What changed in this filing

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Item 1. Financial Statements

2020-11-05 compared with 2020-08-04 · 214 added, 163 removed, 952 unchanged (28% of the section changed)

3 unchanged sentences

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

September 30,

Current assets:

28 unchanged sentences

5,000,000 shares authorized;

none issued or outstanding as of June 30, 2020 and December 31, 2019

none issued or outstanding as of September 30, 2020 and December 31, 2019

Common stock, $ 0.001 par value;

400,000,000 shares authorized;

218,069,218 and 216,177,830 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

218,903,097 and 216,177,830 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

11 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Product revenues, net

23 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss)

9 unchanged sentences

(unaudited, in thousands, except number of shares)

For the Six Months Ended June 30, 2020

For the Nine Months Ended September 30, 2020

Accumulated Other

17 unchanged sentences

( 1,861,102 )

For the Six Months Ended June 30, 2019

Issuance of 698,032 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and performance shares

Issuance of 1,434 shares of Common Stock for services rendered

Issuance of 134,413 shares of Common Stock upon conversion of Convertible Senior Notes due 2020

Stock compensation

Other comprehensive income

Balances at September 30, 2020

( 1,876,305 )

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(unaudited, in thousands, except number of shares)

For the Nine Months Ended September 30, 2019

Accumulated Other

17 unchanged sentences

( 1,670,034 )

Issuance of 506,199 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units

Issuance of 1,629 shares of Common Stock for services rendered

Stock compensation

Other comprehensive income

Balances at September 30, 2019

( 1,541,763 )

See accompanying notes.

2 unchanged sentences

(unaudited, in thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flows from operating activities :

37 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

Organization and business

5 unchanged sentences

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, 2020, the condensed consolidated statements of operations, comprehensive income (loss), and stockholders’ equity for the three and six months ended June 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019 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 September 30, 2020, the condensed consolidated statements of operations, comprehensive income (loss), and stockholders’ equity for the three and nine months ended September 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 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, 2019 has been derived from our audited consolidated financial statements.

50 unchanged sentences

Accounts Receivable.

As of June 30, 2020 and December 31, 2019, we had an immaterial allowance for doubtful accounts.

As of September 30, 2020 and December 31, 2019, we had an immaterial allowance for doubtful accounts.

We provide an allowance for doubtful accounts based on experience and specifically identified risks.

12 unchanged sentences

If both of these criteria are satisfied, we are identified as the primary beneficiary of the VIE.

As of June 30, 2020, there were no entities in which we held a variable interest which we determined to be VIEs.

As of September 30, 2020, there were no entities in which we held a variable interest which we determined to be VIEs.

Long Term Investments.

35 unchanged sentences

The primary factors used to assess the likelihood of realization are our recent history of cumulative earnings or losses, expected reversals of taxable temporary timing differences, forecasts of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets.

Upon evaluating and weighting both positive and negative evidence, we concluded that we should continue to maintain the valuation allowance on the majority of our deferred tax assets as of June 30, 2020.

We recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the position will be sustained upon examination by the taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.

6 unchanged sentences

Disclosure for certain income tax accounting measures are required in the period of enactment and disclosure for government loans, investments, grants, and revenue recognition are required in future periods as federal agencies establish rules and procedures to implement the CARES Act.

During the six months ended June 30, 2020, we have delayed certain payroll tax and estimated income tax payments that we are deferring to future periods.

During the nine months ended September 30, 2020, we have delayed the payment of certain employer payroll tax amounts to future periods as allowed under the Act.

However, we do not expect the CARES Act to have a material impact on our overall financial results, our income tax provision or our liquidity.

11 unchanged sentences

Revenue Recognition.

Revenue-generating contracts are assessed under ASC 606, Revenue from contracts with customers, to identify distinct performance obligations, determine the transaction price of the contract and allocate the transaction price to each of the distinct performance obligations.

Revenue is recognized when we have satisfied a

performance obligation through transferring control of the promised good or service to a customer.

transaction price to each of the distinct performance obligations.

Revenue is recognized when we have satisfied a performance obligation through transferring control of the promised good or service to a customer.

Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service.

32 unchanged sentences

If actual future funding varies from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Additionally, beginning in January 2020, the amount of spending required by eligible patients in the Medicare Part D insurance coverage gap increased 30 % due to the expiration of a provision in the Patient

Protection and Affordable Care Act, which now results in a change in the True Out of Pocket (TrOOP) calculation methodology.

Additionally, beginning in January 2020, the amount of spending required by eligible

patients in the Medicare Part D insurance coverage gap increased 30 % due to the expiration of a provision in the Patient Protection and Affordable Care Act, which now results in a change in the True Out of Pocket (TrOOP) calculation methodology.

The methodological change has resulted in an increase in required spending by patients and, in turn, an increase in manufacturers’ contributions on behalf of patients in the Medicare Part D insurance coverage gap.

84 unchanged sentences

Under collaboration and license agreements with shared commercialization efforts, we record our share of the losses from the co-commercialization efforts in collaboration loss sharing on the condensed consolidated statement of operations.

For the three and six months ended June 30, 2020, collaboration loss sharing represents our 50 % share of the United States loss for commercialization of tafasitamab under our agreement with MorphoSys.

For the three and nine months ended September 30, 2020, collaboration loss sharing represents our 50 % share of the United States loss for commercialization of tafasitamab under our agreement with MorphoSys, which is described in Note 9 below.

Recent Accounting Pronouncements

49 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

JAKAFI revenues, net

21 unchanged sentences

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

At June 30, 2020 and December 31, 2019, our Level 2 U.S.

At September 30, 2020 and December 31, 2019, 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, 2020.

We did not experience any transfers of financial instruments between the fair value hierarchy levels during the nine months ended September 30, 2020.

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):

5 unchanged sentences

Balance as of

June 30, 2020

September 30, 2020

Cash and cash equivalents

18 unchanged sentences

Balance as of

June 30, 2020

September 30, 2020

Acquisition-related contingent consideration

14 unchanged sentences

Change in fair value of contingent consideration

Balance at June 30,

Balance at September 30,

The fair value of the contingent consideration was determined on the date of acquisition, June 1, 2016, using an income approach based on estimated ICLUSIG revenues 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 consolidated statements of operations.

The valuation inputs utilized to estimate the fair value of the contingent consideration as of June 30, 2020 included a weighted

average cost of capital of 10 % and updated projections of future ICLUSIG revenues in the European Union and other countries for the approved third line treatment.

The change in fair value of the contingent consideration during the three and six months ended June 30, 2020 was due primarily to the passage of time as there were no other significant changes in the key assumptions during the period.

The valuation inputs utilized to estimate the fair value of the contingent consideration as of September 30, 2020 included a

weighted average cost of capital of 10 % and updated projections of future ICLUSIG revenues in the European Union and other countries for the approved third line treatment.

The change in fair value of the contingent consideration during the three and nine months ended September 30, 2020 was due primarily to the passage of time as there were no other significant changes in the key assumptions during the period.

We make payments to Takeda quarterly based on the royalties or any additional milestone payments earned in the previous quarter.

At June 30, 2020 and December 31, 2019, contingent consideration earned but not yet paid was $ 7.1 million and $ 23.0 million, respectively, and was included in accrued and other current liabilities.

At September 30, 2020 and December 31, 2019, contingent consideration earned but not yet paid was $ 9.1 million and $ 23.0 million, respectively, and was included in accrued and other current liabilities.

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

June 30, 2020

September 30, 2020

Debt securities (government)

3 unchanged sentences

Debt security assets were assessed for risk of expected credit losses per our accounting policy as described in Note 2.

As of June 30, 2020 and December 31, 2019, the available-for-sale debt securities were held in US-government backed funds and Treasury assets and were assessed on an individual security basis to have a de minimis risk of credit loss.

As of September 30, 2020 and December 31, 2019, the available-for-sale debt securities were held in US-government backed funds and Treasury assets and were assessed on an individual security basis to have a de minimis risk of credit loss.

Concentration of credit risk and current expected credit losses

4 unchanged sentences

In July 2019, we entered into a collaboration and license agreement with Zai Lab (Shanghai) Co., Ltd., a subsidiary of Zai Lab Limited (collectively, “Zai Lab”).

The above collaboration partners comprised, in aggregate, 45 % and 30 % of the accounts receivable balance as of June 30, 2020 and December 31, 2019, respectively.

The above collaboration partners comprised, in aggregate, 30 % of the accounts receivable balance as of September 30, 2020 and December 31, 2019.

For further information relating these collaboration and license agreements, refer to Note 9 to the condensed consolidated financial statements.

7 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

We are exposed to risks associated with extending credit to customers related to the sale of products.

Customers A, B, C and D comprised, in aggregate, 29 % and 39 % of the accounts receivable balance as of June 30, 2020 and December 31, 2019, respectively.

Customers A, B, C and D comprised, in aggregate, 36 % and 39 % of the accounts receivable balance as of September 30, 2020 and December 31, 2019, respectively.

The concentration of credit risk relating to ICLUSIG product revenues or accounts receivable is not significant.

We assessed our collaborative and customer receivable assets as of June 30, 2020 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.

We assessed our collaborative and customer receivable assets as of September 30, 2020 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.

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

September 30,

Raw materials

4 unchanged sentences

Inventories, stated at the lower of cost and net realizable value, consist of raw materials, work in process and finished goods.

At June 30, 2020, $ 16.3 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, 2020, $ 9.6 million of inventory was classified as noncurrent on the condensed consolidated balance sheets as we did not expect this inventory to be consumed for commercial use within the next twelve months.

At September 30, 2020, $ 17.0 million of inventory was classified as current on the condensed consolidated balance sheet as we expect this inventory to be consumed for commercial use within the next twelve months.

At September 30, 2020, $ 8.7 million of inventory was classified as noncurrent on the condensed consolidated balance sheets 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.

2 unchanged sentences

Property and equipment, net consists of the following (in thousands):

September 30,

Office equipment

12 unchanged sentences

At that time, we determined the lease to be a finance lease and recorded a lease liability of $ 31.1 million and a finance lease right-of-use asset of $ 29.1 million, net of a lease incentive from our landlord of $ 2.0 million.

As of June 30, 2020 we have capitalized approximately $ 22.4 million in on site preparation, design and construction costs.

As of September 30, 2020 we have capitalized approximately $ 23.8 million in on site preparation, design and construction costs.

In July 2018, we signed an agreement to purchase land located in Yverdon, Switzerland.

1 unchanged sentence

Upon this parcel, we are constructing a large molecule production facility.

Construction activity commenced in July 2018 and as of June 30, 2020, we have capitalized approximately $ 127.4 million in costs for construction, ground preparation and architectural and engineering studies.

We currently anticipate the facility will be completed in the second half of 2020.

Construction activity commenced in July 2018 and as of September 30, 2020, we have capitalized approximately $ 148.2 million in costs for construction, ground preparation and architectural and engineering studies.

We currently anticipate the facility will be completed in 2021.

We are the lessee of several contracts, including those to secure fleet vehicles, buildings and equipment.

2 unchanged sentences

Our current operating lease liabilities are reflected in accrued and other current liabilities and our noncurrent operating lease liabilities are reflected in other liabilities on the condensed consolidated balance sheets and are as follows (in thousands):

September 30,

Operating lease liabilities

3 unchanged sentences

Total lease liabilities

The cash paid for amounts included in the measurement of our operating lease liabilities for the six months ended June 30, 2020 and 2019 was $ 5.9 million and $ 5.4 million, respectively, in operating cash flows.

The cash paid for amounts included in the measurement of our finance lease liabilities for the six months ended June 30, 2020 and 2019 was $ 0.4 million, in financing cash flows.

As of June 30, 2020, our finance and operating leases had a weighted average lease term of approximately 15.2 and 5.3 years, respectively.

The cash paid for amounts included in the measurement of our operating lease liabilities for the nine months ended September 30, 2020 and 2019 was $ 8.7 million and $ 8.6 million, respectively, in operating cash flows.

The cash paid for amounts included in the measurement of our finance lease liabilities for the nine months ended September 30, 2020 and 2019 was $ 0.6 million, in financing cash flows.

As of September 30, 2020, our finance and operating leases had a weighted average lease term of approximately 14.9 and 4.9 years, respectively.

The discount rate of our leases is an approximation of an estimated incremental borrowing rate and is dependent upon the term and economics of each agreement.

The weighted average discount rate of our finance and operating leases is approximately 3.6 % and 4.5 %, respectively.

For the three and six months ended June 30, 2020, we incurred approximately $ 2.9 million and $ 6.1 million, respectively, of expense related to our operating leases, approximately $ 0.7 million and $ 1.3 million, respectively, of amortization on our finance lease right-of-use assets and approximately $ 0.3 million and $ 0.6 million, respectively, of interest expense on our finance lease liabilities.

For the three and six months ended June 30, 2019, we incurred approximately $ 3.6 million and $ 7.3 million, respectively, of expense related to our operating leases, approximately $ 0.2 million and $ 0.4 million, respectively, of amortization on our finance lease right-of-use assets and a de minimis amount of interest expense on our finance lease liabilities.

Rent expense for the three and six months ended June 30, 2020 was $ 2.9 million and $ 6.4 million, respectively.

Rent expense for the three and six months ended June 30, 2019 was $ 3.7 million and $ 7.0 million, respectively.

For the three and six months ended June 30, 2020 and 2019, the cost of our short term leases with a term less than 12 months was de minimis.

For the three and nine months ended September 30, 2020, we incurred approximately $ 2.9 million and $ 9.0 million, respectively, of expense related to our operating leases, approximately $ 0.7 million and $ 1.9 million, respectively, of amortization on our finance lease right-of-use assets and approximately $ 0.3 million and $ 0.9 million, respectively, of interest expense on our finance lease liabilities.

For the three and nine months ended September 30, 2019, we incurred approximately $ 3.6 million and $ 10.9 million, respectively, of expense related to our operating leases, approximately $ 0.7 million and $ 1.1 million, respectively, of amortization on our finance lease right-of-use assets and approximately $ 0.3 million of interest expense on our finance lease liabilities.

For the three and nine months ended September 30, 2020 and 2019, the cost of our short term leases with a term less than 12 months was de minimis.

Intangible assets and goodwill

1 unchanged sentence

The components of intangible assets were as follows (in thousands, except for useful life):

Balance at June 30, 2020

Balance at September 30, 2020

Balance at December 31, 2019

4 unchanged sentences

Amortization expense

There were no changes to the carrying amount of goodwill for the six months ended June 30, 2020.

There were no changes to the carrying amount of goodwill for the nine months ended September 30, 2020.

License agreements

3 unchanged sentences

Novartis also received worldwide exclusive development and commercialization rights to our MET inhibitor compound capmatinib and certain back-up compounds in all indications.

We retained options to co-develop and to co-promote capmatinib in the United States.

Under this agreement, we received an upfront payment and immediate milestone payment totaling $ 210.0 million and were initially eligible to receive up to $ 1.2 billion in milestone payments across multiple indications upon the achievement of pre-specified events, including 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.

1 unchanged sentence

We became eligible to receive up to $ 75.0 million of additional potential development and regulatory milestones relating to GVHD.

Exclusive of the upfront payment of $ 150.0 million received in 2009 and the immediate milestone of $ 60.0 million earned in 2010, we have recognized and received, in the aggregate, $ 157.0 million for the achievement of development milestones, $ 280.0 million for the achievement of regulatory milestones and $ 120.0 million for the achievement of sales milestones through June 30, 2020.

We recognize development and regulatory milestones upon confirmation of achievement of the event, as development and regulatory approvals are events not controllable by us but rather development activities of Novartis and decisions made by regulatory agencies.

2 unchanged sentences

In June 2020, we recognized a $ 20.0 million regulatory milestone for the Japanese Ministry of Health, Labour and Welfare approval of TABRECTA for METex14 mutation-positive advanced and/or recurrent unresectable non-small cell lung cancer.

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 future capmatinib net sales that range from 12 % to 14 %.

Since the achievement of the $ 60.0 million regulatory milestone related to reimbursement of JAKAVI in Europe in September 2014, we are obligated to pay to Novartis tiered royalties in the low single-digits on future JAKAFI net sales within the United States.

During the three and six months ended June 30, 2020, such royalties payable to Novartis on net sales within the United States totaled $ 23.2 million and $ 40.7 million, respectively, and are reflected in cost of product revenues on the condensed consolidated statements of operations.

During the three and six months ended June 30, 2019, such royalties payable to Novartis on net sales within the United States totaled $ 20.1 million and $ 33.5 million, respectively, and are reflected in cost of product revenues on the condensed consolidated statements of operations.

At June 30, 2020 and December 31, 2019, $ 70.7 million and $ 50.2 million, respectively, of accrued royalties payable to Novartis were included in accrued and other current liabilities on the condensed consolidated balance sheets.

During the three and nine months ended September 30, 2020, such royalties payable to Novartis on net sales within the United States totaled $ 23.9 million and $ 64.6 million, respectively, and are reflected in cost of product revenues on the condensed consolidated statements of operations.

During the three and nine months ended September 30, 2019, such royalties payable to Novartis on net sales within the United States totaled $ 21.2 million and $ 54.7 million, respectively, and are reflected in cost of product revenues on the condensed consolidated statements of operations.

At September 30, 2020 and December 31, 2019, $ 83.0 million and $ 50.2 million, respectively, of accrued royalties payable to Novartis were included in accrued and other current liabilities on the condensed consolidated balance sheets.

Each company is responsible for costs relating to the development and commercialization of ruxolitinib in its respective territories, with costs of collaborative studies shared equally.

5 unchanged sentences

Reimbursable costs incurred after the effective date of the agreement with Novartis are recorded net against the related research and development expenses.

Research and development expenses for the three and six months ended June 30, 2020 were net of $ 0.0 million and $ 0.3 million, respectively, of costs reimbursed by Novartis.

Research and development expenses for the three and six months ended June 30, 2019 were net of $ 0.4 million and $ 1.0 million, respectively, of costs reimbursed by Novartis.

At June 30, 2020 and December 31, 2019, $ 0.1 million and $ 0.4 million, respectively, of reimbursable costs were included in accounts receivable on the condensed consolidated balance sheets.

Milestone and contract revenue under the Novartis agreement for the three and six months ended June 30, 2020 was $ 90.0 million.

Milestone and contract revenue under the Novartis agreement for the three and six months ended June 30, 2019 was $ 0.0 million.

Product royalty revenue related to Novartis net sales of JAKAVI outside of the United States for the three and six months ended June 30, 2020 was $ 66.2 million and $ 122.6 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, 2019 was $ 56.9 million and $ 102.5 million, respectively.

Product royalty revenue related to Novartis net sales of TABRECTA worldwide for the three and six months ended June 30, 2020 was $ 0.7 million.

Research and development expenses for the three and nine months ended September 30, 2020 were net of $ 0.0 million and $ 0.3 million, respectively, of costs reimbursed by Novartis.

Research and development expenses for the three and nine months ended September 30, 2019 were net of $ 0.0 million and $ 1.0 million, respectively, of costs reimbursed by Novartis.

At September 30, 2020 and December 31, 2019, $ 0.1 million and $ 0.4 million, respectively, of reimbursable costs were included in accounts receivable on the condensed consolidated balance sheets.

Milestone and contract revenue under the Novartis agreement for the three and nine months ended September 30, 2020 was $ 0.0 million and $ 90.0 million, respectively.

Milestone and contract revenue under the Novartis agreement for the three and nine months ended September 30, 2019 was $ 0.0 million.

Product royalty revenue related to Novartis net sales of JAKAVI outside of the United States for the three and nine months ended September 30, 2020 was $ 68.3 million and $ 190.9 million, respectively.

Product royalty revenue related to Novartis net sales of JAKAVI outside of the United States for the three and nine months ended September 30, 2019 was $ 58.4 million and $ 160.9 million, respectively.

Product royalty revenue related to Novartis net sales of TABRECTA worldwide for the three and nine months ended September 30, 2020 was $ 1.4 million and $ 2.1 million, respectively.

Lilly – Baricitinib

1 unchanged sentence

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.

We received an upfront payment of $ 90.0 million, and were initially eligible to receive up to $ 665.0 million in substantive milestone payments across multiple indications upon the achievement of pre-specified events, including 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.

Exclusive of the upfront payment of $ 90.0 million received in 2009, we have recognized and received, in aggregate, $ 149.0 million for the achievement of development milestones and $ 235.0 million for the achievement of regulatory milestones through June 30, 2020.

We received an upfront

payment of $ 90.0 million, and were initially eligible to receive up to $ 665.0 million in substantive milestone payments across multiple indications upon the achievement of pre-specified events, including 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.

16 unchanged sentences

We will continue to receive royalties on global net sales of OLUMIANT, pursuant to the terms in the Lilly agreement, as described above.

In May 2020, we amended our agreement with Lilly to enable Lilly to commercialize baricitinib for the treatment of COVID-19.

In addition to the royalties described above, we will be entitled to receive additional royalty payments with rates in the low teens on global net sales of baricitinib for the treatment of COVID-19 that exceed a specified aggregate global net sales threshold.

In 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.

The Lilly agreement will continue until Lilly no longer has any royalty payment obligations or, if earlier, the termination of the agreement in accordance with its terms.

Royalties are payable by Lilly on a product-by-product and country-by-country basis until the latest to occur of (i) the expiration of the last valid claim of the licensed patent rights covering the licensed product in the relevant country, (ii) the expiration of regulatory exclusivity for the licensed product in such country and (iii) a specified period from first commercial sale in such country of the licensed product by Lilly or its affiliates or sublicensees.

its affiliates or sublicensees.

The agreement may be terminated by Lilly for convenience, and may also be terminated under certain other circumstances, including material breach.

Milestone and contract revenue under the Lilly agreement for the three and six months ended June 30, 2020 and 2019 was $ 0.0 million.

Product royalty revenue related to Lilly global net sales of OLUMIANT for the three and six months ended June 30, 2020 was $ 25.8 million and $ 51.3 million, respectively.

Product royalty revenue related to Lilly global net sales of OLUMIANT for the three and six months ended June 30, 2019 was $ 19.1 million and $ 35.2 million, respectively.

Milestone and contract revenue under the Lilly agreement for the three and nine months ended September 30, 2020 and 2019 was $ 0.0 million.

Product royalty revenue related to Lilly global net sales of OLUMIANT for the three and nine months ended September 30, 2020 was $ 28.6 million and $ 79.9 million, respectively.

Product royalty revenue related to Lilly global net sales of OLUMIANT for the three and nine months ended September 30, 2019 was $ 21.6 million and $ 56.8 million, respectively.

Lilly - Ruxolitinib

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shares was $ 4.40 per share.

The shares we acquired were not registered under the Securities Act of 1933 on the purchase date and were subject to certain security specific restrictions for a period of time, and accordingly, we estimated a discount for lack of marketability on the shares on the issuance date of $ 4.5 million, which resulted in a net fair value of the shares on the issuance date of $ 39.5 million.

Therefore, of the total consideration paid of $ 60.0 million, $ 39.5 million was allocated to

our stock purchase in Agenus Inc.

The shares we acquired were not registered under the Securities Act of 1933 on the purchase date and were

subject to certain security specific restrictions for a period of time, and accordingly, we estimated a discount for lack of marketability on the shares on the issuance date of $ 4.5 million, which resulted in a net fair value of the shares on the issuance date of $ 39.5 million.

Therefore, of the total consideration paid of $ 60.0 million, $ 39.5 million was allocated to our stock purchase in Agenus Inc.

and was recorded within long term investments and $ 20.5 million was allocated to research and development expense.

5 unchanged sentences

The sales transactions were priced at market, with per share pricing ranging from $ 3.57 to $ 4.21 , resulting in gross proceeds of approximately $ 4.5 million.

In the third quarter of 2020, we sold an aggregate of approximately 2.5 million shares of Agenus Inc.

common stock, reducing our ownership interest to approximately 7.7 % as of September 30, 2020.

The sales transactions were priced at market, with per share pricing ranging from $ 4.28 to $ 5.25 , resulting in gross proceeds of approximately $ 12.7 million.

While we believe that we continue to be the largest stockholder of Agenus Inc., as a result of having a less than 10% ownership interest and the recent diversification of Agenus Inc.’s development pipeline with other collaboration partners, we concluded that we no longer have significant influence over Agenus Inc.

As such, as of June 30, 2020, we no longer account for our equity investment in Agenus Inc.

As such, we no longer account for our equity investment in Agenus Inc.

as an equity method investment previously accounted for under the fair value option.

1 unchanged sentence

at fair value, whereby the investment is marked to market through earnings in each reporting period.

For the three and six months ended June 30, 2020, we recorded an unrealized gain of $ 26.2 million and an unrealized loss of $ 2.7 million, respectively, based on the change in fair market value of Agenus Inc.’s common stock during these periods.

For the three and six months ended June 30, 2019, we recorded an unrealized gain of $ 0.5 million and $ 11.0 million, respectively, based on the change in fair market value of Agenus Inc.’s common stock during these periods.

For the three and nine months ended September 30, 2020, we recorded an unrealized gain of $ 3.9 million and $ 1.2 million, respectively, based on the change in fair market value of Agenus Inc.’s common stock during these periods.

For the three and nine months ended September 30, 2019, we recorded an unrealized loss of $ 7.5 million and an unrealized gain of $ 3.5 million, respectively, based on the change in fair market value of Agenus Inc.’s common stock during these periods.

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

at June 30, 2020 and December 31, 2019 was $ 65.1 million and $ 72.3 million, respectively.

Research and development expenses for the three and six months ended June 30, 2020 also included $ 0.2 million and $ 0.3 million, respectively, of development costs incurred pursuant to the Agenus arrangement.

Research and development expenses for the three and six months ended June 30, 2019 also included $ 0.5 million and $ 0.9 million, respectively, of development costs incurred pursuant to the Agenus arrangement.

At June 30, 2020 and December 31, 2019, a total of $ 1.5 million and $ 1.6 million, respectively, of such costs were included in accrued and other liabilities on the condensed consolidated balance sheets.

at September 30, 2020 and December 31, 2019 was $ 56.2 million and $ 72.3 million, respectively.

Research and development expenses for the three and nine months ended September 30, 2020 also included $ 0.1 million and $ 0.4 million, respectively, of development costs incurred pursuant to the Agenus arrangement.

Research and development expenses for the three and nine months ended September 30, 2019 also included $ 0.4 million and $ 1.3 million, respectively, of development costs incurred pursuant to the Agenus arrangement.

At September 30, 2020 and December 31, 2019, a total of $ 1.5 million and $ 1.6 million, respectively, of such costs were included in accrued and other liabilities on the condensed consolidated balance sheets.

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

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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.

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.

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Of the total consideration paid of $ 80.0 million, $ 72.8 million was allocated to our stock purchase in Merus and was recorded as a long term investment and $ 7.2 million was allocated to research and development expense.

The fair market value of our total long term investment in Merus at June 30, 2020 and December 31, 2019 was $ 51.5 million and $ 45.1 million, respectively.

The fair market value of our total long term investment in Merus at September 30, 2020 and December 31, 2019 was $ 38.4 million and $ 45.1 million, respectively.

We concluded Merus is not a VIE because it has sufficient equity to finance its activities without additional subordinated financial support and its at-risk equity holders have the characteristics of a controlling financial interest.

As of June 30, 2020, we owned approximately 11 % of the outstanding common shares of Merus and conclude that we have the ability to exercise significant influence, but not control, over Merus based primarily on our ownership interest, the level of intra-entity transactions between us and Merus related to development expenses, as well as other qualitative factors.

As of September 30, 2020, we owned approximately 11 % of the outstanding common shares of Merus and conclude that we have the ability to exercise significant influence, but not control, over Merus based primarily on our ownership interest, the level of intra-entity transactions between us and Merus related to development expenses, as well as other qualitative factors.

We have elected the fair value option to account for our long term investment in Merus whereby the investment is marked to market through earnings in each reporting period.

We believe the fair value option to be the most appropriate accounting method to account for securities in publicly held collaborators for which we have significant influence.

For the three and six months ended June 30, 2020, we recorded an unrealized gain of $ 12.7 million and $ 6.4 million, respectively, based on the change in fair market value of Merus’ common shares during these periods.

For the three and six months ended June 30, 2019, we recorded an unrealized loss of $ 0.4 million and an unrealized gain of $ 2.1 million, respectively, based on the change in fair market value of Merus’ common shares during these periods.

For the three months ended March 31, 2020, Merus reported within its Form 10-Q total revenues of approximately $ 6.3 million and net loss of approximately $ 16.5 million within their condensed consolidated financial statements.

Research and development expenses for the three and six months ended June 30, 2020 included $ 1.9 million and $ 4.2 million, respectively, of additional development costs incurred pursuant to the Merus agreement.

Research and development expenses for the three and six months ended June 30, 2019 included $ 1.7 million and $ 4.3 million, respectively, of additional development costs incurred pursuant to the Merus agreement.

At June 30, 2020 and December

31, 2019, a total of $ 2.0 million and $ 1.6 million, respectively, of such costs were included in accrued and other liabilities on the condensed consolidated balance sheets.

For the three and nine months ended September 30, 2020, we recorded an unrealized loss of $ 13.1 million and $ 6.7 million, respectively, based on the change in fair market value of Merus’ common shares during these periods.

For the three and nine months ended September 30, 2019, we recorded an unrealized gain of $ 10.1 million and $ 12.2 million, respectively, based on the change in fair market value of Merus’ common shares during these periods.

For the three and six months ended June 30, 2020, Merus reported within its Form 10-Q total revenues of approximately $ 6.1 million and $ 12.4 million, respectively, and net loss of approximately $ 18.0 million and $ 34.5 million, respectively, within their condensed consolidated financial statements.

Research and development expenses for the three and nine months ended September 30, 2020 included $ 1.8 million and $ 6.0 million, respectively, of additional development costs incurred pursuant to the Merus agreement.

Research and development expenses for the three and nine months ended September 30, 2019 included $ 1.4 million and $ 5.7 million, respectively, of additional development costs incurred pursuant to the Merus agreement.

At September 30, 2020 and December 31, 2019, a total of $ 0.8 million and $ 1.6 million, respectively, of such costs were included in accrued and other liabilities on the condensed consolidated balance sheets.

In January 2017, we entered into a Collaboration and License Agreement with Calithera Biosciences, Inc.

(“Calithera”).

Under this agreement, we received an exclusive, worldwide license to develop and commercialize small molecule arginase inhibitors, including CB-1158, which is currently in Phase I clinical trials, for hematology and oncology indications.

Under this agreement, we received an exclusive, worldwide license to develop and commercialize small molecule arginase inhibitors, including INCB01158, which is currently in Phase I clinical trials, for hematology and oncology indications.

We have agreed to co-fund 70 % of the global development costs for the development of the licensed products for hematology and oncology indications.

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We will be entitled to 60 % of the profits and losses from net sales of licensed product in the United States, and Calithera will have the right to co-detail licensed products in the United States, and we have agreed to pay Calithera tiered royalties ranging from the low to mid-double digits on net sales of licensed products outside the United States.

Calithera may opt out of its co-funding obligation, in which case the U.S.

profit sharing will no longer be in effect, and we have agreed to pay Calithera tiered royalties ranging from the low to mid-double digits on net sales of licensed products both in the United States and outside the United States, and additional royalties to reimburse Calithera for previously incurred development costs.

In January 2017, we paid Calithera an upfront license fee of $ 45.0 million and have agreed to pay potential development, regulatory and sales milestone payments of over $ 430.0 million if the profit share is in effect, or $ 750.0 million if the profit share terminates.

In 2017, we paid Calithera a $ 12.0 million milestone for the achievement of pharmacokinetic and pharmacodynamics goals for CB-1158 which was recorded in research and development expense.

In August 2020, Calithera delivered notice of its decision to opt out of its co-funding obligation, effective on September 30, 2020.

As a result, the U.S.

profit sharing will no longer be in effect, we will be responsible for funding all of the development costs of INCB01158 and any other licensed products, and the agreement provides that we will pay Calithera tiered royalties ranging from the low to mid-double digits on net sales of licensed products both in the United States and outside the United States and additional royalties to reimburse Calithera for previously incurred development costs.

In addition, the total remaining potential development, regulatory and sales milestone payments will be $ 738.0 million and Calithera will have no further rights to research, develop or co-detail INCB001158 and we will have the right to take over the conduct of all activities related to the research, development and commercialization of INCB001158 for all indications in the hematology/oncology field.

The Calithera agreement will continue on a product-by-product and country-by-country basis for so long as we are developing or commercializing products in the United States (if the parties are sharing profits in the United States) and until we have no further royalty payment obligations, unless earlier terminated according to the terms of the agreement.

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Of the $ 53.0 million, $ 11.6 million was allocated to our stock purchase in Calithera and was recorded within long term investments and $ 41.4 million was allocated to research and development expense.

The fair market value of our long term investment in Calithera at June 30, 2020 and December 31, 2019 was $ 9.1 million and $ 9.8 million, respectively.

fair market value of our long term investment in Calithera at September 30, 2020 and December 31, 2019 was $ 5.9 million and $ 9.8 million, respectively.

We concluded Calithera is not a VIE because it has sufficient equity to finance its activities without additional subordinated financial support and its at-risk equity holders have the characteristics of a controlling financial interest.

As of June 30, 2020, we owned approximately 2 % of the outstanding shares of Calithera common stock and there are several other stockholders who hold larger positions of Calithera.

As of September 30, 2020, we owned approximately 2 % of the outstanding shares of Calithera common stock and there are several other stockholders who hold larger positions of Calithera.

As we do not hold a significant position of the voting shares of Calithera and lack the qualitative characteristics associated with the ability to exercise significant influence, our ownership interest does not meet the criteria to be accounted for as an equity method investment.

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Given our intent to hold the investment for the foreseeable future, we have classified the investment within long term investments on the accompanying condensed consolidated balance sheets.

For the three and six months ended June 30, 2020 we recorded an unrealized gain of $ 1.5 million and an unrealized loss of $ 0.7 million, respectively, based on the change in fair market value of Calithera’s common

stock during these periods.

For the three and six months ended June 30, 2019 we recorded an unrealized loss of $ 4.9 million and $ 0.2 million, respectively, based on the change in fair market value of Calithera’s common stock during these periods.

Research and development expenses for the three and six months ended June 30, 2020 also included $ 1.9 million and $ 4.4 million, respectively, of additional development costs incurred pursuant to the Calithera agreement.

Research and development expenses for the three and six months ended June 30, 2019 also included $ 5.4 million and $ 10.0 million, respectively, of additional development costs incurred pursuant to the Calithera agreement.

At June 30, 2020 and December 31, 2019, a total of $ 1.3 million and $ 1.1 million, respectively, of such costs were included in accrued and other liabilities on the condensed consolidated balance sheets.

For the three and nine months ended September 30, 2020 we recorded an unrealized loss of $ 3.2 million and $ 3.9 million, respectively, based on the change in fair market value of Calithera’s common stock during these periods.

For the three and nine months ended September 30, 2019 we recorded an unrealized loss of $ 1.4 million and $ 1.6 million, respectively, based on the change in fair market value of Calithera’s common stock during these periods.

Research and development expenses for the three and nine months ended September 30, 2020 also included $ 2.0 million and $ 6.4 million, respectively, of additional development costs incurred pursuant to the Calithera agreement.

Research and development expenses for the three and nine months ended September 30, 2019 also included $ 4.7 million and $ 14.7 million, respectively, of additional development costs incurred pursuant to the Calithera agreement.

At September 30, 2020 and December 31, 2019, a total of $ 0.5 million and $ 1.1 million, respectively, of such costs were included in accrued and other liabilities on the condensed consolidated balance sheets.

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

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In 2018, we paid MacroGenics a $ 10.0 million and a $ 5.0 million milestone for the achievement of certain clinical milestones as part of our collaboration and license agreement, which were recorded in research and development expense.

In September 2020, we paid MacroGenics a $ 15.0 million milestone for the achievement of a clinical milestone as part of our collaboration and license agreement, which was recorded in research and development expense.

The MacroGenics agreement will continue until we are no longer commercializing, developing or manufacturing INCMGA0012 or, if earlier, the termination of the agreement in accordance with its terms.

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The agreement may also be terminated by either party under certain other circumstances, including material breach, as set forth in the agreement.

Research and development expenses for the three and six months ended June 30, 2020 also included $ 16.3 million and $ 32.7 million, respectively, of additional development costs incurred pursuant to the MacroGenics agreement.

Research and development expenses for the three and six months ended June 30, 2019 also included $ 9.8 million and $ 19.2 million, respectively, of additional development costs incurred pursuant to the MacroGenics agreement.

At June 30, 2020 and December 31, 2019, a total of $ 0.5 million and $ 1.0 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 nine months ended September 30, 2020 also included $ 10.6 million and $ 43.3 million, respectively, of additional development costs incurred pursuant to the MacroGenics agreement.

Research and development expenses for the three and nine months ended September 30, 2019 also included $ 14.1 million and $ 33.3 million, respectively, of additional development costs incurred pursuant to the MacroGenics agreement.

At September 30, 2020 and December 31, 2019, a total of $ 0.3 million and $ 1.0 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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All acquired shares were subsequently registered under the Securities Act of 1933 in February 2018.

The fair market value of our long term investment in Syros as of June 30, 2020 and December 31, 2019 was $ 10.0 million and $ 6.5 million, respectively.

The fair market value of our long term investment in Syros as of September 30, 2020 and December 31, 2019 was $ 8.3 million and $ 6.5 million, respectively.

We concluded Syros is not a VIE because it has sufficient equity to finance its activities without additional subordinated financial support and its at-risk equity holders have the characteristics of a controlling financial interest.

As of June 30, 2020, we owned approximately 2 % of the outstanding shares of Syros common stock and there are several other stockholders who hold larger positions of Syros.

As of September 30, 2020, we owned approximately 2 % of the outstanding shares of Syros common stock and there are several other stockholders who hold larger positions of Syros.

As we do not hold a significant position of the voting shares of Syros and lack the qualitative characteristics associated with the ability to exercise significant influence, our ownership interest does not meet the criteria to be accounted for as an equity method investment.

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Given our intent to hold the investment for the foreseeable future, we have classified the investment within long term investments on the accompanying condensed consolidated balance sheets.

For the three and six months ended June 30, 2020, we recorded an unrealized gain of $ 4.4 million and $ 3.5 million, respectively, based on the change in fair market value of Syros’ common stock during these periods.

For the three and six months ended June 30, 2019, we recorded an unrealized gain of $ 0.2 million and $ 3.5 million, respectively, based on the change in fair market value of Syros’ common stock during these periods.

For the three and nine months ended September 30, 2020, we recorded an unrealized loss of $ 1.7 million and an unrealized gain of $ 1.8 million, respectively, based on the change in fair market value of Syros’ common stock during these periods.

For the three and nine months ended September 30, 2019, we recorded an unrealized gain of $ 1.1 million and $ 4.6 million, respectively, based on the change in fair market value of Syros’ common stock during these periods.

In December 2018, we entered into a research collaboration and licensing agreement with Innovent.

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In January 2019, we recognized an upfront payment under this agreement of $ 40.0 million upon our transfer of the functional intellectual property related to the clinical-stage product candidates to Innovent, which was recorded in milestone and contract revenues on the condensed consolidated statement of operations.

The upfront milestone was recognized as revenue at a point in time upon our transfer of the licenses to Innovent for the right to use the functional intellectual property.

The upfront milestone

was recognized as revenue at a point in time upon our transfer of the licenses to Innovent for the right to use the functional intellectual property.

In June 2019, we recognized the $ 20.0 million milestone for the first related IND filing in China, which was recorded in milestone and contract revenues.

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We retain an option to assist in the promotion of the three product candidates in the Innovent territories.

Research and development expenses for the three and six months ended June 30, 2020 were net of $ 2.6 million of costs reimbursed by Innovent.

Research and development expenses for the three and six months ended June 30, 2019 were net of $ 0.5 million of costs reimbursed by Innovent.

At June 30, 2020 and December 31, 2019, $ 2.2 million and $ 3.0 million, respectively, of reimbursable costs were included in accounts receivable on the condensed consolidated balance sheets.

Research and development expenses for the three and nine months ended September 30, 2020 were net of $ 1.7 million and $ 4.3 million, respectively, of costs reimbursed by Innovent.

Research and development expenses for the three and nine months ended September 30, 2019 were net of $ 3.6 million and $ 4.1 million, respectively, of costs reimbursed by Innovent.

At September 30, 2020 and December 31, 2019, $ 1.4 million and $ 3.0 million, respectively, of reimbursable costs were included in accounts receivable on the condensed consolidated balance sheets.

In July 2019, we entered into a collaboration and license agreement with Zai Lab.

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We also retain an option to assist in the promotion of INCMGA0012 in Zai Lab’s licensed territories.

Research and development expenses for the three and six months ended June 30, 2020 were net of $ 0.0 million and $ 0.2 million, respectively, of costs reimbursed by Zai Lab.

At June 30, 2020 and December 31, 2019, $ 0.2 million and $ 0.5 million, respectively, of reimbursable costs were included in accounts receivable on the condensed consolidated balance sheets.

Research and development expenses for the three and nine months ended September 30, 2020 were net of $ 0.0 million and $ 0.2 million, respectively, of costs reimbursed by Zai Lab.

At September 30, 2020 and December 31, 2019, $ 0.4 million and $ 0.5 million, respectively, of reimbursable costs were included in accounts receivable on the condensed consolidated balance sheets.

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 is currently in clinical development by MorphoSys.

MorphoSys has exclusive worldwide development and commercialization rights to tafasitamab under a June 2010 collaboration and license agreement with Xencor, Inc.

has exclusive worldwide development and commercialization rights to tafasitamab under a June 2010 collaboration and license agreement with Xencor, Inc.

In December 2019, MorphoSys submitted a Biologics License Application to the FDA for tafasitamab for the treatment of relapsed or refractory diffuse large B cell lymphoma.

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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.

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.

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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.

In July 2020, we and MorphoSys announced that the FDA approved MONJUVI® (tafasitamab-cxix) in combination with lenalidomide for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL) not otherwise specified, including DLBCL arising from low grade lymphoma, and who are not eligible for autologous stem cell transplant.

MONJUVI was approved under accelerated approval based on overall response rate.

In addition, under the collaboration agreement and pursuant to a related purchase agreement, we agreed to purchase American Depositary Shares (“ADSs”), each representing 0.25 of an ordinary share of MorphoSys AG, for an aggregate purchase price of $ 150.0 million or $ 41.33 per ADS (such ADSs to be purchased, the “New ADSs”).

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Of the $ 150.0 million aggregate purchase price paid, $ 95.5 million was allocated to our stock purchase in MorphoSys and was recorded within long term investments and $ 54.5 million, representing the premium paid on the purchase, was allocated to research and development expense.

The fair market value of our long term investment in MorphoSys as of June 30, 2020 was $ 113.1 million.

The fair market value of our long term investment in MorphoSys as of September 30, 2020 was $ 113.9 million.

We concluded MorphoSys is not a VIE because it has sufficient equity to finance its activities without additional subordinated financial support and its at-risk equity holders have the characteristics of a controlling financial interest.

As of June 30, 2020, we owned approximately 3 % of the outstanding shares of MorphoSys common stock and there are several other stockholders who hold larger positions of MorphoSys.

As of September 30, 2020, we owned approximately 3 % of the outstanding shares of MorphoSys common stock and there are several other stockholders who hold larger positions of MorphoSys.

As we do not hold a significant position of the voting shares of MorphoSys and lack the qualitative characteristics associated with the ability to exercise significant influence, our ownership interest does not meet the criteria to be accounted for as an equity method investment.

We intend to hold the investment in MorphoSys for the foreseeable future and therefore, are accounting for our shares held in MorphoSys at fair value, and the investment is marked to market through earnings in each reporting period.

Given our intent to hold the investment for the foreseeable future, we have classified the investment within long term investments on the accompanying condensed consolidated balance sheets.

For the three and six months ended June 30, 2020, we recorded an unrealized gain of $ 27.5 million and $ 17.6 million, respectively, based on the change in fair market value of MorphoSys’ common stock during these periods.

Our 50 % share of the United States loss for the commercialization of tafasitamab was $ 13.3 million and $ 15.4 million, respectively, for the three and six months ended June 30, 2020 and is recorded as collaboration loss sharing on the condensed consolidated statement of operations.

Research and development expenses for the three and six months ended June 30, 2020, includes $ 15.7 million and $ 27.3 million related to our 55 % share of the co-development costs for tafasitamab.

At June 30, 2020, $ 37.5 million was included in accrued and other liabilities on the condensed consolidated balance sheet for amounts due to MorphoSys under the agreement.

Given our intent to hold the investment for the foreseeable future, we have classified the investment within long term investments on the accompanying

condensed consolidated balance sheets.

For the three and nine months ended September 30, 2020, we recorded an unrealized gain of $ 0.9 million and $ 18.5 million, respectively, based on the change in fair market value of MorphoSys’ common stock during these periods.

Our 50 % share of the United States loss for the commercialization of tafasitamab was $ 15.0 million and $ 30.4 million, respectively, for the three and nine months ended September 30, 2020 and is recorded as collaboration loss sharing on the condensed consolidated statement of operations.

Research and development expenses for the three and nine months ended September 30, 2020, includes $ 23.8 million and $ 51.1 million related to our 55 % share of the co-development costs for tafasitamab.

At September 30, 2020, $ 46.8 million was included in accrued and other liabilities on the condensed consolidated balance sheet for amounts due to MorphoSys under the agreement.

Stock compensation

We recorded $ 46.3 million and $ 88.8 million of stock compensation expense on our condensed consolidated statements of operations for the three and six months ended June 30, 2020, respectively.

We recorded $ 40.6 million and $ 81.2 million of stock compensation expense on our condensed consolidated statements of operations for the three and six months ended June 30, 2019, respectively.

Stock compensation expense included within our condensed consolidated statements of operations included research and development expense of $ 32.5 million, $ 61.2 million, $ 27.6 million and $ 55.0 million for the three and six months ended June 30, 2020 and 2019, respectively.

Stock compensation expense included within our condensed consolidated statements of operations also included selling, general and administrative expense of $ 13.6 million, $ 27.1 million, $ 12.8 million and $ 25.8 million for the three and six months ended June 30, 2020

and 2019, respectively.

Stock compensation expense included within our condensed consolidated statements of operations also included cost of product revenues of $ 0.2 million, $ 0.5 million, $ 0.2 million and $ 0.4 million, respectively, for the three and six months ended June 30, 2020.

For the three and six months ended June 30, 2020 and 2019, we capitalized $ 0.1 million, $ 0.3 million, $ 0.1 million and $ 0.2 million, respectively, of stock compensation expense as part of the cost of an asset.

We recorded $ 43.8 million and $ 132.6 million of stock compensation expense on our condensed consolidated statements of operations for the three and nine months ended September 30, 2020, respectively.

We recorded $ 43.4 million and $ 124.6 million of stock compensation expense on our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively.

Stock compensation expense included within our condensed consolidated statements of operations included research and development expense of $ 29.0 million, $ 90.2 million, $ 30.5 million and $ 85.5 million for the three and nine months ended September 30, 2020 and 2019, respectively.

Stock compensation expense included within our condensed consolidated statements of operations also included selling, general and administrative expense of $ 14.6 million, $ 41.7 million, $ 12.8 million and $ 38.6 million for the three and nine months ended September 30, 2020 and 2019, respectively.

Stock compensation expense included within our condensed consolidated statements of operations also included cost of product revenues of $ 0.2 million, $ 0.7 million, $ 0.1 million and $ 0.5 million, respectively, for the three and nine months ended September 30, 2020 and 2019.

For the three and nine months ended September 30, 2020 and 2019, we capitalized $ 0.2 million, $ 0.5 million, $ 0.1 million and $ 0.3 million, respectively, of stock compensation expense as part of the cost of an asset.

We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted, with the following weighted-average assumptions:

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For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Average risk-free interest rates

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Options cancelled

Balance at June 30, 2020

Balance at September 30, 2020

In July 2016, we revised the terms of our annual stock option grants to provide that new option grants would 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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RSUs released

PSUs released

RSUs cancelled

PSUs cancelled

Balance at June 30, 2020

Balance at September 30, 2020

In January 2014, we began granting RSUs and PSUs to our employees at the share price on the date of grant.

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Compensation expense for the performance-based awards is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement.

For the period ended June 30, 2020, the stock compensation expense recorded during the period was for service-based awards and performance conditions deemed probable of achievement and/or achieved.

For PSUs containing performance conditions which were not deemed probable of achievement at June 30, 2020, no stock compensation expense was recognized.

For the period ended September 30, 2020, the stock compensation expense recorded during the period was for service-based awards and performance

conditions deemed probable of achievement and/or achieved.

For PSUs containing performance conditions which were not deemed probable of achievement at September 30, 2020, no stock compensation expense was recognized.

In July 2018, we granted 77,243 PSUs to executives with performance milestones and graded vesting over four years .

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These PSUs will continue to vest through July 2023.

In July 2020, we granted 92,347 PSUs to executives with performance milestones and cliff vesting on the third anniversary from date of grant.

The shares of our common stock into which each PSU may convert is subject to a multiplier up to 200 % based on the level at which the financial and developmental performance conditions are achieved over the service period which ends December 31, 2022.

Compensation expense for the performance-based awards is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement.

For the period ended September 30, 2020, the stock compensation expense recorded during the period was for service-based awards and performance conditions deemed probable of achievement and/or achieved.

For PSUs containing performance conditions which were not deemed probable of achievement at September 30, 2020, no stock compensation expense was recognized.

The following table summarizes our shares available for grant under the 2010 Stock Plan:

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Options, RSUs and PSUs cancelled

Balance at June 30, 2020

Balance at September 30, 2020

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, 2020, was $ 79.9 million, which is expected to be recognized over the weighted average period of approximately 1.3 years.

Total compensation cost of RSUs granted but not yet vested, as of June 30, 2020, was $ 77.9 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, 2020, was $ 21.4 million, which is expected to be recognized over the weighted average period of 1.5 years, should the underlying performance conditions be deemed probable of achievement.

Total compensation cost of options granted but not yet vested, as of September 30, 2020, was $ 89.6 million, which is expected to be recognized over the weighted average period of approximately 1.3 years.

Total compensation cost of RSUs granted but not yet vested, as of September 30, 2020, was $ 139.0 million, which is expected to be recognized over the weighted average period of approximately 1.9 years.

Total compensation cost of PSUs granted but not yet vested, as of September 30, 2020, was $ 26.9 million, which is expected to be recognized over the weighted average period of 1.6 years, should the underlying performance conditions be deemed probable of achievement.

Accrued and other current liabilities

Accrued and other current liabilities consisted of the following (in thousands):

September 30,

Clinical related costs

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Interest Rates

June 30, 2020

September 30,

September 30, 2020

1.25 % Convertible Senior Notes due 2020

The carrying amount and fair value of our convertible senior notes are as follows (in thousands):

June 30, 2020

September 30, 2020

December 31, 2019

8 unchanged sentences

Upon conversion we will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at our election.

The 2020 Notes are reflected in current liabilities on the condensed consolidated balance sheet as of June 30, 2020 due to their maturity date of November 15, 2020, unless earlier purchased or converted.

The 2020 Notes are reflected in current liabilities on the condensed consolidated balance sheet as of September 30, 2020 due to their maturity date of November 15, 2020, unless earlier purchased or converted.

Employee benefit plans

3 unchanged sentences

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, 2020 was $ 3.3 million and $ 6.6 million, respectively.

Defined contribution expense for the three and six months ended June 30, 2019 was $ 3.1 million and $ 6.0 million, respectively.

Defined contribution expense for the three and nine months ended September 30, 2020 was $ 3.5 million and $ 10.1 million, respectively.

Defined contribution expense for the three and nine months ended September 30, 2019 was $ 3.0 million and $ 9.0 million, respectively.

Defined Benefit Pension Plans

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Interest cost

5 unchanged sentences

We expect to contribute a total of $ 4.0 million to the pension plans in 2020 inclusive of the amounts contributed to the plan during the current period.

As of June 30, 2020 and December 31, 2019, $ 25.2 million and $ 24.1 million, respectively, of accrued pension obligation is recorded in other long term liabilities on the condensed consolidated balance sheets.

As of September 30, 2020 and December 31, 2019, $ 26.2 million and $ 24.1 million, respectively, of accrued pension obligation is recorded in other long term liabilities on the condensed consolidated balance sheets.

The Company is subject to U.S.

federal, state and foreign income taxes.

For the three and six months ended June 30, 2020, we recorded income tax expense of approximately $ 17.0 million and $ 33.5 million, respectively.

For the three and six months ended June 30, 2019, we recorded income tax expense of approximately $ 3.4 million and $ 5.1 million, respectively.

The change in tax expense for the three and six months ended June 30, 2020 was primarily driven by increased federal and state tax liabilities that are not fully sheltered by net operating losses or research and development tax credit carryforwards.

The increase was also driven by reduced tax benefits for stock-based compensation in the current period.

As of June 30, 2020, a full valuation allowance continues to be recorded against our U.S.

For the three and nine months ended September 30, 2020, we recorded income tax expense of approximately $ 11.7 million and $ 45.2 million, respectively.

For the three and nine months ended September 30, 2019, we recorded income tax expense of approximately $ 19.7 million and $ 24.9 million, respectively.

The decrease in tax expense for the three months ended September 30, 2020 was primarily driven by increased tax benefits for stock-based compensation and foreign derived intangible income.

The increase in tax expense for the nine months ended September 30, 2020 was primarily driven by increased federal and state tax liabilities that are not fully sheltered by net operating losses or research and development tax credit carryforwards.

As of September 30, 2020, a full valuation allowance continues to be recorded against our U.S.

and Swiss net deferred tax assets.

Based upon our analysis of our historical operating results, as well as projections of our future taxable income (losses) during the periods in which the temporary differences will be recoverable, we believe the uncertainty regarding the realization of our U.S.

and Swiss net deferred tax assets requires a full valuation allowance against such net assets as of June 30, 2020.

and Swiss net deferred tax assets requires a full valuation allowance against such net assets as of September 30, 2020.

When performing our assessment on projections of future taxable income (losses), we consider factors such as the likelihood of regulatory approval and commercial success of products currently under development, among other factors.

The balance of our unrecognized tax benefits (including penalties and interest) increased by approximately $ 0.8 million during the six months ended June 30, 2020.

The balance of our unrecognized tax benefits (including penalties and interest) increased by approximately $ 1.5 million during the nine months ended September 30, 2020.

The overall net increase is primarily driven by unrecognized tax benefits related to current year operations and research and development tax credits offset by audit settlements in Wisconsin and Italy.

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands, except per share data)

11 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Outstanding stock options and awards

9 unchanged sentences

We cannot predict the outcome or the timing of the ultimate resolution of the investigation or qui tam action, or reasonably estimate the possible range of loss, if any, that may result from these matters.

Accordingly, no reserve has been made with respect to these matters as of June 30, 2020.

Accordingly, no reserve has been made with respect to these matters as of September 30, 2020.

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.

1 unchanged sentence

Subsequent event

In July 2020, we and our collaboration partner MorphoSys AG announced that the FDA approved MONJUVI® (tafasitamab-cxix) in combination with lenalidomide for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL) not otherwise specified, including DLBCL arising from low grade lymphoma, and who are not eligible for autologous stem cell transplant.

MONJUVI was approved under accelerated approval based on overall response rate.

In October 2020, Lilly announced that the European Commission approved baricitinib as OLUMIANT for the treatment of moderate-to-severe atopic dermatitis in adult patients who are candidates for systemic therapy.

We expect to recognize a $ 20.0 million milestone payment from Lilly during the fourth quarter of 2020.

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