Harmony Biosciences Holdings, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Harmony Biosciences 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 report covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Net product revenue | $134.2 million | $107.0 million | $253.3 million | $192.3 million |
| Gross profit | $109.2 million | $88.1 million | $207.6 million | $158.7 million |
| Gross margin | 81.4% | 82.3% | 81.9% | 82.5% |
| Operating income | $46.9 million | $33.1 million | $87.3 million | $60.7 million |
| Operating margin | 34.9% | 30.9% | 34.5% | 31.5% |
| Net income | $34.3 million | $23.5 million | $63.8 million | $45.0 million |
| Diluted EPS | $0.56 | $0.39 | $1.05 | $0.74 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $79.6 million | $62.6 million |
Revenue increased 25.4% year over year in the second quarter and 31.7% year over year for the first six months. Management attributed the increase to higher average WAKIX patient volume and price increases. Average patients on WAKIX increased to approximately 5,450 in the second quarter from approximately 4,300 in the prior-year quarter.
Cost of product sales increased faster than revenue, primarily due to higher WAKIX sales and royalties payable to Bioprojet. Operating expenses increased 13.3% in the quarter and 22.6% for the six-month period, driven by clinical development, commercialization, personnel, and marketing costs. Interest expense, net declined because substantially higher investment income more than offset higher debt interest rates.
At June 30, 2023, cash and cash equivalents were $317.4 million, investments were $112.2 million, and cash, cash equivalents and investments totaled $429.9 million. Total debt principal was $196.5 million, with $11.0 million classified as current and $180.5 million of net long-term debt. Stockholders’ equity was $485.2 million, compared with $402.8 million at December 31, 2022.
Material changes versus the prior comparable period
- Six-month revenue increased $61.0 million, or 31.7%, to $253.3 million.
- Six-month operating income increased $26.7 million, or 44.0%, to $87.3 million.
- Six-month net income increased $18.8 million, or 41.7%, to $63.8 million.
- Research and development expense increased 39.6% for the six-month period to $28.3 million, reflecting greater work on idiopathic hypersomnia, Prader-Willi syndrome, and myotonic dystrophy, plus a $0.8 million HBS-102 milestone charge.
- Sales and marketing expense increased 24.8% for the six-month period to $47.1 million due primarily to patient engagement, marketing activity, and sales-force expansion.
- Operating cash flow increased $17.0 million, or 27.2%, to $79.6 million. Investing cash use declined to $9.6 million from $62.5 million, principally because the prior-year period included a $40.0 million WAKIX milestone payment.
- Cash, cash equivalents, and restricted cash increased to $317.7 million from $244.5 million at December 31, 2022.
- The effective tax rate increased to 22.1% for the six-month period from 14.4%, primarily because federal net operating loss carryforwards had been utilized in 2022.
Guidance, outlook, risks, and unusual items
The filing does not provide formal full-year revenue or earnings guidance. Management expects revenue to increase over time and expects research and development, sales and marketing, and general and administrative expenses to remain significant or increase as the company advances clinical programs and supports commercialization.
- Enrollment in the Phase 3 INTUNE trial of WAKIX for idiopathic hypersomnia was completed in May 2023, with topline data expected in the fourth quarter of 2023.
- Following a June 2023 FDA end-of-Phase 2 meeting, management planned to initiate a Phase 3 Prader-Willi syndrome study in the fourth quarter of 2023.
- Topline results from the Phase 2 myotonic dystrophy trial were expected in the fourth quarter of 2023.
- The company planned to submit a supplemental NDA for pediatric narcolepsy in the fourth quarter of 2023.
- Management expected adequate WAKIX supply into the third quarter of 2024, with additional active pharmaceutical ingredient inventory supporting at least 36 months beyond that period. Current inventory’s earliest expected expiration was January 2025.
- On July 26, 2023, the company entered into a new $185.0 million senior secured term loan, used with cash on hand to repay the Blackstone Initial Term Loan and related costs, including a 2% repayment premium. The Blackstone Credit Agreement was terminated.
- On August 1, 2023, the board authorized a common-stock repurchase program of up to $125.0 million, excluding commissions and transaction fees.
- Material risks include dependence on WAKIX, three customers representing 100% of gross product revenue and accounts receivable, reliance on single-source suppliers for products and active pharmaceutical ingredients, reimbursement and market-access uncertainty, clinical and regulatory risks, competition, intellectual-property risks, and debt obligations.
- Additional potential payments include up to $155.0 million under the 2022 Bioprojet license agreement and milestone payments under the HBS-102 agreement, including development, regulatory, and sales milestones.
- The company reported no material litigation and stated that it was in compliance with its debt covenants as of June 30, 2023.
Most important facts for investors to verify
- Whether WAKIX patient growth and pricing can sustain the reported revenue trajectory while gross margins remain near current levels.
- Results and regulatory progress for the INTUNE, Prader-Willi syndrome, myotonic dystrophy, and pediatric narcolepsy programs.
- The terms, interest rate, amortization schedule, and covenant requirements of the replacement JPMorgan term loan.
- The amount and timing of share repurchases under the $125.0 million authorization and their effect on cash balances and share count.
- Customer concentration, single-source supply arrangements, inventory expiration exposure, and potential royalty, licensing, and milestone obligations.
- The impact of federal NOL utilization and state tax limitations on future cash taxes and effective tax rates.
- Management’s liquidity assessment, including the ability of cash generation and investments to fund planned development and commercialization activities.