On August 18th 2020, Galapagos and Gilead put out some crazy press release that caught everyone (at least in biotech) by surprise.
FDA notified Gilead that the FDA would not be approving filgotinib with the current dataset in rheumatoid arthritis.
Filgotinib is a JAK inhibitor that is developed by Galapagos and is licensed to Gilead. Gilead paid $30bn as upfront payment as part of the massive collaboration agreement. Obviously, it had very strong expectations from investors, and is core to the collaboration agreement.
Filgotinib is essentially the 4th to market JAK inhibitor – after Pfizer’s Xeljanz, Abbvie’s Rinvoq, and Lilly’s Olumiant. They had a high clinical bar to hit as a late comer and filgotinib’s angle was perceived better safety – Galapagos and Gilead management teams did not hesitate to show that to investors – raising expectations further.
However, the outcome at the end of the day was that FDA could not approve with current dataset because of safety issue – not in what you would expect with JAK inhibitors, but testicular toxicity signal that was shown in some preclinical/animal studies.
This is particularly large setback for filgotinib because FDA also noted that they are concerned about 200mg dose – this weighs heavy on the long term opportunity for filgotinib because the larger opportunity for filgotinib is expected to be in ulcerative colitis. SELECTION trial showed that 100mg is not efficacious for remission, so FDA’s concern on 200mg is a grave one for the commercial opportunity.
Galapagos share price took a nose drive as soon as the market opened, and it has only been dripping down since.
The stock price is now below where it was during the worst time in Covid19 – a chart that looks tempting for those who want to buy the dip.
However, the stock could be difficult to outperform until the end of the year – because there is no catalyst that could potentially change the equity story for Galapagos and this would further keep the stock price down until late 1Q21 catalyst event – the IPF P3 futility announcement readout.
Hedge funds would be looking to use Galapagos stock as a funding short – lack of catalysts, so there is no risk of getting blown up, but you need short names in the portfolio to fund your LONG positions. I would think that hedge funds would look to cover Galapagos before the IPF P3 futility readout so that they can avoid getting blown up. As the market remains in turmoil, it is important to keep the risk / net exposure tight and Galapagos fits that box.
Below is how I see recent setbacks of Galapagos have changed.
As noted above, bull and bear debate on Galapagos has now shifted completely negative – as bears drive the narrative on the stock, bulls are left just waiting for the next catalyst (IPF P3 futility analysis) so that Galapagos win back credibility – which would force shorts to cover their short position.
Therefore you should always look at the catalyst path after the event to decide whether you should buy the dip – valuation is important, but in this case, what event would generate demand for the stock is more critical to near-term stock moves.
I personally like Galapagos – they have great management team with very high integrity and strong capability. Unfortunately, the nature of drug development is full of uncertainties and throws curve balls at times. However, strong management teams always come out on top eventually – they know the business is hard, and they have the passion and intellectual capacity to drive innovation for patients – which eventually rewards the shareholders.
