Overview statutory results of Galapagos NV
Galapagos NV’s operating income in 2018 amounted to €513.1 million compared to €350.6 million in 2017. This increase is due to internally generated intangible assets – being capitalized R&D expenses – which contributed by €86.6 million more to operating income than previous year, and due to €87.4 million higher turnover due to increased milestone revenues and upfront payments. Other operating income amounted to €9.2 million, including €2.0 million of grants recognized for R&D projects, €1.4 million of recharges to subsidiaries and €5.4 million recuperation of withholding taxes for scientists. The income recognized for tax incentives for investments in intangible fixed assets of €11.3 million (2017: €11.2 million, classified as other operating income), is in 2018 considered as tax income.
The operating costs of 2018 amounted to €654.6 million compared to €490.4 million in 2017. Services and other goods increased substantially to €299.8 million compared to €201.2 million in 2017, primarily due to increased internal and external subcontracting for our preclinical studies and clinical trials as well as increased fees for insourced personnel.
Material purchases increased slightly from €4.8 million in 2017 to €6.2 million in 2018.
Personnel costs in 2018 amounted to €33.4 million compared to €24.8 million in 2017. The number of employees at Galapagos NV at the end of 2018 amounted to 262 as compared to 214 at the end of 2017, excluding insourced personnel.
Depreciation increased to €305.7 million in 2018, compared to €251.4 million in 2017, and related primarily to amortization of R&D expenses.
Galapagos NV’s 2018 financial income increased to €35.7 million compared to €8.4 million in 2017, while financial costs decreased to €21.3 million compared to €34.4 million in 2017. This can mainly be explained by non-cash currency exchange gains on U.S. dollar in 2018, as compared to non-cash currency exchange losses on U.S. dollar in 2017.
Taxes recorded in 2018 consist of €11.3 million tax income, as compared to €34 thousand tax expenses in 2017. This is due to the reclassification in 2018 of the income recognized for tax incentives for investments in intangible fixed assets.
Galapagos NV capitalizes its incurred R&D expenses to the extent that the costs capitalized do not exceed a prudent estimate of their value in use or their future economic benefits for the entity. The ability to recover the capitalized amounts takes into account assumptions (e.g. future peak sales, market share, sale prices, attrition rates regarding the successful completion of the different R&D phases) which have a highly judgmental nature and depend on the outcome of uncertain factors which are beyond the control of the entity (e.g. test results). The achievement of these assumptions is critical and may impact the recoverability of the amounts capitalized. The net book value of capitalized R&D expenditure is zero in 2018 compared to €18.7 million in 2017. The driver for this decrease was the amortization of internally generated intangible assets prior to 2016. R&D expenses capitalized as from 2016 onwards are fully amortized in the year in which they’re capitalized. R&D expenses capitalized in previous years are all amortized at 31 December 2018.
Investments in fixed assets in 2018 amounted to €10.0 million, excluding the internally generated assets. They consisted mainly of costs for the new building, new laboratory and IT equipment, as well as investments in intangible assets, being software and licenses.
Accrued income in 2017 included receivables for tax incentives of €39.7 million; in 2018 the receivable for tax incentives amounted to €48.2 million and was included in other receivables.
Galapagos NV’s cash position at the end of 2018 amounted to €1,274.0 million.
The non-consolidated annual accounts of Galapagos NV which we submit for your approval were prepared in accordance with Belgian accounting rules as well as with the legal and regulatory requirements. They show a negative result. The financial year 2018 closed with a loss of €115.7 million compared to a loss of €165.9 million in 2017. Overall, the result of Galapagos NV is affected by the fact that, as from financial year 2010, Galapagos NV capitalized some of its R&D expenses and revenues that were eligible for such capitalization under Belgian GAAP and amortized these costs over a 3-year period until 2015. R&D expenses capitalized as from 2016 onwards are fully amortized in the year itself. This amortization negatively impacted the net result of Galapagos NV by €1.1 million in 2018, compared to a negative impact of €17.4 million in 2017. The non-consolidated annual accounts of Galapagos NV show accumulated losses of €459.5 million as at 31 December 2018; we refer to the Going Concern Statement for justification for the application of the valuation rules under the going concern assumption.
In 2018, neither Galapagos NV nor its affiliates made direct or active use of financial instruments such as hedging instruments.