9. Fair value re-measurement of share subscription agreement and warrants granted to Gilead

Notes to the consolidated financial statements

Total fair value re-measurement for the year ended 31 December 2019 can be split up as follows:

 

Year ended 31 December

(thousands of €)

2019

Fair value re-measurement of the share subscription agreement

(142,350)

Fair value re-measurement of warrant A

(35,642)

Fair value re-measurement of initial warrant B

(3,653)

Total fair value re-measurement of share subscription agreement and warrants

(181,644)

Gilead share subscription agreement

On 23 August 2019, the closing date of the contract, Gilead made a €960.1 million equity investment in Galapagos NV by subscribing to 6,828,985 new ordinary shares at a price of €140.59 per share, including issuance premium. The equity subscription was accounted for as a financial asset at signing date of the contract on 14 July 2019 and changes in fair value were recorded through profit or loss until closing date, when the financial liability was derecognized.

We recognized a fair value loss of €142.4 million, which reflects the increase in the Galapagos share price between signing and closing of the Gilead agreement. On 23 August 2019, the fair value of the financial liability amounting to €56.7 million was derecognized through the share premium account in equity.

(thousands of €)

2019

Fair value of financial asset at signing date

85,601

Change in fair value recorded in profit or loss

(142,350)

Fair value of financial liability at closing date

(56,749)

Derecognition at closing date

56,749

Fair value on 31 December 2019

Gilead warrants A and B

We measured the warrants (warrant A and initial and subsequent warrant B) at fair value and recognized a warrant issuance liability at closing date of the transaction. Upon approval of the issuance of warrant A and initial warrant B on 22 October 2019 (warrant approval date) the variable consideration was re-measured with a corresponding impact on the transaction price allocated to the performance obligation relating to our drug discovery platform, and the warrant issuance liability became a financial liability measured at fair value with changes through profit or loss as from that moment.

Warrant A has been valued using a standard option model (Black & Scholes Merton). 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, applied discount for lack of marketability). On 6 November 2019 Gilead exercised warrant A and as such increased its ownership in Galapagos to 25.10% of the then outstanding shares.

Between the warrant approval date and the exercise of warrant A our share price increased significantly, resulting in a fair value loss of €35.6 million recognized in profit or loss. On 6 November 2019 the related financial liability, amounting to €79.0 million was derecognized through the share premium account in equity.

Management assessed that the financial liability relating to this warrant A had no remaining fair value at 31 December 2019 mainly because Gilead further increased its ownership to 25.84% at 31 December 2019.

(thousands of €)

2019

Fair value of financial liability at warrant approval date

(43,311)

Change in fair value recorded in profit or loss

(35,642)

Derecognition at warrant A exercise date

78,953

Fair value on 31 December 2019

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 31 December 2019. 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 €3.7 million is mainly the result of an increase in the implied volatility of our share price and our share price itself between the warrant approval date and year-end. The fair value of the financial liability related to the initial warrant B amounts to €6.2 million on 31 December 2019.

The financial liability will be re-measured at fair value at each reporting period.

(thousands of €)

2019

Fair value of financial liability at warrant approval date

(2,545)

Change in fair value recorded in profit or loss

(3,653)

Fair value on 31 December 2019

(6,198)

The fair value of the financial liability related to the initial warrant B of €6.2 million at 31 December 2019 is presented as current financial instrument, in the section current liabilities, in our consolidated statement of financial position.

Subsequent warrant B is still subject to approval by an extraordinary general meeting of shareholders and is therefore still presented as warrant issuance liability in our deferred income (we refer to note 24 for more information). Subsequent 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).