Good day and thank you for standing by. Welcome to the First Half 2022 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sofie Van Gijsel. Please go ahead.

Thank you, operator and welcome all to the audio webcast of Galapagos' H1 2022 results. I'm Sofie Van Gijsel, Investor Relations, representing the reporting team at Galapagos. This recorded webcast is accessible via Galapagos website homepage and will be available for download and replay later on today. I would 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. The company's forward-looking statements involve risks and uncertainties. Galapagos' actual results may differ maturely from the results expressed or implied in these statements. Today's speakers will be Paul Stoffels, CEO; and Bart Filius, COO and President. Paul will discuss the highlights of H1 and Bart will go over the operational and financial results. You will see a presentation on the screen. We estimate that the prepared remarks will take about 20 minutes. Then we'll open it up to Q&A with Paul and Bart joined by Walid Abi-Saab, Chief Medical Officer; and Michele Manto, Chief Commercial Officer. And with that, I'll now turn it over to Paul.

Thank you, Sofie and welcome to this first half review of the year. Let me say, I think we have made very good progress and we'll hope to give you a good insight on where we are with the company. We'll focus on the full half year but first on Q1, you probably have seen that and remember that JYSELECA was approved in the U.K. and Japan in -- for UC and that practice U started on all JAK inhibitors and we'll come back to that later on. That review is ongoing and we'll expect the information by the end of the year. In Q2, a lot of change is happening in the company. First, I joined in -- on April 1 as CEO of the company, joining a team which I know for a long time and with a lot of enthusiasm working together with the team on how we can create a very value-creating pipeline as a company. First, I must say, we are very proud on JYSELECA. We got a reimbursement in 15 countries for RA now, 6 countries to UC and you will see that in the review of Bart where the results of that are following on the European sales. And I think we are all very happy about that. I'm very proud that we can progress JYSELECA in this way. In the pipeline, we kicked off in the whole program of reviewing the pipeline on -- in our capital allocation accordingly. And so we made a move on acquiring two companies, CellPoint and Abound in order to move into oncology. We moved in a very exciting part of oncology with CAR-T, both with new CAR-T products but also with a very transformational platform where we can bring CAR-T to the point-of-care and we'll highlight…

Thank you, Paul and good morning, everyone in the U.S. and good afternoon in Europe. Happy to be with you this afternoon and on a Friday and to give you a bit of background on our performance in the numbers as well as our commercial operation. So if we can go to the next slide. On JYSELECA, as a reminder, it's our first marketed products. We are also the marketing authorization holder since we've taken that back from Gilead. We are reimbursing 15 countries in rheumatoid arthritis and now 6 countries in ulcerative colitis. And we anticipate that the vast majority of Western Europe is going to be reimbursed in UC by the end of this year. So that process is going well. And I'll say a few words about how the drug is received in that indication in a few seconds. And lastly, noteworthy for everyone, we'll have Phase III top line data in the first half of next year in Crohn's disease and that should hopefully enable us to make an extra indication part of the life cycle of JYSELECA. And maybe first in the performance in the market. And on the next slide, you see the quarterly sales as of basically the very first quarter when we were in the market at the time of beginning in Germany in the Q1 '21 up until now in the second quarter of 2022, where we've reached a level of €21 million of revenues in the quarter with a good quarter-on-quarter growth compared to the first quarter of the year. But actually a good straight-line extrapolation of where we've seen the growth in the fourth quarter of last year. And with that, it's becoming clear that we can be a bit more optimistic on our anticipated full year sales. Actually,…

Thanks very much. That concludes the presentation portion of today's audio conference call. I would now like to ask the operator to open up the line for Q&A.

I guess bigger picture, you've announced some deprioritizations within the pipeline. I was wondering if you could maybe talk a little bit more about the overall rationale, what you're looking for in the assets that you're going to be moving forward? And I guess, sort of bigger picture, how much this reflects your overall strategy in terms of what indications you'll be focusing on? Or is this more of an asset-specific decision process? What should we be looking for going forward as you continue to prioritize the pipeline?

Yes. Let me give a high-level answer to this. We -- first, we will focus on real added value which is very logic but addressing medical needs with highly differentiated compounds and then look at the competitive market on where are we on a global base and see then how we can in that market make competitive products which create significant value. For that, you need to have a focus. And definitely, our focus will continue to be on inflammation. As you have seen with oncology, we entered into oncology with specific technologies, specific indications and we are going to further expand that in the future, probably to CAR-Ts in solid. We also have a good -- we are building a good capability in biologics and small molecules in oncology. So oncology will be a significant focus. But again, evaluating very careful how we, as Galapagos, can make a difference with molecules which are differentiated and bring value to patients and then also to our shareholders. We are continuing to evaluate fibrosis as a part of our portfolio. We -- but carefully looking at whether from a capital allocation perspective, that can continue to be part of our portfolio as it is a long-term, highly challenging and -- highly challenging environment with no validated -- or limited validated targets and limited validated endpoints. So we'll carefully look at our therapeutic area of focus, good assets within that and then look at the timeline and how we can deliver a pipeline in the '25-'28 time frame because that's the goal here. It's not earlier. We hope to be earlier.

And your next question comes from the line of Jason Gerberry from Bank of America.

First one just on 667. Just curious how you see your molecule potentially differentiating from Pfizer's dual TYK2 JAK1 which is moving into Phase III for dermatomyositis. I know it's early days but I'm not sure if there's anything even there in terms of your approach versus their dual inhibition approach or any pharmacological differences that you think are important? And then on the cell therapy front, just can you talk about the investment needed, how you plan to scale that over time as you get important derisking data in the next year or so?

All right. With the first question on 3667 and then I pass it on to Paul. Regarding the compound from Pfizer, that's JAK1 TYK2. I think there's been some data with it showing this profile of JAK1 TYK2. However, in our case, 3667, our molecule is a selective TYK2 inhibitor. I think that will play a significant different profile, particularly around some of the safety questions that one has to take into consideration here. But at the same time, there's an element of specificity in dermatomyositis in blocking interferon alpha. And I'm not very clear how an additional JAK inhibition will add into it. Whether the compound from Pfizer will have the right risk-benefit profile will have to be judged based on the results of the data. In our case, 3667, we have shown in psoriasis that we have a clearly active compound demonstrating, again, in line with the TYK2 inhibition. In addition, we have seen evidence of pharmacodynamic activity at the doses that we have used in Phase I. These were demonstrated in ex-vivo assays and the dose that we are electing to test and move forward has demonstrated these positive profile on pharmacodynamic engagement but also safety and tolerability profile. So overall, we feel quite positive, particularly about the selectivity of our TYK2 and the likely success in this indication. And based on that, we are proceeding with our Phase II study. With that, I'll pass it on to Paul.

Well, with regard to the investment in the CAR-T over time, there are two elements to this. Our collaboration with Lonza offers us a that's a very stable existing platform which is scalable, where we don't need to deploy hundreds of millions of dollars before we can even start working in the market. So it's a collaboration with Lonza. During development, we will focus on -- we have to, of course, cover the investment for clinical trials, the development of the product. But as the platform is stable and functions very well at the moment, we have validated with volunteers but also with patient now. We think that, that provides us a competitive time in order to get with new CAR-Ts to the market. We will have a scaled system in hospitals where we can have a very competitive way of doing clinical trials, very attractive for hospitals to collaborate in that. So the combination with the existing Lonza platform where we can build ourselves on as well as the capabilities we've built step by step in the different indications will give us a functioning instrument to run several clinical trials in parallel. I think the speed which we can take here as well as the collaboration with Lonza will give us a very good cost-effective way of getting to clinical trials in this space.

Your next question comes from the line of Charlie Mabbutt from Bernstein.

I'm Charlie Mabbutt from Bernstein. So firstly, on the TYK2. I'm interested to hear what other indications you are discussing internally? And if you'd wait for this Phase II readout before starting in the other trials? And I'm also wondering if you think it makes a difference to go for a different indication in Phase II versus the competition for the selective TYK2s, if they can then use a proof of concept? And then secondly, I noticed that your year-on-year spend for Toledo has sort of halved in the R&D line. So should we read anything into this in terms of your confidence in the program?

Thank you, Charlie. It's Walid, I'll take both -- all three questions. So on the TYK2, we taken -- so we've -- in order to decide the way forward, we have actually taken a step back and taking a look at the regulatory environment, particularly as it pertains to psoriasis and the fact that TYK2 is a member of the JAK family. And we have questions whether the FDA is going to be quite liberal in interpreting disconnection between TYK2 and JAK1. We felt that going into psoriasis is going to be a bit hasty and we'd rather wait for the PDUFA date which is upcoming in -- towards the end of September for the BMS compound. We were evaluating ulcerative colitis as another indication. And you've seen data from deucra which were not positive and that's giving us pause. We're discussing still internally with our teams but also externally with experts to see whether there is a way forward, whether we do understand why TYK2 inhibitors did not perform in that indication. There could be other reason for deucra in particular that might not essentially read out for the rest of the TYK2 inhibitors but we're still evaluating that process. Then we looked at indications where there's good rationale for essentially based on mechanism of action, good rationale for success and we came out with essentially dermatomyositis which is interferon-driven disease and we have clear data from our compound of our blockade of interferon alpha. Another indication that is on our radar screen still is lupus and we were very happy to see the recent data from deucravacitinib showing positive lupus data. So in the context of evaluating our overall investment in the pipeline, as we've been talking about, we will be discussing moving forward with lupus with 3667.…

And your next question comes from the line of James Gordon from JPMorgan.

James Gordon from JPMorgan. A couple of questions, please. First one was JYSELECA. So I saw you took up this year's guide but you haven't increased the EU peak sales. So is it the case that your longer-term sales expectations haven't changed at all, it's just consensus as being overly cautious in the initial modeling? Or is there a possibility that the peak sales could be higher now? So how are you thinking about that? Second question was on the amount of collaboration with CAR-T. How do we think about modeling the profitability? So let's say there was €100 million of sales. How much of that actually could end up as profit for Galapagos versus what actually goes to loans? Can you help us think about how to model that properly? And then third and final question for the October 5 R&D event. In terms of what we're actually able to hear at the event, is there going to be a significant new clinical data? Is it more about things that you're planning to start? And might you have been nice in any further assets by then that you're going to talk about? Could you elaborate a bit on what we're going to find out at that event, please?

I think we got the first two of your questions. The third one we could not understand.

The third one was the CMD. Is there going to be significant new clinical data? Or is it more about what trials you'll start or maybe talking about further assets that you're going to license? What do you think should we look forward to at the R&D event?

Okay.

Should I take a couple of those questions, Paul?

Absolutely.

So first question, James, on your peak sales -- on our peak sales expectation. I think it's a bit too early after a great quarter and an upgrade of our guidance for the full year by €10 million. So then we visit immediately the peak out there which is in 2027. So I think that's still a bit too early. But we are obviously very pleased with what we're seeing in terms of the performance this year, both in qualitative sense in terms of how it's perceived in the marketplace and quantitatively in terms of what we are seeing in terms of sales. So happy with that outcome. On Lonza and how to model that. Actually, at this stage, we're not giving out details on the distribution of share and royalties between us and Lonza. But what I did say, as part of the announcement in June is that we believe that including the royalty that we would pay to Lonza, we believe that we have the distribution of share and royalties between us and Lonza. But what I did say as part of the announcement in June is that we believe that including the royalty that we will pay to Lonza, we believe that we have a very differentiated and very competitive cost of goods position with our CellPoint approach. Hence, I think a good opportunity in the market to compete with others with centralized manufacturing on a cost point of view. So I think that's not exactly the answer now that you would love to have in terms of details. But that's, I think, as far as we're okay to go right now. And then last point on the Capital Markets Day. I think it's going to be a very interesting day. I think we're going to go really across the company in terms of giving perspective on where the strategy of the company is going in terms of indication choices. We're going to give insights in our cell platform -- cell therapy platform with also some external speakers. We're going to give some insights into our thoughts around dermatomyositis. We're going to also do a deep dive on JYSELECA and the end market performance of JYSELECA. So I think it's going to be an extremely interesting and rich day. Let's say, the big data set that's up and coming from Crohn's, obviously, is coming at the beginning of next year. Therefore, that will not yet be available on the October five when we do the Capital Markets Day.

Your next question comes from the line of Matthew Harrison from Morgan Stanley.

I was wondering if you could just give us a little bit of a view on how far you are through the portfolio review? Obviously, you discontinued four compounds here. Just how broad should we be thinking about? And how much more work do you have to do at this point to sort of understand where you are? And I guess, secondarily, obviously, you've made the pivot into oncology. Should we be thinking about pivots into additional therapeutic areas? Or do you think the therapeutic areas that we know about now are set?

Let me say, we have the internal review where we look internally but we have also a very extensive external review on what business opportunities we can bring in at the moment. So it goes in parallel, we're looking strategically, what are the assets and the portfolio prioritization internally as well as looking at additional potential short-term acquisitions as the market now is very -- looking for very -- many biotech companies are looking for partnerships now and it's a great opportunity for us to evaluate that. We will mainly focus on -- at the moment on oncology and -- in oncology and inflammation. In the past, we have said we are looking at select infectious disease opportunities if they would be there. But oncology and inflammation will be the key. And we'll evaluate internally our fibrosis assets and see whether there are still compounds which are valuable and word in the acquisition -- in capital allocation. Where we are is like, let's say, we are in the middle of the review as I'm -- we are in the middle of the review and one-by-one, this is the first reporting to you. And on the Capital Markets Day, we'll be able to give you further insights on long-term strategy, both on oncology and inflammation, other assets in the company as hopefully by then but maybe not yet next opportunities in acquisitions or licensing.

Your next question comes from the line of Phil Nadeau from Cowen.

The question is on JYSELECA. Could you go into maybe a bit more detail about what drove the strong quarter-over-quarter growth? Was it specific indications UC versus RA or specific geographic areas? And then second, you mentioned the EU product review coming out later this year. What is Galapagos' opinion on the potential scenarios for the conclusion of that review? And how could they impact JYSELECA's long-term potential?

It's Michele speaking. I'll take the first question on JYSELECA in the quarter. And then I think I'll pass then for some conclusions on [indiscernible] to believe for some considerations there. So yes, it's been a strong quarter. You've seen acceleration. And actually, this comes from the different variable needs that the launch of UC has contributed, especially Germany the first countries that had the reimbursement immediately after EMA approval at the end of last year. But of course, it is early days for the indication. So it's a very strong contribution but of course, at a different level now to compare with array which is on the market now 1.5 years. Other part of the acceleration has come by the full activation of the geographies. So we have countries like Italy and Spain which have typically long reimbursement timelines so they came really online at the end of last year. And still with the timeline which is very competitive, we benchmarked against the fastest JAKs into national and regional reimbursement in those countries and we really come very strong against those benchmarks. So that's been pleasant to see an upcoming from strong stake or engagement planning across units and in the countries in the past two years -- two, three years when we said the prelaunch, so that's coming to fruition. Also, we've seen an acceleration in Germany which is, of course, the largest country. I would say, with the full integration of the transition from the Gilead teams, we've seen that also coming strongly through also with better customer engagement after the lockdown period with [indiscernible]. So that to say that there is a strong dynamic we see. So that also brought us with confidence to increase the target for this year, seeing this dynamic to continue for the future. For the regulatory position, Walid, I will pass to you.

Yes. Thanks, Michele. Look, it's difficult for us to comment really on the potential outcomes. This is a procedure that it has to take its course. We're working and collaborating with EMA and answering their questions. As you can imagine, none of this was a surprise. These are adverse events of special interest that we've been monitoring for years and been in discussion with the health authorities about them for some time. but at the same time, PRAC has to go through their process and we expect to have feedback by the end of the year. But before then, it will be really very difficult for us to speculate on potential outcomes.

[Operator Instructions] And the next question comes from the line of Jeroen Van den Bossche from KBC Securities.

Congrats on the very strong performance. Maybe two quick questions. With the expansion into more BD activities to the cash burn future, will that still be on target as was communicated in the past? And I'm now looking at 2024 and beyond? And then the other question is more on the CAR-T situation where, obviously, by going through this decentralized approach, there will be a lot of advantages that were discussed. Maybe could you say who would be the legal manufacturer of those materials? Would that be the hospital of Galapagos? And how will you manage the GMP requirements? Which percentage of hospitals do you see this? Or is the majority of hospitals that are using CAR-Ts to your knowledge, also ready for the GMP setting?

Let me take maybe the first question, Jeroen, on the BD activities and the implications for the longer-term cash burn. So as a reminder, what we've shown in the past and is still very valid, was an overview of our R&D spend and our commercial spend. And for everyone on the phone, that was about €350 million, €150 million [ph] in terms of distribution. And we anticipate still that JYSELECA breakeven can be achieved in 2024 resulting then in the R&D envelope that we were highlighting on those slides. Now in all fairness, obviously and I think I've made that clear several times that if we do meaningful BD and if we increase our expenses because of that, those -- that envelope might change by. It might obviously change. There is no let's say, full commitment to say the envelope is the envelope and we're not going to go beyond this because we want to make sure that we invest behind the right in the right programs. And we'll take that accordingly. So more to follow on that front. Obviously, we'll give precise guidance for 2023 and then later on for 2024. And if BD evolves, those numbers will obviously will also evolve, we'll make sure we'll put good money after good projects. And Paul, do you want to take or should I take the CAR-T?

No, I can take the -- as you say, Jeroen, it's a very attractive manufacturing proposal to decentralize, especially for the benefit of patients. The marketing authorization holder will be Galapagos and we will be responsible for the release of the product. So we will be responsible for the GMP requirements and training at the hospitals and we'll have -- because the system allows us to do that, we can do a centralized release based on the information we received from the instruments around the world to check on quality and be able to release that. So this is the strong proposal of CellPoint. It's not just the local manufacturing but it includes a fully integrated data system and quality control system as well as quality release that this will allow us within the time frame we can do it today within three, four hours to give a release after the product has been completed manufacturing. And that is a very strong -- I think a very strong proposal from a time. But also from a GMP, we'll have to train and that's what we do already. People in the hospitals who work with us on this manufacturing are trained and will be inspected. And there will be a quality system which manages all of that. So that is -- but it's our responsibility in the end as marketing authorization holder, we are responsible for the product which the patients will receive.

And the next question comes from the line of Dane Leone from Raymond James.

As we look ahead to the R&D Day in October, how much can you just preview for us about your ability to unveil what the real compound library is at Galapagos and possibilities with targets that are not currently in your stated portfolio and ability to go into new or novel indications? And the basis for this question is, it's obviously early days for you, Paul but the salt and usable kinase portfolio has been many years in the making and it still feels like to the majority of investors, there's no proof of concept there and it's a very high-risk endeavor. And then TYK2 in the CAR-T space are very competitive. So I think where the valuation of the company currently is within the eyes of investors, there still needs to be differentiated assets brought out of the internal compound library. And if not and if they don't exist, then really there needs to be a more aggressive move on the BD front. So putting it all together, I guess, one, what's your conviction that there's still differentiated assets that are yet to be unveiled in the pipeline that we might see in October? And then secondly, what's your updated view on additional external asset acquisitions?

Well, we'll give a full update on the status of the internal pipeline, as we will have finished a strategic review. We can give some insights -- significant insights on where we are going and certain new indications we'll pursue and especially also with our new capabilities in biological in CAR-T, we will be able to give you some insights on what our capabilities are to go into next. We still have to decide how much we disclose from a competitive perspective but you will see the capabilities, we'll be able to show some -- the first results of at least in -- from the life testing. We'll give you a very deep insight in why we think that our CAR-T point-of-care is really differentiated. And that both from an efficacy, hopefully starting -- we can't show efficacy data yet because we are not long enough in the study but we can show the first biomarkers and the first safety results and whatever we have. And that will see -- give you a good insight on. Then we can give you time lines on -- by when. Because with the CAR-T capabilities, we can go very fast on the next-gen CAR-Ts and we can both bring in products from outside. And there is a lot of interest at the moment from people who are approaching us to bring additional compounds which are not in our pipeline today but in partnership to the market and what we can bring from insight. And we'll also have a good view on what we can bring from the insight small molecule space at that moment. It's always difficult to provide prospects on business development opportunities as they -- if they are not concluded. So if we conclude them, we'll be able to bring them. But if we're not concluded, we can give an indication in what space we are looking and we'll give a good strategy review. But we're very clearly focused on extreme to an accelerated pipeline of value creation over the next three years. That is the goal. Hopefully, we can give you confidence in our strategy that we'll be able to deliver. Bart, anything to add from your side?

No.

And your last question today comes from the line of Rosie Turner from Jefferies.

Just one more on 3667, if I may. Just thinking about the broader kind of market dynamics in dermatomyositis. Just thinking about how that plays out because I think we've got Ultomiris in Phase III, albeit not reading out until 2024 and the same think we've got an IG study coming from CSL also in the indication. So I'm just wondering where you see kind of TYK2 is fitting in within the treatment paradigm? And then just if you could give us any potential in terms of the size of the indication in terms of kind of total revenue size?

So maybe I'll tackle the first part and then, Michele, maybe you take on the second one, around the commercial element. When we evaluated the space, we see a large unmet medical need. Currently, what's approved in the market is IV, there's no oral treatment. And we believe that the mechanism of action for TYK2 inhibitor, particularly with clear effects on inhibiting interferon alpha pathways should give us a very good likelihood of success in that space. I think commenting on other competitors who are moving into Phase III, we haven't really seen a very convincing Phase II data. So sometimes companies take risk and move straight into larger indications. And we'll remain to see whether this is going to provide the right risk-benefit profile at the end of these studies. But the studies that we had available and we looked at with positive data in terms of clinical efficacy that we can compare to, we don't think that we would be at a disadvantage and we think we have a very good likelihood of success there. We have to run the study. And at the end of it, see if we have a positive risk-benefit profile but that's the first step that we need to do and then we will take it from there. And I'll pass it on to Michele for the commercial end.

Yes. So this is an area of high unmet need, as Walid indicated. So also the current standard of care is quite limited. So that offers some interesting price possibilities. I would say that now having a plan for the timing of this launch might be a bit early. But what I can say about that is that, that's an area to fully build. So there is a high value high potential for market actually building with all the diagnose and treatment rate to be set and also to have the follow-up of the existing drugs which are not customer friend -- patient-friendly as well in terms of use. So also the oral component will play a big role into that. We need to have a further view then on the profile and the competition there to come with more solid numbers that be able to share.

I will now hand the call back over to Sofie for closing remarks.

Thanks very much. That's all what we had time for today's call. Please feel free to reach out to the IR team if you still have questions and we hope to welcome you at our R&D update on October 5 which we will have in New York as an in-person event. Thank you all for participating and have a great rest of your day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.