ADC Therapeutics SA (ADCT)

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

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements, including the notes thereto, included in this Annual Report. The following discussion includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements. See “Forward-Looking Statements.”

Overview

ADC Therapeutics is a commercial-stage global pioneer in the field of antibody drug conjugates (“ADCs”). The Company is advancing its proprietary ADC technology to transform the treatment paradigm for patients with hematologic malignancies and solid tumors. We have a validated and differentiated technology platform with multiple payloads, linkers and conjugation chemistry, enabling the design of next-generation potent ADCs with an enhanced therapeutic index. Our strategy is focused on expanding and maximizing the ZYNLONTA opportunity in hematology and pursuing our early-stage research portfolio in solid tumors. We are a pioneer and leader in the ADC field with specialized end-to-end capabilities for developing optimized ADCs. This includes a strong, integrated research & development organization and a validated technology platform with clinical-stage product candidates currently in the pipeline, multiple next-generation ADCs being developed and a proven executional track record that includes ZYNLONTA, the first PBD-based ADC receiving accelerated approval from the FDA, conditional approval from the European Commission and conditional approval from the NMPA in China for the treatment of relapsed or refractory DLBCL after two or more lines of systemic therapy.

In our hematology program, our flagship product, ZYNLONTA, a CD19-directed ADC, received accelerated approval from the U.S. Food and Drug Administration (“FDA”) conditional approval from the European Commission and

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conditional approval from the NMPA for the treatment of relapsed or refractory DLBCL after two or more lines of systemic therapy. We are seeking to continue expanding ZYNLONTA internationally, and into earlier lines of DLBCL and indolent lymphomas, including marginal zone lymphoma (“MZL”) and follicular lymphoma (”FL”), as a single agent and in combination through our LOTIS-5 confirmatory Phase 3 clinical trial and LOTIS-7 Phase 1b clinical trial as well as through investigator-initiated trials (“IITs”) at leading institutions. In addition, we are investigating a CD-22 targeted compound, ADCT-602, in collaboration with the MD Anderson Cancer Center in a Phase 1/2 IIT in relapsed or refractory B-cell acute lymphoblastic leukemia.

In our solid tumor program, we have early stage preclinical research programs, including a portfolio of next-generation investigational ADCs targeting Claudin-6, PSMA, NaPi2b, and ASCT2, the most advanced of which are PSMA and Claudin-6. In addition, we are advancing research with a range of payloads, linkers and conjugation technologies against undisclosed targets. The Company is seeking to maximize the value of its solid tumor program through strategic partnerships, collaborations and license arrangements for one or more of its research programs.

Results of Operations

The following table summarizes our results of operations for the years ended December 31, 2024 and 2023:

Revenue

Product Revenues, net

We generate product revenue through the sale of ZYNLONTA in the United States. Revenue is recognized when control is transferred to the customer at the net selling price, which includes reductions for gross-to-net (“GTN”) sales adjustments such as government rebates, chargebacks, distributor service fees, other rebates and administrative fees, sales returns and allowances and sales discounts. In the long term, we expect that our product revenue will increase as we execute our business strategy, although our product revenue may fluctuate from period to period based on a number of factors, including patient demand, as well as the timing, dose and duration, of patient therapy and customers’ buying patterns and GTN deductions. We expect a relatively consistent level of GTN sales adjustments as a percentage of gross sales, but may

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also experience variability in GTN sales adjustments due to additional information and actual experience such as actual rebate and return rates.

Product revenues, net, were $69.3 million for the year ended December 31, 2024 as compared to $69.1 million for the year ended December 31, 2023, an increase of $0.2 million, or 0.3%. The increase is primarily attributable to a higher selling price and favorability in prior period GTN sales adjustments, partially offset by lower sales volume.

License Revenue and Royalties

We generate license revenue and royalties from our strategic agreements for the development and commercialization of ZYNLONTA and other product candidates outside of the United States. Under these agreements, we receive upfront payments and are eligible for certain milestone payments and royalties. See “Item 1. Business—Material Contracts.” We are unable to predict the timing and amounts of license revenue and royalties as meeting milestones is subject to many factors outside of our control and we have limited control over our partners’ commercialization efforts.

License revenues and royalties were $1.6 million for the year ended December 31, 2024 as compared to $0.5 million for the year ended December 31, 2023, an increase of $1.1 million. The increase was attributable to increased royalty revenue from our exclusive license agreement with SOBI to develop and commercialize ZYNLONTA in all territories other than the United States, greater China, Singapore and Japan.

Cost of Product Sales

Cost of product sales primarily includes direct and indirect costs relating to the third-party manufacture and distribution of ZYNLONTA, royalties payable to a collaboration partner based on net product sales of ZYNLONTA and inventory write-downs. We expect that cost of product sales will increase over time as we sell through pre-approval inventory that was previously expensed prior to commercialization under U.S. GAAP. Factors such as inflation may increase our cost of product sales as a percentage of product revenue if we are not able to increase the price at which we sell ZYNLONTA to offset such increases in our cost of product sales.

Cost of product sales were $5.9 million for the year ended December 31, 2024 as compared to $2.5 million for the year ended December 31, 2023, an increase of $3.4 million, or 135.2%. The increase is primarily attributable to higher stability, shipping and storage costs of $1.8 million, a $1.1 million batch cancellation fee and $0.6 million of commercial inventory used for the validation at a new CMO facility which was expensed as a period cost.

Research and Development Expenses

The following table summarizes our research and development expenses for our major development programs for the years ended December 31, 2024 and 2023:

(1) ADCT-601 was discontinued in November 2024.

(2) As of December 31, 2024, Cami, ADCT-901 and ADCT-212 were included in Discontinued programs. For the year ended December 31, 2023 these programs were separately presented as major development programs. Prior periods have been recast to conform to the current period presentation.

(3) Includes third-party contracting and employee expenses, as well as expense for preclinical research, storage, shipping and lab consumables that span multiple programs.

Research and development expense consists primarily of employee related expenses, including share-based compensation expense; costs for production of preclinical and clinical-stage product candidates by CMOs; fees and other costs paid to contract research organizations in connection with the performance of preclinical studies and clinical trials; costs of related

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facilities, materials and equipment; external costs associated with obtaining intellectual property; depreciation; and upfront fees and achieved milestone payments associated with R&D collaboration arrangements.

Our research and development expense may fluctuate from period to period based on a number of factors, including the timing, progress and stage of clinical trials, costs associated with regulatory approval processes and manufacturing costs associated with commercialization activities prior to the receipt of regulatory approval.

Our R&D expenses were $109.6 million for the year ended December 31, 2024 as compared to $127.1 million for the year ended December 31, 2023, a decrease of $17.5 million, or 13.8%, as driven by the following programs and activities:

ZYNLONTA

Research and development expenses for ZYNLONTA were $58.3 million for the year ended December 31, 2024 as compared to $68.5 million for the year ended December 31, 2023, a decrease of $10.2 million, or 14.8%. The overall decrease was primarily due to a net decrease in external clinical trial costs of $5.1 million (decrease in costs associated with LOTIS 5 and other trials offset by an increase in LOTIS 7), lower professional fees of $2.4 million, lower employee expenses of $1.6 million and lower CMC costs of $0.7 million as a result of the implementation of productivity initiatives and focused investment in prioritized development programs.

ADCT-601

Research and development expenses for ADCT-601 were $17.6 million for the year ended December 31, 2024 as

compared to $10.8 million for the year ended December 31, 2023, an increase of $6.9 million, or 63.9%. The increase is

primarily attributable to higher patient enrollment and progress towards the completion of the study. The ADCT-601

program was discontinued in November 2024.

Preclinical product candidates and research pipeline

Research and development expenses associated with our preclinical product candidates and research pipeline were $17.3 million for the year ended December 31, 2024 as compared to $12.8 million for the year ended December 31, 2023, an increase of $4.5 million, or 35.2%. The increase is primarily attributable to increased spending on our research strategy, platform and pipeline initiatives including PSMA and ASCT2.

Discontinued programs

Research and development expenses associated with our discontinued programs including Cami, ADCT-901 and ADCT-212 have decreased to $5.1 million for the year ended December 31, 2024 from $21.7 million, a decrease of $16.7 million, or 76.7%. The decrease was attributable to decreased spending on Cami of $8.7 million, ADCT-212 of $4.6 million and ADCT-901 of $3.4 million.

Share-based compensation

Share-based compensation was $1.9 million for the year ended December 31, 2024 as compared to $4.0 million for the year ended December 31, 2023, a decrease of $2.0 million, or 51.4%. The decrease was driven by fluctuations in our share price as well as forfeitures of awards in connection with employee terminations.

Selling and Marketing Expenses

The following table summarizes our selling and marketing expenses for the year ended December 31, 2024 and 2023:

(1)Excludes share-based compensation expense (reversal).

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Selling and marketing costs (“S&M”) are expensed as incurred and are primarily attributable to commercialization of ZYNLONTA in the United States. S&M includes employee costs and share-based compensation expense for commercial employees and external costs related to commercialization (including professional fees, communication costs and IT costs, travel expenses and depreciation of property and equipment).

Selling and marketing expenses were $44.0 million for the year ended December 31, 2024 as compared to $57.5 million for the year ended December 31, 2023, a decrease of $13.4 million, or 23.4%. The net decrease in external costs and overhead was primarily attributable to a reduction of $12.0 million in marketing and advertising expenses as a result of cost cutting initiatives. The decrease in employee expenses was primarily due to lower wages and benefits of $2.3 million primarily due to decreased headcount, as well as lower recruitment costs of $0.2 million. The increase in share-based compensation expense of $0.6 million was primarily due to forfeitures of awards in connection with prior year employee terminations.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the year ended December 31, 2024 and 2023:

(1)Excludes share-based compensation expense.

General and administrative expense includes employee related costs (including wages, benefits and share-based compensation expense) for general and administrative employees, external costs (including, in particular, professional fees, legal fees and costs associated with maintaining patents and other intellectual property, communications costs and IT costs, facility expenses and travel expenses) and depreciation of property and equipment and right-of-use assets.

General and administrative expenses were $41.9 million for the year ended December 31, 2024 as compared to $48.4 million for the year ended December 31, 2023, an overall decrease of $6.5 million, or 13.5%. The decrease in external costs and overhead of $2.9 million was primarily related to lower professional fees of $1.5 million and lower insurance and IT costs of $1.3 million. The increase in employee expenses was primarily due to higher wages and benefits of $0.4 million and higher recruitment costs. The decrease in share-based compensation expense was primarily due to fluctuations in our share price as well as forfeitures of awards in connection with employee terminations.

Other Income (Expense)

Interest Income

Interest income includes interest received from banks on our cash balances. Our policy is to invest funds in a variety of capital preservation instruments, which may include all or a combination of cash and cash equivalents, short-term and long-term interest-bearing instruments, investment-grade securities, and direct or guaranteed obligations of the U.S. government.

Interest income was $12.3 million for the year ended December 31, 2024 as compared to $10.5 million for the year ended December 31, 2023, an increase of $1.7 million, or 16.4%. The increase was primarily due to higher yields received on our cash deposits.

Interest Expense

Interest expense is primarily related to the accretion of our deferred royalty obligation with HCR and the senior secured term loan facility. Interest expense was $50.2 million for the year ended December 31, 2024 as compared to $46.3 million for the year ended December 31, 2023, an increase of $3.9 million, or 8.4%. The increase was related to higher accretion of our deferred royalty obligation with HCR of $5.7 million as a result of the $73.1 million, net of transaction costs, received in June 2023 upon the first commercial sale of ZYNLONTA in the United Kingdom or any European Union country, which increased the liability. This was partially offset by lower interest on our senior secured term loan facility of $1.8 million as a result of a lower effective interest rate.

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Other, net

Other, net consists primarily of cumulative catch-up adjustments related to our deferred royalty obligation, changes in the fair value (gains or losses) of the Deerfield warrant obligation and the R&D tax credit from our UK operations.

Other, net as of December 31, 2024 and 2023 included the following:

Cumulative catch-up adjustment income, deferred royalty obligation

We periodically assess the expected payments to HCR based on our underlying revenue projections and to the extent the amount or timing of such payments is materially different than our initial estimates we will record a cumulative catch-up adjustment to the deferred royalty obligation. The adjustment to the carrying amount is recognized in Other, net as an adjustment in the period in which the change in estimate occurred. The cumulative catch-up adjustment income was $11.2 million for the year ended December 31, 2024 as compared to $5.0 million for the year ended December 31, 2023, a change of $6.2 million. The change was primarily due to revised revenue forecasts incorporated into the valuation model in 2024 having a greater effect on the expected payments to HCR relative to the 2023 revised revenue forecasts. Revisions in both years were primarily attributable to changes in assumptions in the Company’s updated strategic and development plans, revenue projections and associated timing thereof.

Income Tax Expense

We are subject to corporate taxation in Switzerland. We are also subject to taxation in other jurisdictions in which we operate, in particular, the United States and the United Kingdom, where our two wholly-owned subsidiaries are incorporated. We are entitled under Swiss laws to carry forward any losses incurred for a period of seven years, which could be used to offset future taxable income. We are also entitled under U.S. tax law to carry forward R&D tax credits for a period of up to 20 years, which could be used to offset future taxable income.

We recorded an income tax expense of $0.2 million for the year ended December 31, 2024 as compared to $39.1 million for the year ended December 31, 2023, primarily driven by our U.S. operations and the full valuation allowance recognized on our deferred tax assets.

Income tax expense associated with our U.S. and UK operations was $0.2 million for the year ended December 31, 2024 driven by current period income tax expense of $0.5 million and partially offset by US and UK tax returns true-up benefit of $0.3 million. Generally, current income tax is primarily due to our internal arrangements to reimburse our foreign subsidiaries in the U.S. and the United Kingdom for the services they render to our parent company in Switzerland. Commercial sales in the U.S. also contributed to the current period income tax expense. Ultimately, the net profit at each subsidiary is subject to local income tax. During the year ended December 31, 2024, with respect to our U.S. operations, current income tax expense of $0.3 million was recorded and no deferred tax expense was recorded due to full valuation allowance on deferred tax assets.

Comparatively, our income tax expense of $39.1 million recorded during the year ended December 31, 2023 was driven by the recognition of a $47.8 million valuation allowance on our deferred tax assets due to a change in our intercompany operating and transfer pricing model and estimates of future taxable income and losses. During the year ended December 31, 2023, with respect to our U.S. operations, a deferred tax expense of $37.1 million and current income tax expense of $1.5 million was recorded.

Equity in Net Losses of Joint Venture

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We recorded our proportionate share of Overland ADCT BioPharma’s net loss of $1.5 million and $5.5 million for the years ended December 31, 2024 and 2023, respectively. For the year ended December 31, 2024, we recorded our share of Overland ADCT BioPharma’s net loss up until the point at which our share of losses exceeded our interest in Overland ADCT BioPharma. Losses were not recognized in excess of our total investment, as we have not incurred legal or constructive obligations or committed to additional funding on behalf of the joint venture.

Liquidity and Capital Resources

As of December 31, 2024, we had cash and cash equivalents of $250.9 million and believe that our current cash position and capital resources are sufficient to fund our operation and meet capital requirements for at least the next twelve months from the date of filing this Annual Report on Form 10-K.

We plan to continue to fund our operating needs through our existing cash and cash equivalents, revenues from sales of ZYNLONTA, potential milestone and royalty payments under our licensing agreements and additional equity financings, debt financings and/or other forms of financing, as well as funds provided by collaborations. We are continuously exploring strategic collaborations, business combinations, licensing opportunities or similar strategies for our early-stage research pipeline and for clinical development and commercialization of ZYNLONTA and/or our product candidates. However, we may be unable to obtain such financing, licensing and collaboration arrangements on favorable terms, if at all, and if so we may need to prioritize our portfolio and reduce our investment in early stage research and development activities.

Sources of Liquidity and Capital Resources

To date, we have financed our operations primarily through equity financings, convertible debt and senior secured term loan financings, and additional funds provided by collaborations and royalty financings and sales of ZYNLONTA in the United States. For a description of the Loan Agreement, HCR Agreement and other license and collaboration agreements, see “Item 1. Business - Material Contracts.”

In May 2024, we completed an underwritten offering which resulted in net proceeds of approximately $97.4 million. In August 2024, we filed a prospectus relating to an at-the-market offering program, pursuant to which we may offer and sell our common shares from time to time with an aggregate offering price of $100 million, subject to share limitations, through Jefferies LLC acting as sales agent. To date, we have not sold any shares under the program.

Uses of Capital Resources

Our primary uses of capital are, and we expect will continue to be, research and development expenses, selling and marketing expenses, compensation and related expenses, interest and principal payments on debt obligations and other operating expenses. We expect to incur substantial expenses as we continue to devote substantial resources to research and development and marketing and commercialization efforts, in particular to grow ZYNLONTA in the 3L+ DLBCL setting, continue to study and advance ZYNLONTA in earlier lines of therapy and in combinations to potentially expand our market opportunity and further develop our pipeline and our ADC platform. Cash used to fund operating expenses is impacted by the timing of when we pay expenses, as reflected in the change in our outstanding accounts payable and accrued expenses, as well as the timing of collecting receivables from the sale of ZYNLONTA and paying royalties related to our deferred royalty obligation.

Contractual Obligations and Commitments

Our contractual obligations relate to our outstanding indebtedness under the Loan Agreement, as described above, and our lease agreements. For information relating to our scheduled maturities with respect to our lease liabilities and long-term debt see Note 6, “Leases” and Note 10, “Senior secured term loan facility and warrants”, respectively, included in the Notes to our audited consolidated financial statements.

We have future royalty obligations to HCR, under our royalty purchase agreement, which royalty payment amounts and timing is dependent on the future sales results of ZYNLONTA. See Note 12, “Deferred royalty obligation”, included in the Notes to our audited consolidated financial statements for further information.

For information relating to our non-cancelable obligations under third party manufacturing agreements see Note 14, “Commitments and contingencies”, included in the Notes to our audited consolidated financial statements.

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The Company has entered into various collaborations with development partners, including in-licensing and manufacturing agreements. These agreements provide for the Company to make potential future milestone and royalty payments that are conditional on success, and that are spread over various stages of development and commercialization, including filing an IND application, commencing or completing multiple clinical development stages, obtaining regulatory approval in multiple countries, and achieving various levels of commercial sales. Due to the nature of these arrangements, the future potential payments related to the attainment of the specified milestones are inherently uncertain, and accordingly, no amounts have been recorded for these future potential payments in the Company’s consolidated balance sheets as of December 31, 2024 and 2023. The aggregate amount of such potential milestone payments (excluding royalty payments), under all such collaboration agreements, was $212.2 million, including approximately $79.3 million contingent on the achievement of various research, development and regulatory approval milestones and approximately $132.9 million in sales-based milestones.

Cash Flows

The following table summarizes our cash flows for the years ended December 31, 2024 and 2023:

Net Cash Used in Operating Activities

Net cash used in operating activities increased to $123.8 million for the year ended December 31, 2024 from $118.7 million for the year ended December 31, 2023, an increase of $5.1 million. The increase in cash used in operating activities on a period over period basis was primarily due to the receipt of the $50.0 million in Sobi license milestone during the year ended December 31, 2023 which was recognized in revenue in December 2022 upon approval of the Marketing Authorisation Application by the European Commission for ZYNLONTA in 3L DLBCL as well as a decrease in deferred income taxes of $37.1 million, partially offset by the lower net loss for the period of $82.2 million attributable to a decrease in operating expenses and the timing of cash payments and receipts.

Net Cash Used in Investing Activities

Net cash used in investing activities decreased to $0.9 million for the year ended December 31, 2024 from $3.2 million for the year ended December 31, 2023, a decrease of $2.3 million. The decrease in net cash used in investing activities primarily relates to the timing of property and equipment purchases.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $97.1 million for the year ended December 31, 2024 and primarily related to the net proceeds received from the completion of the Company’s 2024 Equity Offering in May 2024. Net cash provided by financing activities was $73.9 million for the year ended December 31, 2023 and primarily related to the proceeds received under the deferred royalty obligation with HCR upon the first commercial sale of ZYNLONTA in the United Kingdom or any European Union country.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, and we do not currently have, any off-balance sheet arrangements.

Critical Accounting Estimates

A summary of the significant accounting policies is provided in Note 2 “Summary of significant accounting policies,” included in the notes to our audited consolidated financial statements.

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The preparation of financial statements in accordance with generally accepted accounting principles, or GAAP, 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.

We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on 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 and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions and conditions.

Management considers an accounting estimate to be critical if:

•it requires a significant level of estimation uncertainty; and

•changes in the estimate are reasonably likely to have a material effect on our financial condition or results of operations.

We believe the following critical accounting policies and estimates describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Product revenues, net

We generate revenue from sales of ZYNLONTA in the U.S. for the treatment of relapsed or refractory DLBCL. Revenue is recognized when control is transferred to the customer at the net selling price, which includes reductions for gross-to-net (“GTN”) sales adjustments such as government rebates, chargebacks, distributor service fees, other rebates and administrative fees, sales returns and allowances and sales discounts.

GTN sales adjustments involve significant estimates and judgment after considering factors including legal interpretations of applicable laws and regulations, historical experience and drug product analogs in the absence of Company experience, payer channel mix, current contract prices under applicable programs, unbilled claims and processing time lags and inventory levels in the distribution channel. We also use information from external sources to identify prescription trends, patient demand, average selling prices, discarded volumes and sales return and allowance data for the Company and analog drug products. Our estimates are subject to inherent limitations of estimates that rely on third-party information, as certain third-party information was itself in the form of estimates and reflect other limitations including lags between the date as of which third-party information is generated and the date on which we receive third-party information. Estimates will be assessed each period and adjusted as required to revise information or actual experience. In particular, the following rebate requires a substantial degree of judgement.

Discarded Drug Rebate

The Infrastructure Investment and Jobs Act requires manufacturers of certain single-source drugs separately paid for under Medicare Part B and marketed in single-dose containers or packages to provide annual refunds (“discarded drug rebate”), if those portions of the dispensed drug that are unused and discarded exceed an applicable percentage defined by statute or regulation. The Centers for Medicare & Medicaid Services (the “CMS”) finalized regulations to implement this section on November 18, 2022, and the provision went into effect on January 1, 2023. In particular, the estimate for the discarded drug rebate requires a substantial degree of judgement.

We began estimating and recording a provision for the discarded drug rebate as a GTN sales adjustment beginning in the first quarter of 2023. The provision is recorded to Other current liabilities or Other long-term liabilities depending on when the annual refunds are expected to come due. The significant assumptions used to estimate the discarded drug rebate include legal interpretations of applicable laws and regulations, historical experience with discarded volumes and time lags in the processing of claims and invoicing from CMS. We use a number of factors to estimate the discarded drug rebate, including information from external sources to identify the Company’s discarded volumes and information from CMS on discarded volumes. We have now received from CMS the first annual report and invoice for 2023, the payment of which has been paid in the first quarter of 2025, and was generally consistent with our estimate and no significant prior period adjustments were made. We will continue to rely on projection methodologies and expect annual reports to be received from CMS. Given the annual nature of the proposed reporting schedule we will continue to estimate periodically discarded drug rebate liabilities.

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Deferred royalty obligation

On August 25, 2021, we entered into a royalty purchase agreement with certain entities managed by Healthcare Royalty Partners (“HCR”). We accounted for the initial cash received as debt, less transaction costs and will subsequently account for the value of the debt at amortized cost. The amount received by us will be accreted to the total estimated royalty payments over the life of the agreement which will be recorded as interest expense. The carrying value of the debt will decrease for royalty payments made to HCR based on actual net sales and licensing revenue.

To determine the accretion of the liability related to the deferred royalty obligation, we are required to estimate the total amount of future royalty payments and estimated timing of such payment to HCR based on our revenue projections. The Company uses a third party valuation firm to assist in determining the total amount of future royalty payments and estimated timing of such payment to HCR using an option pricing Monte Carlo simulation model.

The significant assumptions used to estimate the HCR deferred royalty obligation accretion of the liability include the revenue projections and timing of payments. At each reporting period, we assess the expected payments to HCR based on its underlying revenue projections and to the extent the amount or timing of such payments is materially different than its initial estimates we will record a cumulative catch-up adjustment to the deferred royalty obligation. The adjustment to the carrying amount is recognized in earnings as an adjustment to Other, net in the period in which the change in estimate occurred.

The exact amount and timing of repayment is likely to be different each reporting period as compared to those estimated based on our revenue projections. A significant increase or decrease in actual net sales of ZYNLONTA compared to the Company’s revenue projections, as well as ZYNLONTA in other indications as well as licensing revenue could change the royalty rate and royalty cap due to HCR, which could materially impact the debt obligation as well as interest expense associated with the royalty purchase agreement. Also, our total obligation to HCR can vary depending on the achievement of the sales milestones as well as the timing of a change in control event.

Recently Issued and Adopted Accounting Pronouncements

Refer to Note 2, “Summary of significant accounting policies” to our audited consolidated financial statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Annual Report.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements, including the notes thereto, included in this Annual Report. The following discussion includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements. See “Forward-Looking Statements.”

Overview

ADC Therapeutics is a leading, commercial-stage global pioneer in the field of antibody drug conjugates (“ADCs”).

Our goal is to be a leading ADC company that transforms the lives of those impacted by cancer. To achieve this, we are focused on unlocking the potential value of our robust ADC portfolio across two pillars of growth: hematology and solid tumors. We are a pioneer in the ADC field with specialized end-to-end capabilities unique to ADCs including a validated technology platform, a growing next-generation research & development toolbox and a proven track record that includes an approved and marketed product. We aim to expand our portfolio and accelerate the development of our pipeline through targeted investments and in collaboration with strategic partners. In this way, we plan to pursue multiple targets in parallel, enabling us to prioritize and ensure disciplined capital allocation strategy while advancing the most promising candidates in both hematology and solid tumors.

In the hematology space, our flagship product, ZYNLONTA, a CD19-directed ADC, received accelerated approval from the U.S. Food and Drug Administration (“FDA”) and conditional approval from the European Commission for the treatment of relapsed or refractory diffuse large B-cell lymphoma (“DLBCL”) after two or more lines of systemic therapy. We are seeking to continue expanding ZYNLONTA into international markets throughout the world, and into earlier lines of DLBCL and other indolent lymphomas, including follicular lymphoma (”FL”) and marginal zone lymphoma MZL as a

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single and combination agent of choice through our LOTIS-5 confirmatory Phase 3 clinical trial and LOTIS-7 Phase1b clinical trial as well as through investigator-initiated trials (“IITs”) at leading institutions. In addition, we are investigating a CD-22 targeted compound, ADCT-602, in a Phase 1/2 investigator-initiated study in relapsed or refractory B-cell acute lymphoblastic leukemia.

In the solid tumor space, our clinical-stage pipeline consists of ADCT-601 (mipasetamab uzoptirine) targeting AXL as a single agent and/or in combination in sarcoma, pancreatic, and NSCLC. Our pre-clinical stage pipeline includes a portfolio of next generation investigational ADCs targeting Claudin-6, NaPi2b, PSMA and other undisclosed targets. In addition, we are advancing research with a range of payloads, linkers and conjugation technologies against undisclosed targets.

Results of Operations

The following table summarizes our results of operations for the year ended December 31, 2023 and 2022:

Revenue

Product Revenues, net

We generate product revenue through the sale of ZYNLONTA in the United States. Revenue is recognized when control is transferred to the customer at the net selling price, which includes reductions for gross-to-net (“GTN”) sales adjustments such as government rebates, chargebacks, distributor service fees, other rebates and administrative fees, sales returns and allowances and sales discounts. In the long term, we expect that our product revenue will increase as we execute our business strategy, although our product revenue may fluctuate from period to period based on a number of factors, including patient demand, as well as the timing, dose and duration, of patient therapy and customers’ buying patterns and gross-to-net deductions. We have experienced in 2023 higher GTN sales adjustments than we had previously recognized, including discarded drug and inflationary rebates. We expect to continue experiencing these level of GTN sales adjustments as a percentage of gross sales.

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Product revenues, net, decreased to $69.1 million for the year ended December 31, 2023 from $74.9 million for the year ended December 31, 2022, a decrease of $5.8 million, or 7.8%. The decrease is primarily attributable to higher GTN deductions due to the Infrastructure Investment and Jobs Act's requirement for manufacturers of certain single-source drugs separately paid for under Medicare Part B and marketed in single-dose containers to provide annual refunds ("discarded drug rebate") for unused drug, as well as lower volume due to changes in our commercialization model and increased competition, partially offset by a higher price.

License Revenue and Royalties

We generate license revenue and royalties from our strategic agreements for the development and commercialization of ZYNLONTA and other product candidates outside of the United States. Under these agreements, we receive upfront payments and are eligible for certain milestone payments and royalties. See “Item 1. Business—Material Contracts.” We are unable to predict the timing and amounts of license revenue and royalties as meeting milestones is subject to many factors outside of our control and we have limited control over our partners’ commercialization efforts.

License revenues and royalties decreased to $0.5 million for the year ended December 31, 2023 from $135.0 million for the year ended December 31, 2022. The decrease is primarily attributable to upfront and milestone payments under our exclusive license agreements with Sobi and MTPC that were recognized in 2022.

Operating Expenses

Cost of Product Sales

Cost of product sales primarily includes direct and indirect costs relating to the third-party manufacture and distribution of ZYNLONTA, royalties payable to a collaboration partner based on net product sales of ZYNLONTA and inventory write-downs. We expect that cost of product sales will increase on an absolute basis as product revenue increases and as we sell through pre-approval inventory that was previously expensed prior to commercialization under U.S. GAAP. Factors such as inflation may also increase our cost of product sales as a percentage of product revenue if we are not able to increase the price at which we sell ZYNLONTA to offset such increases in our cost of product sales.

Cost of product sales decreased to $2.5 million for the year ended December 31, 2023 from $3.3 million for the year ended December 31, 2022, a decrease of $0.8 million, or 23.4%. The decrease is primarily attributable to a reduction in costs related to the manufacturing of batches that did not meet our specifications.

Research and Development Expenses

The following table summarizes our research and development expenses for our major development programs for the years ended December 31, 2023 and 2022:

Research and development expense consists primarily of employee related expenses, including share-based compensation expense; costs for production of preclinical and clinical-stage product candidates by CMOs; fees and other costs paid to contract research organizations in connection with the performance of preclinical studies and clinical trials; costs of related facilities, materials and equipment; external costs associated with obtaining intellectual property; depreciation; and upfront fees and achieved milestone payments associated with R&D collaboration arrangements.

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We expect that research and development expense will decrease on an absolute basis in the near term as we continue our capital allocation optimization, but will continue to comprise the largest component of our overall operating expenses, although our research and development expense may fluctuate from period to period based on a number of factors, including the timing, progress and stage of clinical trials, costs associated with regulatory approval processes and manufacturing costs associated with commercialization activities prior to the receipt of regulatory approval.

Our R&D expenses decreased to $127.1 million for the year ended December 31, 2023 from $186.5 million for the year ended December 31, 2022, a decrease of $59.3 million, or 31.8%.

ZYNLONTA

Research and development expenses for ZYNLONTA decreased to $68.5 million for the year ended December 31, 2023 from $75.9 million for the year ended December 31, 2022, a decrease of $7.4 million. The decrease was due to higher cost sharing with our partners in clinical trial costs primarily resulting from the Sobi license agreement executed in July 2022. We also had lower clinical trial costs for LOTIS 3, LOTIS 6 and LOTIS 7, as well as lower professional fees related to ZYNLONTA for the year ended December 31, 2023 as a result of productivity initiatives and portfolio prioritization.

Cami

Research and development expenses for Cami decreased to $10.3 million for the year ended December 31, 2023 from $38.1 million for the year ended December 31, 2022, a decrease of $27.8 million. The decrease was primarily due to completion of the Phase 2 study in 2022 and our decision to pause the program while we evaluated FDA feedback.

ADCT-601

Research and development expenses for ADCT-601 increased to $10.8 million for the year ended December 31, 2023 from $8.1 million for the year ended December 31, 2022, an increase of $2.7 million. The increase is primarily attributable to higher patient enrollment and progress towards the completion of the study.

ADCT-901

Research and development expenses for ADCT-901 increased to $6.6 million for the year ended December 31, 2023 from $5.5 million for the year ended December 31, 2022, an increase of $1.1 million. This increase was primarily due to increased clinical trial expenses that resulted from increased enrollment and ongoing treatment and monitoring of currently enrolled and completed patients.

ADCT-212

Research and development expenses for ADCT-212 decreased to $4.8 million for the year ended December 31, 2023 from $19.2 million for the year ended December 31, 2022, a decrease of $14.4 million. The decrease is primarily attributable to a decrease in expenses related to IND enabling analytical work during the year ended December 31, 2023. We have re-prioritized the R&D pipeline to focus resources on the most advanced, lower risk value-generating programs and have therefore paused investments on this preclinical program.

Share-based compensation

Share-based compensation decreased to $4.0 million for the year ended December 31, 2023 from $17.4 million for the year ended December 31, 2022, a decrease of $13.5 million. The decrease was driven by decreases in our share price, forfeitures of awards in connection with employee terminations and the workforce reduction announced and put into effect during the second quarter of 2023.

Selling and Marketing Expenses

The following table summarizes our selling and marketing expenses for the year ended December 31, 2023 and 2022:

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(1)Excludes share-based compensation expense.

Selling and marketing costs (“S&M”) are expensed as incurred and are primarily attributable to commercialization of ZYNLONTA in the United States. S&M includes employee costs and share-based compensation expense for commercial employees and external costs related to commercialization (including professional fees, communication costs and IT costs, travel expenses and depreciation of property and equipment). We expect our S&M expenses to decrease as a percentage of revenue over time as we have transitioned to being a commercial-stage public organization and implemented a new go-to-market model in 2023 to help drive growth and optimize local area influence.

Selling and marketing expenses decreased to $57.5 million for the year ended December 31, 2023 from $69.1 million for the year ended December 31, 2022, a decrease of $11.6 million or 16.8%. The decrease in external costs and overhead was primarily attributable to $2.6 million in lower spend on marketing, analytics and expenses, including those expenses in the European Union relating to the commercial launch of ZYNLONTA. The decrease in employee expenses was primarily due to lower wages and benefits of $3.0 million. The decrease in share-based compensation expense of $6.1 million was primarily due to fluctuations in our share price, forfeitures of awards in connection with employee terminations and the commercial re-alignment announced and put into effect during the second quarter of 2023.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the year ended December 31, 2023 and 2022:

(1)Excludes share-based compensation expense.

General and administrative expense includes employee expenses (including share-based compensation expense) for general and administrative employees, external costs (including, in particular, professional fees, legal costs associated with maintaining patents and other intellectual property, communications costs and IT costs, facility expenses and travel expenses), general and administrative costs charged by related parties (including telecommunications costs), depreciation of property and equipment, depreciation of right-of-use assets and amortization of intangible assets.

General and administrative expenses decreased to $48.4 million for the year ended December 31, 2023 from $74.4 million for the year ended December 31, 2022, a decrease of $26.0 million, or 35.0%. The decrease in external costs and overhead was primarily due to lower insurance and IT costs of $4.1 million, as well as lower professional fees of $0.6 million, which primarily includes fees associated with the license agreement entered into with MTPC. The decrease in employee expenses was primarily due to lower wages and benefits of $1.8 million as well as lower temporary help and recruiting of $1.2 million. The decrease in share-based compensation expense was primarily due to fluctuations in our share price, the transition of a board member, forfeitures of awards in connection with terminations and the workforce reductions announced and put into effect during the second quarter of 2023.

Other Income (Expense)

Interest Income

Interest income includes interest received from banks on our cash balances. Our policy is to invest funds in a variety of capital preservation instruments, which may include all or a combination of cash and cash equivalents, short-term and long-term interest-bearing instruments, investment-grade securities, and direct or guaranteed obligations of the U.S. government.

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Interest income increased to $10.5 million for the year ended December 31, 2023 from $2.6 million for the year ended December 31, 2022, an increase of $8.0 million. The increase was due to higher yields received on our cash deposits during the year ended December 31, 2023.

Interest Expense

Interest expense is primarily related to the accretion of our deferred royalty obligation with HCR, the senior secured term loan facility and convertible loans. Interest expense increased to $46.3 million for the year ended December 31, 2023 from $36.7 million for the year ended December 31, 2022, an increase of $9.6 million, or 26.1%. The increase was related to higher interest expense due to the accretion of our deferred royalty obligation with HCR and senior secured term loans, offset by not having interest expense on our convertible loans as a result of the extinguishment on August 15, 2022.

Loss on Debt Extinguishment

On August 15, 2022, pursuant to an exchange agreement with Deerfield (the “Exchange Agreement”), Deerfield exchanged $115.0 million aggregate principal amount of the Company's senior secured convertible notes for warrants to purchase an aggregate of 4,412,840 common shares, an aggregate of 2,390,297 common shares and cash equal to $117.3 million. As a result of the Exchange Agreement, the Company recognized a loss on debt extinguishment of $42.1 million for the year ended December 31, 2022, which primarily consists of the difference between the fair value of the consideration transferred and the carrying value of the convertible loans, exit fee, as well as the unpaid interest payments through the maturity date. Any transaction costs related to the exchange are included as part of the calculation of the loss on debt extinguishment.

Other, net

Other, net consists primarily of changes in the fair value (gains or losses) of the convertible loan, other derivatives and warrant obligation; and cumulative catch-up adjustments related to our deferred royalty obligation.

Other, net as of December 31, 2023 and 2022 included the following:

Convertible Loans, Derivatives, Change in Fair Value Income

The change in fair value of the convertible loans derivatives was recognized as income of $25.7 million for the year ended December 31, 2022. The decreases in fair values of the embedded derivatives were primarily due to decreases in the fair value of the underlying shares during the period. The loan was exchanged on August 15, 2022. As a result, no income or expense was recognized during the year ended December 31, 2023.

Deerfield Warrant Obligation, Change in Fair Value Income

Pursuant to an Exchange Agreement with Deerfield entered into on August 15, 2022, the Company issued warrants to Deerfield to purchase an aggregate of 4,412,840 common shares. The Deerfield warrant obligation has been recorded at its initial fair value at the time the agreement was entered into on August 15, 2022 and is remeasured to fair value at the end of each reporting period. The income of $0.5 million and $11.5 million as a result of changes in the warrant obligation for the year ended December 31, 2023 and 2022, respectively, was primarily due to the decrease in fair value of the underlying shares during the respective period.

Cumulative catch-up adjustment, deferred royalty obligation

We periodically assess the expected payments to HCR based on our underlying revenue projections and to the extent the amount or timing of such payments is materially different than our initial estimates we will record a cumulative catch-up adjustment to the deferred royalty obligation. The adjustment to the carrying amount is recognized in Other, net as an

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adjustment in the period in which the change in estimate occurred. The cumulative catch-up adjustment decreased to $5.0 million for the year ended December 31, 2023 from $15.4 million for the year ended December 31, 2022, a decrease of $10.4 million, or 67.7%. The decrease was primarily due to revised revenue forecasts used in the valuation model.

Income Tax Expense

We recorded an income tax expense of $39.1 million for the year ended December 31, 2023 as compared to $0.2 million for the year ended December 31, 2022, primarily driven by our U.S. operations.

Income tax expense associated with our U.S. operations was $38.6 million for the year ended December 31, 2023 driven by the recognition of a $47.8 million valuation allowance on our deferred tax assets due to a change in our intercompany operating and transfer pricing model. Generally, current income tax is primarily due to our internal arrangements to reimburse our foreign subsidiaries in the U.S. and the United Kingdom for the services they render to our parent company in Switzerland. Commercial sales in the U.S. also contributed to the current period income tax expense. Ultimately, the net profit at each subsidiary is subject to local income tax. During the year ended December 31, 2023, with respect to our U.S. operations, a deferred tax expense of $37.1 million and current income tax expense of $1.5 million was recorded.

Comparatively, our income tax expense of $0.2 million recorded during the year ended December 31, 2022 was driven by $1.8 million of current income tax expense recorded in connection with US and UK operations, partially offset by $1.6 million of deferred income tax benefit related to various book to tax adjustments.

We are subject to corporate taxation in Switzerland. We are also subject to taxation in other jurisdictions in which we operate, in particular, the United States and the United Kingdom, where our two wholly-owned subsidiaries are incorporated. We are entitled under Swiss laws to carry forward any losses incurred for a period of seven years, which could be used to offset future taxable income. We are also entitled under U.S. tax law to carry forward R&D tax credits for a period of up to 20 years, which could be used to offset future taxable income.

In estimating future taxable income to assess the realizability of deferred tax assets, management develops assumptions including the amount of future net revenue and pre-tax operating income (loss) and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying business. Management notes that its projections of future taxable profits and losses rely on currently enacted law and are subject to revision if the U.S. legislates new tax law. As such, changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We record the effect of a tax rate or law change on our deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on our financial condition, results of operations or cash flows.

Equity in Net Losses of Joint Venture

We recorded our proportionate share of Overland ADCT BioPharma’s net loss of $5.5 million and $10.1 million for the years ended December 31, 2023 and 2022, respectively. The decrease in Overland ADCT BioPharma's net loss for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily attributable to lower R&D costs as the BLA submitted by Overland ADCT BioPharma has been accepted and granted priority review by the NMPA, as well as lower share-based compensation expense as a result of a workforce reduction for the year ended December 31, 2023. We also recorded a $0.6 million true-up during the year ended December 31, 2023 to align our proportionate share of Overland ADCT BioPharma's share-based compensation expense, which was lower than our estimate for the year ended December 31, 2022.

Liquidity and Capital Resources

As of December 31, 2023, we had cash and cash equivalents of $278.6 million. We believe that our current capital resources are sufficient to fund our operation and meet capital requirements for more than twelve months after the date of filing this Annual Report on Form 10-K.

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We plan to continue to fund our operating needs through our existing cash and cash equivalents, revenues from sales of ZYNLONTA, and potential milestone and royalty payments under our licensing agreements and additional equity financings, debt financings and/or other forms of financing, as well as funds provided by collaborations. We are also continuously exploring strategic collaborations, business combinations, licensing opportunities or similar strategies for clinical development and commercialization of ZYNLONTA and/or our product candidates.

Sources of Liquidity and Capital Resources

To date, we have financed our operations primarily through equity financings, convertible debt and senior secured term loan financings, and additional funds provided by collaborations and royalty financings and sales of ZYNLONTA in the United States. For a description of the Loan Agreement, HCR Agreement and other license and collaboration agreements, see “Item 1. Business - Material Contracts.”

Uses of Capital Resources

Our primary uses of capital are, and we expect will continue to be, research and development expenses, selling and marketing expenses, compensation and related expenses, interest and principal payments on debt obligations and other operating expenses. We expect to incur substantial expenses as we continue to devote substantial resources to research and development and marketing and commercialization efforts, in particular to grow ZYNLONTA in the 3L+ DLBCL setting, continue to study and advance ZYNLONTA in earlier lines of therapy and in combinations to potentially expand our market opportunity and further develop our pipeline and our ADC platform. Cash used to fund operating expenses is impacted by the timing of when we pay expenses, as reflected in the change in our outstanding accounts payable and accrued expenses, as well as the timing of collecting receivables from the sale of ZYNLONTA and paying royalties related to our deferred royalty obligation.

Contractual Obligations and Commitments

Our contractual obligations relate to our outstanding indebtedness under the Loan Agreement, as described above, and our lease agreements. For information relating to our scheduled maturities with respect to our lease liabilities and long-term debt see Note 6 Leases and Note 10 Senior secured term loan facility and warrants, respectively, included in the Notes to our audited consolidated financial statements.

We have future royalty obligations to HCR, under our royalty purchase agreement, which royalty payment amounts and timing is dependent on the future sales results of ZYNLONTA. See note 13 Deferred Royalty Obligation, included in the Notes to our audited consolidated financial statements for further information.

For information relating to our non-cancelable obligations under third party manufacturing agreements see Note 15 Commitments and Contingencies, included in the Notes to our audited consolidated financial statements.

The Company has entered into various collaborations with development partners, including in-licensing and manufacturing agreements. These agreements provide for the Company to make potential future milestone and royalty payments that are conditional on success, and that are spread over various stages of development and commercialization, including achieving preclinical proof of concept, filing an investigational new drug (“IND”) application, commencing or completing multiple clinical development stages, obtaining regulatory approval in multiple countries, and achieving various levels of commercial sales. Due to the nature of these arrangements, the future potential payments related to the attainment of the specified milestones are inherently uncertain, and accordingly, no amounts have been recorded for these future potential payments in the Company’s consolidated balance sheet as of December 31, 2023 and 2022. The aggregate amount of such potential milestone payments (excluding royalty payments), under all such collaboration agreements, was $372.5 million, including approximately $106.8 million contingent on the achievement of various research, development and regulatory approval milestones and approximately $265.7 million in sales-based milestones. A milestone associated with a collaboration agreement was achieved during December 2020, which the Company recorded as an R&D expense of $5.0 million within the consolidated statement of operation for the year ended December 31, 2020. The milestone continues to be recorded as an accrued expense on the consolidated balance sheet as of December 31, 2023 and December 31, 2022.

Cash Flows

The following table summarizes our cash flows for the years ended December 31, 2023 and 2022:

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Net Cash Used in Operating Activities

Net cash used in operating activities decreased to $118.7 million for the year ended December 31, 2023 from $138.3 million for the year ended December 31, 2022, a decrease of $19.6 million. The decrease was primarily due to the receipt of $50.0 million in Sobi license revenue recognized in December 2022 upon approval of the Marketing Authorisation Application by the European Commission for ZYNLONTA in third-line DLBCL which was received during the year ended December 31, 2023, as well as tax refunds received during the year ended December 31, 2023.

Net Cash Used in Investing Activities

Net cash used in investing activities increased to $3.2 million for the year ended December 31, 2023 from $0.7 million for the year ended December 31, 2022, an increase of $2.5 million. The increase in net cash used in investing activities primarily relates to purchases of property and equipment.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $73.9 million for the year ended December 31, 2023 and primarily related to the proceeds received under the deferred royalty obligation with HCR upon the first commercial sale of ZYNLONTA in the United Kingdom or any European Union country.

Net cash used in financing activities was $0.9 million for the year ended December 31, 2022. For the year ended December 31, 2022, we drew down $120.0 million principal amount of term loans under the Loan Agreement prior to transaction costs paid of $7.2 million during the year ended December 31, 2022. In addition, we received $6.1 million of proceeds, net of transaction costs paid during the year ended December 31, 2022, from the issuance of shares under the share purchase agreement. Additionally, we exchanged our senior secured convertible notes pursuant to the exchange agreement with Deerfield, resulting in $118.3 million (including exit fees and transaction costs) being used.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, and we do not currently have, any off-balance sheet arrangements.

Critical Accounting Estimates

A summary of the significant accounting policies is provided in Note 2 Summary of Significant Accounting Policies, included in the Notes to our audited consolidated financial statements.

The preparation of financial statements in accordance with generally accepted accounting principles, or GAAP, 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.

We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on 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 and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions and conditions.

Management considers an accounting estimate to be critical if:

•it requires a significant level of estimation uncertainty; and

•changes in the estimate are reasonably likely to have a material effect on our financial condition or results of operations.

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We believe the following critical accounting policies and estimates describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Product revenues, net

We generate revenue from sales of ZYNLONTA in the U.S. for the treatment of relapsed or refractory DLBCL, which was approved by the FDA on April 23, 2021 and launched shortly thereafter. We also generate product revenue from sales of products outside the US under license and supply arrangements with partners.

Revenue is recognized when control is transferred to the customer at the net selling price, which includes reductions for gross-to-net (“GTN”) sales adjustments such as government rebates, chargebacks, distributor service fees, other rebates and administrative fees, sales returns and allowances and sales discounts.

GTN sales adjustments involve significant estimates and judgment after considering factors including legal interpretations of applicable laws and regulations, historical experience and drug product analogs in the absence of Company experience, payer channel mix, current contract prices under applicable programs, unbilled claims and processing time lags and inventory levels in the distribution channel. We also use information from external sources to identify prescription trends, patient demand, average selling prices, discarded volumes and sales return and allowance data for the Company and analog drug products. Our estimates are subject to inherent limitations of estimates that rely on third-party information, as certain third-party information was itself in the form of estimates and reflect other limitations including lags between the date as of which third-party information is generated and the date on which we receive third-party information. Estimates will be assessed each period and adjusted as required to revise information or actual experience. In particular, the following rebate requires a substantial degree of judgement.

Discarded Drug Rebate

The Infrastructure Investment and Jobs Act requires manufacturers of certain single-source drugs separately paid for under Medicare Part B and marketed in single-dose containers or packages to provide annual refunds (“discarded drug rebate”), if those portions of the dispensed drug that are unused and discarded exceed an applicable percentage defined by statute or regulation. The Centers for Medicare & Medicaid Services (the “CMS”) finalized regulations to implement this section on November 18, 2022, and the provision went into effect on January 1, 2023. In particular, the estimate for the discarded drug rebate requires a substantial degree of judgement.

We began estimating and recording a provision for the discarded drug rebate as a GTN sales adjustment beginning in the first quarter of 2023, which is included in Other long-term liabilities due to the long-term nature of when the first annual refunds are expected to come due. The significant assumptions used to estimate the discarded drug rebate include legal interpretations of applicable laws and regulations, historical experience with discarded volumes and time lags in the processing of claims and invoicing from CMS. We use a number of factors to estimate the discarded drug rebate, including information from external sources to identify the Company’s discarded volumes, preliminary information from CMS on estimated discarded volumes, as well as legal interpretations of the payment limit amount and J-code billing unit used in the discarded drug rebate calculation. We will continue to rely on projection methodologies and expect annual reports for 2023 and 2024 to be received from CMS by the end of 2024 and 2025, respectively, with an expectation of first invoice payments being made in 2025. Given the annual nature of the proposed reporting schedule we will continue to estimate periodically discarded drug rebate liabilities.

Deferred royalty obligation

On August 25, 2021, we entered into a royalty purchase agreement with certain entities managed by Healthcare Royalty Partners (“HCR”). We accounted for the initial cash received as debt, less transaction costs and will subsequently account for the value of the debt at amortized cost. The amount received by us will be accreted to the total estimated royalty payments over the life of the agreement which will be recorded as interest expense. The carrying value of the debt will decrease for royalty payments made to HCR based on actual net sales and licensing revenue.

To determine the accretion of the liability related to the deferred royalty obligation, we are required to estimate the total amount of future royalty payments and estimated timing of such payment to HCR based on our revenue projections. The Company uses a third party valuation firm to assist in determining the total amount of future royalty payments and estimated timing of such payment to HCR using an option pricing Monte Carlo simulation model.

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The significant assumptions used to estimate the HCR deferred royalty obligation accretion of the liability include the revenue projections and timing of payments. At each reporting period, we assess the expected payments to HCR based on its underlying revenue projections and to the extent the amount or timing of such payments is materially different than its initial estimates we will record a cumulative catch-up adjustment to the deferred royalty obligation. The adjustment to the carrying amount is recognized in earnings as an adjustment to Other, net in the period in which the change in estimate occurred.

The exact amount and timing of repayment is likely to be different each reporting period as compared to those estimated based on our revenue projections. A significant increase or decrease in actual net sales of ZYNLONTA compared to the Company’s revenue projections, and regulatory approval and commercialization of Cami, as well as ZYNLONTA in other indications as well as licensing revenue could change the royalty rate and royalty cap due to HCR, which could materially impact the debt obligation as well as interest expense associated with the royalty purchase agreement. Also, our total obligation to HCR can vary depending on the achievement of the sales milestones as well as the timing of a change in control event.

Recently Issued and Adopted Accounting Pronouncements

Refer to Note 2 to our audited consolidated financial statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Annual Report.