Harmony Biosciences Holdings, Inc. annual report, FY2023

Harmony Biosciences Holdings, Inc. — 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. Although the request references 2023 Q4, this filing is an annual Form 10-K; fourth-quarter financial results are not separately presented in the provided filing text.

Business context

Harmony is a commercial-stage pharmaceutical company focused on rare neurological diseases. Its business remains substantially dependent on WAKIX (pitolisant), approved in the United States for excessive daytime sleepiness and cataplexy in adults with narcolepsy. WAKIX is the company’s only commercially approved product and is not scheduled as a DEA-controlled substance.

The company is developing pitolisant for idiopathic hypersomnia, Prader-Willi syndrome and myotonic dystrophy, while pursuing pediatric narcolepsy approval and new formulations. Harmony acquired Zynerba Pharmaceuticals in October 2023, adding the ZYN002 cannabidiol program for Fragile X syndrome and other neuropsychiatric disorders.

Financial performance and key metrics

Metric	2023	2022	Change
Net product revenue	$582.0 million	$437.9 million	+32.9%
Gross profit	$460.8 million	$354.4 million	+30.0%
Gross margin	79.2%	80.9%	Down 1.7 percentage points
Operating income	$192.0 million	$120.2 million	+59.8%
Operating margin	33.0%	27.4%	Up 5.6 percentage points
Net income	$128.9 million	$181.5 million	Down 29.0%
Diluted earnings per share	$2.13	$2.97	Down 28.3%
Cash flow from operations	$219.4 million	$144.5 million	+51.9%

Revenue growth was driven primarily by a 33.5% increase in units shipped and the net effect of a 7.0% price increase implemented in January 2023. Cost of product sales increased faster than revenue, primarily because higher WAKIX sales moved the company into a higher royalty tier earlier in the year.

Net income declined despite stronger operating income because 2022 included a $76.8 million income-tax benefit from releasing a valuation allowance, while 2023 included $44.5 million of income-tax expense. 2023 also included a $9.8 million loss on debt extinguishment and higher interest expense, partly offset by substantially higher interest income.

Liquidity, cash flow and capital structure

Cash, cash equivalents and investments totaled $425.6 million at December 31, 2023, including $311.7 million of cash and cash equivalents.
Total debt was $196.3 million, with a net carrying value of $193.6 million. The company reported compliance with its debt covenants at year-end.
Operating cash flow was $219.4 million. Investing cash flow used $46.4 million, including $37.0 million for the Zynerba acquisition and net investment purchases. Financing cash flow used $105.6 million, primarily reflecting debt refinancing, debt repayment and share repurchases.
Harmony refinanced the Blackstone facility with a $185.0 million senior secured Term Loan A and a $15.0 million incremental term loan. The loans mature July 26, 2028 and include a $115.0 million maturity payment, in addition to scheduled amortization.
The company believes existing liquidity will fund operational needs and planned investing activities for at least the next 12 months, but notes that projections may prove inaccurate and capital could be consumed sooner than expected.
Harmony repurchased and retired approximately 3.25 million shares for $100.0 million during 2023. The October 2023 program had $150.0 million remaining authorization at year-end.

Material changes versus the prior comparable period

WAKIX net product revenue increased $144.2 million, or 32.9%, year over year.
Research and development expense increased 7.3% to $76.1 million, reflecting higher clinical development activity in PWS, ZYN002, IH, NG1/NG2 and DM1, partly offset by the $30.0 million Bioprojet licensing fee recorded in 2022.
Sales and marketing expense increased 22.9% to $97.4 million, while general and administrative expense increased 13.4% to $95.3 million.
Cost of product sales rose 45.2%, reducing gross margin because of higher WAKIX royalties and an earlier move into a higher royalty tier.
The company completed the Zynerba acquisition for $60.0 million of consideration, excluding approximately $2.6 million of transaction costs. The acquisition generated no revenue in 2023 and resulted in $2.3 million of acquired in-process research and development expense and $7.5 million of severance charges.
The Blackstone Credit Agreement was extinguished, producing a $9.8 million loss on debt extinguishment and approximately $207.3 million of payoff obligations.
Shares outstanding declined from 59.6 million at year-end 2022 to 56.8 million at year-end 2023, primarily due to repurchases, partly offset by equity issuance activity.

Guidance, outlook, commentary and unusual items

Management expects continued WAKIX growth and increased near- and medium-term sales and marketing investment.
The Phase 3 INTUNE study in idiopathic hypersomnia did not meet its primary endpoint with statistical significance. Management reported favorable numerical trends and scheduled an FDA meeting for March 2024 to discuss potential next steps.
Harmony expected to initiate the Phase 3 TEMPO study in Prader-Willi syndrome in the first quarter of 2024. The FDA granted orphan drug designation for PWS in February 2024.
The FDA granted priority review to the pediatric narcolepsy supplemental NDA, with a PDUFA target action date of June 21, 2024.
Data from the NG1 and NG2 pitolisant formulation studies and HBS-102 preclinical studies were expected in the first half of 2024.
Phase 2 topline data in DM1 showed clinically meaningful improvements in excessive daytime sleepiness and fatigue, but the filing states that the study was designed for signal detection and was not powered to establish statistical significance.
Three customers represented 100% of gross product revenue in 2023: CVS Caremark 37%, Accredo 32% and PANTHERx 31%. The company also depends on single-source suppliers for product and active pharmaceutical ingredient.
Multiple generic manufacturers submitted ANDAs seeking approval to market generic WAKIX before expiration of listed patents. Harmony and Bioprojet filed patent infringement actions in the District of Delaware.
The filing states that no known cybersecurity incident had materially affected the company, although management identifies cybersecurity threats that could materially affect operations, strategy, results or financial condition if realized.

Principal risks and contingencies

Concentration of revenue in WAKIX and dependence on continued market acceptance, pricing, reimbursement and safety performance.
Competition from branded, generic and potential future therapies, including generic sodium oxybate and other wake-promoting products.
Regulatory uncertainty, particularly the unsuccessful primary endpoint in IH and the need for additional approvals for pipeline indications.
Patent litigation and the possibility of earlier generic entry, patent invalidation or loss of licensed rights from Bioprojet.
Royalty obligations and potential milestone payments under the Bioprojet agreements, including up to $155.0 million of potential payments under the 2022 LCA and additional HBS-102 milestones.
Dependence on third-party manufacturers, contract research organizations and distributors, including single-source suppliers and foreign manufacturing operations.
Secured debt, variable interest rates, restrictive covenants and the $115.0 million maturity payment due in 2028.
Customer concentration, government and commercial rebate estimates, and pricing pressure from payors and healthcare reform, including the Inflation Reduction Act.
Clinical, product liability, data privacy, cybersecurity, employee retention and acquisition-integration risks.

Most important facts for investors to verify

Whether WAKIX prescription growth, unit volume and net pricing support continued revenue growth after the 2023 price increase.
The sustainability of gross margin given the higher royalty tier and Bioprojet royalty obligations.
The FDA’s response to the IH INTUNE results and the regulatory outcome for pediatric narcolepsy by the June 21, 2024 target date.
Progress, enrollment, safety and efficacy results for the TEMPO, DM1, RECONNECT, NG1/NG2 and HBS-102 programs.
The timing and potential commercial impact of generic WAKIX litigation and ANDA approvals.
Cash generation after share repurchases, Zynerba-related spending, clinical investment and scheduled debt amortization.
Customer and supplier concentration, inventory adequacy, and the accuracy of rebate and sales-deduction estimates.
The terms and potential value of Zynerba’s contingent value rights and the integration of ZYN002.