Report of the statutory auditor
Statutory auditor’s report to the shareholders’ meeting for the year ended 31 December 2020 – Consolidated financial statements
The original text of this report is in Dutch
In the context of the statutory audit of the consolidated financial statements of Galapagos NV (“the company”) and its subsidiaries (jointly “the group”), we hereby submit our statutory audit report. This report includes our report on the consolidated financial statements and the other legal and regulatory requirements. These parts should be considered as integral to the report.
We were appointed in our capacity as statutory auditor by the shareholders’ meeting of 28 April 2020, in accordance with the proposal of the supervisory board issued upon recommendation of the audit committee. Our mandate will expire on the date of the shareholders’ meeting deliberating on the financial statements for the year ending 31 December 2022. We have performed the statutory audit of the consolidated financial statements of Galapagos NV for 15 consecutive periods. We are the statutory auditor of Galapagos NV for 21 consecutive years.
Report on the consolidated financial statements
We have audited the consolidated financial statements of the group, which comprise the consolidated statement of financial position as at 31 December 2020, the consolidated statement of income and comprehensive income/loss, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, as well as the summary of significant accounting policies and other explanatory notes. The consolidated statement of financial position shows total assets of 5 717 731 (000) EUR and the consolidated statement of income and comprehensive income/loss shows a loss for the year then ended of 305 436 (000) EUR.
In our opinion, the consolidated financial statements give a true and fair view of the group’s net equity and financial position as of 31 December 2020 and of its consolidated results and its consolidated cash flow for the year then ended, in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium.
Basis for the unqualified opinion
We conducted our audit in accordance with International Standards on Auditing (ISA), as applicable in Belgium. In addition, we have applied the International Standards on Auditing approved by the IAASB applicable to the current financial year, but not yet approved at national level. Our responsibilities under those standards are further described in the “Responsibilities of the statutory auditor for the audit of the consolidated financial statements” section of our report. We have complied with all ethical requirements relevant to the statutory audit of consolidated financial statements in Belgium, including those regarding independence.
We have obtained from the supervisory board and the company’s officials the explanations and information necessary for performing our audit.
We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key Audit Matter Description
On December 15, 2020, the Company entered into a binding term sheet with Gilead Sciences, Inc. (“Gilead”) (the “December 2020 Amendment”) to amend the license and collaboration agreement for filgotinib previously signed with Gilead in August 2019 (“the 2019 Collaboration”) and to agree on the transfer of development, manufacturing, commercialization and certain other rights to filgotinib in Europe.
As part of the IFRS-15 Revenue from Contracts with Customers (“IFRS 15”) analysis, the accounting treatment for the December 2020 Amendment required judgment in respect of the following:
- Timing of the contract modification: management’s assessment of the legally binding and enforceable nature of the term sheet resulted in management accounting for the contract modification in 2020;
- Determining the appropriate IFRS standard: the contract modification has been analysed under the requirements of IFRS 15, as Gilead is still considered to be a customer;
- Identification of performance obligations: no new or additional performance obligations were identified within the contract modification, resulting in only the partly satisfied filgotinib performance obligation being impacted via the cumulative catch-up method;
- Allocation of the total transaction price: the increased fixed consideration as a result of the modification has been allocated in its entirety to the filgotinib performance obligation, with the Company concluding that the change in the scope of the filgotinib performance obligation and the change in both the fixed and variable consideration are reflective of the updated stand-alone selling price for the remaining activities under this performance obligation;
- Determination of the percentage of completion: in the process of estimating the costs to complete the Company considered that all ongoing and planned clinical trials (including the long term extension trials) would be completed through their final stage.
The evaluation of the reasonableness of management’s estimates and assumptions related to these specific critical judgments and accounting estimates require a high degree of auditor judgment and a significant degree of extra audit effort, including the need to involve our accounting specialists.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures to address all critical judgments related to the December 2020 Amendment included reading the binding term sheet and management’s accounting position paper to understand the terms of this contract and evaluate management’s conclusions.
In relation to management’s critical judgments related to the December 2020 Amendment, our audit procedures included the following:
- We tested the effectiveness of controls over the accounting treatment of significant unusual transactions, which is one of management’s controls over the application of IFRS 15.
- With the assistance of our accounting specialists:
- We evaluated the legally binding and enforceable nature of the term sheet to assess the date of the contract modification;
- We tested management’s identification of the applicable IFRS standard and the distinct performance obligations by evaluating whether the underlying goods, services, or both were highly interdependent and interrelated with one or both of the performance obligations that were partly satisfied at the time of the contract modification.
- We read minutes of board and committee meetings as well as management’s position paper to understand the parties intended use of the licenses and other obligations included in the December 2020 Amendment;
- We evaluated whether the change in the scope of the filgotinib performance obligation resulting from the December 2020 Amendment and the change in both the fixed and variable consideration are reflective of the updated stand-alone selling price for the remaining activities under this performance obligation.
- We assessed the assumptions made in estimating the costs to complete the filgotinib development activities by comparing these with management’s past experience, external information (including information from Gilead) and other observable evidence and by performing sensitivities on the current year’s revenue recognition resulting from changes to these estimates.
IT systems which impact financial reporting
Key Audit Matter Description
During the year, the group implemented various new IT systems, including a new ERP-system and a new reporting and consolidation system. These IT systems form a critical component of the group’s financial reporting activities and impact all account balances. The group places significant reliance on its IT systems and the associated controls.
We have identified the IT systems, which impact financial reporting as a key audit matter because of the:
- Implementation of new key IT systems during the year;
- Reliance on these systems within the group;
- Importance of the IT controls over the systems to maintaining an effective control environment. A key interdependency exists between the ability to rely on IT controls and the ability to rely on system configured automated controls and system reports;
- Pervasive nature of these systems;
- Considerable involvement of our IT specialists; and
- Additional effort needed from the audit team to test compensating controls, evaluate management’s mitigating or remediating actions or perform additional substantive testing in response to any unaddressed IT risks.
The key IT systems impact a range of business processes, including General Ledger, Procurement and Financial Consolidation.
We refer to the section “Risk management and internal control” of the Annual Report for the related management disclosure.
How the Key Audit Matter Was Addressed in the Audit
With the assistance of our IT specialists, we performed the following risk assessment and audit procedures to test IT controls over the in scope IT systems, which are those systems that we considered key for financial reporting purposes:
- Identified the IT risks for each IT system based on our understanding of the flows of transactions and the IT environment;
- Determined whether each general IT control, individually or in combination with other controls, is appropriately designed to address the associated IT risk; and
- Tested the effectiveness of the relevant general IT controls.
Where there were deficiencies in the IT controls, we tested additional manual business process controls that addressed the related IT risks. If no such manual business controls were identified, we performed additional testing such as evaluating management’s mitigating actions or expanding the scope and nature of our direct testing procedures on the account balances that were impacted by these IT deficiencies.
Responsibilities of the supervisory board for the preparation of the consolidated financial statements
The supervisory board is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium and for such internal control as the supervisory board determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the supervisory board is responsible for assessing the group’s ability to continue as a going concern, disclosing, as applicable, matters to be considered for going concern and using the going concern basis of accounting unless the supervisory board either intends to liquidate the group or to cease operations, or has no other realistic alternative but to do so.
Responsibilities of the statutory auditor for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue a statutory auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
During the performance of our audit, we comply with the legal, regulatory and normative framework as applicable to the audit of consolidated financial statements in Belgium. The scope of the audit does not comprise any assurance regarding the future viability of the company nor regarding the efficiency or effectiveness demonstrated by the supervisory board in the way that the company’s business has been conducted or will be conducted.
As part of an audit in accordance with ISA, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
- identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from an error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
- obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group’s internal control;
- evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the supervisory board;
- conclude on the appropriateness of the use of the going concern basis of accounting by the supervisory board and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our statutory auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our statutory auditor’s report. However, future events or conditions may cause the group to cease to continue as a going concern;
- evaluate the overall presentation, structure and content of the consolidated financial statements, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
- obtain sufficient appropriate audit evidence regarding the financial information of the entities and business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with the audit committee regarding, amongst other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the audit committee with a statement that we have complied with relevant ethical requirements regarding independence, and we communicate with them about all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated to the audit committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our report unless law or regulation precludes any public disclosure about the matter.
Other legal and regulatory requirements
Responsibilities of the supervisory board
The supervisory board is responsible for the preparation and the content of the directors’ report on the consolidated financial statements , the statement of non-financial information attached to the directors’ report on the consolidated financial statements and other matters disclosed in the annual report on the consolidated financial statements.
Responsibilities of the statutory auditor
As part of our mandate and in accordance with the Belgian standard complementary to the International Standards on Auditing (ISA) as applicable in Belgium, our responsibility is to verify, in all material respects, the director’s report on the consolidated financial statements , the statement of non-financial information attached to the directors’ report on the consolidated financial statements and other matters disclosed in the annual report on the consolidated financial statements, as well as to report on these matters.
Aspects regarding the directors’ report on the consolidated financial statements and other information disclosed in the annual report on the consolidated financial statements
In our opinion, after performing the specific procedures on the directors’ report on the consolidated financial statements, this report is consistent with the consolidated financial statements for that same year and has been established in accordance with the requirements of article 3:32 of the Code of companies and associations.
In the context of our statutory audit of the consolidated financial statements we are responsible to consider, in particular based on information that we became aware of during the audit, if the directors’ report on the consolidated financial statements and other information disclosed in the annual report on the consolidated financial statements, are free of material misstatements, either by information that is incorrectly stated or otherwise misleading. In the context of the procedures performed, we are not aware of such a material misstatement.
The non-financial information as required by article 3:32, § 2 of the Code of companies and associations, has been disclosed in the directors’ report on the consolidated financial statements that is part of the section on corporate social responsibility of the annual report (section “CSR Report”). This non-financial information has been established by the company in accordance with the United Nations’ Sustainable Development Goals (“SDG’s”). In accordance with article 3:80 § 1, 5° of the Code of companies and associations we do not express any opinion on the question whether this non-financial information has been established in accordance with these SDG’s.
Statements regarding independence
Our audit firm and our network have not performed any prohibited services and our audit firm has remained independent from the group during the performance of our mandate.
The fees for the additional non-audit services compatible with the statutory audit, as defined in article 3:65 of the Code of companies and associations, have been properly disclosed and disaggregated in the notes to the consolidated financial statements.
- This report is consistent with our additional report to the audit committee referred to in article 11 of Regulation (EU) No 537/2014.
Signed at Zaventem, March 25, 2021
The statutory auditor
Deloitte Bedrijfsrevisoren/Réviseurs d’Entreprises CVBA/SCRL
Represented by Nico Houthaeve