Galapagos NV (NASDAQ:GLPG) fell out of favor with a lot of investors after AbbVie (NYSE:ABBV) walked away from an important collaboration three years ago. Now that it looks like the discarded candidate could climb to the top of its class, though; the stock is more popular than ever.

Does a clinical-trial success with an experimental drug make Galapagos a buy now? Let's look at the case for and against the stock to find out.

Person looking at a lot of question marks.

Image source: Getty Images.

Filgotinib is on fire

Three years ago, AbbVie dumped Galapagos NV's filgotinib for another JAK inhibitor that looked a lot prettier at the time. AbbVie's upadacitinib appeared as effective if not better in mid-stage testing, and it was much farther along on the clinical development timeline. To top it off, AbbVie won't have to share revenue with Galapagos if upadacitinib's upcoming application for the treatment of rheumatoid arthritis (RA) earns FDA approval. 

Unburdened by a robust pipeline of its own, Gilead Sciences (NASDAQ:GILD) was eager to give Galapagos $300 million in cash and a $425 million equity investment for rights to filgotinib after AbbVie walked away. If the treatment earns approvals, Galapagos is also eligible to receive tiered royalties of 20% and higher from Gilead.

AbbVie's leading RA injection, Humira, is on pace to achieve $20 billion in sales this year, even though it just isn't an option for many RA patients. As an easy-to-swallow alternative to Humira, filgotinib has a shot at becoming a megablockbuster too, especially if a best-in-class safety profile helps it stand out among its peers.

A safety profile completely free of deadly blood clots through the first of three phase 3 RA studies suggests AbbVie let go of the wrong tablet. The FDA couldn't get over a handful of similar issues that appeared during RA studies with another drug in the same class, Eli Lilly's Olumiant, and severely limited its approval. If it is approved, healthcare providers aren't going to forget that AbbVie's upadacitinib has been associated with cases of pulmonary embolism either.

If filgotinib can make it through a commercial launch with a safety profile unsullied by deadly blood clots and expand to groups beyond RA, Gilead and Galapagos could turn the drug into a $6 billion-per-year cash cow at its peak. That encouraging peak sales estimate includes potential expansions to indications beyond RA. Filgotinib recently aced a mid-stage trial with ankylosing spondylitis patients, and it's in late-stage development for Crohn's disease and ulcerative colitis.

A doctor with cash in lab coat pocket.

Image source: Getty Images.

Beyond filgotinib 

The lead program gets so much attention that it's easy to overlook a slew of additional clinical-stage candidates aimed at four separate diseases and the huge pile of cash Galapagos has to develop them. The company finished June with $1.2 billion cash, cash equivalents, and securities and recently raised another $300 million in a secondary share offering.

Right now, it looks as if Galapagos has enough to develop three clinical-stage candidates aimed at idiopathic pulmonary fibrosis (IPF), a progressive stiffening of lung tissue that threatens the lives of around 200,000 people in the U.S. and EU that lacks treatment options. The company's most advanced IPF candidate is ready to begin a phase 3 study. 

Before the year's out, the company also expects an interim readout from a triple combination therapy for the treatment of cystic fibrosis (CF). Vertex Pharmaceuticals (NASDAQ:VRTX) will probably record $3.0 billion in sales to CF patients this year, largely because it has the only treatments available at the moment. We'll know if Galapagos' triple combo will have a chance at breaking into the space dominated by Vertex when the phase 2 Falcon study reads out sometime in the near future.

Reasons to be nervous

Galapagos' recent enterprise value of $4.8 billion is awfully high for a drugmaker that doesn't have any drugs for sale yet. Investors are expecting blockbuster sales for filgotinib that will never come if its safety profile takes a hit, and the program still has opportunities to stumble.

Although filgotinib sailed through Finch 2 without any issues, it was a 24-week trial with 423 patients. The ongoing Finch 1 and Finch 3 studies are designed for 52 weeks and enrolled a combined 2,850 patients. If a few people in the groups receiving filgotinib end up hospitalized for dangerous blood clots, for any reason, investors could suffer some swift losses. 

A buy now?

Having deep-pocketed partners to pick up the tab for phase 3 development of partnered candidates means Galapagos can head toward commercialization at full speed without depleting its enormous cash pile. This would give the company's burgeoning pipeline of mid- to late-stage programs a chance to resuscitate Galapagos' stock price if the filgotinib program chokes before it reaches the finish line.

Galapagos is a buy, but only for investors at the high end of the risk-tolerance spectrum. Everyone else should consider adding this clinical-stage biotech stock to their watchlist right now.