Details of the unaudited condensed consolidated interim results

Revenues and other income

Revenues

The following table summarizes our revenues for the nine months ended 30 September 2019 and 2018.

Revenues (€725.7 million for the first nine months of 2019, compared to €182.5 million for the first nine months of 2018) were higher due to the revenue recognition of the upfront payment received in August 2019 from Gilead related to (i) the GLPG1690 program and (ii) the access and option rights to our drug discovery platform, offset by (iii) a negative catch-up effect for revenues related to previously received upfront and milestones due to the revised filgotinib collaboration agreement.

The transaction price received from Gilead of €3,569.8 million ($3.95 billion) and the impact of the initial valuation of the share subscription of €85.6 million recognized as a deferred income upon signing of the share subscription agreement with Gilead as required under IFRS 9 were allocated to the three performance obligations identified as follows:

The outstanding balance of the current and non-current deferred income as at 30 September 2019 can be allocated as follows:

For the first nine months of 2019, €15.8 million of reimbursement income was recognized as revenue related to our R&D activities in the scope of our collaboration agreement with Novartis and MorphoSys for MOR106.

Other revenues amounting to €7.4 million mainly consisted of service revenues from our fee-for-service business.

Other income

Other income increased by €4.1 million, mainly driven by higher incentives income from the government for R&D activities.

Results

We realized a net profit of €265.3 million for the first nine months of 2019, compared to a net loss of €44.2 million in the first nine months of 2018.

We reported an operating profit amounting to €393.0 million for the first nine months of 2019, compared to an operating loss of €53.5 million for the first nine months of 2018.

Our R&D expenditure in the first nine months of 2019 amounted to €298.2 million, compared to €231.8 million in the first nine months of 2018. This planned increase was mainly due to an increase of €29.1 million in subcontracting costs primarily related to our IPF program, filgotinib and other programs. Furthermore, personnel costs increased explained by a planned headcount increase and higher costs related to bonuses and warrant plans as a result of the increase of the Galapagos share price.

The table below summarizes our R&D expenditure for the nine months ended 30 September 2019 and 2018, broken down by program.

Our G&A and S&M expenses were €61.2 million in the first nine months of 2019, compared to €26.8 million in the first nine months of 2018. This increase mainly resulted from higher personnel costs due to a planned headcount increase as well as higher costs for bonuses and warrant plans as a result of the increase of the Galapagos share price.

We reported a non-cash fair value loss from the re-measurement of a derivative financial instrument triggered by the share subscription agreement with Gilead between signing and closing of the agreement amounting to €142.3 million. Such amount reflects the increase in the Galapagos share price between signing and closing of the Gilead agreement. 

Net other financial loss in the first nine months of 2019 amounted to €2.0 million, compared to net other financial income of €9.0 million for the first nine months of 2018, which was primarily attributable €34.9 million realized exchange loss on the U.S. dollars upfront payment from Gilead, which was partly compensated by a €32.4 million of unrealized exchange gain on our cash position in U.S. dollars (compared to €6.6 million of unrealized exchange gain on our cash position in U.S. dollars in the first nine months of 2018).

We reported a tax income amounting to €16.7 million primarily from the recognition of deferred tax assets as a consequence of the deal with Gilead.

Segment information

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

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 €5,599.8 million on 30 September 2019.

A net increase of €4,309.0 million in cash and cash equivalents was recorded during the first nine months of 2019, compared to a net increase of €192.5 million during the first nine months of 2018. This net increase was composed of (i) €3,302.0 million of operational cash flow, of which €3,535.0 million cash inflow from the Gilead collaboration and €233.0 million remaining cash outflow from operating activities, and (ii) €960.1 million cash proceeds related to the share subscription by Gilead, (iii) €14.5 million of cash proceeds from capital and share premium increase from exercise of warrants in the first nine months of 2019 and (iv) €32.4 million of unrealized positive exchange rate differences.

Cash and cash equivalents amounted to €5,599.8 million at the end of September 2019 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 €899.0 million of term deposits that 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 €4,270.7 million and aim at meeting short-term cash commitments, while reducing the counterparty risk of investment.

On 30 September 2019, our cash and cash equivalents included $1,533.6 million held in U.S. dollars which could generate foreign exchange gains or losses in our financial results in accordance with the fluctuation of the EUR/U.S. dollar exchange rate as our functional currency is EUR. The foreign exchange loss (-) / gain in case of a 10% increase / decrease in the EUR/U.S. dollar exchange rate amounts to a loss of €135.4 million / gain of €135.4 million.

Finally, our balance sheet held R&D incentives receivables from the French government (Crédit d’Impôt Recherche), to be received in four yearly tranches, and R&D incentives receivables from the Belgian Government, for a total of €99.7 million as at 30 September 2019.

Capital increase

On 30 September 2019, Galapagos NV’s share capital was represented by 61,953,831 shares. All shares were issued, fully paid up and of the same class. The below table summarizes our capital increases for the period ended 30 September 2019.

Note to the cash flow statement

Fair value measurements

Gilead share subscription agreement

On 23 August 2019, Gilead made a €960.1 million equity investment in Galapagos NV by subscribing to 6,828,985 new ordinary shares at a price of €140.59 per share, including issuance premium. The equity subscription was already accounted for as a financial asset at signing of the contract on 14 July 2019 and was subsequently remeasured at fair value through the income statement until 23 August 2019. The fair value measurement of this derivative financial instrument is categorized as a level 3 in the fair value hierarchy because of the following unobservable assumptions:

• Between the date that the deal is signed (14 July 2019) until the date the deal is complete, there was a firm commitment from Galapagos to issue the shares.
• At the initial valuation date (signing of the deal) it was assumed that the date when the deal would be completed was 15 September 2019. This was the forward date from where all the market data is taken from.

Fair value re-measurement of the Gilead share subscription agreement

The €56.7 million current financial liability from the share subscription agreement reflecting the difference between the price paid by Gilead compared to the closing price of our shares on 23 August 2019 was derecognized through share premium.

Gilead warrants A and B

We measured both warrants at fair value (level 3) and recognized a liability at inception of the agreement for the same amount (as part of the deferred income line). This variable consideration was remeasured at 30 September 2019 with a corresponding impact on the transaction price allocated to the performance obligation relating to our drug discovery platform.

The fair value of warrant A amounted to €44.8 million at 30 September 2019. The fair value of warrant B amounted to €5.5 million at 30 September 2019.

Warrant A

Warrant A have been valued using a standard option model (Black & Scholes Merton). The input data used in the model were coming from market observations (volatility, discount rate and share price) and from management estimates (number of shares to be issued, applied discount for lack of marketability).

A change in the unobservable inputs would have the following effect on the fair value of warrant A at 30 September 2019:

• If the number of shares issued through the exercise of the warrant A would be increased by 100,000, the value of the warrant A would increase by €1.6m.
• If the discount for lack of marketability had been estimated at 10% instead of 15%, the value of the liability would have increased by €2.6m.

Warrant B

Warrant B issued to Gilead have been valued on the basis of a Longstaff-Schwartz Monte Carlo model. The input data used in the model were coming from market observations (volatility, discount rate and share price) and from management estimates (number of shares to be issued, applied discount for lack of marketability).

A change in the unobservable inputs would have the following effect on the fair value of warrant B at 30 September 2019:

• If the number of shares issued through the exercise of the warrant B would be increased by 100,000, the value of the warrant B would increase by €0.1m.
• If the discount for lack of marketability had been estimated at 30% instead of 35%, the value of the liability would have increased by €0.4m.