Harmony Biosciences Holdings, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Harmony is a commercial-stage rare-disease pharmaceutical company focused on neurological disorders. Its primary product is WAKIX (pitolisant), approved in the United States for excessive daytime sleepiness and cataplexy in adults with narcolepsy. The company is also developing pitolisant for Prader-Willi syndrome, myotonic dystrophy and idiopathic hypersomnia, and acquired HBS-102 for potential development in Prader-Willi syndrome.
This unaudited report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. As of April 29, 2022, 59.0 million common shares were outstanding.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net product revenue | $85.3 million | $59.7 million | Up 43.0% |
| Gross profit | $70.6 million | $49.3 million | Up 43.3% |
| Gross margin | 82.8% | 82.6% | Broadly stable |
| Operating income | $27.6 million | $14.5 million | Up 89.6% |
| Operating margin | 32.3% | 24.4% | Improved |
| Net income | $21.5 million | $7.4 million | Up 190.9% |
| Diluted EPS | $0.35 | $0.13 | Up $0.22 |
| Net cash from operating activities | $28.9 million | $12.5 million | Up $16.3 million |
Net margin was 25.2% in Q1 2022 versus 12.4% in Q1 2021. Revenue growth was attributed to an increase in the average number of patients using WAKIX, approximately 3,900 during the quarter. More than 80% of insured U.S. lives had formulary access to WAKIX as of March 31, 2022.
Operating expenses were $43.0 million, up 23.9%. Research and development expense increased 62.0% to $7.6 million, sales and marketing expense increased 13.4% to $17.6 million, and general and administrative expense increased 22.9% to $17.9 million. The increases reflected clinical development, commercialization, stock-based compensation and higher amortization following the $40.0 million WAKIX milestone payment.
Interest expense declined 41.5% to $4.2 million, primarily because of lower rates under the August 2021 Blackstone Credit Agreement. Income tax expense was $1.9 million, producing an 8.1% effective quarterly tax rate; the company continues to maintain a full valuation allowance against net deferred tax assets.
Cash, cash equivalents and restricted cash totaled $225.2 million at March 31, 2022, including $224.5 million of cash and cash equivalents. Cash declined by $9.8 million during the quarter, principally because $40.0 million of operating cash flow was more than offset by the final $40.0 million Bioprojet milestone payment. Total assets were $464.0 million and stockholders’ equity was $214.5 million.
Outstanding debt principal was $199.0 million, with $191.9 million recorded net of unamortized debt costs. The Blackstone term loan matures in August 2026, bears interest at LIBOR subject to a 1.0% floor plus 6.5%, and requires a $145.5 million maturity payment. The company had $100.0 million of delayed-draw capacity available through August 9, 2022 and was in compliance with its covenants, including a $10.0 million minimum cash covenant.
Material changes versus the prior comparable period
- Revenue increased $25.6 million, driven by growth in WAKIX patients.
- Operating income nearly doubled as revenue growth exceeded growth in operating expenses.
- Net income increased $14.1 million, aided by stronger operating results and lower interest expense.
- Research and development spending rose $2.9 million as programs in Prader-Willi syndrome, myotonic dystrophy and idiopathic hypersomnia advanced.
- The company paid the final $40.0 million Bioprojet milestone in March 2022 after WAKIX reached $500.0 million in aggregate U.S. net sales. The payment was capitalized as an intangible asset and will increase amortization expense.
- Cash flow from operations improved substantially, but investing cash use remained significant because of the milestone payment.
- Shares outstanding increased modestly, primarily from option exercises; stock-based compensation expense was $4.9 million for the quarter.
Guidance, outlook, commentary and risks
The company did not provide specific quantitative revenue or earnings guidance in the filing. Management stated that existing cash, expected operating and financing cash flows, and potential delayed-draw debt capacity are expected to fund operational needs and planned investments for at least the next 12 months, although this assessment depends on assumptions that could prove incorrect.
Management expects continued investment in commercialization, clinical development and general and administrative infrastructure. Top-line demand was still affected by COVID-19 through reduced healthcare-provider access, fewer patient visits, insurance changes and increased use of free-drug and patient-assistance programs. The company expects pressure to decrease as conditions improve but warned that future outbreaks or variants could adversely affect demand, clinical trials, regulatory timelines, manufacturing and distribution.
WAKIX supply was expected to be adequate into the second quarter of 2023, with additional active pharmaceutical ingredient inventory supporting at least 36 months beyond that period. The company relies on a single-source supplier for its product and active pharmaceutical ingredient.
Key risks include dependence on WAKIX and a limited product portfolio; reimbursement, formulary access and market acceptance; reliance on Bioprojet and third-party manufacturers, distributors and clinical research organizations; clinical and regulatory uncertainty for additional indications; competition and intellectual-property protection; debt service and refinancing requirements; customer concentration; and macroeconomic, inflation, interest-rate and COVID-19 effects. Three customers represented 100% of Q1 product revenue and gross accounts receivable. No material litigation was pending as of March 31, 2022.
Most important facts for investors to verify
- Whether WAKIX patient growth and formulary access continue to support revenue growth after COVID-19-related access and insurance disruptions.
- The sustainability of the approximately 83% gross margin, including royalties, rebates and other product deductions.
- Progress and results of the PWS, DM1 and idiopathic hypersomnia programs, including anticipated PWS topline results in the second half of 2022.
- Use and terms of the $100.0 million delayed-draw term-loan facility and the company’s ability to manage the 2026 debt maturity.
- Future cash requirements for clinical development, commercialization, milestone obligations and potential HBS-102 development.
- Concentration among three customers and dependence on a single-source product and API supplier.
- Potential effects of COVID-19 resurgence, supply-chain interruptions, reimbursement changes and regulatory delays.