Clinically Derisked Oncology Assets And Gilead Partnership Will Drive Long Term Earnings Potential

Catalysts

About Galapagos

Galapagos is repositioning as a capital rich, business development driven biotech company focused on acquiring and advancing clinically derisked assets.

What are the underlying business or industry changes driving this perspective?

• Redeployment of approximately EUR 3 billion of cash from capital intensive cell therapy into externally sourced, mid to late stage programs should convert balance sheet strength into accretive revenue and earnings streams over time.
• Industry wide funding constraints in biotech are creating a growing pool of high quality, clinically validated assets available at more attractive valuations, improving Galapagos’ ability to acquire future revenue and earnings at disciplined prices.
• Rising demand for innovative oncology and immunology therapies, combined with Galapagos’ focus on clinically derisked assets in these areas, increases the probability of bringing differentiated products to market that can support durable revenue growth.
• The TYK2 program GLPG3667, with fully enrolled Phase III enabling studies and potentially differentiated pharmacology, offers an internally generated option on future milestone income, partnering proceeds and royalty streams that could enhance earnings without large incremental fixed costs.
• The deepened collaboration with Gilead, including potential capital contributions, shared development infrastructure and commercial capabilities, can lower execution risk and reduce net development spend per asset, supporting net margin expansion as partnered products mature.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Galapagos's revenue will decrease by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -154.7% today to 41.6% in 3 years time.
• Analysts expect earnings to reach €112.6 million (and earnings per share of €1.45) by about December 2028, up from €-443.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €381.9 million in earnings, and the most bearish expecting €-544.1 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.1x on those 2028 earnings, up from -4.1x today. This future PE is lower than the current PE for the US Biotechs industry at 3087.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.94%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The strategic pivot away from internal R&D into externally sourced, mid to late stage assets may fail to convert Galapagos' substantial cash balance into compelling programs on acceptable terms, which would leave the company overly dependent on declining interest income and shrinking financial investments, pressuring long term revenue and earnings growth.
• The wind down of the cell therapy business, including up to EUR 200 million of restructuring cash costs and site closures across multiple geographies, could overrun current estimates or drag on longer than expected, delaying the goal of becoming cash flow neutral to positive by the end of 2026 and weighing on net margins.
• Heavy reliance on macro interest rates, tax credits and a modest royalty stream from Jyseleca to support the financial profile means that any sustained decline in rates, changes to tax regimes or underperformance in partner product sales could materially reduce other financial income and push earnings lower.
• The success of the BD led growth strategy is partly contingent on close collaboration with Gilead under the OLCA agreement. The need for joint decision making, potential renegotiations and alignment on capital deployment could slow execution in competitive processes, causing Galapagos to miss attractive derisked deals and limiting future revenue expansion.
• Key internal assets such as the TYK2 program GLPG3667 still face clinical and competitive uncertainty despite encouraging early data. Any unfavorable Phase II readouts, stronger rival TYK2 entrants or an inability to secure a strong commercial partner could reduce the program's economic value and dampen future earnings potential.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €30.34 for Galapagos based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €44.8, and the most bearish reporting a price target of just €19.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €270.7 million, earnings will come to €112.6 million, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of €27.9, the analyst price target of €30.34 is 8.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.