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 a global biotechnology company 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 UPLIZNA® (inebilizumab-cdon) injection, for intravenous use ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous 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 VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use DUEXIS® (ibuprofen/famotidine) 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
The COVID-19 pandemic has continued 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 resulting disruptions in healthcare operations and employee absences among our commercial team. 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 because of the COVID-19 pandemic. Although COVID-19 is a global issue that has altered 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, KRYSTEXXA and UPLIZNA
In the first half of 2022, demand for TEPEZZA, KRYSTEXXA and UPLIZNA 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 these medicines and patient access to and willingness to visit healthcare providers. These events resulted in lower new patient enrollment forms, delays in new patients starting infusions and disruptions in therapy. These same events also impacted enrollment in the TEPEZZA clinical trial for chronic/low clinical activity score, or CAS, thyroid eye disease, or TED, and we now expect data from this trial in the first half of 2023. In addition, enrollment in our clinical trial of UPLIZNA in myasthenia gravis was recently impacted by the COVID-19 related lock-downs inChina which, combined with other negative impacts related to the conflict inUkraine , has delayed our expected timeline for topline data to 2024. Our other medicines Patient motivation to continue treatment remains high for our other orphan segment medicines, RAVICTI, PROCYSBI and ACTIMMUNE, and therefore net sales for these three medicines were stable during 2020, 2021 and the first half of 2022, with less impact from COVID-19 compared to our other medicines.
Clinical trials
Our clinical trials have been and may in the future be affected by COVID-19. As referred to above, we experienced enrollment delays in our TEPEZZA clinical trial in chronic/low CAS TED due to the impacts of the omicron variant of COVID-19 and in our UPLIZNA clinical trial in myasthenia gravis due to government ordered COVID-19 lock-downs inChina . 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 healthcare services are interrupted due to COVID-19. Some clinical sites inthe United States and other countries 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 such as omicron subvariants, 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, healthcare providers and our employees. 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. 32 --------------------------------------------------------------------------------
Strategy
Horizon is a leading high-growth, innovation-driven, profitable global biotechnology 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 rare disease 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/low CAS 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. Specifically, with respect to TEPEZZA, we are further expanding our commercial team and continuing to invest in our direct-to-consumer marketing activities, as well as refining our marketing and physician education strategies to address challenges we recently identified in driving adoption by ocular specialists and driving an urgency among ophthalmologists and endocrinologists to diagnose and refer TED patients. 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 R&D; (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, and we have initiated enrollment in three clinical trials 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 (i) planned launch of UPLIZNA in certain European markets this year following theEuropean Commission , or EC, issuing a legally binding decision based on the favorable recommendation of the Committee for Medicinal Products for Human Use, or CHMP, of theEuropean Medicines Agency , or EMA, to grant a Centralised Marketing Authorization, or CMA, for UPLIZNA for the treatment of adult patients with neuromyelitis optica spectrum disorder, or NMOSD, in theEuropean Union , or EU, inApril 2022 ; (ii) potential approvals and commercial launches of UPLIZNA in other markets, includingBrazil , in the coming years; and (iii) potential approvals and commercial launches of TEPEZZA inJapan ,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. 33 --------------------------------------------------------------------------------
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
June 30, Change Change
2022 2021 $ %
(in thousands)
Net sales $ 876,411 $ 832,548 $ 43,863 5 %
Cost of goods sold 230,216 200,995 29,221 15 %
Gross profit 646,195 631,553 14,642 2 %
Operating expenses:
Research and development 103,246 139,834 (36,588 ) (26 )%
Selling, general and administrative 398,221 355,204 43,017 12 %
Impairment of goodwill 56,171 - 56,171 100 %
Gain on sale of asset - (2,000 ) 2,000 100 %
Total operating expenses 557,638 493,038 64,600 13 %
Operating income 88,557 138,515 (49,958 ) (36 )%
Other expense, net:
Interest expense, net (21,409 ) (22,581 ) 1,172 5 %
Foreign exchange gain (loss) 28 (39 ) 67 172 %
Other expense, net (2,389 ) (262 ) (2,127 ) (812 )%
Total other expense, net (23,770 ) (22,882 ) (888 ) (4 )%
Income before expense (benefit) for income taxes 64,787 115,633 (50,846 ) (44 )%
Expense (benefit) for income taxes 3,813 (42,484 ) 46,297 109 %
Net income $ 60,974 $ 158,117 $ (97,143 ) (61 )%
Net sales. Net sales increased $43.9 million , or 5%, to $876.4 million during
the three months ended June 30, 2022 , from $832.5 million during the three
months ended June 30, 2021 . The increase in net sales during the three months
ended June 30, 2022 was primarily due to an increase in net sales in our orphan
segment of $94.8 million , partially offset by a decrease in net sales in our
inflammation segment of $50.9 million when compared to the three months ended
June 30, 2021 . Growth in our orphan segment was primarily due to an increase in
KRYSTEXXA net sales of $37.5 million , an increase in TEPEZZA net sales of $26.6
million and an increase in UPLIZNA net sales of $24.1 million .
34
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The following table reflects net sales by medicine for the three months ended
For the Three Months Ended
June 30, Change Change
2022 2021 $ %
TEPEZZA $ 479,814 $ 453,255 $ 26,559 6 %
KRYSTEXXA 167,755 130,317 37,438 29 %
RAVICTI 75,722 68,426 7,296 11 %
PROCYSBI 47,706 49,775 (2,069 ) (4 )%
UPLIZNA 38,598 14,475 24,123 167 %
ACTIMMUNE 29,989 27,777 2,212 8 %
BUPHENYL 1,387 2,262 (875 ) (39 )%
QUINSAIR 335 222 113 51 %
Orphan segment net sales $ 841,306 $ 746,509 $ 94,797 13 %
PENNSAID 2% 23,586 48,941 (25,355 ) (52 )%
RAYOS 11,150 13,406 (2,256 ) (17 )%
VIMOVO 299 1,582 (1,283 ) (81 )%
DUEXIS 70 22,110 (22,040 ) (100 )%
Inflammation segment net sales $ 35,105 $ 86,039 $ (50,934 ) (59 )%
Total net sales $ 876,411 $ 832,548 $ 43,863 5 %
Orphan Segment
TEPEZZA. Net sales increased $26.6 million , or 6%, to $479.8 million during the
three months ended June 30, 2022 , from $453.2 million during the three months
ended June 30, 2021 . Net sales increased by approximately $13.5 million due to
volume growth and $13.1 million due to higher net pricing. Net sales growth for
TEPEZZA was negatively impacted by the omicron variant of COVID-19 as described
above. We have recently begun executing on several opportunities to accelerate
growth, including significantly expanding the size of our TEPEZZA sales force to
allow our representatives more time with core TEPEZZA prescribers while
educating other key physicians about TED and TEPEZZA, and evolving our
commercial focus to improve the effectiveness of the team. We also continue to
invest significantly in direct-to-consumer advertising based on the returns we
have seen to date. However, it will take some time for these strategies to
contribute to TEPEZZA net sales growth.
KRYSTEXXA. Net sales increased $37.4 million , or 29%, to $167.8 million during
the three months ended June 30, 2022 , from $130.3 million during the three
months ended June 30, 2021 . Net sales increased by approximately $30.5 million
due to volume growth and $6.9 million due to higher net pricing.
RAVICTI. Net sales increased $7.3 million , or 11%, to $75.7 million during the
three months ended June 30, 2022 , from $68.4 million during the three months
ended June 30, 2021 . Net sales increased by approximately $4.4 million due to
volume growth and $2.9 million due to higher net pricing.
UPLIZNA. Net sales increased $24.1 million , or 167%, to $38.6 million during the
three months ended June 30, 2022 , from $14.5 million during the three months
ended June 30, 2021 . Net sales in the United States increased by $15.5 million ,
which was composed of an increase of $13.3 million due to higher sales volume
and $2.2 million due to higher net pricing. The remaining $8.6 million increase
in net sales relates to revenue from our international partners recognized
during the three months ended June 30, 2022 .
35
--------------------------------------------------------------------------------Inflammation Segment
Our interim goodwill impairment test in the second quarter of 2022 indicated an impairment of the inflammation reporting unit. As a result, we recognized an impairment charge of$56.2 million inJune 2022 representing the full amount of goodwill for the inflammation reporting unit. Refer to Note 8,Goodwill and intangible assets, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details. PENNSAID 2%. Net sales decreased$25.3 million , or 52%, to$23.6 million during the three months endedJune 30, 2022 , from$48.9 million during the three months endedJune 30, 2021 . Net sales decreased by approximately$20.0 million resulting from lower net pricing and by approximately$5.4 million due to lower sales volume. InMay 2022 ,Apotex Corp. and its affiliate,Apotex Inc. , or collectively Apotex, initiated an at-risk launch of a generic version of PENNSAID 2% inthe United States . We subsequently initiated patent infringement litigation against Apotex and Apotex agreed to a voluntary injunction against further sales of the generic product pending the outcome of a motion for summary judgment. The injunction prevents further sales by Apotex but does not prevent wholesalers from continuing to resell the initial generic product inventory Apotex sold to them prior to the injunction. The generic competition created pressure on our PENNSAID 2% sales, resulting in increased utilization of co-pay and other patient assistance programs for PENNSAID 2%, which negatively impacted net pricing. We expect our net sales for PENNSAID 2% to continue declining in future periods primarily due to generic competition and the planned wind down of our inflammation segment, as described below. RAYOS. Net sales decreased$2.3 million , or 17%, to$11.1 million during the three months endedJune 30, 2022 , from$13.4 million during the three months endedJune 30, 2021 . Net sales decreased by approximately$3.4 million due to lower net pricing, partially offset by an increase of$1.1 million due to higher 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. VIMOVO. Net sales decreased$1.3 million , or 81%, to$0.3 million during the three months endedJune 30, 2022 , from$1.6 million during the three months endedJune 30, 2021 . Net sales decreased by approximately$0.9 million due to lower sales volume as a result of generic competition and$0.4 million due to lower net pricing. DUEXIS. Net sales decreased$22.0 million , or 100%, to$0.1 million during the three months endedJune 30, 2022 , from$22.1 million during the three months endedJune 30, 2021 . Net sales decreased by approximately$19.8 million resulting from lower sales volume, primarily due to the impact of generic competition, and by approximately$2.2 million due to lower net pricing. Due to the impact of the at-risk launch of generic PENNSAID 2%, we are in the process of redeploying a portion of our inflammation commercial team to support our TEPEZZA expansion. We plan to wind down activities, including active promotion efforts and associated HorizonCares support, for our inflammation segment by the end of the year. As a result, we expect that sales volumes for PENNSAID 2% and RAYOS will decline significantly for the remainder of 2022.
The table below reconciles our gross to net sales for the three months ended
For the Three Months Ended For the Three Months Ended
June 30, 2022 June 30, 2021
Amount % of Gross Sales Amount % of Gross Sales
Gross sales $ 1,241.3 100.0 % $ 1,323.2 100.0 %
Adjustments to gross sales:
Prompt pay discounts (10.0 ) (0.8 )% (13.5 ) (1.0 )%
Medicine returns (7.8 ) (0.6 )% (5.5 ) (0.4 )%
Co-pay and other patient assistance (98.8 ) (8.0 )% (201.3 ) (15.2 )%
Commercial rebates and wholesaler fees (51.2 ) (4.1 )% (80.1 ) (6.1 )%
Government rebates and chargebacks (197.1 ) (15.9 )% (190.3 ) (14.4 )%
Total adjustments (364.9 ) (29.4 )% (490.7 ) (37.1 )%
Net sales $ 876.4 70.6 % $ 832.5 62.9 %
During the three months ended June 30, 2022 , co-pay and other patient assistance
costs, as a percentage of gross sales, decreased to 8.0% from 15.2% during the
three months ended June 30, 2021 , primarily due to a decreased proportion of
inflammation segment medicines sold. Due to the impacts described above with
respect to the inflammation segment, we expect co-pay and other patient
assistance costs to continue to decrease as a percentage of total gross sales.
36
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Cost of Goods Sold. Cost of goods sold increased $29.2 million to $230.2 million
during the three months ended June 30, 2022 , from $201.0 million during the
three months ended June 30, 2021 . The increase in cost of goods sold during the
three months ended June 30, 2022 compared to the three months ended June 30,
2021 , was primarily due to an increase in royalty and earnout expense and an
increase in inventory step-up expense. Royalty and earnout expense increased by
$15.6 million primarily due to royalties payable on net sales of TEPEZZA, which
increased in the three months ended June 30, 2022 compared to the three months
ended June 30, 2021 due to higher net sales. Inventory step-up expense increased
by $10.3 million related to UPLIZNA based on the acquired units of inventory
sold during the three months ended June 30, 2022 compared to the three months
ended June 30, 2021 . In addition, we recorded an $8.8 million inventory reserve
due to the impact of generic competition on PENNSAID 2% sales. As a percentage
of net sales, cost of goods sold (excluding intangible amortization expense of
$90.4 million during the three months ended June 30, 2022 and $88.3 million
during the three months ended June 30, 2021 ) was 16% during the three months
ended June 30, 2022 , compared to 14% during the three months ended June 30,
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.
Research and Development Expenses. R&D expenses decreased $36.6 million to
$103.2 million during the three months ended June 30, 2022 , from $139.8 million
during the three months ended June 30, 2021 . The decrease was primarily
attributable to recognition of a $40.0 million upfront payment in relation to
the agreement with Arrowhead Pharmaceuticals, Inc., or Arrowhead, during the
three months ended June 30, 2021 . This was partially offset by a $11.3 million
increase in clinical trial costs reflecting increased activity in our R&D
pipeline during the three months ended June 30, 2022 compared to three months
ended June 30, 2021 .
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$43.0 million to$398.2 million during the three months endedJune 30, 2022 , from$355.2 million during the three months endedJune 30, 2021 . The increase was primarily attributable to costs associated with the commercialization of our medicines and global expansion initiatives, including an increase of$36.1 million in marketing program costs. We expect our selling, general and administrative expenses to increase in future periods primarily due to continued support for ourU.S. commercial and global expansion activities. Impairment of goodwill. During the three months endedJune 30, 2022 , we recorded an impairment charge of$56.2 million in relation to our inflammation reporting unit. Refer to Note 8,Goodwill , of the Notes to the Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. Gain on sale of asset. During the three months endedJune 30, 2021 , gain on sale of asset represents a$2.0 million contingent consideration payment related to the sale of MIGERGOT in 2019. The contingent consideration was earned during the second quarter of 2021 and it was received inJuly 2021 . Expense (benefit) for Income Taxes. During the three months endedJune 30, 2022 , we recorded an expense for income taxes of$3.8 million compared to a benefit for income taxes of$42.5 million during the three months endedJune 30, 2021 . The expense for income taxes recorded during the three months endedJune 30, 2022 , resulted primarily from the mix of pre-tax income and losses incurred in various tax jurisdictions. 37
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Information by Segment
Refer to Note 11, Segment and Other Information, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of our segment operating income (loss) to our total income before expense (benefit) for income taxes for the three months endedJune 30, 2022 and 2021.
Orphan Segment
The following table reflects our orphan segment net sales and segment operating income for the three months endedJune 30, 2022 and 2021 (in thousands, except percentages). For the Three Months Ended June 30, 2022 2021 Change % Change Net sales$ 841,306 $ 746,509$ 94,797 13 % Segment operating income 315,075 321,235 (6,160 ) (2 %)
Segment operating income. Orphan segment operating income decreased$6.1 million to$315.1 million during the three months endedJune 30, 2022 , from$321.2 million during the three months endedJune 30, 2021 . The decrease was primarily attributable to an increase in selling, general and administrative expenses of$76.0 million , an increase in royalty expenses of$16.0 million and an increase in R&D expenses of$14.4 million , partially offset by an increase in net sales of$94.8 million as described above.
Inflammation Segment
The following table reflects our inflammation segment net sales and segment
operating (loss) income for the three months ended
For the Three Months Ended June 30,
2022 2021 Change % Change
Net sales $ 35,105 $ 86,039 $ (50,934 ) (59 %)
Segment operating (loss) income (6,552 ) 46,767 (53,319 ) (114 %)
Segment operating (loss) income. Inflammation segment operating (loss) income decreased$53.3 million to a$6.5 million operating loss during the three months endedJune 30, 2022 , from$46.8 million in operating income during the three months endedJune 30, 2021 . The decrease was primarily attributable to a decrease in net sales of$50.9 million as described above. 38
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Comparison of Six 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 six months ended
For the Six Months Ended
June 30, Change Change
2022 2021 $ %
(in thousands)
Net sales $ 1,761,656 $ 1,174,954 $ 586,702 50 %
Cost of goods sold 445,278 301,363 143,915 48 %
Gross profit 1,316,378 873,591 442,787 51 %
Operating expenses:
Research and development 206,378 197,527 8,851 4 %
Selling, general and administrative 770,955 687,196 83,759 12 %
Impairment of goodwill 56,171 - 56,171 100 %
Impairment of long-lived asset - 12,371 (12,371 ) (100 %)
Gain on sale of asset - (2,000 ) 2,000 100 %
Total operating expenses 1,033,504 895,094 138,410 15 %
Operating income (loss) 282,874 (21,503 ) 304,377 NM
Other expense, net:
Interest expense, net (42,665 ) (36,041 ) (6,624 ) (18 )%
Foreign exchange gain (loss) 448 (887 ) 1,335 151 %
Other (expense) income, net (3,131 ) 2,962 (6,093 ) (206) %
Total other expense, net (45,348 ) (33,966 ) (11,382 ) (34 %)
Income (loss) before benefit for income taxes 237,526 (55,469 ) 292,995 528 %
Benefit for income taxes (27,709 ) (90,235 ) 62,526 69 %
Net income $ 265,235 $ 34,766 $ 230,469 663 %
Net sales. Net sales increased $586.7 million , or 50%, to $1,761.6 million
during the six months ended June 30, 2022 , from $1,174.9 million during the six
months ended June 30, 2021 . The increase in net sales during the six months
ended June 30, 2022 was primarily due to an increase in net sales in our orphan
segment of $671.6 million . Growth was primarily due to an increase in TEPEZZA
net sales of $526.0 million , an increase in KRYSTEXXA net sales of $71.4 million
and an increase in UPLIZNA net sales of $52.7 million , partially offset by a
decrease in net sales in our inflammation segment of $84.9 million when compared
to the six months ended June 30, 2021 which was primarily driven by a decrease
in net sales of DUEXIS and PENNSAID 2% due to the impact of generic competition.
The following table reflects net sales by medicine for the six months ended
For the Six Months Ended
June 30, Change Change
2022 2021 $ %
TEPEZZA $ 981,265 $ 455,320 $ 525,945 116 %
KRYSTEXXA 308,459 237,074 71,385 30 %
RAVICTI 153,979 141,243 12,736 9 %
PROCYSBI 97,277 93,138 4,139 4 %
UPLIZNA 69,075 16,348 52,727 323 %
ACTIMMUNE 61,424 56,540 4,884 9 %
BUPHENYL 3,548 3,922 (374 ) (10 )%
QUINSAIR 631 431 200 46 %
Orphan segment net sales $ 1,675,658 $ 1,004,016 $ 671,642 67 %
PENNSAID 2% 58,954 94,758 (35,804 ) (38 )%
RAYOS 24,637 28,678 (4,041 ) (14 )%
VIMOVO 1,214 5,927 (4,713 ) (80 )%
DUEXIS 1,193 41,575 (40,382 ) (97 )%
Inflammation segment net sales $ 85,998 $ 170,938 $ (84,940 ) (50 )%
Total net sales $ 1,761,656 $ 1,174,954 $ 586,702 50 %
39--------------------------------------------------------------------------------
Orphan Segment
TEPEZZA. Net sales increased$526.0 million , or 116%, to$981.3 million during the six months endedJune 30, 2022 , from$455.3 million during the six months endedJune 30, 2021 . Net sales increased by approximately$506.9 million due to volume growth and$19.1 million due to higher net pricing. Net sales growth for TEPEZZA was negatively impacted by the omicron variant of COVID-19 and additional commercial challenges we recently identified, as described above. We are implementing strategies to further accelerate TEPEZZA net sales growth however, it will take some time for these strategies to contribute to TEPEZZA net sales growth. KRYSTEXXA. Net sales increased$71.4 million , or 30%, to$308.4 million during the six months endedJune 30, 2022 from$237.0 million during the six months endedJune 30, 2021 . Net sales increased by approximately$53.3 million due to volume growth and$18.1 million due to higher net pricing. RAVICTI. Net sales increased$12.7 million , or 9%, to$153.9 million during the six months endedJune 30, 2022 , from$141.2 million during the six months endedJune 30, 2021 . Net sales increased by approximately$10.5 million due to volume growth and$2.2 million due to higher net pricing. UPLIZNA. Net sales increased$52.7 million , or 323%, to$69.0 million during the six months endedJune 30, 2022 , from$16.3 million during the six months endedJune 30, 2021 . Net sales inthe United States increased by$38.9 million , which was composed of an increase of$35.9 million due to higher sales volume and$3.0 million due to higher net pricing. The remaining$13.8 million increase in net sales relates to revenue and milestone payments from our international partners recognized during the six months endedJune 30, 2022 .
Inflammation Segment
Our interim goodwill impairment test in the second quarter of 2022 indicated an impairment of the inflammation reporting unit. As a result, we recognized an impairment charge of$56.2 million inJune 2022 representing the full amount of goodwill for the inflammation reporting unit. Refer to Note 8,Goodwill and intangible assets, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details. PENNSAID 2%. Net sales decreased$35.8 million , or 38%, to$58.9 million during the six months endedJune 30, 2022 , from$94.7 million during the six months endedJune 30, 2021 . Net sales decreased by approximately$27.8 million resulting from lower net pricing and by approximately$8.0 million due to lower sales volume. InMay 2022 , Apotex initiated an at-risk launch of a generic version of PENNSAID 2% inthe United States . We subsequently initiated patent infringement litigation against Apotex and Apotex agreed to a voluntary injunction against further sales of the generic product pending the outcome of a motion for summary judgment. The injunction prevents further sales by Apotex but does not prevent wholesalers from continuing to resell the initial generic product inventory Apotex sold to them prior to the injunction. The generic competition created pressure on our PENNSAID 2% sales, resulting in increased utilization of co-pay and other patient assistance programs for PENNSAID 2%, which negatively impacted net pricing. We expect our net sales for PENNSAID 2% to continue declining in future periods primarily due to generic competition and the planned wind down of our inflammation segment. RAYOS. Net sales decreased$4.1 million , or 14%, to$24.6 million during the six months endedJune 30, 2022 , from$28.7 million during the six months endedJune 30, 2021 . Net sales decreased by approximately$4.9 million due to lower net pricing, partially offset by an increase of$0.8 million due to higher sales volume.
We have an exclusive license to
VIMOVO Net sales decreased$4.7 million , or 80%, to$1.2 million during the six months endedJune 30, 2022 , from$5.9 million during the six months endedJune 30, 2021 . Net sales decreased by approximately$3.7 million due to lower sales volume as a result of generic competition and$1.0 million due to lower net pricing. DUEXIS. Net sales decreased$40.3 million , or 97%, to$1.2 million during the six months endedJune 30, 2022 , from$41.5 million during the six months endedJune 30, 2021 . Net sales decreased by approximately$36.5 million resulting from lower sales volume, primarily due to the impact of generic competition, and by approximately$3.8 million due to lower net pricing. Due to the impact of the at-risk launch of generic PENNSAID 2%, we are in the process of redeploying a portion of our inflammation commercial team to support our TEPEZZA expansion. We plan to wind down activities, including active promotion efforts and associated HorizonCares support, for our inflammation segment by the end of the year. As a result, we expect that sales volumes for PENNSAID 2% and RAYOS will decline significantly for the remainder of 2022. 40
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The table below reconciles our gross to net sales for the six months ended
For the Six Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021
Amount % of Gross Sales Amount % of Gross Sales
Gross sales $ 2,472.8 100.0 % $ 2,084.7 100.0 %
Adjustments to gross sales:
Prompt pay discounts (20.2 ) (0.8 )% (25.5 ) (1.2 )%
Medicine returns (12.2 ) (0.5 )% (7.6 ) (0.4 )%
Co-pay and other patient assistance (183.6 ) (7.4 )% (400.4 ) (19.2 )%
Commercial rebates and wholesaler fees (102.4 ) (4.2 )% (143.2 ) (6.9 )%
Government rebates and chargebacks (392.7 ) (15.9 )% (333.0 ) (16.0 )%
Total adjustments (711.1 ) (28.8 )% (909.7 ) (43.7 )%
Net sales $ 1,761.7 71.2 % $ 1,175.0 56.3 %
During the six months ended June 30, 2022 , co-pay and other patient assistance
costs, as a percentage of gross sales, decreased to 7.4% from 19.2% during the
six months ended June 30, 2021 , primarily due to a decreased proportion of
inflammation segment medicines sold. Due to the impacts described above with
respect to the inflammation segment, we expect co-pay and other patient
assistance costs to continue to decrease as a percentage of total gross sales.
Cost of Goods Sold. Cost of goods sold increased $144.0 million to $445.3
million during the six months ended June 30, 2022 , from $301.3 million during
the six months ended June 30, 2021 . The increase in cost of goods sold was
primarily due to an increase in royalty and earnout expense, an increase in
inventory step-up expense and an increase in amortization expense. Royalty and
earnout expense increased by $71.1 million primarily due to royalties payable on
net sales of TEPEZZA, which increased during the first half of 2022 compared to
the first half of 2021 due to higher net sales. Inventory step-up expense
increased by $36.6 million related to UPLIZNA based on the acquired units of
inventory sold during the six months ended June 30, 2022 compared to the six
months ended June 30, 2021 . Amortization expense increased $24.7 million
primarily due to the acquisition of the UPLIZNA developed technology intangible
asset in March 2021 . In addition, we recorded an $8.8 million PENNSAID 2%
inventory reserve due to the impact of generic competition on PENNSAID 2% sales.
As a percentage of net sales, cost of goods sold (excluding amortization expense
of $179.2 million during the first half of 2022 and $154.5 million during first
half of 2021) was 15% during the six months ended June 30, 2022 , compared to 12%
during the six months ended June 30, 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.
Research and Development Expenses. R&D expenses increased $8.9 million to $206.4
million during the six months ended June 30, 2022 , from $197.5 million during
the six months ended June 30, 2021 . The increase was primarily attributable to a
$27.7 million increase in clinical trial costs reflecting increased activity in
our R&D pipeline as well as the addition of our new medicine candidates and
development programs following the acquisition of Viela in March 2021 , and an
increase of $13.0 million in consultant costs and $8.3 million in
employee-related costs. This is partially offset by $40.0 million of upfront
payments recognized during the six months ended June 30, 2021 , in relation to
the agreement with Arrowhead.
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$83.8 million to$771.0 million during the six months endedJune 30, 2022 , from$687.2 million during the six months endedJune 30, 2021 . The increase was primarily attributable to costs associated with the commercialization of our medicines and global expansion initiatives. These include an increase of$87.3 million in marketing program costs and an increase of$10.1 million in employee-related costs, partially offset by a decrease of$28.6 million in transaction costs which were incurred during the six months endedJune 30, 2021 relating to the Viela acquisition. We expect our selling, general and administrative expenses to increase in future periods primarily due to continued support for ourU.S. commercial and global expansion activities. 41 -------------------------------------------------------------------------------- Impairment of goodwill. During the six months endedJune 30, 2022 , we recorded an impairment charge of$56.2 million in relation to our inflammation reporting unit. Refer to Note 8,Goodwill , of the Notes to the Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. Impairment of long-lived assets. During the six months endedJune 30, 2021 , we recorded an impairment charge of$12.4 million as a result of vacating theLake Forest office. Refer to Note 15, Lease Obligations, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. Gain on sale of asset. During the six months endedJune 30, 2021 , gain on sale of asset represents a$2.0 million contingent consideration payment related to the sale of MIGERGOT in 2019. The contingent consideration was earned during the second quarter of 2021 and it was received inJuly 2021 . Interest Expense, Net. Interest expense, net, increased$6.6 million to$42.6 million during the six months endedJune 30, 2022 , from$36.0 million during the six months endedJune 30, 2021 . The increase was primarily due to an increase in interest expense of$9.4 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 increases in interest rates on the portion of our variable interest debt, partially offset by an increase in interest income of$3.0 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 six months endedJune 30, 2022 , we recorded a benefit for income taxes of$27.7 million compared to a benefit for income taxes of$90.2 million during the six months endedJune 30, 2021 . The benefit for income taxes recorded during the six months endedJune 30, 2022 , resulted primarily from tax benefits recognized on share-based compensation, partially offset by the mix of pre-tax income and losses incurred in various tax jurisdictions. 42
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Information by Segment
Refer to Note 11, Segment and Other Information, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of our segment operating income to our total income (loss) before expense (benefit) for income taxes for the six months endedJune 30, 2022 and 2021. Orphan Segment The following table reflects our orphan segment net sales and segment operating income for the six months endedJune 30, 2022 and 2021 (in thousands, except percentages). For the Six Months Ended June 30, 2022 2021 Change % Change Net sales$ 1,675,658 $ 1,004,016 $ 671,642 67 % Segment operating income 666,589 322,289 344,300 107 %
Segment operating income. Orphan segment operating income increased$344.3 million to$666.6 million during the six months endedJune 30, 2022 , from$322.3 million during the six months endedJune 30, 2021 . The increase was primarily attributable to an increase in net sales of$671.6 million as described above, partially offset by an increase in selling, general and administrative expenses of$188.8 million , an increase of$72.2 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$57.3 million during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 .
Inflammation Segment
The following table reflects our inflammation segment net sales and segment operating income for the six months endedJune 30, 2022 and 2021 (in thousands, except percentages). For the Six Months Ended June 30, 2022 2021 Change % Change Net sales$ 85,998 $ 170,938$ (84,940 ) (50 %) Segment operating income 8,797 89,447 (80,650 ) (90 %)
Segment operating income. Inflammation segment operating income decreased$80.6 million to$8.8 million during the six months endedJune 30, 2022 , from$89.4 million during the six months endedJune 30, 2021 . The decrease was primarily attributable to a decrease in net sales of$84.9 million as described above, partially offset by a decrease in selling, general and administrative expenses of$7.9 million . 43 --------------------------------------------------------------------------------
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 and six months endedJune 30, 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 (loss) 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 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 For the Six Months Ended
June 30, June 30,
2022 2021 2022 2021
GAAP net income $ 60,974 $ 158,117 $ 265,235 $ 34,766
Depreciation (1) 6,091 3,393 11,943 7,844
Amortization and step-up:
Intangible amortization expense (2) 91,335 88,523 180,595 154,892
Inventory step-up expense (3) 17,362 7,091 44,563 8,002
Interest expense, net (including
amortization of debt discount and
deferred financing costs) 21,409 22,581 42,665 36,041
Expense (benefit) for income taxes 3,813 (42,484 ) (27,709 ) (90,235 )
EBITDA 200,984 237,221 517,292 151,310
Other non-GAAP adjustments:
Impairment of goodwill (4) 56,171 - 56,171 -
Share-based compensation (5) 45,149 54,424 92,449 115,590
Manufacturing plant start-up costs (6) 1,582 - 2,389 -
Restructuring and realignment costs (7) 1,253 930 1,790 7,023
Acquisition/divestiture-related costs
(8) 1,023 29,830 2,612 78,938
Loss on equity security investments (9) 438 - 5,084 -
Impairment of long-lived asset (10) - - - 12,371
Gain on sale of asset (11) - (2,000 ) - (2,000 )
Total of other non-GAAP adjustments 105,616 83,184 160,495 211,922
Adjusted EBITDA $ 306,600 $ 320,405 $ 677,787 $ 363,232
44
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For the Three Months Ended For the Six Months Ended
June 30, June 30,
2022 2021 2022 2021
GAAP net income $ 60,974 $ 158,117 $ 265,235 $ 34,766
Non-GAAP adjustments:
Depreciation (1) 6,091 3,393 11,943 7,844
Amortization and step-up:
Intangible amortization expense (2) 91,335 88,523 180,595 154,892
Amortization of debt discount and deferred
financing costs (12) 2,327 1,467 3,904 2,240
Inventory step-up expense (3) 17,362 7,091 44,563 8,002
Impairment of goodwill (4) 56,171 - 56,171 -
Share-based compensation (5) 45,149 54,424 92,449 115,590
Manufacturing plant start-up costs (6) 1,582 - 2,389 -
Restructuring and realignment costs (7) 1,253 930 1,790 7,023
Acquisition/divestiture-related costs (8) 1,023 29,830 2,612 78,938
Loss on equity security investments (9) 438 - 5,084 -
Impairment of long-lived asset (10) - - - 12,371
Gain on sale of asset (11) - (2,000 ) - (2,000 )
Total of pre-tax non-GAAP adjustments (15) 222,731 183,658 401,500 384,900
Income tax effect of pre-tax non-GAAP
adjustments (13) (29,919 ) (31,934 ) (97,131 ) (105,063 )
Other non-GAAP income tax adjustments (14) - 30,881 - 30,881
Total non-GAAP adjustments 192,812 182,605 304,369 310,718
Non-GAAP net income (15) $ 253,786 $ 340,722 $ 569,604 $ 345,484 Non-GAAP Earnings Per Share: Weighted average ordinary shares - Basic 230,020,004 225,119,684 229,559,715 224,523,538
Non-GAAP Earnings Per Share - Basic GAAP earnings per share - Basic $ 0.27$ 0.70 $ 1.16 $ 0.15 Non-GAAP adjustments (15) 0.83 0.81 1.32 1.39
Non-GAAP earnings per share - Basic (15) $ 1.10
Weighted average ordinary shares - Diluted Weighted average ordinary shares - Basic 230,020,004 225,119,684 229,559,715 224,523,538 Ordinary share equivalents 6,146,380
10,072,176 6,517,432 10,196,292 Weighted average ordinary shares - Diluted 236,166,384 235,191,860 236,077,147 234,719,830
Non-GAAP Earnings Per Share - Diluted GAAP earnings per share - Diluted $ 0.26$ 0.67 $ 1.12 $ 0.15 Non-GAAP adjustments (15) 0.81 0.78 1.29 1.32
Non-GAAP earnings per share - Diluted (15) $ 1.07
(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,
UPLIZNA, ACTIMMUNE, BUPHENYL and RAYOS.
(3) During the three and six months ended
of goods sold
step-up expense related to UPLIZNA inventory revalued in connection with
the Viela acquisition. We recorded $7.1 million and $8.0 million ,
respectively, of UPLIZNA inventory step-up expense in cost of goods sold
during the three and six months ended June 30, 2021 . 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) Our interim goodwill impairment test in the second quarter of 2022
indicated an impairment which represented the difference between theestimated fair value of the inflammation reporting unit and its carrying
value. As a result, we recognized an impairment charge of
reporting unit. Refer to Note 8,
Notes to Condensed Consolidated Financial Statements, included in Item 1 of
this Quarterly Report on Form 10-Q, for further details.
(5) 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.
(6) During the three and six months ended
million and
costs related to our biologic drug product manufacturing facility in
Waterford .
45--------------------------------------------------------------------------------
(7) Represents rent and maintenance charges as a result of vacating the leased
Lake Forest office in the first quarter of 2021. (8) 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.
(9) We held investments in equity securities with readily determinable fair
values of
long-term assets in the condensed consolidated balance sheet. For the three
and six months ended
$0.4 million and$5.1 million , respectively, due to the change in fair value of these securities.
(10) During the six months ended
asset impairment charge of $12.4 million as a result of vacating the
leased Lake Forest office.
(11) During the six months ended June 30, 2021 , gain on sale of asset
represents a
sale of MIGERGOT in 2019. The contingent consideration was triggered
during the second quarter of 2021 and it was received in July 2021 .
(12) Represents amortization of debt discount and deferred financing costs
associated with our debt.
(13) 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.
(14) During the three months ended
and state tax liability on U.S. taxable income generated from an
intercompany transfer and license of intellectual property from a U.S.
subsidiary to an Irish subsidiary which was partially offset by therecognition of a deferred tax asset in the Irish subsidiary, resulting in
a non-GAAP tax adjustment of
million of tax benefit relating to the release of a valuation allowance
which was originally recognized on state net operating losses acquired
through the acquisition of Viela. These state net operating losses are now
usable, resulting in a non-GAAP tax adjustment of $3.1 million .
(15) 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 and six months ended
million, respectively, of upfront and milestone payments related to
license and collaboration agreements. These amounts continue to be
excluded from our segment operating income (loss) and from certain
measures contained in our credit agreement that are relevant to, among
other things, the calculation of the interest rate.
46--------------------------------------------------------------------------------
LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES
As ofJune 30, 2022 , we had retained earnings of$583.8 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. We are in the process of expanding our production capacity to meet anticipated future demand for TEPEZZA, primarily for 2023 and beyond. As ofJune 30, 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 €94.9 million ($99.3 million converted at a Euro-to-Dollar exchange rate as ofJune 30, 2022 of 1.0462), to be delivered throughJune 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$40.0 million in capital expenditures during the second half of 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 ofJune 30, 2022 , the total carrying amount of our investments in these funds was$22.4 million , which is included in other long-term assets in the condensed consolidated balance sheet, and our total future commitments to these funds are$38.2 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 ofJune 30, 2022 , we had$1.9 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, including rising interest rates; 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.
OnApril 25, 2022 , we entered into two interest rate swap agreements with notional amounts totaling$800.0 million , effectiveJune 24, 2022 , to hedge or otherwise protect against interest rate fluctuations on a portion of our variable rate debt. The agreements effectively fix LIBOR at approximately 2.8% throughDecember 24, 2026 . These agreements were designated as cash flow hedges of the variability of future cash flows subject to the variable monthly interest rates on$800.0 million of our 2028 Term Loans and the 2026 Term Loans. Refer to Note 14, Derivative Instruments and Hedging Activities, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. 47 -------------------------------------------------------------------------------- During the six months endedJune 30, 2022 , we issued an aggregate of 2,955,857 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$35.9 million in net proceeds in connection with such issuances. During the six months endedJune 30, 2022 , we made payments of$120.5 million for employee withholding taxes relating to vesting of share-based awards. 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 16, 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 six months ended
For the Six Months Ended
2022 2021
Cash, cash equivalents and restricted cash $ 1,897,300 $
816,158
Cash provided by (used in):
Operating activities 464,987 85,674
Investing activities (52,905 ) (2,815,163 )
Financing activities (92,621 ) 1,468,666
Operating Cash Flows
During the six months ended June 30, 2022 , net cash provided by operating
activities of $465.0 million was primarily attributable to cash collections from
gross sales, partially offset by 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 and payments related to R&D expenses.
During the six months ended June 30, 2021 , net cash provided by operating
activities of $85.7 million was primarily attributable to cash collections from
gross sales, partially offset by 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.
Investing Cash Flows
During the six months endedJune 30, 2022 , net cash used in investing activities of$52.9 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 inDecember 2021 and payments related to purchases of property, plant and equipment of$24.4 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 six months endedJune 30, 2021 , net cash used in investing activities of$2,815.2 million was primarily attributable to payments for acquisitions, net of$2,775.3 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 ofCHF50.0 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 and a milestone payment of$67.0 million to the former River Vision stockholders inApril 2021 .
Financing Cash Flows
During the six months endedJune 30, 2022 , net cash used in financing activities of$92.6 million was primarily attributable to$120.5 million in payments of employee withholding taxes relating to share-based awards, partially offset by$35.9 million in proceeds from the issuance of ordinary shares in connection with stock option exercises and employee share purchase plan purchases. During the six months endedJune 30, 2021 , net cash provided by financing activities of$1,468.7 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 the payment of$141.6 million of employee withholding taxes relating to share-based awards. 48
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Financial Condition as of
Prepaid expenses and other current assets. Prepaid expenses and other current assets increased$71.7 million , from$357.1 million as ofDecember 31, 2021 to$428.8 million as ofJune 30, 2022 . The increase was primarily due to an increase of$55.4 million in deferred charges for taxes on intercompany profits and an increase of$28.3 million in upfront payments for inventory, partially offset by a decrease in prepaid income taxes and an income tax receivable of$13.1 million . Developed technology and other intangible assets, net. Developed technology and other intangible assets, net, decreased$109.5 million , from$2,960.1 million as ofDecember 31, 2021 to$2,850.6 million as ofJune 30, 2022 , primarily related to a decrease of$180.6 million related to amortization of developed technology during the six months endedJune 30, 2022 . This was partially offset by$70.0 million of in-process research and development, or IPR&D, reclassified to developed technology in the second quarter of 2022 due to the EC issuing a legally binding decision to grant a CMA for UPLIZNA for the treatment of adult patients with NMOSD in the EU inApril 2022 . Refer to Note 8,Goodwill and intangible assets, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details. In-process research and development. IPR&D decreased$70.0 million , from$880.0 million as ofDecember 31, 2021 to$810.0 million as ofJune 30, 2022 , primarily related to the reclassification of$70.0 million of IPR&D relating to UPLIZNA to developed technology in the second quarter of 2022. Refer to Note 8,Goodwill and intangible assets, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details.Goodwill .Goodwill decreased$56.2 million , from$1,066.7 million as ofDecember 31, 2021 to$1,010.5 million as ofJune 30, 2022 . Our interim goodwill impairment test in the second quarter of 2022 indicated an impairment which represented the difference between the estimated fair value of the inflammation reporting unit and its carrying value. As a result, we recognized an impairment charge of$56.2 million inJune 2022 representing the full amount of goodwill for the inflammation reporting unit. Refer to Note 8,Goodwill and intangible assets, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details. Accrued expenses and other current liabilities. Accrued expenses and other current liabilities decreased$104.0 million , from$523.0 million as ofDecember 31, 2021 to$419.0 million as ofJune 30, 2022 . This was primarily due to a decrease in accrued payroll-related expenses of$65.9 million , a decrease in accrued upfront and milestone payments of$35.1 million , and a decrease in accrued royalties of$21.4 million , partially offset by an increase in accrued advertising and marketing expenses of$14.6 million .
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 six months endedJune 30, 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 . 49
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