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 2016 amounted to €303.3 million compared to €193.1 million in 2015. This increase was mainly due to higher turnover (i.e. R&D revenues), which increased by €102.1 million, primarily driven by increased milestone revenues. In addition, internally generated intangible assets – being capitalized R&D expenses – contributed €7.1 million more to operating income than previous year. The other operating income amounted to €16.3 million, including €4.7 million of grants recognized for R&D projects, €2.7 million of recharges to subsidiaries and €5.8 million recognized for tax incentives for investments in intangible fixed assets.

The operating costs of 2016 amounted to €350.0 million compared to €242.9 million in 2015. Material purchases decreased slightly from €4.4 million in 2015 to €4.3 million in 2016. Services and other goods decreased to €119.3 million compared to €131.7 million in 2015, primarily due to €19.4 million of one-off costs in 2015 related to the global offering of ordinary shares on 19 May 2015 (NASDAQ IPO), slightly offset by increased internal subcontracting for our pre-clinical studies and clinical trials as well as increased fees for insourced personnel.

Personnel costs in 2016 amounted to €16.6 million compared to €15.7 million in 2015. The number of employees at Galapagos NV at the end of 2016 amounted to 154, excluding insourced personnel.

Depreciation increased to €203.5 million in 2016, compared to €82.6 million in 2015. This was due to amortization booked on the internally generated intangible assets capitalized in 2013, 2014, 2015 and 2016, for which the internally generated intangible assets capitalized in 2016 were fully amortized in 2016, which explained the substantial increase.

Galapagos NV’s 2016 financial income increased significantly to €8.9 million compared to €1.6 million in 2015 and can mainly be explained by increased currency exchange gains on U.S. dollar. Financial costs amouned to €1.5 million compared to €1.2 million in 2015.

Extraordinary costs amounted to €5.9 million in 2016, compared to €13.5 million in 2015, which primarily consisted of extraordinary write-offs of capitalized R&D costs with regard to alliances which ended or programs which were placed on hold (€5.4 million in 2016, compared to €13.2 million in 2015).

Tax expenses recorded in 2016 (€19 thousand) related mainly to an income tax adjustment on the result of prior periods. No tax expenses were recorded in 2015.

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. The net book value of capitalized R&D expenditure amounted to €70.8 million in 2016 compared to €153.0 million in 2015. The driver for this significant decrease was a change in accounting practices in 2016 with regard to internally generated intangible assets: R&D expenses capitalized as from 2016 onwards are fully amortized in the year itself. R&D expenses capitalized in previous years are still amortized over a 3-year period.

Investments in fixed assets in 2016 totaled €1.9 million, excluding the internally generated assets. They consisted mainly of new laboratory and IT equipment, as well as investments in intangible assets, being software development.

Galapagos NV’s cash position at the end of 2016 amounted to €972.6 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 2016 closed with a loss of €45.2 million compared to a loss of €63.0 million in 2015. 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 negatively impacted the net result of Galapagos NV by €29.9 million in 2016, compared to a positive impact of €55.0 million in 2015. The non-consolidated annual accounts of Galapagos NV show accumulated losses of €178.0 million as at 31 December 2016; we refer to the Going Concern Statement for justification for the application of the valuation rules under the going concern assumption.

In 2016, 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). This embedded derivative expired on 19 January 2016 at the time of the completion of the transaction (i.e. date of the notary deed enacting the related capital increase).