After its stock reached all-time highs in February, Galapagos (NASDAQ:GLPG) saw those gains disappear. Don't fret, though. The stock price is down less than 1% year to date -- a decrease many investors, and companies, can only dream of in the current environment.
Is Galapagos's lack of price decline a signal of quality, and should investors look to acquire shares now despite the company's healthy valuation? Let's dig in.
2020 will be a significant year for Galapagos. The company's lead drug, filgotinib, awaits regulatory approval in the U.S., Europe, and Japan as a treatment for moderate to severe rheumatoid arthritis (RA). Galapagos also expects to report top-line data this quarter from a phase 3 clinical trial of filgotinib in patients with ulcerative colitis. Beyond filgotinib, three additional pipeline drugs should report results from mid-stage clinical trials. Finally, Galapagos expects to see early clinical data from its novel "Toledo" program for inflammation.
Galapagos boasts a huge war chest, in excess of 1.86 billion euros, to fund its research and development. The company can thank its strategic partner Gilead (NASDAQ:GILD) for that; last August, the two companies entered into a 10-year global research and development collaboration for multiple products. Gilead paid $3.95 billion and made a $1.1 billion equity investment into Galapagos. This built upon a previous 2015 arrangement to co-develop and commercialize filgotinib. In that deal, Gilead paid $300 million and made a $425 million equity investment up front, and it will continue to pay milestones and royalties.
In short, investors should take comfort in Galapagos's healthy cash position and its alignment with one of the world's leading biopharma companies.
Filgotinib approval decision
The biggest catalyst for Galapagos will be the potential approval of filgotinib. Interestingly, filgotinib was submitted to European and Japanese regulators before the U.S. Food and Drug Administration (FDA). Last August, the European Medicines Agency validated filgotinib's marketing application, meaning the agency acknowledged receipt of the submission and an intent to review it. In October, a submission for approval of filgotinib as a treatment for RA was submitted to the Japanese Ministry of Health, Labor and Welfare.
Gilead announced on Dec. 19 that it had submitted a New Drug Application (NDA) to the FDA for filgotinib as a treatment for moderate to severe RA. Gilead used a priority review voucher, which commits the FDA to reviewing the NDA within a six-month timeframe instead of the standard 10 months. This means the decision deadline will fall in June.
According to a January 2020 report to Congress from the U.S. Government Accountability Office, Gilead bought the priority review voucher from Ultragenyx Pharmaceutical (NASDAQ:RARE) for $80.6 million. This means that Gilead perceives getting to market four months earlier as being of greater value than the price of the voucher. This is a potential signal of management's confidence in the drug, and it could also indicate a competitive field in which a head start to establish market share could prove to have long-term benefit.
Gilead faces stiff competition in RA, which affects more than 1 million people in the United States. There are currently three FDA-approved drugs for RA that inhibit enzymes called Janus kinases (JAK) to reduce inflammation, the same mechanism used by filgotinib. AbbVie (NYSE:ABBV) received FDA approval last August for Rinvoq, its once-daily oral treatment for patients with moderate to severely active RA who have an inadequate or intolerant response to an existing RA treatment called methotrexate. Beyond Rinvoq, there's also Olumiant from Eli Lilly (NYSE:LLY) and Xeljanz from Pfizer (NYSE:PFE). However, not all of these drugs are equal, and each has its drawbacks. For example, last year the FDA added a boxed warning label to Xeljanz stating the drug increased the risk of blood clots and death. Galapagos and Gilead will need to differentiate filgotinib from the others to be successful.
Galapagos will take the commercial lead in certain European countries (France, Germany, Italy, Spain, the UK, Belgium, the Netherlands, and Luxembourg), leaving the rest of the world to Gilead. In Japan, Gilead teamed up with Japanese pharma Eisai to distribute and co-promote filgotinib to the 600,000 to 1 million Japanese people suffering from RA.
Biotech investors will be focused on the potential approval and subsequent launch of filgotinib this year. This article has not even touched on the other indications for filgotinib, several of which are in late-stage clinical testing, or the pipeline candidates which hold promise. The current valuation, in excess of $13 billion, makes me think the potential is already priced in. I want to see how the launch of filgotinib in RA goes. In the meantime, other drug stocks offer better chances for outsized returns.