How will the issuance of 1,800,000 subscription rights affect GLPG's diluted earnings per share?

Answer

The creation of 1,800,000 subscription rights under Galápagos NV’s (GLPG) new “subscription right plan” adds a potential 1.8 million shares to the company’s capital structure. Because diluted earnings‑per‑share (EPS) is calculated by dividing net income (or loss) by the weighted‑average number of shares that could be outstanding if all dilutive instruments are exercised, the issuance of these rights will have a direct impact on the diluted‑EPS figure – but the direction and magnitude of that impact depend on two key factors:

1. Conceptual impact on diluted EPS

Diluted EPS formula (post‑rights exercise)

[
\text{Diluted EPS}{\text{new}} = \frac{\text{Net Income (or Loss)}}{\text{Weighted‑average shares (pre‑rights)} + \underbrace{1,800,000}{\text{new shares from rights}}
}
]

• If Net Income stays the same → denominator ↑ → Diluted EPS falls (i.e., earnings are spread over more shares).
  
• If Net Income rises proportionally to the new capital → the denominator still ↑, but a larger numerator can keep diluted EPS unchanged or even improve it.

2. Quantitative illustration (using a hypothetical baseline)

| Baseline (pre‑rights) | 45,000,000 shares, €120 M net income | Diluted EPS = €2.67 |

• Scenario A shows a ~4 % decline in diluted EPS (from €2.67 to €2.56) because the extra 1.8 M shares dilute earnings without any offsetting profit.
  
• Scenario B (5 % earnings uplift) still results in a small decline (≈ 1 %); the extra profit almost, but not fully, compensates for the extra shares.
  
• Scenario C (10 % earnings uplift) actually raises diluted EPS despite the larger share count, because the capital raised is being deployed profitably.

Take‑away: The net effect hinges on how efficiently Galápagos converts the €21.6 million (if fully subscribed) into incremental earnings.

3. What this means for investors and analysts

1. Immediate dilution risk – Until the rights are exercised, the dilution is potential only. Analysts typically include the 1.8 M shares in the “diluted‑share” count when modeling future EPS, but they may present a “as‑if‑exercised” scenario to gauge worst‑case dilution.

2. Capital‑raising benefit – If the rights are priced at a meaningful discount, the cash inflow can be material for a small‑cap biotech like Galápagos. The key question is how the company will allocate the proceeds (e.g., pipeline expansion, acquisition, or working‑capital). A clear, earnings‑enhancing use will mitigate the dilution impact.

3. Impact on valuation multiples – A lower diluted EPS (if earnings do not rise proportionally) will increase the price‑to‑earnings (P/E) multiple for a given market price, potentially making the stock appear more “expensive” on a earnings basis. Conversely, a successful capital deployment that lifts earnings can compress the P/E, supporting a higher valuation.

4. Disclosure & timing – The rights are created on August 7 2025. The actual exercise window, pricing, and conversion ratio will be detailed in the company’s prospectus or filing. Analysts should monitor the record‑date and exercise‑date to update share‑count assumptions promptly.

4. How to incorporate the rights into your EPS model

1. Gather the current diluted‑share count from the latest 10‑K/annual report (e.g., “Weighted‑average diluted shares outstanding”).
   
2. Add the 1,800,000 rights to that figure to obtain the as‑if‑exercised* diluted‑share denominator.
   
3. Project net income for the next period, explicitly modeling the expected use of the capital raised (e.g., incremental R&D spend, pipeline milestones, or acquisition synergies).
   
4. Re‑calculate diluted EPS with the new denominator and projected net income.
   
5. Run sensitivity analyses:
   
   • No earnings uplift (worst‑case dilution).
     
   • Modest uplift (e.g., 5 % incremental earnings).
     
   • Aggressive uplift (e.g., 10‑15 % incremental earnings).
     

These scenarios will help you gauge the range of possible EPS outcomes and the corresponding impact on valuation multiples.

5. Bottom‑line answer to the question

The issuance of 1,800,000 subscription rights adds a potential 1.8 million new shares to Galápagos NV’s capital structure. If the rights are exercised, the diluted‑share count rises, which—absent a proportional increase in net income—will lower the company’s diluted earnings per share. However, the rights also raise capital (≈ €21.6 million at a typical €12‑per‑share price), and if that capital is deployed profitably, the resulting earnings growth can offset or even outweigh the dilution, potentially keeping diluted EPS unchanged or even improving it. Analysts therefore model both the dilution effect (more shares) and the earnings‑uplift effect (higher net income) to determine the net impact on GLPG’s diluted EPS.

In short, the net effect on diluted EPS will be a function of two variables: (i) the actual number of shares that end up outstanding after the rights are exercised, and (ii) the incremental earnings generated from the capital raised by those rights. Without specific figures on current share count or expected earnings impact, the precise change cannot be quantified, but the direction (downward if earnings stay flat, neutral or upward if earnings rise) is clear.