Galapagos N.V. Annual Report 2016

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Annual Report 2016

Galapagos NV • Annual Report 2016

CONTENTS

Contents

The Galapagos group

Letter from the management.........................

Committed to moving forward .......................

At a glance ...................................................

Strategy........................................................

Organization, structure and operation..........

Galapagos shares .........................................

General statement........................................

Corporate governance

Going concern statement.............................

Policies .........................................................

Risk management and internal control ........

Board of directors.........................................

The Galapagos share....................................

Committees ..................................................

Subsequent events ......................................

Share capital and shares...............................

Overview of Galapagos NV ...........................

Shareholders ................................................

Disclaimer and other information ................

Remuneration report....................................

R&D

Conflict of interests and related parties ........

Statement by the board of directors .............

The Galapagos pipeline................................

Target discovery platform ............................

Financial statements

Rheumatoid arthritis ....................................

Consolidated financial statements................

Inflammatory bowel disease ........................

Notes to the consolidated Financial

Cystic fibrosis ...............................................

statements ...................................................

Idiopathic pulmonary fibrosis ......................

Non-consolidated financial statements ......

136

Osteoarthritis...............................................

Atopic dermatitis..........................................

Auditor's report

Report of the statutory auditor...................

139

Risk factors

Financial position and need for additional

Other information

capital ..........................................................

Glossary of terms .......................................

141

Product development, regulatory approval and

Financial calendar.......................................

152

commercialization........................................

Colophon....................................................

152

Reliance on third parties ..............................

Contact .......................................................

152

Competitive position ....................................

Intellectual property.....................................

Galapagos NV • Annual Report 2016

The Galapagos
group
An overview of
Galapagos, its strategy
and portfolio in 2016

Chantal Tasset

Head of Development

THE GALAPAGOS GROUP

Letter from the management
—

Dear shareholder,

The year 2016 was excellent for Galapagos: we strengthened our pipeline of new medicines and created a solid

basis for continued growth in the coming years. With filgotinib in major Phase 3 trials for rheumatoid arthritis,

Crohn’s disease and ulcerative colitis, we have entered the final phase before our first drug may enter the market.

This program has a long history since the identification of the JAK1 target in 2004. It is thanks to the belief,

the stamina, and the excellence of the Galapagos team that filgotinib is now seen as one of the most promising

potential new treatment options for inflammatory diseases. We are reliving that journey with other molecules

in our pipeline. Most notably, in our cystic fibrosis program we are planning to test a triple combination therapy

in patients in mid-2017, which could be a major breakthrough for the vast majority of patients with this disease.

The Galapagos strategy has remained unchanged over the years: with our

patented technology platform we continue to identify novel drug targets

in human cells. Based on these targets, we develop small molecule drugs

that we take through clinical development. We have come a long way,

evolving from a technology company into a fully integrated R&D

organization. Now is the time to prepare for the next step: to deliver our

innovative medicines to the patients. To that end, we plan to build our

commercial infrastructure to be ready when filgotinib is expected to be

launched, and this infrastructure can be expanded once other Galapagos

medicines reach that stage. Galapagos delivers in R&D and in our

collaborations; we aim to deliver to patients as well.

Our growth continues to accelerate: we are expanding our development organization in 2017. This will be a

challenge, but we like challenges. We are looking for exceptional people who want to play an important part

in our adventure. We seek experts in drug development who feel comfortable in a work place that has the

explorative and dynamic culture of a biotech, as well as the success and certainty of a pharma. Smart people, who

think big, push their limits, and share our ambition to have impact. We want to deliver.

Proudly we present our annual report 2016, reflecting the important progress made last year.

2016: Extending our success in R&D

In the field of inflammation:

▪ Closed our global collaboration with Gilead on filgotinib, received $300 million upfront fee and $425 million

equity investment from Gilead

▪ Reported promising safety and activity profile with filgotinib at 20 weeks in the FITZROY Phase 2 study in

Crohn’s disease

▪ Disclosed achievement of high endoscopy and statistically significant histopathology scores versus placebo

at 10 weeks in FITZROY; these and other FITZROY data were published in The Lancet

▪ Initiated the FINCH Phase 3 program with filgotinib in rheumatoid arthritis, the DIVERSITY Phase 3

program in Crohn’s disease, and the SELECTION Phase 2b/3 program in ulcerative colitis

▪ Initiated a Phase 1b study with antibody MOR106, dosed first atopic dermatitis patients, and disclosed novel

Galapagos target IL-17C of MOR106, all in our collaboration with MorphoSys

▪ Nominated pre-clinical candidate GLPG2534 in atopic dermatitis

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

▪ Reported that GLPG1205 was well tolerated and safe but did not show competitive activity versus placebo in

the ORIGIN Phase 2 study

In cystic fibrosis:

▪ Expanded the collaboration with AbbVie to include an additional $250 million in Phase 1 and 2 milestones
▪ Disclosed favorable safety and tolerability in the Phase 1 study with C1 corrector GLPG2222
▪ Initiated a Phase 1 study with potentiator GLPG2451
▪ Initiated a Phase 1 study with C2 corrector GLPG2737
▪ Nominated 3 pre-clinical candidates: C2 corrector GLPG3221, potentiator GLPG3067, and C1 corrector

GLPG2851

▪ Reported activity and favorable safety with novel potentiator GLPG1837 in our SAPHIRA Phase 2 studies in

Class III mutation patients

In osteoarthritis:

▪ Reported good safety and tolerability as well as up to 60% reduction in a biomarker for cartilage breakdown
within two weeks in healthy human volunteers in a Phase 1 study with candidate GLPG1972 in the alliance

with Servier

In pulmonary disease:

▪ Initiated the FLORA Phase 2a study with GLPG1690 in idiopathic pulmonary fibrosis (IPF) patients
▪ Received orphan drug status in Europe for GLPG1690
▪ Nominated new pre-clinical candidate GLPG2938 for IPF

Grants:

▪ Received a €1.2 million Flemish government grant for our type 2 diabetes program

Corporate

▪ Appointed Dr. Mary Kerr as director of Galapagos
▪ Raised €4.3 million from warrant exercises
▪ Were included in the AEX and Bel20 main indices in Amsterdam and Brussels
▪ Were included in the Stoxx Europe 600 index

2016: Details of the financial results

Revenues

Galapagos’ revenues and other income for 2016 amounted to €151.6 million, compared to €60.6 million in 2015.

Increased revenues were mainly driven by a substantial increase in milestone payments from our collaboration

partners.

Operating result

The group realized a net operating loss in 2016 of €11.5 million, compared to a net operating loss of €89.4 million

in 2015.

R&D expenses for the group in 2016 were €139.6 million compared to €129.7 million in 2015. This planned increase

was due mainly to increased efforts on our clinical and pre-clinical programs, primarily the cystic fibrosis

program and the proprietary pre-clinical programs in inflammation, HBV and fibrosis.

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

G&A and S&M expenses of the group were €23.5 million in 2016, compared to €20.3 million in 2015. This increase

was due primarily to non-cash items such as a higher payable for short term and long term management bonus

and higher costs for warrant plans, mainly as a result of the increase of the Galapagos share price.

Non-cash adjustment on short term financial asset

In 2015, Galapagos recognized a short term financial asset worth €39 million and an offsetting deferred income

of €39 million upon signing of the share subscription agreement with Gilead, as required under IAS 39. This

financial asset initially reflected the share premium that Gilead committed to pay above the closing share

price of Galapagos on the day of signing of the share subscription agreement. Under IAS 39, the fair value of

the financial asset was re-measured at year end and again upon entering into force of the share subscription

agreement on 19 January 2016, when the financial asset expired. Variations in fair value of the financial asset were

recorded in the income statement.

The decrease in the fair value of the financial asset resulting from the increase in the Galapagos share price

between signing of the share subscription agreement and 31 December 2015, resulted in a negative, non-cash

fair value charge of €30.6 million in the 2015 financial results. The subsequent increase in the fair value of the

financial asset resulting from the decrease in the Galapagos share price between 1 January 2016 and 19 January

2016 resulted in a positive non-cash gain of €57.5 million in the financial result of 2016.

The €65.9 million current financial asset from the share subscription agreement reflected the premium that

Gilead paid compared to the closing price of the Galapagos share on the day of the capital increase. This financial

asset expired on 19 January 2016, the effective date of the share subscription agreement and was derecognized

through the share premium account.

Cash position

Cash, cash equivalents, and restricted cash totaled €980.9 million on 31 December 2016.

A net increase of €632.7 million in cash, cash equivalents and restricted cash was recorded in 2016. Net cash flows

from financing activities generated €391.8 million through a subscription of Galapagos shares by Gilead, as well

as €4.3 million from warrant exercises. Furthermore, a net cash inflow from operating activities was realized for

€239.4 million in 2016 resulting from the license fee of $300 million (€275.6 million) received from Gilead and, by

difference, from an operating cash burn of €36.2 million. Finally, €7.3 million was used in investing activities and

€4.8 million positive exchange rate differences were generated on cash and cash equivalents. When excluding

the license fee and milestone payments from Gilead (€56.4 million), the net cash outflows used in operating and

investing activities amount to €100.3 million.

Furthermore, Galapagos’ balance sheet holds an unconditional and unrestricted receivable from the French
government (Créditd’ImpôtRecherche1) now amounting to €34.2 million, payable in 4 yearly tranches. Galapagos’
balance sheet also holds a receivable from the Belgian Government for R&D incentives now amounting to

€30.2 million.

1 Crédit d’Impôt Recherche refers to an innovation incentive system underwritten by the French government.

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

Outlook 2017

Galapagos aims to initiate a CF patient evaluation of its triple combination therapy by mid-2017, as well as

multiple new clinical studies with CF candidates and combinations throughout the year. Together with our

collaboration partner Gilead we plan to start multiple proof-of-concept studies with filgotinib. Topline results

from the FLORA Phase 2a study with GLPG1690 in IPF and from the Phase 1b study with MOR106 in atopic

dermatitis patients are expected in the second half of 2017. Galapagos expects to initiate a Phase 1b study

with GLPG1972 in osteoarthritis patients in the US, as well as Phase 1 studies with GLPG2938 (IPF) and with

GLPG2534 (atopic dermatitis).

Galapagos expects an operational cash burn of €135-155 million during 2017.

I wish to thank our shareholders again for their support last year. We ended 2016 in the best shape yet, both

financially and operationally. We plan to advance our triple combination therapy in CF to patient studies, to

progress the rest of our pipeline, and to work with our collaboration partner Gilead to explore filgotinib broadly

in inflammation.

Regards,

Onno van de Stolpe
CEO

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

‘Let’s keep the desire to excel’

alid Abi-Saab
WWalid Abi-Saab

Chief Medical Officer

Walid Abi-Saab has just begun at Galapagos as the Chief Medical Officer. He

brings decades of experience in medicine, psychiatry and the pharmaceutical

industry.

‘Having worked across several different departments, I’ve been able to explore the

gaps between them and facilitate very open, interdepartmental exchanges of ideas,

which is vital. Functioning with open communication, a shared understanding, and

cross functional fertilization is a winning recipe for overcoming major challenges

and advancing rapidly in development.’

Role at Galapagos

‘For the next few years, my primary responsibility will be the improvement of our

late-stage development capabilities: help the company grow, in other words. But this

has to be done while keeping in mind the history of the company. If we keep the

freedom, the desire to excel and the low hierarchy that have made Galapagos the

company it is, we could grow and maintain our identity.’

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

We have to keep moving forward. What’s the point otherwise?

Motivation

‘We have to keep moving forward. What’s the point otherwise? Drug development

is undeniably difficult, but it’s also inspiring: what we produce helps people, leaves

them feeling better and living longer. We never lose sight of that, no matter how big

the difficulties or how hard the work becomes. Any product we develop will benefit

someone who is suffering. And there are not a lot of people who can say that about

their jobs. Knowing this gets me up in the morning. It encourages me to do better.’

Pushing the limits

‘You have to ask yourself: do things that don’t require any thinking or challenge

actually bring anything to the table? We have a commitment to push harder and

advance, especially in medicine and drug development. The line of work is not easy,

but that’s not a reason for giving up. If I reach a limit, I’ll take a step back and ask

why. I’ll try again from a different angle, I’ll persevere. I won’t give up.’

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

‘Challenges are there to be solved’

Ellen van der Aar

Head of Development

As Head of Development and Project Leader, Ellen van der Aar is responsible

for clinical stage treatments for idiopathic pulmonary fibrosis (IPF) and

osteoarthritis. She often finds her work pushes her limits – but sees the benefit

in this.

‘If you had asked me five years ago, I would never have expected I would be doing this.

I’ve moved far away from my own background to do things I’ve never done before.

It’s challenging in a good way. I’m constantly learning new things.’

Broad horizons

‘When I started at Galapagos, it was in Research and one of the projects I was working

on was in IPF. The therapy moved to Development and I moved with it; it’s very

different work. IPF is an orphan disease and I had developed a rapport with the few

people specializing in it. Now, I’m leading the project. Different skills again, but they

meet my interests.’

Pushing the limits

‘I want to learn. And challenges are there to be solved. It means working longer hours

than I might like, but even so, my investigations still barely scratch the surface. There’s

so much more I want to learn, more depth I would like to go to in my work to further

my understanding. Galapagos appreciates this situation; they’re hiring extra staff.’

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

If you had asked me five years ago, I would never have expected
I would be doing this.

Deadlines

‘They push me more than anything. We have setbacks – they’re inevitable – and

still strive to meet deadlines.

It’s a commitment

to the patients and our

shareholders. If we consider changing our approach, the management team responds

very quickly. Thankfully! In big pharma companies, you might have to wait weeks

for an answer.’

Is the grass greener?

‘There’s significant stress. There are always deadlines. There are unexpected events

that require us to step up and go the extra mile. But despite this, the positives make

it all worthwhile. I wouldn’t want to give it up.’

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

‘You’re contributing to the company’s success’

VVereronique Deiter

onique Deiterenen

Head of Human Resources

Veronique Deiteren is responsible for HR at three sites in three different

countries. She was promoted into the role just a year and a half ago.

‘‘With every new responsibility I’ve been given I’ve been pushed to go out of my

comfort zone. It is quite challenging and scary sometimes, but it’s what makes me

grow as a person, and it is even more rewarding when you then succeed and feel

appreciated. When I stepped into this position, parts of the HR teams for Mechelen

and Romainville were entirely new. They needed training; we all needed to catch

up. We installed new recruitment programs and new systems which have enabled

us to operate more efficiently, and we need to. We have 374 people doing work at

the Belgian, Dutch, and French sites now, with more than 50 to join next year and

another 50 the following year. It introduces major challenges.’

Expertise and experience

‘Finding qualified people with experience in clinical projects and the industrial

environment is a challenge for recruiters. The Belgian biotech and pharma industry

is not that large, so we look further afield for people with the right qualifications,

specific knowledge and expertise that allows them to go straight to work.’

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

People with the ability to bring their own ideas and innovate,
are our best asset.

Being competitive

‘Working at Galapagos is very demanding and challenging. You have to be prepared

to push your limits. But in return, you really feel like you’re contributing to the

company’s success; people want to be part of that and our pipeline and exciting

projects. We still need to stay competitive, meet expectations and industry standards,

and manage change.’

Maintaining values

‘As we grow, Galapagos will have more processes and procedures, but we want to

make sure that the way we work today is still in place: with people participating in a

workplace where they are treated equally and with respect, and where their opinions

are valued. We don’t want to become one of those companies that take forever to

make a decision. People with the ability to bring their own ideas and innovate, are

our best asset. We are determined to keep what we have.’

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

At a glance
—

Key figures (IFRS)

Galapagos group (in € thousands, if not stated
otherwise)

31/12/2016

31/12/2015

31/12/2014

Results1

Revenues and other income

R&D expenditure

S, G&A expenses

Restructuring and integration costs

Personnel expenses (including share-based compensation)

Capital expenditure

Depreciation and amortization of (in)tangible assets

Operating loss

Net financial results

Taxes

Net income / loss (–) from continuing operations

Net income from discontinued operations

Net income / loss (–)

Balance sheet

Total assets

Cash, cash equivalents and restricted cash

Total liabilities

Stockholders’ equity

Galapagos share

151,612

(139,573)

(23,530)

–

(53,530)

4,790

(4,182)

(11,491)

65,737

(235)

54,012

–

60,579

(129,714)

(20,308)

–

(47,034)

6,665

(3,402)

(89,444)

(30,184)

1,218

(118,410)

–

54,012

(118,410)

1,083,338

980,909

324,637

758,701

442,514

348,216

77,515

364,999

90,021

(111,110)

(14,867)

(669)

(38,447)

2,804

(3,765)

(36,624)

1,424

(2,103)

(37,303)

70,514

33,211

270,467

198,440

64,332

206,135

Number of shares issued on 31 December

46,256,078

39,076,342

30,299,129

Basic income / loss (–) per share (in €)

Diluted income / loss (–) per share (in €)

Share price on 31 December (in €)

Personnel data

1.18

1.14

60.94

(3.32)

56.76

1.10

15.49

Total group employees on 31 December (number)

508

435

417

1 Service activities (sold to Charles River on 1 April 2014) for the year 2014 are shown on the line item “Net income from discontinued operations”.

All other line items consist of amounts from continuing operations, except for line item “Net income / loss (–)”, which includes both continuing and
discontinued operations.

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

Employees per site

Number of R&D employees1

1 Total Galapagos R&D (Mechelen, Leiden, Romainville), including external consultants. Total head count Galapagos group (Galapagos R&D and Fidelta) including

external consultants amounts to 508.

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

Strategy
—

We seek to develop a robust portfolio of breakthrough therapies. Our ambition is to become a fully integrated

biopharmaceutical company focused on the development and commercialization of novel medicines. Our

strategy is to leverage our unique and proprietary target discovery platform, which facilitates discovery and

development of therapies with novel modes of action which address the root causes of the disease.

Key elements of our strategy include:

▪ Rapidly advance the development and commercialization of filgotinib with our collaboration partner

Gilead in RA, CD, UC and potentially other inflammatory diseases
Based on the results from our Phase 2 clinical trials, we believe that filgotinib is a promising candidate for

the treatment of RA, CD, UC and potentially other inflammatory diseases. Our collaboration partner Gilead

initiated Phase 3 clinical programs in RA, CD and UC in 2016. We retained an option to co-promote filgotinib

with Gilead in the UK, Germany, France, Italy, Spain, the Netherlands, Belgium, and Luxembourg; exercising

this option would enable us to build a commercial organization and further progress our ambition to

become a fully integrated biopharmaceutical company.

▪ Collaborate with our collaboration partner AbbVie to develop a CF franchise of triple combination

oral therapies
In order to address the unmet need in CF patients with Class II and other mutations in the CFTR gene, we

aim to develop a triple combination therapy comprising a potentiator and two corrector molecules. Our

most advanced candidate drug potentiator GLPG1837, showed promising activity and favorable safety, with

observed treatment emergent adverse events being predominantly mild or moderate, in CF patients with

the Class III mutation of the CFTR gene in a Phase 2 trial late in 2016. This trial also provided data necessary

to validate our in vitro assays and dosing modelling for developing a triple combination therapy. We

initiated a Phase 1 trial for a second potentiator candidate GLPG2451 in May 2016. We reported positive

topline results from a Phase 1 trial for our C1 corrector candidate, GLPG2222, in June 2016 and initiated a
Phase 2 trial on top of Kalydeco®2 in Class III mutation patients in January 2017. We initiated a Phase 1 trial
for our C2 corrector GLPG2737 in November 2016. We dosed the first healthy volunteer with a combination

of GLPG2451 and GLPG2222 in February 2017. We aim to evaluate a once-daily, oral, triple combination

therapy in CF patients starting in mid-2017, with additional trials with novel CF compounds initiating

throughout 2017. In March 2017 we initiated a Phase 1 trial with GLPG3067. We have an exclusive

collaboration agreement with AbbVie to jointly discover, develop, and commercialize these novel CF

modulators.

▪ Advance GLPG1690 in patient clinical trials in IPF

We have completed the enrollment of IPF patients in a Phase 2a trial evaluating target and disease

biomarker changes during three months’ treatment with autotaxin inhibitor GLPG1690 or placebo, and we

intend to disclose topline results of this trial in the second half of 2017. We have worldwide development

and commercialization rights for GLPG1690.

2 Kalydeco® is a potentiator drug marketed by Vertex Pharmaceuticals.

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

▪ Advance GLPG1972 in OA patient clinical trials in the United States

In June 2016, we announced that a Phase 1 first-in-human trial of GLPG1972, a novel mechanism of action

medicine for the treatment of osteoarthritis (OA), showed the drug reduced a cartilage breakdown

biomarker in healthy volunteers by up to 60% within two weeks. We retain all development and

commercialization rights to this compound in the United States (U.S.), and we intend to initiate clinical

trials of GLPG1972 in the U.S. in 2017. Additional data resulting from an ongoing non-clinical program

expected in the second quarter of 2017 will enable our collaboration partner Servier to make a decision

regarding exercising its option to license the compound for further development in OA patient trials outside

the U.S.

▪ Advance MOR106 in AtD patient clinical Phase 1 trials with our collaboration partner MorphoSys

In April 2016, we initiated a Phase 1 first-in-human trial and in October 2016, we announced first dosing of

an atopic dermatitis (AtD) patient with MOR106, a novel human monoclonal antibody medicine in

development with MorphoSys in a Phase 1b trial. MOR106 targets IL17-C, a novel antibody target discovered

by us. MorphoSys and we share costs and potential benefits equally in this collaboration. Topline data from

the Phase 1b trial with MOR106 are expected in the second half of 2017.

▪ Maximize and capture the value of our target discovery platform by becoming a fully integrated

biopharmaceutical company
Our platform has yielded many new mode-of-action investigational therapies across multiple therapeutic

areas. Our most mature pre-clinical programs are GLPG2534 for AtD and GLPG2938 for IPF, both of which we

plan to take into Phase 1 trials in 2017. Additionally, we are exploring the potential of development programs

and pre-clinical drug candidates in ankylosing spondylitis, psoriatic arthritis, lupus, nonalcoholic

steatohepatitis, type 2 diabetes, and hepatitis B. We aim to initiate a Phase 3 trial every other year, while

conducting three proof-of-concept trials, delivering eight new validated targets and three pre-clinical

candidate drugs every year. We aim to select promising programs for internal development and

commercialization to capture greater value for shareholders and establish ourselves as a fully integrated

biopharmaceutical company.

Going concern statement
—

To date, we have incurred significant operating losses, which is reflected in the balance sheet showing

€112.3 million accumulated losses as at 31 December 2016. We realized a consolidated net profit of €54.0 million for

the year ended 31 December 2016. The board of directors has examined the financial statements and accounting

policies. Based on conservative assumptions, we believe that our existing cash, cash equivalents and restricted

cash of €980.9 million at 31 December 2016 will enable us to fund our operating expenses and capital expenditure

requirements at least through the next two to three years. The board of directors is also of the opinion that

additional financing could be obtained, if required. Taking this into account, as well as the favorable outlook

of developments of our drug discovery and development activities, the board of directors is of the opinion that

it can submit the financial statements on a going concern basis. Whilst our cash position is sufficient for our

immediate and mid-term needs, the board of directors points out that if the R&D activities continue to go well,

we may seek additional funding to support the continuing development of our products or to be able to execute

other business opportunities.

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

Risk management and internal control
—

Risk management is embedded in our strategy and is considered important for achieving our operational targets.

To safeguard the proper implementation and execution of the group’s strategy, our executive committee has set

up internal risk management and control systems within Galapagos. The board of directors has delegated an

active role to the audit committee members to monitor the design, implementation and effectiveness of these

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 Galapagos is exposed.

The internal risk management and control system is designed to ensure:

▪ the careful monitoring of the effectiveness of our strategy
▪ Galapagos’ 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:

▪ financial strength in the long run, represented by revenue growth and a solid balance sheet
▪ liquidity in the short run; cash
▪ business performance measures; operational and net profitability
▪ 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 factors and Galapagos’ risk tolerance, the key controls within Galapagos 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 case if the external environment changes, or the laws or regulations or the

strategy of Galapagos change.

The financial risks of Galapagos are managed centrally. The finance department of Galapagos 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 financial markets risk, credit risk, liquidity

risk and currency risk. There are no other important risks, such as interest rate risk, because the group has

nearly no financial debt and has a strong cash position. The group does not buy or trade financial instruments

for speculative purposes. For further reference on financial risk management, see note 33 of the notes to the

consolidated financial statements. We also refer to the “Risk factors” section of the annual report for additional

details on general risk factors.

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

The company’s internal controls over financial reporting are a subset of internal controls and include those

policies and procedures that:

▪ pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the

transactions and dispositions of the assets of the company;

▪ provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial

statements in accordance with IFRS as adopted by the EU, and that receipts and expenditures of the

company are being made only by authorized persons; and

▪ provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or

disposition of the company’s assets that could have a material effect on the financial statements.

Since the company has securities registered with the U.S. Securities and Exchange Commission, or SEC, and

became a large accelerated filer within the meaning of Rule 12b-2 of the U.S. Securities Exchange Act of 1934, as of

year-end 2016, the company needs to assess the effectiveness of the internal controls over financial reporting and

provide a report on the results of this assessment.

In 2016 management has reviewed and formalized its internal controls over financial reporting based on criteria

established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring

Organizations of the Treadway Commission (COSO) and engaged an external advisor to help assess the

effectiveness of those controls.

As described in Section 404 of the U.S. Sarbanes-Oxley Act of 2002 and the rules implementing such act, we will

include the management and the statutory auditor’s assessment of the effectiveness of internal control over

financial reporting in our annual report on Form 20-F, which is expected to be filed with the SEC on or around

the publication date of the present annual report.

Management as well as the statutory auditor concluded that the group maintained, in all material respects,

effective internal control over financial reporting as of 31 December 2016.

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

The Galapagos share
—

Galapagos NV (ticker: GLPG) has been listed on Euronext Amsterdam and Brussels since 6 May 2005 and on

the NASDAQ Global Select Market since 14 May 2015. Galapagos NV forms part of the Bel20 index (top 20 listed

companies) on Euronext Brussels and the AEX Index (top 25 listed companies) on Euronext Amsterdam.

The Galapagos share in 2016

In 2016, the average daily trading volume on Euronext was 259,885 shares and €13 million turnover. The daily

trading volume on NASDAQ in 2016 was 91,397 ADSs and $5.0 million turnover.

Galapagos vs Next Biotech Index in 2016

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

Galapagos vs Nasdaq Biotechnology Index

Investor relations activities

We attracted additional sell-side analyst coverage by U.S. banks. Our IR team presented at a number of

conferences in 2016 and did several of broker-organized and self-organized roadshows throughout the U.S. and

Europe. We presented Full Year, Half Year and Q1 and Q3 2016 results and our R&D Update via webcasts.

The main topics of discussion with investors included the filgotinib DARWIN and FITZROY program results and

progress on our plans to develop a triple combination therapy for cystic fibrosis patients.

Subsequent events
—

On 17 January 2017 we announced the appointment of Dr. Walid Abi-Saab as Chief Medical Officer and member

of the executive committee, beginning on 1 March 2017.

On 20 January 2017 the board of directors conditionally issued 150,000 warrants within the framework of the

authorized capital, for the benefit of Dr. Abi-Saab (“Warrant Plan 2016 (B)”). The issuance of the warrants is subject

to acceptance by Dr. Abi-Saab. These warrants have a term of eight years and an exercise price of €62.50.

On 1 February 2017 we announced the dosing of the first patient with CF Class III (F508del and a gating mutation

like G551D) with our novel CF corrector GLPG2222 as an add-on to Kalydeco in a Phase 2a study. We also

announced the opening of an Investigational New Drug file with the U.S. Food & Drug Administration for

GLPG2222, which triggered a $10 million milestone payment from AbbVie to Galapagos.

On 10 March 2017 we announced the initiation of two additional Phase 2 studies with filgotinib: one in small

bowel Crohn’s disease, and one in fistulizing Crohn’s disease.

On 22 March 2017 we announced the initiation of a Phase 1 trial with GLPG3067, triggering a $7.5 million milestone

payment from our collaboration partner AbbVie.

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

Overview statutory results of Galapagos NV
—

This overview only concerns the non-consolidated statutory results of Galapagos NV. These results are part

of the consolidated results as discussed in the letter from the management.

Galapagos NV’s operating income in 2016 amounted to €303.3 million compared to €193.1 million in 2015. This

increase was mainly due to higher turnover (i.e. R&D revenues), which increased by €102.1 million, primarily

driven by increased milestone revenues. In addition, internally generated intangible assets – being capitalized

R&D expenses – contributed €7.1 million more to operating income than previous year. The other operating

income amounted to €16.3 million, including €4.7 million of grants recognized for R&D projects, €2.7 million of

recharges to subsidiaries and €5.8 million recognized for tax incentives for investments in intangible fixed assets.

The operating costs of 2016 amounted to €350.0 million compared to €242.9 million in 2015. Material purchases

decreased slightly from €4.4 million in 2015 to €4.3 million in 2016. Services and other goods decreased to

€119.3 million compared to €131.7 million in 2015, primarily due to €19.4 million of one-off costs in 2015 related

to the global offering of ordinary shares on 19 May 2015 (NASDAQ IPO), slightly offset by increased internal

subcontracting for our pre-clinical studies and clinical trials as well as increased fees for insourced personnel.

Personnel costs in 2016 amounted to €16.6 million compared to €15.7 million in 2015. The number of employees at

Galapagos NV at the end of 2016 amounted to 154, excluding insourced personnel.

Depreciation increased to €203.5 million in 2016, compared to €82.6 million in 2015. This was due to amortization

booked on the internally generated intangible assets capitalized in 2013, 2014, 2015 and 2016, for which the

internally generated intangible assets capitalized in 2016 were fully amortized in 2016, which explained the

substantial increase.

Galapagos NV’s 2016 financial income increased significantly to €8.9 million compared to €1.6 million in 2015

and can mainly be explained by increased currency exchange gains on U.S. dollar. Financial costs amouned to

€1.5 million compared to €1.2 million in 2015.

Extraordinary costs amounted to €5.9 million in 2016, compared to €13.5 million in 2015, which primarily consisted

of extraordinary write-offs of capitalized R&D costs with regard to alliances which ended or programs which were

placed on hold (€5.4 million in 2016, compared to €13.2 million in 2015).

Tax expenses recorded in 2016 (€19 thousand) related mainly to an income tax adjustment on the result of prior

periods. No tax expenses were recorded in 2015.

Galapagos NV capitalizes its incurred R&D expenses to the extent that the costs capitalized do not exceed a

prudent estimate of their value in use or their future economic benefits for the entity. The ability to recover the

capitalized amounts takes into account assumptions (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. The

net book value of capitalized R&D expenditure amounted to €70.8 million in 2016 compared to €153.0 million in

2015. The driver for this significant decrease was a change in accounting practices in 2016 with regard to internally

generated intangible assets: R&D expenses capitalized as from 2016 onwards are fully amortized in the year itself.

R&D expenses capitalized in previous years are still amortized over a 3-year period.

Investments in fixed assets in 2016 totaled €1.9 million, excluding the internally generated assets. They consisted

mainly of new laboratory and IT equipment, as well as investments in intangible assets, being software

development.

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

Galapagos NV’s cash position at the end of 2016 amounted to €972.6 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 regulatory requirements. They show a

negative result. The financial year 2016 closed with a loss of €45.2 million compared to a loss of €63.0 million

in 2015. Overall, 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 €29.9 million in 2016,

compared to a positive impact of €55.0 million in 2015. The non-consolidated annual accounts of Galapagos NV

show accumulated losses of €178.0 million as at 31 December 2016; we refer to the Going Concern Statement for

justification for the application of the valuation rules under the going concern assumption.

In 2016, neither Galapagos NV nor its affiliates made direct or active use of financial instruments such as hedging.

However, at year-end 2015 an embedded derivative existed under the terms of the Gilead contract (see note 8 of

the notes to the consolidated financial statements). This embedded derivative expired on 19 January 2016 at the

time of the completion of the transaction (i.e. date of the notary deed enacting the related capital increase).

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

Disclaimer and other information
—

This report contains all information required by Belgian law.

Galapagos NV is a limited liability company incorporated in Belgium and has its registered office at Generaal De

Wittelaan L11 A3, 2800 Mechelen, Belgium. Throughout this report, the term “Galapagos NV” refers solely to the

non-consolidated Belgian company and references to “we,” “our,” “the group” or “Galapagos” include Galapagos NV

together with its subsidiaries.

This report is published in Dutch and in English. Galapagos is responsible for the translation and conformity

between the Dutch and English versions. In case of inconsistency between the Dutch and the English versions,

the Dutch version shall prevail.

This report, including the statutory financial statements of Galapagos NV, is available free of charge and upon

request to be addressed to:

Galapagos NV

Investor Relations

Generaal De Wittelaan L11 A3

2800 Mechelen

Belgium

Tel: +32 15 34 29 00

E-mail: ir@glpg.com

A digital version of this report, including the statutory financial statements of Galapagos NV, is available on our

website, www.glpg.com.

We will use reasonable efforts to ensure the accuracy of the digital version, but do not assume responsibility

if inaccuracies or inconsistencies with the printed document arise as a result of any electronic transmission.

Therefore, we consider only the printed version of this report to be legally valid. Other information on our website

or on other websites does not form a part of this report.

As U.S. listed company, we are also subject to the reporting requirements of the U.S. Securities and Exchange

Commission, or SEC. An annual report will be filed with the SEC on Form 20-F. The Form 20-F will be available in

the SEC’s EDGAR database (https://www.sec.gov/edgar.shtml) and a link thereto will be posted on our website.

Forward-looking statements

This report contains forward-looking statements, all of which involve certain risks and uncertainties. These

statements are often, but are not always, made through the use of words or phrases such as “believe,” “anticipate,”

“expect,” “intend,” “plan,” “seek,” “estimate,” “may,” “will,” “could,” “stand to,” “continue,” as well as similar

expressions. Forward-looking statements contained in this report include, but are not limited to, statements

made in the "Letter from the management", the information provided in the section captioned “Outlook

2017”, guidance from management regarding the expected operational use of cash during financial year 2017,

statements regarding the development of a potential triple combination therapy for Class II cystic fibrosis

patients and the possible activity and clinical utility of such a potential triple combination therapy, and

statements regarding the expected timing, design and readouts of ongoing and planned clinical trials (i) with

filgotinib in rheumatoid arthritis, Crohn’s disease, and ulcerative colitis (ii) with GLPG1837, GLPG2451, GLPG3067,

GLPG2222, GLPG2851, GLPG2737, and GLPG3221 in cystic fibrosis, (iii) with GLPG1690 and GLPG2938 in IPF, (iv) with

MOR106 and GLPG2534 in atopic dermatitis and (v) with GLPG1972 in osteoarthritis. We caution the reader that

Galapagos NV • Annual Report 2016

THE GALAPAGOS GROUP

forward-looking statements are not guarantees of future performance. Forward-looking statements may involve

known and unknown risks, uncertainties and other factors which might cause our actual results, financial

condition and liquidity, performance or achievements, or the development of the industry in which we operate,

to be materially different from any historic or future results, financial conditions, performance or achievements

expressed or implied by such forward-looking statements. In addition, even if our results of operations, financial

condition and liquidity, and the development of the industry in which we operate are consistent with such

forward-looking statements, they may not be predictive of results or developments in future periods. Among the

factors that may result in differences are that our expectations regarding our 2017 revenues and financial results

and our 2017 operating expenses may be incorrect (including because one or more of our assumptions underlying

our revenue or expense expectations may not be realized), the inherent uncertainties associated with competitive

developments, clinical trial and product development activities and regulatory approval requirements (including

that data from our clinical research programs in rheumatoid arthritis, Crohn’s disease, ulcerative colitis, cystic

fibrosis, idiopathic pulmonary fibrosis, osteoarthritis, and other inflammatory indications may not support

registration or further development of our product candidates due to safety, efficacy or other reasons), our

reliance on collaborations with third parties (including our collaboration partner for filgotinib, Gilead, and

our collaboration partner for cystic fibrosis, AbbVie), and estimating the commercial potential of our product

candidates. A further list and description of these risks, uncertainties and other risks can be found in our

Securities and Exchange Commission filing and reports, including in our most recent annual report on Form

20-F filed with the SEC and our subsequent filings and reports filed with the SEC. We also refer to the “Risk

Factors” section of this report. 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. We expressly disclaim any obligation to update any such forward-looking statements in this

document to reflect any change in our expectations with regard thereto or any change in events, conditions or

circumstances on which any such statement is based or that may affect the likelihood that actual results will

differ from those set forth in the forward-looking statements, unless specifically required by law or regulation.

Galapagos NV • Annual Report 2016

R&D
Research &
Development

Evi Narinx

Project Manager Development Operations

R&D

The Galapagos pipeline
—

We are a clinical-stage biotechnology company specialized in the discovery and development of medicines with

novel modes of action, addressing disease areas of high unmet medical need. Our pipeline comprises programs

ranging from discovery to Phase 3 clinical trials in inflammation, cystic fibrosis, fibrosis, osteoarthritis and other

indications. Our highly flexible platform is applicable across many therapeutic areas. Our clinical stage programs

include: filgotinib, which is currently in Phase 3 clinical trials in rheumatoid arthritis (RA), Crohn’s disease (CD),

and ulcerative colitis (UC); our cystic fibrosis (CF) portfolio of drugs aimed at a triple combination therapy for 90%

of CF patients, for which we plan to initiate patient clinical trials by mid-2017; GLPG1690, our fully proprietary

autotaxin inhibitor, which is concluding a Phase 2a trial for idiopathic pulmonary fibrosis (IPF); GLPG1972 for

osteoarthritis (OA), which is expected to be dosed in a Phase 1b trial in U.S. patients in 2017; and MOR106, which

is currently being dosed in atopic dermatitis (AtD) patients in a Phase 1b trial. Except for our CF program, these

programs are derived from our proprietary target discovery platform.

We have collaborations with Gilead for filgotinib, with AbbVie for CF, with Servier for GLPG1972, and with

MorphoSys for MOR106. The following table summarizes key information on our lead development programs as

of the date of this annual report:

Galapagos NV • Annual Report 2016

R&D

Proprietary target discovery platform
—

Our target discovery platform provides a significant and substantial competitive advantage in our portfolio of

novel mode of action medicines as it:

▪ closely mimics the in vivo situation through the use of primary human cell with relevant trigger and

readout for a specific disease phenotype;

▪ identifies the optimal point to intervene in a disease pathway by knocking down of a given protein in these

assays;

▪ enables us to rapidly analyze all of the drugable genome and select pharmaceutically tractable protein

targets directly by their ability to regulate key disease biology.

Our product candidate filgotinib acts on a target whose role in the specific disease was discovered by us using our

discovery platform and we believe is a proof of success of this approach. Filgotinib acts on JAK1, and we believe

has potential for a best-in-class profile in Phase 3 clinical trials in RA, CD, and UC.

The human genome is made up of tens of thousands of genes which code for the proteins that make up the

human body. Nearly all chronic diseases and disorders are caused by a disruption in the normal function of

certain proteins. The main goal of pharmaceutical companies is to design drugs that alter the activity of these

proteins so that normal function returns and the cause of the disease is minimized or eliminated. One of the

main obstacles in discovering new drugs is to understand exactly which of the body’s thousands of proteins play

a key role in a particular disease. Once these proteins are discovered, they become targets for drug design. Finding

these targets is one of the critical steps in the drug discovery process. Our approach to target discovery is unique

as our discovery platform focuses on target identification using primary human cells, which we believe provides

a good system to study the effect that a protein might have on the disease in the human body.

In order to study proteins in human cells, we take advantage of the distinctive properties of adenoviruses.

Adenovirus is the virus that causes the common cold and has the capability to infect almost every type of human

cell. The viruses that Galapagos works with have been made replication incompetent, meaning they do not

replicate in the human cell they infect, and so do not interfere with the processes in the cell. We engineered the

viruses to carry small pieces of DNA, specific for individual human genes. When the virus enters the cell, this DNA

piece leads to the production of a short sequence of RNA that is processed in the cell to become “short interfering

RNA”, or siRNA, which specifically interferes with the mRNA of the protein it was designed for. By using these

viruses, we can cause the cells to block, or “knock-down,” the production of a certain protein, mimicking what

a small molecule drug does in the human body. We built a collection with these adenoviruses, now in excess of

20,000 viruses, that addresses over 6,000 drugable genes.

Our drug discovery research is based on the targets discovered using this technology. Once a target is validated,

it is tested against large collections of chemical small molecules to identify chemical structures that interact

with the target and block or activate protein production. These chemical structures are then optimized to obtain

“drug-like” characteristics followed by testing of the drug candidate in the clinic.

We believe that this discovery approach may increase the chances of success in bringing new mode of action

drugs to the market. Since 2009, Galapagos has generated 32 pre-clinical candidates of which 24 have novel modes

of action. Of these, 15 have entered the clinic, 11 with novel modes of action.

In addition to our pipeline of molecules in the clinic, we have multiple discovery programs which are advancing

toward clinical development. Further to targets and molecules in RA, IBD, and CF, we are exploring new modes of

action in OA, metabolic diseases, fibrosis, Hepatitis B virus, and immune inflammation.

Galapagos NV • Annual Report 2016

R&D

Filgotinib is a selective JAK1 inhibitor, potentially
best-in-class
—

Based on results from our Phase 2 trials, we believe that filgotinib is a promising candidate for the treatment

of RA, CD and potentially other inflammatory diseases. We are party to an exclusive Collaboration Agreement

with Gilead to develop and commercialize filgotinib in multiple diseases. Under the terms of the collaboration,

Gilead is primarily responsible for development and seeking regulatory approval of the licensed product. We are

required to use commercially reasonable efforts as requested by Gilead to assist Gilead with certain development

activities. Gilead initiated Phase 3 clinical programs in RA and CD, and a Phase 2b/3 program in UC in 2016.

Our filgotinib program in RA

RA is a chronic autoimmune disease that affects 2.9 million patients (of which approximately 1.5 million are being

treated with biologics) in the U.S. and Europe. RA is characterized by inflammation and degeneration of the joints.

Patients suffer from pain, stiffness, and restricted mobility due to a persistent inflammation of multiple joints,

ultimately resulting in irreversible damage of the joint cartilage and bone. According to GlobalData, sales of RA

therapeutics across the 10 main healthcare markets was USD 19.5 billion in 2015, with the current market being

dominated by injectable, biological therapies. Biologics, mostly TNF therapies, need to be injected and often lose

their effect over time, so there continues to be a considerable unmet need with regard to efficacy, safety, and

convenience of use with existing treatments.

New oral therapies that target the Janus kinase, or JAK, signalling pathway are emerging to treat inflammatory

diseases; JAK inhibitors, however, are associated with a range of side effects, including aberrations in low-density

lipoprotein, or LDL, cholesterol and red blood and NK cell counts. Filgotinib, however, as so far not shown any of

these side effects in Phase 2 clinical trials. In a human whole blood assay we demonstrated that filgotinib, with

a 30-fold selectivity for JAK1 over JAK2, was more selective for JAK1 than any other compound known to us to be

either approved for sale or in clinical development. We believe the high selectivity of filgotinib for JAK1 over JAK2

and JAK3, may allow for a positive efficacy profile, with an improved safety profile.

1 A Pardanani, et al, Leukemia (2013) 27, 1322-1327

Galapagos NV • Annual Report 2016

R&D

Our clinical program for filgotinib for RA

Clinical trials to date have shown that filgotinib is well-tolerated, with atherogenic index improvement and

absence of anemia, and shows strong activity in treating RA. On top of this, we believe its once-a-day oral dosage

and its low risk for drug-drug interactions make it convenient for patient use.

We reported final 24 weeks’ data from DARWIN 1 and DARWIN 2 Phase 2b dose-range finding clinical trials

in 2015. Both trials were double-blind, placebo-controlled for 24 weeks of treatment in patients with moderate

to severe rheumatoid arthritis who showed an inadequate response to methotrexate. DARWIN 1 (594 patients)

evaluated filgotinib as an addition to methotrexate, as once- and twice-daily administration (qd and bid dosing,

respectively) at three daily dose levels. DARWIN 2 (283 patients) evaluated filgotinib as once-daily monotherapy

administration (qd dosing) at three dose levels. Both trials achieved the primary endpoints (ACR20). Below are the

ACR50 and ACR70 scores at 12 and 24 weeks for 100 and 200 mg qd in both DARWIN 1 and DARWIN 2:

Overall, there was no statistically relevant difference between the once-daily and twice-daily dosing regimens

in DARWIN 1. Both trials showed a rapid onset of activity, as of week one for ACR and DAS28(CRP) responses. In

DARWIN 1 (200 mg bid) and in DARWIN 2 (100 mg qd) up to 50% of the patients reached low disease activity or

remission. The 100 mg and 200 mg qd doses achieved similar levels of activity overall.

Galapagos NV • Annual Report 2016

R&D

Safety data in both trials was similarly promising. In dose groups including placebo in both studies, 3.9% of

patients stopped treatment during the trial for safety reasons. In DARWIN 1 patients reporting serious (2.5%

overall) and non-serious treatment-emergent adverse events were evenly spread over the dose groups including

placebo. Serious infections were reported in six patients, including one death on active treatment in the second

half of the trial and for which the Data Safety Monitoring Board did not see a reason to pause or change

the trial. No opportunistic infections were reported. Herpes zoster infection occurred in five patients, equally

spread over placebo and filgotinib groups. In DARWIN 2 a higher discontinuation rate for safety was observed

for placebo (5.6%) during the first 12 weeks of the trial compared to filgotinib treated patients (2.5%) up to week

24. Similar incidence of serious and non-serious treatment-emergent adverse events was reported, evenly spread

over the dose groups including placebo. A higher rate of infections was observed in filgotinib (19% over 24 weeks)

compared to placebo (10% up to week 12), with serious infections remaining limited (1.4% of filgotinib patients).

No malignancies, tuberculosis, major adverse cardiac events, opportunistic infections, or deaths were reported in

DARWIN 2.

On the basis of pre-clinical findings, males in the U.S. were restricted by the FDA to the 100 mg dose for DARWIN

1 and 2. Male reproductive hormones consequently were monitored in male patients taking 200 mg in DARWIN 1

and 2 outside the U.S. No clinically significant changes or discontinuations were observed for male reproductive

hormones in either trial.

Consistent with its selective JAK1 inhibition, filgotinib treatment led to an improvement in hemoglobin (DARWIN

1 up to 0.5 g/dL, or a 4% increase from baseline, DARWIN 2 up to 0.4 g/dL, or 3.6% increase from baseline). In

DARWIN 1, all lipid fractions including HDL and LDL increased, with the largest percentage increase in HDL, while

in DARWIN 2 similar increases in LDL and HDL were maintained. Neutrophil levels remained stable after initial

decline to mid-normal range at week four. Neither lymphocytes nor liver enzymes were impacted by treatment

with filgotinib in either study.

Filgotinib’s improvement in hemoglobin shown in DARWIN 1 and 2 potentially differentiates it when compared

to impact on hemoglobin shown by other JAK inhibitors in RA trials:

Note: data from separate RA studies not conducted by the Company. filgotinib – Westhovens et al, and Kavanaugh et al, ARD 2016; baricitinib – Dougados et al,
Annrheumdis 2016, RA-BUILD; tofacitinib – FDA AdComm briefing document May 2012; upadacitinib – Genovese et al A&R 2016 BALANCE 2.

Galapagos NV • Annual Report 2016

R&D

Filgotinib’s lack of impact on natural killer (NK) cells shown in DARWIN 1 and 2 potentially differentiates it when

compared to the impact on NK cells shown by other JAK inhibitors in RA trials:

Note: data from separate RA studies not conducted by the Company. filgotinib – Westhovens et al, and Kavanaugh et al, ARD 2016; baricitinib – *Dougados et
al, Annrheumdis 2016, RA-BUILD and Tanaka EULAR 2016 abstract RA-BEAM; tofacitinib – Van Vollenhoven abstract 2013, ** median CFB at W6; upadacitinib
– Genovese et al A&R 2016 BALANCE 2.

Of the patients who have completed DARWIN 1 and DARWIN 2 and were eligible to continue, approximately 98% elected

to participate in the DARWIN 3 follow-up trial. DARWIN 3 is a multi-center, open-label, long-term follow-up safety and

efficacy trial of subjects who have completed either DARWIN 1 or DARWIN 2. All subjects have started the trial at the

same dose level, either at 200 mg once per day or at 100 mg twice per day (except for males in the U.S. sites of these trials

who receive a maximum daily dose of 100 mg), depending on the regimen administered during the preceding trial, with

DARWIN 1 subjects continuing to use filgotinib in combination with MTX.

FINCH Phase 3 program with filgotinib in RA

In August 2016, our collaboration partner Gilead initiated the FINCH global Phase 3 program investigating the

efficacy and safety of 100 mg and 200 mg filgotinib once daily, in RA patient populations, ranging from early stage

to biologic-experienced patients:

FINCH 1 is a 52-week, randomized, placebo- and adalimumab-controlled trial in combination with methotrexate
(MTX) in an expected 1,650 patients who have had inadequate response to MTX. The primary endpoint is ACR20

at week 12. The study will also include radiographic assessment at weeks 24 and 52.

FINCH 2 is a 24-week, randomized, placebo-controlled trial in an expected 423 patients who are on conventional
disease-modifying anti-rheumatic drugs (cDMARD), and have had an inadequate response to biological

treatment. The primary endpoint is ACR20 at week 12.

FINCH 3 is a 52-week, randomized trial in an expected 1,200 MTX-naïve patients to study filgotinib in combination with
MTX, as well as monotherapy. The primary endpoint is ACR20 at week 24. Radiographic progression will also be assessed.

Gilead will perform a single dedicated male patient safety study concurrent to all Phase 3 programs. This study is expected

to include RA, CD, and UC patients.

Galapagos NV • Annual Report 2016

R&D

Inflammatory bowel disease
—

Our filgotinib program in inflammatory bowel disease (IBD)

IBD includes CD and UC. We observed high activity and a favorable safety profile in a Phase 2 trial with filgotinib

in CD. The profile we saw with filgotinib in this CD patient trial leads us to believe the candidate drug may

show activity and tolerability in UC patient studies as well. IBD affects approximately 2 million patients (of

which approximately 0.5 million are being treated with biologics) in the U.S. and Europe, and the market for IBD

therapies is approximately $9 billion today, according to GlobalData. Current treatments are dominated by anti-

TNF agents, with new biologic agents gaining some ground in second line treatment.

CD is an IBD of unknown cause, resulting in chronic inflammation of the gastrointestinal (GI) tract with a

relapsing and remitting course. Today, only 10% of CD patients achieve prolonged clinical remission. There are

currently no highly effective oral therapies approved for CD and, similar to RA, treatment is dominated by

injectable, biologic treatments including anti-TNF therapies. Anti-TNF agents have improved the management

of CD; however, not all patients respond to these drugs, and secondary loss of response is reported in up to 50%

of patients per year in placebo-controlled trials. There continues to be a considerable unmet need with these

existing treatments. Dysregulation of the JAK signaling pathway has also been associated with CD, and we believe

that filgotinib, with its high selectivity for JAK1, is a highly attractive candidate for the treatment of CD. By

inhibiting JAK1 but not JAK2, unwanted effects such as anemia may be prevented. This absence of anemia is of

particular importance to IBD patients, who frequently experience fecal blood loss.

Increased activity and focus from pharmaceutical companies has led to more clinical trials of oral therapies in

CD. AbbVie is conducting a Phase 2 trial with upadacitinib (pan-JAK inhibitor) which should read out in 2017.

Celgene announced Phase 1b results with GED-0301 (SMAD-7), which showed early activity but limited endoscopic

improvement. Celgene is also investigating ozanimod (S1P 1 and 5 receptor modulator) in Phase 2 in CD, with

topline results expected in 2017. After two Phase 2 trials, Pfizer announced Xeljanz (pan-JAK inhibitor) will not be

developed further in CD.

Galapagos NV • Annual Report 2016

R&D

Our clinical program with filgotinib in CD

Our FITZROY Phase 2 trial (174 patients) evaluated filgotinib once-daily versus placebo in patients with moderate

to severely active CD and mucosal ulceration. Patients recruited were either anti-TNF naïve or anti-TNF failures.

FITZROY was the first trial in CD to require endoscopic confirmation of lesions at entry, and also to include

a placebo control on endoscopy. The trial comprised two parts, each of 10 weeks duration: the first part

investigated the safety and efficacy of filgotinib 200 mg once daily versus placebo, while the second part of the

study investigated continued treatment through 20 weeks in an observational exploratory design. The FITZROY

trial achieved the primary endpoint of clinical remission at 10 weeks: the percentage of patients achieving

a Crohn’s Disease Activity Index (CDAI) score lower than 150 was statistically significantly higher in patients

treated with filgotinib (47%) versus patients receiving placebo (23%). The share of patients achieving 100-points

clinical response (60%) also was significant versus those receiving placebo (41%). Improvement in quality of life,

histopathology, endoscopy assessment and biomarkers of inflammatory activity were also observed at week 10.

Overall mean change in histopathology scores at week 10 for patients treated with filgotinib (-3.5) versus placebo

(-0.6) was significantly different, confirming the clinical responses in the tissues of patients. More patients on

filgotinib showed >50% improvement in SES-CD (endoscopy) scores versus placebo patients at week 10:

Vermeire et al., The Lancet, 2016

Clinical responses were maintained from week 10 to week 20. Non-responders in the placebo arm from the first

ten weeks received filgotinib 100mg in the second ten weeks and showed improvement in clinical remission

during the second part of the trial.

Overall, in the FITZROY study at 20 weeks of treatment, filgotinib demonstrated a favorable safety profile

consistent with the DARWIN studies in RA. An increase in hemoglobin was also observed in FITZROY, without

difference between filgotinib and placebo. No clinically significant changes from baseline in neutrophils or liver

function tests were observed.

Galapagos NV • Annual Report 2016

R&D

Gilead initiated a Phase 3 trial (DIVERSITY) with filgotinib in CD in November 2016. The DIVERSITY Phase 3

trial investigates efficacy and safety of 100 mg and 200 mg filgotinib once-daily compared to placebo in patients

with moderately to severely active disease including those with prior antibody therapy failure. Gilead will recruit

approximately 1,300 patients from the U.S., Europe, Latin America, Canada, and Asia/Pacific regions. Men and

women in the DIVERSITY trial will be randomized to receive placebo, 100 mg or 200 mg filgotinib. In the U.S.,

males may receive 200 mg if they failed at least one anti-TNF and vedolizumab, a monoclonal anti-integrin

antibody marketed by Takeda.

In March 2017, Gilead initiated two additional Phase 2 studies with filgotinib in Crohn's disease: small bowel and

fistulizing Crohn's disease.

Our clinical program with filgotinib in UC

UC is an inflammatory bowel disease resulting in ulcerations and inflammation of the colon and rectum. Unlike

CD, UC involves damaging inflammation of only the colon and rectum. Although the introduction of anti-TNF

biologics has improved the treatment of some patients, only 33% of patients will achieve long-term remission,

and many patients lose their response to treatment over time. The medical need for improved efficacy is high

and could likely be achieved by a new mechanism of action.

Increased activity and focus from potential competitors has led to more clinical trials of oral therapies in UC.

Pfizer showed activity with Xeljanz (pan-JAK inhibitor) in Phase 3 UC trials and has filed for approval. AbbVie

is conducting a Phase 2 trial with upadacitinib (pan-JAK inhibitor) which should read out in 2017. Celgene is

investigating ozanimod (S1P 1 and 5 receptor modulator) in Phase 3 and GED-0301 (SMAD-7) in Phase 2 in UC.

Gilead initiated the SELECTION Phase 2b/3 trial in UC with filgotinib in December 2016. SELECTION investigates

efficacy and safety of 100 mg and 200 mg filgotinib once-daily compared to placebo in patients with moderately

to severely active disease including those with prior antibody therapy failure. Gilead will recruit approximately

1,300 patients from the U.S., Europe, Latin America, Canada, and Asia/Pacific regions. The SELECTION Phase 2b/3

trial in ulcerative colitis will include a futility analysis, serving as the Phase 2b part of this integrated Phase 2b/3

study. Men and women in SELECTION will be randomized to receive placebo, 100 mg or 200 mg filgotinib. In the

U.S., males may receive 200 mg if they failed at least one anti-TNF and vedolizumab.

Our CF program
—

CF is a rare,

life-threatening, genetic disease affecting the lungs and the digestive system,

impacting

approximately 80,000 patients worldwide with approximately 30,000 patients in the United States. CF patients

carry a defective cystic fibrosis transmembrane conductance regulator, or CFTR, gene and are classified based on

their specific mutation of the CFTR gene. The Class II mutation is present in approximately 90% of CF patients,
with Orkambi®3 being the only approved therapy for the underlying cause of CF in this mutation. Kalydeco is a
disease-modifying treatment for Class III mutations, representing 4% of total CF patients. The market for CF

therapies is robust and growing. According to Vertex Pharmaceuticals, approximately 9,000 patients were treated

with Vertex therapies in 2016, and this they expect to grow to approximately 75,000 patients by 2024. Combined

sales of Kalydeco and Orkambi were approximately $1.7 billion in 2016.

Despite the approval of Kalydeco and Orkambi, there is need for better therapies to improve pulmonary function

for the majority of the patient population. Though many pediatric patients have normal lung function at the

time of diagnosis, physicians generally believe that earlier treatments can have downstream benefits for the

patient by slowing the deterioration in lung function.

3 Orkambi is marketed by Vertex Pharmaceuticals

Galapagos NV • Annual Report 2016

R&D

Two types of disease-modifying CFTR modulators have the current focus of CF drug developers. Potentiator

molecules aim to restore the flow of ions through an activated CFTR by influencing the channel’s opening.

Corrector molecules aim to overcome defective protein processing by restoring proper folding of CFTR and

allowing for increased cell surface expression. In order to improve CFTR function meaningfully for the largest

patient group with Class II, and Class III/IV, and other mutations, we believe a combination of medicines will be

required, comprising a potentiator and two novel corrector (which we refer to as C1 and C2) molecules.

In pre-clinical cellular assay studies, we consistently observed that combinations of potentiator, C1, and C2

correctors restore close to healthy CFTR function in lung epithelial cells and organoids cultured from Class II

patients, both homozygous and heterozygous for F508del, respectively:

These results are suggestive of a compelling therapeutic option for these patients. We believe that our CF

combination therapy may address the unmet need in both homozygous and heterozygous Class II patients, based

on these in vitro results.

We aim to evaluate a once-daily, oral, triple combination CF therapy in patients starting in mid-2017, with

additional trials with novel CF compounds initiating throughout 2017. We have developed a portfolio of lead

and follow-on compounds from which to select the best potentiator and corrector molecules for our triple

combination therapy:

Galapagos NV • Annual Report 2016

R&D

Our clinical program for CF

Our most advanced candidate drug for CF, potentiator GLPG1837, was the first potentiator since Kalydeco to show

comparable results in G551D patients in the SAPHIRA 1 Phase 2a trial in late 2016.

SAPHIRA 1 was an open-label study of three doses of GLPG1837 in 26 patients with the G551D mutation. Of these

patients, 25 patients were on stable Kalydeco treatment at screening and agreed to a one week washout prior to

the start of dosing GLPG1837. One patient was naïve to Kalydeco. All subjects received GLPG1837 125 mg bid (twice-

daily) for 7 days, immediately followed by 250 mg bid for 7 days and subsequently by 500 mg bid for 14 days.

A statistically significant dose dependent decrease in sweat chloride concentration was observed. At the 500 mg

bid dose, sweat chloride decreased from a mean value of 98 mmol/L at baseline to 66 mmol/L (p <0.0001). For

those patients exceeding the predicted target concentration, sweat chloride changed from a mean value of 94

mmol/L at baseline to 52 mmol/L. Below is an illustration of the changes in sweat chloride at increasing pre-dose

exposures of GLPG1837 in blood plasma from SAPHIRA 1 in G551D patients who had washed out of Kalydeco prior

to being treated with GLPG1837:

All ‘1837 exposure measurements are taken pre-dose escalation, except for days 22 and 29 in which there is no
escalation. Here ‘1837 concentration measurements are taken prior to intake of first daily dosis.

Galapagos NV • Annual Report 2016

R&D

25 patients were on stable treatment with Kalydeco prior to this study. For these patients, mean percent predicted

FEV1 (ppFEV1) levels were 74% at screening (prior to Kalydeco washout). The one week wash-out resulted in a

5.4% mean decrease in absolute ppFEV1. At the end of treatment with GLPG1837, the ppFEV1 levels returned to

the Kalydeco pre-washout levels. The figure below illustrates this restoration of ppFEV1 to screening levels, after

washout and treatment with GLPG1837 in SAPHIRA 1:

Overall GLPG1837 was well tolerated in SAPHIRA 1, with observed treatment emergent adverse events being

predominantly mild or moderate, and typical for a CF patient population. One patient dropped out of the study

due to an increase in non-cardiac creatine phosphokinase.

We believe that SAPHIRA 1 represents a clinical validation of our in vitro systems, reinforcing our confidence in

our approach to get to a triple combination therapy.

We initiated a Phase 1 trial for a second potentiator candidate GLPG2451 in May 2016. Follow-on potentiator

GLPG3067 is currently in Phase 1. GLPG1837 has a twice-daily dosing profile, while GLPG2451 has potential for once-

daily dosing.

We reported that GLPG2222, the first early binding (C1) corrector, showed favorable safety and tolerability in

Phase 1 trials in healthy volunteers in June 2016. GLPG2222 was tested in single ascending doses up to 800 mg,

and in multiple ascending doses up to 600 mg qd for 14 days in a double-blind, randomized, placebo-controlled

study. The candidate drug was shown to be well-tolerated and no emerging safety signals observed in the dose

range studied. Absorption of GLPG2222 was rapid and favorable. Pharmacokinetics of GLPG2222 support once-

daily dosing regimens to be explored in further development. We believe GLPG2222 is well positioned for selection

for the first triple combination therapy in 2017 and will be further explored in the clinic throughout the year to

improve our understanding of dosing for the triple combination, including a Phase 2 trial on top of Kalydeco in

Class III mutation patients initiated in January 2017. We dosed the first healthy volunteer with a combination of

GLPG2451 and GLPG2222 in February 2017. Follow-on C1 corrector GLPG2851 will enter Phase 1 trials in 2017.

We initiated a Phase 1 trial for our first late binding (C2) corrector GLPG2737, the final component needed for

a triple combination therapy, in November 2016. Topline results from this trial are expected in Q2 2017. We are

developing follow-on C2 correctors which are expected to enter Phase 1 in 2017.

Galapagos NV • Annual Report 2016

R&D

Our IPF programs
—

IPF is a chronic, relentlessly progressive fibrotic disorder of the lungs that typically affects adults over the age

of 40. According to GlobalData, IPF affects approximately 109,000 patients in the U.S. and Europe and, as such,

we have received orphan designation for our product candidate GLPG1690 in this indication from European

authorities and we intend to seek orphan designation in the U.S. for our product candidates in IPF. The clinical

prognosis of patients with IPF is poor, as the median survival at diagnosis is 2–4 years. Currently, no medical

therapies have been found to cure IPF. The medical treatment strategy aims to slow disease progression and

improve quality of life. Lung transplantation may be an option for appropriate patients with progressive disease

and minimal comorbidities.

Regulatory agencies have approved Esbriet®4and Ofev®5 for the treatment of mild to moderate IPF. Both Esbriet
and Ofev have been shown to slow the rate of functional decline in IPF and are gaining ground as the standard

of care worldwide. Combined sales of both drugs reached $1.1 billion in 2016, with 74% of global revenues being in

the U.S. These regulatory approvals represent a major breakthrough for IPF patients; yet neither drug improves

lung function, and the disease in most patients on these therapies continues to progress. Moreover, the adverse

effects associated with these therapies are considerable (e.g., diarrhea, liver function test abnormalities with Ofev,

nausea and rash with Esbriet). Therefore, there is still a large unmet medical need as IPF remains a major cause of

morbidity and mortality. GlobalData estimates global sales of approved IPF drugs will grow to nearly $2.4 billion

in 2022.

GLPG1690 is a potent and selective inhibitor of autotaxin (ATX) and is fully proprietary to us. We identified ATX as

a potential target for IPF, after finding the target using an inflammation assay in our target discovery platform.

Pharmacology and translational studies published by other parties since then suggest that ATX may also play a

role in metabolic disease, arthritic pain, oncology, and lung disease. We evaluated GLPG1690 in a pre-clinical lung

fibrosis model (bleomycin-treated mice) and observed effects on reducing the fibrotic score, numerically favoring

GLPG1690 over Esbriet.

GLPG1690 completed a Phase 1 first-in-human trial in February 2015. In this trial, GLPG1690 was shown to be well-

tolerated in up to 1000 mg daily dose and demonstrated a favorable pharmacokinetic profile. Moreover, in this

trial GLPG1690 demonstrated the ability to reduce plasma lysophosphatidic acid (LPA) levels on a sustained basis,

implying ATX engagement.

We are currently finalizing a Phase 2a trial (called FLORA) in IPF patients. FLORA is fully recruited and we expect

topline results in the second half of 2017. This randomized, placebo-controlled double-blind trial includes up to

24 patients with IPF from 17 centers in Europe and evaluates treatment with 600 mg of GLPG1690 for 12 weeks.

Primary objectives are to assess safety, tolerability, and pharmacokinetics and pharmacodynamics of GLPG1690

in IPF patients. Target engagement will be measured by LPA in plasma and bronchoalveolar lavage fluid, both

at baseline and through 12 weeks of treatment. Secondary objectives include the evaluation of lung function,

changes in disease biomarkers and quality of life.

In June 2016, we nominated a second candidate drug, GLPG2938, with an undisclosed novel mechanism of action

aimed at IPF. This candidate is expected to enter Phase 1 trials in 2017.

4 Esbriet (pirfenidone) is marketed by Roche.
5 Ofev (nintedanib) is marketed by Boehringer Ingelheim.

Galapagos NV • Annual Report 2016

R&D

Our OA program
—

Sometimes called degenerative joint disease or degenerative arthritis, OA is the most common chronic condition

of the joints. OA can affect any joint, but it occurs most often in the small joints of the fingers, knees, hips, lower
back and neck, and the bases of the thumb and big toe.6 According to GlobalData, OA will be the fourth leading
cause of disability by the year 2020. There are limited data on the total prevalence of OA. GlobalData estimates

that diagnosed cases will grow from approximately 117 million cases in 2016 to approximately 131 million cases by

2024, with cases affecting hand, knee, and hip in that order of prevalence.

In normal joints, a firm, rubbery material called cartilage covers the end of each bone. Cartilage provides a

smooth, gliding surface for joint motion and acts as a cushion between the bones. In OA, the cartilage breaks

down, causing pain, swelling and problems moving the joint. As OA worsens over time, bones may break down

and develop growths called spurs. Bits of bone or cartilage may chip off and float around in the joint. In the body,

an inflammatory process occurs and cytokines (proteins) and enzymes develop that further damage the cartilage.

In the final stages of OA, the cartilage wears away and bone rubs against bone leading to joint damage and more
pain.6

Although OA occurs in people of all ages, it is most common in people older than 65. Common risk factors

include obesity, previous joint injury, overuse of the joint, and weak thigh muscles. One in two adults will develop

symptoms of knee OA during their lives. One in four adults will develop symptoms of hip OA by age 85. Current

treatments for OA include weight loss, physical therapy, pain and anti-inflammatory medicines, and surgery, all

of which address only the symptoms of the disease. There are currently no disease-modifying therapies available

for OA, with drug sales for OA patients amounting to approximately $4 billion in generic painkillers in 2016.

GLPG1972 has a novel mode of action with potential application in OA, and was discovered by us under our

collaboration agreement with Servier, a French pharmaceutical company.

In June 2016, we announced that GLPG1972, a first-in-class candidate drug aimed at treating OA, was shown to

be safe and well tolerated in healthy human volunteers in a Phase 1 first-in-human trial. In this trial, dosing

with GLPG1972 reduced a cartilage breakdown biomarker by up to 60% in these volunteers within two weeks.

In 2017, we intend to conduct a Phase 1b patient clinical trial of GLPG1972 in the U.S., where we retained full

commercial rights. Additional data resulting from the ongoing non-clinical program expected in the second

quarter of 2017 will enable our collaboration partner Servier to decide on the exercise of the option to license the

compound for further development into OA patient trials outside the U.S.

6 From website of the Arthritis Foundation (arthritis.org)

Galapagos NV • Annual Report 2016

R&D

Our AtD programs
—

Atopic dermatitis (AtD), is a chronic pruritic (itching) inflammatory skin disease that most frequently starts

in early childhood, often persists into adulthood, but may also have an adult onset. According to GlobalData,

sales of AtD therapies in the 7 major healthcare markets may reach $4 billion in 2016, with 35 million patients

diagnosed with the disease and 10 million patients being treated in those markets. The main features of AtD

are the impairment of the skin barrier and dysfunction of the immune system accompanied with dry skin and

severe pruritus that is associated with cutaneous hyperactivity to various environmental stimuli. The pruritus

(itching) may lead to sleep loss, anxiety, depression and impaired social life and is therefore considered as

highest therapeutic need in AtD. Generic drugs are the approved standard of care, including immunomodulators

cyclosporine and mycophenolate mofetil and topical treatments. There are disease-modifying biologics in

development.

MOR106 is a human monoclonal antibody designed to selectively target IL-17C. IL-17C is a target discovered by us

and has been shown to be distinct from other members of the IL-17 cytokine family, playing an important and

pro-inflammatory role in certain skin disorders. MOR106 potently inhibits the binding of IL-17C to its receptor

and thus inhibits its biological activity.

MOR106 arises from a discovery and co-development alliance between Galapagos and MorphoSys, in which both

companies contribute their core technologies and expertise.

We are currently evaluating MOR106 in a randomized, double-blind, placebo-controlled Phase 1 trial, with the aim

to evaluate safety and tolerability. As secondary endpoints, the trial will assess pharmacokinetics and potential

immunogenicity of MOR106.

The first part of the trial was conducted in a single center in 56 healthy volunteers, evaluating single ascending

doses (SAD) as intravenous infusion compared to placebo. MOR106 showed favorable safety and PK results when

administered to healthy volunteers in the ongoing trial. Subsequently an investigation was started of multiple

ascending doses (MAD) compared to placebo in approximately 24 patients with moderate to severe AtD in several

European centers. Topline results of the complete trial, including the MAD part in patients and further results

from the SAD part in healthy volunteers, are expected in the second half of 2017.

In June 2016, we nominated a second candidate drug for AtD, GLPG2534, with an undisclosed novel mechanism

of action aimed at atopic dermatitis and which is different from the target of MOR106. This small molecule

candidate is fully proprietary to us and is expected to enter Phase 1 trials in 2017.

Galapagos NV • Annual Report 2016

Risk factors
Description of the risks
of which investors
should be aware

Edo Elstak

Senior Scientist Target Discovery & Validation

RISK FACTORS

Risks related to our financial position and need for
additional capital
—

We are a clinical-stage biotechnology company and have not yet generated significant income. Our operations

to date have been limited to developing our technology and undertaking pre-clinical studies and clinical trials of

our product candidates.

Since our inception, we have incurred significant operating losses. We expect to continue incurring significant

research, development and other expenses related to our ongoing operations, and to continue incurring operating

losses for the foreseeable future. We do not anticipate generating revenues from sales of products for the

foreseeable future, if ever. Because of the numerous risks and uncertainties associated with pharmaceutical

product development, we are unable to predict the timing or amount of expenses and when we will be able to

achieve or maintain profitability, if ever.

We will require substantial additional future capital which may not be available to us on acceptable terms, or

at all, in order to complete clinical development and, if we are successful, to commercialize any of our current

product candidates. In addition, raising additional capital may cause dilution to our existing shareholders, restrict

our operations or require us to relinquish rights to our product candidates or technologies. The incurrence of

additional indebtedness could result in increased fixed payment obligations and could also result in certain

additional restrictive covenants that could adversely impact our ability to conduct our business. In the event

that we enter into collaborations and/or licensing arrangements in order to raise capital, we may be required to

accept unfavorable terms, including relinquishing or licensing to a third party on unfavorable terms our rights

to technologies or product candidates.

For further reference on financial risks in particular, see note 33 of the notes to the consolidated financial

statements.

Risks related to product development, regulatory
approval and commercialization
—

We operate adequate standard operating procedures to secure the integrity and protection of our research and

development activities and results, and the optimum allocation of our R&D budgets. The progress of the most

important research and development programs is continuously monitored by our executive committee; they are

discussed with the board of directors at least once per quarter, and board members with expertise in clinical

and scientific matters occasionally attend meetings with our scientific staff to discuss and assess such programs.

Nevertheless, due to our limited resources and access to capital, we must and have in the past decided to prioritize

development of certain product candidates; these decisions may prove to have been wrong and may adversely

affect our business.

We are heavily dependent on the success of our product candidate filgotinib. We are also dependent on the

success of our other product candidates, such as our CF candidates (including GLPG1837, GLPG2451, GLPG2222,

and GLPG2737), GLPG1690, GLPG1972 and MOR106. We cannot give any assurance that any product candidate

will successfully complete clinical trials or receive regulatory approval, which is necessary before it can be

commercialized.

Galapagos NV • Annual Report 2016

RISK FACTORS

Our business and future success is substantially dependent on our ability to develop successfully, obtain

regulatory approval for, and then successfully commercialize our product candidate filgotinib and our other

product candidates. We are not permitted to market or promote any of our product candidates before we receive

regulatory approval from the FDA, the EMA or any other comparable regulatory authority, and we may never

receive such regulatory approval for any of our product candidates. We cannot give any assurances that our

clinical trials for filgotinib or our other product candidates will be completed in a timely manner, or at all. We

have never completed a Phase 3 trial or submitted an NDA. If filgotinib or any other product candidate is not

approved and commercialized, we will not be able to generate any product revenues for that product candidate.

The regulatory approval processes of the FDA, the EMA and other comparable regulatory authorities are lengthy,

time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for

our product candidates, our business will be substantially harmed.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain.

Results of earlier studies and trials as well as data from any interim analysis of ongoing clinical trials may not be

predictive of future trial results and failure can occur at any time during the clinical trial process. If we experience

delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial

prospects of our product candidates will be harmed, and our ability to generate product revenues from any of

these product candidates will be delayed. If filgotinib or any other product candidate is found to be unsafe or lack

efficacy, we will not be able to obtain regulatory approval for it and our business would be materially harmed.

The rates at which we complete our scientific studies and clinical trials depend on many factors, including, but

not limited to, patient enrolment.

Patient enrolment is a significant factor in the timing of clinical trials and is affected by many factors including

competing clinical trials, clinicians’ and patients’ perceptions as to the potential advantages of the drug being

studied in relation to other available therapies and the relatively limited number of patients. Any of these

occurrences may harm our clinical trials and by extension, our business, financial condition and prospects.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent

their regulatory approval, limit the commercial profile of an approved label, or result in significant negative

consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt,

delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval

by the FDA, the EMA or other comparable regulatory authorities. The drug-related side effects could affect patient

recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims.

Any of these occurrences may harm our business, financial condition and prospects significantly.

Based on pre-clinical findings, we expect that filgotinib, if approved, may have a labeling statement warning

female patients of child-bearing age to take precautionary measures of birth control to protect against

pregnancy, similar to warnings included with other frequently used medications in RA, such as methotrexate.

In addition, there may be dose limitations imposed for male patients that are prescribed filgotinib, if approved. In

connection with the DARWIN clinical program, we agreed with the FDA to exclude the 200 mg filgotinib daily dose

for male subjects in the United States; males received a maximum daily dose of 100 mg in the U.S. sites in these

trials. This limitation was not imposed by any other regulatory agency in any other jurisdiction in which the

DARWIN clinical program is being conducted. We agreed to this limitation because in both rat and dog toxicology

studies, filgotinib induced adverse effects on the male reproductive system and the FDA determined there was

not a sufficient safety margin between the filgotinib exposure at the no-observed-adverse-effect-level, or NOAEL,

observed in these studies and the anticipated human exposure at the 200 mg daily filgotinib dose. Accordingly,

in connection with the DARWIN 3 clinical trial, in the United States, male subjects are dosed at a daily dose of

Galapagos NV • Annual Report 2016

RISK FACTORS

100 mg only. Male participants in this study and their partners are required to use highly effective contraceptive

measures for the duration of the study and during a washout period thereafter. As an additional safety measure,

we monitor clinical laboratory changes in hormone levels for subjects in the DARWIN 3 clinical trial.

Recently generated non-clinical data showed filgotinib did not induce any macroscopic or microscopic findings

in the male reproductive system in animals with higher filgotinib exposure versus previous studies.

The Phase 3 FINCH program, led by our collaboration partner Gilead, is evaluating 100 mg and 200 mg filgotinib

in both males and females in major RA patient populations world-wide. Men and women in both the Phase 2b/

3 SELECTION and Phase 3 DIVERSITY trials in UC and CD, respectively, will be randomized to receive placebo, 100

mg or 200 mg filgotinib. In these SELECTION and DIVERSITY trials in the United States, males may receive 200

mg only if they failed conventional therapy, anti-TNF and vedolizumab. The filgotinib Phase 3 program will also

contain a dedicated male patient testicular safety study.

Even if filgotinib does receive regulatory approval or marketing authorization, the FDA or other regulatory

authorities may impose dosing restrictions that differ from the approved dosing regimen in other jurisdictions.

Box warnings, labeling restrictions, dose limitations and similar restrictions on use could have a material adverse

effect on our ability to commercialize filgotinib in those jurisdictions where such restrictions apply.

Combination therapies involve unique adverse events that could be exacerbated compared to adverse events from

monotherapies or could lead to unfavorable drug-drug interactions.

Risks related to our reliance on third parties
—

We may not be successful

in maintaining development and commercialization collaborations, and a

collaboration partner may not devote sufficient resources to the development or commercialization of our

product candidates. In particular, we are heavily dependent on Gilead for its further development of our product

candidate filgotinib and on AbbVie for its further development of our triple combination product candidate

for the treatment of CF. Gilead and AbbVie may not devote sufficient resources or give sufficient priority

to the filgotinib program or CF collaboration, respectively. Our collaborators may not elect to advance the

product candidates on which we collaborate. Gilead may not be successful in the further development and

commercialization of filgotinib, even when they do devote resources and prioritize their efforts for filgotinib.

AbbVie may not be successful in the further development and commercialization of our potential triple

combination product for the treatment of CF.

The collaboration arrangements that we have established, and any collaboration arrangements that we may

enter into in the future, may ultimately not be successful, which could have a negative impact on our business,

results of operations, financial condition and growth prospects. It is possible that a collaboration partner may not

devote sufficient resources to the development or commercialization of our product candidate or may otherwise

fail in development or commercialization efforts, in which event the development and commercialization of such

product candidate could be delayed or terminated and our business could be substantially harmed.

We rely on third party suppliers for which a reliable supply of materials is required in order to avoid delays in

the drug discovery and development process. 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.

We rely on third parties to conduct our pre-clinical studies and clinical trials.

Galapagos NV • Annual Report 2016

RISK FACTORS

We have relied on and plan to continue to rely on contract research organizations (“CROs”) to monitor and

manage data for our pre-clinical and clinical programs. We and our CROs also rely on clinical sites and

investigators for the performance of our clinical trials in accordance with the applicable protocols and applicable

legal, regulatory and scientific standards. If CROs do not successfully carry out their contractual duties or

obligations or meet quality standards, regulatory requirements or expected, our clinical trials may be extended,

delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize

our product candidates.

We rely on clinical data and results obtained by third parties that could ultimately prove to be inaccurate or

unreliable.

As part of our strategy to mitigate development risk, we seek to develop product candidates with validated

mechanisms of action and we utilize biomarkers to assess potential clinical efficacy early in the development

process. This strategy necessarily relies on clinical data and other results obtained by third parties. If the third-

party data and the results that we rely on prove to be inaccurate, unreliable or not applicable to our product

candidates, we could make inaccurate assumptions and conclusions about our product candidates and our

research and development efforts could be materially adversely affected.

Risks related to our competitive position
—

We face significant competition for our drug discovery and development efforts, and if we do not compete

effectively, our commercial opportunities will be reduced or eliminated.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant

technological change. Our competitors may develop drug products that render our products obsolete or non-

competitive by developing more effective drugs or by developing their products more efficiently. In addition, our

ability to develop competitive products would be limited if our competitors succeeded in obtaining regulatory

approvals for drug candidates more rapidly than we were able to or in obtaining patent protection or other

intellectual property rights that limited our drug development efforts.

Risks related to our intellectual property
—

Our ability to compete may decline if we do not adequately protect our proprietary rights.

We endeavor to protect our proprietary technologies and know-how by entering into confidentiality and

proprietary information agreements with our employees and business partners, and by setting up special

procedures (e.g. with respect to the handling of the laboratory books).

Our commercial success depends on obtaining and maintaining proprietary rights to our product candidates,

as well as successfully defending these rights against third party challenges. We will only be able to protect

our product candidates, and their uses from unauthorized use by third parties to the extent that valid and

enforceable patents, or effectively protected trade secrets, cover them. If we fail to maintain to protect or to

enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our

results of operations.

Pharmaceutical patents and patent applications involve highly complex legal and factual questions, which, if

determined adversely to us, could negatively impact our patent position.

Galapagos NV • Annual Report 2016

RISK FACTORS

The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve

complex legal and factual questions. The interpretation and breadth of claims allowed in some patents covering

pharmaceutical compositions may be uncertain and difficult to determine, and are often affected materially

by the facts and circumstances that pertain to the patented compositions and the related patent claims. The

standards of the United States Patent and Trademark Office, the European Patent Office, and other foreign

counterparts are sometimes uncertain and could change in the future. If we fail to obtain and maintain patent

protection and trade secret protection of our product candidates, we could lose our competitive advantage and

the competition we face would increase, reducing any potential revenues and adversely affecting our ability to

attain or maintain profitability.

We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we

may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek

protection.

Filing, prosecuting and defending patents on our product candidates in all countries and jurisdictions throughout

the world would be prohibitively expensive, and our intellectual property rights in some countries could be less

extensive than those in the United States and Europe. Consequently, we may not be able to prevent third parties

from practicing our inventions in all countries, or from selling or importing products made using our inventions.

Risks related to our organization, structure and
operation
—

Our future success depends on our ability to retain the members of our executive committee and to attract,

retain and motivate qualified personnel. If we are not successful in attracting and retaining highly qualified

personnel, we may not be able to successfully implement our business strategy. Adequate remuneration and

incentive schemes and the sharing of our knowledge amongst key employees mitigate this risk.

We expect that if we continue to build our development, medical and commercial organizations, we will require

significant additional investment in personnel, management and resources. Our ability to achieve our research,

development and commercialization objectives depends on our ability to respond effectively to these demands

and expand our internal organization, systems, controls and facilities to accommodate additional anticipated

growth. If we are unable to manage our growth effectively, our business could be harmed and our ability to

execute our business strategy could suffer.

Risks from the improper conduct of employees, agents, contractors, or collaborators could adversely affect our

reputation and our business, prospects, operating results, and financial condition. Our information technology

systems could face serious disruptions that could adversely affect our business. 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. Our personnel should adhere to continuity plans and procedures

regarding access rights and installation of different programs. Business interruptions could delay us in the process

of developing our product candidates. 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.

We could be subject to liabilities under environmental, health and safety laws or regulations, or fines, penalties

or other sanctions, if we fail to comply with such laws or regulations or otherwise incur costs that could have a

material adverse effect on the success of our business. The very limited use of hazardous materials, the existence

of stringent health and safety operation procedures, and regular inspections and safety days significantly

Galapagos NV • Annual Report 2016

RISK FACTORS

decrease the potential impact as well as the estimated likelihood of the risk. Furthermore, we employ quality

& environmental health and safety managers who closely monitor laboratory safety and continuously seek to

improve quality and safety conditions.

Our collaboration arrangements with our strategic partners may make us an attractive target for potential

acquisitions under certain circumstances. Under certain circumstances, due to the structure of our collaboration

arrangements with our strategic partners, our strategic partners may prefer to acquire us rather than paying

the milestone payments or royalties under the collaboration arrangements, which may bring additional

uncertainties to our business development and prospects.

We may undertake strategic acquisitions in the future and any difficulties from integrating such acquisitions

could adversely affect our share price, operating results and results of operations. We may acquire companies,

businesses and products that complement or augment our existing business. We may not be able to integrate

any acquired business successfully or operate any acquired business profitably. Integrating any newly acquired

business could be expensive and time-consuming. Integration efforts often take a significant amount of time,

place a significant strain on managerial, operational and financial resources, result in loss of key personnel and

could prove to be more difficult or expensive than we predict. As part of our efforts to acquire companies, business

or product candidates or to enter into other significant transactions, we conduct business, legal and financial

due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite our

efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, might not

realize the intended advantages of the transaction.

If we are unable to use tax loss carryforwards to reduce future taxable income or benefit from favorable tax

legislation, our business, results of operations and financial condition may be adversely affected. We 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 our activities, financial situation and results.

Such potential changes and their impact are monitored carefully by management and its advisors.

Being active in research and development in Belgium and France, we have benefited from certain research and

development incentives. If the Belgian and/or the French government decide to eliminate, or reduce the scope or

the rate of, the research and development incentive benefit, either of which it could decide to do at any time, our

results of operations could be adversely affected. We also expect to benefit in the future from the “patent income

deduction” or the replacing “innovation deduction” in Belgium. The innovation deduction applies as of 1 July 2016,

although subject to various conditions, the patent income deduction can continue to apply until 30 June 2021 at

the latest. If, however, there are unexpected adverse changes to the Belgian patent income deduction or replacing

innovation deduction, or if we are unable to qualify for such advantageous tax legislation, our business, results of

operations and financial condition may be adversely affected.

We have received several technological innovation grants to date, to support various research programs from an

agency of the Flemish government to support technological innovation in Flanders. If we fail to comply with our

contractual obligations under the applicable technological innovation grant agreements, we could be forced to

repay all or part of the grants received. Such repayment could adversely affect our ability to finance its research

and development projects.

We annually establish a detailed budget that is submitted to the board of directors for review and approval. Our

performance compared to the budget is continuously monitored by our executive committee and is discussed

with the board of directors at least once per quarter. For the establishment of our financial information, we have

processes and methods in place that enable the preparation of consolidated financial statements for our annual

and quarterly reporting. Our management reporting systems – which include an advanced integrated ERP system

– secure the generation of consistent financial and operational information, allowing management to follow-up

our performance on a daily basis.

Galapagos NV • Annual Report 2016

RISK FACTORS

As a result of the 2016 election in the United States, there is great political uncertainty concerning the fate of

the ACA and other healthcare laws. The United States Congress is expected to draft legislation to repeal parts of

the ACA, but it is uncertain when such legislation would be passed and whether Congress would replace the law

and what any replacement law would encompass. We cannot predict any initiatives that may be adopted in the

future.

Market risks relating to the Galapagos shares
—

We have identified the following major market risks:

▪ Possible volatility of 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 us or our suppliers or

customers may impact the ability or willingness of others to trade with us

▪ Dilution through capital increases

Raising additional capital may cause dilution to our existing shareholders. By raising additional capital

through capital increases with cancellation of the preferential subscription rights of our existing

shareholders, these shareholders will be diluted

▪ Dilution through exercise of warrant plans

The exercise of existing warrants can significantly increase the number of outstanding Galapagos shares

▪ Inability to distribute dividends

We have 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 Galapagos shares

▪ Reputational damage

High ethical standards are maintained throughout the entire organization at all levels. Laws and guidelines

are complied with

▪ Belgian law provisions

There are several provisions of Belgian company law and certain other provisions of Belgian law, such as the

obligation to disclose important shareholdings and merger control, that may apply to us and which may

make an unfriendly tender offer, merger, change in management or other change in control, more difficult.

These provisions could discourage potential takeover attempts that third parties may consider and thus

deprive the shareholders of the opportunity to sell their shares at a premium (which is typically offered in

the framework of a takeover bid)

Galapagos NV • Annual Report 2016

RISK FACTORS

General statement about Galapagos risks
—

According to our current assessment we consider the risks to be manageable and our going concern not to be

endangered at the time of the current report. Assuming no further deterioration of the global business, financial

and regulatory environment, we consider ourselves well prepared to meet all future challenges.

Galapagos NV • Annual Report 2016

Corporate
governance
Corporate governance
at Galapagos in 2016

Herman de Kock

Head of Development

CORPORATE GOVERNANCE

Galapagos’ corporate governance policies
—

We have

adopted the Belgian Corporate Governance Code

2009

(which can be

consulted on

www.corporategovernancecommittee.be) as our reference code. Galapagos NV’s board of directors approved a

Corporate Governance Charter (which is available on our website, www.glpg.com). The Corporate Governance

Charter applies in addition to the law, Galapagos NV’s articles of association and the corporate governance

provisions included in the Belgian Companies Code and the Belgian Corporate Governance Code 2009.

The board of directors strives to comply with the rules of the Belgian Corporate Governance Code 2009 as much

as possible. At the same time, the board of directors is of the opinion that certain deviations from the provisions

of the Belgian Corporate Governance Code 2009 are justified, in view of our activities, our size and the specific

circumstances in which we operate. In such cases, which are mentioned in this corporate governance statement,

we apply the “comply or explain” principle. Reference is made to the “Remuneration of non-executive Directors

of Galapagos NV” section.

In addition to the information set out below, we refer to the “Risk management” and “Risk factors” sections of

this report for a description of the most important characteristics of our internal control and risk management

systems. The “Risk management” and “Risk factors” sections are incorporated by reference in this corporate

governance statement.

Board of directors of Galapagos NV
—

Composition of Galapagos NV’s board of directors

Onno van de Stolpe – Please refer to the “Composition of Galapagos NV’s executive committee” for a biography.

Rajesh Parekh, MA, DPhil has served as the Chairman of our board of directors since 2004. Dr. Parekh is a
General Partner at Advent Life Sciences LLP, which he joined in 2005. During an academic career at Oxford

University, he co-founded Oxford GlycoSciences PLC, where he served as Chief Scientific Officer and Chief

Executive Officer from 1988 until its sale to Celltech Group PLC (now UCB SA) in 2003. He has founded or served

on the boards of several life sciences companies in the United States and Europe including Celldex Therapeutics,

Inc.; Avila Therapeutics, Inc.; EUSA Pharma (Europe) Limited; Thiakis Limited; Biocartis NV; and Amsterdam

Molecular Therapeutics (AMT) Holding N.V. (now uniQure). Dr. Parekh currently serves as a member of the board

of directors of Advent Venture Partners; Advent Life Sciences LLP; Aleta Inc.; Arrakis, Inc.; Aura Inc.; Artax Inc.;

Capella BioSciences Ltd.; Cellnovo Limited; Itara Ltd.; Levicept Limited; PE Limited; and Project Paradise Limited.

He is also a member of the supervisory board of the Novartis Venture Fund. He received his MA in Biochemistry

and DPhil in Molecular Medicine from the University of Oxford, where he has also been a Senior Research Fellow

and Professor.

Harrold van Barlingen, Ph.D. has served as a member of our board of directors since 2005. Dr. Van Barlingen
is the managing director and founder of Thuja Capital B.V., Thuja Capital Holding B.V. and Thuja Capital

Management B.V.. Prior to founding Thuja Capital, he headed the life sciences effort of AlpInvest Partners B.V.

from 2001 to 2006, managing a portfolio of over 30 companies. Previously, he was at the Boston Consulting Group,

or BCG, where he worked as a consultant in management and strategy from 1999 to 2002. Prior to BCG, he headed

the continental activities of The Lewin Group (a Quintiles subsidiary), an internationally active firm specialized

in the field of health economics. He holds an MSc in Medical Biology and a PhD in Medicine, both from Utrecht

University. From 1991 to 1992 he was a visiting scientist at the University of Chicago. He is the author of a

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

wide variety of peer-reviewed scientific and pharmaco-economics papers. He currently serves on the supervisory

boards of Encare Biotech B.V., TheraSolve NV, Indigo Diabetes NV (chairman) and Hemics B.V. (chairman). In

addition, during the last five years he also served on the boards of Okapi Sciences NV, and arGEN-X N.V.

Werner Cautreels, Ph.D. has served as a member of our board of directors since 2009. Dr. Cautreels is the
President, Chief Executive Officer and member of the board of Selecta Biosciences, Inc. Previously, Dr. Cautreels

joined Solvay Pharmaceuticals SA in 1998 where he was Global Head of R&D and later Global Chief Executive

Officer from 2005 onwards, until it was acquired by Abbott Laboratories Inc. in February 2010. Prior to joining

Solvay he was employed by Sanofi SA, Sterling Winthrop, Inc. and Nycomed Amersham PLC in a variety of R&D

management positions in Europe and in the United States from 1979 to 1998. Dr. Cautreels was a director of

Innogenetics NV and ArQule, Inc. from 1999 until 2006, and of Seres Therapeutics Inc. from 2012 until 2016. He

was the President of the Belgian-Luxemburg Chamber of Commerce for Russia and Belarus until June 2010. He

graduated from the University of Antwerp, with a Doctorate in Chemistry, specializing in mass spectrometry. He

received his management and financial education from the Harvard Business School.

Howard Rowe, JD has served as a member of our board of directors since 2010. Mr. Rowe is Managing Director at
Hayfin Capital Management LLP. Prior to joining Hayfin Capital Management, he was a Managing Director with

The Goldman Sachs Group, Inc. where he had multiple healthcare responsibilities over his 12 years at the firm.

His most recent roles at Goldman Sachs were as part of the European Special Situations and Principal Strategies

teams where he established and led the private healthcare investing effort. During that time he served on the

boards of EUSA Pharma (Europe) Limited, Healthcare Brands International Limited, SmallBone Innovations, Inc.,

MedAvante, Inc. and Ikonisys, Inc. Prior to his investing activities, Mr. Rowe was a senior member of the European

Healthcare Investment Banking team, where he advised numerous corporate clients on M&A and corporate

finance activities. Before joining Goldman Sachs, he was a corporate lawyer with the law firm Sullivan & Cromwell

LLP. Mr. Rowe received his Bachelor of Science in Psychobiology from the University of Southern California and

his JD from Harvard Law School.

Katrine Bosley has served as a member of our board of directors since 2013. Ms. Bosley has served as the President,
Chief Executive Officer and member of the board of directors of Editas Medicine, Inc. since June 2014. Prior to

joining Editas, she was the Entrepreneur-in-Residence at The Broad Institute from 2013 to 2014. From 2009 to

2012, she was President, Chief Executive Officer and member of the board of directors of Avila Therapeutics,

Inc., which was acquired by Celgene Corporation in 2012. She served as President, Celgene Avilomics Research at

Celgene in 2012. Prior to her time at Avila Therapeutics she was Vice President, Strategic Operations at Adnexus,

a Bristol-Myers Squibb R&D Company, and was Vice President, Business Development at Adnexus Therapeutics,

Inc. before that. Ms. Bosley joined Adnexus Therapeutics from Biogen Idec, Inc. where she had roles in business

development, commercial operations and portfolio strategy in the United States and Europe. Earlier, she was part

of the healthcare team at the venture firm Highland Capital Partners, Inc. Ms. Bosley graduated from Cornell

University with a B.A. in Biology. She currently serves as chairman of the board of Genocea Biosciences, Inc. and

as a director of Scholar Rock, LLC. She also serves on the board of directors of the Biotechnology Innovation

Organization and is a review committee member of the Wellcome Trust.

Christine Mummery, Ph.D. has served as a member of our board of directors since 30 September 2015. Dr.
Mummery has served as a Professor of Developmental Biology and Chair of the Department of Anatomy and

Embryology at the Leiden University Medical Centre (LUMC) since 2008 and a Professor of Vascular Modelling at

the Technical University of Twente in the Netherlands since September 2015. In 2007, she was a Radcliffe fellow

at the Harvard Stem Cell Institute and Massachusetts General Hospital when human-induced pluripotent stem

cells were being developed, and she was the first to derive these from patients in the Netherlands. In 2002, she

became a Professor at the Utrecht University Medical Centre in the Netherlands. She was a postdoctoral fellow

from 1981 to 1984 at the Hubrecht Institute in Utrecht, where she later also served as a staff scientist and group

leader until 2008. Dr. Mummery obtained her B.S. in Physics, Electronics, and Mathematics at the University of

Nottingham and her Ph.D. in BioPhysics at London University in the United Kingdom. Her primary research

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

focus is currently the development and use of stem cells in cardiovascular development and disease. She served

on the Ethical Councils of the Dutch Ministry of Health, is member of the Royal Netherlands Academy of Arts

and Sciences (KNAW), editor-in-chief of the Cell Press journal Stem Cell Reports, former board member of the

International Society for Stem Cell Research and past-president of the International Society of Differentiation.

She was co-founder of Pluriomics B.V. In addition, she is on the board of ZonMw (Dutch Medical Research Council)

and chairs the executive board of the Institute for human Organ and Disease Model Technologies (hDMT), a non-

profit R&D institute of which we are a founding partner. She is a review committee member of the European

Research Council, the Wellcome Trust (ad hoc) and the Heineken Jury Prize (KNAW).

Mary Kerr, Ph.D., has served as a member of our board of directors since 26 July 2016. Dr. Kerr, a UK national,
is Chief Executive Officer and director at NeRRe Therapeutics. Prior to her appointment at NeRRe, Dr. Kerr held

a range of senior leadership roles at GSK over more than 20 years, most recently as Senior Vice President and

Global Franchise leader for the Immuno-inflammation and Infectious Diseases franchise. Dr. Kerr was a founding

member and on the Corporate Executive team of ViiV Healthcare where she led a turnaround in the performance

of the HIV business in Europe. She has spent the majority of her career on the R&D commercial interface in global

strategy and regional operational roles, predominantly in the specialty and orphan space. Dr. Kerr gained a Ph.D.

in Pharmacology at the University of Bradford, did post-doctoral research at the Michigan Cancer Foundation in

Detroit and has an MBA from the University of Kingston.

About Galapagos NV’s board of directors

Galapagos NV’s 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. At least

three directors are independent.

The directors are appointed by the shareholders’ meeting upon the proposal of the board, for a renewable term

of up to four years. When a position on the board becomes vacant, the other directors may temporarily fill the

mandate until the shareholders’ meeting appoints a new director. The nomination and remuneration committee

nominates, for the approval of the board, candidates to fill vacancies and advises on proposals for appointment

originating from shareholders, in each case taking into account Galapagos’ needs and the selection criteria

determined by the board.

Except for Mr. Onno van de Stolpe, all board members are non-executive directors.

In 2016, the following persons were members of the board: Dr. Raj Parekh (Chairman), Mr. Onno van de Stolpe

(CEO), Dr. Harrold van Barlingen, Dr. Werner Cautreels, Mr. Howard Rowe, Ms. Katrine Bosley, Dr. Christine

Mummery and Dr. Mary Kerr (as from 26 July 2016); the latter five directors were appointed as independent

directors within the meaning of article 526ter of the Belgian Companies Code.

The board’s role is to pursue the long-term success of Galapagos. The board does so by assuming the authority

and responsibilities assigned to it by Belgian corporate law and by combining entrepreneurial leadership with

appropriate risk assessment and management. Each of the directors’ expertise and experience is exemplified by

the varied professional activities they carry out and offices they hold.

In 2016, the board of directors held three regular meetings, six meetings by telephone conference to discuss

specific matters and two meetings in the presence of a notary (relating to the issuance of Warrant Plan

2016, Warrant Plan 2016 RMV and the issuance of shares with cancellation of the shareholders’ preferential

subscription rights). The meetings in the presence of a notary were both attended Mr. Van de Stolpe and Dr. Van

Barlingen via telephone conference and all other directors granted a written proxy to them in advance of the

meeting.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

The attendance rate for the other meetings was as follows: Dr. Parekh: 89%; Mr. Van de Stolpe: 78%; Dr. Cautreels:

89%; Dr. Van Barlingen: 100%; Mr. Rowe: 78%; Ms. Bosley: 78%; Dr. Mummery: 100% and Dr. Kerr: 100% (based on

meetings held after the date of her appointment as director). The overall attendance rate was 89%. In addition,

certain board members also attended a number of review meetings with scientific staff of the group.

The board of directors acts as a collegial body. We do 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.

During 2016, Galapagos NV complied with the Law of 28 July 2011 with respect to gender diversification in the

board of directors, and the board will continue to monitor future compliance.

Committees
—

Executive committee

Composition of Galapagos NV’s executive committee

Wageningen University.

Onno van de Stolpe founded our company in 1999 and has served as our
Chief Executive Officer and a member of our board of directors from 1999

to the present. From 1998 to 1999, he was the Managing Director of

Genomics at IntroGene B.V. (later Crucell N.V., which was acquired by

Johnson & Johnson Services, Inc. in 2011). Prior to joining IntroGene in 1998,

he was Managing Director of Molecular Probes Europe B.V. He established

the European headquarters after joining Molecular Probes, Inc. in the

United States. Previously, he worked for The Netherlands Foreign

Investment Agency in California, where he was responsible for recruiting

biotechnology and medical device companies to locate in the Netherlands.

Mr. Van de Stolpe started his career as Manager of Business Development

at MOGEN International NV in Leiden. He received an MSc degree from

Bart Filius, MBA has served as our Chief Financial Officer since December
2014. Prior to that, Mr. Filius worked over 13 years at Sanofi SA, where he

was the Chief Financial Officer of Sanofi Europe during the last three

years. Earlier at Sanofi, he was the Country Manager and Chief Financial

Officer of Sanofi in the Netherlands. Before that, he was Vice President for

Mergers & Acquisitions, during which time he led and completed the

divestiture of various franchises. Prior to joining Sanofi, he was a strategy

consultant at Arthur D. Little. Mr. Filius has an MBA degree from INSEAD

and a bachelor’s degree in business from Nyenrode Business University.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Piet Wigerinck, Ph.D. joined our company in April 2008 from Tibotec-
Virco Comm. VA (a subsidiary of Johnson & Johnson Services, Inc.) where

he was VP Drug Discovery, Early Development and CM&C, and a member

of the management board. He started his professional career as a

medicinal chemist at Janssen Research Foundation in 1992. He then joined
Tibotec Group NV in 1998, where, under his leadership, TMC114 (PrezistaTM)
and TMC435 (OlysioTM) were selected and moved forward into clinical
trials. Dr. Wigerinck also played a key role in Tibotec’s expansion into

novel diseases such as Hepatitis C and advanced several compounds into

Phase 1 and Phase 2 clinical trials. He brings over 25 years of research and

development experience from both large pharmaceutical companies and

biotechnology companies to our company. Dr. Wigerinck holds a Ph.D.

from the K.U. Leuven and is inventor on more than 25 patent applications.

Andre Hoekema, Ph.D. is responsible for M&A, licensing and intellectual
property at Galapagos. He had the lead in rolling out our pharmaceutical

alliance strategy since its start in 2006, and is the architect of our

collaboration with AbbVie for CF. Dr. Hoekema joined our company in

March 2005 from Invitrogen Corporation, where he was Managing Director

of Corporate Development Europe, overseeing licensing and M&A for

Invitrogen Europe. He brings 30 years of biotech experience from positions

at Molecular Probes Europe B.V. (Managing Director of the European

office), Crucell N.V. (Director of Business Development and Intellectual

Property), Koninklijke DSM N.V., MOGEN International N.V. (Research and

Project Management), and Genentech, Inc. (postdoctoral researcher). Dr.

Hoekema studied Chemistry and holds a Ph.D. from Leiden University.

During his Ph.D. work, he invented the binary vector system for the genetic modification of plants, which he

published in Nature in 1983; this has since then become the global standard in the field of agricultural biotech. He

is the author of more than 30 peer-reviewed scientific papers, and an inventor of over 20 series of patent

applications, resulting in 15 patents issued in the United States. Dr. Hoekema currently also serves as a member of

the supervisory board of Mimetas B.V. and has previously served as a member of the supervisory board of

VitalNext B.V.

Walid Abi-Saab, MD started his job as CMO at Galapagos in March 2017. Dr.
Abi-Saab drives Galapagos' overall medical strategy and is responsible for

late stage clinical development and operations, medical and regulatory

affairs, and safety. Before, Dr. Abi-Saab worked at Shire Pharmaceuticals

where he held various clinical development leadership roles, most recently

as Group Vice President, Global Clinical Development - Therapeutic Area

Head, Gastro-intestinal, Endocrinology and Metabolism. Prior to that, he led

clinical development activities at Novartis, Abbott Laboratories and Pfizer,

addressing a wide range of therapeutic areas and leading teams throughout

the clinical development process. Under his leadership, more than 30

molecules have advanced through clinical development leading to several

approvals in the US, EU and Canada. Prior to his pharma roles, Dr. Abi-Saab

was Assistant Professor of Psychiatry and Neurosurgery at Yale University Medical School, where he headed their

Schizophrenia Research at the Clinical Neuroscience Research Unit and the Neurosurgery Epilepsy Microdialysis

Research Program. Dr. Abi-Saab holds an MD degree from Université Saint Joseph in Beirut, Lebanon.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

About the executive committee of Galapagos NV

The tasks of the executive committee include the following matters: the research, identification and development

of strategic possibilities and proposals which may contribute to our development in general, the drafting and

development of policy guidelines to be approved by our board of directors, management of the group through,

among other things, the implementation of policy guidelines, the supervision of the actual performance of the

business compared to its strategic goals, plans and budgets, and the support of the CEO with the day-to-day

management of Galapagos.

On 31 December 2016, the executive committee consisted of four people: Mr. Van de Stolpe (CEO, also executive

director), Mr. Bart Filius (CFO), Dr. Piet Wigerinck (CSO) and Dr. Andre Hoekema (Senior Vice President, Corporate

Development).

On 17 January 2017, we announced the appointment of Dr. Walid Abi-Saab as Chief Medical Officer and member

of the executive committee, beginning on 1 March 2017.

The executive committee meets regularly, and in principle once per month.

Audit committee

The role of the audit committee is to follow up on financial reporting and verification of financial data, safeguard the integrity

of our financial reporting, verify and follow up on the internal control mechanisms, evaluate and verify the effectiveness of the

risk assessment systems, follow up on the internal and external audit activities, review, monitor and evaluate the independence

and performance of the external auditor and inform the board on the results of the statutory audit.

At the end of 2016, the audit committee consisted of the following three directors: Dr. Cautreels (chairman), Dr. Van Barlingen

and Mr. Rowe. All members of the audit committee are non-executive directors, the majority of whom are independent

within the meaning of article 526ter of the Belgian Companies Code. The chairman is an independent non-executive

director. All members of the audit committee have extensive experience in the life sciences industry. The chairman has

relevant expertise in financial matters (including general accounting and financial reporting) and in matters of audit,

internal control and risk control. The other members have extensive experience in these matters as well.

In 2016, the audit committee held seven meetings, in which it dealt with matters pertaining to audit review, risk

management, monitoring financial reporting, the implementation of Sarbanes-Oxley compliant internal and external audit

systems and the effects of the Belgian and European audit reform legislation. The audit committee acts as a collegial body.

The overall attendance at the audit committee meetings in 2016 was 90%. Some of the meetings were attended by the

statutory auditor.

Nomination and remuneration committee

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.

At the end of 2016, the nomination and remuneration committee consisted of the following three non-executive directors:

Dr. Parekh (chairman), Dr. Cautreels and Ms. Bosley, the majority of whom are independent directors. The committee has

the necessary expertise in the area of remuneration policy.

The nomination and remuneration committee meets at least twice per year. In 2016, the nomination and remuneration

committee held two meetings, dealing with matters pertaining to grants of warrants and bonuses, the nomination of our

Chief Medical Officer and salary increases. The nomination and remuneration committee acts as a collegial body. The

overall attendance rate at the nomination and remuneration committee meetings in 2016 was 100%. The CEO attended

the meetings of this committee when the remuneration of the other members of the executive committee was discussed.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Composition of board committees (excluding the executive committee)

Audit committee

Nomination and
remuneration committee

Onno van de Stolpe

Raj Parekh

Harrold van Barlingen

Werner Cautreels1

Howard Rowe1

Katrine Bosley1

Christine Mummery1

Mary Kerr1

●

*
●

●

● denotes committee membership
* denotes committee chairmanship
1 denotes qualification as an independent director within the meaning of article 526ter of the Belgian Companies Code

Galapagos NV’s share capital and shares
—

Share capital increases and issue of shares by Galapagos NV in 2016

On 1 January 2016, the share capital of Galapagos NV amounted to €211,388,857.22 represented by 39,076,342 shares.

In the course of 2016 there were four capital increases resulting from the exercise of warrants, resulting in the

issuance of 419,035 new shares, an increase of the share capital by €2,222,916.85 and an increase of the issuance

premium account by €2,037,419.60. In addition, on 19 January 2016, Galapagos NV completed the closing of the

global collaboration agreement with Gilead Biopharmaceutics Ireland Unlimited Company, or GBIUC, which is

a direct subsidiary of Gilead Sciences, Inc., in the framework of which GBIUC made a €392,120,658.00 equity

investment by subscribing to new shares at a price of €58.00 per share. This resulted in a share capital increase

of €36,575,392.41, an increase of the issuance premium account by €355,545,265.59 and the issuance to GBIUC of

6,760,701 new ordinary shares.

At the end of 2016, the share capital of Galapagos NV amounted to €250,187,166.48 represented by 46,256,078 shares.

On 1 June 2016, the board of directors issued 634,250 warrants (after acceptance by the beneficiaries) within the

framework of the authorized capital, for the benefit of the directors and an independent consultant of Galapagos

NV, and of employees of the group under new warrant plans (“Warrant Plan 2016” and “Warrant Plan 2016 RMV”).

The offer of warrants to the directors and to the members of the executive committee under Warrant Plan 2016

was approved by the annual shareholders’ meeting of 26 April 2016. The warrants issued under Warrant Plan 2016

and Warrant Plan 2016 RMV have a term of eight years and an exercise price of €46.10.

Number and form of Galapagos shares

Of the 46,256,078 shares of Galapagos NV outstanding at the end of 2016, 7,299,397 were registered shares and

38,956,681 shares were dematerialized shares. All shares are issued and fully paid up and are of the same class.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Rights attached to Galapagos shares

Each share (i) entitles its holder to one vote at the shareholders’ meetings; (ii) represents an identical fraction of

the share capital and has the same rights and obligations and shares 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 Companies Code and Galapagos NV’s articles of association.

Galapagos NV’s authorized capital

In accordance with the articles of association, the extraordinary shareholders’ meeting of Galapagos NV

authorized the board of directors to increase the share capital of Galapagos NV, 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 publication of this renewal in the Annexes

to the Belgian State Gazette, i.e. 3 June 2016. 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 €49,726,531.42. In 2016, 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 1 June 2016, in connection with the issuance of Warrant Plan 2016 and Warrant Plan 2016 RMV,

under which an aggregate maximum of 634,250 new shares can be issued for a total maximum capital increase of

€3,431,292.50 (plus issuance premium). On 31 December 2016, an amount of €46,295,238.92 still remained available

under the authorized capital.

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 group.

Procedure for changes in Galapagos NV’s share capital

In accordance with the Belgian Companies Code, Galapagos NV may increase or decrease its share capital by

decision of the extraordinary shareholders’ meeting approved by 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 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. In

this respect, there are no conditions imposed by Galapagos NV’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 Galapagos treasury shares

In accordance with the Belgian Companies Code, Galapagos NV may purchase, subject to the provisions of

the Belgian Companies Code, Galapagos NV’s own shares and dispose thereof by decision of the extraordinary

shareholders’ meeting approved by a majority of 80% 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 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. The aforementioned

rules are also applicable to the acquisition of shares of Galapagos NV by its subsidiaries.

The board of directors has currently not been authorized by an extraordinary shareholders’ meeting to purchase or sell

its own shares.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

On 31 December 2016, 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 behalf of Galapagos NV or any of its subsidiaries either.

Anti-takeover provisions in Galapagos NV’s articles of association

Galapagos NV’s articles of association currently do not contain any anti-takeover provisions.

Anti-takeover provisions under Belgian law

Under Belgian law, public takeover bids for all outstanding voting securities of 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 higher 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 it became

mandatory for the acquirer to launch a mandatory takeover bid for the shares of all other shareholders.

Material contracts containing change of control clauses

The license and collaboration agreement between the company and Gilead Biopharmaceutics Ireland Unlimited

Company dated 16 December 2015 contains provisions granting certain rights to Gilead upon the occurrence

of a public takeover bid on our shares or a change of control in respect of Galapagos NV, including clause

15.6 (Assignment; Industry Transaction; Acquired Programs), entitling Gilead (i) in the event of an industry

transaction involving Galapagos, as a result of which a drug company of a certain minimum size acquires control

over Galapagos, to terminate our co-promotion rights, to disband all joint committees and undertake exclusive

control of their activities; and (ii) in the event of a change of control as a result of which we acquire rights to an

alternative product that would violate certain of our exclusivity obligations under the agreement, to require us

to either divest or terminate this acquired program.

The amended and restated global collaboration agreement between the company and AbbVie dated 28 April 2016

contains provisions granting certain rights to AbbVie upon the occurrence of a public takeover bid on our shares

or a change of control in respect of Galapagos NV, including clause 13.2 (ChangeinControlofGalapagos), entitling

AbbVie, in the event of a change in control over the company, to disband the joint committees and assume

their tasks, oblige us to take appropriate measures to avoid the disclosure of confidential information, terminate

our co-promotion rights or, depending on the stage in which the change of control occurs, to terminate the

agreement.

Procedure for amendments to Galapagos NV’s articles of association

Pursuant to the Belgian Companies Code, any amendment to the articles of association, such as an increase or

decrease in the share 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 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 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.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Shareholders
—

Major shareholders of Galapagos NV

Based on the transparency notifications received by Galapagos NV under Belgian law and the statements of

acquisition of beneficial ownership filed on Schedule 13G with the U.S. Securities and Exchange Commission

under U.S. securities law, the shareholders owning 5% or more of Galapagos NV’s shares on 31 December 2016 were

Gilead Biopharmaceutics Ireland Unlimited Company (6,760,701 shares or 14.62%), FMR LLC (4,606,507 shares or

9.96%), and Van Herk Investments B.V. (3,943,150 shares or 8.52%).

Major shareholders on 31 December 2016

At the end of 2016, the CEO owned 628,289 shares of Galapagos NV

and 706,874 warrants. The other members of the executive

committee held an aggregate of 35,352 shares and 970,000

warrants. The other members of the board held an aggregate of

49,844 shares and 165,240 warrants. Each warrant entitles its

holder to subscribe to one share of Galapagos NV.

Agreements between Galapagos NV shareholders

On the date of this report, Galapagos NV had no knowledge of the existence of any shareholders’ agreements

between its shareholders.

Agreements with major Galapagos NV shareholders

On 16 December 2015, we signed an exclusive license and collaboration agreement to develop and commercialize

filgotinib in multiple indications with Gilead Biopharmaceutics Ireland Unlimited Company. Under the terms

of the collaboration, Gilead is primarily responsible for development and for seeking regulatory approval of the

licensed product. We are required to use commercially reasonable efforts as requested by Gilead to assist Gilead

with certain development activities. In addition, we agreed on a 20-80 cost split for development costs of the

licensed product, i.e. we will bear 20% of all development costs.

In the framework of the closing of the transaction on 19 January 2016, Gilead paid a license fee of $300 million

(or €275.6 million) and made a $425 million (or €392 million) equity investment in Galapagos NV by subscribing

to new shares at a price of €58 per share, including issuance premium. This resulted in Gilead owning 6,760,701

ordinary shares of Galapagos NV, representing 14.75% of the then outstanding share capital of Galapagos. In the

framework of this transaction, the parties agreed to a lock-up arrangement and a standstill arrangement.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Remuneration report
—

Determination of remuneration of directors and executive
committee members of Galapagos NV

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 with appropriate peer

companies and, for the members 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 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 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,

upon recommendation of the nomination and remuneration committee.

Our remuneration policy

Principles

The objective of our remuneration policy is to attract, motivate and retain the qualified and expert individuals

that we need in order to achieve our 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, while taking into account

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. 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 and of the other members of the executive committee consists of a fixed part

and a variable part (bonus). Remuneration increases and bonuses are merit-driven and based on our performance

rating system that is based on individual performance (including exceptional deliverables) in combination with

our overall performance, 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 2016 the corporate objectives included

elements of clinical trial progression, cash position, corporate development and business development; 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 nomination and 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 nomination and remuneration committee and finally established by the board of directors.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

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 change in the price of Galapagos NV’s share relative to the Next Biotech Index (which tracks Euronext-

listed biotech companies). The share price and the Next Biotech 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 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 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 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 our employ,

except in case of retirement with Galapagos’ consent or in case of redundancy. If employment within the

Galapagos group ends because of either retirement with Galapagos’ consent or redundancy, then the deferred

bonus will become payable on the last day of employment of the beneficiary with the Galapagos group. In

this case, the increase or decrease in the deferred bonus will be calculated in a similar manner to that quoted

above with the exception that the final reference share price will be the price at the close of business on

the Amsterdam/Brussels Euronext Exchange on the last working day immediately preceding the last day of

employment and the final reference value of Next Biotech Index will be the value quoted at the close of trading

on the day preceding the last day of employment.

In addition, exceptional special bonuses, outside the scope of the regular bonus schemes, can be considered

by the board upon recommendation of the nomination and remuneration committee in the event of and for

exceptional achievements.

Relative importance of the various components

The CEO’s bonus under the Senior Management Bonus Scheme 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 under the Senior Management Bonus Scheme, as amended on this point in 2016, can

be maximum 75% (previously, this was 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.

Performance-related premiums in shares, options or other rights to acquire shares

Galapagos 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 Companies Code.

Information on the remuneration policy for the next two years

We currently have no plans to substantially deviate from the general principles of the remuneration policy used

in 2016 and the years before, as described above, in the next two financial years.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Remuneration of non-executive directors of Galapagos NV

Upon recommendation of the nomination and remuneration committee, the annual shareholders’ meeting of

26 April 2016 resolved that the compensation (excluding expenses) of the non-executive directors for the exercise

of their mandate during the financial year ending 31 December 2016 was established as follows: (i) chairman of the

board (Dr. Parekh): €80,000; (ii) other non-executive board members (Dr. Cautreels, Dr. Van Barlingen, Mr. Rowe,

Ms. Bosley and Dr. Mummery): €40,000 each; (iii) annual additional compensation for membership of a board

committee (audit committee: Mr. Rowe and Dr. Van Barlingen; nomination and remuneration committee: Dr.

Cautreels and Ms. Bosley): €5,000; (iv) annual additional compensation for the chairmanship of a board committee

(audit committee: Dr. Cautreels; nomination and remuneration committee: Dr. Parekh): €10,000.

The shareholders’ meeting of 26 July 2016, which resolved upon the appointment of Dr. Mary Kerr as Director

of Galapagos NV, acknowledged that the aforementioned remuneration principles for the financial year ending

on 31 December 2016 approved by the annual shareholders’ meeting of 26 April 2016 applied to determine the

compensation (excluding expenses) of Dr. Kerr, pro rata temporis, for the period starting on the date of her

appointment and ending on 31 December 2016. The compensation of Dr. Kerr for her mandate as non-executive

director during the financial year ending 31 December 2016 hence amounted to €17,282.31.

The remuneration of the non-executive directors does not contain a variable part; hence no performance criteria

apply to the remuneration of the non-executive directors.

In 2016, we issued two warrant plans for the benefit of employees of the group and of the directors and one

independent consultant of Galapagos NV: Warrant Plan 2016 and Warrant Plan 2016 RMV. In accordance with the

resolution of the annual shareholders’ meeting of 26 April 2016, the following number of warrants were offered

under Warrant Plan 2016 to the non-executive directors: Dr. Parekh: 15,000 warrants; and Dr. Cautreels, Ms. Bosley,

Dr. Van Barlingen, Mr. Rowe and Dr. Mummery: each 7,500 warrants. All directors accepted the warrants offered.

These warrants have a term of eight years. The exercise price of the warrants is €46.10. 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. No warrants

were offered to directors under Warrant Plan 2016 RMV. The board of directors does not consider the above

warrants as variable remuneration as defined by the Belgian Companies 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 from this provision, the board of directors has decided to grant

warrants to non-executive directors. This way, Galapagos has additional possibilities to attract competent non-

executive directors and to offer them an attractive additional remuneration that does not affect Galapagos’ cash

position. Furthermore, the grant of warrants is a commonly used method in the sector in which Galapagos

operates. Without this possibility, Galapagos would be confronted with a considerable disadvantage compared to

competitors and peer companies 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 functioning

of the non-executive directors.

In addition to the benefits set forth above, the non-executive directors also received benefits consisting of tax

advisory services in 2016 for an amount of €14,495.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Remuneration of executive directors of Galapagos NV

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.

Criteria and methods to evaluate the performance of Galapagos NV’s
CEO and other executive committee members 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

upon recommendation of the nomination and remuneration committee (whose recommendation is based

on proposals from the CEO with respect to 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 our overall performance, 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 2016 the corporate objectives

included elements of clinical trial progression, cash position, corporate development and business development.

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.

Gross remuneration of our CEO for financial year 2016

i. Base salary (fixed): €472,267 (including €18,859.44 in the form of pension contributions).

ii. Variable remuneration (bonus): given the level of achievement of the criteria from the Senior Management

Bonus Scheme to be entitled to a bonus (i.e. the corporate objectives for 2016), a bonus equal to 100% of the

2016 base salary was awarded over 2016, of which 50% was paid early January 2017, and the other 50% was

deferred for 3 years. The value of the 50% deferred part of the bonus awarded over 2013 was established at

the end of 2016 and resulted in a payment in early January 2017 of an amount of €652,974.18 (a multiple of

4.01 of the deferred bonus, as a result of the share price performance over the period 2013-2016 as per the

provisions of the Senior Management Bonus Scheme).

iii. Pension: €62,843 (of which €18,859.44 is part of the fixed base salary).

iv. Other components of the remuneration: company car, tax advisory services, and payments for invalidity

and healthcare cover, totaling €39,384.25.

In its meeting of 7 December 2016 (in application of article 523 of the Belgian Companies Code and without the

CEO being present) the board of directors resolved, upon recommendation of the nomination and remuneration

committee, to increase the CEO’s salary by 2.5% as from 2017. The principles applied for such increase were in line

with the Remuneration Policy described above.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Aggregate gross remuneration of the other executive committee
members for financial year 2016

i. Base salaries (fixed): €898,435 (including €60,000 in the form of pension contributions).

ii. Variable remunerations (bonuses): given the level of achievement of the criteria from the Senior

Management Bonus Scheme to be entitled to a bonus (i.e. the corporate objectives for 2016), an aggregate

bonus of €673,826 (i.e. 100% of the aggregate bonus pool) was awarded over 2016 of which 50% was paid early

January 2017, and the other 50% was deferred for 3 years. The value of the 50% deferred part of the bonus

awarded over 2013 was established at the end of 2016 and resulted in a payment in early January 2017 of an

amount of €521,192.64 (a multiple of 4.01 of the deferred bonus, as a result of the share price performance

over the period 2013-2016 as per the provisions of the Senior Management Bonus Scheme).

iii. Pensions: €164,711.91 (of which €60,000 are part of the fixed base salary).

iv. Other components of the remunerations: company cars, tax advisory services, and payments for invalidity

and healthcare cover, and other fringe benefits, totaling €45,695.

In its meeting of 7 December 2016 the board of directors resolved, upon recommendation of the nomination

and remuneration committee, to implement salary increases as from 2017 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 relevant benchmarks. The principles applied for such increases were in line with the

Remuneration Policy described above.

Shares, warrants or other rights to acquire shares awarded to,
exercised by or expired for the executive committee members
during financial year 2016

In 2016, only warrants were offered to the members of the executive committee, and no shares or other rights

to acquire shares were awarded. No warrants expired for members of the executive committee in 2016 and, in

aggregate, 215,000 warrants were exercised by members of the executive committee in 2016 (130,000 warrants were

exercised by Onno van de Stolpe, 45,000 warrants by Piet Wigerinck and 40,000 warrants by Andre Hoekema). 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 were offered to and accepted by members of the

executive committee in 2016, under Warrant Plan 2016, issued by the board of directors under the authorized

capital on 1 June 2016, to Mr. Van de Stolpe: 100,000 warrants, to each of Dr. Wigerinck and Mr. Filius: 60,000

warrants, and Dr. Hoekema: 55,000 warrants.

The warrants issued under Warrant Plan 2016 have an exercise price of €46.10 per warrant, a life time of 8 years,

and 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 Galapagos NV.

At the end of 2016, Mr. Van de Stolpe owned 628,289 shares of Galapagos NV and 706,874 warrants. The other

members of the executive committee held an aggregate of 35,352 shares and 970,000 warrants. The other members

of the board held an aggregate of 49,844 shares and 165,240 warrants. Each warrant entitles its holder to subscribe

to one share of Galapagos NV.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Contractual provisions regarding compensation for severance for the
Galapagos NV executive committee members

The contracts between Galapagos NV (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, Galapagos NV 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 Galapagos, 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.

Severance payments for departing executive committee members
during financial year 2016

Not applicable; in 2016 no members of the executive committee (including the CEO) left Galapagos.

Claw-back right of Galapagos relating to variable remuneration

There are no contractual provisions in place between Galapagos and the CEO or the other members of the

executive committee that give Galapagos a contractual right to reclaim from said executives the variable

remuneration that would be awarded based on erroneous financial information.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Conflict of interests and related parties
—

In the event of a transaction where a director’s interest conflicts with the interest of Galapagos NV, the director

shall notify the board of directors in advance of the conflict and will act in accordance with the relevant rules

of the Belgian Companies Code (i.e. article 523 of the Belgian Companies Code). In addition, Galapagos’ Corporate

Governance Charter and Galapagos’ Related Person Transaction Policy contain procedures for transactions

between Galapagos and its directors, members of its executive committee, major shareholders or any of their

immediate family members and affiliates. Without prejudice to the procedure defined in article 523 of the Belgian

Companies Code, these policies provide that all transactions between Galapagos and its directors, its members

of the executive committee or its representatives need the approval of the audit committee and the board of

directors, which approval can only be provided for transactions at normal market conditions. Moreover, conflicts

of interest, even in the event they are not a conflict of interest within the meaning of article 523 of the Belgian

Companies Code, are enacted in the meeting minutes, and the director or member of the executive committee

cannot participate in the voting.

In 2016, one conflict of interests between Galapagos NV and a director within the meaning of article 523 of the

Belgian Companies Code was noted: in a meeting of the board of directors held on 7 December 2016, the following

was reported in accordance with article 523 of the Belgian Companies Code and in connection with the salary

increase and bonus for the CEO: the chairman declared that Mr. Onno van de Stolpe had 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 2.50% as of 2017. Given the actual level of achievement of the

criteria from the Senior Management Bonus Scheme to be entitled to a bonus (i.e. the corporate objectives for

2016) a bonus equal to 100% of his 2016 salary was awarded to Mr. Van de Stolpe for 2016. 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

2016. 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.

Galapagos NV • Annual Report 2016

CORPORATE GOVERNANCE

Statement by the board of directors
—

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 Galapagos as of

31 December 2016.

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 2016, gives a true and fair view on the

development, results and position of Galapagos and on the most important risks and uncertainties with which

Galapagos is confronted.

The board of directors will submit proposed resolutions to the shareholders’ meeting to approve the annual

accounts for the financial year 2016, and to release the directors and the statutory auditor from liability for the

performance of their mandate during the financial year ended 31 December 2016.

Mechelen, 21 March 2017

On behalf of the board of directors

Onno van de Stolpe
CEO

Raj Parekh
Chairman

Galapagos NV • Annual Report 2016

Financial
statements
Consolidated and non-
consolidated financial
statements for 2016

Richard Janssen

VP Alliance Management

FINANCIAL STATEMENTS

Consolidated financial statements
—

Consolidated statements of income and comprehensive income

Consolidated income statement

(thousands of €, except share and per share data)

Revenues

Other income

Total revenues and other income

Research and development expenditure

General and administrative expenses

Sales and marketing expenses

Total operating expenses

Year ended 31 December

2016

129,519

22,093

151,612

39,563

21,017

60,579

2015

Notes

(139,573)

(129,714)

(21,744)

(1,785)

(19,127)

(1,182)

(163,103)

(150,023)

Operating loss

(11,491)

(89,444)

Fair value re-measurement of share subscription agreement

Other financial income

Other financial expenses

57,479

9,950

(1,692)

(30,632)

1,987

(1,539)

Profit / loss (–) before tax

54,246

(119,627)

Income taxes

(235)

1,218

Net income / loss (–)

Net income / loss (–) attributable to:

Owners of the parent

Basic income / loss (–) per share

Diluted income / loss (–) per share

Weighted average number of shares – Basic (in thousands of shares)

Weighted average number of shares – Diluted (in thousands of shares)

54,012

(118,410)

54,012

(118,410)

1.18

1.14

45,696

47,308

(3.32)

35,700

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Consolidated statement of comprehensive income

(thousands of €)

Net income / loss (–)

Year ended 31 December

2016

54,012

2015

Notes

(118,410)

Items that will not be reclassified subsequently to profit or loss:

Re-measurement of defined benefit obligation

(583)

202

Items that may be reclassified subsequently to profit or loss:

Fair value adjustment of available-for-sale financial assets

Translation differences, arisen from translating foreign activities

Other comprehensive income, net of income tax

(399)

(623)

(1,605)

690

892

Total comprehensive income attributable to:

Owners of the parent

52,406

(117,517)

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Consolidated statements of financial position

(thousands of €)

Assets

Intangible assets

Property, plant and equipment

Deferred tax assets

Non-current R&D incentives receivables

Non-current restricted cash

Other non-current assets

Non-currents assets

Inventories

Trade and other receivables

Current R&D incentives receivables

Cash and cash equivalents

Current restricted cash

Current financial asset from share subscription agreement

Other current assets

Current assets

Total assets

Equity and liabilities

Share capital

Share premium account

Other reserves

Translation differences

Accumulated losses

Total equity

Pension liabilities

Provisions

Finance lease liabilities

Other non-current liabilities

Non-current deferred income

Non-current liabilities

31 December

2016

2015

Notes

1,023

14,961

1,957

54,188

1,098

2,880

76,107

300

9,728

10,154

973,241

6,570

–

7,239

1,007,232

1,083,338

223,928

649,135

(1,000)

(1,090)

(112,272)

758,701

3,520

2,469

214,785

220,846

1,550

13,782

1,726

49,384

1,046

557

68,044

325

3,931

9,161

340,314

6,857

8,371

5,512

374,470

442,514

185,399

357,402

(18)

(467)

(177,317)

364,999

2,693

2,291

–

5,103

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

(thousands of €)

Finance lease liabilities

Trade and other payables

Current tax payable

Accrued charges

Deferred income

Current liabilities

Total liabilities

31 December

2016

31,269

1,022

619

70,827

103,791

324,637

2015

Notes

29,482

2,583

490

39,806

72,412

77,515

Total equity and liabilities

1,083,338

442,514

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Consolidated cash flow statements

(thousands of €)

Cash and cash equivalents at beginning of year

2016

340,314

2015

Notes

187,712

Net income / loss (–)

54,012

(118,410)

Adjustments for:

Tax expense / income (–)

Other net financial income

Fair value re-measurement of share subscription agreement

Depreciation of property, plant and equipment

Amortization of intangible fixed assets

Net realized gain / loss (–) on foreign exchange transactions

Share-based compensation

Increase / decrease (–) in provisions

Increase in pension liabilities

Gain on sale of fixed assets

235

(8,258)

(57,479)

3,322

860

1,229

11,034

244

(14)

(1,218)

(448)

30,632

2,372

1,030

(398)

5,036

(125)

(62)

Operating cash flows before movements in working capital

5,192

(81,560)

Increase (–)/ decrease in inventories

Increase in receivables

Increase / decrease (–) in payables

Increase in deferred income

(12,978)

2,102

245,806

(44)

(7,220)

(39,508)

12,780

Cash generated / used (–) in operations

240,148

(115,553)

Interest paid

Interest received

Income taxes paid

(47)

1,066

(1,763)

(49)

1,106

(94)

Net cash flows generated / used (–) in operating activities

239,403

(114,590)

Purchase of property, plant and equipment

Purchase of and expenditure in intangible fixed assets

Proceeds from disposal of property, plant and equipment

Decrease in restricted cash

Acquisition of available-for-sale financial assets

(4,458)

(332)

235

(2,750)

(6,100)

(565)

110

2,258

Net cash flows used in investing activities

(7,287)

(4,297)

Galapagos NV • Annual Report 2016

2015

Notes

(43)

259,410

FINANCIAL STATEMENTS

(thousands of €)

Repayment of obligations under finance leases and other debts

2016

(49)

Proceeds from capital and share premium increases, net of issue costs

391,784

Proceeds from capital and share premium increases from exercise of
warrants

4,261

12,003

Net cash flows generated in financing activities

395,996

271,370

Effect of exchange rate differences on cash and cash equivalents

4,816

118

Increase in cash and cash equivalents

632,927

152,601

Cash and cash equivalents at end of the year

973,241

340,314

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Consolidated statements of changes in equity

Share capital

Share
premium
account

Translation
differences

Other
reserves

Accumul.
losses

Total

157,274

114,182

(1,157)

(220)

(63,944)

206,135

(thousands of €)

On 1 January 2015

Net loss

Other comprehensive income

Total comprehensive income

Share-based compensation

690

202

(118,410)

892

(118,410)

(117,517)

5,036

278,703

(19,360)

12,002

Issue of new shares

40,751

237,952

Share issue costs

(19,360)

Exercise of warrants

6,734

5,269

On 31 December 2015

185,399

357,402

(467)

(18)

(177,317)

364,999

On 1 January 2016

185,399

357,402

(467)

(18)

(177,317)

364,999

Net income

Other comprehensive income

Total comprehensive income

Share-based compensation

Issue of new shares

36,575

289,696

Share issue costs

Exercise of warrants

(269)

2,223

2,037

(623)

(982)

54,012

11,034

54,012

(1,605)

52,406

11,034

326,271

(269)

4,261

On 31 December 2016

223,928

649,135

(1,090)

(1,000)

(112,272)

758,701

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Notes to the consolidated financial statements

1. General information

Galapagos NV is a limited liability company incorporated in Belgium and has its registered office at Generaal De

Wittelaan L11 A3, 2800 Mechelen, Belgium. In the notes to the consolidated financial statements, references to

“we”, “us,” “the group” or “Galapagos” include Galapagos NV together with its subsidiaries.

R&D

The R&D operations are specialized in the discovery and development of small molecules. Our ambition is to

become a leading global biotechnology company focused on the development and commercialization of novel

medicines. Our strategy is to leverage our unique and proprietary target discovery platform, which facilitates our

discovery and development of therapies with novel modes of action.

The components of the operating result presented in the financial statements include the following companies:

Galapagos NV (Mechelen, Belgium); Galapagos SASU (Romainville, France); Galapagos B.V.

(Leiden,

the

Netherlands); Fidelta d.o.o. (Zagreb, Croatia); 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); and Inpharmatica Ltd. (Saffron Walden, UK).

Our operations have 508 employees working in the operating facilities in Mechelen (the Belgian headquarters),

the Netherlands, France, and Croatia.

2. Significant accounting policies

Our principal accounting policies are summarized below.

Basis of preparation and going concern assumption

The consolidated financial statements are prepared in accordance with the International Financing Reporting

Standards (IFRS), issued by the International Accounting Standard Board (IASB) and the interpretations issued by

the IASB’s International Financial Reporting Interpretation Committee. The consolidated financial statements

provide a general overview of our activities and the results achieved. They give a true and fair view of our financial

position, our financial performance and cash flows, on a going concern basis.

New standards and interpretations applicable for the annual period beginning on 1 January
2016
▪ Amendments to IAS 1 Presentation of Financial Statements – Disclosure Initiative (applicable for annual

periods beginning on or after 1 January 2016)

▪ Amendments to IAS 16 and IAS 38 Property, Plant and Equipment and Intangible Assets – Clarification of

Acceptable Methods of Depreciation and Amortization (applicable for annual periods beginning on or after

1 January 2016)

▪ Amendments to IAS 19 Employee Benefits – Employee Contributions (applicable for annual periods

beginning on or after 1 February 2015)

Standards and interpretations published, but not yet applicable for the annual period beginning
on 1 January 2016
▪ IFRS 9 Financial Instruments and subsequent amendments (applicable for annual periods beginning on or

after 1 January 2018)

▪ IFRS 15 Revenue from Contracts with Customers (applicable for annual periods beginning on or after

1 January 2018)

▪ IFRS 16 Leases (applicable for annual periods beginning on or after 1 January 2019, but not yet endorsed in

the EU)

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

▪ Improvements to IFRS (2014-2016) (applicable for annual periods beginning on or after 1 January 2017 or 2018,

but not yet endorsed in the EU)

▪ Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions (applicable

for annual periods beginning on or after 1 January 2018, but not yet endorsed in the EU)

▪ Amendments to IFRS 4 Insurance Contracts – Applying IFRS 9 Financial Instruments with IFRS 4 (applicable

for annual periods beginning on or after 1 January 2018, but not yet endorsed in the EU)

▪ Amendments to IAS 7 Statement of Cash Flows – Disclosure Initiative (applicable for annual periods

beginning on or after 1 January 2017, but not yet endorsed in the EU)

▪ Amendments to IAS 12 Income Taxes – Recognition of Deferred Tax Assets for Unrealized Losses (applicable

for annual periods beginning on or after 1 January 2017, but not yet endorsed in the EU)

▪ IFRIC 22 Foreign Currency Transactions and Advance Consideration (applicable for annual periods

beginning on or after 1 January 2018, but not yet endorsed in the EU)

The new standards applicable did not have any impact on our financials.

Assessment of the impact of IFRS 15 Revenue from Contracts with Customers (applicable for
annual periods beginning on or after 1 January 2018) on the revenue recognition of our current
material license and collaboration agreements.

The IASB has issued IFRS 15 Revenue from Contracts with Customers, with an effective date of 1 January 2018. It

was endorsed by the EU in third quarter of 2016.

The IASB issued clarifications to IFRS 15 Amendments to IFRS 15 – Clarifications to IFRS 15 Revenue from Contracts

with Customers, with an effective date of 1 January 2018, currently awaiting EU endorsement. The clarifications

address how to identify the performance obligations in a contract, how to determine whether a party involved

in a transaction is a principal or an agent, how to determine whether a license provides the customer with a

right to access or a right to use the entity’s intellectual property, and added practical expedients to the transition

requirements of IFRS 15.

Entities will apply a five step model to determine when, how and at what amount revenue is to be recognized

depending on whether certain criteria are met.

The company is currently in process of reviewing all its research and development, license and collaboration

agreements to ascertain how IFRS 15 will impact the identification of performance obligations and the allocation

of consideration to them. We performed preliminary qualitative assessments of the consequences of IFRS 15,

which are however subject to change arising from a more detailed ongoing analysis.

1. Identify the contracts
The substance of our current arrangements is that Galapagos is licensing its IP or selling its compounds to

collaborative partner entities and providing research and development (“R&D”) services. Such activities result in

a good or service that is an output of Galapagos’ ordinary activities.

We generate revenue through a number of these arrangements which include license fees, milestone payments,

reimbursement income and future sales based milestones and sales based royalties.

Certain revenues from our current material licensing and collaboration agreements could be in the scope of IFRS 15.

2. Identify performance obligations
We assessed that there could be one single combined performance obligation for certain arrangements in our

material ongoing license and collaboration arrangements under the new standards of IFRS 15; the transfer of a

license combined with performance of R&D services.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

This is because we could consider that the license has no stand-alone value without Galapagos being further

involved in the R&D collaboration and that there is interdependence between the license and the R&D services to

be provided. For certain arrangements, we could consider that there is a transformational relationship between

the license and the R&D services to be delivered. We could estimate that the Galapagos’ activities during the R&D

collaboration are going to significantly add to Intellectual Property (IP) and thereby the value of the programs.

3. Determine the transaction price
We analyzed the transaction prices of our material ongoing license and collaboration agreements currently

composed of upfront license fees, R&D milestones and cost reimbursements for R&D services being delivered.

Sales based milestones and sales based royalties are part of certain of our arrangements but are not yet included

in our revenues as our most advanced license and collaboration arrangement is entering into a late development

phase. Transaction price must be re-assessed at each reporting periods under IFRS 15.

4. Allocate the transaction price
An entity shall allocate the transaction price to each performance obligation identified in the contract on a

relative stand-alone selling price.

The transaction price of certain of our arrangements could be allocated to a single combined performance

obligation when the transfer of a license is considered to be combined with performance of R&D services.

R&D milestone payment is variable consideration that could be entirely allocated to a specific performance

obligation or to a distinct good or service that forms part of a single performance obligation if certain criteria

under IFRS 15 are met.

5. Recognize revenue
Revenue from certain arrangements could be recognized as Galapagos satisfies a combined performance

obligation.

Galapagos could recognize revenues allocated to a combined performance obligation over the estimated service

period based on a pattern that reflects the transfer of the services. The revenues recognized would reflect the

level of service each period. In this case, Galapagos would use an output model that considers estimates of the

percentage of total R&D service costs that are completed each period compared to the total estimated services

costs (% of completion method).

Milestone payments could be recognized in revenues entirely when achieved as we achieved a specific

performance obligation or to a distinct good or service that forms part of a single performance obligation if

certain criteria under IFRS 15 are met.

Costs reimbursements could be recognized in revenues when costs are incurred and agreed by the parties as

Galapagos is acting as a principal in the scope of its stake of the R&D activities of its ongoing license and

collaboration agreements.

Assessment of the impact of IFRS 15
As the company’s assessment of all contracts, potential performance obligations, and potential allocation of the

revenue is still ongoing, the company is not able at this stage to provide a final estimate of the impact of IFRS 15

on its consolidated financial statements. The company plans to adopt IFRS 15 on the effective date.

Assessment of the impact of the implementation of IFRS 9 Financial Instruments and
subsequent amendments (applicable for annual periods beginning on or after 1 January 2018)
on our consolidated financial statements.

The IASB has issued IFRS 9 Financial Instruments, with an effective date of 1 January 2018, endorsed by the EU

in the fourth quarter of 2016. IFRS 9 addresses the classification, measurement and de-recognition of financial

assets and financial liabilities and introduces new rules for hedge accounting. The new standard also introduces

expanded disclosure requirements and changes in presentation.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

We performed a preliminary assessment evaluating the guidance to determine the potential impact on the

consolidated financial statements.

Financial assets and financial liabilities are recognized on our balance sheet when we become a party to the

contractual provisions of the instrument. Hedging and derivatives have never been used: we do not actively

use currency derivatives to hedge planned future cash flows, nor do we make use of forward foreign exchange

contracts. However, at year-end 2015 and until 19 January 2016, an embedded derivative existed under the terms

of the Gilead contract (see note 8).

As of 31 December 2016, some equity instruments held by the group were classified as “available-for-sale”. The

group applies IAS 39 for its equity instruments.

We performed a preliminary assessment of the impact of the implementation of the new standards of IFRS 9 on

our current accounting policies under IAS 39, and primarily on the current accounting treatment applied for our

available-for-sale financial assets.

All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position,

with value changes recognized in profit or loss, except for those equity investments for which the entity has

elected to present value changes in ‘other comprehensive income’. There is no ‘cost exception’ for unquoted

equities.

‘Other comprehensive income’ option under IFRS 9

If an equity investment is not held for trading, an entity can make an irrevocable election at initial recognition

to measure it at fair value through other comprehensive income with only dividend income recognized in profit

or loss.

Assessment of the impact of IFRS 9
Galapagos’ preliminary assessment is that the coming new standards IFRS 9 Financial Instruments and

subsequent amendments (applicable for annual periods beginning on or after 1 January 2018) should not have a

material impact on our consolidated financial statements. The company plans to adopt IFRS 9 on the effective

date.

IFRS 16 Leases

The IASB has issued IFRS 16 Leases (applicable for annual periods beginning on or after 1 January 2019) currently

awaiting EU endorsement. The standard requires that all leases be recognized in the balance sheet with a

corresponding lease liability, except for short term assets and minor assets. IFRS 16 required leased assets to be

amortized over the lease term, and payments will be allocated between instalments on the lease obligation and

interest expense, classified as financial items. In addition, the nature of the expenses related to those leases will

change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right of the

use assets and interest expense on lease liabilities.

We know that this new coming standard will have an impact on our consolidated financial statements in 2019

and we are currently evaluating the guidance to determine this impact. We plan to adopt IFRS 16 on the effective

date.

Consolidated reporting

The consolidated financial statements comprise the financial statements of Galapagos NV and entities controlled

by Galapagos NV. Control is achieved where Galapagos NV 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

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

when control ceases to exist. Where necessary, adjustments are made to the financial statements of subsidiaries

to ensure consistency with our 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 acquisition 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 us in exchange for control of the acquired entity.

The acquired entity’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.

Goodwill arising on business combinations is recognized as an asset and initially measured as excess of the cost

of acquisition over our 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 date of the 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 acquired entity’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 our 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
▪ We have the intention to complete the intangible assets and use or sell it
▪ We have 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
▪ We are 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 estimated 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.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Property, plant and equipment

Property, plant and equipment are 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

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.

Financial instruments

Financial assets and financial liabilities are recognized on our balance sheet when we become a party to the

contractual provisions of the instrument. Hedging and derivatives have never been used: we do not actively

use currency derivatives to hedge planned future cash flows, nor do we make use of forward foreign exchange

contracts. However, at year-end 2015 and until 19 January 2016, an embedded derivative existed under the terms

of the Gilead contract (see note 8).

Available-for-sale financial assets

The group applies IAS 39 for its equity instruments. At the time of purchase, management determines the

financial instrument’s classification and reviews this classification at each reporting date. The classification

depends on the purpose of acquiring the financial

instrument. As of 31 December 2016, some financial

instruments held by the group were classified as “available-for-sale”. These financial instruments are recognized

or derecognized as of the date of settlement. Following their initial recognition, available-for-sale financial assets

are measured at fair value, and any resulting gain or loss is reported directly in the revaluation reserve within

equity until the financial instruments are sold, redeemed, otherwise disposed of or considered impaired, at which

time the accumulated gain or loss is reported in profit and loss. Initial recognition at fair value is defined

as the fair value of the consideration provided net of transaction costs. However, when investments in equity

instruments do not have a quoted market price in an active market and the fair value cannot be reliably

measured; those equity instruments are measured at cost.

Research and development incentives receivables

The R&D incentives receivables relate to refunds resulting from R&D incentives on research and development

expenses in France and Belgium. Non-current research and development incentives 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.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

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 and

highly liquid investments. Cash and cash equivalents exclude restricted cash which is presented separately in the

statement of financial position.

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. Our 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.

Foreign currencies
▪ Functional and presentation currency

Items included in the financial statements of each of our 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 our 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. We are using monthly transaction rates based on the closing

exchange rates of the foreign currencies on the last business day of the month preceding the date of the

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.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

▪ Financial statements of foreign group companies

The results and financial position of all our 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 cumulative exchange differences are recognized as a separate component of equity
▪ Such cumulative exchange differences are recognized in profit or loss in the period in which the foreign

operation is disposed of

Recognition of expenses linked to clinical trial milestones

We recognize expenses specifically linked to clinical trial milestones with regard to patient recruitment and

patient treatment (i.e. completion), incurred in carrying out clinical trials, in line with actual patient recruitment

or treatment at each period end, in reference to the milestone targets for patient recruitment or treatment.

This involves the calculation of clinical trial accruals at each period end, for which an estimation of the expected

full clinical trial milestone cost is required, as well as the current stage of patient recruitment or treatment.

Clinical trials usually take place over extended time periods and typically involve a set-up phase, a recruitment

phase and a completion phase which ends upon the receipt of a final report containing full statistical analysis

of trial results. Accruals for patient recruitment and patient completion are prepared separately for each clinical

trial in progress and take into consideration the stage of completion of each trial including the number of

patients that have entered the trial and the number of patients that have been treated in the trial. In all cases,

the full cost of each trial is expensed by the time the final report is received.

Revenue recognition

Revenues to date have consisted principally of milestones, license fees and upfront payments received in

connection with collaboration and alliance agreements. We also generate revenue from our fee-for-service

activities, and various research and development incentives and grants.

Collaboration and alliance agreements with our commercial partners for research and development activities

generally include non-refundable upfront fees; costs reimbursements; milestone payments, the receipt of which

is dependent upon the achievement of certain clinical, regulatory or commercial milestones; license fees and

royalties on sales.

The revenue recognition policies can be summarized as follows:

Upfront payments
Non-refundable, upfront payments received in connection with research and development collaboration

agreements are deferred and recognized over the relevant, required periods of our involvement. The payments

and our involvement relate to a contractually defined phase of the project. At inception, management estimates

the period of our involvement as well as the cost involved in the project. Upfront payments are recognized over

the estimated period of involvement, either on a straight line basis or based on the cost incurred under the

project if such cost can be reliably estimated. Periodically we reassess the estimated time and cost to complete

the project phase and adjust the time period over which the revenue is deferred accordingly.

Milestone payments
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. Revenue from these activities can vary significantly from

period to period due to the timing of milestones.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Reimbursement income
Cost reimbursements resulting from license and collaboration agreements with our commercial partners are

recognized as reimbursement income in revenue as the related costs are incurred and upon agreement by the

parties involved. The corresponding expenses are included in research and development expenditure.

Cost reimbursements from collaboration in which we share equally in the risks and benefits associated with

development of a specific drug with a collaboration partner are recognized as decrease of the related incurred

research and development expenditure.

Licenses
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.

Royalties
Royalty revenues are recognized when we can reliably estimate such amounts and collectability is reasonably

assured. As such, we generally recognize royalty revenues in the period in which the licensees are reporting the

royalties to us through royalty reports, that is, royalty revenues are generally recognized in arrears, i.e. after the

period in which sales by the licensees occurred. Under this accounting policy, the royalty revenues we report are

not based upon our estimates and such royalty revenues are typically reported in the same period in which we

receive payment from our licensees.

Grants and R&D incentives
As we carry out extensive research and development activities, we benefit from various grants and R&D incentives

from certain governmental agencies. These grants and R&D incentives generally aim to partly reimburse

approved expenditures incurred in our research and development efforts and are credited to the income

statement, under other income, when the relevant expenditure has been incurred and there is reasonable

assurance that the grants or R&D incentives are receivable.

Interests in joint operations

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement

have rights to the assets and obligations for the liabilities, relating to the arrangement. Joint control is the

contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant

activities require unanimous consent of the parties sharing control.

When we undertake our activities under joint operations, we as a joint operator recognize in relation to our

interest in a joint operation:

▪ Our assets, including our share of any assets held jointly
▪ Our liabilities, including our share of any liabilities incurred jointly
▪ Our revenue from the sale of our share of the output arising from the joint operation
▪ Our share of the revenue from the sale of the output by the joint operation
▪ Our expenses, including our share of any expenses incurred jointly

We account for the assets, liabilities, revenues and expenses relating to our interest in a joint operation in

accordance with IFRSs applicable to the particular assets, liabilities, revenues and expenses.

When we transact with a joint operation in which we are a joint operator (such as sale or contribution of assets),

we are considered to be concluding the transaction with the other parties to the joint operation, and gains and

losses resulting from the transactions are recognized in our consolidated financial statements only to the extent

of other parties’ interests in the joint operation.

When we transact with a joint operation in which we are a joint operator (such as purchase of assets), we do not

recognize our share of the gains and losses until we resell those assets to a third party.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Equity instruments

Equity instruments issued by us are measured by the fair value of the proceeds received, net of direct issue costs.

Employee benefits
a/ Defined contribution plans
Contributions to defined contribution pension plans are recognized as an expense in the income statement as

incurred.

b/ Defined benefit plans
For defined retirement benefit plans, the cost of providing benefits is determined using the projected unit

credit method, with actuarial valuations being carried out at the end of each annual reporting period. Re-

measurement, comprising actuarial gains and losses, the effect of the changes to the asset ceiling (if applicable)

and the return on plan assets (excluding interest), is reflected immediately in the statement of financial position

with a charge or credit recognized in other comprehensive income in the period in which they occur. Re-

measurement recognized in other comprehensive income is reflected immediately in retained earnings and

will not be reclassified to profit or loss. Past service cost is recognized in profit or loss in the period of a plan

amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net

defined benefit liability or asset. Defined benefit costs are categorized as follows:

▪ Service cost (including current service cost, past service cost, as well as gains and losses on curtailments and

settlements)

▪ Net interest expenses or income
▪ Re-measurement

The retirement benefit obligation recognized in the consolidated statement of financial position represents the

actual deficit or surplus in our defined benefit plans. Any surplus resulting from this calculation is limited to the

present value of any economic benefits available in the form of refunds from the plans or a reduction in future

contributions to the plans. A liability for a termination benefit is recognized at the earlier of when we can no

longer withdraw the offer of the termination benefit and when we recognize any related restructuring costs.

c/ Staff bonus plan
We recognize an expense in the income statement for staff bonus plans.

d/ Management bonus plan
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 remaining 50% is

deferred for three years. The deferred 50% component is dependent on the Galapagos share price change relative

to the Next Biotech Index (which tracks Euronext-listed biotech companies). The Galapagos share price and the

Next Biotech 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 Galapagos 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 Galapagos 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 Galapagos share price change is more than 10% worse than the change in the Next Biotech Index the

deferred bonus will be forfeited

We recognize the possible payment of the deferred component of the Senior Management Bonus Schemes within

three years at the moment that the bonus amount is determined, based on the fair value of the liability at each

reporting period. The fair value of the liability is measured by use of the Monte Carlo valuation model taking into

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

consideration (a) the average reference price of the Galapagos share and Next Biotech Index, (b) the average price

of the reporting period of the Galapagos share and the Next Biotech Index, (c) the simulation of the evolution

of the Galapagos share price and the Next Biotech Index based on their volatility and correlation until maturity

of the bonus, (d) the applicable discount rates at the end of the reporting period and (e) the probability of the

number of beneficiaries assumed to stay with us until maturity of the bonus. The changes in fair value are

recognized in profit or loss for the period.

Share-based payments

We grant equity-settled incentives to certain employees, directors and consultants in the form of warrants.

Equity-settled warrants are measured at fair value at the date of acceptance. The fair value determined at the

acceptance date of the warrants is expensed over the vesting period, based on our estimate of warrants that are

expected to be exercised. 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.

Provisions

Provisions are recognized on the balance sheet when we have 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.

Finance and operating leases

Leases are classified as finance leases whenever the terms of the lease substantially transfer 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 our assets 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, we review the carrying amount of our 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 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, we estimate 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.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

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 income/loss per share

Basic net income/loss per share is computed based on the weighted average number of shares outstanding

during the period. Diluted net income per share is computed based on the weighted average number of shares

outstanding including the dilutive effect of warrants, if any.

Discontinued operations

A discontinued operation is a component of us 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; and do not include income tax items. We have only two segments (see note 4).

3. Critical accounting estimates and judgments

In the application of the accounting policies, we are required to make judgments, estimates and assumptions

about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The

estimates and associated assumptions are based on historical experience and other factors that are considered to

be relevant. Actual results may differ from these estimates.

Our estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are

recognized in the period in which the estimate is revised if the revision affects only that period or in the period

of the revisions and future periods if the revision affects both current and future periods.

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 following are the critical judgments and estimates that we have made in the process of applying the

accounting policies and that have the most significant effect on the amounts recognized in the consolidated

financial statements presented elsewhere in this annual report.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Critical judgments in applying accounting policies
Share subscription agreement with Gilead – classification as derivative financial asset or
equity instrument
As described in note 8, Gilead Sciences, Inc. (“Gilead”) committed itself on 16 December 2015 to make a $425 million

equity investment in Galapagos NV by subscribing to new shares at a fixed price of €58 per share, including

issuance premium upon completion of the license and collaboration agreement with Galapagos that took place

on 19 January 2016.

Significant judgment had to be applied in assessing whether this forward subscription commitment of Gilead

over the own shares of Galapagos shall be classified as an own equity instrument of Galapagos or as a derivative

financial asset. IAS 32 requires that for a derivative to meet the definition of equity it must be settled only by the

issuer (Galapagos) exchanging a “fixed amount of cash or another financial asset for a fixed number of its own

equity instruments”. Because the above mentioned commitment of Gilead was made in $, the actual number of

shares finally issued by Galapagos varied with the fluctuation in the $/€ exchange rate until the settlement date

on 19 January 2016.

Despite the fact that this foreign exchange exposure was limited, management judged that this variability

prevented the instrument from being classified as equity under IAS 32 and was therefore treated as a derivative

at fair value through profit and loss.

Revenue recognition
Evaluating the criteria for revenue recognition with respect to our research and development and collaboration

agreements requires management’s judgment to ensure that all criteria have been fulfilled prior to recognizing

any amount of revenue. In particular, such judgments are made with respect to determination of the nature

of transactions, whether simultaneous transactions shall be considered as one or more revenue-generating

transactions, allocation of the contractual price (upfront and milestone payments in connection with a

collaboration agreement) to several elements included in an agreement, and the determination of whether the

significant risks and rewards have been transferred to the buyer. Collaboration agreements are reviewed carefully

to understand the nature of risks and rewards of the arrangement. All of our revenue-generating transactions

have been subject to such evaluation by management.

Critical accounting estimates
Fair value re-measurement of the Gilead share subscription agreement (derivative
financial asset instrument)
(thousands of €)

Fair value at inception

Movement of 2015 (recognized in the income statement)

Fair value per 31 December 2015

Movement of period 1-19 January 2016 (recognized in the income statement)

Fair value per 19 January 2016

Derecognition of the financial asset through the share premium account

Fair value per 31 December 2016

39,003

(30,632)

8,371

57,479

65,850

(65,850)

–

The fair value measurement of this financial derivative financial asset was categorized as a level 3 in the fair

value hierarchy of IFRS 13 Fair Value Measurement.

Its measurement was based on computing the difference between the strike price (€58/ share) and the anticipated

Galapagos forward price, discounted to the valuation date. The notional was converted from U.S. dollar to EUR by

the currency exchange forward rate and the number of shares was computed by dividing the EUR notional by

the strike.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Input data were taken from Bloomberg as of 16 December 2015 and 31 December 2015, including:

▪ EUR OIS Discount rates (curve 133)
▪ Implied forward rate of the GLPG share at 31 January 2016
▪ Implied FX Forward rate at 31 January 2016

This computation was based on the following unobservable assumptions:

▪ Between the date that the deal was signed (16 December 2015) until the date the deal was complete, the two

counterparties could not back off from the deal and it was 100% certain that the U.S. Federal Trade

Commission would give the green light

▪ At the two valuation dates, it was assumed that the date when the deal will be complete would be

31 January 2016. This was the forward date from where all the market data was taken from

▪ It was assumed that the effect of the correlation between the Galapagos share price and the EUR/U.S. dollar

currency exchange rate was negligible. This was reasonable given the very short maturity of the deal

Relationship of unobservable inputs to the fair value measurement:

▪ If one would have assumed that the closing date of the deal was 19 January 2016 (the actual closing date) the

fair value of the derivative financial asset at 31 December 2015 would have been €8,367 thousand.

On 19 January 2016, the value of the financial asset at maturity amounted to €65.9 million, reflecting the share

premium that Gilead paid above our closing share price on the day of the capital increase. This financial asset

expired on the effective date of the share subscription agreement and was derecognized through the share

premium account.

Share-based payments plans
We determine the costs of the share-based payments plans (our warrant 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 expected life of

the warrant and the volatility. The judgments made and the model used are further specified 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. See note 29 for additional details.

Corporate income taxes
Significant judgment is required in determining the use of tax loss carry forwards. Deferred tax assets arising

from unused tax losses or tax credits are only recognized to the extent that there are sufficient taxable temporary

differences or there is convincing evidence that sufficient taxable profit will be available against which the

unused tax losses or unused tax credits can be utilized. Management’s judgment is that such convincing evidence

is currently not sufficiently available except for two subsidiaries operating intercompany on a cost plus basis

and as such a deferred tax asset is therefore recognized. At 31 December 2016, we had a total of approximately

€311.1 million of statutory tax losses carried forward which can be compensated with future taxable statutory

profits for an indefinite period except for an amount of €18 million in Switzerland, Croatia, the United States and

the Netherlands with expiry date between 2018 and 2030. At 31 December 2016, the available tax losses carried

forward in Belgium amounted to €230.9 million.

As from 1 July 2016, the existing Belgian patent income deduction (‘PID’) regime has been abolished and replaced

by the innovation income deduction ('IID') regime (adopted by the Belgian Chamber of Representatives on

2 February 2017 – published in the official Belgian gazette on 20 February 2017).

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Taxpayers benefitting from the previous PID regime will be able to still choose for the old PID regime (instead of

the new IID regime) for five years (grandfathering until 30 June 2021).

The choice for the PID regime is however irrevocable. An assessment is currently ongoing to determine which

regime is the most favorable for Galapagos. Given this ongoing assessment, we have taken the position to make

abstract of the new IID regime when estimating the tax provision in respect of assessment year 2017. In case the

newly IID regime would be applied, it is possible that an additional carried-forward tax asset could be recognized

(however subject to further analysis).

4. Segment information

In 2015, the IFRS 8 threshold of 10% of the combined revenues, external and inter-segment, of all segments

was met by the external and internal revenues reported by our fee-for-service business located in Croatia.

Consequently, there were two reportable segments in 2015 and 2016, R&D and fee-for-service business.

Segment information for the year 2016

(thousands of €)

External revenue

Internal revenue

Other income

Revenues & other income

Segment result

Unallocated expenses (1)

Operating loss

Financial (expenses)/income (2)

Result before tax

Income taxes (2)

Net income

R&D Fee-for-services

Inter-segment
elimination

121,616

–

21,922

143,538

7,903

4,379

171

(4,379)

12,453

(4,379)

1,138

(1,787)

Group

129,519

22,093

151,612

(649)

(10,841)

(11,491)

65,737

54,246

(235)

54,012

(1) The unallocated expenses of €10,841 thousand are composed of (a) €11,034 thousand of warrant costs, (b) €193 thousand of reduced cost from
the IAS19R reclassification of actuarial losses on long term defined post-employment benefit obligations, from profit or loss accounts to other
comprehensive income. The above listed items are not presented to management in our management reporting as segment results, and are,
therefore, presented on the line “unallocated expenses” in our segment reporting.

(2) Cash and taxes are handled at group level and are therefore presented under unallocated (expenses) / income

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Segment information for the year 2015

(thousands of €)

External revenue

Internal revenue

Other income

Revenues & other income

Segment result

Unallocated expenses (1)

Operating loss

Financial (expenses)/income (2)

Result before tax

Income taxes (2)

Net income

R&D Fee-for-services

Inter-segment
elimination

34,129

–

20,778

54,907

5,434

5,459

238

(5,459)

11,131

(5,459)

(82,024)

(2,690)

Group

39,563

–

21,017

60,580

(84,713)

(4,731)

(89,444)

(30,184)

(119,627)

1,218

(118,410)

(1) The unallocated expenses of €4,731 thousand are composed of (a) €5,036 thousand of warrant costs, (b) €507 thousand of decrease in

depreciation cost triggered by an IFRS adjustment on the depreciation charges reported by Fidelta (Croatia) reflecting the expected useful
lifetime following the purchase accounting of the acquisition of the Zagreb Research operations of GSK in 2010, (c) €202 thousand of cost from
the IAS19R reclassification of actuarial gains on long term defined post- employment benefit obligations, from profit or loss accounts to other
comprehensive income. The above listed items are not presented to management in our management reporting as segment results, and are,
therefore, presented on the line “unallocated expenses” in our segment reporting.

(2) Cash and taxes are handled at group level and are therefore presented under unallocated (expenses) / income

Segment assets and liabilities are not information being provided to management on a recurring basis. This

information is therefore not disclosed in our segment information.

Geographical information

In 2016 our operations were located in Belgium, Croatia, France and the Netherlands.

In 2016 our top 10 customers represented 98% of the revenues. Our client base in 2016 and 2015 included eight of

the top 20 pharmaceutical companies in the world.

Following table summarizes our revenues by destination of customer:

(thousands of €)

United States

Europe

Asia Pacific

Total revenues

Year ended 31 December

2016

88,628

40,884

129,519

2015

17,077

22,446

39,563

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Following table summarizes our revenues by major customers:

Year ended 31 December

2016

2015

(thousands of €)

% (thousands of €)

Gilead

United States

AbbVie

Europe

United States

Total revenues

87,813

32,596

120,409

68%

25%

93%

29,870

13,640

16,229

29,870

Following table summarizes our revenues by destination of our entity:

(thousands of €)

Galapagos NV (Belgium)

Galapagos SASU (France)

Fidelta d.o.o. (Croatia)

Xenometrix, Inc. (United States)

Total revenues

Year ended 31 December

2016

121,703

7,732

129,519

75%

34%

41%

75%

2015

34,082

5,440

39,563

In 2016, we held €76 million of non-current assets (€68 million in 2015) distributed as follows:

▪ Belgium: €37 million (€30 million in 2015)
▪ France: €31 million (€29 million in 2015)
▪ Croatia: €4 million (€5 million in 2015)
▪ The Netherlands: €4 million (€4 million in 2015)

The increase in non-current assets was mainly explained by the increase in non-current R&D incentives

receivables (see note 15).

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

5. Total revenues and other income

Revenues

The following table summarizes the revenues for the years ended 31 December 2016 and 2015.

(thousands of €)

Recognition of non-refundable upfront payments

Milestone payments

Reimbursement income

Other revenues

Total revenues

Year ended 31 December

2016

30,257

81,784

9,699

7,777

129,519

2015

26,419

3,835

3,807

5,501

39,563

Total revenues increased by €90.0 million, or 227%, to €129.5 million for the year ended 31 December 2016, from

€39.6 million for the year ended 31 December 2015. This increase was mainly driven by a substantial increase in

milestone payments, as explained below.

Revenue recognized in 2015 from upfront non-refundable payments related to the CF collaboration agreement

with AbbVie signed in September 2013 and the contract signed with AbbVie in February 2012 for our filgotinib

program (including the extension signed in March 2013). Those upfront payments were fully recognized into

revenues by the end of August 2015.

In September 2015 AbbVie decided not to opt in, which ended the collaboration agreement regarding our

filgotinib program and consequently the period of our involvement. There are no outstanding commitments for

us regarding this terminated collaboration for our filgotinib program.

On 16 December 2015, we entered into a global collaboration with Gilead Sciences, Inc. for the development and

commercialization of the JAK1-selective inhibitor filgotinib for inflammatory indications. On 19 January 2016, we

completed the closing of the global collaboration agreement with Gilead, in the framework of which Gilead made

a $425 million (or €392 million) equity investment in Galapagos NV by subscribing to new shares at a price of €58

per share, including issuance premium. This resulted in Gilead owning 6,760,701 ordinary shares of Galapagos NV,

representing 14.75% percent of the then-outstanding share capital of Galapagos. We also received a license fee of
$300 million. In addition, we are still eligible to receive payments of up to $695 million in additional7 development
and regulatory milestones and $600 million in sales milestones, with tiered royalties starting at 20% and a profit

split in co-promotion territories. Furthermore, development costs of the licensed product will be split 20-80. As

such Galapagos will support 20% of all development costs. As we do not expect to have a statutory taxable base

in the foreseeable future, we did not recognize any additional deferred tax asset following the signing of this new

collaboration.

The global collaboration with Gilead foresees continuous involvement from us, since we will perform certain

R&D activities in the development phase of the filgotinib program; therefore, management assessed that the

upfront payment of $300 million (or €275.6 million) received in January 2016 from Gilead should be spread as a

function of the costs incurred for this program, applying the percentage of completion method. In the year ended

31 December 2016, €25.6 million revenues were recognized regarding this upfront payment.

7 In 2016 $60 million of development milestones was already achieved and paid by Gilead.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

In connection with the agreement with Gilead, we recognized a deferred income and an offsetting short-term

financial asset (derivative) of €39 million upon signing of the share subscription agreement with Gilead, as

required under IAS 39. We refer to note 8 for further details. The deferred income will be recognized in function

of the costs incurred for this program, applying the percentage of completion method, along with the upfront

payment. In the year ended 31 December 2016, €3.6 million revenues were recognized in the income statement.

In 2016, Galapagos signed a license agreement with ThromboGenics for an integrin antagonist (formerly

GLPG0187), for which an upfront payment of €1 million was invoiced and fully recognized, as Galapagos has no

further involvement or obligation in the contract.

The following table summarizes the upfront payments recognition for years ended 31 December 2016 and 2015.

Upfront
received

Date of receipt

Revenue
recognized,
year ended
31 December
2016

Revenue
recognized,
year ended
31 December
2015

Outstanding
balance in
deferred
income as at
31 December
2016

Agreement

(thousands of $) (thousands of €)

(thousands of €)

AbbVie collaboration
agreement for CF

AbbVie collaboration
agreement for RA and CD
(filgotinib)

First amendment to
AbbVie collaboration
agreement for RA and CD
(filgotinib)

Gilead collaboration
agreement for filgotinib

ThromboGenics license
agreement for integrin
antagonists

Sirion Biotech license
agreement for RNA
interference (RNAi)
technologies

Total recognition of non-
refundable upfront
payments

$45,000

€34,001

September 2013

€11,401

$150,000

€111,582

February 2012

€12,045

$20,000

€15,619

March 2013

€2,973

$300,000

€275,558

January 2016

€25,621

N.A.

€39.003 (*)

January 2016

€3,626

€249,937

€35,376

N.A.

€1,000

April 2016

€1,000

N.A.

€10

June 2016

€10

€30,257

€26,419

€285,314

(*) deferred income of €39 million booked upon signing of the share subscription agreement with Gilead as required under IAS 39

Milestone revenues increased substantially by €77.9 million to €81.8 million for the year ended 31 December 2016

compared to €3.8 million for the year ended 31 December 2015. Milestones in 2016 related to the filgotinib program

with Gilead in Crohn’s disease and UC, and the CF program with AbbVie.

Reimbursement income increased by €5.9 million or 155%, to €9.7 million for the year ended 31 December 2016

compared to €3.8 million for the year ended 31 December 2015, due to higher reimbursements in relation with the

CF program with AbbVie and the filgotinib program with Gilead (which was partnered with AbbVie in 2015). The

reimbursement of certain research and development costs related to the development work under the Galapagos’

collaboration agreements amounted to €5.9 million for our CF program with AbbVie and €3.5 million for our

filgotinib program with Gilead for the year ended 31 December 2016.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Other revenues increased by €2.3 million, or 41%, to €7.8 million for the year ended 31 December 2016 compared

to €5.5 million for the year ended 31 December 2015, principally due to higher revenues from fee-for-service

activities.

Other income

The following table summarizes other income for the years ended 31 December 2016 and 2015.

(thousands of €)

Grant income

Other income

Total other income

Year ended 31 December

2016

2,329

19,764

22,093

2015

3,095

17,922

21,017

Total other income was composed of grant income and other income and increased by €1.1 million, or 5%, from

€21.0 million for the year ended 31 December 2015 to €22.1 million for the year ended 31 December 2016.

Grant income decreased by €0.8 million, or 25%, from €3.1 million for the year ended 31 December 2015 to

€2.3 million for the year ended 31 December 2016. The majority of this grant income was related to grants from a

Flemish agency, representing approximately 88% of all reported grant income in 2016 (2015: 94%). In many cases

these carry clauses which require us to maintain a presence in the same region for a number of years and invest

according to pre-agreed budgets.

The decrease in grant income was more than offset by an increase in other income of €1.8 million, or 10%, from

€17.9 million for the year ended 31 December 2015 to €19.8 million for the year ended 31 December 2016. Other

income was primarily composed of:

▪ Income from an innovation incentive system of the French government, which represented €9.5 million of
other income for the year ended 31 December 2016 compared to €8.7 million for the year ended 31 December

2015

▪ Income from Belgian R&D incentives with regard to incurred R&D expenses, which represented €5.8 million

of other income for the year ended 31 December 2016 compared to €5.3 million for the year ended

31 December 2015

▪ Tax rebates on payroll withholding taxes of R&D personnel in Belgium and the Netherlands, representing
€3.8 million of other income for the year ended 31 December 2016 compared to €3.0 million for the year

ended 31 December 2015

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

6. Operating costs

Operating result has been calculated after charging (–) / crediting:

Research and development expenditure

The following table summarizes research and development expenditure for the years ended 31 December 2016

and 2015.

(thousands of €)

Personnel costs

Subcontracting

Disposables and lab fees and premises costs

Other operating expenses

Year ended 31 December

2016

(42,315)

(65,649)

(20,414)

(11,196)

2015

(35,875)

(65,883)

(18,696)

(9,260)

Total research and development expenditure

(139,573)

(129,714)

R&D expenditure increased by €9.9 million, or 8%, to €139.6 million for the year ended 31 December 2016, from

€129.7 million for the year ended 31 December 2015. This increase was principally due to:

▪ Increased R&D personnel costs of €6.4 million, or 18%, from €35.9 million for the year ended 31 December
2015 to €42.3 million for the year ended 31 December 2016, which was explained by an enlarged workforce,

higher warrant costs and a higher payable for short term and long term management bonus, mainly as a

result of the increase of our share price change relative to the Next Biotech Index on Euronext

▪ Intensified use of lab consumables was the main driver of the increase in disposables, lab fees and premises
costs of €1.7 million, or 9%, from €18.7 million for the year ended 31 December 2015 to €20.4 million for the

year ended 31 December 2016

▪ Other operating expenses increased by €1.9 million, or 21%, from €9.3 million for the year ended 31 December
2015 to €11.2 million for the year ended 31 December 2016, primarily due to an increase in depreciation of

€1.0 million.

Subcontracting costs were relatively stable and decreased slightly by €0.2 million, or 0.4%, from €65.9 million for

the year ended 31 December 2015 to €65.6 million for the year ended 31 December 2016.

The table below summarizes our research and development expenditure for the years ended 31 December 2016
and 2015, broken down by research and development expenses under alliance8

(thousands of €)

R&D under alliance

Galapagos funded R&D

Total R&D expenditure

Year ended 31 December

2016

(71,980)

(67,593)

2015

(80,832)

(48,882)

(139,573)

(129,714)

8 All filgotinib costs (both costs incurred in the period under alliance (with AbbVie) and costs incurred after AbbVie’s opt-out decision in September 2015) are presented
as “R&D under alliance” or as “partnered” in the tables in this section for the year ended 31 December 2015, as a new alliance was signed in December 2015 with Gilead
for this program.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

We tracked all research and development expenditures against detailed budgets and allocated them by individual

project. The table below summarizes our research and development expenditure for the years ended 31 December

2016 and 2015, broken down by program:

(thousands of €)

Filgotinib program (partnered)

CF program (partnered)

IPF program on GLPG1690 (proprietary)

OA program on GLPG1972 (partnered)

AtD program on MOR106 (partnered)

Other

Total R&D expenditure

Year ended 31 December

2016

(22,376)

(31,203)

(7,129)

(6,538)

(3,491)

(68,836)

(139,573)

2015

(35,404)

(25,634)

(4,612)

(5,832)

(4,651)

(53,582)

(129,714)

R&D expenditure under alliance decreased by €8.9 million, or 11%, from €80.8 million for the year ended

31 December 2015 to €72.0 million for the year ended 31 December 2016, mainly due to decreased R&D spending

in our RA and IBD program on filgotinib (partnered with AbbVie in 2015 and partnered with Gilead in 2016),

which has been partially offset by increased R&D spending on our CF program in collaboration with AbbVie. We

increased our investments in our own funded portfolio by €18.7 million, or 38%, from €48.9 million for the year

ended 31 December 2015 to €67.6 million for the year ended 31 December 2016, primarily because of intensified

research investments in our proprietary programs on inflammation, HBV and fibrosis, as well as increased

spending on our proprietary IPF program GLPG1690.

General and administrative expenses

The following table summarizes the general and administrative expenses for the years ended 31 December 2016

and 2015.

(thousands of €)

Personnel costs and directors fees

Other operating expenses

Total general and administrative expenses

Year ended 31 December

2016

(15,160)

(6,584)

(21,744)

2015

(12,739)

(6,388)

(19,127)

General and administrative expenses amounted to €19.1 million for the year ended 31 December 2015 and

increased by €2.6 million, or 14%, to €21.7 million for the year ended 31 December 2016. This increase was

principally due to directors fees, which increased by €2.7 million, or 116%, from €2.4 million for the year ended

31 December 2015 to €5.1 million for the year ended 31 December 2016, resulting from various effects, such as

increased costs of share-based payments plans (our warrant plans) and increased payables for short and long

term management bonus, mainly as a result of the increase of our share price change relative to the Next Biotech

Index on Euronext.

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Sales and marketing expenses

The following table summarizes the sales and marketing expenses for the years ended 31 December 2016 and 2015.

(thousands of €)

Personnel costs

Other operating expenses

Total sales and marketing expenses

Year ended 31 December

2016

(1,167)

(618)

(1,785)

2015

(785)

(397)

(1,182)

Sales and marketing expenses increased by €0.6 million, or 51%, from €1.2 million for the year ended 31 December

2015 to €1.8 million for the year ended 31 December 2016.

7. Staff costs

The table below summarizes the number of our employees on 31 December 2016 and 2015:

Number of employees on 31 December

Total

The average number of employees during the years 2016 and 2015 was:

Key management

Laboratory staff

Administrative staff

Total

Their aggregate remuneration comprised:

(thousands of €)

Wages and salaries

Social security costs

Pension costs

Other personnel costs

Total personnel costs

2016

508

Year ended 31 December

2016

385

468

2015

435

2015

355

425

Year ended 31 December

2016

(34,857)

(7,328)

(1,728)

(9,617)

2015

(33,676)

(7,328)

(1,456)

(4,574)

(53,530)

(47,034)

The other personnel costs mainly related to costs for warrants granted of €6.6 million (2015: €2.9 million). For the

costs of warrants granted, see note 30.

100

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

8. Fair value re-measurement of share subscription agreement

On 16 December 2015, Gilead Sciences, Inc. and Galapagos NV entered into a global collaboration for the

development and commercialization of filgotinib, in the framework of which Gilead committed to an upfront

payment of $725 million consisting of a license fee of $300 million and a $425 million equity investment in

Galapagos NV by subscribing to new shares at a price of €58 per share, including issuance premium. This

agreement was effectively completed and entered into force on 19 January 2016 and the full payment was received.

In connection with the agreement, we recognized a deferred income and an offsetting short term financial asset (derivative)

of €39 million upon signing of the share subscription agreement with Gilead as required under IAS 39. This financial asset

initially reflected the share premium that Gilead committed to pay above our closing share price on the day of entering into

the subscription agreement. Under IAS 39 the fair value of the financial asset is re-measured at year-end and again upon

entering into force of the share subscription agreement on 19 January 2016, when the financial asset expired. Variations in

fair value of the financial asset are recorded in the income statement.

The decrease in the fair value of the financial asset resulting from the increase in the Galapagos share price

between signing of the share subscription agreement and 31 December 2015 resulted in a negative, non-cash fair

value charge of €30.6 million in the financial results. The subsequent increase in the fair value of the financial

asset resulting from the decrease in our share price between 1 January 2016 and 19 January 2016 resulted in a

positive non-cash gain of €57.5 million in the financial result of 2016.

On 19 January 2016, the value of the financial asset at maturity amounted to €65.9 million, reflecting the share premium

that Gilead paid above our closing share price on the day of the capital increase. This amount was composed of (1) the

initial measurement on the day of entering into the share subscription agreement for an amount of €39 million which

was reported in deferred income and (2) the subsequent re-measurements of the financial asset, reported as financial result

under IAS 39: €30.6 million fair value loss reported in the year 2015 and €57.5 million fair value gain reported in the year 2016,

together a net fair value gain of €26.8 million. This financial asset expired on the effective date of the share subscription

agreement and was derecognized through the share premium account.

9. Other financial income/expenses

The following table summarizes other financial income and expense for the years ended 31 December 2016 and

2015.

(thousands of €)

Other financial income:

Interest on bank deposit

Effect of discounting long term R&D incentives receivables

Currency exchange gain

Other finance income

Total other financial income

Other financial expenses:

Interest expenses

Currency exchange loss

Other finance charges

Total other financial expense

Year ended 31 December

2016

2015

1,614

8,150

9,950

(47)

(1,453)

(191)

(1,692)

1,246

636

1,987

(46)

(1,310)

(182)

(1,539)

Total other net financial income

8,257

448

101

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Other financial income increased significantly by €8.0 million, or 401%, from €2.0 million for the year ended

31 December 2015 to €10.0 million for the year ended 31 December 2016. The increase primarly related to an

exchange gain of €4.8 million on deposits held in U.S. dollar and exchange gains of €2.0 million realized on

milestone payments from AbbVie and Gilead in U.S. dollar.

Other financial expenses increased by €0.2 million, or 10% from €1.5 million for the year ended 31 December 2015

to €1.7 million for the year ended 31 December 2016. Net exchange profit amounts to €6.7 million for the year

ended 31 December 2016, compared to a net exchange loss of €0.7 million for the year ended 31 December 2015.

Interest expenses were related to interests paid on financial lease.

10. Taxes

The following table summarizes the income tax recognized in profit or loss for the years ended 31 December 2016

and 2015.

(thousands of €)

Current tax

Deferred tax

Total income taxes

Year ended 31 December

2016

(466)

231

(235)

2015

(215)

1,433

1,218

Current tax amounted to €0.5 million for the year ended 31 December 2016 and €0.2 million for the year ended

31 December 2015, and was related to taxes for subsidiaries operating on cost plus basis.

Deferred tax income of €0.2 million for the year ended 31 December 2016 and of €1.4 million for the year ended

31 December 2015 related to subsidiaries working on a cost plus basis.

Tax liabilities

The below table illustrates the tax liabilities related captions in the balance sheet as at 31 December 2016 and

2015.

(thousands of €)

Current tax payable

Total tax liabilities

31 December

2016

1,022

2015

2,583

On 31 December 2015, tax liabilities included €2.6 million primarily related to the recognition of tax liabilities for

two subsidiaries operating on a cost plus basis. This amount was partly due to a tax audit on the years 2008 to

2011 and underlying proposed tax adjustment amounting to €1.9 million in cash and decrease of our tax losses

carried forward for €19.5 million. A liability was recognized in 2014 considering this claim and the potential risk,

partly under current tax liability for €1.3 million and partly as a decrease of the R&D incentives receivables for

€0.6 million. The tax adjustment was settled in cash in the fourth quarter of 2016. However, discussions are still

ongoing with regard to this claim.

In addition, taxes on gain on the sale of the service division in 2014 were included in the tax liabilities on

31 December 2015 for €0.4 million and were paid in 2016.

On 31 December 2016, €1.0 million of tax liabilities were primarily related to two of our subsidiaries operating on

a cost plus basis.

102

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Taxes recognized in profit or loss

Corporation tax was calculated at 34% (2015: 34%) – which is the tax rate applied in Belgium – on the estimated

assessable profit for the year. The applied tax rate for other territorial jurisdictions was the tax rate that is

applicable in these respective territorial jurisdictions on the estimated taxable result of the accounting year.

Year ended 31 December

(thousands of €)

Income / loss (–) before tax

Income tax debit / credit (–), calculated using the Belgian statutory tax rate (34%) on
the accounting income / loss (–) before tax (theoretical)

Tax expenses / income (–) in income statement (effective)

Difference in tax expenses / income to explain

Effect of tax rates in other jurisdictions

Effect of non taxable revenues

Effect of consolidation entry without tax impact

Effect of non tax deductible expenses

Effect of recognition of previously non recognized deferred tax assets

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

Total explanations

2016

54,246

18,438

235

(18,203)

163

(27,399)

4,387

(421)

(655)

5,720

(18,203)

2015

(119,627)

(40,661)

(1,218)

39,444

328

(5,934)

12,378

(1,307)

(597)

34,783

(322)

39,444

The main difference between the theoretical tax and the effective tax for the years 2016 and 2015 was primarily

explained by the unrecognized deferred tax assets on tax losses carried forward for which we conservatively assess

that it is not likely that these will be realized in the foreseeable future.

Non-taxable revenues for the years ended 31 December 2016 and 2015 were related to non-taxable subsidies

and tax credits. Non-taxable revenues in 2016 included also the financial profit related to the fair value re-

measurement of the share subscription agreement.

103

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

11. Result per share

Basic result per share is calculated by dividing the net result attributable to shareholders by the weighted average

number of ordinary shares issued during the year. Diluted result per share is calculated based on the weighted

average number of shares (diluted) also considering outstanding warrants, for which our average share price of

the year was higher than the exercise price.

Income / loss per share

Result for the purpose of basic income / loss (–) per share (thousands of €)

Year ended 31 December

2016

54,012

2015

(118,410)

Number of shares (thousands)

Weighted average number of shares for the purpose of basic income /
loss per share

45,696

35,700

Basic income / loss (–) per share (€)

1.18

(3.32)

Result for the purpose of diluted income / loss (–) per share (thousands of €)

54,012

(118,410)

Number of shares (thousands)

Weighted average number of shares for the purpose of diluted income /
loss per share

Number of dilutive potential ordinary shares

45,696

1,612

35,700

Diluted income / loss (–) per share (€)

1.14

(3.32)

As we reported a net loss in 2015, the outstanding warrants (specified in note 30) have an anti-dilutive effect

rather than a dilutive effect. Consequently, basic and diluted loss per share are the same for 2015.

Basic income per share of €1.18 and diluted income per share of €1.14 in 2016 are based on a net income for

2016 which was strongly influenced by the non-cash gain from the fair value re-measurement of the share

subscription agreement with Gilead amounting to €57.5 million.

104

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Customer
relationships

In process
technology

Software &
databases

Brands,
licenses,
patents &
know-how

Total

–

5,561

8,088

565

(1,512)

177

7,318

317

(508)

7,185

6,087

1,026

(1,512)

177

5,777

856

(509)

6,182

1,512

15,161

565

(1,512)

177

1,512

14,392

(4)

332

(512)

1,523

14,269

1,497

13,147

1,030

(1,512)

177

1,501

12,841

(5)

860

(514)

1,501

13,246

1,540

1,003

1,550

1,023

12. Intangible assets

(thousands of €)

Acquisition value

On 1 January 2015

Additions

Sales and disposals

Translation differences

On 31 December 2015

Additions

Sales and disposals

Translation differences

On 31 December 2016

Amortization and impairment

On 1 January 2015

Amortization

Sales and disposals

Translation differences

On 31 December 2015

Amortization

Sales and disposals

Translation differences

On 31 December 2016

Carrying amount

On 31 December 2015

On 31 December 2016

The intangible assets decreased by €0.5 million from €1.5 million as at 31 December 2015, to €1.0 million as at

31 December 2016. The amortization of €0.9 million was partly compensated by new additions for €0.3 million.

105

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

13. Property, plant and equipment

(thousands of €)

Acquisition value

On 1 January 2015

Additions

Sales and disposals

Reclassifications

Translation differences

On 31 December 2015

Additions

Sales and disposals

Reclassifications

Translation differences

On 31 December 2016

Depreciations and impairment

On 1 January 2015

Amortization

Sales and disposals

Reclassifications

Translation differences

On 31 December 2015

Amortization

Sales and disposals

Reclassifications

Translation differences

On 31 December 2016

Carrying amount

On 31 December 2015

On 31 December 2016

Land &
building
improvements

Installation &
machinery

Furniture,
fixtures &
vehicles

Other tangible
assets

8,286

2,158

(6,395)

–

4,049

296

–

28,820

2,250

(5,041)

540

26,588

3,325

(1,315)

1,064

2,594

285

(188)

2,695

210

(105)

167

4,412

29,733

2,973

7,984

164

(6,395)

–

1,753

272

–

19,790

1,873

(4,996)

16,718

2,752

(1,315)

2,046

272

(188)

2,130

243

(100)

(93)

321

1,407

(11)

(543)

(1)

1,174

627

(0)

(1,299)

505

110

(7)

(44)

122

–

Total

40,021

6,100

(11,635)

–

34,506

4,458

(1,420)

(1)

37,624

29,930

2,372

(11,587)

–

20,724

3,322

(1,415)

–

2,025

18,252

2,184

203

22,663

2,296

2,387

9,870

11,481

565

789

1,051

302

13,782

14,961

The property, plant and equipment increased from €13.8 million as at 31 December 2015 to €15.0 million as at

31 December 2016. This increase was mainly the result of new additions of €4.5 million, partly compensated by a

depreciation charge of €3.3 million. The sales and disposals in 2015 related to the move to new premises in France

and the Netherlands.

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.

106

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

14. Other non-current assets

On 15 July 2016, we invested €2.75 million in Pharnext, a French advanced clinical stage biopharmaceutical

company developing new therapeutics for severe orphan and common neurological diseases, listed on Euronext.

Galapagos has no restrictions on the sale of this equity investment and the asset is not pledged under any

Galapagos’ liabilities. This investment is classified as available-for-sale equity investment which qualifies for level

1 fair value measurement based upon the closing price of the PXT securities on Euronext at each reporting date.

Fair value changes on available-for-sale financial assets are recognized directly in equity, through the statement

of changes in equity.

As of 31 December 2016, other non-current assets mainly consisted of available-for-sale equity investments in

Pharnext re-measured at fair value for €2.4 million as follows.

(thousands of €)

Cost at 1 January 2016

Additions of the year

Cost at 31 December 2016

Fair value adjustment of the year

Fair value adjustment at 31 December 2016

Net book value at 31 December 2016

Fair value of available-for-sale
financial assets

–

2,750

(399)

2,351

The unrealized loss of €399 thousand as of 31 December 2016, based on unadjusted quoted market price, was

recorded as a separate item within equity (revaluation reserve) in the line “other reserves”.

15. Research and development incentives receivables

The table below illustrates the R&D incentives receivables related captions in the balance sheet as at 31 December

2016 and 2015.

(thousands of €)

Non-current R&D incentives receivables

Current R&D incentives receivables

Total R&D incentives receivables

31 December

2016

54,188

10,154

64,342

2015

49,384

9,161

58,545

Total R&D incentives receivables increased by €5.8 million compared to 31 December 2015. This increase is

explained by new R&D incentives reported in 2016 for €15.3 million (€9.5 million related to French R&D incentives

and €5.8 million related to Belgian R&D incentives) less the payments received related to French R&D incentives

amounting to €8.7 million and to Belgian R&D incentives amounting to €0.8 million. The R&D incentives

receivables relate to future refunds resulting from R&D incentives on research expenses in France and Belgium.

Non-current R&D incentives receivables are discounted over the period until maturity date.

107

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

The table below provides detailed information on the maturity of the non-current R&D incentives receivables

reported in the balance sheet at 31 December 2016.

Non-current R&D incentives receivables

(thousands of €)

2018

2019

2020

2021

2022–2026

Total

31 December 2016

Maturity date

French non-current R&D
incentives receivables – nominal
value

French non-current R&D
incentives receivables –
discounted value

Belgian non-current R&D
incentives receivables – nominal
value

Belgian non-current R&D
incentives receivables –
discounted value

Total non-current R&D incentives
receivables – nominal value

Total non-current R&D incentives
receivables – discounted value

16. Restricted cash

(thousands of €)

Non-current restricted cash

Current restricted cash

Total restricted cash

8,214

8,621

9,168

8,214

8,621

9,168

26,003

2,074

2,966

3,831

4,188

15,235

28,294

2,074

2,966

3,831

4,188

15,126

28,185

10,288

11,587

12,999

4,188

15,235

54,297

10,288

11,587

12,999

4,188

15,126

54,188

31 December

2016

1,098

6,570

7,668

2015

1,046

6,857

7,903

Restricted cash amounted to €7.9 million on 31 December 2015, and decreased to €7.7 million on 31 December

2016. This decrease is related to the payment of a claim to Charles River by decrease of the escrow account for

€0.3 million, which has been slightly offset by an increase in non-current restricted cash of €0.1 million related

to an increase in the bank guarantee with regard to the rental of additional office space for the Belgian premises.

Restricted cash on 31 December 2016 is related to €0.4 million and €0.7 million of bank guarantees on real estate

lease obligations in Belgium and in the Netherlands respectively, and to €6.6 million escrow account containing

part of the proceeds from the sale of the service division in 2014 for which the release will be possible after final

agreement between the parties.

108

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

17. Trade and other receivables and other current assets

(thousands of €)

Trade receivables

Prepayments

Other receivables

Trade and other receivables

Accrued income

Deferred charges

Other current assets

Total trade and other receivables & other current assets

31 December

2016

6,629

3,078

9,728

3,617

3,621

7,239

16,966

2015

1,494

2,426

3,931

2,976

2,536

5,512

9,443

We consider that the carrying amount of trade and other receivables approximates their fair value. The other

current assets mainly included accrued income from subsidy projects and deferred charges.

On 31 December 2016, we did not have any bad debt allowance.

18. Cash and cash equivalents

(thousands of €)

Cash at banks

Term deposits

Money market funds

Cash on hand

31 December

2016

357,630

515,632

99,977

2015

240,292

100,000

Total cash and cash equivalents

973,241

340,314

We reported a cash position of €973.2 million at the end of December 2016 compared to €340.3 million at year-

end 2015. Net cash inflow from operating activities amounted to €239.4 million for the year ended 31 December

2016. This net cash inflow from operations recorded in 2016 was primarily due to the license fee of $300 million

(€275.6 million) received from Gilead in relation with our collaboration agreement on filgotinib. In addition,

milestone payments increased substantially in 2016 (compared to 2015), which contributed significantly to the net

cash inflow from operations in 2016. The net cash outflow from investing activities amounted to €7.3 million for

the year ended 31 December 2016, which included an acquisition of available-for-sale financial assets (see note

14). The net cash inflow from financing activities amounted to €396.0 million for the year ended 31 December

2016, which can mainly be attributed to the subscription of Galapagos shares by Gilead on 19 January 2016 for

which the cash proceeds from capital and share premium increases amounted to €391.9 million, net of issue costs.

In addition, proceeds received on exercise of warrants contributed to cash generated by financing activities in

2016 in the amount of €4.3 million.

Cash and cash equivalents comprise cash at banks, short term bank deposits and money market funds that are

readily convertible to cash and are subject to an insignificant risk of changes in value. Our cash management

strategy monitors and optimizes our liquidity position. Our cash management strategy may allow short term

deposits with an original maturity exceeding 3 months while monitoring all liquidity aspects. Cash and cash

equivalents comprise €515.6 million of term deposits of which €458.7 million had an original maturity longer than

3 months. All cash and cash equivalents are available upon maximum one month notice period. Cash at banks

109

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

were mainly composed of savings accounts and current accounts. We maintain our bank deposits in highly

rated financial institutions to reduce credit risk. Cash invested in highly liquid money market funds represented

€100.0 million and was aimed at meeting short-term cash commitments, while reducing the counterparty risk

of investment.

19. Share capital

The share capital of Galapagos NV, as set forth in the articles of association, reconciles to ‘share capital’ on the

balance sheet as follows:

(thousands of €)

On 1 January

Share capital increase

Costs of capital increase

Share capital on 31 December

Aggregate share capital

Costs of capital increase (accumulated)

Share capital on 31 December

2016

185,399

38,798

(269)

223,928

250,187

(26,259)

223,928

2015

157,274

47,485

(19,360)

185,399

211,389

(25,990)

185,399

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 history of the share capital of Galapagos NV between 1 January 2015 and 31 December 2016 is as follows:

Date

1 January 2015

26 March 2015

19 May 2015

19 June 2015

25 September 2015

4 December 2015

31 December 2015

1 January 2016

19 January 2016

1 April 2016

19 May 2016

19 September 2016

28 November 2016

31 December 2016

Share capital
increase new
shares
(in thousands of €)

Share capital
increase warrants
(in thousands of €)

Number of shares
issued
(in thousands
of shares)

Aggregate number
of shares after
transaction
(in thousands
of shares)

Aggregate share
capital after
transaction
(in thousands of €)

30,299

163,904

40,751

36,575

572

7,532

491

118

6,761

132

141

3,092

2,659

640

344

668

762

326

467

110

Galapagos NV • Annual Report 2016

39,076

211,389

39,076

211,389

46,256

250,187

FINANCIAL STATEMENTS

On 1 January 2015, Galapagos NV’s share capital amounted to €163,904.1 thousand, represented by 30,299,129 shares.

All shares were issued, fully paid up and of the same class.

On 26 March 2015, warrants were exercised at various exercise prices (with an average exercise price of €10.18 per

warrant), resulting in a share capital increase (including issuance premium) of €5,819 thousand and the issuance

of 571,548 new ordinary shares. The closing price of the Galapagos share on this date was €21.26.

On 19 May 2015, Galapagos completed a global offering of 7,532,499 ordinary shares consisting of a concurrent

public offering in the United States and private placement in Europe and countries other than the United States

and Canada. Galapagos NV offered 5,746,000 ordinary shares through a public offering in the United States in the

form of American Depositary Shares, or ADSs, at a price of $42.05 per ADS, before underwriting discounts. The

ADSs are evidenced by American Depositary Receipts, or ADRs, and each ADS represents the right to receive one

ordinary share. The ADSs are listed on the NASDAQ Global Select Market under the symbol “GLPG.” Galapagos

offered 1,786,499 ordinary shares through a private placement in Europe and countries other than the United

States and Canada at price of €37.00 per share, before underwriting discounts.

Galapagos received €278.7 million of gross proceeds from the global offering, decreased by €19.4 million of

underwriter discounts and commission, and offering expenses, of which €19.3 million has been paid at

31 December 2015 and €0.1 million has been paid in 2016. The total net cash proceeds from the global offering

after remaining settlements amounted to €259.3 million.

On 19 June 2015, warrants were exercised at various exercise prices (with an average exercise price of €8.94 per

warrant), resulting in a share capital increase (including issuance premium) of €4,395 thousand and the issuance

of 491,406 new ordinary shares. The closing price of the Galapagos share on this date was €46.73.

On 25 September 2015, warrants were exercised at various exercise prices (with an average exercise price of €10.13

per warrant), resulting in a share capital increase (including issuance premium) of €1,198 thousand and the

issuance of 118,260 new ordinary shares. The closing price of the Galapagos share on this date was €44.75.

On 4 December 2015, warrants were exercised at various exercise prices (with an average exercise price of €9.30 per

warrant), resulting in a share capital increase (including issuance premium) of €590.8 thousand and the issuance

of 63,500 new ordinary shares. The closing price of the Galapagos share on this date was €44.78.

On 31 December 2015, Galapagos NV’s share capital amounted to €211,388.9 thousand, represented by 39,076,342

shares. All shares were issued, fully paid up and of the same class.

On 19 January 2016, Gilead made a $425 million equity investment in Galapagos NV by subscribing to 6,760,701

new ordinary shares at a price of €58 per share, including issuance premium. Galapagos received €392.1 million

of gross proceeds, decreased by €0.26 million of expenses, which were all paid at 31 December 2016. The total net

cash proceeds from the share subscription by Gilead amounts to €391.9 million. The closing price of the Galapagos

share on 19 January 2016 was €48.26.

On 1 April 2016, warrants were exercised at various exercise prices (with an average exercise price of €10.70 per

warrant) resulting in a share capital increase (including issuance premium) of €1,409.3 thousand and the issuance

of 131,695 new shares. The closing price of the Galapagos share on this date was €36.64.

On 19 May 2016, warrants were exercised at various exercise prices (with an average exercise price of €10.49 per

warrant) resulting in a share capital increase (including issuance premium) of €1,476.4 thousand and the issuance

of 140,770 new shares. The closing price of the Galapagos share on this date was €45.41.

On 19 September 2016, warrants were exercised at various exercise prices (with an average exercise price of €10.00

per warrant) resulting in a share capital increase (including issuance premium) of €603.3 thousand and the

issuance of 60,320 new shares. The closing price of the Galapagos share on this date was €58.62.

111

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

On 28 November 2016, warrants were exercised at various exercise prices (with an average exercise price of €8.94

per warrant) resulting in a share capital increase (including issuance premium) of €771.3 thousand and the

issuance of 86,250 new shares. The closing price of the Galapagos share on this date was €55.73.

On 31 December 2016, Galapagos NV’s share capital amounted to €250,187 thousand, represented by 46,256,078

shares. All shares were issued, fully paid up and of the same class.

All of the share issuances listed above were for cash consideration.

The below table summarizes our capital increases for the years 2016 and 2015.

(thousands of €, except share data)

Number of
shares

Share capital

Share premium

Share capital and
share premium

On 1 January 2015

30,299,129

157,274

114,182

271,456

26 March 2015: exercise of warrants

571,548

3,092

2,727

5,819

19 May 2015: global offering

Ordinary shares (fully paid)

ADSs (fully paid)

1,786,499

5,746,000

Underwriter discounts and offering expenses
(fully paid)

Total global offering

7,532,499

9,665

31,086

(19,360)

21,391

56,436

181,516

237,952

66,100

212,602

(19,360)

259,343

19 June 2015: exercise of warrants

491,406

2,659

1,737

4,395

25 September 2015: exercise of warrants

118,260

4 December 2015: exercise of warrants

63,500

640

344

558

247

1,198

591

On 31 December 2015

39,076,342

185,399

357,402

542,801

112

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

(thousands of €, except share data)

Number of
shares

Share capital

Share premium

Share capital and
share premium

On 1 January 2016

39,076,342

185,399

357,402

542,801

19 January 2016: share subscription from Gilead

Ordinary shares (fully paid)

6,760,701

36,575

355,546

392,121

Derecognition of financial asset from share
subscription agreement

Capital increase expenses (fully paid)

Total share subscription by Gilead

6,760,701

1 April 2016: exercise of warrants

19 May 2016: exercise of warrants

131,695

140,770

19 September 2016: exercise of warrants

60,320

28 November 2016: exercise of warrants

86,250

(269)

36,306

668

762

326

467

(65,850)

(269)

289,696

326,002

741

715

277

305

1,409

1,476

603

772

On 31 December 2016

46,256,078

223,928

649,135

873,063

Other information

Accounting par value of shares (€)

Ordinary shares

5.41

Total

5.41

The board of directors is authorized for a period of five years starting from the date of publication in the Annexes

to the Belgian State Gazette of the shareholders’ resolution that granted the renewed authorization, being 3 June

2016, to increase the share capital of Galapagos NV within the framework of the authorized capital through

contributions in kind or in cash, with limitation or cancellation of the shareholders’ preferential subscription

rights. Said authorization can be renewed. The board of directors is currently not authorized to increase the share

capital after notification by the FSMA (Financial Services and Markets Authority) of a public takeover bid on

Galapagos NV’s shares.

The authorized capital as approved by the extraordinary shareholders’ meeting of 26 April 2016 amounted to

€49,727.5 thousand. As of 31 December 2016, €3,431.2 thousand of the authorized capital was used, so that an

amount of €46,295.2 thousand still remained available.

113

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

20. Other reserves

Actuarial and other gains or losses recognized through other comprehensive income

(thousands of €)

On 1 January

Gain or loss (–) on defined benefit obligation recognized through OCI

Loss on financial asset available-for-sale recognized through OCI

Other reserves on 31 December

2016

(18)

(583)

(399)

(1,000)

2015

(220)

202

(18)

Other reserves consisted of (1) a negative of €601 thousand, compared to a negative of €18 thousand in 2015, which

was related to the re-measurement of defined benefit obligations recognized through OCI in line with IAS19R, and

(2) a negative of €399 thousand, compared to nil in 2015, related to the fair value adjustment on the available-for-

sale equity investment in 2016 (see note 14).

Derivative financial instruments: currency derivatives

We do 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 we have committed are nil (2015: nil).

On 31 December 2016 the fair value of our currency derivatives was nil (2015: nil).

We do not designate our foreign currency denominated debt as a hedge instrument for the purpose of hedging

the translation of our foreign operations.

See note 33 for further information on how we manage financial risks.

21. Translation differences

(thousands of €)

On 1 January

Translation differences, arisen from translating foreign activities

Translation differences on 31 December

2016

(467)

(623)

(1,090)

2015

(1,157)

690

(467)

Translation differences decreased from a negative €0.5 million at the end of December 2015 to a negative of

€1.1 million at the end of December 2016 mainly due to fluctuations of the GB pounds and the U.S. dollar exchange

rates.

114

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

22. Deferred tax

(thousands of €)

Recognized deferred tax assets and liabilities

Assets

Liabilities

31 December

2016

2015

1,957

1,726

Deferred tax assets unrecognized

128,377

145,513

Deferred taxes in the consolidated statement of operations

Tax benefit arising from previously unrecognized tax assets used to reduce
deferred tax expense (+)

Deferred tax expenses relating to use of previously recognized deferred tax assets

231

421

(190)

1,433

The notional interest deduction for an amount of €2.6 million (2015: €2.6 million) and the investment deduction

of €1 million (2015: €1 million) 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 seven 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 consolidated unused tax losses carried forward at 31 December 2016 amounted to €385 million (2015:

€434 million), €17 million were related to unrecognized tax losses with expiry date between 2018 and 2030.

The available statutory tax losses carried forward that can be offset against future statutory taxable profits

amounted to €311.1 million on 31 December 2016. These statutory tax losses can be compensated with future

statutory profits for an indefinite period except for an amount of €18 million in Switzerland, Croatia, the United

States and the Netherlands with expiry date between 2018 and 2030. On 31 December 2016, the available tax losses

carried forward in Galapagos NV (Belgium) amounted to €230.9 million.

We have a history of losses. Excluding the impact of possible upfront or milestone payments to be received

from collaborations, we forecast to continue incurring taxable losses in the foreseeable future as we continue

to invest in clinical and pre-clinical development programs and discovery platforms. Consequently, no deferred

tax asset was set up as at 31 December 2016, except for two subsidiaries operating on a cost plus basis for

which deferred tax assets were recognized for €2.0 million (2015 : €1.7 million).

115

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

23. Finance lease liabilities

(thousands of €)

2016

2015

2016

2015

Minimum lease payments

Present value of minimum
lease payments

31 December

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

(thousands of €)

Leased assets

Installation & machinery

Total leased assets

121

115

Net book value

31 December

Acquisition cost

31 December

2016

2015

2016

2015

109

251

We lease certain of our installation and machinery under finance leases. For the year ended 31 December 2016, the

average borrowing rate was 4.34% (2015: 4.30%). 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 our lease obligations approximates their carrying value.

116

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

24. Trade and other liabilities

(thousands of €)

Trade and other payables

Other current liabilities

Other non-current liabilities

Accrued charges

Deferred income

Total trade and other liabilities

Included in current liabilities

Included in non-current liabilities

Total trade and other liabilities

31 December

2016

31,209

2,469

619

285,612

319,969

102,715

217,254

319,969

2015

29,113

369

2,291

490

39,806

72,068

69,777

2,291

72,068

Our trade and other liabilities, amounting to €320.0 million as of 31 December 2016, increased by €247.9 million

compared to the €72.1 million reported as of 31 December 2015.

The trade and other payables, amounting to €31.2 million as of 31 December 2016, increased slightly compared to

the €29.1 million reported as of 31 December 2015. This increase is mainly due to higher trade payables.

Deferred income (long term and short term) amounted to €285.6 million at 31 December 2016 and increased by

€245.8 million compared to €39.8 million as at 31 December 2015. On the one hand we had per 31 December 2015 a

deferred income of €39 million due to the recognition of a deferred income upon signing of the share subscription

agreement with Gilead (see note 8). On the other hand we received in January 2016 an upfront payment from

Gilead for an amount of $300 million (or €276 million). The global collaboration with Gilead foresees continuous

involvement from us, since we will perform certain R&D activities in the development phase of the filgotinib

program; therefore, management assessed that both items of deferred income should be spread in function of the

costs incurred for this program, applying the percentage of completion method. For the year ended 31 December

2016, €29.2 million were recognized in revenue, of which €3.6 million were related to the deferred income from the

share subscription agreement and €25.6 million were related to the upfront payment.

The outstanding deferred income balance at 31 December 2016 included €285.3 million deferred income related

to filgotinib (€214.8 million classified as non-current deferred income) - of which €35.4 million deferred income

related to the Gilead share subscription agreement, remaining €249.9 million deferred income related to the

$300 million upfront payment - and €0.3 million deferred grant income.

117

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

25. Provisions

(thousands of €)

On 1 January 2016

Additional provisions

Provisions utilized amounts

Translation differences

On 31 December 2016

Post-employment
benefits
(non-current)

Other provisions
(non-current)

–

(2)

–

Total

(2)

The provisions remained stable at €0.1 million.

26. Operating lease obligations

We entered into lease agreements for office and laboratories which qualify as operating leases.

Minimum lease payments under operating leases recognized in the income statement for the year

(thousands of €)

Total minimum lease payments under operating leases

Year ended 31 December

2016

4,302

2015

4,020

Regarding outstanding commitments for future minimum lease payments under operating leases, see off-

balance sheet arrangements as explained in note 27.

27. Off-balance sheet arrangements

Contractual obligations and commitments

We entered into lease agreements for office and laboratories which qualify as operating leases. We also have

certain purchase commitments with CRO subcontractors principally.

On 31 December 2016, we had outstanding obligations for future minimum rent payments and purchase

commitments, which become due as follows:

(thousands of €)

Operating lease obligations

Purchase commitments

Total contractual obligations & commitments

Total

27,263

27,579

54,842

Less than
1 year

4,114

27,084

31,198

1–3 years

3–5 years

More than
5 years

6,494

495

6,989

5,504

11,151

–

5,504

11,151

118

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

28. Contingent assets and liabilities

On 13 March 2014, we announced the signing of a definitive agreement to sell the service division operations

to Charles River Laboratories International, Inc., or CRL, for a total consideration of up to €134 million. CRL

agreed to pay us an immediate cash consideration of €129 million. The potential earn-out of €5 million due upon

achievement of a revenue target 12 months after transaction closing has not been obtained. Approximately 5% of

the total consideration, including price adjustments, was being held on an escrow account. To date, four claims

have been introduced by CRL, which all have been settled for a total amount of €1.3 million. On 17 January 2017 an

amount of €4.1 million was released from the escrow account. The release of the remaining balance of the escrow

account will be possible after final agreement between the parties on the amounts at stake.

Following the divestment, we remained guarantor until early February 2017 in respect of the lease obligations for

certain U.K. premises amounting to £3 million future rent payments. CRL shall fully indemnify us against all

liabilities arising in connection with the lease obligations. We evaluated the risk to be remote. Finally, following

common practice, we have given customary representations and warranties which are capped and limited in

time (since 1 April 2016, CRL can only introduce a claim covered by the Tax Deed (during a period of 5 years), other

claims related to the sale cannot be submitted anymore).

In the course of 2008, a former director of one of the subsidiaries sued for wrongful termination and seeks

damages of €1.5 million. We believe that the amount of damages claimed is unrealistically high. In 2014, the court

requested an external advisor to evaluate the exact amount of damages. On 29 January 2016, the court made a
1st degree judgment, dismissing all claims in full. In appeal, the 2nd degree court instructed the 1st degree court
to conduct a new trial, which is currently pending. So far, no hearings have been scheduled and no decisions

have been made. Considering the defense elements provided, as well as the fact that so far the court has made

no decision indicating that the claim would be sustained, our board and management evaluated the risk to be

remote to possible, but not likely. Accordingly, it was decided not to record any provision in 2016 as the exposure

was considered to be limited.

29. Retirement benefit plans

Defined contribution plans

We operate defined contribution systems for our qualifying employees. The assets of the schemes are held

separately from ours in designated pension plans. For defined contribution systems, we pay contributions to

publicly or privately administered pension or insurance funds. Once the contribution is paid, we do not have any

remaining obligation.

Defined benefit plans in Belgium

Our personnel in Belgium participated in a defined contribution plan (extra-legal pension). The Belgian defined

contribution pension plans were by law subject to minimum guaranteed rates of return, i.e. 3.25% on employer

contributions and 3.75% on employee contributions. These rates, which apply as an average over the entire career,

may be modified by Royal Decree. Therefore, those plans were basically accounted for as defined contribution

plans.

As a consequence of the law of 18 December 2015, minimum returns were guaranteed by the employer as follows:

(a) for the contributions paid as from 1 January 2016, a new variable minimum return based on OLO rates, with

a minimum of 1.75% and a maximum of 3.75%. In review of the low rates of the OLO in the last years, the return

has been initially set to 1.75%; (b) for the contributions paid until end of December 2015, the previously applied

legal returns as mentioned above, continue to apply until retirement date of the employees.

In view of the minimum returns guarantees, the Belgian defined contribution plans classify as defined benefit

plans as from end December 2015.

119

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

As at 31 December 2015 no net liability was recognized in the balance sheet as the minimum rates of return to

be guaranteed by the employer were closely matched by the rates of return guaranteed by the insurer. As at

31 December 2016 however a net liability of €386.6 thousand was recorded.

The contributions for those plans that were due by the employer for 2016 and 2015 amounted to respectively

€528.0 thousand and €476.3 thousand, of which €42.5 thousand was paid after 31 December 2016 (2015: €35.9

thousand). No contributions were made by the employees.

The plan assets as at 31 December 2016 consisted of €1,788.7 thousand (2015: €1,063.7 thousand) individual insurance

reserves, which benefit from a weighted average guaranteed interest rate of 2.82% (2015:3.0%).

Defined benefit plans in France

We use two defined benefit plans for the employees of our French entity. The defined benefit plans are not

supported by funds.

The chemical and pharmaceutical industry’s collective bargaining agreements require that our French entity

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 €1,808.5 thousand for 2016 (2015: €1,520.9 thousand). This

increase is mainly due to changed actuarial assumptions (decrease of discount rate from 2% to 1.44%).

Additionally, there are also seniority premiums paid in France. The provisions for these premiums amounted to

€1,324.9 thousand in 2016 (2015: €1,172.0 thousand).

Total obligation included in the balance sheet related to the defined benefit plans amounts to €3,133.4 thousand

for the year ended 31 December 2016 (2015: €2,692.9 thousand).

Actuarial gains and losses are recognized immediately on the balance sheet, with a charge or credit to other

comprehensive income (OCI), in accordance with IAS 19R. They are not recycled subsequently. Actuarial losses

of €193.2 thousand have been booked through other comprehensive income (OCI) at the end of 2016 (2015: €201.5

thousand of actuarial gains).

Total amounts due by all entities to the pension plans in 2016 were €1.7 million in total (2015: €1.5 million).

Obligations included in the balance sheet:

(thousands of €)

Present value of funded defined benefit obligation

Plan assets

Deficit / surplus

Present value of unfunded defined benefit obligation

Reclassification – Belgian contribution plans

Liability included in the balance sheet

31 December

2016

2,175

(1,789)

387

3,133

–

3,520

2015

(1,064)

2,693

1,064

2,693

120

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

The present value of the gross obligation developed as follows:

(thousands of €)

Opening balance

Current service cost

Actual taxes on contributions paid

Interest cost

Benefits paid

Reclassification – Belgian contribution plans

Actuarial gains (–) or losses due to experience adjustments

Actuarial gains (–) or losses due to experience adjustments related to new financial
assumptions

Actuarial gains (–) or losses due to experience adjustments related to new
demographic assumptions

Closing balance

The fair value of the plan assets developed as follows:

(thousands of €)

Opening balance

Interest income on plan assets

Actual administration costs

Contributions from employer

Actual taxes on contributions paid

Plan assets gain during the period

Reclassification – Belgian contribution plans

Closing balance

2016

3,757

649

(48)

(119)

–

500

432

5,308

2016

(1,064)

(32)

(411)

(332)

–

(1,788)

2015

2,865

194

(44)

1,064

(27)

(99)

(247)

3,757

2015

(1,064)

The expected rate of return on the plan assets is 2%.

The fair value of the plan assets is the fair market value of the plan assets. The fair value of the plan

assets was calculated as the reduced lump sums (received from the plan administrators) actualized with the

assumptions set (discount rate and mortality tables). The total plan assets are equal to the fair value of the plan

assets increased with the financing fund.

Amounts recognized in profit or loss for defined benefit plans are as follows:

(thousands of €)

Current service cost

Interest cost

Interest income

Administration expenses

Revaluations of net liability / net asset

Total expense

Year ended 31 December

2016

649

(32)

773

2015

194

(171)

121

Galapagos NV • Annual Report 2016

FINANCIAL STATEMENTS

Obligation included in the balance sheet reconciles as follows:

(thousands of €)

Opening balance

Real employer contributions

Total expense recognized in the income statement

Re-measurement on the net defined benefit liability

Benefits paid

Closing balance

The most important actuarial assumptions were:

(%)

Discount rate

Expected salary increase

Inflation rate

2016

2,693

(411)

773

583

(119)

3,520

31 December

2016

1.60%

2.50%

1.75%

2015

2,865

(202)

(44)

2,693

2015

2.00%

2.25%

1.75%

The discount rate was based on the Merrill Lynch yields for AA rated Eurozone corporate bonds (bonds with

maturity dates which correspond with the commitments).

Breakdown of defined benefit obligation by type of plan participants:

(number of participants)

Active plan participants

Breakdown of defined benefit obligation by type of benefits:

(thousands of €)

Retirement and death benefits