Galapagos Nv (OTCPK:GLPYY) Q2 2013 Earnings Call August 9, 2013 4:00 AM ET
Elizabeth Goodwin – Director, IR
Onno van de Stolpe – CEO
Guillaume Jetten – CFO
Mathieu Chabert – Bryan, Garnier & Co
Jan de Kerpel – KBC Securities
Well thank you very much operator and welcome to all of you. This is the audio webcast of Galapagos 2013 Half Year Results. I am Elizabeth Goodwin, Director, Investor Relations. This webcast will be accessible via the Galapagos website homepage and will be archived for about a year starting today.
So that your questions could be included, we request that you call in to one of the telephone numbers given in the press release. I’ll give you the number for Belgium, that’s 32-2290-1608.
I’d like to remind everybody that we will be making forward-looking statements during the audio conference today. These forward-looking statements include remarks concerning future developments at 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 speakers will be Onno van de Stolpe, Chief Executive Officer of Galapagos and Guillaume Jetten, Chief Financial Officer. They will take you through the strategy, operational and financial highlights for Galapagos for the first half year and give you some outlook for the full year 2013. You’ll see a PowerPoint presentation on screen during this presentation and we estimate that it will take about 30 minutes to go through that. This will be followed by a Q&A session with our executives.
And having said that, I’d like to hand over now to Onno to give a start to the presentation.
Onno van de Stolpe
Thank you, Elizabeth. I’m pleased to present today the half year results for Galapagos. We clearly had a solid first half of 2013. Our revenues shot up 21% compared to the same period last year whereas our loss, which historically the company has had in the first half year, was halved to 5.4 million. But more importantly, we showed substantial progress in our R&D division in our pipeline and I’ll highlight some of those results during this call.
We had a slow first half for the Service division, disappointing results but we are expecting a better second half and I’ll highlight a little bit of that as well.
Our cash position is very good. We had a solid liquid asset position of over €150 million. And if you look at the company, we clearly are creating a pipeline that’s mature. We currently have five Phase 2 studies, one Phase 1 and ongoing and a number of preclinical candidates that are moving forward towards the clinic. So we’re executing our strategy that we have told to market, to build a solid R&D pipeline and at the same time, trying to limit the amount of cash that is needed to move this forward.
And that’s because we have a revenue generation business model in all aspects of the company. We execute fee-for-service activities, we have alliances that generate – that are risk shared and that generate substantial payments through successes in the discovery and the development of these programs and we have licensing income like we executed the deal with Abbott at the time regarding our JAK1 inhibitor that bought a substantial license payment.
Our growth strategy is really based on new mode-of-action molecules moving forward and the JAK1 program is a clear example of that. The JAK1 was discovered in our own discovery platform and then moved forward all the way through chemistry into the clinic and currently is in two Phase 2 studies, one in rheumatoid arthritis and the second one in Crohn’s disease. At the same time, we’re building a much broader portfolio with both partners as well as proprietary programs based on new mode-of-actions discovered in our platform, partly through the alliances that we have with pharma companies that really have enabled the company to grow to the current size. And we continue to look for new alliances and partnerships to leverage the technology that can be applied I so many different disease areas.
We grow our Service division revenues, although the first half was disappointed, we remain positive for the whole year. We clearly executed on the integrated deals in the Service division and were happy to welcome a number of new customers into the Service division, the Service division comprising of Argenta and BioFocus and slowly starting also up the unit in Zagreb, Fidelta.
To strengthen the Service division as we have over the years, looked at opportunities to increase the capabilities and expertise, we have acquired a small company in the UK, Cangenix, which is a structure-based drug discovery company that has been integrated within the Argenta activities of the Service division and is successfully contributing to the revenues of that group.
But let’s switch to the clinical progress in the pipeline. We announced the started and expanded Phase 2 program with our JAK1 inhibitor in rheumatoid arthritis and we reached agreement with AbbVie to actually expand the indications and that includes a Phase 2 trial in Crohn’s disease for the JAK1 inhibitor as well. We also started another IBD, an inflamed bowel disease program with a new mode of action that is proprietary to Galapagos in ulcerative colitis. This program 974 is currently underway and shall read out early in – by the end of this year or early next year.
We also recently announced the initiation of a Phase 1 First-in-Human study with a new mode of action in the Janssen alliance also in the inflammatory field. This triggered a substantial milestone of 6.6 million. And we’re also pleased to announce earlier in the year that GSK has initiated Phase 2 study in both psoriasis and lupus with our molecule that they licensed last year from Galapagos.
If you look at the preclinical progress, also there we have announced nice progress with an oncology product, triple negative breast cancer, that is now a candidate drug moving towards the clinic. We also announced a milestone in the osteoarthritis alliance with Servier bringing in €3 million. And we announced that we have made substantial progress in our cystic fibrosis program with regard to the potentiator of one of the objectives in that program and we anticipate this potentiator to become a candidate before the end of this year.
We also restructured the alliances. We ended the alliances with Roche and Lilly. The Roche alliance, we obtained substantial payment. All assets were returned to us and we are looking at opportunities to re-partner these going forward.
If we then look at our pipeline over the last couple of years, this really has evolved from an early stage to a deep pipeline with Phase 2s, Phase 1s and preclinical programs. We now have four programs in the clinic at the moment actively. Three of these are in Phase 2 in five different indications, the JAK1 in both RA and Crohn’s, the GSK molecule in lupus and psoriasis and then our FFA2 program in ulcerative colitis. With J&J we have a program in Phase 1 in inflamed bowel disease and then we have a number of programs in preclinical, in total 6 candidate molecules that are moving to the clinic. So a very, very rich portfolio. On top of that, we have over 20 programs in discovery that hopefully will lead to new candidates in the near future.
So quite a remarkable progress in our pipeline with molecules that we have discovered internally on targets that we identified with our platform and therefore, it made sense to give an overview of our productivity since 2009 that probably is unrivalled here in the industry in that short period of time with a relatively small number of people we have identified 17 PCCs, 17 candidate molecules, of which 13 are with new mode of action. So complete new mechanisms to trigger a disease. Nine of these compounds have up to date been bought into the clinic, 6 of these with new mode of actions and of these, 5 have moved forward into Phase 2, 4 of these with new mode of action.
So really our approach is we have taken since we started the company 14 years ago, to identify novel targets, new mode of actions and move these forward into discovery and development has really paid off for this company.
If I switch to the scorecard that we have set for ourselves for this year, you see that we are moving nicely forward in meeting those goals. We had a goal of two Phase 2 studies. Both of these have already been started, 634 in rheumatoid arthritis plus the expansion into Crohn’s, this was not in the planning at the time, and 974 in UC. We have the ambition to start two Phase 1 First-in-Human studies this year, one of them has been started, the 1205 study with J&J. we anticipate still the delivery of a candidate for the potentiator in our cystic fibrosis programs and we anticipate more PCCs, both in the alliances and internal programs, in the internal programs we have the oncology program triple negative breast cancer program that has already reached the PCC stage.
Also, the presence at scientific conferences. We presented at EULAR and at the ASPET meeting and we are anticipating to present at the ACR meeting later in the year. So we’re right on track to deliver what we have said with regard to the operational objectives.
With that, I would like to hand it over to Guillaume to talk you through the numbers.
Thank you very much, Onno. As Onno said, the half year numbers are solid with revenues of 77.4 million versus 64.5 million last year and a net loss that is halved to 5.4 million. If I split up these numbers by division, then you see that in the R&D division, the revenues increased from 31.5 to 49.1, mainly triggered by both the amount of milestones that we generated this year versus last and the revenue recognition that we are doing on the AbbVie front.
Just to remind you, in the beginning of last year, we received $150 million upfront for the 634 program, dollars that is, and we shared we would recognize in a straight-line basis until the end of the third quarter of 2014, so in 30 months. So we recognized these revenues with speed of €3.7 million a year and that early this year, we signed the extension of AbbVie for $20 million and then with that extension, 20% more patients than anticipated. We also anticipate a delay in the program. So what we’re actually doing now is let’s say the amount of deferred income still on the books as per the date the new alliance was signed.
We are also spreading let’s say the 20 million plus, the amount which was still on the balance sheet, we are spreading that until the end of 2014. Well in normal English, this means that for both this year and for next year, we will recognize €45 million revenues a year of this total deal and that means that for half year, in the number of 49.1 million there is included 22.4 million of AbbVie upfront. And as you can see, the milestone recognitions were around 18 million versus 8 million last year.
Also, a comment or two that you see that spending is increasing. That is due to the fact of the maturation of the – of let’s say the pipeline, in particular the 634 and all the others. The Crohn’s extension expansion we’ll see kicking in in half year 2.
Then the Services, which was let’s say the disappointing part of the business at half year. You actually see a like-for-like shrinkage of the business. This is due as Onno said, to slower uptake of the HTS business out of Chesterford Park, the business that we moved from Basel and of course we have been anticipating too to sign new contracts for and also the commensurate effect on the profitability is there. So let’s say the decrease in profitability is purely due to the sales volumes. For half year 2, we are expecting a better performance based upon the sales pipeline that we are having, the risk adjusted sales pipeline. So we are expecting better numbers coming out at the end of the year. We said in the beginning, growth for the full year of high single digit; now we like to mitigate that to the mid to high single digit depending on success that we are having.
For the profitability, the story is the same. We also expect commensurate improvement and we have already been taken measures to make sure that that is happening. The Group results, as we said, that half, resulting in a loss per share at half year of €0.19 per share versus €0.43 last year.
Development of the liquid asset position. As you can see, obviously the cash balance of 137 million is triggered by the financing runs that we did a couple of months ago and some warrant exercises. And on top of that, we have 13.6 million of accounts receivable of milestones which were recognized in half year 1 and which are paid as we speak. So a good number for the year, around 150 million of liquid assets, and on top of that we are also having on the balance sheet now 28 million of unconditional Crédit d’Impôt Recherche receivables. This is an increase from the position of by the end of last year, because is built up by approximately 8 million a year. What you will see with this receivable is that it will increase to approximately 32 million by towards the end of this year and then from then on it’s going to be stable because we are going to get the first tranche of that 32 million, approximately 8 million we are going to get cash in February. And then in 2014, we will build up with the receivable off the 2014 claim, so this claim will increase to 32 and then it will be a yearly cash of 8 million, but also a buildup of 8 million. So this claim of 32 million will remain stable as from now.
Then towards the guidance. Well we have promised you some color on the cash. Well we think that we can give you the color now. We actually repeat that the Group revenues for the full year will be north of 160 million. The cash position will be around 100 million.
Why is that 37 million less than the half year cash? Well, mainly because as a repeat, we received $170 million from AbbVie to fund the Phase 2a and b trials in RA, which is around €130 million and we have said to the markets that the external spending would be before the extension 70 million, after the extension €85 million. We have spent year-to-date, to give you a picture, 32 million and that also means – which also means that spending is going to ramp up in the remaining of the year but also in this cash guidance is assumed that we will fully fund the rest of our portfolio, so no delays in spending are anticipated in that number. And this is also in line with what we have always said that we really like to create the upside for the shareholders and for the company by really fully investing programs that we really believe in. so that is why this number is going to be 100 million by the end of the year.
And on top of that, and I repeat with Onno is saying that it’s even more important we also believe that the progress in the pipeline will be maintained.
Having said this, I would like to hand over back to Onno for a wrap-up.
Onno van de Stolpe
Thank you, Guillaume. I have been at the helm of Galapagos since its inception 15 years ago and I clearly have never been more confident regarding the future of this company. If you look at where we stand today, we clearly have the leadership in the JAK1 space; we have two compounds in Phase 2 in four indications, one that we are executing ourselves, and one that actually is moved forward by GSK. We have a strong position there and we are pretty confident that these will actually reach the market and be the first molecules that are actually going to generate milestones and royalties when they actually are being sold to the patients.
The deal that we signed with AbbVie last year and the license last year of the JAK1 by GSK is clearly a highlight of the success of our approach. And we have always said that we will partner programs along the way towards the market. We do that at various stages. It’s a long way from finding and also target all the way to getting it registered and in some areas it’s impossible for Galapagos to make the last step in this inflammatory area like RA or psoriasis is clearly that we will not be able to do the very high cost Phase 3 parts of the trials, so that we partner at that point in time makes sense and it shows how we are creating value along the lines. In other areas, we will move programs further all the way to the market, when it makes sense for Galapagos and built an infrastructure accordingly.
What these licenses have enabled Galapagos to do is actually broaden our pipeline, and by that creating further opportunities for clinical success. These opportunities are both in our internal programs and in the alliance programs. And of course, we’re all looking for a new 634 program, not all our opportunities will be of the giant size of the 634 program but we clearly see fantastic opportunities with our new mode of actions that we have in our pipeline.
And clearly, and this is a very important part of the strategy of the company that we have always tried to get across to the investors is that our business model supports the investment in proprietary programs without having to go back to the shareholders all the time to ask for money to move these forward. We are now entering a phase where we have to invest substantially in the development of these molecules, but by doing that we are actually creating substantial value and ultimately that should pay off to value to the shareholders. So clearly we are in a very good position to build on the strength that we have in the R&D organization.
If we look at the newsflow for the second half then we will start at least one First-in-Human trial with a new mode of action. We as I said, we will deliver a new PCC in the area of cystic fibrosis around the potentiator and more PCCs both in alliances and internal programs. So these PCCs, the candidates are very important to feed the pipeline towards the clinic in 2014. So the more PCCs we get, the more molecules will enter the clinic in 2014 and 2015.
In addition, we are doing more submissions to scientific conferences where we’ll present the data on the clinical programs and of course that will generate newsflow as well in the second half of the year. we are pleased that 634 is on track with its start of the recruitment, the opening of the centers, the approvals in the countries and we are very pleased that we are on track to actually deliver the data to AbbVie in the first quarter in 2015 and have actually the top line data by the end of 2014.
With that, I would like to hand it back to Elizabeth. Thank you.
Thanks to both of you and this really concludes the presentation part of our conference call. I’d like to ask our operator Sindhu to explain to callers how they can ask questions to the executives.
Thank you madam. (Operator Instructions) The first question comes from Mathieu Chabert from Bryan, Garnier. Please go ahead with your question.
Mathieu Chabert – Bryan, Garnier & Co
Yes, good morning. Two questions, if I may. First one on the Services division, I was wondering if could you comment a little bit on the environment I would say for this, your business and the confidence you have for [Phase 2]. And secondly, Onno, you mentioned during the presentation a couple of times that you will need new alliance. Any chance you could give us some details about the discussion that you currently have with pharma and do you think for example you would be able to re-partner Lilly, Roche or Merck assets? Thank you.
Onno van de Stolpe
Thank you Mathieu. First question on the Service division, the general conditions. If we look at our peers, it’s difficult to see a trend there. Evotec had a somewhat of a disappointing first half, whereas the U.S. had a better first half than last year. So I find it difficult to see a trend there. We don’t anticipate that this is a continuing dip in the outsourcing. It’s been a disappointing first half but we don’t have any reasons to see that this will continue therefore and we have visibility in the order book for the second half and therefore we are confident that the second half will be better than the first half. So we remain pretty positive about the Service division, although that’s – we really have to deliver in the first half – in the second half to prove that.
Regarding new alliances, we are continuously in discussion with pharma companies regarding the assets that we have on the shelf as well as completely new programs. And I don’t want to raise expectations by telling where we are today but I can tell you that we are in full discussion.
Mathieu Chabert – Bryan, Garnier & Co
Okay, thank you very much.
(Operator Instructions) The first question comes from Jan de Kerpel from KBC Securities. Please go ahead with your question.
Jan de Kerpel – KBC Securities
Hello, good morning everybody. Thanks for taking a couple of questions of me. I would like to start on the Service division. If you take into account or exclude the divestments that you did, it was minus 5% versus the first half of 2012. Now during the call, you said that for full year ’13 you see a mid-single digit growth, if I’m not mistake coming down from high single digits, so please correct me if I’m wrong over here. But if that’s correct that means that you see a more than 10, maybe up to 15% growth in the second half of 2013. So can you give us some color on what that is based a little bit more precise items versus just visibility on the books? That would be appreciated. Second item on the Services, I see that the number of intersegment sales that you do or that you outsource from your own R&D activities into the Service business declines. It was less than 1 million this year and has been declining for a longer period of time. What are you not deferring more into from your own R&D division, because I do know you’re outsourcing R&D also to other companies and Services is something that has a lot of fixed costs. So if you can overcome that, it becomes more profitable. With respect to the R&D, Guillaume, you said that the extension of the periods to recognize the AbbVie upfront is due to ‘you hear a delay in the AbbVie program’. So if you could just clarify what you mean by that, where is the delay in the AbbVie program and what’s the consequence of that? I would also like to check then how the recruitment of the Phase 2 programs are going, specifically for 634 and 974, if that’s on track. And also wanted to verify with you, what is the status on GLP187 for metastasis, because I don’t see it on your slides anymore; on the other hand, maybe I’ve missed it, but I haven’t heard that it was stopped formally. Thank you for these questions.
Okay, I will do the first three and then give Onno the word on the fourth one. On the Services, part why do we base – where do we base our forecast on that is really based on the pipeline as we see it. Indeed, you are right, versus last year, that will mean that we will have to show an increase of 10 to 15%, but you also have to remember that the second half of last year was a very weak half year. And again, to repeat, as you know the business model there, sometimes you get chunky results because of the bigger deals that we have and sometimes milestones coming in there. So it is not uncommon if you look back in history, also numbers rise that you have these kind of shrinks.
The decline in – and so you’re question, why are we not doing – why are we not outsourcing more from R&D? Well, we have a model in Galapagos that we always try to go for let’s say the best partner there and we really want to have a comparative model also internally. So obviously we look at opportunities there, but also it has to be a fitting capability. So that’s the reason we are doing that but not until the level yet that it shows into the profitability. But I’m not excluding that; we will do more of that in the near future.
With the delay in AbbVie, what I only meant is the delay due to the fact that we are recruiting more than 20% more patients. So we expect let’s say a delay in delivery of the results with one quarter, so that is still – so that delay is not due to scientific reasons but just due to the fact that with a bigger volume of patients to be recruited globally, that is causing the longer period in which we are going to be recognizing this.
Onno van de Stolpe
Yeah, Jan, maybe in addition to that, the planning with regard to the delivery of the AbbVie data are completely according still in timing to what we have said when we announced the expansion of the 634 deal. So there is no change there whatsoever. Maybe some more color on the internal outsourcing, of course we source a lot to CROs, but those are CROs that have capabilities that Argenta and BioFocus don’t have. It’s CMC, it’s the clinical part, our Service organization goes from target to candidates and of course with the reduction of alliances with Lilly and Roche being terminated, we just have less business to work on than we used to have when we had all these alliances running. And so at some point in the past when we were doing almost was it about 20% of the BioFocus business we also had a whole lot of FTs outsourced to third party drug discovery CROs. That has been reduced. We’re still sourcing substantial amount of work to Fidelta, Zagreb and some smaller parts to Argenta and BioFocus. However, as Guillaume said that can change shortly when we have a need for further capacity.
974, your question on 974, that is completely on track. We have 8 patients in the trial at the moment, the first couple have completed the treatment and we’re on track to complete the full treatment schedule by the end of this year. So it is going as predicted. Your question regarding 187 that it’s not in the pipeline; that is correct. The reason we moved it from the pipeline is that we have completed the trial. The data have been analyzed and will be presented at a future conference. We have previously already said but I’m repeating that that we will not invest in that program ourselves going forward and it’s most likely that we will move this program forward with an academic group with whom we are having discussions as we speak. So it’s not dead, but it’s clearly not a program that’s on the priority list of Galapagos today.
Jan de Kerpel – KBC Securities
Okay, thank you.
There appear to be no further questions. Please continue with any points you wish to raise.
Okay, thanks very much. Just got one more slide for everybody and that is a reminder and an overview of the remaining financial calendar dates for the financial year 2013. I just want to thank everybody who participated today and look forward to speaking with you next time. Thanks, bye-bye.
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