Galapagos lands further in the red after spending spree

By Kirsty Barnes

- Last updated on GMT

Related tags Drug discovery Clinical trial Pharmacology

A highly-acquisitive and research-intensive year has left drug
discovery services provider Galapagos further in the red at the end
of its 2006 financial year, although sales soared.

The firm bought the drug discovery operations of Discovery Partners International (DPI) in July for $6.4m (€4.8m) - a move that cemented its BioFocus division as a top three global provider of drug discovery services. In December Galapagos also spent €19.1m to purchase Inpharmatica, adding two new service units that would help accelerate its drug discovery capabilities. In the same month the company also acquired ProSkelia, which enhanced its product portfolio with the addition of three programs in bone diseases (two for osteoporosis and one for bone metastasis), and one in cachexia (muscle atrophy and weight loss). At the same time the company stepped up its research and development (R&D) expenditure, which nearly doubled to reach €15.9m. Furthermore, general and administrative costs nearly quadrupled to €12m and its sales and marketing spending jumped nearly five times to €1.9m. By the end of this spending spree Galapagos has been left with an operating loss for the year of €11.9m and a pre-tax loss of €12.5m, compared to a 2005 loss of €6.7m for both. "The jump in R&D spending is the main reason that our profit loss was even greater this year,"​ Onno van de Stolpe, CEO of Galapagos, told "This jump was initiated by a large research initiative we have undertaken with GlaxoSmithKline (GSK) for our osteoarthritis compound, as well as some of our other compounds moving futher through the clinical pipeline, which is more expensive."​ The good news for the growing Dutch firm is that the acquired businesses seem to be paying off, with revenue more than tripling to €35.2m. The company's profitable BioFocus DPI service division was by far the stronger performer, generating €31m of this after a 38 per cent growth spurt. "The combination of Galapagos and BioFocus has made our position stronger and growth in this segmentexploded, far outpacing market growth rates of 15 per cent,"​ said van de Stolpe. ​Furthermore, the two acquisitions have been "validated through a number of recent deals in which a combination of services were included, like the recently announced collaboration with the University of Bristol that combines Inpharmatica's Admensa and BioFocus DPI's medicinal chemistry expertise." ​ For the coming year, van de Stolpe said he expects the BioFocus DPI unit to continue to grow above market rates, although growth as strong as this year is unrealistic. He also took the opportunity to announce a one year extension of one of its current service contracts with Eli Lilly, said to be worth over €1m. Under the deal, Galapagos is helping the drug giant to discover new compounds that target nuclear hormone receptors (NHRs), a class of ligand activated proteins that function as on-off switches for transcription within the cell nucleus when bound to specific DNA sequences. Meanwhile, Galapagos said it expects its Drug Discovery division - which saw much of its €4.1m revenue come from an upfront GSK payment - to play a larger role in the coming year and anticipates growth in revenues from milestones to increase, largely thanks to the GSK deal. "Milestone revenue will increase substantially because the osteoarthritis compound will progress significantly,"​ said van de Stolpe. At the same time, however, R&D expenditure will also more than double to approximately €33m as a result of initiating clinical Phase IIb trials of its menopausal treatment oestradiol glucoside (E2G) in the fourth quarter, as well as progressing its rheumatoid arthritis (RA) and osteoporosis drug candidates into preclinical studies, and advancing its other R&D programs in bone and joint diseases. This R&D expenditure will be partly offset by anticipated milestones from its alliance partners, the firm said. van de Stolpe was unable to predict when the company may become profitable, but indicated that the financial situation would worsen before it improved as the amount of R&D spending needed in order to push products into commercialisation continued to increase. "In the meantime, we plan to focus on growing BioFocus DPI as a cash generating unit organically, although will consider outside opportunities if they arise,"​ he said. "We also plan to limit the amount of spending as much as possible, which includes finding a development partner for our osteoporosis compound to ease some of the development costs."​ Looking forward, van de Stolpe said: "This year we intend to fully capitalise on the acquisitions completed in 2006, placing us in prime position to become one of Europe's leading biotechs." "The major steps taken in 2006 have transformed the company financially for 2007,"​ said David Smith, Galapagos' CFO. "Accordingly, we anticipate that Group revenues in 2007 will be in the range of €54-58m. Furthermore, with a significant step up in R&D investment to support progression of our clinical and pre-clinical programs in 2007, we expect that full year cash burn will be €20m." ​This will leave the firm with roughly €30m in cash to play with, after it began the year with €51m, most of which (€42m) came from two private share placements the company made at the end of last year. "We won't have to go back to the market for a while yet,"​ said van de Stolpe.

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