INCYTE CORP 10-Q

Item 1. Financial Statements INCYTE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except number of shares and par value) June 30, 2023 December 31, 2022* (unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,131,123 $ 2,951,422 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 Accounts receivable 637,994 644,879 Inventory 35,937 41,995 Prepaid expenses and other current assets 167,136 167,011 Total current assets 4,264,433 4,092,850 Restricted cash 1,719 1,698 Long term investments 170,316 133,676 Inventory 142,048 78,964 Property and equipment, net 749,352 739,310 Finance lease right-of-use assets, net 25,631 26,298 Other intangible assets, net 134,954 129,219 Goodwill 155,593 155,593 Deferred income tax asset 532,507 457,941 Other assets, net 31,706 25,435 Total assets $ 6,208,259 $ 5,840,984 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 155,538 $ 277,546 Accrued compensation 111,708 138,761 Accrued and other current liabilities 810,852 701,053 Finance lease liabilities 3,166 3,179 Acquisition-related contingent consideration 37,509 36,538 Total current liabilities 1,118,773 1,157,077 Acquisition-related contingent consideration 179,491 184,462 Finance lease liabilities 29,491 30,083 Other liabilities 139,812 99,243 Total liabilities 1,467,567 1,470,865 Commitments and contingencies (Note 14) Stockholders’ equity: Preferred stock, $ 0.001 par value; 5,000,000 shares authorized; none issued or outstanding — — Common stock, $ 0.001 par value; 400,000,000 shares authorized; 223,338,330 and 222,746,719 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 223 223 Additional paid-in capital 4,925,626 4,792,041 Accumulated other comprehensive income 26,806 15,069 Accumulated deficit ( 211,963 ) ( 437,214 ) Total stockholders’ equity 4,740,692 4,370,119 Total liabilities and stockholders’ equity $ 6,208,259 $ 5,840,984 * The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date. See accompanying notes. 3 Table of Contents INCYTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenues: Product revenues, net $ 827,005 $ 663,851 $ 1,520,242 $ 1,269,672 Product royalty revenues 127,605 117,546 243,041 239,960 Milestone and contract revenues — 130,000 — 135,000 Total revenues 954,610 911,397 1,763,283 1,644,632 Costs and expenses: Cost of product revenues (including definite-lived intangible amortization) 68,326 50,636 125,148 93,250 Research and development 400,750 347,196 807,391 700,569 Selling, general and administrative 283,929 253,277 599,535 462,861 Loss on change in fair value of acquisition-related contingent consideration 8,374 3,313 14,570 9,695 (Profit) and loss sharing under collaboration agreements ( 549 ) 2,544 ( 1,911 ) 7,286 Total costs and expenses 760,830 656,966 1,544,733 1,273,661 Income from operations 193,780 254,431 218,550 370,971 Interest income and other, net 42,668 522 75,541 1,782 Interest expense ( 655 ) ( 678 ) ( 1,124 ) ( 1,358 ) 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 Provision for income taxes 74,056 67,946 104,209 100,489 Net income $ 203,548 $ 161,432 $ 225,251 $ 199,424 Net income per share: Basic $ 0.91 $ 0.73 $ 1.01 $ 0.90 Diluted $ 0.90 $ 0.72 $ 1.00 $ 0.89 Shares used in computing net income per share: Basic 223,248 221,660 223,104 221,493 Diluted 225,649 223,661 225,541 223,277 See accompanying notes. 4 Table of Contents INCYTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited, in thousands) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net income $ 203,548 $ 161,432 $ 225,251 $ 199,424 Other comprehensive income (loss): Foreign currency translation gain (loss) 5,189 ( 1,837 ) 8,449 ( 2,619 ) Unrealized gain (loss) on marketable securities, net of tax 489 ( 1,094 ) 2,909 ( 4,187 ) Defined benefit pension gain, net of tax 186 282 379 564 Other comprehensive income (loss) 5,864 ( 2,649 ) 11,737 ( 6,242 ) Comprehensive income $ 209,412 $ 158,783 $ 236,988 $ 193,182 See accompanying notes. 5 Table of Contents INCYTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited, in thousands, except number of shares) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Balances at January 1, 2023 $ 223 $ 4,792,041 $ 15,069 $ ( 437,214 ) $ 4,370,119 Issuance of 313,995 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units, net of shares withheld for taxes — 11,235 — — 11,235 Issuance of 1,073 shares of Common Stock for services rendered — 80 — — 80 Stock compensation — 53,558 — — 53,558 Other comprehensive income — — 5,873 — 5,873 Net income — — — 21,703 21,703 Balance at March 31, 2023 $ 223 $ 4,856,914 $ 20,942 $ ( 415,511 ) $ 4,462,568 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 — 80 — — 80 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 6 Table of Contents INCYTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED) (unaudited, in thousands, except number of shares) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Balances at January 1, 2022 $ 221 $ 4,567,111 $ ( 19,454 ) $ ( 777,874 ) $ 3,770,004 Issuance of 323,582 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units, net of shares withheld for taxes — 14,237 — — 14,237 Issuance of 1,535 shares of Common Stock for services rendered — 112 — — 112 Stock compensation — 44,320 — — 44,320 Other comprehensive loss — — ( 3,593 ) — ( 3,593 ) Net income — — — 37,992 37,992 Balances at March 31, 2022 $ 221 $ 4,625,780 $ ( 23,047 ) $ ( 739,882 ) $ 3,863,072 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. 7 Table of Contents INCYTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Six Months Ended June 30, 2023 2022 Cash flows from operating activities: Net income $ 225,251 $ 199,424 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 39,508 32,945 Stock-based compensation 107,899 90,337 Deferred income taxes ( 61,864 ) 32,475 Other, net ( 3,670 ) 8,467 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 Changes in operating assets and liabilities: Accounts receivable 6,885 ( 66,668 ) Prepaid expenses and other assets ( 8,219 ) ( 25,380 ) Inventory ( 53,436 ) ( 37,190 ) Accounts payable ( 122,008 ) 22,660 Accrued and other liabilities 92,500 51,651 Net cash provided by operating activities 200,923 389,898 Cash flows from investing activities: Sale of long term investments 45 — Capital expenditures ( 19,243 ) ( 28,749 ) Payments for intangible assets ( 15,000 ) — Purchases of marketable securities ( 152,277 ) ( 43,988 ) Sale and maturities of marketable securities 150,487 43,509 Net cash used in investing activities ( 35,988 ) ( 29,228 ) Cash flows from financing activities: Proceeds from issuance of common stock under stock plans 28,367 37,692 Tax withholdings related to restricted and performance share vesting ( 3,428 ) ( 6,854 ) Payment of finance lease liabilities ( 1,638 ) ( 1,368 ) Payment of contingent consideration ( 6,424 ) ( 13,473 ) Net cash provided by financing activities 16,877 15,997 Effect of exchange rates on cash, cash equivalents, restricted cash and investments ( 2,090 ) 1,198 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 Cash, cash equivalents, restricted cash and investments at end of period $ 3,132,842 $ 2,437,025 Supplemental Schedule of Cash Flow Information Income taxes paid $ 137,313 $ 76,464 Unpaid purchases of property and equipment $ 4,420 $ 8,952 Leased assets obtained in exchange for new operating lease liabilities $ 5,275 $ 2,025 Leased assets obtained in exchange for new finance lease liabilities $ 1,024 $ 1,308 See accompanying notes. 8 Table of Contents INCYTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) Note 1. Organization and Business Incyte Corporation (including its subsidiaries, “Incyte,” “we,” “us,” or “our”) is a biopharmaceutical company focused on developing and commercializing proprietary therapeutics. Our portfolio includes compounds in various stages, ranging from preclinical to late stage development, and commercialized products JAKAFI® (ruxolitinib), ICLUSIG® (ponatinib), PEMAZYRE® (pemigatinib), OPZELURA™ (ruxolitinib cream), MINJUVI® (tafasitamab), MONJUVI® (tafasitamab-cxix), which is co-commercialized, and ZYNYZ™ (retifanlimab-dlwr). Our operations are treated as one operating segment. Note 2. Summary of Significant Accounting Policies Basis of presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated balance sheet as of 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. Although we believe that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. Principles of Consolidation. The condensed consolidated financial statements include the accounts of Incyte Corporation and our wholly owned subsidiaries. All inter-company accounts, transactions, and profits have been eliminated in consolidation. Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Other Intangible Assets, net. Other intangible assets, net consist of licensed intellectual property rights acquired in business combinations, which are reported at acquisition date fair value, less accumulated amortization, as well as milestone payments made to collaboration partners incurred at or after the product has obtained regulatory approval. Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method. Intangible assets with finite lives are tested for recoverability whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Cost of Product Revenues. Cost of product revenues includes all product related costs and royalties owed under our collaboration and license agreements, contingent on certain conditions. In addition, cost of product revenues includes the amortization of our licensed intellectual property for ICLUSIG and the amortization of capitalized milestone payments, using the straight-line method over the respective estimated useful lives, which range between approximately 11 to 14 years. Cost of product revenues also includes employee personnel costs, including stock compensation, for those employees dedicated to the production of our commercial products. 9 Table of Contents Recent Accounting Pronouncements There were no new accounting pronouncements issued nor adopted since our filing of the Annual Report on Form 10-K for the year ended December 31, 2022, which could have a significant effect on our condensed consolidated financial statements. Note 3. Revenues Revenues are recognized under guidance within ASC 606, Revenue from Contracts with Customers . The following table presents our disaggregated revenue for the periods presented (in thousands): Three Months Ended June 30, Six Months Ended June 30, 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 PEMAZYRE revenues, net 21,572 18,983 44,047 37,015 MINJUVI revenues, net 13,159 4,411 19,715 8,913 ZYNYZ revenues, net 570 — 570 — Total product revenues, net 827,005 663,851 1,520,242 1,269,672 JAKAVI product royalty revenues 90,448 83,711 167,140 154,578 OLUMIANT product royalty revenues 32,009 30,254 66,164 78,318 TABRECTA product royalty revenues 4,799 3,581 8,976 7,064 PEMAZYRE product royalty revenues 349 — 761 — Total product royalty revenues 127,605 117,546 243,041 239,960 Milestone and contract revenues — 130,000 — 135,000 Total revenues $ 954,610 $ 911,397 $ 1,763,283 $ 1,644,632 For further information on our revenue-generating contracts, refer to Note 7. Note 4. Fair Value of Financial Instruments The following is a summary of our marketable security portfolio for the periods presented (in thousands): Amortized Cost Net Unrealized Losses Estimated Fair Value June 30, 2023 Debt securities (government) $ 294,371 $ ( 2,128 ) $ 292,243 December 31, 2022 Debt securities (government) $ 292,580 $ ( 5,037 ) $ 287,543 Our available-for-sale debt securities generally have contractual maturity dates of between 12 to 18 months. Debt security assets were assessed for risk of expected credit losses. As of 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. 10 Table of Contents Fair Value Measurements FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“the exit price”) in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value we use quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. The fair value hierarchy is broken down into three levels based on the source of inputs as follows: Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities. Level 3—Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement. Recurring Fair Value Measurements Our marketable securities consist of investments in U.S. government debt securities that are classified as available-for-sale. At 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 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): Fair Value Measurement at Reporting Date Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance as of June 30, 2023 Cash and cash equivalents $ 3,131,123 $ — $ — $ 3,131,123 Debt securities (government) — 292,243 — 292,243 Long term investments (Note 7) 170,316 — — 170,316 Total assets $ 3,301,439 $ 292,243 $ — $ 3,593,682 Fair Value Measurement at Reporting Date Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance as of December 31, 2022 Cash and cash equivalents $ 2,951,422 $ — $ — $ 2,951,422 Debt securities (government) — 287,543 — 287,543 Long term investments (Note 7) 133,676 — — 133,676 Total assets $ 3,085,098 $ 287,543 $ — $ 3,372,641 11 Table of Contents The following fair value hierarchy table presents information about each major category of our financial liabilities measured at fair value on a recurring basis as (in thousands): Fair Value Measurement at Reporting Date Using: Quoted Prices in Active Markets for Identical Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance as of June 30, 2023 Acquisition-related contingent consideration $ — $ — $ 217,000 $ 217,000 Total liabilities $ — $ — $ 217,000 $ 217,000 Fair Value Measurement at Reporting Date Using: Quoted Prices in Active Markets for Identical Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance as of December 31, 2022 Acquisition-related contingent consideration $ — $ — $ 221,000 $ 221,000 Total liabilities $ — $ — $ 221,000 $ 221,000 The following is a rollforward of our Level 3 liabilities (in thousands): 2023 Balance at January 1, $ 221,000 Contingent consideration earned during the period but not yet paid ( 18,570 ) Change in fair value of contingent consideration 14,570 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 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 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. Note 5. Concentration of Credit Risk and Current Expected Credit Losses In November 2009, we entered into a collaboration and license agreement with Novartis Pharmaceutical International Ltd. (“Novartis”). In December 2009, we entered into a license, development and commercialization agreement with Eli Lilly and Company (“Lilly”). The above collaboration partners comprised, in aggregate, 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. 12 Table of Contents In November 2011, we began commercialization and distribution of JAKAFI, in April 2020, we began commercialization and distribution of PEMAZYRE, and in October 2021, we began commercialization and distribution of OPZELURA. Our product revenues are concentrated in a number of these customers. The concentration of credit risk related to our JAKAFI, PEMAZYRE and OPZELURA product revenues is as follows: Percentage of Total Net Product Revenues for the Three Months Ended Percentage of Total Net Product Revenues for the Six Months Ended June 30, June 30, 2023 2022 2023 2022 Customer A 16 % 19 % 17 % 19 % Customer B 9 % 12 % 10 % 12 % Customer C 20 % 16 % 19 % 18 % Customer D 10 % 10 % 10 % 10 % Customer E 11 % 14 % 11 % 15 % We are exposed to risks associated with extending credit to customers related to the sale of products. Customers A, B, C, D, and E comprised, in aggregate, 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 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. Note 6. Inventory Our inventory balance consists of the following (in thousands): June 30, 2023 December 31, 2022 Raw materials $ 32,630 $ 31,874 Work-in-process 122,971 54,455 Finished goods 22,384 34,630 Total inventory $ 177,985 $ 120,959 Inventories, stated at the lower of cost and net realizable value, consist of raw materials, work in process and finished goods. 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. The loss of a supplier, the deterioration of our relationship with a supplier, or any unilateral violation of the contractual terms under which we are supplied components by a supplier could adversely affect our total revenues and gross margins. We capitalize inventory after regulatory approval as the related costs are expected to be recoverable through the commercialization of the product. Costs incurred prior to regulatory approval are recorded as research and development expense in our statements of operations. At 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. 13 Table of Contents Note 7. License Agreements Novartis In November 2009, we entered into a Collaboration and License Agreement with Novartis. Under the terms of the agreement, Novartis received exclusive development and commercialization rights outside of the United States to our JAK inhibitor ruxolitinib and certain back-up compounds for hematologic and oncology indications, including all hematological malignancies, solid tumors and myeloproliferative diseases. We retained exclusive development and commercialization rights to JAKAFI (ruxolitinib) in the United States and in certain other indications. Novartis also received worldwide exclusive development and commercialization rights to our MET inhibitor compound capmatinib and certain back-up compounds in all indications. Under this agreement, we were initially eligible to receive up to $ 174.0 million for the achievement of development milestones, up to $ 495.0 million for the achievement of regulatory milestones and up to $ 500.0 million for the achievement of sales milestones. In addition, we are eligible to receive up to $ 75.0 million of additional potential development and regulatory milestones relating to graft-versus-host-disease (“GVHD”). Since the inception of the agreement through 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 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. 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 In December 2009, we entered into a License, Development and Commercialization Agreement with Lilly. Under the terms of the agreement, Lilly received exclusive worldwide development and commercialization rights to our JAK inhibitor baricitinib, and certain back-up compounds for inflammatory and autoimmune diseases. Under this agreement, we were initially eligible to receive up to $ 150.0 million for the achievement of development milestones, up to $ 365.0 million for the achievement of regulatory milestones and up to $ 150.0 million for the achievement of sales milestones. Since the inception of the agreement through 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. 14 Table of Contents In May 2020, we amended our agreement with Lilly to enable Lilly to develop and commercialize baricitinib for the treatment of COVID-19. As part of the amended agreement, in addition to the royalties described above, we will be entitled to receive additional royalty payments with rates in the low teens on global net sales of baricitinib for the treatment of COVID-19 that exceed a specified aggregate global net sales threshold. 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 In March 2016, we entered into an amendment to the agreement with Lilly that amended the non-compete provision of the agreement to allow us to engage in the development and commercialization of ruxolitinib in the GVHD field. Lilly was eligible to receive up to $ 40.0 million in regulatory milestone payments relating to ruxolitinib in the GVHD field. In May 2019, the approval of JAKAFI in steroid-refractory acute GVHD triggered a $ 20.0 million milestone payment to Lilly. In March 2022, the positive recommendation from the European Medicines Agency for regulatory approval of ruxolitinib in the GVHD field triggered an additional $ 20.0 million milestone payment to Lilly, which was recorded as research and development expense in our condensed consolidated statements of operations for the three months ended March 31, 2022. Agenus In January 2015, we entered into a License, Development and Commercialization Agreement with Agenus Inc. and its wholly-owned subsidiary, 4-Antibody AG (now known as Agenus Switzerland Inc.), which we collectively refer to as Agenus. Under this agreement, which was amended in February 2017, the parties have agreed to collaborate on the discovery of novel immuno-therapeutics using Agenus’ antibody discovery platforms. Under the terms of the amended agreement, we received exclusive worldwide development and commercialization rights to four checkpoint modulators directed against GITR, OX40, LAG-3 and TIM-3 as well as two undisclosed targets. Targets may be designated profit-share programs, where all costs and profits are shared equally by us and Agenus, or royalty-bearing programs, where we are responsible for all costs associated with discovery, preclinical, clinical development and commercialization activities. There are currently no profit-share programs. For each royalty-bearing product other than GITR and one undisclosed target, Agenus will be eligible to receive tiered royalties on global net sales ranging from 6 % to 12 %. For GITR and one undisclosed target, Agenus will be eligible to receive 15 % royalties on global net sales. The agreement may be terminated by us for convenience upon 12 months’ notice and may also be terminated under certain other circumstances, including material breach. On October 19, 2022 we notified Agenus that we were terminating the OX40 project. Since the inception of the agreement through 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. shares. 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. 15 Table of Contents Merus In December 2016, we entered into a Collaboration and License Agreement with Merus N.V. (“Merus”). Under this agreement, the parties have agreed to collaborate with respect to the research, discovery and development of bispecific antibodies utilizing Merus’ technology platform. The collaboration encompasses up to ten independent programs. In January 2022, we decided to opt-out of the continued development of MCLA-145, a bispecific antibody targeting PD-L1 and CD137. We continue to collaborate with Merus and leverage the Merus platform to develop a pipeline of novel agents, as we continue to hold worldwide exclusive development and commercialization rights to up to ten additional programs. Of these ten additional programs, Merus retained the option, subject to certain conditions, to co-fund development of up to two such programs. If Merus exercises its co-funding option for a program, Merus would be responsible for funding 35 % of the associated future global development costs and, for certain of such programs, would be responsible for reimbursing us for certain development costs incurred prior to the option exercise. Merus will also have the right to participate in a specified proportion of detailing activities in the United States for one of those co-developed programs. All costs related to the co-funded collaboration programs are subject to joint research and development plans and overseen by a joint development committee, but we will have final determination as to such plans in cases of dispute. We will be responsible for all research, development and commercialization costs relating to all other programs. For each program as to which Merus does not have commercialization or development co-funding rights, Merus is eligible to receive up to $ 100.0 million in future contingent development and regulatory milestones, and up to $ 250.0 million in commercialization milestones as well as tiered royalties ranging from 6 % to 10 % of global net sales. For each program as to which Merus exercises its option to co-fund development, Merus is eligible to receive a 50 % share of profits (or sustain 50 % of any losses) in the United States and be eligible to receive tiered royalties ranging from 6 % to 10 % of net sales of products outside of the United States. If Merus opts to cease co-funding a program as to which it exercised its co-development option, then Merus will no longer receive a share of profits in the United States but will be eligible to receive the same milestones from the co-funding termination date and the same tiered royalties described above with respect to programs where Merus does not have a right to co-fund development and, depending on the stage at which Merus chose to cease co-funding development costs, Merus will be eligible to receive additional royalties ranging up to 4 % of net sales in the United States. 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 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. MacroGenics In October 2017, we entered into a Global Collaboration and License Agreement with MacroGenics, Inc. (“MacroGenics”). Under this agreement, we received exclusive development and commercialization rights worldwide to MacroGenics’ INCMGA0012 (formerly MGA012), an investigational monoclonal antibody that inhibits PD-1. Except as set forth in the succeeding sentence, we have sole authority over and bear all costs and expenses in connection with the development and commercialization of INCMGA0012 in all indications, whether as a monotherapy or as part of a combination regimen. MacroGenics has retained the right to develop and commercialize, at its cost and expense, its pipeline assets in combination with INCMGA0012. In addition, MacroGenics has the right to manufacture a portion of both companies’ global clinical and commercial supply needs of INCMGA0012. In July 2022, we amended our agreement with MacroGenics to reflect changes related to the payment of certain milestones and paid MacroGenics $ 30.0 million, which was previously recorded as research and development expense in our condensed consolidated statements of operations in the third quarter of 2022. In March 2023, we made a $ 15.0 million regulatory milestone payment to MacroGenics for the FDA approval of ZYNYZ for the treatment of adults with Merkel cell carcinoma. This milestone payment was capitalized as an intangible asset and included in Other intangible assets, net on the condensed consolidated balance sheet as of June 30, 2023, and is being amortized through cost of product revenues over the estimated useful life of 13.5 years. 16 Table of Contents 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 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. Syros In January 2018, we entered into a Target Discovery, Research Collaboration and Option Agreement with Syros Pharmaceuticals, Inc. (“Syros”). Under this agreement, Syros will use its proprietary gene control platform to identify novel therapeutic targets with a focus in myeloproliferative neoplasms and we have received options to obtain exclusive worldwide rights to intellectual property resulting from the collaboration for up to seven validated targets. We will have exclusive worldwide rights to develop and commercialize any therapies under the collaboration that modulate those validated targets. We have agreed to pay Syros up to $ 54.0 million in target selection and option exercise fees should we decide to exercise all of our options under the agreement. For products resulting from the collaboration against each of the seven selected and validated targets, we have agreed to pay up to $ 50.0 million in potential development and regulatory milestones and up to $ 65.0 million in potential sales milestones. Syros is also eligible to receive low single-digit royalties on net sales of products resulting from the collaboration. As of 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. MorphoSys In January 2020, we entered into a Collaboration and License Agreement with MorphoSys AG and MorphoSys US Inc., a wholly-owned subsidiary of MorphoSys AG (together with MorphoSys AG, “MorphoSys”), covering the worldwide development and commercialization of MOR208 (tafasitamab), an investigational Fc engineered monoclonal antibody directed against the target molecule CD19 that was under clinical development by MorphoSys at the beginning of the agreement, and has subsequently been commercialized as MONJUVI/MINJUVI. MorphoSys has exclusive worldwide development and commercialization rights to tafasitamab under a June 2010 collaboration and license agreement with Xencor, Inc. Under the terms of the agreement, we received exclusive commercialization rights outside of the United States, and MorphoSys and we have co-commercialization rights in the United States, with respect to tafasitamab. MorphoSys is responsible for leading the commercialization strategy and booking all revenue from sales of tafasitamab in the United States, and we and MorphoSys are both responsible for commercialization efforts in the United States and will share equally the profits and losses from the co-commercialization efforts. We will lead the commercialization strategy outside of the United States, and will be responsible for commercialization efforts and book all revenue from sales of tafasitamab outside of the United States, subject to our royalty payment obligations set forth below. We and MorphoSys have agreed to co-develop tafasitamab and to share development costs associated with global and U.S.-specific clinical trials, with Incyte responsible for 55 % of such costs and MorphoSys responsible for 45 % of such costs. Each company is responsible for funding any independent development activities, and we are responsible for funding development activities specific to territories outside of the United States. All development costs related to the collaboration are subject to a joint development plan. 17 Table of Contents MorphoSys is eligible to receive up to $ 737.5 million in future contingent development and regulatory milestones and up to $ 315.0 million in commercialization milestones as well as tiered royalties ranging from the mid-teens to mid-twenties of net sales outside of the United States. MorphoSys’ right to receive royalties in any particular country will expire upon the last to occur of (a) the expiration of patent rights in that particular country, (b) a specified period of time after the first post-marketing authorization sale of a licensed product comprising tafasitamab in that country, and (c) the expiration of any regulatory exclusivity for that licensed product in that country. Since the inception of the agreement through 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. Syndax In September 2021, we entered into a Collaboration and License Agreement with Syndax Pharmaceuticals, Inc. (“Syndax”), covering the worldwide development and commercialization of SNDX-6352 (“axatilimab”). Axatilimab, currently in clinical development by Syndax, is a monoclonal antibody that blocks the colony stimulating factor-1 (CSF-1) receptor. Syndax has exclusive worldwide development and commercialization rights to axatilimab under a June 2016 license agreement with UCB Biopharma Sprl. The agreement became effective in December 2021. Under the terms of the agreement, we received exclusive commercialization rights outside of the United States, and Syndax and we have co-commercialization rights in the United States, with respect to axatilimab. We will be responsible for leading the commercialization strategy and booking all revenue from sales of axatilimab globally. Incyte and Syndax will share equally the profits and losses from the co-commercialization efforts in the United States. Sales of axatilimab outside the United States will be subject to our royalty payment obligations to Syndax, as set forth below. We and Syndax have agreed to co-develop axatilimab and to share development costs associated with global and U.S.-specific clinical trials, with Incyte responsible for 55 % of such costs and Syndax responsible for 45 % of such costs. Each company is responsible for funding any independent development activities. All development costs related to the collaboration are subject to a joint development plan. In December 2021, we paid Syndax an upfront, non-refundable payment of $ 117.0 million, which was recorded in research and development expense on the consolidated statement of operations for the year ended December 31, 2021. Syndax is eligible to receive up to $ 220.0 million in future contingent development and regulatory milestones and up to $ 230.0 million in sales milestones as well as tiered royalties ranging in the mid-teens on net sales in Europe and Japan and low double digit percentage on net sales in the rest of the world outside of the United States. Syndax’ right to receive royalties in any particular country will expire upon the last to occur of (a) the expiration of patent rights in that particular country, (b) a specified period of time after the first post-marketing authorization sale of a licensed product comprising axatilimab in that country, and (c) the expiration of any regulatory exclusivity for that licensed product in that country. 18 Table of Contents 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 In addition to the license and collaboration agreements discussed above, we have various other license and collaboration agreements that are not individually material to our operating results or financial condition at this time. Pursuant to the terms of those agreements, we may be required to pay, or we may receive, additional amounts contingent upon the occurrence of various future events such as future discovery, development, regulatory or commercial milestones, which in the aggregate could be material. In addition, if any products related to these collaborations are approved for sale, we may be required to pay, or we may receive, royalties on future sales. The payment or receipt of these amounts, however, is contingent upon the occurrence of various future events, the likelihood of which cannot presently be determined. Note 8. Property and Equipment, net Property and equipment, net consists of the following (in thousands): June 30, 2023 December 31, 2022 Office equipment $ 23,182 $ 22,734 Laboratory equipment 202,929 192,141 Computer equipment 121,048 92,115 Land 10,581 10,429 Building and leasehold improvements 571,694 564,170 Operating lease right-of-use assets 24,528 23,311 Construction in progress 34,534 47,224 988,496 952,124 Less accumulated depreciation and amortization ( 239,144 ) ( 212,814 ) Property and equipment, net $ 749,352 $ 739,310 Note 9. Accrued and Other Current Liabilities Accrued and other current liabilities consisted of the following (in thousands): June 30, 2023 December 31, 2022 Royalties $ 321,816 $ 263,466 Clinical related costs 137,780 130,570 Sales allowances 224,474 192,133 Sales and marketing 29,006 31,149 Construction in progress 4,420 3,493 Operating lease liabilities 7,084 8,195 Other current liabilities 86,272 72,047 Total accrued and other current liabilities $ 810,852 $ 701,053 19 Table of Contents Note 10. Stock Compensation 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 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 Average risk-free interest rates 3.88 % 3.04 % 3.76 % 1.67 % 4.87 % 2.92 % 4.27 % 2.77 % Average expected life (in years) 5.58 5.51 4.95 4.77 0.50 0.50 0.50 0.50 Volatility 29 % 33 % 32 % 37 % 27 % 39 % 23 % 28 % Weighted-average fair value (in dollars) $ 22.57 $ 26.35 $ 26.78 $ 25.30 $ 13.82 $ 14.91 $ 14.08 $ 14.53 The risk-free interest rate is derived from the U.S. Federal Reserve rate in effect at the time of grant. The expected life calculation is based on the observed and expected time to the exercise of options by our employees based on historical exercise patterns for similar type options. Expected volatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the options. A dividend yield of zero is assumed based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Nonemployee awards are measured on the grant date by estimating the fair value of the equity instruments to be issued using the expected term, similar to our employee awards. Option activity under our 2010 Stock Incentive Plan (the “2010 Stock Plan”) was as follows: Shares Subject to Outstanding Options Shares Weighted Average Exercise Price Balance at December 31, 2022 12,650,359 $ 87.25 Options granted 702,470 $ 78.53 Options exercised ( 231,417 ) $ 67.05 Options cancelled ( 755,507 ) $ 94.07 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. 20 Table of Contents Restricted stock unit (“RSU”) and performance share (“PSU”) award activity under the 2010 Stock Plan was as follows: Shares Subject to Outstanding Awards Shares Grant Date Value Balance at December 31, 2022 5,187,592 $ 81.24 RSUs granted 829,206 $ 77.15 RSUs released ( 186,167 ) $ 77.96 RSUs cancelled ( 125,325 ) $ 80.67 PSUs cancelled ( 971 ) $ 106.47 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. Each RSU represents the right to acquire one share of our common stock. Each RSU granted in connection with our annual equity awards will vest 25 % annually over four years , while each RSU granted as outstanding merit awards or as part of retention award programs will vest in a single installment at the end of four years . We grant PSUs with performance and/or service-based milestones with graded and/or cliff vesting over three to four years . The shares of our common stock into which each PSU may convert is subject to a multiplier based on the level at which the financial, developmental and market performance conditions are achieved over the service period. Compensation expense for PSUs with financial and developmental performance conditions is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement. For PSUs containing performance conditions which were not deemed probable of achievement, no stock compensation expense is recorded. Compensation expense for PSUs with market performance conditions is calculated using a Monte Carlo simulation model as of the date of grant and recorded over the requisite service period. For the three 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. Each RSU and PSU grant reduces the available share pool by 2 shares. Shares Available for Grant 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 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 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. 21 Table of Contents Note 11. Income Taxes 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 June 30, 2023 2022 2023 2022 Income before provision for income taxes $ 277,604 $ 229,378 $ 329,460 $ 299,913 Provision for income taxes 74,056 67,946 104,209 100,489 Effective tax rate 26.7 % 29.6 % 31.6 % 33.5 % 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. In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law. The IRA includes a 15% corporate alternative minimum tax and a 1% excise tax on share repurchases. We do not expect the IRA to have a material impact on our consolidated financial statements. 22 Table of Contents Note 12. Net Income Per Share Net income per share was calculated as follows for the periods indicated below: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Basic net income $ 203,548 $ 161,432 $ 225,251 $ 199,424 Weighted average common shares outstanding 223,248 221,660 223,104 221,493 Basic net income per share $ 0.91 $ 0.73 $ 1.01 $ 0.90 Diluted net income $ 203,548 $ 161,432 $ 225,251 $ 199,424 Weighted average common shares outstanding 223,248 221,660 223,104 221,493 Dilutive stock options and awards 2,401 2,001 2,437 1,784 Weighted average shares used to compute diluted net income per share 225,649 223,661 225,541 223,277 Diluted net income per share $ 0.90 $ 0.72 $ 1.00 $ 0.89 The potential common shares that were excluded from the diluted net income per share computation are as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Outstanding stock options and awards 12,806,418 10,767,335 10,781,677 10,901,507 Note 13. Employee Benefit Plans Defined Contribution Plans We have a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code covering all U.S. employees and defined contribution plans for other Incyte employees in Europe and Japan. Employees may contribute a portion of their compensation, which is then matched by us, subject to certain limitations. Defined contribution expense for the three 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 We have defined benefit pension plans for our employees in Europe which provide benefits to employees upon retirement, death or disability. The assets of the pension plans are held in collective investment accounts represented by the cash surrender value of an insurance policy and are classified as Level 2 within the fair value hierarchy. 23 Table of Contents The net periodic benefit cost was as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Service cost $ 1,733 $ 2,438 $ 3,821 $ 4,960 Interest cost 44 62 661 126 Expected return on plan assets ( 736 ) ( 1,035 ) ( 2,276 ) ( 2,106 ) Amortization of prior service cost 276 193 379 387 Amortization of actuarial losses ( 90 ) 89 — 177 Net periodic benefit cost $ 1,227 $ 1,747 $ 2,585 $ 3,544 The components of net periodic benefit cost other than the service cost component are included in Interest income and other, net on the condensed consolidated statements of operations. We expect to contribute a total of $ 8.0 million to the pension plans in 2023 inclusive of the amounts contributed to the plan during the current period. Note 14. Commitments and Contingencies We have entered into the collaboration agreements described in Note 7, as well as various other collaboration agreements that are not individually, or in the aggregate, significant to our operating results or financial condition at this time. We may in the future seek to license additional rights relating to technologies or drug development candidates in connection with our drug discovery and development programs. Under these agreements, we may be required to pay upfront fees, milestone payments, and royalties on sales of future products. In the ordinary course of our business, we may become involved in lawsuits, proceedings, and other disputes, including commercial, intellectual property, regulatory, employment, and other matters. We record a reserve for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. 24 Table of Contents