INCYTE CORP 10-Q

Item 1. Financial Statements ​ INCYTE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except number of shares and par value) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ ​ 2020 2019* ​ ASSETS ​ ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 1,497,775 ​ $ 1,832,684 ​ Marketable securities—available-for-sale (amortized cost $ 236,902 ; allowance for credit losses $ 0 ) ​ 237,025 ​ 284,870 ​ Accounts receivable ​ 356,182 ​ 308,809 ​ Inventory ​ 17,012 ​ 11,400 ​ Prepaid expenses and other current assets ​ ​ 51,431 ​ 43,725 ​ Total current assets ​ 2,159,425 ​ 2,481,488 ​ ​ ​ ​ ​ ​ ​ ​ ​ Restricted cash and investments ​ 2,663 ​ 1,023 ​ Long term investments ​ 222,810 ​ 133,657 ​ Inventory ​ 8,697 ​ 5,105 ​ Property and equipment, net ​ 498,335 ​ 377,567 ​ Finance lease right-of-use assets, net ​ ​ 29,123 ​ ​ 29,058 ​ Other intangible assets, net ​ ​ 177,675 ​ ​ 193,828 ​ Goodwill ​ ​ 155,593 ​ ​ 155,593 ​ Other assets, net ​ 53,109 ​ 49,431 ​ Total assets ​ $ 3,307,430 ​ $ 3,426,750 ​ ​ ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 122,512 ​ $ 83,647 ​ Accrued compensation ​ 96,391 ​ 90,706 ​ Interest payable ​ 56 ​ 29 ​ Accrued and other current liabilities ​ 334,315 ​ 285,950 ​ Finance lease liabilities ​ ​ 1,978 ​ ​ 664 ​ Convertible senior notes ​ ​ 11,900 ​ ​ 18,300 ​ Acquisition-related contingent consideration ​ ​ 39,050 ​ ​ 34,044 ​ Total current liabilities ​ 606,202 ​ 513,340 ​ ​ ​ ​ ​ ​ ​ ​ ​ Acquisition-related contingent consideration ​ ​ 232,950 ​ ​ 242,956 ​ Finance lease liabilities ​ ​ 32,848 ​ ​ 31,918 ​ Other liabilities ​ 44,597 ​ 40,130 ​ Total liabilities ​ 916,597 ​ 828,344 ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ ​ ​ ​ ​ ​ Preferred stock, $ 0.001 par value; 5,000,000 shares authorized; none issued or outstanding as of September 30, 2020 and December 31, 2019 ​ — ​ — ​ Common stock, $ 0.001 par value; 400,000,000 shares authorized; 218,903,097 and 216,177,830 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively ​ 219 ​ 216 ​ Additional paid-in capital ​ 4,276,667 ​ 4,044,490 ​ Accumulated other comprehensive loss ​ ( 9,748 ) ​ ( 15,542 ) ​ Accumulated deficit ​ ( 1,876,305 ) ​ ( 1,430,758 ) ​ Total stockholders’ equity ​ 2,390,833 ​ 2,598,406 ​ Total liabilities and stockholders’ equity ​ $ 3,307,430 ​ $ 3,426,750 ​ * The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited 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 ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 2020 2019 Revenues: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Product revenues, net ​ $ 522,252 ​ $ 453,998 ​ $ 1,509,269 ​ $ 1,284,144 ​ Product royalty revenues ​ 98,391 ​ 80,083 ​ 272,924 ​ 217,726 ​ Milestone and contract revenues ​ — ​ 17,500 ​ 95,000 ​ 77,500 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total revenues ​ 620,643 ​ 551,581 ​ 1,877,193 ​ 1,579,370 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Costs and expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of product revenues (including definite-lived intangible amortization) ​ 34,322 ​ ​ 30,040 ​ ​ 95,005 ​ ​ 82,034 ​ Research and development ​ 438,109 ​ ​ 281,336 ​ ​ 1,809,997 ​ ​ 841,244 ​ Selling, general and administrative ​ 120,788 ​ ​ 102,608 ​ ​ 349,934 ​ ​ 332,534 ​ Change in fair value of acquisition-related contingent consideration ​ ​ 7,109 ​ ​ 3,281 ​ ​ 19,790 ​ ​ 16,560 ​ Collaboration loss sharing ​ ​ 14,989 ​ ​ — ​ ​ 30,372 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total costs and expenses ​ 615,317 ​ 417,265 ​ 2,305,098 ​ 1,272,372 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) from operations ​ 5,326 ​ 134,316 ​ ( 427,905 ) ​ 306,998 ​ Other income (expense), net ​ 4,917 ​ ​ 11,961 ​ ​ 18,396 ​ ​ 36,334 ​ Interest expense ​ ( 544 ) ​ ​ ( 597 ) ​ ​ ( 1,746 ) ​ ​ ( 1,248 ) ​ Unrealized gain (loss) on long term investments ​ ( 13,207 ) ​ ​ 2,339 ​ ​ 10,935 ​ ​ 18,703 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) before provision for income taxes ​ ( 3,508 ) ​ 148,019 ​ ( 400,320 ) ​ 360,787 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Provision for income taxes ​ 11,695 ​ ​ 19,748 ​ ​ 45,227 ​ ​ 24,886 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ ( 15,203 ) ​ $ 128,271 ​ $ ( 445,547 ) ​ $ 335,901 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ ( 0.07 ) ​ $ 0.60 ​ $ ( 2.05 ) ​ $ 1.57 ​ Diluted ​ $ ( 0.07 ) ​ $ 0.59 ​ $ ( 2.05 ) ​ $ 1.55 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares used in computing net income (loss) per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 218,784 ​ ​ 215,199 ​ ​ 217,684 ​ ​ 214,628 ​ Diluted ​ ​ 218,784 ​ ​ 217,791 ​ ​ 217,684 ​ ​ 217,393 ​ ​ See accompanying notes. ​ 4 Table of Contents INCYTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited, in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 2020 2019 Net income (loss) ​ $ ( 15,203 ) ​ $ 128,271 ​ $ ( 445,547 ) ​ $ 335,901 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign currency translation ​ ​ 2,532 ​ ​ 187 ​ ​ 5,085 ​ ​ 29 ​ Unrealized (loss) gain on marketable securities, net of tax ​ ( 77 ) ​ ​ 36 ​ ​ 48 ​ ​ 1,175 ​ Defined benefit pension obligations, net of tax ​ ​ 220 ​ 128 ​ 661 ​ 347 ​ Other comprehensive income ​ 2,675 ​ 351 ​ 5,794 ​ 1,551 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Comprehensive income (loss) ​ $ ( 12,528 ) ​ $ 128,622 ​ $ ( 439,753 ) ​ $ 337,452 ​ ​ See accompanying notes. ​ 5 Table of Contents INCYTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited, in thousands, except number of shares) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended September 30, 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ Common ​ Additional ​ Accumulated Other ​ Accumulated ​ Stockholders’ ​ Stock ​ Paid-in Capital ​ Comprehensive Loss ​ Deficit ​ Equity Balances at January 1, 2020 $ 216 ​ $ 4,044,490 ​ $ ( 15,542 ) ​ $ ( 1,430,758 ) ​ $ 2,598,406 Issuance of 772,538 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units 1 ​ 14,618 ​ — ​ — ​ 14,619 Issuance of 1,957 shares of Common Stock for services rendered ​ — ​ ​ 145 ​ ​ — ​ ​ — ​ ​ 145 Stock compensation — ​ ​ 42,758 ​ ​ — ​ ​ — ​ 42,758 Other comprehensive income ​ — ​ — ​ 2,435 ​ — ​ ​ 2,435 Net loss ​ — ​ — ​ — ​ ( 720,642 ) ​ ​ ( 720,642 ) Balances at March 31, 2020 $ 217 ​ $ 4,102,011 ​ $ ( 13,107 ) ​ $ ( 2,151,400 ) ​ $ 1,937,721 Issuance of 936,688 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and 175,615 shares of Common Stock under the ESPP 1 ​ ​ 69,193 ​ ​ — ​ ​ — ​ ​ 69,194 Issuance of 1,403 shares of Common Stock for services rendered ​ — ​ ​ 139 ​ ​ — ​ ​ — ​ ​ 139 Issuance of 3,187 shares of Common Stock upon conversion of Convertible Senior Notes due 2020 ​ — ​ ​ 162 ​ ​ — ​ ​ — ​ ​ 162 Stock compensation — ​ ​ 46,406 ​ ​ — ​ ​ — ​ ​ 46,406 Other comprehensive income — ​ — ​ 684 ​ — ​ 684 Net income — ​ — ​ — ​ 290,298 ​ 290,298 Balances at June 30, 2020 $ 218 ​ $ 4,217,911 ​ $ ( 12,423 ) ​ $ ( 1,861,102 ) ​ $ 2,344,604 Issuance of 698,032 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and performance shares 1 ​ ​ 7,782 ​ ​ — ​ ​ — ​ ​ 7,783 Issuance of 1,434 shares of Common Stock for services rendered ​ — ​ ​ 131 ​ ​ — ​ ​ — ​ ​ 131 Issuance of 134,413 shares of Common Stock upon conversion of Convertible Senior Notes due 2020 ​ — ​ ​ 6,873 ​ ​ — ​ ​ — ​ ​ 6,873 Stock compensation — ​ ​ 43,970 ​ ​ — ​ ​ — ​ ​ 43,970 Other comprehensive income — ​ — ​ 2,675 ​ — ​ 2,675 Net income — ​ — ​ — ​ ( 15,203 ) ​ ( 15,203 ) Balances at September 30, 2020 $ 219 ​ $ 4,276,667 ​ $ ( 9,748 ) ​ $ ( 1,876,305 ) ​ $ 2,390,833 ​ ​ 6 Table of Contents INCYTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED) (unaudited, in thousands, except number of shares) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended September 30, 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ Common ​ Additional ​ Accumulated Other ​ Accumulated ​ Stockholders’ ​ Stock ​ Paid-in Capital ​ Comprehensive Loss ​ Deficit ​ Equity Balances at January 1, 2019 $ 213 ​ $ 3,813,678 ​ $ ( 10,165 ) ​ $ ( 1,877,759 ) ​ $ 1,925,967 Issuance of 1,044,745 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units 1 ​ ​ 15,480 ​ ​ — ​ ​ — ​ ​ 15,481 Issuance of 1,200 shares of Common Stock for services rendered ​ — ​ ​ 104 ​ ​ — ​ ​ — ​ ​ 104 Stock compensation — ​ ​ 40,690 ​ ​ — ​ ​ — ​ ​ 40,690 Adoption of ASU No. 2016-02 — ​ ​ — ​ ​ — ​ ​ 95 ​ ​ 95 Other comprehensive income ​ — ​ ​ — ​ ​ 918 ​ ​ — ​ ​ 918 Net income ​ — ​ ​ — ​ ​ — ​ ​ 102,312 ​ ​ 102,312 Balances at March 31, 2019 $ 214 ​ $ 3,869,952 ​ $ ( 9,247 ) ​ $ ( 1,775,352 ) ​ $ 2,085,567 Issuance of 400,292 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and 143,379 shares of Common Stock under the ESPP ​ 1 ​ ​ 15,190 ​ ​ — ​ ​ — ​ ​ 15,191 Issuance of 1,444 shares of Common Stock for services rendered ​ — ​ ​ 123 ​ ​ — ​ ​ — ​ ​ 123 Stock compensation ​ — ​ ​ 40,710 ​ ​ — ​ ​ — ​ ​ 40,710 Other comprehensive income ​ — ​ ​ — ​ ​ 282 ​ ​ — ​ ​ 282 Net income ​ — ​ ​ — ​ ​ — ​ ​ 105,318 ​ ​ 105,318 Balances at June 30, 2019 $ 215 ​ $ 3,925,975 ​ $ ( 8,965 ) ​ $ ( 1,670,034 ) ​ $ 2,247,191 Issuance of 506,199 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units ​ — ​ ​ 3,111 ​ ​ — ​ ​ — ​ ​ 3,111 Issuance of 1,629 shares of Common Stock for services rendered ​ — ​ ​ 129 ​ ​ — ​ ​ — ​ ​ 129 Stock compensation ​ — ​ ​ 43,474 ​ ​ — ​ ​ — ​ ​ 43,474 Other comprehensive income ​ — ​ ​ — ​ ​ 351 ​ ​ — ​ ​ 351 Net income ​ — ​ ​ — ​ ​ — ​ ​ 128,271 ​ ​ 128,271 Balances at September 30, 2019 $ 215 ​ $ 3,972,689 ​ $ ( 8,614 ) ​ $ ( 1,541,763 ) ​ $ 2,422,527 ​ See accompanying notes. ​ 7 Table of Contents INCYTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ September 30, ​ ​ 2020 2019 Cash flows from operating activities : ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ ( 445,547 ) ​ $ 335,901 ​ Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ 38,641 ​ ​ 41,188 ​ Stock-based compensation ​ 132,616 ​ ​ 124,566 ​ Other, net ​ ​ 8,698 ​ ​ 356 ​ Unrealized gain on long term investments ​ ( 10,935 ) ​ ​ ( 18,703 ) ​ Change in fair value of acquisition-related contingent consideration ​ ​ 19,790 ​ ​ 16,560 ​ Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ ( 55,656 ) ​ ​ 31,482 ​ Prepaid expenses and other assets ​ ( 11,384 ) ​ ​ 9,999 ​ Inventory ​ ( 9,204 ) ​ ​ ( 2,913 ) ​ Accounts payable ​ 38,865 ​ ​ ( 8,451 ) ​ Accrued and other liabilities ​ 62,196 ​ ​ 49,053 ​ Net cash (used in) provided by operating activities ​ ( 231,920 ) ​ 579,038 ​ Cash flows from investing activities : ​ ​ ​ ​ ​ ​ ​ Purchase of long term investments ​ ( 95,468 ) ​ — ​ Sale of long term investment ​ ​ 17,250 ​ ​ — ​ Capital expenditures ​ ( 135,946 ) ​ ( 48,749 ) ​ Purchases of marketable securities ​ ( 418,698 ) ​ ( 222,157 ) ​ Sale and maturities of marketable securities ​ 466,591 ​ 213,480 ​ Net cash used in investing activities ​ ( 166,271 ) ​ ( 57,426 ) ​ Cash flows from financing activities : ​ ​ ​ ​ ​ ​ ​ Proceeds from issuance of common stock under stock plans ​ 91,596 ​ ​ 33,783 ​ Payment of finance lease liabilities ​ ( 619 ) ​ ​ ( 626 ) ​ Payment of contingent consideration ​ ​ ( 31,140 ) ​ ​ ( 16,766 ) ​ Net cash provided by financing activities ​ 59,837 ​ 16,391 ​ Effect of exchange rates on cash, cash equivalents, restricted cash and investments ​ ​ 5,085 ​ ​ 29 ​ Net (decrease) increase in cash, cash equivalents, restricted cash and investments ​ ( 333,269 ) ​ 538,032 ​ Cash, cash equivalents, restricted cash and investments at beginning of period ​ ​ 1,833,707 ​ ​ 1,164,986 ​ Cash, cash equivalents, restricted cash and investments at end of period ​ $ 1,500,438 ​ $ 1,703,018 ​ Supplemental Schedule of Cash Flow Information ​ ​ ​ ​ ​ ​ ​ Interest paid ​ $ 119 ​ $ 119 ​ Income taxes paid ​ $ 56,757 ​ $ 12,398 ​ Reclassification to common stock and additional paid in capital in connection with conversions of 1.25 % convertible senior notes due 2020 ​ $ 6,992 ​ $ — ​ Unpaid purchases of property and equipment ​ $ 12,836 ​ $ — ​ Leased assets obtained in exchange for new operating lease liabilities ​ $ 13,020 ​ $ 6,686 ​ Leased assets obtained in exchange for new finance lease liabilities ​ $ 2,160 ​ $ 29,740 ​ ​ See accompanying notes. ​ 8 Table of Contents INCYTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (Unaudited) ​ 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) and PEMAZYRE® (pemigatinib). Our operations are treated as one operating segment. 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 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. 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, 2019. 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. Foreign Currency Translation . Operations in non-U.S. entities are recorded in the functional currency of each entity. For financial reporting purposes, the functional currency of an entity is determined by a review of the source of an entity's most predominant cash flows. The results of operations for any non-U.S. dollar functional currency entities are translated from functional currencies into U.S. dollars using the average currency rate during each month. Assets and liabilities are translated using currency rates at the end of the period. Adjustments resulting from translating the financial statements of our foreign entities that use their local currency as the functional currency into U.S. dollars are reflected as a component of other comprehensive income (loss). Transaction gains and losses are recorded in other income (expense), net, in the condensed consolidated statements of operations. 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. Concentrations of Credit Risk. Cash, cash equivalents, marketable securities, and trade receivables are financial instruments which potentially subject us to concentrations of credit risk. The estimated fair value of financial instruments approximates the carrying value based on available market information. We primarily invest our excess available funds in 9 Table of Contents debt securities and, by policy, limit the amount of credit exposure to any one issuer and to any one type of investment, other than securities issued or guaranteed by the U.S. government and money market funds that meet certain guidelines. Our receivables mainly relate to our product sales and collaborative agreements with pharmaceutical companies. We have not experienced any significant credit losses on cash, cash equivalents, marketable securities, or trade receivables to date and do not require collateral on receivables. Current Expected Credit Losses. Effective January 1, 2020, financial assets measured at amortized cost are assessed for future expected credit losses under guidance within ASC 326, Financial Instruments – Credit Losses, to determine if application of an expected credit losses reserve is necessary. On a quarterly basis, receivables that resulted from revenue transactions within the scope of ASC 606 and recognized on an amortized cost basis are reviewed on a customer-level basis to analyze expectations of future collections based upon past history of collections, payment, aging of receivables and viability of the customer to continue payment, as well as estimates of future economic conditions. Receivables generally consist of two types: receivables from collaborative agreements, including milestones, reimbursements for agreed-upon activities and sales royalties; and receivables from customer product sales. Collaborative agreement receivables are closely monitored relationships with select, reputable industry peers. Collection of receivables is assessed within each collaborative partnership on a quarterly basis, including evaluation of each entity’s credit quality, financial health and past history of payment. Customer product sales receivables are independently evaluated on a monthly basis, on which unusual items or aged receivables are closely monitored for signs of credit deterioration, or indications of payment refusal. Customer product sales are with specialty pharmaceutical distributors, wholesalers, and certain public and private institutions, some of which whose financial obligations are funded by various government agencies. These receivables are assessed for signs of credit deterioration and in the Company’s sales history and future expectations of economic conditions, there are minimal instances of bad debts or uncollected receivables. Cash and Cash Equivalents. Cash and cash equivalents are held in banks or in custodial accounts with banks. Cash equivalents are defined as all liquid investments and money market funds with maturity from date of purchase of 90 days or less that are readily convertible into cash. Marketable Securities—Available-for-Sale. Our marketable securities consist of investments in U.S. government debt securities that are classified as available-for-sale. Available-for-sale securities are carried at fair value, based on quoted market prices and observable inputs, with unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. We classify marketable securities that are available for use in current operations as current assets on the condensed consolidated balance sheets. Realized gains and losses and declines in value judged to be other than temporary for available-for-sale securities are included in other income (expense), net on the condensed consolidated statements of operations. The cost of securities sold is based on the specific identification method. Accounts Receivable. 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. Accounts receivable are carried at fair value and charged off against the allowance for doubtful accounts when we determine that recovery is unlikely and we cease collection efforts. Inventory. Inventories are determined at the lower of cost and net realizable value with cost determined under the specific identification method and may consist of raw materials, work in process and finished goods. We began capitalizing PEMAZYRE inventory after FDA approval in April 2020 as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to FDA approval have been recorded as research and development expense in our statements of operations. As a result, cost of product revenues for the next 48 months will reflect a lower average per unit cost of materials. JAKAFI, ICLUSIG and PEMAZYRE raw materials and work-in-process inventory are not subject to expiration and the shelf life of finished goods inventory is 36 months from the start of manufacturing of the finished goods. We evaluate for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. We build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. We classify inventory as current on the condensed consolidated balance sheets when we expect inventory to be consumed for commercial use within the next twelve months. 10 Table of Contents Variable Interest Entities . We perform an initial and ongoing evaluation of the entities with which we have variable interests, such as equity ownership, in order to identify entities (i) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support or (ii) in which the equity investors lack an essential characteristic of a controlling financial interest as variable interest entities (“VIE” or “VIEs”). If an entity is identified as a VIE, we perform an assessment to determine whether we have both (i) the power to direct activities that most significantly impact the VIE’s economic performance and (ii) have the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. If both of these criteria are satisfied, we are identified as the primary beneficiary of the VIE. 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. Our long term investments consist of equity investments in common stock of publicly-held companies with whom we have entered into collaboration and license agreements. We classify all of our equity investments in common stock of publicly-held companies as long term investments on our condensed consolidated balance sheets. Our equity investments are accounted for at fair value using readily determinable pricing available on a securities exchange on our condensed consolidated balance sheets. All changes in fair value are reported in the condensed consolidated statements of operations as an unrealized gain (loss) on long term investments. In assessing whether we exercise significant influence over any of the companies in which we hold equity investments, we consider the nature and magnitude of our investment, any voting and protective rights we hold, any participation in the governance of the other company, and other relevant factors such as the presence of a collaboration or other business relationship. Currently, none of our equity investments in publicly-held companies are considered relationships in which we are able to assert control. Property and Equipment, net. Property and equipment, net is stated at cost, less accumulated depreciation and amortization. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the shorter of the estimated useful life of the assets or lease term. Lease Accounting. Accounting Standard Codification (“ASC”) 842, Leases, was adopted for the fiscal year beginning on January 1, 2019. All leases with a lease term greater than 12 months, regardless of lease type classification, are recorded as an obligation on the balance sheet with a corresponding right-of-use asset. Both finance and operating leases are reflected as liabilities on the commencement date of the lease based on the present value of the lease payments to be made over the lease term. Current operating lease liabilities are reflected in accrued and other current liabilities and noncurrent operating lease liabilities are reflected in other liabilities on the condensed consolidated balance sheet. Right-of-use assets are valued at the initial measurement of the lease liability, plus any initial direct costs or rent prepayments, minus lease incentives and any deferred lease payments. Operating lease right-of-use assets are recorded in property and equipment, net on the condensed consolidated balance sheet and lease cost is recognized on a straight-line basis. For finance leases, expense is recognized as separate amortization and interest expense, with higher interest expense in the earlier periods of a lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis over the term of the lease. In determining whether a contract contains a lease, asset and service agreements are assessed at onset and upon modification for criteria of specifically identified assets, control and economic benefit. 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. Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method. Impairment of Long-Lived Assets. Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset. If the expected cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted future cash flows. 11 Table of Contents Goodwill. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually as of October 1 or when a triggering event occurs that could indicate a potential impairment by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that the fair value of net assets are below their carrying amounts. A reporting unit is the same as, or one level below, an operating segment. Our operations are currently comprised of a single, entity wide reporting unit. We completed our most recent annual impairment assessment as of October 1, 2019 and determined that the carrying value of our goodwill was not impaired. Income Taxes. We account for income taxes using the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts reportable for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. 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 September 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. The tax benefit that is recorded for these positions is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any interest and penalties on uncertain tax positions are included within the tax provision. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in March 2020 to provide an estimated $2.2 trillion designed to stimulate the U.S. economy during the COVID-19 pandemic. The Act includes tax relief, government loans, grants and investments for entities in affected industries, which has related accounting and financial reporting impacts. 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 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. We have further described the expected impact and risks of COVID-19 on our business in the overview to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A. Risk Factors. Financing Costs Related to Long-term Debt. Costs associated with obtaining long-term debt are deferred and amortized over the term of the related debt using the effective interest method. Such costs are presented as a direct deduction from the carrying amount of the long-term debt liability, consistent with debt discounts, on the condensed consolidated balance sheets. Net Income (Loss) Per Share. Our basic and diluted net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during all periods presented. Options to purchase stock, restricted stock units, performance stock units and shares issuable upon the conversion of convertible debt are included in diluted earnings per share calculations, unless the effects are anti-dilutive. Accumulated Other Comprehensive Income (Loss). Accumulated other comprehensive income (loss) consists of unrealized gains or losses on marketable securities that are classified as available-for-sale, foreign currency translation gains or losses and defined benefit pension obligations. 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 12 Table of Contents 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. We determine at contract inception whether we will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. We assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer. Product Revenues Our product revenues consist of U.S. sales of JAKAFI and PEMAZYRE and European sales of ICLUSIG. Product revenues are recognized once we satisfy the performance obligation at a point in time under the revenue recognition criteria as described above. We sell JAKAFI and PEMAZYRE to our customers in the U.S., which include specialty pharmacies and wholesalers. We sell ICLUSIG to our customers in the European Union and certain other jurisdictions, which include retail pharmacies, hospital pharmacies and distributors. We recognize revenues for product received by our customers net of allowances for customer credits, including estimated rebates, chargebacks, discounts, returns, distribution service fees, patient assistance programs, and government rebates, such as Medicare Part D coverage gap reimbursements in the U.S. Product shipping and handling costs are included in cost of product revenues. Customer Credits: Our customers are offered various forms of consideration, including allowances, service fees and prompt payment discounts. We expect our customers will earn prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized. Service fees are also deducted from total product sales as they are earned. Rebates and Discounts: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program in the U.S. and mandated discounts in Europe in markets where government-sponsored healthcare systems are the primary payers for healthcare. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The accrual for rebates is based on statutory discount rates and expected utilization as well as historical data we have accumulated since product launches. Our estimates for expected utilization of rebates are based on data received from our customers. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters’ unpaid rebates. If actual future rebates vary from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Chargebacks: Chargebacks are discounts that occur when certain contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, purchase directly from our wholesalers. Contracted customers generally purchase the product at a discounted price. The wholesalers, in turn, charges back to us the difference between the price initially paid by the wholesalers and the discounted price paid by the contracted customers. In addition to actual chargebacks received we maintain an accrual for chargebacks based on the estimated contractual discounts on the inventory levels on hand in our distribution channel. If actual future chargebacks vary from these estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 70 % of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for the expected Medicare Part D coverage gap are based on historical invoices received and in part from data received from our customers. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Additionally, beginning in January 2020, the amount of spending required by eligible 13 Table of Contents patients in the Medicare Part D insurance coverage gap increased 30 % due to the expiration of a provision in the Patient Protection and Affordable Care Act, which now results in a change in the True Out of Pocket (TrOOP) calculation methodology. The methodological change has resulted in an increase in required spending by patients and, in turn, an increase in manufacturers’ contributions on behalf of patients in the Medicare Part D insurance coverage gap. Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators. Product Royalty Revenues Royalty revenues on commercial sales for ruxolitinib (marketed as JAKAVI ® outside the United States) by Novartis Pharmaceutical International Ltd. (“Novartis”) are based on net sales of licensed products in licensed territories as provided by Novartis. Royalty revenues on commercial sales for baricitinib (marketed as OLUMIANT) by Eli Lilly and Company (“Lilly”) are based on net sales of licensed products in licensed territories as provided by Lilly. Royalty revenues on commercial sales for capmatinib (marketed as TABRECTA®) by Novartis are based on net sales of licensed products in the licensed territories as provided by Novartis. We recognize royalty revenues in the period the sales occur. Milestone and Contract Revenues Our license agreements, which fall within the scope of ASC 606, Revenue from Contracts with Customers, include distinct drug compound out-licensing, collection of upfront payments, milestones or royalty revenues from a counterparty, and provision of commercially available products to suppliers. Our agreements often include contractual milestones, which typically relate to the achievement of pre-specified development, regulatory and commercialization events outside of our control, such as regulatory approval of a compound, first patient dosing or achievement of sales-based thresholds. For such cases, we believe that revenue related to these events should not be recognized until the milestone has been achieved. Some contracts form collaborative arrangements of various types with third-parties. We assess whether the nature of the arrangement is within the scope of ASC 808, Collaborative Arrangements, in conjunction with the revenue recognition guidance in ASC 606 to determine the nature of the performance obligations and associated transaction prices. A collaborative relationship may exist when we participate in an activity or process with another party, such as performance of research and development services or the exchange of intellectual property for use in clinical trials, when both parties share in the risks and rewards that result from the activity and participate and govern contract activities through a joint steering committee. The regulatory review and approval process, which includes preclinical testing and clinical trials of each drug candidate, is lengthy, expensive and uncertain. Securing approval by the U.S. Food and Drug Administration (the “FDA”) requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish a drug candidate’s safety and efficacy. The approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance and may involve ongoing requirements for post-marketing studies. Before commencing clinical investigations of a drug candidate in humans, we must submit an Investigational New Drug application (“IND”), which must be reviewed by the FDA. The steps generally required before a drug may be marketed in the United States include preclinical laboratory tests, animal studies and formulation studies, submission to the FDA of an IND for human clinical testing, performance of adequate and well-controlled clinical trials in three phases, as described below, to establish the safety and efficacy of the drug for each indication, submission of a new drug application (“NDA”) or biologics license application (“BLA”) to the FDA for review and FDA approval of the NDA or BLA. Similar requirements exist within foreign regulatory agencies as well. The time required satisfying the FDA requirements or similar requirements of foreign regulatory agencies may vary substantially based on the type, complexity and novelty of the product or the targeted disease. 14 Table of Contents Preclinical testing includes laboratory evaluation of product pharmacology, drug metabolism, and toxicity, which includes animal studies, to assess potential safety and efficacy as well as product chemistry, stability, formulation, development, and testing. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND. The FDA may raise safety concerns or questions about the conduct of the clinical trials included in the IND, and any of these concerns or questions must be resolved before clinical trials can proceed. We cannot be sure that submission of an IND will result in the FDA allowing clinical trials to commence. Clinical trials involve the administration of the investigational drug or the marketed drug to human subjects under the supervision of qualified investigators and in accordance with good clinical practices regulations covering the protection of human subjects. Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be combined. Phase I usually involves the initial introduction of the investigational drug into healthy volunteers to evaluate its safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase II usually involves clinical trials in a limited patient population to evaluate dosage tolerance and optimal dosage, identify possible adverse effects and safety risks, and evaluate and gain preliminary evidence of the efficacy of the drug for specific indications. Phase III clinical trials usually further evaluate clinical efficacy and safety by testing the drug in its final form in an expanded patient population, providing statistical evidence of efficacy and safety, and providing an adequate basis for labeling. We cannot guarantee that Phase I, Phase II or Phase III testing will be completed successfully within any specified period of time, if at all. Furthermore, we, the institutional review board for a trial, or the FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Generally, the milestone events contained in our collaboration agreements coincide with the progression of our drugs from development, to regulatory approval and then to commercialization. The process of successfully discovering a new development candidate, having it approved and successfully commercialized is highly uncertain. As such, the milestone payments we may earn from our partners involve a significant degree of risk to achieve. Therefore, as a drug candidate progresses through the stages of its life-cycle, the value of the drug candidate generally increases. Cost of Product Revenues Cost of product revenues includes all JAKAFI, ICLUSIG and PEMAZYRE related product costs. In addition, cost of product revenues include low single-digit royalties under our collaboration and license agreement to Novartis on all future sales of JAKAFI in the United States and the amortization of our licensed intellectual property for ICLUSIG using the straight-line method over the estimated useful life of 12.5 years from the date of acquisition on June 1, 2016 of all of the outstanding shares of ARIAD Pharmaceuticals (Luxembourg) S.à.r.l. (since renamed Incyte Biosciences Luxembourg S.à.r.l.) from ARIAD Pharmaceuticals, Inc. (“ARIAD”). Cost of product revenues also includes employee personnel costs, including stock compensation, for those employees dedicated to the production of our commercial products. Research and Development Costs. Our policy is to expense research and development costs as incurred, including amounts funded by research and development collaborations. Research and development expenses are comprised of costs we incur in performing research and development activities, including salary and benefits; stock-based compensation expense; outsourced services and other direct expenses, including clinical trial and pharmaceutical development costs; collaboration payments; expenses associated with drug supplies that are not being capitalized; and infrastructure costs, including facilities costs and depreciation expense. If a collaboration is a cost-sharing arrangement in which both we and our collaborator perform development work and share costs, we also recognize, as research and development expense in the period when our collaborator incurs development expenses, our portion of the co-development expenses that we are obligated to reimburse. We often contract with clinical research organizations (“CROs”) to facilitate, coordinate and perform agreed upon research and development of a new drug. To ensure that research and development costs are expensed as incurred, we record monthly accruals for clinical trials and preclinical testing costs based on the work performed under the contract. These CRO contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain clinical trial milestones. In the event that we prepay CRO fees, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development services are performed. Most professional fees, including project and clinical management, data management, monitoring, and medical writing fees are incurred throughout the contract period. These professional fees 15 Table of Contents are expensed based on their percentage of completion at a particular date. Our CRO contracts generally include pass through fees. Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, and other miscellaneous costs, including shipping and printing fees. We expense the costs of pass through fees under our CRO contracts as they are incurred, based on the best information available to us at the time. The estimates of the pass through fees incurred are based on the amount of work completed for the clinical trial and are monitored through correspondence with the CROs, internal reviews and a review of contractual terms. The factors utilized to derive the estimates include the number of patients enrolled, duration of the clinical trial, estimated patient attrition, screening rate and length of the dosing regimen. CRO fees incurred to set up the clinical trial are expensed during the setup period. Under our clinical trial collaboration agreements we may be reimbursed for certain development costs incurred. Such costs are recorded as a reduction of research and development expense in the period in which the related expense is incurred. Stock Compensation. Share-based payment transactions with employees, which include stock options, restricted stock units (“RSUs”) and performance shares (“PSUs”), are recognized as compensation expense over the requisite service period based on their estimated fair values as well as expected forfeiture rates. The stock compensation process requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility over the option term and expected option lives, as well as expected forfeiture rates and the probability of PSUs vesting. The fair value of stock options, which are subject to graded vesting, are recognized as compensation expense over the requisite service period using the accelerated attribution method. The fair value of RSUs that are subject to cliff vesting are recognized as compensation expense over the requisite service period using the straight-line attribution method, and the fair value of RSUs that are subject to graded vesting are recognized as compensation expense over the requisite service period using the accelerated attribution method. The fair value of PSUs are recognized as compensation expense beginning at the time in which the performance conditions are deemed probable of achievement, which we assess as of the end of each reporting period. Once a performance condition is considered probable, we record compensation expense based on the portion of the service period elapsed to date with respect to that award, with a cumulative catch-up, net of estimated forfeitures, and recognize any remaining compensation expense, if any, over the remaining requisite service period using the straight-line attribution method for PSUs that are subject to cliff vesting and using the accelerated attribution method for PSUs that are subject to graded vesting. Long Term Incentive Plans. We have long term incentive plans which provide eligible employees with the opportunity to receive performance and service-based incentive compensation, which may be comprised of cash, stock options, restricted stock units and/or performance shares. The payment of cash and the grant or vesting of equity may be contingent upon the achievement of pre-determined regulatory, sales and internal performance milestones. Acquisition-Related Contingent Consideration. Acquisition-related contingent consideration consists of our future royalty obligations on future net sales of ICLUSIG to Takeda Pharmaceutical Company Limited, which acquired ARIAD (“Takeda”). Acquisition-related contingent consideration was recorded on the acquisition date of June 1, 2016 at the estimated fair value of the obligation, in accordance with the acquisition method of accounting. The fair value measurement is based on significant inputs that are unobservable in the market and thus represents a Level 3 measurement. The fair value of the acquisition-related contingent consideration is remeasured each reporting period, with changes in fair value recorded in the condensed consolidated statements of operations. Collaboration loss sharing. 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 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 In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This guidance applies to all entities and impacts how entities account for credit losses for financial assets measured at amortized cost and available for sale debt securities. ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, 16 Table of Contents including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. For trade receivables, loans and held-to-maturity debt securities, entities will be required to estimate expected credit losses over the lifetime of the asset. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than an other-than-temporary impairment that reduces the cost basis of the investment. Further, an entity will recognize any improvements in estimated credit losses on its available-for-sale debt securities immediately in earnings. Upon adoption, we assessed each financial asset measured at amortized cost and each available-for-sale debt security held for the impact of the guidance as of January 1, 2020 and noted an insignificant impact due to the minimal credit risk associated with our financial assets subject to ASC 326. As such, it was concluded that a reserve for credit losses was de minimis on the adoption date. Financial assets will continue to be assessed on a quarterly basis in future periods. In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which eliminates the required disclosure of the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy. The guidance also eliminates the required disclosure of the entity’s valuation process for Level 3 fair value measurements, however public entities are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2019. We adopted this guidance for the period beginning January 1, 2020 and enhanced our disclosures in Note 4 to the condensed consolidated financial statements to comply with the standard. In August 2018, the FASB issued ASU No. 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General,” an update to Subtopic ASC 715-20. The guidance amended year-end disclosure requirements related to defined benefit pension plans, and does not affect interim disclosures. The guidance is effective for fiscal years ending after December 15, 2020 and is permitted for early adoption. The standard is to be applied on a retrospective basis. Incyte sponsors defined benefit plans for employees located in Europe. We are currently analyzing the impact of ASU No. 2018-14 on the condensed consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software,” an update to Subtopic ASC 350-40. The guidance directs accounting for service contracts for cloud computing arrangements to follow guidance within ASC 350-40 to determine capitalization of implementation costs. The guidance is effective for fiscal years beginning after December 15, 2019 and may be applied on either a retrospective or prospective basis. We adopted this guidance for the period beginning January 1, 2020 on a prospective basis. New contracts for development of internal-use software were assessed and no qualifying contracts were identified during the period. We will continue to assess contracts and will disclose material, qualifying contracts if identified in future periods. In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606.” The guidance clarifies the interactions between Topic 808 and Topic 606, including clarifications on revenue recognition, unit of account, and reporting disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2019. We adopted this guidance for the period beginning January 1, 2020 retrospectively to the date of our initial application of ASC 606, and noted that in assessment of our collaborative agreements, there was no material financial statement impact. Our collaborative arrangements and their associated accounting conclusions are described in detail within Note 9 to the condensed consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance applies to all entities and aims to reduce the complexity of tax accounting standards while enhancing reporting disclosures. This guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein. Early adoption is permitted for any annual periods for which financial statements have not been issued and interim periods therein. We are currently analyzing the impact of ASU No. 2019-12 on the condensed consolidated financial statements. 17 Table of Contents 3. Revenues As discussed in Note 2, revenues are recognized under guidance within ASC 606 and ASC 808. The following table presents our disaggregated revenue for the periods presented (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, September 30, ​ ​ 2020 ​ 2019 ​ 2020 ​ 2019 ​ JAKAFI revenues, net ​ $ 487,783 ​ $ 433,387 ​ $ 1,420,968 ​ $ 1,218,504 ​ ICLUSIG revenues, net ​ ​ 26,380 ​ ​ 20,611 ​ ​ 76,426 ​ ​ 65,640 ​ PEMAZYRE revenues, net ​ ​ 8,089 ​ ​ — ​ ​ 11,875 ​ ​ — ​ Total product revenues, net ​ ​ 522,252 ​ ​ 453,998 ​ ​ 1,509,269 ​ ​ 1,284,144 ​ JAKAVI product royalty revenues ​ ​ 68,306 ​ ​ 58,440 ​ ​ 190,856 ​ ​ 160,906 ​ OLUMIANT product royalty revenues ​ ​ 28,647 ​ ​ 21,643 ​ ​ 79,924 ​ ​ 56,820 ​ TABRECTA product royalty revenues ​ ​ 1,438 ​ ​ — ​ ​ 2,144 ​ ​ — ​ Total product royalty revenues ​ ​ 98,391 ​ ​ 80,083 ​ ​ 272,924 ​ ​ 217,726 ​ Milestone and contract revenues ​ ​ — ​ ​ 17,500 ​ ​ 95,000 ​ ​ 77,500 ​ Total revenues ​ $ 620,643 ​ $ 551,581 ​ $ 1,877,193 ​ $ 1,579,370 ​ ​ For further information on our revenue-generating contracts, refer to Note 9 to the condensed consolidated financial statements. ​ 4. Fair value of financial instruments 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 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 nine months ended September 30, 2020. 18 Table of Contents 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 ​ Significant Other ​ Significant ​ ​ ​ ​ ​ ​ Active Markets for ​ Observable ​ Unobservable ​ ​ ​ ​ ​ ​ Identical Assets ​ Inputs ​ Inputs ​ Balance as of ​ ​ (Level 1) (Level 2) (Level 3) September 30, 2020 Cash and cash equivalents ​ $ 1,497,775 ​ $ — ​ $ — ​ $ 1,497,775 ​ Debt securities (government) ​ — ​ 237,025 ​ — ​ 237,025 ​ Long term investments (Note 9) ​ 222,810 ​ — ​ — ​ 222,810 ​ Total assets ​ $ 1,720,585 ​ $ 237,025 ​ $ — ​ $ 1,957,610 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value Measurement at Reporting Date Using: ​ ​ ​ ​ ​ ​ Quoted Prices in ​ Significant Other ​ Significant ​ ​ ​ ​ ​ ​ Active Markets for ​ Observable ​ Unobservable ​ ​ ​ ​ ​ ​ Identical Assets ​ Inputs ​ Inputs ​ Balance as of ​ ​ (Level 1) (Level 2) (Level 3) December 31, 2019 Cash and cash equivalents ​ $ 1,832,684 ​ $ — ​ $ — ​ $ 1,832,684 ​ Debt securities (government) ​ ​ — ​ 284,870 ​ — ​ ​ 284,870 ​ Long term investments (Note 9) ​ 133,657 ​ — ​ — ​ 133,657 ​ Total assets ​ $ 1,966,341 ​ $ 284,870 ​ $ — ​ $ 2,251,211 ​ ​ 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 ​ Significant Other ​ Significant ​ ​ ​ ​ ​ Active Markets for ​ Observable ​ Unobservable ​ ​ ​ Identical Liabilities ​ Inputs ​ Inputs ​ Balance as of ​ (Level 1) (Level 2) (Level 3) September 30, 2020 Acquisition-related contingent consideration ​ $ — ​ $ — ​ $ 272,000 ​ $ 272,000 Total liabilities ​ $ — ​ $ — ​ $ 272,000 ​ $ 272,000 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value Measurement at Reporting Date Using: ​ ​ ​ ​ ​ ​ Quoted Prices in ​ Significant Other ​ Significant ​ ​ ​ ​ ​ ​ Active Markets for ​ Observable ​ Unobservable ​ ​ ​ ​ ​ ​ Identical Liabilities ​ Inputs ​ Inputs ​ Balance as of ​ ​ (Level 1) (Level 2) (Level 3) December 31, 2019 ​ Acquisition-related contingent consideration ​ $ — ​ $ — ​ $ 277,000 ​ $ 277,000 ​ Total liabilities ​ $ — ​ $ — ​ $ 277,000 ​ $ 277,000 ​ ​ The following is a rollforward of our Level 3 liabilities (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ Balance at January 1, ​ $ 277,000 ​ Contingent consideration earned during the period but not yet paid ​ ​ ( 9,109 ) ​ Payments made during the period ​ ​ ( 15,681 ) ​ Change in fair value of contingent consideration ​ ​ 19,790 ​ Balance at September 30, ​ $ 272,000 ​ ​ 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 September 30, 2020 included a 19 Table of Contents 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 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net ​ ​ ​ ​ ​ ​ Amortized ​ Unrealized ​ Estimated ​ ​ Cost Gains Fair Value September 30, 2020 ​ ​ ​ ​ ​ ​ ​ Debt securities (government) ​ $ 236,902 ​ $ 123 ​ $ 237,025 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Debt securities (government) ​ $ 284,795 ​ $ 75 ​ $ 284,870 ​ ​ 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 per our accounting policy as described in Note 2. 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. 5. Concentration of credit risk and current expected credit losses In November 2009, we entered into a collaboration and license agreement with Novartis. In December 2009, we entered into a license, development and commercialization agreement with Lilly. In December 2018, we entered into a research collaboration and licensing agreement with Innovent Biologics, Inc. (“Innovent”). 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, 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. In November 2011, we began commercialization and distribution of JAKAFI and in April 2020, we began commercialization and distribution of PEMAZYRE to a number of customers. Our product revenues are concentrated in a number of these customers. The concentration of credit risk related to our JAKAFI and PEMAZYRE product revenues is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Percentage of Total Net ​ Percentage of Total Net ​ ​ ​ Product Revenues for the ​ Product Revenues for the ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 ​ 2020 2019 Customer A 20 % 20 % 20 % 19 % ​ Customer B 13 % 14 % 13 % 14 % ​ Customer C 17 % 16 % 17 % 16 % ​ Customer D 10 % 11 % 11 % 12 % ​ ​ 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, 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. 20 Table of Contents 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. 6. Inventory Our inventory balance consists of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ ​ 2020 2019 Raw materials ​ $ 1,275 ​ $ 1,275 ​ Work-in-process ​ ​ 9,745 ​ ​ 8,634 ​ Finished goods ​ 14,689 ​ 6,596 ​ ​ ​ 25,709 ​ 16,505 ​ Inventories-current ​ 17,012 ​ 11,400 ​ Inventories-noncurrent ​ $ 8,697 ​ $ 5,105 ​ ​ Inventories, stated at the lower of cost and net realizable value, consist of raw materials, work in process and finished goods. 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. 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. 7. Property and equipment, net Property and equipment, net consists of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ ​ 2020 2019 Office equipment $ 14,530 ​ $ 15,303 ​ Laboratory equipment ​ ​ 74,960 70,510 ​ Computer equipment ​ 61,964 ​ 59,069 ​ Land ​ ​ 10,447 ​ ​ 10,203 ​ Building and leasehold improvements ​ ​ 206,600 ​ ​ 208,293 ​ Operating lease right-of-use assets ​ ​ 23,862 ​ ​ 19,672 ​ Construction in progress ​ 243,120 ​ 116,387 ​ ​ ​ 635,483 ​ 499,437 ​ Less accumulated depreciation and amortization ​ ( 137,148 ) ​ ( 121,870 ) ​ Property and equipment, net ​ $ 498,335 ​ $ 377,567 ​ ​ In February 2018, we signed an agreement to rent a building in Morges, Switzerland for an initial term of 15 years plus one year of free rent, with multiple options to extend for an additional 20 years . The building will serve as our new European headquarters and will consist of approximately 100,000 square feet of office space. This building will allow for consolidation of our European operations that are currently located in Geneva and Lausanne, Switzerland. Building permits were granted by the local government authorities in September 2018 and construction activity began immediately thereafter. In June 2019, we obtained control of the Morges building to begin our construction activity. 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 September 30, 2020 we have capitalized approximately $ 23.8 million in on site preparation, design and construction costs. 21 Table of Contents In July 2018, we signed an agreement to purchase land located in Yverdon, Switzerland. The land was purchased, in cash, for approximately $ 4.8 million. Upon this parcel, we are constructing a large molecule production facility. 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. Our lease agreements do not contain any material residual value guarantees or restrictive covenants. Some of our building leases include options to renew and the exercise of these options is at our discretion. 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, ​ December 31, ​ ​ 2020 2019 Current ​ ​ ​ ​ ​ ​ ​ Operating lease liabilities ​ $ 10,713 ​ $ 9,343 ​ Finance lease liabilities ​ ​ 1,978 ​ ​ 664 ​ Noncurrent ​ ​ ​ ​ ​ ​ ​ Operating lease liabilities ​ ​ 13,424 ​ ​ 11,854 ​ Finance lease liabilities ​ ​ 32,848 ​ ​ 31,918 ​ Total lease liabilities ​ $ 58,963 ​ $ 53,779 ​ ​ 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 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. 22 Table of Contents 8. Intangible assets and goodwill Intangible Assets, Net The components of intangible assets were as follows (in thousands, except for useful life): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at September 30, 2020 ​ Balance at December 31, 2019 ​ ​ Weighted- ​ Gross ​ ​ ​ Net ​ Gross ​ ​ ​ Net ​ ​ Average Useful ​ Carrying ​ Accumulated ​ Carrying ​ Carrying ​ Accumulated ​ Carrying ​ Lives (Years) Amount Amortization Amount Amount Amortization Amount Finite-lived intangible assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Licensed IP ​ 12.5 ​ $ 271,000 ​ $ 93,325 ​ $ 177,675 ​ $ 271,000 ​ $ 77,172 ​ $ 193,828 ​ Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets is as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Remainder of ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ ​ 2021 ​ ​ 2022 ​ ​ 2023 ​ ​ 2024 ​ ​ Thereafter Amortization expense $ 5,384 ​ $ 21,536 ​ $ 21,536 ​ $ 21,536 ​ $ 21,536 ​ $ 86,147 ​ Goodwill There were no changes to the carrying amount of goodwill for the nine months ended September 30, 2020. 9. 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 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. In April 2016, we amended this agreement to provide that Novartis has exclusive research, development and commercialization rights outside of the United States to ruxolitinib (excluding topical formulations) in the graft-versus-host-disease (“GVHD”) field. 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 September 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. We recognize sales milestones in the corresponding period of the product sale upon confirmation of net sales milestone threshold achievement by Novartis. 23 Table of Contents In May 2020, we recognized a $ 25.0 million development milestone and a $ 45.0 million regulatory milestone for the FDA approval of capmatinib as TABRECTA for the treatment of adult patients with metastatic non-small cell lung cancer (NSCLC) whose tumors have a mutation that leads to MET exon 14 skipping (METex14) as detected by an FDA-approved test. 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 TABRECTA 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 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. Novartis is also responsible for all costs relating to the development and commercialization of capmatinib. The Novartis agreement will continue on a program-by-program basis until Novartis has no royalty payment obligations with respect to such program or, if earlier, the termination of the agreement or any program in accordance with the terms of the agreement. Royalties are payable by Novartis 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 Novartis or its affiliates or sublicensees. The agreement may be terminated in its entirety or on a program-by-program basis by Novartis for convenience. The agreement may also be terminated by either party under certain other circumstances, including material breach. 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 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 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. We received an upfront 24 Table of Contents 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 September 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 Lilly and decisions made by regulatory agencies. We recognize sales milestones in the corresponding period of the product sale upon confirmation of net sales milestone threshold achievement by Lilly. In January 2016, Lilly submitted an NDA to the FDA and a Marketing Authorization Application (MAA) to the European Medicines Agency for baricitinib as treatment for rheumatoid arthritis. In February 2017, we and Lilly announced that the European Commission approved baricitinib as OLUMIANT for the treatment of moderate-to-severe rheumatoid arthritis in adult patients who have responded inadequately to, or who are intolerant to, one or more disease-modifying antirheumatic drugs. In July 2017, Japan's Ministry of Health, Labor and Welfare granted marketing approval for OLUMIANT for the treatment of rheumatoid arthritis in patients with inadequate response to standard-of-care therapies. In June 2018, the FDA approved the 2mg dose of OLUMIANT for the treatment of adults with moderately-to-severely active rheumatoid arthritis who have had an inadequate response to one or more tumor necrosis factor inhibitor therapies. We retained options to co-develop our JAK1/JAK2 inhibitors with Lilly on a compound-by-compound and indication-by-indication basis. Lilly is responsible for all costs relating to the development and commercialization of the compounds unless we elect to co-develop any compounds or indications. If we elect to co-develop any compounds and/or indications, we would be responsible for funding 30 % of the associated future global development costs from the initiation of a Phase IIb trial through regulatory approval, including post-launch studies required by a regulatory authority. We would receive an incremental royalty rate increase across all tiers resulting in effective royalty rates ranging up to the high twenties on potential future global net sales for compounds and/or indications that we elect to co-develop. For indications that we elect not to co-develop, we would receive tiered, double-digit royalty payments on future global net sales with rates ranging up to 20 % if the product is successfully commercialized. If we have started co-development funding for any indication, we can at any time opt out and stop future co-development cost sharing. If we elect to do this we would still be eligible for our base royalties plus an incremental pro-rated royalty commensurate with our contribution to the total co-development cost for those indications for which we co-funded. We previously had retained an option to co-promote products in the United States but, in March 2016, we waived our co-promotion option as part of an amendment to the agreement. In July 2010, we elected to co-develop baricitinib with Lilly in rheumatoid arthritis and became responsible for funding 30% of the associated future global development costs for this indication from the initiation of the Phase IIb trial through regulatory approval, including post-launch studies required by a regulatory authority. We subsequently elected to co-develop baricitinib with Lilly in psoriatic arthritis, atopic dermatitis, alopecia areata, systemic lupus erythematosus and axial spondyloarthritis and were responsible for funding 30% of future global development costs for those indications through regulatory approval, including post-launch studies required by a regulatory authority. In April 2019, we elected to end additional co-funding of the development of baricitinib effective as of January 1, 2019. 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 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 25 Table of Contents 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 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 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. Upon execution of the amendment, we paid Lilly an upfront payment of $ 35.0 million and Lilly is 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. 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, the parties have agreed to collaborate on the discovery of novel immuno-therapeutics using Agenus’ antibody discovery platforms. The agreement became effective on February 18, 2015, upon the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Upon closing of the agreement, we paid Agenus total consideration of $ 60.0 million. In February 2017, we and Agenus amended this agreement (the “Amended Agreement”). 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. In addition to the initial four program targets, we and Agenus have the option to jointly nominate and pursue additional targets within the framework of the collaboration, and in November 2015, three more targets were added. 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. The programs relating to GITR and OX40 and two of the undisclosed targets were profit-share programs until February 2017, while the other targets currently under collaboration are royalty-bearing programs. The Amended Agreement converted the programs relating to GITR and OX40 to royalty-bearing programs and removed from the collaboration the profit-share programs relating to the two undisclosed targets, with one reverting to us and one reverting to Agenus. Should any of those removed programs be successfully developed by a party, the other party will be eligible to receive the same milestone payments as the royalty-bearing programs and royalties at a 15 % rate on global net sales. There are currently no profit-share programs. For each royalty-bearing product other than GITR and OX40, Agenus will be eligible to receive tiered royalties on global net sales ranging from 6 % to 12 %. For GITR and OX40, Agenus will be eligible to receive 15 % royalties on global net sales. In 2017 under the Amended Agreement, we paid Agenus $ 20.0 million in accelerated milestones relating to the clinical development of the GITR and OX40 programs, which was recorded in research and development expense. Agenus was initially eligible to receive up to an additional $ 510.0 million in future contingent development, regulatory and commercialization milestones across all programs in the collaboration. 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. In 2018, we paid Agenus a $ 5.0 million development milestone for the LAG-3 program and a $ 5.0 million development milestone for the TIM-3 program, which were recorded in research and development expense. In connection with the Amended Agreement, we also agreed to purchase 10.0 million shares of Agenus Inc. common stock for an aggregate purchase price of $ 60.0 million in cash, or $ 6.00 per share. We completed the purchase of the shares on February 14, 2017, when the closing price on The Nasdaq Stock Market for Agenus Inc. 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 26 Table of Contents 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. We concluded Agenus Inc. 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. After completion of our stock purchases from Agenus Inc., we held an approximate ownership interest of 18 % and, under circumstances present at that time, concluded that we had the ability to exercise significant influence, but not control, over Agenus Inc., primarily due to the level of intra-entity transactions between us and Agenus related to development expenses, as well as other qualitative factors. In the second quarter of 2020, we sold an aggregate of approximately 1.2 million shares of Agenus Inc. common stock, reducing our ownership interest to approximately 9.8 % as of June 30, 2020. 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, we no longer account for our equity investment in Agenus Inc. as an equity method investment previously accounted for under the fair value option. We will account for our investment in Agenus Inc. at fair value, whereby the investment is marked to market through earnings in each reporting period. 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 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. Merus In December 2016, we entered into a Collaboration and License Agreement with Merus N.V. (“Merus”). Under this agreement, which became effective in January 2017, 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 eleven independent programs. The most advanced collaboration program is MCLA-145, a bispecific antibody targeting PD-L1 and CD137, for which we received exclusive development and commercialization rights outside of the United States. Merus retained exclusive development and commercialization rights in the United States to MCLA-145. Each party will share equally the costs of mutually agreed global development activities for MCLA-145, and fund itself any independent development activities in its territory. Merus will be responsible for commercializing MCLA-145 in the United States and we will be responsible for commercializing it outside of the United States. In addition to receiving rights to MCLA-145 outside of the United States, we received 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 27 Table of Contents 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. In February 2017, we paid Merus an upfront non-refundable payment of $ 120.0 million. For each program as to which Merus does not have commercialization or development co-funding rights, Merus will be 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 will be 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. For MCLA-145, we and Merus will each be eligible to receive tiered royalties on net sales in the other party’s territory at rates ranging from 6 % to 10 %. The Merus agreement will continue on a program-by-program basis until we have no royalty payment obligations with respect to such program or, if earlier, the termination of the agreement or any program in accordance with the terms of the agreement. The agreement may be terminated in its entirety or on a program-by-program basis by us for convenience. The agreement may also be terminated by either party under certain other circumstances, including material breach, as set forth in the agreement. If the agreement is terminated with respect to one or more programs, all rights in the terminated programs revert to Merus, subject to payment to us of a reverse royalty of up to 4 % on sales of future products, if Merus elects to pursue development and commercialization of products arising from the terminated programs. In addition, in December 2016, we entered into a Share Subscription Agreement with Merus, pursuant to which we agreed to purchase 3.2 million common shares of Merus for an aggregate purchase price of $ 80.0 million in cash, or $ 25.00 per share. We completed the purchase of the shares on January 23, 2017 when the closing price on The Nasdaq Stock Market for Merus shares was $ 24.50 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 $ 5.6 million, which resulted in a net fair value of the shares on the issuance date of $ 72.8 million. 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 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 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 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. 28 Table of Contents 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. Calithera 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 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. Calithera will have the right to conduct certain clinical development under the collaboration, including combination studies of a licensed product with a proprietary compound of Calithera. 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. 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. The agreement may be terminated in its entirety or on a product-by-product and/or a country-by-country basis by us for convenience. The agreement may also be terminated by us for Calithera’s uncured material breach, by Calithera for our uncured material breach and by either party for bankruptcy or patent challenge. If the agreement is terminated early with respect to one or more products or countries, all rights in the terminated products and countries revert to Calithera. In addition, in January 2017, we entered into a Stock Purchase Agreement with Calithera for the purchase of 1.7 million common shares of Calithera for an aggregate purchase price of $ 8.0 million in cash, or $ 4.65 per share. We completed the purchase of the shares on January 30, 2017 when the closing price on The Nasdaq Stock Market was $ 6.75 per share. The shares we acquired were registered under the Securities Act of 1933 on the purchase date and there were no security specific restrictions for these shares, and therefore the value of the 1.7 million shares acquired by us was $ 11.6 million. We paid total consideration of $ 53.0 million to Calithera, composed of the $ 45.0 million upfront license fee and the $ 8.0 million stock purchase price. 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 29 Table of Contents 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 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. We intend to hold the investment in Calithera for the foreseeable future and therefore, are accounting for our shares held in Calithera 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 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. 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 will 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 2017, we paid MacroGenics an upfront payment of $ 150.0 million, which was recorded in research and development expense. MacroGenics was initially eligible to receive up to $ 420.0 million in future contingent development and regulatory milestones and up to $ 330.0 million in commercial milestones as well as tiered royalties ranging from 15 % to 24 % of global net sales. 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. The agreement may be terminated in its entirety or on a licensed product by licensed product basis by us for convenience. 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 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. 30 Table of Contents 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. In January 2018, we paid Syros an upfront non-refundable (except in the event of a material breach of the agreement by Syros) payment of $ 10.0 million, which was recorded in research and development expense. In addition, in January 2018, we entered into a Stock Purchase Agreement with Syros for the purchase of 0.8 million common shares of Syros for an aggregate purchase price of $ 10.0 million in cash, or $ 12.61 per share. We agreed to not sell or otherwise transfer any of our Syros shares for a period, referred to as the Lock-Up Period, of 12 months after the closing date of the sale. We completed the purchase of the shares on January 8, 2018 when the closing price on The Nasdaq Stock Market was $ 9.77 per share. The shares we acquired were not registered on the purchase date, and accordingly, we estimated a discount for lack of marketability on the shares of $ 0.1 million, which resulted in a net fair value of the shares on the issuance date of $ 7.6 million. Of the $10.0 million aggregate purchase price paid, $ 7.6 million was allocated to our stock purchase in Syros and was recorded within long term investments and $ 2.4 million, representing premium paid on the purchase, was allocated to research and development expense. Also in January 2018, we entered into an Amended Stock Purchase Agreement with Syros for the purchase of an additional 0.1 million common shares of Syros for an aggregate purchase price of $ 1.4 million in cash, or $ 9.55 per share. The shares were acquired in February 2018 and the $ 1.4 million aggregate purchase price was recorded within long term investments on the condensed consolidated balance sheets. 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 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 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. We intend to hold the investment in Syros for the foreseeable future and therefore, are accounting for our shares held in Syros 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 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. Innovent In December 2018, we entered into a research collaboration and licensing agreement with Innovent. Under the terms of this agreement, Innovent received exclusive development and commercialization rights to our clinical-stage product candidates pemigatinib, itacitinib and parsaclisib in hematology and oncology in mainland China, Hong Kong, Macau and Taiwan. 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 31 Table of Contents 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. In addition, we were initially eligible to receive up to an additional $ 129.0 million in potential development and regulatory milestones. 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 Innovent and decisions made by regulatory agencies. In April 2020, we recognized a $ 5.0 million milestone for the FDA approval of pemigatinib as PEMAZYRE, which was recorded in milestone and contract revenues. In the event of commercialization of the licensed molecule, we are eligible to receive up to $ 202.5 million in potential sales milestones from Innovent. We will recognize sales milestones in the corresponding period of the product sale upon confirmation of net sales milestone threshold achievement by Innovent. We are also eligible to receive tiered royalties from the high-teens to the low-twenties on future sales of products resulting from the collaboration. 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 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. Zai Lab In July 2019, we entered into a collaboration and license agreement with Zai Lab. Under the terms of this agreement, Zai Lab received development and exclusive commercialization rights to INCMGA0012 in hematology and oncology in mainland China, Hong Kong, Macau and Taiwan. In August 2019, we recognized an upfront payment under this agreement of $ 17.5 million upon our transfer of the functional intellectual property related to the licensed product candidate to Zai Lab, which was recorded in milestone and contract revenues. The upfront milestone was recognized as revenue at a point in time upon our transfer of the license to Zai Lab for the right to use the functional intellectual property. The agreement allows for Zai Lab to continue development of the licensed molecule and to submit the licensed molecule to authorities for regulatory approval within the agreement territory, upon which we are eligible for up to $ 22.5 million in potential development and regulatory milestones. 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 Zai Lab and decisions made by regulatory agencies. In the event of commercialization of the licensed molecule, we are eligible to receive up to $ 37.5 million in potential sales milestones from Zai Lab. We will recognize sales milestones in the corresponding period of the product sale upon confirmation of net sales milestone threshold achievement by Zai Lab. We are also eligible to receive tiered royalties from the low to mid-twenties on future product sales resulting from the collaboration. 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 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. 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 is currently in clinical development by MorphoSys. MorphoSys 32 Table of Contents 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. The agreement became effective in March 2020 after clearance by the German and Austrian antitrust authorities and expiration of the waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976. 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. In March 2020, we paid MorphoSys an upfront non-refundable payment of $ 750.0 million which was recorded in research and development expense on the condensed consolidated statement of operations for the three months ended March 31, 2020. MorphoSys is eligible to receive up to $ 740.0 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. 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”). We agreed, subject to limited exceptions, not to sell or otherwise transfer any of the New ADSs for an 18-month period after the closing date of the sale. We completed the purchase of the ADSs on March 3, 2020 when the closing price on The Nasdaq Stock Market was $ 27.65 per ADS. The New ADSs were not registered under the Securities Act of 1933 on the purchase date, and accordingly, we estimated a discount for lack of marketability on the shares of $ 4.9 million, which resulted in a net fair value of the shares on the issuance date of $ 95.5 million. 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 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 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 33 Table of Contents 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. 10. Stock compensation 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Employee Stock Options ​ Employee Stock Purchase Plan ​ ​ For the Three Months Ended For the Nine Months Ended ​ For the Three Months Ended For the Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2020     2019    2020    2019    ​ 2020    2019    2020    2019    Average risk-free interest rates ​ 0.28 %   1.74 %   0.85 %   2.29 %   0.13 %   1.63 %   0.17 %   1.94 %   Average expected life (in years) ​ 5.15 ​ 5.09 ​ 4.96 ​ 5.28 ​ 0.50 ​ 0.50 ​ 0.50 ​ 0.50 ​ Volatility ​ 39 % 45 % 40 % 45 % 38 % 34 % 46 % 34 % Weighted-average fair value (in dollars) ​ 36.73 ​ 34.83 ​ 32.79 ​ 32.38 ​ 22.83 ​ 15.04 ​ 19.07 ​ 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. 34 Table of Contents Option activity under our 2010 Amended and Restated Stock Incentive Plan (the “2010 Stock Plan”) was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares Subject to ​ ​ ​ Outstanding Options ​ ​ ​ ​ ​ Weighted Average ​ ​ Shares Exercise Price Balance at December 31, 2019 12,632,657 ​ $ 81.42 ​ Options granted 2,068,098 ​ $ 93.24 ​ Options exercised ( 1,975,908 ) ​ $ 52.78 ​ Options cancelled ​ ( 444,654 ) ​ $ 91.72 ​ Balance at September 30, 2020 12,280,193 ​ $ 87.65 ​ ​ 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. Previously, our option grants generally had 7 -year terms and vested over three years , with 33 % vesting after one year and the remainder vesting in 24 equal monthly installments. Restricted stock unit (“RSU”) and performance share (“PSU”) award activity under the 2010 Stock Plan was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares Subject to ​ ​ ​ Outstanding Awards ​ ​ Shares Grant Date Value Balance at December 31, 2019 2,602,376 ​ $ 79.69 ​ RSUs granted ​ 1,313,820 ​ $ 98.44 ​ PSUs granted ​ 92,347 ​ $ 106.47 ​ RSUs released ​ ( 549,051 ) ​ $ 86.14 ​ PSUs released ​ ( 35,455 ) ​ $ 78.85 ​ RSUs cancelled ​ ( 114,591 ) ​ $ 84.62 ​ PSUs cancelled ​ ( 142,250 ) ​ $ 68.79 ​ Balance at September 30, 2020 ​ 3,167,196 ​ $ 87.45 ​ ​ In January 2014, we began granting RSUs and PSUs 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 prior to July 2016 was subject to cliff vesting after three years . In July 2016, we revised the terms of our RSU grants to provide that the awards will vest 25 % annually over four years . In June 2018, we granted 190,000 RSUs and 446,500 PSUs under long term incentive plans with performance and/or service-based milestones with graded and/or cliff vesting over three to four years . In April 2019, we granted an additional 100,000 PSUs under one of the existing long term incentive plans with performance based milestones and cliff vesting. For one of the existing long term incentive plans, under which 106,500 PSUs were granted, the actual number of shares of our common stock into which each PSU may convert was subject to a multiplier of up to 267 % based on the level at which the performance conditions were achieved. The actual number of shares of our common stock into which each PSU will convert is at a multiplier of 142 % based on the performance conditions being achieved as of March 31, 2019 and will continue to vest through June 2022. For an existing long term incentive plan, under which 150,000 PSUs were granted, the actual number of shares of our common stock into which each PSU may convert was subject to a multiplier of up to 100 % if all performance conditions were achieved or 0 % if no performance conditions were achieved. The actual number of shares of our common stock into which each PSU will convert is at a multiplier of 100 % based on the performance conditions being achieved as of December 31, 2019 and will cliff vest in June 2021. 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 35 Table of Contents 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 . The shares of our common stock into which each PSU may convert is subject to a multiplier up to 150 % based on the level at which the performance condition is achieved. Compensation expense for the performance-based awards is recorded over the estimated service period when the performance condition is deemed probable of achievement. The actual number of shares of our common stock into which each PSU converted was at a multiplier of 83 % based on the performance condition being achieved as of December 31, 2018. These PSUs will continue to vest through July 2022. In July 2019, we granted 86,975 PSUs to executives with a performance milestone and graded vesting over four years . The shares of our common stock into which each PSU may convert is subject to a multiplier up to 125 % based on the level at which the performance condition is achieved. Compensation expense for the performance-based awards is recorded over the estimated service period when the performance condition is deemed probable of achievement. The actual number of shares of our common stock into which each PSU will convert is at a multiplier of 101.8 % based on the performance condition being achieved as of December 31, 2019. 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: ​ ​ ​ ​ ​ ​ Shares Available ​ ​ for Grant Balance at December 31, 2019 9,882,122 ​ Options, RSUs and PSUs granted ( 4,755,820 ) ​ Options, RSUs and PSUs cancelled ​ 641,542 ​ Balance at September 30, 2020 5,767,844 ​ ​ 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 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. ​ ​ 36 Table of Contents 11. Accrued and other current liabilities Accrued and other current liabilities consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ 2020 2019 Royalties $ 92,149 ​ $ 73,221 Clinical related costs ​ ​ 95,451 88,710 Sales allowances ​ ​ 73,610 ​ ​ 59,924 Construction in progress ​ ​ 12,835 ​ ​ 12,732 Operating lease liabilities ​ ​ 10,713 ​ ​ 9,343 Other current liabilities ​ 49,557 ​ 42,020 Total accrued and other current liabilities ​ $ 334,315 ​ $ 285,950 ​ ​ 12. Debt The components of the convertible senior notes are as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Carrying Amount, ​ ​ ​ Interest Rates ​ ​ ​ September 30, ​ December 31, ​ Debt September 30, 2020 Maturities 2020 2019 1.25 % Convertible Senior Notes due 2020 1.25 % 2020 ​ $ 11,900 ​ $ 18,300 ​ ​ The carrying amount and fair value of our convertible senior notes are as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2020 ​ December 31, 2019 ​ ​ Carrying ​ ​ Carrying ​ ​ ​ ​ Amount ​ Fair Value ​ Amount ​ Fair Value ​ 1.25 % Convertible Senior Notes due 2020 ​ $ 11,900 ​ $ 20,747 ​ $ 18,300 ​ $ 32,511 ​ ​ The fair value of the 1.25 % Convertible Senior Notes due November 15, 2020 (the “2020 Notes”) is based on data from readily available pricing sources which utilize market observable inputs and other characteristics for similar types of instruments, and, therefore, is classified within Level 2 in the fair value hierarchy. Prior to May 14, 2014, the 2020 Notes were not convertible except in connection with a make-whole fundamental change, as defined in the indenture. Beginning on, and including, May 15, 2014, the 2020 Notes are convertible prior to the close of business on the business day immediately preceding May 15, 2020 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on March 31, 2014 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the 2020 Notes on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $ 1,000 principal amount of the 2020 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate for the 2020 Notes on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after May 15, 2020 until the close of business on the second scheduled trading day immediately preceding the relevant maturity date, the 2020 Notes are convertible at any time, regardless of the foregoing circumstances. 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 September 30, 2020 due to their maturity date of November 15, 2020, unless earlier purchased or converted. 37 Table of Contents 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 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 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. The net periodic benefit cost was as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 ​ 2019 2020 ​ 2019 Service cost $ 1,523 ​ $ 1,263 $ 4,457 ​ $ 3,813 Interest cost ​ 49 ​ ​ 84 ​ 142 ​ ​ 253 Expected return on plan assets ​ ( 32 ) ​ ​ ( 60 ) ​ ( 93 ) ​ ​ ( 180 ) Amortization of prior service cost ​ 54 ​ ​ 54 ​ 161 ​ ​ 161 Amortization of actuarial losses ​ ​ 166 ​ ​ 74 ​ ​ 500 ​ ​ 186 ​ Net periodic benefit cost $ 1,760 ​ $ 1,415 $ 5,167 ​ $ 4,233 ​ The components of net periodic benefit cost other than the service cost component are included in other income (expense), net on the condensed consolidated statements of operations. 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 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. 14. Income taxes The Company is subject to U.S. federal, state and foreign income taxes. 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 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. 38 Table of Contents 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. After considering valuation allowance impacts, the change in unrecognized tax benefits resulted in a $ 0.1 million decrease to noncurrent other liabilities on the condensed consolidated balance sheet. 15. Net income (loss) per share Net income (loss) per share was calculated as follows for the periods indicated below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ September 30, September 30, (in thousands, except per share data) 2020 2019 2020 2019 Basic Net Income (Loss) Per Share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic net income (loss) per share ​ $ ( 15,203 ) ​ $ 128,271 ​ $ ( 445,547 ) ​ $ 335,901 Weighted average common shares outstanding ​ ​ 218,784 ​ ​ 215,199 ​ ​ 217,684 ​ ​ 214,628 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic net income (loss) per share ​ $ ( 0.07 ) ​ $ 0.60 ​ $ ( 2.05 ) ​ $ 1.57 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted Net Income (Loss) Per Share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted net income (loss) ​ $ ( 15,203 ) ​ $ 128,271 ​ $ ( 445,547 ) ​ $ 335,901 Weighted average common shares outstanding ​ ​ 218,784 ​ ​ 215,199 ​ ​ 217,684 ​ ​ 214,628 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Dilutive stock options and awards ​ ​ — ​ ​ 2,592 ​ ​ — ​ ​ 2,765 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average shares used to compute diluted net income (loss) per share ​ ​ 218,784 ​ ​ 217,791 ​ ​ 217,684 ​ ​ 217,393 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted net income (loss) per share ​ $ ( 0.07 ) ​ $ 0.59 ​ $ ( 2.05 ) ​ $ 1.55 ​ The potential common shares that were excluded from the diluted net income (loss) per share computation are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 2020 2019 Outstanding stock options and awards 15,447,389 ​ 8,893,596 ​ 15,447,389 ​ 9,457,441 Common shares issuable upon conversion of the 2020 Notes 231,339 ​ 368,939 ​ 231,339 ​ 368,939 Total potential common shares excluded from diluted net income (loss) per share computation 15,678,728 9,262,535 15,678,728 9,826,380 ​ 16. Contingencies In December 2018, we received a civil investigative demand from the U.S. Department of Justice (“DOJ”) for documents and information relating to our speaker programs and patient assistance programs, including our support of non-profit organizations that provide financial assistance to eligible patients. We have cooperated with this inquiry. In November 2019, the qui tam complaint underlying the DOJ inquiry was unsealed (“Complaint”), at which time we learned that a former employee whom we had terminated had made certain allegations relating to the programs described above. We then became aware that the DOJ had not intervened in the qui tam action, and, to our knowledge, the DOJ has not intervened to date. We filed an answer to the Complaint on January 22, 2020, and the action is proceeding. 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 September 30, 2020. 39 Table of Contents 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. 17. Subsequent event 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. ​ ​ 40 Table of Contents ​