What happened
Shares of Galapagos (GLPG -2.31%) gained over 20% last month, according to data provided by S&P Global Market Intelligence. The Belgian pharmaceutical company reported third-quarter 2019 operating results that reminded investors of its long-term potential. The business generated revenue of approximately $831 million in the first nine months of 2019, a 266% increase from the year-ago period. Operating income improved to $434 million in the first three quarters of this year, up from a loss of $59 million in the same period of 2018.
The pre-commercial company is entirely dependent on collaboration revenue right now, but a deepening relationship with Gilead Sciences (GILD 0.07%) has significantly reduced risk. The partner made an up-front payment of $3.95 billion and invested $1.1 billion in Galapagos stock in July as part of an expanded collaboration agreement. That allowed Galapagos to exit September with nearly $6.2 billion in cash and no doubt helped to fuel the pharma stock's rise.
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So what
Investors have plenty of reasons for optimism when it comes to Galapagos. It's likely that filgotinib, a JAK1 inhibitor with significant potential in treating a wide range of inflammatory diseases, will earn multiple regulatory approvals in the coming years. The first, in rheumatoid arthritis, could be handed down in the second half of 2020. The drug candidate is partnered with Gilead Sciences.
But the tie-up with Gilead provides significant value in other areas of the pipeline. Gilead has the right to develop pipeline assets belonging to Galapagos and to commercialize them outside of Europe. The larger peer has already executed its option on GLPG1690, a late-stage asset being developed as a potential treatment for idiopathic pulmonary fibrosis, although there are over 20 additional programs available to choose from.
Meanwhile, there are obvious advantages that come with the massive cash infusion, which should provide Galapagos with a de-risked path to commercializing assets in Europe. It certainly doesn't need to raise money for the foreseeable future.
Now what
Galapagos is now valued at $11.4 billion, and Gilead Sciences owns a 25.1% stake. The Belgian pharma is supported by a deep cash position that can be used to develop and commercialize assets within its deep pipeline in the European market. It may take some high-profile wins and regulatory approvals before the company actually earns its premium valuation, but investors appear optimistic about its potential.
