Incyte(INCY) - 2023 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION Item 1. Financial Statements Presents Incyte's unaudited condensed consolidated financial statements and notes for Q1 2023 and 2022 Condensed Consolidated Balance Sheets | ASSETS (in thousands) | March 31, 2023 (unaudited) | December 31, 2022* | | :-------------------- | :------------------------- | :------------------- | | Cash and cash equivalents | $2,821,051 | $2,951,422 | | Total current assets | $3,971,633 | $4,092,850 | | Total assets | $5,797,623 | $5,840,984 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | March 31, 2023 (unaudited) | December 31, 2022* | | Total current liabilities | $1,006,111 | $1,157,077 | | Total liabilities | $1,335,055 | $1,470,865 | | Total stockholders' equity | $4,462,568 | $4,370,119 | Condensed Consolidated Statements of Operations | (unaudited, in thousands, except per share amounts) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total revenues | $808,673 | $733,235 | | Total costs and expenses | $783,903 | $616,695 | | Income from operations | $24,770 | $116,540 | | Net income | $21,703 | $37,992 | | Net income per share: Basic | $0.10 | $0.17 | | Net income per share: Diluted | $0.10 | $0.17 | Condensed Consolidated Statements of Comprehensive Income (Loss) | (unaudited, in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Net income | $21,703 | $37,992 | | Other comprehensive income (loss) | $5,873 | $(3,593) | | Comprehensive income | $27,576 | $34,399 | Condensed Consolidated Statements of Stockholders' Equity | (unaudited, in thousands, except number of shares) | Balance at January 1, 2023 | Balance at March 31, 2023 | | :----------------------------------------------- | :------------------------- | :------------------------ | | Common Stock | $223 | $223 | | Additional Paid-in Capital | $4,792,041 | $4,856,914 | | Accumulated Other Comprehensive Income | $15,069 | $20,942 | | Accumulated Deficit | $(437,214) | $(415,511) | | Total Stockholders' Equity | $4,370,119 | $4,462,568 | - Total stockholders' equity increased from $4,370,119 thousand at January 1, 2023, to $4,462,568 thousand at March 31, 2023, driven by net income, stock compensation, and other comprehensive income[17] Condensed Consolidated Statements of Cash Flows | (unaudited, in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(105,603) | $215,741 | | Net cash used in investing activities | $(28,559) | $(16,748) | | Net cash provided by financing activities | $4,009 | $96 | | Net (decrease) increase in cash, cash equivalents, restricted cash and investments | $(130,352) | $199,299 | | Cash, cash equivalents, restricted cash and investments at end of period | $2,822,768 | $2,258,459 | - Net cash used in operating activities was $(105.6) million for the three months ended March 31, 2023, a significant decrease from $215.7 million provided in the prior year, primarily due to changes in working capital, specifically a reduction in accounts payable[20][256] Notes to Condensed Consolidated Financial Statements Note 1. Organization and Business Incyte is a biopharmaceutical company developing and commercializing proprietary therapeutics across a broad portfolio - Incyte Corporation is a biopharmaceutical company focused on developing and commercializing proprietary therapeutics[22] - Key commercialized products include JAKAFI® (ruxolitinib), ICLUSIG® (ponatinib), PEMAZYRE® (pemigatinib), OPZELURA™ (ruxolitinib cream), MINJUVI® (tafasitamab), MONJUVI® (tafasitamab-cxix), and ZYNYZ™ (retifanlimab-dlwr)[22] Note 2. Summary of Significant Accounting Policies Outlines basis of presentation, consolidation principles, estimates, and accounting for intangibles and product costs - Unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information[23] - The company's financial statements include accounts of Incyte Corporation and its wholly-owned subsidiaries, with inter-company transactions eliminated[26] - Cost of product revenues includes product-related costs, royalties, and amortization of licensed intellectual property and capitalized milestone payments[29] Note 3. Revenues Total revenues increased to $808.7 million in Q1 2023, driven by JAKAFI and OPZELURA net product revenues Revenues Breakdown | Revenues (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Product revenues, net | $693,237 | $605,821 | | JAKAFI revenues, net | $579,969 | $544,464 | | OPZELURA revenues, net | $56,552 | $12,754 | | Total product royalty revenues | $115,436 | $122,414 | | OLUMIANT product royalty revenues | $34,155 | $48,064 | | Total revenues | $808,673 | $733,235 | - Total revenues increased by $75.4 million (10.3%) year-over-year[31] - JAKAFI net product revenues increased by $35.5 million, driven by volume and price increases, while OPZELURA net product revenues saw a substantial increase of $43.8 million due to increased patient demand and expanded coverage[31][241] Note 4. Fair Value of Financial Instruments Details fair value measurements of financial instruments, including marketable securities and contingent consideration Marketable Security Portfolio | Marketable Security Portfolio (in thousands) | March 31, 2023 | December 31, 2022 | | :----------------------------------------- | :------------- | :---------------- | | Amortized Cost | $294,278 | $292,580 | | Net Unrealized Losses | $(2,617) | $(5,037) | | Estimated Fair Value | $291,661 | $287,543 | - Marketable securities, primarily U.S. government debt securities, are classified as available-for-sale with contractual maturities of 12 to 18 months[32][36] Level 3 Liabilities | Level 3 Liabilities (in thousands) | 2023 | | :--------------------------------- | :--- | | Balance at January 1, | $221,000 | | Contingent consideration earned but not yet paid | $(9,196) | | Change in fair value of contingent consideration | $6,196 | | Balance at March 31, | $218,000 | - The loss on change in fair value of acquisition-related contingent consideration for the three months ended March 31, 2023, was $6.2 million, primarily due to the passage of time[39] Note 5. Concentration of Credit Risk and Current Expected Credit Losses Highlights credit risk concentration with partners and major customers, assessing expected credit losses as de minimis - Novartis and Lilly comprised 18% of the accounts receivable balance as of March 31, 2023[41] Customer Revenue Concentration | Customer | Percentage of Total Net Product Revenues for the Three Months Ended March 31, 2023 | | :------- | :------------------------------------------------------------------------------- | | Customer A | 17 % | | Customer B | 11 % | | Customer C | 17 % | | Customer D | 10 % | | Customer E | 12 % | - Customers A, B, C, D, and E collectively comprised 40% of the accounts receivable balance as of March 31, 2023[43] - The company assessed expected credit losses as de minimis and had no allowance for doubtful accounts as of March 31, 2023[44] Note 6. Inventory Total inventory increased to $157.6 million, with a significant portion classified as non-current Inventory Breakdown | Inventory (in thousands) | March 31, 2023 | December 31, 2022 | | :----------------------- | :------------- | :---------------- | | Raw materials | $29,448 | $31,874 | | Work-in-process | $93,829 | $54,455 | | Finished goods | $34,287 | $34,630 | | Total inventory | $157,564 | $120,959 | - Total inventory increased by $36.6 million from December 31, 2022, to March 31, 2023[45] - As of March 31, 2023, $116.7 million of inventory was classified as non-current, expected to be consumed beyond the next twelve months[45] - Inventory with approximately $40.7 million of pre-regulatory approval product costs is expected to be sold over the next 24 months, resulting in lower cost of product revenues[46] Note 7. License Agreements Details significant license and collaboration agreements for development and commercialization rights, milestones, and royalties - Novartis holds exclusive development and commercialization rights to ruxolitinib (JAKAVI) outside the U.S. and capmatinib (TABRECTA) worldwide, with Incyte receiving tiered, double-digit royalties[47][49][50] - Lilly holds exclusive worldwide rights to baricitinib (OLUMIANT) for inflammatory and autoimmune diseases, with Incyte eligible for tiered, double-digit royalties on global sales[51][52] - Incyte has collaborations for immuno-therapeutics (Agenus), bispecific antibodies (Merus), PD-1 inhibitor retifanlimab (MacroGenics), gene control platform (Syros), CD19 antibody tafasitamab (MorphoSys), and CSF-1R monoclonal antibody axatilimab (Syndax), involving various milestone payments and royalty structures[56][57][59][61][63][65][68][72][75][77] - In March 2023, Incyte made a $15.0 million regulatory milestone payment to MacroGenics for the FDA approval of ZYNYZ, capitalized as an intangible asset[64] - Incyte's 50% share of U.S. profit for tafasitamab commercialization was a $1.4 million profit for Q1 2023, compared to a $4.7 million loss for Q1 2022[74] Note 8. Property and Equipment, net Property and equipment, net, increased slightly to $741.7 million, with buildings as the largest component | Property and Equipment, net (in thousands) | March 31, 2023 | December 31, 2022 | | :--------------------------------------- | :------------- | :---------------- | | Office equipment | $23,144 | $22,734 | | Laboratory equipment | $195,999 | $192,141 | | Computer equipment | $94,661 | $92,115 | | Land | $10,484 | $10,429 | | Building and leasehold improvements | $567,863 | $564,170 | | Operating lease right-of-use assets | $21,818 | $23,311 | | Construction in progress | $53,408 | $47,224 | | Less accumulated depreciation and amortization | $(225,676) | $(212,814) | | Property and equipment, net | $741,701 | $739,310 | Note 9. Accrued and Other Current Liabilities Total accrued and other current liabilities increased to $825.4 million, driven by royalties and sales allowances Accrued and Other Current Liabilities Breakdown | Accrued and Other Current Liabilities (in thousands) | March 31, 2023 | December 31, 2022 | | :------------------------------------------------- | :------------- | :---------------- | | Royalties | $286,230 | $263,466 | | Clinical related costs | $117,417 | $130,570 | | Sales allowances | $220,753 | $192,133 | | Sales and marketing | $60,674 | $31,149 | | Other current liabilities | $129,922 | $72,047 | | Total accrued and other current liabilities | $825,443 | $701,053 | - Royalties increased by $22.8 million, sales allowances by $28.6 million, and sales and marketing by $29.5 million[81] Note 10. Stock Compensation Stock compensation expense increased to $53.4 million, allocated across R&D, SG&A, and product costs Stock Compensation Expense | Stock Compensation Expense (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Total stock compensation expense | $53,379 | $43,841 | | Research and development expense | $31,000 | $26,300 | | Selling, general and administrative expense | $21,600 | $16,900 | | Cost of product revenues | $800 | $600 | - Total stock compensation expense increased by $9.6 million year-over-year[82] - As of March 31, 2023, total unvested compensation costs were $42.3 million for options, $202.8 million for RSUs, and $24.1 million for PSUs, expected to be recognized over weighted average periods of 1.1, 1.8, and 1.7 years, respectively[90] Note 11. Income Taxes Provision for income taxes was $30.2 million, with an effective tax rate of 58.1% due to foreign losses Income Taxes Summary | Income Taxes | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----------- | :-------------------------------- | :-------------------------------- | | Income before provision for income taxes | $51,856 | $70,535 | | Provision for income taxes | $30,153 | $32,543 | | Effective tax rate | 58.1% | 46.1% | - The effective tax rate increased from 46.1% in 2022 to 58.1% in 2023, primarily due to lower U.S. earnings while unbenefited foreign losses remained flat[91] - Unrecognized tax benefits increased by approximately $2.7 million during the period, driven by current year operations and R&D tax credits[92] Note 12. Net Income Per Share Basic and diluted net income per share decreased to $0.10 from $0.17 due to lower net income Net Income Per Share Details | Net Income Per Share | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------- | :-------------------------------- | :-------------------------------- | | Basic net income | $21,703 | $37,992 | | Weighted average common shares outstanding | 222,960 | 221,326 | | Basic net income per share | $0.10 | $0.17 | | Diluted net income per share | $0.10 | $0.17 | - Basic and diluted net income per share decreased by $0.07 year-over-year[94] - Dilutive stock options and awards increased to 2,629 thousand in 2023 from 1,624 thousand in 2022[94] Note 13. Employee Benefit Plans Details defined contribution and benefit plans, with $5.6 million expense for Q1 2023 Defined Contribution Expense | Defined Contribution Expense (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Defined contribution expense | $5.6 | $4.9 | Net Periodic Benefit Cost | Net Periodic Benefit Cost (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Service cost | $2,088 | $2,522 | | Interest cost | $617 | $64 | | Expected return on plan assets | $(1,540) | $(1,071) | | Amortization of prior service cost | $103 | $194 | | Amortization of actuarial losses | $90 | $88 | | Net periodic benefit cost | $1,358 | $1,797 | - The company expects to contribute $8.0 million to its pension plans in 2023[97] Note 14. Commitments and Contingencies Outlines potential future payments under collaboration agreements and risks from lawsuits and disputes - The company may be required to pay upfront fees, milestone payments, and royalties under collaboration agreements, contingent on future discovery, development, regulatory, or commercial milestones[98] - Reserves are recorded for lawsuits, proceedings, and other disputes when a liability is probable and the amount can be reasonably estimated[99] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses Incyte's financial condition and results for Q1 2023, including revenues, expenses, and liquidity - Net income for the three months ended March 31, 2023, was $21.7 million, down from $38.0 million in the corresponding period in 2022[238] - Basic and diluted net income per share for Q1 2023 was $0.10, compared to $0.17 in Q1 2022[238] Forward-Looking Statements Highlights forward-looking statements regarding future operations, performance, and plans, subject to risks - The report contains forward-looking statements related to the discovery, development, manufacturing, and commercialization of compounds and drug candidates, including JAKAFI, PEMAZYRE, ICLUSIG, MONJUVI/MINJUVI, OPZELURA, and ZYNYZ[102] - Key areas of forward-looking statements include plans for international operations, clinical trials, collaboration strategies, regulatory approval processes, safety and effectiveness of drug candidates, and expected financial outcomes like expenses, revenues, and profitability[102] - These statements are subject to risks and uncertainties, such as litigation costs, competition, the impact of the COVID-19 pandemic, and the ability to obtain and maintain regulatory approvals and market share[104][108] Summary Risk Factors Summarizes key business risks, including revenue dependence, reimbursement, distribution, and development challenges - Heavy dependence on JAKAFI/JAKAVI revenues, with potential material harm if revenues decrease[110] - Risks related to obtaining and maintaining adequate coverage and reimbursement for products from government and third-party payors[110] - Operational and financial risks due to reliance on a limited number of specialty pharmacies and wholesalers for product distribution[110] - Challenges in drug discovery and development, including the risk of unsuccessful clinical trials and regulatory approval failures[110] - Impact of the COVID-19 pandemic and other geopolitical events on business operations and financial results[110] Overview Incyte is a global biopharmaceutical company focused on Hematology/Oncology and IAI, with a diverse product portfolio - Incyte operates in two therapeutic areas: Hematology/Oncology (MPNs, GVHD, solid tumors, hematologic malignancies) and Inflammation and Autoimmunity (IAI), including Dermatology[114] - The company's global headquarters is in Wilmington, Delaware, with European headquarters in Morges, Switzerland, and offices in other European countries, Japan, and Canada[113] Hematology and Oncology Details Incyte's Hematology and Oncology franchise, including five approved products and active clinical development - The Hematology and Oncology franchise includes JAKAFI, MONJUVI/MINJUVI, PEMAZYRE, ICLUSIG, and ZYNYZ[115] - JAKAFI is approved for myelofibrosis (MF), polycythemia vera (PV), and steroid-refractory acute and chronic graft-versus-host disease (GVHD) in the U.S., and is the first-line standard of care in MF[116][119] - MONJUVI (U.S.) / MINJUVI (EU) is approved in combination with lenalidomide for relapsed or refractory diffuse large B-cell lymphoma (DLBCL) not eligible for ASCT[137][139] - PEMAZYRE is approved for previously treated, unresectable locally advanced or metastatic cholangiocarcinoma with FGFR2 fusion/rearrangement (U.S., EU, Japan, China) and for myeloid/lymphoid neoplasms (MLNs) with FGFR1 rearrangement (U.S., Japan)[142][143][145][148][149] - ZYNYZ (retifanlimab-dlwr) received accelerated FDA approval in March 2023 for metastatic or recurrent locally advanced Merkel cell carcinoma (MCC)[153] - In early 2023, Incyte discontinued certain programs, including parsaclisib in myelofibrosis and warm hemolytic anemia, and some early-stage programs, to optimize its R&D portfolio[154] Inflammation and AutoImmunity (IAI) Incyte's IAI efforts focus on OPZELURA cream for AD and vitiligo, with pipeline expansion into new indications - OPZELURA (ruxolitinib) cream was approved by the FDA in September 2021 for mild to moderate atopic dermatitis and in July 2022 for nonsegmental vitiligo in patients 12 years and older[179][182] - The European Commission approved OPZELURA for topical treatment of nonsegmental vitiligo with facial involvement in adults and adolescents 12 years and older in April 2023[185] - Ruxolitinib cream is being evaluated in Phase II trials for lichen planus, lichen sclerosus, and hidradenitis suppurativa, and in Phase III trials for prurigo nodularis[188] - Povorcitinib, an oral JAK1 inhibitor, is in Phase III trials for moderate to severe hidradenitis suppurativa and Phase II for vitiligo and prurigo nodularis[189][190] - Auremolimab (anti-IL-15Rβ), acquired in November 2022, is expected to enter clinical studies in 2023 for vitiligo[193] Clinical Programs in Other IAI Initiated Phase II trial for INCB00928 (ALK2) in fibrodysplasia ossificans progressiva (FOP) - INCB00928 (ALK2) is in a Phase II trial for fibrodysplasia ossificans progressiva (FOP)[195] - INCB00928 has received Fast Track designation and orphan drug designation from the FDA for FOP[195] Collaborative Partnered Programs Details milestone and royalty-generating partnered programs like OLUMIANT, JAKAVI, and TABRECTA - OLUMIANT (baricitinib), licensed to Lilly, is approved for rheumatoid arthritis (EU, Japan, U.S.), moderate-to-severe atopic dermatitis (EU, Japan), severe alopecia areata (U.S., EU, Japan), and COVID-19 in hospitalized adults (U.S.)[202][205][206][209] - JAKAVI (ruxolitinib), licensed to Novartis outside the U.S., is approved in Europe for acute or chronic GVHD in patients aged 12 years and older[217] - TABRECTA (capmatinib), licensed to Novartis, is approved in the U.S., Europe, and Japan for metastatic NSCLC with MET exon 14 skipping mutations[212][214][215] License Agreements and Business Relationships Manages out-license and in-license agreements to support drug development and commercialization efforts - Out-license agreements include Novartis (ruxolitinib ex-U.S., capmatinib worldwide), Lilly (baricitinib worldwide), Innovent (pemigatinib, parsaclisib in Greater China), InnoCare (tafasitamab in Greater China), Maruho (ruxolitinib cream in Japan), and CMS Aesthetics (ruxolitinib cream in Greater China and Southeast Asia)[222][223][224][225][226][227] - In-license agreements include Agenus (immuno-therapeutics), Merus (bispecific antibodies), MacroGenics (retifanlimab), Syros (target discovery), MorphoSys (tafasitamab), and Syndax (axatilimab)[228][229][231][232][233][234] - In January 2022, Incyte opted out of MCLA-145 development with Merus, and in September 2022, terminated collaboration with Calithera Biosciences, Inc[230][339] Critical Accounting Policies and Significant Estimates No significant changes to critical accounting policies or estimates during Q1 2023 - Financial statements rely on estimates and assumptions affecting reported amounts of assets, liabilities, revenues, and expenses[235] - No significant changes to critical accounting policies or estimates occurred during the three months ended March 31, 2023[236] Recent Accounting Pronouncements No new accounting pronouncements significantly affected financial statements since the 2022 Form 10-K - No new accounting pronouncements issued or adopted had a significant effect on the condensed consolidated financial statements since the 2022 Form 10-K filing[237] Results of Operations Net income decreased to $21.7 million in Q1 2023, driven by increased operating expenses Financial Performance Summary | Financial Metric (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $21.7 | $38.0 | | Basic and diluted net income per share | $0.10 | $0.17 | Revenues Total revenues increased to $808.7 million in Q1 2023, primarily from JAKAFI and OPZELURA Revenue Breakdown | Revenues (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------- | :-------------------------------- | :-------------------------------- | | JAKAFI revenues, net | $580.0 | $544.5 | | OPZELURA revenues, net | $56.6 | $12.8 | | Total product revenues, net | $693.3 | $605.9 | | JAKAVI product royalty revenues | $76.7 | $70.8 | | OLUMIANT product royalty revenues | $34.1 | $48.0 | | Total product royalty revenues | $115.4 | $122.3 | | Milestone and contract revenues | $0.0 | $5.0 | | Total revenues | $808.7 | $733.2 | - JAKAFI net product revenues increased by $35.5 million, driven by volume and price, partially offset by higher gross-to-net deductions[241] - OPZELURA net product revenues increased significantly by $43.8 million due to increased patient demand and expanded coverage, though impacted by higher co-pay assistance and prior period refill acceleration[241] - OLUMIANT product royalty revenues decreased by $13.9 million, impacted by unfavorable foreign currency exchange rates and decreased net product sales for COVID-19 treatment[245] Cost of Product Revenues Cost of product revenues increased to $56.8 million, driven by higher product-related and royalty costs Cost of Product Revenues Breakdown | Cost of Product Revenues (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Product costs | $23.5 | $12.0 | | Royalty expense | $24.4 | $22.4 | | Total cost of product revenues | $56.8 | $42.6 | - The increase of $14.2 million was primarily driven by product-related costs for commercial products, including OPZELURA[246] Operating Expenses Total operating expenses increased significantly due to higher R&D and SG&A, and other non-operating items Research and development expenses R&D expenses increased due to higher headcount and clinical research activities Research and Development Expenses Breakdown | Research and Development Expenses (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Salary and benefits related | $100.4 | $84.5 | | Stock compensation | $31.0 | $26.3 | | Clinical research and outside services | $229.9 | $210.1 | | Total research and development expenses | $406.6 | $353.4 | - Total R&D expenses increased by $53.2 million, primarily due to increased development headcount and higher clinical research and outside services expenses[247][248] - R&D expenses for Q1 2023 included $2.7 million in upfront and milestone expenses, compared to $20.0 million in Q1 2022[248] Selling, general and administrative expenses SG&A expenses increased due to higher headcount and promotional activities for OPZELURA Selling, General and Administrative Expenses Breakdown | Selling, General and Administrative Expenses (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Salary and benefits related | $72.9 | $67.3 | | Stock compensation | $21.6 | $16.9 | | Other contract services and outside costs | $221.1 | $125.4 | | Total selling, general and administrative expenses | $315.6 | $209.6 | - Total SG&A expenses increased by $106.0 million, driven by increased headcount for the dermatology commercial organization and higher promotional activities for OPZELURA[250] Loss on change in fair value of acquisition-related contingent consideration Loss on contingent consideration was $6.2 million, primarily due to the passage of time - The loss on change in fair value of acquisition-related contingent consideration was $6.2 million for Q1 2023, compared to $6.4 million in Q1 2022, primarily due to the passage of time[251] (Profit) and loss sharing under collaboration agreements Profit from tafasitamab commercialization was $1.4 million for Q1 2023 - Incyte's 50% share of U.S. profit for tafasitamab commercialization was a $1.4 million profit for Q1 2023, a significant improvement from a $4.7 million loss in Q1 2022[252] Interest income and other, net Interest income and other, net, increased substantially to $32.9 million in Q1 2023 - Interest income and other, net, increased substantially to $32.9 million for Q1 2023 from $1.3 million in Q1 2022, primarily due to an increase in interest income[253] Unrealized loss on long term investments Unrealized loss on long-term investments decreased to $5.3 million in Q1 2023 Unrealized Loss on Long Term Investments Breakdown | Unrealized Loss on Long Term Investments (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Agenus | $(10.6) | $(9.2) | | Merus | $10.4 | $(19.0) | | MorphoSys | $1.4 | $(9.6) | | Syndax | $(6.2) | $(6.4) | | Syros | $(0.1) | $(1.9) | | Total unrealized loss on long term investments | $(5.3) | $(46.6) | - Total unrealized loss on long term investments decreased to $5.3 million for Q1 2023 from $46.6 million in Q1 2022, primarily due to a gain on Merus investments[254] Provision for income taxes Provision for income taxes was $30.2 million, with an effective tax rate of 58.1% - The provision for income taxes was $30.2 million for Q1 2023, with an effective tax rate of 58.1%, higher than the U.S. statutory rate due to unbenefited foreign losses and lower U.S. earnings[254] Liquidity and Capital Resources Incyte had $3.1 billion in cash and marketable securities, with $105.6 million net cash used in operations - As of March 31, 2023, Incyte had $3.1 billion in available cash, cash equivalents, and marketable securities[255] - Net cash used in operating activities was $105.6 million for Q1 2023, compared to $215.7 million provided in Q1 2022, primarily due to a reduction in accounts payable[256] - Net cash used in investing activities was $28.6 million for Q1 2023, including purchases of marketable securities ($54.9 million), payments for intangible assets ($15.0 million), and capital expenditures ($11.9 million)[257] - The company has a $500.0 million, three-year senior unsecured revolving credit facility with no outstanding borrowings as of March 31, 2023[260] - U.S. income tax payments are expected to increase significantly in 2023 due to the full utilization of R&D and orphan drug tax credit carryforwards in 2022 and the mandatory capitalization and amortization of R&D expenses[261] Item 3. Quantitative and Qualitative Disclosures about Market Risk Marketable securities totaling $291.7 million are subject to market risks, with minimal interest rate sensitivity - Marketable securities, primarily U.S. government debt securities, totaled $291.7 million as of March 31, 2023[264] - These investments are subject to default, credit rating changes, and interest rate risk[264] - A 10% increase in market interest rates would not materially affect the fair value of marketable securities[264] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2023, with no material changes - Disclosure controls and procedures are designed to ensure timely and accurate reporting of information required by the Exchange Act[265] - As of March 31, 2023, the CEO and CFO concluded that disclosure controls and procedures were effective at the reasonable assurance level[266] - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2023[267] PART II: OTHER INFORMATION This section presents other information, including detailed risk factors, exhibits, and corporate signatures Item 1A. Risk Factors Outlines numerous risks impacting business, financial results, and strategy, categorized by operational area RISKS RELATING TO COMMERCIALIZATION OF OUR PRODUCTS Commercialization risks include revenue dependence, reimbursement challenges, distribution reliance, and intense competition - Heavy dependence on JAKAFI (ruxolitinib) revenues; a decrease could materially harm the business[269][272] - Inability to obtain or maintain anticipated levels of coverage and reimbursement for products from government and other third-party payors could harm product sales and financial condition[274] - Reliance on a limited number of specialty pharmacies and wholesalers for JAKAFI and most other drug products poses a risk of significant reduction in sales[282] - Failure to establish and maintain effective sales, marketing, and distribution capabilities, especially for new dermatology indications like OPZELURA, could hinder successful commercialization[283][284] - Non-compliance with applicable laws and regulations could lead to loss of marketing approval, civil or criminal penalties, and product recalls[285][288] - Product liability claims or perceived harm to patients from product use could lead to regulatory approval revocation, costly lawsuits, and negative impact on sales and reputation[289][291][293] - Intense competition from existing therapies, generic drugs, and new product candidates could decrease revenue and harm business[302] - JAKAFI faces potential generic competition, with patents covering ruxolitinib phosphate and its use expiring in 2028[303] OTHER RISKS RELATING TO OUR BUSINESS Details broader business risks, including epidemics, drug development uncertainties, and international operations - Public health epidemics and pandemics, such as COVID-19, have caused and could continue to cause disruptions to operations, sales, clinical trials, and supply chains[308][309][311] - Unsuccessful drug discovery, development, and commercialization efforts for new drug products or indications could hinder long-term success and revenue diversification[312][315] - Inability to obtain regulatory approval for drug candidates in the U.S. and foreign jurisdictions would prevent commercialization[317] - Dependence on collaborators and licensees for development and commercialization of out-licensed drug candidates, with risks of conflicts or agreement terminations[332][334][335] - Reliance on third parties for manufacturing drug products and candidates could lead to supply shortages, delays, increased costs, or withdrawal of regulatory approval[345][346] - Failure to comply with extensive legal and regulatory requirements in the healthcare industry could result in increased costs, penalties, and loss of business[350] - Risks associated with international operations, including conflicting laws, management difficulties, financial risks, and geopolitical events, could adversely affect business[358][360] - Product liability lawsuits could result in substantial liabilities, limit commercialization, and harm results of operations[361] RISKS RELATING TO OUR FINANCIAL RESULTS Financial risks include potential future losses, capital needs, market risks on investments, and tax law changes - Expectation to incur significant expenses for drug discovery and development, potentially leading to future losses and difficulty in achieving sustained profitability[367][368][370] - Need for additional capital in the future, with uncertainty regarding the ability to raise funds on acceptable terms, potentially limiting R&D or commercialization efforts[371][372] - Marketable securities and long-term investments are subject to risks that could adversely affect the overall financial position, including losses on holdings and impaired liquidity[373][374][375][376] - Changes in tax laws or regulations, such as the mandatory capitalization of R&D expenditures and the Inflation Reduction Act of 2022, could adversely affect results of operations and financial condition[377] - Substantial portion of revenues derived from royalties and milestone payments; failure to achieve milestones or develop licensable product candidates could decrease revenues[378] RISKS RELATING TO INTELLECTUAL PROPERTY AND LEGAL MATTERS IP and legal risks include litigation, enforcement challenges, and potential impacts from changes in patent laws - Arbitration, litigation, and infringement claims could be costly and disrupt drug discovery and development efforts, potentially leading to significant liabilities or licensing requirements[380][381][382] - Inability to adequately protect or enforce proprietary information may result in unauthorized use, loss of revenue, or reduced ability to compete, especially against generic versions of products[383][385] - Changes in U.S. patent laws, such as the America Invents Act, or changes in interpretation, could decrease the effective term and value of patents, or narrow their scope[386][387][388] - International patent protection is uncertain and costly, with involvement in opposition proceedings potentially leading to substantial expenses and loss of rights[390] RISKS RELATING TO INFORMATION TECHNOLOGY AND DATA PRIVACY IT and data privacy risks include system disruptions, security breaches, ERP implementation, and compliance challenges - Significant disruptions of IT systems, data security breaches, or unauthorized disclosures of sensitive data could adversely affect business, lead to liability, or cause reputational damage[391][393][394] - The implementation of a new enterprise resource planning system carries inherent costs and risks, including potential delays and errors[392] - Compliance with rapidly evolving data privacy laws and regulations, such as GDPR, UK GDPR, and CCPA, increases business costs and complexity, with potential for large penalties for noncompliance[395] - Increasing use of social media by employees and contractors could lead to inadvertent disclosure of sensitive data, liability, or reputational damage[396] Item 6. Exhibits Lists exhibits filed with the report, including certifications and XBRL documents - The exhibits include Rule 13a-14(a) Certifications of the CEO and CFO, Statements of the CEO and CFO under Section 906 of Sarbanes-Oxley Act, and XBRL Instance, Schema, Calculation, Label, and Presentation Linkbase Documents[398] Signatures Official signatures of the Chairman, President, CEO, and CFO, dated May 2, 2023 - The report is signed by Hervé Hoppenot, Chairman, President, and Chief Executive Officer, and Christiana Stamoulis, Chief Financial Officer, on May 2, 2023[403]