Anyone wondering what the first major move of Gilead Sciences' (NASDAQ: GILD) new CEO would be now has an answer. On Sunday, Daniel O'Day announced that the biotech had entered into what it called "a transformative research and development collaboration" with Galapagos NV (NASDAQ: GLPG). The total price tag of this 10-year agreement was nearly $5.1 billion.
Galapagos shareholders really liked the deal; the biotech's stock soared 18% on Monday. But what does the expanded partnership with Galapagos mean for Gilead Sciences investors?
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What Gilead gets
Gilead Sciences is shelling out $3.95 billion up front and making a $1.1 billion equity investment in Galapagos. In exchange, the company is getting several goodies.
Let's start with Gilead's increased stake in Galapagos. Gilead already owned a 12.3% stake in its partner. That interest will jump to 22%. In addition, Gilead will receive two warrants that allow it to increase its ownership of Galapagos to up to 29.9%. However, there's a 10-year standstill that prevents Gilead from trying to acquire Galapagos or boost its stake in the company above 29.9%. As part of the agreement, Gilead also will name two members to Galapagos' board of directors after the transaction closes.
The real prize for Gilead, though, is that it will receive an exclusive license and options rights to develop and commercialize all of Galapagos' current and future programs in all countries outside of Europe. Gilead already licensed rights to Galapagos' lead candidate, filgotinib. As part of the latest deal, Galapagos will have greater involvement in the commercialization of the drug in Europe and will split development costs equally instead of footing only 20% of the costs.
Beyond filgotinib, Gilead picks up rights to Galapagos' other late-stage candidate, GLPG1690. The drug is currently in a phase 3 clinical study targeting the treatment of idiopathic pulmonary fibrosis (IPF). Gilead has an option to license GLPG1972 for commercialization in the U.S. The drug is in phase 2 testing for treating osteoarthritis.
Galapagos has more than 20 other programs in earlier stages of research and development. Gilead will be able to exercise its option to license any of these programs outside of Europe after they complete phase 2 studies for $150 million per program. The two companies would then split development costs equally after the opt-in, with Galapagos receiving tiered royalties between 20% and 24% on net sales of any drugs licensed by Gilead as part of the agreement.
Going all in on immunology
The big story with Gilead's deal with Galapagos is that the company is going all in on immunology. This is a brand-new market for Gilead. It shows that O'Day is willing to roll the dice on the biotech elbowing its way into an already crowded field.
There was a major hint about how seriously O'Day views Gilead's opportunity in immunology during the biotech's first-quarter conference call. The FDA requested a safety study in adult males for filgotinib, apparently pushing the U.S. regulatory filing for the drug well into the future. But O'Day mentioned in the Q1 call that he had worked with Gilead's team to "accelerate some of the plans around filgotinib."
Sure enough, Gilead announced on July 1, 2019, that it intends to submit filgotinib to the FDA for approval in treating rheumatoid arthritis this year. Gilead also plans to file for European approval this year.
It looks like immunology will be yet another arena where Gilead and AbbVie slug it out. The two drugmakers currently compete head-to-head in the hepatitis C market. AbbVie's upadacitinib is expected to win FDA approval soon as a treatment for rheumatoid arthritis. Both upadacitinib and filgotinib are projected to rake in billions of dollars in sales annually if approved.
Better than a buyout?
Some investors might wonder why Gilead simply didn't acquire Galapagos. One likely answer is that Galapagos didn't want to give up its independence, while Gilead didn't want to mount a hostile takeover attempt of its close partner.
Also, Gilead could be a little skittish about spending too much on a big deal. In 2017, the company acquired Kite for $11.9 billion. Although Yescarta won FDA approval shortly after the deal closed, the CAR-T therapy has made only $360 million so far.
In some ways, Gilead's agreement with Galapagos might even be better than a buyout. The company will immediately expand its pipeline significantly in one of the most lucrative therapeutic areas. Although the $5.1 billion price tag isn't chump change, it doesn't use too much of Gilead's cash stockpile. The Galapagos agreement leaves Gilead with plenty of money to make other deals.
Since O'Day took the helm at the company, Gilead has announced more than half a dozen collaborations. In the press release announcing the Galapagos transaction, O'Day stated, "The collaboration reflects Gilead's intent to grow our innovation network through diverse and creative partnerships." Investors expecting Gilead to make acquisitions might need to instead be looking for the big biotech to make more collaboration deals.
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