Galapagos NV (GLPG) 2016 Q2 法說會逐字稿

Good day, and welcome to the Galapagos Webcast Conference Call. At this time, I would like to turn the conference over to Elizabeth Goodwin. Please go ahead, ma'am.

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 home page, and will be available for replay later on today.

Now, if you'd 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.

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 the first half of 2016.

Let me start off with that, 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 around Filgotinib, we've handed over the program to our partner Gilead after the closing of the transaction in January, and we were happy to report successful outcome of the regulatory discussions regarding the Filgotinib Phase 3 program in rheumatoid arthritis earlier on in May, the start of which is imminent. 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 also the safety profile that we've seen in all the trials with Filgotinib so far.

Then, with regard to cystic fibrosis, we 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 1 and 2.

We've also started with our potentiator 1837, the Phase 2 trials, Saphira, which is on-track and actually we are, as we announced during our R&D day, increasing the number of patients that we're including in this trial and we expect to read out by the end of the year, the results thereof. We've also started Phase 1 trial with another potentiator, GLPG2451, and we've announced at our R&D day in June, favorable Phase 1 results with our first corrector, 2222.

So, a lot 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 points obviously of our work in the first half, there's a lot going on in the remainder of the pipeline and the start of the Phase 2a with our autotoxin inhibitor 1690, as well as the start of Phase 1 with our first antibody in partnership with Morphosys.

We've also announced favorable Phase 1 top line results in osteoarthritis, which is our drug GLPG1972, which we have partnered with Servier, and where Galapagos has the US rights for future commercialization.

And, as 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 1 in healthy volunteers in 2017.

On the corporate side, we've been included now in the main indices -- in Belgium, the BEL 20, and in the Netherlands, the AEX Index, which are the indices of the largest companies in the Netherlands and Belgium, which is proof of the good results and the good work that Galapagos has been able to achieve over the last couple of years. Also, and that is something which is news that 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 you that are less familiar with that concept. 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 up-front $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 say, 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 having 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 rate on income from Filgotinib of 6.8%. So, financially a 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, our 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 to potentiate a first corrector and a second corrector in development, our autotoxin inhibitor in Phase 2, truly proprietary to Galapagos, osteoarthritis in alliance with Servier. In inflammation so far, we have not disclosed the exact indication, our MOR106 together with Morphosys, and the two new pre-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, EUR969 million cash position at the end of June, coming from EUR348 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 EUR668 million.

There are some smallish changes that we exclude from our cash burn, both on the positive side, some warrant exercises, and a small negative currency translation effect, but our true operational cash burn including investments is EUR48.4 million over the first six months. And as a reminder, I gave guidance to the markets to spend over the full year, between EUR100 million and EUR120 million, so this cash burn is pretty much in line especially knowing that the 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.

So, all-in-all, still good to our target of EUR100 million to EUR120 million. As a second reminder, that is excluding any income from milestones on Filgotinib that might still follow later on this year.

Also, not on this page but it is described in the footnote, is that our cash position of EUR968 million or EUR969 million excludes receivables from the Belgian and French governments worth EUR65 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 EUR37 million to EUR49 million, but also in terms of quality. The revenues have improved significantly in the first six months of this year. And actually, I've tried 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 up-fronts that we recognize over time of involvement with those partners in the program, and we had EUR23 million of that recognized from previous AbbVie payments in the first half of 2015, and we've got EUR10 million from the Gilead up front 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 the increasing its external revenue, now EUR3.4 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, AbbVie, Gilead and Morphosys are involved, and then grant another 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, EUR73 million of expenses in the first half of 2016. Maybe as a clarification, because this might feel a bit counter-intuitive to you all, 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 2 program on Filgotinib, and those were obviously 100% borne by us, whereas in the first half of this year we were still in the start-up phase for the Phase 3 of Filgotinib and we pay only 20% of those expenses.

So hence, a 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, the next slide that is a big influence to our net result, I've shown this slide a couple of times. For those of you that have seen it before, 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 EUR57.5 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 EUR57.5 million has been fully-recognized now in our books. What is left out of the premium still to be recognized is the EUR39 million in orange, and this will follow the same recognition pattern as the $300 million that was the up-front license fee, and we'll take let's say four to five years to fully deplete.

That results in a total net of EUR32 million positive, on an EPS basis EUR0.71. This is coming from EUR34 million negative in the first half of 2015. I explained already the EUR57.5 million non-cash financial asset adjustments, but also there's the operational evolution which is a positive of EUR9 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 EUR32 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 maybe a 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 Phase 3 in Crohn's in the fourth quarter, and a Phase 2/3 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 1 trials. We will see the results of the Phase 1 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 1 results there, and then in 2017 we'll start with first in healthy volunteers, and later on in the year, in patient trials with our triple combination.

Idiopathic pulmonary fibrosis, we anticipate to have the Phase 2 recruited by the end of the year and to be able to show top line dates in the first half of next year, and in osteoarthritis where we have as I said before, the US rights, Galapagos is intending to file a US IND for -- in the first half of 2017 to start a patient trial there as well.

So, all good track as anticipated, our outlook is strong. Filgotinib entering into Phase 3, CFOIs 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 built on the solo balance sheet with cash of almost EUR1 billion, more than $1 billion.

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

Thank you very much, Bart. That does conclude the presentation portion of the audio conference call. I'd now like to ask Maria, our operator, to connect us to any callers with questions for Bart. Go ahead.

(Operator instructions) We will now take our first question, and that comes from Phil Nadeau from Cowan and Company, please go ahead, your line is open.

Good morning. Thanks for taking my questions. I actually have a couple on the upcoming news flow. You pointed out that the Saphira results will be out by the end of the year, and like I said, 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 the second-generation, I think it's 2451? We continue to hear speculation that there's drug-drug interactions with 1837. Kind of what's your latest thinking on that? Which of those is your favorite potentiator? Thank you.

Thanks, Phil. So first of all, on the dose escalation in Saphira, that's a different dose escalation by the way, between Saphira 1 and Saphira 2. Both -- the trial in total 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 honestly cannot answer it. Today, we are obviously very interested to see both the results on 1837 and the results on 2451, and we'll make the right choices by the time we're ready for that, which honestly is not today but more towards the end of the year, early next year, to be able to conclude.

Great, thanks, and one last question on the design of the Crohn's Phase 3. I think at your R&D day you were suggesting that Crohn's Phase 3 could start in Q3, now it looks like Q4. Is there any significance to that, or is it simply a large company like Gilead taking a bit longer to get the design right? Thank you.

Yes, I don't think there's a significance to it. I wouldn't even call it Gilead's making, either. 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, there's no significance to that in terms of underlying topics.

Great, thanks for taking my questions.

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

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 maybe comment on how you may consider designing the Phase 2 combination studies to satisfy the FDA's desire to see the impact of each separate component drug separately? Like, would you look at double accommodations for that purpose even if you aren't pursuing them commercially?

Okay, thanks for those two questions. NACFC maybe first. Not sure yet, NACFC might be just a tad 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 2 design for combinations, again, that is a bit too early to give you from a view on yet -- let's first make sure that we get our Phase 1s right and then we can start a Phase 1 in healthy volunteers. Then in 2017, obviously, that's still our key target is to have a triple culmination in patients. How we then will develop that further, we'll get to that, we'll decide on that when we get there.

Okay, that's helpful, thanks. I just had a very quick follow-on. Could you quickly remind us on the timing for the second generation corrector talk 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've already provided?

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 the first part of 2017, in healthy volunteers.

Okay, that's helpful. Thank you.

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

Hi, thanks for taking my questions. I've got two financial and one on the Cystic Fibrosis program. It's about -- it's firstly on CF. So, you mentioned that the 2451 Phase 1 data are now expected in the early part of 2017. I was hoping you could perhaps give us a bit of color as to the reason for the delay, given this is just a study in healthy volunteers? And also, therefore, how that impacts your thinking with regards to the next study for 2222, that's the corrector, given I think you were planning to do a trial with that one perhaps with 2451? Should we now, therefore, think that perhaps that may be instead with 1837, given 2222 has already completed Phase 1 so it's ready for further combo studies perhaps already?

Then the two financial ones, perhaps more appropriate. Firstly, with regards to the cash burn outlook, you mentioned that the cash burn in the first half is EUR48.4 million and used that as a reference, but I think the EUR48.4 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, therefore, should we also in our minds be excluding, in addition to the Gilead, also any incremental AbbVie milestones you 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 trial 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.

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 change, it's more logistical on the size of the trial that we're 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're going to do a combination there with 2222 and 2451, so that's -- but it's for sure something that we will not do this year, when Phase 1 is still ongoing with 2451.

Then on the financial question, first of all the AbbVie milestones, are they or are they not into the EUR48 million. Actually, they are, so the EUR48 million is a net 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 EUR100 million to EUR120 million is the Filgotinib milestones that could potentially occur later this year. And then, on that last point, your question was, do we defer this as well over the next four-to-five years? The answer is no. Our accounting policy is that we recognize milestones as they are received, unlike the license income which we indeed defer over the next period. I hope those answers the questions, Peter.

That's great, thank you.

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

Good afternoon, and I have three questions on CF program. Can you specify already which population are you planning to include in a Phase 2 triple-combo trials? Are you looking at plus 2 heterogeneous, or homogeneous-only population? Secondly, do you expect to include US sites in your Phase 2 trial for the combination? And finally, does a small delay with the second potentiator result in a delay with initiation of the Phase 2 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.

All right, I'm just noting the questions while you speak, Anastasia. Thanks for those. On the population for Phase 2, exactly which sequence we will do I cannot tell you today, but definitely, ultimately, we'd be interested to test our triple combination both in homozygous and heterozygous. Second question, will this early trial already be in the US? I would think that probably we'll do the early trial not in the US, but ultimately it'll obviously be a trial which will be in the US. And your third question was whether the delay in 2451 delays the Phase 2. We maintain our guidance that we should be able to get the triple combination in patients by the middle of next year. As a reminder, 2737, our second corrector, is the last in line in terms of start-up phase 1, and so far that seems to be on the critical path.

I've got a note here, your question was also whether which class, it's obviously in the [fibroid L] population, going to be testing that.

And just quickly to follow up, would you, pending positive results of Saphira trial, would you consider evaluating one of the potentiators alone in Class 3 mutations? Let's say in the next two years, not eventually, but in the near-term?

Yes, I think -- and we've said that before -- I think our obvious target is the triple combination for Class 2 patients, but we don't rule out that we'd also go after Class 3. But, we do anticipate that we would need to show or at least have hope for a significantly -- that's at least at par or better than [clidecal] results to be able to do that.

Thank you.

(Operator instructions) We will now take our next question from Michael Vlemmix from KBC Securities. Please go ahead, your line is now open.

Hi, good afternoon. I have one question left, it's quite a general, broad one. The idea is to make the Filgotinib JAK inhibitors a first-line chronic therapy for RA -- now, the positioning and potential benefits versus the current DNF alphas are clear, but can you maybe elaborate a bit why you believe that JAK inhibitors will come before the IL-6 inhibitors? Thank you.

Yes, thanks, Michael. Obviously we're a little -- a couple years out before we're actually starting to the commercial strategy, but I do believe that an oral drug has a meaningful benefit over the biologics, both the TNF and the IL-6. So, let's first see what the clinical outcomes are of the Phase 3 trial. But, I do think there is really a place for JAKs and if you look at the results that Lilly has been showing with baricitinib, 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.

All right. Thank you.

(Operator instructions) There are no further questions in the queue at this time.

All right, thank you. 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 the audience members and callers for your support and participation today. Thank you, bye-bye.