Thursday, May 19, 2022

Dr. Harvey Tran Daily Letter: The 50/50 Principle



  • I share with you the investing lesson to take 50% profits on your big winners while letting the rest ride further upsides.
  • After rising to its peak of $273 back in 2020, Galapagos shares tumbled due to fundamental depreciation.
  • By implementing my strategy, you could have secured your profits while banking any upside if the company managed to turn around.
Aerial view of sailing luxury yacht at opened sea at sunny day in Croatia

Tatiana Dyuvbanova/iStock via Getty Images

Dear Readers,

In this letter, I want to share with you an important biotech investing principle that is the "50/50 principle." In my view, this rule is important to your investment success because it lets you know when to sell. Now, I'll illustrate this phenomenon through the investment story of Galapagos (GLPG). 

Back in June 2018, I initiated this under the radar Belgium company, Galapagos. During the time, the shares were trading at $100.19. After the company inked the $5.05B mega partnership with Gilead Sciences (GILD) for the development and commercialization of its lead medicine (filgotinib), the stock rose as high as $273 in February 2020.

At that point, all the ducks seem to have lined up in a row for Galapagos. The results of its various clinical studies, as disclosed by the company, were quite robust. There was extremely aggressive pipeline expansion. During this time, there was no seeming reason to sell the shares of Galapagos.

As I already saw some stellar biotech companies tumble after appreciating several folds, I implemented the "50/50 principle." That is to say, I would recommend shareholders to sell 50% of your shares while keeping the other 50% to ride further upsides.

Leveraging this strategy, you can protect your profits while "playing with the house money" for more gains. Let's say, if the company continues to rally like Jazz Pharmaceuticals (JAZZ) and becomes your 100-folds winner, you would not miss out on any lucrative gains. As such, your Fear of Missing Out (i.e., FOMO) would be assuaged. Nevertheless, you already banked your profits if, by chance, the stock tumbles.

As the story turned out for Galapagos, the fundamentals started to deteriorate over time. First, the FDA issued a Complete Response Letter (i.e., CRL) for its lead medicine (filgotinib) for rheumatoid arthritis (i.e., RA). As you can see, a CRL is a polite way of denying a drug's approval. Given that RA is the company's most promising indication, that's similar to a death blow.

In response to this debacle, Galapagos disclosed to investors that the FDA raised its eye browses on the high dosage filgotinib (i.e., 200mg) formulation. Specifically, there were potential issues with sperm count at this dose. The agency then requested additional data from the MANTA and MANTA-RAy studies. Perhaps, there are also other underlying problems relating to the overall benefits to risks of the high dose filgotinib.

Adding further injury to the insults, Gilead terminated their partnership for any development in the USA due to this debacle. Interestingly, Galapagos later gained the EU approval of filgotinib for both RA and ulcerative colitis. In its launch to date, filgotinib (Jyseleca) sales was significant. Nevertheless, I believe that it's not fast enough to justify the stock's current valuation.

That aside, there hasn't been any sign of development for filgotinib in the most promising and profitable market (i.e., the USA). As the final nails in the coffin for Galapagos, two senior executives - the former CEO/Founder (Onno Van de Stolpe) and the former Chief Scientific Officer (Dr. Piet Wigerinck) - left the company. Even when the new CEO is an excellent candidate, it would take a public company years to recover after the captain abandoned the ship.

From my previous letter about placing your stocks into various categories, you can appreciate that Galapagos transitioned from a "growth stock" to a "turnaround play." And while Galapagos could successfully "turnaround," the chances are not great.

As usual, I'd like to remind investors that the choice to buy, sell, or hold Galapagos or any stock is always yours to make. 

If you want to learn more about Galapagos and access my in-depth research on this company, I encourage you to check out my marketplace service at Seeking Alpha. Last but not least, check out my latest recommendation on another young and powerful growth stock to average down during this bear market.

To your success in life and in investing,

Dr. Harvey Tran

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

Additional disclosure: As a medical doctor/market expert, I'm not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I'm also NOT responsible for the action of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investing in stocks and options can result in a loss of capital. The information presented should NOT be construed as recommendations to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your action. You should also consult with your own financial advisor for specific guidance, as financial circumstances are individualized. That aside, I'm not giving you professional medical advice. Before embarking on any health-changing behavior, make sure you consult with your own doctor.