Galapagos NV (GLPG) 2016 Q1 法說會逐字稿

Thank you very much, and welcome all to the audio webcast of Galapagos's 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'd like to ask some questions at the end, we request that you call in to one of the telephone numbers given in the press release, and I've got one here right at-hand. That's 32 for Belgium, 2-620-0138, and the code is 6420003.

I'd 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's 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's operational and financial highlights for the first three months of 2016, and give you some outlook for the remainder of the year.

You'll see a PowerPoint presentation on screen during this presentation. We estimate that the talk will take about 20 minutes, and it 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.

Thank you, Elizabeth. A pleasure to present to you the Q1 data as well as the -- while we are on this webcast, the new alliance and the expansion of the alliance with AbbVie that actually got signed last night at 2 o'clock, and we are very excited about that one.

But first have a look at what happened in Q1. We were able to finalize the deal around filgotinib with Gilead, where we received a cash -- brought our cash position [above EUR1 billion]. And for the rest of the quarter was dominated by cystic fibrosis news where we are expanding our portfolio to go for a triple combination therapy. And we actually started the first clinical studies in patients in cystic fibrosis with the SAPHIRA trial in the Class II mutation trial; Class III patients subset with the GLPG1837, our potentiator.

So a lot of cystic fibrosis news. But that was not all. After the quarter in April, we announced the start of Phase II with 1690 in idiopathic pulmonary fibrosis. We started a Phase I with MorphoSys, MOR106, which is an antibody that we have a 50/50 ownership with MorphoSys, very excited about it.

We announced the FITZROY results, 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 the 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 end market introduction. Galapagos contributes 20% to this research and development cost. Gilead paid us $725 million, including $425 million in equity and $300 million in license fees.

On top of that we are getting success-based milestones totaling $1.35 billion, and new disclosure is that of that $1.35 billion, $755 million is for development and 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 was that we were able to negotiate a profit split in the co-promotion territories, the co-promotion territories being the big five EU countries plus Benelux, and in all other areas, we received a royalty that starts at 20% and goes up with additional sales. So, in a deal that is truly transformational and reflects the true value of filgotinib as a best-in-class drug.

We can go to the next slide, the clinical pipeline. You see a lot of JAK1 filgotinib studies being scheduled in RA, Crohn's and ulcerative colitis. The first one that will start is RA, where the centers will open in the end of the first-half, and actually the patient dosing will start early in third quarter. Shortly followed by Crohn's, and also now in the planning, I think Q3 started ulcerative colitis trial, which will start as a Phase II trial.

With our own detection inhibitor, 1690, in IPF, we are expecting the topline results in the first-half next year. That recruitment is going well, it's underway. And then cystic fibrosis, as I said, the 8037 SAPHIRA trials are ongoing and the Phase II results will actually be in the second half of this year.

And in the very important Class II, the Delta 508 mutation where we have potentiators and correctors being moved into volunteers to be ready to test the typical combination therapy in the first half -- in the second half and the first half of 2017. So this is a very important program with a lot of different molecules move forward. We are very excited about it. And this is the subject of the expanded alliance with AbbVie.

In osteoarthritis, our alliance with Servier, we are in Phase I at the moment. The results will be published this quarter, and then it will start in a proof of activity -- proof of concept trial later in the year. In information, we have the alliance with MorphoSys, which is an antibody; the topline results of the Phase I will be published in the second half 2017.

So a lot of clinical data coming up. On top of that, we have, of course, a very large discovery pipeline that's moving forward nicely. And we are expecting 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 all. I will start with the FITZROY study. FITZROY is our clinical Phase II study where we tested filgotinib in Crohn's. This is a 20-week study with the primary endpoint of after 10 weeks.

We are very proud in fact of filgotinib as the first drug to show efficacy in both naive and TNF-failing patients and reaching the primary endpoint in that study. Next to the primary endpoint, which is clinical permission, in the study we've also seen good improvements in cardio plaque measurements, SD part measurements and endoscopic measurements.

Recently then we received the (inaudible) final data in the study, and there we have confirmed to patients that shows that improved in clinical scoring up to the (inaudible) activity. So the second part of the study was in fact a complex study for 10 weeks where we end up with more than seven groups, and where at the end we only did clinical assessments.

So based on those clinical assessments, we can confirm that patients have showed a response as we maintain that response over the full trial. As well we had a small group of patients during the first 10 weeks were on placebo and did not show a response. And there we put on the 100 milligrams 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, the study confirmed the safety picture that we've seen with filgotinib in the DARWIN studies and which is being confirmed. So we look forward now to the start of the growth in Phase III which is planned for second half of the year in Q3.

So far for FITZROY. Second program I want to touch on is our CF program. So, in CF, we have (inaudible) growing, as you all know, we are aiming for a triple combination with one potentiator and two different types of colorectal molecules. For each of those components we have a lead and we have backup molecules, and meanwhile identified. And they are in five stages ranging from preclinical tox Phase I up to Phase II.

So the most advanced compound is our potentiator, GLPG8037, which currently is in two small-scale Phase II studies as a monotherapy. So these studies are of course SAPHIRA 1 and 2. In SAPHIRA 1, we will test GLPG8037 as a monotherapy in G551D patients; in SAPHIRA 2, we tested in S1251N mutations, patients with that mutations.

So recruitment is ongoing in all countries, so these are six countries in Europe plus Australia. And in each of two studies, the recruitment is going well, and we have included both KALYDECO naive as well as KALYDECO experienced patients. So primary endpoints of the study is safety and tolerability. Of course, we as well look to the secondary endpoints, which are sweat, fluoride, LEV, and the plasma levels. So the reporting of this data will happen during the second half of this year as well.

That's it for development. Onno?

Thank you, Piet. If we look at the deal that we have just signed with AbbVie, we have expanded our -- the alliance we have started a couple of years back. And that is reflecting the fact that it's now talking about a 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 has substantially increased.

Galapagos is responsible for all preclinical Phase I and Phase II of this alliance, and also paying for that part of the alliance. And therefore we needed to renegotiate the milestones to compensate for the extra cost that we are incurring in moving these programs forward. And I am pleased with the outcome of the discussions, the total remaining milestones are about EUR600 million, they are spread over the preclinical Phase I, Phase II, Phase III, as well as sales milestones.

But I can announce that from that EUR600 million, we have increased the milestones with EUR250 million, and that EUR250 million is for additional amount of payments by AbbVie to Galapagos for milestones associated with Phase I and Phase II. So this will mean that our exposure financially over the next couple of years is substantially reduced in the CF program. If we meet the expected successes in the milestones, then we get handsomely compensated by AbbVie through these milestones.

The other parts of the contract have not been changed. We continue to get royalties between the midteens to 20%, they are tiered based on the sales levels. We will retain 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 a contract a couple of years back. It's really about the increase of the milestones during preclinical Phase I and Phase II.

So we are very pleased with this outcome. We -- we're both -- both companies are very excited; this is a very strategic program. It's going very well and it's a fantastic unmet medical need that we are trying to get a product for. And we will be in patients with a 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 then I can say it's well-known that the first quarter of 2016 has been an exceptional quarter in terms of cash evolution of the Company. Because of the transaction with Gilead, we've reached a level of almost EUR1 billion of cash at the end of March.

And this slide shows you how we got there. We have EUR350 million at the end of the year 2015, the upfronts as well as the shared subscription amounts paid by Gilead in euros, EUR668 million. A little bit of cash coming from warrant exercises. There's one item on this which is new, at least in presentation, that we have a currency translation effect, which is a non-cash effect. But it's because we have a limited amount of our cash in dollars, and the dollar 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 burn for the quarter had been EUR25 million. And as a reminder, I've given guidance that we spent in the year between EUR100 million and EUR120 million, so the EUR25 million from the first quarter is nicely balanced compared to those expectations. So very exciting quarter in terms of cash evolution.

In terms of the P&L, I go to the next slide with revenues. This is always a difficult one to both forecast and estimate, obviously, especially because of the recognition of deferred income, which has played a big role in the P&L topline of our Company. In 2015 first-quarter, we still had almost EUR12.5 million of revenue recognition from the transactions that we have signed with AbbVie in 2012 and 2013, regarding at the time filgotinib in cystic fibrosis.

Those amounts are no longer in our balance sheet, so you will not see those coming in 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 the development of filgotinib.

And, as a reminder, this amount is relatively low at the moment. The way we account for this is that we have -- that we recognize those revenues proportionally to the cost of the program spent. And the cost that we contribute to the 20% that Onno was describing before, are out-of-pocket expenses regarding development. And those have been relatively limited still in the first quarter of 2016.

As a result, also the revenue recognition is relatively limited in the first quarter of 2016. And this goal will increase as the programs get on track later on in this year. The rest is relatively stable, a bit more in cost reimbursements in the first quarter for a total of [EUR50 million] in topline.

Our operating expenses then show the logical consequence and development expenses are lower than last year. This is because last year in the first quarter we were bearing 100% of the cost for our filgotinib development. This was the end of the DARWIN I and DARWIN II programs at the time. Now we are bearing 20% of the cost of the filgotinib program, which is obviously ramping up, as I was just explaining. So, overall. a decline in operating expenses in our P&L as well.

Then this next slide, I won't go through this one in all the details, but still I'd like to remind everyone of it because it's a very particular element -- I've shown exactly the same slides at the end of in early March when we announced that the 2015 full-year results. We have a meaningful impact in our P&L in terms of the financial income and expense. It was a negative impact in our 2015 results of almost EUR31 million. And it was positive impact in our Q1 results of EUR57 million.

This is the result of the share premium accounting that Gilead paid EUR58 a share over a closing price of EUR52 in December. That gap between the two is the share premium, which then was basically fair value at the end of December and again at the closing of the deal, resulting in a negative in December and a positive at the end of the deal. This is nonrecurring, so this is in effect for Q4 2015 and Q1 2016. But you will not see this coming further in any of the quarters because the deal has now been closed in full.

As a result of this, in terms of accounting going forwards, the EUR26.8 has been recognized now between the two amounts in the two quarters that I just was describing. And the EUR39 million is still to be recognized as deferred income, together with the [$300 million] of upfront over the next -- let's say four years.

Then what does this all result in? This results in that we have a profit at the bottom line of EUR36 million, which is largely driven by the EUR57.5 million, which is explained on the previous slides. And in terms of operations, we had a negative EUR14 million in the first half of 2015. This is going down to a negative EUR21 million in 2016, which includes the EUR4.5 million of currency translation effects as well.

In terms of guidance, just as a reminder, we reiterate our guidance of cash burn between EUR100 million and EUR120 million. Obviously this excludes the cash income from filgotinib to the extent 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 are some milestones also associated with some events that are going to be taking place later on 2016.

This cash burn reflects slightly lower in 2015 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 our cystic fibrosis program and our proprietary programs.

So with that, I conclude the financials, and give back to you, Onno, for the conclusions.

Thank you. Here you see a slide with the expected clinical news flow in 2016. Of course, a lot of filgotinib news here on RA, Crohn's and UC. As I said earlier, we are expecting centers to open by the 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 starts around the cystic fibrosis program, most notably our potentiator 1837 Phase II results that we look forward to, and the full recruitment for our IVF program 1690. In OA, we are expecting the Phase I results in the second quarter of this year.

So a lot of news flow coming up, and we will highlight our clinical program as well as our discovery program at our R&D update that we are 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, then clearly Galapagos is on track. Our programs are moving forward nicely as expected and communicated. We are excited about our discovery pipeline that is bringing nice programs towards the clinic. We continue to use our target discovery platform to come up with new mode of action targets, as we are moving into our discovery pipeline.

And all that with a very strong balance sheet. So we are in a great position to continue our road to becoming a fully integrated biotech company.

With that, we conclude the presentation. Back to you, Elizabeth.

All right. Thanks, Onno, Bart and Piet. I'd really like to have the operator, Meon, explain to the callers how they can pose a question to these gentlemen. Go ahead.

(Operator Instructions). [Rag Verhan], Cowen & Company.

Thanks for taking my call and congratulations on closing the revised deal with AbbVie. First of all on filgotinib, now that the Phase -- end of Phase II meeting has happened, can you talk about whether the FDA has allowed you to dose men in the highest dose any more? Or -- and then also what the dosing schedule is going to be in the Phase III for RA in particular.

Thanks. We kind of were expecting that question, so asking -- I am not in a position at the moment to comment on this. We are awaiting 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 patient regarding this point.

Okay. Fair enough. And then during the CF program, you are putting a second potentiator into the clinic soon, your 2451. Can you talk a little about what's kind of different about that molecule and why it could potentially be better?

Piet, do you want to answer that?

Okay. Oh, thanks a lot. I'll take this question. 2451 is a potentiator of a different class. We expect solid [ones] with a PK, so 1837 seems to be closer to a b.i.d. profile with current assumptions, 2041 clearly has a [one a day] profile and comes from a different season, so it's an excellent backup. And depending on the outcome of clinical data with 1837. And the combination we finally put together, we will make together with AbbVie the decision which on both we will move forward into the later combo.

Okay, thank you.

[Michael Vanek, KPC Credit].

-- annual general meeting then floated approved to issue new shares beginning this week. We are wondering, will this hamper the Company's near-term plans? And with almost EUR1 billion on the bank, can you describe 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% --?

Correct.

-- freedom to issue new shares. It's just general corporate good practice, I would say. There's no plan in the short-term at all 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 shareholders was lapsing later on this year, I believe in May. So it was time to renew this, and we were given this last week -- or this week earlier by our shareholders.

Okay. Thank you.

Peter Welford, Jefferies.

Thank you for taking my questions. Firstly, just on cystic fibrosis, when you say that the plan is to move a triple combo into the clinic by the end of the first half, could we 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 like this should be more of an exploratory Phase II before further then just finding studies?

And then secondly, I guess related to the -- just to the cash question. Do you feel at present you have the internal resources to be able to have the capability to potentially look to in-license other programs, perhaps later stage programs, that could perhaps use your cash? Or, at present, are you working full speed on cystic fibrosis and other discovery programs, and therefore the cash is more, I guess, there for the future development of our existing pipeline rather than potentially opportunistic deals that would require additional resources? Thank you.

Peter, let me start with -- thank you -- 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 on early discovery to the clinic with Phase II with IPF.

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 are getting and the partnerships. So we have room in our cash position to look for an opportunity -- an outside opportunity, being at an acquisition or being it in 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, inflammation or orphan diseases. And clearly, we are in the lookout. But, at the moment, there's nothing concrete.

And 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 second half of the year and in patients early next year. Ideal that -- ideally, we can immediately select the three best and best selected combination.

You, of course, have companies' compounds moving forward with a delay of a couple of months. So I will not exclude if we put more than one triple combo into Phase I with the plan currently that by year-end, we select the best one, and that is the one moving forward. Because in the CF program, we've always backed up our leads. So it's a real possibility, but that hasn't been decided yet whether we 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 a triple combination into patients, it will be a complex design. We have a couple of versions on the table. Currently, we don't want to maximize it in terms of matrix and just every combination, but go with a logic design that is capable of showing that each of the components really contributes to this type of combo, which is essential.

Thank you.

(Operator Instructions). Hugo Solvet, Bryan, Garnier.

Thank you for taking the questions. On the last call earlier this year, you seemed confident on the recruitment path for SAPHIRA trial. Could you update us on the later? And do you see any differences for -- in terms of recruitment of patients, whether they are naive or on KALYDECO? I'm sorry I missed that slide.

And have you thought of interactions in the US to open centers there for Phase -- for the triple combo, given Vertex's strong presence in the country? Thank you.

Okay. Onno, can I take the slides for this question?

Absolutely. Oh, okay. On the recruitment of SAPHIRA, I just need to repeat what I said during the call. So we had two studies ongoing, SAPHIRA I and II. Both studies recruit well. And in both studies, we've been capable of including both patients naive to KALYDECO and 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's.

Then opening centers in the US will depend heavily on the type of design. I would assume that certain types of designs would lend themselves more than others, so we haven't started that effort in the US yet. We are talking and exploring what types of studies would be of interest.

But the idea is that in the future Phase IIb, we as well might take patients or a mix of patients from ORKAMBI, not on ORKAMBI, foresee a small wash-out, and then include patients. And we are hopeful that with the good response we see in Europe and Australia, that we can get a similar response in the US for recruitment.

Very good, thank you.

Matthew Harrison, Morgan Stanley.

This is Vikram on for Matthew. We just had one quick question on enrollment again for the CF studies. Any more specifics you can provide about numbers or just how enrollment has been going specifically? I know you mentioned that it's been going well, but any details that you could provide numerically or in a little more detail, would be helpful.

Onno, what can we say on that? (laughter)

Not much, Piet.

So, it's a small trial. The SAPHIRA, we entered the [middle] of six patients, and we'll see if we go beyond that. SAPHIRA II in S1251, the SAPHIRA I in G551D, that started later because we had Australia included. But that's going well, as well. So our role is not currently that we won't be -- of including sufficient patients. But they remain small and -- but we are happy with the current recruits.

Okay?

(Operator Instructions).

All right. It seems that we have ended the interest for questions. So, I really appreciate everyone's participation today. And I remind you all, just like Onno said, we are having our R&D update this year on the 15th of June at the Yale Club in New York. We will be starting the presentation early in the morning New York Time.

Our next financial results are planned for half-year on July 29th, so please mark that as well. Again, we think all audience members and callers for their support and participation today. And I hope you all have a great weekend.

Thank you. Bye bye.