Earnings Call Transcript - GLPG Q1 2020

Elizabeth Goodwin, Investor Relations

Thank you all for joining us today for the audio webcast of Galapagos' First Quarter 2020 Results. I'm Elizabeth Goodwin, Investor Relations. This recorded webcast is accessible via the Galapagos website homepage and will be available for replay later today. To include your questions, we request that you call into one of the telephone numbers provided in last night's press release. I've got one here for you: that's 32 for Belgium, 2404-0659, and the code is 6118715. 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, possible changes in the industry, and the 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, COO and CFO. Onno will go through the operational highlights, and Bart will explain the financial results and expected future news flow. You'll see a PowerPoint presentation on screen. We estimate that presentation will take about 10 minutes. This will be followed by a Q&A session until 9:00 o’clock with Bart and Onno, joined by Walid Abi-Saab, our CMO; Piet Wigerinck, our CSO; and Michele Manto, our CCO. I'd now like to hand over to Onno to start the presentation.

Onno van de Stolpe, CEO

Thank you, Elizabeth. I would like to start with some issues regarding the COVID-19 impact. I would really like to start by thanking my organization for adapting very well to this exceptional situation. These are challenging times, especially for a research and development company. We implemented everything early on in the pandemic, so people are working from home as much as possible. However, for the research teams in the labs, that is not possible, and they continue to come into the office and into the labs. The support functions around that are also still functioning. I am really pleased how that has all evolved over the past weeks. I'm happy to say that the company is continuing to run very efficiently, and we're moving forward regarding all our objectives set. Of course, we are seeing the impact. We have seen the impact on the filgotinib trials that have been halted, and the start of early-stage trials, like the Phase 1 studies, is clearly delayed because of patient safety. A healthy volunteer is the first priority of our company. The good news is that we are on track to report all the top-line results as we have indicated previously. This includes the most important one, the ulcerative colitis filgotinib trial, the SELECTION trial, which we will announce this quarter. So you can expect that data in the coming weeks. We also have the Phase 2a trial of 1690 in systemic sclerosis, which will come in the second half of the year. We've now referred to 1690 as ziritaxestat, which is the generic name of this drug that has been approved. We are looking forward to the very important readout in osteoarthritis from 1972, the Phase 2b trial, the ROCCELLA trial, which will read out in the second half as will the second molecule in idiopathic pulmonary fibrosis, 1205, which will also read out in the second half of this year, Phase 2a. All these trials were completely recruited when the pandemic hit. In the Toledo program, we concluded the Phase 1 studies and are planning the start of the Phase 2 trials. The start of those trials depends on the developments in the coming months regarding the pandemic, which means we have adjusted the expectation of the first Phase 2 Toledo data to the first half of next year from late this year. In that program, we have prioritized 3970 as the main molecule to move forward. We have multiple programs in discovery and development. 3970 currently has the most data and the most promising dataset, so we will focus on that molecule while we continue heavily on advancing the discovery and development of other molecules. Regarding the Phase 3 trial, the ISABELA trial in idiopathic pulmonary fibrosis with ziritaxestat, recruitment is still ongoing. It's tough, as these patients are clearly at risk with reduced lung functions. However, we see the willingness of doctors to continue to recruit these patients. Not all centers can conduct recruitment; if they are dedicated to major COVID-19 activities, they cannot recruit IPF patients. Nonetheless, other centers can proceed with recruitment. Although at a slower pace, we are grateful that we have now over 1,000 patients recruited in that trial, and we continue to recruit these patients as we speak. The fatality analysis is expected in the first half of '21. We had said that it would occur at the beginning of next year; however, that will also be delayed because of COVID-19. We expect it in the first half of next year. If we move to operational highlights this year, we have completed the recruitment of the PINTA study, the 1205 in IPF. We completed two Phase 1 healthy volunteer studies for the Toledo compounds. We're pleased to have received orphan drug designations in systemic sclerosis for ziritaxestat. As indicated, we recruited over 1,000 patients already for IPF within the ISABELA trial with ziritaxestat. We also had two business development activities where we expanded the Fibrocor collaboration in fibrosis and signed a collaboration with Ryvu Therapeutics in Poland on inflammation. If I can go to the next slide, I would like to clarify our activities in the commercial footprint for filgotinib in Europe. Gilead is taking on the marketing of filgotinib in most of the world. However, in the deal that we signed with Gilead last year, we expanded our involvement in filgotinib marketing and commercial activities. For Holland, Belgium and Luxembourg, Galapagos has the responsibility for all indications of filgotinib. We are ready to roll out marketing and introduce this molecule in these countries initially for rheumatoid arthritis and later for IBD, inflammatory bowel disease. For France, Italy and Spain, we have responsibility for commercial activities for rheumatoid arthritis, but not for IBD, which will be handled by Gilead. Conversely, in England and Germany, we won't launch filgotinib for RA, but we will launch it for IBD in those countries. This approach allows us to build a commercial organization gradually. We began building the Benelux about a year and a half ago, started activities in France, Italy and Spain a year ago, and have just initiated activities in England and Germany. We are fully ready to launch filgotinib later this year in those markets, assuming we receive regulatory approval. With that, I would like to hand it over to Bart to go through the financials.

Bart Filius, CFO

Thank you, Onno, for that part. Good morning, everyone, in the U.S., and good afternoon in Europe. It's a pleasure to give a quick introduction to the financials. As always, I'm ready to take any further questions during the Q&A, beyond a couple of slides that I'll show. I always start with our cash position, which is our key performance indicator for the company. We have €5.7 billion – a very healthy balance sheet at the end of Q1 this year, with an operating cash burn of €83 million in the first three months. Our guidance for the full year operating cash burn was between €420 million and €450 million, including some cash inflows from regulatory approval milestones. I will discuss that in detail shortly. The actual cash burn in the first quarter was slightly below our expectations. As a result of the measures around COVID-19, we've slightly reduced our cash burn guidance for the year to €400 million to €430 million. The €83 million in the first quarter includes some non-operating items, such as cash proceeds from warrant exercises and translation effects on currency, totaling roughly €25 million this quarter, all having a positive direction. Moving to the P&L, we saw significant revenue increases to €107 million, but I should emphasize that a large proportion of this is accounting and non-cash-based, meaning it is mainly driven by recognition of upfronts paid by Gilead both in the filgotinib deal and the larger-license collaboration from 2019. There is a recognition of €35 million on filgotinib, and a recognition of €56 million from what we call access rights to the drug discovery platform, included in the €107 million reported for the first quarter. Operating costs are up as well compared to the first quarter of 2019, with some technical items in play. Initially, costs for filgotinib itself have increased from a cost-sharing ratio of 20% to 50%, again as part of the Gilead transaction. Conversely, for ziritaxestat, we are now sharing costs with Gilead as well as further proprietary programs that we are executing and bearing full costs, such as Toledo. Given these trends, our net result is more or less flat compared to the first quarter of 2019, with a net loss of €50 million. There are quite a few non-cash items between operating costs and net results. One important one is a fair-value loss on the Gilead warrants. Gilead has the right to purchase an additional 5% of Galapagos shares at a premium to the market price over the next 10 years, and we need to record a liability for that right. Due to the significantly increased volatility in the Galapagos share as a result of general market volatility, that liability has climbed with a negative €20 million in the first quarter. You will see fluctuations like those in our financial results, fully non-cash, in quarters to come as volatility will change from one quarter to the next. To confirm indeed the revised operating cash burn, a bit lower, our new range is €400 million to €430 million, primarily driven by the pauses in trial execution around COVID-19. This still includes $200 million of anticipated milestones for RA approvals in the U.S., Europe, and Japan. In conclusion, I'll remind you of the anticipated news flow for 2020, which promises to be rich with four significant patient trials reading out. Onno referred to those earlier with filgotinib, 1205, ziritaxestat, and 1972. The highlight of the year will also be the anticipated approval in RA in the U.S., Europe, and Japan, which we anticipate for the second half of the year. With that, I conclude the introductory remarks and hand it over to Elizabeth to guide us through the Q&A. Thank you.

Elizabeth Goodwin, Investor Relations

Thank you very much, Bart and Onno, for those insights. This does conclude the presentation portion of the call. We will now take questions on a first-come, first-served basis, and we do not manage the queue. So please limit yourselves to one question per caller. I'd now like to ask the operator, Derek, to connect us to any callers with questions for our executives.

Christopher Marai, Analyst

First one is really on Toledo. If you could elaborate further on, number one, the target. And number two, it looks like you've selected one molecule, 3970, if I recall, with that TOL2, TOL3 target-selective molecule versus the 3312 that seems to be no longer in development. What guided the decision here in healthy volunteers to choose one over the other ETR business related to the selectivity of the compound or other molecule properties observed in Phase 1 trials? Finally, regarding your SSc program, I would love to understand if you think that autotaxin would have a differential manifestation on organs. We've seen some historical data on skin and lung, and it's sort of different across various compounds and modalities. Would love to hear your comments on that.

Piet Wigerinck, CSO

Okay. Chris, thanks for the question on the TOL program. First, regarding the target, well, that's still undisclosed, so I won't disclose that today. We have plans to brief the field broadly on the discovery, the identity, and the promise we see in this program when we are in the clinic, but that's not today. You mentioned the two compounds, 3312 and 3970. 3312 was indeed a PanTOL compound, while 3970 is a TOL3. During Q1, we completed the multiple ascending dose part of the healthy volunteer studies with both 3312 and 3970. For both compounds, we were pleased with the observed safety and exposures. Notably for 3970, we could include plasma biomarkers, yielding promising data. Thus, we had an opportunity, and with COVID-19 affecting the timeline, we decided to focus on a single compound to optimize our efforts rather than disperse our resources across different compounds without making meaningful progress. This decision is based on the promising plasma biomarker data we saw with 3970. Over to Walid for the systemic question.

Walid Abi-Saab, CMO

Yes. I'm here. Regarding scleroderma, Chris, the approach we've taken in the trial is to have an exploratory Phase 2 study evaluating the effects on the disease itself, not focusing on a particular subtype or organ. We are taking a broad approach as this is our first foray into the space. Scleroderma is tough, being the leading cause of death in autoimmune diseases. The trials in this space are difficult. Based on animal models, we cannot prioritize certain organs over others, but we strongly believe that the autotaxin inhibitor should positively effect the disease, and that's our direction in the NOVESA trial.

Jason Gerberry, Analyst

I'm curious about the update on GLPG1690 and the timeline shift on the futility analysis due to COVID. It was my understanding that you had enrolled one-third of the subjects necessary for futility in early 2000. What’s causing the timing push? Is it trouble capturing the FVC endpoint or perhaps needing to upsize the trial?

Walid Abi-Saab, CMO

Thanks, Jason. For the futility analysis, we need about one-third of the patients enrolled, which is correct, and we have enrolled those. However, we also need about 70% information for the statistical evaluation, which is derived from those enrolled and those that have gone through 52 weeks. The delay stems from the fact we are allowing more flexibility to sites in obtaining FVC in a safe manner. Some can perform it on site, while others may be at risk for delays of one or two months. This affects the overall information we achieve for the analysis. I assure you, this delay is not due to any other trial difficulties beyond this caution related to COVID.

Evan Seigerman, Analyst

Can you expand on your commercial strategy for filgotinib in RA in Europe, especially since this is your first launch in a competitive market? Assuming a similar labeling to competitors, how do you differentiate filgotinib, and do you have plans for a more virtual launch given the uncertain situation?

Michele Manto, COO

There's much that we consider. First, we’re excited about the opportunity of launching filgotinib, reflected in the talent we’ve recruited across the board. The recruitment of leadership teams in all countries is completed and includes experienced professionals from companies that have operated in these markets. Our sales management is also finalized in the countries with anticipated reimbursement this year. Despite the challenges of COVID, we have successfully engaged payers through virtual adboards. We're flexible with our strategy and will scale our sales force based on the evolving circumstances regarding reimbursement and COVID. Regarding the product label, we have strong data that positions filgotinib as best-in-class among JAKs, particularly with great efficacy and safety, which is critical in today’s climate.

Wimal Kapadia, Analyst

I'd like to get your thoughts on the upcoming UC data in context of competitor data. I'm thinking high teens 20% for the induction phase from peers, and low 20% placebo-adjusted rates for maintenance. Your expectations heading into the data would be helpful.

Walid Abi-Saab, CMO

For UC, we have no previous Phase 2 data with filgotinib. The SELECTION trial itself was a Phase 2b/3 trial. We pass through the futility analysis, which is a positive sign, but without specific performance data on filgotinib in UC, we rely heavily on data from Crohn's and other indications. The data from our RA trials suggest that filgotinib will perform at the top line among other JAKs, particularly compared to upadacitinib and likely better than TOFA. Overall, we remain optimistic about its performance based on our prior successes.

Debjit Chattopadhyay, Analyst

I'm curious about the RA MANTA program and the necessity of a supplemental NDA for UC. What interactions have you had with the FDA regarding the label recognition of PE DVT differentiation?

Walid Abi-Saab, CMO

The status of the MANTA program has not been disclosed; Gilead has shared that recruitment should complete in the second half of this year. Discussions with the FDA are ongoing, and we're confident in the data package for filgotinib in RA. Any discussion regarding submission in UC will happen post-results of SELECTION later this quarter.

Brian Abrahams, Analyst

Could you discuss your confidence in the regulatory timelines and filgotinib manufacturing amid COVID-19? What are the specific plans for 3970 in terms of indications and trial designs?

Walid Abi-Saab, CMO

We have no concerns about manufacturing with Gilead; there’s no indication of negative impacts from COVID. We maintain communication with the FDA and EMA and have not been alerted to any anticipated delays for regulatory timelines. As for 3970, we plan to execute studies brought forward in waves based on the toxicology coverage obtained. The first will be a Phase 1b study in patients with psoriasis. Future indications and detailed trial designs will be disclosed as they are approved.

Emily Field, Analyst

Regarding COVID-19, I believe remdesivir is being trialed with baricitinib in the NIAID trial. If this shows promising efficacy, could there be a potential to combine remdesivir with filgotinib? Also, there’s evidence of patients with severe disease recovering but having lung fibrosis. Is this something you would explore from an R&D perspective?

Walid Abi-Saab, CMO

Discussions for combination treatments and insights from studies like the NIAID trial are ongoing. Currently, Gilead is focused on advancing remdesivir, and if inhibition of JAKs proves helpful, Gilead would be in a great position to address that potential. As for the fibrosis portfolio, we need more data on the pathophysiology of patients recovering from COVID before deciding on a direction. Reinserting studies for COVID-related lung damage with our compounds requires careful consideration, particularly since our research targets chronic fibrosis.

Piet Wigerinck, CSO

None of our development candidates exhibit any direct antiviral effect; our compounds focus on targeting cytokine storms. We are currently evaluating which animal models we can use. This is unique given the urgency and unpredictability of pursuing such acute interventions. We’ll consider next steps but recognize this is challenging and speculative with compounds that have not yet been approved.

Eliana Merle, Analyst

Could you provide insight into the expected patient mix for your ulcerative colitis trial, specifically the mix of TNF or biologic naive versus experienced patients? Additionally, for the osteoarthritis trial, have you observed any impacts from COVID, such as missed visits, and what provisions have been made for potential missing data?

Walid Abi-Saab, CMO

In the SELECTION trial, we have separate cohorts for biologic IR and biologic naive patients, with a balanced score of 50/50. For ROCCELLA, we are experiencing the effects of COVID like all other trials. We've established a task force meeting daily to monitor ongoing trials and external data. Our primary focus remains patient safety and maintaining study integrity. We’ve allowed sites flexibility in regards to visit windows and supported access to labs remotely. Currently, we see the impact in ROCCELLA as minimal; we anticipate a slight delay in processing due to our adjustments for patient safety.

Matthew Harrison, Analyst

Could you discuss GLPG1205 and the PINTA study? What insights do you hope to gain from this, especially in relation to patient characteristics and validating novel markers?

Piet Wigerinck, CSO

The PINTA study is a proof-of-concept in about 60 patients, with patients on standard of care, including various treatments. This is a strategic shift from placebo-controlled studies and is more aligned with Phase 3 expectations. We aim to validate FRI as a more sensitive marker to ascertain the progression of IPF. We expect to have all patients recruited and hope to gain insights on treatment effectiveness and patient comparisons across different therapies by the second half of this year.

Phil Nadeau, Analyst

I want to revisit the comparison between 3970 and 3312 within the Toledo program. Previously, 3312 was characterized as one of your best compounds in IBD models, so why was it passed over for 3970? Were the preclinical models not predictive?

Piet Wigerinck, CSO

During Phase 1, 3312 demonstrated low plasma levels, which didn't effectively prove its activity in the colon. Meanwhile, with 3970, we had promising plasma biomarker data. The decision was to go with the molecule that showed better present data rather than one where we only observed absence of activity in its previous stages. Hence, we believed that focusing on 3970 would lead to better results.

Dane Leone, Analyst

With regard to the IPF futility analysis discussion, was the delay due to fewer data points than expected? Are you using an MMRM model for missing data points?

Walid Abi-Saab, CMO

Yes, we are indeed using statistical models. To clarify, we want to ensure enough data for accurate statistical power, but the delay primarily stems from widening visit windows and ensuring patient safety. We're seeing low dropout rates and maintaining data collection integrity.

Laura Sutcliffe, Analyst

Regarding Toledo, should we think of this primarily as 3970 for now? Or are you hoping to bring in other assets soon?

Piet Wigerinck, CSO

We currently have plans for other compounds along with 3970, such as 4399 which we aim to bring to Phase 1 this year. We will explore and disclose comparisons and directions for these candidates as the program develops.

Elizabeth Goodwin, Investor Relations

And Derek, we've got time for one more question.

Lenny Van Steenhuyse, Analyst

Can you elaborate on the cash asset shifts from cash in hand to investments back to cash? Also, regarding the NOVESA trial, is there a focus on preliminary functional readouts in addition to the primary endpoint of MRSS?

Onno van de Stolpe, CEO

Regarding cash, we have transitioned some funds to safer investments. This is part of a precautionary measure in the current environment, ensuring we maintain liquidity. About NOVESA, we are indeed looking at the MRSS endpoint but not specifically targeting interstitial lung disease; however, we will be monitoring functional outcomes as part of the broader approach.

Walid Abi-Saab, CMO

We will monitor FVC and other relevant metrics, but at this stage, I don’t anticipate we will be sufficiently powered to make definitive conclusions due to the anticipated patient population not being adequately represented for interstitial lung disease outcomes.

Elizabeth Goodwin, Investor Relations

Thank you all. That does conclude the Q&A part of the call. Please reach out to the IR team, Sofie Van Gijsel or myself, if you have any questions. Our next scheduled call will be for the first half of 2020 at 8:00 AM Eastern, 14:00 CET on the 7th of August. We thank everyone for their participation today. Wish everyone a great weekend, and please stay safe. Thank you so much. Bye now.