Letter from the management

Dear shareholders,

There is no question that the third quarter of 2019 was defined by the unique and landmark deal with our long-time collaboration partner Gilead, announced mid-July. This 10-year research collaboration is about maximizing innovation based on the identification and development of new mode of action medicines. Thanks to the upfront payment of $3.95 billion and a $1.1 billion equity investment by Gilead, the deal gives us the financial strength – and the independence – to greatly expand our research engine and build a broader pipeline of new mode of action medicines. Gilead will have option rights on our programs outside of Europe, and as part of the agreement, they have already executed that right for our late-stage IPF compound, GLPG1690. We will also benefit greatly from Gilead’s scientific expertise and infrastructure.

Gilead and we strongly believe that this collaboration will provide an accelerated path to advance our pipeline, and thus provide the opportunity to fast track our mission to bring innovation to patients worldwide.

In Q3, together with Gilead, we took important steps forward with our flagship program, filgotinib. Early July, Gilead announced the outcome of the pre-NDA meeting with the FDA. Gilead discussed with the agency the Phase 3 FINCH trials, as well as the ongoing Phase 2 MANTA safety trial, and concluded that they intend to submit filgotinib for approval in RA in the US in 2019. Together with Gilead, we also announced that the European Medicines Agency (EMA) validated the Marketing Authorization Application (MAA) for filgotinib in RA for the European market. In early October, Gilead announced submission of filgotinib to the Japanese Ministry of Health, Labor and Welfare, for approval in RA. Gilead remains on track to submit filgotinib for approval in RA to the FDA before year-end.

Thanks to the progress made, we are on track for potential new drug approvals as of the second half of 2020, and we are excited by the prospect of bringing filgotinib as a new treatment option to RA patients.

We are also proud that the FINCH 2 results for filgotinib in RA were published in JAMA¹Journal of the American Medical Association, which is a further recognition of the importance of the program. Just recently, recruitment commenced for the PENGUIN Phase 3 program with filgotinib in psoriatic arthritis, an important next step to expand our filgotinib inflammation franchise to additional indications.

We also continue our plans to become a fully integrated biotechnology company. The core commercial team for Belgium, the Netherlands, and Luxembourg is firmly in place, and we hired key people for our commercial operations in France, Italy and Spain, following our revised filgotinib agreement with Gilead.

In the meantime, we work hard on progressing our late stage portfolio of other drug candidates. This includes our fully recruited Phase 2b trial with GLPG1972 in osteoarthritis, ROCCELLA, for which we expect data in the second half of next year. We experience good recruitment of the ISABELA 1 & 2 Phase 3 trials with autotaxin inhibitor GLPG1690 in idiopathic pulmonary fibrosis. The enthusiasm for the ISABELA program amongst clinicians, centers, and patients is palpable, as we noticed again at the recent ERS conference. Together with Gilead, we are fully committed to seeking new approaches to meet the large unmet medical need in IPF. Together with our collaboration partners Novartis and MorphoSys, we also continue the Phase 2 trials GECKO and IGUANA with MOR106 in atopic dermatitis, and we recently started a Japanese ethnobridging study.

Furthermore, we are progressing our first Phase 1 trial from the next-generation Toledo program for inflammation, with GLPG3312, and we recently announced the start of a Phase 1 trial with Toledo compound GLPG3970.

Operational overview H1 2019

We refer to our H1 2019 report.

Operational overview Q3 2019

Inflammation

• Gilead and Galapagos announced that the EMA validated the MAA for filgotinib in RA in Europe
• Gilead announced the outcome of the pre-NDA meeting with the FDA, concluding that a path has been established to submit an NDA for filgotinib in RA in the US in 2019
• Publication of the detailed FINCH 2 results in JAMA, a top-tier peer-reviewed journal
• Initiated the Japanese ethnobridging trial with MOR106, together with collaboration partners Novartis and MorphoSys, in Japanese patients with atopic dermatitis
• Initiated a Phase 1 trial with GLPG3970, a second generation Toledo compound against a novel and undisclosed inflammation target class discovered by Galapagos

Corporate & other

• Gilead and Galapagos entered into a 10-year global R&D collaboration; Gilead increased their shareholding in Galapagos to 22.04% of the then issued and outstanding shares of Galapagos NV
• We received transparency notices which can be consulted on our website
• Galapagos raised €6.7 million through warrant exercises in the third quarter of 2019

Recent events

• Together with collaboration partner Gilead, we announced that Week 52 data³Data on file from the Phase 3 FINCH 1 and FINCH 3 trials of filgotinib for the treatment of RA are consistent with and support the profiles observed in the Week 12 and 24 analyses presented earlier this year
• Gilead commenced patient recruitment for PENGUIN, a Phase 3 trial with filgotinib in psoriatic arthritis
• Started Phase 1 trial with GLPG3667, a novel candidate with an undisclosed mode of action directed towards inflammation
• Gilead announced submission of filgotinib for approval in RA in Japan

Q3 2019 financial result

Revenues and other income

Our revenues and other income for the first nine months of 2019 amounted to €752.5 million, compared to €205.1 million for the first nine months of 2018. Revenues represented €725.7 million for the first nine months of 2019 compared to €182.5 million for the first nine months of 2018 and were higher due to the revenue recognition of the upfront payment received in August 2019 from Gilead related to (i) the GLPG1690 program and (ii) the access and option rights to our drug discovery platform, offset by (iii) a negative catch-up effect for revenues related to the previously received upfront and milestones due to the revised filgotinib collaboration agreement.

Other income increased by €4.1 million, mainly driven by higher incentives income from the government for our R&D activities.

Results

We realized a net profit of €265.3 million for the first nine months of 2019, compared to a net loss of €44.2 million for the first nine months of 2018.

We reported an operating profit amounting to €393.0 million for the first nine months of 2019, compared to an operating loss of €53.5 million for the first nine months of 2018.

Our R&D expenditure in the first nine months of 2019 amounted to €298.2 million, compared to €231.8 million for the first nine months of 2018. This planned increase was mainly due to an increase of €29.1 million in subcontracting costs primarily related to our IPF program, filgotinib and other programs. Furthermore, personnel costs increased explained by a planned headcount increase and higher costs related to bonuses and to warrant plans as a result of the increase of the Galapagos share price. These factors also contributed to the increase in our G&A and S&M expenses which were €61.2 million in the first nine months of 2019, compared to €26.8 million in the first nine months of 2018.

We reported a non-cash fair value loss from the re-measurement of a derivative financial instrument triggered by the share subscription agreement with Gilead between signing and closing of the agreement amounting to €142.3 million. Such amount reflects the increase in the Galapagos share price between signing and closing of the Gilead agreement.

Net other financial loss in the first nine months of 2019 amounted to €2.0 million, compared to net other financial income of €9.0 million for the first nine months of 2018, which was primarily attributable to €34.9 million realized exchange loss on the U.S. dollars upfront payment from Gilead, which was partly compensated by a €32.4 million of unrealized exchange gain on our cash position in U.S. dollars (compared to €6.6 million of unrealized exchange gain on our cash position in U.S. dollars in the first nine months of 2018).

We reported a tax income amounting to €16.7 million primarily from the recognition of deferred tax assets as a consequence of the deal with Gilead.

Liquid assets position

Cash and cash equivalents totaled €5,599.8 million on 30 September 2019.

A net increase of €4,309.0 million in cash and cash equivalents was recorded during the first nine months of 2019, compared to a net increase of €192.5 million during the first nine months of 2018. This net increase was composed of (i) €3,302.0 million of operational cash flow, of which €3,535.0 million cash inflow from the Gilead collaboration and €233.0 million remaining cash outflow from operating activities, (ii) €960.1 million cash proceeds related to the share subscription by Gilead, (iii) €14.5 million of cash proceeds from capital and share premium increase from exercise of warrants in the first nine months of 2019 and (iii) €32.4 million of unrealized positive exchange rate differences.

Finally, our balance sheet as at 30 September 2019 held a receivable from the French government (Crédit d’Impôt Recherche⁴Crédit 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 €99.7 million.

Outlook 2019

Following on regulatory submissions in Europe and Japan, Gilead is on track to submit filgotinib for approval in RA in the US before year-end.

We will continue recruitment in our proprietary ISABELA, NOVESA and PINTA trials, and plan to provide an update on recruitment timelines for the ISABELA program in H2 2019. We and our collaboration partner Servier continue towards completion of the ROCCELLA trial in osteoarthritis, on track for topline results in the second half of next year. For MOR106, together with our collaboration partners MorphoSys and Novartis, we continue executing the Phase 1 and 2 trials currently ongoing.

We continue to execute on our Toledo program in order to deliver Phase 1 results and plan to start several Phase 2a trials start in 2020.

Our guidance for an operational cash burn between €320 - €340 million in 2019 is unchanged, excluding the impact from the Gilead  collaboration.

Following the closing of our new collaboration with Gilead, we envision a significant scaling up of our R&D efforts, strengthening our target discovery platform capabilities and substantially growing our R&D team. In other words, stay tuned for Galapagos 2.0, powered for an exciting future. At this exceptional phase in our history, we want to express our sincere thanks for your support of Galapagos, as we focus on delivering innovation with the aim to improve patients’ lives worldwide.

Onno van de Stolpe
CEO