Galapagos NV (NASDAQ:GLPG)
Q1 2016 Earnings Conference Call
April 29, 2016, 08:00 PM ET
Elizabeth Goodwin - Investor Relations
Onno Van De Stolpe - Chief Executive Officer
Piet Wigerinck - Chief Scientific Officer
Bart Filius - Chief Financial Officer
Michaël Vlemmix - KBC Securities
Peter Welford - Jefferies LLC
Hugo Solvet - Bryan Garnier & Co.
Good day and welcome to Galapagos Webcast Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Elizabeth Goodwin. Please go ahead.
Thank you very much and welcome all to the audio webcast of Galapagos’ Q1 2016 results. I’m Elizabeth Goodwin, Investor Relations and I’ll be hosting the event today. This webcast will be accessible via the Galapagos website homepage and will be archived for one-year starting a little bit later today.
If you would like to ask some questions at the end, we request that you call into one of the telephone numbers given in the press release, and I have got one here right at hand that’s 32 for Belgium, 322-620-0138 and the code 6420003.
I would like to remind everyone that we will be making forward-looking statements during today’s audio conference. These forward-looking statements include remarks concerning future developments of the 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.
Turning to today’s agenda, the first speaker will be Onno Van de Stolpe, Chief Executive Officer of Galapagos, Dr. Piet Wigerinck, Chief Scientific Officer and then Bart Filius, Chief Financial Officer. They will take you through Galapagos’ operational and financial highlights for the first three months of 2016 and give you some outlook for the remainder of the year. You will see a PowerPoint presentation on screen during this presentation. We estimate that the talk will take about 20 minutes and will be followed by a question-and-answer session with our Executives.
So with that, I would now like to hand over to Onno for his part of the presentation.
Onno Van De Stolpe
Thank you Elizabeth. Its pleasure to present to you the Q1 data as well as the well aware on this webcast the new alliance or the expansion of the aligns with AbbVie that actually got signed last night at 2 o’clock and we are very excited about that one.
Let’s first have a look at what happened in Q1, we were able to finalize the deal around filgotinib with Gilead, where we receives the cash position above the €1 billion. And the rest of the quarter was dominated by cystic fibrosis news where we are expanding our portfolio to go for triple combination therapy and we actually started the first clinical study in patients in cystic fibrosis with the SAPHIRA trial in the Class II mutation trial, Class III patients success with GLPG1837 are potentiator.
So another cystic fibrosis news with that although after the quarter in April, we announced the start of Phase II with GLPG1690 in idiopathic pulmonary fibrosis. We started Phase I with MorphoSys MOR106 which is an antiubody that we have 50/50 ownership with MorphoSys. Very excited about it.
We announced FITZROY results the filgotinib in Crohn's disease and as I said just last night, we signed the expansion of the cystic fibrosis deal with AbbVie. So a busy first couple of months of year. For those of you not that familiar with the deal with Gilead, let’s have a look at the deal terms.
We have some more granularity there than we have showed previously it’s a co-development deal for all indications. Gilead is clearly in charge of moving this forward through the further clinical testing and market introduction. Galapagos’ contributed 30% to this research and development cost.
Gilead paid $725 million including 425 million in equity and 300 million in license fees. On top of that, we’re getting success based milestones totaling 1.35 billion and new disclosures that of that 1.35, 755 million is for development in regulatory milestones. So a substantial amount of this money will come in, in the coming years when we’re moving filgotinib through the development of regulatory process in a number of different indications.
Very important for Galapagos, we said we were able to negotiate a profit split in the core promotion territories, the core promotion territories being the big five EU countries plus Benelux and in all other areas we receive a royalty that starts at 20% and goes up with additional sales. So a deals that is truly transformational and reflects the true value of filgotinib as a best-in-class drug.
If you can go to the next slide. The clinical pipeline, you see a lot of JAK-1 filgotinib studies being scheduled in RA, Crohn’s and osteoarthritis. The first one that will started is RA where the centers will open in the end of the first half and actually patient dosing will start early in third quarter shortly followed by Crohn’s and also now in the planning is in Q3 start of also [indiscernible] trial with the osteoarthritis as a Phase II trial.
With our oral detection and [indiscernible] 1690 in IPS we’re expecting the top-line results in the first half of next year, that recruitment is going well underway and then cystic fibrosis as I said 8037 SAPHIRA trials are ongoing and Phase II results will actually be in the second half of this year.
And then the very important Class II, the delta F508 mutation where we have potentiators and correctors being moved into volunteers so we’re ready to test the super combinations therapy in the first half in the second half and the first half 2017. So this is a very important program with a lot of different molecules moved forward, we’re very excited about and this is [indiscernible] of the expanded alliance with AbbVie.
In Osteoarthritis, our alliance with Servier, we are in Phase I at the moment at the moment, the results will be published this quarter and then they will start an approval of proof-of-concept trial later in the year. In information we have alliance with MorphoSys, which is an antibody and the top-line results of the Phase I will be published in the second half of 2017.
So a lot of clinical data is coming up and on top of that we have of course a very large discovery pipeline that’s moving forward nicely and we’re excited to see a number of these programs moving into the clinic starting as soon as next half of the year. With that, I would like to hand it over to Piet Wigerinck to talk about the FITZROY study.
Thank you Onno. I will start with the FITZROY study. FITZROY is our clinical Phase II study where we test filgotinib in [indiscernible]. This is a 20-week study with a primary endpoint of after 10 weeks. We’re very proud in fact filgotinib was the first check to show efficacy in both naïve and TNF failing patients and reaching the primary endpoint in that study.
Next to the primary endpoint, clinical [indiscernible] and in this study we’ve also seen good improvement in body of [indiscernible] measurement and endoscopic measurements. Recently then, we received 20 final data in this study and there we have confirmed that stations that improved in clinical scoring up to we can maintain that activity. So the second part of this study was in fact a complex study for 10-weeks where we end up with more than seven groups and we at the entity only did clinical assessments.
So based on those clinical assessments we can confirm that patient has shorter response as we can maintain that response over the full trial, as well we had a small group of patients that during the first 10-week were on placebo and did not show an response and they were put on the 100 milligram which is a low dose and as well in those patients we saw improvement in clinical science for the disease. So overall as well importantly this study confirmed the safety pictures that we've seen with filgotinib in the drawing studies and which is being confirmed. So we look forward now to the start of the Chron’s study in Phase III, which is planned for second half of the year in Q3. So far FITZROY.
Second program, I want to touched on is our CF program. So in CF, we have a lot ongoing, as you will know we are aiming for a triple combination with one potentiator and two different types of corrector molecules. For each of those components we have lease and we have back of molecules in the meanwhile identified and they are in various stages ranging from pre-clinical test Phase I or Phase II.
So the most advance compound in our potentiator GLPG1837, which currently is in two small scale Phase II studies as a monotherapy. So these studies are called SAPHIRA 1 and 2. In SAPHIRA 1, we will test GLPG1837 as a monotherapy in G551D patients, in SAPHIRA 2 we tested in the S1251N mutation, patients with the mutations. So recruitment is ongoing in our countries, so these are six countries in Europe plus Australia and in each of two studies recruitment is going well and we’ve included both Kalydeco naive as well as Kalydeco experience patients.
So primary end-point of this study is safety and tolerability, but of course as we look to the secondary end-points which sweat chloride, FEV and the plasma level. So reporting of this data will happen during the second quarter of this year as well.
That’s it for development. Onno.
Onno Van De Stolpe
Thank you Piet. If we look at the deal that we have this time with AbbVie. We have expanded the alliance we have started a couple of years back. And that is reflecting the fact that is now talking about the triple combination, rather than a dual combination that we have as a focus point in the early years of the alliance, which means that of course the amount of work is substantially increased. Galapagos is responsible for all pre-clinical Phase I and Phase II of this alliance and also pay for that part of the alliance and therefore we needed to renegotiate the milestones to compensate for the extra costs that we are incurring in moving these programs forward.
And I’m pleased with the outcome of the discussions, the total remaining milestones are about 600 million they are spread over the pre-clinical Phase I, Phase II, Phase III as well as sales milestones. Where I can announced that from that 600, we have increased the milestones with 250 million and that 250 million is for additional amount of payments by AbbVie to Galapagos for milestones associated with Phase I and Phase II. So this means that our exposure financially over the next couple of year is to substantially reduced in the CF program if we meet the expected successes in the milestones then we get handsomely compensated by AbbVie to these milestones.
The other part of the contract have not been changed, we continue to get royalties between the mid-teens to 20% this year based on sales levels. We will retain in China and South Korea geographic areas and we have co-promotion rights in the Benelux. AbbVie commercializes and is also responsible for the Phase III development. Galapagos contributes a percentage to the Phase III development. All of these conditions are identical to what it was when we signed the contracted a couple of years back. It’s really about the increase of the milestones during pre-clinical Phase I and Phase II.
So we’re very pleased with this outcome, both companies are very excited, it’s a very strategic program, it’s going very well and it’s a fantastic unmet medical need that we are trying to get product for and we will be in patients with the triple combo in 2017.
With that, I would like to hand it over to Bart Filius, our CFO to talk about financial results.
Thank you, Onno. And I will start as usual during these calls with a view on our cash position and I can say it’s well known that the first quarter of 2016 has been an exceptional quarter in terms of cash evolution at the company. Because of the transaction with Gilead, we reached a level of almost €1 billion of cash at the end of March. And this slide show you how we got there, we have 350 at the end of the year 2015.
The upfront as well as the share subscription amounts paid by Gilead is €668 million, a little bit of cash coming from warrant exercise. There is one item on this, which is new at least in presentation that we have a currency translational effect, which is non-cash effects. But it’s because we have a limited amount of our cash in dollars and the dollars has depreciated over the quarter a bit, so it’s a non cash item, but nevertheless reported in Euros, it’s a negative on our cash balance.
And our operational cash for the quarter have been €25 million and as a reminder given guidance that we would spend in the year between a 100 and a 120. So to 25 from the first quarter is just nicely balanced compared to those expectations. So a very exciting quarter in terms of cash evolutions.
In terms of the P&L, I’ll go to the next slide with revenues, this is always a difficult one to both forecast and estimates obviously, especially because of the recognition of deferred income which has played a big role in the P&L top-line of our company. In 2015, first quarter we still had almost €12.5 million of revenue recognition from the transactions that we have signed with AbbVie in 2012 and 2013 regarding at the time filgotinib and cystic fibrosis. Those amounts are no longer in our balance sheet, so you will not see those coming any further in the course of 2016.
On the contrary, we would see revenue recognition from the Gilead transaction where we have the upfronts as well as the share premium to be recognized over the coming let’s estimate four-years of involvement in development of filgotinib. And as a reminder, this amount is relatively low at the moment, the way we account for this is that we recognized those revenues proportionally to the costs of the program spent and the cost that we can contribute to the 20% that Onno was describing before.
Our out of pocket expenses regarding developments and those have been limited to do in the first quarter of 2016. As a result, also the revenue recognition is relatively limited in the first quarter of 2016 and this will increase as the programs get on-track later on this year. The rest is relatively stable, a bit more in cost reimbursements in the first quarter for a total of 15 million in top-line.
Our operating expenses then show a logical consequence, the development expenses are lower than last year. This is because last year in the first quarter we were bearing a 100% of the cost of filgotinib development, which was the end of the Darwin I and Darwin II program at the time. Now we are bearing 20% of the cost of the filgotinib program, which was obviously ramping up as I was just explaining. So overall a decline in operating expenses and our P&L as well.
Then this next slide, I won’t go through this one in all the details, but still I would like to remind everyone of it, because it’s a very particular element and I’ve shown exactly the same slight at the end of early March when we announced the 2015 full-year results. There is a meaningful impact in our P&L in terms of financial income and expense. It was a negative impact in our 2015 results of almost 31 million and it was a positive impact in our Q1 results of €57 million.
This is the result of the share premium accounting that Gilead paid €58 a share over a closing price of €52 in December. That gap between the two is a share premium which then was basically fair values at the end of December and again at the closing of deal, resulting in a negative in December and a positive at the end of the deal.
This is not weakening, so this is in effect for Q4 to 2015 and Q1 to 2016, but we will not see this coming further in any of the quarter, because the view has now been closed in full. As a result of this, in terms of accounting going forward, the 26.8 has been recognized now between the two amounts in the two quarters that I just was describing and the 39 million is still to be recognized as deferred income together with this $330 million upfront over the next let’s say four years.
Then what that is resulting. This resulting that we had a profit at the bottom-line of €36 million which is largely driven by the 57.5 million which is explained on the previous slide and in terms of operations we had a negative 14 in the first quarter of 2015. This is going down to a negative 21 in 2016 which includes the 4.5 million of currency translations effects as well.
In terms of guidance, just as a reminder, we reiterate our guidance of cash burn between 100 and 120 million, obviously this excludes the cash income from filgotinib to the extent that it has been received in January but also to the extent it is still to be received in the remainder of this year. Because there is some milestones that were associated with some events that are to be going to be taking place later on in 2016.
This cash burden reflects cash slightly lower than in 15 and it reflects the lower spend on filgotinib, because we spent only 20% compared to the 100% last year, but it also reflects on the other hand an increased spend on the cystic fibrosis program and our proprietary programs.
So with that I conclude the financials and get back to you Onno for the conclusions.
Onno Van De Stolpe
Thank you. Here you see the slide with the expected clinical news flow in 2016. Of course, there is a lot of filgotinib new share on RA, Crohn’s and UC. As I said earlier, we are expecting centers to open very end of this half year for our RA trial Phase III. And then Crohn’s to start in the third quarter as well as UC Phase II in the third quarter. Then a number of trial results and start around the cystic fibrosis program, most notably our potentiator 1837 Phase II results that we look forward to and the full recruitment for IPF program 1690. In [OA] (Ph), we’re expecting the Phase I results in the second quarter of this year.
So a lot news will coming up and we will highlight our clinical program as well as our discovery program and our R&D update that we’re having in the Yale Club in New York on June 15, everybody is invited to join us there in this nice setting.
If you look at the outlook, clearly Galapagos is on-track, our programs are moving forward nicely as expected and communicated. We’re excited about our discovery pipeline is being nice programs towards the clinic. We continue to use our target discovery platform to come up with new mode-of-action target as we are moving into our discovery pipeline. And all of that with very strong balance sheet, so we’re in a great positions to continue our role to become a fully integrated biotech company.
With that, we conclude the presentation. Back to you Elizabeth.
All right. Thanks Onno, Bart and Piet. I would really like to have the operator [indiscernible] explain to the callers how they can post the questions to these gentlemen. Go ahead.
Thank you [Operator Instructions] We will now take our first quarter from [indiscernible] from Cowen & Company. Please go ahead.
Hey guys. Thanks for taking my call and congratulations on closing the revised deal with
AbbVie. First on filgotinib now that the [indiscernible] meeting has happened. Can you talk about whether the FDA has allowed you to dose men in with the highest dose anymore and then also what dosing schedules going to be in the Phase II for RA and particular?
Onno Van De Stolpe
Thanks. We kind of were expecting that question. So asking we are not in our position to comment on this, we are waiting the outcome of the discussions with the FDA and together with Gilead, we have decided not to communicate until those discussions have been finalized. And we will at that point go out with the design of the Phase III trial. So you need to be a little bit more patience regarding this point.
Okay. Fair enough. And then the CF program. So now you’re putting a second potentiator into the clinics in your 2451. Can you talk a little bit about what is kind of different about that molecule and why it could potentially be better?
Onno Van De Stolpe
Piet, do you want to answer that.
Okay. Thank you. I think this is twist. 2451 is potentiator of a different class, we expect solid once a day PK. So 1837 seems to be closer to a BID profile with current assumptions 2041 clearly has once a day profile and comes from different [indiscernible]. So it’s an excellent backup and pending on the outcome of clinical data with 1837. And the combination we finally put together, we will make together with AbbVie [indiscernible] which are both we will move forward into the triple combo.
Okay. Thank you.
We will now take our next question from Michaël Vlemmix from KBC Securities. Please go ahead. Your line is open.
I know general meeting then forward to approve to issue new shares beginning this week. We are wondering, will this hamper the company’s near-term plans and with almost €1 billion on the bank. Can you describe me which scenarios you would want to issue new shares?
Yes, hi this is Bart Filius speaking. I missed the first part of the question, but I guess you asked why we’ve asked our shareholders to approve a 20% - Freedom to issue new shares.
It’s just general corporate good practice, I would say there is no plan at the short-term to issue new shares, but we want to be in a position to do so. Our historical percentage freedom that we had been given by the shareholders was lapsing later on this year in May so it was time to renew this and we were given this last week, well this week earlier by our shareholders.
Okay. Thank you.
We will now take our next question from Peter Welford from Jefferies. Please go ahead. Your line is open.
Hello. Thank you for taking my questions. Firstly just on cystic fibrosis when you say that time is to move the triple combo in to clinic by the end of first half. Can you just outline, is it possible that more than one triple combo will move into the clinic at that point in time. And secondly, I guess related to that would you consider sort of a matrix style Phase II design with multiple compounds of multiple doses or is it more likely to be more of an exploratory Phase II that will further than just finding studies?
And then secondly, I guess related to the cash questions. Do you feel at present you have the internal resources to be able to have the capability to potentially look to in-license other program, perhaps later stage programs and that could perhaps for usual cash. Or at present are you working full speed on cystic fibrosis in and other discovery program and therefore the cash is more I guess therefore for the future developments of our existing pipeline rather than potentially opportunistic deals that would require additional resources. Thank you.
Onno Van De Stolpe
Peter let me start with the second question and I think you almost answered your own question. It’s actually both, we’re using our cash for our internal pipeline, we have a good pipeline from all aspects from early discovery to the clinical Phase II with IPS. On the other hand, the cash burn related to filgotinib as well as the CF program is going to be quite limited due to the milestones that we’re getting in the partnership.
So we have room in our cash position to look for an outside opportunity being it an acquisition or being it in-licensing and we will be opportunistic in that respect. Of course, we would like to see something that is close to our core capabilities, information or often orphan diseases and clearly we are on the lookout, but at the moment there is nothing concrete. And then the second question, I would like to refer to Piet.
Okay. The question was on the CF portfolio on the triple combination that we plan to move into the clinic in second half of the year and in patients early next year. In Italy, select the three best and the best selected combination, we of course have compounds moving forward with a delay of a couple of months. So I will not exclude that we put more than one triple combo into Phase I, but the plan currently is that by year end we select the best one and that is the one moving forward, because in the CF program we’ve always backup our leads. So it’s a real possibility but that hasn’t been the strategy that we would put one or more triple combos into healthy volunteers first and patients second.
Then on the Phase II design, if you have to show activity of triple combination into patients, it will be a complex design. We have a couple of reactions on the table, currently we don’t want to maximize it in types of matrix and test is every combination, but go with a logic design, but that is capable of showing that each of the components really contribute to this triple combo which is essential.
[Operator Instructions] We will now take our next question from Hugo Solvet from Bryan Garnier. Please go ahead. Your line is open.
Hi hello, thank you for taking the questions. On the last caller this year you feel confident on the recruiting part for SAPHIRA trial, could you just update us on the later and do you see any differences in terms of recruitment of patients. Whether they are naïve or Kalydeco. I'm sorry I missed that slide and have you thought of [indiscernible] in the U.S. to open centers there for the triple combo, given that has strong presence in the country? Thank you.
Okay. Onno I guess I would take this slide or discussion.
Onno Van De Stolpe
Okay. On the recruitment of SAPHIRA I just need to repeat what I said during the call, so we have two studies ongoing. SAPHIRA 1 and 2 both studies recruit well and in both studies we've being capable of including both patients naïve to Kalydeco and to patients that were on Kalydeco. So we have a nice mix of those two types of patients in the two studies. So that’s on the SAPHIRA.
Then opening centers in the U.S. will depend heavily on the type of design, I would assume that certain types of design lead themselves more than other. So we haven’t started that efforts in the U.S. yet, we’re talking and exploring what types of studies would be interest. But either BID that in the future Phase II/b as well might take patients or a mix of patients or can be [indiscernible] and then in two patients. And we are hopeful that the good response we've seen in Europe and Australia that we can get a similar response in the U.S. for recruitment.
Very good. Thank you.
We will now take our next question from Matthew Harrison from Morgan Stanley. Please go ahead. Your line is open.
Hi. This is [Vikram] (Ph) on for Matthew. We just had one question on enrollment again for the CF studies. Anymore specific you could provide about numbers or just how enrollment has been going specifically. I know you mentioned that has been going well, but any details that you could provide numerically or in a little more detail would be helpful?
Onno what’s getting you say on that.
Onno Van De Stolpe
Not much Piet.
So it’s a small trial, the SAPHIRA we aim for the minimum of six patients and well swiftly grow beyond that. SAPHIRA 2 as well as 51, the SAPHIRA 1 and G551D that started later, because we had Australia included, but that’s going well, as well. So our way is not currently that we want be able of included sufficient patients but they remain small and we are happy with current recruitment.
Alright. It seems that we’ve ended the interest for questions. So I really appreciate everyone’s participation today and I remind you all just like Onno said, we’re having our R&D update this year on the 15th of June at the Yale Club in New York. We’ll be starting the presentation early in the morning New York time. Our next financial results are plan for half year on July 29. So please mark that as well. Again, we thank all audience members and callers for their support and participation today and I hope you all have a great weekend. Thank you. Bye- bye.
That concludes today’s conference call. Thank you for your participations. Ladies and gentlemen you may now disconnect.
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