NVS - Galapagos: Slow Transformation But Led By An Expert

Summary

• GLPG is setting to transform its business after a slew of failures.
• The new CEO is a global expert at this, and I don't see him failing.
• They have a huge cash stockpile.

I haven’t covered Galapagos ( GLPG ) in a while. My last coverage of this once-promising European company was in February. Before that, I covered Galapagos a number of times, including interviewing then CEO Onno Van De Stolpe in 2019. I don’t like to do interviews because I feel it takes away some of an author’s neutrality and makes them too involved in what they are covering. However, Galapagos was a rare exception because in those days, it was promising, and it was European, which was a good diversification opportunity.

Speaking about Mr. Van De Stolpe, after 23 years managing GLPG after co-founding it, Mr. Van De Stolpe retired in January, and was replaced by Paul Stoffels, former chief scientific officer at Johnson & Johnson (JNJ), and a co-founder of Galapagos in 1999. This caused a quick spike in the stock price.

Galapagos still has a nearly $3bn market cap so it is not a complete write-out, however, the company has lost some of its sheen. Filgonitib’s US failure in rheumatoid arthritis (it is approved in the EU and Japan, although with a limited label in EU for at-risk patients) started the process, and eventually a number of Galapagos programs did not do well. The company is still trading below cash. Their cash balance is a whopping $4.27bn, while their market cap is $2.8bn. That means they are trading $1.47bn below cash. I have never seen anything like this in my years of covering biotech.

Among the failures or rejections are the following, as I wrote in my February article:

Galapagos dumped GLPG4059 in type 2 diabetes even after taking it through a phase 1 trial. They also scrapped GLPG1205, which was in a program targeting IPF or idiopathic pulmonary fibrosis, despite announcing proof-of-concept data. They haven’t completely let go of the IPF indication however, which the former CEO had once told me was the most important indication, but now they plan to progress chitinase inhibitor GLPG4716 to a phase 2 trial in IPF. The IPF indication suffered a major setback with the failure of Ziritaxestat (GLPG1690) in a phase 3 trial in February last year.

Even TOLEDO, the company’s much hyped SIK or salt-inducible kinase program, saw its share of failures. TOLEDO had five proof of concept trials of GLPG3970, which failed a phase 2a trial in rheumatoid arthritis as well as one in ulcerative colitis trial, failing to beat placebo in either indication. The company still has two SIK programs from TOLEDO in its pipeline, but these are very, very early stages. Indeed, besides filgotinib, its current pipeline retains very little of its old programs.

That huge stockpile of cash has enabled the company to move to CAR-T by buying out two smaller companies. Whether this is most prudent choice in terms of treatment area is doubtful, because CAR-T hasn’t exactly done swimmingly despite the hype and potential. However that may be, Galapagos now has fully half of its pipeline full of CAR-T indicates - I count 4 of them, two of them in phase 1, all of them in early stages of development.

Galapagos bought into CAR-T by acquiring Cellpoint, a privately held developer of point-of-care CAR-T therapies and AboundBio, a company with a fully human antibody-based library. Galapagos paid €125M and milestone payments worth up to €100M for Cellpoint, and $14mn for AboundBio. This new focus seems to be the brainchild of the new CEO, who said:

This is a first key step in our strategic transformation to accelerate and diversify our pipeline with the aim to create short- and long-term value through focused external growth.

I have my doubts about the prudence of buying such unproven, early stage assets in a space littered with failed biopharma companies. As Evaluate noted :

This technology might be a scientific triumph, but the products that have made it to market have been a commercial disaster in terms of both sales and profits.

Evaluate also says that while Galapagos itself does not have any experience with CAR-T, Gilead ( GILD ), which is a major partner, has a strong presence in CAR-T, with the acquisition and approval of Kite’s Yescarta. Yescarta/tecartus together makes more than a billion dollars for Gilead, which is not bad. So there may just be some synergy between Gilead’s CAR-T and Galapagos’ latest buy, however it is certainly a long way off, and is not going to produce immediate revenues, something that Galapagos desperately needed. The synergy seems to be that Cellpoint’s technology potentially removes a strong barrier for CAR-T. It reduces the time to manufacture these cells to just one week, instead of the months long current process. So if their data next year is good and Gilead decides to opt in, maybe, a few years down the line, we will see something.

This new technology, which lets a company do the CAR-T process at the patient’s location, is competing with a similar plan from Novartis ( NVS ), Gilead’s CAR-T competitor. The Novartis idea is called T-charge, and it has provided data last year. So Gilead is a little behind here.

With nearly $5bn at that time in their stockpile, Galapagos could have bought almost any company they wanted. They could have gone into orphan diseases, bought a company with a strong product and candidate pipeline. Ultragenyx ( RARE ) comes to mind. RARE has a number of approved products from which it makes nearly half a billion dollars a year, and it has a number of rare disease assets in pipeline. The company is valued at $3bn, and could have been valued more except for a lack of near term catalysts. There are other examples of worthwhile buys with $5bn, but an unproven cell therapy company is not among my list of top buys.

Galapagos also exercised its option to in-license novel drug targets for inflammatory bowel disease ((IBD)) discovered by Scipher Medicine's Spectra platform. IBD is sort of a competitive market with a number of approved drugs, including other JAK inhibitors like filgotinib. Filgo itself is approved for Ulcerative Colitis, a form of IBD, ex-US. With such big names as Humira and Remicade for competition, I again fail to see where Galapagos is going with this purchase. However, as the new CEO noted , Galapagos’ new bout of dealmaking won’t stop with CAR-T. As Endpts noted:

Regardless, Galapagos is likely to be focusing on assets in the “sweet spot” of early-stage clinical development. “Phase two, three—they are typically advanced assets, and they are quite expensive because you're in competition with all the large companies,” the CEO explains. “We have to create most of the value ourselves, not buy out the value from somebody else.”

I can see that some analysts are politely unimpressed with these small changes, with Morgan Stanley calling it “an organic transformation which would take time and a greater pivot with the pipeline.”

However, from what the new CEO says, and the five year timeline he has given himself, don’t expect a large buyout of a late stage or approved product with immediate revenue. I think he plans to start off early, explore a few smaller options, and do everything from scratch. That may be good for the company, or not, but it surely isn’t that great for existing shareholders who now have to wait many years to recover their investments.

Financials

GLPG has a market cap of $2.86bn and a cash balance of $4.27bn. In the third quarter of 2022, the company made $25mn in product net sales and $111mn in collaboration revenue. Their cost of sales was $2mn, R&D expenses were $115mn and G&A were 69mn. The company's cash and cash equivalents were $675mn, while their current investments totalled a huge $3.68bn. Here's how this fund originated :

In July 2019, we and Gilead entered into a strategic R&D collaboration, giving Gilead access to our innovative portfolio of compounds and our drug discovery platform, in return for a $3.95 billion upfront payment and a $1.5 billion equity investment (including the exercise of warrant A).

If you look at the company's balance sheet for the last one year, you can see that a much more substantial figure was present as cash and cash equivalents in the third quarter of 2021 - $2.84bn contrasting with this year's third quarter's $675mn. Barring about $500mn, most of this fund was moved to current investments.

The company spends around $180mn in quarterly expenses. Their collaboration revenue for 3Q2022 is a one-off thing, but the expenses are otherwise offset by the incoming product revenue. I think we can thus set their operating expenses at somewhere around $150mn. At that rate, given the cash position, they have a cash runway of nearly 30 quarters. Of course, the new CEO is planning to make a number of strategic buys, so some of those funds will be spent in those purchases. Even so, I think GLPG does not need to worry about cash for years. They also restructured their company, letting go of some 200 employees, which will result in some cost savings.

Bottomline

Prudent investors have little to complain about Galapagos, or its former CEO. In my communications with Mr. Van De Stolpe, I found him to be a thorough gentleman, knowledgeable but humble, and also kind to a then-unknown analyst (this author). GLPG has made many people a lot of money, unless they failed to exit at peak. The new transformation taking place here is long term. But it may create a lot of value because of two factors; the company’s huge cash reserve, and the expertise of the new CEO, who led JNJ’s R&D for 9 long years. While I have no particular opinion right now, I think we should give the new CEO - and all that cash - a chance to prove themselves.

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