Cell Therapy Wind Down And Cash Reserves Will Drive A Leaner, Stronger Biotech Future

Catalysts

About Galapagos

Galapagos is a biotechnology company focused on using its substantial capital base and deal-making expertise to build a differentiated, late stage therapeutic pipeline.

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

• The planned wind down of capital-intensive cell therapy activities should sharply reduce structural R&D and infrastructure costs, enabling a leaner operating model and supporting a return to cash flow positive status by the end of 2026, which can improve net margins and earnings.
• A roughly EUR 3 billion cash position, generating meaningful interest income and underpinned by diversified royalty streams and tax credits, creates a durable financial cushion to pursue high conviction deals while still supporting long term revenue and earnings growth.
• Industry wide funding constraints in biotech are expanding the universe of clinically derisked, late stage assets available at attractive valuations, positioning Galapagos to convert its cash discount into accretive external pipeline acquisitions that can accelerate top line growth.
• The deepened strategic collaboration with Gilead, including potential capital contributions, technical diligence and development support, increases Galapagos’ access to larger, more complex transactions in oncology and immunology that can enhance future revenue scale and profitability.
• The differentiated oral TYK2 asset GLPG3667, with Phase III enabling data expected earlier than planned, offers a potential near to mid term value inflection that can be monetized via partnering or retained for upside, improving the visibility on future revenue contribution and capital efficiency.

Assumptions

This narrative explores a more optimistic perspective on Galapagos compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Galapagos's revenue will remain fairly flat over the next 3 years.
• The bullish analysts assume that profit margins will increase from -154.7% today to 124.9% in 3 years time.
• The bullish analysts expect earnings to reach €364.7 million (and earnings per share of €2.58) by about December 2028, up from €-443.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €-557.7 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from -4.0x today. This future PE is lower than the current PE for the US Biotechs industry at 2943.7x.
• The bullish 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 5.95%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company remains highly dependent on financial income from its large cash balance and money market investments at a time when interest rates have already fallen, and net other financial income has declined from EUR 71.7 million to EUR 30.4 million year on year. As a result, a prolonged low-rate environment or further portfolio shifts could materially reduce interest income and delay or prevent a sustained recovery in earnings.
• The decision to wind down the cell therapy business after failing to secure a buyer, combined with EUR 150 million to EUR 200 million in restructuring cash costs and EUR 100 million to EUR 125 million of additional operating cash impact through 2026, highlights structural challenges in scaling capital-intensive modalities. If similar issues emerge in future verticals, they could depress net margins and prolong operating losses.
• The strategy to rebuild the pipeline via external business development in mid- to late-stage assets is being launched into a biotech landscape where clinically derisked assets are scarce and competitive. If deal valuations remain high or negotiations with Gilead or targets prove slow or complex, Galapagos may either overpay for acquisitions or fail to close sufficient transactions, limiting future revenue growth and earnings expansion.
• The OLCA agreement with Gilead, which still runs for about three and a half years and gives Gilead economically attractive opt-in rights, structurally constrains Galapagos’ negotiating flexibility and could lead to value leakage or execution delays in key deals. This may in turn cap the upside on any new products and weaken long-term profitability and cash generation.
• With the internal R&D engine largely dismantled and the last legacy program GLPG3667 likely to require an external partner if Phase II data justify a Phase III program, Galapagos’ future growth is increasingly tied to accessing and integrating external science in crowded fields such as oncology and immunology. Any failure to secure differentiated, commercially viable assets could leave the company with a shrinking revenue base, persistently negative operating margins and pressure on earnings despite its current cash reserves.

Valuation

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

• The assumed bullish price target for Galapagos is €44.8, which represents up to two standard deviations above the consensus price target of €30.34. This valuation is based on what can be assumed as the expectations of Galapagos's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 more bullish analyst cohort, you'd need to believe that by 2028, revenues will be €291.9 million, earnings will come to €364.7 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of €27.18, the analyst price target of €44.8 is 39.3% higher.
  
• 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.