Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and the Consolidated Financial Statements and related Notes included elsewhere in this Report.

A discussion of our financial performance for the year ended December 31, 2023 as compared to the year ended December 31, 2022 appears below under the captions “Results of Operations” and “Liquidity and Capital Resources.” A discussion of our financial performance for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found under the same captions in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 7, 2023, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at investor.incyte.com/financial-information/annual-reports. These website addresses are intended to be inactive, textual references only. None of the materials on, or accessible through, these websites are part of this report or are incorporated by reference herein.

Overview

Incyte is a global biopharmaceutical company engaged in the discovery, development and commercialization of proprietary therapeutics. We are focused in two therapeutic areas that are defined by the indications of our approved medicines and the diseases for which our clinical candidates are being developed. One therapeutic area is Hematology/Oncology, which comprises Myeloproliferative Neoplasms (MPNs), Graft-Versus-Host Disease (GVHD), solid tumors and hematologic malignancies. The other therapeutic area is Inflammation and Autoimmunity (IAI), which includes our Dermatology commercial franchise. We are also eligible to receive milestones and royalties on molecules discovered by us and licensed to third parties. Our global headquarters is located in Wilmington, Delaware, where we conduct discovery, clinical development and commercial operations. We also conduct clinical development and commercial operations from our European headquarters in Morges, Switzerland and our other offices across Europe, as well as our Japanese office in Tokyo and our Canadian headquarters in Montreal.

Our portfolio focuses on areas of high unmet medical need and includes compounds in various stages, ranging from preclinical to late stage development, and commercialized products JAKAFI (ruxolitinib), ICLUSIG (ponatinib), PEMAZYRE (pemigatinib) and OPZELURA (ruxolitinib) cream, as well asMINJUVI (tafasitamab) and MONJUVI (tafasitamab-cxix), which prior to our February 2024 acquisition of global rights to tafasitamab, were co-commercialized, and ZYNYZ (retifanlimab-dlwr).

Our revenues depend on continued sales of our products, and we depend substantially on product revenues from JAKAFI.We must develop and commercialize new products to achieve revenue growth and to offset revenue losses from when products lose their exclusivity or when competing products are launched. For additional information, including information on the expirations of patents for various products, see Part I, Item 1 of this report, “Business—Patents and Other Intellectual Property” and “Business—Competition.” We devote substantial resources to research and development activities and to acquire rights to new product candidates and technologies, but successful product development in the biopharmaceutical industry is highly uncertain.

Our product revenues also face challenges from economic conditions and drug pricing initiatives driven by governments and private payors. See Part I, Item 1A of this report, “Risk Factors” for a further discussion of certain factors that could impact our future product revenues.

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Regulatory Achievements

In March 2023, under our collaboration agreement with MacroGenics, we received FDA approval of ZYNYZ for the treatment of adults with Merkel cell carcinoma.

In April 2023, the European Commission granted a marketing authorization for OPZELURA(ruxolitinib) cream 15mg/g for the treatment of non-segmental vitiligo with facial involvement in adults and adolescents from 12 years of age.

In September 2023, under our collaboration agreement with Novartis, we received the regulatory approval of JAKAVI (ruxolitinib) in GVHD by the Japanese Ministry of Health, Labour and Welfare.

In December 2023, the BLA was submitted for axatilimab in chronic graft-versus-host disease for the treatment of patients with chronic GVHD after failure of two or more lines of systemic therapy.

License Agreements, Business Relationships and Acquisitions

We establish business relationships, including collaborative arrangements with other companies and medical research institutions to assist in the clinical development and/or commercialization of certain of our drugs and drug candidates and to provide support for our research programs. We also establish business relationships with other companies and medical research institutions to acquire products or rights to products and technologies that are complementary to our business.

Critical Accounting Policies and Significant Estimates

The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of the consolidated financial statements. See Note 1 of Notes to the Consolidated Financial Statements for a complete list of our significant accounting policies.

Revenue Recognition. We recognize revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer in an amount that reflects the consideration we expect to receive in exchange for those goods or services. 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 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 sales of JAKAFI, OPZELURA, ICLUSIG, PEMAZYRE, MINJUVI, and ZYNYZ. Product revenues are recognized once we satisfy the performance obligation at a point in time under the revenue recognition criteria as described above. 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 the Medicaid Drug Rebate Program and Medicare Part D coverage gap reimbursements in the United States. These sales allowances and accruals are recorded based on estimates which are described in detail below. Estimates are assessed as of the end of each reporting period and are updated to reflect current information. We believe that our sales allowances and accruals are reasonable and appropriate based on current facts and circumstances. As of December 31, 2023, a 5% change in our sales allowance and accruals would have had an approximate $64.3 million impact on our income before taxes.

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Customer Credits: Our customers are offered various forms of consideration, including allowances, service fees and prompt payment discounts. We expect our customers will earn prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized. Service fees are also deducted from total product sales as they are earned.

Rebates and Discounts: We accrue rebates for mandated discounts under the Medicaid Drug Rebate Program in the United States and mandated discounts in Europe in markets where government-sponsored healthcare systems are the primary payers for healthcare. These accruals are based on statutory discount rates and expected utilization as well as historical data we have accumulated since product launch.

In the fourth quarter of 2021 and fiscal year 2022 for non-covered patients of OPZELURA, we offered a full buy-down program as we were in the process of obtaining commercial insurance coverage for OPZELURA. During 2022, we contracted with the three largest group purchasing organizations to obtain coverage for OPZELURA. All full buy-down programs for OPZELURA ended effective January 31, 2023.

Our estimates for expected utilization of commercial insurance 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 indirect contracted customers purchase directly from our wholesalers 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.

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. During the fourth quarter of 2021 and fiscal year 2022, we also offered a full buy-down program to non-covered patients of OPZELURA as we were obtaining commercial insurance coverage for OPZELURA. All full buy-down programs for OPZELURA ended effective January 31, 2023.

Product Royalty Revenues

Royalty revenues on commercial sales for JAKAVI and TABRECTA by Novartis are estimated based on information provided by Novartis. Royalty revenues on commercial sales for OLUMIANT by Lilly are estimated based on information provided by Lilly. Royalty revenues on commercial sales for PEMAZYRE by Innovent are estimated based on information provided by Innovent. We recognize royalty revenues in the period the sales occur. We exercise judgment in determining whether the information provided is sufficiently reliable for us to base our royalty revenue recognition thereon. If actual royalties vary from estimates, we may need to adjust the prior period, which would affect royalty revenue and receivable in the period of adjustment. Historically, adjustments to these estimates to reflect actual royalty revenues have not been material to our financial results and have been less than 1% of royalty revenues.

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Milestone and Contract Revenues

At the inception of a contract, we determine the transaction price, in addition to any upfront payment, by estimating the amount of variable consideration, including milestone payments, at the outset of the contract utilizing the most likely amount method. Our contractual milestones typically relate to the achievement of pre-specified development, regulatory and commercialization events outside of our control, such as regulatory approval of a compound, first patient dosing or achievement of sales-based thresholds. We include 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. 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. We review our estimate of the transaction price each period, and make revisions to such estimates as necessary.

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 at the date of grant as well as expected forfeiture rates based on actual experience. 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. For the years ending December 31, 2023 and 2022, our Black-Scholes assumptions included a weighted-average stock price volatility of 32% in 2023 and 36% in 2022, average expected option life of approximately five years and an estimated annualized forfeiture rate of 5%. The average risk-free interest rate assumption used in the Black-Scholes valuations increased from 2.14% in 2022 to 4.01% in 2023.

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. We assess the probability of achievement of performance conditions, including projected product revenues and clinical development milestones, as of the end of each reporting period. Once a performance condition is considered probable, we record compensation expense based on the portion of the service period elapsed to date with respect to that award, with a cumulative catch-up, net of estimated forfeitures, and recognize any remaining compensation expense, if any, over the remaining requisite service period using the straight-line attribution method for PSUs that are subject to cliff vesting and using the accelerated attribution method for PSUs that are subject to graded vesting. Compensation expense for PSUs with market performance conditions is calculated using a Monte Carlo simulation model as of the date of grant and recorded over the requisite service period.

Income Taxes. We account for income taxes using an asset and liability approach to financial accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which the basis differences are expected to reverse. We periodically assess the likelihood of the realization of deferred tax assets, and reduce the carrying amount of these deferred tax assets to an amount that is considered to be more-likely-than-not to be realizable. Our assessment considers recent cumulative earnings experience, projections of future taxable income (losses) and ongoing prudent and feasible tax planning strategies. When performing our assessment on projections of future taxable income (losses), we consider factors such as the likelihood of regulatory approval and commercial success of products currently under development, among other factors. Significant judgment is required in making this assessment and, to the extent that a reversal of any portion of our valuation allowance against our deferred tax assets is deemed appropriate, a tax benefit will be recognized against our income tax provision in the period of such reversal.

We recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the position will be sustained upon examination by the taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit that is recorded for these positions is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any interest and penalties on uncertain tax positions are included within the tax provision.

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We record estimates and prepare and file tax returns in various jurisdictions across the United States, Canada, Europe, and Asia based upon our interpretation of local tax laws and regulations. While we exercise significant judgment when applying complex tax laws and regulations in these various taxing jurisdictions, many of our tax returns are open to audit, and may be subject to future tax, interest, and penalty assessments.

We believe our estimates for the valuation allowances against certain deferred tax assets and the amount of benefits associated with uncertain tax positions recognized in our financial statements are appropriate based upon our assessment of the factors mentioned above. As a result of releasing the valuation allowance on the majority of our U.S. deferred tax assets in 2021, we expect that our reported income tax expense (current plus deferred) for future periods will be higher than that recorded for prior periods.

Results of Operations

Years Ended December 31, 2023 and 2022

We recorded net income for the years ended December 31, 2023 and 2022 of $597.6 million and $340.7 million, respectively. On a per share basis, basic net income was $2.67 and diluted net income was $2.65 for the year ended December 31, 2023. On a per share basis, basic net income was $1.53 and diluted net income was $1.52 for the year ended December 31, 2022.

Revenues

For the Year Ended,December 31,

(in millions)

PEMAZYRE revenues, net 83.6 83.5

MINJUVI revenues, net 37.1 19.7

ZYNYZ revenues, net 1.3 —

JAKAVI product royalty revenues 367.6 331.6

OLUMIANT product royalty revenues 136.1 134.5

TABRECTA product royalty revenues 17.8 15.4

PEMAZYRE product royalty revenues 1.9 1.2

Total product royalty revenues 523.4 482.7

Milestone and contract revenues 7.0 165.0

The increase in JAKAFI product revenues from 2022 to 2023 was comprised of a volume increase of $135.3 million and a price increase of $49.2 million. The increase in OPZELURA net product revenues from 2022 to 2023 was driven by growth in patient demand, refills and expansion in payer coverage as the launch in atopic dermatitis and vitiligo continues. Our product revenues may fluctuate from period to period due to our customers’ purchasing patterns over the course of a year, including as a result of increased inventory building by customers in advance of expected or announced price increases. Product revenues are recorded net of sales allowances. Our revenue recognition policies require estimates of the aforementioned sales allowances each period.

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The following table provides a summary of activity with respect to our sales allowances and accruals (in thousands):

Government rebates and chargebacks are the most significant component of our sales allowances. Increases in certain government reimbursement rates are limited to a measure of inflation, and when the price of a drug increases faster than this measure of inflation it will result in a penalty adjustment factor that causes a larger sales allowance to those government related entities. We expect government rebates and chargebacks as a percentage of our gross product sales will continue to increase in connection with any future product price increases greater than the rate of inflation, and any such increase in these government rebates and chargebacks will have a negative impact on our reported product revenues, net. We adjust our estimates for government rebates and chargebacks based on new information regarding actual rebates as it becomes available.

We brought a lawsuit against the U.S. Centers for Medicare and Medicaid Services (“CMS”) alleging that a recent regulation issued by CMS on the definition of “line extension” for purposes of the Medicaid rebate program is too broad and has the unintended consequence of treating OPZELURA as a “line extension” of JAKAFI under this program. We believe that such a reading would violate CMS's statutory authority and be arbitrary and capricious, given that OPZELURA, among other differentiators, is indicated to treat entirely different medical conditions and entirely different patient populations than JAKAFI. As of December 31, 2023, we have accrued approximately $59.5 million within accrued and other current liabilities on the consolidated balance sheet, relating to the incremental rebates that would be owed were OPZELURA considered a line extension of JAKAFI. The impact on OPZELURA gross to net deductions for the quarter ending December 31, 2023, is approximately 6.5%. If OPZELURA is not treated as a line extension of JAKAFI, this would result in a reversal of our accrual and a lower future gross to net deduction for OPZELURA.

Claims by third-party payors for rebates and chargebacks are frequently submitted after the period in which the related sales occurred, which may result in adjustments to prior period accrual balances in the period in which the new information becomes available. Our company-sponsored patient savings program in which we provide financial assistance to enable commercially-insured patients to afford their insurance premium and co-pays may fluctuate as the commercial insurance landscape evolves and may impact net revenues, particularly for drugs like OPZELURA. We also adjust our allowance for product returns based on new information regarding actual returns as it becomes available.

We expect our sales allowances to fluctuate from quarter to quarter as a result of the Medicare Part D Coverage Gap, the volume of purchases eligible for government mandated discounts and rebates as well as changes in discount percentages which are impacted by potential future price increases, rate of inflation, and other factors.

Product royalty revenues on commercial sales of JAKAVI and TABRECTA by Novartis are based on net sales of licensed products in licensed territories as provided by Novartis. Product royalty revenues on commercial sales of OLUMIANT by Lilly are based on net sales of licensed products in licensed territories as provided by Lilly. The increase in OLUMIANT product royalty revenues for the year ended December 31, 2023 as compared to the corresponding period in 2022 includes unfavorable changes in foreign currency exchange rates. Product royalty revenues on commercial sales of PEMAZYRE by Innovent are based on net sales of licensed products in licensed territories as provided by Innovent.

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Our milestone and contract revenues were $7.0 million and $165.0 million for the years ended December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, our milestone and contract revenues were primarily derived from a regulatory milestone under the Novartis collaboration and license agreement. During the year ended December 31, 2022, our milestone and contract revenues were derived from total regulatory milestones achieved of $135.0 million, in addition to a $30.0 million upfront payment received upon our transfer of functional intellectual property to one of our collaboration partners.

Cost of Product Revenues

For the Year Ended December 31,

(in millions)

Salary and benefits related 11.9 9.5

Stock compensation 3.1 2.7

Amortization of definite-lived intangible assets 22.6 21.5

Total cost of product revenues $ 255.0 $ 207.0

Cost of product revenues includes all product related costs, reserves for obsolescence, employee personnel costs, including stock compensation, for those employees dedicated to the production of our commercial products, royalties owed under our collaborative agreements and amortization of our licensed intellectual property rights for ICLUSIG and the amortization of capitalized milestone payments. Cost of product revenues increased from 2022 to 2023 due primarily to growth in net product revenues and inventory reserves for obsolescence.

Operating Expenses

Research and development expenses

For the Year Ended December 31,

(in millions)

Salary and benefits related $ 399.1 $ 345.6

Clinical research and outside services 936.7 978.9

Occupancy and all other costs 165.1 148.9

Total research and development expenses $ 1,627.6 $ 1,585.9

We account for research and development costs by natural expense line and not costs by project. Salary and benefits related expense increased from 2022 to 2023 due primarily to increased development headcount to sustain our development pipeline. Stock compensation expense may fluctuate from period to period based on the number of awards granted, stock price volatility and expected award lives, as well as expected award forfeiture rates which are used to value equity-based compensation.

The decrease in clinical research and outside services expense from 2022 to 2023 was primarily due to a decrease in one-time collaboration related expenses. The increase in total research and development expense from 2022 to 2023 was primarily due to continued investment in our late stage development assets. Research and development expenses include upfront and milestone expenses related to our collaborative agreements and the asset acquisition of Villaris in 2022, which were $36.7 million and $126.0 million for the years ended December 31, 2023 and 2022, respectively. Research and development expenses for the years ended December 31, 2023 and 2022 were net of $49.1 million and $52.2 million, respectively, of costs reimbursed by our collaborative partners.

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In addition to one-time expenses resulting from upfront fees in connection with the entry into any new or amended collaboration agreements and payment of milestones under those agreements, research and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial related activities. Many factors can affect the cost and timing of our clinical trials, including requests by regulatory agencies for more information, inconclusive results requiring additional clinical trials, slow patient enrollment, adverse side effects among patients, insufficient supplies for our clinical trials, timing of drug supply, including API, and real or perceived lack of effectiveness or safety of our investigational drugs in our clinical trials. In addition, the development of all of our products will be subject to extensive governmental regulation. These factors make it difficult for us to predict the timing and costs of the further development and approval of our products.

Selling, general and administrative expenses

For the Year Ended December 31,

(in millions)

Salary and benefits related $ 300.1 $ 269.1

Other contract services and outside costs 775.1 659.8

Total selling, general and administrative expenses $ 1,161.3 $ 1,002.1

Salary and benefits related expense increased from 2022 to 2023 due primarily to increased headcount. This increased headcount was due primarily to the establishment of our dermatology commercial organization. Stock compensation expense may fluctuate from period to period based on the number of awards granted, stock price volatility and expected award lives, as well as expected award forfeiture rates which are used to value equity-based compensation. The increase in other contract services and outside costs was primarily due to expenses related to promotional activities to support the launch of OPZELURA for the treatment of vitiligo.

Loss on change in fair value of acquisition-related contingent consideration

Acquisition-related contingent consideration, which consists of our future royalty obligations to ARIAD/Takeda, was recorded on the acquisition date, June 1, 2016, at the estimated fair value of the obligation, in accordance with the acquisition method of accounting. The fair value of the acquisition-related contingent consideration is remeasured quarterly. The change in fair value of the acquisition-related contingent consideration for the years ended December 31, 2023 and 2022 was expense of $29.2 million and $12.1 million, respectively, which is recorded in loss on change in fair value of acquisition-related contingent consideration on the consolidated statements of operations. The loss on change in fair value of the contingent consideration during the years ended December 31, 2023 and 2022 was due primarily to fluctuations in foreign currency exchange rates impacting future revenue projections of ICLUSIG and the passage of time.

(Profit) and loss sharing under collaboration agreements

Under the now terminated collaboration and license agreement with MorphoSys, which was executed in March 2020, we and MorphoSys were both responsible for the commercialization efforts of tafasitamab in the United States and will share equally the profits and losses from the co-commercialization efforts. For the year ended December 31, 2023 and 2022, our 50% share of the costs for tafasitamab was $2.0 million and $8.0 million, respectively, as recorded in (profit) and loss sharing under collaboration agreements on the consolidated statement of operations. In February 2024, we entered into a purchase agreement with MorphoSys, as a result of which we now hold exclusive global rights for tafasitamab. See Note 18 of Notes to the Consolidated Financial Statements for further information relating to this agreement.

Interest income and other, net

Interest income and other, net. Interest income and other, net, for the years ended December 31, 2023 and 2022 was $172.3 million and $39.9 million, respectively. The increase in interest income and other, net primarily relates to an increase in interest earned on our cash equivalents and marketable securities generally due to higher interest rates.

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Unrealized gain (loss) on long term investments. Unrealized gains and losses on long term investments will fluctuate from period to period, based on the change in fair value of the securities we hold in our publicly held collaboration partners. The following table provides a summary of those unrealized gains and (losses):

For the Years Ended,December 31,

(in millions)

Calithera (0.2) (0.9)

Total unrealized gain (loss) on long term investments $ 43.9 $ (87.6)

Provision for income taxes. The provision for income taxes for the years ended December 31, 2023 and 2022 was $236.6 million and $188.5 million, respectively.

Our effective tax rate of 28.4% for the year ended December 31, 2023 decreased as compared to 35.6% for the prior year period primarily due to the dilution of the rate impact of foreign losses with no associated tax benefit, an increase in the tax rate benefits associated with research and development and orphan drug tax credits and a decrease in certain non-deductible expenses.

Our effective tax rates for 2023 and 2022 were higher than the U.S. statutory rate primarily due to foreign losses with no associated tax benefit (i.e., full valuation allowance) and an increase in our valuation allowance against certain U.S. federal and state deferred tax assets. This was partially offset by tax rate benefits associated with research and development and orphan drug tax credit generations and the foreign derived intangible income deduction.

Liquidity and Capital Resources

(in millions)

December 31:

Cash, cash equivalents, and marketable securities $ 3,656.0 $ 3,239.0

Year ended December 31:

Cash provided by (used in):

Investing activities $ (207.7) $ (78.5)

Financing activities $ (20.0) $ (0.8)

Capital expenditures (included in investing activities above) $ (32.5) $ (77.8)

Sources and Uses of Cash.

At December 31, 2023, we had available cash, cash equivalents and marketable securities of $3.7 billion. Our cash and marketable securities balances are held in a variety of interest-bearing instruments, including money market accounts and U.S. government debt securities. Available cash is invested in accordance with our investment policy’s primary objectives of liquidity, safety of principal and diversity of investments.

Cash provided by operating activities. The decrease in cash provided by operating activities from 2022 to 2023 was due primarily to changes in working capital.

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Cash used in investing activities. Our investing activities, other than purchases, sales and maturities of marketable securities, have consisted predominantly of capital expenditures and purchases of long term investments. During 2023, net cash used in investing activities was $207.7 million, which represents purchases of marketable securities of $456.0 million, payments for intangible assets of $15.0 million, capital expenditures of $32.5 million, and purchases of long term investments of $10.0 million, offset in part by the sale and maturity of marketable securities of $305.8 million. During 2022, net cash used in investing activities was $78.5 million, which represents purchases of marketable securities of $79.9 million, capital expenditures of $77.8 million, offset in part by the sale and maturity of marketable securities of $79.2 million.

Cash used in financing activities. During 2023, net cash used in financing activities was $20.0 million, and in 2022, net cash used in financing activities was $0.8 million, respectively, consisting primarily of cash paid to ARIAD/Takeda for contingent consideration, offset in part by proceeds from the issuance of common stock under our stock plans net of tax withholdings.

Our capital expenditures for construction activities and our non-operating contractual operating and finance lease obligations are discussed in Note 8 of Notes to the Consolidated Financial Statements.

In August 2021, we entered into a $500.0 million, three-year senior unsecured revolving credit facility, which was subsequently amended in May 2023. We may increase the maximum revolving commitments or add one or more incremental term loan facilities, subject to obtaining commitments from any participating lenders and certain other conditions, in an amount not to exceed $250.0 million plus a contingent additional amount that is dependent on our pro forma consolidated leverage ratio. As of December 31, 2023, we had no outstanding borrowings and were in compliance with all covenants under this facility. The amendment to the credit facility is discussed further in Note 16 of Notes to the Consolidated Financial Statements.

Due to the full utilization of our research and development and orphan drug tax credit carryforwards generated in prior years, our U.S. tax liabilities continue to reflect the adverse impacts of the mandatory capitalization and amortization of research and development expenses as required under the Tax Cuts and Jobs Act of 2017, which eliminated the immediate expensing of such expenses.

We believe that our cash flow from operations, together with our cash, cash equivalents and marketable securities and funds available under our revolving credit facility, will be adequate to satisfy our capital needs for the foreseeable future. Our cash requirements depend on numerous factors, including our expenditures in connection with our drug discovery and development programs and commercialization operations; expenditures in connection with litigation or other legal proceedings; costs for future facility requirements; and expenditures for future strategic equity investments or potential acquisitions. We have entered into and 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 licenses, we may be required to pay upfront fees, milestone payments, and royalties on sales of future products. These contingent future payments are discussed in detail in Note 7 of Notes to the Consolidated Financial Statements.

To the extent we seek to augment our existing cash resources and cash flow from operations to satisfy our cash requirements for future acquisitions or other strategic purposes, we expect that additional funding can be obtained through equity or debt financings or from other sources. The sale of equity or convertible debt securities in the future may be dilutive to our stockholders, and may provide for rights, preferences or privileges senior to those of our holders of common stock. Debt financing arrangements may require us to pledge certain assets or enter into covenants that could restrict our operations or our ability to incur further indebtedness.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our investments in marketable securities, which are composed primarily of U.S. government securities, are subject to default, changes in credit rating and changes in market value. These investments are also subject to interest rate risk and will decrease in value if market interest rates increase. As of December 31, 2023, marketable securities were $442.7 million. Due to the nature of these investments, if market interest rates were to increase immediately and uniformly by 10% from levels as of December 31, 2023, the decline in fair value would not be material.

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Item 8. Financial Statements and Supplementary Data

INDEX

Page

Consolidated Financial Statements of Incyte Corporation

Consolidated Balance Sheets as of December 31, 2023 and 2022 80

Notes to the Consolidated Financial Statements 85

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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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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 13, 2024 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 Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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/s/ Ernst & Young LLP

We have served as the Company's auditor since 1991.

Philadelphia, Pennsylvania

February 13, 2024

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INCYTE CORPORATION

CONSOLIDATED BALANCE SHEETS

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

December 31,

ASSETS

Current assets:

Finance lease right-of-use assets, net 25,535 26,298

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Acquisition-related contingent consideration 38,422 36,538

Commitments and contingencies (Note 16)

Stockholders’ equity:

Accumulated other comprehensive income 13,106 15,069

See accompanying notes.

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INCYTE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

Year Ended December 31,

Revenues:

Costs and expenses:

(Profit) and loss sharing under collaboration agreements 2,045 7,973 37,019

Net income per share:

Shares used in computing net income per share:

See accompanying notes.

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INCYTE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

Year Ended December 31,

Other comprehensive (loss) income:

Defined benefit pension (loss) gain, net of tax (32,623) 25,376 154

See accompanying notes.

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INCYTE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except number of shares)

Issuance of 5,675 shares of Common Stock for services rendered — 434 — — 434

Other comprehensive loss — — (4,094) — (4,094)

Issuance of 5,751 shares of Common Stock for services rendered — 427 — — 427

Issuance of 5,024 shares of Common Stock for services rendered — 321 — — 321

Other comprehensive loss — — (1,963) — (1,963)

See accompanying notes.

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INCYTE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,

Cash flows from operating activities:

Changes in operating assets and liabilities:

Cash flows from investing activities:

Purchase of long term investments (10,000) — (33,510)

Sale of long term investments 45 — 10,473

Payments for intangible assets (15,000) — —

Cash flows from financing activities:

Proceeds from issuance of common stock under stock plans 35,836 61,115 58,626

Net cash (used in) provided by financing activities (20,033) (794) 6,176

Supplemental Schedule of Cash Flow Information

Unpaid purchases of property and equipment $ 5,052 $ 3,493 $ 27,098

See accompanying notes.

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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), OPZELURA® (ruxolitinib cream),MINJUVI® (tafasitamab), MONJUVI® (tafasitamab-cxix) and ZYNYZ® (retifanlimab-dlwr). 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. 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, Revenue from Contracts with Customers, 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.

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.

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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, 2023 and December 31, 2022, we had a de minimis amount of allowance for doubtful accounts. We provide an allowance for doubtful accounts based on management’s assessment of the collectability of specific customer accounts, which 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 expected to be collected.

Inventory. Inventories are valued at the lower of cost and net realizable value. We use the specific identification method to account for commercial product manufactured by third-party contractors, which is our predominant source of inventory. We apply the first-in, first-out (FIFO) method to inventories produced at our internal manufacturing facility located in Yverdon, Switzerland. Inventories consist of costs of materials, including shipping and handling fees, third-party contract manufacturing, and allocable overhead associated with the production of our commercialized products. We capitalize inventory after regulatory approval from U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or Japanese Ministry of Health, Labour and Welfare (MHLW) as the related costs are expected to be recoverable through the commercialization of the product. Costs incurred prior to approval are recorded as research and development expense in our statements of operations.

Raw materials, active pharmaceutical ingredients ("API") and work-in-process inventory are monitored for obsolescence, as applicable, and generally the shelf life of the finished goods inventory is approximately 36 months from the start of manufacturing of the finished goods, with the exception of OPZELURA and ZYNYZ, which currently has an approximate shelf life of 24 months. 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, 2023, 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 the consolidated balance sheets. Our equity investments are accounted for at fair value using readily determinable pricing available on a securities exchange on the 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 relationships in which we are able to assert control.

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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. 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, as well as milestone payments made to collaboration partners incurred at or after the product has obtained regulatory approval. Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method. Intangible assets with finite lives are tested for recoverability whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

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, 2023 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.

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Net Income Per Share. Our basic and diluted net income per share is calculated by dividing the net income by the weighted average number of shares of common stock outstanding during all periods presented. Options to purchase stock, restricted stock units and performance stock units are included in diluted earnings per share calculations, unless the effects are anti-dilutive.

Accumulated Other Comprehensive Income. Accumulated other comprehensive income consists of unrealized gains or losses on our marketable debt securities that are classified as available-for-sale, foreign currency translation gains or losses and unrecognized actuarial gains or loss related to our defined benefit pension plan.

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 sales of JAKAFI, OPZELURA, PEMAZYRE and ZYNYZ in the U.S., sales of MINJUVI, PEMAZYRE, ICLUSIG and OPZELURA in Europe, and sales of PEMAZYRE in Japan. Product revenues are recognized at a point in time once we satisfy the performance obligation and control is transferred under the revenue recognition criteria as described above. We sell JAKAFI, OPZELURA, PEMAZYRE and ZYNYZ to our customers in the U.S., which include specialty and retail pharmacies, specialty distributors and wholesalers. We sell MINJUVI, PEMAZYRE, ICLUSIG and OPZELURA to our customers in the European Union and certain other jurisdictions, which include retail pharmacies, hospital pharmacies and distributors. We sell PEMAZYRE in Japan to an exclusive wholesaler.

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 the Medicaid Drug Rebate Program and Medicare Part D coverage gap reimbursements in the U.S. Product shipping and handling costs are included in cost of product revenues.

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.

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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 indirect 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.

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. Royalty revenues on commercial sales for pemigatinib (marketed as PEMAZYRE®) by Innovent Biologics, Inc. (“Innovent”) are based on net sales of licensed products in licensed territories as provided by Innovent. 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, 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 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.

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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, 2023, we had no revenues from intellectual property 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.

Cost of Product Revenues

Cost of product revenues includes all product related costs and royalties owed under our collaboration and license agreements, contingent on certain conditions. In addition, cost of product revenues includes the amortization of our licensed intellectual property for ICLUSIG and the amortization of capitalized milestone payments, using the straight-line method over the respective estimated useful lives, which range between approximately 11 to 14 years. Cost of product revenues also includes employee personnel costs, including stock compensation, for those employees dedicated to the production of our commercial products.

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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. Costs incurred under the collaboration arrangement that are reimbursable to us are recorded net against the related research and development expenses in the period in which the related expense is incurred.

We often contract with contract 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.

Stock Compensation. Share-based payment transactions with employees, which include stock options, restricted stock units (“RSUs”) and performance shares (“PSUs”), are recognized as compensation expense over the requisite service period based on their estimated fair values as well as expected forfeiture rates. The stock compensation process requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility over the option term and expected option lives, as well as expected forfeiture rates and the probability of PSUs vesting. The fair value of stock options, which are subject to graded vesting, are recognized as compensation expense over the requisite service period using the accelerated attribution method. The fair value of RSUs that are subject to cliff vesting are recognized as compensation expense over the requisite service period using the straight-line attribution method, and the fair value of RSUs that are subject to graded vesting are recognized as compensation expense over the requisite service period using the accelerated attribution method. The fair value of PSUs are recognized as compensation expense beginning at the time in which the performance conditions are deemed probable of achievement, which we assess as of the end of each reporting period. Once a performance condition is considered probable, we record compensation expense based on the portion of the service period elapsed to date with respect to that award, with a cumulative catch-up, net of estimated forfeitures, and recognize any remaining compensation expense, if any, over the remaining requisite service period using the straight-line attribution method for PSUs that are subject to cliff vesting and using the accelerated attribution method for PSUs that are subject to graded vesting. Compensation expense for PSUs with market performance conditions is calculated using a Monte Carlo simulation model as of the date of grant and recorded over the requisite service period.

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, 2023, 2022, and 2021, advertising expenses were approximately $221.9 million, $196.4 million, and $66.0 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.

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Acquisition-Related Contingent Consideration. Acquisition-related contingent consideration consists of our future royalty obligations on future net revenues of ICLUSIG owed to Takeda Pharmaceutical Company Limited, which acquired ARIAD Pharmaceuticals, Inc. (“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.

Acquisitions. To determine whether acquisitions should be accounted for as a business combination or as an asset acquisition, we make certain judgments, which include assessing whether the acquired set of activities and assets would meet the definition of a business under the relevant accounting rules. If the acquired set of activities and assets meets the definition of a business, assets acquired and liabilities assumed are required to be recorded at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an asset acquisition, with the purchase price being allocated to the acquired asset, with no goodwill recorded. For a transaction recorded as an asset acquisition, any acquired in-process research and development that does not have an alternative future use is charged to expense at the acquisition date. See Note 5 for additional information.

(Profit) and loss sharing under collaboration agreements. For the years ended December 31, 2023 and 2022, (profit) and loss sharing under collaboration agreements represents our 50% share of the United States loss for commercialization of MONJUVI (tafasitamab-cxix) under our agreement with MorphoSys, which is described in Note 7 below.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." This amended guidance applies to all public entities and aims to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, to enable investors to develop more decision-useful financial analyses. This guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently analyzing the impact that ASU No. 2023-07 will have on our consolidated financial statements.

In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." This amended guidance applies to all entities and broadly aims to enhance the transparency and decision usefulness of income tax disclosures. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted for any annual periods for which financial statements have not been issued or made available for issuance. We are currently analyzing the impact that ASU No. 2023-09 will have on our consolidated financial statements.

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Note 2. Revenues

As discussed in Note 1, revenues are recognized under guidance within ASC 606. The following table presents our disaggregated revenue for the periods presented (in thousands):

For the Years Ended,December 31,

ZYNYZ revenues, net 1,250 — —

PEMAZYRE product royalty revenues 1,967 1,205 —

For further information on our revenue-generating contracts,refer to Note 7.

Note 3. Fair Value of Financial Instruments

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

AmortizedCost NetUnrealizedLosses EstimatedFair Value

Our available-for-sale debt securities generally have contractual maturity dates of between 12 to 18 months. Debt security assets were assessed for risk of expected credit losses per our accounting policy as described in Note 1. As of December 31, 2023 and 2022, the available-for-sale debt securities were held in U.S.-government backed securities and in Treasury bonds and were assessed on an individual security basis to have a de minimis risk of credit loss.

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Fair Value Measurements

FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“the exit price”) in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, we use quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

Level 3—Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

Recurring Fair Value Measurements

Our marketable securities consist of investments in U.S. government debt securities that are classified as available-for-sale.

At December 31, 2023 and 2022, our Level 2 U.S. government debt securities were valued using readily available pricing sources which utilize market observable inputs, including the current interest rate and other characteristics for similar types of investments. Our long term investments classified as Level 1 were valued using their respective closing stock prices on The Nasdaq Stock Market. We did not experience any transfers of financial instruments between the fair value hierarchy levels during the years ended December 31, 2023 and 2022.

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:

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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:

Acquisition-related contingent consideration $ — $ — $ 212,000 $ 212,000

Fair Value Measurement at Reporting Date Using:

Acquisition-related contingent consideration $ — $ — $ 221,000 $ 221,000

The following is a roll forward of our Level 3 liabilities (in thousands):

Change in fair value of contingent consideration 29,202 12,149

The initial fair value of the contingent consideration was determined on the date of acquisition, June 1, 2016, using an income approach based on projected future net revenues of ICLUSIG in the European Union and other countries for the approved third line treatment over 18 years, and discounted to present value at a rate of 10%. The fair value of the contingent consideration is remeasured each reporting period, with changes in fair value recorded in the consolidated statements of operations. The valuation inputs utilized to estimate the fair value of the contingent consideration as of December 31, 2023 and 2022 included a discount rate of 10% and updated projections of future net revenues of ICLUSIG in the European Union and other countries for the approved third line treatment. The loss on change in fair value of the contingent consideration during the years ended December 31, 2023 and 2022 was due primarily to fluctuations in foreign currency exchange rates impacting future revenue projections of ICLUSIG and the passage of time.

We generally make payments to Takeda quarterly based on the royalties earned in the previous quarter. As of December 31, 2023 and 2022, contingent consideration earned but not yet paid was $10.3 million and $9.3 million, respectively, and was included in accrued and other current liabilities.

Non-Recurring Fair Value Measurements

During the years ended December 31, 2023 and 2022, there were no measurements required for any assets or liabilities at fair value on a non-recurring basis.

Note 4. Concentration of Credit Risk and Current Expected Credit Losses

In November 2009, we entered into a collaboration and license agreement with Novartis. In December 2009, we entered into a license, development and commercialization agreement with Lilly. The above collaboration partners comprised, in aggregate, 20% and 20% of the accounts receivable balance as of December 31, 2023 and 2022, respectively. For further information relating to these collaboration and license agreements,refer to Note 7.

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In November 2011, we began commercialization and distribution of JAKAFI, in April 2020, we began commercialization and distribution of PEMAZYRE and in October 2021, we began commercialization and distribution of OPZELURA. Our product revenues are concentrated in a number of customers these products. The concentration of credit risk related to our JAKAFI, PEMAZYRE and OPZELURA product revenues is as follows:

Percentage of Total NetProduct Revenues for theYears Ended, December 31,

We are exposed to risks associated with extending credit to customers related to the sale of products. Customers A, B, C, D, and E comprised, in the aggregate, 40% and 41% of the accounts receivable balance as of December 31, 2023 and 2022, respectively. The concentration of credit risk relating to our other product revenues or accounts receivable is not significant.

We assessed our collaborative and customer receivable assets as of December 31, 2023 according to our accounting policy for applying reserves for expected credit losses, noting minimal history of uncollectible receivables and the continued perceived creditworthiness of our third party sales relationships, upon which the expected credit losses were considered de minimis.

Note 5. Acquisitions

On November 17, 2022, we completed our acquisition of 100% of the outstanding shares of Villaris Therapeutics, Inc. ("Villaris"). Villaris was an early-stage biopharma company focused on the development of novel antibody therapeutics for vitiligo. We evaluated the acquired set of activities and assets, and concluded that the acquisition of Villaris did not meet the definition of a business, as substantially all of the purchase price was concentrated in a single identifiable preclinical asset. Therefore, the transaction was accounted for as an asset acquisition.

Under the terms of the acquisition agreement, we made an upfront payment of $70.3 million in 2022, which was attributed to the fair value of the preclinical asset acquired. As the preclinical asset had no alternative future use at the date of acquisition, the entire upfront payment amount was expensed to research and development expense on the consolidated statement of operations for the year ended December 31, 2022. There were no material assets or liabilities recorded on the consolidated balance sheet as part of this acquisition. During December 2023, we made a $20.0 million development milestone payment to former Villaris stockholders for the initiation of the Phase 1 clinical trial of INCA034460 as a treatment for vitiligo, which was expensed to research and development expense on the consolidated statement of operations for the year ended December 31, 2023. Former Villaris stockholders are eligible to receive up to an additional $290.0 million upon achievement of certain regulatory milestones, as well as up to an additional $1.05 billion in commercial milestones on net sales of commercialized products. We will accrue for these milestone payments in the future when it becomes probable they will be achieved.

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Note 6. Inventory

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

December 31,

Inventories, stated at the lower of cost and net realizable value, consist of raw materials, API and work-in-process, and finished goods, inclusive of freight and inventoriable overhead. At December 31, 2023, $63.0 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, 2023, $207.0 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.

We capitalize inventory after regulatory approval as the related costs are expected to be recoverable through the commercialization of the product. Costs incurred prior to regulatory approval are recorded as research and development expense in our consolidated statements of operations. At December 31, 2023, inventory with approximately $35.6 million of product costs incurred prior to regulatory approval had not yet been sold. We expect to sell the pre-commercialization inventory over the next 9 to 12 months and, as a result, cost of product revenues will reflect a lower average per unit cost of materials.

Note 7. License Agreements

Novartis

In November 2009, we entered into a Collaboration and License Agreement with Novartis. Under the terms of the agreement, Novartis received exclusive development and commercialization rights outside of the United States to our JAK inhibitor ruxolitinib and certain back-up compounds for hematologic and oncology indications, including all hematological malignancies, solid tumors and myeloproliferative diseases. We retained exclusive development and commercialization rights to JAKAFI (ruxolitinib) in the United States and in certain other indications. Novartis also received worldwide exclusive development and commercialization rights to our MET inhibitor compound capmatinib and certain back-up compounds in all indications.

Under this agreement, we initially were eligible to receive up to $174.0 million for the achievement of development milestones, up to $495.0 million for the achievement of regulatory milestones and up to $500.0 million for the achievement of sales milestones. In addition, we were initially eligible to receive up to $75.0 million of additional potential development and regulatory milestones relating to graft-versus-host-disease (“GVHD”). Since the inception of the agreement through December 31, 2023, we have recognized and received, in the aggregate, $157.0 million for the achievement of development milestones, $345.0 million for the achievement of regulatory milestones and $200.0 million for the achievement of sales 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 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 September 2023, we recognized a $5.0 million regulatory milestone for the approval of JAKAVI (ruxolitinib) in GVHD by the Japanese Ministry of Health, Labour and Welfare.

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We also are eligible to receive tiered, double-digit royalties ranging from the upper-teens to the mid-twenties on future JAKAVI net sales outside of the United States, and tiered, worldwide royalties on TABRECTA net sales that range from 12% to 14%. We are obligated to pay to Novartis tiered royalties in the low single-digits on future JAKAFI net sales within the United States contingent on certain conditions. During the years ended December 31, 2023, 2022 and 2021, such royalties on net sales within the United States totaled $122.1 million, $113.1 million and $99.6 million, respectively, and were reflected in cost of product revenues on the consolidated statements of operations. At December 31, 2023 and 2022, $375.6 million and $253.5 million, respectively, of accrued royalties were included in accrued and other current liabilities on the consolidated balance sheets, payment of which is dependent on the outcome of a contract dispute with Novartis. Each company is responsible for costs relating to the development and commercialization of ruxolitinib in its respective territories, with costs of collaborative studies shared equally. Novartis is also responsible for all costs relating to the development and commercialization of capmatinib.

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.

Milestone and contract revenue under the Novartis agreement was $5.0 million, $60.0 million and $0.0 million for the years ended December 31, 2023, 2022 and 2021, respectively. In addition, for the years ended December 31, 2023, 2022 and 2021, we recorded $367.6 million, $331.6 million and $338.0 million, respectively, of product royalty revenues related to Novartis net sales of JAKAVI outside the United States. For the years ended December 31, 2023, 2022 and 2021 we recorded $17.8 million, $15.4 million and $10.4 million, respectively, 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.

Under this agreement, we were initially eligible to receive up to $150.0 million for the achievement of development milestones, up to $365.0 million for the achievement of regulatory milestones and up to $150.0 million for the achievement of sales milestones. Since the inception of the agreement through December 31, 2023, we have recognized and received, in aggregate, $149.0 million for the achievement of development milestones, $335.0 million for the achievement of regulatory milestones and $50.0 million for the achievement of sales milestones. We are also eligible to receive tiered, double-digit royalties on future global sales with rates ranging up to the mid-twenties if a product is successfully commercialized.

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 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.

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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 $0.0 million, $70.0 million and $50.0 million, respectively, for the years ended December 31, 2023, 2022 and 2021. In addition, for the years ended December 31, 2023, 2022 and 2021, we recorded $136.1 million, $134.5 million and $220.9 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. Lilly was eligible to receive up to $40.0 million in milestone payments relating to ruxolitinib in the GVHD field. Since the date of the amendment through December 31, 2023, we have fully paid Lilly milestones totaling $40.0 million.

Agenus

In January 2015, we entered into a License, Development and Commercialization Agreement with Agenus Inc. and its wholly-owned subsidiary, 4-Antibody AG (now known as Agenus Switzerland Inc.), which we collectively refer to as Agenus. Under this agreement, which was amended in February 2017, the parties have agreed to collaborate on the discovery of novel immuno-therapeutics using Agenus’ antibody discovery platforms. Under this agreement, we are responsible for all costs associated with discovery, preclinical, clinical development and commercialization activities for the currently active programs. Agenus will be eligible to receive tiered royalties on global net sales ranging from 6% to 12%, for all programs but one, in which Agenus will be eligible to receive 15% royalties on global net sales. The agreement may be terminated by us for convenience upon 12 months’ notice and also may be terminated under certain other circumstances, including material breach.

Since the inception of the agreement through December 31, 2023, we have paid Agenus milestones totaling $30.0 million and Agenus is eligible to receive up to an additional $500.0 million in future contingent development, regulatory and commercialization milestones across all programs in the collaboration.

As of December 31, 2023, we held an investment of approximately 12.1 million shares of Agenus Inc. common stock. The fair market value of our long term investment in Agenus Inc. at December 31, 2023 and 2022 was $10.0 million and $29.0 million, respectively. For the years ended December 31, 2023, 2022 and 2021, we recorded an unrealized loss of $18.9 million, an unrealized loss of $9.9 million and an unrealized gain of $4.6 million, respectively, based on the change in fair value of Agenus Inc.’s common stock during the respective periods.

Merus

In December 2016, we entered into a Collaboration and License Agreement with Merus N.V. (“Merus”). Under this agreement, the parties have agreed to collaborate with respect to the research, discovery and development of bispecific antibodies utilizing Merus’ technology platform. The collaboration encompasses up to ten independent programs. We hold worldwide exclusive development and commercialization rights to those programs and are responsible for all research, development and commercialization costs, subject to Merus’ option, subject to certain conditions, to co-fund development of up to two of such programs and participate in certain commercialization activities for one of those co-developed 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.

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For each program as to which Merus does not have commercialization or development co-funding rights, Merus is eligible to receive up to $100.0 million in future contingent development and regulatory milestones, and up to $250.0 million in commercialization milestones as well as tiered royalties ranging from 6% to 10% of global net sales. For each program as to which Merus exercises its option to co-fund development, Merus is eligible to receive a 50% share of profits (or sustain 50% of any losses) in the United States and be eligible to receive tiered royalties ranging from 6% to 10% of net sales of products outside of the United States. If Merus opts to cease co-funding a program as to which it exercised its co-development option, then Merus will no longer receive a share of profits in the United States but will be eligible to receive the same milestones from the co-funding termination date and the same tiered royalties described above with respect to programs where Merus does not have a right to co-fund development and, depending on the stage at which Merus chose to cease co-funding development costs, Merus will be eligible to receive additional royalties ranging up to 4% of net sales in the United States.

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.

During January 2023, August 2023 and December 2023, we paid Merus milestones of $2.5 million, $2.5 million and $1.0 million, respectively, which were recorded as research and development expense in our consolidated statements of operations. Since the inception of the agreement through December 31, 2023, we have paid and expensed Merus milestones totaling $9.0 million.

During August 2023, we purchased approximately 0.5 million shares of Merus’ common shares for an aggregate purchase price of $10.0 million in cash. As of December 31, 2023, we held an investment of approximately 4.0 million Merus common shares. The fair market value of our total long term investment in Merus as of December 31, 2023 and 2022 was $110.1 million and $54.9 million, respectively. For the years ended December 31, 2023, 2022 and 2021, we recorded an unrealized gain of $45.2 million, an unrealized loss of $58.0 million, and an unrealized gain of $48.1 million, respectively, based on the change in fair value of Merus’ common shares during the respective periods.

MacroGenics

In October 2017, we entered into a Global Collaboration and License Agreement with MacroGenics, Inc. (“MacroGenics”). Under this agreement, we received exclusive development and commercialization rights worldwide to MacroGenics’ INCMGA0012 (formerly MGA012), an investigational monoclonal antibody that inhibits PD-1. Except as set forth in the succeeding sentence, we have sole authority over and bear all costs and expenses in connection with the development and commercialization of INCMGA0012 in all indications, whether as a monotherapy or as part of a combination regimen. MacroGenics has retained the right to develop and commercialize, at its cost and expense, its pipeline assets in combination with INCMGA0012. In addition, MacroGenics has the right to manufacture a portion of both companies’ global clinical and commercial supply needs of INCMGA0012.

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.

In July 2022, we amended our agreement with MacroGenics to reflect changes related to the payment of certain milestones and paid MacroGenics $30.0 million, which was recorded as research and development expense in our consolidated statements of operations in the third quarter of 2022.

In March 2023, we made a $15.0 million regulatory milestone payment to MacroGenics for the FDA approval of ZYNYZ for the treatment of adults with Merkel cell carcinoma. This milestone payment was capitalized as an intangible asset and included in Other intangible assets, net on the consolidated balance sheet as of December 31, 2023, and is being amortized through cost of product revenues over the estimated useful life of 13.5 years.

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Since the inception of the agreement through December 31, 2023, we have paid MacroGenics developmental and regulatory milestones totaling $115.0 million. After the amendment and subsequent payments, MacroGenics will be eligible to receive up to an additional $320.0 million in future contingent development and regulatory milestones, and up to $330.0 million in sales milestones as well as tiered royalties ranging from 15% to 24% of global net sales.

Research and development expenses for the years ended December 31, 2023, 2022 and 2021, also included $51.5 million, $89.2 million and $72.3 million, respectively, of development costs incurred pursuant to the MacroGenics agreement. At December 31, 2023 and 2022, a total of $0.3 million and $2.9 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 used its proprietary gene control platform to identify novel therapeutic targets with a focus in myeloproliferative neoplasms and we received options to obtain exclusive worldwide rights to intellectual property resulting from the collaboration for up to seven validated targets. This agreement was terminated in October 2023.

As of December 31, 2023, we held an investment of approximately 0.1 million shares of Syros common stock. The fair market value of our long term investment in Syros as of December 31, 2023 and 2022 was $0.7 million and $0.3 million, respectively. For the years ended December 31, 2023, 2022 and 2021, we recorded an unrealized gain of $0.4 million, an unrealized loss of $2.7 million and an unrealized loss of $7.1 million, respectively, based on the change in fair value of Syros’ common stock during the respective periods.

MorphoSys

In January 2020, we entered into a Collaboration and License Agreement with MorphoSys AG and MorphoSys US Inc., a wholly-owned subsidiary of MorphoSys AG (together with MorphoSys AG, “MorphoSys”), covering the worldwide development and commercialization of MOR208 (tafasitamab), an investigational Fc engineered monoclonal antibody directed against the target molecule CD19 that was under clinical development by MorphoSys at the beginning of the agreement, and has subsequently been commercialized as MONJUVI/MINJUVI. MorphoSys has exclusive worldwide development and commercialization rights to tafasitamab under a June 2010 collaboration and license agreement with Xencor, Inc.

Under the terms of the agreement, we received exclusive commercialization rights outside of the United States, and MorphoSys and we have co-commercialization rights in the United States, with respect to tafasitamab. MorphoSys is responsible for leading the commercialization strategy and booking all revenue from sales of tafasitamab in the United States, and we and MorphoSys are both responsible for commercialization efforts in the United States and will share equally the profits and losses from the co-commercialization efforts. We will lead the commercialization strategy outside of the United States, and will be responsible for commercialization efforts and book all revenue from sales of tafasitamab outside of the United States, subject to our royalty payment obligations set forth below. We and MorphoSys have agreed to co-develop tafasitamab and to share development costs associated with global and U.S.-specific clinical trials, with Incyte responsible for 55% of such costs and MorphoSys responsible for 45% of such costs. Each company is responsible for funding any independent development activities, and we are responsible for funding development activities specific to territories outside of the United States. All development costs related to the collaboration are subject to a joint development plan.

MorphoSys is eligible to receive up to $737.5 million in future contingent development and regulatory milestones and up to $315.0 million in commercialization milestones as well as tiered royalties ranging from the mid-teens to mid-twenties of net sales outside of the United States. MorphoSys’ right to receive royalties in any particular country will expire upon the last to occur of (a) the expiration of patent rights in that particular country, (b) a specified period of time after the first post-marketing authorization sale of a licensed product comprising tafasitamab in that country, and (c) the expiration of any regulatory exclusivity for that licensed product in that country. Since the inception of the agreement through December 31, 2023, we have paid MorphoSys milestones totaling $2.5 million, all of which have previously been recorded as research and development expenses.

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As of December 31, 2023, we held an investment of approximately 3.6 million American Depository Shares, each representing 0.25 of an ordinary share of MorphoSys AG. The fair market value of our long term investment in MorphoSys AG as of December 31, 2023 and 2022 was $35.9 million and $13.0 million, respectively. For the years ended December 31, 2023, 2022 and 2021 we recorded an unrealized gain of $22.9 million, an unrealized loss of $21.2 million, and an unrealized loss of $68.7 million, respectively, based on the change in fair value of MorphoSys AG's ordinary shares during the respective periods.

Our 50% share of the United States loss for the commercialization of tafasitamab for the years ended December 31, 2023, 2022 and 2021 was $2.0 million, $8.0 million, and $37.0 million respectively, and is recorded as (profit) and loss sharing under collaboration agreements on the consolidated statement of operations. Research and development expenses for the years ended December 31, 2023, 2022 and 2021, included $76.1 million, $99.7 million, and $77.0 million, respectively, of costs for tafasitamab including our 55% share of the co-development costs. At December 31, 2023 and 2022, $18.8 million and $28.5 million, respectively, was included in accrued and other liabilities on the consolidated balance sheet for amounts due to MorphoSys under the agreement.

During February 2024, we entered into a purchase agreement with MorphoSys, as a result of which we now hold exclusive global rights for tafasitamab. See Note 18 for further information relating to this agreement.

Syndax

In September 2021, we entered into a Collaboration and License Agreement with Syndax Pharmaceuticals, Inc. (“Syndax”), covering the worldwide development and commercialization of SNDX-6352 (“axatilimab”). The agreement became effective in December 2021. Axatilimab, which is currently in clinical development, is a monoclonal antibody that blocks the colony stimulating factor-1 (CSF-1) receptor. Syndax obtained exclusive worldwide development and commercialization rights to axatilimab under a June 2016 license agreement with UCB Biopharma Sprl.

Under the terms of our agreement, we received exclusive commercialization rights to axatilimab outside of the United States, and share commercialization rights in the United States with Syndax. We are responsible for leading the commercialization strategy and booking all revenue from sales of axatilimab globally. Incyte and Syndax will share equally the profits and losses from the co-commercialization efforts in the United States. Sales of axatilimab outside the United States will be subject to our royalty payment obligations to Syndax, as set forth below. We and Syndax have agreed to co-develop axatilimab and to share development costs associated with global and U.S.-specific clinical trials, with Incyte responsible for 55% of such costs and Syndax responsible for 45% of such costs. Each company is responsible for funding any independent development activities. All development costs related to the collaboration are subject to a joint development plan.

In December 2021, we paid Syndax an upfront, non-refundable payment of $117.0 million, which was recorded in research and development expense on the consolidated statement of operations for the year ended December 31, 2021. Syndax is eligible to receive up to $220.0 million in future contingent development and regulatory milestones and up to $230.0 million in sales milestones as well as tiered royalties ranging in the mid-teens on net sales in Europe and Japan and low double digit percentage on net sales in the rest of the world outside of the United States. Syndax’s right to receive royalties in any particular country will expire upon the last to occur of (a) the expiration of patent rights in that particular country, (b) a specified period of time after the first post-marketing authorization sale of a licensed product comprising axatilimab in that country, and (c) the expiration of any regulatory exclusivity for that licensed product in that country.

As of December 31, 2023, we held an investment of approximately 1.4 million shares of Syndax common stock. The fair market value of our long term investment in Syndax as of December 31, 2023 and 2022 was $30.7 million and $36.2 million, respectively. For the years ended December 31, 2023, 2022 and 2021, we recorded an unrealized loss of $5.5 million, and unrealized gain of $5.1 million, and an unrealized gain of $6.3 million, respectively, based on the change in fair value of Syndax’s common stock during the respective periods.

Research and development expenses for the year ended December 31, 2023, includes $25.8 million related to our 55% share of the co-development costs for axatilimab. At December 31, 2023, $1.8 million was included in accrued and other liabilities on the consolidated balance sheet for amounts due to Syndax under the agreement.

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Other Agreements

In addition to the license and collaboration agreements discussed above, we have various other license and collaboration agreements that are not individually material to our operating results or financial condition at this time. Pursuant to the terms of those agreements, we may be required to pay, or we may receive, additional amounts contingent upon the occurrence of various future events such as future discovery, development, regulatory or commercial milestones, which in the aggregate could be material. In addition, if any products related to these collaborations are approved for sale, we may be required to pay, or we may receive, royalties on future sales. The payment or receipt of these amounts, however, is contingent upon the occurrence of various future events, the likelihood of which cannot presently be determined.

Note 8. Property and Equipment, net

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

December 31,

Less accumulated depreciation and amortization (269,934) (212,814)

Depreciation expense, including amortization expense of leasehold improvements, was $60.1 million, $46.3 million and $36.3 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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,

Current

Operating lease liabilities $ 5,686 $ 8,195

Noncurrent

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The maturity of our lease liabilities are as follows (in thousands):

Operating Finance

Present value of lease liabilities $ 19,970 $ 32,601

The cash paid for amounts included in the measurement of our operating lease liabilities for the years ended December 31, 2023, 2022 and 2021 was $9.4 million, $11.8 million and $14.3 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, 2023, 2022 and 2021 was $3.4 million, $2.9 million and $2.4 million respectively, in financing cash flows.

As of December 31, 2023, our finance and operating leases had a weighted average lease term of approximately 10.8 years and 5.8 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 was approximately 4.0% and 3.9%, respectively.

As of December 31, 2022, our finance and operating leases had a weighted average lease term of approximately 12.0 years and 5.5 years, respectively. The weighted average discount rate of our finance and operating leases was approximately 4.2% and 4.4%, respectively.

As of December 31, 2021, our finance and operating leases had a weighted average lease term of approximately 13.4 years and 4.9 years, respectively. The weighted average discount rate of our finance and operating leases was approximately 4.1% and 4.8%, respectively.

For the year ended December 31, 2023, we incurred approximately $9.8 million of expense related to our operating leases, approximately $3.5 million of amortization on our finance lease right-of-use assets and approximately $1.3 million of interest expense on our finance lease liabilities. For the year ended December 31, 2022, we incurred approximately $11.7 million of expense related to our operating leases, approximately $3.1 million of amortization on our finance lease right-of-use assets and approximately $1.4 million of interest expense on our finance lease liabilities. For the year ended December 31, 2021, we incurred approximately $14.2 million of expense related to our operating leases, approximately $2.7 million of amortization on our finance lease right-of-use assets and approximately $1.3 million of interest expense on our finance lease liabilities.

Note 9. Intangible Assets and Goodwill

Intangible Assets, Net

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

Finite-lived intangible assets:

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Amortization expense was $22.5 million for the year ended December 31, 2023, and amortization expense was $21.5 million for the years ended December 31, 2022 and 2021 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):

Goodwill

There were no changes to the carrying amount of goodwill for the years ended December 31, 2023 and 2022.

Note 10. Accrued and Other Current Liabilities

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

December 31,

Total accrued and other current liabilities $ 935,569 $ 701,053

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, 2023 and 2022. 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, 2023, we had a total of 11,557,443 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 in April 2023, for issuance of common stock to employees, non-employee directors, consultants, and scientific advisors. Awards under the 2010 Stock Plan include stock options, RSUs and PSUs.

In June 2023, our stockholders approved an increase in the number of shares of common stock reserved for issuance under the 2010 Stock Plan from 53,953,475 to 66,453,475.

Stock Options

Options are granted to employees, consultants, and scientific advisors under the 2010 Stock Plan. Options are also granted under the 2010 Stock Plan to non-employee members of our Board of Directors, pursuant to a formula set forth in the 2010 Stock Plan. All options are exercisable at the fair market value of the stock on the date of grant.

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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 seven-year terms and vested over three years, with 33% vesting after one year and the remainder vesting in 24 equal monthly installments. Non-employee director options expire after 10 years and vest in full on the first anniversary of the date of grant or, if earlier, the date of the next annual meeting of stockholders.

Option activity under the 2010 Stock Plan was as follows:

Shares Subject toOutstanding Options

Shares Weighted AverageExercise Price

Options to purchase a total of 9,743,775, 8,952,289 and 8,024,951 shares as of December 31, 2023, 2022 and 2021, respectively, were exercisable. The aggregate intrinsic value of options exercised for the years ended December 31, 2023, 2022 and 2021 were $3.2 million, $6.0 million and $12.7 million, respectively. At December 31, 2023, the aggregate intrinsic value of options outstanding and vested options are $2.0 million and $1.9 million, respectively.

The following table summarizes information about stock options outstanding as of December 31, 2023 under the 2010 Stock Plan:

Options Outstanding Options Exercisable

Restricted Stock Units and Performance Shares

RSUs and PSUs are granted to our employees at the share price on the date of grant. Each RSU represents the right to acquire one share of our common stock. Each RSU granted in connection with our annual equity awards will vest 25% annually over four years, while each RSU granted as outstanding merit awards or as part of retention award programs will vest in a single installment at the end of four years.

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We grant PSUs with performance and/or service-based milestones with graded and/or cliff vesting over three to four years. The shares of our common stock into which each PSU may convert is subject to a multiplier based on the level at which the financial, developmental and market performance conditions are achieved over the service period. Compensation expense for PSUs with financial and developmental performance conditions is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement. For PSUs containing performance conditions which were not deemed probable of achievement, no stock compensation expense is recorded. Compensation expense for PSUs with market performance conditions is calculated using a Monte Carlo simulation model as of the date of grant and recorded over the requisite service period. For the years ended December 31, 2023, 2022 and 2021, we recorded $17.2 million, $7.8 million and $8.3 million, respectively, of stock compensation expense for PSUs on our consolidated statements of operations.

RSU and PSU award activity under the 2010 Stock Plan was as follows:

Shares Subject toOutstanding Awards

Shares Grant Date Value

The following table summarizes our shares available for grant under the 2010 Plan. Each RSU and PSU grant reduces the available share pool by 2 shares.

Shares Availablefor Grant

Options, RSUs and PSUs granted (9,196,930)

Options, RSUs and PSUs cancelled 2,455,586

Employee Stock Purchase Plan. On May 21, 1997, our stockholders adopted the 1997 Employee Stock Purchase Plan, which was most recently amended in April 2023 (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. In June 2023, our stockholders approved an increase in the number of shares of common stock reserved for issuance under the ESPP from 9,600,000 to 10,350,000. We issued 380,145, 308,413 and 264,503 shares under the ESPP in 2023, 2022 and 2021, respectively. For the years ended December 31, 2023, 2022 and 2021, we recorded stock compensation expense of $5.1 million, $4.7 million and $4.6 million, respectively, as the ESPP is considered compensatory under the FASB stock compensation rules. As of December 31, 2023, 742,417 shares remain available for issuance under the ESPP.

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Note 12. Stock Compensation

We recorded $215.9 million, $188.4 million and $183.0 million, respectively, of stock compensation expense for the years ended December 31, 2023, 2022 and 2021. Stock compensation expense within the consolidated statements of operations included research and development expense for the years ended December 31, 2023, 2022 and 2021 of $126.7 million, $112.5 million and $114.3 million, respectively. Stock compensation expense within the consolidated statements of operations also included selling, general and administrative expense for the years ended December 31, 2023, 2022 and 2021 of $86.1 million, $73.2 million and $67.0 million, respectively. Stock compensation expense within the consolidated statements of operations also included cost of product revenues for the years ended December 31, 2023, 2022 and 2021 of $3.1 million, $2.7 million and $1.7 million, respectively.

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

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.

Total compensation cost of options granted but not yet vested as of December 31, 2023, was $30.0 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, 2023, was $235.4 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, 2023, was $17.0 million, which is expected to be recognized over the weighted average period of 1.9 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 (benefit) for income taxes is based on income before provision (benefit) for income taxes as follows (in thousands):

Year Ended December 31,

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Our provision (benefit) for income taxes consists of the following (in thousands):

Year Ended December 31,

Current:

Deferred:

On a periodic basis, we reassess the valuation allowance on our deferred income tax assets. 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.

In the fourth quarter of 2021, we assessed the valuation allowance and considered positive evidence, including significant cumulative consolidated and U.S. income over the three years ended December 31, 2021, consistent growth in product revenues, and expectations regarding future profitability. We also assessed negative evidence, including the potential impact of competition, clinical failures and patent expirations on our projections. After assessing both the positive evidence and negative evidence, we determined it was more likely than not that the majority of our U.S. deferred tax assets would be realized in the future and released the associated valuation allowance as of December 31, 2021. This resulted in a benefit of $569.0 million.

A reconciliation of income taxes at the U.S. federal statutory rate to the provision (benefit) for income taxes is as follows (in thousands):

Year Ended December 31,

Acquisitions accounted for as research and development expenses 4,200 14,700 —

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 of 21%. It also includes a tax benefit associated with the remeasurement of foreign deferred tax assets resulting from the cancellation of a tax holiday. The income tax credits in the table above includes a tax benefit associated with the issuance of non-refundable Swiss income tax credits. The remeasurement of foreign deferred tax assets and the Swiss income tax credits are fully offset with a valuation allowance in the table above.

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Significant components of our deferred tax assets and liabilities are as follows (in thousands):

December 31,

Deferred tax assets:

Acquisition-related contingent consideration 30,298 30,483

Less valuation allowance for deferred tax assets (2,096,318) (472,125)

Deferred tax liabilities:

Total gross deferred tax liabilities (40,214) (42,562)

The valuation allowance for deferred tax assets increased by approximately $1.6 billion during the year ended December 31, 2023 and increased by approximately $63.9 million during the year ended December 31, 2022. The valuation allowance increase during 2023 was primarily due to the issuance of non-refundable Swiss income tax credits, future deductible temporary differences mainly associated with U.S. research and development expenses required to be capitalized and amortized under the Tax Cuts and Jobs Act of 2017, as well as foreign net operating losses (“NOLs”), which are not more-likely-than-not to be realized as of December 31, 2023.

During the year ended December 31, 2023, our gross deferred tax assets increased by $1.8 billion primarily due to our Swiss subsidiaries being granted approximately $1.4 billion of non-refundable income tax credits, the mandatory capitalization of research and development expenses and the remeasurement of foreign deferred tax assets. The Swiss credits are available for use during the periods 2023 through 2028, however due to the subsidiaries' historical cumulative loss position, we have recorded a full valuation allowance at this time as it is more-likely-than-not that the credits would expire unused. The valuation allowance position will continue to be monitored in the future.

As of December 31, 2023, we had NOL carryforwards, research and development credit carryforwards and foreign income tax credit carryforwards as follows (in thousands):

Amount Expiring if not utilized

Net operating loss carryforwards

Research and development credit carryforwards

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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, we would recognize a tax benefit of $59.1 million. The following table summarizes the gross amounts of unrecognized tax benefits (in thousands):

Year Ended December 31,

Additions related to prior periods tax positions 3,687 5,027

Reductions related to prior periods tax positions (10,382) (2,087)

Additions related to current period tax positions 3,019 8,290

Reductions due to lapse of applicable statute of limitations (33) (356)

Currency translation adjustment 23 (89)

Our policy is to recognize interest and penalties related to uncertain tax positions, if any, as a component of income tax expense. During the years ending December 31, 2023 and 2022, we recorded interest and penalties as a component of income tax expense of $4.9 million and $3.8 million, respectively. We believe that it is reasonably possible that a decrease of up to $22.0 million in unrecognized tax benefits may be necessary within the next twelve months due to a lapse in the statute of limitations.

We file 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 Per Share

Our basic net income per share is computed by dividing the net income by the number of weighted average common shares outstanding during the period. Our diluted net income per share is computed by dividing net income by the weighted average common shares outstanding during the period assuming potentially dilutive common shares of stock options, RSUs and PSUs.

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Net income per share was calculated as follows for the periods indicated below:

Year Ended December 31,

Basic Net Income Per Share

Basic net income per share $ 2.67 $ 1.53 $ 4.30

Diluted Net Income Per Share

Diluted net income per share $ 2.65 $ 1.52 $ 4.27

The potential common shares that were excluded from the diluted net income per share computation are as follows:

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 $18.9 million, $18.7 million and $16.7 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Defined Benefit Pension Plans

We have defined benefit pension plans for our employees in Europe which provide benefits to employees upon retirement, death or disability. The assets of the pension plans are held in collective investment accounts represented by the cash surrender value of an insurance policy and are classified as Level 2 within the fair value hierarchy.

The pension plans assumptions reflect the expected investment return and discount rate on plan assets and disability rate probabilities. The benefit obligation at December 31, 2023 for the plans was determined usinga discount rate of 1.30% and rate of compensation increase of 2.25%. The 2023 net periodic benefit cost for the plans was determined using discount rates of 2.20%, rates of compensation increase of 2.25% and long term expected return on plan assets of 5.80%. The benefit obligation at December 31, 2022 for the plans was determined usinga discount rate of 2.20% and rate of compensation increase of 2.25%. The 2022 net periodic benefit cost for the plans was determined using discount rates of 0.20%, rates of compensation increase of 2.00% and long term expected return on plan assets of 4.50%.

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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,

Plan participants' contributions 4,534 3,649

Transfer of benefits net of payments from fund 1,866 3,295

Expenses paid from assets (118) (87)

Fair value of plan assets, beginning of year 102,023 93,995

Actual return on plan assets 140 (5,257)

Plan participants' contributions 4,534 3,649

Transfer of benefits net of payments from fund 1,866 3,295

Expenses paid from assets (118) (87)

The unfunded liability is reported in other liabilities on the consolidated balance sheets as of December 31, 2023 and 2022. The accumulated benefit obligation is $157.9 million and $105.1 million as of December 31, 2023 and 2022, respectively.

The net periodic benefit cost was as follows (in thousands):

Year Ended December 31,

Expected return on plan assets (5,688) (4,184) (60)

Amortization of prior service cost 771 773 217

Amortization of actuarial losses — 356 1,154

The components of net periodic benefit cost other than the service cost component are included in interest income and other, net on the consolidated statements of operations.

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Other changes in the plans assets and the benefit obligation that is recognized in accumulated other comprehensive income (loss) were as follows, net of tax (in thousands):

Year Ended December 31,

Pension (asset) liability, beginning of year $ (1,699) $ 23,677 $ 23,831

Plan amendment — — 6,017

We expect to contribute a total of $10.0 million to the pension plans in 2024. The following payments are expected to be paid from the fund (in thousands):

Note 16. Commitments and Contingencies

Commitments

In August 2021, we entered into a revolving credit and guaranty agreement, which was subsequently amended in May 2023 (as amended, the “Credit Agreement”), among the Incyte Corporation, as borrower, subsidiary Incyte Holdings Corporation, as a guarantor, a group of lenders (the “Lenders”), and J.P. Morgan Chase Bank, N.A. as administrative agent. Under the Credit Agreement, the Lenders have committed to provide an unsecured revolving credit facility in an aggregate principal amount of up to $500.0 million that matures in August 2024. We may increase the maximum revolving commitments or add one or more incremental term loan facilities to the Credit Agreement, subject to obtaining commitments from any participating lenders and certain other conditions, in an amount not to exceed (1) $250.0 million plus (2) an additional amount, so long as after giving effect to the incurrence of such additional amount, our pro forma consolidated leverage ratio would not exceed 0.25:1.00 above its consolidated leverage ratio in effect immediately prior to giving effect to such increase.

Loans under the Credit Agreement will bear interest, at our option, at a per annum rate equal to either (a) a base rate plus an applicable rate per annum varying from 0.125% to 0.875% depending on the consolidated leverage ratio or (b) a Eurodollar rate plus an applicable rate per annum varying from 1.125% to 1.875% depending on the consolidated leverage ratio. Commitment fees payable on the undrawn amount range from 0.150% per annum to 0.225% per annum, based on our consolidated leverage ratio.

INCY US Equity

INCY · 10-K · period ended 2023-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

INCY US Equity☆

INCY · 10-K · period ended 2023-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

INCY US Equity