Letter from the management

The Galapagos group CSR report

Dear shareholder,

2018 was a truly pivotal year in the history of our company, with the publication of our first ever Phase 3 results, FINCH 2, for filgotinib in rheumatoid arthritis. We again find the results very promising. Moreover, we and our collaboration partner Gilead also announced promising Phase 2 results in ankylosing spondylitis (TORTUGA) and psoriatic arthritis (EQUATOR), highlighting once more filgotinib’s potential as a veritable ‘pipeline in a product’. We are proud that both the TORTUGA and EQUATOR results were published in The Lancet.

Onno van de Stolpe, CEO of Galapagos (photo)

We also expanded our fully proprietary fibrosis portfolio, most notably with the start of the Phase 3 program with autotaxin inhibitor GLPG1690 (ISABELA) and the Phase 2 trial in IPF with our GPR84 inhibitor, GLPG1205 (PINTA). Early 2019, we announced that we broadened the potential reach of our GLPG1690 program with the Phase 2 trial in systemic sclerosis (NOVESA). Beyond fibrosis, our MOR106 program entered a Phase 2 trial (IGUANA) in atopic dermatitis as well as a subcutaneous Phase 1b bridging trial. Together with our collaboration partner Servier, we started a global Phase 2b trial in osteoarthritis (ROCCELLA).

With these proofs of platform now in mid-to-late-stage trials, we continue to leverage our innovative target discovery platform to develop breakthrough drugs and ultimately deliver these to patients with large unmet needs. The best example of our continued efforts to raise the bar in science may be Toledo, our newly revealed preclinical program focused on a fully proprietary, as of yet undisclosed, novel target class. True to our DNA of ‘following the data’ with agility, scientific rigor, and purpose, we plan to roll out a comprehensive program in a number of indications with multiple candidates exhibiting various selectivity profiles.

All this contributes to our purpose of striving to keep at the forefront of innovation in our core disease areas, inflammation and fibrosis.

In 2019, we look forward to substantial news flow: first and foremost, we just reported that the Phase 3 FINCH 1 & 3 trials with filgotinib in rheumatoid arthritis met their primary and key secondary endpoints. The excellent safety data shown in FINCH 1 & 3 fully confirmed the differentiated safety profile observed in FINCH 2 and other previous studies with filgotinib. Our collaboration partner Gilead will now share these positive data with regulatory agencies and discuss next steps for filings. Also for filgotinib, we expect Gilead to announce the proof-of-concept results in Sjögren’s and cutaneous lupus and initiate the Phase 3 in psoriatic arthritis. For MOR106, together with collaboration partners MorphoSys and Novartis, we look forward to the topline results from the IGUANA trial and the subcutaneous bridging study. For Toledo, we expect results of the first Phase 1 in the second half of the year, and plan to initiate a Phase 1 study with a second generation Toledo compound.

From a financial perspective, we ended 2018 with a strong balance sheet, helped by a successful capital transaction, bringing in gross proceeds of EUR 296 million. We also announced two important business development deals: together with collaboration partner MorphoSys, we closed a license agreement with Novartis for MOR106, and we outlicensed our cystic fibrosis portfolio to AbbVie. Looking ahead, we guide for an operational cash burn1The 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 2017, the operational cash burn represented €154.1 million between EUR 320 and EUR 340 million for full year 2019, mainly driven by our growing and maturing clinical pipeline. In 2019, we expect to run over 40 trials, with a significant number of late-stage and proprietary programs, and we are expanding the team in order to deliver on our pipeline. Further, we continue to build out our commercial organization, as we gear up for the expected market launch of filgotinib.

R&D

In the field of inflammation:

  • We and Gilead announced positive results in FINCH 2, the first of three Phase 3 trials in RA patients with our selective JAK1 inhibitor filgotinib
  • We and Gilead announced positive results in EQUATOR, a Phase 2 trial with filgotinib in psoriatic arthritis patients. These results were presented in a plenary session at ACR 2018 and published in The Lancet
  • We and Gilead announced positive results in TORTUGA, a Phase 2 trial with filgotinib in ankylosing spondylitis patients. These results were published in The Lancet
  • We and Gilead announced that SELECTION, a Phase 2/3 trial with filgotinib in UC patients moved into Phase 3, following a planned futility analysis
  • We initiated the IGUANA Phase 2 trial and a Phase 1b bridging trial with MOR106 in atopic dermatitis patients, together with collaboration partners MorphoSys and Novartis

In fibrosis:

  • We initiated the Phase 3 ISABELA 1 & 2 trials with fully proprietary autotaxin inhibitor GLPG1690 in IPF patients
  • We initiated the PINTA Phase 2 trial with our fully proprietary GPR84 inhibitor GLPG1205 in IPF patients
  • We presented the FLORA Phase 2a results with GLPG1690 at ATS 2018 and published them in The Lancet Respiratory

In osteoarthritis:

  • We and Servier reported that ADAMTS-5 inhibitor GLPG1972 was well tolerated and showed a dose dependent decrease in ARGS neoepitope, a cartilage breakdown biomarker, in serum of osteoarthritis patients
  • We and our collaboration partner Servier initiated the global ROCCELLA Phase 2 trial with GLPG1972 in osteoarthritis patients
  • We obtained Fast Track review status with GLPG1972 from the FDA

Corporate:

  • We raised €296.2 million in gross proceeds in a U.S. public offering of ADS and €7.7 million from warrant exercises
  • We restructured our CF collaboration agreement with partner AbbVie
  • We and collaboration partner MorphoSys outlicensed MOR106 in atopic dermatitis to Novartis

Post-period events:

  • We initiated a Phase 2 trial with fully proprietary autotaxin inhibitor GLPG1690 in systemic sclerosis (SSc; NOVESA), and recruited the first patient
  • We initiated a Phase 1 trial with our first Toledo target class inhibitor GLPG3312
  • We announced partnerships with both Fibrocor and Evotec, inlicensing preclinical targets in the field of fibrosis
  • We initiated the GECKO study for MOR106, a Phase 2 study testing a subcutaneous formulation of MOR106 in combination with topical corticosteroids in patients with atopic dermatitis
  • We and Gilead reported that the Phase 3 FINCH 1 & 3 trials met their primary and most key secondary endpoints, confirming the encouraging safety profile observed in FINCH 2 and other previous studies

2018: Details of the financial results

Revenues

Galapagos’ revenues and other income for 2018 amounted to €317.8 million, compared to €155.9 million in 2017. Increased revenues and other income were mainly driven by an upfront payment of €47.5 million from Novartis related to the MOR106 program, increased recognition in revenue of the upfront payment and milestones related to the filgotinib program with Gilead, revenue recognition related to the additional upfront payment of $45.0 million from AbbVie and previous upfront payment and milestones, and the change in accounting treatment from the adoption of IFRS 15 – Revenue from contract with customers on 1 January 2018.

Operating result

The group realized a net operating loss in 2018 of €44.8 million, compared to a net operating loss of €89.8 million in 2017.

R&D expenses for the group in 2018 were €322.8 million compared to €218.5 million in 2017. This planned increase was due mainly to increased efforts on our clinical and preclinical programs, primarily filgotinib, our IPF program, and the proprietary preclinical programs in inflammation and fibrosis.

G&A and S&M expenses of the group were €39.8 million in 2018, compared to €27.2 million in 2017. This increase was due primarily to a planned headcount increase and higher costs for warrant plans (non-cash), mainly as a result of the increase of the Galapagos share price.

Net result

The group realized a net loss in 2018 of €29.3 million, compared to a net loss of €115.7 million in 2017.

Cash position

Cash and cash equivalents totaled €1,290.8 million on 31 December 2018.

A net increase of €139.6 million in cash and cash equivalents was recorded in 2018, compared to an increase of €178.0 million in 2017. Net cash flows from financing activities generated €287.9 million of cash, consisting of €280.2 million net proceeds from the U.S. public offering, and €7.7 million proceeds from warrant exercises. Furthermore, a net cash outflow from operating activities was realized for €142.5 million in 2018. Finally, €15.9 million was used in investing activities and €10.1 million positive exchange rate differences were generated on cash and cash equivalents. The operational cash burn amounted to €158.4 million.

Furthermore, Galapagos’ balance sheet holds 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 both receivables of €84.6 million.

Outlook 2019

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 and cutaneous lupus, and to launch a Phase 3 trial in PsA.

We also plan to fully recruit our Phase 2 PINTA study for our fully proprietary IPF compound GLPG1205, as well as our ROCCELLA study in OA, together with collaboration partner Servier. For GLPG1690, we plan to continue our ISABELA trials as well as the NOVESA Phase 2 trial in systemic sclerosis (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 our recently started Phase 2 trial in AtD with MOR106 in combination with topical corticosteroids (the GECKO Phase 2 trial) as well as a Japanese ethno-bridging study. In the second half of the year, we expect the primary analysis of the IGUANA Phase 2 trial in AtD and topline results of the subcutaneous Phase 1 bridging study. 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 earlier stage studies, 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 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 expect an operational cash burn between €320 and €340 million in 2019.

I wish to thank our shareholders for their support last year. We took substantial steps towards becoming an integrated biopharmaceutical company in 2018. Please stay with us as we continue to "Think Big" and break innovative ground in inflammation and fibrosis.

Regards,

Onno van de Stolpe
CEO

1 The 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. The operational cash burn represented €158.4 million for 2018, and €154.1 million for 2017

2 Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government