Letter from the management

Dear shareholders,

We present you with our report on the first quarter of 2021, one in which we both delivered progress with and faced adversity in our pipeline, while driving our commercial business in Europe through the launch of Jyseleca (filgotinib) in rheumatoid arthritis (RA). We move forward with confidence at Galapagos, applying lessons learned to our pipeline decisions, and re-fitting our organization to the new situation.

In February, we announced the end of the development program for ziritaxestat, a molecule in Phase 3 trials in idiopathic pulmonary fibrosis (IPF), due to the unfavorable risk/benefit profile observed by an Independent Data Monitoring Committee (IDMC). As disappointed as we were, and for patients in need of a new treatment option in this very complex, debilitating condition, we continue to work hard on our differentiated pipeline.

These last months, we embarked on a review of our plans. We listened to our shareholders and had constructive discussions with our R&D teams and management board members, as well as with our supervisory board. We all agree that our scientific foundations are solid, we have outstanding teams, and we have the financial resources to execute our own programs as well as to enrich our pipeline.

We do not intend to deviate from our mission to build on novel targets to address unmet medical needs in inflammation, fibrosis, and kidney disease. Also, we remain fully committed to the launch of filgotinib in Europe. Our teams are working very hard to ensure our drug reaches the greatest number of patients and we’ve already hit some important milestones in RA. Furthermore, Gilead submitted the new drug application in Japan for filgotinib for the treatment of ulcerative colitis (UC) patients with an inadequate response to conventional therapies, and, in Europe, we anticipate a Committee for Medicinal Products for Human Use (CHMP) opinion on the submission for potential approval in UC later this year.

The key objective of our exercise was to refocus development plans for 2021, taking lessons learned on board and right-sizing our organization with the goal to select a more risk-balanced pipeline.

In the end we made three key decisions:

1. Refocus our clinical pipeline by critically examining its risk profile and breadth;
2. Cut significant cost in the organization to support this re-sized pipeline development; and
3. Task our business development team to identify and execute on a transformative opportunity.

Starting with our pipeline, we carefully evaluated the risk-balance and prioritized assets with what we believe have enhanced chances of clinical success in our core therapeutic areas:

• We are testing our lead Toledo program ‘3970, a SIK2/3 inhibitor, in five Proof of Concept studies in different indications, and pending on the outcome of the studies, we plan to roll out our further development plans in the second half of the year;
• We selected an additional molecule from our Toledo program, SIK2/3 inhibitor ‘4876, as a candidate to accelerate from preclinical phase into clinical development;
• We aim to progress our TYK2 inhibitor '3667 into Phase 2b;
• We selected chitinase inhibitor ’4716 to progress to Phase 2 in IPF and decided to stop development of our other IPF molecule ’1205;
• We stopped further work on ‘4059 for metabolic disease, given that this is not a core therapeutic area;
• We discontinued our early research efforts in metabolic diseases and osteoarthritis (OA); and
• We challenged and fine-tuned our stage-gating process to advance compounds.

Our reviewed pipeline offers significant newsflow and we look forward to sharing results this year and next.

In line with our review, we decided to discontinue or cancel certain studies, and we identified opportunities to reduce operational costs, for a total potential savings of €150 million on a full-year basis. Roughly half of these savings will be realized in 2021, resulting in a 2021 cash burn guidance of between €580 million and €620 million.

Meanwhile, we remain well on track in launching filgotinib in Europe. In the first quarter, we successfully completed the transitions of commercial and medical teams from Gilead in Germany, the UK, Spain, and Italy. Everything is in place to complete the final transitions from Gilead to us by year-end. Q1 also saw progress on access and reimbursement for filgotinib in RA. We are delighted with the recommendation by the National Institute for Health and Care Excellence (NICE) for filgotinib in the UK for the treatment of eligible adult patients with moderate to severe active RA. Furthermore, we received an additional benefit in RA by the Gemeinsamer Bundesausschuss (G-BA) in Germany. We are encouraged by the primary endpoint outcome with the MANTA/RAy semen parameter studies as we await the CHMP opinion in UC.

We are pleased that our partner Gilead recently announced an extension of the lockup period for their current holding in Galapagos (16,707,477 shares) until 2024, which is testament to their continued support.

Altogether, these adjustments make for a right-sized, refocused version of Galapagos, on a path towards success with our first commercial product as well as with new R&D opportunities, substantial clinical news flow, and a lengthened cash runway for clinical validation of our early assets.

Operational overview Q1 2021

In inflammation

• We and Gilead announced interim data on the MANTA/RAy studies. 8.3% of patients on placebo and 6.7% of patients on filgotinib had a 50% or more decline in sperm concentration at week 13; these results are being shared with regulatory authorities
• We initiated two additional Proof of Concept trials with Toledo compound ’3970, a SIK2/3 inhibitor. The first patients were dosed in both the TAPINOMA study in systemic lupus erythematosus and in the GLIDER study in Sjögren’s syndrome
• Gilead announced that NICE recommended filgotinib for reimbursement for moderate to severe RA patients in the UK
• We published the FINCH 1 Phase 3 data (Combe et al. 2021) and FINCH 3 Phase 3 data (Westhovens et al. 2021) in the Annals of the Rheumatic Diseases

In fibrosis

• We discontinued development of ziritaxestat in the ISABELA Phase 3 program in IPF

Corporate & other

• Bart Filius was promoted to President and Chief Operating Officer
• We raised €2.3 million from subscription right exercises

Recent events

• All annual general meeting (AGM) proposals were approved by shareholders at the AGM on 28 April 2021
• We received a transparency notification from the Capital Group indicating they hold 4.65% of the current outstanding Galapagos shares
• Gilead submitted the new drug application in Japan for filgotinib for the treatment of UC with an inadequate response to conventional therapies
• We and Gilead ended the DIVERGENCE 2 trial with filgotinib in fistulizing CD
• We completed enrollment of the SEA TURTLE Phase 2 study with ‘3970 in UC
• We announced an extension of the lockup period for Gilead’s current shares in Galapagos to 2024
• We received the second installment of €75 million from Gilead, following payment of an earlier installment of €35 million in January 2021, included under the revised filgotinib agreement as announced in December 2020

Q1 2021 financial result

Details of financial results

Due to the sale of our fee-for-service business (Fidelta) to Selvita on 4 January 2021 for a total consideration of €37.1 million (including customary adjustments for net cash and working capital), the results of Fidelta are presented as “Net profit from discontinued operations” in our consolidated income statements.

Revenues and other income from continuing operations

Our revenues and other income from continuing operations for the first three months of 2021 amounted to €124.2 million, compared to €103.6 million for the first three months of 2020.

Revenues amounted to €113.9 million for the first three months of 2021 compared to €94.8 million for the first three months of 2020, and were higher mainly driven by the increase in revenue recognition of upfront consideration and milestone payments received in the scope of the collaboration with Gilead for filgotinib amounting to €55.3 million for the first three months of 2021 (€35.4 million for the same period last year).

Other income (€10.3 million vs €8.7 million for the same period last year) increased, mainly driven by higher incentives income from the government for our R&D activities.

Results from continuing operations

We realized a net loss from continuing operations of €12.8 million for the first three months of 2021, compared to a net loss of €52.3 million for the first three months of 2020.

We reported an operating loss amounting to €50.8 million for the first three months of 2021, compared to an operating loss of €46.2 million for the same period last year.

Our R&D expenditure in the first three months of 2021 amounted to €130.0 million, compared to €115.5 million for the first three months of 2020. This increase was due to an increase in subcontracting costs primarily related to our filgotinib program, our Toledo program and other clinical programs, compensated by a decrease for ziritaxestat, the OA program with GLPG1972 and the program in atopic dermatitis (AtD) with MOR106. Furthermore, personnel costs increased explained by a planned headcount increase following the growth of our activities and increased cost of our subscription right plans. This last factor, together with increased costs of the commercial launch of filgotinib in Europe, contributed to the increase in our G&A and S&M expenses which were €45.0 million in the first three months of 2021, compared to €34.3 million in the first three months of 2020.

We reported a non-cash fair value gain from the re-measurement of initial warrant B issued to Gilead, amounting to €2.0 million, mainly due to the decreased implied volatility of the Galapagos share price as well as its evolution between 31 December 2020 and 31 March 2021.

Net other financial income in the first three months of 2021 amounted to €36.2 million, compared to net other financial income of €14.8 million for the first three months of 2020, which was primarily attributable to €45.5 million of currency exchange gain on our cash and cash equivalents and current financial investments in U.S. dollars and to €6.5 million of negative changes in (fair) value of current financial investments and financial assets.

Results from discontinued operations

The net profit from discontinued operations for the three months ended 31 March 2021 consisted of the gain on the sale of Fidelta, our fee-for-services business, for €22.2 million.

Group net results

The group realized a net profit for the first three months of 2021 amounting to €9.4 million, compared to a net loss of €50.6 million for the same period in 2020.

Cash position

Current financial investments and cash and cash equivalents totaled €5,114.7 million on 31 March 2021 (€5,169.3 million on 31 December 2020, including the cash and cash equivalents included in the assets classified as held for sale).

Total net decrease in current financial investments and cash and cash equivalents amounted to €54.6 million in the first three months of 2021, compared to a net decrease of €58.4 million during the first three months of 2020. This net decrease was composed of (i) €127.7 million of operational cash burn,¹We refer to the note on the cash position of our condensed consolidated interim financial statements for an explanation and reconciliation of this alternative performance measure. (ii) offset by €2.3 million of cash proceeds from capital and share premium increase from exercise of subscription rights in the first three months of 2021, (iii) €3.6 million of negative changes in (fair) value of current financial investments and €45.7 million of mainly positive exchange rate differences, (iv) €28.7 million cash in from the disposal of Fidelta, net of cash disposed.

Finally, our balance sheet on 31 March 2021 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) and a receivable from the Belgian Government for R&D incentives, for a total of €142.3 million.

Outlook 2021

We anticipate regulatory announcements with filgotinib as well as news on progress in our differentiated pipeline of novel target-based candidates this year.

We expect reimbursement decisions in most key European markets for filgotinib in RA this year, as we complete the transition to a full European commercial operation by year end. We anticipate a CHMP opinion and a European Commission decision for filgotinib in UC. We expect that our collaboration partner Gilead will complete recruitment for the global DIVERSITY Phase 3 trial in Crohn’s disease this year.

Within our broader inflammation portfolio, we expect to report topline results from several trials this year, including a Phase 1b trial with TYK2 inhibitor ‘3667 in psoriasis and three Proof of Concept studies with lead Toledo candidate SIK2/3 inhibitor ‘3970 in psoriasis, UC, and RA.

Within our fibrosis portfolio, we expect to progress early clinical compounds with novel mechanisms of action, with the aim to develop novel treatments to help patients suffering from this debilitating condition.

Following the review of our plans for 2021, we give guidance for full year 2021 operational cash burn of €580 to €620 million, and potential savings of €150 million on a full-year basis.

We thank you for your continued support, as we move forward on our strategy to develop novel mechanism of action drugs aimed at addressing unmet need in inflammation, fibrosis, and kidney disease. We are confident that we have a strong cash position, expert teams, and excellent science to achieve this.

¹ We refer to the note on the cash position of our condensed consolidated interim financial statements for an explanation and reconciliation of this alternative performance measure.
² Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government.