INCYTE CORP 10-K

Item 8. Financial Statements and Supplementary Data INDEX ​ ​ ​ ​ Page Consolidated Financial Statements of Incyte Corporation ​ Report of Ernst & Young LLP, Independent Registered Public Accounting Firm 76 Consolidated Balance Sheets as of December 31, 2020 and 2019 78 Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 79 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018 80 Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018 81 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 82 Notes to the Consolidated Financial Statements 83 Interim Consolidated Financial Information (unaudited) 119 ​ 75 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Incyte Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Incyte Corporation (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 9, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. ​ ​ ​ ​ Allowances for rebates, discounts and chargebacks owed to governmental entities Description of the Matter ​ As discussed in Note 1 to the consolidated financial statements, the Company recognizes revenues for product received by its customers net of allowances for customer credits, including estimated rebates, chargebacks, discounts, returns, distribution service fees, patient assistance programs, and government rebates. Liabilities related to sales allowances are presented within accrued and other current liabilities on the consolidated balance sheet and totaled $73.2 million as of December 31, 2020. Auditing the allowances for rebates, discounts and chargebacks owed to governmental entities was complex and highly judgmental due to the significant estimation uncertainty involved in management’s assumptions, including the levels of expected utilization of these rebates, discounts 76 Table of Contents and chargebacks based on the amount of drugs sold to eligible patients, as well as the complexity of the government mandated calculations. The allowances for rebates, discounts and chargebacks owed to governmental entities are sensitive to these significant assumptions and calculations. How We Addressed the Matter in Our Audit ​ We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s review of the allowances for rebates, discounts and chargebacks owed to governmental entities. For example, we tested controls over management’s review of the significant assumptions, such as the utilization of these rebates, discounts and chargebacks as well as controls over management’s review of the application of the government mandated calculations. To test the allowances for rebates, discounts, and chargebacks owed to governmental entities, we performed audit procedures that included, among others, evaluating the methodologies used and testing the significant assumptions discussed above. We compared the significant assumptions used by management to historical trends, evaluated the change in the accruals from prior periods, and assessed the historical accuracy of management’s estimates against actual results. We also tested the completeness and accuracy of the underlying data used in the Company’s calculations through reconciliation to third-party invoices, claims data and actual cash payments. In addition, we involved our governmental pricing specialists to assist in evaluating management’s methodology and calculations used to measure certain estimated rebates, discounts and chargebacks. ​ ​ Valuation of acquisition-related contingent consideration liability Description of the Matter ​ As discussed in Note 3 to the consolidated financial statements, the Company’s acquisition-related contingent consideration liability, which consists of certain future royalty obligations on future net sales of ICLUSIG, is remeasured to its estimated fair value each reporting period, with changes in fair value recorded in the consolidated statements of operations. As of December 31, 2020, the acquisition-related contingent consideration liability was $266.0 million. Auditing the valuation of the acquisition-related contingent consideration liability was complex and highly judgmental due to the significant estimation required in determining the fair value. In particular, the fair value estimate was sensitive to significant assumptions such as the weighted average cost of capital and projected future ICLUSIG revenues, which are affected by expectations about future industry, market or economic conditions, and are forward-looking and inherently uncertain. How We Addressed the Matter in Our Audit ​ We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s valuation of the acquisition-related contingent consideration liability. For example, we tested the Company's controls over management’s review of the valuation model, including controls over the significant assumptions utilized in the calculation, such as the weighted average cost of capital and the projected future ICLUSIG revenues. To test the estimated fair value of the acquisition-related contingent consideration liability, we performed audit procedures that included, among others, assessing the terms of the arrangement, evaluating the methodology used, and testing the significant assumptions discussed above used by the Company in its analysis. We involved our valuation specialists to assist in the evaluation of the significant assumptions and methodology used by the Company. We also compared the significant assumptions to current industry, market and economic trends and to the Company's budgets and forecasts. In addition, we assessed the historical accuracy of management’s estimates against actual performance. ​ /s/ Ernst & Young LLP We have served as the Company's auditor since 1991. Philadelphia, Pennsylvania February 9, 2021 77 Table of Contents INCYTE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except number of shares and par value) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ 2020 2019 ASSETS ​ ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 1,513,008 ​ $ 1,832,684 ​ Marketable securities—available-for-sale (amortized cost $ 288,199 ; allowance for credit losses $ 0 ) ​ 288,369 ​ 284,870 ​ Accounts receivable ​ 481,994 ​ 308,809 ​ Inventory ​ 16,425 ​ 11,400 ​ Prepaid expenses and other current assets ​ ​ 60,098 ​ ​ 43,725 ​ Total current assets ​ 2,359,894 ​ 2,481,488 ​ ​ ​ ​ ​ ​ ​ ​ ​ Restricted cash and investments ​ 1,757 ​ ​ 1,023 ​ Long term investments ​ 222,301 ​ ​ 133,657 ​ Inventory ​ 19,548 ​ ​ 5,105 ​ Property and equipment, net ​ 559,625 ​ ​ 377,567 ​ Finance lease right-of-use assets, net ​ ​ 28,451 ​ ​ 29,058 ​ Other intangible assets, net ​ ​ 172,291 ​ ​ 193,828 ​ Goodwill ​ ​ 155,593 ​ ​ 155,593 ​ Other assets, net ​ 41,458 ​ ​ 49,431 ​ Total assets ​ $ 3,560,918 ​ $ 3,426,750 ​ ​ ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 98,767 ​ $ 83,647 ​ Accrued compensation ​ 113,340 ​ 90,706 ​ Accrued and other current liabilities ​ 378,404 ​ 285,979 ​ Finance lease liabilities ​ ​ 2,284 ​ ​ 664 ​ Convertible senior notes ​ ​ — ​ ​ 18,300 ​ Acquisition-related contingent consideration ​ ​ 38,400 ​ ​ 34,044 ​ Total current liabilities ​ 631,195 ​ 513,340 ​ ​ ​ ​ ​ ​ ​ ​ ​ Acquisition-related contingent consideration ​ ​ 227,600 ​ ​ 242,956 ​ Finance lease liabilities ​ ​ 32,573 ​ ​ 31,918 ​ Other liabilities ​ 58,282 ​ ​ 40,130 ​ Total liabilities ​ 949,650 ​ 828,344 ​ ​ ​ ​ ​ ​ ​ ​ ​ Commitments and contingencies (Note 16) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ ​ ​ ​ ​ ​ Preferred stock, $ 0.001 par value; 5,000,000 shares authorized; none issued or outstanding as of December 31, 2020 and December 31, 2019 ​ — ​ — ​ Common stock, $ 0.001 par value; 400,000,000 shares authorized; 219,489,329 and 216,177,830 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively ​ 219 ​ ​ 216 ​ Additional paid-in capital ​ 4,352,864 ​ ​ 4,044,490 ​ Accumulated other comprehensive loss ​ ( 15,360 ) ​ ​ ( 15,542 ) ​ Accumulated deficit ​ ( 1,726,455 ) ​ ​ ( 1,430,758 ) ​ Total stockholders’ equity ​ 2,611,268 ​ 2,598,406 ​ Total liabilities and stockholders’ equity ​ $ 3,560,918 ​ $ 3,426,750 ​ See accompanying notes. 78 Table of Contents INCYTE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 2019 2018 Revenues: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Product revenues, net ​ $ 2,068,736 ​ $ 1,774,922 ​ $ 1,466,900 ​ Product royalty revenues ​ 392,966 ​ 306,337 ​ 234,780 ​ Milestone and contract revenues ​ 205,000 ​ 77,500 ​ 180,000 ​ Other revenues ​ — ​ — ​ 203 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total revenues ​ 2,666,702 ​ 2,158,759 ​ 1,881,883 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Costs and expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of product revenues (including definite-lived intangible amortization) ​ 131,328 ​ 114,249 ​ 94,123 ​ Research and development ​ 2,215,942 ​ 1,154,111 ​ 1,197,957 ​ Selling, general and administrative ​ 516,922 ​ 468,711 ​ 434,407 ​ Change in fair value of acquisition-related contingent consideration ​ ​ 23,385 ​ ​ 19,682 ​ ​ 26,173 ​ Collaboration loss sharing ​ ​ 42,801 ​ ​ — ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total costs and expenses ​ 2,930,378 ​ 1,756,753 ​ 1,752,660 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) from operations ​ ( 263,676 ) ​ 402,006 ​ 129,223 ​ Other income (expense), net ​ 23,206 ​ 52,182 ​ 31,760 ​ Interest expense ​ ( 2,174 ) ​ ( 1,855 ) ​ ( 1,543 ) ​ Unrealized gain (loss) on long term investments ​ 10,426 ​ 34,458 ​ ( 44,093 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) before provision for income taxes ​ ( 232,218 ) ​ 486,791 ​ 115,347 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Provision for income taxes ​ 63,479 ​ 39,885 ​ 5,854 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ ( 295,697 ) ​ $ 446,906 ​ $ 109,493 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ ( 1.36 ) ​ $ 2.08 ​ $ 0.52 ​ Diluted ​ $ ( 1.36 ) ​ $ 2.05 ​ $ 0.51 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares used in computing net income (loss) per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 218,073 ​ ​ 214,913 ​ ​ 212,383 ​ Diluted ​ ​ 218,073 ​ ​ 217,657 ​ ​ 215,635 ​ See accompanying notes. ​ 79 Table of Contents INCYTE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS ) (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 2019 2018 Net income (loss) ​ $ ( 295,697 ) ​ $ 446,906 ​ $ 109,493 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income (loss): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign currency translation ​ ​ 8,450 ​ ​ ( 192 ) ​ ​ 91 ​ Unrealized gain on marketable securities, net of tax ​ 95 ​ 1,137 ​ 203 ​ Defined benefit pension obligations, net of tax ​ ​ ( 8,363 ) ​ ​ ( 6,322 ) ​ ​ ( 696 ) ​ Other comprehensive income (loss) ​ 182 ​ ( 5,377 ) ​ ( 402 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Comprehensive income (loss) ​ $ ( 295,515 ) ​ $ 441,529 ​ $ 109,091 ​ See accompanying notes. ​ 80 Table of Contents INCYTE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except number of shares) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Other ​ ​ ​ ​ Total ​ ​ ​ Common ​ Paid-in ​ Comprehensive ​ Accumulated ​ Stockholders’ ​ ​ ​ Stock ​ Capital ​ Loss ​ Deficit ​ Equity Balances at December 31, 2017 ​ $ 211 ​ $ 3,627,433 ​ $ ( 7,010 ) ​ $ ( 1,990,005 ) ​ $ 1,630,629 ​ Issuance of 1,624,376 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and 233,712 shares of Common Stock under the ESPP ​ 2 ​ ​ 29,940 ​ ​ — ​ ​ — ​ 29,942 ​ Issuance of 148,761 shares of Common Stock upon conversion of Convertible Senior Notes due 2018 ​ — ​ ​ 7,695 ​ ​ — ​ ​ — ​ 7,695 ​ Issuance of 4,905 shares of Common Stock for services rendered ​ ​ — ​ ​ 344 ​ ​ — ​ ​ — ​ ​ 344 ​ Stock compensation ​ — ​ 148,266 ​ — ​ — ​ 148,266 ​ Other comprehensive loss ​ ​ — ​ — ​ ( 402 ) ​ — ​ ​ ( 402 ) ​ Adoption of ASU No. 2016-01 ​ ​ — ​ ​ — ​ ​ ( 2,753 ) ​ ​ 2,753 ​ ​ — ​ Net income ​ ​ — ​ — ​ — ​ 109,493 ​ ​ 109,493 ​ Balances at December 31, 2018 ​ $ 213 ​ $ 3,813,678 ​ $ ( 10,165 ) ​ $ ( 1,877,759 ) ​ $ 1,925,967 ​ Issuance of 2,657,892 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and 239,590 shares of Common Stock under the ESPP ​ 3 ​ ​ 63,296 ​ ​ — ​ ​ — ​ ​ 63,299 ​ Issuance of 5,688 shares of Common Stock for services rendered ​ ​ — ​ ​ 487 ​ ​ — ​ ​ — ​ ​ 487 ​ Stock compensation ​ ​ — ​ ​ 167,029 ​ ​ — ​ ​ — ​ ​ 167,029 ​ Other comprehensive loss ​ — ​ — ​ ( 5,377 ) ​ — ​ ( 5,377 ) ​ Adoption of ASU No. 2016-02 (Note 1) ​ — ​ ​ — ​ ​ — ​ ​ 95 ​ 95 ​ Net income ​ — ​ — ​ — ​ 446,906 ​ 446,906 ​ Balances at December 31, 2019 ​ $ 216 ​ $ 4,044,490 ​ $ ( 15,542 ) ​ $ ( 1,430,758 ) ​ $ 2,598,406 ​ Issuance of 2,677,810 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and 258,453 shares of Common Stock under the ESPP ​ 3 ​ ​ 110,302 ​ ​ — ​ ​ — ​ ​ 110,305 ​ Issuance of 6,350 shares of Common Stock for services rendered ​ ​ — ​ ​ 546 ​ ​ — ​ ​ — ​ ​ 546 ​ Issuance of 368,886 shares of Common Stock upon conversion of Convertible Senior Notes due 2020 ​ ​ — ​ ​ 18,999 ​ ​ — ​ ​ — ​ ​ 18,999 ​ Stock compensation ​ — ​ ​ 178,527 ​ ​ — ​ ​ — ​ ​ 178,527 ​ Other comprehensive income ​ — ​ — ​ 182 ​ — ​ 182 ​ Net loss ​ — ​ — ​ — ​ ( 295,697 ) ​ ( 295,697 ) ​ Balances at December 31, 2020 ​ $ 219 ​ $ 4,352,864 ​ $ ( 15,360 ) ​ $ ( 1,726,455 ) ​ $ 2,611,268 ​ See accompanying notes. 81 Table of Contents INCYTE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 2019 2018 Cash flows from operating activities : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ ( 295,697 ) ​ $ 446,906 ​ $ 109,493 ​ Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ ​ 51,807 ​ 54,533 ​ 54,969 ​ Stock-based compensation ​ ​ 177,877 ​ 166,589 ​ 148,153 ​ Deferred income taxes ​ ​ ( 350 ) ​ ​ ( 377 ) ​ ​ ( 459 ) ​ Other, net ​ ​ 546 ​ ​ 486 ​ ​ 344 ​ Unrealized (gain) loss on long term investments ​ ​ ( 10,426 ) ​ ( 34,458 ) ​ 44,093 ​ Change in fair value of acquisition-related contingent consideration ​ ​ 23,385 ​ ​ 19,682 ​ ​ 26,173 ​ Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ ( 173,185 ) ​ ( 1,211 ) ​ ( 41,299 ) ​ Prepaid expenses and other assets ​ ​ ( 8,050 ) ​ 5,744 ​ ( 33,412 ) ​ Inventory ​ ​ ( 19,468 ) ​ ( 6,100 ) ​ 4,043 ​ Accounts payable ​ ​ 15,120 ​ ( 20,180 ) ​ 36,156 ​ Accrued and other liabilities ​ ​ 113,842 ​ 79,042 ​ ( 12,027 ) ​ Net cash (used in) provided by operating activities ​ ( 124,599 ) ​ 710,656 ​ 336,227 ​ Cash flows from investing activities : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Purchase of long term investments ​ ​ ( 95,468 ) ​ — ​ ( 8,936 ) ​ Sale of long term investment ​ ​ 17,250 ​ ​ — ​ ​ — ​ Capital expenditures ​ ​ ( 187,379 ) ​ ( 78,064 ) ​ ( 73,483 ) ​ Purchases of marketable securities ​ ​ ( 516,874 ) ​ ( 374,809 ) ​ ( 159,932 ) ​ Sale and maturities of marketable securities ​ ​ 513,470 ​ 365,419 ​ 155,928 ​ Net cash used in investing activities ​ ( 269,001 ) ​ ( 87,454 ) ​ ( 86,423 ) ​ Cash flows from financing activities : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Proceeds from issuance of common stock under stock plans ​ ​ 110,305 ​ 63,299 ​ 29,942 ​ Payment of finance lease liabilities ​ ​ ( 836 ) ​ ( 822 ) ​ — ​ Payment of contingent consideration ​ ​ ( 37,760 ) ​ ​ ( 16,766 ) ​ ​ ( 15,285 ) ​ Net cash provided by financing activities ​ 71,709 ​ 45,711 ​ 14,657 ​ Effect of exchange rates on cash, cash equivalents, restricted cash and investments ​ ​ 2,949 ​ ​ ( 192 ) ​ ​ 91 ​ Net (decrease) increase in cash, cash equivalents, restricted cash and investments ​ ​ ( 318,942 ) ​ 668,721 ​ 264,552 ​ Cash, cash equivalents, restricted cash and investments at beginning of period ​ ​ 1,833,707 ​ ​ 1,164,986 ​ ​ 900,434 ​ Cash, cash equivalents, restricted cash and investments at end of period ​ $ 1,514,765 ​ $ 1,833,707 ​ $ 1,164,986 ​ Supplemental Schedule of Cash Flow Information ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest paid ​ $ 194 ​ $ 239 ​ $ 268 ​ Income taxes paid ​ $ 70,712 ​ $ 33,553 ​ $ 5,417 ​ Reclassification to common stock and additional paid in capital in connection with conversions of 0.375 % convertible senior notes due 2018 ​ $ — ​ $ — ​ $ 7,695 ​ Reclassification to common stock and additional paid in capital in connection with conversions of 1.25 % convertible senior notes due 2020 ​ $ 18,999 ​ $ — ​ $ — ​ Unpaid purchases of property and equipment ​ $ 22,807 ​ $ 12,732 ​ $ 7,673 ​ Leased assets obtained in exchange for new operating lease liabilities ​ $ 19,908 ​ $ 7,607 ​ $ — ​ Leased assets obtained in exchange for new finance lease liabilities ​ $ 2,160 ​ $ 29,889 ​ $ — ​ See accompanying notes. ​ 82 Table of Contents INCYTE CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization and Summary of Significant Accounting Policies Organization and Business. Incyte Corporation (including its subsidiaries, “Incyte,” “we,” “us,” or “our”) is a biopharmaceutical company focused on developing and commercializing proprietary therapeutics. Our portfolio includes compounds in various stages, ranging from preclinical to late stage development, and commercialized products JAKAFI® (ruxolitinib), ICLUSIG® (ponatinib), PEMAZYRE® (pemigatinib) and MONJUVI® (tafasitamab-cxix) which is co-commercialized. Our operations are treated as one operating segment. Principles of Consolidation. The 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 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. By policy, we invest our excess available funds primarily in U.S. government debt securities which are securities issued or guaranteed by the U.S. government and money market funds that meet certain guidelines, which limits exposure to potential credit losses. 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. 83 Table of Contents 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 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 consolidated statements of operations. The cost of securities sold is based on the specific identification method. Accounts Receivable. As of December 31, 2020 and 2019, we had no allowance for doubtful accounts. We provide an allowance for doubtful accounts based on management’s assessment of the collectability of specific customer accounts and includes consideration of the credit worthiness and financial condition of those customers, aging of such receivables, history of collectability with the customer and the general economic environment. We record an allowance to reduce the receivables to the amount that is reasonably believed to be collectible. 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 consolidated balance sheets when we expect inventory to be consumed for commercial use within the next twelve months. 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 December 31, 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 consolidated balance sheets. Our equity investments are accounted for at fair value using readily determinable pricing available on a securities exchange on our consolidated balance sheets. All changes in fair value are reported in the 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 84 Table of Contents 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 using the modified retrospective method. 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 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 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. 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, 2020 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 December 31, 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 85 Table of Contents 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 year ended December 31, 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 Item 1. Business and in Item 1A. Risk Factors. 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 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 apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation, which for the Company is generally at a point in time. We also assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer. Product Revenues Our product revenues consist of 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. 86 Table of Contents 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 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 For each collaborative research, development and/or commercialization agreement that results in revenue under the guidance of ASC 606, Revenue from Contracts with Customers, we identify all material performance obligations, which may include the license to intellectual property and know-how, research and development activities and/or other activities. In order to determine the transaction price, in addition to any upfront payment, we estimate the amount of variable consideration, including milestone payments, at the outset of the contract utilizing the most likely amount method. The most likely amount method is used since the milestone payments have a binary outcome (i.e., we receive all or none of the milestone payment). We constrain the estimate of variable consideration such that it is probable that a significant 87 Table of Contents reversal of previously recognized revenue will not occur. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, management considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required. Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction price is generally allocated to each separate performance obligation on a relative standalone selling price basis. Out-licensing arrangements contain the right to use functional intellectual property, which is the underlying performance obligation of these collaborative arrangements. If the license of our intellectual property is determined to be distinct from other performance obligations in the arrangement, the functional intellectual property that is transferred to the collaborative partner at the onset of the arrangement is concluded to have significant standalone functionality and value at the point in time at which the intellectual property is made available to the collaborative partner. For licenses that are not distinct from other obligations identified in the arrangement, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, we apply an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. For each of the three years ended December 31, 2020, we had no revenues from intellectual licenses recognized over time. For milestone revenues related to sales-based achievements, we recognize the milestone revenues in the corresponding period of the product sale, in accordance with the guidance of ASC 606-10-55-65 for contracts that include a license to intellectual property and the license is the predominant item to which the product sale relates. Subsequent to the transfer of the intellectual property, we may earn milestones through achievement of pre-specified developmental or regulatory events and, as such, milestones are accounted for as variable consideration. We include developmental or regulatory milestones in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the milestone is subsequently resolved. Under the agreements currently in place, we do not consider these events to be within our control, but rather dependent upon the development activities of our collaborative partners and the decisions made by regulatory agencies. Accordingly, these milestones are not included in the transaction price until the counterparty, or third-party in the event of a regulatory submission, confirms the satisfaction or completion of the milestone triggering event. Given the high level of uncertainty of achievement, variable consideration associated with milestones are fully constrained until confirmation of the satisfaction or completion of the milestone by the third-party. 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 value of these milestones is dictated within the contract and is fixed upon achievement and reflects the amount of consideration which we expect to be entitled to in exchange for the satisfaction of that milestone. 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 and therefore, subsequent milestone payments due to Incyte are recognized as revenue at the point in time when such milestones are achieved. Our collaboration agreements may also include an option for the collaborative partner to elect to participate in research and development activities, such as shared participation in additional clinical trials using the compound. The presence of additional options for future participatory activities are assessed to determine if they represent material rights offered by us to the collaborative partner. We also determine whether the reimbursement of research and development expenses should be accounted for as collaborative revenues or an offset to research and development expenses in accordance with the provisions of gross or net revenue presentation and recognize the corresponding revenues or records the corresponding offset to research and development expenses as incurred. Our collaborative agreements may also include provisions for additional future collaborative efforts, such as options for shared commercialization staffing or licensing of additional molecules, involvement in joint committees, or options for inclusion in negotiations of future supply rights, which at the time of each collaborative agreement’s inception, are assessed to determine if these meet the definition of a performance obligation under ASC 606. 88 Table of Contents 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 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 89 Table of Contents 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. Advertising Expenses. Advertising expenses, comprised primarily of television, radio, print media and Internet advertising, are expensed as incurred and are included in selling, general, and administrative expenses. For the years ended December 31, 2020, 2019, and 2018, advertising expenses were approximately $ 28.9 million, $ 15.3 million, and $ 10.6 million, respectively. 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 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 consolidated statement of operations. For the year ended December 31, 2020, collaboration loss sharing represents our 50 % share of the United States loss for commercialization of MONJUVI (tafasitamab) under our agreement with MorphoSys, which is described in Note 6 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, 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 are 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 recognizes 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 3 to the consolidated 90 Table of Contents 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 and have adopted this guidance for the period ending December 31, 2020 as reflected in our disclosures in Note 15. 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 6 to the 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 consolidated financial statements. 91 Table of Contents Note 2. Revenues As discussed in Note 1, revenues are recognized under guidance within ASC 606 and ASC 808. The following table presents our disaggregated revenue for the periods presented (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended, ​ ​ December 31, ​ ​ 2020 ​ 2019 ​ 2018 ​ JAKAFI revenues, net ​ $ 1,937,850 ​ $ 1,684,968 ​ $ 1,386,964 ​ ICLUSIG revenues, net ​ ​ 105,002 ​ ​ 89,954 ​ ​ 79,936 ​ PEMAZYRE revenues, net ​ ​ 25,884 ​ ​ — ​ ​ — ​ Total product revenues, net ​ ​ 2,068,736 ​ ​ 1,774,922 ​ ​ 1,466,900 ​ JAKAVI product royalty revenues ​ ​ 277,902 ​ ​ 225,913 ​ ​ 194,694 ​ OLUMIANT product royalty revenues ​ ​ 110,920 ​ ​ 80,424 ​ ​ 40,086 ​ TABRECTA product royalty revenues ​ ​ 4,144 ​ ​ — ​ ​ — ​ Total product royalty revenues ​ ​ 392,966 ​ ​ 306,337 ​ ​ 234,780 ​ Milestone and contract revenues ​ ​ 205,000 ​ ​ 77,500 ​ ​ 180,000 ​ Other revenues ​ ​ — ​ ​ — ​ ​ 203 ​ Total revenues ​ $ 2,666,702 ​ $ 2,158,759 ​ $ 1,881,883 ​ ​ For further information on our revenue-generating contracts, refer to Note 6. Note 3. Fair Value of Financial Instruments The following is a summary of our marketable security portfolio for the periods presented (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net ​ ​ ​ ​ ​ ​ Amortized ​ Unrealized ​ Estimated ​ ​ Cost Gains Fair Value December 31, 2020 ​ ​ ​ ​ ​ ​ ​ Debt securities (government) ​ $ 288,199 ​ $ 170 ​ $ 288,369 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Debt securities (government) ​ $ 284,795 ​ $ 75 ​ $ 284,870 ​ ​ Our 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 1. As of December 31, 2020 and 2019, the available-for-sale debt securities were held in U.S. government debt securities and Treasury assets and were assessed on an individual security basis to have a de minimis risk of credit loss. Fair Value Measurements FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“the exit price”) in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value we use quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. The fair value hierarchy is broken down into three levels based on the source of inputs as follows: Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities. 92 Table of Contents 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 December 31, 2020 and 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 years ended December 31, 2020 and 2019. 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) December 31, 2020 Cash and cash equivalents ​ $ 1,513,008 ​ $ — ​ $ — ​ $ 1,513,008 ​ Debt securities (government) ​ — ​ 288,369 ​ — ​ 288,369 ​ Long term investments (Note 6) ​ 222,301 ​ — ​ — ​ 222,301 ​ Total assets ​ $ 1,735,309 ​ $ 288,369 ​ $ — ​ $ 2,023,678 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 6) ​ 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 (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) December 31, 2020 Acquisition-related contingent consideration ​ $ — ​ $ — ​ $ 266,000 ​ $ 266,000 Total liabilities ​ $ — ​ $ — ​ $ 266,000 ​ $ 266,000 93 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 roll forward of our Level 3 liabilities (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ 2019 ​ Balance at January 1, ​ $ 277,000 ​ $ 287,001 ​ Contingent consideration earned during the period but not yet paid ​ ​ ( 9,595 ) ​ ​ ( 23,012 ) ​ Payments made during the period ​ ​ ( 24,790 ) ​ ​ ( 6,671 ) ​ Change in fair value of contingent consideration ​ ​ 23,385 ​ ​ 19,682 ​ Balance at December 31, ​ $ 266,000 ​ $ 277,000 ​ ​ 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 December 31, 2020 included a weighted average cost of capital of 10 % and updated projections of future ICLUSIG revenues in the European Union and other countries for the approved third line treatment. The change in fair value of the contingent consideration during the years ended December 31, 2020 and 2019 was due primarily to the passage of time as there were no other significant changes in the key assumptions. We make payments to Takeda quarterly based on the royalties or any additional milestone payments earned in the previous quarter. As of December 31, 2020 and 2019, contingent consideration earned but not yet paid was $ 9.6 million and $ 23.0 million, respectively, and was included in accrued and other current liabilities. Non-Recurring Fair Value Measurements During the years ended December 31, 2020 and 2019, there were no measurements required for any assets or liabilities at fair value on a non-recurring basis. Note 4. Concentrations 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, 42 % and 30 % of the accounts receivable balance as of December 31, 2020 and 2019, respectively. For further information relating to these collaboration and license agreements, refer to Note 6. 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: ​ 94 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Percentage of Total Net ​ ​ ​ Product Revenues for the ​ ​ ​ Years Ended, ​ ​ ​ December 31, ​ ​ 2020 ​ 2019 ​ 2018 ​ Customer A ​ 20 % 20 % 20 % Customer B ​ 13 % 13 % 14 % Customer C ​ 17 % 16 % 15 % Customer D ​ 11 % 11 % 11 % ​ 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 the aggregate, 29 % and 39 % of the accounts receivable balance as of December 31, 2020 and 2019, respectively. The concentration of credit risk relating to ICLUSIG product revenues or accounts receivable is not significant. We assessed our collaborative and customer receivable assets as of December 31, 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. Note 5. Inventory Our inventory balance consists of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2020 ​ 2019 ​ Raw materials ​ $ 1,275 ​ $ 1,275 ​ Work-in-process ​ ​ 21,242 ​ ​ 8,634 ​ Finished goods ​ 13,456 ​ 6,596 ​ ​ ​ 35,973 ​ 16,505 ​ Inventories-current ​ 16,425 ​ 11,400 ​ Inventories-noncurrent ​ $ 19,548 ​ $ 5,105 ​ ​ Inventories, stated at the lower of cost and net realizable value, consist of raw materials, work-in-process and finished goods. At December 31, 2020, $ 16.4 million of inventory was classified as current on the consolidated balance sheet as we expect this inventory to be consumed for commercial use within the next twelve months. At December 31, 2020, $ 19.5 million of inventory was classified as non-current on the consolidated balance sheet as we did not expect this inventory to be consumed for commercial use within the next twelve months. We obtain some inventory components from a limited number of suppliers due to technology, availability, price, quality or other considerations. The loss of a supplier, the deterioration of our relationship with a supplier, or any unilateral violation of the contractual terms under which we are supplied components by a supplier could adversely affect our total revenues and gross margins. Note 6. 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. 95 Table of Contents 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 $ 200.0 million for the achievement of sales milestones through December 31, 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. In 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, 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 and a $ 80.0 million sales milestone for Novartis achieving annual net sales of a JAK licensed product of $ 1.2 billion. In 2018, we recognized a $ 60.0 million sales milestone for Novartis achieving annual net sales of a JAK licensed product of $ 900.0 million. 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 years ended December 31, 2020, 2019 and 2018, such royalties payable to Novartis on net sales within the United States totaled $ 89.9 million, $ 77.6 million and $ 63.0 million, respectively, and were reflected in cost of product revenues on the consolidated statements of operations. At December 31, 2020 and 2019, $ 96.4 million and $ 50.2 million, respectively, of accrued royalties payable to Novartis were included in accrued and other current liabilities on the 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 years ended December 31, 2020, 2019 and 2018 were net of $ 0.3 million, $ 1.5 million, and $ 3.2 million, respectively, of costs reimbursed by Novartis. At December 31, 2020 and 2019, $ 0.2 million and $ 0.4 million, respectively, of reimbursable costs were included in accounts receivable on the consolidated balance sheets. 96 Table of Contents Milestone and contract revenue under the Novartis agreement was $ 170.0 million, $ 0.0 million and $ 60.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. In addition, for the years ended December 31, 2020, 2019 and 2018, we recorded $ 277.9 million, $ 225.9 million and $ 194.7 million, respectively, of product royalty revenues related to Novartis net sales of JAKAVI outside the United States. For the year ended December 31, 2020 we recorded $ 4.1 million of product royalty revenues related to Novartis net sales of TABRECTA worldwide. 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 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 $ 265.0 million for the achievement of regulatory milestones through December 31, 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. 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. In 2020, we recognized a $ 20.0 million regulatory milestone for the European Commission approval of OLUMIANT and a $ 10.0 million regulatory milestone for the MHLW approval of OLUMIANT for the treatment of moderate-to-severe atopic dermatitis in adult patients who are candidates for systemic therapy. In 2018, we recognized a $ 20.0 million development milestone for the first patient treated in the systemic lupus erythematosus Phase III program for baricitinib and a $ 100.0 million regulatory milestone for the FDA approval of the 2mg dose of OLUMIANT for the treatment of adults with moderately-to-severely active rheumatoid arthritis. 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. 97 Table of Contents 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. We recorded no research and development expense under the Lilly agreement for co-funding the development of baricitinib for the years ended December 31, 2020 and 2019. Research and development expenses recorded under the Lilly agreement representing 30 % of the global development costs for baricitinib for the treatment of rheumatoid arthritis, psoriatic arthritis, atopic dermatitis, alopecia areata, systemic lupus erythematosus and axial spondyloarthritis for the year ended December 31, 2018 was $ 68.6 million. In May 2020, we amended our agreement with Lilly to enable Lilly to develop and commercialize baricitinib for the treatment of COVID-19. As part of the amended agreement, in addition to the royalties described above, we will be entitled to receive additional royalty payments with rates in the low teens on global net sales of baricitinib for the treatment of COVID-19 that exceed a specified aggregate global net sales threshold. The Lilly agreement will continue until Lilly no longer has any royalty payment obligations or, if earlier, the termination of the agreement in accordance with its terms. Royalties are payable by Lilly on a product-by-product and country-by-country basis until the latest to occur of (i) the expiration of the last valid claim of the licensed patent rights covering the licensed product in the relevant country, (ii) the expiration of regulatory exclusivity for the licensed product in such country and (iii) a specified period from first commercial sale in such country of the licensed product by Lilly or its affiliates or sublicensees. 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 was $ 30.0 million, $ 0.0 million and $ 120.0 million, respectively, for the years ended December 31, 2020, 2019 and 2018. In addition, for the years ended December 31, 2020, 2019 and 2018, we recorded $ 110.9 million, $ 80.4 million and $ 40.1 million, respectively, of product royalty revenues related to Lilly net sales of OLUMIANT outside the United States. 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 98 Table of Contents 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 on the consolidated statement of operations for the year ended December 31, 2018. 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 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 % as of December 31, 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. 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 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 years ended December 31, 2020, 2019 and 2018, we recorded an unrealized loss of $ 10.3 million, an unrealized gain of $ 30.0 million and an unrealized loss of $ 15.6 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. as of December 31, 2020 and 2019 was $ 44.7 million and $ 72.3 million, respectively. Research and development expenses for the years ended December 31, 2020, 2019 and 2018, also included $ 0.0 million, $ 1.5 million and $ 4.6 million, respectively, of development costs incurred pursuant to the Agenus arrangement. 99 Table of Contents At December 31, 2020 and 2019, a total of $ 0.5 million and $ 1.6 million, respectively, of such costs were included in accrued and other liabilities on the 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 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 100 Table of Contents 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 as of December 31, 2020 and 2019 was $ 56.1 million and $ 45.1 million, respectively. In January 2021, we purchased 350,000 common shares in Merus’ underwritten public offering of 4,848,485 common shares at the public offering price of $ 24.75 per share, or an aggregate purchase price of $ 8.7 million. 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 December 31, 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 years ended December 31, 2020, 2019 and 2018, we recorded an unrealized gain of $ 11.0 million, an unrealized gain of $ 0.3 million, and an unrealized loss of $ 17.3 million, respectively, based on the change in fair market value of Merus’ common shares during these periods. Research and development expenses for the years ended December 31, 2020, 2019 and 2018 included $ 8.9 million, $ 7.2 million and $ 10.3 million, respectively, of additional development costs incurred pursuant to the Merus agreement. At December 31, 2020 and 2019, a total of $ 1.6 million and $ 1.6 million, respectively, of such costs were included in accrued and other liabilities on the 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. 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, Calithera earned a $ 12.0 million milestone payment from us 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. 101 Table of Contents 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 fair market value of our long term investment in Calithera as of December 31, 2020 and 2019 was $ 8.4 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 December 31, 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 consolidated balance sheets. For the years ended December 31, 2020, 2019 and 2018, we recorded an unrealized loss of $ 1.4 million, an unrealized gain of $ 2.9 million, and an unrealized loss of $ 7.5 million, respectively, based on the change in fair market value of Calithera’s common stock during these periods. Research and development expenses for the years ended December 31, 2020, 2019 and 2018 also included $ 8.9 million, $ 17.9 million and $ 12.0 million, respectively, of additional development costs incurred pursuant to the Calithera agreement. At December 31, 2020 and 2019, a total of $ 0.6 million and $ 1.1 million, respectively, of such costs were included in accrued and other liabilities on the 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 2020, we paid MacroGenics $ 40.0 million in milestones for the achievement of certain clinical milestones as part of our collaboration and license agreement, which were recorded in research and development expense on our consolidated statement of operations for the year ended December 31, 2020. In 2018, we paid MacroGenics a $ 10.0 million 102 Table of Contents 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 on our consolidated statement of operations for the year ended December 31, 2018. 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 years ended December 31, 2020, 2019 and 2018, also included $ 59.0 million, $ 51.1 million and $ 35.4 million, respectively, of additional development costs incurred pursuant to the MacroGenics agreement. At December 31, 2020 and 2019, a total of $ 0.1 million and $ 1.0 million, respectively, of such costs were included in accrued and other liabilities on the consolidated balance sheets. Syros In January 2018, we entered into a target discovery, research collaboration and option agreement with Syros Pharmaceuticals, Inc. (“Syros”). Under this agreement, Syros will use its proprietary gene control platform to identify novel therapeutic targets with a focus in myeloproliferative neoplasms and we have received options to obtain exclusive worldwide rights to intellectual property resulting from the collaboration for up to seven validated targets. We will have exclusive worldwide rights to develop and commercialize any therapies under the collaboration that modulate those validated targets. We have agreed to pay Syros up to $ 54.0 million in target selection and option exercise fees should we decide to exercise all of our options under the agreement. For products resulting from the collaboration against each of the seven selected and validated targets, we have agreed to pay up to $ 50.0 million in potential development and regulatory milestones and up to $ 65.0 million in potential sales milestones. Syros is also eligible to receive low single-digit royalties on net sales of products resulting from the collaboration. 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 on our consolidated statement of operations for the year ended December 31, 2018. 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 on the consolidated statement of operations for the year ended December 31, 2018. 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 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 December 31, 2020 and 2019 was $ 10.2 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 December 31, 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 103 Table of Contents future, we have classified the investment within long term investments on the accompanying consolidated balance sheets. For the years ended December 31, 2020, 2019 and 2018, we recorded an unrealized gain of $ 3.7 million, an unrealized gain of $ 1.3 million and an unrealized loss of $ 3.7 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 consolidated statement of operations for the year ended December 31, 2019. The upfront milestone was recognized as revenue at a point in time upon our transfer of the licenses to Innovent for the right to use the functional intellectual property. In 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 2020, we recognized a $ 5.0 million milestone for the FDA approval of pemigatinib as PEMAZYRE. In 2019, we recognized the $ 20.0 million milestone for the first related IND filing in China. 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 years ended December 31, 2020 and 2019 were net of $ 5.4 million and $ 6.2 million, respectively, of costs reimbursed by Innovent. At December 31, 2020 and 2019, $ 1.2 million and $ 3.0 million, respectively, of reimbursable costs were included in accounts receivable on the 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 on the consolidated statement of operations for the year ended December 31, 2019. 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. 104 Table of Contents Research and development expenses for the year ended December 31, 2020 were net of $ 0.2 million of costs reimbursed by Zai Lab. At December 31, 2020 and 2019, $ 0.6 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 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 consolidated statement of operations for the year ended December 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 December 31, 2020 was $ 102.9 million. 105 Table of Contents 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 December 31, 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 consolidated balance sheets. For the year ended December 31, 2020, we recorded an unrealized gain of $ 7.4 million based on the change in fair market value of MorphoSys’ common stock during the period. Our 50 % share of the United States loss for the commercialization of tafasitamab was $ 42.8 million for the year ended December 31, 2020 and is recorded as collaboration loss sharing on the consolidated statement of operations. Research and development expenses for the year ended December 31, 2020, included $ 88.2 million related to our 55 % share of the co-development costs for tafasitamab. At December 31, 2020, $ 54.2 million was included in accrued and other liabilities on the consolidated balance sheet for amounts due to MorphoSys under the agreement. Nimble In September 2020, we entered into a collaboration and license agreement with Nimble Therapeutics, Inc. (“Nimble”). Under the terms of this agreement, Nimble will utilize their peptide synthesis, screening and optimization platform for discovery and validation of peptides against specified targets. Under the agreement, Nimble is eligible to receive up to $ 8.0 million in future contingent discovery milestones and up to $ 127.0 million in future contingent development and regulatory milestones. Additionally, in the event of successful commercialization, Nimble is eligible to receive up to $ 130.0 million in future contingent sales milestones and tiered royalties on net sales in the low single digits. Note 7. Property and Equipment, net Property and equipment, net consists of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2020 2019 Office equipment $ 17,880 ​ $ 15,303 ​ Laboratory equipment ​ ​ 86,021 70,510 ​ Computer equipment ​ 66,640 ​ 59,069 ​ Land ​ ​ 10,671 ​ ​ 10,203 ​ Building and leasehold improvements ​ ​ 238,042 ​ ​ 208,293 ​ Operating lease right-of-use assets ​ ​ 26,816 ​ ​ 19,672 ​ Construction in progress ​ 257,929 ​ 116,387 ​ ​ ​ 703,999 ​ 499,437 ​ Less accumulated depreciation and amortization ​ ( 144,374 ) ​ ( 121,870 ) ​ Property and equipment, net ​ $ 559,625 ​ $ 377,567 ​ ​ Depreciation expense, including amortization expense of leasehold improvements, was $ 29.6 million, $ 32.1 million and $ 32.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. In March 2017, we acquired additional adjacent buildings to our global headquarters in Wilmington, Delaware and in 2019, began demolition of these buildings and construction of a new laboratory and office building totaling approximately 200,000 square feet. As of December 31, 2020, we have capitalized approximately $ 79.5 million in on site preparation, design and construction costs and currently expect the building to be completed in the second half of 2021. 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 serves as our new 106 Table of Contents European headquarters and consists of approximately 100,000 square feet of office space. This building allowed for consolidation of our European operations that were located in Geneva and Lausanne, Switzerland. In June 2019, we obtained control of the Morges building to begin our construction activity, which was completed in 2020. 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 December 31, 2020, we have capitalized approximately $ 17.9 million in leasehold improvements. 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 December 31, 2020, we have capitalized approximately $ 167.4 million in costs for construction, ground preparation and architectural and engineering studies. We currently expect the facility will be operational in the second half of 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 consolidated balance sheets and are as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ ​ 2020 2019 Current ​ ​ ​ ​ ​ ​ ​ Operating lease liabilities ​ $ 12,674 ​ $ 9,343 ​ Finance lease liabilities ​ ​ 2,284 ​ ​ 664 ​ Noncurrent ​ ​ ​ ​ ​ ​ ​ Operating lease liabilities ​ ​ 14,188 ​ ​ 11,854 ​ Finance lease liabilities ​ ​ 32,573 ​ ​ 31,918 ​ Total lease liabilities ​ $ 61,719 ​ $ 53,779 ​ ​ The maturity of our lease liabilities are as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating ​ Finance ​ 2021 ​ $ 14,091 ​ $ 3,652 ​ 2022 ​ ​ 6,948 ​ ​ 3,448 ​ 2023 ​ ​ 3,714 ​ ​ 3,341 ​ 2024 ​ ​ 906 ​ ​ 2,756 ​ 2025 ​ ​ 761 ​ ​ 2,772 ​ After 2025 ​ ​ 4,118 ​ ​ 29,292 ​ Total lease cash payments ​ $ 30,538 ​ $ 45,261 ​ Less: discount ​ ​ 3,676 ​ ​ 10,404 ​ Present value of lease liabilities ​ $ 26,862 ​ $ 34,857 ​ ​ The cash paid for amounts included in the measurement of our operating lease liabilities for the years ended December 31, 2020 and 2019 was $ 12.1 million and $ 11.9 million, respectively, in operating cash flows. The cash paid for amounts included in the measurement of our finance lease liabilities for the years ended December 31, 2020 and 2019 was $ 0.8 million in financing cash flows. As of December 31, 2020, our finance and operating leases had a weighted average lease term of approximately 14.2 and 4.7 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 3.7 % and 4.7 %, respectively. As of December 31, 2019, our finance and operating leases had a weighted average lease term of approximately 15.8 and 3.0 years, respectively, and the weighted average discount rate of our finance and operating leases was approximately 3.6 % and 4.5 %, respectively. 107 Table of Contents For the year ended December 31, 2020, we incurred approximately $ 12.5 million of expense related to our operating leases, approximately $ 2.6 million of amortization on our finance lease right-of-use assets and approximately $ 1.2 million of interest expense on our finance lease liabilities. For the year ended December 31, 2019, we incurred approximately $ 12.7 million of expense related to our operating leases, approximately $ 1.7 million of amortization on our finance lease right-of-use assets and approximately $ 0.6 million of interest expense on our finance lease liabilities. For the years ended December 31, 2020 and 2019, the cost of our short term leases with a term less than 12 months was approximately $ 1.9 million and $ 1.1 million, respectively. Note 8. Intangible Assets and Goodwill Intangible Assets, Net The components of intangible assets were as follows (in thousands, except for useful life): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at December 31, 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 ​ $ 98,709 ​ $ 172,291 ​ $ 271,000 ​ $ 77,172 ​ $ 193,828 ​ Amortization expense was $ 21.5 million for the years ended December 31, 2020, 2019 and 2018 and is recorded in cost of product revenues on the consolidated statement of operations. Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets will be as follows for the years ending December 31 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2021 ​ ​ 2022 ​ ​ 2023 ​ ​ 2024 ​ ​ 2025 ​ ​ Thereafter Amortization expense $ 21,536 ​ $ 21,536 ​ $ 21,536 ​ $ 21,536 ​ $ 21,536 ​ $ 64,611 ​ Goodwill There were no changes to the carrying amount of goodwill for the years ended December 31, 2020 and 2019. ​ ​ Note 9. Accrued and Other Current Liabilities Accrued and other current liabilities consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ 2020 2019 Royalties $ 106,011 ​ $ 73,221 Clinical related costs ​ ​ 115,897 88,710 Sales allowances ​ ​ 73,204 ​ ​ 59,924 Construction in progress ​ ​ 22,807 ​ ​ 12,732 Operating lease liabilities ​ ​ 12,674 ​ ​ 9,343 Other current liabilities ​ 47,811 ​ 42,049 Total accrued and other current liabilities ​ $ 378,404 ​ $ 285,979 ​ ​ Note 10. Convertible Notes The carrying amount and fair value of our convertible notes were as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ 2020 ​ 2019 ​ ​ Carrying ​ ​ Carrying ​ ​ ​ ​ Amount ​ Fair Value ​ Amount ​ Fair Value ​ 1.25 % Convertible Senior Notes due 2020 ​ $ — ​ $ — ​ $ 18,300 ​ $ 32,511 ​ 108 Table of Contents ​ The fair value as of December 31, 2019 of the 1.25 % Convertible Senior Notes that matured on November 15, 2020 (the “2020 Notes”) was 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 were 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 maturity date, the 2020 Notes were convertible at any time, regardless of the foregoing circumstances. Upon conversion we had the option to pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. The initial conversion rate for the 2020 Notes was 19.3207 shares of common stock per $ 1,000 principal amount, equivalent to an initial conversion price of approximately $ 51.76 per share. Prior to maturity on November 15, 2020, we settled, upon conversion, the remaining 2020 Notes principal balance in shares of common stock. Note 11. Stockholders’ Equity Preferred Stock. We are authorized to issue 5,000,000 shares of preferred stock, none of which was outstanding as of December 31, 2020 and 2019. The Board of Directors may determine the rights, preferences and privileges of any preferred stock issued in the future. Common Stock. We are authorized to issue 400,000,000 shares of common stock. Stock Compensation Plans. As of December 31, 2020, we had a total of 6,460,660 shares of our common stock available for future issuance related to our stock plans as described below. 2010 Stock Incentive Plan. In May 2010 the Board of Directors adopted the 2010 Stock Incentive Plan (the “2010 Stock Plan”), which was most recently amended and restated in March 2019, for issuance of common stock to employees, non-employee directors, consultants, and scientific advisors. Options are granted to employees, consultants, and scientific advisors under the 2010 Stock Plan, pursuant to a formula determined by our Board of Directors. All options are exercisable at the fair market value of the stock on the date of grant. Non-employee director options expire after ten years . In April 2019, our stockholders approved an increase in the number of shares of common stock reserved for issuance under the 2010 Stock Plan from 36,753,475 to 44,453,475 . 109 Table of Contents Option activity under 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 2,256,146 ​ $ 92.82 ​ Options exercised ( 2,230,588 ) ​ $ 52.78 ​ Options cancelled ​ ( 542,927 ) ​ $ 92.66 ​ Balance at December 31, 2020 12,115,288 ​ $ 88.31 ​ ​ 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. Options to purchase a total of 6,732,942 , 6,896,492 and 7,194,171 shares as of December 31, 2020, 2019 and 2018, respectively, were exercisable. The aggregate intrinsic value of options exercised for the years ended December 31, 2020, 2019 and 2018 were $ 87.5 million, $ 113.8 million and $ 73.9 million, respectively. At December 31, 2020, the aggregate intrinsic value of options outstanding and vested options are $ 86.3 million and $ 84.3 million, respectively. The following table summarizes information about stock options outstanding as of December 31, 2020 under the 2010 Stock Plan: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Options Outstanding ​ Options Exercisable ​ ​ ​ Weighted Average Weighted ​ Weighted ​ ​ ​ ​ ​ Remaining ​ Average ​ ​ ​ Average ​ ​ ​ Number ​ Contractual Life ​ Exercise ​ Number ​ Exercise ​ Range of Exercise Prices ​ Outstanding ​ (in years) ​ Price ​ Exercisable ​ Price ​ $ 18.97 - $ 68.62 1,659,221 5.97 ​ $ 63.57 1,106,486 ​ $ 61.34 ​ $ 68.82 - $ 68.97 48,657 7.78 ​ 68.95 21,816 ​ 68.95 ​ $ 72.27 - $ 72.27 1,714,370 7.96 ​ 72.27 597,888 ​ 72.27 ​ $ 72.58 - $ 80.50 1,745,853 6.34 ​ 77.24 1,041,346 ​ 75.79 ​ $ 80.56 - $ 85.01 1,586,213 7.21 ​ 84.35 951,572 ​ 84.15 ​ $ 85.34 - $ 95.34 1,376,900 7.24 ​ 93.20 597,552 ​ 92.96 ​ $ 95.54 - $ 106.47 1,985,715 6.48 ​ 101.14 926,623 ​ 96.69 ​ $ 107.69 - $ 124.00 ​ 1,219,175 ​ 5.68 ​ ​ 113.55 ​ 801,950 ​ ​ 113.45 ​ $ 124.03 - $ 134.38 ​ 753,912 ​ 6.13 ​ ​ 129.23 ​ 664,552 ​ ​ 129.35 ​ $ 138.52 - $ 138.52 ​ 25,272 ​ 6.25 ​ ​ 138.52 ​ 23,157 ​ ​ 138.52 ​ ​ 12,115,288 ​ ​ ​ ​ ​ 6,732,942 ​ ​ ​ ​ ​ Restricted Stock Units and Performance Shares In January 2014, we began granting restricted stock units (“RSUs”) and performance shares (“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 110 Table of Contents 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 December 31, 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 December 31, 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 December 31, 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 December 31, 2020, no stock compensation expense was recognized. RSU and 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 ​ 1,356,377 ​ $ 98.11 ​ PSUs granted ​ 92,347 ​ $ 106.47 ​ RSUs released ​ ( 572,810 ) ​ $ 86.21 ​ PSUs released ​ ( 35,455 ) ​ $ 78.85 ​ RSUs cancelled ​ ( 141,002 ) ​ $ 86.03 ​ PSUs cancelled ​ ( 17,250 ) ​ $ 68.79 ​ Balance at December 31, 2020 ​ 3,284,583 ​ $ 87.42 ​ ​ 111 Table of Contents The following table summarizes our shares available for grant under the 2010 Plan. E ach RSU and PSU grant reduces the available share pool by 2 shares. ​ ​ ​ ​ ​ ​ ​ Shares Available ​ ​ for Grant Balance at December 31, 2019 9,882,122 ​ Options, RSUs and PSUs granted ( 5,153,982 ) ​ Options, RSUs and PSUs cancelled ​ 787,042 ​ Balance at December 31, 2020 5,515,182 ​ ​ Employee Stock Purchase Plan. On May 21, 1997, our stockholders adopted the 1997 Employee Stock Purchase Plan, which was most recently amended in April 2020 (the “ESPP”). Each regular full-time and part-time employee working 20 hours or more per week is eligible to participate after one month of employment. We issued 258,453 , 239,590 and 233,712 shares under the ESPP in 2020, 2019 and 2018, respectively. For the years ended December 31, 2020, 2019 and 2018, we recorded stock compensation expense of $ 4.6 million, $ 3.4 million and $ 3.7 million, respectively, as the ESPP is considered compensatory under the FASB stock compensation rules. As of December 31, 2020, 945,478 shares remain available for issuance under the ESPP. Note 12. Stock Compensation We recorded $ 177.9 million, $ 166.6 million and $ 148.2 million, respectively, of stock compensation expense for the years ended December 31, 2020, 2019 and 2018. Stock compensation expense within our consolidated statements of operations included research and development expense for the years ended December 31, 2020, 2019 and 2018 of $ 120.4 million, $ 114.0 million and $ 101.1 million, respectively. Stock compensation expense within our consolidated statements of operations also included selling, general and administrative expense for the years ended December 31, 2020, 2019 and 2018 of $ 56.6 million, $ 51.9 million and $ 47.1 million, respectively. Stock compensation expense within our consolidated statements of operations also included cost of product revenues for the years ended December 31, 2020 and 2019 of $ 1.0 million and $ 0.7 million respectively. For the years ended December 31, 2020, 2019 and 2018, we capitalized $ 0.6 million, $ 0.4 million and $ 0.1 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 options granted, with the following weighted-average assumptions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Employee Stock Options ​ Employee Stock Purchase Plan ​ ​ ​ For the year ended December 31, ​ For the year ended December 31, ​ ​ 2020 2019 2018 2020 2019 2018 ​ Average risk-free interest rates ​ 0.80 % 2.27 % 2.61 % 0.17 % 1.82 % 2.62 % Average expected life (in years) ​ 4.98 ​ 5.27 ​ 5.26 ​ 0.50 ​ 0.50 ​ 0.50 ​ Volatility ​ 40 % 45 % 45 % 45 % 31 % 46 % Weighted-average fair value (in dollars) ​ 32.65 ​ 32.38 ​ 34.20 ​ 19.13 ​ 14.04 ​ 15.80 ​ ​ 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. Based on our historical experience of employee turnover, we have assumed an annualized forfeiture rate of 5 % for our options, PSUs and RSUs . Under the true-up provisions of the stock compensation guidance, we will record additional expense as the awards vest 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. 112 Table of Contents Total compensation cost of options granted but not yet vested as of December 31, 2020, was $ 75.0 million, which is expected to be recognized over the weighted average period of 1.2 years. Total compensation cost of RSUs granted but not yet vested, as of December 31, 2020, was $ 119.0 million, which is expected to be recognized over the weighted average period of 1.7 years. Total compensation cost of PSUs granted but not yet vested, as of December 31, 2020, was $ 25.7 million, which is expected to be recognized over the weighted average period of 1.3 years, should the underlying performance conditions be deemed probable of achievement. Note 13. Income Taxes We are subject to U.S. federal, state and foreign corporate income taxes. The provision for income taxes is based on income (loss) before provision for income taxes as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 2019 2018 U.S. ​ $ ( 16,609 ) ​ $ 712,486 ​ $ 478,050 ​ Non-U.S. ​ ( 215,609 ) ​ ( 225,695 ) ​ ( 362,703 ) ​ Income (loss) before provision for income taxes ​ $ ( 232,218 ) ​ $ 486,791 ​ $ 115,347 ​ ​ Our provision for income taxes consists of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 2019 2018 ​ Current: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Federal ​ $ 43,595 ​ $ 23,526 ​ $ — ​ State ​ ​ 18,881 ​ ​ 11,553 ​ ​ 5,010 ​ Foreign ​ 1,353 ​ 5,183 ​ 1,303 ​ ​ ​ ​ 63,829 ​ ​ 40,262 ​ ​ 6,313 ​ Deferred: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ State ​ ​ — ​ ​ ( 205 ) ​ ​ 111 ​ Foreign ​ ​ ( 350 ) ​ ​ ( 172 ) ​ ​ ( 570 ) ​ ​ ​ ​ ( 350 ) ​ ​ ( 377 ) ​ ​ ( 459 ) ​ Total provision for income taxes ​ $ 63,479 ​ $ 39,885 ​ $ 5,854 ​ ​ A reconciliation of income taxes at the U.S. federal statutory rate to the provision for income taxes is as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 2019 2018 Provision (benefit) at U.S. federal statutory rate ​ $ ( 48,766 ) ​ $ 102,226 ​ $ 24,223 ​ Unbenefited future tax deductions and tax credits ​ 105,923 ​ ( 73,666 ) ​ ( 51,861 ) ​ Excess tax benefits related to share-based compensation ​ ( 9,750 ) ​ ( 13,418 ) ​ ( 8,233 ) ​ Foreign tax rate differential ​ ​ 30,412 ​ ​ 25,419 ​ ​ 37,061 ​ Non-deductible officer compensation ​ ​ 7,418 ​ ​ 5,213 ​ ​ 4,114 ​ Foreign-derived intangible income ​ ​ ( 22,830 ) ​ ​ ( 9,153 ) ​ ​ — ​ Other ​ 1,072 ​ 3,264 ​ 550 ​ Provision for income taxes ​ $ 63,479 ​ $ 39,885 ​ $ 5,854 ​ ​ The foreign tax rate differential in the table above reflects the impact of operations in jurisdictions with tax rates that differ from the U.S. federal statutory rate. 113 Table of Contents Significant components of our deferred tax assets and liabilities are as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2020 2019 Deferred tax assets: ​ ​ ​ ​ ​ ​ ​ Net operating loss carry forwards ​ $ 128,088 ​ $ 102,001 ​ Federal and state research credits ​ 305,099 ​ 400,550 ​ Capitalized research and development ​ 43,806 ​ 46,188 ​ Deferred revenue and accruals ​ 27,467 ​ 13,609 ​ Non-cash compensation ​ ​ 75,867 ​ ​ 67,345 ​ Acquisition-related contingent consideration ​ 32,658 ​ 31,956 ​ Intangibles, net ​ ​ 289,848 ​ ​ 92,806 ​ Long term investments ​ ​ 25,968 ​ ​ 14,899 ​ Other ​ 26,303 ​ 21,885 ​ Total gross deferred tax assets ​ 955,104 ​ 791,239 ​ Less valuation allowance for deferred tax assets ​ ( 930,209 ) ​ ( 770,497 ) ​ Net deferred tax assets ​ $ 24,895 ​ $ 20,742 ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferred tax liabilities: ​ ​ ​ ​ ​ ​ ​ Property and equipment ​ $ ( 22,841 ) ​ $ ( 19,095 ) ​ Total gross deferred tax liabilities ​ ( 22,841 ) ​ ( 19,095 ) ​ Net deferred tax assets ​ $ 2,054 ​ $ 1,647 ​ ​ The net deferred tax asset balance is reported in other assets, net on the consolidated balance sheets as of December 31, 2020 and 2019. As of December 31, 2020, the Company has net operating loss (“NOL”) carryforwards, research and development credit carryforwards and orphan drug tax credit carryforwards as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ Amount ​ Expiring if not utilized ​ Net operating loss carryforwards ​ ​ ​ ​ ​ ​ State ​ $ 361,890 ​ 2021 through 2039; indefinite ​ Foreign ​ ​ 1,250,048 ​ 2021 through 2027 ​ Research and development credit carryforwards ​ ​ ​ ​ ​ ​ Federal ​ ​ 150,598 ​ 2036 through 2040 ​ State ​ ​ 23,986 ​ 2021 through 2039; indefinite ​ Orphan drug tax credit carryforwards ​ ​ 162,653 ​ 2035 through 2040 ​ ​ The valuation allowance for deferred tax assets increased by approximately $ 159.7 million during the year ended December 31, 2020, decreased by approximately $ 66.5 million during the year ended December 31, 2019 and increased by approximately $ 2.2 million during the year ended December 31, 2018. The net valuation allowance increase during 2020 was primarily due to the generation of future deductible temporary differences and foreign NOLs offset by a net utilization of research and development (“R&D”) and orphan drug credits in the U.S. Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. 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, management believes 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 December 31, 2020. When performing our assessment on projections of future taxable income (losses), we 114 Table of Contents consider factors such as the likelihood of regulatory approval and commercial success of products currently under development, among other factors. The financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. If such unrecognized tax benefits were realized and not subject to valuation allowances, we would recognize a tax benefit of $ 31.6 million. The following table summarizes the gross amounts of unrecognized tax benefits (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ ​ 2020 2019 ​ Balance at beginning of year ​ $ 24,251 ​ $ 22,395 ​ Additions related to prior periods tax positions ​ ​ 3,953 ​ 726 ​ Reductions related to prior periods tax positions ​ ​ ( 216 ) ​ ​ ( 82 ) ​ Additions related to current period tax positions ​ ​ 4,119 ​ 1,835 ​ Settlements ​ ​ ( 201 ) ​ ​ — ​ Reductions due to lapse of applicable statute of limitations ​ ​ ( 397 ) ​ ​ ( 557 ) ​ Currency translation adjustment ​ ​ 88 ​ ​ ( 66 ) ​ Balance at end of year ​ $ 31,597 ​ $ 24,251 ​ ​ Our policy is to recognize interest and penalties related to uncertain tax positions, if any, as a component of income tax expense. During the year ended December 31, 2020, we recorded a negligible reduction to interest and penalties as a component of income tax expense. During the years ending December 31, 2019 and 2018, we recorded interest and penalties as a component of income tax expense of $ 0.2 million and $ 0.1 million, respectively. We do not anticipate any significant changes to our unrecognized tax benefits during the next twelve months. The Company files U.S. federal, state and local income tax returns and income tax returns in various foreign jurisdictions, with statutes of limitation generally ranging from three to five years during which such tax returns may be audited by the relevant tax authorities. Those statutes could be extended due to NOL or tax credit carryforwards generated during these periods that are subsequently utilized in open tax periods. In general, tax authorities have the ability to adjust the NOL carryforward or tax credits for three years after utilization of that year’s tax attribute carryforward. Note 14. Net Income (Loss) Per Share Our basic net income (loss) per share is computed by dividing the net income (loss) by the number of weighted average common shares outstanding during the period. Our diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average common shares outstanding during the period assuming potentially dilutive common shares of stock options, RSUs, PSUs and common shares issuable upon conversion of the 2020 Notes using the if-converted method. Common shares issuable upon conversion of the 2020 Notes were excluded from the diluted net income (loss) per share computation for all periods presented as their share effect was anti-dilutive. 115 Table of Contents Net income (loss) per share was calculated as follows for the periods indicated below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands, except per share data) 2020 2019 2018 Basic Net Income (Loss) Per Share ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic net income (loss) ​ $ ( 295,697 ) ​ $ 446,906 ​ $ 109,493 Weighted average common shares outstanding ​ ​ 218,073 ​ ​ 214,913 ​ ​ 212,383 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic net income (loss) per share ​ $ ( 1.36 ) ​ $ 2.08 ​ $ 0.52 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted Net Income (Loss) Per Share ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted net income (loss) ​ $ ( 295,697 ) ​ $ 446,906 ​ $ 109,493 Weighted average common shares outstanding ​ ​ 218,073 ​ ​ 214,913 ​ ​ 212,383 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Dilutive stock options and awards ​ ​ — ​ ​ 2,744 ​ ​ 3,252 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average shares used to compute diluted net income (loss) per share ​ ​ 218,073 ​ ​ 217,657 ​ ​ 215,635 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted net income (loss) per share ​ $ ( 1.36 ) ​ $ 2.05 ​ $ 0.51 ​ The following potential common shares were excluded from the calculation as their effect would be anti-dilutive: ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 2019 2018 Outstanding stock options and awards 15,274,871 9,349,889 8,255,992 Common shares issuable upon conversion of the 2020 Notes — 368,939 368,939 Total potential common shares excluded from diluted net income (loss) per share computation 15,274,871 9,718,828 8,624,931 ​ ​ Note 15. 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 was $ 13.4 million, $ 11.7 million and $ 10.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Included in the 2020, 2019 and 2018 defined contribution expense was $ 1.7 million, $ 1.6 million and $ 1.4 million, respectively, of expense related to matching contributions under the non-U.S. defined contribution plans. 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 pension plans assumptions reflect the expected investment return and discount rate on plan assets and disability rate probabilities. The benefit obligation at December 31, 2020 for the plans was determined using a discount rate of 0.10 % and rate of compensation increase of 2.00 %. The 2020 net periodic benefit cost for the plans was determined using discount rates of 0.30 %, rates of compensation increase of 2.25 % and long-term expected return on plan assets of 0.30 %. The benefit obligation at December 31, 2019 for the plans was determined using a discount rate of 0.30 % and rate of compensation increase of 2.25 %. The 2019 net periodic benefit cost for the plans was determined using discount rates of 0.75 %, rates of compensation increase of 2.25 % and long-term expected return on plan assets of 0.75 %. 116 Table of Contents Summarized information regarding changes in the obligations and plan assets, the funded status and the amounts recorded were as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 2019 ​ Benefit obligation, beginning of year $ 62,770 $ 46,038 Employer service cost ​ 6,047 ​ 5,195 Interest cost ​ 193 ​ 345 Plan participants' contributions ​ ​ 2,237 ​ ​ 1,613 ​ Actuarial loss ​ ​ 9,372 ​ ​ 6,672 ​ Transfer of benefits net of payments from fund ​ ​ 11,057 ​ ​ 2,184 ​ Expenses paid from assets ​ ​ ( 88 ) ​ ​ ( 61 ) ​ Translation loss ​ ​ 6,371 ​ ​ 784 ​ Benefit obligation, end of year ​ ​ 97,959 ​ ​ 62,770 ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value of plan assets, beginning of year ​ ​ 38,662 ​ ​ 30,368 ​ Actual return on plan assets ​ ​ 260 ​ ​ 132 ​ Employer contributions ​ ​ 5,413 ​ ​ 3,910 ​ Plan participants' contributions ​ ​ 2,237 ​ ​ 1,613 ​ Transfer of benefits net of payments from fund ​ ​ 11,057 ​ ​ 2,184 ​ Expenses paid from assets ​ ​ ( 88 ) ​ ​ ( 61 ) ​ Translation gain ​ ​ 3,724 ​ ​ 516 ​ Fair value of plan assets, end of year ​ ​ 61,265 ​ ​ 38,662 ​ ​ ​ ​ ​ ​ ​ ​ ​ Unfunded liability, end of year ​ $ 36,694 ​ $ 24,108 ​ ​ The unfunded liability is reported in other liabilities on the consolidated balance sheets as of December 31, 2020 and 2019. The accumulated benefit obligation is $ 83.2 million and $ 52.9 million as of December 31, 2020 and 2019, respectively. The net periodic benefit cost was as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 ​ 2019 ​ 2018 ​ Service cost $ 6,047 ​ $ 5,195 ​ $ 4,450 ​ Interest cost ​ 193 ​ ​ 345 ​ ​ 278 Expected return on plan assets ​ ( 126 ) ​ ​ ( 241 ) ​ ​ ( 195 ) Amortization of prior service cost ​ 216 ​ ​ 214 ​ ​ 179 Amortization of actuarial losses ​ ​ 667 ​ ​ 247 ​ ​ 265 ​ Net periodic benefit cost $ 6,997 ​ $ 5,760 ​ $ 4,977 ​ The components of net periodic benefit cost other than the service cost component are included in other income (expense), net on the consolidated statements of operations. 117 Table of Contents Other changes in the plans assets and the benefit obligation that is recognized in accumulated other comprehensive loss were as follows, net of tax (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 2019 2018 ​ Pension liability, beginning of year $ 15,468 ​ $ 9,146 ​ $ 8,450 ​ Net prior service costs ​ ​ ( 216 ) ​ ​ ( 214 ) ​ ​ ( 179 ) ​ Net loss ​ 8,579 ​ ​ 6,536 ​ ​ 875 ​ Pension liability, end of year ​ $ 23,831 ​ $ 15,468 ​ $ 9,146 ​ ​ We expect to contribute a total of $ 6.0 million to the pension plans in 2021. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ 2021 ​ ​ ​ ​ $ 3,315 ​ 2022 ​ ​ ​ ​ ​ 3,413 ​ 2023 ​ ​ ​ ​ ​ 3,474 ​ 2024 ​ ​ ​ ​ ​ 3,506 ​ 2025 ​ ​ ​ ​ ​ 3,972 ​ 2026-2030 ​ ​ ​ ​ ​ 22,498 ​ Total ​ ​ ​ ​ $ 40,178 ​ ​ ​ Note 16. Commitments and Contingencies In October 2019, we entered into an agreement with Wilmington Friends School Inc., to purchase property for $ 50.0 million to expand our global headquarters. Under that agreement, closing of the purchase is subject to certain standard closing conditions, including an initial diligence period and a subsequent approval period. Information on our future lease obligations are described in Note 7. We have entered into the collaboration agreements described in Note 6, as well as various other collaboration agreements that are not individually, or in the aggregate, significant to our operating results or financial condition at this time. We may in the future seek to license additional rights relating to technologies or drug development candidates in connection with our drug discovery and development programs. Under these agreements, we may be required to pay upfront fees, milestone payments, and royalties on sales of future products. In 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 (“Relator”). The DOJ has not intervened to date. We filed an Answer to the Complaint on January 22, 2020 and on November 12, 2020, we filed a Motion for Summary Judgment (Motion). All briefing on the Motion was completed on December 22, 2020 and the Judge will rule on the Motion based on these filings in due course. A trial date has not been set. We intend to continue defending ourselves vigorously against these allegations. 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 December 31, 2020. In the ordinary course of our business, we may become involved in lawsuits, proceedings, and other disputes, including commercial, intellectual property, regulatory, employment, and other matters. 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. 118 Table of Contents Note 17. Segment Information We currently operate in one operating business segment focused on the discovery, development and commercialization of proprietary therapeutics. Our chief operating decision-maker manages the operations of our company as a single operating segment. We do not operate in any material separate lines of business or separate business entities with respect to our products or product development. During the year ended December 31, 2020, total revenues generated by subsidiaries in the United States was $ 2.6 billion and total revenues generated from subsidiaries in Europe was $ 105.0 million. During the year ended December 31, 2019, total revenues generated by subsidiaries in the United States was $ 2.1 billion and total revenues generated from subsidiaries in Europe was $ 90.0 million. During the year ended December 31, 2018, total revenues generated by subsidiaries in the United States was $ 1.8 billion and total revenues generated from subsidiaries in Europe was $ 79.9 million. As of December 31, 2020, property and equipment, net was approximately $ 336.9 million in the United States, approximately $ 218.0 million in Europe and approximately $4.7 million in Japan. As of December 31, 2019, property and equipment, net was approximately $ 261.7 million in the United States and approximately $ 109.9 million in Europe. Note 18. Interim Consolidated Financial Information (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal 2020 Quarter Ended ​ (in thousands, except per share data) March 31, June 30, September 30, December 31, ​ Revenues (1) ​ $ 568,507 ​ $ 688,043 ​ $ 620,643 $ 789,509 ​ Net income (loss) ​ $ ( 720,642 ) ​ $ 290,298 ​ $ ( 15,203 ) $ 149,850 ​ Basic net income (loss) per share ​ $ ( 3.33 ) ​ $ 1.33 ​ $ ( 0.07 ) ​ $ 0.68 ​ Diluted net income (loss) per share ​ $ ( 3.33 ) ​ $ 1.32 ​ $ ( 0.07 ) ​ $ 0.68 ​ Shares used in computation of basic net income (loss) per share ​ 216,721 ​ 217,549 ​ 218,784 ​ 219,239 ​ Shares used in computation of diluted net income (loss) per share ​ ​ 216,721 ​ ​ 220,434 ​ ​ 218,784 ​ ​ 221,228 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal 2019 Quarter Ended ​ (in thousands, except per share data) March 31, June 30, September 30, December 31, ​ Revenues (2) ​ $ 497,857 ​ $ 529,932 ​ $ 551,581 $ 579,389 ​ Net income ​ $ 102,312 ​ $ 105,318 ​ $ 128,271 $ 111,005 ​ Basic net income per share ​ $ 0.48 ​ $ 0.49 ​ $ 0.60 ​ $ 0.51 ​ Diluted net income per share ​ $ 0.47 ​ $ 0.48 ​ $ 0.59 ​ $ 0.51 ​ Shares used in computation of basic net income per share ​ 214,065 ​ 214,620 ​ 215,199 ​ 215,770 ​ Shares used in computation of diluted net income per share ​ ​ 217,061 ​ ​ 217,483 ​ ​ 217,791 ​ ​ 218,542 ​ (1) The quarters ended March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020 include $ 486.7 million, $ 500.3 million, $ 522.3 million, and $ 559.5 million, respectively, of product revenues, net, relating to JAKAFI, ICLUSIG and PEMAZYRE. The quarters ended March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020 include $ 81.8 million, $ 92.8 million, $ 98.4 million and $ 119.9 million, respectively, of product royalty revenues related to the sale of JAKAVI and OLUMIANT outside the United States and TABRECTA worldwide. The quarters ended March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020 include $ 0.0 million, $ 95.0 million, $ 0.0 million and $ 110.0 million, respectively, of milestone and contract revenues relating to the Innovent, Lilly and Novartis agreements. (2) The quarters ended March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019 include $ 396.2 million, $ 433.9 million, $ 454.0 million, and $ 490.8 million, respectively, of product revenues, net, relating to JAKAFI and ICLUSIG. The quarters ended March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019 include $ 61.6 million, $ 76.0 million, $ 80.1 million and $ 88.6 million, respectively, of product royalty revenues related to the sale of JAKAVI and OLUMIANT outside the United States. In December 2018 and July 2019, we entered into collaborative research and license agreements with Innovent and Zai Lab, respectively. The quarters ended March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019 include $ 40.0 million, 119 Table of Contents $ 20.0 million, $ 17.5 million and $ 0.0 million, respectively, of milestone and contract revenues relating to these agreements. ​ ​ Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.