Degroof Petercam 7 augustus 2020
Galapagos (Buy from Hold) - 2Q20 results (EUR 158.5 / TP EUR 205 from EUR 223)
Facts
Revenues amounted to EUR 118m (Css. EUR 113m; DPe EUR 120m).
OPEX increased 82% YoY, landing at EUR 204m (Css. EUR 172m; DPe EUR 182m), comprising EUR 149m in R&D, EUR 17m in S&M and EUR 38m in G&A.
The company realized a net loss of EUR 86m (Css. EUR 93m net loss; DPe EUR 71m net loss).
Cash & cash equivalents end of June stood at EUR 5,566m (Css. EUR 5,575m; DPe EUR 5,669m).
The FY20 operational cash burn guidance of EUR 400m – EUR 430m was reiterated.
After a pause in recruitment due to COVID-19 in DIVERSITY and PENGUIN - the ongoing filgotinib trials in Crohn’s disease and psoriatic arthritis - Gilead recently restarted recruiting patients at select sites, and enrollment into the MANTA and MANTA-RAy studies has been concluded.
Outlook for second semester of 2020:
Filgotinib: 1/ rheumatoid arthritis: following positive CHMP opinion, potential approval is anticipated 2/ ankylosing spondylitis: Phase III launch
GLPG1972 (collaboration with Servier): Phase IIb topline in osteoarthritis (OA)
GLPG1205: PINTA Phase II topline in idiopathic pulmonary fibrosis (IPF)
GLPG1690 (ziritaxestat): NOVESA Phase IIa topline in systemic sclerosis (SSc)
Toledo: launch of `3970 exploratory Phase II trials with anticipated readout 1H21
The company is hosting a conference call today at 14:00 CET.
Our view – Steep increase in OPEX YoY
We observe a steep increase in OPEX YoY. Based on the latter, we took the liberty to factor in a higher of level of future OPEX projections to better reflect the company’s anticipated transition into a biopharmaceutical entity as well as the higher level overhead costs due to a continuously expanding (pre)clinical R&D efforts.
Expected newsflow for 2020 remains on track:
The most significant milestone will be the regulatory feedback on filgotinib for treatment of moderate-to-severe rheumatoid arthritis (RA) expected in the upcoming months. Based on the solid Phase III data package, our model assumes approval and potential peak sales of EUR 3,361m.
GLPG1972: our 50% success rate in OA is relatively bullish and to a large extent implies a positive outcome of the ongoing Phase IIb trial.
Both GLPG1205 and ziritaxestat being evaluated in exploratory Phase IIa trials in IPF and SSc, respectively, we consider the most substantial value-inflection for these indications to occur after positive readout in larger, qualitative follow-up trials.
Investment conclusion
We value Galapagos using an rNPV (WACC: 11%). After adjusting OPEX projections, cash position and outstanding shares, our PT arrives at EUR 205. We acknowledge that our SOTP valuation might pose some downside risk, given our relatively high success rate attribution to mid-to-late-stage programs. However, GLPG shares dropped substantially the past couple of months, what we consider to be an overreaction by the market, driven by Covid-19-related share price volatility and the Phase III readout of filgotinib in ulcerative colitis (UC). The latter was not perfect but still competitive with other JAKi’s being evaluated/approved in UC in our view. At current, lowered share price levels, we believe the long-term upside potential outweighs the downside risk. This is further supported by the company’s strong cash position, providing financial firepower to feed the development of (pre)clinical assets we currently do not yet include in our SOTP. We therefore upgrade to Buy.