Harmony Biosciences Holdings, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Harmony is a commercial-stage pharmaceutical company focused on rare neurological diseases. Its principal product is WAKIX (pitolisant), approved in the United States for excessive daytime sleepiness and cataplexy in adults with narcolepsy. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net product revenue | $107.0 million | $73.8 million | $192.3 million | $133.5 million |
| Gross profit | $88.1 million | $61.1 million | $158.7 million | $110.4 million |
| Gross margin | 82.3% | 82.8% | 82.5% | 82.7% |
| Operating income | $33.1 million | $23.3 million | $60.7 million | $37.8 million |
| Operating margin | 30.9% | 31.6% | 31.5% | 28.3% |
| Net income | $23.5 million | $14.1 million | $45.0 million | $21.5 million |
| Diluted EPS | $0.39 | $0.24 | $0.74 | $0.37 |
| Net cash from operating activities | Not separately provided | Not separately provided | $62.6 million | $30.6 million |
Revenue increased 45.0% in the quarter and 44.1% year to date, driven by growth in the average number of patients on WAKIX and price increases. The average number of patients on WAKIX was approximately 4,300 during the quarter, and the company reported formulary access covering more than 80% of insured U.S. lives.
- Q2 operating expenses were $55.0 million, up 45.4%, including research and development of $12.7 million, sales and marketing of $20.2 million, and general and administrative expense of $22.2 million.
- Six-month operating expenses were $98.0 million, up 35.1%.
- Interest expense, net declined to $3.9 million in Q2 and $8.1 million year to date, primarily following the 2021 refinancing under the Blackstone Credit Agreement.
- Income tax expense was $5.7 million in Q2 and $7.6 million year to date. The six-month effective tax rate was 14.4%, compared with 8.4% in 2021.
- Cash, cash equivalents and investments totaled approximately $259.7 million at June 30, 2022, including $236.5 million of cash and cash equivalents and $22.4 million of investments.
- Total debt principal was $198.5 million, with $191.8 million of net carrying value. The debt bears interest at LIBOR, subject to a 1.00% floor, plus 6.50%, and matures primarily in 2026.
Material changes versus the prior comparable period
- Revenue and gross profit grew substantially, while gross margin remained broadly stable.
- Research and development expense increased 95.0% in Q2 and 81.1% year to date, reflecting clinical development work for idiopathic hypersomnia, Prader-Willi syndrome and myotonic dystrophy, together with higher personnel costs.
- Sales and marketing expense increased 18.4% in Q2 and 16.0% year to date due primarily to patient engagement, marketing activity and sales-force expansion.
- General and administrative expense increased 55.0% in Q2 and 38.8% year to date, driven by higher stock-based compensation, personnel costs and amortization of the $40.0 million WAKIX sales milestone capitalized in March 2022.
- Operating cash flow more than doubled year to date to $62.6 million, despite increased trade receivables.
- Investing cash outflows declined to $62.5 million from $100.2 million, reflecting the 2022 $40.0 million milestone payment and $22.4 million of purchases of debt securities, compared with the $100.0 million milestone payment in 2021.
Guidance, outlook, risks and unusual items
- No formal quantitative revenue or earnings guidance is provided in the filing.
- Management expects existing cash, investments and anticipated operating and financing cash flows to fund operating needs and planned investing activities for at least the next 12 months. The company states that it was in compliance with its debt covenants at June 30, 2022, including the requirement to maintain at least $10.0 million in specified cash accounts.
- Management expected adequate WAKIX supply into the fourth quarter of 2023, with additional active pharmaceutical ingredient inventory supporting at least 36 months beyond that period. The company depends on a single-source supplier for its product and active pharmaceutical ingredient.
- Clinical and commercial activities remain exposed to COVID-19-related disruptions, including restricted healthcare-provider access, reduced diagnosis and sleep-lab availability, clinical-trial delays, supply-chain interruptions and potential reimbursement changes.
- WAKIX revenue and receivables are highly concentrated. Three specialty-pharmacy customers represented 100% of six-month product revenue and gross receivables: CVS Caremark, Pantherx and Accredo.
- The company has ongoing royalty obligations to Bioprojet and potential HBS-102 milestone payments of up to $174.8 million, excluding royalties.
- On July 31, 2022, after quarter-end, Harmony entered into a license and commercialization agreement with Bioprojet for additional pitolisant-based products in the United States and Latin America. The agreement includes a non-refundable $30.0 million upfront fee, up to $150.0 million in development and sales milestones, additional potential payments, and royalties. Closing remained subject to antitrust clearance and other customary conditions.
- The filing reports no material litigation claims or defaults, and management concluded that disclosure controls were effective as of June 30, 2022.
Important facts for investors to verify
- Whether WAKIX patient growth, pricing and formulary access continue to support approximately 44% year-to-date revenue growth.
- The pace and return on materially higher research and development, sales and marketing and stock-based compensation spending.
- Interest-rate exposure under the LIBOR-based debt and the company’s ability to manage the $198.5 million principal balance, including the large 2026 maturity.
- Customer concentration and the effect of rebates, government and commercial payer mix, and patient-assistance programs on net revenue and receivables.
- Progress, timing, funding requirements and clinical outcomes for the IH, PWS, DM and HBS-102 programs.
- Completion and economics of the post-quarter-end Bioprojet license, including the $30.0 million upfront payment and contingent milestone obligations.
- Reliability of the single-source supply chain and the potential effect of renewed COVID-19 disruptions or other manufacturing and distribution interruptions.