Letter from the management

Dear shareholders,

It’s been an incredibly busy half year for Galapagos.

We reported strong ACR activity and consistent tolerability with highly selective JAK1 inhibitor filgotinib in the EQUATOR trial in psoriatic arthritis patients. Recruitment of the FINCH 1 and 3 trials in RA has been completed, and we expect to hear the FINCH 2 results, our very first Phase 3 data at Galapagos, in the third quarter of the year. The SELECTION trial with filgotinib in ulcerative colitis patients passed a planned interim futility analysis after 350 patients completed the induction period in the Phase 2b portion of the trial. Consequently, the SELECTION trial proceeded into Phase 3 as planned at both the 100 mg and 200 mg once-daily dose level in biologic-experienced and biologic-naïve patients. We completed recruitment of the TORTUGA Phase 2 trial with filgotinib in ankylosing spondylitis and expect to report the topline results this quarter.

Turning to idiopathic pulmonary fibrosis (IPF), the FLORA Phase 2a trial results with selective autotaxin inhibitor GLPG1690 were presented at ATS 2018 and published in The Lancet Respiratory Medicine. We announced the final design for the ISABELA Phase 3 trials with GLPG1690, aiming to achieve a broad label in IPF; recruitment is expected to begin in the second half of the year.

We presented pre-clinical and clinical results with GLPG1972/S201086 at OARSI and EULAR, and announced the start of the global ROCCELLA Phase 2 trial with GLPG1972/S201086 in osteoarthritis patients together with our collaboration partner Servier. We also presented clinical findings with MOR106 in atopic dermatitis patients at AAD 2018 and reported the start of the IGUANA Phase 2 trial.

We started the FALCON trial of our first triple combination therapy in cystic fibrosis patients and expect the topline results in Q3 2018. PELICAN achieved its primary endpoint, with favorable tolerability of GLPG2737 in CF patients taking Orkambi^®1Orkambi is marketed by Vertex Pharmaceuticals. AbbVie decided not to proceed with the second triple combo with potentiator GLPG3067, C1 corrector GLPG2222, and C2 corrector GLPG2737. We are reviewing the future of our CF collaboration with AbbVie.

Operational overview Q1 2018

We refer to our Q1 2018 report.

Operational overview Q2 2018

Inflammation

• Gilead reported completion of recruitment of FINCH 1 and FINCH 3 Phase 3 trials in rheumatoid arthritis (RA)
• Consistent activity and tolerability profile with filgotinib in DARWIN 3 week 108 results in RA patients
• Achieved primary endpoint with favorable tolerability in EQUATOR Phase 2 trial with filgotinib in psoriatic arthritis patients
• Gilead reported progression of the SELECTION trial with filgotinib in ulcerative colitis into Phase 3
• Presented disease-modifying effect in preclinical osteoarthritis models with GLPG1972/S201086 at OARSI and EULAR 2018
• Announced ROCCELLA Phase 2 trial design with GLPG1972/S201086, together with collaboration partner Servier
• Announced the start of the IGUANA Phase 2 trial with MOR106, together with collaboration partner MorphoSys

Idiopathic pulmonary fibrosis (IPF)

• Announced the design for the global ISABELA Phase 3 trial with GLPG1690 in IPF patients
• Published the FLORA Phase 2a findings in The Lancet Respiratory Medicine and presented same at ATS 2018

Cystic fibrosis (CF)

• Announced the start of the FALCON trial of triple combination GLPG2451+GLPG2222+GLPG2737 in CF patients homozygous for the delF508 mutation
• Achieved the primary endpoint in the PELICAN trial with GLPG2737 in CF patients
• Reported that AbbVie decided not to proceed with the triple combination GLPG3067+GLPG2222+GLPG2737 
• Reported that Galapagos is reviewing the future of its collaboration with AbbVie

Corporate & other

• Raised an additional €1.3 million from warrant exercises in the second quarter
• Received a transparency notice from Van Herk Investments B.V. that it crossed above the 10% threshold

Recent events

• Announced design for PINTA Phase 2 trial with GLPG1205 in IPF
• Announced a global license agreement for MOR106 with Novartis together with our collaboration partner MorphoSys

H1 2018 financial result

Revenues and other income

Our revenues and other income for the first six months of 2018 amounted to €101.9 million, compared to €73.0 million in the first six months of 2017. Revenues (€87.6 million in the first six months of 2018 compared to €60.9 million in the first six months of 2017) were higher due to increased recognition in revenue of the upfront payment related to the filgotinib program with Gilead, which is recognized as a function of the costs incurred for this program, but also due to the adoption of IFRS 15 – Revenue from contract with customers, on 1 January 2018, resulting in the recognition for the first six months of 2018 of €19.6 million of deferred revenues related to previously recognized upfront and milestones under the former applicable standards of IAS 18. We refer to the notes to this interim consolidated financial report for additional information on the impact of the adoption of IFRS 15 on our consolidated financial statements.

Other income increased to €14.3 million for the first six months of 2018 from €12.1 million for the first six months of 2017, mainly driven by higher income from R&D incentives.

Results

We realized a net loss of €59.1 million for the first six months of 2018, compared to a net loss of €49.2 million in the first six months of 2017.

We reported an operating loss amounting to €65.8 million for the first six months of 2018, compared to an operating loss of €32.9 million for the first six months of 2017.

Our R&D expenses in the first six months of 2018 were €151.4 million, compared to €92.9 million for the first six months of 2017. This planned increase was due mainly to an increase of €44.5 million in subcontracting costs primarily on our filgotinib and GLPG1690 programs. Furthermore, personnel costs were higher, driven by a planned headcount increase. The latter also explained the increase in our G&A and S&M expenses which were €16.2 million in the first six months of 2018, compared to €13.0 million in the first six months of 2017.

Net financial income in the first six months of 2018 amounted to €6.9 million, compared to net financial expenses of €16.3 million for the first six months of 2017, and were primarily attributable to €5.3 million of unrealized exchange gain on our cash position in U.S. dollars (€17.1 million of unrealized exchange loss for the first six months of 2017). 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 and cash equivalents totaled €1,066.8 million on 30 June 2018.

A net decrease of €84.4 million in cash and cash equivalents was recorded during the first six months of 2018, compared to a net increase of €288.8 million during the first six months of 2017. Net cash flows used in operating activities amounted to €91.3 million in the first six months of 2018. Exercise of warrants in the first six months of 2018 generated a financing cash inflow of €5.3 million. Furthermore, €3.7 million was used in investing activities and €5.3 million unrealized positive exchange rate differences were reported on cash and cash equivalents.

Finally, 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 €41.7 million, payable in 4 yearly tranches. Our balance sheet also held a receivable from the Belgian Government for R&D incentives amounting to €44.5 million.

Outlook 2018

We aim to report topline results with the FINCH 2 (Ph3 rheumatoid arthritis) and TORTUGA (Ph2 ankylosing spondylitis) filgotinib trials in the third quarter. In cystic fibrosis we anticipate the interim readout of the FALCON patient trial. We expect to start dosing in the ISABELA (Ph3 IPF ‘1690), ROCCELLA (Ph2 ‘1972 OA), and PINTA (Ph2 IPF ‘1205) patient trials later in 2018.

As a result of the recently announced collaboration agreement with Novartis on MOR106, we are reducing our expectations for operational cash burn³The 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 the full year of 2017, the operational cash burn represented €154.1 million. from the originally guided €220-240 million to an operational cash burn of between €180-200 million in 2018, assuming successful U.S. antitrust clearance of the deal.

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