Overview statutory results of Galapagos NV

This overview only concerns the non-consolidated statutory results of Galapagos NV. These results are part of the consolidated results as discussed in the Letter from the management.

Galapagos NV’s operating income in 2015 amounted to €193.1 million compared to €172.7 million in 2014. This increase is mainly due to increased income from internally generated intangible assets – being capitalized R&D expenses – which contributed €23.7 million more to operating income than in the previous year. Turnover (i.e. R&D revenues) decreased slightly with €3.2 million compared to 2014. The other operating income amounts to €15.2 million, including €3.1 million of grants recognized for R&D projects, €3.3 million of recharges to subsidiaries and €5.3 million recognized for tax incentives for investments in intangible fixed assets.

The operating costs of 2015 amounted to €242.9 million compared to €197.6 million in 2014. Material purchases increased slightly from €3.7 million in 2014 to €4.4 million in 2015. Services and other goods increased substantially to €131.7 million compared to €96.7 million in 2014, primarily due to €19.4 million of one-off costs related to the global offering of ordinary shares on 19 May 2015 (NASDAQ IPO). In addition, increased subcontracting for our pre-clinical studies and clinical trials contributed to increased operating costs, driven by the maturing pipeline of our R&D projects.

Personnel costs in 2015 amounted to €15.7 million compared to €13.7 million in 2014. The number of employees at Galapagos NV at the end of 2015 amounted to 133, excluding insourced personnel.

Depreciation increased to €82.6 million in 2015, compared to €76.8 million in 2014. This is due to amortization booked on the internally generated intangible assets capitalized in 2012, 2013, 2014 and 2015.

Galapagos NV’s 2015 financial income decreased significantly to €1.6 million compared to €108.1 million in 2014 and can be explained by a capital gain in 2014 of €105.9 million that has been realized in connection with the sale of the service division to Charles River Laboratories International, Inc. on 1 April 2014. Financial costs amounted to €1.2 million compared to €1.1 million in 2014.

Extraordinary costs amount to €13.5 million in 2015, compared to €19.7 million in 2014, which primarily consists of extraordinary write-offs of capitalized R&D costs with regard to alliances which ended or programs which were placed on hold (€13.2 million in 2015, compared to €13.5 million in 2014).

No tax expenses have been recorded in 2015. Tax expenses recorded in 2014 (€0.4 million) are related to capital gain taxes related to the sale of the service division.

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 (i.e. future peak sales, market share, sales price, 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 (i.e. test results). The achievement of these assumptions is critical and may impact the recoverability of the amounts capitalized. Capitalized R&D expenses amount to €153.0 million compared to €129.5 million last year.

Investments in fixed assets in 2015 totaled €1.4 million, excluding the internally generated assets. They consist mainly of new laboratory equipment, as well as investments in intangible assets, being software development.

Galapagos NV’s cash position at the end of 2015 amounted to €339.4 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 2015 closed with a loss of €63.0 million compared to a profit of €62.0 million in 2014. The recorded net profit in 2014 can entirely be explained by a substantial gain on the sale of the service division as mentioned above. Overall, the result of Galapagos NV is largely affected by the fact that, as from financial year 2010, Galapagos NV capitalizes some of its R&D expenses and revenues that are eligible for such capitalization under Belgian GAAP. This capitalization positively impacted the net result of Galapagos NV by €55.0 million in 2015, compared to a positive impact of €12.1 million in 2014. The non-consolidated annual accounts of Galapagos NV show accumulated losses of €132.8 million as at 31 December 2015; we refer to the Going Concern Statement for justification for the application of the valuation rules under the going concern assumption.

In 2015, neither Galapagos NV nor its affiliates made direct or active use of financial instruments such as hedging. However, at year-end 2015 an embedded derivative existed under the terms of the Gilead contract (see note 8 of the notes to the consolidated financial statements).