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Table of contents
REPORT OF THE BOARD OF DIRECTORS
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AUDITED CONSOLIDATED 2012 ANNUAL FINANCIAL STATEMENTS
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CONSOLIDATED INCOME STATEMENTS AND CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
CONSOLIDATED CASH FLOW STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF THE STATUTORY AUDITOR
AUDITED NON-CONSOLIDATED 2012 ANNUAL FINANCIAL STATEMENTS
CONDENSED NON-CONSOLIDATED ANNUAL ACCOUNTS
GLOSSARY
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Galapagos Annual Report 2012
Annual Financial Report 2012
This document, Galapagos’ Annual Financial Report 2012, contains all required information as per the Belgian Code of
Companies.
LANGUAGE OF THE ANNUAL FINANCIAL REPORT 2012
According to Belgian law, Galapagos must publish its Annual Financial Report in Dutch. The Company also provides
an English translation. In case of differences in interpretation, the Dutch version will take precedence. Galapagos is
responsible for the translation and conformity between the Dutch and English versions.
AVAILABILITY OF THE ANNUAL FINANCIAL REPORT 2012
This document is available to the public free of charge and upon request:
Galapagos NV
Investor Relations
Generaal De Wittelaan L11 A3
B-2800 Mechelen, Belgium
Tel: +32 15 34 29 00
ir@glpg.com
An electronic version of the Annual Financial Report 2012 is available on the website of Galapagos, www.glpg.com.
Galapagos will use reasonable efforts to ensure the accuracy of the electronic version, but does not assume responsibility
if inaccuracies or inconsistencies with the printed document arise as a result of any electronic transmission. Therefore,
Galapagos considers only the printed version of the Annual Financial Report 2012 to be legally valid. Other information on
the website of Galapagos or on other websites does not form a part of this Annual Financial Report.
FORWARD-LOOKING STATEMENTS
The Annual Financial Report 2012 may contain forward-looking statements, including, without limitation, statements
containing the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “seeks,” “estimates,” “may,” “will,” “could,”
“stands to,” and “continues,” as well as similar expressions. Such forward-looking statements may involve known and
unknown risks, uncertainties and other factors which might cause the actual results, financial condition, performance
or achievements of Galapagos, or industry results, to be materially different from any historic or future results, financial
conditions, performance or achievements expressed or implied by such forward-looking statements. Given these
uncertainties, the reader is advised not to place any undue reliance on such forward-looking statements. These forward-
looking statements speak only as of the date of publication of this document. Galapagos expressly disclaims any obligation
to update any such forward-looking statements in this document to reflect any change in its expectations with regard
thereto or any change in events, conditions or circumstances on which any such statement is based, unless required by law
or regulation.
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Galapagos Annual Report 2012
Report of the Board of Directors
BOARD OF DIRECTORS’ REPORT TO THE SHAREHOLDERS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2012
Ladies and gentlemen,
Dear shareholders,
We present to you our report relating to Galapagos’ consolidated and non-consolidated results during the financial year
ended on 31 December 2012.
Throughout this report the term “Galapagos NV” shall refer solely to the non-consolidated Belgian company. “Galapagos” or
“Group” or “Company” shall refer to the consolidated group of companies.
The companies included in the consolidated results are: Galapagos NV (Mechelen, Belgium); Galapagos BV (Leiden, The
Netherlands); BioFocus DPI (Holdings) Ltd. and its subsidiaries BioFocus DPI Ltd., Cambridge Drug Discovery Holding Ltd.,
Cambridge Genetics Ltd., Cambridge Discovery Ltd. (Saffron Walden, UK); BioFocus, Inc. and its subsidiaries, BioFocus DPI
LLC, and Xenometrix Inc.; BioFocus DPI AG (Basel, Switzerland) and its subsidiary Discovery Partners International GmbH
(Heidelberg, Germany); Inpharmatica Ltd. (Saffron Walden, UK); Galapagos SASU (Romainville, France), Argenta Discovery
2009 Ltd. (Harlow, UK) and Galapagos istraživački centar d.o.o. (Zagreb, Croatia).
1. OVERVIEW OF DEVELOPMENT, RESULT AND POSITION OF THE GALAPAGOS GROUP
Galapagos made a strong claim on leadership in the JAK1 space in 2012. The Company announced the AbbVie (formerly
Abbott) agreement for GLPG0634 in February 2012, delivering substantial shareholder value and reducing overall risks for
the Company. GlaxoSmithKline (GSK) announced the initiation of Phase 2 studies in lupus and psoriasis with GSK2586184, a
selective JAK1 inhibitor which was in-licensed from Galapagos in February 2012.
Under the leadership of newly appointed Chief Scientific Officer Dr Piet Wigerinck, Galapagos went on to deliver significant
alliance milestones and make solid progress in its proprietary pipeline in 2012. Today Galapagos stands resolutely among
the top European biotechnology companies, with one of the most promising new drugs in rheumatoid arthritis in its
development portfolio, prospects for more clinical Proofs-of-Concept before end 2014, and substantial financial resources to
bring other potential breakthrough drugs further toward the clinic in the coming years.
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Galapagos Annual Report 2012
R&D division gains momentum in 2012, expands opportunities beyond GLPG0634
Galapagos increased the momentum of its R&D pipeline by the end of 2012, ending the year with 4 clinical, 6 pre-clinical,
and more than 30 discovery programs. Galapagos is on track to have a mature pipeline of three programs in Phase 2
studies and multiple Phase 1 programs by end 2013.
On 29 February 2012, Galapagos and AbbVie announced a global collaboration to develop and commercialize GLPG0634
to treat autoimmune diseases. Under the terms of the agreement, AbbVie made an upfront payment of $150 million for
rights related to the global collaboration. This upfront payment will be recognized over 30 months and will contribute to
Galapagos’ revenues over the coming three years. Upon successful completion of the rheumatoid arthritis Phase 2 studies
by Galapagos, AbbVie will license the program for a one-time fee of $200 million. AbbVie will assume sole responsibility for
Phase 3 clinical development and will have global manufacturing rights. Pending achievement of certain developmental,
regulatory, commercial and sales-based milestones, Galapagos will be eligible to receive additional milestone payments from
AbbVie, potentially amounting to $1 billion, in addition to tiered double-digit royalties on net sales upon commercialization.
Furthermore, Galapagos retains co-promotion rights in the Benelux.
GLPG0634 is the first selective JAK1 inhibitor in Phase 2 to potentially treat multiple autoimmune diseases, such as RA.
After the excellent results of the single center Proof-of-Concept study with GLPG0634, Galapagos proceeded with a
Phase 2, dose-range finding study over multiple study centers. This trial confirmed the safety and clinical benefit of the drug
to rheumatoid arthritis (RA) patients within 4 weeks. Statistically significant improvements were seen for DAS28, HAQ-DI,
ACR and CRP for the 300mg dose. Galapagos will initiate Phase 2b clinical studies in RA in the second quarter of 2013.
In view of future Phase 2b studies in the US, Galapagos opened an Investigational New Drug (IND) application for
GLPG0634 with the US Food and Drug Administration. Galapagos initiated a Phase 1 drug interaction study in the United
States. Acceptance of the IND was based on a review by the FDA of the GLPG0634 data package, including chemical/
pharmaceutical data, preclinical data up to the formal 13-week toxicology studies, and currently completed clinical studies.
In February 2012, GSK exercised the exclusive option to license GLPG0555 and GLPG0778 and recently announced the
initiation of Phase 2 studies with GLPG0778 in psoriasis and lupus. Galapagos is eligible to receive up to €34 million in
downstream milestones plus up to double-digit royalties on commercial sales arising out of these in-licensed programs.
In October 2012 Galapagos started its second Phase 1 clinical study with GLPG0974, a GPR43 inhibitor being developed
to treat chronic neutrophil-driven inflammatory conditions such as inflammatory bowel disease (IBD). GLPG0974 is the
first ever clinical compound directed against GPR43. In a First-in-human study, GLPG0974 showed excellent safety and
pharmacokinetics, as well as up to 90% inhibition of a relevant biomarker. In the second Phase I study, the safety and
tolerability of multiple ascending doses of GLPG0974 was evaluated for 2 weeks in 32 healthy volunteers. Aim of the study
was also to confirm the strong biomarker signal. Galapagos intends to initiate and complete a Phase 2 Proof-of-Concept
study with GLPG0974 in ulcerative colitis patients in 2013.
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In the field of oncology, GLPG0187, an integrin receptor antagonist, was tested in a Phase 1b, maximum tolerated dose
study including cancer patients. This study was extended at investigator request, in order to confirm an early sign of
activity.
GLPG0492, an orally available selective androgen receptor modulator (SARM) was tested in a Phase I Proof of Mechanism
study to assess the effect on muscle function in healthy volunteers. A biomarker effect similar to that of Oxandrolone was
observed, but the data were insufficient for Galapagos to pursue GLPG0492 further in cachexia, and further development of
the compound was discontinued.
The R&D division delivered progress in both alliances and proprietary programs, strengthening the depth of the pipeline
beyond the success with GLPG0634. Three pre-clinical candidates and other milestones were announced in the alliances in
2012. Today, Galapagos is progressing 14 different novel target-based programs within the alliances, including five pre-
clinical candidates. Galapagos aims to have at least two of these alliance candidates move into Phase 1 before end 2013.
In 2012, a number of new proprietary opportunities emerged and progressed in 2012. In an antibiotic program proprietary
to Galapagos, a candidate drug CAM-1 was selected. This newly discovered antibiotic works by inhibiting the target DNA
pol IIIα (DnaE), an enzyme present in all bacteria and essential for their growth; this target is absent in humans. This
candidate shows strong activity against all tested drug resistant Staphylococcus aureus, including hospital and community
acquired MRSA strains. Galapagos aims to enter the clinic in the first quarter of 2014, with a Proof of Concept study
thereafter. Galapagos was also awarded a grant from the Flemish agency for Innovation by Science and Technology (IWT)
to exploit the Company’s know-how in DNA pol IIIα (DnaE) to discover new antibiotic treatments against additional bacterial
species beyond what has been developed thus far.
In cystic fibrosis, an area in which Galapagos intends to progress medicines all the way to the market, the Company
identified a potentiator series which showed potency higher than that of Kalydeco™ in both the GD551 and delF508
mutations in Ussing chamber assays. Galapagos will continue to work on lead optimization of this series, with the aim to
nominate a pre-clinical candidate before year end.
Good performance of the service division
Both companies in our service division, BioFocus and Argenta, performed well in 2012. They were able to grow their
external revenues by 10% and generated a segment result in line with 2011. BioFocus and Argenta continue to provide
the kind of scientific quality and timely execution that clients in drug discovery need when looking to resource work on
their pipelines. In 2012, the service division announced significant collaboration deals with partners such as Ono Pharma,
AstraZeneca, Almirall, ANTABIO, and the University of Cambridge. Within BioFocus, the decision was
taken to close the Basel site and move the high-throughput screening activities from Basel to Chesterford Park in the UK.
Personnel
At the end of 2012, the total number of employees working within the Group amounted to 796.
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Environment
All companies of the Group continue to hold the necessary permits for their exploitation, and to respect the applicable
environmental rules.
Group financial results
Revenues
Galapagos’ revenues for the full year 2012 amounted to €153 million, an increase of 36% compared to 2011. The service
division focused efforts on growing their external business in 2012, with external revenues of €65.8 million growing +10%
over 2011, despite closure of BioFocus’ Basel operations and the resulting transfer of the high-throughput screening
activities to Chesterford Park in the UK. The R&D division reported total revenues of €87.2 million, reflecting considerable
milestone achievements in the alliances and €37.2 million in revenue recognition from the $150 million AbbVie payment.
Result
The Group incurred a net loss for the full year 2012 of €5.7 million, or €0.22 loss per share, compared to a loss of €30.1
million, or €1.13 loss per share in 2011.
The R&D division incurred a segment loss of €3.5 million in 2012, compared to €40.5 million last year. R&D expenses were
€80.3 million, compared to €84.5 million last year.
The BioFocus and Argenta Service division reported a gross margin of 33.7% (2011: 31.7%) on external revenues and
a segment result of €8.2 million, compared to €9.0 million last year. Included in the reported segment result for 2012
were one-off investments to build up the high-throughput screening business in the UK, following the transfer from Basel.
Corrected for these factors, the profitability of the running business in 2012 was in line with 2011.
General and administrative costs from continuing operations increased to €24.5 million, reflecting expenses related to the
now-completed implementation of a company-wide ERP system to achieve better cost control and purchasing efficiencies of
scale and one-off payroll expenses related to closing the AbbVie deal. General and administrative expenses as a share of
group revenues decreased to 16.0% compared to 19.6% in 2011.
Restructuring and integration expenses of €2.5 million relate to the closure of Basel and reorganization costs. Result on
divestment of €2 million is the net of the liquidation costs of dormant legal entities and an earn-out payment received from
Evotec connected with the sale of Compound Focus, Inc. in 2011.
Liquid assets position
Cash on balance was €94.7 million on 31 December 2012. The Company’s liquid asset position of €115.4 million at year
end 2012 (€48.5 million at year end 2011) included €20.7 million in alliance related receivables for which revenues were
recorded in 2012 and payment is expected in Q1 2013. The liquid asset position was negatively impacted by pulled-forward
preparations for the Phase 2b study with GLPG0634, amounting to €10 million spending earlier than planned in 2012, while
total external spend expected for the Phase 2 studies in rheumatoid arthritis remains unchanged.
In addition, Galapagos’ balance sheet holds an unconditional and unrestricted receivable from the French government
(Crédit d’Impôt Recherche)1 amounting to €25 million, payable in three yearly tranches starting in early 2014. A significant
1 Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government
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portion of this receivable could be transferred into cash if needed.
Outlook for 2013
The Phase 2b clinical study for GLPG0634 will start in the second quarter of 2013, on track to delivering the full Phase 2
package to AbbVie in late 2014. The Company expects to make significant progress in both partnered and non-partnered
R&D programs as the pipeline continues to mature across a broad range of therapeutic areas, resulting in three Phase 2 and
multiple Phase 1 programs by end 2013. Management guides for €160 million in Group revenues in 2013.
2. OVERVIEW OF DEVELOPMENT, RESULT AND POSITION OF GALAPAGOS NV
Chapter 2 only concerns the non-consolidated statutory results of Galapagos NV. These results are part of
the consolidated results as discussed above.
Galapagos NV’s operating income in 2012 amounted to €133.7 million compared to €96.7 million in 2011. This increase
is mainly due to increased external revenues of €20.1 million. As a result of capitalization of intangible assets for a third
consecutive year, this increase in operating income was further enhanced by income from capitalized R&D expenses. The
other operating income amounts to €13.3 million, including €1.1 million in grants recognized for R&D projects, €5.8 million
in recharges to subsidiaries and €4.3 million recognized in tax incentives for investments in intangible fixed assets.
The operating costs of 2012 amounted to €133.7 million compared to €118.7 million in 2011. Material purchases decreased
to €3.4 million compared to €3.9 million in 2011. Services and other goods increased to €71.3 million compared to €69.2
million in 2011, mainly as a result of increased software costs related to the ERP system and increased outsourcing for
development of our products.
Personnel costs in 2012 amounted to €11.8 million compared to €9.8 million in 2011. The number of employees at
Galapagos NV at the end of 2012 amounted to 113.
Depreciation increased to €45.5 million in 2012, compared to €33.7 million in 2011. This is due to amortization booked on
the internally generated intangible assets capitalized in 2010, 2011, and 2012.
Galapagos NV’s 2012 financial income increased to €3.1 million compared to €1.8 million in 2011, which can be explained
mainly by interest earned on the $150 million upfront payment received from AbbVie in 2012. Financial costs amounted
to €0.9 million compared to €1.6 million in 2011. This is due to lower cost of unrealized translation differences on the
outstanding receivables and loans in foreign currency.
Extraordinary costs were recorded in 2012 and amount to €29.5 million, of which €28.4 million relates to the extraordinary
write-off of capitalized R&D costs with regard to alliances which have ended or programs which have been placed on hold.
Galapagos NV is capitalizing 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
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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. Capitalized R&D expenses amount to €90.4 million compared to
€84.6 million last year.
Investments in fixed assets in 2012 totaled €1.6 million, excluding the internally generated assets. They consisted mainly of
investments in intangible assets, being software and licenses for implementation of a company-wide ERP system.
Galapagos NV’s cash position at the end of 2012 amounted to €71.6 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 statutory requirements. They show a negative result. The
financial year 2012 closed with a loss of €27.2 million compared to a loss of €32.5 million in 2011. 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 €10.4 million in 2012, compared to a positive impact of €15.0 million in 2011.
In 2012, neither Galapagos NV nor its affiliates made direct or active use of financial instruments such as hedging.
3. ACTIVITIES IN THE AREA OF RESEARCH AND DEVELOPMENT
For a description of Galapagos’ Research & Development activities in 2012, we refer to what is set forth above in section 1,
topic “R&D division gains monumentum in 2012, expands opportunities beyond GLPG0634.”
4. SHARES AND CAPITAL
Capital increases and issue of shares
On 1 January 2012, the share capital of Galapagos NV amounted to €142,928,662.81 represented by 26,421,441 shares.
In the course of 2012 there were four capital increases resulting from the exercise of warrants, resulting in the issuance of
349,306 new shares, an increase of the share capital by €1,886,925.46 and an increase of the issuance premium account
by €854,697.81. At the end of 2012, the total share capital of Galapagos NV amounted to €144,815,588.27 represented by
26,770,747 shares.
On 3 September 2012, the Board of Directors issued 481,140 warrants (after acceptances) within the framework of the
authorized capital, for the benefit of the Directors and certain independent consultants of Galapagos NV, and of employees
of the Group under a new warrant plan (“Warrant Plan 2012”). The offer of warrants to the Company’s Directors under
Warrant Plan 2012 was approved by the Extraordinary General Shareholders’ Meeting of 22 August 2012. The warrants
issued under Warrant Plan 2012 have a term of eight years and an exercise price of €14.19.
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Shares and rights attached to the shares
Of the 26,770,747 shares of Galapagos NV outstanding at the end of 2012, 1,652,271 were registered shares, 25,117,716
shares were dematerialized shares and 760 shares were bearer shares. All shares are issued and fully paid up and are of
the same class.
Each share (i) entitles its holder to one vote at the Shareholders’ Meetings; (ii) represents an identical fraction of the capital
and has the same rights and obligations and participates equally in the profit of Galapagos NV; and (iii) gives its holder a
preferential subscription right to subscribe to new shares, convertible bonds or warrants in proportion to the part of the
share capital represented by the shares already held. The preferential subscription right can be restricted or cancelled
by a resolution approved by the Shareholders’ Meeting, or by the Board of Directors subject to an authorization of the
Shareholders’ Meeting, in accordance with the provisions of the Belgian Company Code and Galapagos NV’s articles of
association.
Authorized capital
In accordance with the articles of association, the Extraordinary General Shareholders’ Meeting of Galapagos NV authorized
the Board of Directors to increase the share capital of the Company, in one or several times, and under certain conditions
set forth in extenso in the articles of association of Galapagos NV. This authorization was renewed and is valid for a period
of five years from the date of this renewal, i.e. 23 May 2011. The Board of Directors may increase the share capital of
Galapagos NV within the framework of the authorized capital for an amount of up to €142,590,770.44. In 2012, Galapagos
NV’s Board of Directors made use of the right to increase the capital in the framework of the authorized capital on one
occasion: on 3 September 2012, in connection with the issuance of Warrant Plan 2012 under which a maximum of 481,140
new shares can be issued for a total maximum capital increase of €2,602,967.40 (plus issuance premium).
When increasing the share capital within the limits of the authorized capital, the Board of Directors may, in Galapagos NV’s
interest, restrict or cancel the shareholders’ preferential subscription rights, even if such restriction or cancellation is made
for the benefit of one or more specific persons other than the employees of the Company or its subsidiaries.
Changes in share capital
In accordance with the Belgian Company Code, Galapagos NV may increase or decrease its capital by decision of the
Extraordinary General Shareholders’ Meeting taken with a majority of 75% of the votes cast, at a meeting where at least
50% of the share capital of Galapagos NV is present or represented. If the attendance quorum of 50% is not met, a new
Extraordinary General Shareholders’ Meeting must be convened at which the shareholders may decide on the agenda
items, irrespective of the percentage of share capital present or represented at such meeting. There are in this respect no
conditions imposed by the Company’s articles of association that are more stringent than those required by law.
Within the framework of the powers granted to it under the authorized capital, the Board of Directors may also increase
Galapagos NV’s capital as specified in its articles of association.
Purchase and sale of own shares
At the Extraordinary General Shareholders’ Meeting of 23 May 2011, the Board of Directors was authorized to approve the
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acquisition, subject to the provisions of the Belgian Company Code, of Galapagos NV’s own shares representing up to 10%
of Galapagos NV’s capital at a price which may not be lower than €0.05 and not higher than 110% of the price at which
such shares were quoted on the Brussels stock exchange on the day preceding the day of the purchase. This authorization
was granted for a period of 18 months after the publication of such decision in the Annexes to the Belgian State Gazette.
The authorization is also applicable to the acquisition of shares of Galapagos NV by its affiliates. The conditions for the
purchase and sale of own shares are set forth in extenso in the articles of association of Galapagos NV.
On 31 December 2012, neither Galapagos NV nor any subsidiary of Galapagos NV held any shares in Galapagos NV nor did
any third party hold any shares in Galapagos NV on their behalf.
Anti-takeover provisions in Galapagos NV’s articles of association
The Board of Directors is expressly authorized during a period of three years as of the date of the General Shareholders’
Meeting which granted this authorization, i.e. 23 May 2011, to increase Galapagos NV’s share capital within the context of
the authorized capital by contributions in kind or in cash with restriction or cancellation of the shareholders’ preferential
subscription rights, even after the FSMA has notified Galapagos NV of a public take-over offer for the Company’s shares,
provided that the relevant provisions of the Belgian Company Code are complied with, including that the number of shares
issued under such capital increase does not exceed 10% of the shares issued by Galapagos NV prior to such capital
increase. The authorization referred to above may be renewed.
The articles of association explicitly authorize the Board of Directors to acquire and dispose of any shares of Galapagos
NV, without prior approval by the Shareholders’ Meeting, if this is necessary to avoid a serious and imminent harm to the
Company. This authorization was granted for a period of three years from the publication of such decision in the Annexes to
the Belgian State Gazette (i.e. 10 June 2011). This authorization applies under the same conditions to the acquisition of the
shares of Galapagos NV by its subsidiaries.
Anti-takeover provisions under Belgian laws
Under Belgian law, public takeover bids for all the outstanding voting securities issued by the issuer are subject to the
supervision of the FSMA. If the latter determines that a takeover violates Belgian law, it may lead to suspension of the
exercise of the rights attached to any shares that were acquired in connection with the envisaged takeover. Pursuant to
the Belgian law of 1 April 2007 on public takeovers, a mandatory takeover bid must be made when, as a result of its own
acquisition or the acquisition by persons acting in concert with it, a person owns, directly or indirectly, more than 30% of
the securities with voting rights in a company with registered office in Belgium whose securities are admitted to trading
on a regulated or recognized market. The acquirer must offer to all other shareholders the opportunity to sell their shares
at the highest of (i) the highest price offered by the acquirer for shares of the issuer during the 12 months preceding the
announcement of the bid or (ii) the weighted average price of the shares on the most liquid market of the last 30 calendar
days prior to the date on which the obligation of the acquirer to offer the takeover of the shares of other shareholders
starts.
Change of the articles of association
Pursuant to the Belgian Company Code, any amendment to the articles of association such as an increase or decrease in
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the capital of Galapagos NV, and certain other matters such as the approval of the dissolution, merger or de-merger of
Galapagos NV may only be authorized with the approval of at least 75% of the votes validly cast at an Extraordinary General
Shareholders’ Meeting where at least 50% of Galapagos NV’s share capital is present or represented. If the attendance
quorum of 50% is not met, a new Extraordinary General Shareholders’ Meeting must be convened at which the shareholders
may decide on the agenda items, irrespective of the percentage of share capital present or represented at such meeting.
Agreements with and between Shareholders
On the date of this report, Galapagos NV had no knowledge of the existence of any shareholders’ agreements between
Galapagos’ shareholders. Throughout 2012 there were no lock-up agreements in effect between the Company and any of
its shareholders.
Shareholders’ structure
Based on the transparency notifications received by the Company, the shareholders owning 5% or more of the Company’s
shares on 31 December 2012 were Delta Lloyd Asset Management N.V. (3,000,000 shares), Johnson & Johnson (2,350,061
shares), Baker Bros. Advisors, LLC (1,722,066 shares) and The Capital Group Companies, Inc. (1,554,438 shares).
At the end of 2012, the CEO owned 325,348 shares of Galapagos and 655,000 warrants. The other members of the
Executive Team held an aggregate of 48,402 shares and 690,000 warrants. The other members of the Board held an
aggregate of 16,800 shares and 180,710 warrants. Each warrant entitles to one share of the Company.
5. RISK FACTORS
Risk management is embedded in our strategy and is considered important for achieving our operational targets (see section
1, topic ‘Outlook 2013’).
To safeguard the proper implementation and execution of the Group’s strategy, we have an internal risk management
and control system. The Board of Directors has delegated an active role to the Audit Committee members for designing,
implementing and operating the Company’s internal risk management and control systems. The purpose of these systems is
to manage in an effective and efficient manner the significant risks to which the Company is exposed.
The internal control system is designed to ensure:
•
•
the careful monitoring of the effectiveness of our strategy
the Company’s continuity and sustainability, through, for instance, consistent accounting, reliable financial
reporting and compliance with laws and regulations
• our focus on the most efficient and effective way to conduct our business
We have defined our risk tolerance on a number of internal and external factors including:
• business performance measures; operational and net profitability
• financial strength in the long run, represented by revenue growth and a solid balance sheet
•
liquidity in the short run; cash
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• scientific risks and opportunities
• dependence on our alliance partners
• compliance with relevant rules and regulations
•
reputation
The identification and analysis of risks is an ongoing process that is naturally a critical component of internal control.
On the basis of these and the Company’s risk tolerance, the key controls within the Company will be registered and the
effectiveness will be monitored. If the assessment shows the necessity to modify the controls we will do so. This could be
the situation if the external environment changes, or the laws or regulations or the strategy of the Company change.
Scientific risks
The Group operates adequate standard operating procedures to secure the integrity and protection of its research and
development activities and results, and the optimum allocation of its R&D budgets. The progress of the most important
research and development programs is continuously monitored by the Executive Committee; they are discussed with the
Board at least once per quarter, and Board members with expertise in clinical and scientific matters occasionally attend
meetings with scientific staff to discuss and assess such programs.
Reliance on key staff and management
Our ability to attract and retain highly skilled personnel on acceptable terms is limited by the competition for qualified
personnel. The absence of professionals could have a material adverse effect on business, financial condition, results of
operations and prospects. Adequate remuneration and incentive schemes and the sharing of the Company’s knowledge
amongst key employees mitigate this risk. In the recent past, Galapagos has continued to be successful in attracting and
retaining qualified employees.
Operational risk
• This risk can take many forms including business interruption, inappropriate behavior, lack of
performance. This risk has a high potential impact, but is mitigated by policies and procedures such as
surveillance of the buildings, annual appraisals and bonuses, and monthly management meetings.
•
Internal and external IT systems
Continuing an uninterrupted performance of our IT system is critical to the success of our business strategy
and operations. A recovery plan for data has been implemented, as well as a system for interception of
power failures. Fire walls and virus scanners provide an additional and adequate protection. The Company’s
personnel should adhere to continuity plans and procedures regarding access rights and installation of different
programs.
Safety risk: handling materials potentially hazardous to health
The very limited use of hazardous materials, the existence of stringent health and safety operation procedures, and regular
inspections and safety days significantly decrease the potential impact as well as the estimated likelihood of the risk.
Furthermore, the Group employs quality & environmental health and safety managers who closely monitor laboratory safety
and continuously seek to improve quality and safety conditions.
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Finance risk
• Accounting estimates – impairment of goodwill
The Group constantly uses estimates and assumptions concerning the future, especially when performing
impairment tests on goodwill and (in)tangible assets. These tests are performed on a realistic and regular
basis.
• Credit risk
Credit risk represents the risk of financial loss caused by default of the counterparty. This risk is within
acceptable boundaries as clients are major, well-respected, creditworthy, international pharmaceutical
companies, research foundations, and biotech companies.
• Taxation
The Company may incur unexpected tax charges, including penalties, due to the failure of tax planning or
due to the challenge by tax authorities on the basis of transfer pricing.
Any changes to Belgian and international taxation legislation or the interpretation of such legislation by tax
authorities may influence the Group’s activities, financial situation and results. Such potential changes and
their impact are monitored carefully by management and its advisors.
• Changes in accounting standards
Any changes to the accounting standards may influence the Group’s financial situation and results. Here as
well, such potential changes and their impact are carefully monitored.
• Financial and liquidity risk
Liquidity risk represents the risk that an entity will encounter difficulty in meeting obligations associated with
its financial liabilities.
The Company monitors its cash on a regular basis by means of cash forecasts and sensitivity analyses. The
Group’s net operating cash flow after investments was positive in 2012 (cash flow) as opposed to a negative cash
flow (cash burn) in 2011, which was mainly due to the $150 million upfront payment received from AbbVie in
2012. To fund its operations, research activities, and acquisitions, the Group may need additional cash, which
may not be available on acceptable terms when required, if at all. At the moment the Group has no financial debt
except limited financial lease obligations.
• Foreign exchange risk
As a large part of the revenues and costs are denominated in currencies other than the Euro, our functional
currency, the Company has considerable potential exposure to foreign currency fluctuation. The effect of
these fluctuations is recorded in the profit & loss statement or in the consolidated equity, in accordance with the
applicable accounting standards. The Company makes efforts to limit the exposure by closing contracts in local
currencies and by matching revenues and costs in a foreign currency. In order to further reduce this risk,
Galapagos implemented a netting system within the group in the course of 2012, which restrains intra-group
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payments between entities with a different functional currency.
Galapagos annually establishes a detailed budget that is submitted to the Board of Directors for review and approval. The
Group’s performance compared to the budget is continuously monitored by the Executive Committee and is discussed
with the Board at least once per quarter. For the establishment of its financial information, the Group has processes and
methods in place that enable the preparation of consolidated financial statements for its annual and mid-year reporting,
and more often if required. The Group’s management reporting systems secure the generation of consistent financial and
operational information, allowing management to follow-up the Group’s performance on a daily basis. In view of continuous
improvement the Group has implemented a new and advanced integrated ERP system.
Intellectual property risk
The Company’s commercial success depends in part on the ability to obtain, maintain and enforce adequate protection of
the intellectual property rights, including patents, in technologies and products and this in a large geographical zone. The
development of grantable patents is not obvious. The possession of patents increases the revenues and is an important
tool when negotiating with potential partners. The outcome of legal disputes concerning patent infringement is difficult
to predict. Legal proceedings over IP rights can be time consuming and expensive and should be avoided by constant
monitoring of published patents and patent applications. Galapagos endeavors to protect its proprietary technologies and
know-how by entering into confidentiality and proprietary information agreements with employees and partners, and by
setting up special procedures (e.g. with respect to the handling of the laboratory books). Future changes in IP law also can
substantially influence the Company’s operations.
Market risk
• Possible volatility share price
The market price of the shares might be affected by a variety of factors outside management control, such
as the global economic situation, the business development of competitors, sector mergers and acquisitions;
it is difficult to mitigate this risk.
• Economic risk due to failure in confidence
General public confidence about future economic conditions or performance of Galapagos or its suppliers or
customers may impact the ability or willingness of others to trade with the Company.
• Dilution through exercise of warrant plans
The exercise of existing warrants can significantly increase the number of shares.
•
Inability to distribute dividends
The Group has a limited operating history and future profitability cannot be guaranteed. Galapagos NV has
significant losses carried-forward and will thus not be able to distribute dividends in the near future. This can
cause people to refrain from investing in the Company’s stock.
• Acquisition / integration risk
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The acquisition and integration of other companies, as part of the Company’s strategy to expand its business
through acquisition of other businesses, present challenges to Galapagos’ personnel and operations.
Specific risks are unanticipated costs, loss of key personnel, the inability to obtain the expected benefits and
synergies of the merger. Galapagos makes sure that every acquisition is preceded by a thorough due
diligence and sets up systems that allow a smooth integration of the acquired businesses and teams.
• Reputational damage
High ethical standards are maintained throughout the entire organization at all levels. Laws and guidelines
are complied with.
Interrupted product supply - loss of key suppliers
A reliable supply of materials is required in order to eliminate production delays.
Most goods and services are provided by several different suppliers, which mitigates the risk of loss of key suppliers.
Expanding the suppliers’ network can be time consuming as all source suppliers are subject to rigorous ethical and quality
control standards. The suppliers should perform as contractually required or expected.
Reliance on key clients
Certain relationships represent significant sources of revenues. Loss or deterioration of these relationships can significantly
impact the results of the Group. The weakness of the global economy and the ongoing financial crisis has adversely
affected businesses. This risk can be mitigated through multiple alliances with different partners, and through strengthening
relationships with existing clients.
Competition: organizations providing similar contract research – price pressure in the contract research
market
The Group faces competition from contract research companies that may bring products and services to the market which
are more competitive or affordable and which might hurt the position of the service operations.
Legal risks
• Possible litigations and claims – product liability
Product liability cases and claims may give rise to adverse regulatory action and/or negative market perception
of the Company and its products. In most cases damages can be controlled. The likelihood of claims increases
with the increase in size and visibility of the Company. The company carries appropriate insurance policies to
cover its risks, including for its clinical trials.
• Failure to comply with laws and regulations – penalties or cease operations
The industry in which the Company operates is strictly regulated. If the Company fails to meet strict regulatory
requirements, the Company may be required to pay penalties or even to close down certain facilities.
• Change in alliance strategy
Current or prospective licensees and partners may use or develop alternative strategies, technologies or
competing products, independently or in collaboration with others. This strategic shift in business focus can
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seriously impact the Company’s results.
• Compliance with Corporate Governance
Galapagos has always in all material respects been compliant with the Corporate Governance Code. Members of
the Executive Committee and of the Board are expected to conduct their duties according to the highest ethical
and professional business standards.
Product development
Pre-clinical testing, clinical research and regulatory approval of a pharmaceutical or medical product is a very intensive and
costly process, and is subject to a high degree of failure in every phase. In some cases regulatory approval might not be
received, or might be restricted to certain geographical regions or indications, or later withdrawn or significantly delayed,
which could impact the receipt of product revenues, if any.
General statement about Galapagos Group risks
According to our current assessment we consider the risks to be manageable and the going concern of the Company not
to be endangered at the time of the current report. Assuming no further deterioration of the global business, financial and
regulatory environment, the Group considers itself well prepared to meet all future challenges.
6. SIGNIFICANT EVENTS ANNOUNCED AFTER THE END OF THE FINANCIAL YEAR
Galapagos announced the following significant events after 31 December 2012:
• 9 January: Galapagos delivers candidate drug in GSK alliance and receives milestone payment (included in 2012
revenues
• 10 January: Galapagos receives €2.7 million IWT grant for antibacterial research (not included in 2012 revenues)
• 15 January: Galapagos creates Fidelta, a third Galapagos service division
• 15 January: Galapagos acquires Cangenix, a structure-based drug discovery company
• 16 January: Galapagos delivers candidate drug in its alliance with Janssen Pharmaceutica NV and receives
€4 million milestone payment (included in 2012 revenues)
• 30 January: Galapagos receives €2.5 million IWT grant for IBD research (not included in 2012 revenues)
• 5 February: Galapagos announces GSK2586184 JAK1 molecule progresses to Phase 2 studies
• 4 March: Katrine Bosley appointed to Galapagos’ Board of Directors as of 27 February 2013 and resignation of
Ferdinand Verdonck effective 26 February 2013
• 6 March: Galapagos receives €7.5 million in Servier alliances (included in 2012 revenues)
• 8 March: Galapagos and Roche conclude strategic alliance and Galapagos receives a payment of €5.75
million for work completed in 2012 (included in 2012 revenues)
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7. GOING CONCERN AND ACCOUNTING STANDARDS
The 2012 consolidated results are negative for Galapagos, and the balance sheet shows a loss carry-over. The Board has
examined the statements and accounting standards. Taking into account the solid cash position, in particular after the
conclusion of the GLPG0634 deal with Abbott in February 2012, and the favorable outlook of developments of Galapagos
NV’s drug discovery activities and its subsidiaries’ activities including GLPG0634, the Board is of the opinion that it can
submit the annual accounts on an ongoing concern basis.
The Board is also of the opinion that additional financing could be obtained, if required. Whilst Galapagos NV’s cash position
is sufficient for the Company’s immediate and midterm needs, the Board points out that if the R&D activities continue to
go well, Galapagos NV may seek additional funding to support the continuing development of its products or to be able to
execute other business opportunities.
8. CORPORATE GOVERNANCE STATEMENT
8.1. General
Galapagos uses the Belgian Corporate Governance Code 2009 (which can be found on
www.corporategovernancecommittee.be) as reference code. Galapagos’ Board of Directors approved a Corporate
Governance Charter. The Charter, which is available on the Company’s website, is applicable in addition to the law, the
Company’s articles of association and the corporate governance provisions included in the Belgian Company Code and the
Belgian Corporate Governance Code 2009.
The Company’s Corporate Governance Charter includes the following specific rules and charters:
• Charter of the Board of Directors
• Charter of the Audit Committee
• Charter of the Nomination- and Remuneration Committee
• Charter of the Executive Committee
• Dealing Charter (which provides procedures and guidelines to prevent abuse of insider knowledge and to
prevent insider trading and market manipulation).
The Board of Directors intends to comply with the provisions of the Belgian Corporate Governance Code at all times.
Nevertheless, it is possible not to comply with certain corporate governance provisions when the specific circumstances
are taken into account. In such cases, which are mentioned in this chapter, the Company applies the “comply or explain”
principle.
8.2. Board of Directors
Galapagos’ Board of Directors consists of minimum five and maximum nine members, including the Chairman and the CEO.
The Chairman is a non-executive Director and does not hold the office of CEO. The Board of Directors consists of at least
three independent Directors.
Except for Mr Onno van de Stolpe, all Board members are non-executive Directors.
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In 2012, the following persons were members of the Board: Dr Raj Parekh (Chairman), Ir Onno van de Stolpe (CEO), Dr
Harrold van Barlingen, Mr Ferdinand Verdonck, Dr Werner Cautreels, Mr Howard Rowe and Dr Vicki Sato; the latter four
Directors were appointed as independent Directors within the meaning of article 526ter of the Belgian Company Code.
The Board’s role is to pursue the long-term success of the Company by assuming the authority and responsibility of the
Board set out in Belgian Corporate law and by providing entrepreneurial leadership and enabling risks to be assessed and
managed. The activities exercised and offices held by each of the Directors reflect the expertise and experience of each of
them.
In 2012, the Board of Directors held 4 regular meetings, 9 meetings by telephone conference to discuss specific matters and
1 meeting in the presence of a notary (the latter relating to the issuance of the Warrant Plan 2012).
The attendance rate (in person or by written proxy to a fellow Director) for the Board members in function at 31 December
2012 was as follows: Dr Parekh 100%, Mr Van de Stolpe 93%, Mr Verdonck 100%, Dr Van Barlingen 86%, Mr Rowe 100%,
Dr Cautreels 100% and Dr Sato 79%. The overall attendance rate was 94%. In addition, certain Board members (including
Dr Cautreels and Dr Sato) also attended a number of review meetings with scientific staff of the Group.
The Board of Directors acts as a collegial body. The Company does not have a formalized process in place to evaluate the
Board, its Committees and its individual Directors; the Board is of the opinion that such evaluation can occur on an ongoing
and informal basis within the framework of the meetings of the Board and its Committees.
In connection with the requirements of the Law of 28 July 2011 relating to certain changes to the Belgian Company Code,
in particular with respect to gender diversification in the Board of Directors, the Board will continue to monitor the gender
diversification requirements.
8.3. Committees
The Board of Directors has installed a Nomination and Remuneration Committee, an Audit Committee and an Executive
Committee.
At the end of 2012, the Nomination- and Remuneration Committee consisted of the following three non-executive Directors:
Dr Parekh (Chairman), Dr Cautreels and Mr Rowe, the majority of whom are independent Directors. The Committee has the
necessary expertise in the area of remuneration policy.
The Nomination and Remuneration Committee’s role is twofold: providing recommendations to the Board of Directors
regarding the remuneration policy of Galapagos and the remuneration of Directors and members of the Executive
Committee, and selecting the appropriate candidates and making recommendations to the Board of Directors in relation to
the appointment of Directors and members of the Executive Committee.
The Nomination and Remuneration Committee meets at least twice per year. In 2012, the Nomination- and Remuneration
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Committee made recommendations on 3 occasions, dealing with matters including grants of warrants and bonuses, new
warrant plans, and salary increases. The Nomination and Remuneration Committee acts as a collegial body. The overall
attendance (present or represented) at the Nomination and Remuneration Committee meetings in 2012 was 100%. The
CEO attended the meetings of this Committee when the remuneration of the other members of the Executive Committee
was discussed.
At the end of 2012, the Audit Committee consisted of the following three Directors: Mr Verdonck (Chairman), Dr Parekh and
Dr Cautreels. All members of the Audit Committee are non-executive Directors, the majority of whom are independent. The
Chairman is an independent non-executive Director and has extensive experience in financial matters (including general
accounting and financial reporting) and in matters of audit, internal control and risk control. The other members are
competent in these matters as well.
The role of the Audit Committee is to follow up on financial reporting and verification of financial data, verify and follow up
on the internal control mechanisms, evaluate and verify the effectiveness of the risk assessment systems, and follow up on
the internal and external audit activities.
In 2012, the Audit Committee held 4 meetings, in which it dealt with matters including audit review, authorities and
procedures, risk management and the ERP system. The Audit Committee acts as a collegial body. The overall attendance
(present or represented) at the Audit Committee meetings in 2012 was 100%. Some of the meetings were attended by the
Statutory Auditor.
The tasks of the Executive Committee include the following matters: the research, identification and development
of strategic possibilities and proposals which may contribute to Galapagos’ development in general, the drafting and
development of policy guidelines to be approved by the Board of Directors, Galapagos’ management through, among other
things, the implementation of policy guidelines, the supervision of the performance of the business in comparison with the
strategic goals, plans and budgets, and the support of the CEO with the day-to-day management of Galapagos.
On 31 December 2012, the Executive Committee consisted of five people: Mr Van de Stolpe (CEO, also executive Director),
Dr Andre Hoekema (Senior Vice President, Corporate Development), Dr Chris Newton (Senior Vice President, Galapagos
Services), Dr Piet Wigerinck (Chief Scientific Officer) and Mr Guillaume Jetten (CFO).
The Executive Committee meets regularly, and in principle once per month.
8.4. Remuneration report
8.4.1 Procedure for establishing the remuneration policy and setting the remuneration for members of the
Board of Directors and of the Executive Committee
The procedure for establishing the remuneration policy and setting remuneration for members of the Board of Directors
and of the Executive Committee is determined by the Board of Directors on the basis of proposals from the Nomination and
Remuneration Committee, taking into account relevant benchmarks from the biotechnology industry and, for the members
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of the Executive Committee, also the Group’s performance rating system.
The remuneration of the members of the Board and the grant of warrants to members of the Board are submitted by the
Board for approval to the General Shareholders’ Meeting, and are only implemented after such approval.
The fixed and variable remuneration of the CEO (who is a member of the Board) is established by the Board of Directors
based upon an authorization from the General Shareholders’ Meeting. The fixed and variable remuneration of, and grant of
warrants to, the other members of the Executive Committee is established by the Board of Directors.
8.4.2 Remuneration policy
a) Principles
The objective of Galapagos’ remuneration policy is to attract, motivate and retain the qualified and expert individuals
that the Group needs in order to achieve its strategic and operational objectives. In light of the remuneration policy,
the structure of the remuneration package for the Executive Committee is designed to balance short-term operational
performance with the long-term objective of creating sustainable value within the Group, while taking account of the
interests of all stakeholders.
The remuneration of the non-executive Directors consists of a fixed annual amount, irrespective of the number of Board
meetings that are held during the year, with a correction principle that, in the event a Director’s presence rate at Board
meetings is below 75%, the annual remuneration will be proportionally decreased. The remuneration of the non-executive
Directors does not contain a variable part. The Board fees are paid in quarterly installments at the end of each calendar
quarter.
The remuneration of the CEO (who is an executive Director) and of the other members of the Executive Committee consists
of a fixed amount and of a variable part (bonus). Remuneration increases and bonuses are merit-driven and based on
the Group’s performance rating system that is based on individual performance (including exceptional deliverables) in
combination with the overall performance of the Group, compared to the level of achievement of individual and corporate
objectives that are established annually. The corporate objectives and the CEO’s objectives are established annually by the
Board of Directors, and the objectives of the other members of the Executive Committee are established annually by the
CEO and are in relation to the corporate objectives set by the Board. For 2012 the corporate objectives included elements
of revenue, cash flow, operating profitability, clinical trial results and licensing; all of these objectives were considered to
be of equal importance. The level of achievement of the objectives for the CEO is reviewed at the end of each year by the
Remuneration Committee and discussed and finally established by the Board, and the level of achievement of the objectives
of the other members of the Executive Committee is assessed by the CEO at the end of the year in connection with appraisal
discussions, discussed by the Remuneration Committee and finally established by the Board of Directors.
Pursuant to the rules of the Senior Management Bonus Scheme established in 2006, 50% of the bonus is paid immediately
around year-end and the payment of the other 50% is deferred for three years. The deferred 50% component is
dependent on the Company’s share price change relative to the Next Biotech Index (which tracks the Company’s peers).
The Company’s share price and Index at the start and end of the 3-year period is calculated by the average price over the
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preceding and last month of the 3-year period, respectively.
•
If the Company’s share price change is better than or equal to the change in the Next Biotech Index, the deferred
bonus will be adjusted by the share price increase/decrease and paid out.
•
If the Company’s share price change is up to 10% worse than the change in the Next Biotech Index, 50% of
the deferred bonus will be adjusted by the share price increase/decrease and paid out, and the remainder will be
forfeited.
•
If the Company’s share price change is more than 10% worse than the change in the Next Biotech Index the
deferred bonus will be forfeited.
To be entitled to any deferred payment under the bonus scheme the beneficiary must still be in the Company’s employ.
b) Relative importance of the various components
The CEO’s bonus can be maximum 100% of the fixed part of his annual remuneration of the year for which the bonus is
awarded. The aggregate bonuses of the other members of the Executive Committee’s remuneration can be maximum 60%
of the total amount of the fixed part of their aggregate annual remuneration of the year for which the bonus is awarded.
In addition, the CEO and/or the other members of the Executive Committee enjoy a number of benefits such as pension
payments, insurances and other fringe benefits, the monetary value of which is, however, limited.
c) Performance-related premiums in shares, options or other rights to acquire shares
The Company does not provide for any performance-related premiums in shares, options or other rights to acquire shares.
The warrants granted to members of the Board of Directors (including the CEO) are not considered as a (performance-
related or otherwise) variable remuneration as defined by the Belgian Company Code.
d) Information on the remuneration policy for the next two financial years
The Company currently has no plans to substantially deviate from the remuneration policy used in 2012 and the years
before, as described above, in the next two financial years.
8.4.3 Remuneration of non-executive Directors
Pursuant to the decision of the Annual General Shareholders’ Meeting of 24 April 2012, each of the independent Directors
(i.e. Mr Verdonck, Dr Cautreels, Mr Rowe and Dr Sato) received a fixed annual remuneration of €20,000 in 2012. In
addition, the Annual General Shareholders’ Meeting of 24 April 2012 authorized an additional compensation of €20,000 for
Directors who provide actively and on a regular basis independent clinical and scientific advice to the Board of Directors.
In 2012, this was the case for Dr Cautreels and Dr Sato. The Chairman of the Audit Committee (Mr Verdonck) received an
additional fixed amount of €5,000 for performing his duties as Chairman. The non-executive Director who does not qualify
as independent Directors and who does not represent a shareholder of the Company (Dr Van Barlingen) also received a
fixed annual remuneration for his mandate as a Director of €20,000. In the event a Director has a presence rate at Board
meetings that is below 75% , the amounts referred to above are proportionally decreased. Directors who represent a
shareholder in the Board of Directors would only receive reimbursement of the expenses incurred for participating in the
Board of Directors (there were no such Directors in 2012).
The remuneration of the non-executive Directors does not contain a variable part; hence no performance criteria apply to
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the remuneration of the non-executive Directors.
The Chairman of the Board of Directors, Dr Parekh, does not receive remuneration like the other Directors. However,
a consultancy contract was made with him several years ago, under which he receives an annual fee of £50,000 as
compensation for giving strategic advice.
The Board of Directors resolved to issue the Warrant Plan 2012 for the benefit of the Directors and two independent
consultants of Galapagos NV, and of employees of the Group. In accordance with the resolution of the Extraordinary
General Shareholders’ Meeting of 22 August 2012, the following warrants were offered under such Plan to the non-executive
Directors: Dr Parekh and Mr Verdonck: each 3,780 warrants; Dr Van Barlingen, Dr Cautreels, Mr Rowe and Dr Sato: each
2,520 warrants. All beneficiaries accepted the warrants. These warrants have a term of eight years. The exercise price
of the warrants is €14.19. As regards the Directors, the warrants vest over a period of 36 months at a rate of 1/36th per
month. The warrants cannot be transferred and cannot be exercised prior to the end of the third calendar year following
the year of the grant. The Board of Directors does not consider these warrants as variable remuneration as defined by the
Belgian Company Code as they are not subject to any performance-related criteria.
The Board of Directors points out that provision 7.7 of the Belgian Corporate Governance Code 2009 stipulates that non-
executive Directors should not be entitled to performance-related remuneration such as stock-related long-term incentive
schemes. In deviation to this provision, the Board of Directors has decided to grant warrants to non-executive Directors.
This way, the Company has additional possibilities to attract competent non-executive Directors and to offer them an
attractive additional remuneration that does not affect the cash position of the Company. Furthermore, the grant of
warrants is a commonly used method in the sector in which the Company operates. Without this possibility, the Company
would be confronted with a considerable disadvantage compared to competitors who do offer stock-related incentive
schemes to their non-executive Directors. The Board of Directors is of the opinion that the granting of warrants has no
negative impact on the function of the non-executive Directors.
Except as set forth above, there are no other benefits granted to the non-executive Directors.
8.4.4 Remuneration of members of the Executive Committee that are also a member of the Board of Directors
Mr Van de Stolpe is an executive member of the Board of Directors. As managing Director and CEO, he acts as Chairman
of the Executive Committee. Mr Van de Stolpe does not receive any specific or additional remuneration for his work on the
Board of Directors, as this is part of his total remuneration package in his capacity as member of the Executive Committee.
8.4.5 Criteria and methods to evaluate performance of the CEO and the members of the Executive Committee
in connection with their performance based remuneration
The executive Director (CEO) and the members of the Executive Committee are eligible for performance-based remuneration
(bonus). The level of the achieved bonus is established annually by the Board of Directors on the basis of proposals from
the Nomination and Remuneration Committee (whose proposals are based on recommendations by the CEO for the other
members of the Executive Committee). The award of a bonus is merit-driven and based on the Group’s performance rating
system that is based on annual individual performance (including exceptional deliverables) in combination with the overall
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performance of the Group, compared to the level of achievement of individual and corporate objectives that are established
annually. The corporate objectives and the CEO’s objectives are established annually by the Board of Directors, and the
objectives of the other members of the Executive Committee are established annually by the CEO. For 2012 the corporate
objectives included elements of revenue, cash flow, operating profitability, clinical trial results and licensing; all of these
objectives were considered to be of equal importance. Each of the corporate objectives is clear and measurable so that it is
easy to determine whether or not a specific objective has been achieved or not.
8.4.6 Gross remuneration of the CEO (executive Director, Chairman of the Executive Committee) (Mr Van de
Stolpe) for financial year 2012
a) Base salary (fixed): €402,811
b) Variable remuneration (bonus): as 3 out of 5 criteria from the Senior Management Bonus Scheme to be entitled to a
bonus (i.e. the corporate objectives for 2012) were achieved, a bonus of €253,000 (i.e. 60% of the 2012 base salary) has
been awarded over 2012 of which 50% was paid early January 2013, and the other 50% was deferred for 3 years. The
value of the 50% deferred part of the bonus awarded over 2009 was established at the end of 2012 and resulted in a
payment in early January 2013 of an amount of €389,134 (a multiple of 1.96 of the deferred bonus, as a result of the share
price performance over the period 2009-2012, see section 8.4.2). In connection with the major collaboration agreement
relating to GLPG0634 entered into in February 2012 a special bonus has been awarded by the Board (upon recommendation
of the Remuneration Committee) in the amount of €150,000 of which 50% was payable in April 2012 and the other 50%
was deferred for 3 years.
c) Pension: €70,708.
d) Other components of the remuneration: company car and payments for invalidity and healthcare cover, totaling €25,398.
In its meeting of 18 December 2012 (in application of Article 523 of the Code of Companies without the CEO being present)
the Board of Directors resolved to increase the CEO’s salary by 3% as from 2013. The principles applied for such increase
were in line with the Remuneration Policy described above.
8.4.7 Total (aggregate) gross remuneration of the other members of the Executive Committee for financial
year 2012
a) Base salaries (fixed): €1,356,345.
b) Variable remunerations (bonuses): as 3 out of 5 criteria from the Senior Management Bonus Scheme to be entitled to a
bonus (i.e. the corporate objectives for 2012) were achieved, an aggregate bonus of €319,250 (i.e. 60% of the aggregate
bonus pot for the incumbents in function on 31 December 2012) has been awarded over 2012 of which 50% was paid early
January 2013, and the other 50% was deferred for 3 years. The value of the 50% deferred part of the bonus awarded
over 2009 was established at the end of 2012 and resulted in an aggregate payment of €428,781 (a multiple of 1.96 of the
deferred bonus, as a result of the share price performance over the period 2009-2012, see section 8.4.2). The deferred
bonus was paid in early January 2013. In connection with the major collaboration agreement relating to GLPG0634 entered
into in February 2012 a special bonus has been awarded in the aggregate amount of €375,000 of which 50% was payable in
April 2012 and the other 50% was deferred for 3 years.
c) Pensions: €51,838.
d) Other components of the remunerations: company cars, payments for invalidity and healthcare cover, and other fringe
benefits, totaling €68,659.
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The amounts in this section include normal payments for compensation and benefits made to the two members of the
Executive Committee whose employment with the Group ended in 2012, until the date of cessation of their employment, i.e.
until 14 March 2012 for Dr Graham Dixon and until 14 December 2012 for Dr Radan Spaventi; the numbers do not include
their respective termination payments (see section 8.4.10 below).
In its meeting of 18 December 2012 the Board of Directors resolved to implement salary increases as from 2013 for the
members of the Executive Committee generally in line with the increases awarded in previous years, based on individual
performance and taking into account the relevant benchmarks. The principles applied for such increases were in line with
the Remuneration Policy described above.
8.4.8 Shares, warrants or other rights to acquire shares awarded to, exercised by or expired for the CEO and
other members of the Executive Committee during financial year 2012
In 2012, only warrants have been offered to the members of the Executive Committee, and no shares or other rights to
acquire shares have been awarded. No warrants have expired for members of the Executive Committee in 2012 and, in
aggregate, 45,000 warrants have been exercised by members of the Executive Committee in 2012. The Board of Directors
does not consider the granted warrants as a variable remuneration, as they are not subject to any performance criteria.
The following number of warrants have been offered to and accepted by members of the Executive Committee in 2012:
under the Warrant Plan 2012, issued by the Board of Directors under the authorized capital, on 3 September 2012, to each
of Dr Hoekema, Dr Newton, Mr Jetten and Dr Spaventi (who left the Group in December 2012): 20,000 warrants; to Dr
Wigerinck: 50,000 warrants and to Mr Van de Stolpe: 100,000 warrants. The warrants issued under Warrant Plan 2012 have
an exercise price of €14.19 per warrant, a life time of 8 years, vest only and fully at the end of the third calendar year after
the year of the grant, except for Mr Van de Stolpe, whose warrants vest over a period of 36 months at a rate of 1/36th per
month. The warrants cannot be exercised prior to the end of the third calendar year after the year of the grant; they are
not transferable; and each warrant gives the right to subscribe to one share of the Company.
At the end of 2012, the CEO owned 325,348 shares of Galapagos and 655,000 warrants. The other members of the
Executive Committee in function on 31 December 2012 held an aggregate of 48,402 shares and 690,000 warrants. The
other members of the Board held an aggregate of 16,800 shares and 180,710 warrants. Each warrant entitles to one share
of the Company.
8.4.9 Contractual provisions regarding compensation for severance for the CEO and other members of the
Executive Committee
The contracts between the Company (or its relevant affiliates) and the CEO and other members of the Executive Committee
do not provide for severance compensation. They do not contain notice periods that exceed six months. However, in
the past the Company has entered into undertakings with the CEO and the other members of the Executive Committee,
providing that in case their contract with the Group is terminated as a result of a change of control of the Company, they
would be entitled to a severance compensation of 12 months’ base salary for the CEO and 9 months’ base salary for the
other members of the Executive Committee.
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8.4.10 Severance payment for departing members of the Executive Committee in 2012
In 2012, two members of the Executive Committee have left the Group: Dr Graham Dixon left effective 14 March 2012
and Dr Radan Spaventi left effective 14 December 2012. In connection with their departure, payments have been
made as follows: (i) to Dr Dixon: a total payment of €214,961 (including a compensation in lieu of 6 months’ notice and
a compensation for the deferred parts of bonuses); and (ii) to Dr Spaventi: a total payment of €394,380 (including a
compensation in lieu of 17 week notice, a compensation for the deferred parts of bonuses, and an additional compensatory
payment). Since the additional compensatory payment to Dr Spaventi slightly exceeded the equivalent of 12 month salary,
it was made after review and approval by the Remuneration Committee and the Board. The Board has also resolved to
approve a deviation from the relevant warrant plan rules for the benefit of both Dr Dixon and Dr Spaventi, by waiving, for
them, the application of the principles that a warrant holder can exercise vested warrants only during an exercise period
that falls within six months from the termination of the employment relation, and that upon termination of the employment
relation a part of the warrants may become null and void if the termination takes place before the end of the third calendar
year following the year of the offer.
8.4.11 Claw-back right of the Company relating to variable part of remuneration
There are no contractual provisions in place between the Company and the CEO and the other members of the Executive
Committee that give the Company a contractual right to reclaim from said executives the variable remuneration that would
be awarded based on erroneous financial information.
8.5. Conflict of interest and related parties
In the event of a transaction where a Director’s interest conflicts with the interest of the Company, the Director shall notify
the Board of Directors in advance of the conflict and will act in accordance with the relevant rules of the Company Code
(i.e. article 523 of the Company Code). In addition, the Company’s Corporate Governance Charter includes a policy for
transactions between the Company and its Directors and executive managers. Without prejudice to the procedure defined
in article 523 of the Belgian Company Code, this policy provides that all transactions between the Company and its directors,
its members of the Executive Committee or its representatives need the approval of the Board of Directors, whose approval
can only be provided for transactions at normal market conditions. Such a conflict of interest, even in the event it is not a
conflict of interest as provided for in article 523 of the Belgian Company Code, shall be written down in the minutes, and the
Director or member of the Executive Committee shall not vote.
In 2012, three cases of conflict of interest between the Company and a Director were noted:
(i) In a meeting of the Board of Directors of 14 March 2012, the following was reported, in application of article 523 of the
Belgian Code of Companies, in connection with an exceptional bonus of 150,000 euro for the CEO (an executive Director)
as reward for the major transaction involving GLPG0634: the Chairman declared that Mr Van de Stolpe had informed the
Board of Directors of a conflict of interest, concerning the proposed award to him of said exceptional bonus. It has been
explained to the Board that said exceptional bonus is a justified reward for the major deal-making result achieved by Mr
Van de Stolpe. The exceptional bonus will have no material impact on the financial position of the Company. The Board
shared the opinion of the Remuneration Committee that the proposed bonus is justified and reasonable. Mr Van de
Stolpe did not take part in the deliberation and the vote concerning this decision.
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(ii) In a meeting of 13 June 2012, it was resolved that the Board would make a recommendation to the next General
Shareholders’ Meeting for a grant of warrants to the CEO and the other members of the Board under a proposed
Warrant Plan 2012 as follows: Mr Van de Stolpe 100,000 warrants; Dr Parekh and Mr Verdonck: each 3,780 warrants; Dr
Van Barlingen, Dr Cautreels, Mr Rowe and Dr Sato: each 2,520 warrants. In application of article 523 of the Belgian
Code of Companies the following is reported in connection with the proposed warrant offer for the CEO: The Chairman
declares that Mr Onno van de Stolpe has informed the Board of Directors of a conflict of interest, concerning the
proposed award to him of 100,000 warrants. It has been explained to the Board that the said warrant offer is proposed
upon recommendation of the Remuneration Committee and is a justified reward for the results achieved by Mr Van de
Stolpe. The award of this benefit will have no material impact on the financial position of the company. The Board
shares the opinion of the Remuneration Committee that the proposed benefit is justified and reasonable. Mr Van
de Stolpe did not take part in the deliberation and the vote concerning this decision. Furthermore, as a warrant offer is
proposed to each Director, the same procedure has been followed for each Director individually.
(iii) In a meeting of the Board of Directors on 18 December 2012 the following was reported, in application of article 523
of the Belgian Code of Companies, in connection with the salary increase and bonus for the CEO: the Chairman declares
that Mr Onno van de Stolpe has informed the Board of Directors of a conflict of interest, concerning the proposed award
to him of a salary increase and a bonus. The salary of Mr Van de Stolpe was increased with 3% as of 2013. As 3 out of
5 criteria from the Senior Management Bonus Scheme to be entitled to a bonus (i.e. the corporate objectives for 2012)
were achieved, a bonus of €253,000 (i.e. 60% of his 2012 salary) has been awarded to Mr Van de Stolpe for 2012. It
has been explained to the Board that said salary increase and bonus is a justified reward for the results achieved by Mr
Van de Stolpe in 2012. The salary increase and bonus will have no material impact on the financial position of the
Company. The Board shares the opinion of the Remuneration Committee that the proposed salary increase and bonus
is justified and reasonable. Mr Van de Stolpe did not take part in the deliberation and the vote concerning this decision.
8.6. Other matters
For a description of the most important characteristics of the internal control and risk management systems of the Company
we refer to Section 5 “Risk Factors” of this Report, which is incorporated by reference in this Corporate Governance
Statement.
For information relating to anti-takeover provisions, the major shareholders of the Company and the shares and warrants
held by the members of the Board of Directors and the members of the Executive Committee, we refer to Section 4 “Shares
and Capital” of this report, which is incorporated by reference in this Corporate Governance Statement.
Based on the transparency notifications received by the Company, the shareholders owning 5% or more of the Company’s
shares on 31 December 2012 were Delta Lloyd Asset Management N.V. (3,000,000 shares), Johnson & Johnson (2,350,061
shares), Baker Bros. Advisors, LLC (1,722,066 shares) and The Capital Group Companies, Inc. (1,554,438 shares).
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9. FURTHER INFORMATION
This report of the Board of Directors will also be made available on the Company website: www.glpg.com/investor/financial_
reports.htm.
* * *
The Board of Directors of Galapagos NV, represented by all its members, declares that, as far as it is aware, the statutory
accounts and consolidated financial statements, prepared according to the applicable standards for financial statements,
give a true and fair view of the equity, financial position and the results of the Company and its consolidated companies as
of 31 December 2012.
The Board of Directors of Galapagos NV, represented by all its members, further declares that, as far as it is aware,
this report to the shareholders for the financial year ending on 31 December 2012, gives a true and fair view on the
development, results and position of the Company and its consolidated companies and on the most important risks and
uncertainties with which the Company is being confronted.
On behalf of the Management and the Board of Directors of Galapagos, we would like to thank our shareholders for their
support in 2012, a good year for the Company. We aim to build on the momentum achieved in the pipeline last year, on
track to delivering a mature and broad pipeline of three Phase 2 programs in four indications, multiple Phase 1 studies, and
pre-clinical candidates in the alliances and our internal programs in 2013.
* * *
The Board of Directors will submit to you proposals of resolutions to approve the annual accounts for the financial year
2012, and to discharge the Directors and the Statutory Auditor, for the exercise of their mandate during the financial year
that ended on 31 December 2012.
Mechelen, 22 March 2013
On behalf of the Board of Directors,
(signed)
Onno van de Stolpe
CEO
(signed)
Raj Parekh
Chairman
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Consolidated financial statements
CONSOLIDATED INCOME STATEMENTS AND CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR
THE YEARS ENDED 31 DECEMBER
Consolidated income statement
Thousands of €
Services revenue
R&D revenue
Other income
Total operating income
Services cost of sales
R&D Expenditure
General and administrative costs
Sales and marketing expenses
Restructuring and integration
costs
Result on divestment
Operating profit/loss (-)
Finance income
Finance cost
Profit/loss (-) before tax
Taxes
NET PROFIT/LOSS (-)
NET PROFIT/LOSS (-)
attributable to:
Owners of the parent
Basic result per share (in €)
Notes
Continuing
Continuing
Discontinued
Discontinued
operations
operations
operations
operations
Dec 2012
Dec 2011
Dec 2012
Dec 2011
Group total
Group total
Dec 2012
Dec 2011
65,660
70,608
16,716
57,147
36,322
19,403
2,418
65,660
70,608
16,716
59,565
36,322
19,403
152,984
112,872
2,418
152,984
115,290
-48,179
-80,259
-24,511
-2,134
-2,506
-2,006
-39,091
-84,460
-22,121
-2,273
5,197
-6,610
-29,877
3,820
-2,362
831
-1,647
-1,832
-602
-3,043
-3,058
-48,179
-80,259
-24,511
-2,134
-2,506
-2,006
-40,923
-84,460
-22,723
-2,273
2,154
-6,610
-32,935
28
-4
3,820
-2,362
859
-1,651
-5,152
-30,693
-3,034
-5,152
-33,727
-569
630
-569
630
-5,721
-30,063
-3,034
-5,721
-33,097
-5,721
-0.22
-30,063
-1.14
-3,034
-0.11
-5,721
-0.22
-33,097
-1.25
4
5
5
5
5
5
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7
8
9
10
10
10
Consolidated statement of comprehensive income
Exchange difference arising on
translating of foreign operations
Other comprehensive income
Total comprehensive income
attributable to:
Owners of the parent
29
959
959
1,333
1,333
-956
-956
959
959
377
377
-4,761
-28,730
-3,990
-4,761
-32,720
Galapagos Annual Report 2012
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AT 31 DECEMBER
Assets
Thousands of €
NON-CURRENT ASSETS
Goodwill
Intangible assets
Property, plant and equipment
Deferred tax assets
Non-Current tax receivables
Available for sale financial assets and other non-current assets
CURRENT ASSETS
Inventories
Trade and other receivables
Current tax receivables
Cash and cash equivalents
Other current assets
TOTAL ASSETS
Equity and liabilities
Thousands of €
TOTAL EQUITY
Share capital
Share premium account
Translation differences
Accumulated losses
TOTAL LIABILITIES
NON-CURRENT LIABILITIES
Pension liabilities
Provisions
Deferred tax liabilities
Finance lease liabilities
Other non-current liabilities
CURRENT LIABILITIES
Provisions
Finance lease liabilities
Trade and other payables
Current tax payable
Other current liabilities
Notes
12
13
14
23
9
16
15
17
9
18
17
2012
102,602
37,667
9,424
18,099
1,705
35,288
419
132,727
204
32,494
188
94,647
5,194
2011
95,493
38,880
10,614
19,524
2,166
23,081
1,228
65,561
502
30,010
32,555
2,495
235,329
161,055
Notes
2012
2011
118,447
118,376
19
20
21
29
27
23
24
26
27
24
26
9
26
139,347
72,876
994
-94,770
137,460
72,021
35
-91,140
116,882
42,679
7,868
2,035
676
2,624
165
2,367
7,319
1,426
786
2,403
451
2,253
109,014
35,360
176
240
22,093
3
86,501
393
425
18,068
616
15,857
TOTAL LIABILITIES AND EQUITY
235,329
161,055
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CONSOLIDATED CASH FLOW STATEMENTS FOR THE YEARS ENDED 31 DECEMBER
Thousands of €
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
Notes
2012
32,555
2011
40,397
Result from operations
-6,610
-32,935
Adjustments for:
Depreciation of property, plant and equipment
Amortization of intangible fixed assets
Inventories write off
Exchange gain/loss (-) on translation of net assets of subsidiary
Share based compensation
Gain (-) / Loss (+) on disposal of business
Increase/Decrease (-) provisions
Increase/Decrease (-) pension liabilities (assets)
Profit on disposal of fixed assets
14
13
6,884
2,125
3
-659
2,086
3,004
-359
609
-17
7,727
4,369
244
2,040
-2,154
296
297
Operating cash flows before movements in working capital
7,066
-20,116
Increase (-)/Decrease in inventories
Increase (-)/Decrease in receivables
Increase/Decrease (-) in payables
Cash generated/used (-) in operations
Interest paid and other financial costs
Taxes
17
26
8
291
-16,876
74,249
942
11,032
-3,265
64,729
-11,407
-471
-153
-603
19
NET CASH FLOWS GENERATED/USED (-) IN OPERATING ACTIVITIES
64,104
-11,991
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Thousands of €
Purchase of property, plant and equipment
Purchase of and expenditure in intangible fixed assets
Proceeds from disposal of intangible assets
Proceeds from disposal of property, plant and equipment
Acquisitions (-), disposals (+) of subsidiaries, associates or joint ventures, net of cash acquired
NET CASH USED IN INVESTING ACTIVITIES
Repayment of obligations under finance leases and other debts
Proceeds of Capital and Share premium increases, net of issue costs
Interest received and other financial income
NET CASH GENERATED/USED (-) IN FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH AND CASH EQUIVALENTS
Notes
14
13
13
14
34
7
2012
-5,896
-940
20
379
2011
-4,396
-1,437
44
8,710
-6,437
2,921
-477
2,742
1,769
4,034
391
-343
553
423
633
594
INCREASE/DECREASE (-) IN CASH AND CASH EQUIVALENTS
62,092
-7,842
CASH AND CASH EQUIVALENTS AT END OF YEAR
94,647
32,555
CONSOLIDATED CASH FLOW STATEMENT FROM DISCONTINUED OPERATIONS
Thousands of €
Net cash flows generated/used (-) in operating activities
Net cash generated/used (-) in investing activities
Net cash generated/used (-) in financing activities
Net change in cash and cash equivalents
2012
2011
-1,582
9,291
2
7,711
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CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Share capital
Share premium
Translation dif-
Accumulated
Thousands of €
Balance at 1 January 2011
137,122
account
71,806
ferences
-343
Net result
Other comprehensive income
Total comprehensive income
Share based compensation
Exercise warrants
Other
338
215
Balance at 31 December 2011
137,460
72,021
Net result
Other comprehensive income
Total comprehensive income
Share based compensation
Exercise warrants
Other
1,887
855
378
378
35
959
959
losses
-60,079
-33,097
-33,097
2,040
-4
-91,140
-5,721
-5,721
2,086
5
Total
148,506
-33,097
378
-32,719
2,040
553
-4
118,376
-5,721
959
-4,762
2,086
2,742
5
Balance at 31 December 2012
139,347
72,876
994
-94,770
118,447
The consolidated financial statements of Galapagos were approved by the Board of Directors and authorized for issue, on 22
March 2013. They were signed on its behalf by:
(signed)
Onno van de Stolpe
Executive Director
22 March 2013
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Notes to the Consolidated
Financial Statements
1. GENERAL INFORMATION
Galapagos NV (“the Company” or “Galapagos”) is a limited liability company incorporated in Belgium and has its registered
office at Generaal De Wittelaan L11/A3, 2800 Mechelen, Belgium. In this document references to “the Group” include
Galapagos together with its subsidiaries.
Galapagos NV was founded in 1999 as a joint venture between Crucell BV and Tibotec NV. Galapagos is an integrated drug
discovery company with capabilities from target discovery to clinical proof of concept.
R&D
Galapagos’ R&D operations are specialized in the discovery and development of small molecules. Galapagos funds these
programs through alliance payments from its pharma partners, cash generated by its profitable service operations, licensing
agreements, and its cash reserves. Many of these programs are based on proprietary disease-modifying drug targets in
disease areas for which there is a need for safe and effective medicines.
Services
The Service operations comprise BioFocus and Argenta. Galapagos acquired BioFocus in October 2005 and added to
this business through a number of acquisitions in 2006 and 2008. BioFocus offers a full suite of target-to-drug discovery
products and services to pharmaceutical and biotech companies and to patient foundations, encompassing target discovery
and validation, screening and drug discovery through to delivery of pre-clinical candidates.
Galapagos acquired Argenta in February 2010 and retained this company as a separate operation next to BioFocus.
Argenta’s contract research, which includes expertise in medicinal chemistry, computer-aided drug discovery, in vitro
biology, analytics, in vivo pharmacokinetics, pharmacology and world-leading respiratory models, has a strong reputation for
scientific excellence.
Galapagos acquired GlaxoSmithKline’s research center in Zagreb, Croatia in September 2010, which became part of the R&D
operations. In February 2013 this research center has been renamed Fidelta and will become part of the Service division
once this site has made the operational transition to a services company.
History of the Company since IPO
The shares of Galapagos NV have been listed on Euronext Brussels and Amsterdam since May 2005.
The Group has grown strongly over the last years, both organically and through acquisitions.
At the end of 2005, Galapagos acquired UK-based BioFocus plc. (and its affiliates). The shares of BioFocus were listed
on the Alternative Investment Market (AIM) of the London Stock Exchange and the acquisition occurred through a public
takeover bid in which Galapagos shares were offered in exchange for BioFocus shares. In connection with this acquisition
the shares of Galapagos were then also listed on AIM.
In July 2006, Galapagos acquired the shares of the subsidiaries of Discovery Partners International, Inc. against cash
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Galapagos Annual Report 2012
payment. As a result, US-based ChemRx Advanced Technologies, Inc. (later renamed into BioFocus DPI, Inc.) and the
Swiss DPI AG (now called BioFocus DPI AG) and their respective affiliates, were added to the Group. In September 2006
Galapagos NV raised €11.1 million in a private placement on Euronext Brussels and Euronext Amsterdam amounting to a net
cash contribution of €10.7 million. In December 2006, Galapagos acquired the UK-based Inpharmatica Ltd and the French
ProSkelia SASU (renamed into Galapagos SASU). Both acquisitions were financed with Galapagos shares. Together with
the acquisition of ProSkelia, Galapagos NV raised €31 million in a private placement, amounting to a net cash contribution of
€29.6 million.
In March 2008, Galapagos’ Level 1 American Depositary Receipt (ADR) facility in the United States became effective. In
April 2008 Galapagos cancelled its quotation on AIM. In August 2008, Galapagos acquired the assets and ongoing service
agreements of UK-based Sareum Limited against cash payment. These assets positioned Galapagos’ service division
BioFocus strongly in the growing field of structure-based drug discovery. In November 2008 Galapagos completed the sale
of its San Diego based affiliate BioFocus DPI, Inc. to ChemVentures Pty Ltd.
On 21 October 2009, Galapagos raised €18.2 million in a private placement on Euronext resulting in a net cash contribution
of €17.5 million.
On 1 February 2010, Galapagos acquired the service operations of Argenta Discovery for a €16.5 million cash payment.
On 9 September 2010, Galapagos acquired GlaxoSmithKline’s research center in Zagreb, Croatia. On 21 October 2010,
Galapagos raised €28.7 million in a private placement with international institutional investors.
On 1 June 2011, Galapagos announced the sale of Compound Focus, Inc. to Evotec for €10.25M cash and an additional
€2.25 in potential earn-out payments upon performance of the business in 2012/2013 depending on revenues and certain
corporate milestones; in 2012 an amount of €1 million was received as earn-out payment.
On 29 February 2012, Galapagos and Abbott (now AbbVie) announced a global collaboration to develop and commercialize
GLPG0634 to treat autoimmune diseases. Under the terms of the agreement, AbbVie made an initial upfront payment of
$150 million for rights related to the global collaboration. Revenue recognition of this upfront over 30 months will contribute
to profitability of Galapagos for the coming three years. Upon successful completion of the rheumatoid arthritis Phase 2
studies, AbbVie will license the program for a one-time fee of $200 million if the studies meet certain pre-agreed criteria.
AbbVie will assume sole responsibility for Phase 3 clinical development and global manufacturing. Pending achievement of
certain developmental, regulatory, commercial and sales-based milestones, Galapagos would be eligible to receive additional
milestone payments from AbbVie, potentially amounting to $1.0 billion, in addition to tiered double-digit royalties on net
sales upon commercialization. Galapagos retains co-promotion rights in Belgium, the Netherlands and Luxembourg.
A complete list of all companies directly or indirectly owned by Galapagos is detailed in note 33.
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Galapagos Annual Report 2012
2. ACCOUNTING POLICIES
Basis of preparation
These consolidated financial statements were prepared in accordance with International Financial Reporting Standards
(IFRS) as adopted by the EU. The principal accounting policies used for the preparation of these consolidated financial
statements are set out below.
Standards and interpretations applicable for the annual period beginning on 1 January 2012
• Amendments to IFRS 7 Financial Instruments: Disclosures – Transfers of Financial Assets (applicable for annual
periods beginning on or after 1 July 2011)
Standards and Interpretations published, but not yet applicable for the annual period beginning on
1 January 2012
•
IFRS 9 Financial Instruments and subsequent amendments (normally applicable for annual periods beginning on
or after 1 January 2015)
•
•
•
IFRS 10 Consolidated Financial Statements (applicable for annual periods beginning on or after 1 January 2014)
IFRS 11 Joint Arrangements (applicable for annual periods beginning on or after 1 January 2014)
IFRS 12 Disclosures of Interests in Other Entities (applicable for annual periods beginning on or after 1 January
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2014)
•
•
•
IFRS 13 Fair Value Measurement (applicable for annual periods beginning on or after 1 January 2013)
IAS 27 Separate Financial Statements (applicable for annual periods beginning on or after 1 January 2014)
IAS 28 Investments in Associates and Joint Ventures (applicable for annual periods beginning on or after
1 January 2014)
•
Improvements to IFRS (2009-2011) (normally applicable for annual periods beginning on or after 1 January 2013)
• Amendments to IFRS 1 First Time Adoption of International Financial Reporting Standards – Severe Hyperinflation
and Removal of Fixed Dates for First-time Adopters (applicable for annual periods beginning on or after 1 January
2013)
• Amendments to IFRS 1 First Time Adoption of International Financial Reporting Standards – Government Loans
(normally applicable for annual periods beginning on or after 1 January 2013)
• Amendments to IFRS 7 Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities
(applicable for annual periods beginning on or after 1 January 2013)
• Amendments to IFRS 10, IFRS 11 and IFRS 12 – Consolidated Financial Statements, Joint Arrangements and
Disclosure of Interests in Other Entities: Transition Guidance (applicable for annual periods beginning on or after
1 January 2014)
• Amendments to IFRS 10, IFRS 12 and IAS 27 – Consolidated Financial Statements and Disclosure of Interests in
Other Entities: Investment Entities (applicable for annual periods beginning on or after 1 January 2014)
• Amendments to IAS 1 Presentation of Financial Statements - Presentation of Items of Other Comprehensive
Income (applicable for annual periods beginning on or after 1 July 2012)
• Amendments to IAS 12 Income Taxes – Deferred Tax: Recovery of Underlying Assets (applicable for annual
periods beginning on or after 1 January 2013)
• Amendments to IAS 19 Employee Benefits (applicable for annual periods beginning on or after 1 January 2013)
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Galapagos Annual Report 2012
• Amendments to IAS 32 Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities
(applicable for annual periods beginning on or after 1 January 2014)
•
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (applicable for annual periods beginning on
or after 1 January 2013)
Management is currently investigating the impact of the initial application of these new and amended standards and
interpretations on the Group’s financial statements.
Going concern basis
The consolidated financial statements are prepared in accordance with the International Financing Reporting Standards
(IFRS) published by the International Accounting Standard Board (IASB) and the interpretations issued by the IASB’s
International Financial Reporting Interpretation Committee, which have been endorsed by the European Commission.
The consolidated financial statements provide a general overview of the Group’s activities and the results achieved. They
give a true and fair view of the entity’s financial position, its financial performance and cash flows, on a going concern basis.
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Group reporting
The consolidated financial statements comprise the financial statements of the Company and entities controlled by the
Company (its subsidiaries) established at 31 December each year. Together they constitute the Group. Control is achieved
where the Company has the power to govern the financial and operating policies of another entity so as to obtain benefits
from its activities.
The results of subsidiaries are included in the income statement and statement of comprehensive income from the effective
date of acquisition up to the date when control ceases to exist.
Where necessary, adjustments are made to the financial statements of subsidiaries to ensure consistency with the Group’s
accounting policies.
All intra-group transactions, balances, income and expenses are eliminated when preparing the consolidated financial
statements.
Business combinations
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured as the
aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments
issued by the Group in exchange for control of the acquiree.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under
IFRS 3 are recognized at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are
classified as held for sale in accordance with IFRS 5 Non Current Assets Held for Sale and Discontinued Operations, which
are recognized and measured at fair value less costs to sell. For each business combination, it is determined whether the
non-controlling interest in the acquiree is measured at fair value or at the proportionate share of the acquiree’s identifiable
net assets.
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Galapagos Annual Report 2012
Business combinations and related goodwill/negative goodwill
Goodwill arising on business combinations is recognized as an asset and initially measured at cost, being the excess
of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets, liabilities and contingent
liabilities of the acquired subsidiary less the value of the non-controlling interests at the date of acquisition. Goodwill is not
amortized but tested for impairment on an annual basis and whenever there is an indication that the cash generating unit
to which goodwill has been allocated may be impaired. Goodwill is stated at cost less accumulated impairment losses. An
impairment loss recognized for goodwill is not reversed in a subsequent period.
In cases in which the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent
liabilities less the value of the non-controlling interests exceeds cost, all fair values and cost calculations are reassessed. In
the event that an excess still exists, it is immediately recognized in the profit or loss statement.
Intangible assets
Expenditure on research activities is recognized as an expense in the period in which it is incurred.
An internally generated intangible asset arising from the Group’s development activities is recognized only if all of the
following conditions are met:
• Technically feasible to complete the intangible asset so that it will be available for use or sale
• The Group has the intention to complete the intangible assets and use or sell it
• The Group has the ability to use or sell the intangible assets
• The intangible asset will generate probable future economic benefits, or indicate the existence of a market
• Adequate technical, financial and other resources to complete the development are available
• The Group is able to measure reliably the expenditure attributable to the intangible asset during its
development.
The amount capitalized as internally generated intangible assets is the sum of the development costs incurred as of the date
that the asset meets the conditions described above.
Internally generated intangible assets are amortized on a straight-line basis over their useful lives. If the recognition criteria
for accounting as an intangible asset are not met, development costs are recognized as an expense in the period in which
they are incurred.
Intellectual property, which comprises patents, licenses and rights is measured internally at purchase cost and is amortized
on a straight-line basis over the estimated useful life on the following bases:
• Customer relationships: 1-10 years
•
In process technology: 3-5 years
• Software & databases: 3-5 years
• Brands, licenses, patents & know how: 5-15 years
In the event an asset has an indefinite life, this fact is disclosed along with the reasons for being deemed to have an
indefinite life.
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Galapagos Annual Report 2012
Property, plant and equipment
Property, plant and equipment is recognized at cost less accumulated depreciation and any impairment loss. Depreciation
is recognized so as to write off the cost or valuation of assets over their useful lives, using the straight-line method, on the
following bases:
•
Installation & machinery: 4-15 years
• Furniture, fixtures & vehicles: 4-10 years
Any gain or loss incurred at the disposal of an asset is determined as the difference between the sale proceeds and the
carrying amount of the asset, and is recognized in profit or loss.
Leasehold improvements
Leasehold improvements are depreciated over the term of the lease, unless a shorter useful life is expected.
Assets held under finance lease
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Assets held under finance leases are depreciated over their useful lives on the same bases as owned assets or, where
shorter, over the term of the related lease agreement.
Inventories
Inventories are valued at the lower of cost and net realizable value. The net realizable value represents the estimated sales
price less all estimated costs for completion and costs for marketing, sales and logistics.
Cost of raw materials comprises mainly purchase costs. Raw materials are not ordinarily interchangeable, and they are as
such accounted for using the specific identification of their individual cost.
The costs of work in progress comprise costs of materials, direct costs for personnel, and manufacturing overheads linked to
transportation costs of inventory to the production location.
Molecule screening libraries are stated at cost on acquisition and written off over their useful economic lives, calculated by
reference to utilization, but which in any event cannot exceed 5 years.
Financial instruments
Financial assets and financial liabilities are recognized on the Group’s balance sheet when the Group becomes a party to the
contractual provisions of the instrument.
Tax receivables
Non-current tax receivables are discounted over the period until maturity date according to the appropriate discount rates.
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal value reduced by appropriate allowances for
irrecoverable amounts.
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Galapagos Annual Report 2012
Available for sale financial assets
Available for sale investments are measured at fair value, except for those equity instruments that do not have a quoted
market price in an active market and whose fair value cannot be reliably measured. Those equity instruments are measured
at historical cost.
Gains and losses arising from changes in fair value are recognized directly in equity until the security is disposed of or is
determined to be impaired, at which time the cumulative gain or loss previously recognized in equity is included in the net
profit or loss for the period. Impairment losses recognized in profit or loss for equity investments classified as available
for sale are not subsequently reversed through profit or loss. Impairment losses recognized in profit or loss for debt
instruments classified as available for sale are subsequently reversed if an increase in the fair value of the instrument can be
objectively related to an event occurring after the recognition of the impairment loss.
Cash and cash equivalents
Cash and cash equivalents are measured at nominal value. For the purposes of the cash flow statements, cash and cash
equivalents comprise cash on hand, deposits held on call with banks, other short term deposits, highly liquid investments
and bank overdrafts. Bank overdrafts are presented on the balance sheet as current liabilities.
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Trade payables
Trade payables bear no interest and are measured at their nominal value.
Taxation
Income tax in the profit or loss accounts represents the sum of the current tax and deferred tax.
Current tax is the expected tax payable on the taxable profit of the year. The taxable profit of the year differs from the
profit as reported in the financial statements as it excludes items of income or expense that are taxable or deductible
in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is
calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred income tax is provided in full, using the liability-method, on temporary differences arising between the tax bases
of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not
accounted for if it arises from the initial recognition of an asset or liability in a transaction other than a business combination
that at the time of the transaction affects neither accounting nor taxable profit nor loss.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the
balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income
tax liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be
available against which the temporary differences can be utilized. As such, a deferred tax asset for the carry forward of
unused tax losses will be recognized to the extent that is probable that future taxable profits will be available.
The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount
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Galapagos Annual Report 2012
of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets
relating to tax losses carried forward are recognized to the extent that it is probable that the related tax benefit will be
realized.
Foreign currencies
• Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are valued using the currency of
the primary economic environment in which the entity operates. The consolidated financial statements are
presented in Euros, which is the Company’s functional and presentation currency.
• Transactions and balances in foreign currency
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing
at the dates of transaction. Foreign currency gains and losses resulting from the settlement of such
transactions and from the translation at closing rates of monetary assets and liabilities denominated in
foreign currencies are recognized in the income statement.
Non-monetary assets and liabilities measured at historical cost that are denominated in foreign currencies
are translated using the exchange rate at the date of the transaction.
• Financial statements of foreign group companies
The results and financial position of all Group entities that have a functional currency different from Euro are
translated as follows:
•
Assets and liabilities for each balance sheet presented are translated at the closing rate at the
date of that balance sheet
•
•
•
Income and expenses for each income statement are translated at average exchange rates;
All resulting exchange differences are recognized as a separate component of equity
Such exchange rates are recognized in profit or loss in the period in which the foreign operation is
disposed of.
Revenue recognition
The Group generates revenues from providing research and development services, drug discovery and development
activities, license or royalty agreements, the sale of products, various R&D incentives and from grants. The revenue
recognition policies can be summarized as follows:
• Service business milestone payments are recognized as revenues when achieved
• Research milestone payments are recognized as revenues when achieved. In addition, the payments have
to be acquired irrevocably and the milestone payment amount needs to be substantive and commensurate
with the magnitude of the related achievement. Milestone payments that are not substantive, not
commensurate or that are not irrevocable are recorded as deferred revenue. The Group believes that each
substantive milestone payment represents a separate reasonable value for that phase of the collaboration
agreement
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Galapagos Annual Report 2012
• Non-refundable, up-front payments received in connection with research and development collaboration
agreements are deferred and recognized on a straight-line basis over the relevant periods of continuing
involvement, which is considered to be ended at the moment the first milestone is achieved
• Fees received from partners for options to license molecules or programs are recognized as revenue at fair
value, over the option period unless the license is taken by the partner at an earlier moment than foreseen
in the contract, in which case the remaining fees are recognized as license revenue at that point
• Sales from the BioFocus and Argenta business units typically comprise multiple elements combined in one or
more license agreements. The elements in such multiple element arrangements are accounted for as
follows:
•
•
Sales of molecule collections and reagents are recognized as product revenue when delivered
Contract research and development services are recognized as service revenues at fair value as
such services are rendered. These services are usually in the form of a defined number of the
Group’s full-time equivalent (“FTE”) at a specified rate per FTE
•
Upfront non-refundable license fees are only recognized as revenue at fair value when products
were delivered and/or services were rendered in a separate transaction and the Group has fulfilled
all conditions and obligations under the related agreement. In case of continuing involvement
of the Group, the upfront fee would not be regarded as a separate transaction and the upfront
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non-refundable license fees will be deferred over the period of the collaboration
•
Molecule collections or viruses and technology access fees are recognized as license revenue over
the period in which access is granted
•
Revenue under compound repository services is recorded as costs are incurred, which includes
indirect costs that are based on provisional rates estimated by management. If actual costs are
subsequently calculated to be greater than provisional rates, the additional income is recorded
if there is a contractual right to submit updated claims. A reserve is provided against receivables
for estimated losses that may result from rate negotiations, audit adjustments and/or lack of
government funding availability if it is deemed necessary. To the extent that we incur
adjustments due to rate negotiations or lack of government funding availability, revenue may be
impacted
• The Group receives operational grants and tax credits from certain governmental agencies which support
the Group’s research and development efforts. These grants and tax credits generally aim to partly
reimburse approved expenditures incurred in research and development efforts of the Group and are
credited to the income statement when the relevant expenditure has been incurred and there is reasonable
assurance that the grant or tax credit is receivable
• Revenues from term licenses are spread over the period to which the licenses relate, reflecting the obligation
over the term, to update content and provide ongoing maintenance
• Revenues from perpetual licenses are recognized immediately upon sale to the extent that there are no
further obligations, and only if the license imposes no further restrictions.
Equity instruments
Equity instruments issued by the Company are measured by the fair value of the proceeds received, net of direct issue costs.
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Galapagos Annual Report 2012
Defined contribution plans
Contributions to defined contribution pension plans are recognized as an expense in the income statement as incurred.
Defined benefit plans
For defined benefit plans, the cost of providing benefits is determined using the “projected unit credit method,” with
actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses that exceed 10 per cent of the
greater of the present value of the Group’s defined benefit obligation and the fair value of plan assets as at the end of the
prior year are amortized over the expected average remaining working lives of the participating employees. Past service
cost is recognized immediately to the extent that the benefits are already vested, and otherwise is amortized on a straight-
line basis over the average period until the benefits become vested.
For defined benefits plans, the amount recognized in the balance sheet is determined as the present value of the defined
obligations adjusted for the unrecognized actuarial gains and losses and less any past service costs not yet recognized and
the fair value of any plan assets.
Provisions
Provisions are recognized on the balance sheet when a Group company has a present obligation as a result of a past event;
when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations and a
reliable estimate can be made of the amount of the obligations. The amount recognized as a provision is the best estimate
of the expenditure required to settle the present obligation at the balance sheet date. If the effect is material, provisions
are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of
the time value of the money and, when appropriate, the risk specified to the liability.
The Group as lessee
Leases are classified as finance leases whenever the terms of the lease substantially transfers all the risks and rewards of
ownership to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognized as assets of the Group at their fair value or, if lower, at the present value
of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is
included in the balance sheet as a finance lease obligation. The payments are divided proportionally between the financial
costs and a diminution of the outstanding balance of the obligation, so that the periodic interest rate on the outstanding
balance of the obligation would be constant. Interest is recognized in the income statement, unless it is directly attributable
to the corresponding asset, in which case they are capitalized.
Rents paid on operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits
received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the
lease term.
Impairment of tangible and intangible assets
At each balance sheet date, the Group reviews the carrying amount of its tangible and intangible assets to determine
whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the
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Galapagos Annual Report 2012
recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the
asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of
the cash-generating unit to which the asset belongs.
An intangible asset with an indefinite useful life is tested for impairment annually, and whenever there is an indication that
the asset might be impaired. The recoverable amount is the higher of fair value less costs to sell and value in use.
If the recoverable amount of an asset or cash generating unit is estimated to be less than the carrying amount, the carrying
amount of the asset is reduced to its recoverable amount. An impairment loss is recognized as an expense immediately.
When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been
determined, had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss resulting
from a sale of a subsidiary is recognized as income. In other cases impairment losses of goodwill are never reversed.
Net earnings/loss per share
Basic net earnings/loss per share is computed based on the weighted average number of shares outstanding during the
period. Diluted net loss per share, if any, is computed based on the weighted-average number of shares outstanding
including the dilutive effect of warrants.
Share-based payments
The Group uses equity-settled share-based payments as an incentive to certain employees, directors and consultants.
Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant
date of the warrants is expensed over the vesting period, based on the Group’s estimate of shares that will vest eventually.
Fair value is measured by use of the Black & Scholes model. The expected life used in the model has been adjusted, based
on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioral considerations.
Discontinued Operations
A discontinued operation is a component of the Group that either has been disposed of or is classified as held for sale and
(a) represents a separate major line of business or geographical area of operations, (b) is part of a single coordinated plan
to dispose of a separate major line of business or geographical area of operations, or (c) is a subsidiary acquired exclusively
with a view to resale.
Segment reporting
Segment results include revenue and expenses directly attributable to a segment and the relevant portion of revenue and
expenses that can be allocated on a reasonable basis to a segment.
Segment assets and liabilities comprise those operating assets and liabilities that are directly attributable to the segment
or can be allocated to the segment on a reasonable basis. Segment assets and liabilities do not include income tax items.
For further information, we refer to note 35 “Critical accounting estimates and judgments” and note 36 “Financial risk
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Galapagos Annual Report 2012
management.”
3. SEGMENT REPORTING
Segment reporting is represented in line with information presented to the CODM (Chief Operating Decision Maker). The
CODM within Galapagos has been identified as the Executive Committee.
The Executive Committee assesses the performance of the operating segments by reviewing revenue, adjusted EBIT and
gross margins by segment. Adjusted EBIT excludes the effects of share option compensation charges, impact of the
impairment test of goodwill and restructuring costs from the operating segments. Interest income and charges and tax are
not included in the results for the operating segments that are reviewed by the Executive Committee.
Operating segments
For management purposes, the Group is divided into two operating divisions: R&D and Services. These divisions form the
basis upon which the Group reports its primary segment information.
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Principal activities are as follows:
R&D operations
Galapagos’ R&D operations are specialized in the discovery and development of small molecules. Galapagos funds these
programs through alliance payments from its pharma partners, cash generated by its profitable service operations, licensing
agreement from its proprietary pipeline, and its cash reserves. Many of these programs are based on proprietary disease-
modifying drug targets in disease areas for which there is a need for safe and effective medicines.
Service operations
Galapagos’ service operations offer target-to-drug discovery products and services to pharmaceutical and biotech companies
and to patient foundations, encompassing target discovery and validation, screening and drug discovery through to delivery
of pre-clinical candidates. The service division has two operating units: BioFocus, which Galapagos has operated since 2005,
and Argenta, which Galapagos acquired in February 2010. Galapagos operates these units in parallel, with both providing
additional capacity and drug discovery capabilities to the Galapagos Group.
The operational results of these segments are evaluated monthly at the meetings of the Executive Committee for resource
allocation and performance measurement. Intersegment sales are charged at prevailing rates based on a tax transfer
pricing study.
Segment information about these businesses for the years ended 31 December 2012 and 2011 is presented below.
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Galapagos Annual Report 2012
2012 SEGMENT INFORMATION
Thousands of €
R&D revenue
Service revenue
Other Income
Grant Income
External revenue
Internal revenue
Total revenue
Cost of sales
Gross Margin
Opex
MR EBIT
MR EBITDA
R&D Tax Credits
Discounting of CIR receivables
Reversal of Novartis revenue recognition
Transfer Pricing Effect
Warrants
IFRS Amortization
Other effects
IFRS EBIT - RECURRING
G
N
I
T
R
O
P
E
R
T
N
E
M
E
G
A
N
A
M
G
N
I
R
R
U
C
E
R
-
S
R
F
I
Continuing operations
Discontinued
Unallocated
Galapagos
operations
costs
Group total
R&D
Services
Intersegment
eliminations
65,959
4,676
65,766
10,639
2,216
83,490
65,766
4,145
3,201
87,635
68,967
-5,638
-46,378
81,997
22,590
-85,528
-14,373
-3,531
8,217
896
11,652
4,294
-300
-197
472
-1,372
415
-327
-546
-1,369
-472
-714
-1,694
-557
4,779
-3,004
-1,136
981
17
-7,347
-7,347
2,765
-4,582
4,582
-6,333
-6,333
-6,333
65,959
70,442
10,639
2,216
149,256
149,256
-49,250
100,006
-101,653
-1,647
6,215
4,294
-300
-197
-2,086
-1,279
-884
-6,333
-2,099
-3,004
-1,136
-1,369
981
17
Basel closing costs
G Loss on liquidation of Cambridge Drug Discovery Holdings Ltd
N
I
R
R
U
C
E
R
N
O
N
-
Earn Out Income from Evotec
Restructuring costs
Other Effect on IFRS Non Recurring Result
S
R
F
I
IFRS EBIT
-1,914
1,638
-6,333
-6,610
Service revenues within the R&D segment relate to fee-for-service work performed by the Zagreb site for GSK, as well as fee-for-
service work for Servier.
Unallocated G&A costs relate to corporate costs which mainly consist of management services (i.e. corporate personnel such as
CEO, CFO, investor relations, business development), IT services, legal services, finance services, HR services and IP costs (legal/
patent protection). Depreciation charges and software costs related to the implementation of the company-wide ERP system also
contribute in 2012 to corporate costs as opposed to previous year.
t
s
e
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46
Galapagos Annual Report 2012
2011 SEGMENT INFORMATION
Thousands of €
R&D revenue
Service revenue
Other Income
Grant Income
External revenue
Internal revenue
Total revenue
Cost of sales
Gross Margin
Opex
MR EBIT
MR EBITDA
R&D Tax Credits
Reversal of Novartis revenue recognition
Employee Profit Sharing Reserve
Transfer Pricing Effect
Warrants
IFRS Amortization
Other effects
G
N
I
T
R
O
P
E
R
T
N
E
M
E
G
A
N
A
M
G
N
I
R
R
U
C
E
R
-
S
R
F
I
Continuing operations
Discontinued
Unallocated
Galapagos
operations
costs
Group total
R&D
Services
Intersegment
eliminations
36,306
10,510
2,501
59,575
12
33
49,317
59,619
5,133
10,662
-15,795
54,451
70,281
-15,795
-46,651
54,451
23,630
-94,962
-14,581
-40,512
9,048
-35,413
13,668
5,905
-9,891
9,891
6,052
-197
-107
397
-1,339
218
-222
-397
-693
-2,434
-67
36,306
59,575
10,522
2,534
108,936
108,936
-40,747
68,189
-104,479
-36,289
-26,415
6,052
-197
-107
-2,040
-2,219
-289
-4,826
-4,826
-4,826
156
-8
-2
IFRS EBIT - RECURRING
-35,710
5,456
-10
-4,826
-35,089
Result on divestment of Compound Focus
IFRS EBIT
N
O
N
-
S
R
F
I
G
N
I
R
R
U
C
E
R
5,197
-35,710
10,653
-3,043
-3,053
2,154
-4,826
-32,935
The discontinued operation relates to the service division.
Geographical information
In 2012 the Group’s operations were located in Belgium, Croatia, France, Switzerland, The Netherlands and United Kingdom.
The Group’s R&D division is located in Belgium, Croatia, France and The Netherlands, with its service division operating in the
remaining countries. The Swiss site was closed in the second half of 2012.
In 2012 the Group’s top 10 customers represent 78% of the revenues. Our Group’s client base includes 4 of the top 10
pharmaceutical companies in the world.
t
s
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47
Galapagos Annual Report 2012
4. TOTAL OPERATING INCOME
4. TOTAL OPERATING INCOME
Thousands of €
Sales of goods
Services (selling FTE)
Milestone payments
License fees
Recognition of up-front non refundable fees
Other operating income
Total
2012
2,205
66,885
28,201
38
38,493
17,162
2011
12,548
51,762
29,663
75
1,839
19,403
152,984
115,290
Sales of goods consist of the sale of chemical compound libraries on a non-exclusive basis.
Service revenues include the sale of biology and chemistry FTEs (full time equivalents) and related access fees under
external contracts for the provision of target discovery and drug discovery services.
Milestone payments are mainly earned in the R&D business, as well as the recognition of up-front fees. The up-front fees
are deferred and taken in revenue according to the accounting policies. Up-front fees increased significantly compared to
2011 because of the recognition in 2012 of €37.2 million of the $150 million (€112 million) up-front received from AbbVie for
GLPG0634 in March 2012.
License fees cover the provision of chemistry based software and research tools under license agreements, which can also
involve ongoing maintenance obligations.
Other income includes government grants received towards the cost of internal research and development programs. In
many cases these carry clauses which require the Company to maintain a presence in the same region for a number of
years and invest according to pre-agreed budgets. Failure to do so may result in the repayment of all or part of the grants
received. In addition, other income also includes other incentives received from government agencies, and consists mainly
of the French and Belgian tax credit for research companies and the Dutch and Belgian credit for salaries of research
personnel.
t
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48
Galapagos Annual Report 2012
5. OPERATING COSTS
Operating result has been calculated after charging (-)/crediting:
Services cost of sales
Thousands of €
Personnel costs
Disposables and lab fees
Depreciation
Provisions
Other operating expenses
Total
2012
-24,562
-12,940
-4,132
376
-6,920
-48,179
2011
2011 Pro Forma
-19,891
-6,137
-5,942
-8,556
-40,526
-19,891
-6,137
-5,942
-397
-8,556
-40,923
Compared to 2011, cost of sales increased significantly due to increased personnel costs and lab consumables because of
increased laboratory staff. Also the fact that services performed less work for the R&D segment contributes to increased
cost of sales, as less costs have been shifted to R&D expenditure as compared to last year. Other operational costs mainly
contain travel expenses, consultancy costs and fees.
R&D expenditure
Thousands of €
Personnel costs
Disposables and lab fees
Subcontracting
Premises costs
Depreciation
Impairment
Provisions
Other operating expenses
Total
2012
-27,131
-9,764
-25,393
-9,013
-3,535
-626
-4,796
2011
2011 Pro Forma
-29,716
-22,450
-20,481
-7,573
-3,002
-576
85
-747
-27,736
-12,568
-24,538
-8,908
-3,002
-576
85
-7,217
-84,460
-80,259
-84,460
R&D expenses decreased from €84.5 million to €80.3 million, reflecting stringent cost control on disposables and lab fees,
office expenses and maintenance costs.
t
s
e
o
N
49
Galapagos Annual Report 2012
General and administrative costs
Thousands of €
Personnel costs
Premises costs
Professional fees
Director fees
Depreciation
Provisions
Other operating expenses
Total
2012
-9,445
-4,590
-2,708
-1,524
-1,348
-4,896
-24,511
2011
2011 Pro Forma
-6,569
-5,218
-2,527
-1,493
-2,577
-397
-4,339
-23,120
-6,569
-5,218
-2,527
-1,493
-2,577
-4,339
-22,723
General and administrative costs increased to €24.5 million, primarily due to increased personnel costs. In addition,
the implementation of a company-wide ERP system to achieve better cost control and purchasing efficiencies of scale
contributed more to G&A costs than last year. Premises costs include rent, service charges, property taxes and utility
costs such as water, electricity and gas. Professional fees also include legal and tax fees related to the global collaboration
agreement with AbbVie on GLPG0634 and the closure of the Swiss operations. Other operational costs mainly contain travel
t
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o
N
expenses, telephone, consultancy costs and fees.
Sales and marketing expenses
Thousands of €
Personnel costs
Other operating expenses
Total
Restructuring and integration costs and impairment
Thousands of €
Restructuring and integration costs
Total
2011
2011 Pro Forma
-1,460
-813
-2,273
-1,460
-813
-2,273
2011
2011 Pro Forma
2012
-1,445
-690
-2,134
2012
-2,506
-2,506
Restructuring and integration expenses of €2.5 million relate to the closure of the operations in Basel and reorganization
costs.
50
Galapagos Annual Report 2012
6. PERSONNEL COSTS
The number of employees on 31 December was:
Total
The average number of employees during the year was:
Key Management
Laboratory staff
Administrative staff
Total
Their aggregate remuneration comprised:
Thousands of €
Wages and salaries
Social security costs
Pension costs
Other costs
Total
2012
796
796
2012
6
716
94
816
2012
-46,903
-8,394
-3,656
-3,641
2011
835
835
2011
7
698
96
801
2011
2011 Pro Forma
-42,520
-7,379
-3,767
-3,970
-40,957
-7,108
-3,767
-3,824
-62,594
-57,636
-55,656
The other personnel costs mainly relate to costs for meal tickets, canteen costs, travel expenses, costs for temporary
personnel and costs for warrants granted of €2,086K (2011: €2,040K). For the costs of warrants granted, we refer to
note 30.
t
s
e
o
N
51
Galapagos Annual Report 2012
7. FINANCE INCOME
Thousands of €
Interest on bank deposits
Interest on short term deposits
Other financial income
Total
2012
1,022
0
2,798
3,820
2011
297
21
541
859
Increased interest income on bank deposits mainly comes from interests on the $150 million upfront payment (€112 million)
received from AbbVie in March 2012. The other financial income in 2012 mainly relates to translation differences coming
from CHF. For 2011 this relates to translation differences coming from USD.
8. FINANCE COSTS
Thousands of €
Interest on obligations under finance lease
Other financial costs
Total
2012
-150
-2,211
-2,362
2011
-138
-1,514
-1,651
t
s
e
o
N
Increase in other financial charges can on the one hand be explained by available-for-sale financial assets which have
been written off as management assesses these shares to be impaired as from 2012. On the other hand €0.6 million of
goodwill for R&D was impaired and as such reversed because this goodwill was related to programs of ProSkelia SASU
(now: Galapagos SASU) for which currently no more work is performed (on hold). More specifically, the largest part of this
goodwill was allocated to GLPG0492 (SARM-Cachexia) for which the further development of the compound was discontinued
in 2012. For 2011 the other financial costs mainly relate to exchange rate losses and translation differences arising from
GBP.
9. TAXES
Tax assets and liabilities
Thousands of €
Tax assets
Non Current tax receivables
Current tax receivable
Total
2012
2011
35,288
188
35,476
23,081
23,081
The tax receivables relate to refunds resulting from tax credits on research expenses in France and Belgium. Non-current
tax receivables are discounted over the period until maturity date.
Thousands of €
Tax liabilities
Income tax payable
Total
2012
2011
3
3
616
616
52
Galapagos Annual Report 2012
Taxes recognized in profit or loss
Thousands of €
Current tax
Deferred tax (note 23)
Total
2012
150
-719
-569
2011
-553
1,182
630
Corporation tax is calculated at 34% (2011: 34%) - which is the tax rate applied in Belgium - of the estimated assessable
profit for the year. Current group result before tax is a loss before tax as well as last year. The applied tax rate for other
territorial jurisdictions is the tax rate that is applicable in these respective territorial jurisdictions on the estimated taxable
result of the accounting year.
The tax of the year can be reconciled to the accounting profit/loss as follows:
t
s
e
o
N
Thousands of €
Profit/loss (-) before tax
Income tax credit, calculated using the Belgian statutory tax rate on the accounting
profit/loss (-) before tax (theoretical)
Tax expenses in income statement (effective)
Difference in tax expense to explain
Effect of tax rates in other jurisdictions
Effect of non taxable revenues
Effect of consolidation correction without tax impact
Effect of non tax deductible expenses
Effect of recognition of previous non recognized deferred tax assets
Effect of change in tax rates
Effect of tax losses (utilized) reversed
Effect from under or over provisions in prior periods
Effect of non recognition of deferred tax assets
Effect of R&D tax credit claims
Effect of derecognition of previous recognized deferred tax assets
Total Explanations
2012
-5,152
-1,751
569
2,320
-325
-4,520
157
1,840
-14
-127
-1,496
102
8,508
-2,332
527
2,320
%
34
2011
-33,727
%
34
-11,464
-629
10,835
27
-8,245
2,247
787
-671
-49
-4,438
314
20,863
10,835
The main difference between the theoretical tax and the effective tax is explained by the unrecognized deferred tax assets
on tax losses carried forward for which the Company conservatively assesses that it is not likely that these will be realized in
the foreseeable future, except for BioFocus DPI Ltd. and Galapagos Research Centre d.o.o (since 5 February 2013: Fidelta
d.o.o.); and the investment allowances for research and development (tax credit (see note 23)). The non-taxable revenues,
comprehending tax incentives like CIR, IWT, etc. in the different sites are also an important factor for the financial year
2012.
53
Galapagos Annual Report 2012
10. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the net result attributable to shareholders by the weighted average
number of ordinary shares issued during the year.
Thousands of €
Result for the purpose of basic result per share
- from continuing operations
- from discontinued operations
Group result for the purpose of basic result per share
Number of shares (thousands)
2012
2011
-5,721
-5,721
-30,063
-3,034
-33,097
- Weighted average number of shares for the purpose of result per share
26,545
26,403
Basic result per share (Euros)
- Basic result from continuing operations per share (Euros)
- Basic result from discontinued operations per share (Euros)
-0.22
-0.22
-1.25
-1.14
-0.11
t
s
e
o
N
Thousands of €
Result for the purpose of diluted result per share, being net profit/loss
- from continuing operations
- from discontinued operations
Group result for the purpose of diluted result per share
Number of shares (thousands)
2012
2011
-5,721
-5,721
-30,063
-3,034
-33,097
- Weighted average number of shares for the purpose of basic result per share
26,545
26,403
Number of dilutive potential ordinary shares
Diluted result per share (Euros)
- Diluted result from continuing operations per share (Euros)
- Diluted result from discontinued operations per share (Euros)
-0.22
-0.22
-1.25
-1.14
-0.11
As the Group is reporting a net loss, the outstanding warrants have an anti-dilutive effect rather than a dilutive effect.
Consequently, basic and diluted loss per share are the same.
54
Galapagos Annual Report 2012
11. RIGHTS AND COMMITMENTS NOT REFLECTED IN THE BALANCE SHEET
For this subject matter we refer to note 28 “Contingent liabilities and assets”.
12. GOODWILL
Thousands of €
On 1 January 2011
Disposal of subsidiaries
On 31 December 2011
Liquidation of subsidiaries
Goodwill impairment
On 31 December 2012
t
s
e
o
N
42,380
-3,500
38,880
-620
-593
37,667
As a result of the sale of Compound Focus, Inc. in 2011, the goodwill decreased to €38,880K.
The further decline in goodwill in 2012 can on the one hand be explained by the liquidation of Cambridge Drug Discovery
Holdings Ltd and its subsidiaries Cambridge Genetics Ltd and Cambridge Discovery Ltd. On the other hand goodwill for
R&D was impaired and as such reversed because this goodwill was related to programs of ProSkelia SASU (now: Galapagos
SASU) for which currently no more work is performed (on hold). More specifically, the larger part of this goodwill was
allocated to GLPG0492 (SARM-Cachexia) for which the further development of the compound was discontinued in 2012.
Thousands of €
Services - BioFocus
Services - Argenta
R&D
Total
2012
29,040
8,627
2011
29,660
8,627
593
37,667
38,880
The recoverable amounts for the CGU’s (Cash-generating units) were determined based on a value in use calculation. The
most important assumptions for these calculations are the discount percentage, the growth rate and the expected changes
in sales price and direct cost during the period. Management estimates the discount rate based on percentages that are
applicable in the current market (before taxes) and that take into account the time value of money and the specific risks
of the CGU’s. The growth increase is based on the growth predictions for the industry. Changes in sales prices and direct
costs are based on historical experience and expectations of future changes in the market.
55
Galapagos Annual Report 2012
The Company cannot predict whether events that trigger goodwill impairment will occur, when they will occur or how they
will affect any asset values reported. Galapagos believes that all of its estimates are reasonable: they are consistent with
the internal reporting and external market data, and reflect management’s best estimates. However, inherent uncertainties
exist that management may not be able to control. While a change in the estimates used could have a material impact on
the calculation of the fair values and trigger an impairment charge, the Company is not aware of any reasonably possible
change in a key assumption used that would cause a business unit’s carrying amount to exceed its recoverable amount.
Services
The recoverable value for this CGU was determined based on a value in use calculation which uses input values from an
annual budget and as projected until 2022 as approved by the Audit Committee. Management used growth assumptions of
6% for the first two years for BioFocus and 7% for Argenta, decreasing to 5% for both by 2022 with a perpetual growth of
2%. The EBIT-margin evolves to 15% for BioFocus and 16% for Argenta. The applied discount rate used was 15%. Only
when the following assumptions are applied the recoverable amounts would fall below the current book values. For Argenta,
a discount rate of more than 80%. For BioFocus, a discount rate of more than 18%. The cash flows for the following years
were extrapolated on the basis of a prudent estimation of the growth of this segment.
t
s
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N
56
Galapagos Annual Report 2012
13. INTANGIBLE ASSETS
Thousands of €
Acquisition value
At 1 January 2011
Additions
Sales and disposals
Transfer
Translation differences
Balance at 31 December 2011
Additions
Sales and disposals
Transfer
Translation differences
Balance at 31 December 2012
Amortization and impairment
t
s
e
o
N
At 1 January 2011
Charge for the year
Impairment
Sales and disposals
Transfer
Translation differences
Balance at 31 December 2011
Charge for the year
Impairment
Sales and disposals
Transfer
Translation differences
Balance at 31 December 2012
Carrying amount
At 31 December 2011
At 31 December 2012
Customer rela-
In process tech-
Software & data-
tionships
nology
bases
Brands, licenses,
patents & know-
Total
how
16,585
6
-1,500
40
15,131
-375
2,927
100
5,144
1,431
53
6,629
941
-3
-306
-28
5,561
7,231
17,783
5,435
2,942
421
-1,500
38
7,336
1,568
-357
2,391
84
11,022
5,908
143
15
6,066
-505
5,561
4,922
585
12
53
5,571
455
-187
-28
5,811
1,057
1,420
4,090
6,051
15
6,066
-505
77
4,167
-2,116
4
2,054
2,069
267
66
2,403
102
-1,699
4
809
1,764
1,245
31,869
1,437
-1,500
185
31,991
941
-377
75
32,629
18,335
3,794
575
-1,500
172
21,377
2,125
-357
60
23,205
7,795
6,760
10,614
9,425
The additions in software and databases relate to the implementation of a company-wide ERP system. The impairment and
disposal recorded in previous year on licenses relate to the write-off with regard to the Enceladus assets, which were returned
to Enceladus.
57
Galapagos Annual Report 2012
14. PROPERTY, PLANT AND EQUIPMENT
Land & building
Installation &
Furniture, fix-
Other tangible
improvements
machinery
tures & vehicles
assets
Thousands of €
Acquisition value
At 1 January 2011
Additions
Sales and disposals
Variations in scope
Transfer
Translation differences
Balance at 31 December 2011
Additions
Sales and disposals
Other increase/decrease (-)
Transfer
Translation differences
Balance at 31 December 2012
Depreciations and impairment
At 1 January 2011
Charge for the year
Sales and disposals
Variations in scope
Transfer
Translation differences
Balance at 31 December 2011
Charge for the year
Sales and disposals
Other increase/decrease (-)
Transfer
Translation differences
Balance at 31 December 2012
Carrying amount
At 31 December 2011
At 31 December 2012
13,473
51,710
231
-4
-147
122
13,675
300
-1,148
791
93
13,712
8,660
1,932
-93
96
10,594
1,477
-1,124
731
75
11,753
3,820
-544
-2,622
-340
490
52,514
5,060
-12,237
1,313
364
47,015
35,789
4,935
-512
-1,682
-170
517
38,877
4,402
-11,902
1,189
268
32,834
3,082
1,959
13,637
14,181
1,470
272
-174
-23
2
1,547
539
-11
227
2,012
35
4,350
705
162
-174
-23
4
674
312
-7
435
1,434
21
2,869
873
1,481
Total
73,215
4,396
-730
-2,792
648
74,735
5,900
-13,400
227
501
67,962
49,328
7,727
-686
-1,798
640
55,211
6,884
-13,034
435
368
49,864
6,561
72
-9
340
34
6,998
-4
-4,117
8
2,886
4,175
697
170
23
5,066
692
-3,354
3
2,408
There are no pledged items of property, plant and equipment. There are also no restrictions in use on any items of
property, plant and equipment.
1,932
478
19,524
18,099
t
s
e
o
N
58
Galapagos Annual Report 2012
15. INVENTORY
Thousands of €
Raw materials and supplies (net)
Work in progress (net)
Total
2012
204
204
2011
389
113
502
The work in progress consisted of incomplete molecule collections in Basel for which the operations stopped in 2012.
16. AVAILABLE FOR SALE FINANCIAL ASSETS AND OTHER NON CURRRENT ASSETS
Available for sale financial assets have been written off in 2012 (2011: €805K) and represent an investment in common
stock in an unlisted biotechnology company incorporated in the USA. The shares are not traded on the open market;
management assesses these shares to be impaired as from 2012.
In 2008 a reclassification was done from cash and cash equivalents to available for sale financial assets. This reclassification
relates to the CDO (for an amount of €2,000K), that was impaired fully in 2008, and as of 31 December 2012 remained at a
fair value of €0.
Thousands of €
Available for sale financial assets
Other non current assets
Total
17. TRADE AND OTHER RECEIVABLES
Thousands of €
Trade receivables
Prepayments
Other receivables
Other current receivables
Accrued income
Deferred charges
Total
Measurement at cost
Measurement at fair value
2012
420
420
2011
1,037
191
1,228
2012
2012
27,876
2,125
2,493
5,194
2,685
2,509
2011
805
805
2011
25,048
2,769
2,194
2,495
1,616
879
37,688
32,505
The Group considers that the carrying amount of trade and other receivables approximates their fair value. The other
current assets mainly include accrued income from subsidy projects and deferred charges.
t
s
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N
59
Galapagos Annual Report 2012
18. CASH AND CASH EQUIVALENTS
Thousands of €
Bank balances
Cash at hand
Total
2012
94,643
4
94,647
2011
32,543
12
32,555
The bank balances and cash held by the Group and short-term bank deposits have an original maturity of maximum three
months. The carrying amount of these assets approximates their fair value. The cash and cash equivalents have no
restrictions upon them.
19. SHARE CAPITAL
The share capital of Galapagos NV, as included in the articles of association, reconciles to the ‘Capital’ on the balance sheet
as follows:
Thousands of €
Share capital Galapagos NV
Costs of capital increases (accumulated)
Capital
2012
144,815
-5,468
2011
142,928
-5,468
139,347
137,460
Costs of capital increases are netted against the proceeds of capital increases, in accordance with IAS 32 Financial
instruments: disclosure and presentation.
History of Share Capital
The overview below represents the evolution of the share capital as included in the articles of association of Galapagos NV
(rounded).
Date
Shares (in €)
(in €)
after Transaction
Transaction (in €)
Share Capital
Share Capital In-
Aggregate Num-
Aggregate Share
Increase New
crease Warrants
Number of
Shares issued
ber of Shares
Capital after
1 January 2011
31 December 2011
5 April 2012
29 June 2012
14 September 2012
17 December 2012
31 December 2012
740,590
101,162
116,688
928,486
137,414
18,699
21,569
171,624
26,358,984
142,590,770
26,421,441
142,928,662
26,558,855
26,577,554
26,599,123
26,770,747
143,669,252
143,770,414
143,887,102
144,815,588
26,770,747
144,815,588
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As of 1 January 2011, the Company’s share capital amounted to €142,590,770.44, represented by 26,358,984 shares. All
shares were issued, fully paid up and of the same class.
On 30 March 2011, 52,496 warrants were exercised at various exercise prices under Warrant Plan 2005, Warrant Plan 2006
Belgium/The Netherlands, Warrant Plan 2006 UK, Warrant Plan 2007 and Warrant Plan 2007 RMV. The exercise resulted in
a share capital increase of €284,003.36 (plus €185,260.31 in issuance premium) and the issuance of 52,496 new shares.
On 23 May 2011, the Board of Galapagos decided, within the framework of the authorized capital, to create a maximum of
802,500 warrants, for the benefit of certain employees and independent consultants of Galapagos and its subsidiaries under
a new warrant plan (“Warrant Plan 2011”). After acceptances, the total number of warrants de facto created and granted
under this plan is 619,000. These warrants have a term of eight years. The exercise price of the warrants is €9.95. As of
31 December 2012 no warrants were exercised under this plan and 569.000 warrants were still outstanding.
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On 23 May 2011, the Extraordinary General Shareholders’ Meeting of Galapagos decided to create a maximum of 131,740
warrants, for the benefit of the directors of Galapagos under a new warrant plan (“Warrant Plan 2011 (B)”). After
acceptances, the total number of warrants de facto created and granted under this plan is 129,220. These warrants have a
term of five years. The exercise price of the warrants is €9.95. As of 31 December 2012 no warrants were exercised under
this plan and all warrants were still outstanding.
On 30 June 2011, 8,386 warrants were exercised under Warrant Plan 2006 Belgium/The Netherlands. The exercise resulted
in a share capital increase of €45,368.26 (plus €26,835.20 in issuance premium) and the issuance of 8,386 new shares.
On 19 December 2011, 1,575 warrants were exercised under Warrant Plan 2006 Belgium/The Netherlands. The exercise
resulted in a share capital increase of €8,520.75 (plus €2,693.25 in issuance premium) and the issuance of 1,575 new
shares.
On 31 December 2011, the Company’s share capital amounted to €142,928,662.81, represented by 26,421,441 shares. All
shares were issued, fully paid up and of the same class.
On 5 April 2012, 137,414 warrants were exercised at various exercise prices under Warrant Plan 2002 Belgium, Warrant
Plan 2005, Warrant Plan 2006 Belgium/The Netherlands, Warrant Plan 2006 UK, Warrant Plan 2007, Warrant Plan 2007 RMV
and Warrant Plan 2008. The exercise resulted in a share capital increase of €740,589.74 (plus €359,072.53 in issuance
premium) and the issuance of 137,414 new shares.
On 29 June 2012, 18,699 warrants were exercised at various exercise prices under Warrant Plan 2006 Belgium/The
Netherlands, Warrant Plan 2006 UK, Warrant Plan 2007, Warrant Plan 2007 RMV and Warrant Plan 2008. The exercise
resulted in a share capital increase of €101,161.59 (plus €59,091.48 in issuance premium) and the issuance of 18,699 new
shares.
On 12 July 2012, the Board of Directors of Galapagos NV decided, within the framework of the authorized capital, to create
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Galapagos Annual Report 2012
a maximum of 530,140 warrants, for the benefit of the Directors and certain independent consultants of Galapagos NV,
and of employees of the Group under a new warrant plan (“Warrant Plan 2012”). After acceptances, the total number of
warrants de facto created and granted under this plan is 481,140. These warrants have a term of eight years. The exercise
price of the warrants is €14.19. As of 31 December 2012 no warrants were exercised under this plan and 456,140 warrants
were still outstanding.
On 14 September 2012, 21,569 warrants were exercised at various exercise prices under Warrant Plan 2005, Warrant Plan
2006 UK, Warrant Plan 2007 RMV and Warrant Plan 2008. The exercise resulted in a share capital increase of €116,688.29
(plus €28,133.01 in issuance premium) and the issuance of 21,569 new shares.
On 17 December 2012, 171,624 warrants were exercised at various exercise prices under Warrant Plan 2002 Belgium,
Warrant Plan 2005, Warrant Plan 2006 Belgium/The Netherlands, Warrant Plan 2006 UK, Warrant Plan 2007, Warrant Plan
2007 RMV and Warrant Plan 2008. The exercise resulted in a share capital increase of €928,485.84 (plus €408,400.79 in
issuance premium) and the issuance of 171,624 new shares.
On 31 December 2012, the Company’s share capital amounted to € 144,815,588.27, represented by 26,770,747 shares. All
shares were issued, fully paid up and of the same class.
Other information
Par value of shares
Ordinary shares
5.41
Total
5.41
The Board of Directors is authorized for a period of 3 years starting from the date of the General Shareholders’ Meeting that
granted the renewed authorization, being 23 May 2011, to increase the share capital of the Company within the framework
of the authorized capital through contributions in kind or in cash, with limitation or cancellation of the shareholders’
preferential rights, even after notification by the FSMA (Financial Services and Markets Authority) of a public takeover bid
on the Company’s shares, provided that the relevant provisions of the Code of Companies are complied with, including that
the number of issued shares cannot be more than one tenth of the number of shares issued prior to the capital increase and
representing the share capital of the Company. Said authorization can be renewed.
The authorized capital as approved by the Extraordinary General Shareholders’ Meeting of 23 May 2011 amounted
to €142,590,770.44. As of 31 December 2012, €2,602,967.40 of the authorized capital was used, so that on the balance
sheet date an amount of €139,987,803.04 still remained available under the authorized capital.
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20. SHARE PREMIUM
Thousands of €
On 1 January
Increase as a result of capital increase in cash
On 31 December
21. TRANSLATION DIFFERENCE
Thousands of €
On 1 January
Translation differences, arisen from translating foreign activities
On 31 December
2012
72,021
855
72,876
2012
35
959
994
2011
71,806
215
72,021
2011
-343
378
35
The increase in translation differences is mainly related to the translation of foreign operations in CHF.
22. DERIVATIVE FINANCIAL INSTRUMENTS
Currency derivatives
The Group does not actively use currency derivatives to hedge planned future cash flows. On the balance sheet date, total
notional amount of outstanding forward foreign exchange contracts that the Group has committed are nil (2011: nil).
On 31 December 2012 the fair value of the Group’s currency derivatives is estimated to be nil (2011: nil).
The Group does not designate its foreign currency denominated debt as a hedge instrument for the purpose of hedging the
translation of its foreign operations.
See note 36 for further information on how the Group manages financial risks.
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23. DEFERRED TAX
Thousands of €
I
Recognized deferred tax assets and liabilities
Assets
Liabilities
2012
2011
1,705
-2,624
2,166
-2,403
II
Deferred tax assets unrecognized
106,197
105,642
III Deferred taxes
Deferred tax expenses net relating to origination and reversal of temporary differences
Tax benefit arising from previously unrecognized tax assets used to reduce deferred tax expense (+)
Deferred tax expenses relating to write down of previously recognized deferred tax assets
-719
-205
14
-527
1,182
511
671
The notional interest deduction for an amount of €2,624K (2011: €7,169K) and the investment deduction of €966K (2011:
€1,916K) could give rise to deferred tax assets. The amount of notional interest deduction that has been accumulated in
the past can be carried forward for maximum 7 years, the notional interest deduction of 2012 and following years will not be
carried forward according to a change in the Belgian tax legislation. There is no limit in time for the investment deduction.
The unused tax losses carried forward at 31 December 2012 amount to €345,546K (2011: €350,650K), €41,594K relates to
unrecognized tax losses with expiry date between 2013 and 2027.
The tax losses carried forward can be compensated with future profits of the Group for an indefinite period except for
Switzerland, the US and Croatia. Because BioFocus DPI Ltd. was profitable in 2011 and 2012 and management expects
that this situation is sustainable, a deferred tax asset was set up for an amount of €1,000K (2011: €1,493K). This amount
was based on a conservative estimate of net profits for the next 5 years. For the same reasons a deferred tax asset for
tax losses carried forward, which are limited in time (3 years), was set up for the Zagreb research center for an amount of
€678K.
The deferred tax liabilities relate to timing differences on the value of fixed assets of BioFocus DPI Ltd, BioFocus DPI
Holdings and Argenta.
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24. FINANCE LEASE LIABILITIES
Thousands of €
2012
2011
2012
2011
Minimum lease payments
Present value of minimum lease
payments
Amounts payable under finance lease
Within one year
In the second to fifth years inclusive
After five years
Less future finance charges
Present value of lease obligation
Less amount due for settlement within 12 months
Amount due for settlement after 12 months
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327
298
625
220
405
531
667
1,198
322
876
240
165
405
240
165
425
451
876
425
451
Thousands of €
Leased assets
Installation & machinery
Total
Net book value
Acquisition cost
2012
2011
2012
2011
295
295
1,227
1,227
2,247
2,247
4,679
4,679
The Group leases certain of its installation and machinery under finance leases. For the year ended 31 December 2012, the
average borrowing rate was 8.29% (2011: 7.92%). The interest rates were fixed at the date of the contracts. All leases are
on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.
The fair value of the Group’s lease obligations approximates their carrying value. Leased assets decreased because some
assets are no longer classified as leased assets in 2012.
25. OPERATING LEASE OBLIGATIONS
The Group as lessee
The Group has rental contracts for office and laboratories which qualify as operating leases as follows:
Thousands of €
Minimum lease payments under operating leases recognized in the income statement for the year
Total
65
2012
6,702
2011
7,065
6,702
7,065
Galapagos Annual Report 2012
On the balance sheet date, the Group had outstanding commitments for future minimum rent payments, which become due
as follows:
Thousands of €
Within one year
In the second to fifth years inclusive
After five years
Total
26. TRADE AND OTHER PAYABLES
Thousands of €
Trade payables
Other creditors
Other current liabilities
Accrued charges
Deferred income
Total
Included in current liabilities
Included in non-current liabilities
Total
2012
6,056
20,532
15,883
42,472
2012
22,093
2,367
86,501
2,893
83,608
2011
6,927
24,517
17,717
49,161
2011
18,068
2,253
15,857
2,837
13,020
110,962
36,178
108,594
2,367
110,962
33,925
2,253
36,178
The increase in deferred income is due to the revenue recognition of the $150 million (€112 million) upfront payment
received from AbbVie of which €37.2 million has been recognized in 2012. The balance of €74.4 million has been deferred
and will be recognized as income in 2013 (€44.6 million) in 2014 (€29.8 million).
27. PROVISIONS
Thousands of €
Balance per 1 January 2012
Additional provisions
Provisions utilized amounts
Transfer
Translation differences
Balance at 31 December 2012
Post-employment
benefits
(non-current)
Other provisions
(non-current)
Restructuring
provision
(current)
4
6
10
783
14
-3
-141
13
666
393
760
-1,136
141
18
176
Total
1,180
780
-1,139
31
852
Additional provisions contain a restructuring provision for the Basel site of €760K (2011: €388K) which has been fully utilized
in the aftermath of the closing of the site in Basel.
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28. CONTINGENT LIABILITIES AND ASSETS
As a result of the acquisition of ProSkelia SASU (now: Galapagos SASU) from ProStrakan in 2006, ProStrakan is entitled
to earn-outs for a maximum amount of €14.5 million, in case of achievement of predetermined milestones in the research
programs that were taken over by Galapagos. The achievement of these milestones will generate a net positive cash flow
for the Group, but this is still too uncertain. Due to this uncertainty a contingent liability has not been recorded yet.
As a result of the acquisition of GlaxoSmithKline Research Centre Zagreb d.o.o. (as per 31 December 2012: Galapagos
Research Centre d.o.o and since 5 February 2013: Fidelta d.o.o.) from Glaxo Group Limited in 2010, Fidelta is entitled to
subsidy payments of €10.75 million over a period of three years from the acquisition until May 2013. In return, Fidelta is
obliged to perform research services for GSK should such work be requested by GSK.
29. RETIREMENT BENEFIT SCHEME
Defined contribution plans
The Group operates defined contribution systems for all of its qualifying employees. The assets of the schemes are
held separately from those of the Group in designated pension plans. For defined contribution systems, the Group pays
contributions to publicly or privately administered pension- or insurance funds. Once the contribution is paid, the Group
does not have any remaining obligation.
The personnel of the Group in Belgium participate in a defined contribution plan (extra-legal pension). These arrangements
are subject to a minimum guaranteed return in accordance with the Belgian legislation. These plans are financed through a
group insurance policy for which the insurance company also guarantees a minimum return. Similar pension schemes apply
to the Group entities in other countries, except for France.
The amounts due by the Group to these pension schemes for 2012 was €2,911,423 (2011: €2,543,460) of which €52,501
was paid after 31 December 2012 (2011: nihil). These amounts do not include the pension contributions of Galapagos SASU
(see below).
Defined benefit plans
The Group uses two defined benefit plans for Galapagos SASU France. The defined benefit plans are not supported by
funds.
The first defined benefit plan is an addition to the French Social Security and requires Galapagos SASU to pay certain
pension contributions, as under the French Social Security. In 2012 Galapagos SASU paid for this purpose €775,380 as
employer social contributions (2011: €554,398).
In addition, the Chemical and Pharmaceutical Industry’s collective bargaining agreements require that Galapagos SASU pays
a retirement allowance depending on the seniority of the employees at the moment they retire. The benefit obligations for
these retirement allowances amounted to €1,115,870 for 2012 (2011: €728,641). This increase is mainly due to a change in
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Galapagos Annual Report 2012
actuarial assumptions (decrease of discount rate from 4.75% to 3.00%).
Additionally, there are also seniority premiums paid in France. The provisions for these premiums amounted to €919,591
in 2012 (2011: €697,322).
The revised IAS 19 standard is effective for accounting years beginning on or after 1 January 2013 with retroactive effect
on accounting years beginning on or after January 1 2012 (the effects on 2012 are to be posted in 2013). Actuarial gains
and losses are to be recognized in the balance sheet immediately, with a charge or credit to other comprehensive income
(OCI). They are not recycled subsequently. Regarding the provisions for seniority premiums (‘Gratifications’) the revised
IAS 19 standard will not trigger any changes. Regarding retirement allowances (‘Indemnités de départ en retraite’)
€179.464 of unrecognized losses on January 1 2012 will have to be booked to retained earnings on January 1 2012. The
actuarial loss of €274.065 which occurs during 2012 will have to be booked through OCI at the end of 2012. IAS 19R will
have no impact on the income statement in this case.
Obligations included in the balance sheet
In €
Present value of funded defined benefit obligation
Fair value of plan assets
Shortage
Actuarial gains or losses (-) not recognized
Liability included in the balance sheet
The present value of the gross obligation developed as follow
In €
Opening balance
Acquired through business combination
Current service cost
Interest cost
Benefits paid
Impact modification rights
Actuarial gains (-) or losses
Closing balance
31/12/2012
31/12/2011
1,115,870
728,641
1,115,870
-453,529
662,341
728,641
-179,464
549,177
31/12/2012
31/12/2011
728,641
517,421
78,554
34,610
274,065
1,115,870
75,568
29,673
107,274
-1,295
728,641
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Galapagos Annual Report 2012
Amounts recognized in profit or loss for defined benefit plans are as follows
In €
Current service cost
Interest cost
Actuarial gains or losses (-)
Total expense
31/12/2012
31/12/2011
78,554
34,610
75,568
29,673
113,164
105,241
This expense is booked as pension cost within G&A personnel costs.
Obligation included in the balance sheet reconciles as follows
In €
Opening balance
Total expense
Paid allowances and contributions by the employer
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31/12/2012
31/12/2011
549,177
113,164
443,936
105,241
Closing balance
662,341
549,177
The most important actuarial assumptions are
In €
Discount rate
Expected salary increase
Adjustments resulting from experience amount to
In €
Present value of the gross obligation
Experience adjustments
31/12/2012
31/12/2011
3.00%
2.50%
4.75%
2.50%
31/12/2012
31/12/2011
1,115,870
21,064
728,641
-2,887
The expected contributions for next year amount to €146.690 of which €113.214 is related to service cost and €33.476 is
related to interest cost.
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Galapagos Annual Report 2012
30. WARRANT PLANS
Presented below is a summary of Warrant Plans activities for the reported periods. Various Warrant Plans were approved
for the benefit of directors and independent consultants of Galapagos NV, and of employees of the Group. The warrants
offered to employees and independent consultants vest according to the following schema: 10% of the number of warrants
granted vest upon the date of the grant; an additional 10% vest at the first anniversary of the grant; an additional 20%
vest at the second anniversary of the grant; an additional 20% vest at the third anniversary of the grant; and an additional
40% vest at the end of the third calendar year following the grant. This vesting mechanism does not apply to the warrants
granted under the Warrant Plan 2011 and Warrant Plan 2012, for which all warrants vest at the end of the third calendar
year following the year of the grant, with no intermediate vesting. The warrants offered to Directors vest over a period of
36 months at a rate of 1/36th per month. Warrants cannot be exercised before the end of the third calendar year following
the year of the grant. Pursuant to a resolution of the Extraordinary General Shareholders’ Meeting of 23 May 2011 an in
principle provision has been incorporated in the Warrant Plans that in the event of a change of control of the Company all
outstanding warrants vest immediately and will be immediately exercisable.
After the reverse 4:1 share split decided by the Shareholders’ Meeting of 29 March 2005, 4 warrants of Warrant Plan 2002
Belgium entitle the warrant holder to subscribe to one share. For the Warrant Plans created from 2005 onwards, one
warrant entitles the warrant holder to subscribe to one share. In the summaries and tables below, the numbers of warrants
issued under Warrant Plan 2002 Belgium are divided by 4 to avoid a mixture of rights.
The table below sets forth a summary of warrants outstanding and exercisable at 31 December 2012, per Warrant Plan:
Warrants
Allocation
date
Expiry
Date
Exercise
Price (€)
Outstanding
per 1
January
2012
Granted
during the
year
Exercised
during the
year
Forfeited
during the
year
Expired
during the
year
Outstand-
ing per 31
December
2012
Exercis-
able per 31
December
2012
2002 B
2002 B
2002 B
2005
2005
2005
2005
15/06/04
14/06/17
09/07/04
08/07/17
31/01/05
30/01/17
04/07/05
03/07/18
23/11/05
22/11/18
15/12/05
14/12/18
22/11/06
21/11/19
2006 BNL
13/02/06
12/02/19
2006 BNL
22/11/06
21/11/19
2006 BNL
04/05/07
03/05/20
2006 BNL
28/06/07
27/06/20
2006 BNL
21/12/07
20/12/20
2006 UK
2006 UK
2006 UK
2006 UK
2006 UK
01/06/06
31/05/14
22/11/06
21/11/14
19/12/06
18/12/14
28/06/07
27/06/15
21/12/07
20/12/15
4.00
4.00
6.76
6.91
8.35
8.60
8.65
8.61
8.65
9.22
8.65
7.12
8.70
8.65
9.18
8.43
7.25
2,000
31,250
105,000
145,000
60,000
12,500
21,445
59,121
7,000
7,500
735
11,355
54,717
5,405
9,625
19,455
504
2,000
52,500
25,000
19,450
6,372
8,940
37,026
3,570
9,625
11,565
504
31,250
52,500
31,250
52,500
145,000
145,000
35,000
12,500
1,995
52,749
7,000
7,500
735
2,100
17,691
1,835
35,000
12,500
1,995
52,749
7,000
7,500
735
2,100
17,691
1,835
7,890
7,890
315
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Warrants
Allocation
date
Expiry
Date
Exercise
Price (€)
Outstand-
ing per 1
January
2012
Granted
during the
year
Exercised
during the
year
Forfeited
during the
year
Expired
during the
year
82,675
39,725
50,354
108,126
187,445
101,500
194,119
55,000
506,000
56,670
75,000
491,350
190,248
75,000
619,000
129,220
8.65
8.65
8.65
5.60
5.60
5.87
7.09
7.09
11.55
11.55
11.74
9.95
9.95
14.19
481,140
Outstand-
ing per 31
December
2012
Exercis-
able per 31
December
2012
108,126
108,126
104,770
104,770
61,775
61,775
143,765
143,765
5,000
50,000
50,000
16,000
29,100
50,000
25,000
490,000
56,670
75,000
462,250
190,248
75,000
569,000
129,220
456,140
3,341,290
481,140
349,306
120,100
5,315
3,347,709
844,181
Weighted aver-
Warrants
age exercise
price
8.37
8.70
9.51
2,719,653
542,484
748,220
-28,318
-62,457
-35,808
3,341,290
949,683
481,140
-120,100
-349,306
-5,315
3,347,709
844,181
2007
2007
28/06/07
27/06/15
28/06/07
27/06/20
2007 RMV
25/10/07
24/10/20
2008
2008 B
2009
2009 B
2009 B
2010
2010 B
2010 C
2011
2011 B
2012
Total
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26/06/08
25/06/21
26/06/08
25/06/13
01/04/09
31/03/17
02/06/09
01/06/14
02/06/09
01/06/17
27/04/10
26/04/18
27/04/10
26/04/15
23/12/10
26/04/18
23/05/11
22/05/19
23/05/11
22/05/16
03/09/12
02/09/20
Outstanding on 1 January 2011
Exercisable on 31 December 2010
Granted during the period
Forfeited during the year
Exercised during the period
Expired during the year
Outstanding on 31 December 2011
Exercisable on 31 December 2011
Granted during the period
Forfeited during the year
Exercised during the period
Expired during the year
Outstanding on 31 December 2012
Exercisable on 31 December 2012
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Galapagos Annual Report 2012
The table below sets forth the valuation of the warrants.
Belgian Plans
Exercise Price
Current share price
Fair value on the grant date
Estimated volatility (%)
Time to expiration (years)
Risk free rate (%)
Expected dividends
2012
2011
3 September
23 May
23 May
14.19
13.02
5.91
39.91
8.00
2.24
None
9.95
9.54
4.70
39.49
8.00
3.50
None
9.95
9.54
3.68
39.49
5.00
3.50
None
The method of determining the exercise share price is set up by the Board of Directors.
The estimated volatility is calculated on the basis of the historical volatility of the share price over the useful life of the
warrants, validated by reference to the volatility of a representative biotech index.
The time to expiration of the warrant is calculated as the estimated duration until exercise, taking into account the specific
features of the plans.
The warrants have been accounted for in accordance with International Financial Reporting Standard 2 on Share Based
Payments. IFRS 2 takes effect for all warrants offered after 7 November 2002.
Warrants expense for warrants that vested in 2012 amounted to €2,086K (2011: €2,040K).
The following table provides an overview of the outstanding warrants per category of warrant holders at 31 December 2012.
Category
Non-executive Directors
Executive Team
Other
Total warrants outstanding
Number of warrants
2012
180,710
1,345,000
1,821,999
2011
163,070
1,357,500
1,820,720
3,347,709
3,341,290
The outstanding warrants at the end of the accounting period have an average exercise price of €9.51 (2011: €10,52) and a
weighted average remaining useful life of 1,880 days (2011: 2,103 days).
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31. RELATED PARTIES
Intercompany transactions between Galapagos NV and its subsidiaries, and amongst the subsidiaries, have been eliminated
in the consolidation and are not disclosed in this note.
Trading transactions
In 2012 and 2011, Galapagos NV and its affiliates had no trading transactions with parties that are considered as related
parties as defined in IAS24.
Potential conflicts of interest between the Company and its Directors
In 2012 and 2011 the Directors received an annual fee of €20,000 plus expenses. The chairman of the Audit Committee
received an additional payment of €5,000 per year. In addition, the Annual General Shareholders’ Meeting of 24 April 2012
authorized an additional compensation of €20,000 for Directors who provide actively and on a regular basis independent
clinical and scientific advice to the Board of Directors. In 2012, this was the case for Dr Cautreels and Dr Sato. Dr Parekh,
the Chairman of the Board, is compensated through a consultancy agreement only (see note 32).
There are no loans between Galapagos NV and the members of its Board of Directors or its Executive Committee.
The remuneration of key management (including the CEO) is set out in note 32.
In 2012 (as in 2011), there were no arrangements or understandings with major shareholders pursuant to which a
representative of such shareholder became a Board Member or Executive Committee member of the Company.
In 2012, a total of 117,640 warrants were issued to the Directors, of which 100,000 for the CEO; this issue of warrants was
decided by the Board of Directors within the framework of the authorized capital, in accordance with the resolution of the
Extraordinary General Shareholders’ Meeting of 22 August 2012. In 2011, the total number of warrants issued to Directors
was 129,220 (of which 100,000 for the CEO) by decision of the Extraordinary General Shareholders’ Meeting of 23 May
2011.
32. REMUNERATION OF KEY MANAGEMENT PERSONNEL
On 31 December 2012, the Executive Committee comprised five members: Mr Onno van de Stolpe, Dr Andre Hoekema, Dr
Chris Newton, Dr Piet Wigerinck and Mr Guillaume Jetten. In the course of 2012, two individuals ceased to be a member
of the Executive Committee: Dr Graham Dixon with effect from 14 March 2012 and Dr Radan Spaventi with effect from 14
December 2012. The remuneration package of the members of the Executive Committee who were in function in the course
of 2012 comprises:
Thousands of € (except for the number of warrants)
31/12/2012
31/12/2011
Short-term employee benefits(*)
Post-employment benefits
Total benefits excluding warrants
Number of warrants offered in the year
3,348
123
3,470
3,044
88
3,132
230,000
225,000
(*) includes: salaries, employer social security contributions, other short term benefits.
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The above table includes the normal payments for compensation and benefits made to Dr Dixon and Dr Spaventi up to the
date of cessation of their employment. In addition, as compensation for the termination of their employment, the following
payments have been made to them: (i) to Dr Dixon: a total payment of €214,961; and (ii) to Dr Spaventi: a total payment of
€394,380; the aggregate social security contributions on these payments amounted to €74,235.
The members of the Executive Committee provide their services for the Group on a full-time basis. Their remuneration
includes all costs for the Group, including retirement contributions.
The 230,000 warrants offered in 2012 to the members of the Executive Committee were offered under Warrant Plan 2012.
The retirement benefits to the members of the Executive Committee are part of the retirement benefit scheme to which all
qualified personnel are entitled; the contributions are paid as a percentage of the gross annual salary. This does not apply
to the members of the Executive Committee who render their services as an independent consultant and who make their
own pension contributions.
The Executive Committee members, together with other senior managers, are eligible to receive bonuses under the Senior
Management Bonus Scheme established in 2006. Pursuant to the rules of the Senior Management Bonus Scheme, 50% of
the bonus is paid immediately around year-end and the payment of the other 50% is deferred for three years. The deferred
50% component is dependent on the Company’s share price change relative to the Next Biotech Index (which tracks the
Company’s peers). The Company’s share price and Index at the start and end of the 3-year period is calculated by the
average price over the preceding and last month of the 3-year period, respectively.
•
If the Company’s share price change is better than or equal to the change in the Next Biotech Index, the deferred
bonus will be adjusted by the share price increase/decrease and paid out.
•
If the Company’s share price change is up to 10% worse than the change in the Next Biotech Index, 50% of
the deferred bonus will be adjusted by the share price increase/decrease and paid out, and the remainder will be
forfeited.
•
If the Company’s share price change is more than 10% worse than the change in the Next Biotech Index the
deferred bonus will be forfeited.
To be entitled to any deferred payment under the bonus scheme the beneficiary must still be in the Company’s employ.
The seven members of the Executive Committee (including the CEO) who were in function in the course of 2012 were
paid an aggregate amount of €1,759,156 in remunerations and received an aggregate amount of €1,366,470 in bonuses.
The aggregate bonus amount was composed of 3 parts: (i) an aggregate bonus of €286,125, being 50% of the bonus
for performance over 2012 (paid in early January 2013), with the other 50% being deferred for 3 years, (ii) an aggregate
amount of €817,915 paid in early January 2013 as the 50% deferred part of the bonus over 2009; this deferred part was
established at the end of 2012 using a multiple of 1.96 of the deferred part of the 2009 bonus, as a result of the share price
performance over the period 2009-2012; and (iii) an aggregate amount of €262,430 paid in April 2012 as 50% of the special
bonus in connection with the major collaboration agreement relating to GLPG0634 entered into in February 2012, with the
other 50% being deferred for 3 years. For 2011, the members of the then Executive Committee (comprising 7 members
including the CEO) were paid an aggregate amount of €1,770,663 in remunerations and an aggregate amount of €925,876
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in bonuses (which was the 50% deferred part of the bonus for performance in 2008; no bonus was paid for performance in
2011 as not 3 out of the 5 corporate objectives had been met in 2011).
Other components of their remuneration included contributions to the Group’s pension and health insurance schemes,
company cars and certain fringe benefits of non-material value.
Only the CEO is a member of both the Executive Committee and the Board of Directors. The CEO does not receive any
special remuneration for his work on the Board of Directors, as this is part of his total remuneration package in his capacity
as member of the Executive Committee.
No loans, quasi-loans or other guarantees were given to members of the Board and of the Executive Committee.
Transactions with non-executive directors
In connection with the compensation of independent Directors, the Annual Shareholders’ Meeting (AGM) of 24 April 2012
fixed the annual remuneration for independent Directors for the exercise of their mandate as a Director of the Company at
€20,000 plus expenses and resolved to pay an additional compensation of €5,000 to the chairman of the Audit Committee
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of the Board of Directors for his activities as chairman of the Audit Committee. Said AGM also authorized an additional
compensation of €20,000 for Directors who provide actively and on a regular basis independent clinical and scientific advice
to the Board. In 2012, this was the case for Dr Cautreels and Dr Sato. In 2012, a total amount of €112,474 was paid to the
independent Directors as Board fees (2011: €80,000) and €11,331 as expenses (2011: €3,798).
The aforementioned AGM fixed the annual remuneration for non-executive Directors who are not independent Directors and
who do not represent a shareholder at €20,000 plus expenses. In 2012 an aggregate amount of €20,000 was paid to these
Directors (2011: €28,111); they did not claim reimbursement of expenses.
The aforementioned AGM resolved that in case a Director attends less than 75% of the meetings of the Board of Directors,
the annual amounts mentioned in the two paragraphs here above shall be reduced pro rata the absence score of such
Director. This rule did not require implementation in 2012.
The aforementioned AGM resolved that the Directors who represent a shareholder on the Board of Directors will only receive
reimbursement for the expenses they incur for attending meetings of the Board of Directors and no other compensation or
fees for their Board membership. There were no such Directors in 2012 or 2011.
As of 1 August 2005, the Chairman of the Board Dr Parekh receives an annual consulting fee of £50,000 as compensation
for his specific assignment to assist the Company in strategic positioning, financing and acquisitions, including, amongst
others, the evaluation of several alternative corporate transactions, including potential company and compound acquisitions,
as well as strategic alliance opportunities. Dr Parekh does not receive other cash compensation from the Company.
In 2012, 17,640 warrants were granted to non-executive Directors (2011: 29,220).
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33. CONSOLIDATED COMPANIES AS OF 31 DECEMBER 2012
Name of the subsidiary
through subsidiaries)
2011)
% voting right Galapagos
Change in % voting right
Country
NV (directly or indirectly
previous period (2012 vs
Argenta Discovery 2009 Ltd
United Kingdom
BioFocus DPI (Holdings) Ltd
United Kingdom
BioFocus DPI AG
Switzerland
BioFocus DPI Ltd
United Kingdom
BioFocus DPI, LLC.
BioFocus, Inc.
United States
United States
Cambridge Discovery Ltd.
United Kingdom
Cambridge Drug Discovery Holding Ltd.
United Kingdom
Cambridge Genetics Ltd.
United Kingdom
Discovery Partners International GmbH
Germany
Galapagos B.V.
The Netherlands
Galapagos istraživački centar d.o.o.
Galapagos SASU
Croatia
France
Inpharmatica Ltd
United Kingdom
Xenometrics, Inc.
United States
100%
100%
100%
100%
100%
100%
0%
0%
0%
100%
100%
100%
100%
100%
100%
(100%)
(100%)
(100%)
Notes:
1. On 1 June 2011, BioFocus, Inc. sold the 100% of the shares of Compound Focus, Inc. to an affiliate of Evotec AG.
2. On 6 March 2012, the dormant legacy companies (acquired in the framework of the acquisition of BioFocus) Cambridge
Discovery Ltd., Cambridge Drug Discovery Holding Ltd. and Cambridge Genetics Ltd, were dissolved.
3. On 5 February 2013, Galapagos istraživački centar d.o.o. was renamed into Fidelta d.o.o.
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34. COMPANY ACQUISITIONS AND DISPOSALS
During 2012, no company acquisitions or sales were performed by the Group. Result on divestment of €2 million is the net
of the liquidation costs of dormant legal entities and an earn-out payment received from Evotec connected with the sale of
Compound Focus, Inc. in 2011.
Thousands of €
Result on divestment
Net loss on liquidation of dormant companies
Earn-out income for disposal of Compound Focus Inc (sold in 2011)
Total Result on divestment
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Liquidation of dormant companies
Thousands of €
Dissolution of fully consolidated companies
CTA effect on disposal of Cambridge Discovery Ltd
CTA effect on disposal of Cambridge Drug Discovery Holdings Ltd
Total CTA effect
Reversal of goodwill recorded in Cambridge Drug Discovery Holdings Ltd
Net loss on divestment
2012
-3,006
1,000
-2,006
6/3/2012
-4,758
2,373
-2,386
-620
-3,006
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Galapagos Annual Report 2012
During the year 2011, one company was sold.
Disposal of Compound Focus, Inc.
Thousands of €
Transfer of fully consolidated company
Fixed assets
Financial assets
Trade & other receivables
Prepayments
Cash
Total assets
Equity
Trade payables
Accrued charges
Deferred income
Total equity and liabilities
Total assets
Total liabilities
Translation differences
Net assets
Goodwill at acquisition
Costs associated to sale
Sell price
Gain/loss on sale
Net cash from divestment
31/5/2011
993
41
761
2,544
57
4,396
3,469
64
175
688
4,396
4,396
927
355
3,114
3,500
1,482
10,249
2,154
8,710
On 1 June 2011 Galapagos sold its facility in South San Francisco (Compound Focus, Inc.), the compound management
business of BioFocus, to a subsidiary of Evotec AG. This facility has been part of BioFocus, the service division of the
Galapagos Group, since the acquisition of the Discovery Partners International assets by Galapagos in July 2006. For
the sale of all shares in Compound Focus, Galapagos received a cash upfront of €10.25M with an additional €2.25M in
potential earn-out payments. An earn-out payment of €1.0 million has been received in 2012, contributing to 2012 result
on divestment. No other earn-out payments will be received, so there is no longer a contingent asset related to the sale
of Compound Focus, Inc. The realized gain on the sale of Compound Focus amounts to €2.2M. Due to debt restructuring
resulting from the sale of Compound Focus, Inc., the service division reported a gain of €5.2M, whereas Compound
Focus, Inc. realized a €3.0M loss as discontinued operation.
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Galapagos Annual Report 2012
35. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Drafting financial statements in accordance with IFRS requires management to make judgments and estimates and to use
assumptions that influence the reported amounts of assets and liabilities, the notes on contingent assets and liabilities on
the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual
results may differ from these estimates.
The most important assumptions concerning future developments and the most important sources of uncertainty for
estimates on the balance sheet date are presented below.
Share based payments plans
The Group determines the costs of the share based payments plans on the basis of the fair value of the equity instrument
at grant date. Determining the fair value assumes choosing the most suitable valuation model for these equity instruments,
by which the characteristics of the grant have a decisive influence. This assumes also the input into the valuation model
of some relevant judgments, like the estimated useful life of the warrant and the volatility. The judgments made and the
model used are specified further in note 30.
Pension obligations
The cost of a defined pension arrangement is determined based on actuarial valuations. An actuarial valuation assumes
the estimation of discount rates, estimated returns on assets, future salary increases, mortality figures and future
pension increases. Because of the long term nature of these pension plans, the valuation of these is subject to important
uncertainties. We refer to note 29 for additional details.
Impairment of goodwill
Changes in management assumptions on profit margin and growth rates used for cash flow predictions, could have an
important impact on the results of the Group. Determining whether goodwill is impaired requires an estimation of the value
in use of the cash generating units to which the goodwill has been allocated. The value in use calculation requires the
entity to estimate the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order
to calculate present value. The carrying amount of goodwill on the balance sheet date was €37.667 (2011: €38,880). An
impairment loss was recognized during 2012 related to the goodwill for R&D, because this goodwill was related to programs
for which currently no more work is performed (on hold).
Details of the assumptions used in testing goodwill for impairment are given in note 12.
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36. FINANCIAL RISK MANAGEMENT
We refer to note 5 “Risk factors” of the Report of the Board of Directors for additional details on general risk factors.
Capital management
The Group manages its capital to ensure that the Group will be able to continue as a going concern. At the same time, the
Group wants to ensure the return to its shareholders through the results from its research activities. This strategy has not
changed compared to 2011.
The capital structure of the Group consists of financial debt (which currently the Group barely has), cash at bank and in
hand and cash equivalents, as mentioned in note 18, and equity attributed to the holders of equity instruments of the
Company, such as capital, reserves and results carried forward, as mentioned in the consolidated statement of changes in
equity.
The Group manages its capital structure and makes the necessary adjustments in the light of changes of economic
circumstances, the risk characteristics of underlying assets and the projected cash needs of the current research activities.
The most important parameters used in assessing the capital structure are the current cash situation and the expected cash
generation rate: the cash generation is defined as the net result, corrected for depreciations and reduced by investments in
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fixed assets.
The Group wishes to maintain a capital structure that is sufficient to finance research activities for at least 12 months. For
this, cash receipts from possible collaboration or other cash generating contracts, as well as the cash receipts from the
services division BioFocus, are taken into account. To keep the capital structure at a certain level, the Group can issue new
shares or enter into financing agreements.
The Group is not subject to any externally imposed capital requirements.
Financial risk management
The financial department of the Company coordinates the access to national and international financial markets and
considers and manages continuously the financial risks concerning the activities of the Group. These relate to the credit risk
and the currency risk. There are no other important risks, such as liquidity risk or interest rate risk because the Group has
nearly no financial debt and has a good cash position. The Group does not buy or trade financial instruments for speculative
purposes. The Group primarily attempts to manage the currency risk by closing contracts in local currencies with the
other party. These clients are for the most part large pharma groups that typically are better equipped to hedge against a
possible exchange rate risk. For the remainder, the Group attempts to manage the currency risk for debt and receivables
by matching the gains and costs in a foreign currency.
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Galapagos Annual Report 2012
Categories of material financial assets and liabilities:
Thousands of €
Financial assets
Cash at bank and in hand
Trade receivables
Other amounts receivable
Tax receivables (current and non-current)
Financial liabilities
Trade debtors
Other amounts payable
Leasing debts
Tax payable
Credit risk on receivables
2012
2011
94,647
27,876
2,493
35,476
22,093
2,367
405
3
32,555
25,048
2,194
23,081
18,068
2,253
876
616
The term “credit risk” refers to the risk that a counterparty will default on its contractual obligations resulting in financial
loss to the Group. To limit the risk of financial losses, the Group has developed a policy of only dealing with creditworthy
counterparties.
Galapagos grants credit to its clients in the framework of its normal business activities. Usually, the Group requires
no pledge or other collateral to cover the amounts due. Management continuously evaluates the client portfolio for
creditworthiness. All receivables are considered collectable, except for these for which a provision for doubtful debtors has
been established.
The trade receivables consist of a limited amount of creditworthy customers, many of which are large pharmaceutical
companies, spread over different geographical areas.
Four clients represented 77% of the trade receivables at the end of 2012. The large percentage at year-end was caused
by important milestone payments that will be paid in 2013. Other clients with outstanding payables represented less than
10% of the total balance sheet of the Group at the end of 2012. The concentration of the credit risk within the group is
influenced strongly by the size of the amounts in the partnering agreements.
The net book value of the financial assets in the financial statements represents the maximum credit risk.
Aging balance of receivables that are due, but that are still considered collectable:
Thousands of €
60 - 90 days
90 - 120 days
2012
445
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Liquidity risk
The Group’s consolidated balance sheet shows an amount of €94,770K as incurred losses. Cash needs are projected on
a 3-year rolling forecast basis and are compared with expected available cash balances at the end of each period. These
projections are based on realistic assumptions with regard to milestone and upfront payments to be received, taking into
account the Company’s past track record, including the assumption that not all new projects that are being planned will be
realized. On the basis of these projections and sensitivity analysis the Company expects no need for additional external
funding for its current operations for at least the next 3 years. The Company could also decide to disinvest from some of its
present activities as a means of generating additional cash.
Market risk: interest rate risk
The Group’s financial performance is not subject to any significant interest rate risk. The Company has in its portfolio a
CDO for which the “mark to model” value is zero, and which consequently has been fully impaired. Based on the latest
information, the tranche in our portfolio of the CDO has not been impacted by settled credit events. Galapagos no longer
receives interests on the CDO.
Market risk: exchange rate risk
The Group’s financial performance is subject to exchange rate risk, because part of its purchases is done in US dollars,
Swiss Francs, GB Pounds and Croatian Kuna. To limit this risk, the Group attempts to align incoming and outgoing cash
flows in currencies other than EUR. In addition, contracts closed by the different entities of the Group are mainly in the
functional currencies of that entity. The exchange rate risk within the Group is therefore almost exclusively caused by the
intra-group transactions between entities with a different functional currency. In order to further reduce this risk, Galapagos
implemented a netting system within the group in the course of 2012, which restrains intra-group payments between
entities with a different functional currency.
The exchange rate risk in case of a 10% change in the exchange rate amounts to:
Net book value - Thousands of €
31/12/2012
31/12/2011
Euros - US Dollars
Euros - GB Pounds
Euros - CH Francs
Euros - HR Kunas
CH Francs - GB Pounds
HR Kunas - GB Pounds
US Dollars - GB Pounds
507
927
93
1,146
95
5
807
503
977
371
682
21
4
808
The magnitude of the amounts on 31 December 2012 has increased mainly in the conversion Euros – HR Kunas, despite a
decrease in the conversion Euros – CH Francs.
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37. AUDIT FEES
The statutory auditor’s fees for carrying out the statutory auditor’s mandate on the level of the Group headed by Galapagos
NV amounted to €88,850 in 2012 (2011: €80,250). The fees for exceptional services or special missions executed by the
statutory auditor, in particular other control missions, amounted to €12,863 in 2012 (2011: €5,510). Fees for persons
related to the statutory auditor for carrying out an auditor’s mandate on the level of the group headed by Galapagos
NV amounted to €111,150 in 2012 (2011: €119,750). The fees paid in 2012 for exceptional services or special missions
executed in this Group by persons related to the statutory auditor for tax and consultancy amounted to €126,087 (2011:
€76,328 for tax consultancy). The Audit Committee and the Board of Directors are of the opinion that these ad hoc
activities do not affect the independence of the statutory auditor in the performance of his statutory duties. The majority of
the abovementioned additional fees were approved in advance by the Audit Committee. The one to one rule was complied
with.
38. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
Galapagos announced the following significant events after 31 December 2012:
• 9 January: Galapagos delivers candidate drug in GSK alliance and receives milestone payment (included in 2012
revenues)
• 10 January: Galapagos receives €2.7 million IWT grant for antibacterial research (not included in 2012 revenues)
• 15 January: Galapagos creates Fidelta, a third Galapagos service division
• 15 January: Galapagos acquires Cangenix, a structure-based drug discovery company
• 16 January: Galapagos delivers candidate drug in its alliance with Janssen Pharmaceutica NV and receives
€4 million milestone payment (included in 2012 revenues)
• 30 January: Galapagos receives €2.5 million IWT grant for IBD research (not included in 2012 revenues)
• 5 February: Galapagos announces GSK2586184 JAK1 molecule progresses to Phase 2 studies
• 4 March: Katrine Bosley appointed to Galapagos’ Board of Directors as of 27 February 2013 and resignation of
Ferdinand Verdonck effective 26 February 2013
• 6 March: Galapagos receives €7.5 million in Servier alliances (included in 2012 revenues)
• 8 March: Galapagos and Roche conclude strategic alliance and Galapagos receives a payment of €5.75 million for
work completed in 2012 (included in 2012 revenues)
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Report of the statutory auditor
Statutory auditor’s report to the shareholders’ meeting
on the consolidated financial statements for the year ended 31 December 2012
Galapagos NV
To the shareholders
As required by law, we report to you on the performance of our mandate of statutory auditor. This report includes our
report on the consolidated financial statements as defined below together with our report on other legal and regulatory
requirements.
Report on the consolidated financial statements – Unqualified opinion
We have audited the accompanying consolidated financial statements of Galapagos NV (“the company”) and its subsidiaries
(jointly “the group”), prepared in accordance with International Financial Reporting Standards as adopted by the European
Union and with the legal and regulatory requirements applicable in Belgium. These consolidated financial statements
comprise the consolidated statement of financial position as at 31 December 2012, the consolidated income statement, the
consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated
statement of cash flows 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 235.329 (000) EUR and the
consolidated income statement shows a consolidated loss for the year then ended of 5.721 (000) EUR.
Responsibility of the board of directors for the preparation of the consolidated financial statements
The board of directors is responsible for the preparation and fair presentation of consolidated financial statements in
accordance with International Financial Reporting Standards as adopted by the European Union and with the legal and
regulatory requirements applicable in Belgium, and for such internal control as the board of directors determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether
due to fraud or error.
Statutory auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted
our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the statutory auditor’s judgment, including the assessment of
the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control relevant to the group’s preparation and fair presentation of the
consolidated financial statements 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. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the board of
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Galapagos Annual Report 2012
directors, as well as evaluating the overall presentation of the consolidated financial statements. We have obtained from the
company’s officials and the board of directors the explanations and information necessary for performing our audit.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Unqualified opinion
In our opinion, the consolidated financial statements of Galapagos NV give a true and fair view of the group’s net equity
and financial position as of 31 December 2012, and of its results and its cash flows for the year then ended, in accordance
with International Financial Reporting Standards as adopted by the European Union and with the legal and regulatory
requirements applicable in Belgium.
Report on other legal and regulatory requirements
The board of directors is responsible for the preparation and the content of the directors’ report on the consolidated financial
statements.
In the framework of our mandate, our responsibility is to verify, for all significant aspects, the compliance with some legal
and regulatory requirements. On this basis, we provide the following additional comment which does not modify the scope
of our audit opinion on the consolidated financial statements:
•
The directors’ report on the consolidated financial statements includes the information required by law, is, for all
significant aspects, in agreement with the consolidated financial statements and is not in obvious contradiction with any
information obtained in the performance of our mandate.
Kortrijk, 25 March 2013
The statutory auditor
(signed)
_________________________________________________
DELOITTE Bedrijfsrevisoren / Reviseurs d’Entreprises
BV o.v.v.e. CVBA / SC s.f.d. SCRL
Represented by Gino Desmet
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Galapagos Annual Report 2012
Non-consolidated Financial
Statements
CONDENSED NON-CONSOLIDATED (STATUTORY) ANNUAL ACCOUNTS
GALAPAGOS NV STATEMENT OF PROFIT AND LOSS
Thousands of € on 31 December
2012
2011
Turnover
Internally generated intangible assets
Other operating income
45,981
74,450
13,282
26,509
61,380
8,818
Operating income
133,713
96,707
Raw materials, consumables and goods for resale
Services and other goods
Remuneration, social security costs and pensions
Depreciation, impairment and other amounts written off on constitution costs, intangible and
tangible assets
Other operating charges
Operating profit/loss (-)
Finance income
Finance cost
-3,423
-71,304
-11,795
-45,490
-1,713
-3,852
-69,205
-9,809
-33,710
-2,093
-12
-21,962
3,117
-860
1,760
-1,558
Result on ordinary activities before taxes
2,245
-21,760
Extraordinary income
Extraordinary cost
Result before taxes
Taxes
Result for the year
Loss brought forward
-29,477
3
-10,728
-27,232
-32,485
-27,232
-32,485
-88,055
-55,570
Result to be carried forward
-115,287
-88,055
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Galapagos Annual Report 2012
GALAPAGOS NV BALANCE SHEET ON DECEMBER 31
Assets
Thousands of € on 31 December
Non-current assets
Intangible assets
Property, plant and equipment
Financial Fixed Assets
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a
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l
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Equity and liabilities
Thousands of € on 31 December
Equity
Share capital and reserves
Share premium account
Accumulated losses
Investment grants
Liabilities
Non-current liabilities
Obligations under finance lease (non-current)
Other liabilities
Current liabilities
Trade and other payables
Obligations under finance lease (current)
Tax, payroll and social security liabilities
Other liabilities
Total equity and liabilities
i
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a
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fi
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a
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-
n
o
N
87
2012
185,982
100,553
3,233
82,196
110,482
204
38,652
71,626
2011
185,966
98,314
3,306
84,346
62,055
206
55,162
6,687
296,464
248,021
2012
98,600
144,816
66,916
-115,287
2,155
2011
122,627
142,929
66,061
-88,055
1,693
197,864
125,394
573
165
408
855
495
360
197,291
124,539
46,033
204
2,370
148,684
296,464
68,551
188
1,920
53,880
248,021
Galapagos Annual Report 2012
Glossary
ACR20
Candidate drug
American College of Rheumatology 20% response rate
Substance that has satisfied the requirements of pre-
signifies a 20% or greater improvement in the number
clinical testing and has been selected for clinical testing
of swollen and tender joints as well as a 20% or greater
for the treatment of a certain disorder in humans
improvement in three out of five other disease-activity
measures
ADR
CDO
Collateralized debt obligation; a type of structured
asset-backed security (ABS) whose value and payments
American Depositary Receipt; Galapagos has a Level
are derived from a portfolio of fixed-income underlying
1 ADR with ticker symbol GLPYY and CUSIP number
assets
36315X101, which is traded over the counter on the Pink
Sheets. One ADR is equivalent to one ordinary share in
Galapagos NV
Attrition rate
CGU
Cash-generating unit; the smallest recognizable group
of assets which generates entries of finance largely
independent from entries of finance generated with the
The historical success rate for drug discovery and
other assets or group of assets
development, based on publicly known development
paths. Statistically seen, investment in at least 12
target-based programs is required to ensure that at least
one of these will reach a Phase 3 study. Most new drug
R&D programs are discontinued before reaching Phase 3
because they are not successful enough to be approved
Bioavailability
Assessment of the amount of (candidate) drug
that reaches a body’s systemic circulation after
administration
Biomarker
Substance used as an indicator of a biological state,
particularly to monitor a biological response to a
candidate drug
Black & Scholes model
A mathematical description of financial markets and
CIR
Credit Impot Recherche, or research credit. Under the
CIR, the French government refunds up to 30% of the
annual investment in French R&D operations, over a
period of three years. Galapagos benefits from the CIR
through its operations in Romainville, just outside Paris.
Clinical Proof of Concept (PoC)
Point in the drug development process where the
candidate drug shows efficacy in a therapeutic setting
CODM (Chief Operating Decision Maker)
Within Galapagos it has been identified as the Executive
Committee
Compound
A chemical substance, often a small molecule with drug-
like properties
derivative investment instruments that is widely used in
Compound repository services
the pricing of European options and warrants
The selection, formatting, storage, processing
Cachexia
Loss of appetite, weight and muscle mass in persons
and delivery of compounds, which are owned by
government, academic and commercial organizations
who are not actively trying to lose weight; it can be a
Contract research organization
symptom of underlying illnesses such as cancer, COPD
Organization which provides drug discovery and
and age-related disorders
development services
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COPD
pre-clinical candidate, start of a clinical research study,
Chronic obstructive pulmonary disease; chronic lung
regulatory filings and approvals, and achievement of
disease characterized by difficulty breathing and
commercial sales goals
persistent coughing; includes the diseases commonly
referred to as chronic bronchitis and emphysema
CRP
C-reactive protein is a protein found in the blood, the
levels of which rise in response to inflammation
Drug development
Process of bringing a new drug to the market; includes
both pre-clinical development and human clinical trials
Drug discovery
Process by which a (potential) therapeutic is either
Cystic fibrosis
discovered or designed
A life-threatening genetic disease that affects
approximately 70,000 people worldwide. Although the
disease affects the entire body, difficulty breathing is
Efficacy
Effectiveness for intended use
the most serious symptom as a result of frequent lung
FDA
infections
DAS28
The Food and Drug Administration is an agency
responsible for protecting and promoting public health
DAS28 is an RA Disease Activity Score based on
Fee-for-service
C-reactive protein, tender and swollen joint counts of 28
Payment system where the service provider is paid a
defined joints and physician’s global health assessment
specific amount for each procedure or service performed
Development
FIH
Process of bringing a new drug to the market. At
First-in-human clinical trial, usually conducted in healthy
Galapagos, this is the department which performs
volunteers with the aim to assess the safety, tolerability
pre-clinical and clinical development research, clinical
and bioavailability of the candidate drug
batch scale-up, and regulatory filings of Galapagos’ drug
candidates
Discovery
FSMA
The Belgian market authority: Financial Services and
Markets Authority, or Autoriteit voor Financiële Diensten
Process by which new medicines are discovered and/
en Markten
or designed. At Galapagos, this is the department that
oversees target and drug discovery research through to
nomination of pre-clinical candidates
Disease-modifying
FTE
Full-time equivalent; a way to measure a worker’s
involvement in a project. For example, an FTE of 1.0
means that the equivalent work of one full-time worker
Addresses the cause of disease and modifying the
was used on the project
disease progression, not just the symptoms of the
disease
GLPG0187
Galapagos candidate drug being developed for treatment
Downstream milestones
of cancer metastasis; currently in a Phase 1b patient
The downstream milestones are for successes at key
study
decision making points in the alliance, i.e. selection of a
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GLPG0555
are protected by patents, trademarks or copyrights
First candidate drug from Galapagos’ arthritis alliance
with GlaxoSmithKline; inlicensed by GSK in 2012
Intersegment
Occurring between the different operations of a
GLPG0634
company
Small molecule selective JAK1 inhibitor which showed
excellent efficacy and safety in rheumatoid arthritis
patients in Phase 2 trials in November 2011 and
November 2012, partnered with AbbVie in 2012
GLPG0778
Investigational New Drug (IND) application
United States Federal law requires a pharmaceutical
company to obtain an exemption to ship an experimental
drug across state lines, usually to clinical investigators,
before a marketing application for the drug has been
Second candidate drug from Galapagos’ arthritis alliance
approved. The IND is the means by which the sponsor
with GlaxoSmithKline, inlicensed by GSK in 2012. This
technically obtains this exemption
program is now called GSK2586184 and is currently in
Phase 2 studies in lupus and psoriasis
GLPG0974
JAK
Janus kinases (JAK) are critical components of signaling
mechanisms utilized by a number of cytokines and
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Galapagos candidate drug targeting GPR43, which plays
growth factors, including those that are elevated in
a key role in Inflammatory Bowel Disease: currently
rheumatoid arthritis
in a Phase 1 multiple ascending dose study in healthy
volunteers
GSK2586184
Metastasis
Transmission of cancerous cells from a primary site
(usually a tumor) to one or more sites elsewhere in the
Previously known as GLPG0778, GSK2586184 is a
body
second candidate drug from Galapagos’ arthritis alliance
with GlaxoSmithKline, inlicensed by GSK in 2012. This
program is currently in Phase 2 studies in lupus and
psoriasis
Infectious diseases
Diseases that are caused by pathogenic micro-organisms
such as bacteria, viruses, parasites or fungi
Milestone
Major achievement in a project or program; in
Galapagos’ alliances, this is usually associated with a
payment
Molecule collections
Chemical libraries, usually consisting of drug-like small
molecules that are designed to interact with to specific
Inflammatory diseases
target classes. These collections can be screened
A large, unrelated group of disorders associated with
against a target to generate initial “hits” in a drug
abnormalities in inflammation
discovery program
In-/out-licensing
MRSA
Receiving/granting permission from/to another company
Methicillin-resistant Staphylococcus aureus is a strain of
or institution to use a brand name, patent, or other
Staphylococcus aureus that is resistant to methicillin. It
proprietary right, in exchange for a fee and/or royalty
causes a potentially life-threatening infection that occurs
Intellectual property
Creations of the mind that have commercial value and
most frequently among patients in hospitals
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Oral dosing
of in vitro and in vivo screening, pharmaco-kinetics,
Administration of medicine by the mouth, either as a
toxicology, and chemical upscaling
solution or solid (capsule, pill) form
OTC
Pre-clinical candidate (PCC)
A potential drug that meets chemical and biological
“Over the Counter” which means trading directly
criteria to begin the development process
between two parties. In the U.S., over the counter
trading in stocks is carried out via market makers who
use quotation services such as the OTC Bulletin Board
(OTCBB) and the Pink Sheets. The US over-the-counter
market is monitored by the NASD. Galapagos’ Level
1 ADR is traded over the counter under ticker symbol
Psoriasis
Psoriasis is an immune-mediated disease that affects
the skin. It is caused by the immune system being
mistakenly triggered, resulting in overproduction of new
skin cells
GLPYY on the Pink Sheets in the US, www.pinksheets.
Rheumatoid arthritis (RA)
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Outsourcing
Contracting work to a third party
Pharmacokinetics (PK)
Study of what a body does to a drug; the fate of a
substance delivered to a body
Phase 1
A chronic, systemic inflammatory disease that causes
joint inflammation, and usually leads to cartilage
destruction, bone erosion and disability
R&D operations
Research and development operations; unit responsible
for discovery and developing new candidate drugs
for internal pipeline or as part of risk/reward sharing
alliances with partners
First stage of clinical testing of a potential new treatment
Screening
designed to assess the safety and tolerability of a drug,
usually performed in a small number of healthy human
volunteers
Phase 2
Second stage of clinical testing, usually performed in 20-
300 patients, in order to determine efficacy, tolerability
and the most effective dose to use
Phase 3
Large clinical trials, usually conducted in 300-3000
patients to gain a definitive understanding of the efficacy
and tolerability of the candidate treatment by comparing
it to the “gold standard” treatment; serves as the
principle basis for regulatory approval
Pre-clinical
Stage of drug research development, undertaken prior
to the administration of the drug to humans. Consists
Method usually applied at the beginning of a drug
discovery campaign, where a target is tested in a
biochemical assay against a series of small molecules
or antibodies to obtain an initial set of “hits” that show
activity against the target. These hits are then further
tested or optimized
Service operations
Business unit primarily focused on delivering products
and conducting fee-for-service work for clients. Since
February 2010, Galapagos’ service operations include the
BioFocus and Argenta business units
SilenceSelect®
Galapagos’ proprietary collection of arrayed
adenoviruses, effective in knock-down human genes
in primary cells to identify novel drug targets. This
technology forms the basis of Galapagos’ target
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discovery engine
Systemic Lupus Erythematosus
Systemic Lupus Erythematosus (SLE) is an autoimmune
disease characterized by inflammation of many parts of
the body. This inflammation is caused by the immune
system that mistakenly attacks healthy cells, leading to
tissue damage
Target
Protein that has been shown to be involved in a disease
process and forms the basis of therapeutic intervention
or drug discovery
Target discovery
Identification and validation of proteins that have been
shown to play a role in a disease process
Technology access fee
License payment made in return for access to specific
technology (e.g. compound or virus collections)
Ussing Chamber
Ussing chamber is a scientific tool used to measure the
current as an indicator of ion transport taking place
across an epithelium
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Galapagos NV
Generaal De Wittelaan L11 A3
2800 Mechelen
Belgium
Tel: +32 15 34 29 00
Fax: +32 15 34 29 01
E-mail: ir@glpg.com
Careers
E-mail: jobs@glpg.com
www.glpg.com/careers/jobs.htm
www.glpg.com