5. Total revenues and other income

Revenues

The following table summarizes the revenues for the years ended 31 December 2018 and 2017.

Galapagos’ revenues for 2018 amounted to €288.8 million, compared to €127.1 million in 2017. Increased revenues were mainly driven by (i) an upfront payment of €47.5 million from Novartis related to the MOR106 program, (ii) increased recognition in revenue of the upfront payment and milestones related to the filgotinib program with Gilead, (iii) revenue recognition related to the additional upfront payment of $45.0 million from AbbVie in the scope of the restructuring of the collaboration and previous upfront payment and milestones, and (iv) the change in accounting treatment from the adoption of IFRS 15 on 1 January 2018.

The following table summarizes the revenue recognition of upfront payments, license fees and milestone payments for the years ended 31 December 2018 and 2017, as well as the impact of the adoption of IFRS 15. The revenues recognized for the years ended 31 December 2018 are presented under the IFRS 15 standard as well as under the former applicable IAS 18 standard, with a comparison to the year ended 31 December 2017 under the former applicable IAS 18 standard.

The adoption of IFRS 15 resulted in a timing difference of revenue recognition between IAS 18 and IFRS 15 which negatively impacted the accumulated losses and increased the amount of deferred income (contract liabilities) by an amount of €83.2 million, as shown in the table above (column “Deferred income reclassified from equity following adoption of IFRS 15”). We elected the modified retrospective method for the transition which foresees that prior period figures remain as reported under the previous standard and the cumulative effect of applying IFRS 15 is recognized as an adjustment to the opening balance of equity as at the date of initial application (1 January 2018). The IFRS 15 adoption resulted in the recognition for the year ended 31 December 2018 of €60.8 million of deferred revenues related to previously recognized upfront payments (€12.6 million) and milestones (€48.2 million) under the former applicable standards of IAS 18.

The following table details revenue recognition approach and amounts for the years ended 31 December 2018 and 2017 by collaboration and license contract by type of revenue: upfront payments, milestone payment, reimbursement income, and other revenues.

For the year ended 31 December 2018, €124.4 million related to the Gilead collaboration agreement were recognized in revenue under IFRS 15 in function of costs incurred, applying the percentage of completion method. This revenue recognition consisted of (i) €84.8 million related to the upfront license fee, (ii) €12.0 million related to the deferred income triggered by the accounting treatment of the share subscription agreement under IAS 39 Financial Instruments: recognition and measurement, at the time of signing of the agreement in 2015, (iii) €19.8 million related to milestone payments received prior to 31 December 2017, and (iv) €7.8 million related to milestone payments received in the year 2018. The outstanding balance of deferred income from the Gilead collaboration agreement at 31 December 2018 amounted to €145.8 million which was all reported as current deferred income, as we expect to reach cost cap, as specified below, end of 2019.

In December 2015, we entered into a license and collaboration agreement to co-develop filgotinib with Gilead in rheumatoid arthritis, Crohn’s disease, ulcerative colitis and other indications. We are responsible for funding 20% of the associated global development costs of the program. We have retained certain mechanisms to give us cost protection as filgotinib advances in clinical development. We can defer our portion of the global co-development study costs if they exceed a predetermined level, which we expect to reach at the end of 2019, and this deferment would be credited against future milestones, royalties or profit sharing at our option. If there are no future amounts to be paid by Gilead, we will not be obligated to make any payments to Gilead for such deferment.

For the year ended 31 December 2018, €88.9 million income related to the AbbVie collaboration agreement were recognized in revenue under IFRS 15 in function of costs incurred, applying the percentage of completion method. This revenue recognition consisted of (i) €14.1 million related to the initial upfront license fee received in 2013, (ii) €28.4 million related to milestone payments received in previous years, (iii) €8.4 million related to milestones achieved in the year 2018 and finally (iv) €38.0 million related to the $45.0 million (€38.9 million) related to the additional upfront payment received upon execution of the second amended and restated collaboration agreement in October 2018.. The outstanding balance of deferred income from the AbbVie collaboration agreement at 31 December 2018 amounted to €3.3 million, all reported as current deferred income.

On 19 July 2018, MorphoSys and Galapagos announced signing of a global exclusive license agreement with Novartis covering the development and commercialization of the joint program MOR106, a monoclonal antibody directed against IL-17C, which will be developed further in atopic dermatitis (AtD) and potentially other indications. MorphoSys and Galapagos received an equal share of an upfront payment of €95 million and are entitled to potential future milestone payments of up to approximately €850 million plus royalties up to low-teens to low-twenties. Novartis will bear all future research, development, manufacturing and commercialization costs related to MOR106. For the year ended 31 December 2018 the upfront payment received from Novartis of €47.5 million related to the MOR106 program was recognized as revenue.

Finally, for the year ended December 31, 2018, a milestone payment of €9.0 million related to the collaboration agreement for osteoarthritis with Servier, was additionally recognized in revenue.

Reimbursement income increased by €5.4 million, to €8.7 million for the year ended 31 December 2018 compared to €3.3 million for the year ended 31 December 2017, due to higher reimbursements in relation with the MOR106 program with MorphoSys. The reimbursement of certain research and development costs for the year ended 31 December 2017 were related to our collaboration agreements with AbbVie and Servier.

Other revenues increased by €1.3 million, or 15%, to €10.2 million for the year ended 31 December 2018 compared to €8.9 million for the year ended 31 December 2017, principally due to higher revenues from fee-for-service activities.

Other income

The following table summarizes other income for the years ended 31 December 2018 and 2017.

Total other income was composed of grant income and other income and increased by €0.2 million, or 1%, from €28.8 million for the year ended 31 December 2017 to €29.0 million for the year ended 31 December 2018.

Grant income increased by €0.6 million, or 54%, from €1.0 million for the year ended 31 December 2017 to €1.6 million for the year ended 31 December 2018. The majority of this grant income was related to grants from a Flemish agency, representing approximately 95% of all reported grant income in 2018 (2017: 93%). In many cases these carry clauses which require us to maintain a presence in the same region for a number of years and invest according to pre-agreed budgets.

The increase in grant income was partly compensated by a decrease in other income of €0.4 million, or 1%, from €27.8 million for the year ended 31 December 2017 to €27.4 million for the year ended 31 December 2018. Other income was primarily composed of:

• Income from an innovation incentive system of the French government, which represented €9.3 million of other income for the year ended 31 December 2018 compared to €10.3 million for the year ended 31 December 2017
• Income from Belgian R&D incentives with regard to incurred R&D expenses, which represented €11.3 million of other income for the year ended 31 December 2018 compared to €11.2 million for the year ended 31 December 2017
• Tax rebates on payroll withholding taxes of R&D personnel in Belgium and the Netherlands, representing €6.3 million of other income for the year ended 31 December 2018 compared to €5.3 million for the year ended 31 December 2017