Letter from the management

Dear shareholders,

The Galapagos team continues to push the limits, with progress across our pipeline in the first half of 2017.

In addition to the Phase 3 programs initiated in rheumatoid arthritis, Crohn’s disease and ulcerative colitis last year with filgotinib, Gilead started additional Phase 2 studies in small bowel and fistulizing Crohn’s disease, Sjögren’s syndrome, cutaneous lupus erythematosus, and uveitis. Galapagos started Phase 2 studies with filgotinib in psoriatic arthritis and ankylosing spondylitis earlier this year, making filgotinib widely explored in inflammation indications. We expect more studies with filgotinib in new indications to be initiated later this year. We now have nearly 1,900 patient years’ experience in RA patients, as DARWIN 3 continues; in the first interim readout, presented at EULAR 2017, we reported continued activity with safety in line with the core studies.

In cystic fibrosis, we and AbbVie developed a large portfolio of potentiators and correctors that provides the opportunity to develop distinct triple combination therapies. At our R&D update in June, we reported that Phase 1 results on GLPG2451, GLPG2222 and GLPG2737 showed favorable findings relating to safety and tolerability of the individual components that constitute our current most advanced potential triple combination therapy. These results led us to initiate that triple combination program, including start of the regulatory review process in Europe this month, which we expect to allow for a patient study with ‘2737 in combination with Orkambi^®1Orkambi^® is a registered drug of Vertex Pharmaceuticals and the first patient study with the triple combination ‘2451, ‘2222, and ‘2737 to start in the fourth quarter. In addition, we announced the plan to start two additional triple combination studies in 2018, potentially enriching our future offering to CF patients.

But this is only part of what we reported at our R&D update. We received orphan status from the U.S. FDA for our proprietary autotaxin inhibitor GLPG1690, and we expect to report topline results for the FLORA Phase 2a study in IPF patients this quarter. We also plan to report topline results from MOR106 in atopic dermatitis patients later this year. We initiated a Phase 1b patient study in the U.S. with novel osteoarthritis candidate GLPG1972. We also added several pre-clinical candidates, to grow our proprietary pipeline to seven clinical-stage programs today.

In April we raised €364 million gross proceeds in a U.S. public offering. We reported a cash balance of €1,263 million on 30 June 2017, further strengthening our solid financial position to invest in our promising R&D programs. With your continued support, we look forward to keeping you informed on execution of our strategy the rest of this year, on our way to becoming a fully integrated biopharmaceutical company.

Operational overview Q1 2017

We refer to our Q1 2017 report.

Operational overview Q2 2017

Inflammation

• We reported the first interim readout with filgotinib in RA patients in long-term extension study DARWIN 3 at EULAR 2017: continued activity and safety in line with the core studies
• Our collaboration partner Gilead initiated new Phase 2 studies with filgotinib in cutaneous lupus erythematosus, uveitis, and Sjögren’s syndrome
• We initiated Phase 2 studies with filgotinib in psoriatic arthritis and ankylosing spondylitis, initiation of the former triggering a $10 million milestone payment from our collaboration partner Gilead
• We disclosed the target of GLPG1972 to be ADAMTS-5 during OARSI 2017
• We dosed the first osteoarthritis patient with GLPG1972 in a Phase 1b study in the U.S.
• We expect to report topline results with MOR106, a human monoclonal antibody targeting IL-17C, in a Phase 1b trial in atopic dermatitis patients later in 2017
• We nominated fully proprietary pre-clinical candidates GLPG3121 and GLPG3312 with undisclosed targets in inflammation

Cystic fibrosis (CF)

• We reported favorable findings relating to safety and tolerability of C2 corrector GLPG2737 and potentiator GLPG2451
• We reported initiation of the first triple combination patient program, starting with regulatory process in July
• We reported plans to initiate patient studies with two additional triple combinations out of our deep CF candidate portfolio

Idiopathic pulmonary fibrosis (IPF)

• We received orphan drug status from the U.S. FDA for GLPG1690 in IPF
• We completed the Phase 2a FLORA study with GLPG1690; we expect results in the third quarter
• We nominated fully proprietary pre-clinical candidate GLPG3499 in fibrosis, replacing GLPG2938

Additional pipeline progress

• We announced plans to initiate a new study with GPR84 inhibitor GLPG1205 in an undisclosed indication later in 2017
• We nominated pre-clinical candidate GLPG2384 in an undisclosed indication
• We nominated pre-clinical candidate GLPG3535 for pain in the alliance with collaboration partner Calchan

Corporate

• We raised €364 million gross proceeds from a U.S. public offering and €4.7 million from warrant exercises, resulting in the issue of 4,611,600 new shares
• We received shareholder approval for all proposed resolutions at the 25 April 2017 AGM and EGM

Recent events

• We announced the appointment of Michele Manto as SVP Commercial Operations
• On 27 July 2017, Servier announced the inlicensing of GLPG1972, triggering a €6 million license fee payment to Galapagos

H1 2017 financial result

Revenues and other income

Our revenues and other income for the first six months of 2017 amounted to €73.0 million, compared to €48.8 million in the same period of 2016. Revenues (€60.9 million vs €38.8 million for the same period last year) were higher due to increased revenue recognition of upfront payments, which were related to our filgotinib program with Gilead. Other income increased slightly (€12.1 million vs €10.0 million for the same period last year), mainly driven by higher income from R&D incentives.

Results

We realized a net loss of €49.2 million for the first six months of 2017, compared to a net profit of €32.2 million in the first six months of 2016. Last year’s result 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.

We reported an operating loss amounting to €32.9 million for the first half of 2017, compared to an operating loss of €24.3 million for the same period last year.

Our R&D expenses in the first six months of 2017 were €92.9 million, compared to €62.4 million for the first half of 2016. This planned increase was due mainly to an increase of €21.3 million in subcontracting costs for our filgotinib and cystic fibrosis programs. Furthermore, personnel costs increased, explained by a planned headcount increase, as well as higher costs for warrants and bonus plans as a result of the increase of our share price.

Our G&A and S&M expenses were €13.0 million in the first six months of 2017, compared to €10.7 million in the first half of 2016. This increase primarily resulted from higher costs recognized for warrants and bonus plans as a result of the increase of our share price.

Net other financial expenses in the first six months of 2017 amounted to €16.2 million, compared to net other financial expenses of €0.9 million for the same period last year, and were primarily attributable to €17.1 million of unrealized exchange loss on our cash position in U.S. dollar. We expect to use this cash held in U.S. dollar to settle our future payables in U.S. dollar, which will be primarily linked to our global collaboration with Gilead for the development of filgotinib.

Liquid assets position

Cash, cash equivalents and restricted cash totaled €1,263.2 million at 30 June 2017.

A net increase of €288.8 million in cash and cash equivalents was recorded during the first six months of 2017, compared to an increase of €620.2 million during the same period last year. Net cash flows used in operating activities amounted to €51.3 million during the first six months of 2017. Furthermore €4.5 million was generated in investing activities primarily driven by the release of restricted cash to cash and cash equivalents for €6.6 million. Financing activities generated €352.8 million of cash, consisting of €348.1 million proceeds from the U.S. public offering and €4.7 million proceeds from warrant exercises. Finally €17.1 million of unrealized negative exchange rate differences were reported on cash and cash equivalents.

On 30 June 2017, 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 €39.6 million, to be received in yearly tranches from 2017 to 2021. Our balance sheet also held a receivable from the Belgian government for R&D incentives amounting to €31.9 million, to be received in yearly tranches from 2018 to 2027.

Outlook 2017

Looking to the second half of the year, we aim to dose the first CF patient with our first triple combination therapy in Q4, and to launch new clinical studies with CF candidates and combinations throughout the half year. Together with our collaboration partner Gilead we plan to start additional proof-of-concept studies with filgotinib. Topline results from the FLORA Phase 2a study with GLPG1690 in IPF (Q3) and from the Phase 1b study with MOR106 in atopic dermatitis patients are expected later this year. We expect to complete recruitment for a Phase 1b study with GLPG1972 in osteoarthritis patients in the U.S. We maintain our guidance for an operational use of cash of €135-155 million during 2017.

We thank you again for your support of Galapagos. We aim to discover and develop more novel medications, bring the successful therapies to the market, and improve patients’ lives.

Onno van de Stolpe
CEO