Harmony Biosciences Holdings, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Harmony Biosciences is a commercial-stage pharmaceutical company focused on rare and other neurological diseases. Its principal product is WAKIX (pitolisant), approved in the United States for excessive daytime sleepiness and cataplexy in adults with narcolepsy. This quarterly report covers the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net product revenue | $117.2 million | $80.7 million | $309.5 million | $214.2 million |
| Gross profit | $94.2 million | $66.1 million | $253.0 million | $176.5 million |
| Gross margin | 80.4% | 81.9% | 81.7% | 82.4% |
| Operating income | $11.9 million | $21.1 million | $72.6 million | $58.9 million |
| Operating margin | 10.2% | 26.1% | 23.4% | 27.5% |
| Net income | $87.9 million | $(9.6) million | $133.0 million | $11.9 million |
| Diluted EPS | $1.44 | $(0.17) | $2.18 | $0.20 |
| Net cash from operations | Not separately disclosed for quarter | Not separately disclosed for quarter | $117.8 million | $61.0 million |
Revenue increased 45.2% year over year in Q3 and 44.5% year over year for the first nine months, driven by growth in average WAKIX patients and price increases. The average number of patients on WAKIX during Q3 was approximately 4,600, and formulary access covered more than 80% of insured U.S. lives.
As of September 30, 2022, cash and cash equivalents were $261.3 million, restricted cash was $0.8 million, and investments totaled $54.7 million, for cash, cash equivalents and investments of approximately $316.0 million. Total assets were $643.5 million and stockholders’ equity was $343.9 million.
Outstanding debt principal was $198.0 million, with a net carrying value of $191.7 million. The debt bears interest at LIBOR, subject to a 1.00% floor, plus 6.50%, and has a significant maturity payment of $145.5 million due in August 2026. The delayed-draw facility of up to $100.0 million was extended to August 9, 2023, subject to a 1% annual ticking fee on undrawn amounts.
Material changes versus the prior comparable period
- Research and development expense increased 245.4% in Q3 and 165.3% for the nine-month period, primarily because of a $30.0 million non-refundable licensing fee under the new Bioprojet agreement and increased clinical development activity.
- Total operating expenses increased 82.7% in Q3 and 53.3% for the nine months, reducing operating margin despite strong revenue growth.
- Cost of product sales increased faster than revenue, causing gross margin to decline by approximately 1.5 percentage points in Q3 and 0.7 percentage points for the nine months. Bioprojet royalties were a principal component of cost of product sales.
- Interest expense declined 26.5% in Q3 and 38.9% for the nine months, primarily reflecting the lower-cost Blackstone Credit Agreement compared with the prior OrbiMed facility.
- Net income benefited from a $79.976 million Q3 income tax benefit, including a $74.474 million discrete benefit from releasing a valuation allowance and a $21.892 million benefit related to utilization of deferred tax assets. This benefit is not indicative of recurring operating performance.
- In July 2022, Harmony entered into a new license and commercialization agreement with Bioprojet for additional pitolisant-based products in the United States and Latin America. The agreement includes potential future payments of up to $155.0 million, in addition to other development-related payments and royalties.
Cash flow, outlook, risks, and unusual items
- For the first nine months, operating cash flow was $117.8 million, investing cash outflow was $94.9 million, and financing cash inflow was $4.2 million. Investing outflows included the $40.0 million final WAKIX sales milestone payment and $55.6 million of investment securities purchases.
- Management believes existing cash, investments, and expected operating and financing cash flows will fund operational liquidity needs and planned investing activities for at least the next twelve months. The filing does not provide formal revenue or earnings guidance.
- Management expects continued investment in clinical programs for idiopathic hypersomnia, Prader-Willi syndrome, and myotonic dystrophy, as well as development of HBS-102 and potential pipeline expansion. The INTUNE Phase 3 idiopathic hypersomnia study had activated more than 70% of targeted sites; topline results for the myotonic dystrophy study were expected in 2023.
- Management reported positive initial topline results from the Prader-Willi syndrome Phase 2 study on the primary excessive-daytime-sleepiness outcome, with the full dataset expected to inform further development.
- Management expected adequate WAKIX supply into the first quarter of 2024, with additional active pharmaceutical ingredient inventory supporting at least 36 months beyond that point, subject to potential manufacturing and distribution disruptions.
- Key risks include dependence on WAKIX and a limited customer base, reliance on single-source suppliers for product and active pharmaceutical ingredient, reimbursement and market acceptance, clinical and regulatory uncertainty, competition, intellectual-property risks, COVID-19-related disruptions, interest-rate exposure, and substantial future debt repayment obligations.
- Three customers represented 100% of nine-month product revenue: CVS Caremark 40%, PANTHERx 30%, and Accredo 30%. The same three customers represented 100% of gross receivables at September 30, 2022.
- The company reported no material legal proceedings, stated that it was in compliance with debt covenants, and concluded that disclosure controls and procedures were effective as of September 30, 2022.
Important facts for investors to verify
- Whether WAKIX patient growth, pricing, formulary access, and revenue momentum continue while COVID-19 and reimbursement pressures recede.
- The recurring earnings impact of higher research and development, sales and marketing, stock-based compensation, royalties, and intangible amortization expenses.
- The extent to which the Q3 and nine-month tax benefits are nonrecurring and how future effective tax rates will compare with reported rates.
- Progress, enrollment, safety, and efficacy data for the idiopathic hypersomnia, Prader-Willi syndrome, and myotonic dystrophy programs.
- Terms, milestones, royalties, and development obligations under the 2022 Bioprojet license and the HBS-102 asset purchase agreement.
- Liquidity relative to the $198.0 million debt balance, variable-rate interest exposure, the delayed-draw facility, and the large August 2026 maturity payment.
- Customer concentration, single-source manufacturing dependence, supply-chain continuity, and the potential for inventory write-offs as WAKIX inventory approaches expiration.