Earnings Call Transcript - GLPG Q1 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to the Galapagos Financial Results Q1 2021 Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Elizabeth Goodwin. Please go ahead.

Elizabeth Goodwin, Investor Relations

Thank you all, and welcome to our call today. I'm Elizabeth Goodwin, Investor Relations, and the webcast that we're recording is going to be accessible via the Galapagos website homepage and will be available for download and replay later on today. I'd like to remind everyone that we'll 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 environment. 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 Onno Van De Stolpe, CEO; and Bart Filius, President and COO. Onno will reflect on the operational highlights, and then Bart will go over the financial results and expected news flow for the year. You'll see a PowerPoint presentation on screen. We estimate that their prepared remarks will take about 10 minutes. And then we'll open up with the Q&A with Bart and Onno, joined by the rest of our Management Board. And with that, I would now like to hand over to Onno.

Onno Van De Stolpe, CEO

Thank you, Elizabeth, and welcome, everybody, to this webcast. We have clearly had a tough 12 months behind us. A lot of confidence was lost. We had a dramatic drop in stock price caused by a number of events, including failures in our late-stage pipeline with 1972 and ziritaxestat and the CRL regarding Jyseleca in the United States. So very disappointing. But clearly, we are ready to go forward with confidence to regain the trust of the investors and regain the excitement around the company that was with us for a very long period of time. We have done a soul-searching and analyzed our R&D portfolio and our organization and see what we can do to optimize and balance the risk better than we have been doing. We have done a complete portfolio review in the research pipeline, and we have taken a number of actions that I will highlight that we believe is improving the risk balance. This gives us a better chance of bringing new world vaccines to the patients. On the commercial side, we are fully in the launch of Jyseleca in Europe for Rheumatoid Arthritis. We have taken over many of the European countries from our partner, Gilead. By the end of the year, Galapagos will be the only one marketing filgotinib in Europe, Jyseleca. And that is, of course, fantastic for Galapagos to be in that position after many years of development to now bring the drugs to patients. We have said that we are stepping up to the plate regarding our business development. We have a gap in the pipeline between Jyseleca on the market and the earlier-stage programs with TYK2 and Toledo that are in proof-of-concept studies. We would like to fill that with getting a product into in-licensing or through an acquisition. So that is one of the objectives for this year. And on the financial side, we decided to right-size the company with a reorganization with substantial savings that Bart will highlight later in this presentation. If we go to the next slide, I can show you the priorities that we have in R&D. We decided to focus on the core indications, letting go of some disease areas where we had activities. We prioritized projects, and we also put additional resources on certain product candidates that we believe have the highest chance of reaching the clinical phases and making a difference in certain diseases. If we go to the next slide, looking at the pipeline, it remains quite differentiated and diverse after the reanalysis with filgotinib still in a late-stage Phase III study in Crohn's disease, RA on the market. We expect the EMA approval in the second half of this year. We have another program in the JAK class 555, which is in an exploratory study in osteoarthritis. We have the entire Toledo franchise with multiple molecules moving forward in different proof-of-concept studies. So we are focused on inflammation and fibrosis while still having various mechanisms in different disease areas. On the next slide, you see the discontinued programs as a consequence of our analysis where we decided to stop our molecule 1205 in fibrosis and selected an in-licensed molecule to move into Phase II in IPF. Unfortunately, but we believe it's the best decision. We also stopped all activities in metabolic disease. It was a difficult disease area, and it's clearly not our core expertise, and we decided to stop early discovery work in osteoarthritis. We had started that 2 years ago with the idea to come up with new targets. OA is a very complex area to bring products to patients, especially because the Phase III criteria, the registration criteria, are not clear. So we decided to stop that part and put our resources in areas where we believe we have a better chance and a more balanced risk profile. In the next slide, you see encouraging data in exploratory Crohn's disease studies. We had a small study with Gilead in small bowel Crohn's disease and in Fistulizing Crohn's disease. In both studies, the 200-milligram dosage performed really well. We are very pleased with this data set, and maybe in the Q&A, you can ask questions to Walid to talk more about this data set. These results clearly bode well for the ongoing Crohn's disease study that we anticipate to fully recruit this year. Although it has taken a long time to find patients for that big study, at least these data give us confidence that we're on the right track. The Fistulizing Crohn's disease data were met with incredible enthusiasm by our partner, Gilead. With that, I would like to hand it over to Bart to continue with the commercial part.

Bart Filius, President and COO

Yes. Thank you, Onno, and good afternoon, everyone in Europe. Good morning to everyone calling in from the U.S. I appreciate the opportunity to discuss progress on the commercial front. Before I dive into the financial details for the quarter, Michele Manto, our Chief Commercial Officer, is also available for the Q&A later on for any further updates on launch progress in Europe. On this chart of Europe, you see where we are with the operational transition. The transition is on track. Actually, in the biggest markets, the transition has been completed regarding the commercial teams. This applies to Germany and the U.K. Employees from Gilead have moved over to Galapagos. France, Italy, and Spain were already our primary focus to begin with, and you see in those markets, some transitions are also taking place. So roughly 80% of the market potential is now managed directly by us. Before the year ends, we will also take over the Nordics, Austria, Switzerland, and Ireland. As we've said before, we are not planning to be active in other markets, and the rest of Europe will work through a third party. We'll update you as this year progresses on how we are planning to execute on that front. Consequently, we're not yet booking the sales in Germany and the U.K. that connect to the actual physical supply of goods, which will happen in the second half of this year. Hence, you will not have seen any top-line revenues in our financials, either for those markets, as they are still covered by Gilead for the first six months of this year, and probably during Q3, we'll make that transition. A quick word on reimbursement on the next slide: some interesting updates here. Germany, fully reimbursed already since Q4 of last year, as you can launch the product immediately after approval. We have now received verdicts from the Federal Joint Committee, the G-BA, and they've given us an additional benefit qualification, which we think is a big win. It's a qualification similar to what RINVOQ has in this market but better than what Xeljanz and Olumiant have. So we think that bodes well for the launch progression in Germany. In France, we anticipate to launch in this second quarter, as the authorities will want to see the MANTA data before approving us for male patients. We need to review that once submitted but will launch on a female-only basis initially. In the U.K., we're proud to tell you that through a recommendation by NICE, we will be the first advanced therapy to be recommended for moderate and severe RA patients. Spain and Italy's reimbursement progressing as planned, and we anticipate going to patients in those countries in a reimbursed fashion during the third quarter. The same applies to the rest of Europe, with reimbursement discussions on track for finalization by the end of the year. Skipping over the commercial aspect, let's move to the organizational and financial parts of this presentation. Onno mentioned that we have refocused our clinical efforts on described programs. We've also applied more stringent stage gating, ensuring that we progress the best opportunities to the next stages while making sure the portfolio approach is appropriate regarding imbalances across different stages and therapy areas. All this leads to a meaningful savings program, planning to take out €150 million of expenses on a full-year basis. This represents 20-25% of our cash burn, with a previous indication that we expect a cash burn for the year to be around €670 million. We're now guiding for a midpoint of €600 million, with a range between €580 million and €620 million. This reflects our anticipations for about half of the savings to materialize in 2021, with a full-year savings effect anticipated in the calendar year 2022. Regarding financials for the first quarter: our cash position stands at €5.1 billion, which is very healthy. There are a few exceptional items that we do not include in our operating cash burn, such as proceeds from warrant exercises. In this quarter, we specifically want to highlight the divestment of Fidelta, our CRO in Croatia, generating net cash proceeds of around €30 million. We also had a positive currency quarter, leading to a translation effect of about €40 million positive. Our operational cash burn is a negative €128 million, which includes cash income of €35 million from Gilead as part of our December agreement. So, you can calculate the quarterly cash burn for the full year, which we anticipate to be between €580 million and €620 million. On the P&L side, revenues are up, driven by revenue recognition on filgotinib and the platform. These represent the deferred revenue or the deferred income positions accrued on our balance sheet. There was a total of €124 million in revenues. Costs are slightly up, with revenues and costs tracking around the same amount at about €175 million. The cost drivers are filgotinib, our Toledo program, and commercial expansion support costs. Net-wise, we actually realized a profit of €9 million this quarter, driven by the positive currency translation effect and the disposal of Fidelta leading to an accounting profit of €22 million. Lastly, looking at our outlook for the remainder of the year, we have a lot ahead in terms of data. We expect data for 3666, our TYK2 in psoriasis patients. We also anticipate clarity on data from the studies with our first Toledo compound in psoriasis, RA, and ulcerative colitis this summer. Regarding filgotinib, we expect an approval decision in UC in the second half of the year. Our study in Crohn's disease DIVERSITY will be fully recruited in the second half of the year as well, giving us a timeline for when we will see this data, which we hope to announce by the end of 2022. With that, I'll leave the prepared comments and slides and hand it back to Elizabeth for the Q&A. Thank you.

Elizabeth Goodwin, Investor Relations

Thank you, Onno and Bart. That concludes the presentation portion indeed. And now I'd like to ask our operator, Lin, to remind us how callers can post questions. Go ahead, Lin.

Operator, Operator

Diversity will be fully recruited in the second half of the year, providing us with a timeline for when we can expect this data, which we aim to announce by the end of 2022. Now, I will conclude the prepared comments and slides and hand it back to Elizabeth for the Q&A. Thank you. Elizabeth Goodwin, Investor Relations: Thank you, Onno and Bart. That wraps up the presentation portion. Now, I would like to ask our operator, Lin, to remind us how callers can submit their questions. Please go ahead, Lin.

Elizabeth Goodwin, Investor Relations

All right. Our first question comes from Peter Welford of Jefferies.

Peter Welford, Analyst

I'll start with just two questions, and I'll come back later. So firstly, regarding business development, you mention a transformative deal. I'm curious to hear what you mean by transformative. Should we think you're looking to do more than just bring in an asset or two? Is there something bigger picture that you'd like to pursue? Also, will this focus on the same core areas your internal R&D is targeting: inflammation, fibrosis, and kidney disease? Or could it be broader?

Onno Van De Stolpe, CEO

Yes, Peter, I'll take the first question, and Walid can address the second. Yes, we're seeking a transformative business development deal to fill the gap in our pipeline. Now, with JV 1972 falling away, we have an imbalance between early versus commercial products. This is something we would like to address. We're currently contemplating one product that will come in late Phase II, ideal, or just before starting Phase III—that's one option. The other one is we're interested in bringing in more products, likely in the therapeutic areas where we currently operate. However, we're also exploring the possibility of acquiring certain commercial rights for Europe to supplement the Jyseleca franchise, so the sales organization can offer more than just Jyseleca. So actually, we have two different objectives here.

Walid Abi-Saab, Chief Medical Officer

Peter, regarding 555, we are actually testing this in Phase I as a particular injection. We will be evaluating a series of doses over time. Our primary endpoints will be based on pharmacokinetics and safety, and based on these data, we will then decide on the most appropriate next step. We have some questions about the regulatory path going forward and the risk balance of our entire portfolio. But ultimately, we will evaluate the data and determine the best way forward.

Elizabeth Goodwin, Investor Relations

Okay. Our next question comes from Jason Gerberry from Bank of America Merrill Lynch.

Jason Gerberry, Analyst

Thanks, Elizabeth. Could you talk a little about how you see the selective TYK2 molecule differing from Bristol's TYK2? What important pharmacologic attributes do you think help differentiate it, and when can we expect early-stage data on it? Also, concerning France and the female-only label, is this unique to France? If something unexpected were to occur that was inconsistent with the 13-week results, do you foresee a female-only label for the drug possibly happening elsewhere?

Walid Abi-Saab, Chief Medical Officer

Okay. For our molecule as a domain kinase inhibitor versus the modulators available, how this translates clinically is the critical question, and that's where we see potential. Preclinically, our molecule is highly selective, which is why we've advanced it to development. In clinical data with healthy subjects, we had favorable pharmacokinetics compatible with once-daily dosing and promising pharmacodynamic activity corroborating preclinical results. We monitored these closely and have not observed any concerning changes in the lipid profile or cell life parameters. We eagerly await our Phase Ib study that is a small trial with about 30 patients at two doses versus placebo over four weeks. This gives us a sense of how the compound performs. Comparing it to Deucravacitinib in a Phase IIb trial could yield more insights as well. Regarding the label, Onno, do you want to clarify what’s happening in France?

Onno Van De Stolpe, CEO

Yes, I can. Just to clarify the French situation regarding reimbursement. There is no change to the European label approving both male and female populations. Different geographies display different sensitivities in reimbursement evaluations. Germany has positive NICE recommendations, and the G-BA gave us an extra benefit. France tends to be more cautious on safety and will evaluate our MANTA data as they consider reimbursement for males. We are looking to submit our MANTA data and are optimistic that we can achieve final reimbursement soon.

Elizabeth Goodwin, Investor Relations

All right. Our next question comes from Graig Suvannavejh from Goldman Sachs.

Graig Suvannavejh, Analyst

Thanks, Elizabeth. I'd like to ask about Filgotinib. What’s the path forward regarding the MANTA MANTA-RAy safety data—has this been shared with the FDA? If not, when might we expect this? Also, Galapagos' views on the recent PDUFA extensions for various approved JAKs—any thoughts on that?

Walid Abi-Saab, Chief Medical Officer

Thank you, Graig. Regarding filgotinib, we've shared foundational data with European and Japanese health authorities, which is more comprehensive than what we can publicly share at the moment. As for the FDA, they are eager to receive the data, but we haven’t had returning feedback or requests from them. Regarding your question about the PDUFA extensions, I have to emphasize that this is speculation. However, I believe there are two distinct areas—the dermatology division and the hematology division—which have their own safety concerns regarding JAKs. I can't provide more insights since we haven’t received any concerns or requests. That's all I can share confidently. How about the kidney disease program?

Onno Van De Stolpe, CEO

Thanks, Walid. The compound 2737 is our first entry into kidney disease, specifically in polycystic kidney disease, and it's part of a broader program. We choose to focus on diseases with shorter clinical trial endpoints to maintain manageable risk profiles. However, we won't disclose specific compounds for other kidney diseases at this time.

Elizabeth Goodwin, Investor Relations

All right. Our next question comes from Laerke Engkilde from JPMorgan.

Laerke Engkilde, Analyst

Just a modeling question. With the potential €150 million of OpEx savings, could you elaborate on how we should think about the level of OpEx in 2022 versus 2021?

Bart Filius, President and COO

Yes, let me take that question, Laerke. It's too early to provide guidance for 2022. But we plan to realize all €150 million savings, setting a new standard for R&D and G&A expenses next year. If there's compelling scientific evidence, we may adjust that figure as necessary to address data and developments in the next six months.

Elizabeth Goodwin, Investor Relations

Our next question comes from Wimal Kapadia from Bernstein.

Wimal Kapadia, Analyst

Thanks, Elizabeth. Can I just ask one question? On the R&D strategy, you're taking a more focused approach moving forward. How should we view the evolution of the Toledo assets and TYK2 if early data suggests less differentiation compared to current offerings?

Onno Van De Stolpe, CEO

Piet?

Piet Wigerinck, Chief Scientific Officer

I'll start with Toledo. We are completing five proof-of-concept studies, and these outcomes will guide our focus areas. We don't face heavy competition for this mechanism of action currently. Our main goal is to generate data that demonstrate clinical significance versus available therapies. As for TYK2, I'll let Walid elaborate.

Walid Abi-Saab, Chief Medical Officer

For TYK2, our first step is evaluating the Phase Ib data shortly. While it may not provide comprehensive direction, it will inform whether we should pursue a more extensive Phase IIb trial.

Elizabeth Goodwin, Investor Relations

Okay. Our next question comes from Rosie Turner from Barclays.

Rosie Turner, Analyst

Thanks, Elizabeth. Could you elaborate on the opportunity in Japan, especially since it is being led by Gilead? When do we expect approvals, and can you provide any estimates on peak royalty streams?

Michele Manto, Chief Commercial Officer

Yes, thank you. Gilead is leading the launch in Japan, and we understand that they are pleased with the progress. The submission has been completed, and we expect approval later this year; however, we do not have more visibility on the specifics.

Elizabeth Goodwin, Investor Relations

Our next question comes from Brian Abrahams of RBC.

Brian Abrahams, Analyst

I have two pipeline questions. You mentioned data for filgotinib in small bowel and Fistulizing Crohn's disease—could you put that in context regarding existing therapies and general applicability to your broader Crohn's population? Also, you indicated prioritizing 4617 over 1205 in IPF. Can you discuss the rationale behind that and what lessons you've drawn from your extensive IPF experience?

Walid Abi-Saab, Chief Medical Officer

Thank you, Brian. The data we have in the two exploratory studies, Div. 1 and Div. 2 in small bowel and Fistulizing Crohn's disease, were conclusive studies Gilead was conducting. Both trials were stopped at about 70% recruitment due to prolonged timelines, which detracted from the DIVERSITY trial. So while the small patient numbers limit generalizability, the initial data makes us optimistic, especially as our 200-milligram dosage shows consistent effectiveness across various disease types. Regarding IPF, we did see effects over placebo with 1205 but realized its effects were better suited for combination therapy. As such, we chose 4617 as it has proven promise, though we're proceeding cautiously until we fully analyze the data we’ve collected on our Phase III programs, which provide crucial insights for our next steps.

Elizabeth Goodwin, Investor Relations

Our next question comes from Phil Nadeau of Cowen.

Phil Nadeau, Analyst

Two questions from me. First, regarding the Toledo proof-of-concept studies, what do you consider proof of concept? Do you need to see compelling clinical data? Is the sample size key, or is it more about safety and biomarkers? Secondly, just a housekeeping item on financials: most of the filgotinib revenue was from amortization of milestones and upfront payments—was that from filgotinib or other products?

Piet Wigerinck, Chief Scientific Officer

For proof of concept, we are pleased with the three fully recruited studies, one of which is completed. We aim to generate significant clinical data that demonstrates the efficacy of the compound. If we only see biomarker responses, we would be disappointed.

Bart Filius, President and COO

Regarding filgotinib sales, we are booking small amounts of sales in a few markets like Holland. It is early days in small markets, but sales in larger markets, such as Germany and the U.K., will start in the second half of this year.

Elizabeth Goodwin, Investor Relations

All right. Our next question comes from Laura Sutcliffe of UBS.

Laura Sutcliffe, Analyst

Firstly, do you view the internal pipeline prioritization exercise as complete, or is there still more to do? On a BD note, is collaborating with Gilead on one of their pipeline assets still a consideration? Secondly, could you share your confidence in 4876, given that 3970 has shown promise?

Onno Van De Stolpe, CEO

Yes, we’re actively in discussions with Gilead regarding how they could help us fill our gap. We have a solid collaboration and interaction with them, so it’s certainly possible to work together on an asset. Regarding the internal prioritization, we have finalized that decision, displaying a balance of projects stopped and resources allocated as needed.

Walid Abi-Saab, Chief Medical Officer

Regarding 4876, it shares the same biological profile with 3970 as a backup. We've made significant advancements in our knowledge of the target, and it's a more potent compound, allowing us to better handle the target if needed.

Elizabeth Goodwin, Investor Relations

All right. Our next question comes from Lenny Van Steenhuyse from KBC Securities.

Lenny Van Steenhuyse, Analyst

More of a high-level question. There's mention of a more stringent stage-gating process for R&D determinations. Can you elaborate on what that looks like in practice, including checks and balances for asset progress?

Onno Van De Stolpe, CEO

This process is ongoing at the company. We are reviewing our progression checks, particularly for pivotal decision points between candidates moving from preclinical to clinical phases. We're assessing if we can enhance governance to aid in making better decisions.

Elizabeth Goodwin, Investor Relations

And now Jason McCarthy from the Maxim Group.

Michael Okunewitch, Analyst

This is Michael Okunewitch on behalf of Jason. You mentioned that a proof-of-concept study for one of the Toledo programs has completed, and data is expected soon. Could you give a bit more detail on specific proof-of-concept readouts for the Toledo compound?

Onno Van De Stolpe, CEO

As we guided earlier this year, we’ll gather the data from the first three completed PoC studies together and aim to present those findings during summer. Expect to receive them in the next two months.

Michael Okunewitch, Analyst

And could you provide color regarding the rationale for the U.K. recommending filgotinib as an advanced therapy for moderate patients compared to existing drugs?

Michele Manto, Chief Commercial Officer

Yes, this is Michele. The recommendation by NICE followed their careful evaluation of our therapy profile, resonating with both efficacy and a favorable safety profile. We executed an access strategy improving the economics and the value proposition for Jyseleca, leading to that decision that positions us ahead of the competition.

Elizabeth Goodwin, Investor Relations

All right. We do have follow-up questions coming in. Peter Welford from Jefferies has another question.

Peter Welford, Analyst

Just to follow up on 4876. Have PK combo studies been done with the Chinese inhibitor with regard to the pharmacokinetics of those combinations, and can you share any updates?

Onno Van De Stolpe, CEO

Yes, I believe you're referring to 4876 and the PK combinations. Those trials are indeed planned and have not yet been executed. We will be able to provide more details on this later.

Elizabeth Goodwin, Investor Relations

Our next question comes from Matthew Harrison from Morgan Stanley.

Connor Meehan, Analyst

This is Connor on behalf of Matthew. Can you provide additional comments on your business development plans? Do you plan on pursuing both commercial and clinical deals, or do you prioritize one over the other?

Onno Van De Stolpe, CEO

Indeed, we plan to pursue both. We aim to have a product to bridge the gap along with a commercial deal to enhance our basket of offerings beyond just Jyseleca.

Elizabeth Goodwin, Investor Relations

We also have Dane Leone from Raymond James.

Dane Leone, Analyst

Thanks, Elizabeth. Just two quick questions. First, regarding transformative BD. If you embark on a sizable acquisition, how does that work with the Gilead partnership? I think many of us assumed Gilead would have automatic buying rights. Second, how do you view the development pipeline? Based on your current offerings, you're pursuing large markets but could you look at bringing earlier projects that could hit smaller markets with faster development?

Onno Van De Stolpe, CEO

That is indeed true; Gilead retains options following the last Phase II for products outside Europe, limiting our financial tally. Gilead has expressed interest in collaborating financially on potential acquisitions to manage associated costs. As for indications, we are indeed looking for opportunities to enter the inflammatory and fibrotic space in ways that lead to quicker approvals while maintaining potential development for longer projects.

Elizabeth Goodwin, Investor Relations

Thank you. That concludes our call today. If you have any additional questions, please reach out to the IR team. Our next financial results call will be the first half results on the 6th of August. Thanks for participating today, and goodbye.