Galapagos (NASDAQ:GLPG) galloped to all-time highs heading into this week. Although a pullback in the overall market has caused the biotech to give up some of its gains, Galapagos is still up close to 20% year to date and up around 150% over the past 12 months.
Some investors could view Galapagos as valued at a steep premium after its big run-up. But is it really too late to buy the high-flying biotech stock?
Behind Galapagos' great gains
The primary catalyst behind Galapagos' meteoric rise over the last year was its major collaboration deal signed with Gilead Sciences (NASDAQ:GILD) in July last year. Gilead forked over $5.1 billion for the 10-year agreement, with a $3.95 billion upfront payment and a $1.1 billion equity investment in Galapagos.
Gilead and Galapagos were already partnering on immunology drug filgotinib. The new deal gave Gilead the rights to Galapagos' other late-stage pipeline candidate, idiopathic pulmonary fibrosis (IPF) drug GLPG1690. In addition, Gilead can exercise an option to license any of Galapagos' other candidates.
You can attribute Gilead's interest in Galapagos to the tremendous promise for filgotinib. The experimental drug sailed through late-stage clinical studies targeting rheumatoid arthritis with flying colors. Gilead and Galapagos filed for U.S. and European regulatory approvals for filgotinib in treating rheumatoid arthritis in 2019. Approvals are anticipated later this year in the indication.
And that could be just the start. Gilead and Galapagos are also evaluating filgotinib in other late-stage clinical studies in treating Crohn's disease, psoriatic arthritis, and ulcerative colitis. It's also in phase 2 clinical studies targeting ankylosing spondylitis and other inflammatory diseases.
Crunching the numbers
Just how successful filgotinib could be if it wins approval remains to be seen. But peak annual sales of close to $3 billion in treating rheumatoid arthritis and another $3 billion in treating other immunology indications could be possible. Filgotinib's safety profile and convenience (it's an oral medication instead of an injection) could boost its commercial success.
That kind of market potential might make Galapagos' current market cap of under $16 billion seem like a steal. However, it's important to remember that the biotech won't rake in all of the money that filgotinib could make.
Galapagos will market filgotinib on its own in Belgium, the Netherlands and Luxembourg. It will split profits generated by filgotinib equally with Gilead in France, Germany, Italy, Spain, and the United Kingdom. In other countries, Galapagos stands to receive tiered royalties between 20% and 30%.
Based on AbbVie's experience with blockbuster drug Humira prior to it losing exclusivity in Europe, I expect somewhere around two-thirds of filgotinib's sales will be made in the U.S. If we use a peak annual sales estimate of $6 billion, that would give Galapagos a maximum of $1.2 billion from U.S. sales of the drug. Outside of the U.S., my back-of-the-napkin estimate is that Galapagos would make a little under $1 billion annually.
It's more difficult to predict the financial impact for Galapagos' other drugs. Galapagos thinks that the global market for IPF could be $5 billion by 2025. If we assumed GLPG1690 could capture half of that market, Galapagos would probably make around $750 million annually at peak sales due to its licensing deal with Gilead.
To buy or not to buy?
My numbers are admittedly very rough. However, I think that peak revenue from filgotinib and GLPG1690 could bring in somewhere in the ballpark of $3 billion for Galapagos in the future. The company's other earlier-stage programs could boost its sales. In addition, Galapagos is eligible to receive some hefty milestone payments from Gilead if all goes well.
Still, though, we're looking at a stock that currently trades at more than five times sales that it might achieve sometime in the future. I like the potential for Galapagos' products. However, I think that there are other biotech stocks with more room to run. My view is that it is a little too late to jump on the Galapagos bandwagon.