Harmony Biosciences Holdings, Inc. annual report, FY2021

Harmony Biosciences Holdings, Inc. — FY2021 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2021, filed February 28, 2022. Harmony is a commercial-stage rare-disease pharmaceutical company focused on neurological disorders. Its only commercially approved product is WAKIX (pitolisant), approved in the United States for excessive daytime sleepiness and cataplexy in adults with narcolepsy.

WAKIX commercial launch began in November 2019.
Average patients on WAKIX at the end of 2021 were approximately 3,800; formulary access covered approximately 80% of insured U.S. lives.
The pipeline included Phase 2 programs in Prader-Willi syndrome and myotonic dystrophy type 1, and a planned Phase 3 program in idiopathic hypersomnia.
In August 2021, the company acquired HBS-102, an MCHR1 antagonist, for an upfront payment of $3.5 million, with additional potential milestone and royalty obligations.

Financial performance and key metrics

Metric	FY2021	FY2020	Change
Net product revenue	$305.4 million	$159.7 million	Up 91.2%
Gross profit	$249.9 million	$132.0 million	Up 89.3%
Gross margin	81.8%	82.6%	Down approximately 80 bps
Operating income	$87.5 million	$17.0 million	Up $70.5 million
Net income (loss)	$34.6 million	$(36.9) million	Improved by $71.5 million
Diluted EPS	$0.58	$(2.48)	Improved
Operating expenses	$162.4 million	$115.0 million	Up 41.2%
Net cash from operating activities	$98.6 million	$(3.0) million	Improved by $101.5 million

Operating margin was approximately 28.7%; net margin was approximately 11.3%.
Research and development expense increased 56.1% to $30.4 million, primarily from PWS and DM development, HBS-102 acquisition costs and stock compensation.
Sales and marketing expense increased 22.0% to $68.1 million, reflecting patient engagement, marketing activities and stock compensation.
General and administrative expense increased 60.8% to $63.9 million, driven by amortization of the cataplexy milestone intangible asset, stock compensation, public-company insurance and increased headcount.
Cost of product sales was $55.5 million, including $51.0 million of sales-based, trademark and tiered royalties to Bioprojet.
Cash, cash equivalents and restricted cash totaled $235.1 million at year-end, including $234.3 million of cash and cash equivalents.
Total assets were $433.4 million; total liabilities were $246.9 million; stockholders’ equity was $186.5 million.

Debt, liquidity and cash flow

Debt outstanding was $199.5 million at December 31, 2021, with a net carrying value of $192.0 million.
In August 2021, the company entered into a $200.0 million senior secured term loan and a delayed-draw facility of up to $100.0 million. The delayed-draw facility was available through August 9, 2022.
The term loan bears interest at LIBOR, subject to a 1.00% floor, plus 6.50%, and matures August 9, 2026. A $145.5 million principal payment is due at maturity.
The credit agreement requires at least $10.0 million of cash and cash equivalents in specified deposit accounts and includes restrictive covenants. The company reported compliance with the covenants at year-end.
Investing cash use was $100.3 million, primarily the $100.0 million Bioprojet cataplexy milestone payment made in January 2021.
Financing cash flow was $7.4 million after Blackstone debt proceeds, common-stock proceeds, repayment of the OrbiMed loan and related exit fees.
Management believes available cash and expected operating and financing cash flows will fund operational liquidity needs and planned investing activities for the next 12 months, although this assessment depends on assumptions that may prove incorrect.

Material changes versus the prior comparable period

Revenue nearly doubled as WAKIX patient utilization increased and pricing reflected the expanded cataplexy indication approved in October 2020.
The company moved from a $36.9 million net loss to $34.6 million net income, despite higher operating expenses and a $26.1 million loss on debt extinguishment.
Operating cash flow turned positive at $98.6 million, compared with $3.0 million of cash used in operations in 2020.
The company refinanced the OrbiMed debt with the Blackstone facility, issued approximately $30.0 million of common stock to Blackstone and recorded a $26.1 million debt-extinguishment loss.
The $100.0 million Bioprojet cataplexy milestone was paid in January 2021. After year-end, the company reached $500.0 million in aggregate U.S. WAKIX net sales, triggering an additional $40.0 million Bioprojet payment expected in March 2022.
Common shares outstanding increased to 58.8 million at December 31, 2021, from 56.9 million at December 31, 2020, primarily due to common-stock issuance and equity award exercises.
The company ceased to qualify as an emerging growth company as of December 31, 2021 and became subject to additional public-company reporting and internal-control requirements.

Guidance, outlook, commentary and risks

Management did not provide a quantitative revenue or earnings outlook in the filing.
Topline results from the PWS Phase 2 trial were expected in the second half of 2022; DM1 Phase 2 results were expected in 2023; and the IH Phase 3 trial was planned for the first half of 2022.
Management expected research and development and sales and marketing expenses to remain significant or increase as clinical programs and commercialization activities advance.
The company expected adequate WAKIX supply into the first quarter of 2023, with additional active pharmaceutical ingredient inventory supporting at least 36 months beyond that period, subject to potential supply-chain disruptions.
COVID-19 continued to limit healthcare-professional access, patient visits, diagnosis and clinical-trial execution, and increased reliance on patient assistance and free-drug programs.
WAKIX revenue is highly concentrated: three customers represented 100% of gross product revenue in 2021, with CVS Caremark at 36%, PANTHERx at 35% and Accredo at 29%.
The company relies on a single-source supplier for product, product candidates and active pharmaceutical ingredient, and depends on third parties for manufacturing, packaging, storage and distribution.
Key risks include dependence on WAKIX as the sole approved product, competition and potential generic entry, reimbursement and pricing pressure, regulatory and clinical-development uncertainty, Bioprojet license obligations, debt covenants, intellectual-property challenges and future capital requirements.
The filing states that no pending litigation was expected to have a material adverse effect on results, financial condition or cash flows.

Important facts investors should verify

Whether WAKIX prescription growth and patient conversion continue after COVID-19-related access and insurance disruptions.
Actual gross-to-net deductions, rebate accruals and customer concentration; the Medicaid rebate accrual was identified as the critical audit matter.
Timing and amount of the $40.0 million Bioprojet milestone payment and ongoing royalty rates of 13% to 24%, plus a 3% trademark royalty.
Ability to meet the Blackstone debt amortization schedule, maintain the $10.0 million minimum cash covenant and refinance or repay the large 2026 maturity.
Clinical-trial enrollment, safety and efficacy results for PWS, DM1 and idiopathic hypersomnia, and any resulting regulatory filings or approvals.
Supply continuity and qualification of alternative manufacturers given reliance on single-source suppliers.
Patent and regulatory exclusivity timelines, including WAKIX orphan exclusivity reported through 2026 for EDS and 2027 for cataplexy, and patent expirations primarily in 2029-2030.
Use and potential limitation of approximately $98.1 million of federal and $120.1 million of state net operating loss carryforwards.