Letter from the management

Letter from the management

Dear Shareholder,

Our aim is to become a leading global biotechnology company focused on the development and commercialization of medicines for diseases with a high unmet medical need. Our strategy is to leverage our unique and proprietary target discovery platform, which facilitates discovery and development of therapies with novel modes of action. In the first half of 2015, the Galapagos team executed very well and made substantial progress toward achievement of our goals.

Galapagos reported encouraging Phase 2B results with selective JAK1 inhibitor filgotinib in rheumatoid arthritis (RA) in April and July this year, forming a strong basis for Phase 3 trials and creating a new opportunity for safe oral therapy for patients. Furthermore, Galapagos and our partner AbbVie showed promising pre-clinical data on compounds for its potential triple combination therapy for cystic fibrosis, the last ingredient of which should be selected as a candidate later this quarter. On the back of these successes and the promise of our target and drug discovery approach, in May 2015 Galapagos listed on the NASDAQ and attracted €279 million gross proceeds in new capital. As a result, we completed the first half of 2015 with a very strong balance sheet to progress our pipeline of programs in inflammation, CF, and fibrosis therapies. Operationally in the second half of 2015, we look forward to completing the data package for AbbVie’s licensing decision on filgotinib, and seeing the 10 week primary endpoint results with filgotinib in Crohn’s before year end. We remain on track in our development of a triple combination therapy to Class II patients in cystic fibrosis. We anticipate starting our first patient study in CF in the Class III mutation with GLPG1837 later this year. In Q1 2016 we expect to report Phase 2 Proof-of-Concept results with GPR84 inhibitor GLPG1205 in ulcerative colitis patients and initiate an exploratory Phase 2 study with autotaxin inhibitor GLPG1690 in idiopathic pulmonary fibrosis.

Overview of progress in our pipeline in H1 2015

  • Rheumatoid arthritis
    • Galapagos reported promising efficacy, a rapid onset of action, and a potentially differentiated safety profile in its topline week 12 results for DARWIN 1 (594 rheumatoid arthritis patients, methotrexate add-on) and DARWIN 2 (283 RA patients, monotherapy) with filgotinib in April 2015
    • In July 2015, Galapagos announced that at week 24, patients treated with the selective JAK1 inhibitor filgotinib showed further improvement in signs and symptoms of rheumatoid arthritis activity, as demonstrated by improved ACR responses, DAS28(CRP), and other scores, compared to week 12 in the DARWIN 1 Phase 2B methotrexate add-on study.
    • Topline 24 week data for DARWIN 2 are expected later this month, with a licensing decision by AbbVie expected following this
  • Inflammatory bowel disease
    • We expect to report 10 week topline primary endpoint results before end 2015 from the FITZROY Phase 2 study with filgotinib: a 20 week, 175 patient study in Crohn’s disease
    • Galapagos completed recruitment for ORIGIN, a Phase 2 Proof-of-Concept study with GLPG1205, a selective inhibitor of GPR84, in 60 ulcerative colitis patients. We expect to announce topline results from ORIGIN in Q1 2016
  • Cystic fibrosis
    • AbbVie presented novel assays used by Galapagos and AbbVie to screen for novel corrector-potentiator combinations at ECFS 2015
    • Nomination of a second corrector as a pre-clinical candidate is expected later this quarter, thereby completing the discovery phase of our potential triple combination therapy for Class II patients in cystic fibrosis
    • Topline safety and tolerability results of the Phase 1 with potentiator GLPG1837 are expected in Q4
    • Initiation of Phase 2 with GLPG1837 in Class III patients and of Phase 1 with corrector GLPG2222 are expected before end 2015
  • IPF
    • Galapagos reported promising safety and tolerability, and favourable drug-like properties from a Phase 1 First-In-Human study with GLPG1690, a selective autotaxin inhibitor fully owned by Galapagos. Filing of an exploratory Phase 2 study protocol for evaluation in patients with idiopathic pulmonary fibrosis (IPF) expected before year end
  • Other
    • We announced two grant awards from Flemish IWT: €2.5 million for antibiotic research and €1.6 million for hepatitis B research
    • JnJ terminated the inflammation alliance with Galapagos and returned GLPG1205 and GLPG1690 to us. Both assets are in Phase 2 clinical development and are now fully proprietary to Galapagos

Corporate developments

  • Raised €261 million net proceeds from a global offering and concurrent listing on NASDAQ, included participation by AbbVie ($30 million) and JNJ ($25 million)
  • Commemorated 10 years as a publicly listed company on Euronext Amsterdam and Brussels
  • Fidelity, Federated, and BNP Paribas notified of new major shareholdings
  • Raised €10.2 million cash through warrant exercises

Interim financial result

Revenues

Group revenues and other income for the first half of 2015 amounted to €36.9 million compared to €45.1 million in the same period of 2014. Revenues (€26.7 million vs €35.5 million last year) were lower due to reduced milestone payments, reflecting the increasing proprietary nature of our pipeline programs. Other income (€10.3 million vs €9.6 million last year) increased in H1 ’15, driven mainly by R&D incentives in Belgium and France.

Results

The Group realized a net loss for the first half of 2015 of €34.2 million, compared to a net loss of €14.6 million in the first six months of 2014 for continuing operations.

Following the sale of the service division, the Group reported a net profit from discontinued operations of €70.5 million in the first half of 2014. Galapagos recorded a result on divestment of €67.5 million.

R&D expenses for the Group in the first half of 2015 were €63.3 million compared to €52.8 million in 2014. This planned increase is mainly due to increased efforts on the filgotinib and cystic fibrosis programs.

G&A and S&M expenses of the Group were €9.2 million in the first half of 2015, compared to €7.4 million in the first half of 2014. This increase is primarily due to a higher provision for short term and long term management bonus, amongst other as a result of the recent evolution of Galapagos share price change relative to the Next Biotech Index.

Finally, for one subsidiary, a deferred tax asset was set up for an amount of €1.8 million on 30 June 2015, of which €1.5 million was additionally recognized in the first six months of 2015.

Liquid assets position

Cash, cash equivalents and restricted cash totalled €404.6 million on 30 June 2015, which is the highest cash balance the Company has ever reported.

A net increase of €209.8 million in cash and cash equivalents was recorded during the first half of 2015, compared to an increase of €82.6 million during the same period last year. Net cash flows from financing activities generated €261.0 million through a recent global offering and concurrent listing on NASDAQ, as well as €10.2 million from warrant exercises. Furthermore, the Company continued to intensify its R&D investments, with a net cash outflow of €62.2 million from operating activities in the first six months of 2015.

Restricted cash amounted to €10.7 million at the end of December 2014, and decreased to €7.2 million for the half year ended 30 June 2015. This decrease is related to (i) the release of the €3 million bank guarantee issued in 2013 for the rental of the new premises in France which expired on 30 June 2015 following the move to the new offices, and (ii) the payment of a claim to Charles River by decrease of the escrow account. Restricted cash on 30 June 2015 is related to €0.3 million bank guarantee on real estate lease obligations in Belgium, and to €6.9 million escrow account containing part of the proceeds from the sale of the service division in 2014 for which the release will be possible after final agreement between the parties on the exposure regarding one outstanding claim. An amount of €0.3 million has been accrued in March 2015 based on a preliminary estimate of the exposure.

Furthermore, Galapagos’ balance sheet holds an unconditional and unrestricted receivable from the French government (Crédit d’Impôt Recherche)[1] now amounting to €35.6 million, payable in 4.5 yearly tranches. Galapagos’ balance sheet also holds a receivable from the Belgian Government for R&D incentives now amounting to €22.4 million, payable as from 2016 in 5.5 yearly tranches.

Outlook 2015

The DARWIN 2 week 24 topline results with filgotinib are expected to be disclosed later this month. AbbVie is expected to make a licensing decision following delivery of the DARWIN 2 final week 24 data. We expect to nominate a second corrector candidate in CF later this quarter and report topline Phase 1 results with GLPG1837 in Q4. We plan to report 10 week results with filgotinib in Crohn’s disease, initiation of Phase 2 with potentiator GLPG1837 in Class III CF patients, and initiation of Phase 1 with corrector GLPG2222 before end 2015. Galapagos expects to make significant progress in earlier stage R&D programs. With a solid cash balance in excess of €400 million, we remain well positioned to support this pipeline development.

Based on the forecast for the remainder of the year, management retains 2015 guidance for operational cash burn: €110 - €130 million, excluding alliance milestones or income from filgotinib.

We thank you, our shareholders, for your support. Galapagos has delivered a phenomenal first half year 2015, with more results to come in the next months. Thank you for staying with us through the years and giving us the opportunity to deliver on our strategic plan.

Onno van de Stolpe
CEO

Raj Parekh
Chairman of the Board of Directors

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