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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

or

o         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: 0-27488

INCYTE CORPORATION

(Exact name of registrant as specified in its charter)

(302) 498-6700

(Registrant’s telephone number, including area code)

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. x Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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). o Yes  x No

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 126,305,547 as of October 20, 2011.

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INCYTE CORPORATION

INDEX

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PART I:    FINANCIAL INFORMATION

Item 1.    Financial Statements

INCYTE CORPORATION

Condensed Consolidated Balance Sheets

(in thousands)

*       The condensed consolidated balance sheet at December 31, 2010 has been derived from the audited financial statements at that date.

See accompanying notes.

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INCYTE CORPORATION

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

See accompanying notes.

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INCYTE CORPORATION

Condensed Consolidated Statements of Comprehensive Income (loss)

(in thousands)

(unaudited)

See accompanying notes.

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INCYTE CORPORATION

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

See accompanying notes.

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INCYTE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

1.     Organization and business

Incyte Corporation (“Incyte,” “we,” “us,” or “our”) is a drug discovery and development company focused on developing small molecule drugs to treat serious unmet medical needs. Our pipeline is focused in the areas of oncology and inflammation and includes compounds in various stages of development, ranging from preclinical to late-stage development.

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 September 30, 2011 and the condensed consolidated statements of operations, comprehensive loss and cash flows for the three and nine months ended September 30, 2011 and 2010, are unaudited, but include all adjustments, consisting 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, 2010 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, 2010.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued amendments to the accounting and disclosure guidance for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. We adopted this guidance prospectively on January 1, 2011 and the adoption had no impact on our condensed consolidated financial statements. The potential future impact of the adoption of these amendments will depend on the nature of any new arrangements that we enter into in the future or will depend on any material modifications made to any of our existing arrangements.

3.     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 standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value we use quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

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

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

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

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Our marketable securities consist of investments in corporate debt securities, U.S. Treasury notes, and other U.S. government agency and non-agency mortgage-backed securities that are classified as available-for-sale. We classify marketable securities available to fund current operations as current assets on the condensed consolidated balance sheet. Marketable securities are classified as long-term assets on the condensed consolidated balance sheets if (i) they have been in an unrealized loss position for longer than six months and (ii) we have the ability to hold them until the carrying value is recovered and such holding period may be longer than one year.

At September 30, 2011, our Level 2 mortgage backed securities are valued using readily available pricing sources which utilize market observable inputs, including the current interest rate and other characteristics for similar types of instruments.

Restricted cash and investments consist of amounts held in escrow for interest payments on our 4.75% convertible senior notes through October 2012.  The restricted investments consist of U.S. Treasury notes.

The following fair value hierarchy table presents information about each major category of our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 (in thousands):

The following is a summary of our marketable security portfolio as of September 30, 2011 and December 31, 2010, respectively.

4.     Concentration of credit risk

For the three and nine months ended September 30, 2011, one customer contributed 81% and 85%, respectively, of revenues.  For the three and nine months ended September 30, 2010, one customer contributed 80% and 48%, respectively, of revenues.

Three customers comprised 100% of the accounts receivable balance at September 30, 2011. Three customers comprised 92% of the accounts receivable balance at December 31, 2010.

5.     License agreements

Novartis

In November 2009, we entered into a Collaboration and License Agreement with Novartis International Pharmaceutical Ltd. Under the terms of the agreement, Novartis received exclusive development and commercialization rights outside of the United States to our JAK inhibitor ruxolitinib and certain back-up compounds for hematologic and oncology indications, including all hematological malignancies, solid tumors and myeloproliferative diseases. We retained exclusive development and commercialization rights to ruxolitinib in the United States and in certain other indications. Novartis also received worldwide exclusive development and commercialization rights to our c-MET inhibitor compound INCB28060 (also known as INC280) and certain back-up compounds in all indications. We retained options to co-develop and to co-promote INCB28060 in the United States.

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Under this agreement, we received an upfront payment and immediate milestone payment totaling $210 million and were initially eligible to receive additional payments of up to approximately $1.1 billion if defined development and commercialization milestones are achieved. For the nine months ended September 30, 2011 we recognized $15 million under this agreement for the achievement of a predefined milestone in an ongoing Phase I dose-escalation trial for INCB28060 in patients with solid tumors.  In 2010, we recognized and received $50 million in milestone payments for the initiation of the ruxolitinib global Phase III trial, RESPONSE, in patients with polycythemia vera. We also could receive tiered, double digit royalties on future ruxolitinib sales outside of the United States. Each company is responsible for costs relating to the development and commercialization of ruxolitinib in its respective territories, with costs of collaborative studies shared equally. Novartis is responsible for all costs relating to the development and commercialization of INCB28060 after the initial Phase I clinical trial.

The Novartis agreement will continue on a program-by-program basis until Novartis has no royalty payment obligations with respect to such program or, if earlier, the termination of the agreement or any program in accordance with the terms of the agreement. The agreement may be terminated in its entirety or on a program-by-program basis by Novartis for convenience. The agreement may also be terminated by either party under certain other circumstances, including material breach.

We determined that there were two deliverables under the agreement: (i) the ex U.S. license for ruxolitinib and (ii) our obligations in connection with our participation on the joint development committee for myelofibrosis and polycythemia vera/essential thrombocythemia. We concluded that these deliverables should be accounted for as a single unit of accounting and the $150.0 million upfront payment received in December 2009 and the immediate $60.0 million milestone payment received in January 2010 should be recognized on a straight line basis through December 2013 when we estimate we will complete our obligations in connection with our participation on the joint development committee, our estimated performance period under the agreement. We have no further substantive obligations to Novartis after the completion of our obligations in connection with the joint development committee. All future milestone payments will be recognized as revenue upon the achievement of the associated milestone.

At December 31, 2009, we recorded $10.9 million of reimbursable costs incurred prior to the effective date of the agreement as deferred revenue on the condensed consolidated balance sheet. These costs will be recognized on a straight line basis through December 2013 consistent with the aforementioned upfront and milestone payments. Future reimbursable costs incurred after the effective date of the agreement with Novartis will be recorded net against the related research and development expenses. At September 30, 2011 and December 31, 2010, $2.3 million and $4.6 million, respectively, of reimbursable costs were included in accounts receivable on the condensed consolidated balance sheet. Research and development expenses for the three and nine months ended September 30, 2011 were net of $0.7 million and $2.2 million, respectively, of costs reimbursed by Novartis.   Research and development expenses for the three and nine months ended September 30, 2010 were net of $0.6 million and $6.2 million, respectively, of costs reimbursed by Novartis.

Contract revenue under the Novartis agreement was $13.5 million and $55.6 million, respectively, for the three and nine months ended September 30, 2011, including a $15 million milestone for INCB28060 that was earned in the three months ended March 31, 2011. Contract revenue under the Novartis agreement was $13.5 million and $40.6 million, respectively, for the three and nine months ended September 30, 2010.

Lilly

In December 2009, we entered into a License, Development and Commercialization Agreement with Eli Lilly and Company. Under the terms of the agreement, Lilly received exclusive worldwide development and commercialization rights to our JAK inhibitor INCB28050, now known as LY3009104, and certain back-up compounds for inflammatory and autoimmune diseases. We received an initial payment of $90 million, and were initially eligible to receive additional payments of up to $665 million based on the achievement of defined development, regulatory and commercialization milestones. In 2010, we recognized and received $49 million in milestone payments from Lilly. We also could receive tiered, double-digit royalty payments on future global sales with rates ranging up to 20% if the product is successfully commercialized.

We retained options to co-develop our JAK inhibitors with Lilly on a compound-by-compound and indication-by-indication basis. Lilly will be responsible for all costs relating to the development and commercialization of the compounds unless we elect to co-develop any compounds or indications. If we elect to co-develop any compounds and/or indications, we would be responsible for funding 30% of the associated future global development costs from the initiation of a Phase IIb trial. We would receive an incremental royalty rate increase across all tiers resulting in effective royalty rates ranging up to the high twenties on potential future global sales for compounds and/or indications that we elect to co-develop. We also retained an option to co-promote products in the United States. In July 2010, we elected to co-develop LY3009104 with Lilly in rheumatoid arthritis and we are responsible for funding 30% of the associated future global development costs for this indication from the initiation of a Phase IIb trial through regulatory approval. We have retained certain mechanisms to give us cost protection as LY3009104 advances in clinical development. We can defer our portion of co-development study costs by indication if they exceed a predetermined level. This deferment would be credited

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against future milestones or royalties and we would still be eligible for the full incremental royalties related to the co-development option. In addition, even if we have started co-development funding for any indication, we can at any time opt out for that indication and stop future co-development cost sharing. If we elect to do this we would still be eligible for our base royalties plus an incremental pro-rated royalty commensurate with our contribution to the total co-development cost for those indications for which we co-funded. The Lilly agreement will continue until Lilly no longer has any royalty payment obligations or, if earlier, the termination of the agreement in accordance with its terms. The agreement may be terminated by Lilly for convenience, and may also be terminated under certain other circumstances, including material breach.

We determined that there were two deliverables under the agreement: (i) the worldwide license and (ii) our obligations in connection with a co-development option. We concluded that these deliverables should be accounted for as a single unit of accounting and the $90.0 million upfront payment should be recognized on a straight line basis as revenue through December 2016, our estimated performance period under the agreement. All milestone payments will be recognized as revenue upon the achievement of the associated milestone. Reimbursable costs incurred after the effective date with Lilly will be recorded net against the related research and development expenses. At September 30, 2011 and December 31, 2010, $0.1 million and $0.3 million, respectively, of reimbursable costs were included in accounts receivable on the condensed consolidated balance sheet. Research and development expenses for the three and nine months ended September 30, 2011 were net of $0.0 million and $0.2 million, respectively, of costs reimbursed by Lilly.  Research and development expenses for the three and nine months ended September 30, 2010 were net of $0.4 million and $2.6 million, respectively, of costs reimbursed by Lilly.

Contract revenue under the Lilly agreement was $3.2 million and $9.6 million, respectively, for the three and nine months ended September 30, 2011. Contract revenue under the Lilly agreement was $3.2 million and $39.6 million, respectively, for the three and nine months ended September 30, 2010. Included in these amounts was a $30.0 million payment in connection with a milestone received from Lilly during 2010.

6.     Stock compensation

We recorded $7.4 million and $21.5 million of stock compensation expense on our unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2011, respectively.  We recorded $4.1 million and $10.7 million of stock compensation expense on our unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2010, respectively.  We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted, with the following weighted-average assumptions:

The risk-free interest rate is derived from the U.S. Federal Reserve rate in effect at the time of grant. The expected life calculation is based on the observed and expected time to the exercise of options by our employees based on historical exercise patterns for similar type options. Expected volatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the options. A dividend yield of zero is assumed based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends.

Based on our historical experience, we have assumed an annualized forfeiture rate of 5% for our options. Under the true-up provisions of the stock based compensation guidance, we will record additional expense if the actual forfeiture rate is lower than we estimated, and will record a recovery of prior expense if the actual forfeiture is higher than we estimated.

Total compensation cost of options granted but not yet vested, as of September 30, 2011, was $23.0 million, which is expected to be recognized over the weighted average period of 3.09 years.

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The following table summarizes activity under all stock option plans:

7.     Debt

The carrying amount and fair value of our convertible notes are as follows (in thousands):

The fair value of the 4.75% convertible senior notes due 2015 was calculated based on quoted market prices.

8.     Net loss per share

The following potential common shares were excluded from the calculations as their effect would be anti-dilutive:

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations as of and for the three and nine months ended September 30, 2011 should be read in conjunction with the financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements as of and for the year ended December 31, 2010 included in our Annual Report on Form 10-K previously filed with the SEC.

This report contains forward-looking statements that involve risks and uncertainties. These statements relate to future periods, future events or our future operating or financial plans or performance. Often, these statements include the words “believe,” “expect,” “target,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “potential,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or “may,” or the negative of these terms, and other similar expressions. These forward-looking statements include statements as to:

·                  the discovery, development, formulation, manufacturing and commercialization of our compounds and our product candidates including the date ruxolitinib could be available to myelofibrosis patients in the United States;

·                  focus on our drug discovery, development and commercialization efforts;

·                  conducting clinical trials internally, with collaborators, or with clinical research organizations;

·                  our collaboration and strategic relationship strategy; anticipated benefits and disadvantages of entering into collaboration agreements;

·                  our licensing, investment and commercialization strategies, including our plans to launch ruxolitinib;

·                  the regulatory approval process, including obtaining U.S. Food and Drug Administration and other international health authorities approval for our products in the United States and abroad and the possible date for completion of priority review of ruxolitinib;

·                  the safety, effectiveness and potential benefits and indications of our product candidates and other compounds under development;

·                  the timing and size of our clinical trials; the compounds expected to enter clinical trials; timing of clinical trial results;

·                  our ability to manage expansion of our drug discovery and development operations;

·                  future required expertise relating to clinical trials, manufacturing, sales and marketing;

·                  obtaining and terminating licenses to products, compounds or technology, or other intellectual property rights;

·                  the receipt from or payments pursuant to collaboration or license agreements resulting from milestones or royalties;

·                  the decrease in revenues from our information product-related activities;

·                  plans to develop and commercialize products on our own;

·                  plans to use third party manufacturers;

·                  expected expenses and expenditure levels; expected uses of cash; expected revenues and sources of revenues;

·                  expected losses; fluctuation of losses;

·                  our profitability; the adequacy of our capital resources to continue operations;

·                  the need to raise additional capital;

·                  the costs associated with resolving matters in litigation;

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·                  our expectations regarding competition;

·                  our investments, including anticipated expenditures, losses and expenses;

·                  our patent prosecution and maintenance efforts; and

·                  our indebtedness, and debt service obligations.

These forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. These risks and uncertainties could cause actual results to differ materially from those projected and include, but are not limited to:

·                  our ability to successfully obtain regulatory approval for and commercialize ruxolitinib;

·                  our ability to maintain at anticipated levels, reimbursement for ruxolitinib from government health administration authorities, private health insurers and other organizations;

·                  our ability to establish and maintain effective sales, marketing and distribution capabilities;

·                  the risk of reliance on other parties to manufacture ruxolitinib, which could result in a short supply of ruxolitinib, increased costs, and withdrawal of regulatory approval;

·                  our ability to maintain regulatory approvals to market ruxolitinib;

·                  our ability to successfully identify patients and achieve a significant market share in order to achieve or maintain profitability;

·                  the risk of civil or criminal penalties if we market ruxolitinib in a manner that violates health care fraud and abuse laws;

·                  our ability to discover, develop, formulate, manufacture and commercialize a drug candidate or product;

·                  the risk of unanticipated delays in research and development efforts;

·                  the risk that previous preclinical testing or clinical trial results are not necessarily indicative of future clinical trial results;

·                  risks relating to the conduct of our clinical trials;

·                  changing regulatory requirements;

·                  the risk of adverse safety findings;

·                  the risk that results of our clinical trials do not support submission of a marketing approval application for our product candidates;

·                  the risk of significant delays or costs in obtaining regulatory approvals;

·                  risks relating to our reliance on third party manufacturers, collaborators, and clinical research organizations;

·                  risks relating to the development of new products and their use by us and our current and potential collaborators;

·                  risks relating to our inability to control the development of out-licensed drug compounds or drug candidates;

·                  risks relating to our collaborators’ ability to develop and commercialize product candidates;

·                  costs associated with prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights;

·                  our ability to maintain or obtain adequate product liability and other insurance coverage;

·                  the risk that our product candidates may not obtain or maintain regulatory approval;

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·                  the impact of technological advances and competition;

·                  the ability to compete against third parties with greater resources than ours;

·                  risks relating to changes in pricing and reimbursements in the markets in which we may compete;

·                  competition to develop and commercialize similar drug products;

·                  our ability to obtain patent protection and freedom to operate for our discoveries and to continue to be effective in expanding our patent coverage;

·                  the impact of changing laws on our patent portfolio;

·                  developments in and expenses relating to litigation;

·                  our ability to in-license potential drug compounds or drug candidates or other technology;

·                  our substantial leverage and limitations on our ability to incur additional indebtedness and incur liens on our assets imposed by our debt obligations;

·                  our ability to obtain additional capital when needed;

·                  fluctuations in net cash provided and used by operating, financing and investing activities;

·                  our history of operating losses; and

·                  the risks set forth under “Risk Factors.”

Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by federal securities laws, we undertake no obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

In this report all references to “Incyte,” “we,” “us,” “our” or the “Company” mean Incyte Corporation and our subsidiaries, except where it is made clear that the term means only the parent company.

Incyte is our registered trademark. We also refer to trademarks of other corporations and organizations in this Quarterly Report on Form 10-Q.

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Overview

Incyte is a drug discovery and development company, focused on developing small molecule drugs to treat serious unmet medical needs. Our pipeline is focused in the areas of oncology and inflammation and includes compounds in various stages of development, ranging from preclinical to late-stage development.

Our two most advanced programs involve our janus kinase (JAK) inhibitors. Oral ruxolitinib (INCB18424) is in clinical development for the treatment of several myeloproliferative neoplasms and is part of a collaboration agreement with Novartis International Pharmaceutical Ltd. in which Novartis received exclusive development and commercialization rights outside of the United States to ruxolitinib for hematologic and oncology indications, including all hematological malignancies, solid tumors and myeloproliferative diseases. We submitted a New Drug Application (NDA) for ruxolitinib for the treatment of myelofibrosis in June 2011 and, in August 2011, the U.S. Food and Drug Administration (FDA) accepted our NDA filing. The FDA also granted our request for priority review, which is given to investigational drugs that may offer either a major advance in treatment or provide a treatment where no adequate therapy exists. The FDA has a goal to complete the priority review within six months. Therefore, if the NDA is approved, we anticipate that ruxolitinib could be available for U.S. patients with myelofibrosis in the fourth quarter of 2011.

Oral LY3009104 is in clinical development for rheumatoid arthritis by Eli Lilly and Company under our collaboration agreement with Lilly. Lilly received exclusive worldwide development and commercialization rights for the compound for inflammatory and autoimmune diseases; however, last year we exercised our co-development rights for rheumatoid arthritis in exchange for tiered royalty rates ranging up to the high twenties. We believe these strategic relationships increase the likelihood of the successful development and commercialization of these compounds.

We are engaged in a number of other development programs evaluating our novel c-METand IDO inhibitors and are also continuing to invest in our discovery efforts.

Our pipeline includes the following compounds:

(1)                                  We licensed rights outside the U.S. to Novartis and retained U.S. rights.

(2)                                 This compound is a topical formulation; all others are an oral formulation.

(3)                                  We licensed worldwide rights to Lilly and have elected to co-develop with Lilly and we retain a co-promotion option.

(4)                                  We licensed worldwide rights to Novartis and retained co-development and co-promotion options.

(5)                                  This includes several other myelofibrosis studies, including a joint global Phase II trial with Novartis in thrombocytopenic patients and a Phase II trial in patients using a sustained-release formulation.

(6)                                  These studies are investigator sponsored trials.

In September 2011, we announced that we had discontinued development of our lead sheddase inhibitor, INCB7839, for the treatment of metastatic breast cancer.

We expect to continue to expand our drug discovery and development program in the future.  Conducting clinical trials for our drug candidates in development is a lengthy, time-consuming and expensive process. If we are unable to successfully develop and market pharmaceutical products over the next several years, our business, financial condition and results of operations would be adversely

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impacted.  To date, we have not, and we may never, achieve sustained revenues sufficient to offset expenses.  We may incur net losses in future periods and we may never achieve or maintain profitability. We also expect that our operating results may fluctuate from quarter to quarter and that those fluctuations may be substantial.

Critical Accounting Policies and Significant Estimates

The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going 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 affect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

·                  Revenue recognition;

·                  Research and development costs;

·                  Stock compensation;

·                  Investments; and

·                  Convertible debt and derivative accounting.

Revenue Recognition.  Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectability is reasonably assured. Revenues are deferred for fees received before earned or until no further obligations exist. We exercise judgment in determining that collectability is reasonably assured or that services have been delivered in accordance with the arrangement. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.

Under agreements involving multiple deliverables, services and/or rights to use assets, the multiple elements are divided into separate units of accounting when certain criteria are met, including whether the delivered items have stand alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. When separate units of accounting exist, consideration is allocated among the separate elements based on their respective fair values. The determination of fair value of each element is based on objective evidence from historical sales of the individual elements by us to other customers. If such evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value for each undelivered element does exist or until all elements of the arrangement are delivered. When elements are specifically tied to a separate earnings process, revenue is recognized when the specific performance obligation tied to the element is completed. When revenues for an element are not specifically tied to a separate earnings process, they are recognized ratably over the term of the agreement. All milestone payments are recognized as revenue upon the achievement of the associated milestone.

Revenues from licenses to our intellectual property are recognized when earned under the terms of the related agreements. Royalty revenues are recognized upon the sale of products or services to third parties by the licensee or other agreed upon terms. We estimate royalty revenues based on previous period royalties received and information provided by the third party licensee. We exercise judgment in determining whether the information provided by licensees is sufficiently reliable for us to base our royalty revenue recognition thereon.

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

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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. Reimbursable costs incurred in connection with collaborative license agreements are recorded as a reduction of research and development expenses.

Stock Compensation.   Accounting guidance for stock compensation requires all share-based payment transactions with employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period based on their fair values. The accounting guidance also requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility and expected option lives, as well as expected option forfeiture rates, to value equity-based compensation and requires the recognition of the fair value of stock compensation in the statement of operations. We recorded $7.4 million and $21.5 million, respectively, of stock compensation expense on our condensed consolidated statement of operations for the three and nine months ended September 30, 2011 and $4.1 million and $10.7 million, respectively, for the three and nine months ended September 30, 2010.

Investments.  We carry our investments at their respective fair values. We periodically evaluate the fair values of our investments to determine whether any declines in the fair value of investments represent an other-than-temporary impairment. This evaluation consists of a review of several factors, including the length of time and extent that a security has been in an unrealized loss position, the existence of an event that would impair the issuer’s future repayment potential, the near term prospects for recovery of the market value of a security and if we intend to sell or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If management determines that such an impairment exists, we would recognize an impairment charge. Because we may determine that market or business conditions may lead us to sell a short-term investment or marketable security prior to maturity, we classify our short-term investments and marketable securities as “available-for-sale.” Investments in securities that are classified as available-for-sale and have readily determinable fair values are measured at fair market value in the balance sheets, and unrealized holding gains and losses for these investments are reported as a separate component of stockholders’ equity until realized. We classify those marketable securities that may be used in operations within one year as short-term investments. Those marketable securities in which we have both the ability to hold until maturity and have a maturity date beyond one year from our most recent condensed consolidated balance sheet date are classified as long-term marketable securities.

Convertible Debt and Derivative Accounting.  We perform an assessment of all embedded features of a debt instrument to determine if (1) such features should be bifurcated and separately accounted for, and (2) if bifurcation requirements are met, whether such features should be classified and accounted for as equity or liabilities. If the embedded feature meets the requirements to be bifurcated and accounted for as a liability, the fair value of the embedded feature is measured initially, included as a liability on the condensed consolidated balance sheet, and remeasured each reporting period. Any changes in fair value are recorded in the condensed consolidated statement of operations. We monitor, on an ongoing basis, whether events or circumstances could give rise to a change in our classification of embedded features.

Results of Operations

We recorded a net loss of $53.1 million, or $0.42 per share (basic and diluted) for the three months ended September 30, 2011, as compared to a net loss of $31.7 million, or $0.26 per share (basic and diluted)  for the same period in 2010. The net loss for the nine months ended September 30, 2011 was $131.5 million, or $1.05 per share (basic and diluted), as compared to $64.4 million, or $0.53 per share (basic and diluted), for the same period in 2010.

Revenues.

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Our total revenues were $16.8 million and $65.6 million and $16.9 million and $84.0 million for the three and nine months ended September 30, 2011 and 2010, respectively, which included a $15.0 million milestone for INCB28060 recognized under the Novartis agreement during the nine months ended September 30, 2011. For the nine months ended September 30, 2010 we recognized $30.0 million and $3.0 million, respectively, in contract revenues relating to milestone payments under our Lilly and Pfizer agreements.  In addition, for the three and nine months ended September 30, 2011 and 2010, contract revenues were derived from the straight line recognition of revenue associated with the Novartis and Lilly upfront fees over the estimated performance periods. The upfront fees related to the Novartis agreement included a $150.0 million upfront payment received in 2009, a $60.0 million immediate milestone payment received in 2010 and $10.9 million of reimbursable costs incurred prior to the effective date of the agreement. The upfront fees related to the Lilly agreement consisted of a $90.0 million upfront payment received in 2010.

Operating Expenses.

Research and development expenses.

We currently track research and development costs by natural expense line and not costs by project. Salary and benefits related expense increased from the three and nine months ended September 30, 2010 to the three and nine months ended September 30, 2011 due to increased development headcount to sustain our development pipeline. Stock compensation expense may fluctuate from period to period based on the number of options granted, stock price volatility and expected option lives, as well as expected option forfeiture rates which are used to value equity-based compensation. The increase in clinical research and outside services expense from the three and nine months ended September 30, 2010 to the three and nine months ended September 30, 2011 was primarily the result of increased development costs due to timing of our clinical trial activities and increased medical affairs costs. Research and development expenses for the three and nine months ended September 30, 2011 and 2010 were net of $0.7 million and $2.4 million and $0.9 million and $8.8 million, respectively, of costs reimbursed by our collaborative partners. The increase in occupancy and all other costs from the three and nine months ended September 30, 2010 to the three and nine months ended September 30, 2011 was primarily the result of increased depreciation and laboratory expenses. 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 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.

In July 2010, we elected to co-develop LY3009104 with Lilly in rheumatoid arthritis and will receive an incremental royalty rate increase across all tiers for this indication.  We are responsible for funding 30% of the associated future global development costs for this indication from the initiation of a Phase IIb trial through regulatory approval.  We have retained certain mechanisms to give us cost protection as LY3009104 advances in clinical development. We can defer our portion of co-development study costs by indication if they exceed a predetermined level. This deferment would be credited against future milestones or royalties and we would still be eligible for the full incremental royalties related to the co-development option. In addition, even if we have started co-development funding for any indication, we can at any time opt out for that indication and stop future co-development cost sharing. If we elect to do this we would still be eligible for our base royalties plus an incremental pro-rated royalty commensurate with our contribution to the total co-development cost for those indications for which we contributed funding.

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Selling, general and administrative expenses.

Salary and benefits related expense increased from the three and nine months ended September 30, 2010 to the three and nine months ended September 30, 2011 due to increased headcount. This increased headcount was due to preparation for the potential commercialization of ruxolitinib for myelofibrosis, including the hiring of a sales force. Stock compensation expense may fluctuate from period to period based on the number of options granted, stock price volatility and expected option lives, as well as expected option forfeiture rates which are used to value equity-based compensation. The increase in other contract services and outside costs was primarily due to preparation for the potential commercialization of ruxolitinib for myelofibrosis.

Interest Expense.    Interest expense for the three and nine months ended September 30, 2011 was $11.0 million and $32.7 million, respectively, compared to $10.5 million and $32.7 million, respectively, for the corresponding periods in 2010.  The increase in the three months ended September 30, 2011 from the 2010 period is primarily attributable to the increase in non-cash amortization of our debt discount related to our 4.75% convertible senior notes due 2015.

Loss on redemption of convertible senior and subordinated notes.  During the nine months ended September 30, 2010, we redeemed the remaining $55.6 million principal amount of our 3½% convertible senior notes due 2011 and $119.0 million principal amount of our 3½% convertible subordinated notes due 2011. These redemptions resulted in a loss of $4.0 million primarily related to the unamortized debt discount from the 3½% convertible senior notes we redeemed.

Liquidity and Capital Resources

We had net losses from inception in 1991 through 1996 and in 1999 through the first nine months of 2011. Because of those losses, we had an accumulated deficit of $1.6 billion as of September 30, 2011. We have funded our research and development operations through sales of equity securities, the issuance of convertible notes, cash received from customers, and collaborative arrangements. At September 30, 2011, we had available cash, cash equivalents, and marketable securities of $317.0 million, excluding a funded restricted cash and investment escrow account of $28.5 million reserved for interest payments through October 2012 on our 4.75% convertible senior notes due 2015. Our cash and marketable securities balances are held in a variety of interest-bearing instruments, including money market accounts and U.S. government agency and non-agency mortgage-backed securities. Available cash is invested in accordance with our investment policy’s primary objectives of liquidity, safety of principal and diversity of investments.

Net cash used in operating activities was $121.9 million for the nine months ended September 30, 2011, compared to $70.5 million provided by operating activities for the nine months ended September 30, 2010.  The $192.4 million decrease was due primarily to the upfront and milestone payments received from our collaborators for the nine months ended September 30, 2010.

Our investing activities, other than purchases, sales and maturities of marketable securities, have consisted predominantly of capital expenditures.  Net cash used in investing activities was $1.4 million for the nine months ended September 30, 2011, which represented primarily sales and maturities of marketable securities of $1.4 million offset by capital expenditures of $2.8 million.  Net cash provided by investing activities was $17.0 million for the nine months ended September 30, 2010, which represented primarily sales and maturities of marketable securities of $18.4 million offset by capital expenditures of $1.4 million. In the future, net cash used by investing activities may fluctuate significantly from period to period due to the timing of capital expenditures, maturities/sales and purchases of marketable securities, and acquisitions, including possible earn-out payments to former stockholders of Maxia Pharmaceuticals, Inc.

Net cash provided by financing activities was $17.7 million for the nine months ended September 30, 2011 and net cash used in financing activities was $148.6 million for the nine months ended September 30, 2010.  For the nine months ended September 30, 2011 and 2010, we received $17.7 million and $10.0 million, respectively, from issuance of common stock under our stock plans and employee stock purchase plan.  For the nine months ended September 30, 2010, we used $158.6 million, to redeem the remaining 3 ½% convertible senior notes and 3 ½% convertible subordinated notes, including interest.

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The following summarizes our significant contractual obligations as of September 30, 2011 and the effect those obligations are expected to have on our liquidity and cash flow in future periods:

We have funded an escrow account of $28.5 million for interest payments on our 4.75% convertible senior notes through October 2012, which the table above excludes.

The table above also excludes certain commitments that are contingent upon future events. The most significant of these contractual commitments that we consider to be contingent obligations are summarized below.

Commitments related to Maxia Pharmaceuticals, Inc. are considered contingent commitments as future events must occur to cause these commitments to be enforceable. In February 2003, we completed our acquisition of Maxia. Under the merger agreement, former Maxia stockholders have the right to receive certain earn out amounts of up to a potential aggregate amount of $14.0 million upon the occurrence of certain research and development milestones set forth in the merger agreement. Twenty percent of each earn out payment, if earned, will be paid in cash and the remaining eighty percent will be paid in shares of our common stock. None of these milestones has been achieved as of September 30, 2011.

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 up-front fees, milestone payments, and royalties on sales of future products.

We believe that our cash, cash equivalents and marketable securities will be adequate to satisfy our capital needs for at least the next twelve months. 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; competing technological and market developments; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; our receipt of any milestone or other payments under any collaborative agreements we may enter into, including the agreements with Novartis, Lilly and Pfizer; if our NDA for ruxolitinib is approved, the extent to which commercialization of ruxolitinib is successful; and expenditures in connection with strategic relationships and license agreements. Changes in our research and development or commercialization plans or other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources.

Until we can generate a sufficient amount of product revenues to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations. The sale of equity or additional 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. The indenture under which our 4.75% convertible senior notes due 2015 are issued contains a covenant that, among other things, limits our ability and the ability of any of our subsidiaries to incur additional indebtedness, create liens, or sell, lease, license, transfer or otherwise dispose of certain of our or their assets. We do not know whether additional funding will be available on acceptable terms, if at all. If we are not able to secure additional funding when needed, we may have to scale back our operations, delay or eliminate one or more of our research or development programs, or attempt to obtain funds by entering into an agreement with a collaborator or licensee that would result in terms that are not favorable to us or relinquishing our rights in certain of our proprietary technologies or drug candidates.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements other than those that are discussed above.

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Item 3.        Quantitative and Qualitative Disclosures About Market Risk

Our investments in marketable securities, which are composed primarily of U.S. government agency and non-agency mortgage-backed securities and money market funds, are subject to default, changes in credit rating and changes in market value. These investments are also subject to interest rate risk and will decrease in value if market rate interest rates increase. As of September 30, 2011, cash, cash equivalents and marketable securities were $317.0 million, excluding a funded restricted cash and investment escrow account of $28.5 million reserved for interest payments through October 2012 on our 4.75% convertible senior notes due 2015. Due to the nature of these investments, if market interest rates were to increase immediately and uniformly by 10% from levels as of September 30, 2011, the decline in fair value would not be material.

Item 4.        Controls and Procedures

Evaluation of disclosure controls and procedures.    We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting.    There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II:    OTHER INFORMATION

Item 1A.   Risk Factors

RISKS RELATING TO OUR LEAD PRODUCT RUXOLITINIB

If we are unable to successfully obtain regulatory approval for and commercialize ruxolitinib for the treatment of myelofibrosis or for additional indications, or if we are significantly delayed or limited in doing so, our business may be materially harmed.

In June 2011, we submitted a new drug application, or NDA, to the U. S. Food and Drug Administration, or FDA, for ruxolitinib for the treatment of myelofibrosis.  In August 2011, the FDA accepted the NDA and granted our request for priority review.  The FDA has a goal to complete the priority review within six months.  If the NDA is approved, we could begin to market ruxolitinib in the United States for the treatment of myelofibrosis as early as the fourth quarter of 2011.  Even if the NDA is approved, such approval does not guarantee future revenues.  The commercial success of ruxolitinib and our ability to generate and maintain revenues from the sale of ruxolitinib will depend on a number of factors, including:

·                  our ability to successfully launch commercial sales in the United States for the treatment of myelofibrosis;

·                  the number of patients with myelofibrosis who are diagnosed with the disease and identified to us and the number of patients with myelofibrosis that may be treated with ruxolitinib;

·                  the acceptance of ruxolitinib by patients and the healthcare community;

·                  whether physicians, patients and healthcare payors view ruxolitinib as therapeutically effective and safe relative to cost and

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any alternative therapies;

·                  the ability to obtain and maintain sufficient coverage or reimbursement by third-party payors;

·                  the ability of our third-party manufacturers to manufacture ruxolitinib in sufficient quantities with acceptable quality;

·                  the ability of our company and our third-party providers to provide marketing and distribution support for ruxolitinib;

·                  the label and promotional claims allowed by the FDA;

·                  the maintenance of regulatory approval for the treatment of myelofibrosis in the United States; and

·                  our ability to develop, obtain regulatory approval for and commercialize ruxolitinib in the United States for indications in addition to myelofibrosis.

If we receive regulatory approval for the sale of ruxolitinib but are not successful in commercializing sales of ruxolitinib in the United States, or are significantly delayed or limited in doing so, our business may be materially harmed and we may need to delay other product candidate initiatives or even significantly curtail operations.

In addition, whether or not we receive royalties under our collaboration agreement with Novartis for sales of ruxolitinib for the treatment of myelofibrosis outside of the United States will depend on the receipt of European marketing authorization and on factors similar to those listed above for jurisdictions outside of the United States.

If we receive regulatory approval to market ruxolitinib in the United States but are unable to obtain, or maintain at anticipated levels, reimbursement for ruxolitinib from government health administration authorities, private health insurers and other organizations, our pricing may be affected or our product sales, results of operations or financial condition could be harmed.

If we receive regulatory approval to market ruxolitinib in the United States, we may not be able to sell ruxolitinib on a profitable basis or our profitability may be reduced if we are required to sell ruxolitinib at lower than anticipated prices or reimbursement is unavailable or limited in scope or amount. Ruxolitinib is expensive and almost all patients will require some form of third party coverage to afford its cost. Our future revenues and profitability will be adversely affected if we cannot depend on government and other third-party payors to defray the cost of ruxolitinib to the patient. If these entities refuse to provide coverage and reimbursement with respect to ruxolitinib, determine to provide a lower level of coverage and reimbursement than anticipated, or reduce previously approved levels of coverage and reimbursement, then our pricing or reimbursement for ruxolitinib may be affected and our product sales, results of operations or financial condition could be harmed.

Changes in pricing or the amount of reimbursement for ruxolitinib may also reduce our profitability and worsen our financial condition. In the United States, there have been, and we expect there will continue to be, efforts to control and reduce healthcare costs. Government and other third-party payors are challenging the prices charged for healthcare products and increasingly limiting and attempting to limit both coverage and level of reimbursement for prescription drugs. A significant reduction in the amount of reimbursement or pricing for ruxolitinib in the United States may have a material adverse effect on our business.

We expect to be dependent upon a limited number of specialty pharmacies for a significant portion of any revenues from ruxolitinib, and the loss of, or significant reduction in sales to, any one of these specialty pharmacies could adversely affect our operations and financial condition.

If we receive regulatory approval for the sale of ruxolitinib in the United States, we plan to sell ruxolitinib to specialty pharmacies, which in turn will dispense ruxolitinib to patients in fulfillment of prescriptions. We do not intend to promote ruxolitinib to specialty pharmacies, and specialty pharmacies will not set or determine demand for ruxolitinib. Our ability to successfully commercialize ruxolitinib will depend, in part, on the extent to which we are able to provide adequate distribution of ruxolitinib to patients. Although we have contracted with a number of specialty pharmacies in preparation for the potential regulatory approval of ruxolitinib, such specialty pharmacies are expected generally to carry a very limited inventory and may be reluctant to be part of our distribution network in the future if demand for the product does not increase. Further, it is possible that these specialty pharmacies could decide to change their policies or fees, or both, at some time in the future. This could result in their refusal to carry smaller volume products such as ruxolitinib, or cause higher product costs, lower margins or the need to find alternative methods of distributing our product. Although we believe we can find alternative channels to distribute ruxolitinib on a relatively short notice, our revenue during that period of time may suffer and we may incur additional costs to replace any such specialty pharmacies. The loss of any large specialty

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pharmacies, a significant reduction in sales we make to specialty pharmacies, or any failure to pay for the products we have shipped to them could materially and adversely affect our results of operations and financial condition.

If we are unable to establish and maintain effective sales, marketing and distribution capabilities, or to enter into agreements with third parties to do so, we will not be able to successfully commercialize ruxolitinib.

We have no experience selling and marketing drug products and with pricing and obtaining adequate third-party reimbursement for drug products. Under our collaboration and license agreement with Novartis, we have retained commercialization rights to ruxolitinib in the United States. We have established commercial capabilities in the United States in preparation for the potential commercialization of ruxolitinib for the treatment of myelofibrosis, but cannot guarantee that we will be able to maintain our own capabilities or enter into and maintain any marketing, distribution or third-party logistics agreements with third-party providers on acceptable terms, if at all.  We may not be able to correctly judge the size and experience of the sales and marketing force and the scale of distribution capabilities necessary to successfully market and sell ruxolitinib. Establishing and maintaining sales, marketing and distribution capabilities are expensive and time-consuming.  Competition for personnel with experience in sales and marketing can be high.  Our expenses associated with building up and maintaining the sales force and distribution capabilities may be disproportional compared to the revenues we may be able to generate on sales of ruxolitinib. We cannot guarantee that we will be successful in commercializing ruxolitinib.

Our reliance on other parties to manufacture ruxolitinib could result in a short supply of ruxolitinib, increased costs, and withdrawal of regulatory approval.

We do not currently operate manufacturing facilities for commercial production of ruxolitinib. Accordingly, we will be subject to the risks described below under “— Other Risks Relating to Our Business —  Our reliance on other parties to manufacture our drug candidates could result in a short supply of the drugs, delays in clinical trials or drug development, increased costs, and withdrawal or denial of a regulatory authority’s approval.”

If we are able to secure regulatory approval to market ruxolitinib, and we fail to comply with continuing regulations, we could lose our approval to market ruxolitinib.

If we are able to secure regulatory approval to market ruxolitinib in the United States, we cannot guarantee that we will be able to maintain such regulatory approval. If we do not maintain our regulatory approval to market ruxolitinib, our results of operations will be materially harmed. We and our current collaborators, third-party manufacturers and suppliers are subject to rigorous and extensive regulation by the FDA and other federal and state agencies. These regulations continue to apply after product marketing approval, and cover, among other things, testing, manufacturing, quality control, labeling, advertising, promotion, risk mitigation, and adverse event reporting requirements.

If we succeed in obtaining regulatory approval for ruxolitinib, our commercialization of ruxolitinib will be subject to post-regulatory approval surveillance, and ruxolitinib may have to be withdrawn from the market or subject to restrictions if previously unknown problems occur. Regulatory agencies may also require additional clinical trials or testing for ruxolitinib, and ruxolitinib may be recalled or may be subject to reformulation, additional studies, changes in labeling, warnings to the public and negative publicity.

Failure to comply with the laws and requirements, including statutes and regulations, administered by the FDA or other agencies could result in:

·                  administrative and judicial sanctions, including, warning letters;

·                  fines and other civil penalties;

·                  withdrawal of a previously granted regulatory approval for ruxolitinib;

·                  interruption of production;

·                  operating restrictions;

·                  product recall or seizure;

·                  injunctions; and

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·                  criminal prosecution.

The occurrence of any such an event may have a material adverse effect on our business.

If the use of ruxolitinib harms patients, or is perceived to harm patients even when such harm is unrelated to ruxolitinib, our regulatory approval could be revoked or otherwise negatively impacted or we could be subject to costly and damaging product liability claims.

The testing of ruxolitinib, and if regulatory approval is obtained, the manufacturing, marketing and sale of ruxolitinib expose us to product liability and other risks. Side effects and other problems experienced by patients from the use of ruxolitinib could:

·                  lessen the frequency with which physicians decide to prescribe ruxolitinib;

·                  encourage physicians to stop prescribing ruxolitinib to their patients who previously had been prescribed ruxolitinib;