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 2017 amounted to €350.6 million compared to €303.3 million in 2016. This increase is due to internally generated intangible assets – being capitalized R&D expenses – which contributed by €73.3 million more to operating income than previous year, partially offset by €30.5 million lower turnover due to decreased milestone revenues. The other operating income amounted to €20.8 million, including €2.5 million of grants recognized for R&D projects, €1.4 million of recharges to subsidiaries and €11.2 million (2016: €5.8 million) of income recognized for tax incentives for investments in intangible fixed assets.

The operating costs of 2017 amounted to €490.4 million compared to €355.9 million in 2016. Services and other goods increased substantially to €201.2 million compared to €119.3 million in 2016, primarily due to increased internal and external subcontracting for our pre-clinical studies and clinical trials as well as increased fees for insourced personnel.

Material purchases increased slightly from €4.3 million in 2016 to €4.8 million in 2017.

Personnel costs in 2017 amounted to €24.8 million compared to €16.6 million in 2016. The number of employees at Galapagos NV at the end of 2017 amounted to 214 as compared to 154 at the end of 2016, excluding insourced personnel.

Depreciation increased to €251.4 million in 2017, compared to €203.5 million in 2016.

Non-recurring operating costs amounted to €0.5 million in 2017, compared to €5.9 million in 2016, which consisted of extraordinary write-offs of capitalized R&D costs with regard to research projects which were either placed on hold or stopped.

Galapagos NV’s 2017 financial income decreased to €8.4 million compared to €8.9 million in 2016, while financial costs increased significantly to €34.4 million compared to €1.5 million in 2016. This can mainly be explained by increased non-cash currency exchange losses on U.S. dollar.

Taxes recorded in 2017 consist of €34 thousand tax expenses, as compared to €19 thousand in 2016.

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 (e.g. future peak sales, market share, sale prices, 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 (e.g. 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 €18.7 million in 2017 compared to €70.8 million in 2016. The driver for this decrease was the amortization of internally generated intangible assets prior to 2016. R&D expenses capitalized as from 2016 onwards are fully amortized in the year in which they’re capitalized. R&D expenses capitalized in previous years are still amortized over a 3‑year period.

Investments in fixed assets in 2017 amounted to €4.1 million, excluding the internally generated assets. They consisted mainly of new laboratory and IT equipment, as well as investments in intangible assets, being software and in process technology.

Accrued income in 2017 included receivables for tax incentives of €39.7 million, as compared to €30.3 million in 2016.

Galapagos NV’s cash position at the end of 2017 amounted to €1,145.8 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 2017 closed with a loss of €165.9 million compared to a loss of €45.2 million in 2016. Overall, the result of Galapagos NV is largely affected by the fact that, as from financial year 2010, Galapagos NV capitalized some of its R&D expenses and revenues that were eligible for such capitalization under Belgian GAAP and amortized these costs over a 3-year period until 2015. R&D expenses capitalized as from 2016 onwards are fully amortized in the year itself. This amortization negatively impacted the net result of Galapagos NV by €17.4 million in 2017, compared to a negative impact of €29.9 million in 2016. The non-consolidated annual accounts of Galapagos NV show accumulated losses of €343.9 million as at 31 December 2017; we refer to the Going Concern Statement for justification for the application of the valuation rules under the going concern assumption.

In 2017, neither Galapagos NV nor its affiliates made direct or active use of financial instruments such as hedging instruments.