Degroof Petercam 25 oktober 2019
Galapagos (Buy) - 3Q19 financial update (EUR 145.9 / TP EUR 186)
Facts – Strong cash buffer to expand and accelerate clinical development
Galapagos published its 3Q19 financial results. Revenues amounted to EUR 634m (Css. EUR 512m), an increase YoY, coming from partial recognition of the USD 3.95bn upfront payment of the recent Gilead deal, primarily related to the ‘1690 program. The remainder of the upfront was booked as deferred income, of which EUR 2.3bn is allocated to the company’s drug discovery platform, to be recognized linearly over 10 years, and of which EUR 0.8bn is allocated to filgotinib, to be recognized over a period of 4 to 5 years.
OPEX increased YoY, landing at EUR 153m (Css. EUR 113m), with R&D EUR 121m and S,G&A EUR 32m. This increase in OPEX is mainly attributed to an increase in subcontracting costs primarily for clinical development of the IPF program, filgotinib and other programs. Personnel costs were higher as a result of a headcount increase.
This leads to an operating profit of EUR 491m (vs EUR 12m operating profit in 3Q18). The company realized a net profit of EUR 361m (vs EUR 15m net profit in 3Q18; Css. EUR 319m).
Cash & cash equivalents came in at EUR 5,600m (Css. EUR 4,431m).
On the development pipeline, the company provides the following outlook for the remainder of the year:
-After filing for regulatory approval of filgotinib for the treatment of rheumatoid arthritis (RA) with the European and Japanese regulator, submission to the US FDA is anticipated before year-end.
-The company continues recruitment in ISABELA, NOVESA with ‘1690 and PINTA trial with ‘1205, and plans to provide an update on recruitment timelines for the ISABELA program in 2H19.
-With collaboration partners MorphoSys and Novartis, the company continues executing the Phase 1 and 2 trials currently ongoing with MOR106.
-The company continues to be positive on the progress of its Toledo program and expects its first generation compounds to start Phase IIa proof-of-concept trials next year.
-During the 3Q19 Q&A session last evening, Gilead provided an update on the Phase IIa trials of filgotinib in Sjögren’s syndrome and cutaneous lupus. Although the primary endpoints in these small, exploratory studies were not met, evidence of activity with filgotinib was observed in both trials, particularly in patients who had markers of more active disease. Gilead will perform further analysis on the data before deciding on the next steps.
Management guidance for FY19 operational cash burn of EUR 320m to EUR 340m is unchanged, excluding the impact of the Gilead deal.
The company is hosting a conference call at 14.00pm CEST.
Our view
The gross of our current valuation is driven by Galapagos’ extensive filgotinib program and solid cash position. In our view, filgotinib established a solid data package in RA efficacy- and safety-wise and hence ticks the boxes to become a suitable chronic oral treatment paradigm. We believe the company and partner Gilead are on schedule in the regulatory process towards gaining approval for treatment of RA in the major markets: submissions have already occurred in Europe and Japan, NDA submission to the US FDA is planned before year-end. Potential approval and launch is anticipated for 2H20.
In addition to RA, the Phase III programs in psoriatic arthritis (recruitment recently started by Gilead) and ankylosing spondylitis (expected to start in 1H20) also represent a significant market opportunity, along with the Phase III program in ulcerative colitis (anticipated readout in 1H20), the Phase IIb readout of ‘1972 in osteoarthritis and Phase III futility analysis for ‘1690 in IPF, both anticipated in 2H20.
Investment conclusion
The primary focus of the 3Q19 financial update revolved around providing more granularity on the recent deal with Gilead, especially regarding the implementation of the latter into the financial statements. No surprising elements were reported. We maintain our Buy recommendation.