Letter from the management

Letter from the management

Dear shareholders,

Galapagos is well on its way toward becoming an integrated biopharmaceutical company specialized in finding novel modes of action and developing therapies for patients with high medical need.

We reported a very eventful third quarter, showing that our platform delivers more than filgotinib. We announced outstanding results with our autotaxin inhibitor GLPG1690 in idiopathic pulmonary fibrosis patients, followed by antibody MOR106 (jointly owned with MorphoSys) targeting IL-17C in atopic dermatitis patients. We discovered the targets for these medicines the same way we found JAK1 for inflammation, using our unique target discovery engine. These additional proofs of platform come at a pivotal moment for us, as we prepare to start the commercial phase of the company. The promising Phase 2a results observed with GLPG1690 have fueled an ambition to build a proprietary, worldwide R&D and commercial franchise in fibrosis, next to inflammation.

Onno van de Stolpe, CEO of Galapagos (photo)

We have built Galapagos step by step over the years, and we are now adding the last pieces to the puzzle: a Phase 3 study and a commercial organization. What a fantastic opportunity, being able to create the company we envision to be in 2020. To that end, we are actively recruiting more top development talent, growing and evolving the company to its next phase. Change has always been an inextricable part of Galapagos since our inception almost 19 years ago. We are pioneers in exploring biology, finding new modes of action and developing matching novel medicines. We are also pioneers in taking the company further while nourishing our innovative motor; our discovery platform will always be at the heart of Galapagos. So far we have shown the world what the combination of excellent science and strong business acumen can deliver. Now we want to prove that an innovative core and being commercially successful can go together. It is in our DNA to evolve into a new company over and over again. We learn. We adapt. We step up - what a journey this is.

Our R&D engine continues to progress a large number of discovery and clinical candidate medicines. We anticipate updating the markets on the development of our cystic fibrosis triple combination therapies at the North American Cystic Fibrosis Conference in Indianapolis next month and expect to dose the first patient with the first triple by year end. We also plan to report the ALBATROSS Phase 2 study (GLPG2222 + Kalydeco1Kalydeco® is a registered drug of Vertex Pharmaceuticals. in Class II heterozygous patients) topline results before year-end. Our development teams are preparing the next stage studies with GLPG1690 in IPF and MOR106 in atopic dermatitis. We completed recruitment of a Phase 1b patient study with ADAMTS-5 inhibitor GLPG1972 in osteoarthritis and expect to report topline results in early 2018.

We reported a cash balance of €1,220 million on 30 September 2017, retaining a solid financial position to invest in our promising R&D programs. With your continued support, we anticipate to keep reporting strong progress towards our goal of becoming a fully integrated biopharmaceutical company.

Operational overview H1 2017

We refer to our H1 2017 report.

Operational overview Q3 2017

Inflammation

  • Our collaboration partner Gilead initiated studies to investigate proof-of-concept with filgotinib in uveitis and lupus membranous nephropathy
  • Our collaboration partner Servier inlicensed the non-U.S. commercial rights to novel ADAMTS-5 inhibitor GLPG1972 for osteoarthritis. This triggered a €6 million license fee payment to Galapagos. Servier and Galapagos will make joint decisions about co-development of GLPG1972
  • We completed recruitment of osteoarthritis patients for a Phase 1b study with GLPG1972 in the U.S.
  • We reported promising signs of clinical activity with MOR106, a human monoclonal antibody targeting IL-17C, in a Phase 1b study in atopic dermatitis patients

Idiopathic pulmonary fibrosis (IPF)

  • We announced that GLPG1690 halted disease progression and was reported to be well tolerated in the Phase 2a FLORA study in patients with moderate-to-severe IPF

Cystic fibrosis (CF)

  • We progressed as planned in discussions with U.K. regulatory authorities for the initiation of a first triple combination evaluation in CF patients in Q4 2017
  • We completed recruitment for the FLAMINGO patient study with GLPG2222

Corporate

  • We announced the appointment of Michele Manto as Senior VP Commercial Operations

Q3 2017 financial result

Revenues and other income

Our revenues and other income for the first nine months of 2017 amounted to €106.4 million, compared to €65.0 million in the first nine months of 2016. Revenues for the first nine months of 2017 (€87.9 million vs. €50.0 million for the first nine months of 2016) were higher due to increased revenue recognition of upfront payments, which were related to our filgotinib program with Gilead, and due to an increase in milestone payments. Other income for the first nine months of 2017 increased (€18.5 million vs. €15.0 million for the first nine months of 2016), mainly driven by higher income from R&D incentives.

Results

We realized a net loss of €85.9 million for the first nine months of 2017, compared to a net profit of €8.1 million in the first nine months of 2016. Last year’s net profit 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 €62.6 million for the first nine months of 2017, compared to an operating loss of €48.5 million for the first nine months of 2016.

Our R&D expenses for the first nine months of 2017 were €149.2 million, compared to €96.7 million for the first nine months of 2016. This planned increase was due mainly to an increase of €37.0 million in subcontracting costs, mostly for our filgotinib and cystic fibrosis programs. Furthermore, personnel costs increased in 2017, 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 €19.7 million for the first nine months of 2017, compared to €16.8 million for the first nine months 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 nine months of 2017 amounted to €23.1 million, compared to net other financial expenses of €0.9 million for the same period last year, and were primarily attributable to €24.8 million of unrealized exchange loss on our cash position in U.S. dollars. We expect to use this cash held in U.S. dollars to settle our future payables in U.S. dollars, 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 €1,220.1 million at 30 September 2017.

A net increase of €245.6 million in cash and cash equivalents was recorded during the first nine months of 2017, compared to an increase of €590.5 million during the first nine months of 2016. Net cash flows used in operating activities amounted to €86.2 million during the first nine months of 2017. Furthermore €3.6 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 €353.0 million of cash, consisting of €348.1 million proceeds from the U.S. public offering and €4.9 million proceeds from warrant exercises. Finally €24.8 million of unrealized negative exchange rate differences were reported on cash and cash equivalents.

On 30 September 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 €42.0 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 €34.2 million, to be received in yearly tranches from 2018 to 2027.

Outlook 2017

Looking to the remainder of the year, we aim to dose the first CF patient with our first triple combination investigational therapy in Q4, to disclose the ALBATROSS study topline results, and to launch new clinical studies with CF candidates and combinations. We aim to prepare the next late-stage study design with GLPG1690 in IPF patients and with MOR106 in Phase 2 in atopic dermatitis patients. We expect to end the year 2017 at the lower end of the guided range between €135-155 million operational use of cash.

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

Onno van de Stolpe
CEO

1 Kalydeco® is a registered drug of Vertex Pharmaceuticals.
2 Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government.