Galapagos: trade at a discount with a fast-growing marketed product (NASDAQ: GLPG)

Galapagos S.A. (NASDAQ: GLPG) is a biotech with a market capitalization of $2.9 billion that has been around for quite some time with a checkered history. He has managed to raise a lot of money in the past and currently has a bunch of start-up assets to display for all of its R&D investments over the years. It was incorporated in 1999 and has its head office in Mechelen, Belgium. I like this $43.55 biotech because it holds billions of dollars in cash (over $4 billion) and virtually no debt. There is a cash burn, but it becomes more manageable as the company now has a marketed asset in JYSELECA. For now, operating cash burn is around ~$400/yr. Paul Stoffels took over as CEO in April 2022. New management is considering how best to run the business, but has in the meantime executed two small acquisitions (which increased cash burn a bit for the year) .

Stoffels commented on the strategic review as follows during the recent earnings call (emphasis mine):

Let me say that we have the internal review where we review internally, but we also have a very thorough external review on what business opportunities we can bring in at this time. So it goes in parallel, we look strategically, what are the assets and the prioritization of the portfolio internally like as well as to examine other potential acquisitions in the short term because the market is now very – looking for very — many biotech companies are currently looking for partnerships and this is a great opportunity for us to assess that.

We will focus primarily — for now on oncology and — on oncology and inflammation. In the past, we’ve said we’re looking at some infectious disease opportunities if they’re there. But oncology and inflammation will be key. And we will internally evaluate our fibrosis assets and see if there are still compounds that have value and a word in acquisition — in capital allocation. Where we are, let’s say, we’re in the middle of the review as I am — we’re in the middle of the review and one by one, this is the first report to you. And on Capital Markets Day, we can give you more information on the long-term strategy, both oncology and inflammation, other company assets as we hope to see. here there but maybe not yet any future acquisition or licensing opportunities.

Meanwhile, Jyseleca is performing quite well:

The company expects to achieve annual sales of approximately $500 million in Europe. It’s still years away, but it will still be a powerful force in reducing operating cash burn.

With market capitalization well below net cash on the balance sheet and this growing income stream, and without debt, I think stocks are definitely cheap. Management will have to make dire decisions or be very unlucky to destroy the future returns of this position and the stock price.

There are some option angles that I think are worth considering.

For a long time the Galapagos has been a huge bag of money with some money consumption and little. Large amounts of cash dampen volatility and its options market has relatively moderate implied volatility. Its implied volatility is still higher than that of a biotech index like the iShares Biotechnology (IBB) ETF, but not by that much. See SPDR S&P Biotech ETF (XBI) below:

compared to Galapagos:

The timelines are slightly different as there were no April Strikes on XBI.

As Galapagos transforms, over time, from a cash bank into a more typical biotech with traded assets, potentially increasing cash burn (on acquisitions and operations) and a more active pipeline, its volatility is likely to increase. I would prefer it to be upside volatility and the stock to be a big winner, but other outcomes are conceivable.

If volatility is set to increase over time, this suggests that a stranglehold or straddle position could be attractive. As management seems to take time with its acquisitions, the very long maturities are the most interesting. These only trade in Europe (and they are European options), but they are out until June 24th. I mixed common stocks with a long-term straddle position (European options).