Galapagos' (GLPG) Management Discusses Q2 2016 Results - Earnings Call Transcript

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Galapagos NV (NASDAQ:GLPG)

Q2 2016 Earnings Conference Call

July 29, 2016, 8:00 am ET


Elizabeth Goodwin - IR

Bart Filius - CFO


Phil Nadeau - Cowen & Company

Vikram Purohit - Morgan Stanley

Peter Welford - Jefferies

Anastasia Karpova - Kempen

Michaël Vlemmix - KBC Securities


Good day and welcome to Galapagos Webcast Conference Call.

At this time, I would like to turn the conference over to Elizabeth Goodwin. Please go ahead ma'am.

Elizabeth Goodwin

Thank you and welcome all to the audio webcast of Galapagos' half year 2016 results. I'm Elizabeth Goodwin, Investor Relations. I'll be hosting the event today. This webcast is accessible via the Galapagos website homepage and will be available for replay later on today.

Now, if you would like to have your questions included in our Q&A session, we request that you call into the telephone number given in today's press release, and I'll give it to you right now that's +32 for Belgium, 2 (404) 0659. There are other numbers included in the press release, if you want to dial a local number and the code for the conference is 4067587.

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.

Today's speaker will be Bart Filius, Chief Financial Officer. He will take you through Galapagos' operational and financial highlights for the first half of 2016 and give you some outlook for the remainder of the year. You will see a PowerPoint presentation on screen during this talk. We estimate that the talk will take about 15 minutes and this will be followed by a Q&A session.

I would now like to hand over to Bart to start the presentation.

Bart Filius

Yes, thank you, Elizabeth, and good afternoon everyone or good morning if you're calling in from the United States. Thanks for joining for this webcast where we will be discussing our first half year results and the operational highlights of first half 2016.

Let me start off with a couple of slides on the operational highlights first, because it's been an extremely productive first half of the year. First of all regarding everything along filgotinib we handed over the program to our partner Gilead after the closing of the transaction in January and we were happy to report a successful outcome of the regulatory discussions regarding the filgotinib Phase 3 program in rheumatoid arthritis earlier on in May. The start of which is imminence. Actually, the first patient screens have been done and we expect that first dosing should take place shortly.

Also regarding filgotinib, we've been announcing the FITZROY results, the 20-weeks results, which showed continued response and confirmed dose for the safety profile that we've seen in all the trials with filgotinib so far.

Then with regard to cystic fibrosis, we've announced in April the alliance expansion with our partner AbbVie. That collaboration has been increased in financial terms. We've increased the amount of milestones that AbbVie will be paying us as part of the contract with $250 million, all related to activities in Phases I and II.

We've also started with our potentiator 1837 the Phase II trail SAPHIRA, which is on-track, and actually, we are as we announced during our R&D Day increasing the number of patient operating, including in this trial and we expect to readout by the end of the year the result thereof.

And we've also started Phase I trial with another potentiator GLPG2451. And we've announced at our R&D Day in June favorable Phase I results with our first corrector 2222. So love going on with cystic fibrosis, these three bars are just the surface of this. A lot else going on and we've been happy to discuss that in more detail in June in New York at the R&D Day.

But also beyond filgotinib and cystic fibrosis, which have been the focus point obviously of our work in the first-half, there's a lot going on in the remainder of the pipeline and the start of Phase 2A with our autotaxin inhibitor 1690, as well as the start of a Phase I with our first antibody in partnership with MorphoSys.

We've also announced favorable Phase I top-line results in osteoarthritis, which is our drug GLPG1972, which we have partnered with Servier, and where Galapagos' has the U.S. rights for future commercialization.

And as a proof of our platform continuing to deliver new candidates, with novel modes-of-action, we've also announced two new pre-clinical candidates 2938 in idiopathic pulmonary fibrosis and 2534 in atopic dermatitis, and both of those we anticipate to start into a Phase I in patient, in healthy volunteers in 2017.

On the corporate side, we've been included now in the main indices. In Belgium, about 20; and in The Netherlands the AX Index, which are the indices of the largest companies in The Netherlands and Belgium, which is a proof of the good results or the good work that Galapagos has been able to achieve over the last couple of years.

Also and that is something which is unused and we've been able to include in our Press Release last night, is that we've received a positive tax ruling on the patent related income regarding filgotinib, which is the income coming out of the Gilead transaction.

Let me say a few words about this in a bit more detail for those of who are less familiar with that concept. And this allows us basically to deduct 80% of the income that we receive from the Gilead transaction from our taxable base. This applies to income from the license, the upfront $300 million and it will also apply to income from future milestones, as well as income from royalties thereafter.

With all this, I do not anticipate to have any tax costs associated over the next three to five years, which is the period of the ruling because beyond the 80% deductibility we also have sufficient operating losses to prevent everything else being equal obviously to prevent us adding to pay any taxes.

Beyond that period, if that tax ruling is extended, we should expect to continue to benefit from the 80% deduction. Hence, we realize an effective tax rates on income from filgotinib of 6.8%, so financially very favorable situation for us.

On the next Slide, I then show our pipeline in a bit more detail. I won't go through everything of this because most of you know this quite well. In orange, the partnered elements and in green are proprietary products. So overall, more than 10 molecules that we have in clinical development in different Phases from pre-clinical up to now, also Phase 3. The filgotinib programs in RA, but also in Crohn's disease, and ulcerative colitis are on here. In cystic fibrosis, multiple programs a potentiator, a first corrector and a second corrector in development, our autotaxin inhibitor in Phase II, fully proprietary to Galapagos. Osteoarthritis in alliance with Servier. In inflammation, so far we have not disclosed the exact indication or more 106 to go with MorphoSys and the two new per-clinical candidates that we have been able to announce in June and that I spoke of a little bit earlier.

So, so far the operational highlights. Let me then continue into the financial results of 2016 first half. And as usual, I'll start off with the cash position of the company €969 million cash position at the end of June coming from €348 million at the end of December and obviously as we've also seen in the first quarter the increase is largely due to the Gilead transaction that has generated €668 million.

There are some smallish changes that we exclude from our cash burn both on the positive side some warrant exercises and small negative currency translation effects. But our true operational cash burn including investments is €48.4 million over the first six months.

And as a reminder, I gave guidance to the markets to spent over the full year between €100 million and €120 million. So this cash burn is pretty much in line especially knowing that second half of the year is likely to be a little bit more cash intense due to the starts of the various filgotinib trials and those expenses will increase as of now.

And so all in all good to our target of €100 million and €120 million, as a second reminder that is excluding any income from milestones on filgotinib it might follow later on this year.

Also note on this page, but it's described in the footnote is that our cash position of €968 million or €969 million excludes in fact receivables from the Belgian and French governments worth €65 million as of June 2016.

And if I go to the P&L, I'll start off with revenues. We had a very, very good first half compared to the first half of 2015 with a notable increase of revenues in absolute terms from €37 million to €49 million. But also in terms of quality the revenues have improved significantly in the first six months of this year. And actually I'll try to distinguish that between the colors green and various orange colors. In green is what we have recognized in our P&L in deferred revenue. So this is income that has been paid by our partners as upfronts that we recognize overtime of involvements with those partners in the program. And we had €23 million of that recognized from previous ad repayments in the first half of 2015 and we've got €10 million from the Gilead upfront recognized in the first half of 2016.

The remainder is generally cash generating revenue, and as you can see here that has nearly tripled compared to the position that we had in the first half of 2015, with a good performance of our fee-for-service subsidiary, Fidelta continues be increasing its external revenue now €3.4 million in the first six months. Milestones most notably those from AbbVie two milestones of $10 million each are in the first half of 2016 regarding cystic fibrosis. Some cost reimbursements also partners that reimburse us for expenses that we make in partnership programs again at Gilead and MorphoSys are involved and then grants and other income from government sources worth €10 million, so good quality of revenue and a good increase of revenue as well.

On the expenses side, it's more or less stable €73 million of expenses in the first half of 2016 and may be as a clarification because it's my still discounting [ph] 250 or the development expenses are slightly lower this first half than they were in the first half of 2015. This is because in the first half of 2015 we were still ramping up the expenses associated with the Darwin program so the Phase II program on filgotinib and those were obviously 100% borne by us. Whereas in the first half of this year we were still in the startup phase for the Phase 3 of filgotinib and we pay only 20% of those expenses. So hence slightly lower number there, but my expectation is that this number obviously will increase significantly as the filgotinib program is going to ramp up.

Then as a quick reminder of the next slide that is a big influence to our net result I've shown this slide a couple of times, so those of you that have seen it before I accept my apologies I will not go through all the details, but I'd like to remind everyone that we had a significant one-off in the first half of 2016 of €57.5 million which was accounting related to the premium that Gilead has paid on the shares of Galapagos when they made the commitment first in December and then the finalization of the transaction in January. So this €57.5 million is fully recognized now in our books. What is left out of the premium still to be recognized is the €39 million in orange and this will follow the same recognition pattern as the $300 million that was the upfront license fee and will take let's say four to five years to fully deplete.

That results in total net of €32 million positive on an net EPS basis €0.71. This is coming from €34 million negative in the first half of 2015. I explained already the €57.5 non-cash financial asset adjustments but also there is the operational evolution that which is a positive of €9 million including the evolution in operating results as well as the other lines such as the tax and financial lines in our P&L leading to a net profit again of €32 million.

So far the financials and I'm happy obviously to take any questions that you might have in the Q&A but then quickly may be look at the outlook the clinical news flow first of all, as I mentioned before in filgotinib we are starting the Phase 3 trial in rheumatoid arthritis. We are expecting to start a Phase III in Crohn's in the fourth quarter and a Phase II, III on ulcerative colitis also in the fourth quarter, a lot going on in cystic fibrosis, the results with our potentiator 1837 should come up by the end of the year. We'll be starting other Phase I trials. We will see the results of the Phase I with our potentiator 2451 slightly later than we expected. We expected this to be the year-end, now it's going to be early 2017, Phase I results there, and then in 2017 we will start with first in healthy volunteers and later on in the year in patients trials with our triple combination.

Idiopathic pulmonary fibrosis, we anticipate we will have the Phase II recruited by the end of the year and to be able to show top-line data in the first half of next year and in osteoarthritis where we have, as I said before, the U.S. rights Galapagos intending to file a U.S. IND for in the first half of 2017 to start a patient file there as well.

So all good track as anticipated our outlook is strong filgotinib entering into Phase 3, CF FOIS on the triple combination and a continuous set of new programs coming out of discovery reaching the clinic from the platform that we have. All builds on a solid balance sheet with cash of almost €1 billion, more than $1 billion.

So with that Elizabeth I will give it back to you and open the floor to questions.

Elizabeth Goodwin

Thank you very much, Bart. That does conclude the presentation portion of the audio conference call.

I would now like to ask Maria, our operator, to connect us to any callers with questions for Bart. Go ahead.

Question-and-Answer Session


Thank you. [Operator Instructions].

We will now take our first question and that comes from Phil Nadeau from Cowen & Company. Please go ahead. Your line is open.

Phil Nadeau

Good morning. Thanks for taking my questions. I actually have a couple on the upcoming news flow. You pointed out that the Servier results will be out by the end of the year and I guess two questions there first on the dose escalation design what's your understanding of how long the patients will be at steady state levels after the last dose increase? And then second I'm curious to hear your latest thoughts on the comparison between 1837 and in the second generation I think it's 2451. We continue to hear speculation that this drug interaction of 1837 kind of what's your latest thinking on that? Which dose is your favorite potentiator? Thank you.

Bart Filius

Good, thanks Phil. It's first of all in the dose escalation Interferon that's a different dose escalation by the way between Interferon 1 and Interferon 2 both highly totally is four weeks and patients will be on the highest dose in the last two weeks of that period. On the second point what's the favorite potentiator, I obviously I cannot answer it today we are obviously very interested to see both the results on 1837 and the results on 2451 and we will make the right choices and by the time we are ready for that, which obviously is not today but more towards the end of the year, early next year to be able to conclude.

Phil Nadeau

Great, thanks and just one last question on the design in the current Phase III, I think on your R&D Day you were suggesting that current Phase III could stand Q3 now looks like Q4, is there any significance to that or is this simply a large company like you are taking a bit longer to get the design right? Thank you.

Bart Filius

Yes I don't see there is significant to it I wouldn't even call it the Gilead making either, it's I think it's a logistical slippage. It's true that we were hoping still to achieve it by the end of Q3 now it looks like it's going to be Q4, so we want to be fully transparent there but it's there is no significance to that in terms of underlying topics.


We will now take our next question from Matthew Harrison from Morgan Stanley. Please go ahead. Your line is now open.

Vikram Purohit

Thanks. This is Vikram on for Matthew. So just two questions from our side. First would you be able to share your thoughts about what CF data you expect to be able to present at NACFC this year. And second question could you may be comment on how you may consider designing the Phase II combination studies to satisfy kind of the FDA's desire to see the impact of each separate component drugs separately but would you look at double the combinations for, for that purpose even if you aren't pursuing them commercially?

Bart Filius

Okay. Thanks for those two questions. NACFC may be first not sure yet that NACFC might be just step early for us to show the SAPHIRA results. So the timeline there is I'm not 100% sure on exactly whether we're going to be able to make NACFC there. We obviously want to make sure that we get the trial and the outcomes right more than making sure that we meet exactly that particular deadline. So no promises there yet.

In terms of Phase II design for a combination again that is a bit too early to give you far more view on yet. Let's first make sure that we get our Phase I's right and that we can start a Phase I in healthy volunteers. Then in 2017 obviously that's still our key target is to have a triple combination in patients how we then will develop that further we will get through that, we will decide on that when we get there.

Vikram Purohit

Okay. That's helpful, thanks. So a very quick follow-on, could you quickly remind us on the timing for the second generation corrector tox studies and kind of when you might expect them to be clinic ready is there any more specific guidance you could give beyond what you have already provided?

Bart Filius

Our anticipation is that we should be ready to get into healthy volunteers with our second generation corrector by the end of the year allowing us to go into the triple in first part of 2017 in healthy volunteers.


We will now take our next question from Peter Welford from Jefferies. Please go ahead. Your line is now open.

Peter Welford

Hi thanks for taking my questions, I have got two financial and one on the cystic fibrosis program. So, Bart, firstly on the CF, so you mentioned of the 2451 Phase I data are now expected in the early part of 2017. So if you can perhaps give us a bit of color as to the reasons of the delay given this is just a study in healthy volunteers and also that will -- how that impacts your thinking with regards to the next study for 2222 that's the correct given I think you were planning to do a trial perhaps with 2451 and should we now think that perhaps may be instead with 1837 given 2222 has already completed Phase I, so it's ready for further combo study perhaps already. Then the two financial ones is perhaps it is more appropriate and firstly with regards to the cash burn outlook, you mentioned that the cash burn in the first half is €48.4 million and used that a reference, but I think the €48.4 million also excludes if my math is right the $20 million of AbbVie milestone income that you got during the first half. So when we look at your full year guidance that for should be also in our minds be excluding in addition to the Gilead also any incremental AbbVie milestone to receive during the second half of the year. And then secondly just on the -- you mentioned filgotinib milestones that could come in the future during this year, if those milestones do come presumably on trials start or anything similar. Are those milestones also going to be deferred over the four to five year period or will you recognize milestones recognized this year in full? Thank you.

Bart Filius

Okay. Thanks for those questions, Peter. So first of all on the delay in 2451 it's true, it was planned to be the end of the year now it's early next year. Again that is not a meaningful changes more logistical and the size of the trial that we are actually executing, so don't read too much into that whether it has an impact on the combination with 2222, we haven't actually made up our mind in full yet as to whether or not we are going to do a combination there with 2222 and 2451, so that's but it's for sure something that we will not do at this year when Phase I is still ongoing with 2451.

Then on the financial question first of all the AbbVie milestones are they are, they are not into the €48 million, actually they are so the €48 million is in next cash burn including the income from AbbVie, so that's also the way to look at that going forward. The only thing which is excluded from the guidance of €100 million to €120 million is the filgotinib milestone that could potentially occur later this year.

And then on that last point to your question was do we defer this as well over the next four to five years the answer is no. Our accounting policy there will be recognize milestones as they are received unlike the license income which we indeed defer over the next periods. Hope those answer the questions Peter?


We will now take our next question from Anastasia Karpova from Kempen. Please go ahead. Your line is now open.

Anastasia Karpova

Good afternoon and I have three questions on CF program. Can you specify already which populations are you planning to include in the Phase II triple combo trials, looking at across two heterogeneous or homogenous on the population. Secondly, do you expect to include U.S. sites in your Phase II trial for the combination? And finally does a small delay with the second potentiator result in a delay with initiation of the Phase II with triple combo because it initially was planned by the middle of 2017 but I got a perception that it's slightly shifted now. Thank you.

Bart Filius

All right, noting the questions while you speak Anastasia. Thanks for those on the population for Phase II, exactly in which sequence we will do it, I cannot tell you today but definitely ultimately we would be interested to test out the combination both in homozygous and heterozygous.

Second question will this early trial already be in the U.S. I would think that probably the early trial not in U.S. but ultimately it will obviously be a trial which will be in the U.S.

And your third question was whether the delay in 2451 delayed the Phase II. We maintain our guidance that we should be able to get the triple combination in patients by the middle of next year. And as a remainder at 2737 our second corrector it is the last in line in terms of start of Phase I and so far that seems to be on the critical path.

I can know your question also whether in which class it's obviously in the FITZROY bill population can be testing that.

Anastasia Karpova

And just quickly the follow-up, could you spending positive results of SAPHIRA trial, would you consider evaluating one of the potentiators alone in class limitations let's say in the next two years not eventually but in the near-term?

Bart Filius

Yes I think and we said that before, I think where our obvious target is the triple combination for Class 2 patients but we don't rule out that we those who go after Class 3 but we do anticipate that we would need to show or at least have hope for a significantly at least at par or better than Kalydeco results should be able to do that.


[Operator Instructions].

We will now take our next question from Michaël Vlemmix from KBC Securities. Please go ahead. Your line is now open.

Michaël Vlemmix

I have one question left it's quite a general broad one. The idea is to make the filgotinib JAK inhibitors first line chronic therapy for RA now the positioning of potential benefits versus the current TNF are clear but can you may be elaborate a bit why you believe that JAK inhibitors will come before the IL-6 inhibitors? Thank you.

Bart Filius

Yes thanks Michael. Obviously we are little cuppy as out before we are actually starting to the commercial strategy but I do believe that in oral drug it has a meaningful benefit over the biologics both the TNF and the IL-6. So let's first see what the clinical outcomes are with the Phase III trial but I do think there is really a place for JAKs and if you look at the results that maybe shown with our filgotinib, I think that's also clear both in terms of efficacy and safety for the JAKs to go before the biologics and as such go before TNFs as well as the IL-6 category.


[Operator Instructions].

There are no further questions in the queue at this time.

Elizabeth Goodwin

All right. Thank you. And thank everyone for participating in today's call. Our next financial results will be for third quarter 2016 on the 28th of October. We look forward to speaking to you then about the results and again thanks to all your -- all the audience members and callers for support and participation today. Thank you. Bye-bye.

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