Galapagos: A Buying Opportunity Arises
Jun. 2.17 | About: Galapagos (GLPG)
The European Investor
The European Investor
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Summary
•Galapagos stock dipped after lower Q1 2017 results.
•The stock went down 13% over the last two months.
•We believe Galapagos is a decent investment, and take a look to whether or not the correction was justified.
Galapagos (NASDAQ:GLPG) reported disappointing results for Q1 2017. Even though revenue grew, the company could not keep its profits above zero. This resulted in a stock correction of about 13%. We believe that the company is still a solid performer, and that this dip in the stock price is the perfect buying opportunity for long horizon investors.
The company
Galapagos is a Belgian-Dutch biotech company. It was founded in 1999 and has its headquarters in Mechelen, Belgium. The company focuses on research against diseases such as cystic fibrosis, inflammations, fibrosis and osteoarthritis. Currently the company has several medicine programs running, of which 3 programs are in phase 3 of research and 8 programs are in phase 2.
Galapagos' flagship product is called Filgotinib, a possible cure for rheumatoid arthritis and Crohn's disease. The medicine currently has three programs in phase 3 of research. The company also cooperates with Gilead (NASDAQ:GILD) for an additional phase 2 study to use the medicine against small bowel and fistulizing Crohn's disease, among others.
Click to enlargeFilgotinib clinical pipeline Source: Galapagos
On 4 April 2017, Galapagos also announced to enter in collaboration with Gilead to test Filtoginib in Sjögren's syndrome. Furthermore, Galapagos cooperates closely with Abbvie (NYSE:ABBV) on a phase 2 study for the treatment of cystic fibrosis.
The stock
Galapagos stock trades on both Nasdaq and Euronext under the ticker GLPG. The stock has a market cap of € 3.86B and an average daily volume of 197,000 shares. The stock is part of both the Belgian BEL20 index and the Dutch AEX index.
GLPG Chart
GLPG data by YCharts
Over the last 2 months, Galapagos underperformed both indexes with close to 13%. While the indices went up 4-5%, GLPG went down almost 9% as a consequence of the publication of the disappointing first quarter results. Up to that point, the stock was at a record high of €85.1 on 13 April, 2017.
Financials
The correction that started after the publication of the first quarter results was caused by the disappointing content of the report. While Galapagos was able to more than double its revenue year-over-year to €39.9 million, the biotech company could not attain a positive net result. While the net income was still €36 million in last year's first quarter, it dropped down to negative €13.6 million in this first quarter.
To have a better understanding about why the Q1 2017 results were such a disappointment, we dig a little deeper into the latest financials of the company. When looking at the income statement, it is clear that most of this difference in profit comes from a total sum of €57.5 million in fair value re-measurement of share subscription agreement. This re-measurement was a one-time increase in value in the collaboration contract between Galapagos and Gilead for the development and commercialization of Filtoginib. It is clear that the absence of this income should not be worrisome, as it was a one-time payment.
Another big cost that pushed net income down was the company's R&D expenditure. This expense went up 62% from €27.8 million in Q1 2016 to €44.9 million in Q1 2017. Galapagos keeps a high level of R&D expenses as it results in the company's main source of revenue: medicine that can eventually be sold. To attain a solid program flow, the company sets the bar high for itself.
Click to enlargeGalapagos Research and Development ambition
Source: Galapagos Investor Presentation
We believe that this increase in expenses is in no way a reason to panic, as it provides new opportunities and adds to Galapagos' growth. We must keep in mind that the company more than doubled its revenue in just a year's time. Furthermore, we believe that Galapagos is a company that is very well hedged against worrying circumstances. For instance, the company keeps a strict eye on its cash usage, which was about €23 million for Q1 '17. This is in line with the cashburn guidance of €135-155 million for fiscal year 2017. Furthermore, Galapagos' total cash position is currently at €980 million. This puts the company in a relatively safe spot as it is good for almost 25 times Q1 '17 revenue.
In his outlook for the rest of 2017, CEO Onno van de Stolpe said that the company will keep growing and is planning to start new phase 1 and phase 2 studies in the coming months. In collaboration with Gilead, Galapagos will also release a proof-of-concept study for Filgotinib.
Conclusion
All the elements above keep us suspecting that Galapagos is still a good investment. The company still has a very decent cash position, and is relatively conservative when it comes to spending. Keep in mind though that Galapagos still is a growth investment, rather than a value investment. This implies a lot more volatility and risk. However, there is quite some upward potential for Galapagos due to the last correction. We believe that this dip in stock price has opened the perfect window for buying a company that is in full development and is performing solidly.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.