Our First "Triple" – With Lots More to Come

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It was the very first recommendation that we made, and we made it in the very first issue of Private Briefing.

With its 4.8% surge yesterday, the stock that I'm referring to is now up more than 205% since we first told you about it.

That makes it our first "triple."

And this is far from being the end of the story.

You see, we believe there are even greater gains to come.

That's what I'd like to tell you about today.

As some of you may have guessed by now, I'm talking about Galapagos NV (PINK ADR: GLPYY), the Belgium-based biotech that Martin Hutchinson recommended back on Aug. 11, 2011.

This was one of those rare stock picks that broke our way right from the beginning.

In late November 2011, for instance, Galapagos shares soared 41% in a week after the company disclosed that its GLPG0634 drug compound had demonstrated "excellent efficacy and safety" in a Phase II rheumatoid arthritis (RA) study.

And the good news didn't stop.

The stock continued to run and was up 78% by late February 2012, when Big Pharma player Abbott Laboratories Inc. (NYSE: ABT) agreed to pay Galapagos as much as $1.35 billion for rights to the very same RA drug. (Following the planned breakup of Abbott, spin-off drug venture AbbVie Inc. (NYSE: ABBV) continues that work.)

A billion-dollar drug-development agreement is pretty juicy stuff … especially since Galapagos, at the time, had a market cap of only about $400 million.

It was right about then that some of the savvier institutional players finally started to take notice.

In the middle part of last July for instance – with the stock already up 85% from where Martin recommended it – Galapagos received a "transparency notification" (a European form of investment disclosure) from Baker Bros. Life Sciences LP/Baker Bros. Advisors LLC, an institutional player that has a reputation for picking biotech-sector winners. In aggregate, the Baker ventures took a combined stake of 1.722 million shares in Galapagos – or 6.48% of the baby biotech's total shares.

Investments like that tend to be long-term in nature. Several other institutions have taken similar stakes.

Then came Martin's "big pronouncement."

In mid-September, while Martin and I were talking about Galapagos for an update column I was writing for you, the veteran global merchant banker surprised me with this observation.

"You know, Bill, when you look at this company, and see that its market cap is a mere $475 million, the only conclusion you can reach is that this is still a very cheap stock," he said. "I mean, this is an up-and-running R&D lab operation – with proven results, no less. I think that, over time, it should be fairly easy for these researchers to bring that market cap up to $4 billion or $5 billion."

In other words, Martin was telling me … us … that Galapagos was a proverbial "10-bagger" in the making – a stock that gave you a 10-times return on your original outlay.

And he was talking about a tenfold return on a stock that had already doubled (since, by then, it was up nearly 108%).

Only time will tell if Martin's "10-bagger" prediction proves correct. But the shares have tacked on an additional 40% since he made that bold call.

These vignettes illustrate an important point that Martin has made over and over in our analysis stories on Galapagos: Despite its modest size, this is a company that has a lot going on.

The activities of the last week alone underscore this key point.

Just yesterday, in fact, Galapagos disclosed that it had identified a second pre-clinical compound in its alliance with Janssen Pharmaceutica NV, an achievement that triggered a $5.31 million (4 million euros) milestone payment. This stems from a 2007 alliance agreement reached by the two companies that gives Janssen – a unit of Johnson & Johnson Inc. (NYSE: JNJ) – the right to option certain Galapagos internal programs. This Janssen milestone payment was for the delivery of a second pre-clinical candidate.

In other news this week, Galapagos on Tuesday said that its Zagreb, Croatia, research site will form the basis of a newly created service division, which the company is referring to as Fidelta. Next to BioFocus and Argenta, Fidelta will represent the company's third service division.

Galapagos acquired the Zagreb operation in September 2010 from GlaxoSmithKline PLC (NYSE ADR: GSK), which had run it as a research center. By refocusing Fidelta, Galapagos transforms it into a drug-discovery company that will specialize in inflammation, infectious, metabolic, and oncology diseases.

Also on Tuesday, Galapagos announced that it spent $1.6 million to acquire Cangenix Ltd., a British "gene-to-structure" biotech firm that's already profitable. The Canterbury-based Cangenix will be folded into Galapagos' Argenta drug-discovery-services unit.

Plans call for Argento to integrate all of Cangenix's assets, know-how, personnel and service contracts. The acquisition will contribute to the Argenta revenue and profit for 2013.

Technically a mid-sized, clinical-stage biotech, Galapagos specializes in small-molecule and antibody therapies with a novel mode of action. As it stands right now, the company is working on four clinical, six pre-clinical and 30 discovery programs in cystic fibrosis, inflammation, antibiotics, metabolic disease, and other indications. Its lead program is the afore-mentioned GLPG0634, an oral medication aimed at rheumatoid arthritis (RA) and potentially other inflammatory diseases.

When I saw that the stock had eclipsed the 200% gain level thanks to its surge yesterday, I telephoned Martin at his office in New York State to congratulate him again for having brought Private Briefing subscribers such a great return in only 17 months. He was already studying the stock's chart when I reached him and was clearly still looking at it as we started to talk.

"Bill, this is a company that continues to go from strength to strength – and that is still very reasonably priced as a research powerhouse," Martin said to me. "That said, we do have to note that the stock's tripling in price is being noticed by the market, so it's not as obscure as it was. That's not necessarily a bad thing. But it does mean one must take protective measures. If you don't have one, put a broad (say 30%) trailing stop on it, so that if the price zooms and crashes, you'll get out near the top."

And if you're looking to establish a new position, or add to an existing one, think about "averaging in" as a strategy that will let you offset any downdrafts, should they occur.

[Editor's Note: Galapagos' U.S. shares are somewhat thinly traded. Don't let that scare you off, though. If you buy the U.S. shares, just be sure to use limit orders to purchase at the price you desire. The stock is also actively traded on the Brussels exchange - about 66,000 shares a day, Martin says. Check with your broker to see if it allows U.S. investors to buy shares abroad.]

  1. BELLENGER | January 17, 2013

    Got in stock in March 3/29/2012 and up 68% since then–also up 28% in LF which I think was a recommendation from PB

  2. 000037089620 | January 21, 2013

    GLPYY was a triple from 2011. 2012-13's low was $14 and high $26. Which of your recom-mendations have such potential? CLDX? CYCC? MCP?
    Tony Daltorio gave hope to steel industry because of cheap natural gas. Dr. Moors, however, suggested that natural gas will rise to $4.35/1000CF this year.
    Shah Galini wrote that the market will continue to rise for sometime. Steve Christ, however, thought the crash is coming.
    I think timing has to do with a lot of it. If one buy now and put a 25% stop the chance of losing money is very real because of the coming crash, don't you think?

    • (Admin) Bill Patalon | February 6, 2013

      Greetings …

      As always, we appreciate it when you folks take time to post. And I know that you're a regular reader and poster … meaning I'm very grateful for your time.

      Let me offer a couple of thoughts in return.

      You said that GLPYY was a triple from 2011 … I think I understand the point that you're making …. but I guess my feeling it that the timeline doesn't matter … a triple's a triple. And that's not intended as a "flip" comment or a criticism by any means. Some of the folks who've ridden this for all or part of the way aren't concerned about the timeline … they're happy to pocket the profit.

      As for these returns being a function of "timing" … isn't that the very basis of investing … timing? (Again, I intend these comments to be analytical and part of a give-and-take … and not flippant … it's easy to misconstrue the "tone" in a Webnote … and given that you're a valued reader and regular commenter, I wouldn't want you to infer a tone of disrespect, which I assure you isn't at all intended….BP).

      And we've had some great results in shorter timelines. PCYC is currently up more than 140% (and as much as 153%) from last April. So that's not far behind. Peter's Sandstorm more than doubled. Same for NQ, at its peak.

      Our two main refinery recommendations are nearing double territory.

      CLDX has experienced a very strong resurgence of late. And we've written about several intriguing biotech firms in recent months

      Naturally, we're always looking for new opportunities.

      As for the need for caution … as a regular reader, you know that caution and the need to protect oneself is a standard theme here — probably much more than you'll find at most financial publishers. That's the influence of Chief Investment Strategist Keith Fitz-Gerald, who brings experience as a global trader and a commitment to discipline and risk management to our venture here.

      Hope that helps a bit. And, please, by all means, drop me a line anytime you wish. Message me with folo-ups if you wish.

      Hope this note finds you well…

      Respectfully yours;

      William (Bill) Patalon III
      Executive Editor
      Money Morning & Private Briefing

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