Harmony Biosciences Holdings, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Harmony is a commercial-stage pharmaceutical company focused on rare neurological disorders. Its primary product, WAKIX (pitolisant), is approved in the United States for excessive daytime sleepiness and cataplexy in adults with narcolepsy. The report covers the three months ended March 31, 2021, with comparisons to the three months ended March 31, 2020. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net product revenue | $59.7 million | $19.8 million | Up 200.8% |
| Gross profit | $49.3 million | $16.4 million | Up 201.0% |
| Gross margin | 82.6% | 82.5% | Broadly stable |
| Operating income (loss) | $14.5 million | $(9.6) million | Improved $24.1 million |
| Net income (loss) | $7.4 million | $(38.6) million | Improved $46.0 million |
| Net income (loss) per diluted share | $0.13 | $(6.30) | Improved |
| Cash provided by operating activities | $12.5 million | $(26.7) million | Improved $39.2 million |
| Cash used in investing activities | $(100.0) million | $0.0 million | Cataplexy milestone payment |
Operating expenses were $34.7 million, compared with $26.0 million in the prior-year period. Research and development expense was $4.7 million, sales and marketing expense was $15.5 million, and general and administrative expense was $14.5 million. Operating margin was approximately 24.3%, compared with negative 48.4% in Q1 2020; net margin was approximately 12.4%, compared with negative 194.7%.
At March 31, 2021, cash and cash equivalents were $141.2 million, or $141.9 million including restricted cash. Total assets were $337.3 million and stockholders’ equity was $107.9 million. The company had $194.9 million of long-term debt net of discounts and issuance costs, based on $200.0 million of principal outstanding. The OrbiMed facility matures in January 2026, bears interest at the greater of one-month LIBOR or 2.0%, plus 11.0%, and includes a 7.0% exit fee on principal repaid.
Material changes versus the prior comparable period
- Revenue increased primarily from the continued WAKIX commercial launch and the price increase associated with the October 2020 cataplexy approval.
- Cost of product sales increased to $10.4 million from $3.5 million, primarily reflecting higher WAKIX sales and related royalties. Royalties and sales-based fees recognized in cost of product sales were $9.5 million.
- Research and development expense increased 36.4% to $4.7 million, primarily due to clinical development work in Prader-Willi syndrome and myotonic dystrophy.
- Sales and marketing expense increased 17.0% to $15.5 million due primarily to patient engagement and marketing activities.
- General and administrative expense increased 56.6% to $14.5 million, driven by amortization of the cataplexy milestone intangible asset, stock-based compensation, and public-company insurance costs, partly offset by lower Paragon-related fees.
- Q1 2020 included a $22.6 million loss on extinguishment of the CRG debt and $1.1 million of warrant expense; these items were absent or immaterial in Q1 2021.
- Cash declined by $87.5 million during the quarter, largely because of the $100.0 million milestone payment to Bioprojet made in January 2021.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects revenue to increase over time but cautions that future growth may be affected by product discounts, rebates, payer mix, reimbursement, and the ongoing COVID-19 pandemic.
- As of March 31, 2021, more than 2,700 healthcare professionals had prescribed WAKIX, approximately 2,800 patients were on therapy, and formulary access covered approximately 80% of insured U.S. lives.
- Management expects adequate WAKIX supply through the third quarter of 2022, with additional active pharmaceutical ingredient inventory supporting an estimated 18 to 24 months beyond that period.
- A Phase 2 Prader-Willi syndrome trial was initiated in December 2020, with topline results expected in the first half of 2022. A Phase 2 adult myotonic dystrophy trial was planned for the first half of 2021, with topline results expected in the second half of 2022.
- The pediatric narcolepsy program has been delayed because Bioprojet amended and expanded its Phase 3 trial. Harmony is awaiting trial data before determining the next steps and continues to evaluate strategies for pediatric exclusivity.
- COVID-19 reduced in-person healthcare professional access, patient visits, sleep-testing capacity, and potentially commercial insurance coverage. The company expects the pandemic could adversely affect future revenue growth and clinical-development timelines.
- The company depends on a single-source supplier for its product and active pharmaceutical ingredient and relies on third parties for manufacturing, distribution, and clinical-trial activities.
- Three customers represented 100% of gross product revenue and accounts receivable in the quarter: CVS Caremark, Pantherx, and Accredo. The company also has concentration risk from holding substantially all cash and money-market funds with one financial institution.
- Management states that existing cash, expected operating cash flow, and financing activities should fund operational liquidity needs and planned investments for the next twelve months, but acknowledges that assumptions could prove incorrect and capital could be used sooner.
- The company had an accumulated deficit of $480.8 million and maintains a full valuation allowance against deferred tax assets; no income tax expense was recorded in the quarter.
Most important facts for investors to verify
- Whether WAKIX prescription growth, patient starts, persistence, payer access, and pricing support continued revenue expansion after Q1 2021.
- The sustainability of the approximately 83% gross margin, particularly royalty rates, rebates, discounts, inventory obsolescence, and manufacturing costs.
- Cash burn after the $100.0 million milestone payment and the company’s ability to maintain required minimum liquidity under the OrbiMed credit agreement.
- The impact of COVID-19 on diagnosis rates, healthcare professional access, insurance coverage, patient assistance utilization, and clinical-trial schedules.
- Progress and results of the Prader-Willi syndrome, myotonic dystrophy, and pediatric narcolepsy programs, including regulatory and exclusivity implications.
- Exposure to the single-source supply arrangement, third-party manufacturers, and the concentration of revenue and receivables among three customers.
- The high-cost debt structure, including the stated interest rate, 7.0% exit fee, collateral package, covenants, and potential refinancing requirements before the January 2026 maturity.