Harmony Biosciences Holdings, Inc. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020, with comparisons to fiscal year 2019. The company is a commercial-stage pharmaceutical company focused on rare neurological disorders. Its only approved product is WAKIX (pitolisant), launched in the United States in November 2019 for excessive daytime sleepiness in adults with narcolepsy and approved for adult cataplexy in October 2020.
Key Financial Metrics
| Metric | FY2020 | FY2019 | Change / Comment |
|---|---|---|---|
| Net product revenue | $159.7 million | $6.0 million | Increased $153.7 million, or 2,564.6%, due to the WAKIX launch |
| Gross profit | $132.0 million | $4.4 million | Gross margin was approximately 82.6% versus 73.7% |
| Operating expenses | $115.0 million | $150.3 million | Decreased primarily because of a 2019 NDA-acceptance milestone payment |
| Operating income (loss) | $17.0 million | $(145.9) million | Improved substantially; operating margin was approximately 10.6% |
| Net loss | $(36.9) million | $(152.0) million | Net loss margin was approximately (23.1%) versus (2,535.0%) |
| Net loss available to common stockholders | $(63.8 million) | $(187.2 million) | Includes preferred-stock dividend accumulation in 2020 |
| Adjusted net income | $32.5 million | $(132.8) million | Non-GAAP measure excluding specified financing, amortization, stock compensation and other items |
| Net cash used in operating activities | $(3.0 million) | $(75.4 million) | Improved with commercial revenue growth |
| Net cash used in investing activities | $(2.0 million) | $(127.1 million) | 2019 included $127.0 million of Bioprojet milestone payments |
| Net cash provided by financing activities | $209.2 million | $143.8 million | Included IPO proceeds and new debt financing |
| Cash, cash equivalents and restricted cash | $229.4 million | $25.2 million | Increased primarily from IPO and OrbiMed financing |
| Debt, net of issuance costs | $194.3 million | $97.9 million | CRG debt was refinanced with a $200.0 million OrbiMed facility |
| Accumulated deficit | $488.2 million | $422.9 million | Continued cumulative losses |
Material Changes Versus FY2019
- WAKIX commercial sales scaled materially, generating $159.7 million of net product revenue compared with $6.0 million in the initial launch period in 2019.
- WAKIX received FDA approval for adult cataplexy in October 2020, expanding its approved label beyond excessive daytime sleepiness.
- Research and development expense fell 72.1% to $19.4 million, primarily because 2019 included a $50.0 million NDA-acceptance milestone payment to Bioprojet.
- Sales and marketing expense increased 26.0% to $55.8 million as the company expanded its field sales force and commercialization activities.
- The company replaced the CRG loan with a $200.0 million OrbiMed credit facility in January 2020. The refinancing generated a $22.6 million loss on debt extinguishment and included a 7% exit fee on principal repaid or prepaid.
- The August 2020 IPO generated approximately $135.4 million of net proceeds. Convertible preferred stock automatically converted into common stock, and the company’s common stock began trading on Nasdaq in August 2020.
- Gross product margins improved, although cost of product sales includes substantial royalties to Bioprojet. FY2020 royalties recognized in cost of product sales were $25.6 million.
Liquidity, Debt and Capital Resources
Management stated that existing cash, cash equivalents and anticipated cash from operating and financing activities should fund operational liquidity needs and planned investing activities for the next 12 months. This assessment is subject to assumptions that may prove incorrect. The company previously disclosed substantial doubt regarding going-concern status, but the 2020 IPO and OrbiMed financing resolved the significant liquidity uncertainty identified in prior periods.
The OrbiMed facility has $200.0 million of principal, matures in January 2026, and bears interest at the greater of one-month LIBOR or 2.00%, plus 11.00%. It is secured by substantially all company assets other than intellectual property licensed through the Bioprojet agreement and includes minimum revenue and liquidity covenants, including minimum liquidity of $12.5 million. The company reported compliance with its financial covenants through December 31, 2020.
A $100.0 million milestone payment to Bioprojet became payable following the cataplexy approval and was accrued at year-end. It was paid in full on January 6, 2021. The company also owes a $40.0 million milestone upon aggregate U.S. WAKIX net sales reaching $500.0 million, in addition to tiered sales royalties of 13% to 24% and a 3% trademark royalty.
Guidance, Outlook and Management Commentary
- Management expects continued investment in WAKIX commercialization, sales and marketing, manufacturing, public-company infrastructure, intellectual property and clinical development.
- The company expects to initiate a Phase 3 pediatric narcolepsy trial in the second half of 2021, targeting both excessive daytime sleepiness and cataplexy. Topline results are expected in the first half of 2023.
- A Phase 2 Prader-Willi syndrome trial began in December 2020, with topline results expected in the first half of 2022.
- The company planned to initiate a Phase 2 myotonic dystrophy trial in the first half of 2021, with topline results expected in the second half of 2022.
- Management expects revenue growth to remain exposed to COVID-19 effects, including reduced healthcare-professional access, fewer patient visits and diagnoses, loss of commercial insurance, and increased use of patient-assistance or free-goods programs.
- The company expected adequate WAKIX supply through the first half of 2022, with additional active pharmaceutical ingredient inventory supporting an estimated 12 to 18 months beyond that period, subject to potential manufacturing and logistics disruptions.
- No formal revenue, earnings or margin guidance was provided in the filing.
Principal Risks and Unusual Items
- Product concentration: WAKIX is the company’s only approved product and is expected to generate substantially all revenue for the foreseeable future.
- Profitability and financing: The company has a substantial accumulated deficit, continued net losses and no committed source of additional capital. Future financing could dilute shareholders or impose restrictive terms.
- Debt and covenant risk: The OrbiMed facility carries a high stated interest rate, is secured by company assets and includes restrictive and financial covenants.
- Bioprojet dependence: The company relies on Bioprojet for core pitolisant intellectual property and owes milestone and royalty payments. A material breach or termination could eliminate U.S. rights to WAKIX.
- COVID-19 exposure: The pandemic may reduce prescription demand, delay clinical trials, disrupt sleep-lab access, affect reimbursement mix and interrupt manufacturing or distribution.
- Customer concentration: Three customers represented 100% of FY2020 gross product revenue: CVS Caremark 40%, PANTHERx 33% and Accredo 27%.
- Supply concentration: The company relies on third parties, including single-source suppliers, for intermediates, active pharmaceutical ingredient, finished product, packaging and distribution.
- Competition and pricing: WAKIX competes with established branded, generic and controlled-substance therapies, many of which may be lower-priced or more familiar to prescribers.
- Regulatory and clinical risk: Additional indications remain subject to successful clinical trials, regulatory review, patient enrollment and reimbursement.
- Unusual financial items: FY2020 included a $22.6 million debt-extinguishment loss, $3.1 million of warrant expense and $9.8 million of intangible-asset amortization. The company recorded no income tax expense because its deferred tax assets were fully offset by a valuation allowance.
Investor Verification Checklist
- Verify the sustainability of WAKIX prescription growth, net revenue conversion and gross margin after royalties, rebates, discounts and patient-assistance programs.
- Reconcile the $229.4 million liquidity balance with the January 2021 $100.0 million Bioprojet milestone payment and assess remaining liquidity thereafter.
- Review OrbiMed interest expense, maturity, exit-fee provisions, collateral package and minimum revenue and liquidity covenants.
- Monitor customer concentration, formulary access, payer mix and the effect of COVID-19-related insurance losses on net revenue.
- Track the pediatric narcolepsy, Prader-Willi syndrome and myotonic dystrophy programs against stated trial timelines and regulatory milestones.
- Assess patent, orphan-exclusivity and generic-entry protection for WAKIX, including the disclosed patent expirations generally extending to 2029 and orphan exclusivity through 2026.
- Review the Bioprojet license for future milestone, royalty, consent, exclusivity and termination provisions, including the $40.0 million sales milestone.
- Evaluate dependence on single-source manufacturers and the adequacy of inventory and active pharmaceutical ingredient supply beyond the first half of 2022.