Letter from the CEO

Letter from the CEO

Dear shareholder,

We present our 2014 Annual Report, the first online version, to you. The 2014 Annual Report is our response to market requests to offer more information about our strategy, the markets we operate in, and the potential differentiation of our products, in addition to the financials and a report on corporate governance matters. We hope you find this new format helpful, and we look forward to receiving your feedback.

The year 2014 was a transition and execution year for Galapagos. With the sale of BioFocus and Argenta to Charles River Laboratories in April 2014, Galapagos made the transition from a hybrid service and pipeline company into a clinical stage R&D biotech that develops drugs with novel modes of action for high unmet medical needs. Our priority is to execute on our current clinical programs, and use our unique target discovery platform to deliver new innovative programs in the future.

In 2014 we greatly expanded our clinical activities, and our pipeline grew to three Phase 2 and two Phase 1 programs. Galapagos completed recruitment for the global DARWIN Phase 2b program with filgotinib in rheumatoid arthritis; we expect to report topline results for 12 weeks of treatment in DARWIN 1 (mid-April) and DARWIN 2 (early-May). Our cystic fibrosis program entered the clinic, and we are close to candidate nomination for our third molecule to complement our triple combination therapy for the main cystic fibrosis mutation. In addition to filgotinib and cystic fibrosis, the Company has '1205 (ulcerative colitis) and '1690 (idiopathic pulmonary fibrosis) in clinical development and 25 programs in discovery stage.

2014: Strong progress in R&D

In the field of inflammation:

  • Completed recruitment of Phase 2b DARWIN program with filgotinib in patients with moderate to severe RA who do not respond well to methotrexate (MTX). DARWIN 1: dose-range finding in 599 patients on background treatment with MTX DARWIN 2: dose-range finding in 287 patients without MTX. Both studies are placebo controlled for the first 12 weeks, plus 12 more weeks' treatment for longer term safety data. DARWIN 3: long term extension study
  • 98% of eligible patients (434 patients as of end of February 2015) enrolled in DARWIN 3
  • Presented a clean drug-drug interaction profile with filgotinib
  • Continued enrollment in 180-patient Phase 2 Crohn's study with filgotinib
  • Reported lack of efficacy in Proof of Concept study with GLPG0974 in ulcerative colitis
  • Disclosed novel target GPR84 and positive Phase 1 data for GLPG1205, prepared for Phase 2 study in ulcerative colitis with GLPG1205, which initiated in early 2015
  • Nominated pre-clinical candidate antibody MOR106 in inflammation in alliance with MorphoSys

In cystic fibrosis:

  • Reported restoration of up to 60% healthy CFTR function in pre-clinical evaluations of Galapagos triple combination therapy compounds for Class II mutation
  • Initiated Phase 1 study with potentiator GLPG1837, topline results expected Q3 2015
  • Nominated corrector GLPG2222 as a pre-clinical candidate, Phase 1 start expected before end 2015

In osteoarthritis:

  • Delivered pre-clinical candidate GLPG1972 in the alliance with Servier, Phase 1 start expected before end 2015

In pulmonary disease:

  • Initiated Phase 1 study with GLPG1690, reported positive topline results in Q1 2015

Grants for research:

  • Flemish agency for Innovation by Science and Technology (IWT) grants: €2.9 million for cystic fibrosis and €2.3 million for fibrosis

2014: Largest year end cash balance in Company history

Galapagos exceeded guidance for full year revenues in 2014, achieving €108 million including €18 million in services revenues from the first quarter. Galapagos is well-positioned to create significant value from its R&D assets, with nearly €200 million in cash on the balance sheet, the largest year end cash position ever for Galapagos.

Revenues

Galapagos’ revenues and other income for 2014 amounted to €108.2 million, which includes €18.2 million of revenues and other income from discontinued service operations, sold to Charles River Laboratories on 1 April 2014. Revenues from continuing operations of €90.0 million represent a decrease of 7% compared to 2013, reflecting lower recognition of deferred revenues from upfront payments, as a result of the longer duration of the filgotinib program. Income from milestones, grants and R&D incentives was in line with 2013.

Result

The Group realized a net profit in 2014 of €33.2 million, or €1.10 income per share, compared to a net loss of €8.1 million, or €0.28 loss per share in 2013.

Net loss from continuing operations amounted to €37.3 million. Operating expenses from continuing operations at €126.6 million were 11.6% (€13.2 million) higher than in 2013. This increase is principally the result of higher investments in the development of our mid-stage product candidates filgotinib, GLPG1205, and GLPG1690, and increased spending to accelerate the cystic fibrosis program with AbbVie. This planned increase was driven by the maturing R&D pipeline and the resulting costs of clinical trials.

Cash position

Cash, cash equivalents and restricted cash totaled €198.4 million on 31 December 2014, which is the highest year-end cash balance Galapagos has ever reported. Restricted cash of €10.7 million includes a bank guarantee on real estate lease obligations and an escrow account connected to the sale of the service operations. €10.4 million of this restricted cash is expected to be released by mid-2015. Net cash proceeds from the sale of the service operations amounted to €130.8 million. In addition, Galapagos' balance sheet holds R&D incentives receivables from the French and Belgian governments amounting to €51.3 million, of which €7.4 million will be collected in 2015.

Outlook 2015

The Phase 2b clinical program for filgotinib in RA is expected to deliver the 12-week topline efficacy and safety data for DARWIN 1 by mid-April 2015, with 12 week topline results for DARWIN 2 in early May 2015. 24-week results from both studies are expected in July. The 10-week results from filgotinib in Crohn's disease (FITZROY trial) are expected in the second half of 2015. Subsequent to DARWIN 24-week results becoming available, a licensing decision by AbbVie is expected.

In cystic fibrosis, Galapagos expects to nominate a second corrector in the first half of 2015. Galapagos will report topline Phase 1 results with GLPG1837 and initiate a Phase 2 study in Class III cystic fibrosis patients in the second half of 2015.

Galapagos expects to make significant progress in both partnered and non-partnered R&D programs as the pipeline continues to mature across a broad range of therapeutic areas, resulting in multiple additional clinical and pre-clinical stage programs by end 2015.

Galapagos expects an operational use of cash of €110 - 130 million during 2015, excluding milestone payments and a potential $200 million license fee from our partner AbbVie for filgotinib. Excluding income from a potential license of filgotinib by AbbVie, Galapagos has a runway until the end of 2016.

We appreciate your support as shareholder in 2014. Today, Galapagos is at a key point in its development, with the first of 4 readouts from the DARWIN program expected in 2015. We aim to deliver the most clinical research results in Galapagos’ history in 2015.

Regards,
Onno van de Stolpe
CEO