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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
or
oTRANSITION 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)
Delaware94-3136539
(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 classTrading Symbol(s)Name of exchange on which registered
Common Stock, $.001 par value per shareINCY
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
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 223,088,306 as of April 25, 2023.


Table of Contents
INCYTE CORPORATION
INDEX
2

Table of Contents
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
INCYTE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares and par value)
March 31,
2023
December 31,
2022*
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$2,821,051 $2,951,422 
Marketable securities—available-for-sale (amortized cost $294,278 and $292,580 as of March 31, 2023 and December 31, 2022, respectively; allowance for credit losses $0 as of March 31, 2023 and December 31, 2022)
291,661 287,543 
Accounts receivable623,788 644,879 
Inventory40,876 41,995 
Prepaid expenses and other current assets194,257 167,011 
Total current assets3,971,633 4,092,850 
Restricted cash1,717 1,698 
Long term investments128,313 133,676 
Inventory116,688 78,964 
Property and equipment, net741,701 739,310 
Finance lease right-of-use assets, net25,849 26,298 
Other intangible assets, net140,658 129,219 
Goodwill155,593 155,593 
Deferred income tax asset494,751 457,941 
Other assets, net20,720 25,435 
Total assets$5,797,623 $5,840,984 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$55,633 $277,546 
Accrued compensation84,717 138,761 
Accrued and other current liabilities825,443 701,053 
Finance lease liabilities3,149 3,179 
Acquisition-related contingent consideration37,169 36,538 
Total current liabilities1,006,111 1,157,077 
Acquisition-related contingent consideration180,831 184,462 
Finance lease liabilities29,699 30,083 
Other liabilities118,414 99,243 
Total liabilities1,335,055 1,470,865 
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; 223,061,787 and 222,746,719 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively
223 223 
Additional paid-in capital4,856,914 4,792,041 
Accumulated other comprehensive income20,942 15,069 
Accumulated deficit(415,511)(437,214)
Total stockholders’ equity4,462,568 4,370,119 
Total liabilities and stockholders’ equity$5,797,623 $5,840,984 
*The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date.
See accompanying notes.
3

Table of Contents
INCYTE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
Three Months Ended
March 31,
20232022
Revenues:
Product revenues, net$693,237 $605,821 
Product royalty revenues115,436 122,414 
Milestone and contract revenues 5,000 
Total revenues808,673 733,235 
Costs and expenses:
Cost of product revenues (including definite-lived intangible amortization)56,822 42,614 
Research and development406,641 353,373 
Selling, general and administrative315,606 209,584 
Loss on change in fair value of acquisition-related contingent consideration6,196 6,382 
(Profit) and loss sharing under collaboration agreements(1,362)4,742 
Total costs and expenses783,903 616,695 
Income from operations24,770 116,540 
Interest income and other, net32,873 1,260 
Interest expense(469)(680)
Unrealized loss on long term investments(5,318)(46,585)
Income before provision for income taxes51,856 70,535 
Provision for income taxes30,153 32,543 
Net income$21,703 $37,992 
Net income per share:
Basic$0.10 $0.17 
Diluted$0.10 $0.17 
Shares used in computing net income per share:
Basic222,960221,326
Diluted225,589222,950
See accompanying notes.
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INCYTE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)
Three Months Ended
March 31,
20232022
Net income$21,703 $37,992 
Other comprehensive income (loss):
Foreign currency translation gain (loss)3,260 (782)
Unrealized gain (loss) on marketable securities, net of tax2,420 (3,093)
Defined benefit pension gain, net of tax193 282 
Other comprehensive income (loss)5,873 (3,593)
Comprehensive income$27,576 $34,399 
See accompanying notes.
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INCYTE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands, except number of shares)
Common
Stock
Additional
Paid-in Capital
Accumulated Other
Comprehensive Income
Accumulated
Deficit
Total
Stockholders’
Equity
Balances at January 1, 2023$223 $4,792,041 $15,069 $(437,214)$4,370,119 
Issuance of 313,995 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units, net of shares withheld for taxes
— 11,235 — — 11,235 
Issuance of 1,073 shares of Common Stock for services rendered
— 80 — — 80 
Stock compensation— 53,558 — — 53,558 
Other comprehensive income— — 5,873 — 5,873 
Net income— — — 21,703 21,703 
Balance at March 31, 2023$223 $4,856,914 $20,942 $(415,511)$4,462,568 
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 
Balances at March 31, 2022$221 $4,625,780 $(23,047)$(739,882)$3,863,072 
See accompanying notes.
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INCYTE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Three Months Ended
March 31,
20232022
Cash flows from operating activities:
Net income$21,703 $37,992 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization19,211 16,438 
Stock-based compensation53,379 43,841 
Deferred income taxes(22,163)2,106 
Other, net(2,651)2,091 
Unrealized loss on long term investments5,318 46,585 
Loss on change in fair value of acquisition-related contingent consideration6,196 6,382 
Changes in operating assets and liabilities:
Accounts receivable21,091 53,956 
Prepaid expenses and other assets(24,354)(13,971)
Inventory(33,320)(13,903)
Accounts payable(221,913)(19,563)
Accrued and other liabilities71,900 53,787 
Net cash (used in) provided by operating activities(105,603)215,741 
Cash flows from investing activities:
Sale of long term investments45  
Capital expenditures(11,906)(17,006)
Payments for intangible assets(15,000) 
Purchases of marketable securities(54,887) 
Sale and maturities of marketable securities53,189 258 
Net cash used in investing activities(28,559)(16,748)
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans13,988 16,398 
Tax withholdings related to restricted and performance share vesting(2,753)(2,161)
Payment of finance lease liabilities(802)(668)
Payment of contingent consideration(6,424)(13,473)
Net cash provided by financing activities4,009 96 
Effect of exchange rates on cash, cash equivalents, restricted cash and investments(199)210 
Net (decrease) increase in cash, cash equivalents, restricted cash and investments(130,352)199,299 
Cash, cash equivalents, restricted cash and investments at beginning of period2,953,120 2,059,160 
Cash, cash equivalents, restricted cash and investments at end of period$2,822,768 $2,258,459 
Supplemental Schedule of Cash Flow Information
Income taxes paid$7,107 $3,472 
Unpaid purchases of property and equipment$3,059 $15,764 
Leased assets obtained in exchange for new operating lease liabilities$809 $1,618 
Leased assets obtained in exchange for new finance lease liabilities$385 $584 
See accompanying notes.
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INCYTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(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), MONJUVI® (tafasitamab-cxix), which is co-commercialized, and ZYNYZ™ (retifanlimab-dlwr). 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 March 31, 2023, the condensed consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the three months ended March 31, 2023 and 2022, 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, 2022 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, 2022.
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.
Other Intangible Assets, net. Other intangible assets, net consist of licensed intellectual property rights acquired in business combinations, which are reported at acquisition date fair value, less accumulated amortization, as well as milestone payments made to collaboration partners incurred at or after the product has obtained regulatory approval. Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method. Intangible assets with finite lives are tested for recoverability whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
Cost of Product Revenues. Cost of product revenues includes all product related costs and royalties owed under our collaboration and license agreements, contingent on certain conditions. In addition, cost of product revenues includes the amortization of our licensed intellectual property for ICLUSIG and the amortization of capitalized milestone payments, using the straight-line method over the respective estimated useful lives, which range between approximately 11 to 14 years. Cost of product revenues also includes employee personnel costs, including stock compensation, for those employees dedicated to the production of our commercial products.
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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, 2022, which could have a significant effect on our condensed consolidated financial statements.
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
March 31,
20232022
JAKAFI revenues, net$579,969 $544,464 
ICLUSIG revenues, net27,685 26,069 
PEMAZYRE revenues, net22,475 18,032 
MINJUVI revenues, net6,556 4,502 
OPZELURA revenues, net56,552 12,754 
Total product revenues, net693,237 605,821 
JAKAVI product royalty revenues76,692 70,867 
OLUMIANT product royalty revenues34,155 48,064 
TABRECTA product royalty revenues4,177 3,483 
PEMAZYRE product royalty revenues412  
Total product royalty revenues115,436 122,414 
Milestone and contract revenues 5,000 
Total revenues$808,673 $733,235 
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
March 31, 2023
Debt securities (government)$294,278 $(2,617)$291,661 
December 31, 2022
Debt securities (government)$292,580 $(5,037)$287,543 
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 March 31, 2023 and December 31, 2022, 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.
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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.
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 March 31, 2023 and December 31, 2022, 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 three months ended March 31, 2023.
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
March 31, 2023
Cash and cash equivalents$2,821,051 $ $ $2,821,051 
Debt securities (government) 291,661  291,661 
Long term investments (Note 7)
128,313   128,313 
Total assets$2,949,364 $291,661 $ $3,241,025 
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, 2022
Cash and cash equivalents$2,951,422 $ $ $2,951,422 
Debt securities (government) 287,543  287,543 
Long term investments (Note 7)
133,676   133,676 
Total assets$3,085,098 $287,543 $ $3,372,641 
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The following fair value hierarchy table presents information about each major category of our financial liabilities measured at fair value on a recurring basis as (in thousands):
Fair Value Measurement at Reporting Date Using:
Quoted Prices in
Active Markets for
Identical Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance as of
March 31, 2023
Acquisition-related contingent consideration$ $ $218,000 $218,000 
Total liabilities$ $ $218,000 $218,000 
Fair Value Measurement at Reporting Date Using:
Quoted Prices in
Active Markets for
Identical Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance as of
December 31, 2022
Acquisition-related contingent consideration$ $ $221,000 $221,000 
Total liabilities$ $ $221,000 $221,000 
The following is a rollforward of our Level 3 liabilities (in thousands):
2023
Balance at January 1, $221,000 
Contingent consideration earned during the period but not yet paid(9,196)
Change in fair value of contingent consideration6,196 
Balance at March 31,$218,000 
The initial 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 March 31, 2023 and December 31, 2022 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 loss on change in fair value of the contingent consideration during the three months ended March 31, 2023 was due primarily to the passage of time.
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 March 31, 2023 and December 31, 2022, contingent consideration earned but not yet paid was $9.2 million and $9.3 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”). The above collaboration partners comprised, in aggregate, 18% and 20% of the accounts receivable balance as of March 31, 2023 and December 31, 2022, 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
March 31,
20232022
Customer A17 %19 %
Customer B11 %12 %
Customer C17 %18 %
Customer D10 %10 %
Customer E12 %15 %
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, 40% and 41% of the accounts receivable balance as of March 31, 2023 and December 31, 2022, 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 March 31, 2023 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 March 31, 2023 and December 31, 2022, we had no allowance for doubtful accounts.
Note 6. Inventory
Our inventory balance consists of the following (in thousands):
March 31,
2023
December 31,
2022
Raw materials$29,448 $31,874 
Work-in-process93,829 54,455 
Finished goods34,287 34,630 
Total inventory$157,564 $120,959 
Inventories, stated at the lower of cost and net realizable value, consist of raw materials, work in process and finished goods. At March 31, 2023, $40.9 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 March 31, 2023, $116.7 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 regulatory approval as the related costs are expected to be recoverable through the commercialization of the product. Costs incurred prior to regulatory approval are recorded as research and development expense in our statements of operations. At March 31, 2023, inventory with approximately $40.7 million of product costs incurred prior to regulatory approval had not yet been sold. We expect to sell the pre-commercialization inventory over the next 24 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, we are eligible to receive up to $75.0 million of additional potential development and regulatory milestones relating to graft-versus-host-disease (“GVHD”). Since the inception of the agreement through March 31, 2023, 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.
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 months ended March 31, 2023 and 2022, such royalties on net sales within the United States totaled $23.4 million and $21.7 million, respectively, and were reflected in cost of product revenues on the condensed consolidated statements of operations. At March 31, 2023 and December 31, 2022, $276.9 million and $253.5 million, respectively, of accrued royalties were included in accrued and other current liabilities on the condensed consolidated balance sheets, payment of which is dependent on the outcome of a contract dispute with Novartis. 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.
Product royalty revenue related to Novartis net sales of JAKAVI outside of the United States for the three months ended March 31, 2023 and 2022 was $76.7 million and $70.9 million, respectively. Product royalty revenue related to Novartis net sales of TABRECTA worldwide for the three months ended March 31, 2023 and 2022 was $4.2 million and $3.5 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.
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. Since the inception of the agreement through March 31, 2023, 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. We are also eligible to receive tiered, double-digit royalties 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.
Product royalty revenue related to Lilly net sales of OLUMIANT outside of the United States for the three months ended March 31, 2023 and 2022 was $34.2 million and $48.1 million, respectively.
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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 was 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 for the three months ended March 31, 2022.
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.
Since the inception of the agreement through March 31, 2023, 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.
As of March 31, 2023, we held an investment of approximately 12.1 million shares of Agenus common stock. The fair market value of our long term investment in Agenus at March 31, 2023 and December 31, 2022 was $18.3 million and $29.0 million, respectively. For the three months ended March 31, 2023 and 2022, we recorded an unrealized loss of $10.6 million and $9.2 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.
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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. In January 2023, we paid Merus a milestone of $2.5 million, which was recorded as research and development expense in our condensed consolidated statements of operations during the three months ended March 31, 2023. Since the inception of the agreement through March 31, 2023, we have paid and expensed Merus milestones totaling $5.5 million.
As of March 31, 2023, we held an investment of approximately 3.6 million common shares. The fair market value of our total long term investment in Merus at March 31, 2023 and December 31, 2022 was $65.3 million and $54.9 million, respectively. For the three months ended March 31, 2023 and 2022, we recorded an unrealized gain $10.4 million and an unrealized loss of $19.0 million, respectively, based on the change in fair value of Merus’ common shares during the respective periods.
MacroGenics
In October 2017, we entered into a Global Collaboration and License Agreement with MacroGenics, Inc. (“MacroGenics”). Under this agreement, we received exclusive development and commercialization rights worldwide to MacroGenics’ INCMGA0012 (formerly MGA012), an investigational monoclonal antibody that inhibits PD-1. Except as set forth in the succeeding sentence, we have sole authority over and bear all costs and expenses in connection with the development and commercialization of INCMGA0012 in all indications, whether as a monotherapy or as part of a combination regimen. MacroGenics has retained the right to develop and commercialize, at its cost and expense, its pipeline assets in combination with INCMGA0012. In addition, MacroGenics has the right to manufacture a portion of both companies’ global clinical and commercial supply needs of INCMGA0012.
In July 2022, we amended our agreement with MacroGenics to reflect changes related to the payment of certain milestones and paid MacroGenics $30.0 million, which was previously recorded as research and development expense in our condensed consolidated statements of operations in the third quarter of 2022. In March 2023, we made a $15.0 million regulatory milestone payment to MacroGenics for the FDA approval of ZYNYZ for the treatment of adults with Merkel cell carcinoma. This milestone payment was capitalized as an intangible asset and included in Other intangible assets, net on the condensed consolidated balance sheet as of March 31, 2023, and will be amortized through cost of product revenues over the estimated useful life of 13.5 years.
Since the inception of the agreement through March 31, 2023, we have paid MacroGenics developmental and regulatory milestones totaling $115.0 million. After the amendment and subsequent payments, MacroGenics will be eligible to receive up to an additional $320.0 million in future contingent development and regulatory milestones, and up to $330.0 million in sales milestones as well as tiered royalties ranging from 15% to 24% of global net sales.
Research and development expenses for the three months ended March 31, 2023 and 2022 also included $17.8 million and $13.5 million, respectively, of development costs incurred pursuant to the MacroGenics agreement. At March 31, 2023 and December 31, 2022, a total of $1.3 million and $2.9 million of such costs were included in accrued and other liabilities on the condensed consolidated balance sheets.
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Syros
In January 2018, we entered into a Target Discovery, Research Collaboration and Option Agreement with Syros Pharmaceuticals, Inc. (“Syros”). Under this agreement, Syros will use its proprietary gene control platform to identify novel therapeutic targets with a focus in myeloproliferative neoplasms and we have received options to obtain exclusive worldwide rights to intellectual property resulting from the collaboration for up to seven validated targets. We will have exclusive worldwide rights to develop and commercialize any therapies under the collaboration that modulate those validated targets. We have agreed to pay Syros up to $54.0 million in target selection and option exercise fees should we decide to exercise all of our options under the agreement. For products resulting from the collaboration against each of the seven selected and validated targets, we have agreed to pay up to $50.0 million in potential development and regulatory milestones and up to $65.0 million in potential sales milestones. Syros is also eligible to receive low single-digit royalties on net sales of products resulting from the collaboration.
As of March 31, 2023, we held an investment of 93,753 shares of Syros common stock. The fair market value of our long term investment in Syros as of March 31, 2023 and December 31, 2022 was $0.3 million and $0.3 million, respectively. For the three months ended March 31, 2023 and 2022, we recorded an unrealized loss of $0.1 million and $1.9 million, respectively, based on the change in fair value of Syros’ common stock during the respective periods.
MorphoSys
In January 2020, we entered into a Collaboration and License Agreement with MorphoSys AG and MorphoSys US Inc., a wholly-owned subsidiary of MorphoSys AG (together with MorphoSys AG, “MorphoSys”), covering the worldwide development and commercialization of MOR208 (tafasitamab), an investigational Fc engineered monoclonal antibody directed against the target molecule CD19 that was under clinical development by MorphoSys at the beginning of the agreement, and has subsequently been commercialized as MONJUVI/MINJUVI. MorphoSys has exclusive worldwide development and commercialization rights to tafasitamab under a June 2010 collaboration and license agreement with Xencor, Inc.
Under the terms of the agreement, we received exclusive commercialization rights outside of the United States, and MorphoSys and we have co-commercialization rights in the United States, with respect to tafasitamab. MorphoSys is responsible for leading the commercialization strategy and booking all revenue from sales of tafasitamab in the United States, and we and MorphoSys are both responsible for commercialization efforts in the United States and will share equally the profits and losses from the co-commercialization efforts. We will lead the commercialization strategy outside of the United States, and will be responsible for commercialization efforts and book all revenue from sales of tafasitamab outside of the United States, subject to our royalty payment obligations set forth below. We and MorphoSys have agreed to co-develop tafasitamab and to share development costs associated with global and U.S.-specific clinical trials, with Incyte responsible for 55% of such costs and MorphoSys responsible for 45% of such costs. Each company is responsible for funding any independent development activities, and we are responsible for funding development activities specific to territories outside of the United States. All development costs related to the collaboration are subject to a joint development plan.
MorphoSys is eligible to receive up to $737.5 million in future contingent development and regulatory milestones and up to $315.0 million in commercialization milestones as well as tiered royalties ranging from the mid-teens to mid-twenties of net sales outside of the United States. MorphoSys’ right to receive royalties in any particular country will expire upon the last to occur of (a) the expiration of patent rights in that particular country, (b) a specified period of time after the first post-marketing authorization sale of a licensed product comprising tafasitamab in that country, and (c) the expiration of any regulatory exclusivity for that licensed product in that country. Since the inception of the agreement through March 31, 2023, we have paid MorphoSys milestones totaling $2.5 million, all of which have previously been recorded as research and development expenses.
As of March 31, 2023, we held an investment of approximately 3.6 million American Depository Shares, each representing 0.25 of an ordinary share of MorphoSys. The fair market value of our long term investment in MorphoSys as of March 31, 2023 and December 31, 2022 was $14.4 million and $13.0 million, respectively. For the three months ended March 31, 2023 and 2022, we recorded an unrealized gain of $1.4 million and an unrealized loss of $9.6 million, respectively, based on the change in fair value of MorphoSys’ ordinary shares during the respective periods.
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Our 50% share of the United States profit or loss for the commercialization of tafasitamab for the three months ended March 31, 2023 was a profit of $1.4 million, and was a $4.7 million loss for the three months ended March 31, 2022, and is recorded as (profit) and loss sharing under collaboration agreements on the condensed consolidated statement of operations. Research and development expenses for the three months ended March 31, 2023 and 2022, includes $25.2 million and $21.0 million, respectively, related to our 55% share of the co-development costs for tafasitamab. At March 31, 2023 and December 31, 2022, $27.1 million and $28.5 million, respectively, was included in accrued and other liabilities on the condensed consolidated balance sheets for amounts due to MorphoSys under the agreement.
Syndax
In September 2021, we entered into a Collaboration and License Agreement with Syndax Pharmaceuticals, Inc. (“Syndax”), covering the worldwide development and commercialization of SNDX-6352 (“axatilimab”). Axatilimab, currently in clinical development by Syndax, is a monoclonal antibody that blocks the colony stimulating factor-1 (CSF-1) receptor. Syndax has exclusive worldwide development and commercialization rights to axatilimab under a June 2016 license agreement with UCB Biopharma Sprl. The agreement became effective in December 2021.
Under the terms of the agreement, we received exclusive commercialization rights outside of the United States, and Syndax and we have co-commercialization rights in the United States, with respect to axatilimab. We will be responsible for leading the commercialization strategy and booking all revenue from sales of axatilimab globally, and Syndax will have the option to co-commercialization axatilimab with Incyte in the United States. Incyte and Syndax will share equally the profits and losses from the co-commercialization efforts in the United States. Sales of axatilimab outside the United States will be subject to our royalty payment obligations to Syndax, as set forth below. We and Syndax have agreed to co-develop axatilimab and to share development costs associated with global and U.S.-specific clinical trials, with Incyte responsible for 55% of such costs and Syndax responsible for 45% of such costs. Each company is responsible for funding any independent development activities. All development costs related to the collaboration are subject to a joint development plan.
In December 2021, we paid Syndax an upfront, non-refundable payment of $117.0 million, which was recorded in research and development expense on the consolidated statement of operations for the year ended December 31, 2021. Syndax is eligible to receive up to $220.0 million in future contingent development and regulatory milestones and up to $230.0 million in sales milestones as well as tiered royalties ranging in the mid-teens on net sales in Europe and Japan and low double digit percentage on net sales in the rest of the world outside of the United States. Syndax’ right to receive royalties in any particular country will expire upon the last to occur of (a) the expiration of patent rights in that particular country, (b) a specified period of time after the first post-marketing authorization sale of a licensed product comprising axatilimab in that country, and (c) the expiration of any regulatory exclusivity for that licensed product in that country.
As of March 31, 2023, we held an investment of approximately 1.4 million shares of Syndax common stock. The fair market value of our long term investment in Syndax as of March 31, 2023 and December 31, 2022 was $30.0 million and $36.2 million. For the three months ended March 31, 2023 and 2022, we recorded an unrealized loss of $6.2 million and $6.4 million, respectively, based on the change in fair value of Syndax’s common stock during the respective periods.
Other Agreements
In addition to the license and collaboration agreements discussed above, we have various other license and collaboration agreements that are not individually material to our operating results or financial condition at this time. Pursuant to the terms of those agreements, we may be required to pay, or we may receive, additional amounts contingent upon the occurrence of various future events such as future discovery, development, regulatory or commercial milestones, which in the aggregate could be material. In addition, if any products related to these collaborations are approved for sale, we may be required to pay, or we may receive, royalties on future sales. The payment or receipt of these amounts, however, is contingent upon the occurrence of various future events, the likelihood of which cannot presently be determined.
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Note 8. Property and Equipment, net
Property and equipment, net consists of the following (in thousands):
March 31,
2023
December 31,
2022
Office equipment$23,144 $22,734 
Laboratory equipment195,999 192,141 
Computer equipment94,661 92,115 
Land10,484 10,429 
Building and leasehold improvements567,863 564,170 
Operating lease right-of-use assets21,818 23,311 
Construction in progress53,408 47,224 
967,377 952,124 
Less accumulated depreciation and amortization(225,676)(212,814)
Property and equipment, net$741,701 $739,310 
Note 9. Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following (in thousands):
March 31,
2023
December 31,
2022
Royalties$286,230$263,466
Clinical related costs117,417130,570
Sales allowances220,753192,133
Sales and marketing60,67431,149
Construction in progress3,0593,493
Operating lease liabilities7,3888,195
Other current liabilities129,92272,047
Total accrued and other current liabilities$825,443$701,053
Note 10. Stock Compensation
We recorded $53.4 million and $43.8 million of stock compensation expense on our condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022, respectively. Stock compensation expense included within our condensed consolidated statements of operations included research and development expense of $31.0 million and $26.3 million for the three months ended March 31, 2023 and 2022, respectively. Stock compensation expense included within our condensed consolidated statements of operations also included selling, general and administrative expense of $21.6 million and $16.9 million for the three months ended March 31, 2023 and 2022, respectively. Stock compensation expense included within our condensed consolidated statements of operations also included cost of product revenues of $0.8 million and $0.6 million for the three months ended March 31, 2023 and 2022, respectively.
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We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted, with the following weighted-average assumptions:
Employee Stock OptionsEmployee Stock Purchase Plan
For the Three Months EndedFor the Three Months Ended
March 31,March 31,
2023202220232022
Average risk-free interest rates3.72 %1.47 %4.06 %2.28 %
Average expected life (in years)4.734.660.500.50
Volatility33 %38 %22 %24 %
Weighted-average fair value (in dollars)$28.24 $25.15 $13.70 $13.76 
The risk-free interest rate is derived from the U.S. Federal Reserve rate in effect at the time of grant. The expected life calculation is based on the observed and expected time to the exercise of options by our employees based on historical exercise patterns for similar type options. Expected volatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the options. A dividend yield of zero is assumed based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Nonemployee awards are measured on the grant date by estimating the fair value of the equity instruments to be issued using the expected term, similar to our employee awards.
Option activity under our 2010 Stock Incentive Plan (the “2010 Stock Plan”) was as follows:
Shares Subject to
Outstanding Options
SharesWeighted Average
Exercise Price
Balance at December 31, 202212,650,359$87.25 
Options granted521,152$83.07 
Options exercised(207,650)$67.37 
Options cancelled(544,806)$95.30 
Balance at March 31, 202312,419,055$87.06 
Our annual stock option grants generally have a 10-year term and vest over four years, with 25% vesting after one year and the remainder vesting in 36 equal monthly installments.
Restricted stock unit (“RSU”) and performance share (“PSU”) award activity under the 2010 Stock Plan was as follows:
Shares Subject to
Outstanding Awards
SharesGrant Date Value
Balance at December 31, 20225,187,592$81.24 
RSUs granted 577,956$83.12 
RSUs released(140,791)$78.04 
RSUs cancelled (73,338)$81.34 
PSUs cancelled(971)$106.47 
Balance at March 31, 20235,550,448$81.52 
RSUs and PSUs are granted to our employees at the share price on the date of grant. Each RSU represents the right to acquire one share of our common stock. Each RSU granted in connection with our annual equity awards will vest 25% annually over four years, while each RSU granted as outstanding merit awards or as part of retention award programs will vest in a single installment at the end of four years.
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We grant PSUs with performance and/or service-based milestones with graded and/or cliff vesting over three to four years. The shares of our common stock into which each PSU may convert is subject to a multiplier based on the level at which the financial, developmental and market performance conditions are achieved over the service period. Compensation expense for PSUs with financial and developmental performance conditions is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement. For PSUs containing performance conditions which were not deemed probable of achievement, no stock compensation expense is recorded. Compensation expense for PSUs with market performance conditions is calculated using a Monte Carlo simulation model as of the date of grant and recorded over the requisite service period. For the three months ended March 31, 2023 and 2022, we recorded $6.5 million and $1.8 million, respectively, of stock compensation expense for PSUs on our condensed consolidated statements of operations.
The following table summarizes our shares available for grant under the 2010 Stock Plan. Each RSU and PSU grant reduces the available share pool by 2 shares.
Shares Available
for Grant
Balance at December 31, 20225,056,370
Options, RSUs and PSUs granted(1,677,064)
Options, RSUs and PSUs cancelled692,169
Balance at March 31, 20234,071,475
Based on our historical experience of employee turnover, we have assumed an annualized forfeiture rate of 5% for our options, RSUs and PSUs. Under the true-up provisions of the stock compensation guidance, we will record additional expense if the actual forfeiture rate is lower than we estimated, and will record a recovery of prior expense if the actual forfeiture is higher than we estimated.
Total compensation cost of options granted but not yet vested, as of March 31, 2023, was $42.3 million, which is expected to be recognized over the weighted average period of approximately 1.1 years. Total compensation cost of RSUs granted but not yet vested, as of March 31, 2023, was $202.8 million, which is expected to be recognized over the weighted average period of approximately 1.8 years. Total compensation cost of PSUs granted but not yet vested, as of March 31, 2023, was $24.1 million, which is expected to be recognized over the weighted average period of 1.7 years, should the underlying performance conditions be deemed probable of achievement.
Note 11. Income Taxes
For the three months ended March 31, 2023 and 2022, we recorded the following provisions for income taxes and effective tax rates as compared to our income before provision for income taxes:
Three Months Ended
March 31,
20232022
Income before provision for income taxes$51,856 $70,535 
Provision for income taxes30,153 32,543 
Effective tax rate58.1%46.1%
Our effective tax rate for both of the three months ended March 31, 2023 and 2022 was higher than the U.S. statutory rate primarily due to foreign losses with no associated tax benefit (i.e., full valuation allowance). While the tax expense for the three months ended March 31, 2023 decreased marginally as compared to that for the prior year period, the effective tax rate increased as a result of lower U.S. earnings, while unbenefited foreign losses remained flat.
The balance of our unrecognized tax benefits (including penalties and interest) increased by approximately $2.7 million during the three months ended March 31, 2023, resulting in movements to other liabilities and deferred income tax asset on the condensed consolidated balance sheet. The overall increase is primarily driven by unrecognized tax benefits related to current year operations and research and development tax credits. We accrue interest and penalties related to unrecognized tax benefits as a component of its provision for income taxes.
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In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law. The IRA includes a 15% corporate alternative minimum tax and a 1% excise tax on share repurchases. We do not expect the IRA to have a material impact on our consolidated financial statements.
Note 12. Net Income Per Share
Net income per share was calculated as follows for the periods indicated below:
Three Months Ended
March 31,
20232022
Basic net income$21,703 $37,992 
Weighted average common shares outstanding222,960221,326
Basic net income per share$0.10 $0.17 
Diluted net income$21,703 $37,992 
Weighted average common shares outstanding222,960221,326
Dilutive stock options and awards2,6291,624
Weighted average shares used to compute diluted net income per share 225,589222,950
Diluted net income per share$0.10 $0.17 
The potential common shares that were excluded from the diluted net income per share computation are as follows:
Three Months Ended
March 31,
20232022
Outstanding stock options and awards10,078,34211,116,177
Note 13. Employee Benefit Plans
Defined Contribution Plans
We have a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code covering all U.S. employees and defined contribution plans for other Incyte employees in Europe and Japan. Employees may contribute a portion of their compensation, which is then matched by us, subject to certain limitations. Defined contribution expense for the three months ended March 31, 2023 and 2022 was $5.6 million and $4.9 million, respectively.
Defined Benefit Pension Plans
We have defined benefit pension plans for our employees in Europe which provide benefits to employees upon retirement, death or disability. The assets of the pension plans are held in collective investment accounts represented by the cash surrender value of an insurance policy and are classified as Level 2 within the fair value hierarchy.
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The net periodic benefit cost was as follows (in thousands):
Three Months Ended
March 31,
20232022
Service cost$2,088 $2,522 
Interest cost617 64 
Expected return on plan assets(1,540)(1,071)
Amortization of prior service cost103 194 
Amortization of actuarial losses90 88 
Net periodic benefit cost$1,358 $1,797 
The components of net periodic benefit cost other than the service cost component are included in Interest income and other, net on the condensed consolidated statements of operations. We expect to contribute a total of $8.0 million to the pension plans in 2023 inclusive of the amounts contributed to the plan during the current period.
Note 14. Commitments and Contingencies
We have entered into the collaboration agreements described in Note 7, as well as various other collaboration agreements that are not individually, or in the aggregate, significant to our operating results or financial condition at this time. We may in the future seek to license additional rights relating to technologies or drug development candidates in connection with our drug discovery and development programs. Under these agreements, we may be required to pay upfront fees, milestone payments, and royalties on sales of future products.
In the ordinary course of our business, we may become involved in lawsuits, proceedings, and other disputes, including commercial, intellectual property, regulatory, employment, and other matters. We record a reserve for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations as of and for the three months ended March 31, 2023 should be read in conjunction with the unaudited condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements as of and for the year ended December 31, 2022 included in our Annual Report on Form 10-K for the year ended December 31, 2022 previously filed with the SEC.
Forward-Looking Statements
This report contains forward-looking statements that involve risks and uncertainties. These statements relate to future periods, future events or our future operating or financial plans or performance. Often, these statements include the words “believe,” “expect,” “target,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “potential,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or “may,” or the negative of these terms, and other similar expressions. These forward-looking statements include statements as to:
the discovery, development, formulation, manufacturing and commercialization of our compounds, our drug candidates and JAKAFI®/JAKAVI® (ruxolitinib), PEMAZYRE® (pemigatinib), ICLUSIG® (ponatinib), MONJUVI®(tafasitamab-cxix) /MINJUVI® (tafasitamab), OPZELURA™ (ruxolitinib) cream and ZYNYZ™ (retifanlimab-dlwr);
our plans to further develop our operations outside of the United States;
conducting clinical trials internally, with collaborators, or with clinical research organizations;
our collaboration and strategic relationship strategy, and anticipated benefits and disadvantages of entering into collaboration agreements;
our licensing, investment and commercialization strategies, including our plans to commercialize our drug products and drug candidates;
the regulatory approval process, including obtaining U.S. Food and Drug Administration and other international regulatory authorities’ approval for our products in the United States and abroad;
the safety, effectiveness and potential benefits and indications of our drug candidates and other compounds under development;
the timing and size of our clinical trials; the compounds expected to enter clinical trials; timing of clinical trial results;
our ability to manage expansion of our drug discovery and development operations;
future required expertise relating to clinical trials, manufacturing, sales and marketing;
obtaining and terminating licenses to products, drug candidates or technology, or other intellectual property rights;
the receipt from or payments pursuant to collaboration or license agreements resulting from milestones or royalties;
plans to develop and commercialize products on our own;
plans to use third-party manufacturers;
plans for our manufacturing operations;
expected expenses and expenditure levels; expected uses of cash; expected revenues and sources of revenues, including milestone payments; expectations with respect to inventory;
expectations with respect to reimbursement for our products;
the expected impact of recent accounting pronouncements and changes in tax laws;
expected losses; fluctuation of losses; currency translation impact associated with non-U.S. operations and collaboration royalties;
our profitability; the adequacy of our capital resources to continue operations;
the need to raise additional capital;
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the costs associated with resolving matters in litigation and governmental proceedings;
our expectations regarding competition;
our investments, including anticipated expenditures, losses and expenses;
our patent prosecution and maintenance efforts; and
the potential effects of the COVID-19 pandemic and efforts undertaken or to be undertaken by us or applicable governmental authorities on local and global economic conditions, and on our business, results of operations and financial condition.
These forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. These risks and uncertainties could cause actual results to differ materially from those projected and include, but are not limited to:
our ability to successfully commercialize our drug products and drug candidates;
our ability to obtain, or maintain at anticipated levels, coverage and reimbursement for our products from government health administration authorities, private health insurers and other organizations;
our ability to establish and maintain effective sales, marketing and distribution capabilities;
the risk of reliance on other parties to manufacture our products, which could result in a short supply of our products, increased costs, and withdrawal of regulatory approval;
our ability to maintain regulatory approvals to market our products;
our ability to achieve a significant market share in order to achieve or maintain profitability;
the risk of civil or criminal penalties if we market our products in a manner that violates health care fraud and abuse and other applicable laws, rules and regulations;
our ability to discover, develop, formulate, manufacture and commercialize our drug candidates;
the risk of unanticipated delays in, or discontinuations of, research and development efforts;
the risk that previous preclinical testing or clinical trial results are not necessarily indicative of future clinical trial results;
risks relating to the conduct of our clinical trials, including geopolitical risks;
changing regulatory requirements;
the risk of adverse safety findings;
the risk that results of our clinical trials do not support submission of a marketing approval application for our drug candidates;
the risk of significant delays or costs in obtaining regulatory approvals;
risks relating to our reliance on third-party manufacturers, collaborators, and clinical research organizations;
risks relating to the development of new products and their use by us and our current and potential collaborators;
risks relating to our inability to control the development of out-licensed compounds or drug candidates;
risks relatin