Harmony Biosciences Holdings, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Harmony Biosciences is a commercial-stage pharmaceutical company focused on rare neurological diseases. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021 and 2020. The company’s sole approved commercial product is WAKIX (pitolisant), approved in the United States for excessive daytime sleepiness and cataplexy in adults with narcolepsy.
Harmony launched WAKIX in November 2019 and is developing additional pitolisant indications for idiopathic hypersomnia, Prader-Willi syndrome and myotonic dystrophy. It is also advancing HBS-102, an MCHR1 antagonist, through preclinical development.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net product revenue | $437.9 million | $305.4 million | +43.4% |
| Gross profit | $354.4 million | $249.9 million | +41.8% |
| Gross margin | 80.9% | 81.8% | Down approximately 90 bps |
| Operating income | $120.2 million | $87.5 million | +37.3% |
| Net income | $181.5 million | $34.6 million | +424.5% |
| Diluted EPS | $2.97 | $0.58 | +412.1% |
| Cash flow from operations | $144.5 million | $98.6 million | +46.6% |
| Cash flow from investing | $(141.8) million | $(100.3) million | Greater use of cash |
| Cash flow from financing | $6.8 million | $7.4 million | Down slightly |
- Revenue growth reflected increased average WAKIX patients and price increases. Average patients on WAKIX in the fourth quarter were approximately 4,900.
- Cost of product sales was $83.5 million, up 50.4%, primarily due to higher WAKIX sales and royalties to Bioprojet.
- Research and development expense increased 133.4% to $70.9 million, principally due to a $30.0 million non-refundable licensing fee under the 2022 Bioprojet agreement and higher clinical development and personnel costs.
- Sales and marketing expense increased 16.4% to $79.3 million, driven by sales-force expansion, marketing activity and patient assistance programs.
- General and administrative expense increased 31.5% to $84.0 million, including higher stock compensation, personnel costs, travel and amortization of the $40.0 million WAKIX sales milestone capitalized as an intangible asset.
- The $76.8 million income tax benefit included a $96.4 million release of the deferred-tax-asset valuation allowance. This substantially increased reported net income and is an unusual, largely non-cash item.
- Stock-based compensation expense was $26.9 million, compared with $16.1 million in 2021.
Liquidity, debt and capital resources
- Cash, cash equivalents, restricted cash and investments totaled $346.4 million at December 31, 2022, including $243.8 million of cash and cash equivalents and $101.9 million of available-for-sale investments.
- Outstanding debt was $197.5 million of principal, with a net carrying value of $191.6 million after unamortized debt issuance costs.
- The debt consists primarily of the Blackstone senior secured term loan. It bears interest at LIBOR, subject to a 1.00% floor, plus 6.50%, and matures on August 9, 2026.
- Scheduled principal payments are $2.0 million in 2023, $20.0 million in 2024, $20.0 million in 2025 and $155.5 million in 2026.
- The delayed-draw facility permits borrowing of up to $100.0 million through August 9, 2023 and carries a 1% annual ticking fee on undrawn amounts beginning August 10, 2022.
- The credit agreement is secured by company assets, includes restrictive covenants and requires at least $10.0 million of cash and cash equivalents in specified accounts. Harmony reported compliance with its covenants at year-end.
- Management stated that existing liquidity, anticipated operating cash flow and borrowing capacity should fund operational needs and planned investments for at least the next 12 months.
Material changes versus the prior comparable period
- WAKIX revenue increased $132.4 million year over year, while operating income rose $32.7 million.
- Operating cash flow increased $45.9 million, supported by higher profitability, despite a $19.9 million increase in trade receivables.
- Investing cash outflows increased to $141.8 million, primarily due to $110.7 million of investment purchases and the $40.0 million Bioprojet milestone payment.
- Unlike 2021, Harmony recorded no debt extinguishment loss in 2022. The 2021 period included a $26.1 million loss associated with refinancing the OrbiMed facility.
- Net income benefited materially from the release of the $96.4 million deferred-tax valuation allowance after the company achieved three years of cumulative pretax income.
- Harmony entered into the 2022 License and Commercialization Agreement with Bioprojet for additional pitolisant-based products in the United States and Latin America. Up to $155.0 million of additional milestone payments may become due, in addition to royalties.
- WAKIX formulary access exceeded 80% of insured U.S. lives as of December 31, 2022.
Guidance, outlook, risks and unusual items
- Management expects continued investment in WAKIX commercialization and in clinical development for idiopathic hypersomnia, Prader-Willi syndrome and myotonic dystrophy. The filing does not provide formal 2023 revenue or earnings guidance.
- The Phase 3 INTUNE study in idiopathic hypersomnia had approximately 85% of targeted sites activated at year-end.
- Phase 2 Prader-Willi syndrome topline data showed a positive signal on the primary excessive-daytime-sleepiness outcome. The full data set was under analysis, with a planned FDA end-of-Phase 2 meeting and an intended Phase 3 program.
- Topline results from the myotonic dystrophy Phase 2 study were anticipated in the fourth quarter of 2023.
- Bioprojet received a positive EMA CHMP opinion for pediatric narcolepsy on January 26, 2023. Harmony was pursuing a supplemental FDA application and pediatric exclusivity.
- Key business risks include dependence on WAKIX as the only approved product, competition from branded and generic therapies, pricing and reimbursement pressure, regulatory and clinical trial uncertainty, reliance on Bioprojet, sole-source manufacturing and supply relationships, and concentration among three customers that represented 100% of gross product revenue.
- Additional risks include the secured debt covenant structure, potential future milestone and royalty payments, intellectual-property challenges, cybersecurity and data-privacy exposure, and possible healthcare-pricing reforms.
- No material litigation was outstanding at December 31, 2022, and the company reported effective disclosure controls and internal control over financial reporting. Deloitte & Touche issued unqualified audit opinions.
Important facts for investors to verify
- Whether WAKIX patient growth, pricing and formulary access can sustain revenue growth and offset rising royalties and commercial expenses.
- The effect of the $96.4 million tax valuation-allowance release on normalized earnings and future tax expense.
- Remaining Bioprojet milestone obligations, sales-based royalties and the potential $155.0 million of payments under the 2022 LCA.
- The timing, cost and regulatory probability of the idiopathic hypersomnia, Prader-Willi syndrome, myotonic dystrophy and pediatric narcolepsy programs.
- Debt repayment capacity, the 2026 maturity concentration and compliance with secured-loan covenants, including the minimum cash requirement.
- Exposure to customer concentration, sole-source suppliers, inventory expiration and potential WAKIX supply interruptions.
- Competitive effects from generic sodium oxybate, lower-priced therapies and other developing narcolepsy treatments.