Harmony Biosciences Holdings, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Harmony is a commercial-stage rare-disease pharmaceutical company focused on neurological disorders. Its principal product is WAKIX (pitolisant), approved in the United States for excessive daytime sleepiness and cataplexy in adults with narcolepsy. The filing covers the quarter and nine months ended September 30, 2021, with comparisons to the same periods in 2020.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net product revenue | $80.7 million | $45.6 million | $214.2 million | $103.5 million |
| Gross profit | $66.1 million | $37.7 million | $176.5 million | $85.6 million |
| Gross margin | 81.9% | 82.7% | 82.4% | 82.8% |
| Operating income | $21.1 million | $10.4 million | $58.9 million | $9.2 million |
| Operating margin | 26.1% | 22.8% | 27.5% | 8.9% |
| Net income available to common stockholders | $(9.6) million | $(4.1) million | $11.9 million | $(63.6) million |
| Diluted earnings per share | $(0.17) | $(0.14) | $0.20 | $(4.15) |
- Revenue increased 77.0% year over year in Q3 and 107.1% in the first nine months, driven by growing WAKIX sales and pricing related to the cataplexy approval.
- Cost of product sales increased 85.1% in Q3 and 111.6% year to date, primarily reflecting higher WAKIX sales and royalties payable to Bioprojet.
- Operating expenses were $45.1 million in Q3 and $117.6 million year to date, including research and development of $11.7 million and $22.9 million, sales and marketing of $16.5 million and $49.0 million, and general and administrative expense of $16.9 million and $45.7 million, respectively.
- Q3 net loss included a $26.1 million loss on extinguishment of the OrbiMed debt. Excluding this unusual item and other specified adjustments, non-GAAP adjusted net income was $30.4 million in Q3 and $84.7 million for the first nine months.
- Cash, cash equivalents and restricted cash were $190.5 million at September 30, 2021, compared with $229.4 million at December 31, 2020. Cash and cash equivalents alone were $189.7 million.
- Operating activities generated $61.0 million of cash in the first nine months, compared with cash used of $13.0 million in the prior-year period. Investing activities used $100.3 million, primarily for the $100.0 million Bioprojet milestone payment.
- Outstanding debt had a $192.1 million net carrying value, consisting primarily of the $200.0 million Blackstone term loan. The company also has access to a delayed-draw term loan facility of up to $100.0 million beginning August 9, 2022.
- Stockholders’ equity increased to $152.0 million from $97.2 million at year-end 2020. Common shares outstanding were 58.4 million at September 30, 2021.
Material changes versus the prior comparable period
- WAKIX commercial momentum materially increased revenue and operating income, although higher commercial, personnel, stock-based compensation, and development costs also increased expenses.
- In August 2021, Harmony replaced the OrbiMed loan with a $200.0 million Blackstone senior secured term loan, paid approximately $222.0 million to extinguish the OrbiMed debt, and recorded a $26.1 million extinguishment loss.
- Harmony sold 1,048,951 common shares to Blackstone for gross proceeds of $30.0 million and issued 221,511 shares to OrbiMed upon warrant settlement.
- Harmony acquired HBS-102 from ConSynance for $3.5 million and obtained development and commercialization rights outside Greater China. Potential milestone payments total up to $174.75 million, excluding royalties.
- Research and development expense increased 93.7% year to date, primarily because of HBS-102, PWS and myotonic dystrophy clinical development, and higher stock compensation.
- General and administrative expense increased 73.9% year to date, mainly due to amortization of the cataplexy-related intangible asset, higher stock compensation, public-company costs, and increased headcount.
Guidance, outlook, management commentary, risks and unusual items
- Management stated that existing cash, anticipated operating cash flow, financing activities, and potential delayed-draw debt availability are expected to fund operational and planned investing needs for at least the next 12 months. Management noted that this conclusion depends on assumptions that may prove incorrect.
- As of September 30, approximately 40% of about 8,000 targeted healthcare professionals had prescribed WAKIX, the average number of patients on WAKIX was approximately 3,500, and formulary access covered approximately 80% of insured U.S. lives.
- Management expected continued, but decreasing, COVID-19-related pressure on demand as healthcare access improves. Risks include reduced healthcare professional access, changes in insurance coverage, delayed diagnosis and treatment, clinical-trial disruption, sleep-lab access limitations, supply-chain interruptions, and potential FDA delays.
- The company expected adequate WAKIX supply through the fourth quarter of 2022, with additional active pharmaceutical ingredient inventory supporting at least 24 months beyond that period, subject to manufacturing and distribution risks.
- Management anticipated topline results from the PWS Phase 2 trial in the first half of 2022 and from the DM1 Phase 2 trial in the second half of 2022. The pediatric narcolepsy program timeline was delayed because Bioprojet amended and expanded its Phase 3 trial; Harmony planned to await the data before determining the next steps.
- The Blackstone facility bears interest at LIBOR, subject to a 1.00% floor, plus 6.50%, matures in August 2026, is secured by company assets subject to specified exceptions, and requires at least $10.0 million of cash and cash equivalents in designated accounts.
- Customer and receivables concentration is significant: three specialty-pharmacy customers represented 100% of gross receivables and 100% of first-nine-month revenue. The company also relies on a single-source supplier for its product and active pharmaceutical ingredient.
- The company reported no material pending legal proceedings, no defaults upon senior securities, and effective disclosure controls as of September 30, 2021.
Important facts for investors to verify
- Whether WAKIX prescription growth, patient additions, pricing, reimbursement, and formulary access support continued revenue growth after the initial commercialization ramp.
- The timing and results of the PWS and DM1 clinical programs and the revised pediatric narcolepsy development strategy.
- Progress and capital requirements for HBS-102, including potential milestone payments, royalties, and clinical-development decisions.
- Compliance with Blackstone debt covenants, the required cash minimum, interest-rate exposure, amortization schedule, and the $145.5 million maturity payment in 2026.
- The sustainability of operating cash generation after excluding the $26.1 million debt-extinguishment charge and other non-cash adjustments.
- Exposure to customer concentration, single-source manufacturing, inventory expiration and obsolescence, COVID-19 effects, regulatory changes, and reimbursement or competitive pressure.
- The impact of intangible-asset amortization, stock-based compensation, and other non-GAAP adjustments when assessing earnings quality.