Letter from the management

Letter from the management

Dear shareholder,

We look back on another very successful execution year at Galapagos. Our strategy is to leverage our innovative target discovery platform to develop breakthrough drugs and ultimately deliver these to patients with large unmet need. Our successes with filgotinib in rheumatoid arthritis and Crohn’s disease in previous years showed that JAK1 inhibition can make a difference. In 2017, we showed that GLPG1690 (autotaxin inhibitor) halted IPF disease progression in the FLORA trial, as well as a marked reduction of signs and symptoms in atopic dermatitis patients with MOR106 (IL-17C inhibitor). As such, we delivered two new proofs of platform for our approach to finding novel medicines next to filgotinib.

Onno van de Stolpe, CEO of Galapagos (photo)

But this is just the beginning. We continue to discover new modes of action, and plan to bring them all the way to patients. We use our proprietary target discovery technology to identify novel target proteins that play a crucial role in diseases with high unmet medical need. These targets are then used as the starting points to develop new mode of action medicines. In this way, we strive to create a leading innovative position in disease areas like inflammation and fibrosis.

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 trial of our first triple combination therapy in cystic fibrosis. We expect to launch pivotal trials with GLPG1690 in IPF, building our fully proprietary IPF franchise. And by moving GLPG1205, GLPG1972, MOR106, and more CF triple combinations into Phase 2 trials, 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 trials and to be ready for market introduction of our candidate medicines.

Galapagos ended 2017 with an extraordinarily strong balance sheet. We are continuing to grow our late stage development organization to execute on our successful programs. Now with the decision to co-promote filgotinib in Europe with Gilead, we have started to build a commercial organization. While key programs are financed by our collaboration partners, the share of proprietary late stage development is expected to grow. During 2018 we expect to be running 13 Phase 2 trials. All of this will contribute to our financial guidance for operational cash burn between €220 – €240 million in 2018.

Proudly we present our annual report 2017, reflecting the substantial progress made last year.

R&D

In the field of inflammation:

  • We and Gilead initiated patient trials in 8 new indications with our selective JAK1 inhibitor filgotinib
  • We opted in to co-promote filgotinib together with Gilead in Germany, France, Italy, Spain, the United Kingdom, Belgium, the Netherlands, and Luxembourg, should filgotinib be approved for commercial sale
  • We and Gilead reported consistent safety findings and durable activity with filgotinib treatment up to 84 weeks in the DARWIN 3 long term extension Phase 2b trial in rheumatoid arthritis patients
  • We and MorphoSys reported favorable tolerability and promising activity with human monoclonal antibody MOR106 (targeting IL-17C) in a Phase 1b trial in atopic dermatitis patients
  • We reported that ADAMTS-5 inhibitor GLPG1972 was well tolerated and showed a dose dependent decrease in ARGS neoepitope, a cartilage breakdown biomarker, in blood serum of osteoarthritis patients
  • Servier in-licensed ex-U.S. rights to GLPG1972
  • We nominated pre-clinical candidates GLPG3121, GLPG3312, and GLPG3667 in inflammation

In fibrosis:

  • We reported halt of disease progression with 12 weeks’ treatment with autotaxin inhibitor GLPG1690 in the FLORA Phase 2a trial in IPF patients
  • We disclosed favorable safety and tolerability in Phase 1 trials with C1 corrector GLPG2222, C2 corrector GLPG2737, and potentiators GLPG2451 and GLPG3067
  • We reported progress in our CF program, triggering $37.5 million in milestone payments from our collaboration partner AbbVie
  • We reported favorable tolerability and promising activity with GLPG2222 in the ALBATROSS and FLAMINGO trials in CF patients

Corporate:

  • We raised €363.9 million in gross proceeds in a U.S. public offering of ADS and €5.3 million from warrant exercises
  • We were included in the NASDAQ Biotechnology Index
  • We strengthened our team with new Chief Medical Officer Walid Abi-Saab and Senior Vice President Commercial Operations Michele Manto

2017: Details of the financial results

Revenues

Galapagos’ revenues and other income for 2017 amounted to €155.9 million, compared to €151.6 million in 2016. Increased revenues and other income were mainly driven by higher revenue recognition and higher R&D incentives in line with increased R&D expenses.

Operating result

The group realized a net operating loss in 2017 of €89.8 million, compared to a net operating loss of €11.5 million in 2016.

R&D expenses for the group in 2017 were €218.5 million compared to €139.6 million in 2016. This planned increase was due mainly to increased efforts on our clinical and pre-clinical programs, primarily filgotinib, our cystic fibrosis program, and the proprietary pre-clinical programs in inflammation and fibrosis.

G&A and S&M expenses of the group were €27.2 million in 2017, compared to €23.5 million in 2016. This increase was due primarily to a higher liability for short term and long term management bonus and higher costs for warrant plans (non-cash), both mainly as a result of the increase of the Galapagos share price.

Net result

The group realized a net loss in 2017 of €115.7 million, compared to a net profit of €54.0 million in 2016. The net loss in 2017 was negatively influenced for €27.8 million by currency exchange rate fluctuation on our cash positions held in U.S. dollars.

The result of 2016 was primarily driven by a €57.5 million non-cash fair value gain from the re-measurement of the financial asset triggered by the share subscription agreement with Gilead.

Cash position

Cash, cash equivalents, and restricted cash totaled €1,152.4 million on 31 December 2017.

A net increase of €171.5 million in cash, cash equivalents and restricted cash was recorded in 2017, compared to an increase of €632.7 million in 2016. Net cash flows from financing activities generated €353.4 million of cash, consisting of €348.1 million net proceeds from the U.S. public offering, and €5.3 million proceeds from warrant exercises. Furthermore, a net cash outflow from operating activities was realized for €147.0 million in 2017. Finally, €7.1 million was used in investing activities (when excluding the movement in restricted cash) and €27.8 million negative exchange rate differences were generated on cash and cash equivalents. The operational cash burn1The operational cash burn (or operational cash flow if this performance measure is positive) is equal to the sum of the net cash flows generated/used (–) in operating activities and the net cash flows generated/used (–) in investing activities minus (i) the proceeds or cash used, if any, in acquisitions or disposals of businesses; and (ii) the movement in restricted cash, if any. This alternative performance measure is in our view an important metric for a biotech company in the development stage. For 2016, the operational cash flow generated represented €231.9 million, which was significantly impacted by the upfront payment from Gilead of €275.6 million. amounted to €154.1 million.

Furthermore, Galapagos’ balance sheet holds a receivable from the French government (Crédit d’Impôt Recherche2Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government.) now amounting to €36.4 million, payable in 4 yearly tranches. Galapagos’ balance sheet also holds a receivable from the Belgian Government for R&D incentives now amounting to €39.4 million.

Outlook 2018

We aim to report topline results with the FINCH 2 (rheumatoid arthritis), EQUATOR (psoriatic arthritis), TORTUGA (ankylosing spondylitis) clinical trials with filgotinib, as well as a decision to continue to Phase 3 in SELECTION (ulcerative colitis). We expect our collaboration partner Gilead 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 aim to initiate pivotal trials with GLPG1690 (IPF) and Phase 2 trials with GLPG1205 (IPF), an additional CF triple combination, GLPG1972 (osteoarthritis), and MOR106 (atopic dermatitis).

The company expects an operational use of cash of €220 – €240 million in 2018.

I wish to thank our shareholders again for their support last year. Even with all the progress made at Galapagos in 2017, we believe it has only just started. Please stay with us as we take the next steps in our journey to become a fully integrated biopharmaceutical company, breaking innovative ground in inflammation and fibrosis.

Regards,
Onno van de Stolpe
CEO

1 The operational cash burn (or operational cash flow if this performance measure is positive) is equal to the sum of the net cash flows generated/used (–) in operating activities and the net cash flows generated/used (–) in investing activities minus (i) the proceeds or cash used, if any, in acquisitions or disposals of businesses; and (ii) the movement in restricted cash, if any. This alternative performance measure is in our view an important metric for a biotech company in the development stage. For 2016, the operational cash flow generated represented €231.9 million, which was significantly impacted by the upfront payment from Gilead of €275.6 million.

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