Details of the unaudited interim results

Notes

Revenues and other income

Revenues

The following table summarizes our revenues for the three months ended 31 March 2018 and 2017.

 

Three months ended 31 March

(thousands of €)

2018

2017

Recognition of non-refundable upfront payments and license fees

25,824

15,225

Milestone payments

8,809

16,564

Reimbursement income

192

104

Other revenues

3,081

2,099

Total revenues

37,907

33,992

Revenues (€37.9 million vs €34.0 million for the same period last year) were higher due to an increase in the recognition of the upfront payment from Gilead related to the filgotinib program, which is recognized in function of the costs incurred for this program, but also due to the adoption of IFRS 15 – Revenue from contract with customers, on 1 January 2018, resulting in the recognition for the first quarter of 2018 of €10.4 million of deferred revenues related to previously recognized upfront and milestones under the former applicable standards of IAS 18.

The following table summarizes the recognition of the upfront, license fees and milestones payments received for the three months ended 31 March 2018 and 2017.

 

 

 

 

IAS 18

 

IFRS 15

IFRS 15

IAS 18

IAS 18

IFRS 15

Agreement

Consideration received

Consideration received

Collaboration start date

Outstanding balance in deferred income as at 31 December 2017

Deferred income reclassified from equity following adoption of IFRS 15

Outstanding balance in deferred income as at 1 January 2018

Revenue recognized, three months ended 31 March 2018

Revenue recognized, three months ended 31 March 2018

Revenue recognized, three months ended 31 March 2017

Outstanding balance in deferred income as at 31 March 2018

 

(thousands of $)

(thousands of €)

 

(thousands of €)

(1)

deferred income of €39 million booked upon signing of the share subscription agreement with Gilead as required under IAS 39 Financial instruments: recognition and measurement

Gilead collaboration agreement for filgotinib – Upfront payment

300,000

275,558

January 2016

187,449

 

187,449

20,914

20,914

13,337

166,535

Gilead collaboration agreement for filgotinib – Sub­scription agreement(1)

N.A.

39,003

January 2016

26,532

 

26,532

2,960

2,960

1,888

23,572

Servier collaboration agreement for osteo­arthritis – License fee

N.A.

6,000

June 2010

5,362

(5,362)

 

383

 

AbbVie collaboration agreement for CF – Upfront payments

45,000

34,001

September 2013

 

14,872

14,872

1,950

 

 

12,922

Total upfront and license fees:

 

219,343

9,510

228,853

25,824

24,257

15,225

203,028

 

 

 

 

 

 

 

 

 

 

 

Gilead collaboration agreement for filgotinib – Milestone payments

70,000

64,435

January 2016

 

43,832

43,832

4,891

 

 

38,941

AbbVie collaboration agreement for CF – Milestone payments

77,500

68,310

September 2013

 

29,878

29,878

3,918

 

16,564

25,960

Total milestones:

 

 

73,710

73,710

8,809

16,564

64,901

Total:

 

 

219,343

83,220

302,563

34,633

24,257

31,789

267,929

The first adoption of IFRS 15 Revenue from contracts with customers negatively impacted the accumulated losses and increased the amount of deferred income (contract liabilities) with an amount of €83.2 million, as shown in the table above (column “Deferred income reclassified from equity following adoption of IFRS 15”). We elected the modified retrospective method for the transition which foresees that prior period figures remain as reported under the previous standard and the cumulative effect of applying IFRS 15 is recognized as an adjustment to the opening balance of equity as at the date of initial application (beginning of the year 2018).

The revenues recognized for the three months ended 31 March 2018 are presented in the table above under IFRS 15 standard as well as under IAS 18 standard, with a comparison to last year’s period under IAS 18 standard.

We applied the five step model detailed in the IFRS 15 standard to determine when, how and at what amount revenue is to be recognized depending on whether certain criteria are met. The significant judgements made in applying this standard are detailed below:

The substance of our current arrangements is that Galapagos is licensing its IP to collaborative partner entities and conducts research and development (“R&D”) activities. Such activities result in a service that is the output of Galapagos’ ordinary activities. We generate revenue through a number of these arrangements which include license fees, milestone payments, reimbursement income and future sales based milestones and sales based royalties. We assessed that the revenues from our current material licensing and collaboration agreements are in the scope of IFRS 15.

Collaboration with Gilead

We concluded as follows:

  • We assessed that there is one single performance obligation under the new standards of IFRS 15; the transfer of a license combined with performance of R&D activities. This is because we considered that the license is not distinct in the context of the contract.
  • The transaction price of our agreement is currently composed of a fixed part, being an upfront license fee and a variable part, being milestone payments and cost reimbursements for R&D activities delivered. Milestone payments are included in our revenues only when achieved. Sales based milestones and sales based royalties are a part of our arrangement but are not yet included in our revenues as our program is still in phase 3 of development.
  • The transaction price has been allocated to the single performance obligation and revenues have been recognized over the estimated service period based on a pattern that reflects the transfer of the license and progress to complete satisfaction of the R&D activities. This is because we considered that there is a transformational relationship between the license and the R&D activities to be delivered.
  • We have chosen an input model to measure the satisfaction of the single performance obligation that considers percentage of costs incurred for this program that are completed each period (% of completion method).
  • Costs reimbursements received from Gilead are to be recognized in revenues when costs are incurred and agreed by the parties as we are acting as a principal in the scope of our stake of the R&D activities of our ongoing license and collaboration agreements.

As a result of this analysis, for the first three months of 2018, €28.8 million of deferred income related to the Gilead collaboration agreement were recognized in revenue under IFRS 15 in function of costs incurred, applying the percentage of completion method. This revenue recognition consisted of (i) €20.9 million related to the upfront license fee, (ii) €3.0 million related to the deferred income triggered by the accounting treatment of the share subscription agreement under IAS 39 Financial Instruments: recognition and measurement, and (iii) €4.9 million related to milestone payments received. The outstanding balance of deferred income from the Gilead collaboration agreement at the end of March 2018 amounted to €229.0 million of which €83.9 million reported as non-current deferred income.

As reflected in the table above, the impact of the IFRS 15 adoption on our revenues generated from our collaboration with Gilead was only related to the deferral of previously recognized milestones.

Collaboration with AbbVie

We concluded as follows:

  • We assessed that there is one single performance obligation under the new standards of IFRS 15; the transfer of a license combined with performance of R&D activities. This is because we considered that the license is not capable of being distinct and is not distinct in the context of the contract.
  • The transaction price of our agreement is currently composed of a fixed part, being an upfront license fee, and a variable part, being milestone payments and cost reimbursements for R&D activities delivered. Milestone payments are included in our revenues only when achieved. Sales based milestones and sales based royalties are a part of our arrangement but are not yet included in our revenues as our program is still in phase 1 & 2 of development.
  • The transaction price has been allocated to the single performance obligation and revenues have been recognized over the estimated service period based on a pattern that reflects the transfer of the license and progress to complete satisfaction of the R&D activities. This is because we considered that there is a transformational relationship between the license and the R&D activities to be delivered.
  • We have chosen an input model to measure the satisfaction of the single performance obligation that considers a percentage of costs incurred for this program that are completed each period (% of completion method).
  • Costs reimbursements received from AbbVie could be recognized in revenues when costs are incurred and agreed by the parties as we are acting as a principal in the scope of our stake of the R&D activities of our ongoing license and collaboration agreements.

As a result of this analysis, for the first three months of 2018, €5.9 million of deferred income related to the AbbVie collaboration agreement were recognized in revenue under IFRS 15 in function of costs incurred, applying the percentage of completion method. This revenue recognition consisted of (i) €2.0 million related to the upfront license fee and (ii) €3.9 million related to milestone payments received in previous years. The outstanding balance of deferred income from the AbbVie collaboration agreement at the end of March 2018 amounted to €38.9 million of which €18.6 million reported as non-current deferred income.

As reflected in the table above, the impact of the IFRS 15 adoption on our revenues generated from our collaboration with AbbVie was related to the deferral of previously recognized upfront fee and milestones.

Finally, the deferred income balance on 31 December 2017 related to the license fee received from Servier in the scope of our license and collaboration agreement in the field of osteoarthritis (€5.4 million) was fully reclassified to equity as a consequence of the adoption of the new standard.

Other revenues

Other revenues mainly consisted in service revenues from our fee-for-service business for €3.0 million, as reported under the segment information disclosure below.

Other income

The following table summarizes our other income for the three months ended 31 March 2018 and 2017.

 

Three months ended 31 March

(thousands of €)

2018

2017

Grant income

549

293

Other income

6,382

5,578

Total other income

6,931

5,871

Other income increased (€6.9 million vs €5.9 million last year) in the first three months of 2018, mainly driven by higher income from R&D incentives.

Results

We realized a net loss of €37.3 million for the first three months of 2018, compared to a net loss of €13.6 million in the first three months of 2017.

We reported an operating loss amounting to €32.0 million for the first three months of 2018, compared to an operating loss of €11.2 million for the same period last year.

Our R&D expenses in the first three months of 2018 were €69.8 million, compared to €44.9 million in 2017. This planned increase was due mainly to an increase of €20.4 million in subcontracting costs primarily on our filgotinib and GLPG1690 programs. Furthermore, personnel costs increased, explained by a planned headcount increase.

Our G&A and S&M expenses were €7.1 million in the first quarter of 2018, compared to €6.2 million in the first quarter of 2017. This increase mainly resulted from higher personnel costs due to a planned headcount increase.

Net financial expenses in the first three months of 2018 amounted to €5.2 million compared to net financial expenses of €2.4 million in 2017, and were primarily attributable to €5.6 million of unrealized exchange loss on our cash position in U.S. dollars. We expect to use this cash held in U.S. dollars to settle our future payables in U.S. dollars, which will be primarily linked to our global collaboration with Gilead for the development of filgotinib.

Segment information

We have two reportable segments: R&D and our fee-for-service business Fidelta, located in Croatia.

 

Segment information for the three months ended 31 March 2018

(thousands of €)

R&D

Fee-for-services

Inter-segment elimination

Group

(1)

Unallocated expenses consist of expenses for warrant plans under IFRS 2 Share based payments.

(2)

Financial results and taxes information are not being provided to management in our management reporting as segment results and therefore, their aggregate amount is disclosed at the level of the group in our segment reporting.

External revenue

34,888

3,019

 

37,907

Internal revenue

 

2,175

(2,175)

Other income

6,931

 

6,931

Revenues & other income

41,819

5,194

(2,175)

44,838

 

 

 

 

 

Segment result

(29,424)

1,330

 

(28,093)

Unallocated expenses(1)

 

 

 

(3,943)

Operating loss

 

 

 

(32,036)

Financial (expenses) / income(2)

 

 

 

(5,184)

Result before tax

 

 

 

(37,221)

Income taxes(2)

 

 

 

(62)

Net loss

 

 

 

(37,283)

 

Segment information for the three months ended 31 March 2017

(thousands of €)

R&D

Fee-for-services

Inter-segment elimination

Group

(1)

Unallocated expenses consist of expenses for warrant plans under IFRS 2 Share based payments.

(2)

Financial results and taxes information are not being provided to management in our management reporting as segment results and therefore, their aggregate amount is disclosed at the level of the group in our segment reporting.

External revenue

31,950

2,042

 

33,992

Internal revenue

 

1,005

(1,005)

Other income

5,859

12

 

5,871

Revenues & other income

37,809

3,059

(1,005)

39,863

 

 

 

 

 

Segment result

(7,745)

(457)

 

(8,202)

Unallocated expenses(1)

 

 

 

(3,023)

Operating loss

 

 

 

(11,225)

Financial (expenses) / income(2)

 

 

 

(2,380)

Result before tax

 

 

 

(13,605)

Income taxes(2)

 

 

 

Net loss

 

 

 

(13,605)

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 and cash equivalents totaled €1,108.2 million on 31 March 2018.

A net decrease of €43.0 million in cash and cash equivalents was recorded during the first three months of 2018, compared to a decrease of €19.9 million during the same period last year. Net cash flows used in operating activities amounted to €39.8 million in the first quarter 2018. Exercise of warrants in the first quarter of 2018 generated a financing cash inflow of €3.9 million. Furthermore €1.5 million was used in investing activities and €5.6 million unrealized negative exchange rate differences were reported on cash and cash equivalents.

Cash and cash equivalents amounted to €1,108.2 million at the end of March 2018 and comprised cash and 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 three months while monitoring all liquidity aspects. Cash and cash equivalents comprised €662.4 million of term deposits with an original maturity longer than three 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 €149.6 million and aim at meeting short-term cash commitments, while reducing the counterparty risk of investment.

 

31 March

31 December

(thousands of €)

2018

2017

Cash at banks

296,226

288,052

Term deposits

662,355

713,446

Money market funds

149,602

149,711

Cash on hand

3

3

Total cash and cash equivalents

1,108,186

1,151,211

On 31 March 2018, our cash and cash equivalents included $247.4 million held in U.S. dollars which could generate foreign exchange gain or loss in our financial results in accordance with the fluctuation of the EUR/U.S. dollar exchange rate as our functional currency is EUR. We expect to use this cash held in U.S. dollars to settle our future payables in U.S. dollars which will be primarily linked to our global collaboration with Gilead for the development of filgotinib.

Finally, our balance sheet held R&D incentives receivables from the French government (Crédit d’Impôt Recherche) amounting to €39.1 million as of 31 March 2018, to be received in four yearly tranches. Our balance sheet also held R&D incentives receivables from the Belgian Government amounting to €41.7 million as at 31 March 2018.

Capital increase

On 31 March 2018, Galapagos NV’s share capital was represented by 51,234,962 shares. All shares were issued, fully paid up and of the same class. The below table summarizes our capital increases for the quarter ended 31 March 2018.

(thousands of €, except share data)

Number
of shares

Share
capital

Share
premium

Share capital and share premium

Average exercise price warrants

Closing share price on date of capital increase

On 1 January 2018

50,936,778

233,414

993,025

1,226,439

 

 

 

 

 

 

 

 

 

20 March 2018: exercise of warrants

298,184

1,613

2,311

3,924

13.16

83.72

 

 

 

 

 

 

 

On 31 March 2018

51,234,962

235,027

995,336

1,230,363