Galapagos(GLPG) - 2020 Q4 - Annual Report

PART I Key Information This section presents selected financial data for 2016-2020 under IFRS, highlighting a significant net loss in 2020, and outlines key risks including commercialization, product development, and financial stability Selected Financial Data The company's selected IFRS financial data for 2016-2020 shows a shift from €149.8 million net income in 2019 to a €305.4 million net loss in 2020, with total assets decreasing and a significant cash outflow from operations Consolidated Statement of Operations (2016-2020) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | (in thousands of Euro, except per share data) | | | | | | | Revenues | € 478,053 | € 834,901 | € 278,666 | € 127,087 | € 129,519 | | Total operating expenses | € (708,892) | € (517,049) | € (354,746) | € (245,720) | € (163,103) | | Operating income/loss (-) | € (178,632) | € 368,748 | € (47,080) | € (89,802) | € (11,491) | | Net income/loss (-) | € (305,436) | € 149,845 | € (29,259) | € (115,704) | € 54,012 | | Basic income/loss (-) per share | € (4.69) | € 2.60 | € (0.56) | € (2.34) | € 1.18 | | Diluted income/loss (-) per share | € (4.69) | € 2.49 | € (0.56) | € (2.34) | € 1.14 | Condensed Consolidated Statement of Financial Position (2016-2020) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | (in thousands of Euro) | | | | | | | Total assets | € 5,717,731 | € 6,068,609 | € 1,439,496 | € 1,286,274 | € 1,083,338 | | Total equity | € 2,670,355 | € 2,875,658 | € 1,214,249 | € 1,011,983 | € 758,701 | | Total liabilities | € 3,047,375 | € 3,192,951 | € 225,247 | € 274,291 | € 324,637 | Condensed Consolidated Statement of Cash Flows (2016-2020) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | (in thousands of Euro) | | | | | | | Net cash flows from operating activities | € (427,336) | € 3,208,617 | € (142,466) | € (147,030) | € 239,403 | | Net cash flows from investing activities | € 757,288 | € (3,764,660) | € (15,914) | € (549) | € (7,287) | | Net cash flows from financing activities | € 22,040 | € 1,335,751 | € 287,876 | € 353,357 | € 395,996 | | Cash and cash equivalents at end of period | € 2,143,071 | € 1,861,616 | € 1,290,796 | € 1,151,211 | € 973,241 | Risk Factors The company faces significant risks in commercializing filgotinib, lengthy clinical trials, financial stability, reliance on Gilead and third parties, intellectual property protection, and operational challenges including COVID-19 impacts - The company is heavily dependent on its global R&D collaboration with Gilead and the commercial success of its lead product, filgotinib[19] - The transition of European commercialization rights for filgotinib from Gilead to Galapagos is a significant undertaking with potential financial and managerial challenges[20] - The company has limited sales and distribution experience and is in the process of building its European commercial infrastructure[22] - The business, operations, and growth prospects could be materially and adversely affected by the COVID-19 pandemic[33] Information on the Company This section details Galapagos' corporate history, business operations, organizational structure, and physical assets, focusing on its biopharmaceutical strategy, clinical pipeline, key collaborations, intellectual property, and regulatory environment History and Development of the Company Galapagos NV, incorporated in Belgium in 1999, now operates as a single R&D segment after selling Fidelta in 2021, with capital expenditures significantly increasing from €13.7 million in 2018 to €91.3 million in 2020 - Galapagos NV was incorporated in Belgium on June 30, 1999, and its principal executive offices are located in Mechelen, Belgium[249] - The company sold its fee-for-service business segment, Fidelta, in a transaction that closed on January 4, 2021, and now operates as a single R&D segment[251] Capital Expenditures (2018-2020) | Year Ended December 31, | Capital Expenditure (€ million) | | :--- | :--- | | 2018 | €13.7 | | 2019 | €45.7 | | 2020 | €91.3 | Business Overview Galapagos is an integrated biopharmaceutical company focused on novel medicines for inflammation and fibrosis, driven by its proprietary target discovery platform, with a pipeline led by filgotinib and the Toledo program, and is building European commercial infrastructure - The company's pipeline includes programs from discovery to Phase 3, with key assets being the preferential JAK1 inhibitor filgotinib, GPR84 inhibitor GLPG1205 for IPF, and the Toledo program's SIK2/3 inhibitor GLPG3970[253] - The company's strategy is to develop first-in-class medicines based on novel targets identified through its proprietary discovery platform, with a focus on inflammation and fibrosis[368] - A key strategic element is the transformative 10-year R&D collaboration with Gilead, which provides significant funding and leverages Gilead's development and commercial expertise outside Europe[375] Organizational Structure. As of December 31, 2020, Galapagos NV had 14 wholly-owned subsidiaries across several countries, with its Croatian subsidiary Fidelta d.o.o. sold on January 4, 2021 List of Subsidiaries (as of Dec 31, 2020) | Company | Country of incorporation | Ownership and voting interest | | :--- | :--- | :--- | | Fidelta d.o.o. | Croatia | 100% | | Galapagos B.V. | The Netherlands | 100% | | Galapagos GmbH | Switzerland | 100% | | Galapagos, Inc. | United States | 100% | | Galapagos SASU | France | 100% | | Galapagos Biotech Ltd. | United Kingdom | 100% | | Galapagos Real Estate Belgium BV | Belgium | 100% | | Xenometrix, Inc. in liquidation | United States | 100% | | Galapagos Biopharma Belgium BV | Belgium | 100% | | Galapagos Biopharma Netherlands B.V. | The Netherlands | 100% | | Galapagos Biopharma Spain S.L.U | Spain | 100% | | Galapagos Biopharma Italy S.r.l. | Italy | 100% | | Galapagos Biopharma Germany GmbH | Germany | 100% | | Galapagos Real Estate Netherlands B.V. | The Netherlands | 100% | Property, Plants and Equipment. The company leases its main facilities in Belgium, France, and the Netherlands, and is expanding its physical footprint with new office and laboratory facilities in Leiden (€79 million estimated) and land purchases in Mechelen (€22 million spent) - The company leases its principal executive, operational, and R&D facilities in Belgium, France, and the Netherlands[561] - Galapagos is building new facilities in Leiden, the Netherlands, with an estimated total project cost of approximately €79 million[564] - The company has purchased land in Mechelen, Belgium, and is evaluating building options, with expenditures to date around €22 million[565] Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting a revenue decrease and net loss in 2020 due to the one-off Gilead payment in 2019, rising R&D and commercialization expenses, and a strong liquidity position of over €5.1 billion Operating Results The company's operating results show a shift from €149.8 million net income in 2019 to a €305.4 million net loss in 2020, driven by a 43% revenue decrease from the Gilead payment and a 37% increase in operating expenses due to R&D and commercial launch preparations Financial Performance Comparison (2019 vs. 2020) | | 2020 | 2019 | | :--- | :--- | :--- | | (in thousands of Euro) | | | | Total revenues and other income | € 530,260 | € 885,797 | | Total operating expenses | € (708,892) | € (517,049) | | Operating income/loss (-) | € (178,632) | € 368,748 | | Net income/loss (-) | € (305,436) | € 149,845 | - The decrease in 2020 revenues was mainly due to the one-time recognition in 2019 of €667.0 million from the upfront payment from Gilead allocated to the ziritaxestat program[659] - R&D expenses increased by 25% in 2020, driven by advancing the filgotinib and Toledo programs[668] - Sales and marketing expenses grew 170% due to preparations for the commercial launch of Jyseleca[672] Liquidity and Capital Resources The company maintains a strong liquidity position with €5.17 billion in financial investments and cash as of December 31, 2020, despite an operational cash burn of €517.4 million in 2020, believing existing capital is sufficient for future operations Cash Position | | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | (in thousands of Euro) | | | | Current financial investments | € 3,026,278 | € 3,919,216 | | Cash and cash equivalents | € 2,143,071 | € 1,861,616 | | Total | € 5,169,349 | € 5,780,832 | Operational Cash Burn | | 2020 | 2019 | | :--- | :--- | :--- | | (in thousands of Euro) | | | | Operational cash burn adjusted for Gilead transaction | € (517,404) | € (334,304) | - Management believes that existing cash and financial investments will be sufficient to fund operating expenses and capital expenditure requirements for the coming years and at least for a period of 12 months[774] Tabular Disclosure of Contractual Obligations As of December 31, 2020, Galapagos had €347.9 million in purchase commitments, with €271.9 million due within one year, and a €493.4 million cost-sharing obligation with Gilead for filgotinib development Purchase Commitments as of December 31, 2020 | | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | (in thousands of Euro) | | | | | | | Purchase commitments | € 347,873 | € 271,922 | € 73,009 | € 2,870 | € 72 | - The company has a contractual cost-sharing obligation with Gilead for filgotinib development, estimated at €493.4 million as of December 31, 2020[788] Directors, Senior Management and Employees This section details the company's 2020 transition to a two-tier governance structure (Supervisory and Management Boards), compensation practices including long-term incentives, adherence to Belgian corporate governance, and significant employee growth to 1,304 by year-end 2020 Directors and Senior Management In 2020, Galapagos adopted a two-tier governance structure with an eight-member Supervisory Board (including two Gilead designees) and a six-member Management Board led by CEO Onno van de Stolpe - The company implemented a two-tier governance structure in April 2020, comprising a Supervisory Board and a Management Board[796] - The Supervisory Board has eight members, including Chairman Raj Parekh and two designees from major shareholder Gilead: Daniel O'Day and Linda Higgins[798][800][801] - The Management Board consists of six members, including CEO Onno van de Stolpe, President & COO Bart Filius, and CSO Piet Wigerinck[814][816] Compensation Aggregate compensation for management and supervisory boards in FY2020 was €3.5 million (excluding share-based), with supervisory members receiving fixed cash and equity, and management receiving fixed salary, variable cash bonuses, and long-term incentives - Aggregate compensation paid to management and supervisory board members for FY2020 was €3,536,272.94, excluding share-based compensation[827] - Supervisory board remuneration consists of fixed cash fees and an equivalent equity-based component, where members must use the net amount to acquire company shares[830] - Management board remuneration includes a fixed salary, a variable cash bonus (up to 75% of base salary for the CEO, 50% for others), and long-term incentives like RSUs and subscription rights[840] Board Practices The Supervisory Board has an Audit Committee and a Nomination and Remuneration Committee, and as a foreign private issuer, Galapagos follows Belgian corporate governance practices which differ from Nasdaq standards in committee composition and independent director sessions - The Supervisory Board has two main committees: an Audit Committee and a Nomination and Remuneration Committee[874] - The Audit Committee consists of three independent members, with Howard Rowe qualifying as the 'audit committee financial expert'[885] - The company relies on home country (Belgian) corporate governance practices, which differ from Nasdaq rules regarding committee composition and the requirement for regularly scheduled executive sessions of only independent directors[884][1103] Employees The company's workforce significantly expanded from 725 in 2018 to 1,304 in 2020 (excluding Fidelta), with most employees in R&D and Development roles, primarily located in Belgium, France, and the Netherlands Employee Headcount by Function and Year | Function | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Research | 330 | 266 | 245 | | Development | 449 | 300 | 207 | | Commercial | 147 | 40 | — | | Corporate and support | 372 | 233 | 114 | | Total | 1,304 | 1,003 | 725 | Major Shareholders and Related Party Transactions This section identifies Gilead Sciences (25.54%), The Capital Group (9.91%), and Van Herk Investments (7.48%) as major shareholders, detailing significant related party transactions with Gilead including a $3.95 billion upfront payment and a $1.1 billion equity investment, and the company's policy for reviewing such transactions Major Shareholders As of March 15, 2021, Gilead Sciences, Inc. is the largest shareholder with a 25.54% stake, followed by The Capital Group Companies, Inc. with 9.91% and Van Herk Investments B.V. with 7.48% Beneficial Ownership of Major Shareholders (as of March 15, 2021) | Name of beneficial owner | Percentage | | :--- | :--- | | Gilead Sciences, Inc. | 25.54 % | | The Capital Group Companies, Inc. | 9.91 % | | Van Herk Investments B.V. | 7.48 % | Related Party Transactions Primary related party transactions are with major shareholder Gilead, including a 10-year global R&D collaboration with a $3.95 billion upfront payment and a $1.1 billion equity investment, and the amended filgotinib agreement granting Galapagos sole European commercial responsibility - The company entered into a 10-year global R&D collaboration with Gilead in July 2019, receiving a $3.95 billion upfront payment and a $1.1 billion equity investment[910][911] - In December 2020, the filgotinib agreement with Gilead was amended, granting Galapagos sole responsibility for commercialization and development in Europe[911][920] - The company has a specific procedure under Belgian law and its corporate governance charter for handling transactions with related parties, requiring assessment by a committee of independent directors to ensure fairness[941] Financial Information This section contains the company's consolidated financial statements and states its dividend policy of retaining all earnings for business operations and expansion, with no dividends ever paid or anticipated - The company has never declared or paid any cash dividends and does not anticipate paying any in the foreseeable future, intending to retain all available funds for business operations and expansion[949] The Offer and Listing The company's ADSs are listed on the Nasdaq Global Select Market under "GLPG" since May 2015, and ordinary shares trade on Euronext Amsterdam and Brussels under the same symbol since May 2005 - The company's ADSs are listed on the Nasdaq Global Select Market under the symbol "GLPG"[952] - The company's ordinary shares are listed on Euronext Amsterdam and Euronext Brussels, also under the symbol "GLPG"[952] Quantitative and Qualitative Disclosures About Market Risk The company centrally manages liquidity, credit, currency, and interest rate risks, with significant foreign exchange risk from U.S. dollar holdings and Gilead payments, maintaining a strong liquidity position sufficient for future operations - The company is exposed to foreign exchange risk, primarily from U.S. dollar-denominated cash holdings and payments from its collaboration with Gilead, as its reporting currency is the euro[1059] - As of December 31, 2020, the company held €2.14 billion in cash and cash equivalents and €3.03 billion in current financial investments, which management believes is sufficient to fund operations for the coming years[1050] - A 100 basis point change in interest rates would impact profit or loss by approximately €51.7 million[1058] PART II Controls and Procedures This section affirms the effectiveness of the company's disclosure controls and internal control over financial reporting as of December 31, 2020, as concluded by management and audited by the independent public accounting firm - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[1080] - Management assessed the effectiveness of internal control over financial reporting based on the 2013 COSO framework and concluded that it was effective as of December 31, 2020[1084] - No changes were made to the internal control over financial reporting during the period that materially affected, or are reasonably likely to materially affect, these controls[1086] Other Information (Items 16A-16H) This section covers various governance and compliance topics, identifying Howard Rowe as the audit committee financial expert, detailing the company's Code of Business Conduct, principal accountant fees of €2.36 million in 2020, and reliance on Belgian corporate governance practices differing from Nasdaq standards - The Supervisory Board has determined that Howard Rowe is an audit committee financial expert[1089] - The company has adopted a Code of Business Conduct and Ethics applicable to all employees, management, and board members[1090] Principal Accountant Fees (2019-2020) | Fee Type | 2020 | 2019 | | :--- | :--- | :--- | | (in thousands of Euro) | | | | Audit Fees | € 1,202.8 | € 1,406.8 | | Audit-Related Fees | € 214.4 | € 101.3 | | All Other Fees | € 938.4 | € 194.8 | | Total | € 2,355.6 | € 1,702.9 | - As a foreign private issuer, the company follows certain Belgian corporate governance practices in lieu of Nasdaq listing standards, particularly regarding shareholder meeting quorum, committee composition, and executive sessions for independent directors[1100][1103] PART III Financial Statements This section contains the full audited consolidated financial statements for 2018-2020, prepared under IFRS, including Deloitte's unqualified opinion on both financial statements and internal control over financial reporting, and notes on critical audit matters like the filgotinib collaboration amendment - The financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, 2019, and 2018, and the results of its operations and its cash flows for the three-year period, in conformity with IFRS[1113] - The independent auditor, Deloitte, issued an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2020[1114] - A critical audit matter identified was the accounting treatment for the December 2020 amendment to the filgotinib collaboration agreement with Gilead, which required significant judgment regarding the timing, applicable standards, performance obligations, and revenue recognition under IFRS 15[1118][1121]