Letter from the management

Letter from the management

Dear Shareholders,

For Galapagos, there is no such thing as slow months of summer. We delivered robust progress in R&D and kept executing our plans on track. Our collaboration partner Gilead started the FINCH Phase 3 program with filgotinib in rheumatoid arthritis (RA), to be conducted in centers all over the world. We announced successful completion of discussions with regulatory authorities for the next studies with filgotinib in Crohn’s disease and ulcerative colitis; these studies are expected to start before the end of 2016. Also on filgotinib, we reported endoscopic and histopathologic improvements that are consistent with clinical remission rates observed in patients with Crohn’s disease in the FITZROY study, in an abstract submitted to UEG Week 2016.

Onno van de Stolpe, CEO of Galapagos (photo)

In this third quarter, we received orphan status from the EU for our autotaxin inhibitor GLPG1690. Galapagos started a Phase 2a biomarker study with GLPG1690 in patients with idiopathic pulmonary fibrosis (IPF) earlier this year. Next step is filing for orphan drug designation with the FDA in the United States. GLPG1690 is fully proprietary to Galapagos. Galapagos and MorphoSys also disclosed the first dosing with MOR106 in atopic dermatitis patients and disclosed the target of MOR106, IL-17C, which was discovered by Galapagos to play a role in skin inflammation.

Galapagos has been working in cystic fibrosis (CF) since 2005, giving us 11 years’ experience of developing new drugs in the field. We remain on track to evaluate a potential triple combination therapy in patient studies in mid-2017. Galapagos and AbbVie reported the results for the first-in-human study with GLPG2222 and for the Phase 2 SAPHIRA 2 study with GLPG1837 in S1251N mutation patients, and profiled much of our preclinical CF work at NACFC 2016 in Orlando.

We look forward to the last months of 2016. At the ACR conference in Washington we will present further modelling data on filgotinib and we will share our initial biomarker work from DARWIN on filgotinib. We will show patient reported outcomes from FITZROY at AIBD in December. In CF we will be starting Phase 1 with GLPG2737, our C2 corrector, which will bring us another step closer towards developing a triple combination therapy with the potential for transformative efficacy.

All these innovations could not have been possible without the continuous trust of our investors, and I thank you for that. But most of all, I want to thank my colleagues. Without their determination and ability to solve the most complex puzzles in biology, chemistry, and development, we would not have been where we are right now. And it is the Galapagos commitment to ‘getting things done’ that will bring us further along our way. The best is yet to come.

Operational overview Q3 2016

Rheumatoid arthritis

  • Reported first patient dosing in the FINCH Phase 3 program with filgotinib in rheumatoid arthritis

Inflammatory bowel disease

  • Reported that endoscopic improvements with filgotinib are consistent with clinical remission rates in patients with Crohn’s disease, in an abstract submitted to UEG Week 2016
  • Announced successful completion of discussions with regulatory authorities for the next studies with filgotinib in Crohn’s disease (DIVERSITY) and ulcerative colitis (SELECTION). Both studies will recruit approximately 1,300 patients each from the US, Europe, Latin America, Canada, and Asia/Pacific. The SELECTION Phase 2b/3 study in ulcerative colitis will include a futility analysis, serving as the Phase 2b part of this integrated Phase 2b/3 study. The filgotinib Phase 3 program will also contain a dedicated male patient testicular safety study. First dosing in DIVERSITY and SELECTION is expected in Q4’16

Atopic dermatitis

  • Galapagos and MorphoSys disclosed the first dosing with MOR106 in atopic dermatitis patients and disclosed the target of MOR106, IL-17C, which was discovered by Galapagos to play a role in skin inflammation.
  • Topline results from the Phase 1 study with MOR106 are expected in the second half of 2017

Cystic fibrosis (CF)

  • We remain on track to have a potential triple combination therapy in patient studies in mid-2017
  • Galapagos and AbbVie reported the results for the First-in-Human study with GLPG2222 and for the Phase 2 SAPHIRA 2 study with GLPG1837 in S1251N mutation patients at NACFC 2016

Fibrosis

  • Received orphan status from the EU for autotaxin inhibitor GLPG1690. Galapagos started a Phase 2a biomarker study with GLPG1690 in patients with idiopathic pulmonary fibrosis (IPF) earlier this year. Topline results are expected in Q2 2017

Q3 2016 financial result

Revenues and other income

Our revenues and other income for the first nine months of 2016 amounted to €65.0 million, compared to €47.2 million in the same period of 2015. Revenues (€50.0 million vs €32.4 million for the same period last year) were higher due to an increase of milestone payments received and contractually agreed costs recharges on partnered programs (i.e. reimbursement income). Other income was stable (€15.0 million vs €14.8 million for the same period last year).

Results

We realized a net profit of €8.1 million for the first nine months of 2016, compared to a net loss of €61.4 million in the first nine months of 2015. This evolution was primarily driven by €57.5 million fair value gain from the re-measurement of the financial asset triggered by the recent Share Subscription Agreement with Gilead.

We reported an operating loss amounting to €48.5 million for the first nine months of 2016, compared to an operating loss of €63.3 million for the same period last year.

Our R&D expenses in the first nine months of 2016 were €96.7 million, compared to €96.9 million for the same period in 2015.

Our G&A and S&M expenses were €16.8 million in the first nine months of 2016, compared to €13.6 million in the first nine months of 2015. This increase mainly resulted from higher costs recognized in relation to the warrant plans as a result of the increase of our share price in the past year as well as a slight headcount increase and higher other operational costs.

Financial results were primarily driven by the fair value re-measurement of the Share Subscription Agreement, which is explained under the next caption below. Net other financial costs in the first nine months of 2016 amounted to €0.9 million, compared to a net other financial income of €0.4 million in the first nine months of 2015, and were primarily attributable to €2.4 million of exchange loss on our cash position in USD due to the fluctuation of the USD exchange rate in the first nine months of 2016.

Fair value re-measurement of Share Subscription Agreement

On 16 December 2015, Gilead and Galapagos entered into a global collaboration for the development and commercialization of filgotinib, in the framework of which Gilead committed to an upfront payment of $725 million consisting of a license fee of $300 million and a $425 million equity investment in Galapagos NV by subscribing to new shares at a price of €58 per share, including issuance premium. This agreement was effectively completed and entered into force on 19 January 2016 and the full payment was received.

In connection with this agreement, we recognized in December 2015 a short term financial asset (derivative) and an offsetting deferred income of €39 million upon signing of the Share Subscription Agreement with Gilead as required under IAS 39. This financial asset initially reflected the share premium that Gilead committed to pay above our closing share price on the day of entering into the Share Subscription Agreement. Under IAS 39 the fair value of the financial asset was re-measured at year-end and again upon closing of the Share Subscription Agreement on 19 January 2016, when the financial asset expired. Variations in fair value of the financial asset are recorded in the income statement.

The decrease in the fair value of the financial asset resulting from the increase in the Galapagos share price between signing of the Share Subscription Agreement and 31 December 2015 resulted in a negative, non-cash fair value adjustment of €30.6 million in the financial results of 2015.

The subsequent increase in the fair value of the financial asset resulting from the decrease in our share price between 1 January 2016 and 19 January 2016 resulted in a positive non-cash adjustment of €57.5 million in the financial result of the first quarter of 2016.

On 19 January 2016, the value of the financial asset at maturity amounted to €65.9 million, reflecting the share premium that Gilead paid above our closing share price on the day of the capital increase. This financial asset expired on the effective date of the Share Subscription Agreement.

Liquid assets position

Cash, cash equivalents and restricted cash totaled €938.8 million on 30 September 2016.

A net increase of €590.5 million in cash and cash equivalents was recorded during the first nine months of 2016, compared to an increase of €178.8 million during the same period last year. Net cash flows from financing activities generated €395.2 million mainly through the share subscription by Gilead. Furthermore, a net cash inflow from operating activities was realized for €204.3 million in the first nine months of 2016 resulting from the license fee of $300 million (€275.6 million) received from Gilead and, by difference, from an operating cash burn of €71.3 million. Finally, €6.7 million was used in investing activities and €2.4 million negative exchange rate differences were generated on cash and cash equivalents.

Finally, our balance sheet holds an unconditional and unrestricted receivable from the French government (Crédit d’Impôt Recherche1Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government.) now amounting to €39.0 million, to be received in yearly tranches from 2016 to 2020. Our balance sheet also holds a receivable from the Belgian Government for R&D incentives now amounting to €28.3 million, to be received in yearly tranches from 2017 to 2026.

Outlook 2016

In the first nine months of 2016, Galapagos continued to execute as planned on its R&D strategy. The full year 2016 is expected to deliver more data, with topline results expected from GLPG1837 in the SAPHIRA 1 Phase 2 program in patients with the G551D mutation. In addition, we expect to initiate a Phase 1 study with novel C2 corrector GLPG2737 in CF, and our collaboration partner Gilead is expected to start dosing with filgotinib in a Phase 3 program in Crohn’s disease, and Phase 2b/3 in ulcerative colitis.

Based on the forecast for the remainder of the year, management retains 2016 guidance for operational cash burn (excluding payments received from our collaboration partner Gilead for filgotinib) of €100-120 million.

We thank you again for your support of Galapagos. We aim to discover and to develop more novel medications, bring the successful therapies to the market, and improve patients’ lives.

Onno van de Stolpe
CEO

1Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government.