UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to               

Commission File Number: 001-12400

INCYTE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	94-3136539
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
1801 Augustine Cut-Off Wilmington, DE 19803	19803
(Address of principal executive offices)	(Zip Code)

(302) 498-6700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of exchange on which registered
Common Stock, $.001 par value per share	INCY	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

The number of outstanding shares of the registrant’s Common Stock, $.001 par value, was 222,475,468 as of October 25, 2022.

INCYTE CORPORATION

INDEX

PART I: FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income (Loss)	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Forward-Looking Statements	28
	Summary Risk Factors	32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56
Item 4.	Controls and Procedures	57
PART II: OTHER INFORMATION
Item 1A.	Risk Factors	57
Item 6.	Exhibits	86
	Signatures	87

2

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

INCYTE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except number of shares and par value)

	September 30, 2022		December 31, 2021*
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,690,622	$	2,057,440
Marketable securities—available-for-sale (amortized cost $292,941 and $291,871 as of September 30, 2022 and December 31, 2021, respectively; allowance for credit losses $0 as of September 30, 2022 and December 31, 2021)	286,500		290,752
Accounts receivable	618,188		616,300
Inventory	45,869		27,904
Prepaid expenses and other current assets	179,932		126,278
Total current assets	3,821,111		3,118,674
Restricted cash and investments	1,601		1,720
Long term investments	149,124		221,266
Inventory	55,264		29,034
Property and equipment, net	715,733		723,920
Finance lease right-of-use assets, net	26,679		27,548
Other intangible assets, net	134,603		150,755
Goodwill	155,593		155,593
Deferred income tax asset	426,840		467,538
Other assets, net	23,666		37,304
Total assets	$	5,510,214	$	4,933,352
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	163,175	$	172,110
Accrued compensation	106,309		108,962
Accrued and other current liabilities	699,814		533,595
Finance lease liabilities	3,112		2,635
Acquisition-related contingent consideration	34,186		37,006
Total current liabilities	1,006,596		854,308
Acquisition-related contingent consideration	171,814		206,994
Finance lease liabilities	30,476		31,632
Other liabilities	74,677		70,414
Total liabilities	1,283,563		1,163,348
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued or outstanding	—		—
Common stock, $0.001 par value; 400,000,000 shares authorized; 222,454,839 and 221,084,433 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	222		221
Additional paid-in capital	4,721,166		4,567,111
Accumulated other comprehensive loss	(29,062)		(19,454)
Accumulated deficit	(465,675)		(777,874)
Total stockholders’ equity	4,226,651		3,770,004
Total liabilities and stockholders’ equity	$	5,510,214	$	4,933,352

*The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date.

See accompanying notes.

3

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues:
Product revenues, net	$	713,010	$	594,013	$	1,982,682	$	1,673,974
Product royalty revenues	110,293		183,974		350,253		404,440
Milestone and contract revenues	—		35,000		135,000		45,000
Total revenues	823,303		812,987		2,467,935		2,123,414
Costs and expenses:
Cost of product revenues (including definite-lived intangible amortization)	54,584		39,869		147,834		107,117
Research and development	384,007		334,945		1,084,576		985,352
Selling, general and administrative	266,460		190,704		729,321		513,358
(Gain) loss on change in fair value of acquisition-related contingent consideration	(21,893)		2,910		(12,198)		13,068
Collaboration loss sharing	1,769		9,149		9,055		29,476
Total costs and expenses	684,927		577,577		1,958,588		1,648,371
Income from operations	138,376		235,410		509,347		475,043
Other income (expense), net	11,513		1,948		13,295		4,931
Interest expense	(641)		(439)		(1,999)		(1,156)
Unrealized loss on long term investments	(660)		(27,450)		(72,142)		(28,394)
Income before provision for income taxes	148,588		209,469		448,501		450,424
Provision for income taxes	35,813		27,730		136,302		65,694
Net income	$	112,775	$	181,739	$	312,199	$	384,730
Net income per share:
Basic	$	0.51	$	0.82	$	1.41	$	1.75
Diluted	$	0.50	$	0.82	$	1.40	$	1.73
Shares used in computing net income per share:
Basic	222,415		220,845		221,801		220,243
Diluted	224,175		222,248		223,626		222,113

See accompanying notes.

4

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited, in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	112,775	$	181,739	$	312,199	$	384,730
Other comprehensive loss:
Foreign currency translation loss	(2,513)		(629)		(5,132)		(4,061)
Unrealized loss on marketable securities, net of tax	(1,135)		(86)		(5,322)		(251)
Defined benefit pension gain, net of tax	282		342		846		1,026
Other comprehensive loss	(3,366)		(373)		(9,608)		(3,286)
Comprehensive income	$	109,409	$	181,366	$	302,591	$	381,444

See accompanying notes.

5

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands, except number of shares)

	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
Balances at January 1, 2022	$	221	$	4,567,111	$	(19,454)	$	(777,874)	$	3,770,004
Issuance of 323,582 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units, net of shares withheld for taxes	—		14,237		—		—		14,237
Issuance of 1,535 shares of Common Stock for services rendered	—		112		—		—		112
Stock compensation	—		44,320		—		—		44,320
Other comprehensive loss	—		—		(3,593)		—		(3,593)
Net income	—		—		—		37,992		37,992
Balance at March 31, 2022	$	221	$	4,625,780	$	(23,047)	$	(739,882)	$	3,863,072
Issuance of 274,693 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and performance shares, net of shares withheld for taxes and 189,684 shares of Common Stock under the ESPP	1		16,600		—		—		16,601
Issuance of 1,469 shares of Common Stock for services rendered	—		109		—		—		109
Stock compensation	—		46,496		—		—		46,496
Other comprehensive loss	—		—		(2,649)		—		(2,649)
Net income	—		—		—		161,432		161,432
Balances at June 30, 2022	$	222	$	4,688,985	$	(25,696)	$	(578,450)	$	4,085,061
Issuance of 578,106 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units, net of shares withheld for taxes	—		(13,572)		—		—		(13,572)
Issuance of 1,337 shares of Common Stock for services rendered	—		94		—		—		94
Stock compensation	—		45,659		—		—		45,659
Other comprehensive loss	—		—		(3,366)		—		(3,366)
Net income	—		—		—		112,775		112,775
Balances at September 30, 2022	$	222	$	4,721,166	$	(29,062)	$	(465,675)	$	4,226,651

6

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(unaudited, in thousands, except number of shares)

	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
Balances at January 1, 2021	$	219	$	4,352,864	$	(15,360)	$	(1,726,455)	$	2,611,268
Issuance of 389,512 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units, net of shares withheld for taxes	1		20,027		—		—		20,028
Issuance of 1,357 shares of Common Stock for services rendered	—		108		—		—		108
Stock compensation	—		47,903		—		—		47,903
Other comprehensive loss	—		—		(4,998)		—		(4,998)
Net income	—		—		—		53,535		53,535
Balances at March 31, 2021	$	220	$	4,420,902	$	(20,358)	$	(1,672,920)	$	2,727,844
Issuance of 390,001 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and performance shares, net of shares withheld for taxes and 153,082 shares of Common Stock under the ESPP	—		11,016		—		—		11,016
Issuance of 1,288 shares of Common Stock for services rendered	—		109		—		—		109
Stock compensation	—		45,351		—		—		45,351
Other comprehensive income	—		—		2,085		—		2,085
Net income	—		—		—		149,456		149,456
Balances at June 30, 2021	$	220	$	4,477,378	$	(18,273)	$	(1,523,464)	$	2,935,861
Issuance of 459,084 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units, net of shares withheld for taxes	1		(11,993)		—		—		(11,992)
Issuance of 1,466 shares of Common Stock for services rendered	—		108		—		—		108
Stock compensation	—		43,314		—		—		43,314
Other comprehensive loss	—		—		(373)		—		(373)
Net income	—		—		—		181,739		181,739
Balances at September 30, 2021	$	221	$	4,508,807	$	(18,646)	$	(1,341,725)	$	3,148,657

See accompanying notes.

7

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	312,199	$	384,730
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	49,637		42,986
Stock-based compensation	135,741		134,784
Deferred income taxes	40,432		(178)
Other, net	15,097		5,268
Unrealized loss on long term investments	72,142		28,394
(Gain) loss on change in fair value of acquisition-related contingent consideration	(12,198)		13,068
Changes in operating assets and liabilities:
Accounts receivable	(1,888)		(34,695)
Prepaid expenses and other assets	(40,016)		(24,784)
Inventory	(48,316)		(16,215)
Accounts payable	(8,935)		15,742
Accrued and other liabilities	172,384		85,037
Net cash provided by operating activities	686,279		634,137
Cash flows from investing activities:
Purchase of long term investments	—		(8,662)
Sale of long term investments	—		10,473
Capital expenditures	(56,560)		(146,543)
Purchases of marketable securities	(59,058)		(228,170)
Sale and maturities of marketable securities	57,988		231,250
Net cash used in investing activities	(57,630)		(141,652)
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans	42,989		48,432
Tax withholdings related to restricted and performance share vesting	(25,724)		(29,380)
Payment of finance lease liabilities	(2,106)		(1,788)
Payment of contingent consideration	(13,473)		(20,093)
Net cash provided by (used in) financing activities	1,686		(2,829)
Effect of exchange rates on cash, cash equivalents, restricted cash and investments	2,728		(3,718)
Net increase in cash, cash equivalents, restricted cash and investments	633,063		485,938
Cash, cash equivalents, restricted cash and investments at beginning of period	2,059,160		1,514,765
Cash, cash equivalents, restricted cash and investments at end of period	$	2,692,223	$	2,000,703
Supplemental Schedule of Cash Flow Information
Income taxes paid	$	116,537	$	45,872
Unpaid purchases of property and equipment	$	8,836	$	23,892
Leased assets obtained in exchange for new operating lease liabilities	$	3,650	$	9,068
Leased assets obtained in exchange for new finance lease liabilities	$	1,448	$	455

See accompanying notes.

8

INCYTE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Note 1. Organization and Business

Incyte Corporation (including its subsidiaries, “Incyte,” “we,” “us,” or “our”) is a biopharmaceutical company focused on developing and commercializing proprietary therapeutics. Our portfolio includes compounds in various stages, ranging from preclinical to late stage development, and commercialized products JAKAFI® (ruxolitinib), ICLUSIG® (ponatinib), PEMAZYRE® (pemigatinib), OPZELURA™ (ruxolitinib cream), MINJUVI® (tafasitamab) and MONJUVI® (tafasitamab-cxix), which is co-commercialized. Our operations are treated as one operating segment.

Note 2. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated balance sheet as of September 30, 2022, the condensed consolidated statements of operations, comprehensive income (loss), and stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021, are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2021 has been derived from our audited consolidated financial statements.

Although we believe that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Principles of Consolidation. The condensed consolidated financial statements include the accounts of Incyte Corporation and our wholly owned subsidiaries. All inter-company accounts, transactions, and profits have been eliminated in consolidation.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Recent Accounting Pronouncements

There were no new accounting pronouncements issued nor adopted since our filing of the Annual Report on Form 10-K for the year ended December 31, 2021, which could have a significant effect on our condensed consolidated financial statements.

9

Note 3. Revenues

Revenues are recognized under guidance within ASC 606, Revenue from Contracts with Customers. The following table presents our disaggregated revenue for the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
JAKAFI revenues, net	$	619,595	$	547,373	$	1,761,732	$	1,542,138
ICLUSIG revenues, net	25,929		28,522		78,222		82,356
PEMAZYRE revenues, net	23,414		17,562		60,429		48,924
MINJUVI revenues, net	5,932		556		14,845		556
OPZELURA revenues, net	38,140		—		67,454		—
Total product revenues, net	713,010		594,013		1,982,682		1,673,974
JAKAVI product royalty revenues	85,808		94,655		240,386		242,295
OLUMIANT product royalty revenues	20,371		86,572		98,689		154,875
TABRECTA product royalty revenues	4,114		2,747		11,178		7,270
Total product royalty revenues	110,293		183,974		350,253		404,440
Milestone and contract revenues	—		35,000		135,000		45,000
Total revenues	$	823,303	$	812,987	$	2,467,935	$	2,123,414

For further information on our revenue-generating contracts, refer to Note 7.

Note 4. Fair Value of Financial Instruments

The following is a summary of our marketable security portfolio for the periods presented (in thousands):

	Amortized Cost		Net Unrealized Losses		Estimated Fair Value
September 30, 2022
Debt securities (government)	$	292,941	$	(6,441)	$	286,500
December 31, 2021
Debt securities (government)	$	291,871	$	(1,119)	$	290,752

Our available-for-sale debt securities generally have contractual maturity dates of between 12 to 18 months. Debt security assets were assessed for risk of expected credit losses. As of September 30, 2022 and December 31, 2021, the available-for-sale debt securities were held in U.S.-government backed securities and in Treasury bonds and were assessed on an individual security basis to have a de minimis risk of credit loss.

Fair Value Measurements

FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“the exit price”) in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value we use quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

10

Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

Level 3—Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

Recurring Fair Value Measurements

Our marketable securities consist of investments in U.S. government debt securities that are classified as available-for-sale.

At September 30, 2022 and December 31, 2021, our Level 2 U.S. government debt securities were valued using readily available pricing sources which utilize market observable inputs, including the current interest rate and other characteristics for similar types of investments. Our long term investments classified as Level 1 were valued using their respective closing stock prices on The Nasdaq Stock Market. We did not experience any transfers of financial instruments between the fair value hierarchy levels during the nine months ended September 30, 2022.

The following fair value hierarchy table presents information about each major category of our financial assets measured at fair value on a recurring basis (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2022
Cash and cash equivalents	$	2,690,622	$	—	$	—	$	2,690,622
Debt securities (government)	—		286,500		—		286,500
Long term investments (Note 7)	149,124		—		—		149,124
Total assets	$	2,839,746	$	286,500	$	—	$	3,126,246

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2021
Cash and cash equivalents	$	2,057,440	$	—	$	—	$	2,057,440
Debt securities (government)	—		290,752		—		290,752
Long term investments (Note 7)	221,266		—		—		221,266
Total assets	$	2,278,706	$	290,752	$	—	$	2,569,458

The following fair value hierarchy table presents information about each major category of our financial liabilities measured at fair value on a recurring basis as (in thousands):

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2022
Acquisition-related contingent consideration	$	—	$	—	$	206,000	$	206,000
Total liabilities	$	—	$	—	$	206,000	$	206,000

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	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2021
Acquisition-related contingent consideration	$	—	$	—	$	244,000	$	244,000
Total liabilities	$	—	$	—	$	244,000	$	244,000

The following is a rollforward of our Level 3 liabilities (in thousands):

	2022
Balance at January 1,	$	244,000
Contingent consideration earned during the period but not yet paid	(25,802)
Change in fair value of contingent consideration	(12,198)
Balance at September 30,	$	206,000

The fair value of the contingent consideration was determined on the date of acquisition, June 1, 2016, using an income approach based on projected future net revenues of ICLUSIG in the European Union and other countries for the approved third line treatment over 18 years, and discounted to present value at a rate of 10%. The fair value of the contingent consideration is remeasured each reporting period, with changes in fair value recorded in the condensed consolidated statements of operations. The valuation inputs utilized to estimate the fair value of the contingent consideration as of September 30, 2022 and December 31, 2021 included a discount rate of 10% and updated projections of future net revenues of ICLUSIG in the European Union and other countries for the approved third line treatment. The gain on change in fair value of the contingent consideration during the three and nine months ended September 30, 2022 was due primarily to the changes in foreign currency exchange rates included within the updated projections of future net revenues of ICLUSIG.

We generally make payments to Takeda Pharmaceutical Company Limited quarterly based on the royalties or any additional milestone payments earned in the previous quarter. At September 30, 2022 and December 31, 2021, contingent consideration earned but not yet paid was $25.8 million and $19.6 million, respectively, and was included in accrued and other current liabilities.

Note 5. Concentration of Credit Risk and Current Expected Credit Losses

In November 2009, we entered into a collaboration and license agreement with Novartis Pharmaceutical International Ltd. (“Novartis”). In December 2009, we entered into a license, development and commercialization agreement with Eli Lilly and Company (“Lilly”). In December 2018, we entered into a research collaboration and licensing agreement with Innovent Biologics, Inc. (“Innovent”). In July 2019, we entered into a collaboration and license agreement with Zai Lab (Shanghai) Co., Ltd., a subsidiary of Zai Lab Limited (collectively, “Zai Lab”). The above collaboration partners comprised, in aggregate, 19% and 36% of the accounts receivable balance as of September 30, 2022 and December 31, 2021, respectively. For further information relating to these collaboration and license agreements, refer to Note 7.

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In November 2011, we began commercialization and distribution of JAKAFI, in April 2020, we began commercialization and distribution of PEMAZYRE, and in October 2021, we began commercialization and distribution of OPZELURA. Our product revenues are concentrated in a number of these customers. The concentration of credit risk related to our JAKAFI, PEMAZYRE and OPZELURA product revenues is as follows:

	Percentage of Total Net Product Revenues for the Three Months Ended				Percentage of Total Net Product Revenues for the Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Customer A	19	%	19	%	19	%	19	%
Customer B	10	%	11	%	11	%	12	%
Customer C	15	%	17	%	18	%	18	%
Customer D	5	%	9	%	5	%	10	%
Customer E	9	%	11	%	10	%	11	%

We are exposed to risks associated with extending credit to customers related to the sale of products. Customers A, B, C, D and E comprised, in aggregate, 36% and 31% of the accounts receivable balance as of September 30, 2022 and December 31, 2021, respectively. The concentration of credit risk relating to our other product revenues or accounts receivable is not significant.

We assessed our collaborative and customer receivable assets as of September 30, 2022 according to our accounting policy for applying reserves for expected credit losses, noting minimal history of uncollectible receivables and the continued perceived creditworthiness of our third party sales relationships, upon which the expected credit losses were considered de minimis. As of September 30, 2022 and December 31, 2021, we had no allowance for doubtful accounts.

Note 6. Inventory

Our inventory balance consists of the following (in thousands):

	September 30, 2022		December 31, 2021
Raw materials	$	32,289	$	1,275
Work-in-process	35,465		39,895
Finished goods	33,379		15,768
Total inventory	$	101,133	$	56,938

Inventories, stated at the lower of cost and net realizable value, consist of raw materials, work in process and finished goods. At September 30, 2022, $45.9 million of inventory was classified as current on the condensed consolidated balance sheet as we expect this inventory to be consumed for commercial use within the next twelve months. At September 30, 2022, $55.3 million of inventory was classified as non-current on the condensed consolidated balance sheet as we did not expect this inventory to be consumed for commercial use within the next twelve months. We obtain some inventory components from a limited number of suppliers due to technology, availability, price, quality or other considerations. The loss of a supplier, the deterioration of our relationship with a supplier, or any unilateral violation of the contractual terms under which we are supplied components by a supplier could adversely affect our total revenues and gross margins.

We capitalize inventory after U.S. Food and Drug Administration (FDA) approval as the related costs are expected to be recoverable through the commercialization of the product. Costs incurred prior to FDA approval are recorded as research and development expense in our statements of operations. At September 30, 2022, inventory with approximately $56.8 million of product costs incurred prior to FDA approval had not yet been sold. We expect to sell the pre-commercialization inventory over the next 28 months and, as a result, cost of product revenues will reflect a lower average per unit cost of materials.

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Note 7. License Agreements

Novartis

In November 2009, we entered into a Collaboration and License Agreement with Novartis. Under the terms of the agreement, Novartis received exclusive development and commercialization rights outside of the United States to our JAK inhibitor ruxolitinib and certain back-up compounds for hematologic and oncology indications, including all hematological malignancies, solid tumors and myeloproliferative diseases. We retained exclusive development and commercialization rights to JAKAFI (ruxolitinib) in the United States and in certain other indications. Novartis also received worldwide exclusive development and commercialization rights to our MET inhibitor compound capmatinib and certain back-up compounds in all indications.

Under this agreement, we were initially eligible to receive up to $174.0 million for the achievement of development milestones, up to $495.0 million for the achievement of regulatory milestones and up to $500.0 million for the achievement of sales milestones. In addition, under an amendment to this agreement, we were initially eligible to receive up to $75.0 million of additional potential development and regulatory milestones relating to graft-versus-host-disease (“GVHD”). We have recognized and received, in the aggregate, $157.0 million for the achievement of development milestones, $340.0 million for the achievement of regulatory milestones, and $200.0 million for the achievement of sales milestones through September 30, 2022.

In April 2022, we recognized a $15.0 million regulatory milestone for the positive opinion issued by the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) that recommends granting marketing authorization for capmatinib (TABRECTA) as a monotherapy for the treatment of adults with advanced non-small cell lung cancer. Additionally, in May 2022, we recognized a $45.0 million regulatory milestone as a result of the European Commission’s approval of JAKAVI (ruxolitinib) as the first post-steroid treatment for acute and chronic GVHD.

We also are eligible to receive tiered, double-digit royalties ranging from the upper-teens to the mid-twenties on future JAKAVI net sales outside of the United States, and tiered, worldwide royalties on TABRECTA net sales that range from 12% to 14%. We are obligated to pay to Novartis tiered royalties in the low single-digits on future JAKAFI net sales within the United States contingent on certain conditions. During the three and nine months ended September 30, 2022, such royalties on net sales within the United States totaled $30.3 million and $81.3 million, respectively, and were reflected in cost of product revenues on the condensed consolidated statements of operations. During the three and nine months ended September 30, 2021, such royalties on net sales within the United States totaled $26.9 million and $70.6 million, respectively, and were reflected in cost of product revenues on the condensed consolidated statements of operations. At September 30, 2022 and December 31, 2021, $221.7 million and $148.1 million, respectively, of accrued royalties were included in accrued and other current liabilities on the condensed consolidated balance sheets. Each company is responsible for costs relating to the development and commercialization of ruxolitinib in its respective territories, with costs of collaborative studies shared equally. Novartis is also responsible for all costs relating to the development and commercialization of capmatinib.

We had no milestone and contract revenue under the Novartis agreement for the three months ended September 30, 2022, and we had $60.0 million for the nine months ended September 30, 2022. Product royalty revenue related to Novartis net sales of JAKAVI outside of the United States for the three and nine months ended September 30, 2022 was $85.8 million and $240.4 million, respectively. Product royalty revenue related to Novartis net sales of JAKAVI outside of the United States for the three and nine months ended September 30, 2021 was $94.7 million and $242.3 million, respectively. Product royalty revenue related to Novartis net sales of TABRECTA worldwide for the three and nine months ended September 30, 2022 was $4.1 million and $11.2 million, respectively. Product royalty revenue related to Novartis net sales of TABRECTA worldwide for the three and nine months ended September 30, 2021 was $2.7 million and $7.3 million, respectively.

Lilly – Baricitinib

In December 2009, we entered into a License, Development and Commercialization Agreement with Lilly. Under the terms of the agreement, Lilly received exclusive worldwide development and commercialization rights to our JAK inhibitor baricitinib, and certain back-up compounds for inflammatory and autoimmune diseases.

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Under this agreement, we were initially eligible to receive up to $150.0 million for the achievement of development milestones, up to $365.0 million for the achievement of regulatory milestones and up to $150.0 million for the achievement of sales milestones. We have recognized and received, in aggregate, $149.0 million for the achievement of development milestones, $335.0 million for the achievement of regulatory milestones and $50.0 million for the achievement of sales milestones through September 30, 2022. We are also eligible to receive tiered, double-digit royalty payments on future global sales with rates ranging up to the mid-twenties if a product is successfully commercialized.

In May 2020, we amended our agreement with Lilly to enable Lilly to develop and commercialize baricitinib for the treatment of COVID-19. As part of the amended agreement, in addition to the royalties described above, we will be entitled to receive additional royalty payments with rates in the low teens on global net sales of baricitinib for the treatment of COVID-19 that exceed a specified aggregate global net sales threshold.

In June 2022, we recognized a $40.0 million regulatory milestone for the FDA approval of OLUMIANT as a first-in-disease systemic treatment for adults with severe alopecia areata. Additionally, in June 2022 we recognized a $20.0 million regulatory milestone for the European Commission’s approval for OLUMIANT for the treatment of adults with severe alopecia areata, and a $10.0 million regulatory milestone for the Ministry of Health, Labour and Welfare of Japan’s approval for OLUMIANT for the treatment of adults with severe alopecia areata in Japan.

We had no milestone and contract revenue under the Lilly agreement for the three months ended September 30, 2022, and we had $70.0 million for the nine months ended September 30, 2022. Product royalty revenue related to Lilly net sales of OLUMIANT outside of the United States for the three and nine months ended September 30, 2022 was $20.4 million and $98.7 million, respectively. Product royalty revenue related to Lilly net sales of OLUMIANT outside of the United States for the three and nine months ended September 30, 2021 was $86.6 million and $154.9 million, respectively.

Lilly - Ruxolitinib

In March 2016, we entered into an amendment to the agreement with Lilly that amended the non-compete provision of the agreement to allow us to engage in the development and commercialization of ruxolitinib in the GVHD field. Lilly is eligible to receive up to $40.0 million in regulatory milestone payments relating to ruxolitinib in the GVHD field. In May 2019, the approval of JAKAFI in steroid-refractory acute GVHD triggered a $20.0 million milestone payment to Lilly. In March 2022, the positive recommendation from the European Medicines Agency for regulatory approval of ruxolitinib in the GVHD field triggered an additional $20.0 million milestone payment to Lilly, which was recorded as research and development expense in our condensed consolidated statements of operations.

Agenus

In January 2015, we entered into a License, Development and Commercialization Agreement with Agenus Inc. and its wholly-owned subsidiary, 4-Antibody AG (now known as Agenus Switzerland Inc.), which we collectively refer to as Agenus. Under this agreement, which was amended in February 2017, the parties have agreed to collaborate on the discovery of novel immuno-therapeutics using Agenus’ antibody discovery platforms. Under the terms of the amended agreement, we received exclusive worldwide development and commercialization rights to four checkpoint modulators directed against GITR, OX40, LAG-3 and TIM-3 as well as two undisclosed targets. Targets may be designated profit-share programs, where all costs and profits are shared equally by us and Agenus, or royalty-bearing programs, where we are responsible for all costs associated with discovery, preclinical, clinical development and commercialization activities. There are currently no profit-share programs. For each royalty-bearing product other than GITR and one undisclosed target, Agenus will be eligible to receive tiered royalties on global net sales ranging from 6% to 12%. For GITR and one undisclosed target, Agenus will be eligible to receive 15% royalties on global net sales. The agreement may be terminated by us for convenience upon 12 months’ notice and may also be terminated under certain other circumstances, including material breach. On October 19, 2022 we notified Agenus that we were terminating the OX40 project.

As of September 30, 2022, we have paid Agenus milestones totaling $30.0 million and Agenus is eligible to receive up to an additional $500.0 million in future contingent development, regulatory and commercialization milestones across all programs in the collaboration.

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In addition, in 2017 we purchased 10.0 million shares of Agenus Inc.’s common stock for an aggregate purchase price of $60.0 million in cash, or $6.00 per share. In 2020, we sold an aggregate of approximately 3.7 million shares of Agenus Inc.’s common stock resulting in gross proceeds of approximately $17.2 million. In 2021, we sold an aggregate of approximately 2.0 million shares of Agenus Inc.’s common stock resulting in gross proceeds of approximately $10.5 million. The fair market value of our long term investment in Agenus Inc. at September 30, 2022 and December 31, 2021 was $24.8 million and $38.9 million, respectively.

We intend to hold the investment in Agenus Inc. for the foreseeable future and therefore, are accounting for our shares held in Agenus Inc. at fair value whereby the investment is marked to market through earnings in each reporting period. Given our intent to hold the investment for the foreseeable future, we have classified the investment within long term investments on the accompanying condensed consolidated balance sheets. For the three and nine months ended September 30, 2022, we recorded an unrealized gain of $1.3 million and an unrealized loss of $14.1 million, respectively, based on the change in fair value of Agenus Inc.’s common stock during the respective periods. For the three and nine months ended September 30, 2021, we recorded an unrealized loss of $2.8 million and an unrealized gain of $29.1 million, respectively, based on the change in fair value of Agenus Inc.’s common stock during the respective periods.

Merus

In December 2016, we entered into a Collaboration and License Agreement with Merus N.V. (“Merus”). Under this agreement, the parties have agreed to collaborate with respect to the research, discovery and development of bispecific antibodies utilizing Merus’ technology platform. The collaboration encompasses up to ten independent programs.

In January 2022, we decided to opt-out of the continued development of MCLA-145, a bispecific antibody targeting PD-L1 and CD137. We continue to collaborate with Merus and leverage the Merus platform to develop a pipeline of novel agents, as we continue to hold worldwide exclusive development and commercialization rights to up to ten additional programs. Of these ten additional programs, Merus retained the option, subject to certain conditions, to co-fund development of up to two such programs. If Merus exercises its co-funding option for a program, Merus would be responsible for funding 35% of the associated future global development costs and, for certain of such programs, would be responsible for reimbursing us for certain development costs incurred prior to the option exercise. Merus will also have the right to participate in a specified proportion of detailing activities in the United States for one of those co-developed programs. All costs related to the co-funded collaboration programs are subject to joint research and development plans and overseen by a joint development committee, but we will have final determination as to such plans in cases of dispute. We will be responsible for all research, development and commercialization costs relating to all other programs.

For each program as to which Merus does not have commercialization or development co-funding rights, Merus is eligible to receive up to $100.0 million in future contingent development and regulatory milestones, and up to $250.0 million in commercialization milestones as well as tiered royalties ranging from 6% to 10% of global net sales. For each program as to which Merus exercises its option to co-fund development, Merus is eligible to receive a 50% share of profits (or sustain 50% of any losses) in the United States and be eligible to receive tiered royalties ranging from 6% to 10% of net sales of products outside of the United States. If Merus opts to cease co-funding a program as to which it exercised its co-development option, then Merus will no longer receive a share of profits in the United States but will be eligible to receive the same milestones from the co-funding termination date and the same tiered royalties described above with respect to programs where Merus does not have a right to co-fund development and, depending on the stage at which Merus chose to cease co-funding development costs, Merus will be eligible to receive additional royalties ranging up to 4% of net sales in the United States. As of September 30, 2022, we have paid Merus milestones totaling $3.0 million.

In addition, in 2016 we entered into a Share Subscription Agreement with Merus, pursuant to which we purchased 3.2 million common shares of Merus for an aggregate purchase price of $80.0 million in cash, or $25.00 per share. In January 2021, we purchased 350,000 common shares in Merus’ underwritten public offering of 4,848,485 common shares at the public offering price of $24.75 per share, or an aggregate purchase price of $8.7 million. The fair market value of our total long term investment in Merus at September 30, 2022 and December 31, 2021 was $71.1 million and $112.9 million, respectively. As of September 30, 2022, we owned approximately 8% of the outstanding common shares of Merus.

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We have concluded that we have the ability to exercise significant influence, but not control, over Merus based primarily on our ownership interest, the level of intra-entity transactions between us and Merus related to development expenses, as well as other qualitative factors. We have elected the fair value option to account for our long term investment in Merus whereby the investment is marked to market through earnings in each reporting period. We believe the fair value option to be the most appropriate accounting method to account for securities in publicly h