Details of the unaudited condensed consolidated interim results

Revenues and other income

Revenues

The following table summarizes our revenues for the six months ended 30 June 2020 and 2019.

Revenues (€201.8 million for the first six months of 2020, compared to €91.8 million for the first six months of 2019) were mainly higher due to the revenue recognition of the upfront payment received in August 2019 from Gilead related to (i) the access and option rights to our drug discovery platform, and (ii) additional consideration received for the extended cost sharing for filgotinib.

The rollforward of the outstanding balance of the current and non-current deferred income between 1 January 2020 and 30 June 2020 can be summarized as follows:

Other income

Other income (€22.8 million for the first six months of 2020, compared to €16.7 million for the first six months of 2019) increased by €6.1 million, mainly driven by higher incentives income from the government for R&D activities.

Results

We realized a net loss of €165.6 million for the first six months of 2020, compared to a net loss of €95.9 million in the first six months of 2019.

We reported an operating loss amounting to €130.8 million for the first six months of 2020, compared to an operating loss of €97.6 million for the first six months of 2019.

Our R&D expenditure in the first six months of 2020 amounted to €265.9 million, compared to €177.6 million in the first six months of 2019. This planned increase was mainly due to an increase of €42.7 million in subcontracting costs primarily related to our filgotinib program, our Toledo program and other clinical programs. Furthermore, personnel costs increased by €35.4 million explained by a planned headcount increase and increased costs of the subscription right plans.

The cost increase for filgotinib for the first six months of 2020 compared to the same period in 2019, was mainly due to the increased cost share from 20/80 to 50/50 on the global development activities effective as from the closing of our collaboration agreement with Gilead on 23 August 2019. As from this date, we also started to share the development costs equally with Gilead for ziritaxestat (GLPG1690), while those costs were carried fully by us before, which is the main driver of the decrease in our costs for this program.

The table below summarizes our R&D expenditure for the six months ended 30 June 2020 and 2019, broken down by program.

Our G&A and S&M expenses were €89.5 million in the first six months of 2020, compared to €28.6 million in the first six months of 2019. This increase mainly resulted from higher personnel costs for €31.3 million due to a planned headcount increase and higher costs of the subscription right plans, and increased costs from the preparation of the commercial launch of filgotinib in Europe.

We reported a non-cash fair value loss from the re-measurement of initial warrant B issued to Gilead, amounting to €21.1 million, mainly due to the increased implied volatility of the Galapagos share price.

Net other financial loss in the first six months of 2020 amounted to €13.0 million, compared to net other financial income of €1.8 million for the first six months of 2019, which was primarily attributable to negative changes in (fair) value of current financial investments of €12.5 million. The increase in financial expenses was further explained by the effect of discounting long term deferred income for €8.7 million, offset by net currency gains and interest income.

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.

Cash position

Cash and cash equivalents and current financial investments totaled €5,566.5 million on 30 June 2020 (€5,780.8 million on 31 December 2019)

A net decrease of €214.3 million in cash and cash equivalents and current financial investments was recorded during the first six months of 2020, compared to a net decrease of €142.9 million during the first six months of 2019. This net decrease was composed of (i) €230.5 million of operational cash burn, (ii) €23.3 million of cash proceeds from capital and share premium increase from exercise of subscription rights in the first six months of 2020, and (iii) €7.1 million of negative changes in (fair) value  of current financial investments and unrealized positive exchange rate differences.

The operational cash burn (or operational cash flow if this performance measure is positive) is a financial measure that is not calculated in accordance with IFRS. Operational cash burn/ cash flow is defined as the increase or decrease in our cash and cash equivalents (excluding the effect of exchange rate differences on cash and cash equivalents), minus:

i. the net proceeds, if any, from share capital and share premium increases included in the net cash flows generated / used (–) in financing activities

ii. the net proceeds or cash used, if any, in acquisitions or disposals of businesses; the movement in restricted cash and movement in current financial investments, if any, included in the net cash flows generated / used (–) in investing activities.

This alternative performance measure is in our view an important metric for a biotech company in the development stage.

The following table represents a reconciliation of the operational cash burn:

Cash and cash equivalents and current financial investments comprised cash at banks, short-term bank deposits, treasury bills and money market funds. The short-term bank deposits and money market funds 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 €1,169.2 million of term deposits that are available upon maximum three 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 €1,439.6 million and are presented as current financial investments on 30 June 2020 because we are not using them for meeting short-term cash commitments. Since 2020, the current financial investments also include treasury bills, amounting to €1,742.6 million on 30 June 2020.

On 30 June 2020, our cash and cash equivalents and current financial investments included $1,459.8 million held in U.S. dollars ($1,507.4 million on 31 December 2019) 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% change in the EUR/U.S. dollar exchange rate amounts to €130.4 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 €116.6 million as at 30 June 2020.

Capital increase

On 30 June 2020, Galapagos NV’s share capital was represented by 65,254,562 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 June 2020.

Note to the cash flow statement

The increase in the costs of our subscription right plans is primarily related to the issuance of our subscription right plans 2020 to a higher number of beneficiaries as well as a higher fair value of the attached subscription rights mainly due to the increase in the price and the volatility of the Galapagos share. Under these subscription right plans, 2,173,335 subscription rights were granted to the beneficiaries of the plans. The subscription rights have an exercise term of eight years as of the date of the offer and have an exercise price of €168.42 (the average closing price of the share on Euronext Amsterdam and Brussels during the thirty days preceding the date of the offer on 17 April 2020). The subscription rights are not transferable and can in principle not be exercised prior to 1 January 2024. Each subscription right gives the right to subscribe to one new Galapagos share.

Fair value re-measurements

Gilead warrants B

The issuance of initial warrant B was approved on 22 October 2019 by the extraordinary general meeting of shareholders and is not yet exercised by Gilead at 30 June 2020. The fair value measurement of this financial liability is categorized as level 3 in the fair value hierarchy. Initial warrant B has been valued on the basis of a Longstaff-Schwartz Monte Carlo model. The input data used in the model were derived from market observations (volatility, discount rate and share price) and from management estimates (number of shares to be issued and applied discount for lack of marketability). The recognized fair value loss of €21.1 million was mainly the result of an increase in the implied volatility of our share price between 31 December 2019 and 30 June 2020. The fair value of the financial liability related to the initial warrant B amounted to €27.3 million on 30 June 2020 and was presented as a current financial instrument.

Subsequent warrant B is still subject to approval by an extraordinary general meeting of shareholders and is therefore still presented as issuance liability in our deferred income.