Earnings Call Transcript - GLPG Q3 2021

Operator, Operator

Good afternoon, everyone, and welcome to the Galapagos Financial Results Q3 2021 Conference Call. All participants are in listen-only mode until we reach the question-and-answer session, at which point instructions will be provided. I will now pass the call over to Sofie Van Gijsel. Please proceed.

Sofie Van Gijsel, Investor Relations

Thank you, operator, and welcome all to the audio webcast of Galapagos’ Q3 2021 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 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, 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 President. Onno will reflect on the operational highlights, and Bart will go over the commercial and financial results, as well as the expected news flows for the year. 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 Onno and Bart, joined by the rest of our management board. And with that, I’ll now turn it over to Onno.

Onno van de Stolpe, CEO

Thank you, Sofie. Good day, everybody. Thank you for joining this webcast. You already experienced and heard the changes. We have a change in IR as well as in leadership. This will be the last webcast where Elizabeth will be part of the Galapagos team and Sofie is taking over. Additionally, this will be the last webcast where Piet Wigerinck, our CSO, is present. So we’d like to thank both of them for their fantastic services over the years and their contribution to building the company to what it is today. It has been a fantastic journey and an honor to work with you. Let me give you a short Q3 update, if I can get to the next slide. We reported positive Phase 1b data with our TYK2 molecule in psoriasis. We are excited about this mechanism and about the molecule. We’re planning for two Phase 2b trials next year in psoriasis, as well as in ulcerative colitis. We also reported biological activity in our SIK program with 3970 in both UC and psoriasis. Although we also faced disappointment in RA, where we didn’t see any activity, it’s clear that we are unlocking a new mechanism for the treatment of inflammatory diseases. We still have one trial ongoing in Sjögren’s disease that will read out next year. We are busy in research to develop new SIK molecules with specificities to tackle the challenges in these diseases. Good news is that after a significant period, the DIVERSITY trial is fully recruited. That’s the Crohn’s disease trial with filgotinib that is in Phase 3 and is expected to read out next year. We are pleased with the positive CHMP opinion for filgotinib in ulcerative colitis, and we expect the approval by the EU for filgotinib in ulcerative colitis in Europe any day now. In the meantime, we are launching filgotinib, Jyseleca in Europe. That launch is on track, and we will be reporting the sales of the first month; Bart will provide more details on that later. You can also ask questions to Michele during the Q&A regarding the start of commercialization in Europe by Galapagos. We are in full recruitment action regarding a new CEO and a new CSO. That is ongoing. We have identified good candidates for both positions, but the CSO candidate will only join after the CEO has been appointed or at least announced, so a bit of patience there is necessary. If we go to the next slide, we are very pleased to have taken over all responsibilities regarding the Crohn’s disease trial with filgotinib, the DIVERSITY trial from Gilead. It’s advantageous for Galapagos to be in the driver’s seat here to move this program forward. We received a payment of $15 million from Gilead for this transition of control over the trial. Importantly, we were able to negotiate a reduced royalty rate for sales of filgotinib in Europe of 5.6% to 10.5% across all indications, including RA and UC, when filgotinib receives approval for Crohn’s disease. This is a significant achievement for Galapagos. Gilead remains responsible for all commercial activities outside Europe. We have taken over the majority of all the commercial activities in Europe, which will be finalized by the end of the year. If we look at the pipeline in the next slide, we see the challenges we are facing. While filgotinib has advanced to commercial filing for Crohn’s disease, we currently have a significant gap with the rest of the pipeline following earlier setbacks in IPF and OA. However, we do have promising molecules in early-stage development that we need to progress as quickly as possible. You see the SIKs and TYK2 mentioned earlier. We have very exciting molecules in fibrosis that are still very early but show promise. Additionally, we have one program in kidney disease currently in Phase 2a. We are making progress with our pipeline but require time to advance these molecules to the later stages. Thus, bridging the gap through business development is a crucial objective for our company, and Bart will discuss that further. With that, I would like to hand it over to Bart Filius, our President and Chief Operating Officer.

Bart Filius, COO and President

Thanks, Onno. Good morning, everyone in the U.S. and good afternoon in Europe. I am pleased to share some insights about the commercial performance of Jyseleca in Europe, as well as on the financials, including updates on our cash burn guidance that I’ll discuss in a few minutes. First of all, concerning Jyseleca in Europe, we are very pleased with how the launch in rheumatoid arthritis has progressed. Here on this slide, you see a view of sales, showing a combined view of sales booked by Gilead and Galapagos, which we feel is the best way to convey the product performance in the European markets. The sales booked by Gilead are in gray, while the sales booked by Galapagos are in orange. This reflects the transfer of commercialization efforts and supply chain responsibilities from Gilead to Galapagos, which started significantly happening in June and July, with more to come by year-end. There was an exceptional stocking in June, July, which affects the numbers, as you can see. The overall total is €60 million year-to-date, of which €6 million is recorded by Galapagos, and we are happy with that trajectory. Moving on to the next slide, we provide some perspectives on the markets. First of all, in the EU5, on the left, we see the splits in the rheumatoid arthritis market between the anti-TNF class, the JAK inhibitors, and other biologics. We see a nice 17% share for the JAK class, which is still growing across the five key countries in Europe. On the right, we show the growing market share of Jyseleca, specifically in Germany, where we currently have a 4% market share in the dynamic market of RA. In France and the UK, where we only launched a few months ago, it is still too early to see significant market penetration. However, we are pleased with our progress in Germany. Additionally, we conduct our market research to understand how the product is perceived in terms of efficacy and safety. We are happy to report that despite only being in the market for months, Jyseleca is viewed favorably in comparison to other JAK inhibitors regarding efficacy and safety. We are also making progress in reimbursements, with work ongoing in 14 different countries, particularly Germany and Denmark, where some procedures are still in progress. We have signed a contract with a third-party distributor for Eastern Europe, Portugal, and Greece, which is a strategic decision to optimize Jyseleca's promotion in those territories. Now on to cash, we have accelerated our savings program, as stated in the press release. We are reducing our cash burn by €50 million, bringing it to a range around €550 million, down from €580 million to €620 million previously. Our cost reduction program commenced after our earlier setbacks and has so far exceeded our expectations. We are tracking significant progress on that front. Regarding our cash burn, it's essential to note that our R&D investments currently amount to around €350 million. As we anticipate making Jyseleca breakeven in 2024, we should be able to reduce our cash burn considerably by that time. Currently, our cash burn for the nine months leading up to the end of September stands at €377 million, with our total cash balance at €4.9 billion at the end of that quarter. While there are no major updates on the financials, it's worth mentioning that revenue recognition has been a bit more complicated this quarter due to the DIVERSITY amendments. This is related to the accounting under IFRS percentage of completion, resulting in lower revenue recognition for the quarter. However, this is a one-off effect, and we expect to return to normal levels moving forward. Our operating costs are flat versus last year; however, a mix of increased commercial and G&A expenses alongside decreased R&D expenses means we are more or less flat versus 2020 in that regard. Looking forward, we remain optimistic about the upcoming approval for ulcerative colitis by the European Commission. Additionally, we hope to fully recruit the MANGROVE trial with 2737 in polycystic kidney disease soon. Lastly, we are laying the foundations for future growth in line with our strategic review from March, focusing on R&D advancements, effective commercial launches, optimizing business development, and executing on our financial strategies. With that, I will conclude this portion. We are on schedule, as indicated by Sofie. I suggest we hand it back for the Q&A. Thank you.

Sofie Van Gijsel, Investor Relations

Thanks very much, Onno and Bart. This 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

Our first question comes from Wimal Kapadia from Bernstein. Please go ahead with your question.

Wimal Kapadia, Analyst

Oh, great. Thank you very much for taking my question. So I guess just one. Just curious to hear your thoughts on the recent failure of Bristol’s deucra in UC. How that potentially changes your thinking about your own TYK2 program, if at all? Any read across or comments would be much appreciated. Thank you.

Walid Abi-Saab, Executive

Yes, hi. This is Walid; I’ll take this question. Good morning and good afternoon, everybody. It’s surprising actually for us to see these data because TYK2 inhibitors are expected to work in ulcerative colitis by inhibiting signaling through IL-23. As you know, IL-23 inhibitors have demonstrated efficacy in ulcerative colitis. Nonetheless, pertaining to the information we know about deucra and what’s been shared by BMS, it might come down to a matter of dosing. They mentioned having another study ongoing where they’re evaluating a higher dose. In ulcerative colitis, it is generally necessary to use a dose that is two to three times higher than what works in other inflammatory conditions such as psoriasis and RA. In our case, we feel quite comfortable with our selective TYK2 inhibitor. We are currently completing the Phase 1 studies and pre-clinical work that will enable chronic dosing and move into Phase 2 for psoriasis and ulcerative colitis. So we are continuing to progress in that area. If it turns out to be a matter of dose, we simply need to evaluate our molecule to determine if we can achieve the needed exposure to produce the desired effects, as we do not question the mechanism of action here; it may just be compound-specific dose-limiting effects. Thank you.

Wimal Kapadia, Analyst

Great. Thanks very much. Super helpful.

Operator, Operator

Our next question comes from the line of Dane Leone from Raymond James. Please go ahead with your question.

Dane Leone, Analyst

Hi, thank you for taking the questions and the updates on the progress. I guess, I’ll use my one question to ask this. Has the board and management, going through the process of looking at new leadership and/or the way that companies should be run forward, considered actually breaking up the company? We have a recent example of bluebird bio effectively splitting their company into commercial assets and an asset still in the development phase. Why wouldn’t you consider that, given you, as you pointed out, have a big gap between filgotinib being a commercial asset and a very early stage R&D portfolio, where you could have two companies that need different skill sets to run them, potentially being more efficient from an operating perspective? I would appreciate your thoughts there. Thank you.

Onno van de Stolpe, CEO

Yeah, thank you for the question. Of course, this is a scenario we have discussed internally. We think that keeping the two together makes the most sense for Galapagos at this point in time. We believe that filgotinib represents a solid business case for us in Europe. It is showing positive trends despite the high startup costs, and we are convinced we can turn this into a profitable enterprise. We brought filgotinib to market and are planning to further build our European commercial infrastructure alongside other molecules. Of course, there have been delays pushing new molecules to market, but we believe we can fill that gap. We prefer to pursue a business development and M&A strategy, rather than splitting up the company, which would likely destroy capital value for Galapagos. Retaining our marketing personnel for filgotinib would also present challenges if we split the company. Hence, we believe keeping everything combined and addressing the current pipeline issues through external acquisitions is the best course of action to create shareholder value.

Operator, Operator

Our next question comes from line of Jason Gerberry from Bank of America. Please go ahead with your question.

Jason Gerberry, Analyst

Hey, guys, good morning. Thank you for taking my question. Just wanted to come back to the commentary about how you guys are evaluating BD and sort of juggling that in parallel with the CEO hiring decision. Sort of, are you guys aggressively looking at larger, more transformational type deals, or just smaller type transactions until you get a CEO in the seat? Thanks.

Bart Filius, COO and President

Yeah, Jason, Bart speaking here. No, that’s a great question. Pending a new CEO nomination, one should not expect business development initiatives that would dramatically change the strategic direction of the company. Our focus in BD is clearly on inflammation and fibrosis, which are areas we know well and are committed to, as well as potential commercial opportunities in Europe where we can leverage our existing infrastructure. We are primarily exploring bolt-on transactions of that nature, but without a new CEO announcement, you should not expect any major transformational deals that would alter the company’s overall size or direction.

Operator, Operator

Our next question comes from the line of Rosie Turner from Barclays. Please go ahead with your question.

Rosie Turner, Analyst

Hi, good afternoon. Thank you so much for taking my question. I guess it’d be useful to hear a little bit more about this partnership in Eastern Europe, Portugal, and Greece. Any insights regarding the economics of that deal, and whether it will extend into ulcerative colitis as well? Thanks very much.

Michele Manto, Executive

Yeah. So, I wasn’t sure about the question. So the question is about the partnership in Eastern Europe?

Onno van de Stolpe, CEO

Yeah, Eastern Europe.

Michele Manto, Executive

Absolutely. We decided to partner with companies that have established infrastructure in those regions. It’s critical for optimizing the entire Jyseleca pipeline and maximizing revenue opportunities. We plan to eventually extend this collaboration to our upcoming ulcerative colitis indications post-approval, allowing us to enhance our P&L by achieving revenue boosts without having to heavily invest in operations in these areas. Is that addressing your question fully?

Rosie Turner, Analyst

Yeah. That’s great. Thank you.

Operator, Operator

Our next question comes from line of Matthew Harrison from Morgan Stanley. Please go ahead with your question.

Matthew Harrison, Analyst

Great. Good morning. Thanks for taking the question. I guess I was curious if you have had any interaction with AbbVie related to the CF program. Or do you have any ideas on what’s going on there and any thoughts on the outlook for that? Thanks.

Onno van de Stolpe, CEO

Hi, Matt, this is Onno. Of course, we have a general idea of what’s going on there. We receive updates from AbbVie every six months, but they’re quite brief, so not a lot of detail. We do know some good news is that AbbVie is citing the same number of molecules we have as being part of their triple combo. If this is true, then it’s good news for Galapagos if it eventually reaches the market; our royalties are linked to the number of molecules in that triple combination. We hope that two of the three molecules are stable, but we have no confirmation from AbbVie in that respect.

Operator, Operator

Our next question comes from line of Steven Valen from RBC Capital Markets. Please go ahead with your question.

Unidentified Analyst, Analyst

Thanks so much for that. This is Steve on for Brian. I’m wondering if you can share any additional insights related to the preclinical safety of the Toledo molecules? Do you have any greater clarity on the relative compound-specific versus target-specific safety, toxicity, and tolerability? Thanks.

Onno van de Stolpe, CEO

Thanks for the great question. I want to refer you to what we shared on the profile earlier. In principle, we never disclose specific details regarding any organs. Overall, we are pleased with the profiles, which now allow us to move the first cohort into Phase 2 while another one is in Phase 1. Based on the information we’ve gathered, we hope to generate compounds that hit the targets more effectively and also develop selective SIK2 and SIK3 inhibitors going forward. These three axes form our current strategic design for development. Thank you.

Operator, Operator

Our next question comes from line of Peter Welford from Jefferies. Please go ahead with your question.

Peter Welford, Analyst

Hi, thanks for taking my question. Can I ask just regarding the cost and salesforce run, when we think about the sales and marketing spend? Should we consider that the current run rate will modestly increase going into 2022? Given your transition to full control from Gilead, is there likely to be any significant ramp-up when we think about the UC indication rollout, and how does that impact the incremental headcount needed for UC? Additionally, I’d like clarification regarding the CEO search criteria. Is the search for a scientifically focused CEO, with experience in BD and pipeline management, or is it a broader search? Thank you.

Bart Filius, COO and President

Hi Peter, it’s Bart speaking. Regarding your first point about organization, there might be a slight increase in costs related to UC and remaining country transfers from Gilead to Galapagos, but it’s not expected to be significant. We are at a run rate that is very manageable. One word of caution: next year, we won’t be sharing our expenses and results with Gilead at a 50-50 split anymore. Instead, we’ll take on 100% of both top-line and costs. So we’ll provide more details regarding 2022 expectations during our upcoming results announcements in February. Overall, I don’t anticipate a major deviation in costs. As for the CEO profile, we have communicated that we are specifically looking for an individual with a strong R&D background, which is crucial for the company’s future. With our partnership with Gilead and €5 billion on our balance sheet for developing innovative molecules, we are searching for a CEO who can guide these processes with strategic leadership. However, it’s essential we find someone with substantial experience in commercial strategy and business development as well, given our existing product in the market and need for strategic BD activities.

Operator, Operator

Our next question comes from line of Phil Nadeau from Cowen. Please go ahead with your question.

Ernie Rodriguez, Analyst

Hi, this is Ernie Rodriguez on for Phil. Thank you for taking our questions. I have two follow-ups. First, could you provide some updates regarding the next-generation Toledo compound? Are you still projecting to have a candidate in the clinic in 2022, and what are you looking for? Additionally, regarding Jyseleca’s potential in IBD in the U.S., could you provide insights into your strategy or discussions given the MANTA and MANTA-RAy studies results?

Walid Abi-Saab, Executive

Should I take the first question? This is Walid. So, Bart and Piet have already covered some of it before. As you know, our initial focus in this area was with 3970, and we are encouraged by the evidence of clear clinical activity in psoriasis and biological activity in ulcerative colitis. However, we have recognized a need for extended inhibition during the drug administration. This is currently our focus. One of the main strategies we are pursuing with this SIK2/3 inhibitor is to create compounds that can effectively inhibit both enzymes over a longer duration, allowing us to properly assess our efficacy. We have made strides in learning regarding our platform, and we are proud to lead discussions around the role of these pathways in inflammation. That said, we will be able to determine the way forward based on clinical data. We are optimistic about 2022, as we expect to have a SIK2/3 inhibitor enter clinical trials in Phase 1, helping us to evaluate the potential application in various indications, such as colitis and rheumatologic conditions.

Bart Filius, COO and President

Regarding Jyseleca’s prospects in the U.S., given the heightened scrutiny faced by the class, it seems increasingly unlikely that Gilead will launch Jyseleca in the U.S. market. Nonetheless, the Crohn’s study is crucial and will read out early 2023. However, our primary focus remains on Europe and other territories worldwide. The likelihood of Jyseleca entering the U.S. market appears very slim.

Operator, Operator

We have a follow-up question from Rosie Turner from Barclays. Please go ahead with your question.

Rosie Turner, Analyst

Hi, good afternoon, again. Just thinking about ulcerative colitis. In terms of the upcoming approval and subsequent launch, what are the potential economies of scale since you already have approvals in place? Will this likely accelerate the rollout, now that we’re in 12 countries? Thank you.

Michele Manto, Executive

Yes, this is Michele. Certainly, when we built the infrastructure across various countries, we approached this with an eye on future indications, including UC. Extensive evaluations were conducted country by country, advanced by input from external experts and consultants, which guided us in developing the most effective operating models for each country. This preparation will allow for flexible additions of personnel, including sales forces and medical organizations, to target gastroenterologists more effectively. In some countries, we will expand our existing forces, while in others, we will enhance the existing capabilities within the rheumatology teams to address new indications. This strategy ensures cost-effectiveness as we roll out our activity across countries, accounting for regional nuances, reimbursement timelines, and operational efficiencies.

Rosie Turner, Analyst

Perfect, very clear. Thank you.

Operator, Operator

We appear to have one last question that just got registered. It comes from the line of Van Der Bracht. Please kindly ask your question.

Yves Van Der Bracht, Analyst

So thank you for the chat thus far and the information provided. I have a question regarding Jyseleca. Can you offer further insights into physician feedback on the product, particularly in Germany? Are there specific points we should be aware of regarding how they view it in comparison with peers? Additionally, are specific patient populations more appropriate for utilizing Jyseleca?

Michele Manto, Executive

Thank you for your question. The feedback we have been receiving on Jyseleca is consistently positive in terms of efficacy and safety profile. Physicians refer back to the JAK1 preferential features of filgotinib, which have contributed to its recognized differentiation in the market. This acknowledgment is evident in market research, particularly in Germany and other countries. This positive reception reassures us about Jyseleca’s continued performance in the current climate and sets a solid foundation for its market position. Additionally, physicians have noted rapid onset of action and sustained effects in patients who have been using the drug for longer periods, aligning with our expectations at launch and our execution strategy across geographies.

Operator, Operator

It appears we have reached the last question from Mr. Van Der Bracht, who is from KBC Securities. We appear to have no further questions at this point, so I hand the conference back to Sofie.

Sofie Van Gijsel, Investor Relations

Thanks so much, operator. This concludes the Q&A portion for today. Please feel free to reach out to the IR team if you still have questions. Our next financial results call will be our full year 2021 results on February 25 of next year. Thank you all for participating today, and have a great rest of your day.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s conference call. You may now disconnect your lines. Thank you.