GLPGF - Galapagos: Crohn's Disease Trial Failure Still Maintaining A Buy Rating

Summary

• On February 8th, 2023, Galapagos announced disappointing results of their phase 3 DIVERSITY Crohn's disease study; the company is no longer planning to file an MAA.
• Galapagos stock fell 8%, and the stock is still hovering around negative $2.0Bn enterprise value territory.
• We continue to maintain a buy rating due to cheap valuation and potential optionality around business development deals during 2023.

Key updates: Galapagos fails phase 3 Crohn's disease study

On February 8th 2023, Galapagos (GLPG) announced the top line results of the company's phase 3 DIVERSITY study, which is a global phase 3 trial focused on evaluating the safety and efficacy of filgotinib (100mg and 200mg once daily dosing schedule). The key target population that the study was studying filgotinib's potential role as an induction and maintenance therapy targeting the biologic-naïve and biologic-experienced moderate-severe Crohn's disease ((CD)) patient population, which could be a good additional label extension opportunity for filgotinib (included in the company's previous peak sales projection of ~$ 500M ). The results were disappointing, a) the 2 induction cohorts missed the co-primary endpoints (clinical remission and endoscopic response) at week 10 timepoint, b) although, during the maintenance phase, filgotinib (200mg QD) met co-primary endpoints (clinical remission and endoscopic response) at week 58 timepoint. The safety seems compelling, as expected, similar to what we have seen in previous RA and UC studies .

Net-net, we believe this data readout makes filgotinib's market potential in CD questionable, which we believe is the reason why the company decided not to submit an MAA application for the EMA around Crohn's disease. This news is disappointing, especially after last December's announcement from Gilead (GILD) that they will no longer seek US approval of filgotinib for the rheumatoid arthritis indication.

The company shared its plans to continue developing filgotinib for axial spondyloarthritis (AxSpA), where we expect the trial to start during 2023, albeit we do not believe the start of phase 3 to move the stock price at this point.

Risks

We re-iterate the risks from our previous article:

Clinical risk remains as Galapagos has multiple early-stage and late-stage clinical development ongoing. Potential unexpected competition can emerge for Jyseleca's sales, further putting downward pressure on the expected peak sales. As the company is not yet cashflow positive, there is a potential financing risk if they exhaust all their cash reserve in M&A activity, where they may have to raise additional capital to fund their operation; if this happens, additional shares issued can dilute the value of the existing shares.

Conclusion: Maintaining a non-consensus buy rating

We find the phase 3 CD data disappointing; however, as we discussed in our previous article , we don't see filgotinib as a key driver of the company's value, and the CD readout could act as a clearing event for the stock at this point. We maintain Galapagos with a BUY rating due to (i) a great amount of cash reserve of ~$4Bn and deeply negative enterprise value (-$2bn), (ii) strong management, Paul Stoffels, with impressive track-record from J&J leading the company, and (iii) potential business development optionality.

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