Earnings Call Transcript - GLPG Q1 2023

Sofie Van Gijsel, Investor Relations

Thank you, operator, and thank you, and welcome to the audio webcast of Galapagos First Quarter 2023 Results. I'm Sofie Van Gijsel, Investor Relations representing the reporting team at Galapagos. This recorded webcast is accessible via the Galapagos website homepage and will be available for download and replay later on today. I would like to remind everyone that we will be making forward-looking statements during today's webcast. These forward-looking statements include remarks concerning future developments of the pipeline and our company and possible changes in the industry and competitive environments. Because these forward-looking statements involve risks and uncertainties, Galapagos' actual results may differ materially from the results expressed or implied in these statements. Today's speakers will be Paul Stoffels, CEO; and Bart Filius, President, COO and CFO. Paul will discuss the Q1 highlights and provide an update on our immunology and oncology portfolio. Bart will go over the commercial and financial results. You will see a presentation on screen. We estimate that the prepared remarks will take about 20 minutes, then we'll open it up to Q&A with Paul and Bart joined by Michele Manto, Chief Commercial Officer; and Daniele D'Ambrosio, Head of Immunology. And with that, I'll now turn over to Paul.

Paulus Stoffels, CEO

Thank you, Sofie. Good morning, good afternoon, and thank you for joining our Q1 results highlights. Let's take a moment to look at the highlights presented on the slide. Starting with immunology, while we were disappointed with the outcome of the Crohn's disease study, we are pleased to announce that we recently dosed the first patient in a Phase III registrational study with filgotinib in axial spondyloarthritis, marking a potential third indication for Jyseleca. Additionally, we are opening clinical sites for our Phase II study with a TYK2 inhibitor and expect to dose the first patients soon. Moving on to oncology, we shared very encouraging safety and efficacy results for '5201, our CAR T -- CD19 CAR-T in CLL, at the EHA meeting in February. We'll revisit this data later in the presentation. Meanwhile, we are expanding our Cocoon network and making good progress in opening additional sites in Europe and our first sites in the U.S. At the corporate level, we have taken important steps to execute the strategic reorientation of our company. Notably, we successfully transferred our drug discovery and research activities in Romainville, France to NoValiX, a French drug discovery-focused contract research organization. We are thrilled with this transfer, as NoValiX is a great fit for our French colleagues and aligns well with our strategy to build fit-for-purpose R&D organizations. Here, you see our pipeline. As mentioned, the pipeline is now focused on two therapeutic areas: immunology and oncology. I will summarize the different programs. In immunology, unfortunately, the Crohn's disease results were not what we expected. However, we have RA and UC markets, and the registration trial in AxSpA is underway. We are advancing our TYK2 in dermatomyositis and also in SLE, aiming to start the patient study with our CD19 CAR-T in SLE later this year. Meanwhile, we are working on multiple preclinical targets that we are excited to advance if we see a best-in-class profile. In oncology, we are seeing good progress with the CD19 programs. I am pleased to report that we received approval this morning to commence the clinical trial with our BCMA program in multiple myeloma. Additionally, through Abound and external collaborations, we are progressing with multiple new targets and developing our next-generation CAR-Ts for point-of-care units. In immunology, we are focused on all stages of the research process, initiating new preclinical and research programs on best-in-class targets. We are integrating our CAR-T capabilities with our immunology team in the CD19 area for lupus. The TYK2 is progressing as a late-stage molecule, and filgotinib is expanding its indication. So we remain strongly focused on immunology. A bit more detail on our axial spondyloarthritis study: AxSpA is a disease characterized by inflammation of the spine and sacroiliac joints. It is a very diverse disease affecting young individuals with low remission rates today. Patients have limited options with existing drugs, and no new modes of action are expected in the near future. The TORTUGA data in AxSpA, communicated in 2018 and published in Lancet, gave us the confidence to proceed with filgotinib in AxSpA. This is also demonstrated in the graph on the slide. The 200 milligrams showed strong, significant effect sizes in mean change from baseline in the ASDA score compared to placebo. Early action is noticeable as early as week 1 of treatment, with continued response until week 12. We have good expectations for this indication. The start of the OLINGUITO Phase III in AxSpA with filgotinib will include a total of 238 patients, either receiving placebo or 200-milligram filgotinib, as shown on the slide. The primary endpoint, ASAS40, will be evaluated at week 16, and patients can enter an open-label part of the study until week 52, which we will report as top-line results. The start is anticipated next quarter, with top-line results expected in 2025. From week 52 to week 104 in the study, we plan to re-randomize patients achieving low disease activity at week 52 to either 100 or 200 milligrams until week 104. The study design has been endorsed by the authorities and is good to go. Regarding the TYK2 study, the GALARISSO trial is currently active and set to begin recruiting patients. It is a placebo-controlled study involving 62 patients for 24 weeks with a 4-week follow-up in patients with active dermatomyositis and reduced muscle strength. We expect top-line results in the first half of 2025. As a reminder, we also initiated the SLE study with the same molecule, which should report results in the second half of 2025. In oncology, as I mentioned last time, we are focused on our point-of-care network for CAR-T. This slide illustrates how we are changing the CAR-T treatment paradigm by decentralizing production with our Cocoon platform, which we integrated into Galapagos through the acquisition of CellPoint. Collaboratively with CellPoint, we are now developing these new products. The decentralization allows for a short, seven-day vein-to-vein time. Currently, we run this production in hospitals with a very high success rate through two clinical trials, with plans for a third soon. On the next slide, you can see the Cocoon, with the cartridge depicted, as well as its environment. We envision a future where we can stack multiple Cocoons to optimize GMP unit space usage. This is complemented by the development of digital and data systems that collect and register all data, enabling quality control and release to allow the seven-day vein-to-vein timeline. Our production remains very consistent across the centers, achieving close to 100% delivery to patients. The next slide provides data that I discussed regarding CLL. The study design includes at least three dose levels being evaluated in a Phase I/II dose-finding study in CLL within the point-of-care setting, presenting encouraging data at the EBMT-EHA Conference in February. Data is available for two dose levels, while the third is presently being tested. Importantly, we are including patients with Richter's transformation, which is typically not included in CLL trials, and we are seeing very good results. We expect top-line data for the three dose levels in mid-2023, and results will be presented at ASH later this year. The next slide shows initial data, indicating an overall response rate in six out of seven patients, with six out of seven achieving a complete response. On the right side of the slide, you can see a patient with Richter's who, after 28 days, is in complete remission, with no detectable disease through biomarkers. The swimming plot of this patient shows that across the two different levels, all responders achieved overall response, and all complete responders were observed, although one patient relapsed after five months due to CD19 escape. Notably, all patients with Richter's transformation achieved a complete response. We are continuing to recruit for these studies, and updates will be provided mid-year, with data being presented at major conferences. We remain focused on validating the safety of the product. Additionally, it's important to note that we have not observed any Grade 3 or 4 CRS in any of the patients tested across the two dose levels, nor have we seen neurotoxicity or ICANS throughout the study. Overall, we are seeing high efficacy, even in very complex patients, alongside a favorable safety profile. I would now like to turn the floor over to Bart. This is an important meeting as it is Bart's last call, as you may have seen in the press this week, because Bart will be leaving us. I want to express my gratitude to Bart for his contributions over the past nine years. He has been a pivotal leader in our introduction to Nasdaq, played a key role in finalizing the Gilead deal, built our European commercial organization, and so much more on a daily basis. Importantly, Bart has been by my side during our transition into Galapagos, and we have enjoyed a productive collaboration over the past 14 months. Bart, the floor is yours.

Bart Filius, President, COO and CFO

Thank you, Paul. Good morning, everyone. This will be my last webcast, and I want to express my gratitude to all the shareholders, investors, analysts, and anyone else tuning in for this call and previous ones. We've shared both ups and downs during my time here, and I appreciate your support of Galapagos. It has been a fantastic nine years, but it's time for me to explore new opportunities after supporting the leadership transition over the past year. I will now go over the financials and operational details one last time, and we will have a Q&A session afterward. Starting with Jyseleca sales, we found them to be a bit disappointing in the first quarter, as they were weaker than expected. The impact of the JAK class on market share in advanced therapies was stronger than anticipated based on the drug review and label change outcomes. It seems that doctors have adopted a cautious approach, reflecting in the early market shares. It’s still early, and we are evaluating the impact of the label change and how it is being received in the markets, including whether this is a temporary situation or a longer-term issue. Consequently, we plan to reassess our guidance during the Q2 call in early August. For now, we are neither withdrawing nor confirming our existing guidance, but a robust return to growth in Q2 will be essential to meet our original guidance range. Moving on to our cash position, we reported EUR 4 billion at the end of Q1, with a quarterly cash burn of EUR 99 million. We reaffirm our full-year cash burn range of EUR 380 million to EUR 420 million, which aligns well with our current trend. Our treasury management focuses on risk and return. On the risk management side, we have not been exposed to any troubled financial institutions recently, due to our conservative investment policy. We diversify our cash across high-grade financial institutions, money market funds, and T-bills. Regarding currency exposure, we're approximately 80% in euros and 20% in dollars, as we aim to limit our dollar exposure to our operational needs, estimated around the 20% mark. On the return side, we are pleased that we are entering positive interest rate territory, and we anticipate that over the full calendar year, our return on capital could average about 3%, although it might be lower in earlier quarters and higher later on. It's important to note that not all of this will directly reflect in our cash burn or cash inflows, as some returns include fair market value effects from investments, placing expected cash burn closer to 2%. From a profit and loss perspective, we had a favorable quarter, achieving a profit of EUR 23 million, largely due to increased revenue recognition for filgotinib, linked to the DIVERSITY study. Following that, we will reduce development budgets, and we will no longer invest in Crohn's, which has increased our percentage of completion for filgotinib development, allowing us to recognize a one-time effect of about EUR 50 million in revenue this quarter. Revenue for our platform remains stable at EUR 58 million. Operating costs were flat compared to last year, with a mixed impact from oncology expenses and reductions elsewhere. Interest income also supported our net results, resulting in a net profit of EUR 23 million for the quarter. Looking ahead, we anticipate key top-line results this summer from NHL and CLL trials related to our CD19 programs. We are also awaiting the CD19 IND submission and have received CTA approval for the BCMA program. Trial initiations for AxSpA have begun, with dermatomyositis and lupus starting soon, along with plans for a CD19 trial in lupus later this year as well as expansion cohorts and a Phase I/II BCMA trial beginning shortly. Additionally, we are actively pursuing business development opportunities and aim to execute more deals throughout 2023. Thank you all once again, and I will hand it over to the operator for the Q&A.

Sofie Van Gijsel, Investor Relations

Thank you, Paul and Bart. That concludes the presentation portion of today's audio conference call. I would now like to ask the operator to open up the line for Q&A.

Operator, Operator

The first question comes from Brian Abrahams from RBC Capital Markets.

Unidentified Analyst, Analyst

This is on for Brian. Could you share your view on how much personnel for quality control and manufacturing release will be required at each site? And whether it is different between the U.S. and Europe. And when thinking about the model, are you thinking more so for point of care at each individual facility, or more of a regional hub-and-spoke model? And could you also briefly talk about if any of these CAR-T cell studies will be read out and will be conducted in the U.S. sites?

Paulus Stoffels, CEO

On the first point regarding the number of personnel needed, the production process is mostly hands-off, with only the initial startup and the last few days being more labor-intensive for quality release and control. Currently, we anticipate needing three or four people per center during clinical trials to ensure round-the-clock coverage. Most of the time, the Cocoon operates independently, functioning as a fully automated system once established, with quality control integrated. Regarding the logistics, we are focusing on sites close to hospitals. In urban areas, a 30- or 45-minute drive allows one Cocoon to serve multiple hospitals, which we are already seeing in some clinical trials. The regional approach varies; in Belgium and Europe, hospitals can be relatively close, while in the U.S., it means something different, and we will need to assess that further. We are also beginning to establish centers in the U.S., with a setup and selection timeline of six to nine months. Our team is currently evaluating hospitals in different regions, particularly on the East Coast, and we aim to initiate our clinical trials in the U.S. within the next nine to twelve months.

Unidentified Analyst, Analyst

That was very helpful. I have a quick follow-up. There appears to be significant interest in CAR-T cell programs for lupus. Given your strong relationship with Gilead, I was curious if there are any opportunities to leverage that connection. It seems Gilead may also be interested in this area. I wanted to know if there are any possibilities there or if you have thoughts on exploring additional opportunities beyond lupus.

Paulus Stoffels, CEO

Yes, this initial lupus study yielded unexpectedly positive results. While it's not impossible to explore other areas within autoimmune diseases for new indications, we will begin with a small patient study. I believe many academic centers are already investigating these areas. As we gather clinical information regarding its application in patients with autoimmune diseases, we will certainly act on it. Currently, we do not conduct basic research in this field; instead, we monitor and collaborate with the academic community to pursue new indications.

Operator, Operator

Your next question comes from the line of Mike Ulz from Morgan Stanley.

Michael Ulz, Analyst

Maybe just one on Jyseleca sales trends throughout the quarter. Just curious if you can give us a little bit more color on what you were seeing sort of through the months of the quarter. Is there sort of a steady down trend? Or is it flattening? Or is there increasing pressure here? And to the extent you can, maybe give us a little bit of your thoughts on how to think about Q2.

Michele Manto, Chief Commercial Officer

Sure. This is Michele, thanks for the question. It's important to consider what happened at the end of the year. The new label from the Article 20 procedure was communicated positively, concluding the process but also creating some uncertainty for prescribing physicians on how to interpret it. This uncertainty has been evident in our advisory boards and incident collections, reflecting the situation in the markets and among operating physicians. We observed that the adoption of JAKs for new patients has decreased as physicians have become very conservative in their usage. However, we are seeing efforts to address this uncertainty. For instance, the German Rheumatology Society published guidance with a clear checklist indicating that JAKs can be used for non-at-risk patients at any line of treatment, and for the smaller at-risk group, only after one failure of biologic therapy. This provides an opportunity for the JAK class to increase again, but it relies on treating physicians implementing these recommendations in their practices. The key question now is how quickly they will adopt this new guidance and how extensively they will apply it. We are continuously monitoring this to see how the trend will evolve, which is why we are taking the time to revisit the guidance and plan to share updates in the middle of the year with our H1 earnings.

Operator, Operator

The next question comes from the line of Peter Verdult from Citigroup.

Peter Verdult, Analyst

I have one question and one clarification. Regarding M&A activity beyond CellPoint and Abound, why haven’t you been able to pursue more opportunities? Is it due to unrealistic valuation expectations or the inability to find suitable assets with a commercial therapeutic effect? I’m looking for a clearer picture of the situation. The clarification for Michele is that you have reiterated your cash burn guidance for the year, but mentioned that you will return in August with updated or maintained guidance for Jyseleca. So my question is, if you were to lower the guidance for Jyseleca, would that result in a reduction in cash burn? Regardless, you stated there is flexibility for you to maintain that guidance. I just want to confirm what you are specifically indicating in the press release.

Paulus Stoffels, CEO

On the first topic regarding business development, we have made progress with CellPoint and Abound. Last June marked a significant achievement for us as we began our oncology efforts. As the company started to enter the oncology field, we needed time to enhance our capabilities and insights before pursuing additional opportunities. During this period, we conducted numerous visit analyses and received a substantial amount of inquiries from companies seeking financing and showing interest in collaboration. We are currently in the process of selecting the next deal to pursue, and you can expect to see movement on additional deals in the coming months. It took us nearly a year to build our capabilities, integrate CellPoint and Abound, attract new talent, and prepare ourselves to make informed decisions. Acquisitions and licensing agreements must be well-considered, requiring thorough assessment of the competitive landscape and ensuring that what we acquire will truly create an impact. I’m proud to say that we have already initiated three different clinical trials involving three distinct molecules with CellPoint: two targeting CD19 and one for BCMA. We plan to expand further into immunology, and you will see significant business development activity before the end of the year.

Bart Filius, President, COO and CFO

Okay. And I'll take the second part of the question about the cash burn. So what we are confirming in the press release is the cash burn guidance of EUR 380 million to EUR 420 million. So we are not planning to readjust that guidance, depending on the outcome of the valuation around the Jyseleca sales guidance in August. We will make sure that, through proper cost management and through effective basically managing within the range, we are able to maintain our target with regard to cash burn for the full year.

Peter Verdult, Analyst

Bart, good luck with your next chapter.

Bart Filius, President, COO and CFO

Thank you, Peter.

Operator, Operator

Your next question comes from the line of Dane Leone from Raymond James.

Dane Leone, Analyst

Bart, it's been great working with you over the years. Best wishes on your next endeavor. Maybe two from us. Firstly, could you provide a little bit more nuance in terms of where you see the maximal interest rate blended on your current cash balance settling out? Is 3% the top number that you would expect going forward? Or would that still be a blend that might go higher? And then secondly, in terms of the TYK2 program, how important is success in dermatomyositis and other indications in leveraging the current infrastructure in place to commercialize Jyseleca? Said differently, is the TYK2 program success now required to make a positive ROI on the current commercial infrastructure? Or can Jyseleca still, and is expected to, provide a positive EBIT margin on its own sales over time?

Bart Filius, President, COO and CFO

Yes. Dane, thanks for your words. Let me take the first part of the question. And then Michele, you will take the second part of the question around the commercial and the TYK2. On the interest rate, the 3% is a blended rate. So there is, indeed, let's say, last quarter rates should be beyond that. Obviously, this is all dependent on where the ECB and the Fed will take us. But with the current expectations of the Fed reaching sort of the end of the curve at the moment, and the ECB maybe 50 basis points away, we think we are going to be above 3% on average for new term deposits and new money market fund performances. T-bills are generally a little bit below in terms of output. But on average, between euros and dollars, in the current environment, we anticipate to be a bit north of the 3% once we get to a stable level.

Michele Manto, Chief Commercial Officer

So I'll take the next question on the TYK2. So to start with, the guidance and the ambition we shared last year on Jyseleca was, per se, a positive business case, right? Remember the breakeven and then the profitability. Of course, this is part of the revisiting of what we are doing now to see how that goes. But the part of the infrastructure we have built for Jyseleca in the core will also be instrumental to accelerate the start in oncology, which will be early in timing than the possible launch of the TYK2. So that will be an important infrastructure, both at the headquarters functions and also in the countries, to accelerate the oncology launch. And then, of course, looking at it later in the decade, TYK2 or the lupus programs definitely will be able to leverage the infrastructure that we have built in the past years for Jyseleca.

Operator, Operator

Your next question comes from the line of Jason Gerberry from Bank of America Securities.

Jason Gerberry, Analyst

Just on Cocoon. I'm just curious how the process that you use in the clinical trials would differ from a likely commercial product, and if there would be ultimately additional work needed to be done at some point to bridge a clinical product or process to commercial product process. And are there any meaningful differences you'd flag in sort of the hurdle of the CTA approval process versus the IND clearance process?

Paulus Stoffels, CEO

No, we are completing several simplifications at the Cocoon. The process is quite stable. We are integrating cell separation in the Cocoon before the pivotal work begins. Once that is finished, that process will be finalized. Then we will focus on quality control and quality release by automating testing to minimize hands-on work in hospitals and maintain sterility. Everything will be integrated into the xCellit platform. Currently, we consistently deliver cells from the machine to the patients within four hours, and we can complete quality release in the same timeframe. In the morning, the cells come from the instrument, and in the afternoon, the patient receives the cells—all part of the seven-day vein-to-vein process. Regarding your second question about the CTA versus the IND, we will finalize at pivotal and will be prepared to submit as part of the pivotal process.

Operator, Operator

Your next question comes from Brian Balchin from Jefferies.

Brian Balchin, Analyst

Just on BD again. Is the messaging still one additional product on the market by 2028? Or has the more challenging dynamic shifted that thinking? I.e., could we expect a shift to more mid- to late-stage pipeline deals?

Paulus Stoffels, CEO

We are currently pushing forward vigorously. We anticipate introducing one more product by 2028, which will likely be one of our CAR-T therapies. We are actively engaged in the oncology sector, where there is potential for additional products. While we can't make any promises at this moment, we are focused on business development and our internal initiatives for the next CAR-T therapies. Our goal is to potentially bring two CAR-T therapies to market by 2028, targeting different indications. As you know, we are working on NHL with one CAR-T and CLL with another, and we expect to address multiple myeloma as well. We are committed to meeting significant medical needs, and our current emphasis with Cocoon is on identifying areas where we can have a major impact, particularly where a seven-day vein-to-vein process in hospitals can enhance patient survival. We are analyzing short life expectancy conditions and disease indications that could be addressed. For now, we are focused on one product, but we will provide updates as we progress with our business development and clinical efforts over the next 12 to 24 months. Is that clear, Brian?

Operator, Operator

There seems to be no further questions. I'd like to turn it over for any closing remarks.

Sofie Van Gijsel, Investor Relations

Thank you, operator. This concludes today's call. Please feel free to reach out to the IR team if you still have questions. Our next financial results call will be our H1 2023 results on August 4. Thank you all for participating, and have a great rest of your day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.