Letter from the management

Dear Shareholders,

Galapagos is making steps towards realizing its strategy of becoming an integrated, commercial biotechnological company. On the one hand, there is the science: our target discovery platform that provides the starting points for our pipeline and our research and development departments to come up with new mode of action drugs. The other part of our success has been the collaborations we’ve been able to strike with pharmaceutical companies, which have helped us to get this far and eventually bring proprietary products to the market ourselves.

“Finding novel modes of action is what’s the most difficult in this industry,” said CSO Piet Wigerinck during our annual R&D Update in June. “We choose this path because disease modifying drugs can have the most impact on the lives of patients.” And we move forward vigorously, on track to initiate one Phase 3 every two years and to deliver three Proof-of-Concepts in patients per year. Next to further developing our collaboration programs, we aim to progress our proprietary portfolio as much as possible on our own. Then again, commercial decisions will always be based on the outcome of our research and development. It is the science that drives our path forward.

Looking at the first half-year 2016, we announced significant progress. We transferred the filgotinib programs over to our collaboration partner Gilead, after which they successfully conducted the discussions with regulatory authorities for the roll-out of the FINCH Phase 3 program in rheumatoid arthritis. At our yearly R&D Update, we announced substantial progress in our cystic fibrosis program with AbbVie, initiating clinical studies and showing promising pre-clinical data from our portfolio of potentiator and corrector drug candidates. We announced further progress in our pipeline, with the start of the FLORA Phase 2a study with GLPG1690 in idiopathic pulmonary fibrosis and a Phase 1 study with novel monoclonal antibody MOR106. We announced new pre-clinical candidates in inflammation and showed encouraging osteoarthritis biomarker data with GLPG1972 at our R&D Update in June.

This first half-year was characterized by two pivotal moments in the history of Galapagos: in March, we were included in the BEL20 index in Brussels, followed in June by the AEX index on Euronext Amsterdam, representing the top 20 and top 25 listed companies in Belgium and the Netherlands, respectively. We confidently look ahead to what the second half year of 2016 will bring, including the anticipated start of the Phase 3 programs in RA and Crohn’s disease: the first of many Galapagos Phase 3 studies yet to come.

Operational overview Q1 2016:

We refer to our Q1 2016 report.

Operational overview Q2 2016

Rheumatoid arthritis

• Gilead and Galapagos completed discussions with the FDA and the EMA, resulting in inclusion of 200mg and 100mg doses for males and females in the FINCH Phase 3 program in rheumatoid arthritis, expected to start in Q3 2016

Inflammatory bowel disease

• Reported topline for the second part of the FITZROY program with filgotinib in Crohn’s disease: clinical responses continued from week 10 to week 20, safety profile similar to that previously observed
• FITZROY week 10 results with filgotinib presented by principal investigator Dr Severine Vermeire (CU Leuven, Belgium) at ECCO and DDW 2016
• Gilead plans to start a Phase 2/3 study with filgotinib in ulcerative colitis and a Phase 3 study in Crohn’s disease in Q4 2016

Inflammation

• Galapagos’ candidate drug GLPG1972 for osteoarthritis was tested in a Phase 1 study in healthy volunteers. Topline results indicate GLPG1972 was well-tolerated in the study and that it reduced a cartilage breakdown biomarker by 50% within two weeks. Galapagos and collaboration partner Servier are planning next steps for further development of GLPG1972 in osteoarthritis. Galapagos has the full U.S. commercial rights in the osteoarthritis collaboration with Servier
• Galapagos and MorphoSys initiated a Phase 1 study with novel monoclonal antibody MOR106. Topline results are expected in the second half of 2017
• Galapagos nominated pre-clinical candidate GLPG2534, with a novel mechanism of action for atopic dermatitis. A phase 1 start with GLPG2534 is expected in 2017

Cystic fibrosis (CF)

• Galapagos and AbbVie reported that the CF portfolio remains on track to have a triple combination therapy in Phase 2 in mid-2017
• Both companies announced an expansion to their CF collaboration, increasing the total potential milestones to $600 million, including an additional $250 million for Phase 1 and 2 events. Remaining terms are unchanged: Galapagos has co-promotion rights in Belgium, Luxembourg and The Netherlands; full commercial rights in China and South Korea; and tiered royalties outside the co-promotion countries ranging from the mid-teens to 20%
• SAPHIRA, a Phase 2 Proof-of-Concept study in CF patients with G551D or S1251N mutations, is expected to include more patients due to interest from the CF patients. Topline results are expected in second half of this year
• Galapagos initiated a Phase 1 study with novel potentiator GLPG2451, triggering a $10 million milestone payment from collaboration partner AbbVie. Topline results are expected in the first half of next year
• Galapagos reported topline results with novel corrector GLPG2222 in healthy volunteers: well-tolerated and no adverse safety signals observed

Fibrosis

• Started a Phase 2a biomarker study with autotaxin inhibitor GLPG1690 in patients with idiopathic pulmonary fibrosis (IPF). Topline results are expected in Q2 2017
• Galapagos nominated pre-clinical candidate GLPG2938, with a novel mechanism of action for IPF. A phase 1 start with GLPG2938 is expected in 2017

Other/corporate

• Received a confirmation ruling from the Belgian Ministry of Finance that the Gilead collaboration agreement on filgotinib benefits from the Belgian patent income deduction, which allows Galapagos to deduct 80% of patent-related income from its taxable income. The ruling is valid for five years and an extension can be requested thereafter
• Galapagos announced the aim to initiate one Phase 3 study every two years and deliver three clinical Proofs-of-Concept each year
• €2.9 million was raised in warrant exercises
• The shares issued to Gilead were listed on Euronext Brussels and Amsterdam
• Galapagos was included in the Bel 20 and AEX index on respectively Euronext Brussels and Amsterdam

H1 2016 financial result

Revenues and other income

Our revenues and other income for the first six months of 2016 amounted to €48.8 million, compared to €36.9 million in the same period of 2015. Revenues (€38.8 million vs €26.7 million 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 (€10.0 million vs €10.3 million last year).

Results

We realized a net profit of €32.2 million for the first six months of 2016, compared to a net loss of €34.2 million in the first six 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 €24.3 million for the first six months of 2016, compared to an operating loss of €35.6 million for the same period last year.

Our R&D expenses in the first six months of 2016 were €62.4 million, compared to €63.3 million for the same period in 2015. This planned decrease was mainly due to lower outsourcing costs for our filgotinib program, since Phase 3 development is expected to start in the second half of this year.

Our G&A and S&M expenses were €10.7 million in the first six months of 2016, compared to €9.2 million in the first six 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.

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 six months of 2016 amounted to €0.9 million, compared to €0.1 million in 2015, and were primarily attributable to €1.8 million of unrealized exchange loss on our cash position in USD due to the fluctuation of the USD exchange rate in the first half 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 €968.5 million on 30 June 2016.

A net increase of €620.2 million in cash and cash equivalents was recorded during the first six months of 2016, compared to an increase of €209.8 million during the same period last year. Net cash flows from financing activities generated €394.8 million mainly through the share subscription by Gilead. Furthermore, a net cash inflow from operating activities was realized for €230.2 million in the first six months of 2016 resulting from the license fee of $300 million (€275.6 million) received from Gilead and an operating cash burn of €45.4 million. Finally, €3.0 million was used in investing activities and €1.8 million unrealized 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 €37.9 million, payable 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 €26.9 million, payable in yearly tranches from 2016 to 2026.

Outlook 2016

In the first half-year of 2016, Galapagos has successfully executed its R&D strategy. The full year 2016 is expected to deliver more data, with topline results expected from GLPG1837 in the SAPHIRA Phase 2 program. In addition, we expect to initiate more clinical trials in our CF program, and our collaboration partner Gilead is expected to start Phase 3 programs with filgotinib in RA and Crohn’s disease, and Phase 2/3 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