Letter from the management

Letter from the management

Dear shareholders,

We reported another quarter of solid pipeline progress in the first quarter of 2018, as we prepared for the next wave of late stage studies, finished up execution on several other patient studies, and moved our early pipeline forward.

In our osteoarthritis, atopic dermatitis, and cystic fibrosis programs, we are preparing for the next patient studies in the second quarter. Importantly, we received feedback from regulatory authorities for our ISABELA global pivotal studies with GLPG1690 in idiopathic pulmonary fibrosis, expected to start in the second half of 2018. We await the next round of filgotinib clinical study results, starting with the EQUATOR studies in psoriatic arthritis in the second quarter.

Onno van de Stolpe, CEO of Galapagos (photo)

The coming year will be data-rich, as we expect the first Phase 3 data with filgotinib in rheumatoid arthritis, along with an interim decision to move to Phase 3 in the ulcerative colitis trial and readouts in our trials in ankylosing spondylitis and psoriatic arthritis. In cystic fibrosis, we will see topline results from the PELICAN trial and a first interim readout with FALCON, a patient study of our first triple combination therapy. We expect to launch pivotal trials with GLPG1690 in IPF, building our fully proprietary IPF franchise. And with our planned start of Phase 2 studies for GLPG1205, GLPG1972, MOR106, and a second CF triple combination, we set the foundations for the next set of clinical results. Meanwhile, we continue to expand our organization to be able to execute the increasing number of clinical studies and to be ready for the anticipated market introduction of our drug candidates.

Galapagos ended the first quarter of 2018 with a strong balance sheet. We are continuing to grow our late stage development organization to execute on our successful programs. The Galapagos share of proprietary late stage development is growing, leading to increased costs for our company. During 2018 we expect to be running 13 Phase 2 studies. All this will contribute to our financial guidance for operational cash burn between €220 and €240 million for full year 2018.

Operational overview Q1 2018

Inflammation

  • Completed recruitment for the EQUATOR and TORTUGA Phase 2 Proof-of-Concept trials with filgotinib
  • Reported good tolerability and dose-dependent decreases of biomarker ARGS neoepitope in the blood serum of osteoarthritis patients treated with GLPG1972
  • Presented the key findings of the Phase 1b trial in atopic dermatitis patients with MOR106 at AAD 2018

Cystic fibrosis (CF)

  • Reported activity and good tolerability with C1 corrector GLPG2222 in homozygous Class II patients in the FLAMINGO Phase 2 trial
  • Completed Phase 1 with the second triple combination therapy comprising GLPG3067, GLPG2222, and GLPG2737
  • Completed recruitment for the Phase 2 PELICAN trial with C2 corrector GLPG2737 in combination with Orkambi®1A combination potentiator-corrector therapy marketed by Vertex Pharmaceuticals. in Class II homozygous patients

Corporate & other

  • Raised €3.9 million from warrant exercises

Recent events

  • Announced ISABELA, a global Phase 3 program with GLPG1690 in IPF based on feedback from FDA and EMA
  • Announced initiation of FALCON, our first clinical trial with an investigational triple combination therapy in CF patients

Q1 2018 financial result

Revenues and other income

Our revenues and other income for the first three months of 2018 amounted to €44.8 million, compared to €39.9 million in the same period of 2017. Revenues (€37.9 million vs €34.0 million for the same period last year) were higher due to an increased recognition in revenue of the upfront payment related to the filgotinib program with Gilead, in line with the increased spending, but also due to the adoption of IFRS 15 – Revenue from contract with customers, on 1 January 2018, resulting in the recognition for the first quarter of 2018 of €10.4 million of deferred revenues related to previously recognized upfront and milestones under the former applicable standards of IAS 18. We refer to the notes to this interim consolidated financial report for additional information on the impact of the adoption of IFRS 15 on our consolidated financial statements.

Other income increased (€6.9 million vs €5.9 million for the same period last year), mainly driven by higher income from R&D incentives.

Results

We realized a net loss of €37.3 million for the first three months of 2018, compared to a net loss of €13.6 million in the first three months of 2017.

We reported an operating loss amounting to €32.0 million for the first quarter of 2018, compared to an operating loss of €11.2 million for the same period last year.

Our R&D expenses in the first three months of 2018 were €69.8 million, compared to €44.9 million for the first quarter of 2017. This planned increase was due mainly to an increase of €20.4 million in subcontracting costs primarily on our filgotinib and GLPG1690 programs. Furthermore, personnel costs increased explained by a planned headcount increase. Our G&A and S&M expenses were €7.1 million in the first quarter of 2018, compared to €6.2 million in the first quarter of 2017. This increase mainly resulted from higher personnel costs due to a planned headcount increase.

Net financial expenses in the first three months of 2018 amounted to €5.2 million, compared to net financial expenses of €2.4 million for the same period last year, and were primarily attributable to €5.6 million of unrealized exchange loss on our cash position in U.S. dollars. We expect to use this cash held in U.S. dollars to settle our future payables in U.S. dollars, which will be primarily linked to our global collaboration with Gilead for the development of filgotinib.

Liquid assets position

Cash and cash equivalents totaled €1,108.2 million on 31 March 2018.

A net decrease of €43.0 million in cash and cash equivalents was recorded during the first three months of 2018, compared to a net decrease of €19.9 million during the same period last year. Net cash flows used in operating activities amounted to €39.8 million in the first three months of 2018. Exercise of warrants in the first quarter of 2018 generated a financing cash inflow of €3.9 million. Furthermore, €1.5 million was used in investing activities and €5.6 million unrealized negative exchange rate differences were reported on cash and cash equivalents.

Finally, our balance sheet held a receivable from the French government (Crédit d’Impôt Recherche2Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government. ) amounting to €39.1 million, payable in 4 yearly tranches. Our balance sheet also held a receivable from the Belgian Government for R&D incentives amounting to €41.7 million.

Outlook 2018

We aim to report topline results with the FINCH 2 (rheumatoid arthritis), EQUATOR (psoriatic arthritis), TORTUGA (ankylosing spondylitis) filgotinib trials as well as a decision to continue to Phase 3 in SELECTION (ulcerative colitis). Our collaboration partner Gilead expects to complete recruitment of FINCH 1 and FINCH 3, the remaining RA Phase 3 trials with filgotinib. In cystic fibrosis we anticipate the readout of the PELICAN patient trial and an interim readout in FALCON. We recently announced the design for the ISABELA pivotal trials with GLPG1690 in IPF. We expect to start dosing ISABELA and initiate Phase 2 trials with GLPG1205 (IPF), an additional CF triple combination, GLPG1972 (osteoarthritis), and MOR106 (atopic dermatitis) later in 2018.

The company expects an operational cash burn between €220 and €240 million in 2018.

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

1 A combination potentiator-corrector therapy marketed by Vertex Pharmaceuticals.
2 Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government.