What changed in this filing

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Item 1. Financial Statements

2023-08-01 compared with 2023-05-02 · 149 added, 84 removed, 517 unchanged (31% of the section changed)

6 unchanged sentences

Cash and cash equivalents $ 3,131,123 $ 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)

Marketable securities—available-for-sale (amortized cost $ 294,371 and $ 292,580 as of June 30, 2023 and December 31, 2022, respectively;

allowance for credit losses $ 0 as of June 30, 2023 and December 31, 2022)

292,243 287,543

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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

223,338,330 and 222,746,719 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 4,925,626 4,792,041

9 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Product revenues, net $ 827,005 $ 663,851 $ 1,520,242 $ 1,269,672

12 unchanged sentences

Interest expense ( 655 ) ( 678 ) ( 1,124 ) ( 1,358 )

Unrealized loss on long term investments ( 5,318 ) ( 46,585 )

Unrealized gain (loss) on long term investments 41,811 ( 24,897 ) 36,493 ( 71,482 )

Income before provision for income taxes 277,604 229,378 329,460 299,913

12 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net income $ 203,548 $ 161,432 $ 225,251 $ 199,424

22 unchanged sentences

Balance at March 31, 2023 $ 223 $ 4,856,914 $ 20,942 $ ( 415,511 ) $ 4,462,568

Issuance of 59,093 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and performance shares, net of shares withheld for taxes and 216,168 shares of Common Stock under the ESPP

— 13,704 — — 13,704

Issuance of 1,282 shares of Common Stock for services rendered

Stock compensation — 54,928 — — 54,928

Other comprehensive income — — 5,864 — 5,864

Net income — — — 203,548 203,548

Balances at June 30, 2023 $ 223 $ 4,925,626 $ 26,806 $ ( 211,963 ) $ 4,740,692

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(unaudited, in thousands, except number of shares)

Stock Additional

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Balances at March 31, 2022 $ 221 $ 4,625,780 $ ( 23,047 ) $ ( 739,882 ) $ 3,863,072

Issuance of 274,693 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and performance shares, net of shares withheld for taxes and 189,684 shares of Common Stock under the ESPP

1 16,600 — — 16,601

Issuance of 1,469 shares of Common Stock for services rendered

— 109 — — 109

Stock compensation — 46,496 — — 46,496

Other comprehensive loss — — ( 2,649 ) — ( 2,649 )

Net income — — — 161,432 161,432

Balances at June 30, 2022 $ 222 $ 4,688,985 $ ( 25,696 ) $ ( 578,450 ) $ 4,085,061

See accompanying notes.

2 unchanged sentences

(unaudited, in thousands)

Three Months Ended

Six Months Ended

Cash flows from operating activities:

5 unchanged sentences

Other, net ( 3,670 ) 8,467

Unrealized loss on long term investments 5,318 46,585

Unrealized (gain) loss on long term investments ( 36,493 ) 71,482

Loss on change in fair value of acquisition-related contingent consideration 14,570 9,695

5 unchanged sentences

Accrued and other liabilities 92,500 51,651

Net cash (used in) provided by operating activities ( 105,603 ) 215,741

Net cash provided by operating activities 200,923 389,898

Cash flows from investing activities:

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Effect of exchange rates on cash, cash equivalents, restricted cash and investments ( 2,090 ) 1,198

Net (decrease) increase in cash, cash equivalents, restricted cash and investments ( 130,352 ) 199,299

Net increase in cash, cash equivalents, restricted cash and investments 179,722 377,865

Cash, cash equivalents, restricted cash and investments at beginning of period 2,953,120 2,059,160

8 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

June 30, 2023

Organization and Business

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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 as of June 30, 2023, the condensed consolidated statements of operations, comprehensive income (loss), and stockholders’ equity for the three and six months ended June 30, 2023 and 2022, and the condensed consolidated statements of cash flows for the six months ended June 30, 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.

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

JAKAFI revenues, net $ 682,384 $ 597,673 $ 1,262,353 $ 1,142,137

OPZELURA revenues, net 80,233 16,560 136,785 29,314

ICLUSIG revenues, net 29,087 26,224 56,772 52,293

1 unchanged sentence

MINJUVI revenues, net 13,159 4,411 19,715 8,913

OPZELURA revenues, net 56,552 12,754

ZYNYZ revenues, net 570 — 570 —

Total product revenues, net 827,005 663,851 1,520,242 1,269,672

10 unchanged sentences

Losses Estimated

March 31, 2023

June 30, 2023

Debt securities (government) $ 294,371 $ ( 2,128 ) $ 292,243

3 unchanged sentences

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.

As of June 30, 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.

Fair Value Measurements

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government debt securities that are classified as available-for-sale.

At March 31, 2023 and December 31, 2022, our Level 2 U.S.

At June 30, 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.

We did not experience any transfers of financial instruments between the fair value hierarchy levels during the six months ended June 30, 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):

6 unchanged sentences

(Level 3) Balance as of

March 31, 2023

June 30, 2023

Cash and cash equivalents $ 3,131,123 $ — $ — $ 3,131,123

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(Level 3) Balance as of

March 31, 2023

June 30, 2023

Acquisition-related contingent consideration $ — $ — $ 217,000 $ 217,000

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Change in fair value of contingent consideration 14,570

Balance at March 31, $ 218,000

Balance at June 30, $ 217,000

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.

The valuation inputs utilized to estimate the fair value of the contingent consideration as of June 30, 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 and six months ended June 30, 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.

At June 30, 2023 and December 31, 2022, contingent consideration earned but not yet paid was $ 18.6 million and $ 9.3 million, respectively, and was included in accrued and other current liabilities.

Concentration of Credit Risk and Current Expected Credit Losses

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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.

The above collaboration partners comprised, in aggregate, 20 % and 20 % of the accounts receivable balance as of June 30, 2023 and December 31, 2022, respectively.

For further information relating to these collaboration and license agreements, refer to Note 7.

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Product Revenues for the

Three Months Ended

Three Months Ended Percentage of Total Net

Product Revenues for the

Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Customer A 16 % 19 % 17 % 19 %

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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.

Customers A, B, C, D, and E comprised, in aggregate, 35 % and 41 % of the accounts receivable balance as of June 30, 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.

We assessed our collaborative and customer receivable assets as of June 30, 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 June 30, 2023 and December 31, 2022, we had no allowance for doubtful accounts.

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

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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.

At June 30, 2023, $ 35.9 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 June 30, 2023, $ 142.0 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.

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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.

At June 30, 2023, inventory with approximately $ 32.6 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 12 to 18 months and, as a result, cost of product revenues will reflect a lower average per unit cost of materials.

License Agreements

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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.

Since the inception of the agreement through June 30, 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.

During the three and six months ended June 30, 2023, such royalties on net sales within the United States totaled $ 33.5 million and $ 56.9 million, respectively, and were reflected in cost of product revenues on the condensed consolidated statements of operations.

During the three and six months ended June 30, 2022, such royalties on net sales within the United States totaled $ 29.3 million and $ 51.0 million, respectively, and were reflected in cost of product revenues on the condensed consolidated statements of operations.

At June 30, 2023 and December 31, 2022, $ 310.3 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.

We had no milestone and contract revenue under the Novartis agreement for the three and six months ended June 30, 2023.

Milestone and contract revenue under the Novartis agreement was $ 60.0 million for both the three and six months ended June 30, 2022.

Product royalty revenue related to Novartis net sales of JAKAVI outside of the United States for the three and six months ended June 30, 2023 was $ 90.4 million and $ 167.1 million, respectively.

Product royalty revenue related to Novartis net sales of JAKAVI outside of the United States for the three and six months ended June 30, 2022 was $ 83.7 million and $ 154.6 million, respectively.

Product royalty revenue related to Novartis net sales of TABRECTA worldwide for the three and six months ended June 30, 2023 was $ 4.8 million and $ 9.0 million, respectively.

Product royalty revenue related to Novartis net sales of TABRECTA worldwide for the three and six months ended June 30, 2022 was $ 3.6 million and $ 7.1 million, respectively.

Lilly – Baricitinib

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Under this agreement, we were initially eligible to receive up to $ 150.0 million for the achievement of development milestones, up to $ 365.0 million for the achievement of regulatory milestones and up to $ 150.0 million for the achievement of sales milestones.

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.

Since the inception of the agreement through June 30, 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.

1 unchanged sentence

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.

We had no milestone and contract revenue under the Lilly agreement for the three and six months ended June 30, 2023.

Milestone and contract revenue under the Lilly agreement was $ 70.0 million for both the three and six months ended June 30, 2022.

Product royalty revenue related to Lilly net sales of OLUMIANT outside of the United States for the three and six months ended June 30, 2023 was $ 32.0 million and $ 66.2 million, respectively.

Product royalty revenue related to Lilly net sales of OLUMIANT outside of the United States for the three and six months ended June 30, 2022 was $ 30.3 million and $ 78.3 million, respectively.

Lilly - Ruxolitinib

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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.

Since the inception of the agreement through June 30, 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 June 30, 2023, we held an investment of approximately 12.1 million shares of Agenus Inc.

common stock.

The fair market value of our long term investment in Agenus Inc.

at June 30, 2023 and December 31, 2022 was $ 19.3 million and $ 29.0 million, respectively.

For the three and six months ended June 30, 2023, we recorded an unrealized gain of $ 0.9 million and an unrealized loss of $ 9.7 million, respectively, based on the change in fair value of Agenus Inc.’s common stock during the respective periods.

For the three and six months ended June 30, 2022, we recorded an unrealized loss of $ 6.3 million and $ 15.4 million, respectively, based on the change in fair value of Agenus Inc.’s common stock during the respective periods.

During May 2023, Agenus Inc.

distributed a dividend of shares it owned of its publicly traded subsidiary MiNK Therapeutics' ("MiNK") common stock to shareholders who held Agenus Inc.

As a result, we acquired approximately 0.2 million shares of MiNK common stock.

The fair market value of our long term investment in MiNK at June 30, 2023 was $ 0.4 million, and during the three months ended June 30, 2023, and we recorded an unrealized gain of $ 0.2 million based on the change in fair value of MiNK’s common stock during the period.

In December 2016, we entered into a Collaboration and License Agreement with Merus N.V.

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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.

Since the inception of the agreement through June 30, 2023, we have paid and expensed Merus milestones totaling $ 5.5 million.

As of June 30, 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 June 30, 2023 and December 31, 2022 was $ 93.5 million and $ 54.9 million, respectively.

For the three and six months ended June 30, 2023, we recorded an unrealized gain of $ 28.2 million and $ 38.6 million, respectively, based on the change in fair value of Merus’ common shares during the respective periods.

For the three and six months ended June 30, 2022, we recorded an unrealized loss of $ 13.5 million and $ 32.5 million, respectively, based on the change in fair value of Merus’ common shares during the respective periods.

In October 2017, we entered into a Global Collaboration and License Agreement with MacroGenics, Inc.

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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.

This milestone payment was capitalized as an intangible asset and included in Other intangible assets, net on the condensed consolidated balance sheet as of June 30, 2023, and is being amortized through cost of product revenues over the estimated useful life of 13.5 years.

Since the inception of the agreement through June 30, 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.

Research and development expenses for the three and six months ended June 30, 2023 also included $ 12.1 million and $ 29.9 million, respectively, of development costs incurred pursuant to the MacroGenics agreement.

Research and development expenses for the three and six months ended June 30, 2022 also included $ 14.8 million and $ 28.3 million, respectively, of development costs incurred pursuant to the MacroGenics agreement.

At June 30, 2023 and December 31, 2022, a total of $ 0.2 million and $ 2.9 million of such costs were included in accrued and other liabilities on the condensed consolidated balance sheets.

In January 2018, we entered into a Target Discovery, Research Collaboration and Option Agreement with Syros Pharmaceuticals, Inc.

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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.

As of June 30, 2023, we held an investment of approximately 0.1 million shares of Syros common stock.

The fair market value of our long term investment in Syros as of June 30, 2023 and December 31, 2022 was $ 0.3 million and $ 0.3 million, respectively.

For the three and six months ended June 30, 2023, we recorded a nominal unrealized loss and an unrealized loss of $ 0.1 million, respectively, based on the change in fair value of Syros’ common stock during the respective periods.

For the three and six months ended June 30, 2022, we recorded an unrealized loss of $ 0.2 million and $ 2.2 million, respectively, based on the change in fair value of Syros’ common stock during the respective periods.

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.

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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.

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.

Since the inception of the agreement through June 30, 2023, we have paid MorphoSys milestones totaling $ 2.5 million, all of which have previously been recorded as research and development expenses.

As of June 30, 2023, we held an investment of approximately 3.6 million American Depository Shares, each representing 0.25 of an ordinary share of MorphoSys AG.

The fair market value of our long term investment in MorphoSys AG as of June 30, 2023 and December 31, 2022 was $ 27.1 million and $ 13.0 million, respectively.

For the three and six months ended June 30, 2023, we recorded an unrealized gain of $ 12.7 million and $ 14.1 million, respectively, based on the change in fair value of MorphoSys AG's ordinary shares during the respective periods.

For the three and six months ended June 30, 2022, we recorded an unrealized loss of $ 7.1 million and $ 16.7 million, respectively, based on the change in fair value of MorphoSys AG's ordinary shares during the respective periods.

Our 50 % share of the United States profit or loss for the commercialization of tafasitamab for the three and six months ended June 30, 2023 was a profit of $ 0.5 million and $ 1.9 million, respectively, and is recorded as (profit) and loss sharing under collaboration agreements on the condensed consolidated statement of operations.

Our 50 % share of the United States loss for the commercialization of tafasitamab for the three and six months ended June 30, 2022 was $ 2.5 million and $ 7.3 million, respectively, 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 and six months ended June 30, 2023, includes $ 20.3 million and $ 45.5 million, respectively, related to our 55 % share of the co-development costs for tafasitamab.

Research and development expenses for the three and six months ended June 30, 2022, includes $ 27.5 million and $ 48.5 million, respectively, related to our 55 % share of the co-development costs for tafasitamab.

At June 30, 2023 and December 31, 2022, $ 39.3 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.

In September 2021, we entered into a Collaboration and License Agreement with Syndax Pharmaceuticals, Inc.

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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.

We will be responsible for leading the commercialization strategy and booking all revenue from sales of axatilimab globally.

Incyte and Syndax will share equally the profits and losses from the co-commercialization efforts in the United States.

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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.

As of June 30, 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 June 30, 2023 and December 31, 2022 was $ 29.8 million and $ 36.2 million.

For the three and six months ended June 30, 2023, we recorded an unrealized loss of $ 0.2 million and $ 6.4 million, respectively, based on the change in fair value of Syndax’s common stock during the respective periods.

For the three and six months ended June 30, 2022, we recorded an unrealized gain of $ 2.7 million and an unrealized loss of $ 3.8 million, respectively, based on the change in fair value of Syndax’s common stock during the respective periods.

Research and development expenses for the three and six months ended June 30, 2023, includes $ 6.2 million and $ 11.8 million, respectively, related to our 55 % share of the co-development costs for axatilimab.

At June 30, 2023, $ 4.4 million was included in accrued and other liabilities on the condensed consolidated balance sheet for amounts due to Syndax under the agreement.

Other Agreements

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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.

We recorded $ 54.5 million and $ 107.9 million of stock compensation expense on our condensed consolidated statements of operations for the three and six months ended June 30, 2023, respectively.

We recorded $ 46.5 million and $ 90.3 million of stock compensation expense on our condensed consolidated statements of operations for the three and six months ended June 30, 2022, respectively.

Stock compensation expense included within our condensed consolidated statements of operations included research and development expense of $ 32.8 million, $ 63.8 million, $ 28.1 million and $ 54.4 million for the three and six months ended June 30, 2023 and 2022, respectively.

Stock compensation expense included within our condensed consolidated statements of operations also included selling, general and administrative expense of $ 20.9 million, $ 42.5 million, $ 17.7 million and $ 34.6 million for the three and six months ended June 30, 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, $ 1.6 million, $ 0.7 million and $ 1.3 million, respectively, for the three and six months ended June 30, 2023 and 2022.

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 Options Employee Stock Purchase Plan

For the Three Months Ended For the Three Months Ended

March 31, March 31,

For the Three Months Ended For the Six Months Ended For the Three Months Ended For the Six Months Ended

June 30, June 30,

2023 2022 2023 2022 2023 2022 2023 2022

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Options cancelled ( 755,507 ) $ 94.07

Balance at March 31, 2023 12,419,055 $ 87.06

Balance at June 30, 2023 12,365,905 $ 86.72

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.

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PSUs cancelled ( 971 ) $ 106.47

Balance at March 31, 2023 5,550,448 $ 81.52

Balance at June 30, 2023 5,704,335 $ 80.77

RSUs and PSUs are granted to our employees at the share price on the date of grant.

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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.

For the three and six months ended June 30, 2023 we recorded $ 2.7 million and $ 9.2 million, respectively, of stock compensation expense for PSUs on our condensed consolidated statements of operations.

For the three and six months ended June 30, 2022 we recorded $ 0.1 million and $ 1.9 million 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.

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Balance at December 31, 2022 5,056,370

Additional authorization 12,500,000

Options, RSUs and PSUs granted ( 2,360,882 )

Options, RSUs and PSUs cancelled 1,006,844

Balance at March 31, 2023 4,071,475

Balance at June 30, 2023 16,202,332

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.

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:

Total compensation cost of options granted but not yet vested, as of June 30, 2023, was $ 34.5 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 June 30, 2023, was $ 175.0 million, which is expected to be recognized over the weighted average period of approximately 1.6 years.

Total compensation cost of PSUs granted but not yet vested, as of June 30, 2023, was $ 28.2 million, which is expected to be recognized over the weighted average period of 1.4 years, should the underlying performance conditions be deemed probable of achievement.

For the three and six months ended June 30, 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

June 30, Six Months Ended

2023 2022 2023 2022

Income before provision for income taxes $ 277,604 $ 229,378 $ 329,460 $ 299,913

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Effective tax rate 26.7 % 29.6 % 31.6 % 33.5 %

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.

Our effective tax rate for each of the three and six months ended June 30, 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) and an increase in our valuation allowance against certain U.S.

federal and state deferred tax assets offset to a lesser extent by tax rate benefits associated with research and development and orphan drug tax credit generations and foreign derived intangible income deductions.

The effective tax rate for the three and six months ended June 30, 2023 decreased as compared to that for the prior year periods due to a greater tax benefit recognized in 2023 associated with research and development and orphan drug tax credit generations.

The balance of our unrecognized tax benefits (including penalties and interest) decreased marginally during the six months ended June 30, 2023.

This movement was primarily driven by additions to current and prior period tax positions of $ 4.2 million, as well as $ 2.8 million of interest and penalties, offset by reductions related to prior period tax positions of $ 7.1 million.

We accrue interest and penalties related to unrecognized tax benefits as a component of its provision for income taxes.

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Basic net income $ 203,548 $ 161,432 $ 225,251 $ 199,424

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Outstanding stock options and awards 12,806,418 10,767,335 10,781,677 10,901,507

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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 contribution expense for the three and six months ended June 30, 2023 was $ 4.0 million and $ 9.6 million, respectively.

Defined contribution expense for the three and six months ended June 30, 2022 was $ 4.7 million and $ 9.6 million, respectively.

Defined Benefit Pension Plans

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Service cost $ 1,733 $ 2,438 $ 3,821 $ 4,960

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements