Pending Galapagos investment by Gilead
In July 2019, Galapagos entered into an option, license and collaboration agreement with Gilead that covers the Galapagos current and future product portfolio other than filgotinib. Upon closing, Gilead will make an upfront license and option fee payment of $3.95 billion and an equity investment in Galapagos of approximately $1.1 billion. Gilead will acquire rights to participate in the development and commercialization of GLPG-1690, GLPG-1972, and Galapagos’ other current and future clinical programs that have entered clinical development during the first ten years of the collaboration. Gilead may exercise its option to acquire a license to a program after the receipt of a data package from a completed, qualifying Phase 2 study. If GLPG-1690 receives marketing approval in the United States, Gilead will pay Galapagos $325 million as well as tiered royalties. If Gilead exercises its option to acquire a license to the GLPG-1972, it will pay a $250 million option exercise fee and Galapagos would be eligible to receive up to $750 million in development, regulatory and commercial milestones plus tiered royalties.
For other products in Galapagos’ current and future pipeline, Gilead would pay a $150 million option exercise fee per program. Galapagos would receive tiered royalties ranging from 20% to 24% on net sales of all Galapagos products optioned by them as part of the Collaboration Agreement (including GLPG-1690 and GLPG-1972), subject to customary royalty terms and adjustments. The companies would share development and commercialization costs equally. But Galapagos will retain exclusive rights to commercialize products included in the optioned program in the European Union, Iceland, Norway, Lichtenstein and Switzerland.
Gilead also entered into an agreement to purchase enough shares of Galapagos to give Gilead ownership of 20.1% on a fully diluted basis, at a price of €140.59 per share. In addition, Gilead would receive warrants that confer the right to subscribe for new shares to be issued by Galapagos sufficient to bring the number of shares owned to 29.9% of outstanding shares. Gilead will have the right to designate two members of the Galapagos Board.
In summary, a lot of cash is going to Galapagos, with a lot of risk and opportunity transferred to Gilead. Clearly a good deal for Galapagos, and the reason the stock climbed so sharply after the deal was announced. I will treat whether the deal is good for Gilead in separate article.
GLPG1972 for Osteoarthritis
For me, the main reason to invest directly in Galapagos, or in it through Gilead, is its potential osteoarthritis therapy GLPG1972. The caveat is that GLPG1972 is at a much earlier stage of development than filgotinib. It is being developed in partnership with Servier (private). Galapagos has retained full commercial rights in the United States, while Servier has the rest-of-world rights, with milestone payments and single-digit royalties due to Galapagos on potential commercial sales [per Q2 call transcript].
Estimates are that osteoarthritis, often simply called arthritis as it is the most common form of the disease, affects 237 million people, a number that will grow as the population ages. That contrasts with rheumatoid arthritis, thought to affect about 25 million people. So the global market opportunity is about 10 times as large.
From an investing standpoint, the key insight is that there is nothing on the market to treat the disease itself, only pain medication. For some patients, joint replacement surgery is an option. That means if GLPG1972 is proven to be safe and effective in more advanced clinical trials, and is approved by regulatory agencies, it is almost certain to become an instant blockbuster. It could reach the status that Humira had, in a field ten times as large.
The Phase 2 ROCCELLA trial completed enrolling patients in June. It is testing GLPG in patients with osteoarthritis of the knee and is double-blinded and placebo controller. In preclinical trials, GLPG1972 was shown to efficiently target a cartilage degrading enzyme called ADAMTS-5. A Phase 1 study in healthy subjects met all of its safety and pharmacokinetic targets and also demonstrated that GLPG1972/S201086 reduced the blood level of the ARGS neo-epitope, a biomarker for cartilage breakdown, by approximately 50% within two weeks. Topline results should be available in about one year.
Clearly, the readout of the Phase 2 trial will be crucial to valuing Galapagos. The Gilead deal should complete before those trial results are available.
Stock Price and Market Capitalization
On August 21, 2019, Galapagos closed at $169.54. Its 52-week low had been $85.00. The 52-week high of $191.63 came shortly after the Gilead announcement. Its market capitalization at the current price is about $9.3 billion.
Those who do not invest in clinical-stage pharmaceutical companies may be justified in staying away from a company with that large of a market capitalization that does not yet have a commercial product. An ordinary, profitable company with a P/E ratio of 20 would be generating $465 million in annual profits to get that market cap. Biotech investors, however, figure that the approvals for filgotinib are nearly certain. There will certainly be doctors and patients willing to try a new rheumatoid arthritis drug. If the drug can take a substantial share of the market, it could justify the current market capitalization. Beyond that, we would have the rest of the Galapagos pipeline.
Galapagos reported about € 1.15 billion (or $1.4 billion) in cash at the end of Q2. With the further cash infusion from Gilead, it should be in a very strong cash position once the deal closes.
Just the thought of bringing an effective osteoarthritis drug to the market, even if it is likely several years out, is what appeals to me. To keep this post short, I did not discuss the rest of the clinical pipeline, much less any preclinical discoveries made, but there looks like significant potential value there as well.
Despite the run up in the stock price this year, I think Galapagos remains a good long-term investment, pending more data events. I am a long-term holder of Gilead's stock, so I will effectively own Galapagos when the deal closes. Still, based on what I have learned to date, I would be more inclined to invest new dollars directly in Galapagos, rather than through Gilead.
Disclosure: I am/we are long GILD, INCY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.