NEUROCRINE BIOSCIENCES, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations section contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part II, Item 1A under the caption "Risk Factors." The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year endedDecember 31, 2019 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, which are contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and our Quarterly Report on Form 10-Q for the six months endedJune 30, 2020 . Overview We are a commercial-stage biopharmaceutical company focused on discovering and developing innovative and life-changing treatments for patients with serious, challenging and under-addressed neurological, endocrine and psychiatric disorders. We specialize in targeting and interrupting disease-causing mechanisms involving the interconnected pathways of the nervous and endocrine systems. Currently, we are primarily focused on the commercialization of INGREZZA® (valbenazine) inthe United States , or US, our firstUS Food and Drug Administration , or FDA, approved product. InApril 2017 , we received FDA approval of our first marketed product, INGREZZA, for the treatment of adults with tardive dyskinesia, or TD. Shortly after receiving FDA approval, we began commercializing INGREZZA in the US using a specialty sales force primarily focused on educating physicians who treat patients with TD, including psychiatrists and neurologists. InApril 2020 , we received FDA approval for ONGENTYS® (opicapone) as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in adult Parkinson's disease patients, which was commercialized by our commercial team in lateSeptember 2020 . Our collaboration partner, AbbVie Inc., or AbbVie, received approval of ORILISSA® (elagolix) for the management of moderate to severe endometriosis pain in women from the FDA inJuly 2018 andHealth Canada inOctober 2018 . InMay 2020 , AbbVie received approval from the FDA for ORIAHNNTM (elagolix) for the management of heavy menstrual bleeding associated with uterine fibroids in pre-menopausal women. We receive royalties at tiered percentage rates on any net sales of ORILISSA and ORIAHNN. Also inMay 2020 , we entered into a collaboration and licensing agreement withIdorsia Pharmaceuticals Ltd , or Idorsia. In connection with the agreement, we paid Idorsia$45.0 million upfront to gain a license to NBI-827104, a potent, selective, orally active and brain penetrating T-type calcium channel blocker, in clinical development for the treatment of a rare pediatric epilepsy. The agreement includes a research collaboration to discover and identify additional novel T-type calcium channel blockers as development candidates. InJune 2020 , we entered into an exclusive license agreement with Takeda Pharmaceutical Company Limited, orTakeda , which became effective inJuly 2020 . The agreement is focused on the development and commercialization of certain compounds inTakeda's early to mid-stage psychiatry pipeline. In connection with the agreement, we paidTakeda $120.0 million upfront to gain an exclusive license to seven ofTakeda's pipeline programs, including three clinical-stage assets for schizophrenia, treatment-resistant depression, and anhedonia. The collaboration also includes a cost-sharing arrangement for certain collaboration activities. Our late-stage pipeline includes valbenazine for the treatment of chorea in adult patients with Huntington's disease, or HD, crinecerfont (NBI-74788) for the treatment of congenital adrenal hyperplasia, or CAH, in adult patients, and NBIb-1817 (VY-AADC) for the treatment of advanced Parkinson's disease patients with motor fluctuations that are refractory to medical management. Our product candidate for advanced Parkinson's disease is partnered with Voyager Therapeutics, Inc., or Voyager. Our early-stage clinical pipeline includes crinecerfont for the treatment of CAH in pediatric patients, elagolix for the treatment of polycystic ovary syndrome, or PCOS, in women, NBI-1065844 (TAK-831) for the treatment of schizophrenia, NBI-1065845 (TAK-653) for the treatment of treatment-resistant depression, NBI-1065846 (TAK-041) for the treatment of anhedonia in depression, NBI-921352 (XEN901) for the treatment of epilepsy, and NBI-827104 (ACT-709478) for the treatment of a rare pediatric epilepsy. Our product candidate for PCOS is partnered with AbbVie. Going forward, we expect to augment our product pipeline by acquiring, through license or otherwise, additional drug candidates for research and development, or R&D, and potential commercialization. 18
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COVID-19
The global COVID-19 pandemic has dramatically changed the ways in which we live and interact with one another. While we adapt to this new shared reality, our mission remains unchanged: to discover and develop life-changing treatments for people with serious, challenging and under-addressed disorders. While we are unable to reliably estimate the duration or extent of any potential business disruption or financial impact during this time, including any impacts on INGREZZA product sales or R&D expense, we remain committed to (1) prioritizing the safety, health and well-being of patients, their caregivers, healthcare providers and our employees; (2) ensuring patients with TD are well supported and have continued uninterrupted access to INGREZZA, for which we currently do not expect any supply disruption; and (3) advancing ongoing clinical studies. As part of this commitment, we implemented a "Work from Home Policy" in earlyMarch 2020 for employees not involved in business-critical activities. For employees involved in business-critical activities, we implemented safety measures designed to comply with federal, state and local guidelines. Due to the impact of COVID-19, we initially paused enrollment of new patients in several of our clinical trials. Beginning in the third quarter of 2020, we began enrolling patients in our HD and CAH studies. To date, we have not experienced any interruption of our supply of drug products needed to support our ongoing clinical studies, but we expect that completion and data readouts for several of our ongoing and planned studies will be delayed. We continue to believe that existing funds, cash generated from operations, and existing sources of and access to financing are adequate to satisfy our needs for working capital, capital expenditures, debt service requirements and other business development initiatives that we plan to strategically pursue. However, should the COVID-19 pandemic and any associated recession or depression continue for a prolonged period, our results of operations, financial condition, liquidity and cash flows could be materially impacted by lower revenues and profitability and a lower likelihood of effectively and efficiently developing new medicines. Results of Operations for the Three and Nine Months EndedSeptember 30, 2020 and 2019 Revenues The following table presents revenues by category. Three Months Ended Nine Months Ended September 30, September 30, (in millions) 2020 2019 2020 2019 Product sales, net$ 254.1 $ 198.1 $ 752.8 $ 515.0 Collaboration revenue 4.4 24.0 45.2 29.0 Total revenues$ 258.5 $ 222.1 $ 798.0 $ 544.0 Product Sales, Net. Net product sales were$254.1 million and$752.8 million for the three and nine months endedSeptember 30, 2020 , respectively, compared with$198.1 million and$515.0 million in the comparable periods last year, reflecting increased INGREZZA net product sales primarily driven by new patient additions. ONGENTYS net product sales were$0.1 million for the three and nine months endedSeptember 30, 2020 . Collaboration Revenue. Collaboration revenue reflects the achievement of certain development, regulatory and commercial milestones, royalties received on any net sales of ORILISSA and ORIAHNN and license fees earned under our collaboration agreements withAbbVie andMitsubishi Tanabe Pharma Corporation , or MTPC. Collaboration revenue was$4.4 million and$45.2 million for the three and nine months endedSeptember 30, 2020 , respectively, compared with$24.0 million and$29.0 million in the comparable periods last year, primarily reflecting the achievement of a$30.0 million regulatory milestone associated with AbbVie's receipt of FDA approval for ORIAHNN for uterine fibroids inMay 2020 . Operating Expenses Cost of Sales. Cost of sales was$2.7 million and$7.2 million for the three and nine months endedSeptember 30, 2020 , respectively, compared with$2.2 million and$4.9 million in the comparable periods last year. Research and Development. We support our drug discovery and development efforts through the commitment of significant resources to discovery, R&D programs and business development opportunities. Costs are reflected in the applicable development stage based upon the program status when incurred. Therefore, the same program could be reflected in different development stages in the same reporting period. For several of our programs, the R&D activities are part of our collaborative and other relationships. 19
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Late stage consists of costs incurred related to product candidates in Phase II registrational studies and onwards. Early stage consists of costs incurred related to product candidates in post-investigational new drug application, or IND, through Phase II non-registrational studies. Research and discovery consists of pre-IND costs. Milestone expenses reflect payments made in connection with our collaborative and other relationships. Payroll and benefits consists of costs incurred for salaries and wages, payroll taxes, benefits and share-based compensation associated with employees involved in ongoing R&D activities. Share-based compensation may fluctuate from period to period based on factors that are not within our control, such as our stock price on the dates share-based grants are issued. Facilities and other consists of indirect costs incurred in support of overall R&D activities and non-specific programs, including activities that benefit multiple programs, such as management costs, as well as depreciation, information technology and facility-based expenses. These costs are not allocated to a specific program or stage. The following table presents R&D expense by category:
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2020 2019 2020 2019
Late stage $ 15.3 $ 10.5 $ 41.4 $ 29.6
Early stage 9.8 5.4 20.0 18.0
Research and discovery 11.7 6.0 31.6 16.8
Milestone expenses - - 20.0 10.0
Payroll and benefits 24.8 17.9 73.9 50.7
Facilities and other 7.5 5.5 21.4 19.6
Total R&D expense $ 69.1 $ 45.3 $ 208.3 $ 144.7
R&D expense was $69.1 million and $208.3 million for the three and nine months
ended September 30, 2020 , respectively, compared with $45.3 million and $144.7
million in the comparable periods last year, primarily reflecting increased
investment to support advancing our expanded clinical portfolio and increased
personnel expenses on higher headcount.
Acquired In-Process Research and Development. In connection with the payment of
the upfront fee pursuant to our collaboration and license agreement with
Idorsia, we recorded a charge of $46.0 million , accounted for as in-process
research and development, or IPR&D, in the second quarter of 2020. In the third
quarter of 2020, we recorded a charge of $118.5 million , accounted for as IPR&D,
in connection with the payment of the upfront fee pursuant to our exclusive
license agreement with Takeda . In connection with the payments of the upfront
fees pursuant to our collaboration and license agreement with Voyager, we
recorded charges of $118.1 million , accounted for as IPR&D, in the first nine
months of 2019.
Sales, General and Administrative. Sales, general and administrative, or SG&A,
expense was $112.5 million and $326.8 million for the three and nine months
ended September 30, 2020 , respectively, compared with $84.5 million and $252.8
million in the comparable periods last year, primarily reflecting increased
personnel expenses on higher headcount and continued investment in INGREZZA
marketing.
Other Expense, Net
Other expense, net, was $12.8 million and $31.7 million for the three months
ended September 30, 2020 and 2019, respectively. For the nine months ended
September 30, 2020 , other expense, net, was $26.2 million , compared with $15.6
million in the comparable period last year. Periodic fluctuations in other
expense, net, primarily reflect unrealized gains or losses recognized to adjust
our equity investments in Voyager and Xenon Pharmaceuticals Inc. to fair value.
Provision for Income Taxes
Our provision for income taxes was $0.5 million and $5.6 million for the three
and nine months ended September 30, 2020 , respectively, compared with $4.6
million and $4.9 million in the comparable periods last year. At September 30,
2020 and 2019, we had full valuation allowances against our net deferred tax
assets as realization was uncertain. As a result, tax expense for the three and
nine months ended September 30, 2020 and 2019, respectively, varies from the
statutory tax rate primarily due to changes in our valuation allowances, net of
other permanent book/tax differences, tax credits generated and impacts of
changes in tax laws.
Net (Loss) Income
We incurred a net loss of $57.6 million , or $0.62 diluted net loss per share,
for the three months ended September 30, 2020 , compared with net income of $53.8
million , or $0.56 diluted earnings per share, in the comparable period last
year. For the
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nine months endedSeptember 30, 2020 , net income was$59.4 million , or$0.61 diluted earnings per share, compared with$3.0 million , or$0.03 diluted earnings per share, in the comparable period last year. Liquidity and Capital Resources AtSeptember 30, 2020 , our cash and cash equivalents and debt securities available-for-sale totaled$1.1 billion compared with$970.2 million atDecember 31, 2019 . Net cash provided by operating activities was$139.6 million for the nine months endedSeptember 30, 2020 , compared with$49.5 million in the comparable period last year, primarily reflecting increased INGREZZA net product sales offset partially by increased upfront payments in connection with our collaborations with Idorsia andTakeda . Net cash provided by investing activities was$151.8 million for the nine months endedSeptember 30, 2020 , compared with net cash used in investing activities of$44.9 million in the comparable period last year, reflecting timing differences related to purchases, sales and maturities of debt securities available-for-sale, changes in our portfolio-mix, and an equity investment of$54.7 million in Voyager inMarch 2019 . Net cash provided by financing activities was$21.6 million for the nine months endedSeptember 30, 2020 , compared with$20.0 million in the comparable period last year, reflecting proceeds from issuances of our common stock. Convertible Senior Notes. InMay 2017 , we issued$517.5 million of 2.25% convertible senior notes dueMay 15, 2024 . Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements atSeptember 30, 2020 or 2019. Critical Accounting Policies and Estimates There were no changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Interest Rate Risk We are exposed to interest rate risk on our short-term investments. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid and high-quality government and other debt securities. To minimize our exposure due to adverse shifts in interest rates, we invest in short-term securities and ensure that the maximum average maturity of our investments does not exceed twelve months. If a 1% change in interest rates were to have occurred onSeptember 30, 2020 , it would not have had a material effect on the fair value of our investment portfolio as of that date. Due to the short holding period of our investments, we have concluded that we do not have a material financial market risk exposure. Recently Issued Accounting Pronouncements For a summary of new accounting pronouncements which may be applicable to us, see Note 1 to the condensed consolidated financial statements included in this report. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, these forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements. Forward-looking statements can be identified by the use of forward-looking words such as "believes," "expects," "hopes," "may," "will," "plan," "intends," "estimates," "could," "should," "would," "continue," "seeks," "proforma," or "anticipates," or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, technology enhancements, possible changes in legislation and other statements that are not historical. These statements include but are not limited to statements under the captions "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as other sections in this report. You should be aware that the occurrence of any of the events discussed under the heading in Part II titled "Item 1A. Risk Factors" and elsewhere in this report could substantially harm our business, results of operations and financial condition and that if any of these events occurs, the trading price of our common stock could decline and you could lose all or a part of the value of your shares of our common stock. The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this report. We urge you not to place undue reliance on these forward-looking statements, which 21
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speak only as of the date of this report. Except as required by law, we assume no obligation to update our forward-looking statements, even if new information becomes available in the future. Item 3. Quantitative and Qualitative Disclosures About Market Risk A discussion of our exposure to, and management of, market risk appears in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading "Interest Rate Risk." Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports required by the Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the timelines specified in theSEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control over Financial Reporting An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any changes to our internal control over financial reporting that occurred during our last fiscal quarter and that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our evaluation did not identify significant changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter endedSeptember 30, 2020 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 22
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