Letter from the management

Letter from the management

Dear shareholders,

The first quarter of 2019 was one of the most historic ones in our nearly 20 year existence: our Phase 3 FINCH 1 and 3 results with our lead program, selective JAK1 inhibitor filgotinib, show competitive efficacy and safety potential in rheumatoid arthritis (RA). In particular, the safety data from the FINCH program, demonstrated in more than 3,000 patients during six months of treatment, supported the long-term safety data seen with filgotinib in the DARWIN 3 study, as reported at week 156. The large body of filgotinib results to date points to its promising risk/benefit profile, and we expect our collaboration partner Gilead to discuss submissions for approval in RA with regulatory authorities in the coming months.

And this is only the beginning: we believe that the efficacy and safety results of filgotinib in RA have potential read-throughs to the overall filgotinib development program, currently ongoing in more than 10 different inflammatory conditions. In 2019, we anticipate that Gilead will report topline results with filgotinib in Sjögren's syndrome and cutaneous lupus, and initiate a Phase 3 trial in psoriatic arthritis.

Onno van de Stolpe, CEO of Galapagos (photo)

We are also making steady progress with regard to the other programs in our broad and growing pipeline. We opened new centers for the global Phase 3 ISABELA trial with our fully proprietary autotaxin inhibitor GLPG1690 in idiopathic pulmonary fibrosis (IPF). It is noteworthy that recruitment per center is currently above target. This reflects the enthusiasm we hear from investigators on this innovative trial, as GLPG1690 has the potential to address the high unmet medical need for IPF patients world-wide. Recruitment for the Phase 2 NOVESA trial with GLPG1690 in systemic sclerosis (SSc) and for the Phase 2 PINTA trial with GPR84 inhibitor GLPG1205 in IPF is on track. We initiated the GECKO Phase 2 trial with antibody MOR106 for atopic dermatitis acting on novel target IL-17C. We opened an IND for this trial with the FDA in the U.S.

Furthermore, we note excellent progress in recruitment for the Phase 2b ROCCELLA trial for osteoarthritis with ADAMTS-5 inhibitor GLPG1972, which we develop together with our collaboration partner Servier.

At the same time, we continue to leverage our unique target discovery engine, as we keep pushing forward to discover novel targets and develop new mode of action molecules. This includes our Toledo class of novel targets for inflammation, for which we brought a first compound, GLPG3312, into the clinic in early 2019, with a second one expected to follow in the second half of the year.

Galapagos ended the first quarter of 2019 with a very strong balance sheet. We continue to grow our organization to support this broad pipeline, while we continue to build a commercial organization for potential launch of filgotinib in Europe next year. The Galapagos proprietary late stage development is growing, leading to increased costs for our company. This year we expect to execute over 40 clinical trials. Our financial guidance for operational cash burn1

The operational cash burn (or operational cash flow if this performance measure is positive) is equal to the increase or decrease in our cash and cash equivalents (excluding the effect of exchange rate differences on cash and cash equivalents), minus:

  1. the net proceeds, if any, from share capital and share premium increases included in the net cash flows generated / used (–) in financing activities
  2. the net proceeds or cash used, if any, in acquisitions or disposals of businesses; and the movement in restricted cash, if any, included in the net cash flows generated / used (–) in investing activities.

This alternative performance measure is in our view an important metric for a biotech company in the development stage.

between €320 and €340 million for full year 2019 remains unchanged.

Operational overview Q1 2019

Inflammation

  • Reported positive results with filgotinib in the Phase 3 FINCH 1 and 3 trials in RA, with collaboration partner Gilead
  • Gilead completed recruitment for the SELECTION Phase 3 trial in UC, as well for the Phase 2 trials in Sjögren’s disease and cutaneous lupus
  • Initiated a Phase 1 trial with GLPG3312, a first compound from our Toledo class of novel targets for inflammation

Fibrosis

  • Initiated the NOVESA Phase 2 trial with GLPG1690 in SSc
  • Inlicensed compounds from Fibrocor and Evotec for fibrosis

Corporate & other

  • Raised €3.5 million from warrant exercises

Recent events

  • Initiated a Phase 1 trial with GLPG3121, a novel JAK1/TYK2 inhibitor aimed at inflammation
  • Initiated the GECKO Phase 2 trial with MOR106 together with collaboration partners MorphoSys and Novartis

Q1 2019 financial result

Revenues and other income

Our revenues and other income for the first three months of 2019 amounted to €40.9 million, compared to €44.8 million in the first three months of 2018. Revenues (€33.0 million for the first three months of 2019 vs €37.9 million for the first three months of 2018) were lower due to lower over time recognition in revenue of the upfront payments and milestone payments related to the filgotinib program with Gilead, as well as for the CF program as we are transitioning the activities to AbbVie. This was partly compensated by higher reimbursement income mainly from Novartis in the scope of our collaboration for MOR106.

Other income increased (€7.9 million for the first three months of 2019 vs €6.9 million for the first three months of 2018), mainly driven by higher income from R&D incentives.

Results

We realized a net loss of €48.7 million for the first three months of 2019, compared to a net loss of €37.3 million for the first three months of 2018.

We reported an operating loss amounting to €53.2 million for the first three months of 2019, compared to an operating loss of €32.0 million for the first three months of 2018.

Our R&D expenditure in the first three months of 2019 amounted to €83.2 million, compared to €69.8 million for the first three months of 2018. This planned increase was mainly due to an increase of €5.5 million in subcontracting costs primarily related to our IPF program and other proprietary programs. Furthermore, personnel costs increased explained by a planned headcount increase and higher costs related to the warrant plans as a result of the increase of the Galapagos share price. These also explained the increase in our G&A and S&M expenses which were €11.0 million in the first three months of 2019, compared to €7.1 million in the first three months of 2018.

Net financial income in the first three months of 2019 amounted to €4.7 million, compared to net financial expenses of €5.2 million for the first three months of 2018, which was primarily attributable to €5.0 million of unrealized exchange gain on our cash position in U.S. dollars (€5.6 million of unrealized exchange loss on our cash position in U.S. dollars in the first three months of 2018).

Liquid assets position

Cash and cash equivalents totaled €1,222.9 million on 31 March 2019.

A net decrease of €67.9 million in cash and cash equivalents was recorded during the first three months of 2019, compared to a net decrease of €43.0 million during the first three months of 2018. This net decrease was composed of €76.3 million of operational cash burn, offset by (i) €3.5 million of cash proceeds from capital and share premium increase from exercise of warrants in the first three months of 2019 and (ii) €5.0 million of unrealized positive exchange rate differences.

Finally, our balance sheet as at 31 March 2019 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.), payable in 4 yearly tranches, and a receivable from the Belgian Government for R&D incentives, for a total of €87.7 million.

Outlook 2019

Following on the positive Phase 3 FINCH trial results, Gilead plans to discuss submissions for approval of filgotinib in RA with regulatory authorities in 2019. Also for filgotinib, in the second half of the year, we expect Gilead to report topline results for the proof-of-concept studies in Sjögren’s syndrome and cutaneous lupus, and to launch a Phase 3 trial in PsA.

We also plan to fully recruit our Phase 2 PINTA trial for our IPF compound GLPG1205 as well as for our ROCCELLA study in OA, together with collaboration partner Servier. For GLPG1690, we plan to continue recruitment in our ISABELA trials as well as the NOVESA Phase 2 trial in SSc, for which a first patient was dosed in early 2019.

For MOR106, together with our collaboration partners MorphoSys and Novartis, we plan to continue recruiting the Phase 2 trial in AtD with MOR106 in combination with topical corticosteroids (the GECKO trial), for which a first patient was dosed post-period, and to prepare further for the Japanese ethno-bridging study. We will also continue the IGUANA Phase 2 trial in AtD as well as the subcutaneous Phase 1 bridging study with MOR106. Pending positive results, these four studies combined should offer a solid data package for our collaboration partner Novartis to move into Phase 3.

With regard to our earlier and fully proprietary programs, we expect Phase 1 readouts of a number of trials, including for GLPG3312, the first Toledo compound that entered the clinic in early 2019. This molecule is scheduled to be dosed in patients in a first proof-of-concept study in ulcerative colitis before the end of the year. We also plan to initiate a Phase 1 trial with our second generation Toledo compound, GLPG3970, in the second half of the year.

Given the large number of maturing proprietary clinical programs and the expansion of our R&D and commercial team, we retain our guidance for an operational cash burn between €320 and €340 million in 2019.

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

Onno van de Stolpe
CEO

1 The operational cash burn (or operational cash flow if this performance measure is positive) is equal to the increase or decrease in our cash and cash equivalents (excluding the effect of exchange rate differences on cash and cash equivalents), minus:

  1. the net proceeds, if any, from share capital and share premium increases included in the net cash flows generated / used (–) in financing activities
  2. the net proceeds or cash used, if any, in acquisitions or disposals of businesses; and the movement in restricted cash, if any, included in the net cash flows generated / used (–) in investing activities.

This alternative performance measure is in our view an important metric for a biotech company in the development stage.

2 Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government.Gilead plans to discuss submissions for approval in rheumatoid arthritis with regulatory authorities