Letter from the management

Dear shareholder,

2021 was a year of reflection, resulting in refocused R&D activities and resized spend, as well as commercial roll-out, with a major effort to launch Jyseleca® throughout Europe.

We made excellent progress with Jyseleca (filgotinib) and successfully completed the process of becoming Marketing Authorization Holder (MAH) in Europe for our first medicine. Improving patients’ lives is at the core of what we do, and becoming a fully integrated, independent European biopharma is a major achievement to make that mission a reality for patients suffering from chronic debilitating conditions.

One year after receiving approval for Jyseleca in Europe for the treatment of adults with moderate to severe rheumatoid arthritis (RA), we secured reimbursement in 14 countries, including the major markets of Germany, France, Spain, Italy, and Great Britain. As of 31 December 2021, we reported €14.8 million of Jyseleca sales in Europe out of a total in-market performance of €25.7 million, supporting confidence in the potential of our filgotinib franchise in Europe and in our own commercial capabilities.

We also received approval by the European Commission (EC), and most recently by the Medicines and Healthcare products Regulatory Agency (MHRA) in Great Britain, for a second indication for Jyseleca for patients suffering from moderate to severe active ulcerative colitis (UC). We are now progressing full steam ahead with the commercial roll out and Jyseleca is currently on the market for UC in Germany and the Netherlands, with other European territories to follow in the course of 2022.

We announced the completion of patient enrollment in the global Phase 3 DIVERSITY study with filgotinib in Crohn’s Disease (CD), with topline results anticipated in the first half of 2023. In October, we announced that we will be solely responsible for all development activities for DIVERSITY and the long-term extension study starting 1 April 2022. Gilead will make a one-time payment of $15 million to support Galapagos with the remaining DIVERSITY trial costs, and should the EC grant regulatory approval of filgotinib for the treatment of CD based on data from the DIVERSITY trial, royalties payable by Galapagos to Gilead will be reduced by 30% across all filgotinib indications, or 5.6% to 10.5% of net sales in Europe. These royalties are payable as of 2024.

Also for filgotinib, we were pleased to report on the primary endpoint with the MANTA and MANTA-RAy studies investigating the effect on semen parameters, indicating that 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.

Differentiated portfolio

Due to the unfavorable risk/benefit profile observed by an Independent Data Monitoring Committee (IDMC) in the Phase 3 study of ziritaxestat (GLPG1690) in idiopathic pulmonary fibrosis (IPF), we had to discontinue further development of this program. This not only was a major setback for Galapagos but most importantly for patients suffering from this terrible disease for which current treatment options remain limited.

In 2021, we also made important progress across our broader inflammation pipeline, most notably with our TYK2 and SIKi programs. We observed clinical activity with our TYK2 inhibitor GLPG3667 in a Phase 1b study in psoriasis (Pso), and we are currently finalizing a Phase 1 dose escalation study in healthy volunteers. We reported results from the first patient studies of our SIKi program with SIK2/3 inhibitor GLPG3970. The biological activity observed in the studies in Pso and UC highlights the pioneering role we are playing to unravel the role of SIKi in inflammation, and support further development of our SIKi portfolio. We are currently working on a set of follow-up SIKi compounds with improved pharmacology and selectivity profiles, and plan to select a preclinical candidate to move into a healthy volunteer study this year.

Beyond inflammation, we completed patient recruitment in our MANGROVE Phase 2 trial with GLPG2737, a novel Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) inhibitor, in autosomal dominant polycystic kidney disease (ADPKD), with results expected in 2023.

I am very proud of our committed teams for working tirelessly to bring novel mode of action medicines to patients, and now that my tenure at the helm of this company is drawing to an end, I could not be more honored to hand over the baton to Dr. Paul Stoffels on 1 April.¹ As a co-founder and board member in the early years, Paul has a keen understanding of our roots as well as who we are today. I strongly believe that Paul’s strategic and inspirational leadership, along with his deep knowledge of both the industry and Galapagos, make him the right next CEO to deliver tremendous value to all stakeholders, including investors, shareholders, and patients.

R&D

In the field of inflammation:

• We received approval in Europe from the EC for filgotinib 200mg (Jyseleca) for the treatment of moderate to severe UC
• Gilead announced that NICE recommended filgotinib for reimbursement for moderate to severe RA patients in Great Britain
• We initiated the FILOSOPHY Phase 4 study with filgotinib in RA
• We and Gilead announced interim data on the MANTA and 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 announced completion of patient enrollment for DIVERSITY Phase 3 study with filgotinib in CD including a 10-week induction phase, followed by a 47-week maintenance phase. Topline results are anticipated in the first half of 2023
• We reported encouraging exploratory data from the DIVERGENCE 2 trial with filgotinib in fistulizing CD
• We observed activity with TYK2 inhibitor GLPG3667 in Pso, with a generally safe and well tolerated profile, and are currently completing a dose escalation study in healthy volunteers
• We reported on biological activity with SIK2/3 inhibitor GLPG3970 in inflammation, and more particularly in the CALOSOMA Phase 1b study in Pso and the SEA TURTLE Phase 2a study in UC. We did not see activity in the LADYBUG trial in RA. Following the first read-outs with GLPG3970, we decided to terminate the TAPINOMA Phase 1b study with GLPG3970 in systemic lupus erythematosus due to slow recruitment in this trial and low likelihood of success
• We published the SELECTION Phase 3 data (Feagan et al. 2021) in The Lancet and 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, GLPG1690, in the ISABELA Phase 3 program in IPF

Other clinical programs:

• We announced the full recruitment for the MANGROVE Phase 2 trial with investigational CFTR inhibitor GLPG2737 in patients with ADPKD

Corporate:

• On 4 January 2021 we sold fee-for-service business Fidelta to Selvita for a total of €37.1 million
• We raised €3.3 million from subscription right exercises
• We announced an extension of the lock-up period for Gilead’s current shares (currently 25.49%) in Galapagos to 2024
• We announced the planned departure of Piet Wigerinck, our Chief Scientific Officer, and the planned retirement of Onno van de Stolpe, founder and Chief Executive Officer
• We received the second installment of €75 million from Gilead in Q2, following payment of an earlier installment of €35 million in January 2021, included under the revised filgotinib agreement as announced in December 2020
• We announced that we will assume operational and financial responsibility for the ongoing DIVERSITY clinical study in CD with filgotinib and the long-term extension study. Gilead will make a one-time payment of $15 million to Galapagos to support the costs of the DIVERSITY clinical program, and if the EC grants regulatory approval based on data from the DIVERSITY trial, royalties payable by Galapagos to Gilead will be reduced by 30% across all filgotinib indications
• As MAH for Jyseleca in RA and UC, we own full commercialization responsibilities across Europe

Post-period events:

• We are finalizing the Phase 1 study with SIK3 inhibitor GLPG4399 in healthy volunteers
• On 11 February 2022, EMA announced that its Pharmacovigilance Risk Assessment Committee (PRAC) started an article 20 specific pharmacovigilance procedure to investigate the safety data for all JAK inhibitors following recent results from the ORAL surveillance study with tofacitinib (Xeljanz®, Pfizer) as well as the data from an observational study with baricitinib (Olumiant®, Eli Lilly)
• We appointed Dr. Paul Stoffels¹ as Chief Executive Officer and successor for our current CEO and founder Onno van de Stolpe effective 1 April 2022. Onno will stay on until October 31 2022 as an advisor to hand over his activities and support Paul in specific projects.
• We received approval in Great Britain from the MHRA for filgotinib 200mg (Jyseleca) for the treatment of moderate to severe UC. Gilead anticipates a decision for Jyseleca in UC from the Japanese authorities in the first half of 2022
• We announced Sobi as our third-party partner for the distribution and commercialization of Jyseleca in Eastern and Central Europe, Portugal, Greece, and the Baltic countries
• We decided to terminate the GLIDER Phase 2a study with SIK2/3 inhibitor GLPG3970 in Sjögren’s disease

2021: Details of the financial results

After the sale of our fee-for-service business (Fidelta) to Selvita on the 4 January 2021 for a total consideration of €37.1 million, we only have one remaining reporting segment. The results of Fidelta, including the impact of the 2021 sale, are presented as “Net results from discontinued operations” in our consolidated income statements for the year 2021 and 2020.

Net revenues from continuing operations

Our net revenues from continuing operations for 2021 amounted to €484.8 million, compared to €478.1 million in 2020.

We reported net sales of Jyseleca in 2021 amounting to €14.8 million, which reflects the sales booked by Galapagos after the country-by-country transition from Gilead.

Collaboration revenues amounted to €470.1 million in 2021, compared to €478.1 million last year. The revenue recognition linked to the upfront consideration and milestone payments in the scope of the collaboration with Gilead for filgotinib, amounted to €235.7 million in 2021 (€228.1 million in 2020). The revenue recognition related to the exclusive access rights for Gilead to our drug discovery platform amounted to €230.6 million in 2021 (€229.6 million in 2020). Additionally we have recognized royalty income from Gilead for Jyseleca for €3.8 million in 2021 (compared to €16.2 million in 2020, which was mainly from income related to upfront payments from a distribution agreement for the commercial launch of filgotinib in Japan).

Our deferred income balance on 31 December 2021 includes €1.8 billion allocated to our drug discovery platform that is recognized linearly over 10 years, and €0.6 billion allocated to the filgotinib development that is recognized over time until the end of the development period.

Results from continuing operations

We realized a net loss from continuing operations of €125.4 million in 2021, compared to a net loss of €311.0 million in 2020.

We reported an operating loss amounting to €165.6 million in 2021, compared to an operating loss of €178.6 million in 2020.

Cost of sales related to Jyseleca net sales in 2021 amounted to €1.6 million.

Our R&D expenditure in 2021 amounted to €491.7 million, compared to €523.7 million in 2020. This decrease was primarily due to the winding down of the programs with ziritaxestat (IPF), MOR106 (atopic dermatitis), and GLPG1972 (OA) and reduced spend on our other programs. This was partly offset by costs increases for our filgotinib, Toledo (SIKi) and TYK2 programs, on a yearly comparison basis.

Our S&M and G&A expenses were respectively €70.0 million and €140.9 million in 2021, compared to respectively €66.5 million and €118.8 million in 2020. This increase was primarily due to an increase in personnel costs resulting from an increase in headcount and other operating expenses mainly driven by the commercial launch of filgotinib in Europe. This increase was partly offset by higher cost recharges from us to Gilead in the scope of our commercial cost sharing for filgotinib in Europe.

Other operating income (€53.7 million in 2021 vs €52.2 million in 2020) slightly increased, mainly driven by higher grant income.

We reported a non-cash fair value gain from the re-measurement of initial warrant B issued to Gilead, amounting to €3.0 million in 2021 (€3.0 million in 2020), mainly due to the decreased implied volatility of the Galapagos share price and its evolution between 31 December 2020 and 31 December 2021.

Net other financial income in 2021 amounted to €39.6 million, compared to net other financial loss of €134.2 million in 2020. Net other financial income in 2021 was primarily attributable to €57.2 million of currency exchange gains on our cash and cash equivalents in U.S. dollars, and to €8.8 million of net interest expenses. The other financial expenses also contained the effect of discounting our long term deferred income of €9.3 million.

Results from discontinued operations

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

Group net results

We reported a group net loss in 2021 of €103.2 million, compared to a net loss of €305.4 million in 2020.

Cash, cash equivalents and current financial investments

Current financial investments and cash and cash equivalents totaled €4,703.2 million on 31 December 2021 as compared to €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 cash and cash equivalents and current financial investments amounted to €466.1 million in 2021, compared to a net decrease of €611.5 million in 2020. This net decrease was composed of (i) €564.8 million of operational cash burn², offset by (ii) €6.8 million positive changes in (fair) value of current financial investments and €59.9 million of mainly positive exchange rate differences, (iii) €3.3 million of cash proceeds from capital and share premium increase from exercise of subscription rights in 2021, and (iv) €28.7 million cash in from disposal of subsidiaries.

Our balance sheet on 31 December 2021 included R&D incentives receivables from the French government (Crédit d’Impôt Recherche³), and from the Belgian Government, for a total of €144.0 million.

Outlook for 2022

Early in 2022, we announced the appointment of Dr. Paul Stoffels¹ as successor for founder and current CEO Onno van de Stolpe, effective 1 April 2022. Paul is widely recognized as an inspirational industry leader with exceptional R&D as well as global executive experience, with an outstanding track record of accelerated product development in biotech and pharma through insightful acquisitions and strategic partnerships.

In 2022, we expect reimbursement decisions in most key European markets for Jyseleca in UC, and we anticipate our distribution partner Sobi to progress further with reimbursement discussions for Jyseleca in RA and UC in Eastern and Central Europe, Portugal, Greece, and the Baltic countries. In Japan, our collaboration partner Gilead expects a decision on the use of Jyseleca in UC in the first half of 2022.

Earlier this year, the EMA announced that its Pharmacovigilance Risk Assessment Committee (PRAC) started an article 20 specific pharmacovigilance procedure to investigate the safety data for all JAK inhibitors following recent results from the ORAL Surveillance study with tofacitinib⁴ as well as the data from an observational study with baricitinib⁵. Following initiation of this procedure, all JAKi MAHs will be invited to submit evidence and we will continue to work with the EMA. The European Commission has asked the EMA to give its opinion by 30 September 2022.

Within our broader inflammation portfolio, we expect the read out from a healthy volunteer Phase 1b trial with JAK1 inhibitor GLPG0555 for application in knee osteoarthritis and from multiple Phase 1 trials in healthy volunteers. We aim to progress our TYK2 inhibitor GLPG3667 into a Phase 2 program, following the dose escalation Phase 1 study currently being finalized, also taking into account the current regulatory and competitive landscape for TYK2 as a class. We aim to advance selected compounds with optimized pharmacology and selectivity from our SIKi portfolio into the clinic. Within our fibrosis portfolio, we are evaluating the start of a Phase 2 trial with chitinase inhibitor GLPG4716 in lung fibrosis.

For 2022 we anticipate a further significant reduction of our cash burn and expect to land between €450 and €490 million. This includes sales for Jyseleca that we anticipate between €65 and €75 million.

We believe our strong cash balance affords us the opportunity to develop our pipeline through internal as well as externally sourced assets. We expect our scientific expertise, strong leadership, and growing commercial franchise to propel us forward as we rebuild a differentiated pipeline of novel mode of action drug candidates to help patients in need of new treatment options.

We want to thank you for your continued support as we took important decisions and actions to set our foundations for future growth. My 23 years at the helm of this company have been an incredible journey and I am very pleased that Paul will take over as CEO. Together with the board and our strong management team, we believe that we can look forward with confidence to the future of our company.

Respectfully,

Onno van de Stolpe
CEO