Goldman Sachs update
Galapagos NV (GLPG.AS): Answering investor questions
We have received a number of investor questions on Galapagos' idiopathic pulmonary fibrosis data and potential next steps. We have also spoken to Galapagos since its investor call. We continue to view the data as very positive for Galapagos. Our thoughts are as follows:
Our view on the data and its significance: We have received some questions from investors on how to interpret the clear trend shown by the data, in the context of the result not reaching statistical significance. The trial was not powered for statistical significance, which explains why the p value at 12 weeks was not at the threshold for statistical significance. Nonetheless, we believe that the clear trend towards disease stabilisation for patients on active treatment is highly encouraging, and indeed unprecedented for other IPF drugs.
Patients excluded from the FVC analysis do not raise particular concerns: We have had a number of questions from investors on why the FVC data presented by Galapagos excluded 2 of the 17 patients on treatment at week 8 and 4 of the patients at week 12. We understand that these exclusions were required by American Thoracic Society measurement criteria. Under these, to measure FVC, the patient is given eight attempts to provide a forced exhalation reading (this is viewed as a "practical upper limit"). If a patient cannot provide a forced exhalation three times from the eight attempts (e.g. a failed attempt might be because they cough), the measurement is excluded. The reason for this is that after more than eight forced exhalations, the patient could tire and FVC could drop, reducing the reliability of the data. Therefore, we do not believe that the exclusions raise concerns for the data.
Our view on the next steps from here: On the call, management discussed its openness to whether this drug is used as an add-on therapy or as a standalone agent. Management stated that the next trial "could be pivotal". We have subsequently discussed Galapagos' R&D plans with management. Our understanding is that its intention is first to start a trial of GLPG1690 as an add-on therapy (e.g. to Roche's Esbriet). Assuming that this trial takes around one year to recruit, and patients receive study medication for one year, we could see a read out in 1H 2020. We understand that Galapagos will also investigate the drug as a single agent. This could potentially be investigated by the inclusion of an arm with single agent GLPG1690 in the first trial, or alternatively with an additional trial of GLPG1690 (head to head against a standard of care drug). On pricing, management believes that it could achieve pricing similar to Esbriet, even as an add-on therapy, if the drug shows significant incremental benefit.
Galapagos' strategic intention with the asset: We understand from management that Galapagos intends to develop the asset itself. We would therefore view an outlicensing event as unlikely. We support this stance as we believe that Galapagos has comfortable financial capacity to finance the trials (€1.3 bn in cash), and retaining 100% economic rights to the asset would seem the best way to maximise value. In our sum of the parts model, we had valued this asset at €6 per share, with peak sales before probability adjustment of $817 mn. If the drug is ultimately successful, on our forecasts it could be worth €42 per share, i.e., almost two thirds of Galapagos' current market capitalisation.
We are Buy rated on Galapagos with a 12-month target price of €94 derived from a SOTP DCF based value of €89 per share (85% weighting), and an M&A valuation of €119 per share (15% weighting). Our M&A valuation is calculated by: (1) applying a 7.5% WACC to our stand-alone DCF (assumed WACC of a larger potential acquirer), rather than the 10% WACC we assume for Galapagos, and (2) assuming 90% cost synergies (as we believe an acquirer would acquire Galapagos for its IP rather than the infrastructure). Key downside risks to our view and price target are outcomes of clinical trials, ability to recruit patients into later-stage cystic fibrosis trials, and potential value destructive M&A.