Galapagos - Earnings Call - Q2 2019

Transcript

Speaker 0

Good day and welcome to the Galapagos H1 Results Conference Call. At this time I would like to turn the conference over to Elizabeth Goodwin. Please go ahead ma'am.

Speaker 1

Welcome all to the audio webcast of Galapagos' First Half twenty nineteen Results. I'm Elizabeth Goodwin in Investor Relations, and this recorded webcast is accessible via the Galapagos website homepage and will be available for replay later on today. So that your questions can be included, we request that you call in to one of the telephone numbers given in last night's press release. I'll give you the one for Belgium. That's 3059, and the access code is 6080337.

I'd like to remind everyone that we will be making forward looking statements during today's webcast. These forward looking statements include remarks concerning future developments of the pipeline and our company and possible changes in the industry and competitive environment. Because these forward looking statements involve risks and uncertainties, Galapagos' actual results may differ materially from the results expressed or implied in these statements. Today's speakers will be Anno van Nystolpe, CEO and Bart Filius, COO and CFO. Anno will go through the operational highlights, and Bart will explain the financial results and 2019 news flow we expect in the second half of the year.

You'll see a PowerPoint presentation on screen, and we estimate that this part will take about ten minutes. And this will be followed by a question and answer session with Bart and Anno, who will be joined by Waleed Abhi Sab, our CMO. And at this point, I'd like to hand over to Anno to begin the presentation. Go ahead.

Speaker 2

Thank you, Elizabeth. Pleasure to have the word and talk to you about the operational highlights of the first half. Clearly, a fantastic first half on all aspects, the clinic, the commercial operation start and of course, the deal with our friends from Gilead recently announced that I'll come back to in more detail. But let's first look at the clinical delivery over the first half. A lot of news on filgotinib where we had the excellent FINCH one and FINCH three Phase three results in rheumatoid arthritis, clearly a hallmark data set for Galapagos and Gilead.

We also completed the recruitment in our Phase three ulcerative colitis trial as well as in Phase two trials in Sjogren's and lupus. And we are nicely on track to build our commercial organization within Galapagos for the European market where we will be operating in rheumatoid arthritis. In IPF, we after starting last year, sixteen ninety in IPF with the ESABELA study, we went for the second indication in sclerosis. We started the NOVESSA phase two trial, so very nice that we went into the second indication so rapidly. And we strengthened the IPF franchise by licensing two compounds from early stage compounds from Fibrocor and Evotec.

In osteoarthritis, we completed the recruitment in the Phase IIb trial together with Servier, actually six months ahead of schedule, so we're very pleased with the rapid recruitment there, and we will be looking forward to the data next year on that trial. And in MOR106 we started an additional trial, the GECO Phase II trial, that's a program we're doing together with MorphoSys and Novartis. Novartis licensed this compound from us last year. And then further in inflammation, we were very pleased to have our first Toledo compound in the clinic. We started Phase I with 3,312, and the second one is on its way to enter the clinic shortly.

So Toledo is getting shape, and we believe this could be a very, very important program for inflammation going forward. But let's look at the deal with Gilead. Of course, you've all heard about it and seen many of the details, but let's highlight some of the facts again in the next couple of slides. It's clearly a deal that is transformative for Galapagos and very innovative for the industry, I must say. It's the largest life science collaboration history of the life sciences, so that's a hallmark for, I guess, also European biotech.

I'm very pleased with the model where we remain independent for a very long time and get enormous amounts of fund to really go after innovation, innovation and innovation. So that is really what the focus of this deal is, and that should be very good for patients going forward. It's based on our unique discovery engine, especially our target discovery where we have the antiviral collection to come up with novel targets for various diseases, and then followed by very rapid drug discovery capabilities that Galapagos has to move programs rapidly into preclinical and then towards the clinic. But clearly we can benefit from expertise that Gilead has in chemistry and development, formulation and of course, the infrastructure to market drugs worldwide. Clearly, we are not at all in the commercial side of business yet.

We will now focus on Europe as for the commercial aspects of the business and leave the rest of the world to Gilead, which we believe is a very good step for us. And this will all lead to further acceleration of the current programs, but also of new programs. We now plan to double our R and D efforts and hopefully come up with new mode of actions rapidly to improve the lives of patients. And with this current structure, we have our work ahead to roll out commercial infrastructure throughout Europe and build that over the next couple of years in in all the various countries, so that in a ten years period, we will be a fully equipped European biopharmaceutical company, and then wander out to the rest of the world after that period of time. Let's look a little bit at financials of this deal.

It's quite complex, and it's large. We get a 3,950,000,000.00 upfront payment to do this deal. Interestingly, Gilead has no say in where this money will be spent. It's all up to Galapagos if we on what therapy areas, what targets, but also what acquisitions we would do. There are no limitations and there's no impact from Gilead in that.

They also do an equity investment at this point of €1,100,000,000 which is at 20% premium to the thirty day average when the deal was announced, and that increases their stake to 22%. They get two warrants to further increase the percent to 29.9 over the next couple of years. And they receive an opt in for all the programs that we currently have for all the rights outside Europe as well as on programs that we are going to develop over the next ten years. They pay us an opt in fee, and I'll come back to the numbers and certain milestones as well. Also very interesting to note is that after they opt in, they're going to pay 50% of all the Phase III costs.

So we're splitting the costs worldwide, which reduces the risk of these Phase IIIs tremendously. And we're still getting a very nice royalty on sales that they're making outside Europe between 2024%. So let's go through the specific programs details here. First, on the platform, it was very important when we talked about this deal that there would be no barriers, there would be no secrecy between the two companies. So we are sharing all the targets that Galapagos is working on, also future targets that we discover, and there will be full transparency to Gilead to maximize the science collaboration between the two companies.

We plan to exchange scientists back and forth to maximize

Speaker 3

synergy between

Speaker 2

the two companies. We can do it because it's very clear what happens later on when they can opt in and not opt in. So I think all of that is very nicely worded in the contract, and I think it will benefit the science tremendously. As part of the deal, we revised the current filgotinib collaboration, where we're actually taking on a larger part of the expenses. It's going to be fifty-fifty going forward as of now of the development cost.

And Galapagos is getting a bigger say in the European commercialization. So in the big five countries, Galapagos will have a big impact on the commercialization of filgotinib in the various diseases. For 1690, our IPF drug, we provided the license as part of this deal for all rights outside Europe. We will continue in Europe, we will market that of course like all the other drugs, but they will market it outside Europe, and they will still pay a $325,000,000 milestone if the drug gets approved in The US. In 1972, it's a little bit different, because that's in a partnership with our French partner Servier, where we only have The US rights unencumbered.

So Gilead gets an option for those rights after the phase 2b that's currently running the ROCCELLA trial. They will pay us in $250,000,000 opt in if they want to exercise the option, and the $750,000,000 in further milestones downstream from that. For the rest of the world, Servier has the rights, and we are getting royalties from Servier on sales in the other territories. These are substantially lower than the ones Gillette is paying Servier's single digit royalties. It's a

Speaker 3

deal

Speaker 2

that was signed with Servier when we are at the target stage, a very early stage deal. And then all other programs, including Toledo, and Toledo actually consists of a number of different programs, but every single program there is an option fee when Gilead exercises after, decides to exercise after a phase two study of 150,000,000, and then as I said before, we'll share all further development costs fiftyfifty between the parties, and we're getting on all the programs except for filgotinib where we get royalties between 2030%, For all other programs, we get royalties between 2024%. So I think these are the program highlights, and of course, these are very large numbers, and it's a very impressive deal. I think what is important more from a holistic point of view is that we have found a very innovative way, I think, to work together and still keep our full independence on going forward, both on an equity point of view, where we will remain an independent company on the stock market, but also on a science point of view, which is very important for us that we can continue to do what we believe are the right things to invest in, in the science.

And for the next ten years, it's clear that we have a very close marriage with Gilead, and the start has been a very good relationship, very high energy, a lot of adrenaline. We had actually the honor of Dan O'Dea visiting Galapagos last week and talking to our staff, and that went extremely positive. The deal is very well received within the company. So I think it's been a very positive outcome of six months of negotiations, and we're all very pleased that this is now done. Of course, we still are waiting for the competitive review in The U.

S, but we expect that to end in the next four weeks or so, and then the deal will be delivered. With that, I would like to hand it over to Bart, who has been extremely instrumental in getting the deal together, but he can now talk about the

Speaker 4

financials. Thank you, Ono. Good morning, everyone in The U. S. Good afternoon in Europe.

Obviously, focus of this call is to a large extent on this transaction with Gilead, but we also have to report the second quarter financials. So I'll do this with two slides that those of you that are following the company have seen before and they'll describe basically the financial evolution over the second quarter of this year. So the first slide there is on cash. As usual, we are ending the cash balance sheet at €1,150,000,000 at the June. And if you look back, you take out a couple of specific items which you always do such as capital increases and translation effects, but then the actual net cash burn is a little more than €150,000,000 over the first six months of the year.

And as a reminder for everyone, the guidance that I've given at the beginning of the year for total cash burn is between $320,000,000 and €340,000,000 So the 152,000,000 that you see here on the chart is coming pretty close to 50% of that number. So this is just to say that the cash burn over the first six months is completely in line with our expectations. Now I've chosen not to change the guidance for the full year even though we all understand that the ultimate operating cash burn will be different because of the Gilead transaction, but I thought it was more relevant to highlight the underlying operational cash burn, which indeed we confirm to be on track as per previous guidance, but then clearly we anticipate a significant cash in the course of the second half of this year, euros 3,950,000,000.00 upfront in dollars and €1,100,000,000 in equity stake including the premium in dollars as well. So then over to P and L, the highlights again, revenues are a little higher than they were in first half in 2018. This is there's two elements that are supporting that.

First of all, for MOR106, we are actually recording the reimbursements for the expenses that we make by Novartis in our revenues that drives part of the increase. Secondly, we've also achieved a milestone of $25,000,000 in our collaboration with AbbVie for the final completion of the FALCON study. So that's also in these numbers included in the first half year. Operating costs are clearly higher than they've been in the 2018, fully in line with expectations and the key drivers are really the middle and late stage development expenses and then within that bucket, obviously, 90 is its expenses are increasing significantly versus last year as the Phase three program has really come off the ground in 2019. So as a result of those two, revenues being a bit higher, operating costs being clearly higher as well, then the net result is negative compared to 2018 by about €35,000,000 which also includes a bit of financial income and expenses.

Then my final slide to highlight what is still to deliver in terms of a key news flow over the second half of this year and that's quite a bit. Maybe first to highlight is that we have achieved all of the guidance as we have presented in the first half of the year as you see on this slide with one exception of one Phase I starts that we were anticipating for first half twenty nineteen, which is now going to be 2020. On the second half of the year, there is data coming on two more filgotinib indications. Ono already spoke about those, Sjogren's and lupus is still to come in the second half of the year. We're also anticipating the start of the Phase three program in psoriatic arthritis And obviously, the key events for filgotinib are also the filings in Europe and The U.

S. That we are anticipating in the second half of this year. In fibrosis, we will have our PINTA study with twelve oh five fully recruited by the end of the year. We already achieved ahead of schedule the ROCCELLA study fully recruited and on MOR106 there is one specific Japanese study that we're starting in the second half of the year. And then there's quite a bit going on also with the earlier programs in Phase one.

We anticipate top line data Phase one for our first generation Toledo compounds. That's going be something to look out for in the second half of the year clearly. But we're also starting to further Phase 1s, one with a novel agent 3667 and with what we call a second generation Toledo compound 3970 as well. And then finally, we hope by the end of this year, if Phase I allows, we hope to start a proof of concept with our first Toledo compound in IBD with 3,312. So that's with regard to the news.

So still a lot to come in the second half of the year. And then as the year progresses, we'll start giving also some guidance as to the key data events, the numerous key data events I would say in 2020 that will come in the next twelve months. So with that, I'll stop and give the word back to Elizabeth to lead us through the Q and A.

Speaker 1

Thank you, Bart and Anno. That does conclude the presentation portion of the call today. I'm going to ask our participants to only one per firm today so we can give more people an opportunity to ask questions. And our operator, Jenny, will be helping us to achieve that. I'd like to ask Jenny now to connect us to any callers who may have questions for our executives.

Speaker 0

Thank you. Again, that's star one to ask a question. We'll pause just a moment to allow everyone an opportunity to signal for questions. And we'll hear first from Roshi Jolly of Bernstein.

Speaker 5

Hi, Roshi Jolley of Bernstein. Thanks for taking my question. So firstly, on cost post the Gilead deal, I mean, you already outlined that you intend to hire commercial operations in Europe. How should we think about the level of incremental sales and marketing spend? And over what time period can we expect saving for this and likewise for R and D as well?

Speaker 4

All right. Raxi, let me take that. Bartfili speaking. First of all, the commercial cost, maybe good to highlight to everyone on the phone that the economics of the filgotinib structure have not changed except for the development cost share. So we're still in Europe sharing all expenses fifty-fifty.

So to the extent that we are incurring further expenses on our P and L as opposed to on the Gilead P and L, it will be a shift in line items compared to previous guidance. So it's not going be the commercial cost, I think, which is going be the key driver for increasing in cash burn. On the other hand, we do anticipate, as Alain was speaking to, a significant increase in our research and development costs. This will not be from one year to the next. This will be a gradual increase over the next couple of years.

First of all, we all know that it will take a bit of time to get to this doubling of infrastructure both in terms of people and fixed infrastructures, but that will take a couple of years. And at the same time, obviously, a large element of our expenses in development is depending on the actual results that we achieve. So where we do see increases next year and more detailed guidance will come over the next, let's say, six months, but where we do see meaningful increase next year is in development costs regarding the Toledo program, which we were anticipating, by the way, already independent of the Gilead transaction. I hope this clarifies a bit the question, Rashi.

Speaker 0

And our next question comes from Evan Zigerman of Credit Suisse.

Speaker 3

Hi, guys. Thank you for taking my question. Just one on your large cash balance. So how do we ensure that you're basically going to be using this to generate shareholder value? What are your strategic priorities terms of spend aside from increasing R and D?

Thank you very much.

Speaker 4

Yes. Thanks for the question, Bart again. So clearly, priorities are indeed on the research and development. For now, what we've said is that we are intending to double those investments in innovation and that it will take a couple of years to materialize. We actually are inviting you and others here on the phone also to attend our R and D Day on the November 14 of this year where we're planning to give some further details on our plans for the next couple of years.

But obviously, we will maintain our same threshold, our same focus on high quality innovation in Galapagos as we have demonstrated over the past couple of years going forward as well. So we are not in a hurry to work on this other than that we want to make sure that it is invested behind the right and the good ideas for true innovation for patients. And in terms of track record, let me add then also that we have been able to do this very successfully over the last three, four years as well. Our cash expenses have also doubled in that period and even more than doubled. So there's ample opportunity I think from within our own company to invest in R and D and make sure that the cash balance is used in a wise fashion.

Speaker 0

And so we'll go next to a question from Emily Field of Barclays.

Speaker 6

Hi, yes. I was just wondering if the FDA thus far has seen any of the preliminary data from the MANTA studies, when you expect MANTA and Monterey to be fully enrolled, and if you expect you will need the full data to file assuming the selection trial

Speaker 7

Yes. Hi. This is Walid. I'll take your call. Good morning, everybody in The US, and good afternoon for the rest.

So regarding the meeting the with the FDA, we did have a discussion with the FDA, including all the FINCH data and the available MANTA data, which were blinded. So there was no unblinding of the of the MANTA study, and that formed the basis of the discussion that Gilead actually led with the FDA. At the end of that, we agreed that we can move forward and file in The US regardless of the MANTA study. Of course, we will include all the data available from MANTA, from all the other open label also studies that are ongoing, but the completion of the MANTA program will not be needed prior to filing. And I believe you asked a question about selection, and I don't think that that was a subject of a discussion, but I I I don't think this will be necessarily treated any different than than than the program in RA because in the end, we are generating more data by that time.

Did I answer your question? I'm not sure if I'm if I captured all the pieces of your questions.

Speaker 6

How enrollment is going, you know, since the addition of the Monterey study?

Speaker 7

Right. So, you know, we we have not been guiding on this. Gilead is is gonna be taking the lead in in sharing information, but to a great extent since Manta is not on the critical path for filing, I believe, you know, this is essentially not critical information to guide for this. But I can assure you that recruitment is going up more, you know, on the side of MANTA because we increased the size as as we talked about. And and with discussion with the FDA, we increased the inclusion exclusion criteria, modified them to be able to allow us to recruit faster, and also Manta Ray with the engagement with a number of sites.

So we will we will be seeing this, but we're not we're not providing any specific details on this.

Speaker 0

And we will go next to Brian Abrahams of RBC Capital Markets.

Speaker 8

Hi there. Thanks so much for taking my question. Congrats again on the Gilead deal. Continuing on filgotinib, what are your latest expectations on a potential label relative to competitors in RA from an efficacy and safety standpoint? Any compromises you might expect on the label that has enabled filing before the completion of MANTA?

And how much can be interpreted from a blinded, on safety from blinded sperm counts? Thanks.

Speaker 7

Yeah. Thanks, Brian. So look, we've been very pleased with the results of the FINCH program. I think we've been saying this for a long time that our highly selective JAK one profile for filgotinib is gonna translate into a very beneficial risk benefit profile, and that materialize. And from there to sort of specifically speculate on what the label would look like, I think that would be quite premature.

I think that that is a review issue that the FDA will have to, you know, weigh in on, of course, and and I I cannot I cannot sort of put the cart side of the horse in that case. In the event of the MANTA and evaluating the blinded data, I think that would give you a general sense of certain changes that you would see, whether it would make you feel more or less comfortable. Again, I I don't wanna go into the details of this, but suffice it to say, when the data from the blinded MANTA program plus the totality of the FINCH program were discussed with the FDA, we felt comfortable that we can move forward and file in The US this year still.

Speaker 9

Thanks very much.

Speaker 0

And our next question comes from James Quigley of JPMorgan.

Speaker 10

Hello. Thanks for taking my question. Just one quick one on the JAK1, TYK2, which was discontinued. Is TYK2 still a mechanism that you'd look to develop drugs for, especially given that the Bristol's Bristol's drug is progressing relatively rapidly? Think I'll leave it there.

Thank you.

Speaker 7

Yeah. Thank you, James. Yes. TYK2 is is a is a area that we're interested in developing compound compounds in this area. And as you've been as we've been saying for a long period of time, having also our own JAK one, which is very advanced and filgotinib, offers an opportunity to to consider combination treatment, which which would really enable us to address key unmet medical need in these indications.

Just keep in mind how much more improvement is needed in these patients. You know, I I remind you, we talk about ACR fifties of around forty or fifty percent, ACR seventies at about twenty or thirty percent. Those numbers should be ACR seventies around seventy and already eighty percent. There's a huge room for improvement. Combination therapy with with arfuglatinib is an important strategy.

Toledo will be also a very important strategy for us to achieve those goals, and that's what we're striving towards.

Speaker 0

And our next question comes from Ellie Merle of Cantor Fitzgerald.

Speaker 11

Hi guys, thanks for taking the question and congrats on all the progress. Just one on sort of your M and A and BD strategy given your very strong cash position now. Can you just elaborate a little bit on how you're thinking about this? And I guess, what therapeutic areas or modalities you think would complement your discovery efforts? Yes.

Speaker 2

This is Omer here. I'm happy to answer your question. It's clear that we will be on the lookout for compounds that could complement our portfolio. Clearly, fibrosis inflammation remain important, but we will be expanding the therapeutic areas with our internal research. Well, we're already doing that, but we will accelerate that expansion and diversification.

And clearly, we will also be looking for compounds in those areas as well. Don't expect any major acquisitions for now It most likely will be more compact licenses and maybe technology platforms as they really complement what we currently have internal. So we're there will be a busy time ahead for us there.

Speaker 0

And we'll go next to Peter Welford of Jefferies.

Speaker 12

Hi, thanks. I wanted to ask about your earlier preclinical Phase I type and drug discovery efforts. Firstly, I guess just with regards to discussions with Gilead, were there any particular new areas they wanted you to increase efforts in perhaps or any desperately agreements reached as far as areas that they would like to see you move into? And I wonder as well, 3,667, is that a brand new class? Or is that similar to any of the drugs that you already have within your pipeline?

Speaker 2

I'll do the first part, Matthew. There has been no pressure or not even mentioning by Gilead of areas of interest for them to go into. That's really clear from day one that that's off limits. We determine what we think are the right areas to focus on, and they only have information right. So we're going to inform them regularly on what we're doing, but they will not be able to influence our program.

Waleed?

Speaker 7

And this is Waleed. So for the 03/1967, I we're not disclosing the target today. But what I can tell you that it is not a backup compound to any compound that we have in our pipeline. So I think it's safe to assume that it's a new pharmacology.

Speaker 0

And we'll go to our next question from Matthew Harrison of Morgan Stanley.

Speaker 9

Hey, good morning. Thanks for taking my question. Guess for me, just a question broadly on Toledo. Think on a Gilead call, you suggest that you're planning to start, I think, 10 Phase II studies sometime next year and gonna have a very broad effort towards finding, you know, potential areas to move that program forward. Can you just maybe outline for us, you know, what you think is important about the the phase one data in healthiest we'll get this year and then when you might start to disclose some

Speaker 7

of

Speaker 9

the indications and the breadth of that program? Yes.

Speaker 2

This is clearly Valid in a better position to answer. So Valid?

Speaker 7

Thank you, Anno. Yeah. Look, I mean, we've set we've identified this area a couple years ago, and we were very impressed with the data that we've seen. Preclinically, we decided to invest heavily in it from chemistry and biology. We we view this program as a new platform that's gonna make us give give us the opportunity to address a number of unmet medical needs.

And as such, we are advancing these programs, these various molecules forward with various level of selectivity for certain subtypes, if you think of them as the JAKs, you know, JAK1, JAK2, JAK3, so on and so forth. And there's a huge element of learning from the clinic that we're take back to to the lab to help to help inform what's going on. And it's in the same spirit that when we go broadly into indications in the inflammation space and and perhaps in fibrosis as well, that we wanna sort of learn and and adjust the the best molecule with the best selectivity to the target indication. So what would we learn from phase one? Well, we're first, the most important part of us part of the learning in phase one is about the safety and the tolerability of these compounds.

That's why we're very excited that we're able to get in the clinic, and we're advancing forward. So by the end of the year, we'll share more information about it. But there are also certain pharmacodynamic endpoints that we're including in these trials to also guide us about sort of which type of, you know, cytokines might be affected and so on and so forth. But it's very important that you think of this that we're taking a really large approach, a platform approach, where these molecules are gonna be informing each other and guiding the subsequent development to be niche towards the best indication that will address the most important unmet medical need, but also to help us to speed up development by learning from compounds that are more advanced to influence the ones that are going that are coming at their heels.

Speaker 0

And we'll hear next from Anastasia Kartova of Kempen.

Speaker 13

Good afternoon. Quick question. On a bit coming 3,000. Can somebody please explain what made you comfortable going in this indication given that JAK is not directly related into pathology and if modulation of interferon gamma would be sufficient to show efficacy or clinically meaningful efficacy indication that hasn't seen any of these in the kind drugs.

Speaker 7

I'm I'm sorry. I didn't quite catch the the you're you were going in and out, but I'm assuming you're asking about what is the rationale for why we went into Sjogren's syndrome. Is that is that what you're saying?

Speaker 13

Yeah. And how comfortable are you with the positive outcome?

Speaker 0

Right. Well,

Speaker 7

look. I think, you know, the preclinical data that we had convinced us that this is an indication that that we have a likelihood that we could work. Of course, in that indication, there's still a significant unmet need. And the nature of the phase two study that we put in place was it was maybe more exploratory, just as you said, because it's not as well formed and advanced, say, for example, compared to, you know, ankylosing spondylitis or psoriatic arthritis. So the nature of the phase two study is more exploratory to cast a wider net and look at various endpoints to see where we where we need to go next.

As we indicated, the results will be shared in second half of the year, and we will use that information to guide what would be the next step and and whether the you know, whether whether filgotinib is gonna be able to address an unmet medical need in Jibran syndrome to to take it forward.

Speaker 0

And we'll hear next from Dane Leone of Raymond James.

Speaker 14

Hi. Thank you very much. Congratulations on the update. And since I was on the last call, congratulations on Gilead deal. So the one question from me, maybe a bit of a delayed question, but it's one that's been percolating quite a bit within the investment community here in The US.

You know, when you look at, some of the complicated programs that you and Gilead are going to tackle, such as the Toledo program, a lot of people have been debating, whether it's a fair comparison to, the complicated, algorithm that was the CF program, that your team undertook in partnership with AbbVie. And the question comes out is how are you structuring, some of the decision making here between the two teams? Because what we saw with the AbbVie partnership that somewhat dissolved over time. I know the back story is a little bit more complicated, but, you know, it seemed to be finally come down to a difference of opinion on how to accelerate some assets from early testing to later testing, between the two teams, and ultimately the conflict resolution had to occur. So just from a high level, how are you thinking about managing, that type of conflict resolution when you have these complicated programs like Toledo and other ones presumably that will occur over the

Speaker 15

life of this partnership? Thank you.

Speaker 2

Yeah, that's a good point. This is all now it's completely different than in the previous collaboration with AbbVie where it was a complicated decision making and conflict resolution. Here, it is quite simple that we have final say on all aspects with regard to the programs until the end of phase two. The two the final phase two has to be a qualifying phase two for Gilead to exercise its option, to decide to exercise its option or not. If they exercise the option, then it's going to be a joint collaboration and there's a clear dispute resolution described in the contract with the final say ultimately related to the territory.

So we will always have final say on Europe, and Gilead will always have final say after exercise the option in the territories outside Europe. And that makes it all quite a bit more clear and straightforward to exercise. So ultimately that could lead it's not desired, but it's a possibility that we would do a separate European Phase III if we have, by example, a major issue with Gilead on how a phase three would be designed worldwide or the planning of that phase three. So that has all been discussed, we think it's very elegantly resolved in the contract that we have signed.

Speaker 0

And we'll hear next from Greg Savonovich of Goldman Sachs.

Speaker 3

Yes. Hey, good afternoon. Thanks for taking questions. Sorry about the noise in the background. But just a question about BD.

Given the company's traditional focus on small molecules and you talk about platforms that you're looking at, can you just give us additional color? Are you looking at, say, biologic based approaches or gene editing based approaches? Any color there on the platform you're looking at? Well,

Speaker 2

it's not our first priority to see if we can get large molecules into our platform or in our pipeline, but also not excluding it at this point in time. It's still very early days. We have to sit together with the teams and see what makes best sense to move forward. But clearly, we will be looking at new areas for Galapagos, including RNA, which seems to be a very attractive area to expand into. So we will be open for various different technologies to enter the research engine of Galapagos.

Speaker 0

And our next question comes from Christopher Marai of Nomura Instinet.

Speaker 15

Hi, good morning. Thanks for taking the question. So just number one on capital allocation. I was wondering if you could comment on any interest in potentially reacquiring rights to some of the compounds that you currently have collaborations or partnerships around, obviously, the Gilead collaboration. And then secondly, maybe Walid can help us understand what the target is for Toledo.

Thank you.

Speaker 4

Maybe I'll take the first question, Chris. Bart speaking. So on capital allocation, no, that's not on the agenda to look for reacquiring certain rights that we had previously licensed. I think everything that's been licensed third parties has been up for good strategic reasons more than anything else. So that's not on the agenda.

The Toledo target question, I'll hand it over to Alif, but I'm sure the answer is going to be relatively short. Alif, do you want to comment this one?

Speaker 7

Well, thank you, Bart. I think you could have answered it. Look. We're not we're not sharing the the target for Toledo. We we've been saying this.

It's important for us to to do this for competitive reasons, and our our objective will be or our plan would be to do it sometime when we start our number of multiple phase two trials as we said previously.

Speaker 15

Toledo target, that is. Thank you.

Speaker 7

I'm sorry. I I didn't hear what you said, Chris.

Speaker 15

Oh, I'm sorry. Does the does the does the r and d day in November make sense from the perspective of releasing the Toledo target? That's my last question. Thank you very much. Congrats on the collaboration.

Speaker 7

Yeah. Thank you, Chris. No. I think it will be more in next year sometimes after we start our phase two trials with, you know, multiple phase two trials at the same time. That's been our target.

Speaker 0

And our next question comes from Pasha Sarraf of SVB Leerink.

Speaker 16

Hi, this is Dylan Dupuis sitting in for Pasha. Just two quick questions. Number one, are you going to be bringing in house any discovery programs or discovery targets that Gilead is currently working on? And then number two, how does your plans to expand your R and D, how does that impact your previously stated goals for bringing X amount of compounds through different stages of development?

Speaker 2

I'll do the first part.

Speaker 7

The first part was

Speaker 4

Discovery program is coming in from Gilead.

Speaker 2

Yeah. There is a possibility that the that Gilead or slightly that Gilead is working on similar programs that we have programs on. We haven't shared that yet because we're still in a period that we cannot share that kind of information, but we'll do that immediately after the conclusion of the transaction. And if there is an interest to join efforts on programs, we will do that. There's also a possibility that they will continue independently, but both options are described in the contract.

So it's very well possible that we will jointly work on a program that Gilead already has efforts on.

Speaker 4

Yes, I'll take the second part of the question. And I think this is also one that to discuss in more detail on the R and D Day in November. But clearly, if we are going to invest more in our discovery platform and programs, we would anticipate higher output also from those programs. So previously, we've also always guided for three preclinical candidates every year coming out of our discovery efforts. And yes, you should expect this number to go up clearly if we are increasing our investments there as well.

Speaker 0

And we'll hear next from Phil Nadeau of Cowen and Company.

Speaker 17

Good morning. Thanks for taking my questions and congratulations on the progress. First on the Jogren's and CLE data that we're going to see for filgotinib in the second half of the year. Given that both of those have a variety of symptoms, can you give us some sense of what data would serve as proof of concept? Kind of what what changes on on what endpoints?

And briefly, just a housekeeping item. Do you have any sense of how the upfront is gonna be accounted for? Is it gonna be amortized? And if so, over what period? Thanks.

Speaker 7

Yeah. So, I mean, I think for those for those studies, again, I I think I mentioned this a little bit before. We were we were being a bit more exploratory. Gilead has done and I say we are used the joint we. So we're looking at at various endpoints for cutaneous lupus.

The the the endpoint itself for cutaneous lupus is actually the the typical endpoint we will look at. I am sorry. I can't remember it off the top of my head, to be honest with you. But we're also looking at other manifestation of lupus that some of these patients will also have. So, again, those studies tend to be more exploratory in nature that we're looking at at virtually all things that we can look at that would be affected in this disease with the idea that this will guide the next study, next studies which could be either phase two or phase three depending on how robust the data and how convinced we are with these findings.

Off to you, Bart.

Speaker 4

I'll take that one, Walid. On the upfront accounting, Phil, yes, that will be amortized over years. Basically, it's going to be spread out in different buckets. There is parts of the upfront that will be allocated to sixteen ninety. There will be parts allocated to the platform, to other molecules, to filgotinib.

So it's a relatively complicated exercise. At the end of the day, what I expect is that we will have, let's say, roughly 15 to 20% recognized in one shot in the 2019 accounts and the remainder being recognized over the period of the collaboration, so that's a ten year period, with some fluctuations over years, probably a little bit more in the early years and then winding down towards the later years. I'll give full details on that in our Q3 call in October once we will have closed the transaction and then also finalized the accounting of that transaction, but this gives you an idea as to how we're thinking about this at this stage. And then full clarity will come in a couple of months.

Speaker 0

We'll hear next from Adam Walsh of Stifel.

Speaker 8

Hi. Good afternoon, and thanks for taking my questions. On the ROCCELLA Phase 2b trial with nineteen seventy two in osteoarthritis, that enrollment is now complete. The primary endpoints are reduction in cartilage loss by quantitative MRI. I'm just wondering what results would be considered positive or sufficient to trigger Gilead to opt in.

I think those results are becoming in about twelve months now. If you could give us a sense for kinda what the thresholds there are, that would be great. Thank you.

Speaker 7

Adam, this is Salit. So as you correctly indicated, that trial, the primary endpoint is a reduction in cartilage loss as measured by MRI at the same time over a twelve week twelve month period. At the same time, we're looking at the usual suspect, the WOMAC with all its subtype subscales, also measures of pain, the patient's assessment, looking also at joint space narrowing by by X-ray. Not expecting also that that in this trial with the size that that you would be able to see something on a joint space narrowing, but still those will give you directionally where where things are heading. There there are no specific discussions with Gilead as to a threshold that will that will make them opt in.

Actually, that probably question is more appropriate to ask Gilead than than us. What would good look like in in their in their opinion? But look, this is an area of high unmet medical need, and there's a very high potential reward financially if things move forward. There's no treatment to modify the disease, and Gilead is very, very excited about this program as are we. And when the data become available, we'll we'll be sitting together and look pouring over it, and and and I think the decision whether or not they opt in is is probably better asked to them and not to us.

Thanks.

Speaker 0

And we'll go to our next question from Patrick Tuchel of Berenberg Capital Markets.

Speaker 3

Thanks, good morning and afternoon. My question's regarding filgotinib in Europe. Can you remind us how we should think about the necessity of the MANTA studies and data in the EU filings? And when in 2020 we should anticipate the potential launch in RA in the EU? Thanks.

Speaker 7

So we've, you know, we've talked about the filgotinib filing in Europe that now discussions with EMA. There was no need to have the results of the MANTA trial before we file. So the plan for filing in The EU is in the second quarter and probably the earlier part of the second quarter if I can be a little bit more specific. And then with that, one would expect launching sometime next year, probably in the second half. Pardon?

And

Speaker 4

Yeah. Just just I I thought you're I heard you say second quarter and third quarter is what's fighting. Right, Philippe?

Speaker 7

I'm sorry. I meant second yeah. Yeah. I meant second half. Sorry.

Speaker 0

And at this time, there are no other questions in the queue. I'll turn the call back to our presenters.

Speaker 1

All right. Thanks, everybody. This does conclude the call today. Our next scheduled call is going to be the third quarter twenty nineteen results on the October 25. We thank all the callers for their support and participation and wish everybody a very happy summer.

Thank you. Bye bye.