Good day, and thank you for standing by. Welcome to the Galapagos Financial Results Q1 2022 Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sofie Van Gijsel. Please go ahead.

Thank you, operator, and welcome all to the audio webcast of Galapagos' Q1 2022 results. I'm Sofie Van Gijsel, 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 statements include remarks concerning the 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 Dr. Paul Stoffels, CEO; and Bart Filius, COO, CFO, and President. Paul will reflect on the corporate and strategic highlights, and Bart will go over the operational and financial results. We estimate that the prepared remarks will take about 20 minutes. After that, we'll open to Q&A with Paul and Bart, joined by Dr. Walid Abi-Saab, CMO; and Michele Manto, Chief Commercial Officer. And with that, I'll now turn it over to Paul.

Good morning, and thank you, Sofie. I'm very pleased to be here for the first time at the quarterly results presentation for Galapagos. I joined four weeks ago and am happy to be on board, working with the teams here. I spent the first four weeks reviewing with the Board and the teams across the organization, the research and development projects, but also the commercial opportunities. I'm fascinated and impressed by what the team has been doing over the last years, and where we are today, especially with the capabilities the team has brought together. I hope today we will be able to talk to you a little bit about where we are, but also shortly about where we will go. The mission of the company is very similar to what I have been driving for my whole life: bringing new and novel medicines to patients around the world, with a real focus on how we can make patients live longer and better lives, especially focusing on quantifying what we do in terms of years of life and improving quality of life. A founder's spirit is driving Galapagos as a main driver for the success of the company. A very important point is our fully integrated company. I am convinced, even more so than before I joined on April 1, that Galapagos has the opportunity to become a fully integrated and remain an independent European biopharma. There are strong development and discovery capabilities in the company. I visited all the teams, and the capabilities are there to make a real difference in R&D. Filgotinib is an example of how the company moved uniquely from discovery through development to commercialization. Now, Jyseleca is a growing franchise in Europe, and the team will report on that later in the meeting. We have a strong collaboration with Gilead, and I've interacted many times with them since I arrived; it's a collaboration where we can count on the strength of our own teams, but also the strengths Gilead brings as our global partner for development and commercialization. Lastly, we have a strong balance sheet, allowing us to focus on what matters: significantly transforming our pipeline and bringing multiple new opportunities to the clinic and hopefully to the market. To summarize, we focus on high unmet medical needs in our existing and possibly new disease areas. We will continue to work on our first-in-class targets but will also choose more best-in-class targets and ensure we move the pipeline closer to proof of concept than in the past. This will allow us to speed up entering the clinic and making our choices faster and accelerating new products to market. We will pursue internal and external opportunities. The market is difficult for many companies currently, prompting many to reach out to us for collaboration, particularly those with assets in late preclinical and early-stage clinical settings, which are of great interest to us. Our intent is not to make a large acquisition; we see more value in operating in the late preclinical and Phase I proof-of-concept spaces. We hope to enter into several new deals over the next few months, bringing in select opportunities from the preclinical Phase I space. We are also looking into the Phase II and Phase III spaces for new opportunities that align with our existing therapeutic areas. This combination of accelerating R&D and integrating select opportunities through smaller acquisitions or licensing deals will help us escalate our pipeline and enhance value creation. We will return to you in the second half of the year with the overall strategy once we have solidified the internal and Board strategies. Bart, with this, I'll give it to you.

Thank you very much, Paul, and good morning, everyone in the U.S. and good afternoon, everyone in Europe. Now I have the chance to provide you with a perspective on the operational highlights for the quarter, starting with our pipeline's current state. We are highlighting three key programs here. First, filgotinib. Jyseleca has a marketed product with an ongoing diversity study in Crohn's disease. This study is fully recruited, and we anticipate seeing full results, including maintenance data, in early 2023. That’s a significant trial from which we await data in the first half of next year. The second is our TYK2 inhibitor, 3667. We're observing this with care and vigilance concerning its clinical and regulatory progress as we identify the right indication for this asset while considering the external environment. Our ambition is to initiate a Phase II program still within this year. The third program is CFTR 2737, which we're evaluating in polycystic kidney disease via a one-year trial. That trial, too, has been fully recruited since late last year, and we look forward to data from this proof-of-concept study in the first half of 2023. Moving on to our marketed product, Jyseleca, we're proud to have our first marketed products available for patients in Europe. As the marketing authorization holder, we’ve transitioned from Gilead and have launched in two indications: rheumatoid arthritis and ulcerative colitis. The growth trajectory for Jyseleca in RA in Europe is on track, reporting sales of EUR 14.4 million in the first quarter, showing a nice growth curve quarter-on-quarter. We also received a EUR 1 million milestone payment from our partner, Sobi, who is launching in Eastern European countries and Portugal. Based on this, we are confirming our guidance from February that we expect to achieve sales between EUR 65 million and EUR 75 million. Additionally, the ongoing review under Article 20 by the PRAC is still in progress, and we expect to have further updates from CHMP and the European Commission in the coming months. Regarding market share, we see a favorable increase, with the JAK class in Europe now approaching a 20% market share as of last March 2022. Our market share in the dynamic markets across the EU5 is now near 5%. Some countries, such as Italy and Spain, only launched in the fourth quarter of last year, and we're pleased with the evolving trend. Our market research shows that Jyseleca stands out in terms of efficacy and safety compared to other JAKs in the class. We're pleased with Jyseleca’s growing brand awareness and market share, and we're continuing to expand our coverage in Europe, including countries where reimbursement for Jyseleca is being established. This, in turn, contributes to a promising business case. We anticipate achieving around EUR 0.5 billion in sales across Europe across three indications. We now have two approvals in RA and UC and expect to gain approval for Crohn's as well in 2023 or early 2024. This growth potential includes a contribution margin of around 50% and a favorable patent life. As of end-March, we have a cash position of EUR 4.6 billion, excluding certain adjustments. Our operational cash burn was EUR 77 million this quarter, which is below the expected 25% for Q1. However, we did receive a final EUR 50 million payment from Gilead this quarter concerning renegotiations. Revenue recognition from our deferred balance sheet is EUR 2.3 billion, and we recognized just above EUR 110 million in the first quarter. We will keep our guidance between EUR 450 million and EUR 490 million for this year. In summary, we believe the foundation for future growth is sound, and we are looking at breakthrough opportunities to fill our pipeline further while successfully rolling out Jyseleca in Europe. Thank you for your attention. Sofie, I suggest we move to Q&A.

Thanks very much, 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.

The first question comes from the line of Matthew Harrison from Morgan Stanley.

Great, appreciate it. Paul, maybe if I could just start with you. I was wondering about your comments you made upfront. Can you just give us some sense around what you're thinking about late-stage versus early-stage? I know it sounds like the focus here is on early-stage in-licensing, but you also mentioned some late-stage. So maybe just what you're thinking about there? And are you thinking about a few programs in early stage and one in late stage, etc.?

Yes. The value creation power of Galapagos revolves around moving assets from preclinical to early clinical proof of concept while ensuring we are responsible for significant value creation. Our focus will be on bringing in assets in that area. However, we will not overlook early-stage programs; we are indeed looking into Phase II assets, albeit we prioritize preclinical assets. We aim to steer clear of Phase III assets due to their established strategies, high prices, and limited added value for a company like us. Hence, we will focus mainly on clinical assets at the Phase I/II level. Balancing our undertaking with best-in-class and first-in-class targets will enable us to broaden our capabilities as we move forward.

Next question comes from the line of Dane Leone from Raymond James.

Congratulations on joining the organization, Paul. Maybe a targeted question for me just to keep things moving. It seems from your commentary that you're not apt to do a larger acquisition, which has been an area of huge debate with investors. Does this mean that any acquisition would probably come out of the cash balance held under Galapagos and could be argued as unaffiliated with the Gilead partnership? If so, could you maybe give us an estimate of what that cash balance would be and could be used for a deal that would really only benefit Galapagos?

I'll first answer a part, and then I want Bart to weigh in here. Currently, we are looking for the best opportunities. We have the freedom to decide whether to use our cash balance or collaborate with Gilead, allowing us a broader scope to tackle exciting global assets. We evaluate both methods.

I would add that the Gilead contract has a lot of flexibility and is very good for both earlier stage assets and for mid-stage assets. Having licensed something, Gilead gains an opt-in right at the end of Phase IIb or at a pre-pivotal stage against a milestone of $150 million. This remains financially attractive. However, we are also open to evaluating opportunities earlier on.

Next question comes from the line of Brian Abrahams from RBC Capital Markets.

This is Steve on for Brian. Congrats on the progress. Maybe looking at the SYK targeting assay, 4605 and fibrosis. I'm curious if you can speak a bit more on your thinking of optimizing the SYK inhibitor for fibrosis and maybe how that might differ from what you've done in, say, ulcerative colitis or psoriasis, and what mechanistic data gives you confidence that targeting simple kinase is a good target there?

Thanks a lot. This is Walid. I'll take this question. I apologize for my voice; I'm feeling a bit under the weather. One specific characteristic of 4605 is its increased concentration in tissue. In animal models, it showed promising results for interstitial pulmonary fibrosis (IPF). However, our previous large program in IPF did not translate well in clinical trials. Therefore, we're strengthening our preclinical assays, adding more assays to link animal data and human data effectively. We plan to enhance our trial design based on lessons learned from the ISABELA study before moving forward with this compound. So, regarding 4605, it remains under evaluation, and we aim to have a conclusion in the next 3 to 6 months regarding the next steps.

Next question comes from Charlie Mabbutt from Bernstein.

So Paul, what are your initial thoughts on the TYK2 and Toledo programs? Do you see a chance that you could deprioritize those and allocate your capital elsewhere?

We are committed to coming to a final conclusion on the TYK2 and Toledo programs and maximizing their chances of success. Over the next few weeks and months, we will objectively evaluate their potential and decide on the best course of action with these assets. Elsewhere, new data concerning TYK2 is coming to light, and we're assessing how it compares to our ongoing work, with updates to follow in the coming months.

Next question comes from the line of Jason Gerberry from Bank of America.

Paul, I just wanted to put a finer point on the commentary about capital deployment. If I hear you correctly, it sounds like you are envisioning more structured licensing-type transactions where upfront dollar amounts are smaller, aligning better with typical Gilead opt-ins. That said, when you negotiate these deals, what do you believe makes you a more attractive partner than larger companies, particularly Gilead?

Yes. My experience tells me that derisking products and paying a larger amount when the product shows promise offers a better value proposition than incurring high initial costs amidst uncertainty. It's not rigid; we will evaluate opportunities on their merits, but our primary goal is to add new products while minimizing risk. Our partnership with Gilead has provided us with great leverage, allowing us to capture a significant share of U.S. commercialization, freeing us to focus on progressing the R&D of our assets and justifying the strength of this collaboration.

Next question comes from the line of Phil Nadeau from Cowen & Co.

Paul, congratulations on taking over the CEO role. Two related questions for you on the R&D strategy. First, in your remarks, you mentioned that Galapagos would focus more on unmet needs. Could you elaborate on that? How will this be a shift in strategy versus the past? Second, some criticism of your R&D strategy has been that Phase II trials didn't sufficiently derisk programs before progressing into Phase III, leading to costly failures. Do you think that's a fair criticism? How do you envision proof-of-concept studies changing in the future?

For the first drug, Jyseleca, filgotinib, the approach was successful as it advanced smoothly from discovery to market. The areas of inflammation and fibrosis are quite challenging with high risk. Moving toward areas with significant unmet medical needs while focusing on solid assets should accelerate our market timeline. We will transition from first-in-class to best-in-class targets while navigating these medical needs that should facilitate quicker market entry. When we revisit our strategies, we aim to develop clear timelines in three, five, and seven years to ensure substantial value creation in the mid-term.

Next question comes from the line of Brian Garnier.

Congrats on starting on this road. Regarding your business development strategy, if I understood you correctly, you're focusing more on first-in-class assets and preclinical Phase II due to your existing capabilities. While late-stage investments aren’t your primary focus, would you still consider any best-in-class targets? Would that be a fair representation? And would late-stage opportunities be evaluated mainly for licensing rather than full acquisition?

When it comes to licensing versus acquisition, it will depend on what we wish to bring on board, including whether it’s merely the asset or the potential value from its team and capabilities. We strive to acquire differentiated assets with significant added value. Our balance between first-in-class and best-in-class targets will allow us to maintain the pursuit of transformative assets closely aligned with new market potential.

I have one final question. Would you consider commercial rights for already approved drugs in the U.S., for instance, in partnerships with U.S. biotech firms that want to establish a European presence?

Yes, there is considerable inbound interest as we have a functioning commercial organization in Europe. We see a lot of potential interest from biotech firms wishing to partner with us in European markets if it aligns with our goals and infrastructure.

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

Dr. Stoffels, is September Q3 still the right timeframe for us to expect your official strategic outlook for Galapagos? Additionally, could you characterize the current business development environment? Does the sector pullback create opportunities, or are most firms still retaining unrealistic expectations?

Bart will take part of the timeframe discussion, but we are working diligently with the Board and executive team over the next three to five months. Regarding modalities, we will consider biologics as an option as new indications evolve. As we bring in new modalities, we will also need to supplement our existing capabilities accordingly.

I can confirm that there is a notable increase in inbound requests from companies showcasing promising science that lack the funding to reach the next stage. This market dynamic greatly enhances Galapagos' position. We will utilize our cash balance responsibly, capitalizing on new partnership opportunities while staying strategic.

Next question comes from the line of Peter Welford from Jefferies.

It seems you're impressed with Galapagos' technology, yet why not concentrate on leveraging the existing platform while also pursuing smaller bolt-on deals to optimize the commercial infrastructure in Europe, which remains underutilized? My question is, what specific skills do you think Galapagos has in preclinical and Phase I development, and why focus on bringing in new assets rather than developing internally? Lastly, are there new modalities that you would consider pursuing?

There will be a full evaluation of the pipeline and opportunities. I'm proud of Galapagos's capabilities in biology, chemistry, formulation, and toxicology. We possess a comprehensive end-to-end capability to propel medicines from late development to market. We must utilize these capabilities on existing targets, prioritizing best-in-class licensing while considering commercial opportunities that arise. We will decide what stays, what goes, and what we acquire to shape a robust pipeline for the future.

The next question comes from the line of Jeroen Van den Bossche, KBC Securities.

Congratulations on the exciting and successful launch of Jyseleca. I have one question regarding the EMEA or EMA review in September. What risks do you associate with Jyseleca compared to Olumiant? How could this potentially impact your pipeline where you still have JAK1 inhibitors under development?

The Article 20 initiated by the EMA is a review focused on analyzing risk-benefit of the entire class of JAK inhibitors, sparked by the oral surveillance study and observational study conducted on Olumiant. The adverse events displayed have been carefully monitored, and since we are the latest entrants in this market, we have been building and sharing our adverse events data with the EMA throughout our reviews. We cannot speculate about the outcomes without further data, but we have confidence in our data package. We believe that, due to Jyseleca's preferential action on JAK1, our adverse event profile and risk-benefit profile are positive. Our strong comparative performance in terms of efficacy and safety enhances the comfort level of prescribers in recognizing our advantages.

Thank you, Walid. I would like to add that Jyseleca's performance, together with our continuous updates, supports prescriber confidence in its efficacy and safety, especially with its JAK1 preferential mode of action. The JAK class itself hasn't been affected by the ongoing procedure, which allows for continued positive performance from Jyseleca in its available markets.

Thank you, operator. That concludes today's call. Please feel free to reach out to the IR team if you have any further questions. Our next financial results call will be the H1 2022 results on August 5. Thank you all for participating, and have a great rest of your day.

That does conclude our conference for today. Thank you for participating. You may all disconnect.