INCYTE CORP 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and the Consolidated Financial Statements and related Notes included elsewhere in this Report. A discussion of our financial performance for the year ended December 31, 2022 as compared to the year ended December 31, 2021 appears below under the captions “Results of Operations” and “Liquidity and Capital Resources.” A discussion of our financial performance for the year ended December 31, 2021 compared to the year ended December 31, 2020 can be found under the same captions in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 8, 2022, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at investor.incyte.com/financial-information/annual-reports . These website addresses are intended to be inactive, textual references only. None of the materials on, or accessible through, these websites are part of this report or are incorporated by reference herein. Overview Incyte is a biopharmaceutical company focused on the discovery, development and commercialization of proprietary therapeutics. Our global headquarters is located in Wilmington, Delaware, where we conduct global clinical development and commercial operations. We also conduct clinical development and commercial operations from our European headquarters in Morges, Switzerland and our other offices across Europe, our Japanese office in Tokyo and our Canadian headquarters in Montreal. Our portfolio focuses on areas of high unmet medical need and includes compounds in various stages, ranging from preclinical to late stage development, and commercialized products JAKAFI® (ruxolitinib), ICLUSIG® (ponatinib), PEMAZYRE® (pemigatinib) and OPZELURA™ (ruxolitinib) cream, as well as MINJUVI® (tafasitamab) and MONJUVI® (tafasitamab-cxix), which are co-commercialized. Our revenues depend on continued sales of our products, and we depend substantially on product revenues from JAKAFI. We must develop and commercialize new products to achieve revenue growth and to offset revenue losses from when products lose their exclusivity or when competing products are launched. For additional information, including information on the expirations of patents for various products, see Part I, Item 1 of this report, “Business—Patents and Other Intellectual Property” and “Business—Competition.” We devote substantial resources to research and development activities and to acquire rights to new product candidates and technologies, but successful product development in the biopharmaceutical industry is highly uncertain. Our product revenues also face challenges from economic conditions and drug pricing initiatives driven by governments and private payors. See Part I, Item 1A of this report, “Risk Factors” for a further discussion of certain factors that could impact our future product revenues. 65 Table of Contents Effects of the COVID-19 Pandemic on Our Business The impact of the COVID-19 pandemic on our operational and financial performance going forward depends on numerous factors, all of which are difficult to predict. These include the duration, spread and intensity of the pandemic; the protective measures imposed (or reimposed) by governmental authorities or by us to protect our employees; and the effects of the pandemic and such protective measures on our suppliers, collaborators and services providers and on the healthcare organizations serving patients. As a result, it is not currently possible to ascertain the potential long term impact of the COVID-19 pandemic on our business. To date, however, we have not experienced a material effect on the results of our commercial operations, or our manufacturing supply chain. New patient starts for treatment decreased as a result of shelter in place and other protective measures in the early stages of the pandemic, and if decreases in new patient starts occur in future periods, our revenues in future periods could be adversely affected. We continue to anticipate that short-term effects may continue to emerge across different aspects of our global clinical trial programs. For example, while we expect ongoing monitoring of already-enrolled patients to continue, difficulties in monitoring may result as a consequence of any new shelter in place orders and other protective measures implemented by governmental authorities or clinical trial sites. In addition, new patient recruitment in certain clinical trials has been and may in the future be impacted, in particular with respect to our earlier stage clinical trials. We also expect the conduct of clinical trials may continue to vary by disease state and by severity of disease, as well as by geography, as some regions are more adversely impacted. Overall, we caution that the duration and severity of the continuing COVID-19 pandemic remains uncertain, and we may not yet be able to assess its consequences accurately or fully at this time. Regulatory Achievements In May 2022, under our collaboration agreement with Novartis International Pharmaceutical Ltd., the European Commission (EC) approved JAKAVI (ruxolitinib) for the treatment of patients aged 12 years and older with acute and chronic GVHD and who have inadequate response to corticosteroids or other systemic therapies. JAKAVI is the first Janus kinase (JAK)1/2 inhibitor available for patients with GVHD in Europe. In May 2022, under our collaboration agreement with Eli Lilly and Company, the U.S. Food and Drug Administration (FDA) approved OLUMIANT for the treatment of COVID-19 in hospitalized adults requiring supplemental oxygen, non-invasive or invasive mechanical ventilation, or extracorporeal membrane oxygenation with a recommended dose of 4-mg once daily for 14 days or until hospital discharge, whichever comes first. OLUMIANT is the first and only JAK inhibitor FDA-approved for the treatment of COVID-19 in certain hospitalized adults requiring various degrees of oxygen support. In June 2022, under our collaboration agreement with Novartis, the EC approved TABRECTA (capmatinib) as a monotherapy for the treatment of adults with advanced non-small cell lung cancer NSCLC) harboring alterations leading to mesenchymalepithelial-transition factor gene (MET) exon 14 (METex14) kipping who require systemic therapy following prior treatment with immunotherapy and/or platinum-based chemotherapy. In June 2022, under our collaboration agreement with Lilly, the FDA approved OLUMIANT as the first and only systemic treatment for adults with severe alopecia areata (AA). In June 2022, the EC approved OLUMIANT as the first and only centrally-authorized treatment for adults with severe AA in Europe. In June 2022, the Japan Ministry of Health, Labor and Welfare approved OLUMIANT as a treatment for adults with alopecia areata. In July 2022, the FDA approved OPZELURA (ruxolitinib) cream for the topical treatment of nonsegmental vitiligo in adult and pediatric patients 12 years of age and older. OPZELURA is the first and only FDA-approved treatment for repigmentation in patients with vitiligo, and the only topical formulation of a JAK inhibitor approved in the United States. In August 2022, the FDA approved PEMAZYRE for the treatment of adults with relapsed or refractory myeloid/ lymphoid neoplasms (MLNs) with FGFR1 rearrangement. PEMAZYRE is the first and only targeted treatment for MLNs with FGFR1 rearrangement. MLNs with FGFR1 rearrangement are extremely rare and aggressive blood cancers that may impact less than 1 in 100,000 people in the United States. 66 Table of Contents In December 2022, the FDA approved a supplemental new drug application (sNDA) for revisions to JAKAFI labelling to update the Pediatric Use section of the Prescribing Information to describe the available experience of ruxolitinib in pediatric patients based on data from a study in children with de novo high-risk CRLF2-rearranged and/or JAK pathway-mutant acute lymphoblastic leukemia. License Agreements, Business Relationships and Acquisitions We establish business relationships, including collaborative arrangements with other companies and medical research institutions to assist in the clinical development and/or commercialization of certain of our drugs and drug candidates and to provide support for our research programs. We also establish business relationships with other companies and medical research institutions to acquire products or rights to products and technologies that are complementary to our business. Summarized below are the significant achievements under our existing collaboration and license agreements and additional agreements we entered into during the year ended December 31, 2022. Innovent In March 2022, we recognized a $5.0 million milestone under our collaboration and licensing agreement with Innovent Biologics, Inc., for approval for PEMAZYRE in China for the treatment of adults with locally advanced or metastatic cholangiocarcinoma, which was recorded in milestone and contract revenues. Lilly In June 2022, we recognized $70.0 million in regulatory milestones for Eli Lilly and Company gaining approval of OLUMIANT in the United States, Europe and Japan for the treatment of alopecia areata. Maruho In April 2022, we entered into a Strategic Alliance Agreement with Maruho Co., Ltd for the development, manufacturing and exclusive commercialization of ruxolitinib cream, a novel cream formulation of Incyte’s selective JAK2 inhibitor ruxolitinib, for treatment of autoimmune and inflammatory dermatology indications in Japan. Under the terms of the agreement, we recognized an upfront payment and are eligible to receive additional potential development, regulatory and commercial milestones and royalties on net sales of the licensed product in Japan. Maruho will receive the rights to develop, manufacture and exclusively commercialize ruxolitinib cream, and other potential future topical formulations of ruxolitinib, in autoimmune and inflammatory dermatologic diseases, including vitiligo and atopic dermatitis, in Japan. Novartis 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 recommended 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. Villaris In November 2022, we acquired Villaris Therapeutics, Inc., an asset-centric biopharmaceutical company focused on the development of novel antibody therapeutics for vitiligo. Its lead asset, auremolimab (VM6), is an anti-IL-15Rβ monoclonal antibody (mAb). Under the terms of the agreement, we paid an upfront payment of $70 million, and former Villaris stockholders will be eligible for up to $310.0 million upon achievement of certain development and regulatory milestones, as well as up to an additional $1.05 billion in commercial milestones on net sales of the product. 67 Table of Contents CMS Aesthetics Limited In December 2022, we entered into a Collaboration and License Agreement with CMS Aesthetics Limited, a subsidiary of China Medical System Holdings Limited, for the development and commercialization of ruxolitinib cream, a novel cream formulation of Incyte’s selective JAK inhibitor ruxolitinib, for the treatment of autoimmune and inflammatory dermatologic diseases in Greater China and Southeast Asia. Under the terms of the agreement, CMS paid us an upfront payment of $30.0 million upon our transfer of the functional intellectual property related to ruxolitinib cream to CMS, and we are eligible to receive additional potential development, regulatory and commercial milestones and royalties on net sales of the licensed product in CMS’ territory. CMS received an exclusive license to develop and commercialize and a non-exclusive license to manufacture ruxolitinib cream, and potentially other future topical formulations of ruxolitinib, in autoimmune and inflammatory dermatologic diseases, including vitiligo and atopic dermatitis, for patients in mainland China, Hong Kong, Macau, Taiwan and Southeast Asia. Critical Accounting Policies and Significant Estimates The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of the consolidated financial statements. See Note 1 of Notes to the Consolidated Financial Statements for a complete list of our significant accounting policies. Revenue Recognition. We recognize revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation, which for the Company is at a point in time. We also assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer. Product Revenues Our product revenues consist of sales of JAKAFI, OPZELURA, PEMAZYRE, ICLUSIG, and MINJUVI. Product revenues are recognized once we satisfy the performance obligation at a point in time under the revenue recognition criteria as described above. We recognize revenues for product received by our customers net of allowances for customer credits, including estimated rebates, chargebacks, discounts, returns, distribution service fees, patient assistance programs, and government rebates, such as Medicare Part D coverage gap reimbursements in the United States. These sales allowances and accruals are recorded based on estimates which are described in detail below. Estimates are assessed as of the end of each reporting period and are updated to reflect current information. We believe that our sales allowances and accruals are reasonable and appropriate based on current facts and circumstances. As of December 31, 2022, a 5% change in our sales allowance and accruals would have had an approximate $50.1 million impact on our income before taxes. Customer Credits: Our customers are offered various forms of consideration, including allowances, service fees and prompt payment discounts. We expect our customers will earn prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized. Service fees are also deducted from total product sales as they are earned. 68 Table of Contents Rebates and Discounts: We accrue rebates for mandated discounts under the Medicaid Drug Rebate Program in the United States and mandated discounts in Europe in markets where government-sponsored healthcare systems are the primary payers for healthcare. These accruals are based on statutory discount rates and expected utilization as well as historical data we have accumulated since product launch. In the fourth quarter of 2021 and fiscal year 2022 for non-covered patients of OPZELURA, we offered a full buy-down program as we were in the process of obtaining commercial insurance coverage for OPZELURA. During 2022, we contracted with the three largest group purchasing organizations to obtain coverage for OPZELURA. All full buy-down programs for OPZELURA ended effective January 31, 2023. Our estimates for expected utilization of commercial insurance rebates are based on data received from our customers. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters’ unpaid rebates. If actual future rebates vary from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Chargebacks: Chargebacks are discounts that occur when certain indirect contracted customers purchase directly from our wholesalers at a discounted price. The wholesalers, in turn, charges back to us the difference between the price initially paid by the wholesalers and the discounted price paid by the contracted customers. In addition to actual chargebacks received, we maintain an accrual for chargebacks based on the estimated contractual discounts on the inventory levels on hand in our distribution channel. If actual future chargebacks vary from these estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 70% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for the expected Medicare Part D coverage gap are based on historical invoices received and in part from data received from our customers. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Additionally, beginning in January 2020, the amount of spending required by eligible patients in the Medicare Part D insurance coverage gap increased 30% due to the expiration of a provision in the Patient Protection and Affordable Care Act, which now results in a change in the True Out of Pocket (TrOOP) calculation methodology. The methodological change has resulted in an increase in required spending by patients and, in turn, an increase in manufacturers’ contributions on behalf of patients in the Medicare Part D insurance coverage gap. Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators. During the fourth quarter of 2021 and fiscal year 2022, we also offered a full buy-down program to non-covered patients of OPZELURA as we were obtaining commercial insurance coverage for OPZELURA. All full buy-down programs for OPZELURA ended effective January 31, 2023. Product Royalty Revenues Royalty revenues on commercial sales for JAKAVI and TABRECTA by Novartis are estimated based on information provided by Novartis. Royalty revenues on commercial sales for OLUMIANT by Lilly are estimated based on information provided by Lilly. Royalty revenues on commercial sales for PEMAZYRE by Innovent are estimated based on information provided by Innovent. We recognize royalty revenues in the period the sales occur. We exercise judgment in determining whether the information provided is sufficiently reliable for us to base our royalty revenue recognition thereon. If actual royalties vary from estimates, we may need to adjust the prior period, which would affect royalty revenue and receivable in the period of adjustment. Historically, adjustments to these estimates to reflect actual royalty revenues have not been material to our financial results and have been less than 1% of royalty revenues. 69 Table of Contents Milestone and Contract Revenues At the inception of a contract, we determine the transaction price, in addition to any upfront payment, by estimating the amount of variable consideration, including milestone payments, at the outset of the contract utilizing the most likely amount method. Our contractual milestones typically relate to the achievement of pre-specified development, regulatory and commercialization events outside of our control, such as regulatory approval of a compound, first patient dosing or achievement of sales-based thresholds. We include milestones in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the milestone is subsequently resolved. Given the high level of uncertainty of achievement, variable consideration associated with milestones are fully constrained until confirmation of the satisfaction or completion of the milestone by the third-party. We review our estimate of the transaction price each period, and make revisions to such estimates as necessary. Stock Compensation. Share-based payment transactions with employees, which include stock options, restricted stock units (RSUs) and performance shares (PSUs), are recognized as compensation expense over the requisite service period based on their estimated fair values at the date of grant as well as expected forfeiture rates based on actual experience. The stock compensation process requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility over the option term and expected option lives, as well as expected forfeiture rates and the probability of PSUs vesting. For the years ending December 31, 2022 and 2021, our Black-Scholes assumptions included a weighted-average stock price volatility of 36% in 2022 and 39% in 2021, average expected option life of approximately five years and an estimated annualized forfeiture rate of 5%. The average risk-free interest rate assumption used in the Black-Scholes valuations increased from 0.62% in 2021 to 2.14% in 2022. The fair value of stock options, which are subject to graded vesting, are recognized as compensation expense over the requisite service period using the accelerated attribution method. The fair value of RSUs that are subject to cliff vesting are recognized as compensation expense over the requisite service period using the straight-line attribution method, and the fair value of RSUs that are subject to graded vesting are recognized as compensation expense over the requisite service period using the accelerated attribution method. The fair value of PSUs are recognized as compensation expense beginning at the time in which the performance conditions are deemed probable of achievement. We assess the probability of achievement of performance conditions, including projected product revenues and clinical development milestones, as of the end of each reporting period. Once a performance condition is considered probable, we record compensation expense based on the portion of the service period elapsed to date with respect to that award, with a cumulative catch-up, net of estimated forfeitures, and recognize any remaining compensation expense, if any, over the remaining requisite service period using the straight-line attribution method for PSUs that are subject to cliff vesting and using the accelerated attribution method for PSUs that are subject to graded vesting. 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. Income Taxes. We account for income taxes using an asset and liability approach to financial accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which the basis differences are expected to reverse. We periodically assess the likelihood of the realization of deferred tax assets, and reduce the carrying amount of these deferred tax assets to an amount that is considered to be more-likely-than-not to be realizable. Our assessment considers recent cumulative earnings experience, projections of future taxable income (losses) and ongoing prudent and feasible tax planning strategies. When performing our assessment on projections of future taxable income (losses), we consider factors such as the likelihood of regulatory approval and commercial success of products currently under development, among other factors. Significant judgment is required in making this assessment and, to the extent that a reversal of any portion of our valuation allowance against our deferred tax assets is deemed appropriate, a tax benefit will be recognized against our income tax provision in the period of such reversal. We recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the position will be sustained upon examination by the taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit that is recorded for these positions is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any interest and penalties on uncertain tax positions are included within the tax provision. 70 Table of Contents We record estimates and prepare and file tax returns in various jurisdictions across the United States, Canada, Europe, and Asia based upon our interpretation of local tax laws and regulations. While we exercise significant judgment when applying complex tax laws and regulations in these various taxing jurisdictions, many of our tax returns are open to audit, and may be subject to future tax, interest, and penalty assessments. We believe our estimates for the valuation allowances against certain deferred tax assets and the amount of benefits associated with uncertain tax positions recognized in our financial statements are appropriate based upon our assessment of the factors mentioned above. As a result of releasing the valuation allowance on the majority of our U.S. deferred tax assets in 2021, we expect that our reported income tax expense (current plus deferred) for future periods will be higher than that recorded for prior periods. Acquisition-related contingent consideration. Acquisition-related contingent consideration, which consists of our future royalty obligations to ARIAD/Takeda, was recorded on the acquisition date at the estimated fair value of the obligation, in accordance with the acquisition method of accounting using an income approach based on projected future net revenues of ICLUSIG in the European Union and other countries. The fair value of the acquisition-related contingent consideration is remeasured each reporting period, with changes in fair value recorded in the consolidated statements of operations. The assumptions used to determine the fair value of the acquisition-related contingent consideration include projected future net revenues of ICLUSIG and a discount rate, which require significant judgement and are analyzed on a quarterly basis. As the fair value measurement is based on significant inputs that are unobservable in the market, this represents a Level 3 measurement. The valuation inputs utilized to estimate the fair value of the contingent consideration as of December 31, 2022 and 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. While we use the best available information to prepare our projections of future net revenues of ICLUSIG and discount rate assumptions, actual ICLUSIG revenues and/or market conditions could differ significantly. Changes to one or multiple inputs could have a material impact on the amount of acquisition-related contingent consideration expense recorded during the reporting period. Results of Operations Years Ended December 31, 2022 and 2021 We recorded net income for the years ended December 31, 2022 and 2021 of $340.7 million and $948.6 million, respectively. On a per share basis, basic net income was $1.53 and diluted net income was $1.52 for the year ended December 31, 2022. On a per share basis, basic net income was $4.30 and diluted net income was $4.27 for the year ended December 31, 2021. For the year ended December 31, 2021, we recorded a benefit from income taxes of $569.0 million when we released the valuation allowance on the majority of our U.S. deferred tax assets. This benefit increased net income by $2.58 per basic and $2.56 per diluted share for the year ended December 31, 2021. 71 Table of Contents Revenues For the Year Ended, December 31, 2022 2021 (in millions) JAKAFI revenues, net $ 2,409.2 $ 2,134.5 ICLUSIG revenues, net 105.8 109.4 PEMAZYRE revenues, net 83.5 68.5 MINJUVI revenues, net 19.7 4.9 OPZELURA revenues, net 128.7 4.7 Total product revenues, net 2,746.9 2,322.0 JAKAVI product royalty revenues 331.6 338.0 OLUMIANT product royalty revenues 134.5 220.9 TABRECTA product royalty revenues 15.4 10.4 PEMAZYRE product royalty revenues 1.2 — Total product royalty revenues 482.7 569.3 Milestone and contract revenues 165.0 95.0 Total revenues $ 3,394.6 $ 2,986.3 The increase in JAKAFI product revenues from 2021 to 2022 was comprised of a volume increase of $156.5 million and a price increase of $118.2 million. The increase in OPZELURA product revenues in 2022 was driven by the full year sales volume impact of the launch of OPZELURA following the September 2021 FDA approval for the treatment of atopic dermatitis and, subsequently, for the treatment of vitiligo in July 2022. Our product revenues may fluctuate from period to period due to our customers’ purchasing patterns over the course of a year, including as a result of increased inventory building by customers in advance of expected or announced price increases. Product revenues are recorded net of estimated product returns, pricing discounts including rebates offered pursuant to mandatory federal and state government programs and chargebacks, prompt pay discounts and distribution fees and co-pay assistance. Our revenue recognition policies require estimates of the aforementioned sales allowances each period. The following table provides a summary of activity with respect to our sales allowances and accruals (in thousands): Year Ended December 31, 2022 Discounts and Distribution Fees Government Rebates and Chargebacks Co-Pay Assistance and Other Discounts Product Returns Total Balance at January 1, 2022 $ 14,678 $ 99,304 $ 24,074 $ 4,740 $ 142,796 Allowances for current period sales 119,977 621,051 258,041 5,587 1,004,656 Allowances for prior period sales (94) (2,626) (5) — (2,725) Credits/payments for current period sales (97,085) (509,430) (248,300) — (854,815) Credits/payments for prior period sales (12,160) (59,834) (8,230) (3,961) (84,185) Balance at December 31, 2022 $ 25,316 $ 148,465 $ 25,580 $ 6,366 $ 205,727 72 Table of Contents Government rebates and chargebacks are the most significant component of our sales allowances. Increases in certain government reimbursement rates are limited to a measure of inflation, and when the price of a drug increases faster than this measure of inflation it will result in a penalty adjustment factor that causes a larger sales allowance to those government related entities. We expect government rebates and chargebacks as a percentage of our gross product sales will continue to increase in connection with any future product price increases greater than the rate of inflation, and any such increase in these government rebates and chargebacks will have a negative impact on our reported product revenues, net. We adjust our estimates for government rebates and chargebacks based on new information regarding actual rebates as it becomes available. Claims by third-party payors for rebates and chargebacks are frequently submitted after the period in which the related sales occurred, which may result in adjustments to prior period accrual balances in the period in which the new information becomes available. Our company-sponsored patient savings program in which we provide financial assistance to enable commercially-insured patients to afford their insurance premium and co-pays may fluctuate as the commercial insurance landscape evolves and may impact net revenues, particularly for drugs like OPZELURA. We also adjust our allowance for product returns based on new information regarding actual returns as it becomes available. We expect our sales allowances to fluctuate from quarter to quarter as a result of the Medicare Part D Coverage Gap, the volume of purchases eligible for government mandated discounts and rebates as well as changes in discount percentages which are impacted by potential future price increases, rate of inflation, and other factors. Product royalty revenues on commercial sales of JAKAVI and TABRECTA by Novartis are based on net sales of licensed products in licensed territories as provided by Novartis. The decrease in JAKAVI product royalty revenues for the year ended December 31, 2022 as compared to the corresponding period in 2021 reflects unfavorable changes in foreign currency exchange rates. Product royalty revenues on commercial sales of OLUMIANT by Lilly are based on net sales of licensed products in licensed territories as provided by Lilly. The decrease in OLUMIANT product royalty revenues for the year ended December 31, 2022 as compared to the corresponding period in 2021 reflects unfavorable changes in foreign currency exchange rates and a decrease in net product sales of OLUMIANT for use as a treatment for COVID-19. Product royalty revenues on commercial sales of PEMAZYRE by Innovent are based on net sales of licensed products in licensed territories as provided by Innovent. Our milestone and contract revenues were $165.0 million and $95.0 million for the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, our milestone and contract revenues were derived from total regulatory milestones achieved of $135.0 million, in addition to a $30.0 million upfront payment received upon our transfer of functional intellectual property to one of our collaboration partners. During the year ended December 31, 2021, our milestone and contract revenues were derived from the achievement of a $50.0 million sales milestone, a $10.0 million regulatory milestone, and $35.0 million upfront payment received upon our transfer of functional intellectual property to one of our collaboration partners. Cost of Product Revenues For the Year Ended December 31, 2022 2021 (in millions) Product costs $ 57.1 $ 21.0 Salary and benefits related 9.5 7.2 Stock compensation 2.7 1.7 Royalty expense 116.2 99.6 Amortization of definite-lived intangible assets 21.5 21.5 Total cost of product revenues $ 207.0 $ 151.0 Cost of product revenues includes all product related costs, employee personnel costs, including stock compensation, for those employees dedicated to the production of our commercial products, royalties owed under our collaborative agreements and amortization of our licensed intellectual property rights for ICLUSIG using the straight-line method over the estimated useful life of 12.5 years. Cost of product revenues increased from 2021 to 2022 due primarily to product related costs for our commercial products, including OPZELURA. 73 Table of Contents Operating Expenses Research and development expenses For the Year Ended December 31, 2022 2021 (in millions) Salary and benefits related $ 345.6 $ 306.0 Stock compensation 112.5 114.3 Clinical research and outside services 978.9 902.3 Occupancy and all other costs 148.9 135.6 Total research and development expenses $ 1,585.9 $ 1,458.2 We account for research and development costs by natural expense line and not costs by project. Salary and benefits related expense increased from 2021 to 2022 due primarily to increased development headcount to sustain our development pipeline. Stock compensation expense may fluctuate from period to period based on the number of awards granted, stock price volatility and expected award lives, as well as expected award forfeiture rates which are used to value equity-based compensation. The increase in clinical research and outside services expense from 2021 to 2022 was primarily due to continued investment in our late stage development assets. Research and development expenses also include upfront and milestone expenses related to our collaborative agreements and the acquisition of Villaris, which were $126.0 million and $149.0 million for the years ended December 31, 2022 and 2021, respectively. Research and development expenses for the years ended December 31, 2022 and 2021 were net of $52.2 million and $29.6 million, respectively, of costs reimbursed by our collaborative partners. In addition to one-time expenses resulting from upfront fees in connection with the entry into any new or amended collaboration agreements and payment of milestones under those agreements, research and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial related activities. Many factors can affect the cost and timing of our clinical trials, including requests by regulatory agencies for more information, inconclusive results requiring additional clinical trials, slow patient enrollment, adverse side effects among patients, insufficient supplies for our clinical trials, timing of drug supply, including API, and real or perceived lack of effectiveness or safety of our investigational drugs in our clinical trials. In addition, the development of all of our products will be subject to extensive governmental regulation. These factors make it difficult for us to predict the timing and costs of the further development and approval of our products. Selling, general and administrative expenses For the Year Ended December 31, 2022 2021 (in millions) Salary and benefits related $ 269.1 $ 222.4 Stock compensation 73.2 67.0 Other contract services and outside costs 659.8 450.2 Total selling, general and administrative expenses $ 1,002.1 $ 739.6 Salary and benefits related expense increased from 2021 to 2022 due primarily to increased headcount. This increased headcount was due primarily to the establishment of our dermatology commercial organization. Stock compensation expense may fluctuate from period to period based on the number of awards granted, stock price volatility and expected award lives, as well as expected award forfeiture rates which are used to value equity-based compensation. The increase in other contract services and outside costs was primarily due to expenses related to our dermatology commercial organization and activities to support the launch of OPZELURA for the treatments of atopic dermatitis and vitiligo. 74 Table of Contents Loss on change in fair value of acquisition-related contingent consideration Acquisition-related contingent consideration, which consists of our future royalty obligations to ARIAD/Takeda, was recorded on the acquisition date, June 1, 2016, at the estimated fair value of the obligation, in accordance with the acquisition method of accounting. The fair value of the acquisition-related contingent consideration is remeasured quarterly. The change in fair value of the acquisition-related contingent consideration for the years ended December 31, 2022 and 2021 was expense of $12.1 million and $14.7 million, respectively, which is recorded in loss on change in fair value of acquisition-related contingent consideration on the consolidated statements of operations. The losses on change in fair value of the contingent consideration during the years ended December 31, 2022 and 2021, were due primarily to the impact of updated projections of future net revenues of ICLUSIG in the European Union and the passage of time. (Profit) and loss sharing under collaboration agreements Under the collaboration and license agreement with MorphoSys, which was executed in March 2020, we and MorphoSys are both responsible for the commercialization efforts of tafasitamab in the United States and will share equally the profits and losses from the co-commercialization efforts. For the year ended December 31, 2022 and 2021, our 50% share of the costs for tafasitamab was $8.0 million and $37.0 million, respectively, as recorded in (profit) and loss sharing under collaboration agreements on the consolidated statement of operations. Other income (expense), net Other income (expense), net. Other income (expense), net, for the years ended December 31, 2022 and 2021 was $39.9 million and $10.6 million, respectively. The increase in other income (expense), net primarily relates to an increase in interest income. Unrealized gain (loss) on long term investments. Unrealized gains and losses on long term investments will fluctuate from period to period, based on the change in fair value of the securities we hold in our publicly held collaboration partners. The following table provides a summary of those unrealized gains and (losses): For the Years Ended, December 31, 2022 2021 (in millions) Agenus $ (9.9) $ 4.6 Calithera (0.9) (7.3) Merus (58.0) 48.1 MorphoSys (21.2) (68.7) Syndax 5.1 6.3 Syros (2.7) (7.1) Total unrealized loss on long term investments $ (87.6) $ (24.1) Provision (benefit) for income taxes. The provision (benefit) for income taxes for the years ended December 31, 2022 and 2021 was a provision of $188.5 million and a benefit of $378.1 million, respectively. The increase in tax expense of $566.6 million from 2021 to 2022 was primarily driven by the change in valuation allowance for U.S. deferred tax assets. For the year ended December 31, 2022, we recorded net tax expense of $28.4 million for the increase in the valuation allowance for deferred tax assets, primarily as a result of legislative changes from the Tax Cut and Jobs Act of 2017 that went into effect in 2022 requiring capitalization of research and development expenditures. For the year ended December 31, 2021, we recorded a benefit from income taxes of $569.0 million when we released the valuation allowance on the majority of our U.S. deferred tax assets. Further information on the impacts of the valuation allowance and significant judgments related to changes can be found in Note 13 of Notes to the Consolidated Financial Statements. 75 Table of Contents Liquidity and Capital Resources 2022 2021 (in millions) December 31: Cash, cash equivalents, and marketable securities $ 3,239.0 $ 2,348.2 Working capital $ 2,935.8 $ 2,264.4 Year ended December 31: Cash provided by (used in): Operating activities $ 969.9 $ 749.5 Investing activities $ (78.5) $ (207.7) Financing activities $ (0.8) $ 6.2 Capital expenditures (included in investing activities above) $ (77.8) $ (181.0) Sources and Uses of Cash. Due to historical net losses, we had an accumulated deficit of $0.4 billion as of December 31, 2022. We have funded our research and development operations through cash received from customers, sales of equity securities, the issuance of convertible notes, and collaborative arrangements. At December 31, 2022, we had available cash, cash equivalents and marketable securities of $3.2 billion. Our cash and marketable securities balances are held in a variety of interest-bearing instruments, including money market accounts and U.S. government debt securities. Available cash is invested in accordance with our investment policy’s primary objectives of liquidity, safety of principal and diversity of investments. Cash provided by (used in) operating activities. The increase in cash provided by operating activities from 2021 to 2022 was due primarily to changes in working capital. Cash used in investing activities. Our investing activities, other than purchases, sales and maturities of marketable securities, have consisted predominantly of capital expenditures and purchases of long term investments. During 2022, net cash used in investing activities was $78.5 million, which represents purchases of marketable securities of $79.9 million, capital expenditures of $77.8 million, offset in part by the sale and maturity of marketable securities of $79.2 million. During 2021, net cash used in investing activities was $207.7 million, which represents purchases of marketable securities of $235.2 million, capital expenditures of $181.0 million and purchase of long term equity investments of $33.5 million, offset in part by the sale and maturity of marketable securities of $231.5 million and the sale of long term investment of $10.5 million. Cash (used in) provided by financing activities. During 2022, net cash used in financing activities was $0.8 million, and in 2021, net cash provided by financing activities was $6.2 million, respectively, consisting primarily of proceeds from the issuance of common stock under our stock plans net of tax withholdings, offset in part by cash paid to ARIAD/Takeda for contingent consideration. Our capital expenditures for construction activities and our non-operating contractual operating and finance lease obligations are discussed in Note 8 of Notes to the Consolidated Financial Statements. In addition, in October 2019, we entered into an agreement with Wilmington Friends School Inc., to purchase property for $50.0 million to expand our global headquarters. Under that agreement, closing of the purchase is subject to certain standard closing conditions, including an initial diligence period and a subsequent approval period. In August 2021, we entered into a $500.0 million, three-year senior unsecured revolving credit facility. We may increase the maximum revolving commitments or add one or more incremental term loan facilities, subject to obtaining commitments from any participating lenders and certain other conditions, in an amount not to exceed $250.0 million plus a contingent additional amount that is dependent on our pro forma consolidated leverage ratio. As of December 31, 2022, we had no outstanding borrowings and were in compliance with all covenants under this facility. Our U.S. income tax payments will increase significantly due to the mandatory capitalization and amortization of research and development expenses for tax years beginning after December 31, 2021, as required under the Tax Cuts and Jobs Act of 2017, which eliminated the immediate expensing of such expenses. 76 Table of Contents We believe that our cash flow from operations, together with our cash, cash equivalents and marketable securities and funds available under our revolving credit facility, will be adequate to satisfy our capital needs for the foreseeable future. Our cash requirements depend on numerous factors, including our expenditures in connection with our drug discovery and development programs and commercialization operations; expenditures in connection with litigation or other legal proceedings; costs for future facility requirements; and expenditures for future strategic equity investments or potential acquisitions. We have entered into and 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 licenses, we may be required to pay upfront fees, milestone payments, and royalties on sales of future products. These contingent future payments are discussed in detail in Note 7 of Notes to the Consolidated Financial Statements. To the extent we seek to augment our existing cash resources and cash flow from operations to satisfy our cash requirements for future acquisitions or other strategic purposes, we expect that additional funding can be obtained through equity or debt financings or from other sources. The sale of equity or convertible debt securities in the future may be dilutive to our stockholders, and may provide for rights, preferences or privileges senior to those of our holders of common stock. Debt financing arrangements may require us to pledge certain assets or enter into covenants that could restrict our operations or our ability to incur further indebtedness.