Cell Therapy Exit And Single Late Stage Asset Will Drive Weaker Long Term Earnings

Catalysts

About Galapagos

Galapagos is a biotech company that is repositioning itself as a lean, cash rich platform focused on external business development and a limited internal pipeline.

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

• The intention to fully exit cell therapy and close multiple sites in Europe, the U.S. and China could leave Galapagos with a much narrower operational base. This may restrict future revenue sources and keep earnings heavily reliant on financial income rather than product sales.
• The heavy focus on acquiring mid to late stage external assets in oncology and immunology concentrates execution risk in business development timing and pricing. Extended deal cycles or overpayment for clinically derisked programs could pressure future net margins and delay a shift from operating losses to sustainable earnings.
• Dependence on interest income from approximately €3b of cash, along with existing royalty and tax streams, to target cash flow neutral to positive status by the end of 2026 means that any decline in interest rates or erosion in these income sources could weaken future cash generation and limit capacity to support new R&D or M&A without diluting shareholders.
• The agreement that gives Gilead preferential options on assets and requires close coordination for larger transactions can add structural complexity and potential delays. This may reduce Galapagos' agility in competitive bidding situations and ultimately weigh on the economics of future deals and earnings power.
• The plan to rely on a single late stage internal program, TYK2 inhibitor GLPG3667, while exploring potential partnering, increases concentration risk. If data or partnering terms fall short of expectations, it could leave the company with a thin pipeline and prolong the period of operating losses relative to interest and royalty income.

Assumptions

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

• The bearish analysts are assuming Galapagos's revenue will decrease by 9.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -154.7% today to 21.1% in 3 years time.
• The bearish analysts expect earnings to reach €45.4 million (and earnings per share of €2.5) by about January 2029, up from €-443.9 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €211.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 32.8x on those 2029 earnings, up from -4.1x today. This future PE is lower than the current PE for the US Biotechs industry at 2989.3x.
• The bearish 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 5.97%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The cash balance of about €3b, which currently generates interest income and is guided to support cash flow neutral to positive status by the end of 2026, could underpin a more resilient earnings profile than a simple cash burn story suggests. This may support future earnings and net margins.
• Longer dated income streams from Jyseleca royalties, earn outs that management expects to continue into the mid 2030s and recurring tax receivables of about €20 million to €35 million per year provide relatively visible cash inflows that may help stabilize revenue and support net margins over time.
• The TYK2 inhibitor GLPG3667 is now fully enrolled in two Phase III enabling studies with data expected in early 2026 and is positioned with a differentiated pharmacology profile. It could turn into a meaningful asset through partnering or out-licensing, potentially adding to revenue and improving earnings beyond a pure cash box thesis.
• If the business development team, supported by Gilead’s capital, diligence capabilities and commercial experience, succeeds in acquiring mid or late stage clinically derisked programs in oncology and immunology on disciplined terms, this could rebuild the pipeline faster than expected and support future revenue and net margins.

Valuation

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

• The assumed bearish price target for Galapagos is €19.0, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2029, revenues will be €215.1 million, earnings will come to €45.4 million, and it would be trading on a PE ratio of 32.8x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of €27.92, the analyst price target of €19.0 is 46.9% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.