Harmony Biosciences Holdings, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Harmony Biosciences is a commercial-stage pharmaceutical company focused on rare and other neurological diseases. Its principal commercial product is WAKIX (pitolisant), approved in the United States for excessive daytime sleepiness and cataplexy in adults with narcolepsy. This report covers the three months ended March 31, 2023, compared with the same period in 2022. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net product revenue | $119.1 million | $85.3 million | Up 39.6% |
| Gross profit | $98.3 million | $70.6 million | Up 39.3% |
| Gross margin | 82.5% | 82.8% | Down approximately 0.3 percentage points |
| Operating income | $40.4 million | $27.6 million | Up 46.7% |
| Operating margin | 33.9% | 32.3% | Improved approximately 1.6 percentage points |
| Net income | $29.5 million | $21.5 million | Up 37.2% |
| Diluted EPS | $0.48 | $0.35 | Up $0.13 |
| Net cash from operating activities | $42.6 million | $28.9 million | Up $13.7 million |
- Revenue growth reflected an increase in average WAKIX patients from approximately 4,300 to 5,100 and price increases.
- Cost of product sales increased 41.2% to $20.8 million, primarily because of higher WAKIX sales; the company incurred $19.1 million of royalties to Bioprojet.
- Research and development expense increased 75.4% to $13.3 million, driven by clinical development in idiopathic hypersomnia, Prader-Willi syndrome and myotonic dystrophy, the HBS-102 preclinical milestone, and higher personnel costs.
- Sales and marketing expense increased 28.4% to $22.6 million, primarily due to patient engagement, marketing activities and sales-force expansion. General and administrative expense increased 23.4% to $22.1 million.
- Income tax expense was $8.3 million, representing a 22.0% effective tax rate, versus $1.9 million and an 8.1% rate in the prior-year quarter. The company stated that federal NOL carryforwards were fully utilized as of December 31, 2022.
- Cash, cash equivalents and investments totaled $392.4 million at March 31, 2023; including restricted cash, total cash, cash equivalents, restricted cash and investments were approximately $393.2 million.
- Debt principal was $197.0 million, with a net carrying value of $191.6 million. The term loan bears interest at LIBOR, subject to a 1.00% floor, plus 6.50%, and matures in August 2026. The company made a $0.5 million principal repayment during the quarter.
- Net cash used in investing activities was $1.8 million, reflecting purchases and maturities or sales of investment securities. Net cash provided by financing activities was $3.4 million, including $3.9 million from exercised options.
Material changes versus the prior comparable period
- WAKIX revenue, operating income and net income increased substantially year over year, while operating margin expanded despite higher research, selling and administrative spending.
- Operating cash flow increased by approximately 47%, and the company did not repeat the $40.0 million Bioprojet milestone payment made in Q1 2022.
- Interest expense, net declined 36.6% to $2.6 million, primarily because interest income from cash and investments offset higher borrowing costs associated with increased LIBOR.
- Cash and cash equivalents increased from $243.8 million at December 31, 2022, to $288.0 million at March 31, 2023. Total assets increased to $715.1 million from $673.9 million, while stockholders’ equity increased to $443.0 million from $402.8 million.
- In March 2023, a preclinical milestone for HBS-102 triggered a payment of approximately $0.8 million, expected to be paid in April 2023. Additional potential HBS-102 payments include development, regulatory and sales milestones.
Guidance, outlook, commentary and risks
- Management expects topline data from the Phase 3 INTUNE trial of pitolisant in idiopathic hypersomnia in the fourth quarter of 2023.
- Topline results from the Phase 2 myotonic dystrophy trial are also anticipated in the fourth quarter of 2023. An FDA end-of-Phase 2 meeting for the Prader-Willi syndrome program was scheduled for late Q2 2023, with the company intending to advance the program to Phase 3.
- Bioprojet received European approval for a pediatric narcolepsy indication in March 2023. Harmony is working toward a supplemental FDA submission and pursuing pediatric exclusivity for WAKIX.
- Management expects research and development, sales and marketing, and general and administrative expenses to remain significant or increase as clinical programs, commercialization and the pipeline expand. The filing does not provide quantitative full-year revenue or earnings guidance.
- The company expects adequate WAKIX supply into Q1 2024, with additional active pharmaceutical ingredient inventory expected to support at least 36 months beyond that point. Current inventory has an earliest expected expiration of February 2024.
- Management believes existing cash, investments, operating cash generation, financing resources and potential borrowing capacity will fund operating and planned investing needs for at least the next 12 months. This assessment depends on assumptions that may prove incorrect.
- Key risks include dependence on WAKIX and a limited customer base, single-source suppliers for products and active pharmaceutical ingredients, reimbursement and market acceptance, clinical and regulatory uncertainty, competition, intellectual-property protection, milestone and royalty obligations, interest-rate exposure, and debt covenants. Three customers represented 100% of gross product revenue in the quarter.
- The company reported no material pending litigation, was in compliance with its debt covenants, and concluded that disclosure controls and procedures were effective as of March 31, 2023.
- After quarter-end, Jeffrey Dayno became President and Chief Executive Officer, and Kumar Budur was appointed Chief Medical Officer.
Important facts for investors to verify
- Validate the sustainability of WAKIX growth, including patient additions, pricing, payer access, gross-to-net deductions and customer concentration.
- Assess whether increased clinical spending produces successful INTUNE, Prader-Willi syndrome and myotonic dystrophy outcomes and supports future regulatory submissions.
- Review the $197.0 million debt principal, variable-rate exposure, August 2026 maturity and the company’s ability to meet scheduled amortization and covenant requirements.
- Monitor potential Bioprojet and HBS-102 development, regulatory and sales milestone payments, as well as ongoing royalties.
- Evaluate the timing and impact of federal and state tax payments following utilization of federal NOL carryforwards.
- Confirm supply continuity and inventory expiration risk for WAKIX, along with the company’s reliance on single-source suppliers.