Business Context and Reporting Period
Harmony Biosciences Holdings, Inc. is a commercial-stage pharmaceutical company focused on rare neurological disorders. Its operating subsidiary commercializes WAKIX (pitolisant), approved in August 2019 for excessive daytime sleepiness in adults with narcolepsy. The company completed its initial public offering in August 2020 and its common stock trades on Nasdaq under HRMY.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the same periods in 2019. WAKIX commercial availability began in November 2019; therefore, the 2019 comparable periods had no product revenue.
Key Financial Metrics
| Metric | Three months ended September 30, 2020 | Nine months ended September 30, 2020 | Comparable 2019 period |
|---|---|---|---|
| Net product revenue | $45.6 million | $103.5 million | $0 |
| Gross profit | $37.7 million | $85.6 million | $0 |
| Gross margin | 82.7% | 82.8% | Not meaningful |
| Operating income (loss) | $10.4 million | $9.2 million | $(29.8) million / $(112.2) million |
| Net income (loss) | $1.9 million | $(36.7) million | $(31.9) million / $(115.5) million |
| Net loss available to common stockholders | $(4.1) million | $(63.6) million | $(40.9) million / $(141.2) million |
| Basic and diluted loss per share | $(0.14) | $(4.15) | $(5.26) / $(18.15) |
Quarterly operating margin was approximately 22.8% and nine-month operating margin was approximately 8.9%. Quarterly net margin was approximately 4.2%; the nine-month net margin was approximately negative 35.5%.
- Operating expenses were $27.3 million in the quarter and $76.4 million year to date. Nine-month research and development expense declined to $11.8 million from $62.3 million, primarily because the 2019 period included a $50.0 million Bioprojet milestone payment.
- Nine-month sales and marketing expense increased to $38.3 million from $27.5 million due primarily to the WAKIX commercial launch and field sales infrastructure.
- Interest expense was $6.9 million for the quarter and $20.3 million year to date. Other expense included warrant fair-value losses of $1.5 million and $3.1 million, respectively.
- The company recorded a $22.6 million loss on debt extinguishment during the nine months related to repayment of the CRG facility.
Balance Sheet, Cash Flow and Liquidity
- Cash and cash equivalents were $221.7 million at September 30, 2020, compared with $24.5 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $222.5 million.
- Current assets were $250.2 million and current liabilities were $31.8 million, implying approximately $218.5 million of reported net working capital.
- Long-term debt, net of debt discounts and issuance costs, was $192.9 million, consisting primarily of $200.0 million of OrbiMed principal. The facility matures in January 2026 and bears interest at the greater of LIBOR or 2.0%, plus 11.0%.
- For the nine months, operating cash flow was negative $13.0 million, investing cash flow was negative $0.002 million, and financing cash flow was positive $210.3 million. Ending cash and restricted cash increased by $197.3 million.
- Financing inflows included approximately $135.4 million of net IPO proceeds and approximately $194.2 million of net OrbiMed borrowing proceeds, partially offset by CRG repayment and exit fees of approximately $120.6 million.
- Accumulated deficit was $488.0 million. Management stated that available cash and expected operating and financing cash flows should fund operational and planned investing needs for the next 12 months, although actual cash use could exceed estimates.
Material Changes Versus the Prior Comparable Period
- The company transitioned from a pre-commercial business to a revenue-generating commercial-stage company following the WAKIX launch.
- Revenue increased from zero to $45.6 million in the quarter and $103.5 million for the nine months.
- The company generated quarterly net income of $1.9 million before preferred-stock dividend allocations, compared with a $31.9 million loss in the 2019 quarter, but remained unprofitable for the nine-month period.
- The IPO materially strengthened liquidity, converted all outstanding Series A, B and C preferred stock into common stock, and resulted in approximately 56.9 million common shares outstanding at September 30, 2020.
- The company replaced the CRG debt with the higher-capacity OrbiMed facility, increasing net debt from $97.9 million at year-end 2019 to $192.9 million at September 30, 2020.
- WAKIX average patients during the third quarter were approximately 2,200, up 22% from the second quarter. More than 2,000 healthcare professionals had prescribed WAKIX since launch, and formulary access covered approximately 182 million lives, or about 80% of the target covered population.
Guidance, Outlook, Commentary and Risks
- Management expects expenses to increase as it expands WAKIX commercialization, sales and marketing, post-approval activities, manufacturing, research programs in Prader-Willi syndrome, myotonic dystrophy and pediatric narcolepsy, personnel, public-company infrastructure and intellectual-property activities.
- Management expects adequate WAKIX supply through 2021, but relies on third-party manufacturers and a single-source supplier for the product, active pharmaceutical ingredient and certain components.
- COVID-19 reduced in-person healthcare-provider access, patient visits and narcolepsy diagnosis activity. Management expects revenue growth in the fourth quarter of 2020 and potentially later periods to be adversely affected by the pandemic, unemployment, insurance loss and increased use of patient-assistance or free-goods programs.
- On October 13, 2020, after the reporting date, the FDA approved WAKIX for cataplexy in adults with narcolepsy. This triggered a $100.0 million Bioprojet milestone payment due within 90 days; the company paid $2.0 million in October to extend the payment deadline and expected to pay the remaining milestone by its due date.
- Additional license obligations include a $40.0 million milestone upon achievement of $500.0 million in aggregate U.S. net sales and continuing royalties. Nine-month royalties and sales-based license costs were $16.6 million and accrued royalties were $7.3 million at September 30, 2020.
- Key risks include dependence on WAKIX as the sole approved product, continued operating losses, substantial milestone and royalty obligations, debt covenants and secured borrowings, reimbursement and pricing pressure, regulatory and clinical-development uncertainty, COVID-19 disruption, competition, intellectual-property challenges, and reliance on third-party manufacturing and distribution.
- The filing states that disclosure controls and procedures were effective as of September 30, 2020, with no material changes in internal control over financial reporting during the quarter. The filing also indicates no material pending legal proceedings.
Important Facts for Investors to Verify
- Whether WAKIX prescription growth and formulary access translate into sustained net revenue growth and improved operating cash flow.
- The timing and funding of the $100.0 million Bioprojet cataplexy milestone, the $40.0 million sales milestone, and ongoing royalty obligations.
- Compliance with OrbiMed’s minimum revenue, minimum liquidity and other restrictive covenants, including the $12.5 million minimum liquidity requirement.
- The effect of COVID-19 on prescriptions, reimbursement, patient assistance utilization, clinical trials and supply continuity.
- Whether the company can achieve sustained profitability after increased commercialization, research and development, public-company and interest expenses.
- Customer concentration: three specialty-pharmacy or distributor customers represented 100% of gross accounts receivable and 100% of nine-month 2020 gross product revenue.
- The impact of third-party manufacturing dependence, single-source supply arrangements and the stated September 2021 earliest expected inventory expiration.