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, 2020 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, 2020 . Overview We are a neuroscience-focused, biopharmaceutical company dedicated to discovering, developing and delivering life-changing treatments for people with serious, challenging and under-addressed neurological, endocrine and psychiatric disorders. Our diverse portfolio includesUnited States Food and Drug Administration , or FDA, approved treatments for tardive dyskinesia, Parkinson's disease, endometriosis*, uterine fibroids* and clinical programs in multiple therapeutic areas. For nearly three decades, we have specialized in targeting and interrupting disease-causing mechanisms involving the interconnected pathways of the nervous and endocrine systems. (*in collaboration with AbbVie Inc.) We launched INGREZZA® (valbenazine) inthe United States , or US, with our specialty sales force inMay 2017 , after receiving FDA approval for INGREZZA as the first FDA-approved drug for the treatment of tardive dyskinesia inApril 2017 . InSeptember 2020 , we launched ONGENTYS® (opicapone) in the US leveraging our existing INGREZZA commercial infrastructure after receiving FDA approval for ONGENTYS for Parkinson's disease inApril 2020 . INGREZZA net product sales represent the significant majority of our total net product sales. Our partner AbbVie Inc., or AbbVie, launched ORILISSA® (elagolix tablets) in the US andCanada in August andNovember 2018 , respectively, after receiving FDA andHealth Canada approval for ORILISSA for endometriosis in July andOctober 2018 , respectively. InJune 2020 , AbbVie launched ORIAHNN® (elagolix, estradiol and norethindrone acetate capsules and elagolix capsules) in the US after receiving FDA approval for ORIAHNN for uterine fibroids inMay 2020 . We receive royalties at tiered percentage rates on AbbVie net sales of ORILISSA and ORIAHNN. In addition, we have a rapidly expanding pipeline of potential treatments and gene therapies for diseases such as Huntington's disease, or HD, congenital adrenal hyperplasia, or CAH, epilepsy, schizophrenia and depression. Pipeline Highlights: INGREZZA: •InFebruary 2021 , theMitsubishi Tanabe Pharma Corporation , or MTPC, reported positive top-line results from the J-KINECT Phase III Study, designed to evaluate the efficacy and safety of valbenazine in tardive dyskinesia. Detailed results from this trial will be presented at a future medical conference. InApril 2021 , MTPC submitted a Marketing Authorization Application, or MAA, with theMinistry of Health and Welfare inJapan for valbenazine for the treatment of tardive dyskinesia. MTPC submission of valbenazine triggered a milestone payment of$15.0 million , to be paid by MTPC toNeurocrine Biosciences and recognized as collaboration revenue in the second quarter of 2021. Luvadaxistat (NBI-1065844/TAK-831): •OnMarch 2, 2021 , we announced that investigational drug luvadaxistat did not meet its primary endpoint in the Phase II INTERACT study in adults with negative symptoms of schizophrenia. Luvadaxistat met both secondary endpoints of cognitive assessment. We plan to initiate a Phase II study for the treatment of cognitive impairment associated with schizophrenia, or CIAS, by the end of 2021. NBIb-1817 (VY-AADC): •InFebruary 2021 , we notified Voyager Therapeutics, Inc., or Voyager, of our termination of the NBIb-1817 for Parkinson's disease program. The effective date of this termination will beAugust 2, 2021 . The termination does not apply to any other development program other than NBIb-1817 for Parkinson's disease, and our collaboration and license agreement with Voyager will otherwise continue in effect. 16
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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 and their caregivers, healthcare providers and our employees; (2) ensuring patients with tardive dyskinesia 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. We have since developed and are implementing plans regarding the opening of our sites to enable our employees to return to work in our corporate offices and the field, which plans take into account applicable public health authority and local government guidelines and which are designed to ensure community and employee safety. However, the effects of the COVID-19 pandemic continue to rapidly evolve and even if our employees more broadly return to work in our corporate offices and the field, we may nevertheless have to resume a remote work model. We continue to evaluate our remote work model and the impact of global spikes or surges in COVID-19 infection and hospitalization rates. Due to the impact of COVID-19, we initially paused enrollment of new patients in several of our clinical studies. 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. We recognize, however, that we may have to make further operational adjustments to our ongoing and planned clinical studies and that patient enrollment and new clinical trial site initiations may be further slowed due to the COVID-19 pandemic, especially if it is further prolonged or grows in severity. Most hospitals, community mental health facilities, physicians' offices, pharmacies, and other healthcare facilities have implemented policies that limited access of patients and our employees to such facilities and limited the ability of patients, pharmacies, and prescribers to interact with each other. Due to these polices, our field force has been utilizing digital, video, and telephonic engagement tools and tactics, which may be less effective than our ordinary processes. The ultimate impact of the COVID-19 pandemic, including any lasting effects on our revenue and the way we conduct our business, is highly uncertain and subject to continued change. 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, the circumstances surrounding the COVID-19 pandemic are volatile and subject to rapid change. Despite our mitigation efforts, we may experience delays or an inability to execute on our clinical and preclinical development plans, reduced revenues or other adverse impacts to our business, which are described in more detail in "Risk Factors" in Part I, Item 1A of this Quarterly Report on Form 10-Q. We recognize that this pandemic will continue to present unique challenges for us throughout 2021, and potentially into 2022. Results of Operations for the Three Months EndedMarch 31, 2021 and 2020 Revenues The following table presents revenues by category. Three Months Ended March 31, (in millions) 2021 2020 Product sales, net$ 231.0 $ 231.1 Collaboration revenue 5.6 6.0 Total revenues$ 236.6 $ 237.1
Product Sales, Net. Net product sales were
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the impact of COVID-19 on our customers. ONGENTYS net product sales were$1.4 million for the three months endedMarch 31, 2021 . Collaboration Revenue. Collaboration revenue reflects royalties earned on AbbVie net sales of ORILISSA and ORIAHNN and license fees earned under our collaboration agreement withMitsubishi Tanabe Pharma Corporation , or MTPC. Collaboration revenue was$5.6 million for the three months endedMarch 31, 2021 , compared with$6.0 million in the comparable period last year. Operating Expenses Cost of Sales. Cost of sales was$2.9 million for the three months endedMarch 31, 2021 , compared with$2.1 million in the comparable period last year. Research and Development. We support our drug discovery and development efforts through the commitment of significant resources to discovery, R&D programs and business development opportunities. Costs are reflected in the applicable development stage based upon the program status when incurred. Therefore, the same program could be reflected in different development stages in the same reporting period. For several of our programs, the R&D activities are part of our collaborative and other relationships. Late stage consists of costs incurred related to product candidates in Phase II registrational studies and onwards. Early stage consists of costs incurred related to product candidates in post-investigational new drug application, or IND, through Phase II non-registrational studies. Research and discovery consists of pre-IND costs. Payroll and benefits consists of costs incurred for salaries and wages, payroll taxes, benefits and share-based compensation associated with employees involved in ongoing R&D activities. Share-based compensation may fluctuate from period to period based on factors that are not within our control, such as our stock price on the dates share-based grants are issued. Facilities and other consists of indirect costs incurred in support of overall R&D activities and non-specific programs, including activities that benefit multiple programs, such as management costs, as well as depreciation, information technology and facility-based expenses. These costs are not allocated to a specific program or stage. The following table presents R&D expense by category: Three Months Ended March 31, (in millions) 2021 2020 Late stage$ 13.0 $ 13.0 Early stage 5.5 4.6 Research and discovery 9.4 9.2 Payroll and benefits 35.5 23.9 Facilities and other 9.8 7.6 Total R&D expense$ 73.2 $ 58.3 R&D expense was$73.2 million for the three months endedMarch 31, 2021 , compared with$58.3 million in the comparable period last year, primarily reflecting increased investment to support advancing our expanded clinical portfolio and higher personnel expenses driven by a non-cash share-based compensation charge of$6.4 million related to the modification of certain share-based awards. Selling, General and Administrative. Selling, general and administrative, or SG&A, expense was$129.0 million for the three months endedMarch 31, 2021 , compared with$117.8 million in the comparable period last year, primarily reflecting increased investment to support our commercialization activities and continued investment in INGREZZA. Other Expense, Net Other expense, net, was$4.3 million for the three months endedMarch 31, 2021 , compared with$20.0 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 inVoyager and Xenon Pharmaceuticals Inc. to fair value. (Benefit from) Provision for Income Taxes The benefit from income taxes was$4.9 million for the three months endedMarch 31, 2021 , compared with a provision for income taxes of$1.5 million in the comparable period last year. Our effective tax rate for the three months endedMarch 31, 2021 was lower than federal and state statutory rates primarily due to excess tax benefits related to stock compensation. On 18
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December 31, 2020 , we released substantially all of our valuation allowance against our net operating losses and other deferred tax assets. Beginning in the first quarter of 2021, we began recording a provision for income taxes using an effective tax rate approximating federal and state statutory rates. Due to our ability to offset our pre-tax income against previously benefited federal net operating losses, no federal cash tax is expected in 2021. Net Income Net income was$32.1 million , or$0.33 diluted earnings per share, for the three months endedMarch 31, 2021 , compared with$37.4 million , or$0.39 diluted earnings per share, in the comparable period last year, primarily reflecting increased investment in commercial initiatives and to support advancing our expanded clinical portfolio. Liquidity and Capital Resources AtMarch 31, 2021 , our cash, cash equivalents and debt security investments totaled$1.1 billion compared with$1.0 billion atDecember 31, 2020 . Net cash provided by operating activities was$87.3 million for the three months endedMarch 31, 2021 , compared with$35.5 million in the comparable period last year, primarily reflecting increased working capital on timing of accounts receivable collections and accounts payable payments. Net cash provided by investing activities was$63.1 million for the three months endedMarch 31, 2021 , compared with$33.2 million in the comparable period last year, reflecting timing differences related to purchases, sales, and maturities of debt securities available-for-sale and changes in our portfolio-mix. Net cash provided by financing activities was$15.1 million for the three months endedMarch 31, 2021 , compared with$6.0 million in the comparable period last year, reflecting proceeds from issuances of our common stock. Convertible Senior Notes. InMay 2017 , we completed a private placement of$517.5 million in aggregate principal amount of 2.25% convertible senior notes dueMay 15, 2024 , or the 2024 Notes. InNovember 2020 , we entered into separate, privately negotiated transactions with certain holders of the 2024 Notes to repurchase$136.2 million aggregate principal amount of the 2024 Notes for an aggregate repurchase price of$186.9 million in cash. AtMarch 31, 2021 ,$381.2 million aggregate principal amount of the 2024 Notes remained outstanding. We may not redeem the 2024 Notes prior toMay 15, 2021 . On or after this date, at our election, we may redeem all, or any portion, of the 2024 Notes under certain circumstances. The 2024 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by us. There are customary events of default with respect to the 2024 Notes, including that upon certain events of default, 100% of the principal and accrued and unpaid interest on the 2024 Notes will automatically become due and payable. 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, 2020 . 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 onMarch 31, 2021 , 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 19
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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 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 endedMarch 31, 2021 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 20
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