HORIZON THERAPEUTICS PUBLIC LIMITED COMPANY The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements include, but are not limited to, statements concerning our strategy and other aspects of our future operations, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our medicines, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words "anticipates", "believes", "estimates", "expects", "intends", "may", "plans", "projects", "will", "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, "Risk Factors" in this report and in our other filings with theSecurities and Exchange Commission , orSEC . We do not assume any obligation to update any forward-looking statements.
Unless otherwise indicated or the context otherwise requires, references to
"Horizon", "we", "us" and "our" refer to
OUR BUSINESS
We are focused on the discovery, development and commercialization of medicines that address critical needs for people impacted by rare, autoimmune and severe inflammatory diseases. Our pipeline is purposeful: we apply scientific expertise and courage to bring clinically meaningful therapies to patients. We believe science and compassion must work together to transform lives. We have two reportable segments, the orphan segment and the inflammation segment, and our commercial portfolio is currently composed of 12 medicines in the areas of rare diseases, gout, ophthalmology and inflammation.
As of
Orphan
TEPEZZA® (teprotumumab-trbw), for intravenous infusion KRYSTEXXA® (pegloticase injection), for intravenous infusion RAVICTI® (glycerol phenylbutyrate) oral liquid PROCYSBI® (cysteamine bitartrate) delayed-release capsules and granules, for oral use ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous use UPLIZNA® (inebilizumab-cdon) injection, for intravenous use BUPHENYL® (sodium phenylbutyrate) tablets and powder, for oral use QUINSAIR™ (levofloxacin) solution for inhalation Inflammation PENNSAID® (diclofenac sodium topical solution) 2% w/w, or PENNSAID 2%, for topical use RAYOS® (prednisone) delayed-release tablets, for oral use DUEXIS® (ibuprofen/famotidine) tablets, for oral use VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use Acquisitions and Divestitures
Since
• In
manufacturing facility from
of OPKO Health, Inc., in Waterford, Ireland for $67.9 million .
• In
in which we acquired all of the issued and outstanding shares of Viela's
common stock for
acquisition was approximately $3.0 billion , including cash acquired of
$342.3 million .
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Impact of COVID-19
Beginning inMarch 2020 , many states and municipalities inthe United States took aggressive actions to reduce the spread of the COVID-19 pandemic, including limiting non-essential gatherings of people, ceasing all non-essential travel, ordering certain businesses and government agencies to cease non-essential operations at physical locations and issuing "shelter-in-place" orders which directed individuals to shelter at their places of residence (subject to limited exceptions). Similarly, the Irish government limited gatherings of people and encouraged employees to work from their homes. Vaccines and treatments have now enabled a resumption of more normal business practices and initiatives in many countries, includingthe United States andIreland , however the COVID-19 pandemic may continue to have a negative impact on our operations and net sales during 2022, including due to the emergence of new variants of the virus and potential actions to combat their transmission. In addition, our clinical trials have been and may in the future be affected by the COVID-19 pandemic as referred to below. Economic and health conditions inthe United States and across most of the world are continuing to change rapidly because of the COVID-19 pandemic. Although COVID-19 is a global issue that is altering business and consumer activity, the biopharmaceutical industry is considered a critical and essential industry inthe United States and many other countries and, therefore, we do not currently expect any government-imposed extended shut downs of suppliers or distribution channels, although our suppliers and other third parties on which we rely could be impacted by employee absences due to COVID-19 illnesses. While certain of our contract manufacturers are involved in manufacturing vaccines for COVID-19, we do not currently expect these activities to impact the future supply of our medicines. In respect of our medicines, we believe we have sufficient inventory of raw materials and finished goods and we expect patients to be able to continue to receive their medicines at a site of care, for our infused medicines, and from their current pharmacies, alternative pharmacies or, if necessary, by direct shipment from our third-party providers that have such capability, for our other medicines.
TEPEZZA
The launch of our infused medicine for thyroid eye disease, or TED, TEPEZZA, which was approved by theU.S. Food and Drug Administration , or FDA, onJanuary 21, 2020 , significantly exceeded our expectations. In early 2019, we initiated our pre-launch disease awareness, market development and market access efforts with multi-functional field-based teams beginning to engage with key stakeholders inJuly 2019 . We believe these pre-launch efforts, the severity and acute nature of TED, and a highly motivated patient population have generated significant demand for the medicine. While we experienced a much higher number of new patients in 2020 than our initial estimates, the impact from COVID-19 slowed the generation of TEPEZZA patient enrollment forms, which drive new patient starts. InDecember 2020 , pursuant to the Defense Production Act of 1950, or DPA,Catalent Indiana, LLC , or Catalent, was ordered to prioritize certain COVID-19 vaccine manufacturing, resulting in the cancellation of previously guaranteed and contracted TEPEZZA drug product manufacturing slots, which were required to maintain TEPEZZA supply. To offset the reduced slots, we accelerated plans to increase the production scale of TEPEZZA drug product at Catalent. InMarch 2021 , the FDA approved a prior approval supplement to the TEPEZZA biologics license application, or BLA (which was previously approved inJanuary 2020 ), giving us authorization to manufacture more TEPEZZA drug product in a batch resulting in an increased number of vials with each manufacturing slot. We commenced resupply of TEPEZZA to the market inApril 2021 . In addition, we received FDA approval inDecember 2021 for a second drug product manufacturer,Patheon Pharmaceuticals Inc. , or Patheon (the contract development and manufacturing services organization of Thermo Fisher Scientific). As a result of the prior supply disruption, we delayed the start of an FDA-required post-marketing study to evaluate safety of TEPEZZA in a larger patient population and retreatment rates relative to how long patients receive the medicine. The FDA-required post-marketing study was initiated in the fourth quarter of 2021. We also delayed the start of our planned TEPEZZA clinical trial in chronic TED and an exploratory trial of TEPEZZA in diffuse cutaneous systemic sclerosis. The TEPEZZA clinical trial in chronic TED was initiated in the third quarter of 2021, and the exploratory trial of TEPEZZA in diffuse cutaneous systemic sclerosis was initiated in the fourth quarter of 2021. In the first quarter of 2022, demand for TEPEZZA was negatively impacted by the omicron variant of COVID-19. The omicron variant resulted in significant employee absences in our commercial organization due to illness and also impacted operations at sites of care that infuse TEPEZZA and patient access to and willingness to visit healthcare providers. These events resulted in lower new patient enrollment forms for TEPEZZA, delays in new patients starting infusions and disruptions in therapy. These same events also impacted enrollment in the TEPEZZA clinical trial in chronic TED and we now expect data from this trial in the first half of 2023.
KRYSTEXXA and UPLIZNA
KRYSTEXXA is an infused medicine for uncontrolled gout and was also achieving rapid growth prior to the COVID-19 pandemic. While the vast majority of patients on therapy maintained therapy, many new patients delayed infusions due to shelter-in-place guidelines and patients voluntarily delaying visits to healthcare providers and infusion centers. While there continues to be some impact on demand for KRYSTEXXA, we have seen improvements as healthcare systems have adapted to cope with the pandemic and vaccines have been widely administered inthe United States . 30 -------------------------------------------------------------------------------- UPLIZNA is an infused medicine for neuromyelitis optica spectrum disorder, or NMOSD, and was acquired through the Viela acquisition inMarch 2021 . While there continues to be some impact on demand for UPLIZNA primarily due to limited patient access to healthcare providers and infusion centers, we have also seen improvements as healthcare systems have adapted to cope with the pandemic and vaccines have been widely administered inthe United States . Similar to TEPEZZA above, demand for KRYSTEXXA and UPLIZNA were also negatively impacted by the omicron variant of COVID-19 in the first quarter of 2022. The omicron variant resulted in significant employee absences in our commercial organization due to illness and also impacted operations at sites of care that infuse KRYSTEXXA and UPLIZNA and patient access to and willingness to visit healthcare providers. These events resulted in lower new patient enrollment forms for KRYSTEXXA and UPLIZNA, delays in new patients starting infusions and disruptions in therapy. Our other medicines Our other orphan segment medicines, RAVICTI, PROCYSBI and ACTIMMUNE, treat serious, chronic diseases with serious consequences if left untreated. It is therefore critical for patients to maintain therapy. Patient motivation to continue treatment is high, and therefore net sales for these three medicines were stable during 2020 and 2021, with less impact from COVID-19 compared to our other medicines. In regard to the inflammation segment, the impact of COVID-19 has significantly waned as healthcare systems have adapted to cope with the pandemic and vaccines have been widely administered inthe United States , thereby facilitating the return to mainly in-person engagement by our sales representatives with healthcare providers. In addition, with our HorizonCares program, most patients do not need to physically visit a pharmacy to obtain a prescription because the vast majority of these medicines are delivered to a patient's home through mail or local courier, depending on the participating pharmacy.
Clinical trials
Our clinical trials have been and may in the future be affected by COVID-19 or its variants. As referred to above, certain clinical trials for TEPEZZA were delayed due to the impact of the TEPEZZA supply disruption at Catalent, and more recently we experienced enrollment delays in our TEPEZZA clinical trial in chronic TED due to the impacts of the omicron variant of COVID-19. In addition, clinical site initiation and patient enrollment may be delayed due to staffing shortages or prioritization of hospital and healthcare resources toward COVID-19. Current or potential patients in our ongoing or planned clinical trials may also choose to not enroll, not participate in follow-up clinical visits or drop out of the trial as a result of, or a precaution against, contracting COVID-19. Further, some patients may not be able or willing to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Some clinical sites inthe United States have slowed or stopped further enrollment of new patients in clinical trials, denied access to site monitors or otherwise curtailed certain operations. Similarly, our ability to recruit and retain principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, may be adversely impacted. These events could delay our clinical trials, increase the cost of completing our clinical trials and negatively impact the integrity, reliability or robustness of the data from our clinical trials. We are continuing to actively monitor the possible impacts from the COVID-19 pandemic, including the emergence of new variants of the virus, and may take further actions to alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of patients. There is significant uncertainty about the duration and potential impact of the COVID-19 pandemic. This means that our results could change at any time and the contemplated impact of the COVID-19 pandemic on our business results and outlook represents our estimate based on the information available as of the date of this Quarterly Report on Form 10-Q.
Strategy
Horizon is a leading high-growth, innovation-driven, profitable biotech company.
We are focused on the discovery, development and commercialization of medicines
that address critical needs for people impacted by rare, autoimmune and severe
inflammatory diseases. Our three strategic goals are to: (i) maximize the value
of our on-market medicines through commercial execution and clinical investment;
(ii) expand our research and development, or R&D, pipeline through significant
internal investment and external business development; and (iii) build a global
presence in targeted international markets. Our vision is to build healthier
communities, urgently and responsibly, supported by our philosophy to make a
meaningful difference for patients and communities in need. We believe this
generates value for our multiple stakeholders, including our shareholders.
Our commercialization strategy for our on-market rare disease medicines,
including our key growth drivers TEPEZZA, KRYSTEXXA and UPLIZNA, includes
initiatives to increase awareness of the conditions each medicine is designed to
treat, enhancing efforts to identify target patients and, for TEPEZZA and
KRYSTEXXA, to promote earlier treatment; driving awareness of the benefits of
the medicines, including, for TEPEZZA, in the treatment of chronic TED, and for
UPLIZNA, increasing awareness of what differentiates our medicines from other
available therapies; optimizing timely access for patients to the medicines; and
maximizing the value of the medicines through investment in clinical trials.
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Our R&D strategy is to expand our pipeline of preclinical and clinical
development programs to drive sustainable growth, as well as maximizing the
benefit and value of our existing medicines through development programs. We are
(i) acquiring, licensing and developing medicines for indications that address
unmet needs in rare, autoimmune and severe inflammatory diseases, particularly
those in our therapeutic areas of focus; (ii) maximizing our pipeline candidates
through internal research and development; (iii) expanding our early-stage
pipeline through partnerships and collaborations; and (iv) continuing to build
out our research capabilities to generate discovery-stage candidates internally.
Our R&D pipeline includes more than 20 programs. We expect to initiate seven
clinical trials in 2022 and have initiated enrollment in two of them since the
start of the year.
The aim of our global expansion strategy is to build a global presence in
targeted international markets to support the planned launch of UPLIZNA in
Europe this year following our receipt of marketing authorization from the
European Commission in April 2022 , and potential approvals and commercial
launches in other markets, including Brazil , in the coming years, and to support
the potential approvals and commercial launches of TEPEZZA in Japan , Brazil and
other international markets over the next several years. We plan to use a
combination of direct marketing and partnerships for our global expansion
efforts and are establishing the infrastructure needed to support these
activities.
RESULTS OF OPERATIONS
Comparison of Three Months Ended
Consolidated Results
The table below should be referenced in connection with a review of the
following discussion of our results of operations for the three months ended
For the Three Months Ended
March 31, Change Change
2022 2021 $ %
(in thousands)
Net sales $ 885,245 $ 342,406 $ 542,839 159 %
Cost of goods sold 215,062 100,368 114,694 114 %
Gross profit 670,183 242,038 428,145 177 %
Operating expenses:
Research and development 103,132 57,693 45,439 79 %
Selling, general and administrative 372,734 331,992 40,742 12 %
Impairment of long-lived asset - 12,371 (12,371 ) (100 %)
Total operating expenses 475,866 402,056 73,810 18 %
Operating income (loss) 194,317 (160,018 ) 354,335 221 %
Other expense, net:
Interest expense, net (21,256 ) (13,460 ) (7,796 ) (58 %)
Foreign exchange gain (loss) 420 (848 ) 1,268 150 %
Other (expense) income, net (742 ) 3,224 (3,966 ) (123 %)
Total other expense, net (21,578 ) (11,084 ) (10,494 ) (95) %
Income (loss) before benefit for income taxes 172,739 (171,102 ) 343,841 201 %
Benefit for income taxes (31,522 ) (47,751 ) 16,229 34 %
Net income (loss) $ 204,261 $ (123,351 ) $ 327,612 266 %
Net sales. Net sales increased $542.8 million , or 159%, to $885.2 million during
the three months ended March 31, 2022 , from $342.4 million during the three
months ended March 31, 2021 . The increase in net sales during the three months
ended March 31, 2022 was primarily due to an increase in net sales in our orphan
segment of $576.8 million . Growth was primarily due to an increase in TEPEZZA
net sales of $499.4 million primarily due to the impact of the short-term supply
disruption in 2020 as described below, an increase in KRYSTEXXA net sales of
$34.0 million and an increase in UPLIZNA net sales of $28.6 million , partially
offset by a decrease in net sales in our inflammation segment of $34.0 million
when compared to the three months ended March 31, 2021 .
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The following table reflects net sales by medicine for the three months ended
Three Months Ended
March 31, Change Change
2022 2021 $ %
TEPEZZA $ 501,451 $ 2,065 499,386 NM
KRYSTEXXA 140,704 106,757 33,947 32 %
RAVICTI 78,257 72,817 5,440 7 %
PROCYSBI 49,571 43,363 6,208 14 %
ACTIMMUNE 31,435 28,763 2,672 9 %
UPLIZNA 30,477 1,873 28,604 NM
BUPHENYL 2,161 1,660 501 30 %
QUINSAIR 296 209 87 42 %
Orphan segment net sales $ 834,352 $ 257,507 $ 576,845 224 %
PENNSAID 2% 35,368 45,817 (10,449 ) (23 )%
RAYOS 13,487 15,272 (1,785 ) (12 )%
DUEXIS 1,123 19,465 (18,342 ) (94 )%
VIMOVO 915 4,345 (3,430 ) (79 )%
Inflammation segment net sales $ 50,893 $ 84,899 $ (34,006 ) (40 )%
Total net sales $ 885,245 $ 342,406 $ 542,839 159 %
Orphan Segment
TEPEZZA. Net sales increased $499.4 million to $501.5 million during the three
months ended March 31, 2022 , from $2.1 million during the three months ended
March 31, 2021 . Net sales primarily increased due to volume growth of
approximately $499.4 million . In December 2020 , pursuant to the DPA, Catalent
was ordered to prioritize certain COVID-19 vaccine manufacturing, resulting in
the cancellation of previously guaranteed and contracted TEPEZZA drug product
manufacturing slots in December 2020 , which were required to maintain TEPEZZA
supply. In March 2021 , the FDA approved a prior approval supplement to the
TEPEZZA biologics license application (which was previously approved in January
2020 ), giving us authorization to manufacture more TEPEZZA drug product in a
batch resulting in an increased number of vials with each manufacturing slot. We
commenced resupply of TEPEZZA to the market in April 2021 . Refer to the Impact
of COVID-19 section above for further information.
KRYSTEXXA. Net sales increased $34.0 million , or 32%, to $140.7 million during
the three months ended March 31, 2022 , from $106.7 million during the three
months ended March 31, 2021 . Net sales increased by approximately $22.9 million
due to volume growth and $11.1 million due to higher net pricing.
RAVICTI. Net sales increased $5.4 million , or 7%, to $78.2 million during the
three months ended March 31, 2022 , from $72.8 million during the three months
ended March 31, 2021 . Net sales increased by approximately $6.1 million due to
volume growth, partially offset by a decrease of approximately $0.7 million due
to lower net pricing.
PROCYSBI. Net sales increased $6.2 million , or 14%, to $49.5 million during the
three months ended March 31, 2022 , from $43.3 million during the three months
ended March 31, 2021 . Net sales increased by approximately $4.8 million due to
volume growth and $1.4 million due to higher net pricing.
ACTIMMUNE. Net sales increased $2.7 million , or 9%, to $31.4 million during the
three months ended March 31, 2022 , from $28.7 million during the three months
ended March 31, 2021 . Net sales increased by approximately $2.0 million due to
volume growth and $0.7 million due to higher net pricing.
UPLIZNA. Net sales increased $28.6 million to $30.5 million during the three
months ended March 31, 2022 , from $1.9 million during the three months ended
March 31, 2021 . Net sales increased by approximately $27.3 million due to volume
growth and $1.3 million due to higher net pricing. We began recognizing UPLIZNA
sales following our acquisition of Viela on March 15, 2021 . UPLIZNA revenue is
affected each reporting period by the changes in the estimate of variable
consideration included in the remeasurement of the refund liability for
shipments to Mitsubishi Tanabe Pharma Corporation , or MTPC. During the three
months ended March 31, 2022 , we recognized $1.6 million of revenue as a result
of the change in this estimate. The amount of variable consideration recognized
is dependent on MTPC's sales over which we have no direct control.
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--------------------------------------------------------------------------------Inflammation Segment
PENNSAID 2%. Net sales decreased$10.4 million , or 23%, to$35.4 million during the three months endedMarch 31, 2022 , from$45.8 million during the three months endedMarch 31, 2021 . Net sales decreased by approximately$7.8 million due to lower net pricing and$2.6 million due to lower sales volume. RAYOS. Net sales decreased$1.8 million , or 12%, to$13.5 million during the three months endedMarch 31, 2022 , from$15.3 million during the three months endedMarch 31, 2021 . Net sales decreased by approximately$1.5 million due to lower net pricing and$0.3 million due to lower sales volume. We have an exclusive license toU.S. patents and patent applications from Vectura Group plc covering RAYOS. Under our settlement agreement withTeva Pharmaceuticals Industries Limited (formerly known asActavis Laboratories FL, Inc. , which itself was formerly known asWatson Laboratories, Inc. -Florida ), or Teva, Teva may enter the market onDecember 23, 2022 , or earlier under certain circumstances. As a result, we expect our net sales for RAYOS to decline in future periods. DUEXIS. Net sales decreased$18.3 million , or 94%, to$1.1 million during the three months endedMarch 31, 2022 , from$19.4 million during the three months endedMarch 31, 2021 . Net sales decreased by approximately$16.8 million resulting from lower sales volume, primarily due to the impact of generic competition, and a decrease of approximately$1.5 million due to lower net pricing. VIMOVO. Net sales decreased$3.4 million , or 79%, to$0.9 million during the three months endedMarch 31, 2022 , from$4.3 million during the three months endedMarch 31, 2021 . Net sales decreased by approximately$2.8 million due to lower sales volume as a result of generic competition, which began in 2020, and$0.6 million due to lower net pricing.
The table below reconciles our gross to net sales for the three months ended
Three Months Ended Three Months Ended
March 31, 2022 March 31, 2021
Amount % of Gross Sales Amount % of Gross SalesGross sales$ 1,231.5 100.0 %$ 761.5 100.0 % Adjustments to gross sales: Prompt pay discounts (10.2 ) (0.8 )% (12.0 ) (1.6 )% Medicine returns (4.4 ) (0.3 )% (2.1 ) (0.3 )% Co-pay and other patient assistance (84.8 ) (6.9 )% (199.1 ) (26.1 )% Commercial rebates and wholesaler fees (51.3 ) (4.2 )% (63.1 ) (8.3 )% Government rebates and chargebacks (195.6 ) (15.9 )% (142.7 ) (18.7 )% Total adjustments (346.3 ) (28.1 )% (419.0 ) (55.0 )% Net sales$ 885.2 71.9 %$ 342.4 45.0 %
During the three months ended
On a quarter-to-quarter basis, our net sales have traditionally been lower in first half of the year, particularly in the first quarter, with the second half of the year representing a greater share of overall net sales each year. This is due to annual managed care plan changes and the re-setting of patients' medical insurance deductibles at the beginning of each year, resulting in higher co-pay and other patient assistance costs as patients meet their annual medical insurance deductibles during the first and second quarters, and higher net sales in the second half of the year after patients meet their deductibles and healthcare plans reimburse a greater portion of the total cost of our medicines. In addition, the TEPEZZA supply disruption as described above negatively impacted sales of TEPEZZA in the first quarter of 2021. Cost of Goods Sold. Cost of goods sold increased$114.7 million to$215.1 million during the three months endedMarch 31, 2022 , from$100.4 million during the three months endedMarch 31, 2021 . The increase in cost of goods sold was primarily due to an increase in royalty expense, an increase in inventory step-up expense and an increase in amortization expense. Royalty expense increased by$53.7 million primarily due to royalties payable on net sales of TEPEZZA, which increased significantly during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 due to higher net sales. Inventory step-up expense increased by$26.3 million related to UPLIZNA based on the acquired units of inventory sold during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Amortization expense increased$22.6 million primarily due to the acquisition of the UPLIZNA developed technology intangible asset inMarch 2021 . As a percentage of net sales, cost of goods sold (excluding amortization expense of$89.3 million during the three months endedMarch 31, 2022 and$66.4 million during the three months endedMarch 31, 2021 ) was 14% during the three months endedMarch 31, 2022 , compared to 11% during the three months endedMarch 31, 2021 . The increase in cost of goods sold as a percentage of net sales was primarily due to a change in the mix of medicines sold and increases in inventory step-up expense related to UPLIZNA as noted above. 34 -------------------------------------------------------------------------------- Research and Development Expenses. R&D expenses increased$45.4 million to$103.1 million during the three months endedMarch 31, 2022 , from$57.7 million during the three months endedMarch 31, 2021 . The increase was primarily attributable to a$19.8 million increase in clinical trial and manufacturing development costs reflecting increased activity in our R&D pipeline as well as the addition of Viela's medicine candidates and development programs following the acquisition of Viela inMarch 2021 and an increase of$13.5 million in employee-related costs.
We expect our R&D expenses to continue increasing significantly in future periods as a result of our on-going and planned clinical trials for our pipeline including new medicine candidates and development programs acquired in 2021.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased$40.7 million to$372.7 million during the three months endedMarch 31, 2022 , from$332.0 million during the three months endedMarch 31, 2021 . The increase was primarily attributable to costs associated with the commercialization of our medicines and global expansion initiatives. These include an increase of$51.2 million in marketing program costs, an increase of$12.7 million in employee-related costs and an increase of$4.3 million in consulting costs. This was partially offset by a decrease of$28.0 million in transaction costs which were incurred during the first quarter of 2021 relating to the Viela acquisition.
We expect our selling, general and administrative expenses to increase
significantly in future periods primarily due to continued support for our
Impairment of long-lived asset. During the three months endedMarch 31, 2021 , we recorded an impairment charge of$12.4 million as a result of vacating theLake Forest office. Interest Expense, Net. Interest expense, net, increased$7.8 million to$21.2 million during the three months endedMarch 31, 2022 , from$13.4 million during the three months endedMarch 31, 2021 . The increase was primarily due to an increase in interest expense of$7.9 million , primarily related to an additional$1.6 billion aggregate principal amount of term loans borrowed pursuant to an amendment to our Credit Agreement, the proceeds of which, in addition to a portion of our existing cash on hand, was used to pay the consideration for the Viela acquisition, and a decrease in interest income of$0.1 million . Refer to Note 13, Debt Agreements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. Benefit for Income Taxes. During the three months endedMarch 31, 2022 , we recorded a benefit for income taxes of$31.5 million compared to a benefit for income taxes of$47.8 million during the three months endedMarch 31, 2021 . The benefit for income taxes recorded during the three months endedMarch 31, 2022 , resulted primarily from tax benefits recognized on share-based compensation. 35
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Information by Segment
Refer to Note 11, Segment and Other Information, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of our segment operating income to our total income (loss) before benefit for income taxes for the three months endedMarch 31, 2022 and 2021. Orphan Segment The following table reflects our orphan segment net sales and segment operating income for the three months endedMarch 31, 2022 and 2021 (in thousands, except percentages). For the Three Months Ended March 31, 2022 2021 Change % Change Net sales $ 834,352 $ 257,507$ 576,845 224 % Segment operating income 351,514 1,054 350,460 NM
Segment operating income. Orphan segment operating income increased$350.4 million to$351.5 million during the three months endedMarch 31, 2022 , from$1.1 million during the three months endedMarch 31, 2021 . The increase was primarily attributable to an increase in net sales of$576.8 million as described above, partially offset by an increase in selling, general and administrative expenses of$112.8 million , an increase of$56.2 million in royalty expense primarily related to an increase in royalties payable on net sales of TEPEZZA and an increase in R&D expenses of$42.9 million during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase in selling, general and administrative expenses was mainly due to increases related to the commercialization of our medicines and global expansion initiatives. Inflammation Segment
The following table reflects our inflammation segment net sales and segment
operating income for the three months ended
For the Three Months Ended March 31,
2022 2021 Change % Change
Net sales $ 50,893 $ 84,899 $ (34,006 ) (40 %)
Segment operating income 15,349 42,680 (27,331 ) (64 %)
Segment operating income. Inflammation segment operating income decreased$27.3 million to$15.3 million during the three months endedMarch 31, 2022 , from$42.6 million during the three months endedMarch 31, 2021 . The decrease was primarily attributable to a decrease in net sales of$34.0 million as described above, partially offset by a decrease in selling, general and administrative expenses of$3.2 million . 36
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NON-GAAP FINANCIAL MEASURES
We provide certain non-GAAP financial measures, including EBITDA, or earnings before interest, taxes, depreciation and amortization, adjusted EBITDA, non-GAAP net income and non-GAAP earnings per share. These non-GAAP financial measures are intended to provide additional information on our performance, operations and profitability. Adjustments to our GAAP figures as well as EBITDA exclude acquisition/divestiture-related costs, manufacturing plant start-up costs and restructuring and realignment costs, as well as non-cash items such as share-based compensation, inventory step-up expense, depreciation and amortization, non-cash interest expense, long-lived assets impairment charges, loss on equity security investments and other non-cash adjustments. Certain other special items or substantive events may also be included in the non-GAAP adjustments periodically when their magnitude is significant within the periods incurred. We maintain an established non-GAAP cost policy that guides the determination of what costs will be excluded in non-GAAP measures. We believe that these non-GAAP financial measures, when considered together with the GAAP figures, can enhance an overall understanding of our financial and operating performance. The non-GAAP financial measures are included with the intent of providing investors with a more complete understanding of our historical financial results and trends and to facilitate comparisons between periods. In addition, these non-GAAP financial measures are among the indicators our management uses for planning and forecasting purposes and measuring our performance. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, non-GAAP financial measures used by other companies. Beginning in the fourth quarter of 2021, following consultation with the staff of theDivision of Corporation Finance of theU.S. Securities and Exchange Commission , we no longer exclude upfront and milestone payments related to license and collaboration agreements from our non-GAAP financial measures and its line-item components. For purposes of comparability, non-GAAP financial measures for the three months endedMarch 31, 2021 have been updated to reflect this change. The upfront and milestone payments related to license and collaboration agreements continue to be excluded from our segment operating income and from certain measures contained in our credit agreement that are relevant to, among other things, the calculation of the interest rate. Reconciliations of reported GAAP net income (loss) to EBITDA, adjusted EBITDA and non-GAAP net income, and the related per share amounts, were as follows (in thousands, except share and per share amounts): For the Three Months Ended March 31, 2022 2021 GAAP net income (loss) $ 204,261 $ (123,351 ) Depreciation (1) 5,852 4,451 Amortization and step-up: Intangible amortization expense (2) 89,260 66,369 Inventory step-up expense (3) 27,201 911
Interest expense, net (including amortization of debt discount and deferred financing costs)
21,256 13,460
Benefit for income taxes (31,522 ) (47,751 )
EBITDA 316,308 (85,911 )
Other non-GAAP adjustments:
Share-based compensation (4) 47,300 61,166
Loss on equity security investments (5) 4,646 -
Acquisition/divestiture-related costs (6) 1,589 49,108
Manufacturing plant start-up costs (7) 807 -
Restructuring and realignment costs (8) 537 6,093
Impairment of long-lived asset (9) - 12,371
Total of other non-GAAP adjustments 54,879 128,738
Adjusted EBITDA $ 371,187 $ 42,827
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For the Three Months Ended March 31,
2022 2021
GAAP net income (loss) $ 204,261 $ (123,351 )
Non-GAAP adjustments:
Depreciation (1) 5,852 4,451
Amortization and step-up:
Intangible amortization expense (2) 89,260 66,369
Amortization of debt discount and deferred
financing costs (10) 1,577 773
Inventory step-up expense (3) 27,201 911
Share-based compensation (4) 47,300 61,166
Loss on equity security investments (5) 4,646 -
Acquisition/divestiture-related costs (6) 1,589 49,108
Manufacturing plant start-up costs (7) 807 -
Restructuring and realignment costs (8) 537 6,093
Impairment of long-lived asset (9) - 12,371
Total of pre-tax non-GAAP adjustments (12) 178,769 201,242
Income tax effect of pre-tax non-GAAP adjustments
(11) (67,212 ) (73,129 )
Total non-GAAP adjustments (12) 111,557 128,113
Non-GAAP net income (12) $ 315,818 $ 4,762
Non-GAAP Earnings Per Share:
Weighted average ordinary shares - Basic 229,094,311 223,920,768
Non-GAAP Earnings Per Share - Basic
GAAP earnings (loss) per share - Basic $ 0.89 $ (0.55 )
Non-GAAP adjustments (12) 0.49 0.57
Non-GAAP earnings per share - Basic (12) $ 1.38 $ 0.02
Weighted average ordinary shares - Diluted
Weighted average ordinary shares - Basic 229,094,311 223,920,768
Ordinary share equivalents 6,859,007 10,190,012
Weighted average ordinary shares - Diluted 235,953,318 234,110,780
Non-GAAP Earnings Per Share - Diluted
GAAP earnings (loss) per share - Diluted $ 0.87 $ (0.55 )
Non-GAAP adjustments (12) 0.47 0.57
Non-GAAP earnings per share - Diluted (12) $ 1.34 $ 0.02
(1) Represents depreciation expense related to our property, plant, equipment,
software and leasehold improvements.
(2) Intangible amortization expenses are primarily associated with ourdeveloped technology related to TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI,
ACTIMMUNE, UPLIZNA, BUPHENYL, PENNSAID 2% and RAYOS.
(3) During the three months ended
cost of goods sold
inventory step-up expense related to UPLIZNA inventory revalued in
connection with the Viela acquisition. Refer to Note 5, Inventories, of the
Notes to Condensed Consolidated Financial Statements, included in Item 1 of
this Quarterly Report on Form 10-Q for further details.
(4) Represents share-based compensation expense associated with our stock
option, restricted stock unit and performance stock unit grants to our
employees and non-employee directors and our employee share purchase plan.
(5) We held investments in equity securities with readily determinable fair
values of
assets in the condensed consolidated balance sheet. For the three months
ended
due to the change in fair value of these securities.
(6) Primarily represents transaction and integration costs, including,advisory, legal, consulting and certain employee-related costs, incurred in
connection with our acquisitions and divestitures. Costs recovered from
subleases of acquired facilities and reimbursed expenses incurred under
transition arrangements for divestitures are also reflected in this line
item.
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(7) During the three months ended
manufacturing plant start-up costs related to the Waterford biologic drug
product manufacturing facility purchased from EirGen in July 2021 .
(8) Represents rent and maintenance charges as a result of vacating the leased
Lake Forest office in the first quarter of 2021.
(9) During the three months ended
asset impairment charge of
Lake Forest office.
(10) Represents amortization of debt discount and deferred financing costs
associated with our debt.
(11) Income tax adjustments on pre-tax non-GAAP adjustments represent the
estimated income tax impact of each pre-tax non-GAAP adjustment based on
the statutory income tax rate of the applicable jurisdictions for each
non-GAAP adjustment.
(12) As discussed above, following consultation with the staff of the Division
of Corporation Finance of the
no longer exclude upfront and milestone payments related to license and
collaboration agreements from our non-GAAP financial measures and its
line-item components. Adjusted EBITDA and non-GAAP net income for the
three months ended March 31, 2021 , includes $3.0 million of upfront and
milestone payments related to license and collaboration agreements. Theseamounts continue to be excluded from our segment operating income and from
certain measures contained in our credit agreement that are relevant to,
among other things, the calculation of the interest rate.
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LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES
As ofMarch 31, 2022 , we had retained earnings of$522.9 million . We expect that our sales and marketing expenses will continue to increase as a result of the commercialization of our medicines and global expansion initiatives, but we believe these cost increases will be more than offset by higher net sales and gross profits in future periods. Additionally, we expect that our R&D costs will continue to increase as we acquire or develop more development-stage medicine candidates and advance our candidates through the clinical development and regulatory approval processes. In particular, we expect to incur substantial costs in connection with advancing our pipeline of medicine candidates and development programs in on-going and planned clinical trials. Following the highly successful launch of TEPEZZA, which significantly exceeded our expectations, we are in the process of expanding our production capacity to meet anticipated future demand for TEPEZZA. As ofMarch 31, 2022 we had total purchase commitments, including the minimum annual order quantities and binding firm orders, withAGC Biologics A/S (formerly known as CMC Biologics A/S) for TEPEZZA drug substance of €96.0 million ($106.2 million converted at a Euro-to-Dollar exchange rate as ofMarch 31, 2022 of 1.1059), to be delivered throughMarch 2024 . We also expect to incur additional costs and to enter into additional purchase commitments in connection with our efforts to expand TEPEZZA production capacity in order to meet anticipated increases in demand.
Under our license agreement with
InJuly 2021 , we completed the purchase of a biologic drug product manufacturing facility from EirGen for$67.9 million . Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. We expect to incur approximately$35.0 million in capital expenditures through 2022 in order to complete the drug product facility. We are committed to invest as a strategic limited partner in four venture capital funds: Forbion Growth Opportunities Fund I C.V., Forbion Capital Fund V C.V.,Aisling Capital V, L.P. andRiverVest Venture Fund V, L.P. As ofMarch 31, 2022 , the total carrying amount of our investments in these funds was$24.8 million , which is included in other assets in the condensed consolidated balance sheet, and our total future commitments to these funds are$42.6 million . We have financed our operations to date through equity financings, debt financings and the issuance of convertible notes, along with cash flows from operations during the last several years. As ofMarch 31, 2022 , we had$1.6 billion in cash and cash equivalents and total debt with a book value of$2.6 billion and face value of$2.6 billion . We believe our existing cash and cash equivalents and our expected cash flows from our operations will be sufficient to fund our business needs for at least the next 12 months from the issuance of the financial statements in this Quarterly Report on Form 10-Q. We do not have any financial covenants or non-financial covenants that we expect to be affected by the economic disruptions and negative effects of the COVID-19 pandemic. We have a significant amount of debt outstanding on a consolidated basis. For a description of our debt agreements, refer to Note 13, Debt Agreements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q. This substantial level of debt could have important consequences to our business, including, but not limited to: making it more difficult for us to satisfy our obligations; requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund acquisitions, capital expenditures, R&D and future business opportunities; limiting our ability to obtain additional financing, including borrowing additional funds; increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions; limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and placing us at a disadvantage as compared to our competitors, to the extent that they are not as highly leveraged. We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness.
In addition, the indenture governing our 5.5% Senior Notes due 2027 and our Credit Agreement impose various covenants that limit our ability and/or our restricted subsidiaries' ability to, among other things, pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments, incur additional debt and issue certain preferred stock, incur liens on assets, engage in certain asset sales or merger transactions, enter into transactions with affiliates, designate subsidiaries as unrestricted subsidiaries; and allow to exist certain restrictions on the ability of restricted subsidiaries to pay dividends or make other payments to us.
During the three months endedMarch 31, 2022 , we issued an aggregate of 2,112,964 of our ordinary shares in connection with stock option exercises, the vesting of restricted stock units and performance stock units, and employee share purchase plan purchases. We received a total of$9.1 million in net proceeds in connection with such issuances. During the three months endedMarch 31, 2022 , we made payments of$115.1 million for employee withholding taxes relating to vesting of share-based awards. 40 -------------------------------------------------------------------------------- Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities, other than the indemnification agreements discussed in Note 15, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q.
Sources and Uses of Cash
The following table provides a summary of our cash position and cash flows for
the three months ended
For the Three Months Ended
2022 2021
Cash, cash equivalents and restricted cash $ 1,647,265 $
815,448
Cash provided by (used in):
Operating activities 215,791 (3,728 )
Investing activities (40,724 ) (2,729,499 )
Financing activities (110,037 ) 1,469,194
Operating Cash Flows
During the three months ended March 31, 2022 , net cash provided by operating
activities of $215.8 million were favorably impacted by higher net sales offset
by the timing of working capital cash flows.
During the three months ended March 31, 2021 , net cash used in operating
activities of $3.7 million was primarily attributable to payments made related
to patient assistance costs for our inflammation segment medicines and
government rebates for our orphan segment medicines, payments related to
selling, general and administrative expenses, including transaction costs
related to the Viela acquisition and payments related to R&D expenses, partially
offset by cash collections from gross sales, including TEPEZZA sales prior to
the supply disruption.
Investing Cash Flows
During the three months ended March 31, 2022 , net cash used in investing
activities of $40.7 million was primarily attributable to an upfront payment of
$25.0 million paid to Alpine Immune Sciences, Inc., or Alpine, in the first
quarter of 2022 relating to an exclusive license agreement entered into in
December 2021 and payments related to purchases of property, plant and equipment
of $14.2 million . Refer to Note 4, Acquisitions, Divestitures and other
Arrangements, of the Notes to Condensed Consolidated Financial Statements,
included in Item 1 of this Quarterly Report on Form 10-Q, for further details on
the Alpine license agreement.
During the three months ended March 31, 2021 , net cash used in investing
activities of $2,729.5 million was primarily attributable to payments for
acquisitions, net of $2,707.4 million which was primarily attributable to $2.6
billion paid in relation to the Viela acquisition, net of acquired cash. In
addition, we made a milestone payment of CHF50.0 million ($56.1 million when
converted using a CHF-to-Dollar exchange rate at the date of payment of 1.1228)
under our license agreement with Roche, during the first quarter of 2021.
Financing Cash Flows
During the three months endedMarch 31, 2022 , net cash used in financing activities of$110.0 million was primarily attributable to$115.1 million in payments of employee withholding taxes relating to share-based awards, partially offset by$9.1 million in proceeds from the issuance of ordinary shares in connection with stock option exercises. During the three months endedMarch 31, 2021 , net cash provided by financing activities of$1,469.2 million was primarily attributable to an additional$1.6 billion aggregate principal amount of term loans borrowed pursuant to an amendment to our Credit Agreement, the proceeds of which, in addition to a portion of our existing cash on hand, was used to pay the consideration for the Viela acquisition, partially offset by$128.3 million in payments of employee withholding taxes relating to share-based awards. 41 --------------------------------------------------------------------------------
Financial Condition as of
Developed technology and other intangible assets, net. Developed technology and other intangible assets, net, decreased$88.1 million , from$2,960.1 million as ofDecember 31, 2021 to$2,872.0 million as ofMarch 31, 2022 , primarily related to amortization of developed technology during the three months endedMarch 31, 2022 . In-process research and development. InApril 2022 , theEuropean Commission granted marketing authorization for UPLIZNA for the treatment of adult patients with NMOSD in theEuropean Union . As a result, we expect to reclass$70.0 million of in-process research and development to developed technology in the second quarter of 2022.Goodwill . AtSeptember 30, 2021 , we determined that an interim impairment analysis of the inflammation reporting unit's$56.2 million goodwill balance was warranted. The fair value of the inflammation reporting unit exceeded its carrying value by more than 30% as ofSeptember 30, 2021 , the interim testing date, resulting in no impairment. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10 percent decrease to the fair values of the reporting unit. A 10% decrease in fair value would reduce the excess of the reporting unit's fair value over its carrying value to approximately 19%. Our annual qualitative goodwill impairment test performed for both the orphan and inflammation reporting unit in the fourth quarter of 2021 did not indicate an impairment. While no impairment was recognized during the year endedDecember 31, 2021 , we anticipate that an impairment of the inflammation reporting unit's goodwill could occur in the next 12 to 18 months if the reporting unit does not achieve currently forecasted net sales and profitability estimates. These forecasts and estimates could be impacted by factors outside of our control, such as increased competition from an earlier than anticipated PENNSAID 2% generic entrant, which may result in impairment. Accrued expenses and other current liabilities. Accrued expenses and other current liabilities decreased$145.6 million , from$523.0 million as ofDecember 31, 2021 to$377.4 million as ofMarch 31, 2022 . This was primarily due to a decrease in payroll-related expenses of$63.7 million , a decrease in accrued upfront and milestone payments of$35.1 million and a decrease in accrued royalties of$21.7 million . Deferred tax liabilities, net. Deferred tax liabilities, net, decreased$55.7 million from$390.5 million as ofDecember 31, 2021 to$334.8 million as ofMarch 31, 2022 , primarily due to a benefit for income taxes recognized during the three months endedMarch 31, 2022 .
Contractual Obligations
As of
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance withU.S. GAAP principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. Certain of these policies are considered critical as these most significantly impact a company's financial condition and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results may vary from these estimates. During the three months endedMarch 31, 2022 , there have been no significant changes in our application of our critical accounting policies. A summary of our critical accounting policies is included in Item 7 to our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 42
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