false--12-31Q220190000879169Large Accelerated FilerINCYTE CORPP20DP30D0.3318700000213274660214865720P12Mus-gaap:OtherNonoperatingIncomeExpenseus-gaap:OtherNonoperatingIncomeExpenseus-gaap:OtherNonoperatingIncomeExpenseus-gaap:OtherNonoperatingIncomeExpense0000000us-gaap:FinanceLeaseLiabilityCurrentus-gaap:FinanceLeaseLiabilityNoncurrentP16Yus-gaap:AccruedLiabilitiesCurrentus-gaap:OtherLiabilitiesNoncurrent00P3YP36MP24M0.167P10YP7Y

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number: 001-12400

INCYTE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

94-3136539

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

1801 Augustine Cut-Off

Wilmington, DE 19803

19803

(Address of principal executive offices)

(Zip Code)

(302) 498-6700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

Name of exchange on which registered

Common Stock, $.001 par value per share

INCY

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   No

The number of outstanding shares of the registrant’s Common Stock, $.001 par value, was 215,066,629 as of July 23, 2019.

Table of Contents

INCYTE CORPORATION

INDEX

0

PART I: FINANCIAL INFORMATION

    

3

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations

4

Condensed Consolidated Statements of Comprehensive Income

5

Condensed Consolidated Statements of Stockholders’ Equity

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

63

Item 4.

Controls and Procedures

63

PART II: OTHER INFORMATION

Item 1A.

Risk Factors

64

Item 6.

Exhibits

87

Signatures

88

2

Table of Contents

PART I:    FINANCIAL INFORMATION

Item 1.    Financial Statements

INCYTE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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

June 30,

December 31,

    

2019

    

2018*

ASSETS

Current assets:

Cash and cash equivalents

$

1,416,224

$

1,163,980

Marketable securities—available-for-sale

 

279,631

 

274,343

Accounts receivable

 

302,680

 

307,598

Inventory

 

6,527

 

6,967

Prepaid expenses and other current assets

53,563

 

79,366

Total current assets

 

2,058,625

 

1,832,254

Restricted cash and investments

 

1,014

 

1,006

Long term investments

 

115,563

 

99,199

Inventory

 

6,166

 

3,438

Property and equipment, net

 

339,122

 

319,751

Finance lease right-of use assets, net

30,348

Other intangible assets, net

204,596

215,364

Goodwill

155,593

155,593

Other assets, net

 

36,606

 

19,157

Total assets

$

2,947,633

$

2,645,762

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

66,184

$

103,827

Accrued compensation

 

53,697

 

60,176

Interest payable

 

30

 

29

Accrued and other current liabilities

 

210,474

 

229,401

Finance lease liabilities

791

Acquisition-related contingent consideration

35,929

31,844

Total current liabilities

 

367,105

 

425,277

Convertible senior notes

 

17,862

 

17,434

Acquisition-related contingent consideration

250,071

255,157

Finance lease liabilities

31,643

Other liabilities

 

33,761

 

21,927

Total liabilities

 

700,442

 

719,795

Stockholders’ equity:

Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued or outstanding as of June 30, 2019 and December 31, 2018

 

 

Common stock, $0.001 par value; 400,000,000 shares authorized; 214,865,720 and 213,274,660 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

 

215

 

213

Additional paid-in capital

 

3,925,975

 

3,813,678

Accumulated other comprehensive loss

 

(8,965)

 

(10,165)

Accumulated deficit

 

(1,670,034)

 

(1,877,759)

Total stockholders’ equity

 

2,247,191

 

1,925,967

Total liabilities and stockholders’ equity

$

2,947,633

$

2,645,762

*   The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited financial statements at that date.

See accompanying notes.

3

Table of Contents

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2019

    

2018

    

2019

    

2018

 

Revenues:

Product revenues, net

$

433,897

$

365,524

$

830,146

$

700,029

Product royalty revenues

 

76,035

 

55,953

 

137,643

 

103,669

Milestone and contract revenues

 

20,000

 

100,000

 

60,000

 

100,000

Other revenues

 

 

39

 

 

100

Total revenues

 

529,932

 

521,516

 

1,027,789

 

903,798

Costs and expenses:

Cost of product revenues (including definite-lived intangible amortization)

 

29,406

24,856

51,994

42,962

Research and development

 

289,363

298,089

559,908

601,192

Selling, general and administrative

 

105,943

108,029

229,926

229,527

Change in fair value of acquisition-related contingent consideration

6,608

7,303

13,279

13,988

Total costs and expenses

 

431,320

 

438,277

 

855,107

 

887,669

Income from operations

 

98,612

 

83,239

 

172,682

 

16,129

Other income (expense), net

 

15,000

5,808

24,373

10,270

Interest expense

 

(316)

(398)

(651)

(783)

Unrealized gain (loss) on long term investments

 

(4,625)

(34,641)

16,364

(11,962)

Income before provision for income taxes

 

108,671

 

54,008

 

212,768

 

13,654

Provision for income taxes

 

3,353

 

1,614

 

5,138

 

2,400

Net income

$

105,318

$

52,394

$

207,630

$

11,254

Net income per share:

Basic

$

0.49

$

0.25

$

0.97

$

0.05

Diluted

$

0.48

$

0.24

$

0.96

$

0.05

Shares used in computing net income per share:

Basic

214,620

212,210

214,342

211,945

Diluted

217,483

215,103

217,274

215,294

See accompanying notes.

4

Table of Contents

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2019

    

2018

    

2019

    

2018

 

Net income

$

105,318

$

52,394

$

207,630

$

11,254

Other comprehensive income (loss):

Foreign currency translation

(284)

100

(158)

135

Unrealized gain (loss) on marketable securities, net of tax

 

458

102

1,139

(403)

Defined benefit pension obligations, net of tax

108

 

111

 

219

 

222

Other comprehensive income (loss)

 

282

 

313

 

1,200

 

(46)

Comprehensive income

$

105,600

$

52,707

$

208,830

$

11,208

See accompanying notes.

5

Table of Contents

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands, except number of shares)

For the Six Months Ended June 30, 2018

Total

Common

Additional

Accumulated Other

Accumulated

Stockholders’

Stock

Paid-in Capital

Comprehensive Loss

Deficit

Equity

Balances at January 1, 2018

$

211

$

3,627,433

$

(7,010)

$

(1,990,005)

$

1,630,629

Issuance of 623,709 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units

1

2,575

2,576

Issuance of 1,032 shares of Common Stock for services rendered

87

87

Issuance of 539 shares of Common Stock upon conversion of Convertible Senior Notes due 2018

 

27

27

Stock compensation

36,224

36,224

Adoption of ASU No. 2016-01

(2,753)

2,753

Other comprehensive loss

(359)

(359)

Net loss

(41,140)

(41,140)

Balances at March 31, 2018

$

212

$

3,666,346

$

(10,122)

$

(2,028,392)

$

1,628,044

Issuance of 369,109 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and 150,538 shares of Common Stock under the ESPP

15,480

15,480

Issuance of 1,281 shares of Common Stock for services rendered

85

85

Issuance of 38 shares of Common Stock upon conversion of Convertible Senior Notes due 2018

 

2

2

Stock compensation

36,605

36,605

Other comprehensive income

313

313

Net income

52,394

52,394

Balances at June 30, 2018

$

212

$

3,718,518

$

(9,809)

$

(1,975,998)

$

1,732,923

For the Six Months Ended June 30, 2019

Total

Common

Additional

Accumulated Other

Accumulated

Stockholders’

Stock

Paid-in Capital

Comprehensive Loss

Deficit

Equity

Balances at January 1, 2019

$

213

$

3,813,678

$

(10,165)

$

(1,877,759)

$

1,925,967

Issuance of 1,044,745 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units

 

1

 

15,480

 

 

 

15,481

Issuance of 1,200 shares of Common Stock for services rendered

104

104

Stock compensation

 

40,690

 

40,690

Adoption of ASU No. 2016-02 (Note 2)

 

 

 

 

95

 

95

Other comprehensive income

 

 

918

 

918

Net income

 

 

 

102,312

102,312

Balances at March 31, 2019

$

214

$

3,869,952

$

(9,247)

$

(1,775,352)

$

2,085,567

Issuance of 400,292 shares of Common Stock upon exercise of stock options and settlement of employee restricted stock units and 143,379 shares of Common Stock under the ESPP

 

1

15,190

15,191

Issuance of 1,444 shares of Common Stock for services rendered

123

123

Stock compensation

 

40,710

40,710

Other comprehensive income

 

 

 

282

 

 

282

Net income

 

 

 

 

105,318

 

105,318

Balances at June 30, 2019

$

215

$

3,925,975

$

(8,965)

$

(1,670,034)

$

2,247,191

See accompanying notes.

6

Table of Contents

INCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

Six Months Ended

June 30,

    

2019

    

2018

 

Cash flows from operating activities:

Net income

$

207,630

$

11,254

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

27,326

 

26,925

Stock-based compensation

 

81,207

 

72,829

Other, net

227

172

Unrealized (gain) loss on long term investments

 

(16,364)

 

11,962

Change in fair value of acquisition-related contingent consideration

13,279

 

13,988

Changes in operating assets and liabilities:

Accounts receivable

 

4,918

 

(50,011)

Prepaid expenses and other assets

 

8,354

 

(23,589)

Inventory

 

(2,288)

 

1,878

Accounts payable

 

(32,243)

 

7,888

Accrued and other liabilities

 

16,577

 

(20,055)

Net cash provided by operating activities

 

308,623

 

53,241

Cash flows from investing activities:

Purchase of long term investments

 

 

(8,936)

Capital expenditures

 

(65,561)

 

(23,381)

Purchases of marketable securities

 

(103,970)

 

(58,827)

Sale and maturities of marketable securities

 

99,821

 

58,694

Net cash used in investing activities

 

(69,710)

 

(32,450)

Cash flows from financing activities:

Proceeds from issuance of common stock under stock plans

 

30,672

 

18,043

Payment of finance lease liabilities

 

(409)

 

Payment of contingent consideration

(16,766)

(9,886)

Net cash provided by financing activities

 

13,497

 

8,157

Effect of exchange rates on cash, cash equivalents, restricted cash and investments

(158)

135

Net increase in cash, cash equivalents, restricted cash and investments

 

252,252

 

29,083

Cash, cash equivalents, restricted cash and investments at beginning of period

1,164,986

900,434

Cash, cash equivalents, restricted cash and investments at end of period

$

1,417,238

$

929,517

Supplemental Schedule of Cash Flow Information

Interest paid

$

119

$

134

Income taxes paid

$

6,439

$

1,944

Reclassification to common stock and additional paid in capital in connection with conversions of 0.375% convertible senior notes due 2018

$

$

29

Leased assets obtained in exchange for new operating lease liabilities

$

2,358

$

Leased assets obtained in exchange for new finance lease liabilities

$

29,740

$

See accompanying notes.

7

Table of Contents

INCYTE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

1.     Organization and business

Incyte Corporation (including its subsidiaries, “Incyte,” “we,” “us,” or “our”) is a biopharmaceutical company focused on developing and commercializing proprietary therapeutics. Our portfolio includes compounds in various stages, ranging from preclinical to late stage development, and commercialized products JAKAFI® (ruxolitinib) and ICLUSIG® (ponatinib). Our operations are treated as one operating segment.

2.     Summary of significant accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated balance sheet as of June 30, 2019, the condensed consolidated statements of operations, comprehensive income, and stockholders’ equity for the three and six months ended June 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.  The condensed consolidated balance sheet at December 31, 2018 has been derived from audited financial statements.

Although we believe that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Principles of Consolidation.  The condensed consolidated financial statements include the accounts of Incyte Corporation and our wholly owned subsidiaries. All inter-company accounts, transactions, and profits have been eliminated in consolidation.

Foreign Currency Translation. Operations in non-U.S. entities are recorded in the functional currency of each entity. For financial reporting purposes, the functional currency of an entity is determined by a review of the source of an entity's most predominant cash flows. The results of operations for any non-U.S. dollar functional currency entities are translated from functional currencies into U.S. dollars using the average currency rate during each month. Assets and liabilities are translated using currency rates at the end of the period. Adjustments resulting from translating the financial statements of our foreign entities that use their local currency as the functional currency into U.S. dollars are reflected as a component of other comprehensive income (loss). Transaction gains and losses are recorded in other income (expense), net, in the condensed consolidated statements of operations.

Use of Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Concentrations of Credit Risk.  Cash, cash equivalents, marketable securities, and trade receivables are financial instruments which potentially subject us to concentrations of credit risk. The estimated fair value of financial instruments approximates the carrying value based on available market information. We primarily invest our excess available funds in debt securities and, by policy, limit the amount of credit exposure to any one issuer and to any one type of investment,

8

Table of Contents

other than securities issued or guaranteed by the U.S. government and money market funds that meet certain guidelines. Our receivables mainly relate to our product sales of JAKAFI, ICLUSIG 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.

Cash and Cash Equivalents.  Cash and cash equivalents are held in banks or in custodial accounts with banks. Cash equivalents are defined as all liquid investments and money market funds with maturity from date of purchase of 90 days or less that are readily convertible into cash.

Marketable Securities—Available-for-Sale.  Our marketable securities consist of investments in corporate debt securities and U.S. government securities that are classified as available-for-sale. Available-for-sale securities are carried at fair value, based on quoted market prices and observable inputs, with unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. We classify marketable securities that are available for use in current operations as current assets on the condensed consolidated balance sheets. Realized gains and losses and declines in value judged to be other than temporary for available-for-sale securities are included in other income (expense), net on the condensed consolidated statements of operations.  The cost of securities sold is based on the specific identification method.

Accounts Receivable.  As of June 30, 2019 and December 31, 2018, we had a de minimis allowance for doubtful accounts. We provide an allowance for doubtful accounts based on experience and specifically identified risks. Accounts receivable are carried at fair value and charged off against the allowance for doubtful accounts when we determine that recovery is unlikely and we cease collection efforts.

Inventory.  Inventories are determined at the lower of cost and net realizable value with cost determined under the specific identification method and may consist of raw materials, work in process and finished goods.

JAKAFI raw materials and work-in-process inventory is not subject to expiration and the shelf life of finished goods inventory is 36 months from the start of manufacturing of the finished goods. ICLUSIG raw materials and work-in-process inventory is not subject to expiration and finished goods inventory has a shelf life of 24 months from the start of manufacturing of the finished goods.  We evaluate for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. We build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. We classify inventory as current on the condensed consolidated balance sheets when we expect inventory to be consumed for commercial use within the next twelve months.

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 June 30, 2019, 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 condensed consolidated balance sheets. Our equity investments are accounted for at fair value using readily determinable pricing available on a securities exchange on the condensed consolidated balance sheets. All changes in fair value are reported in the condensed consolidated statements of operations as an unrealized gain (loss) on long term investments.  

In assessing whether we exercise significant influence over any of the companies in which we hold equity investments, we consider the nature and magnitude of our investment, any voting and protective rights we hold, any participation in the governance of the other company, and other relevant factors such as the presence of a collaboration or

9

Table of Contents

other business relationship. Currently, none of our equity investments in publicly-held companies are considered relationships in which we are able to assert control.

Property and Equipment, net.  Property and equipment, net is stated at cost, less accumulated depreciation and amortization. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the shorter of the estimated useful life of the assets or lease term.

Lease Accounting.  The new accounting standard for leases, Accounting Standard Codification (“ASC”) 842, Leases, was adopted for the fiscal year beginning on January 1, 2019. Per the new standard, 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. Under the prior leasing standard, only contracts assessed as capital leases were recorded on the balance sheet. Both finance and operating leases are reflected as liabilities on the commencement date of the lease based on the present value of the lease payments to be made over the lease term. Current operating lease liabilities are reflected in accrued and other current liabilities and noncurrent operating lease liabilities are reflected in other liabilities on the condensed consolidated balance sheet. Right-of-use assets are valued at the initial measurement of the lease liability, plus any initial direct costs or rent prepayments, minus lease incentives and deferred lease payments, and are amortized over the lease term. Operating right-of-use assets are recorded in property and equipment, net on the condensed consolidated balance sheet. For operating leases, the expense recognition is similar to that of operating leases under ASC 840, with a single lease cost recognized on a straight-line basis. For finance leases, the expense recognition is similar to that of capital leases under ASC 840, with separate amortization and interest expense, with higher interest expense in the earlier periods of a lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis over the term of the lease.

In determining whether a contract contains a lease, asset and service agreements are assessed at onset and upon modification for criteria of specifically identified assets, control and economic benefit.

Other Intangible Assets, net. Other intangible assets, net consist of licensed intellectual property rights acquired in business combinations, which are reported at acquisition date fair value, less accumulated amortization. Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method.

Impairment of Long-Lived Assets.  Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset.  If the expected cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted future cash flows.

Goodwill.  Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed.  Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually as of October 1 or when a triggering event occurs that could indicate a potential impairment by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that the fair value of net assets are below their carrying amounts.  A reporting unit is the same as, or one level below, an operating segment. Our operations are currently comprised of a single, entity wide reporting unit. We completed our most recent annual impairment assessment as of October 1, 2018 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.

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,

10

Table of Contents

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.

Financing Costs Related to Long-term Debt.  Costs associated with obtaining long-term debt are deferred and amortized over the term of the related debt using the effective interest method. Such costs are presented as a direct deduction from the carrying amount of the long-term debt liability, consistent with debt discounts, on the condensed consolidated balance sheets.

Grant Accounting.  Grant amounts received from government agencies for operations are deferred and are amortized into income over the service period of the grant. Grant amounts received for purchases of capital assets are deferred and amortized into other income (expense), net over the useful life of the related capital assets. Such amounts are recorded in other liabilities on the condensed consolidated balance sheets.

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

Accumulated Other Comprehensive Income (Loss).  Accumulated other comprehensive income (loss) consists of unrealized gains or losses on marketable securities that are classified as available-for-sale, foreign currency translation gains or losses and defined benefit pension obligations.

Revenue Recognition.  Revenue-generating contracts are assessed to identify distinct performance obligations, allocating transaction prices to those performance obligations, and criteria for satisfaction of a performance obligation. Revenue is recognized when we have satisfied a performance obligation through transferring control of the promised good or service to a customer. Control, in this instance, may mean the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service. We determine at contract inception whether we will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. We assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.

Product Revenues

Our product revenues consist of U.S. sales of JAKAFI and European sales of ICLUSIG.  Product revenues are recognized once we satisfy the performance obligation at a point in time under the revenue recognition criteria as described above. In November 2011, we began shipping JAKAFI to our customers in the U.S., which include specialty pharmacies and wholesalers. In June 2016, we acquired the right to and began shipping ICLUSIG to our customers in the European Union and certain other jurisdictions, which include retail pharmacies, hospital pharmacies and distributors.

We recognize revenues for product received by our customers net of allowances for customer credits, including estimated rebates, chargebacks, discounts, returns, distribution service fees, patient assistance programs, and government rebates, such as Medicare Part D coverage gap reimbursements in the U.S. At June 30, 2019 and December 31, 2018, $60.9 million and $44.8 million, respectively, of accrued sales allowances were included in accrued and other current liabilities on the condensed consolidated balance sheets. Product shipping and handling costs are included in cost of product revenues.

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

11

Table of Contents

Rebates and Discounts:  Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program in the U.S. and mandated discounts in Europe in markets where government-sponsored healthcare systems are the primary payers for healthcare. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The accrual for rebates is based on statutory discount rates and expected utilization as well as historical data we have accumulated since product launches. Our estimates for expected utilization of rebates are based on data received from our customers. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters’ unpaid rebates. If actual future rebates vary from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks:  Chargebacks are discounts that occur when certain contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, purchase directly from our wholesalers. Contracted customers generally purchase the product at a discounted price. The wholesalers, in turn, charges back to us the difference between the price initially paid by the wholesalers and the discounted price paid by the contracted customers. In addition to actual chargebacks received we maintain an accrual for chargebacks based on the estimated contractual discounts on the inventory levels on hand in our distribution channel.  If actual future chargebacks vary from these estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Medicare Part D Coverage Gap:  Medicare Part D prescription drug benefit mandates manufacturers to fund 70% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for the expected Medicare Part D coverage gap are based on historical invoices received and in part from data received from our customers. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-payment Assistance:  Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Product Royalty Revenues

Royalty revenues on commercial sales for ruxolitinib (marketed as JAKAVI® outside the United States) by Novartis Pharmaceutical International Ltd. (“Novartis”) are based on net sales of licensed products in licensed territories as provided by Novartis.  Royalty revenues on commercial sales for baricitinib (marketed as OLUMIANT) by Eli Lilly and Company (“Lilly”) are based on net sales of licensed products in licensed territories as provided by Lilly. We recognize royalty revenues in the period the sales occur.

Cost of Product Revenues

Cost of product revenues includes all JAKAFI related product costs as well as ICLUSIG related product costs. The acquired ICLUSIG inventories were recorded at fair value less costs to sell in connection with our June 2016 acquisition of ARIAD Pharmaceuticals (Luxembourg) S.à.r.l., since renamed Incyte Biosciences Luxembourg S.à.r.l. (the “Acquisition”). In addition, cost of product revenues include low single-digit royalties under our collaboration and license agreement to Novartis on all future sales of JAKAFI in the United States. Subsequent to the Acquisition on June 1, 2016, cost of product revenues also includes the amortization of our licensed intellectual property for ICLUSIG using the straight-line method over the estimated useful life of 12.5 years.    

Milestone and Contract Revenues

Our license agreements, which fall within the scope of ASC 606, Revenue from Contracts with Customers, include distinct drug compound out-licensing, collection of upfront payments, milestones or royalty revenues from a counterparty,

12

Table of Contents

and provision of commercially available products to suppliers. Our agreements often include contractual milestones, which typically relate to the achievement of pre-specified development, regulatory and commercialization events outside of our control, such as regulatory approval of a compound, first patient dosing or achievement of sales-based thresholds. For such cases, we believe that revenue related to these events should not be recognized until the milestone has been achieved.

Some contracts form collaborative arrangements of various types with third-parties. We assess whether the nature of the arrangement is within the scope of ASC 808, Collaborative Arrangements, in conjunction with the new revenue guidance to determine the nature of the performance obligations and associated transaction prices. A collaborative relationship may exist when we participate in an activity or process with another party, such as performance of research and development services or the exchange of intellectual property for use in clinical trials, when both parties share in the risks and rewards that result from the activity or participate and govern contract activities through a joint steering committee.

The regulatory review and approval process, which includes preclinical testing and clinical trials of each drug candidate, is lengthy, expensive and uncertain. Securing approval by the U.S. Food and Drug Administration (the “FDA”) requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish a drug candidate’s safety and efficacy. The approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance and may involve ongoing requirements for post-marketing studies. Before commencing clinical investigations of a drug candidate in humans, we must submit an Investigational New Drug application (“IND”), which must be reviewed by the FDA.

The steps generally required before a drug may be marketed in the United States include preclinical laboratory tests, animal studies and formulation studies, submission to the FDA of an IND for human clinical testing, performance of adequate and well-controlled clinical trials in three phases, as described below, to establish the safety and efficacy of the drug for each indication, submission of a new drug application (“NDA”) or biologics license application (“BLA”) to the FDA for review and FDA approval of the NDA or BLA.

Similar requirements exist within foreign regulatory agencies as well. The time required satisfying the FDA requirements or similar requirements of foreign regulatory agencies may vary substantially based on the type, complexity and novelty of the product or the targeted disease.

Preclinical testing includes laboratory evaluation of product pharmacology, drug metabolism, and toxicity, which includes animal studies, to assess potential safety and efficacy as well as product chemistry, stability, formulation, development, and testing. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND. The FDA may raise safety concerns or questions about the conduct of the clinical trials included in the IND, and any of these concerns or questions must be resolved before clinical trials can proceed. We cannot be sure that submission of an IND will result in the FDA allowing clinical trials to commence. Clinical trials involve the administration of the investigational drug or the marketed drug to human subjects under the supervision of qualified investigators and in accordance with good clinical practices regulations covering the protection of human subjects. Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be combined. Phase I usually involves the initial introduction of the investigational drug into healthy volunteers to evaluate its safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase II usually involves clinical trials in a limited patient population to evaluate dosage tolerance and optimal dosage, identify possible adverse effects and safety risks, and evaluate and gain preliminary evidence of the efficacy of the drug for specific indications. Phase III clinical trials usually further evaluate clinical efficacy and safety by testing the drug in its final form in an expanded patient population, providing statistical evidence of efficacy and safety, and providing an adequate basis for labeling. We cannot guarantee that Phase I, Phase II or Phase III testing will be completed successfully within any specified period of time, if at all. Furthermore, we, the institutional review board for a trial, or the FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

Generally, the milestone events contained in our collaboration agreements coincide with the progression of our drugs from development, to regulatory approval and then to commercialization. The process of successfully discovering a new development candidate, having it approved and successfully commercialized is highly uncertain. As such, the

13

Table of Contents

milestone payments we may earn from our partners involve a significant degree of risk to achieve. Therefore, as a drug candidate progresses through the stages of its life-cycle, the value of the drug candidate generally increases.

Research and Development Costs.  Our policy is to expense research and development costs as incurred. We often contract with clinical research organizations (“CROs”) to facilitate, coordinate and perform agreed upon research and development of a new drug. To ensure that research and development costs are expensed as incurred, we record monthly accruals for clinical trials and preclinical testing costs based on the work performed under the contract.

These CRO contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain clinical trial milestones. In the event that we prepay CRO fees, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development services are performed. Most professional fees, including project and clinical management, data management, monitoring, and medical writing fees are incurred throughout the contract period. These professional fees are expensed based on their percentage of completion at a particular date. Our CRO contracts generally include pass through fees. Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, and other miscellaneous costs, including shipping and printing fees. We expense the costs of pass through fees under our CRO contracts as they are incurred, based on the best information available to us at the time. The estimates of the pass through fees incurred are based on the amount of work completed for the clinical trial and are monitored through correspondence with the CROs, internal reviews and a review of contractual terms. The factors utilized to derive the estimates include the number of patients enrolled, duration of the clinical trial, estimated patient attrition, screening rate and length of the dosing regimen. CRO fees incurred to set up the clinical trial are expensed during the setup period. Under our clinical trial collaboration agreements we may be reimbursed for certain development costs incurred. Such costs are recorded as a reduction of research and development expense in the period in which the related expense is incurred.

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

Long term Incentive Plans. We have long term incentive plans which provide eligible employees with the opportunity to receive performance and service-based incentive compensation, which may be comprised of cash, stock options, restricted stock units and/or performance shares. The payment of cash and the grant or vesting of equity may be contingent upon the achievement of pre-determined regulatory, sales and internal performance milestones.

Acquisition-Related Contingent Consideration. Acquisition-related contingent consideration, which consists of our future royalty and certain potential milestone obligations to Takeda Pharmaceutical Company Limited, which acquired ARIAD (“Takeda”), is recorded on the acquisition date at the estimated fair value of the obligation, in accordance with the acquisition method of accounting.  The fair value measurement is based on significant inputs that are unobservable in the market and thus represents a Level 3 measurement. The fair value of the acquisition-related contingent consideration is remeasured each reporting period, with changes in fair value recorded in the condensed consolidated statements of operations.

14

Table of Contents

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASC 842, Leases, that requires lessees to recognize assets and liabilities on the balance sheet for most leases including operating leases. Additionally, the FASB issued clarifying guidance to the topic in ASUs No. 2018-10, No. 2018-11, No. 2018-20 and No. 2019-01 which clarified certain aspects of the new leases standard and provided an optional transition method. The guidance requires that the lessees classify leases as either a finance or operating lease and lessors classify all leases as sales-type, direct financing or operating leases. The statement of operations presentation and expense recognition for lessees for finance leases is similar to that of capital leases under ASC 840, with separate interest and amortization expense with higher interest expense in the earlier periods of a lease. For operating leases, the statement of operations presentation and expense recognition is similar to that of operating leases under ASC 840, with a single lease cost recognized on a straight-line basis. We implemented a third-party information technology application to facilitate activities for the new accounting and disclosure requirements and implemented new internal control procedures to support the new accounting and reporting processes associated with adopting the guidance. We elected the package of practical expedients and adopted utilizing the optional transition method as defined within ASU No. 2018-11. Accordingly, prior periods will not be restated to reflect the adopted standard. We did not elect the hindsight expedient.

As a result of adoption on January 1, 2019, we recorded $23.6 million of lease right-of-use assets, $23.7 million of lease liabilities and an adjustment to retained earnings of $0.1 million. In addition, our capital lease assets and liabilities are now classified as finance lease right-of-use assets and liabilities.  The capital asset and financing liability of $18.7 million recorded in 2018 related to the Morges office building and construction, described more fully in Note 7, was derecognized upon adoption. The adoption of the standard did not materially impact our consolidated net income and had no impact on our consolidated cash flows.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This guidance applies to all entities and impacts how entities account for credit losses for most financial assets and other instruments. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. For trade receivables, loans and held-to-maturity debt securities, entities will be required to estimate lifetime expected credit losses.  The FASB released clarifying guidance in April 2019 within ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” and in May 2019 within ASU No. 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief.”  The updates provide guidance on estimating credit losses, including transition relief by allowing for election of the fair value methodology on an instrument-by-instrument basis for eligible financial instruments within the scope of ASC 825-10. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods therein.  Elections under ASU 2019-05 require a modified retrospective application through a cumulative-effect adjustment in the opening balance of retained earnings upon adoption. We are currently analyzing the impact of the ASUs on our condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This guidance expanded the scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services and supersedes the guidance in ASC 505-50. Under this new standard, nonemployee awards are measured on the grant date by estimating the fair value of the equity instruments to be issued rather than the fair value of the goods or services received. Entities may use the expected term when estimating the fair value of a nonemployee option or elect to use the contractual term as the expected term, on an award-by-award basis. The cumulative effect of the transition adjustment is to be recorded as an adjustment to retained earnings as of the beginning of the annual period of adoption.  We adopted this standard for the period beginning January 1, 2019 and concluded there to be no change in our previous accounting for nonemployee awards and no impact on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General,” an update to Subtopic ASC 715-20. The guidance amended year-end disclosure requirements related to defined benefit pension plans, and does not affect interim disclosures. The guidance is effective for fiscal years ending after December 15, 2020, and is permitted for early adoption. The standard is to be applied on a retrospective basis. Incyte

15

Table of Contents

sponsors defined benefit plans for employees located in Europe. We are currently analyzing the impact of ASU No. 2018-14 on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software,” an update to Subtopic ASC 350-40. The guidance directs accounting for service contracts for cloud computing arrangements to follow guidance within ASC 350-40 to determine capitalization of implementation costs. The guidance is effective for fiscal years beginning after December 15, 2019, and is permitted for early adoption. The standard may be applied on either a retrospective or prospective basis. We are currently analyzing the impact of ASU No. 2018-15 on our condensed consolidated financial statements.

In August 2018, the SEC issued a final rule Release No. 33-10532, “Disclosure Update and Simplification,” to amend certain disclosure requirements now seen as redundant, duplicative, overlapping, outdated or superseded in the wake of recent accounting pronouncements. The amended rules became effective November 5, 2018. We analyzed the release in preparation of our Form 10-Q during the first interim period in 2019, which resulted in the additional disclosure of changes to stockholders’ equity during interim periods, as presented within the condensed consolidated statements of stockholders’ equity. We note that many of the amended requirements under this Release are not applicable to the Company, as we do not make dividend payments to stockholders, currently report our activities under a single business segment, and already provided all other significant disclosure requirements.

In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606.” The guidance clarifies the interactions between Topic 808 and Topic 606, including clarifications on revenue recognition, unit of account, and reporting disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2019, and is permitted for early adoption. The standard is to be applied on a retrospective basis to the date of the initial application of Topic 606. We utilize collaborative arrangements as described in our license agreements footnote and are currently analyzing the impact of ASU No. 2018-18 on our condensed consolidated financial statements.

3.     Revenues

The following table presents our disaggregated revenue for the periods presented (in thousands):

Three Months Ended

Six Months Ended

    

June 30,

    

June 30,

    

2019

2018

2019

2018

JAKAFI revenues, net

$

409,506

$

345,624

$

785,117

$

659,344

ICLUSIG revenues, net

24,391

19,900

45,029

40,685

Total product revenues, net

433,897

365,524

830,146

700,029

JAKAVI product royalty revenues

56,895

47,101

102,466

88,438

OLUMIANT product royalty revenues

19,140

8,852

35,177

15,231

Total product royalty revenues

76,035

55,953

137,643

103,669

Milestone and contract revenues

20,000

100,000

60,000

100,000

Other revenues

39

100

Total revenues

$

529,932

$

521,516

$

1,027,789

$

903,798

For further information on our revenue-generating contracts, refer to our license agreements footnote.

4.     Fair value of financial instruments

FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“the exit price”) in an orderly transaction between market participants at the measurement date. The guidance 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.

16

Table of Contents

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 corporate debt securities and U.S. government securities that are classified as available-for-sale.

At June 30, 2019 and December 31, 2018, our Level 2 corporate debt and U.S. government 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.  

Our policy is to recognize transfers into and transfers out of fair value hierarchy levels as of the end of the reporting period. There were no transfers out of or into hierarchy levels during the six months ended June 30, 2019.

The following fair value hierarchy table presents information about each major category of our financial assets measured at fair value on a recurring basis (in thousands):

Fair Value Measurement at Reporting Date Using:

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Balance as of

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

June 30, 2019

 

Cash and cash equivalents

$

1,416,224

$

$

$

1,416,224

Debt securities (corporate and government)

 

 

279,631

 

 

279,631

Long term investments (Note 9)

 

115,563

 

 

 

115,563

Total assets

$

1,531,787

$

279,631

$

$

1,811,418

Fair Value Measurement at Reporting Date Using:

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Balance as of

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

December 31, 2018

 

Cash and cash equivalents

$

1,163,980

$

$

$

1,163,980

Debt securities (corporate and government)

 

274,343

 

274,343

Long term investment (Note 9)

 

99,199

 

 

 

99,199

Total assets

$

1,263,179

$

274,343

$

$

1,537,522

17

Table of Contents

The following fair value hierarchy table presents information about each major category of our financial liabilities measured at fair value on a recurring basis as (in thousands):

Fair Value Measurement at Reporting Date Using:

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

                                

Identical Liabilities

Inputs

Inputs

Balance as of

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

June 30, 2019

Acquisition-related contingent consideration

$

$

$

286,000

$

286,000

Total liabilities

$

$

$

286,000

$

286,000

Fair Value Measurement at Reporting Date Using:

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Liabilities

Inputs

Inputs

Balance as of

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

December 31, 2018

Acquisition-related contingent consideration

$

$

$

287,001

$

287,001

Total liabilities

$

$

$

287,001

$

287,001

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

Balance at January 1, 2019

$

287,001

Contingent consideration earned during the period but not yet paid

(7,608)

Payments made during the period

(6,672)

Change in fair value of contingent consideration

13,279

Balance at June 30, 2019

$

286,000

The fair value of the contingent consideration was determined using an income approach based on projected ICLUSIG revenues in the European Union and other countries for the approved third-line treatment and discount rates. The fair value of the contingent consideration is remeasured each reporting period, with changes in fair value recorded in the condensed consolidated statements of operations. The change in fair value of the contingent consideration during the three and six months ended June 30, 2019 was due primarily to the passage of time as there were no other significant changes in the key assumptions during the period.

We make payments to Takeda quarterly based on the royalties or any additional milestone payments earned in the previous quarter. At June 30, 2019 and December 31, 2018, contingent consideration earned but not yet paid was $7.6 million and $13.2 million, respectively. Royalties earned in the second quarter of 2019 of $7.6 million were included in accrued and other current liabilities at June 30, 2019.  Royalties earned in the third quarter of 2018 of $6.7 million were included in accounts payable and the royalties earned in the fourth quarter of 2018 of $6.5 million were included in accrued and other current liabilities at December 31, 2018. We paid Takeda $6.7 million for royalties earned in the first quarter of 2019 that were included in accrued and other current liabilities at March 31, 2019.

The following is a summary of our marketable security portfolio (in thousands):

Net

Net

Amortized

Unrealized

Unrealized

Estimated

    

Cost

    

Gains

    

Losses

    

Fair Value

 

June 30, 2019

    

    

    

    

Debt securities (corporate and government)

$

279,553

$

78

$

$

279,631

December 31, 2018

Debt securities (corporate and government)

$

275,405

$

$

(1,062)

$

274,343

Our debt securities generally have contractual maturity dates of between 12 to 18 months.

18

Table of Contents

5.     Concentration of credit risk

In December 2009, we entered into a license, development and commercialization agreement with Lilly. In November 2009, we entered into a collaboration and license agreement with Novartis. In December 2018, we entered into a research collaboration and licensing agreement with Innovent Biologics, Inc. (“Innovent”). The concentration of credit risk related to our collaborative partners is as follows:

Percentage of Total

Percentage of Total

Milestone and Contract Revenues for the

Milestone and Contract Revenues for the

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2019

    

2018

    

2019

    

2018

    

 

Collaboration Partner A

    

%  

%  

    

%  

%  

Collaboration Partner B

 

%  

100

%  

%  

100

%  

Collaboration Partner C

 

100

%  

%  

 

100

%  

%  

Collaboration Partners A, B and C comprised, in aggregate, 27% and 42% of the accounts receivable balance as of June 30, 2019 and December 31, 2018, respectively.

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

Percentage of Total Net

Percentage of Total Net

Product Revenues for the

Product Revenues for the

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2019

    

2018

    

2019

    

2018

    

 

Customer A

    

20

%  

21

%  

    

19

%  

21

%  

Customer B

 

13

%  

15

%  

 

14

%  

14

%  

Customer C

 

16

%  

14

%  

 

16

%  

14

%  

Customer D

 

11

%  

12

%  

 

12

%  

11

%  

We are exposed to risks associated with extending credit to customers related to the sale of products. Customers A, B, C and D comprised, in aggregate, 36% and 30% of the accounts receivable balance as of June 30, 2019 and December 31, 2018, respectively.

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

6.     Inventory

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

June 30,

December 31,

    

2019

    

2018

 

Raw materials

$

1,766

$

481

Work-in-process

6,929

3,488

Finished goods

 

3,998

 

6,436

 

12,693

 

10,405

Inventories-current

 

6,527

 

6,967

Inventories-noncurrent

$

6,166

$

3,438

Inventories, stated at the lower of cost and net realizable value, consist of raw materials, work in process and finished goods. At June 30, 2019, $6.5 million of inventory was classified as current on the condensed consolidated balance sheet as we expect this inventory to be consumed for commercial use within the next twelve months. At June 30, 2019, $6.2 million of inventory was classified as noncurrent on the condensed consolidated balance sheets as we did not expect

19

Table of Contents

this inventory to be consumed for commercial use within the next twelve months.  We obtain some inventory components from a limited number of suppliers due to technology, availability, price, quality or other considerations. The loss of a supplier, the deterioration of our relationship with a supplier, or any unilateral violation of the contractual terms under which we are supplied components by a supplier could adversely affect our total revenues and gross margins.

7.    Property and equipment, net

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

June 30,

December 31,

    

2019

    

2018

 

Office equipment

    

$