INCYTE CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data" and the Consolidated Financial Statements and related Notes included elsewhere in this Report. A discussion of our financial performance for the year ended
December 31, 2021as compared to the year ended December 31, 2020appears below under the captions "Results of Operations" and "Liquidity and Capital Resources." A discussion of our financial performance for the year ended December 31, 2020compared to the year ended December 31, 2019can be found under the same captions in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SECon February 9, 2021, which is available free of charge on the SEC'swebsite at www.sec.gov and our Investor Relations website at investor.incyte.com/financial-information/annual-reports. These website addresses are intended to be inactive, textual references only. None of the materials on, or accessible through, these websites are part of this report or are incorporated by reference herein.
Incyteis a biopharmaceutical company focused on the discovery, development and commercialization of proprietary therapeutics. Our global headquarters is located in Wilmington, Delaware, where we conduct global clinical development and commercial operations. We also conduct commercial and clinical development operations from our European headquarters in Morges, Switzerlandand our Japanese office in Tokyo. Our portfolio includes compounds in various stages, ranging from preclinical to late stage development, and commercialized products JAKAFI® (ruxolitinib), ICLUSIG® (ponatinib), PEMAZYRE® (pemigatinib), OPZELURA™ (ruxolitinib) cream, MINJUVI® (tafasitamab) and MONJUVI® (tafasitamab-cxix), which is co-commercialized.
Effects of the COVID-19 pandemic on our business
December 2019, coronavirus disease of 2019, or COVID-19, was first reported in Wuhan, China. In March 2020, the World Health Organizationdeclared COVID-19 a pandemic and certain governments, including the State of Delawarewhere our primary offices and laboratory spaces are located, enacted stay-at-home orders and sweeping restrictions to travel and business activity were initiated by corporations and governments. 66
We took aggressive, proactive actions early on to protect the health of our employees, and their families, including voluntarily requiring almost all personnel across our global enterprise to work remotely and restricting access to our sites to personnel
whowere required to perform critical business continuity activities. In May 2020, we initiated a return to full laboratory work at our facilities in Wilmington, Delaware, as well as a gradual return to office-based working, where allowed under local guidelines, at our offices in North America, Europeand Asia. However, the spread of the Omicron variant beginning late in 2021 has led to renewed restrictions in some jurisdictions and a voluntary reduction in travel and in-person meetings even where restrictions were not imposed. While we currently believe we are well-positioned to function in a hybrid on-site and virtual or remote fashion, the extent of the COVID-19 Pandemic's effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, protective measures, and the reimposition of protective measures, implemented by governmental authorities or by us to protect our employees, and effects of the pandemic and such protective measures on our suppliers, collaborators, services providers and healthcare organizations serving patients, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain or predict the overall long-term impact of the COVID-19 pandemic on our business. To date, we have not experienced a material effect on the results of our commercial operations, or our manufacturing supply chain. New patient starts for treatment decreased as a result of shelter in place and other protective measures, and if decreases in new patient starts occur in future periods, our revenues in future periods could be adversely affected. We continue to anticipate that short-term effects may continue to emerge across different aspects of our global clinical trial programs. For example, while we expect ongoing monitoring of already-enrolled patients to continue, difficulties in monitoring may result as a consequence of shelter in place orders and other protective measures implemented by governmental authorities or clinical trial sites. In addition, new patient recruitment in certain clinical trials has been and may in the future be impacted, in particular with respect to our earlier stage clinical trials. We also expect the conduct of clinical trials may continue to vary by disease state and by severity of disease, as well as by geography, as some regions are more adversely impacted. Until our return to full laboratory work, our discovery laboratories were staffed by essential personnel, and hence certain discovery programs experienced delays. Still, we caution that the duration and severity of the continuing COVID-19 pandemic remains uncertain and we may not yet be able to assess its consequences accurately or fully at this time. Regulatory Achievements
March 2021, PEMAZYRE (pemigatinib) was approved by the Japanese Ministry of Health, Labour and Welfarefor the treatment of patients with unresectable biliary tract cancer with an FGFR2 fusion gene, worsening after cancer chemotherapy. Also in March 2021, PEMAZYRE was approved by the European Commissionfor the treatment of adults with locally advanced or metastatic cholangiocarcinoma with an FGFR2 fusion or rearrangement that have progressed after at least one prior line of systemic therapy. PEMAZYRE was approved by the Food and Drug Administration(FDA) in April 2020for the treatment of adults with previously treated, unresectable locally advanced or metastatic cholangiocarcinoma with an FGFR2 fusion or other rearrangement as detected by an FDA-approved test. We have retained all rights to PEMAZYRE globally, other than those granted to Innovent Biologics, Inc. to develop and commercialize pemigatinib in hematology and oncology in mainland China, Hong Kong, Macauand Taiwan. In August 2021, under our collaboration and license agreement with MorphoSys AG, the European Commissiongranted conditional marketing authorization for MINJUVI (tafasitamab) in combination with lenalidomide, followed by MINJUVI monotherapy, for the treatment of adult patients with relapsed or refractory DLBCL whoare not eligible for autologous stem cell transplant. MONJUVI (tafasitamab-cxix) was approved by the FDA in July 2020in combination with lenalidomide for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL) not otherwise specified, including DLBCL arising from low grade lymphoma, and whoare not eligible for autologous stem cell transplant. We have rights to co-commercialize tafasitamab in the United Stateswith MorphoSys, and we have exclusive development and commercialization rights outside of the United States. In September 2021, the FDA approved JAKAFI for the treatment of chronic GVHD after failure of one or two lines of systemic therapy in adult and pediatric patients 12 years and older. We have retained all development and commercialization rights to JAKAFI in the United Statesand are eligible to receive development and sales milestones as 67
as well as royalties from sales of products outside
September 2021, the FDA approved OPZELURA (ruxolitinib) cream, a novel cream formulation of our selective JAK1/JAK2 inhibitor ruxolitinib, for the topical short-term and non-continuous chronic treatment of mild to moderate atopic dermatitis in non-immunocompromised patients 12 years of age and older whose disease is not adequately controlled with topical prescription therapies, or when those therapies are not advisable.
License agreements and commercial relationships
We establish business relationships, including collaborative arrangements with other companies and medical research institutions to assist in the clinical development and/or commercialization of certain of our drugs and drug candidates and to provide support for our research programs. We also establish business relationships with other companies and medical research institutions to acquire products or rights to products and technologies that are complementary to our business. Summarized below are the significant achievements under our existing collaboration and license agreements and additional agreements we entered into during the year ended
December 31, 2021.
August 2021, we entered into a Collaboration and License Agreement with a subsidiary of InnoCare Pharma Limited. Under the terms of this agreement, InnoCare's subsidiary received development and exclusive commercialization rights to tafasitamab in hematology and oncology in mainland China, Hong Kong, Macauand Taiwan. In September 2021, we recognized an upfront payment under this agreement of $35.0 millionupon our transfer of technology related to the licensed product candidate to InnoCare which was recorded in milestone and contract revenues. Under the terms of this agreement, we are eligible to receive up to an additional $45.0 millionin potential development and regulatory milestones and up to $37.5 millionin potential sales milestones from InnoCare. We are also eligible to receive tiered royalties from the low to mid-twenties on future product sales resulting from the collaboration.
September 2021, we entered into a Collaboration and License Agreement with Syndax covering the worldwide development and commercialization of SNDX-6352 (axatilimab), Syndax's anti-CSF-1R monoclonal antibody. The Agreement became effective in December 2021with the expiration of the initial waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. Under the terms of this agreement, we received exclusive commercialization rights outside of the United States, and Syndax has co-commercialization rights in the United Stateswith respect to axatilimab. We paid Syndax an upfront payment of $117.0 millionupon effectiveness of the agreement. Syndax is eligible to receive up to $220.0 millionin future contingent development and regulatory milestones and $230.0 millionin sales milestones as well as tiered royalties ranging in the mid-teens on net sales in Europeand Japanand low double digit percentage on net sales in the rest of the world outside of the United States.
Additional information regarding our collaboration agreements, including their financial and accounting impact on our business and results of operations, can be found in Note 6 of Notes to the Consolidated Financial Statements. 68
Significant Accounting Policies and Estimates
The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of the consolidated financial statements. See Note 1 of Notes to the Consolidated Financial Statements for a complete list of our significant accounting policies. Revenue Recognition. We recognize revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation, which for the Company is at a point in time. We also assess collectability based primarily on the customer's payment history and on the creditworthiness of the customer.
Our product revenues consist of sales of JAKAFI, OPZELURA, PEMAZYRE, ICLUSIG, and MINJUVI. Product revenues are recognized once we satisfy the performance obligation at a point in time under the revenue recognition criteria as described above. We recognize revenues for product received by our customers net of allowances for customer credits, including estimated rebates, chargebacks, discounts, returns, distribution service fees, patient assistance programs, and government rebates, such as Medicare Part D coverage gap reimbursements in
the United States. These sales allowances and accruals are recorded based on estimates which are described in detail below. Estimates are assessed as of the end of each reporting period and are updated to reflect current information. We believe that our sales allowances and accruals are reasonable and appropriate based on current facts and circumstances. As of December 31, 2021, a 5% change in our sales allowance and accruals would have had an approximate $29.2 millionimpact on our income before taxes. Customer Credits: Our customers are offered various forms of consideration, including allowances, service fees and prompt payment discounts. We expect our customers will earn prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized. Service fees are also deducted from total product sales as they are earned. Rebates and Discounts: We accrue rebates for mandated discounts under the Medicaid Drug Rebate Program in the United Statesand mandated discounts in Europein markets where government-sponsored healthcare systems are the primary payers for healthcare. These accruals are based on statutory discount rates and expected utilization as well as historical data we have accumulated since product launch. 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 contract customers purchase directly from our wholesalers at a reduced price. Wholesalers, in turn, charge us the difference between the price originally paid by wholesalers and the discounted price paid by contract customers. In addition to actual chargebacks received, we maintain a provision for chargebacks based on estimated contract discounts on available stock levels in our distribution channel. If actual future chargebacks differ from these estimates, we may need to adjust
accruals for the period, which would affect the revenue for the adjustment period.
Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 70% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for the expected Medicare Part D coverage gap are based on historical invoices received and in part from data received from our customers. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Additionally, beginning in
January 2020, the amount of spending required by eligible patients in the Medicare Part D insurance coverage gap increased 30% due to the expiration of a provision in the Patient Protection and Affordable Care Act, which now results in a change in the True Out of Pocket (TrOOP) calculation methodology. The methodological change has resulted in an increase in required spending by patients and, in turn, an increase in manufacturers' contributions on behalf of patients in the Medicare Part D insurance coverage gap. Co-payment Assistance: Patients whohave 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 income
Royalty revenues on commercial sales for JAKAVI and TABRECTA by Novartis are estimated based on information provided by Novartis. Royalty revenues on commercial sales for OLUMIANT by Lilly are estimated based on information provided by Lilly. We recognize royalty revenues in the period the sales occur. We exercise judgment in determining whether the information provided is sufficiently reliable for us to base our royalty revenue recognition thereon. If actual royalties vary from estimates, we may need to adjust the prior period, which would affect royalty revenue and receivable in the period of adjustment. Historically, adjustments to these estimates to reflect actual royalty revenues have not been material to our financial results and have been less than 1% of royalty revenues.
Stage and contract income
At the inception of a contract, we determine the transaction price, in addition to any upfront payment, by estimating the amount of variable consideration, including milestone payments, at the outset of the contract utilizing the most likely amount method. Our contractual milestones typically relate to the achievement of pre-specified development, regulatory and commercialization events outside of our control, such as regulatory approval of a compound, first patient dosing or achievement of sales-based thresholds. We include milestones in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the milestone is subsequently resolved. Given the high level of uncertainty of achievement, variable consideration associated with milestones are fully constrained until confirmation of the satisfaction or completion of the milestone by the third-party. We review our estimate of the transaction price each period, and make revisions to such estimates as necessary. Stock Compensation. Share-based payment transactions with employees, which include stock options, restricted stock units (RSUs) and performance shares (PSUs), are recognized as compensation expense over the requisite service period based on their estimated fair values at the date of grant as well as expected forfeiture rates based on actual experience. The stock compensation process requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility over the option term and expected option lives, as well as expected forfeiture rates and the probability of PSUs vesting. For the years ending
December 31, 2021and 2020, our Black-Scholes assumptions have remained unchanged with a weighted-average stock price volatility of 39% to 40%, average expected option life of approximately five years and an estimated annualized forfeiture rate of 5%. 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 70 Table of Contents period using the accelerated attribution method. The fair value of PSUs are recognized as compensation expense beginning at the time in which the performance conditions are deemed probable of achievement. We assess the probability of achievement of performance conditions, including projected product revenues and clinical development milestones, as of the end of each reporting period. Once a performance condition is considered probable, we record compensation expense based on the portion of the service period elapsed to date with respect to that award, with a cumulative catch-up, net of estimated forfeitures, and recognize any remaining compensation expense, if any, over the remaining requisite service period using the straight-line attribution method for PSUs that are subject to cliff vesting and using the accelerated attribution method for PSUs that are subject to graded vesting. Compensation expense for PSUs with market performance conditions is calculated using a Monte Carlo simulation model as of the date of grant and recorded over the requisite service period. Income Taxes. We account for income taxes using an asset and liability approach to financial accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which the basis differences are expected to reverse. We periodically assess the likelihood of the realization of deferred tax assets, and reduce the carrying amount of these deferred tax assets to an amount that is considered to be more-likely-than-not to be realizable. Our assessment considers recent cumulative earnings experience, projections of future taxable income (losses) and ongoing prudent and feasible tax planning strategies. When performing our assessment on projections of future taxable income (losses), we consider factors such as the likelihood of regulatory approval and commercial success of products currently under development, among other factors. Significant judgment is required in making this assessment and, to the extent that a reversal of any portion of our valuation allowance against our deferred tax assets is deemed appropriate, a tax benefit will be recognized against our income tax provision in the period of such reversal. We recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the position will be sustained upon examination by the taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit that is recorded for these positions is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any interest and penalties on uncertain tax positions are included within the tax provision. We record estimates and prepare and file tax returns in various jurisdictions across the United States, Canada, Europe, and Asiabased upon our interpretation of local tax laws and regulations. While we exercise significant judgment when applying complex tax laws and regulations in these various taxing jurisdictions, many of our tax returns are open to audit, and may be subject to future tax, interest, and penalty assessments. We believe our estimates for the valuation allowances against certain deferred tax assets and the amount of benefits associated with uncertain tax positions recognized in our financial statements are appropriate based upon our assessment of the factors mentioned above. As a result of releasing the valuation allowance on the majority of our U.S.deferred tax assets in 2021, we expect that our reported income tax expense (current plus deferred) for future periods will be higher than that recorded for prior periods. Acquisition-related contingent consideration. Acquisition-related contingent consideration, which consists of our future royalty obligations to ARIAD/Takeda, was recorded on the acquisition date at the estimated fair value of the obligation, in accordance with the acquisition method of accounting using an income approach based on projected future net revenues of ICLUSIG in the European Unionand other countries. The fair value of the acquisition-related contingent consideration is remeasured each reporting period, with changes in fair value recorded in the consolidated statements of operations. The assumptions used to determine the fair value of the acquisition-related contingent consideration include projected future net revenues of ICLUSIG and a discount rate which, require significant judgement and are analyzed on a quarterly basis. As the fair value measurement is based on significant inputs that are unobservable in the market, this represents a Level 3 measurement. The valuation inputs utilized to estimate the fair value of the contingent consideration as of December 31, 2021and 2020 included a discount rate of 10% and updated projections of future net revenues of ICLUSIG in the European Unionand other countries for the approved third line treatment. 71
Although we use the best information available to prepare our projections for
future net revenues of ICLUSIG and discount rate assumptions, actual ICLUSIG revenues and/or market conditions could differ significantly. Changes to one or multiple inputs could have a material impact on the amount of acquisition-related contingent consideration expense recorded during the reporting period. Results of Operations
We recorded net income for the year ended
December 31, 2021of $948.6 millionand net loss for the year ended December 31, 2020of $295.7 million. On a per share basis, basic net income was $4.30and diluted net income was $4.27for the year ended December 31, 2021. On a per share basis, basic and diluted net loss was $1.36for the year ended December 31, 2020. For the year ended December 31, 2021, we recorded a benefit from income taxes of $569.0 millionwhen we released the valuation allowance on the majority of our U.S.deferred tax assets. This benefit increased net income by $2.58per basic and $2.56per diluted share for the year ended December 31, 2021. Revenues For the Year Ended, December 31, 2021 2020 (in millions) JAKAFI revenues, net $ 2,134.5 $ 1,937.8ICLUSIG revenues, net 109.4 105.0 PEMAZYRE revenues, net 68.5 25.9 MINJUVI revenues, net 4.9 - OPZELURA revenues, net 4.7 - Total product revenues, net 2,322.0 2,068.7 JAKAVI product royalty revenues 338.0 277.9
OLUMIANT product royalty income 220.9 110.9 TABRECTA product royalty income 10.4 4.2 Total product royalty income
569.3 393.0 Milestone and contract revenues 95.0 205.0 Total revenues
$ 2,986.3 $ 2,666.7The increase in JAKAFI product revenues from 2020 to 2021 was comprised of a volume increase of $110.1 millionand a price increase of $86.6 million. Our product revenues may fluctuate from period to period due to our customers' purchasing patterns over the course of a year, including as a result of increased inventory building by customers in advance of expected or announced price increases. Product revenues are recorded net of estimated product returns, pricing discounts including rebates offered pursuant to mandatory federal and state government programs and chargebacks, prompt pay discounts and distribution fees and co-pay assistance. Our revenue recognition policies require estimates of the aforementioned sales allowances each period. 72
The following table provides a summary of activity with respect to our sales allowances and accrued liabilities (in thousands):
Co-Pay Discounts and Government Assistance Distribution Rebates and and Other Product
Year Ended December 31, 2021 Fees Chargebacks Discounts Returns Total Balance at January 1, 2021 $ 8,536 $
Allocations for current period sales
434,800 69,056 4,740 583,284 Provisions for sales from previous years
91 (889) - 609 (189) Credits/payments for current period sales (62,250) (359,936) (45,859) - (468,045) Credits/payments for prior period sales (6,387) (41,662) (407) (2,177) (50,633) Balance at December 31, 2021
$ 14,678 $ 99,304 $ 24,074 $ 4,740 $ 142,796Government rebates and chargebacks are the most significant component of our sales allowances. Increases in certain government reimbursement rates are limited to a measure of inflation, and when the price of a drug increases faster than this measure of inflation it will result in a penalty adjustment factor that causes a larger sales allowance to those government related entities. We expect government rebates and chargebacks as a percentage of our gross product sales will continue to increase in connection with any future product price increases greater than the rate of inflation, and any such increase in these government rebates and chargebacks will have a negative impact on our reported product revenues, net. We adjust our estimates for government rebates and chargebacks based on new information regarding actual rebates as it becomes available. Claims by third-party payors for rebates and chargebacks are frequently submitted after the period in which the related sales occurred, which may result in adjustments to prior period accrual balances in the period in which the new information becomes available. We also adjust our allowance for product returns based on new information regarding actual returns as it becomes available.
We expect our sales allocations to fluctuate from quarter to quarter due to the Medicare Part D coverage gap, the volume of purchases eligible for government-mandated rebates and rebates as well as changes in the discount percentages which are impacted by possible future price increases, rate of inflation and other factors.
Product royalty revenues on commercial sales of JAKAVI and TABRECTA by Novartis are based on net sales of licensed products in licensed territories as provided by Novartis. Product royalty revenues on commercial sales of OLUMIANT by Lilly are based on net sales of licensed products in licensed territories as provided by Lilly. Our milestone and contract revenues were
$95.0 millionand $205.0 millionfor the years ended December 31, 2021and 2020, respectively. During the year ended December 31, 2021, our milestone and contract revenues were derived from a $50.0 millionsales milestone under the Lilly license, development and commercialization agreement, a $10.0 millionmilestone under the Innovent research collaboration and licensing agreement and a $35.0 millionupfront payment under the InnoCare collaboration and license agreement. During the year ended December 31, 2020, our milestone and contract revenues were derived from a $5.0 millionmilestone under the Innovent agreement, $170.0 millionin milestones under the Novartis agreement and $30.0 millionin milestones under the Lilly agreement. Cost of Product Revenues For the Year Ended, December 31, 2021 2020 (in millions) Product costs $ 21.0 $ 15.3Salary and benefits related 7.2 3.6 Stock compensation 1.7 1.0 Royalty expense 99.6 89.9
Amortization of finite life intangible assets 21.5 21.5 Total cost of product revenue
$ 151.0 $ 131.373 Table of Contents Cost of product revenues includes all product related costs, employee personnel costs, including stock compensation, for those employees dedicated to the production of our commercial products, low single-digit royalties to Novartis on all sales of JAKAFI in the United Statesand amortization of our licensed intellectual property rights for ICLUSIG using the straight-line method over the estimated useful life of 12.5 years. Cost of product revenues increased from 2020 to 2021 due primarily to increased royalties to Novartis on all JAKAFI sales in the United States.
Research and development costs
For the Years Ended, December 31, 2021 2020 (in millions) Salary and benefits related
$ 306.0 $ 285.8Stock compensation 114.3 120.4 Clinical research and outside services 902.3 1,701.3 Occupancy and all other costs 135.6 108.4
Total research and development expenditure
We account for research and development costs by natural expense line and not costs by project. Salary and benefits related expense increased from 2020 to 2021 due primarily to increased development headcount to sustain our development pipeline. Stock compensation expense may fluctuate from period to period based on the number of awards granted, stock price volatility and expected award lives, as well as expected award forfeiture rates which are used to value equity-based compensation. The decrease in clinical research and outside services expense from 2020 to 2021 was primarily due to expense related to the purchase of an FDA priority review voucher in the prior year that enabled OPZELURA to be the first JAK inhibitor approved in a topical formulation and due to upfront consideration related to our collaborative agreements recorded in the prior year. Research and development expenses include upfront and milestone expenses related to our collaborative agreements of
$149.0 millionand $976.1 millionfor the years ended December 31, 2021and 2020, respectively. Research and development expenses for the years ended December 31, 2021and 2020 were net of $29.6 millionand $8.5 million, respectively, of costs reimbursed by our collaborative partners. In addition to one-time expenses resulting from upfront fees in connection with the entry into any new or amended collaboration agreements and payment of milestones under those agreements, research and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial related activities. Many factors can affect the cost and timing of our clinical trials, including requests by regulatory agencies for more information, inconclusive results requiring additional clinical trials, slow patient enrollment, adverse side effects among patients, insufficient supplies for our clinical trials, timing of drug supply, including API, and real or perceived lack of effectiveness or safety of our investigational drugs in our clinical trials. In addition, the development of all of our products will be subject to extensive governmental regulation. These factors make it difficult for us to predict the timing and costs of the further development and approval of our products. 74
Selling, general and administrative expenses
For the Years Ended, December 31, 2021 2020 (in millions) Salary and benefits related
$ 222.4 $ 158.2Stock compensation 67.0 56.6 Other contract services and outside costs 450.2
Total selling, general and administrative expenses
Salary and benefits related expense increased from 2020 to 2021 due primarily to increased headcount. This increased headcount was due primarily to the ongoing commercialization efforts related to JAKAFI for intermediate or high-risk myelofibrosis, uncontrolled polycythemia vera and GVHD as well as increased headcount related to the establishment of our dermatology commercial organization and activities to support the launch of OPZELURA for the treatment of atopic dermatitis. Stock compensation expense may fluctuate from period to period based on the number of awards granted, stock price volatility and expected award lives, as well as expected award forfeiture rates which are used to value equity-based compensation. The increase in other contract services and outside costs was primarily due to the establishment of our dermatology commercial organization, expenses related to activities to support the launch of OPZELURA and expense recognized in connection with a legal settlement, as discussed in Note 15 of Notes to the Consolidated Financial Statements.
Change in fair value of contingent consideration related to the acquisition
Acquisition-related contingent consideration, which consists of our future royalty obligations to ARIAD/Takeda, was recorded on the acquisition date,
June 1, 2016, at the estimated fair value of the obligation, in accordance with the acquisition method of accounting. The fair value of the acquisition-related contingent consideration is remeasured quarterly. The change in fair value of the acquisition-related contingent consideration for the years ended December 31, 2021and 2020 was expense of $14.7 millionand $23.4 million, respectively, which is recorded in change in fair value of acquisition-related contingent consideration on the consolidated statements of operations. The change in fair value of the contingent consideration for the year ended December 31, 2021was due primarily to the impact of updated projections of future net revenues of ICLUSIG in the European Unionand the passage of time. The change in fair value of the contingent consideration for the year ended December 31, 2020was due primarily to the passage of time as there were no other significant changes in the key assumptions during the period.
Sharing collaboration losses
Under the collaboration and license agreement with MorphoSys, which was executed in
March 2020, we and MorphoSys are both responsible for the commercialization efforts of tafasitamab in the United Statesand will share equally the profits and losses from the co-commercialization efforts. For the year ended December 31, 2021and 2020, our 50% share of the costs for tafasitamab was $37.0 millionand $42.8 million, respectively, as recorded in collaboration loss sharing on the consolidated statement of operations.
Other income (expenses)
Other income (expense), net. Other income (expense), net, for the years ended
December 31, 2021and 2020 was $10.6 millionand $23.2 million, respectively. The decrease in other income (expense), net primarily relates to a decrease in interest income earned from our investments in marketable securities and money market accounts. Interest expense. Interest expense for the years ended December 31, 2021and
$1.9 millionand $2.2 million, respectively. Included in interest expense for the years ended December 31, 2021and 2020 was approximately $1.3 millionand $1.2 million, respectively, of interest expense on our finance lease liabilities. Also included in interest expense for the year ended December 31, 2020was $0.7 millionof non-cash charges to amortize the discount on our convertible senior notes that matured in November 2020. 75
Unrealized gain (loss) on long term investments. Unrealized gains and losses on long term investments will fluctuate from period to period, based on the change in fair value of the securities we hold in our publicly held collaboration partners. The following table provides a summary of those unrealized gains
and (losses): For the Years Ended, December 31, 2021 2020 (in millions) Agenus
$ 4.6 $ (10.3)Calithera (7.3) (1.4) Merus 48.1 11.0 MorphoSys (68.7) 7.4 Syndax 6.3 - Syros (7.1) 3.7
Total unrealized gains (losses) on long-term investments
(Benefit) provision for income taxes. The (benefit) provision for income taxes for the years ended
December 31, 2021and 2020 was a benefit of $378.1 millionand a provision of $63.5 million, respectively. The benefit for income taxes in 2021 is primarily driven by the release of the valuation allowance on the majority of our U.S.deferred tax assets in the fourth quarter. This benefit is partially offset by higher tax expense from U.S.operations. Further information on the release of the valuation allowance and significant judgments related to its release can be found in Note 12 of Notes to the Consolidated Financial Statements.
Cash and capital resources
2021 2020 (in millions)
Cash, cash equivalents, and marketable securities
$ 1,801.4Working capital $ 2,264.4 $ 1,728.7Year ended December 31: Cash provided by (used in): Operating activities $ 749.5 $ (124.6)Investing activities $ (207.7) $ (269.0)Financing activities $ 6.2 $ 71.7
Capital expenditures (included in investing activities above)
$ (187.4)Sources and Uses of Cash.
Due to historical net losses, we had an accumulated deficit of
$0.8 billionas of December 31, 2021. We have funded our research and development operations through cash received from customers, sales of equity securities, the issuance of convertible notes, and collaborative arrangements. At December 31, 2021, we had available cash, cash equivalents and marketable securities of $2.3 billion. Our cash and marketable securities balances are held in a variety of interest-bearing instruments, including money market accounts and U.S.government debt securities. Available cash is invested in accordance with our investment policy's primary objectives of liquidity, safety of principal and diversity of investments. Cash provided by (used in) operating activities. The increase in cash provided by operating activities from 2020 to 2021 was due primarily to cash outflows in March 2020related to our collaboration and license agreement with MorphoSys and changes in working capital. Cash used in investing activities. Our investing activities, other than purchases, sales and maturities of marketable securities, have consisted predominantly of capital expenditures and purchases of long term investments. During 2021, net cash used in investing activities was $207.7 million, which represents purchases of marketable securities of $235.2 million, capital expenditures of $181.0 millionand purchase of long term equity investments of $33.5 million, offset in part by the 76
sale and maturity of marketable securities of
$231.5 millionand the sale of long term investment of $10.5 million. During 2020, net cash used in investing activities was $269.0 million, which represents purchases of marketable securities of $516.9 million, capital expenditures of $187.4 millionand purchase of long term equity investments of $95.5 million, offset in part by the sale and maturity of marketable securities of $513.5 millionand the sale of long term investment of $17.3 million. Cash provided by financing activities. During 2021 and 2020, net cash provided by financing activities was $6.2 millionand $71.7 million, respectively, consisting primarily of proceeds from the issuance of common stock under our stock plans net of tax withholdings, offset in part by cash paid to ARIAD/Takeda for contingent consideration. Our capital expenditures for construction activities and our non-operating contractual operating and finance lease obligations are discussed in Note 7 of Notes to the Consolidated Financial Statements. In addition, in October 2019, we entered into an agreement with Wilmington Friends School Inc., to purchase property for $50.0 millionto expand our global headquarters. Under that agreement, closing of the purchase is subject to certain standard closing conditions, including an initial diligence period and a subsequent approval period. In August 2021, we entered into a $500.0 million, three-year senior unsecured revolving credit facility. We may increase the maximum revolving commitments or add one or more incremental term loan facilities, subject to obtaining commitments from any participating lenders and certain other conditions, in an amount not to exceed $250.0 millionplus a contingent additional amount that is dependent on our pro forma consolidated leverage ratio. As of December 31, 2021, we had no outstanding borrowings and were in compliance with all covenants under this facility. We believe that our cash flow from operations, together with our cash, cash equivalents and marketable securities and funds available under our revolving credit facility, will be adequate to satisfy our capital needs for the foreseeable future. Our cash requirements depend on numerous factors, including our expenditures in connection with our drug discovery and development programs and commercialization operations; expenditures in connection with litigation or other legal proceedings; costs for future facility requirements; and expenditures for future strategic equity investments or potential acquisitions. We have entered into and may in the future seek to license additional rights relating to technologies or drug development candidates in connection with our drug discovery and development programs. Under these licenses, we may be required to pay upfront fees, milestone payments, and royalties on sales of future products. These contingent future payments are discussed in detail in Note 6 of Notes to the Consolidated Financial Statements. To the extent we seek to augment our existing cash resources and cash flow from operations to satisfy our cash requirements for future acquisitions or other strategic purposes, we expect that additional funding can be obtained through equity or debt financings or from other sources. The sale of equity or convertible debt securities in the future may be dilutive to our stockholders, and may provide for rights, preferences or privileges senior to those of our holders of common stock. Debt financing arrangements may require us to pledge certain assets or enter into covenants that could restrict our operations or our ability to incur further indebtedness.
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