HARMONY BIOSCIENCES HOLDINGS, INC. Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. We
intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements other than statements of historical facts contained in this Quarterly
Report on Form 10-Q, including statements regarding our future results of
operations and financial position, the anticipated impact of the novel
coronavirus ("COVID-19") pandemic on our business, business strategy, products,
prospective products, product approvals, research and development costs,
anticipated timing and likelihood of success of clinical trials, expected timing
of the release of clinical trial data, the plans and objectives of management
for future operations and future results of anticipated products, are
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other important factors that may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. Important factors that could cause such differences include, but are
not limited to, statements about:
• our commercialization efforts and strategy for WAKIX;
• the rate and degree of market acceptance and clinical utility of WAKIX,
pitolisant in additional indications, if approved, and any other
product candidates we may develop or acquire, if approved;
• our research and development plans, including our plans to explore the
therapeutic potential of pitolisant in additional indications;
• our ongoing and planned clinical trials;
• our ability to expand the scope of our license agreement with
Société Civile de Recherche ("Bioprojet");
• the availability of favorable insurance coverage and reimbursement for WAKIX;
• the impact of the COVID-19 pandemic;
• the timing of, and our ability to obtain, regulatory approvals for
pitolisant for other indications as well as any other product
candidates;
• our estimates regarding expenses, future revenue, capital requirements
and needs for additional financing;
• our ability to identify additional products or product candidates with
significant commercial potential that are consistent with our
commercial objectives;
• our commercialization, marketing and manufacturing capabilities and strategy;
• significant competition in our industry;
• our intellectual property position;
• loss or retirement of key members of management;
• failure to successfully execute our growth strategy, including any
delays in our planned future growth;
• our failure to maintain effective internal controls; and
• the impact of government laws and regulations.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "expect," "plan," "anticipate," "could," "intend,"
"target," "project," "contemplate," "believe," "estimate," "predict,"
"potential", or "continue" or the negative of these terms or other similar
expressions. The forward-looking statements in this Quarterly Report on Form
10-Q are only predictions. We have based these forward-looking statements
largely on our current expectations and projections about future events and
financial trends that we believe may affect our business, financial condition
and results of operations. These forward-looking statements speak only as of the
date of this Quarterly Report on Form 10-Q and are subject to a number of
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important factors that could cause actual results to differ materially from those in the forward-looking statements, including the factors described under the sections in this Quarterly Report on Form 10-Q titled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.
Unless otherwise indicated, information contained in this Quarterly Report on Form 10-Q concerning our industry, including industry statistics and forecasts, competitive position and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and other third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data, and our experience in, and knowledge of, such industry and markets, which we believe to be reasonable. In addition, projections, forecasts, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements." These and other factors could cause results to differ materially from those expressed and forecasts in the estimates made by the independent parties and by us. You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
As used herein, the terms "Harmony," "we," "us," "our" and "the Company" refer
to
Company Overview
We are a commercial-stage pharmaceutical company focused on developing and
commercializing innovative therapies for patients living with rare neurological
disorders who have unmet medical needs. Our product, WAKIX (pitolisant), is a
first-in-class molecule with a novel mechanism of action ("MOA") specifically
designed to increase histamine signaling in the brain by binding to H3
receptors. In August 2019 , WAKIX was approved by the U.S. Food and Drug
Administration (the "FDA") for the treatment of excessive daytime sleepiness
("EDS") in adult patients with narcolepsy, and its U.S. commercial launch was
initiated in November 2019 . On October 13, 2020 , WAKIX was approved by the FDA
for the treatment of cataplexy in adult patients with narcolepsy. WAKIX is the
first-and-only approved product for patients with narcolepsy that is not
scheduled as a controlled substance by the Drug Enforcement Administration (the
"DEA").
We plan to pursue label expansion for WAKIX in narcolepsy in pediatric patients
and engage with the FDA in pursuit of pediatric exclusivity. Our strategic
partner, Bioprojet is evaluating pitolisant in pediatric patients with
narcolepsy in a Phase 3 trial. Bioprojet amended the protocol and increased the
number of patients in the trial which has pushed out the timeline for trial
completion and read out of the data. We and Bioprojet have decided to wait for
the read out of the data to inform how best to advance the pediatric narcolepsy
program. We believe that our strategic decision to wait for this data before
advancing the pediatric program is the most prudent and thoughtful path forward
from a development and financial perspective. In the meantime, we are continuing
to evaluate regulatory strategies with regard to obtaining pediatric
exclusivity. We anticipate providing an update on the path forward in the coming
months.
We believe that pitolisant's ability to regulate histamine gives it the
potential to provide therapeutic benefit in other rare neurological disorders
that are mediated through H3 receptors and histamine signaling. Beyond
narcolepsy, we are initially focusing on the treatment of EDS associated with
Prader-Willi Syndrome ("PWS") and myotonic dystrophy, otherwise known as
dystrophia myotonica ("DM"). In December 2020 , we initiated a Phase 2 clinical
trial to evaluate pitolisant for the treatment of EDS and other key symptoms in
patients with PWS and anticipate topline results from this trial in the first
half of 2022. We are also planning to commence a Phase 2 clinical trial in adult
patients with DM1 in the first half of 2021, with topline results expected in
the second half of 2022. Beyond these indications, we intend to further explore
pitolisant in other
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rare neurological disorders in which fatigue and cognitive impairment are prominent symptoms with significant impact on daily functioning.
We also seek to expand our pipeline through the acquisition of additional assets that focus on addressing the unmet needs of patients with neurological disorders. We intend to target assets that will be complementary to WAKIX and our expanding list of potential new indications for WAKIX, and/or assets that will allow us to further leverage the expertise and infrastructure that we have successfully built at Harmony. Pitolisant was developed byBioprojet and approved by theEuropean Medicines Agency ("EMA") in 2016 for the treatment of narcolepsy in adult patients with or without cataplexy. We acquired an exclusive license to develop, manufacture and commercialize pitolisant inthe United States pursuant to our license agreement withBioprojet (as amended, the "Bioprojet License Agreement") inJuly 2017 . Pitolisant was granted Orphan Drug Designation for the treatment of narcolepsy by the FDA in 2010. It received Breakthrough Therapy designation for the treatment of cataplexy in patients with narcolepsy and Fast Track status for the treatment of EDS and cataplexy in patients with narcolepsy inApril 2018 . Our operating subsidiary,Harmony Biosciences, LLC , was formed inMay 2017 . We were formed inJuly 2017 asHarmony Biosciences II, LLC , aDelaware limited liability company, and we converted to aDelaware corporation namedHarmony Biosciences II, Inc. inSeptember 2017 . InFebruary 2020 , we changed our name toHarmony Biosciences Holdings, Inc. Our operations to date have consisted of building and staffing our organization, acquiring the rights to pitolisant, raising capital, opening an investigational new drug applications ("IND") for pitolisant in narcolepsy, initiating an Expanded Access Program ("EAP") for pitolisant for appropriate patients with narcolepsy inthe United States , preparing and submitting our NDA for pitolisant, gaining NDA approval for WAKIX for the treatment of EDS or cataplexy in adult patients with narcolepsy, and launching and commercializing WAKIX inthe United States . In addition, we have opened INDs for development programs in PWS and DM and have initiated, or intend to initiate, clinical trials in PWS, DM and pediatric narcolepsy to pursue potential new indications.
Liquidity and Sources of Funding
For the three months endedMarch 31, 2021 , we generated$59.7 million of net product revenues. We have financed our operations primarily with (a) proceeds from sales of our convertible preferred stock, (b) borrowings under (i) our multi-draw term loan agreement (the "Loan Agreement") withCRG Servicing LLC ("CRG") and (ii) our credit agreement (the "Credit Agreement") withOrbiMed Royalty & Credit Opportunities III, LP ("OrbiMed"), and (c) proceeds from our initial public offering ("IPO") inAugust 2020 . As ofMarch 31, 2021 , we had cash, cash equivalents and restricted cash of$141.9 million and accumulated deficit of$480.8 million . As ofMarch 31, 2021 , we had outstanding debt, net of issuance costs, of$194.9 million . We believe that our anticipated cash from operating and financing activities and existing cash and cash equivalents will enable us to meet our operational liquidity needs and fund planned investing activities for the next twelve months. We have based this estimate on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we expect. See "-Liquidity and Capital Resources."
Our revenues and expenses in future quarters may differ from our expectations as we:
• commercialize WAKIX in
cataplexy in adult patients with narcolepsy;
• incur sales and marketing costs to support the commercialization of
WAKIX and any additional product candidates;
• pay royalties and make milestone payments to
of WAKIX;
• incur manufacturing costs for WAKIX and any additional product candidates;
• implement post-approval requirements related to WAKIX;
• conduct clinical trials in PWS, DM, and potential new indications for
pitolisant or any additional product candidates;
• conduct a pediatric narcolepsy program in pursuit of an indication and
extension of our patents based on pediatric exclusivity;
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• conduct earlier stage research and development activities for pitolisant;
• support independent investigator-initiated research for which there is
a valid scientific rationale;
• hire additional personnel;
• invest in measures to protect and expand our intellectual property;
• incur interest expenses in conjunction with our debt facility;
• seek regulatory approvals for pitolisant or any additional product
candidates that successfully complete clinical development;
• conduct additional clinical trials in pursuit of potential new
indications for pitolisant; acquire or in-license other assets and
technologies; and
• incur additional costs associated with being a public company.
Commercial Launch Metrics
As ofMarch 31, 2021 , over 2,700 unique healthcare professionals ("HCPs") (out of a total of approximately 8,000 HCPs who treat approximately 90% of diagnosed narcolepsy patients) have prescribed WAKIX since it became available inNovember 2019 . The average number of patients on WAKIX atMarch 31, 2021 was approximately 2,800. Additionally, as ofMarch 31, 2021 , we have secured formulary access for approximately 80% of all insured lives (Commercial, Medicare and Medicaid) inthe United States . Within these covered lives, we have observed favorable access to WAKIX subsequent to the expanded approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy inOctober 2020 .
COVID-19 Business Update
With the global impact of the COVID-19 pandemic, we have developed a response strategy that includes establishing cross-functional response teams and implementing business continuity plans to manage the impact of the pandemic on our employees, patients, HCPs, and our business. Despite our response strategy, the COVID-19 pandemic is having an effect on our business and the pharmaceutical industry in general, and is impacting the way stakeholders interact with one another during this pandemic. We continue to leverage technology and virtual engagement initiatives to offset our reduced in-person access to HCPs. The COVID-19 pandemic, which has led to high unemployment and corresponding loss of medical insurance, has caused a change in relationship dynamics between patients and their HCPs and has impacted the way patients take, or do not take, their medication. Based on these factors, we expect that the revenue growth rate in future quarters may be adversely impacted by the ongoing COVID-19 pandemic.
We continue to identify new and innovative ways to maintain meaningful engagement, generate awareness and educate our patients, HCPs and payors to minimize the pressure from the COVID-19 pandemic on our business and support our commercial launch performance.
Commercialization
With respect to our commercialization activities, we believe the COVID-19
pandemic is putting pressure on top-line prescription demand for WAKIX,
primarily due to (i) our field sales team's reduced ability to access HCPs in
person, and (ii) fewer patients seeing HCPs for prescriptions or treatments. The
impact on demand for WAKIX may also be related to a reduced ability of
prescribers to diagnose narcolepsy patients given the limitations in access to
sleep testing, the reduced ability to see patients due to (i) cancelled
appointments and (ii) the reprioritization of healthcare resources toward the
treatment of COVID-19, both of which lead to fewer prescriptions. Despite these
challenges, we continue to engage and educate HCPs virtually on the overall
benefit/risk profile of WAKIX and continue to provide support for people living
with narcolepsy. As offices, clinics and institutions have begun to allow
limited in-person interactions pursuant to health authority and local government
guidelines, our field teams continue to re-initiate in-person interactions with
HCPs and customers, but the timing and level of engagement vary by account and
region and may be adversely impacted in the future where reemergence or future
outbreaks of COVID-19 may occur.
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High unemployment and the corresponding loss of health insurance is causing some eligible patients to shift from commercial insurance to free goods and patient assistance programs, which impacts our ability to convert demand to revenue. Depending on the scale and ultimate duration of the COVID-19 pandemic and the extent of an economic slowdown, widespread unemployment and resulting loss of employer-sponsored insurance coverage, we may experience a shift from commercial payor coverage to government payor coverage or continued/increased demand for patient assistance and/or free drug programs, which could further impact our net revenue in the coming quarters.
Supply Chain
We currently expect to have adequate supply of WAKIX through the third quarter of 2022, with additional API on-hand inventory to support 18 to 24 months beyond this time frame. We are working closely with our third-party manufacturers, distributors and other partners to manage our supply chain activities and mitigate potential disruptions to our product supplies as a result of the COVID-19 pandemic. We believe that our access to the required production lines to produce additional API and WAKIX finished product throughout the next 12-18 months will not be directly impacted by the potential need to reprioritize manufacturing resources due to the production of materials utilized for COVID-19 vaccines. Our manufacturing partners inFrance andthe United States continue to be operational. If the COVID-19 pandemic persists for an extended period of time and/or begins to impact essential distribution systems such as transatlantic freight, FedEx,UPS and postal delivery, we could experience disruptions to our supply chain and operations with associated delays in the manufacturing and supply of our products.
Research and Development
The COVID-19 pandemic has negatively impacted the pharmaceutical industry's
ability to conduct clinical trials. While we initially experienced some
challenges due to the COVID-19 pandemic, we have taken measures and put
contingency plans in place in order to advance our clinical development
programs. We have implemented remote and virtual approaches to clinical trials,
including using telemedicine for remote clinic visits to perform efficacy
assessments and sending out licensed HCPs to each patient to collect safety
assessments (e.g. labs, electrocardiograms) as required by the protocols. We are
also performing remote site visits and data monitoring where possible. These
measures are being instituted with the intent of maintaining patient safety and
trial continuity while preserving study integrity. One unique challenge we are
facing is the ability to access sleep labs during the COVID-19 pandemic in order
to conduct objective sleep testing, which is required for some of our clinical
trials. In addition, we rely on contract research organizations ("CROs") or
other third parties to assist us with clinical trials, and we cannot guarantee
that they will continue to perform their contractual duties in a timely and
satisfactory manner as a result of the COVID-19 pandemic. If the COVID-19
pandemic continues and persists for an extended period of time, or reemerges in
the future, we could experience significant delays in our clinical development
timelines, which would adversely affect our business, financial condition,
results of operations and growth prospects.
Corporate Development and Other Financial Impacts
The COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of domestic and global financial markets. If the disruption persists and/or worsens, we may be unable to access additional capital, which could negatively affect our ability to execute on certain corporate development transactions or other important investment opportunities. The pandemic could also impact our ability to conduct in-person due diligence, negotiations, and other interactions to identify new opportunities. The COVID-19 pandemic has also affected, and continues to affect, our business operations and financial results. The extent of the impact of the COVID-19 pandemic on our ability to generate sales of, and revenues from, our approved products, our clinical development and regulatory efforts, our corporate development objectives and the value of and market for our common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of or reemergence of outbreaks, governmental travel restrictions, quarantines, social distancing and business closure requirements inthe United States ,France , and other countries, and the effectiveness of actions taken globally to contain and treat COVID-19.
Corporate Responsibility Impact
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We continue to provide support to our local communities, patient-focused organizations and other charitable organizations during the COVID-19 pandemic with relief efforts, including corporate donations, supplying food, medical supplies and other resources. For the safety and well-being of our employees, consultants and their families, during the COVID-19 pandemic, we have abided by government-issued work from home orders. We continue to clean and sanitize our offices on a regular basis and have implemented COVID-19 screening procedures and social distancing guidelines before allowing employees or guests to enter our offices. Financial Operations Overview Revenue We did not generate any revenue from inception until the fourth quarter of 2019. Our current product, WAKIX, was approved by the FDA for the treatment of EDS in adult patients with narcolepsy inAugust 2019 , became commercially available inNovember 2019 and was approved by the FDA for the treatment of cataplexy in adult patients with narcolepsy inOctober 2020 . For the three months endedMarch 31, 2021 and 2020, we had$59.7 million and$19.8 million , respectively, of net product revenue. The increase was due to the growing commercial sales of WAKIX which was launched onNovember 1, 2019 and the price increase of WAKIX in connection with the cataplexy indication approval in the fourth quarter of 2020. Total revenue consists of net sales of WAKIX. Net sales represent the gross sales of WAKIX less provisions for product sales discounts and allowances. At this time, these provisions include trade allowances, rebates to government and commercial entities, and discounts. Although we expect net sales to increase over time, the provisions for product sales discounts and allowances may fluctuate based on the mix of sales to different customer segments and/or changes in our accrual estimates.
Cost of Product Sales
Cost of product sales includes manufacturing and distribution costs, the cost of the drug substance, FDA program fees, royalties due to third parties on net product sales, freight, shipping, handling, storage costs and salaries of employees involved with production. We began capitalizing inventory upon FDA approval of WAKIX. Excluded from cost of product sold is amortization of acquired developed technology of$4.6 million and$1.8 million in the three months endedMarch 31, 2021 and 2020, respectively. Previously expensed inventory that was manufactured in anticipation for commercialization preapproval has not had a material impact on our historical results of operations and is not expected to have a material impact on future results of operations. Further, previously expensed inventory has not had a material impact on our gross margin percentage historically, and we do not anticipate a material impact on our gross margin percentage once our previously expensed inventories have been exhausted. Our cost of product sales is increasing moderately as we continue to ramp up production and sales infrastructure to meet expected demand for WAKIX. The shelf life of our product is three years from date of manufacture, with the earliest expiration of current inventory expected to beMay 2022 . We regularly review our inventory for obsolescence and expect write-offs from time to time. We will continue to assess obsolescence in future periods as demand for WAKIX and the rate of inventory turnover evolves.
Research and Development Expenses
Our research and development expenses have been applied toward the license of
the rights to pitolisant, the conduct of an Expanded Access Program ("EAP") to
provide appropriate patients with pitolisant at no cost as part of a clinical
trial to assess safety prior to the approval of WAKIX, the preparation of the
NDA, and the initiation of development programs for potential new indications
for pitolisant in patients with PWS and DM. We also have research and
development expenses related to our team of Medical Science Liaisons ("MSLs")
who interact with key opinion leaders, with a focus on the science, the role of
histamine in sleep-wake state stability and the novel mechanism of action of
pitolisant. In addition, our MSLs support our market access team with clinical
data presentations to payors upon request. Research and development costs are
expensed as incurred. We have significantly increased our research and
development efforts as we advance our clinical programs in PWS and DM, and
assess other product candidates to expand our pipeline. Research and development
expenses include:
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• employee-related expenses, such as salaries, share-based compensation,
benefits and travel expenses for our research and development
personnel;
• direct third-party costs such as expenses incurred under agreements
with CROs, and contract manufacturing organizations ("CMOs");
• manufacturing costs in connection with producing materials for use in
conducting clinical trials; other third-party expenses directly
attributable to the development of our product candidates; and
• amortization expense for assets used in research and development activities.
Currently, WAKIX is our only product and we do not currently track our internal research and development expenses on an indication-by-indication basis. A significant portion of our research and development costs are external costs, such as fees paid to CROs and CMOs, central laboratories, contractors, and consultants in connection with our clinical development activities. Internal expenses primarily relate to personnel, early research and consumable costs, which are deployed across multiple programs. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, milestone payments, and the cost of submitting an NDA to the FDA (and/or other regulatory authorities). We expect our research and development expenses to be significant over the next several years as we advance our current clinical development programs and prepare to seek regulatory approval for additional indications for pitolisant as well as potential new product candidates.
At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of any additional indications for pitolisant or other product candidates that we move forward for regulatory approval. There are numerous risks and uncertainties associated with developing product candidates, including uncertainty related to:
• the duration, costs and timing for clinical trials of our current
development programs and any further clinical trials related to new
product candidates;
• the sufficiency of our financial and other resources to complete the
necessary preclinical studies and clinical trials;
• the impact of the COVID-19 pandemic on the ability to initiate new
clinical trials and/or maintain the continuity of ongoing clinical
trials that could be impacted by future shelter-in-place orders and
needs of the health care system to focus on managing patients affected
by COVID-19;
• receiving Bioprojet's consent to pursue additional indications for
pitolisant;
• the acceptance of INDs for our planned clinical trials or future
clinical trials;
• the successful and timely enrollment and completion of clinical trials;
• the successful completion of preclinical studies and clinical trials;
• successful data from our clinical programs that support an acceptable
risk-benefit profile of our product candidates in the intended
populations;
• the receipt and maintenance of regulatory and marketing approvals from
applicable regulatory authorities;
• establishing agreements with third-party manufacturers for clinical
supply for our clinical trials and commercial manufacturing, if our
product candidate is approved;
• the entry into collaborations to further the development of our product
candidates;
• obtaining and maintaining patent and trade secret protection or
regulatory exclusivity for our product candidates; and
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• successfully launching our product candidates and achieving commercial
sales, if and when approved.
A change in the outcome of any of these variables with respect to the development of any of our programs or any product candidate we develop would significantly change the costs, timing and viability associated with the development and/or regulatory approval of such programs or product candidates.
Sales and Marketing Expenses
Our sales and marketing expenses have primarily been limited to the market development and launch activities of WAKIX for the treatment of EDS or cataplexy in adult patients with narcolepsy. Market development and commercial launch activities account for a significant portion of the overall company operating expenses and are expensed as they are incurred. Our sales and marketing expenses are increasing in the near- and mid-term to support our indications for the treatment of EDS or cataplexy in adult patients with narcolepsy and to expand our portfolio with the anticipated growth from potential additional indications.
Sales and marketing expenses include:
• employee-related expenses, such as salaries, share-based compensation,
benefits and travel expenses for our sales and marketing personnel;
• healthcare professional-related expenses, including marketing programs,
healthcare professional promotional medical education, disease
education, conference exhibits and market research;
• patient-related expenses, including patient awareness and education
programs, disease awareness education, patient reimbursement programs,
patient support services and market research;
• market access expenses, including payor education, specialty pharmacy
programs and services to support the continued commercialization of
WAKIX; and
• secondary data purchases (i.e. patient claims and prescription data),
data warehouse development and data management.
In addition, these expenses include external costs such as website development,
media placement fees, agency fees for patient, medical education and promotional
expenses, market research, analysis of secondary data, conference fees,
consulting fees and travel expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for our personnel in executive, legal, finance and accounting, human resources, investor relations, and other administrative departments. General and administrative expenses also consist of office leases, and professional fees, including legal, tax and accounting and consulting fees. We anticipate that our general and administrative expenses will increase in the future to support our continued commercialization efforts, ongoing and future potential research and development activities, and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees paid to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with the requirements of Nasdaq and theSEC , insurance and investor relations costs. If any of our current or future indication expansion programs or new product candidates obtainU.S. regulatory approval, we expect that we would incur significantly increased expenses associated with building a sales and marketing team.
Paragon Agreements
We were party to a management services agreement (the "Management Services Agreement") withParagon Biosciences, LLC ("Paragon"), effective onSeptember 22, 2017 through the consummation of our IPO, pursuant to which Paragon provided us with certain professional services. In exchange for services provided to us under the Management Services Agreement, we paid Paragon a management fee of$0.3 million per each calendar month. 29
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We are also party to a right-of-use agreement with Paragon whereby we have
access to and the right to use certain office space leased by Paragon in
Loss on Debt Extinguishment
Loss on debt extinguishment consists primarily of costs of extinguishment of debt during the period related to the prepayment of the Loan Agreement with CRG.
Other Income / Expense, Net
Other income / expense, net consists primarily of costs of the fair value of the warrants associated with the Credit Agreement we entered into with OrbiMed.
Interest Income / Interest Expense
Interest income / expense, net consists primarily of interest expense on debt facilities and amortization of debt issuance costs offset by interest income earned on our cash balances. Results of Operations
The following table sets forth selected items in our condensed consolidated statements of operations for the periods presented:
For the Three Months Ended March 31,
2021 2020
(In thousands)
Net product revenue $ 59,674 $ 19,840
Cost of product sales 10,409 3,474
Gross profit 49,265 16,366
Operating expenses:
Research and development 4,679 3,431
Sales and marketing 15,506 13,254
General and administrative 14,547 9,290
Total operating expenses 34,732 25,975
Operating income (loss) 14,533 (9,609 )
Loss on debt extinguishment - (22,639 )
Other expense, net (20 ) -
Interest expense, net (7,127 ) (6,372 )
Net income (loss) before provision for income taxes 7,386 (38,620 )
Provision for income taxes - -
Net income (loss) $ 7,386 $ (38,620 )
Net Product Revenue
Net product revenue increased by $39.8 million , or 200.8%, for the three months
ended March 31, 2021 compared to the same period in 2020. The increase was due
to the growing commercial sales of WAKIX which was launched on November 1, 2019
and the price increase of WAKIX in connection with the cataplexy indication
approval in the fourth quarter of 2020.
Cost of Product Sales
Cost of product sales increased by $6.9 million , or 199.6%, for the three months
ended March 31, 2021 compared to the same period in 2020. The increase was due
to the growing commercial sales of WAKIX, which was launched on November 1,
2019 . Cost of product sales is primarily comprised of the royalty payment to
Bioprojet .
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Research and Development Expenses
Research and development expenses increased by$1.2 million , or 36.4%, for the three months endedMarch 31, 2021 as compared to the same period in 2020. The increase was primarily due to clinical development work associated with PWS and DM.
Sales and Marketing Expenses
Sales and marketing expenses increased by$2.3 million , or 17.0%, for the three months endedMarch 31, 2021 as compared to the same period in 2020. The increase was primarily due to patient engagement and marketing activities.
General and Administrative Expenses
General and administrative expenses increased by$5.3 million , or 56.6%, for the three months endedMarch 31, 2021 as compared to the same period in 2020. This is primarily due to intangible asset amortization of the milestone payment made in connection with theFDA's approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy inOctober 2020 , stock compensation associated with new awards, and the additional cost of public company insurance, offset by fees paid to Paragon. Loss on Debt Extinguishment Loss on debt extinguishment decreased$22.6 million , or 100%, for the three months endedMarch 31, 2021 as compared to the same period in 2020 due to costs of extinguishment of debt during the period related to the prepayment of the Loan Agreement with CRG. Other Expense, Net
Other expense remained relatively flat for the three months ended
Interest Expense, Net Interest expense increased by$0.8 million , or 11.8%, for the three months endedMarch 31, 2021 , as compared to the same period in 2020 primarily due to payment of interest on the Loan Agreement and amortization of debt issuance costs compared to the payment of interest on the Credit Agreement and amortization of debt issuance costs. Income Taxes For interim periods, we estimate the annual effective income tax rate and apply the estimated rate to the year-to-date income or loss before income taxes. The effective income tax rate was 0.0% for all periods. Currently, we have recorded a full valuation allowance against our net deferred tax assets, primarily related to federal and state net operating losses.
Liquidity and Capital Resources
Overview To date, we have financed our operations primarily with (a) proceeds from sales of our convertible preferred stock, (b) borrowings under (i) our Loan Agreement with CRG and (ii) our Credit Agreement with OrbiMed, and (c) the proceeds from our IPO. From our inception throughMarch 31, 2021 , we have received aggregate proceeds of$345.0 million from sales of our convertible preferred stock. OnAugust 21, 2020 , we completed the IPO of our common stock, in which we sold 6,151,162 shares of our common stock, including 802,325 shares of our common stock pursuant to the underwriters' over-allotment option. The shares began trading on the Nasdaq Global Market onAugust 19, 2020 . The shares were sold at a price of$24.00 per share for net proceeds of approximately$135.4 million . As ofMarch 31, 2021 , we had cash, cash equivalents and 31
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restricted cash of$141.9 million and accumulated deficit of$480.8 million . As ofMarch 31, 2021 , we had outstanding debt, net of issuance costs, of$194.9 million . The condensed consolidated financial statements have been prepared as though we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred operating losses and negative cash flows from operations since inception resulting in an accumulated deficit of$480.8 million as ofMarch 31, 2021 . We believe that our anticipated cash from operating and financing activities and existing cash and cash equivalents will enable us to meet our operational liquidity needs and fund our planned investing activities for the next 12 months. We have based this estimate on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we expect. See "-Overview-Liquidity and Sources of Funding." OrbiMed Credit Agreement OnFebruary 28, 2019 , we entered into the Loan Agreement with CRG for an aggregate of$200.0 million of which$102.5 million was outstanding as ofDecember 31, 2019 . OnJanuary 9, 2020 , we entered into the Credit Agreement with OrbiMed for an aggregate of$200.0 million and paid off all of our obligations under the Loan Agreement. Borrowings under the Credit Agreement are collateralized by all of the Company's assets, excluding the intellectual property licensed through the Bioprojet License Agreement. At the time of prepayment or repayment of all or any portion of the principal of the OrbiMed Loan, the Company is required to pay an exit fee of 7.0% of the principal amount of the OrbiMed Loan prepaid, repaid, or required to be prepaid or repaid. The Credit Agreement matures onJanuary 9, 2026 and bears an interest rate of the greater of (a) LIBOR or (b) 2.00% per annum, plus 11.00% per annum. When the LIBOR rate is no longer used post-2021, the Prime Rate will be used in the determination of the interest rate. The Credit Agreement requires compliance with certain financial covenants, including minimum net revenue thresholds and cash balance requirements (which include maintaining minimum liquidity of$12.5 million ), and financial reporting requirements. We have been in compliance with the financial covenants under the Credit Agreement since it was entered into onJanuary 9, 2020 . The Credit Agreement also contains certain negative restrictive covenants that either limit our ability to, or require a mandatory prepayment in the event we, engage in new lines of business, incur additional indebtedness or liens, make certain investments, make certain payments, pay cash dividends, merge with other companies or consummate certain changes of control, acquire other companies, transfer or dispose of certain assets, liquidate or dissolve, amend certain material agreements, enter into sale and leaseback transactions, enter into various other specified transactions, and change our name, location, executive office or executive management without notice. Recent Milestone Payment Upon FDA approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy inOctober 2020 (the "Cataplexy Milestone Trigger Date"), we became obligated to make the$100.0 million milestone payment (the "Cataplexy Milestone Payment") toBioprojet pursuant to the terms of the Bioprojet License Agreement. Subsequently, inOctober 2020 , we made a payment toBioprojet of$2.0 million to extend the Cataplexy Milestone Payment due date to within 90 days of the Cataplexy Milestone Trigger Date. OnJanuary 6, 2021 , we made the$100.0 million Cataplexy Milestone Payment in full toBioprojet . Cash Flows
The following table sets forth a summary of our cash flows for the three months
ended
For the Three Months Ended March 31,
2021 2020
(In thousands)
Selected cash flow data
Cash provided by (used in):
Operating activities $ 12,530 $ (26,702 )
Investing activities (100,004 ) -
Financing activities 12 73,762
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Table of Contents Operating Activities Net cash provided by operating activities increased to$12.5 million for the three months endedMarch 31, 2021 as compared to net cash used in operation activities of$26.7 million for the same period in 2020. This decrease was primarily attributable to company revenue growth and net income associated with the commercialization of WAKIX. Net cash provided by operating activities for the three months endedMarch 31, 2021 consisted of our net income of$7.4 million adjusted for non-cash items of$3.3 million related to stock compensation expense and$4.6 million related to intangible amortization and fair value of warrants. Net cash used in operating activities for the three months endedMarch 31, 2020 consisted of our net loss of$38.6 million adjusted for non-cash items of$22.6 million associated with loss on extinguishment of debt and$3.0 million related to intangible amortization and fair value of warrants. Net working capital excluding cash decreased by$14.6 million due to company growth and the commercial launch of WAKIX.
Investing Activities
Net cash used in investing activities increased to$100.0 million for the three months endedMarch 31, 2021 as compared to$0.0 million for the same period in 2020. This change was primarily attributable to the$100.0 million milestone payment associated with the Bioprojet License Agreement.
Financing Activities
Net cash provided by financing activities for the three months endedMarch 31, 2021 was$0.0 million , as compared to$73.7 million for the same period in 2020. This change was primarily attributable to$194.2 million associated with the OrbiMed Credit Agreement net of issuance, offset with$120.9 million of repayment and exit fees associated with the CRG Loan Agreement.
Off-Balance Sheet Arrangements
For the three months ended
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of expenses during the reporting periods. In accordance with GAAP, we evaluate our estimates and judgments on an ongoing basis. Significant estimates include assumptions used in the determination of some of our costs incurred under our services type agreements and which costs are charged to research and development and general and administrative expense. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We define our critical accounting policies as those under GAAP that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. During the quarter covered by this report, there were no material changes to the accounting policies and assumptions previously disclosed, except as disclosed in Note 3 to the unaudited condensed consolidated financial statements contained herein. 33
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Recent Accounting Pronouncements
See Note 3 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for more information.
The JOBS Act
We are an "emerging growth company", or EGC, as defined in the Jumpstart Our Business Startups Act, or JOBS Act, of 2012. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to the JOBS Act. We will remain an EGC until the earliest of (i) the last day of our fiscal year (a) following the fifth anniversary of the completion of the initial public offering of our common stock, (b) in which we have total annual gross revenues of at least$1.07 billion or (ii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds$700.0 million as of the priorJune 30th and (iii) the date on which we have issued more than$1.0 billion in non-convertible debt securities over a three-year period.
Non-GAAP Financial Measures
In addition to our GAAP results, we provide certain non-GAAP metrics including adjusted net income and adjusted net income per share. We believe that the presentation of these measures provides important supplemental information to management and investors regarding our performance. These measurements are not a substitute for GAAP measurements, and the manner in which we calculate adjusted net income and adjusted net income per share may not be identical to the manner in which other companies calculate adjusted net income and adjusted net income per share. Management uses these non-GAAP measurements as an aid in monitoring our on-going financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against comparable companies.
EBITDA is intended to provide a measure of the Company's operating performance as it eliminates the effects of financing and capital expenditures. EBITDA consists of GAAP net loss excluding: (i) interest expense, (ii) income tax provision, (iii) depreciation and (iv) amortization of intangibles.
Non-GAAP adjusted net income (loss) and non-GAAP adjusted net income (loss) per
share are intended to provide an enduring, normalized view of net income and our
broader business operations that we expect to experience on an ongoing basis by
removing items which may be irregular, one-time, or non-recurring from net
income. This enables us to identify underlying trends in our business that could
otherwise be masked by such items.
Non-GAAP adjusted net income (loss) consists of GAAP net loss excluding: (i)
interest expense, (ii) income tax provision, (iii) depreciation, (iv)
amortization of intangibles, (v) stock-based compensation, (vi) loss on debt
extinguishment, and (vii) warrant expense.
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A reconciliation of GAAP net loss to non-GAAP adjusted net income (loss) appears in the table below (in thousands except share and per share data):
For the Three Months Ended March 31,
2021 2020
Net income (loss) $ 7,386 $ (38,620 )
Non-GAAP Adjustments:
Interest expense 7,127 6,372
Taxes - -
Depreciation 100 97
Amortization 4,579 1,786
EBITDA 19,192 (30,365 )
Additional Non-GAAP Adjustments:
Stock-based compensation expense 3,251 368
Loss on debt extinguishment - 22,639
Warrant expense - 1,146
Non-GAAP adjusted net income (loss) $ 22,443 $ (6,212 )
Accumulation of yield on preferred stock - (10,445 )
Non-GAAP adjusted net income (loss) available to
common stockholders 22,443 (16,657 )
GAAP reported net income (loss) per diluted share
(6.30 )
Non-GAAP adjusted net income (loss) per diluted share
(2.14 )
Weighted average number of shares of common stock
used in non-GAAP diluted per share 58,805,285 7,790,667
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