Details of the unaudited interim results

Revenues and other income

Revenues

The following table summarizes our revenues for the three months ended 31 March 2016 and 2015.

Revenues (€10.1 million vs €14.8 million last year) were lower due to a decrease in revenue recognition of upfront payments, which was only partially compensated by higher costs reimbursements.

The following table summarizes the upfront payments recognition for the three months ended 31 March 2016 and 2015.

Revenue recognized in 2015 from upfront non-refundable payments related to the CF collaboration agreement with AbbVie signed in September 2013 and the contract signed with AbbVie in February 2012 for our filgotinib program (including the extension signed in March 2013). Those upfront payments were fully recognized into revenues by the end of August 2015.

In September 2015 AbbVie decided not to opt in, which ended the collaboration agreement regarding our filgotinib program and consequently the period of our involvement. There are no outstanding commitments for us regarding this terminated collaboration for our filgotinib program.

On 16 December 2015, we entered into a global partnership with Gilead Sciences, Inc. for the development and commercialization of the JAK1-selective inhibitor filgotinib for inflammatory indications. On 19 January 2016, we completed the closing of the global collaboration agreement with Gilead, in the framework of which Gilead made a $425 million (or €392 million) equity investment in Galapagos NV by subscribing to new shares at a price of €58 per share, including issuance premium. This resulted in Gilead owning 6,760,701 ordinary shares of Galapagos NV, representing 14.75% percent of the then outstanding share capital of Galapagos. We also received a license fee of $300 million. In addition, we are eligible for payments of up to $755 million in development and regulatory milestones and $600 million in sales milestones, with tiered royalties starting at 20% and a profit split in co-promotion territories. Finally, we agreed on a 20-80 cost split for development costs of the licensed product, i.e. we will support 20% of all development costs. As we do not expect to have a statutory taxable base in the foreseeable future, we did not recognize any additional deferred tax asset following the signing of this new collaboration.

The global partnership with Gilead foresees continuous involvement from us since we will perform certain R&D activities in the development phase of the filgotinib program and therefore management assessed that the upfront payment of $300 million (or €276 million) received in January 2016 from Gilead should be spread in function of the costs incurred for this program, applying the percentage of completion method. In Q1 2016, €4.2 million revenues have been recognised regarding this upfront payment.

In connection with the agreement with Gilead, we recognized a deferred income and an offsetting short-term financial asset (derivative) of €39 million upon signing of the Share Subscription Agreement with Gilead as required under IAS 39. We refer to the note below for further detail. The deferred income will be recognized in function of the costs incurred for this program, applying the percentage of completion method, along with the upfront payment. In Q1 2016, €0.6 million revenues were recognized in the income statement.

Other income

The following table summarizes our other income for the three months ended 31 March 2016 and 2015.

Other income (€4.7 million vs €5.2 million last year) decreased in the first three months of 2016, driven mainly by lower income recognized from grants in Belgium.

Results

We realized a net profit of €35.9 million for the first three months of 2016, compared to a net loss of €14.2 million in the first three months of 2015.

Our R&D expenses in the first three months of 2016 were €27.8 million, compared to €31.6 million in 2015. This planned decrease was mainly due to lower outsourcing costs for our filgotinib program since Phase 3 development is expected to start later this year.

Our G&A and S&M expenses were €4.4 million in the first three months of 2016, compared to €3.8 million in the first three months of 2015. This increase mainly resulted from higher costs recognized in relation to the warrant plans as a result of the increase of our share price in the past year.

Financial results were primarily driven by the fair value re-measurement of the Share Subscription Agreement, which is explained under the next caption below. Other financial expenses in the first three months of 2016 amounted to €4.8 million compared to €1.2 million in 2015 and was primarily attributable to €4.5 million of unrealized exchange loss on our cash position in USD due to the fluctuation of the USD exchange rate in the first quarter of 2016.

Finally, income taxes of €1.5 million in the first three months of 2015 reflected the setup of an additional deferred tax asset. We had a total of €1.7 million deferred tax assets on the balance sheet for two subsidiaries at the end of the first three months of 2015 and 2016.

Fair value re-measurement of Share Subscription Agreement

On 16 December 2015, Gilead and Galapagos entered into a global collaboration for the development and commercialization of filgotinib, in the framework of which Gilead committed to an upfront payment of $725 million consisting of a license fee of $300 million and a $425 million equity investment in Galapagos NV by subscribing to new shares at a price of €58 per share, including issuance premium. This agreement was effectively completed and entered into force on 19 January 2016, and the full payment was received.

In connection with this agreement, we recognized in December 2015 a short term financial asset (derivative) and an offsetting deferred income of €39 million upon signing of the Share Subscription Agreement with Gilead as required under IAS 39. This financial asset initially reflected the share premium that Gilead committed to pay above our closing share price on the day of entering into the Share Subscription Agreement. Under IAS 39 the fair value of the financial asset was re-measured at year-end and again upon entering into force of the Share Subscription Agreement on 19 January 2016, when the financial asset expired. Variations in fair value of the financial asset are recorded in the income statement.

The decrease in the fair value of the financial asset resulting from the increase in the Galapagos share price between signing of the Share Subscription Agreement and 31 December 2015 resulted in a negative, non-cash adjustment fair value charge of €30.6 million in the financial results of 2015.

The subsequent increase in the fair value of the financial asset resulting from the decrease in our share price between 1 January 2016 and 19 January 2016 resulted in a positive non-cash gain of €57.5 million in the financial result of the first quarter of 2016.

On 19 January 2016, the value of the financial asset at maturity amounted to €65.9 million, reflecting the share premium that Gilead paid above our closing share price on the day of the capital increase. This amount was composed of (1) the initial measurement on the day of entering into the Share Subscription Agreement for an amount of €39 million which was reported in deferred income and (2) the subsequent re-measurements of the financial asset, reported as financial result under IAS 39: €30.6 million fair value loss reported in the year 2015 and €57.5 million fair value gain reported in the first quarter of 2016, together a net fair value gain of €26.8 million. This financial asset expired on the effective date of the Share Subscription Agreement.

Segment information

Since the last quarter of 2015, the IFRS 8 threshold of 10% of the combined revenues, external and intersegment, of all segments was met by the external and internal revenues reported by our fee-for-service business Fidelta, located in Croatia. Consequently, there are two reportable segments: R&D and fee-for-service business.

The basis of accounting for any transactions between reportable segments is consistent with the valuation rules and with transactions with third parties.

Liquid assets position

Cash, cash equivalents and restricted cash totaled €987.6 million on 31 March 2016.

A net increase of €638.0 million in cash and cash equivalents was recorded during the first three months of 2016, compared to a decrease of €26.4 million during the same period last year. Net cash flows from financing activities were generated for €392.0 million through the share subscription by Gilead. Furthermore, a net cash inflow from operating activities was realized for €251.5 million in the first three months of 2016 resulting from the license fee of $300 million (€275.6 million) received from Gilead and an operating cash burn of €24.0 million. Finally, €1.0 million was used in investing activities and €4.5 million unrealized negative exchange rate differences were generated on cash and cash equivalents.

Restricted cash amounted to €7.9 million at the end of December 2015, and increased to €9.3 million at the end of March 2016. The increase related to €1.4 million cash received from warrant exercises that remained on a blocked account until 1 April 2016 when the notary deed formally establishing the capital increase was enacted.

Restricted cash on 31 March 2016 was composed of (1) €1.4 million advances on capital increase through the exercise of warrants, (2) €0.3 million and €0.7 million bank guarantees on real estate lease obligations in Belgium and in the Netherlands respectively, and (3) €6.9 million escrow account containing part of the proceeds from the sale of the service division in 2014 for which the release will be possible after final agreement between the parties on the exposure regarding one outstanding claim. An amount of €0.3 million was accrued in March 2015 based on a preliminary estimate of the exposure.

Cash and cash equivalents amounted to €978.3 million at the end of March 2016 and comprised cash at banks, short term bank deposits and money market funds that are readily convertible to cash and are subject to an insignificant risk of changes in value. Our cash management strategy may allow short term deposits with an original maturity exceeding 3 months while monitoring all liquidity aspects. Cash and cash equivalents comprised €347.8 million of term deposits with an original maturity longer than 3 months but which are available upon one month notice period. Cash at banks were mainly composed of savings accounts and current accounts. We maintain our bank deposits in highly rated financial institutions to reduce credit risk. Cash invested in highly liquid money market funds represented €85.0 million and was aimed at meeting short-term cash commitments, while reducing the counterparty risk of investment.

On 31 March 2016, our cash and cash equivalents included $113 million held in USD which could generate unrealized exchange gain or loss in our financial results in accordance with the fluctuation of the EUR/USD exchange rate as our functional currency is EUR. We expect to use this cash held in USD to settle our future payables in USD which will be primarily linked our global collaboration with Gilead for the development of filgotinib.

Furthermore, our balance sheet held an unconditional and unrestricted receivable from the French government (Crédit d'Impôt Recherche²Crédit d'Impôt Recherche refers to an innovation incentive system underwritten by the French government.) amounting to €35.8 million as of 31 March, 2016, payable in yearly tranches from 2016 to 2020. Our balance sheet also holds a receivable from the Belgian Government for R&D incentives amounting to €26.2 million as of 31 March, 2016, payable in yearly tranches from 2016 until 2026.

Finally, our balance sheet includes an advance payment of $10 million (€8.8 million) received from AbbVie regarding the CF program as pre-payment of a development milestone that both parties would include in an amended and restated Collaboration Agreement.

Capital increase

On 19 January 2016, Gilead made a $425 million equity investment in Galapagos NV by subscribing to 6,760,701 new ordinary shares at a price of €58 per share, including issuance premium.

Galapagos received €392.1 million of gross proceeds, decreased by €0.2 million of expenses, of which €0.01 million has been paid at 31 March 2016 and €0.19 million remained to be settled in cash. The total net cash proceeds from the share subscription by Gilead after remaining settlements are expected to amount to €391.9 million.

The €65.9 million current financial asset from the Share Subscription Agreement reflecting the premium that Gilead paid compared to the closing price of our shares on 19 January 2016 were derecognized via the share premium account.

On 31 March 2016, Galapagos NV’s share capital was represented by 45,837,043 shares. All shares were issued, fully paid up and of the same class.

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