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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-03-25 · 176 added, 341 removed, 189 unchanged (73% of the section changed)

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Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this Annual Report.

We are a commercial-stage pharmaceutical company focused on developing and commercializing innovative therapies for patients living with rare neurological disorders who have unmet medical needs.

We are a commercial-stage, rare disease pharmaceutical company focused on developing and commercializing innovative therapies for patients living with rare neurological diseases who have unmet medical needs.

Our product, WAKIX (pitolisant), is a first-in-class molecule with a novel mechanism of action (“MOA”) specifically designed to increase histamine signaling in the brain by binding to H 3 receptors.

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WAKIX is the first-and-only approved product for patients with narcolepsy that is not scheduled as a controlled substance by the Drug Enforcement Administration (the “DEA”).

We plan to pursue label expansion for WAKIX in narcolepsy in pediatric patients and engage with the FDA in pursuit of pediatric exclusivity.

We currently expect to initiate a Phase 3 clinical trial in pediatric patients in the second half of 2021 in pursuit of indications for both EDS and cataplexy.

We believe that pitolisant’s ability to regulate histamine gives it the potential to provide therapeutic benefit in other rare neurological disorders that are mediated through H 3 receptors and histamine signaling.

We are initially focusing on the treatment of EDS associated with Prader-Willi Syndrome (“PWS”) and myotonic dystrophy, otherwise known as dystrophia myotonica (“DM”).

In December 2020, we initiated a Phase 2 clinical trial to evaluate pitolisant for the treatment of EDS and other key symptoms in patients with PWS and anticipate topline results in the first half of 2022.

We are also planning to commence a Phase 2 clinical trial in adult patients with DM in the first half of 2021, with topline results expected in the second half of 2022, under our open Investigational New Drug application (“IND”).

Beyond these indications, we intend to further explore pitolisant in other rare neurological disorders in which fatigue and cognitive impairment are prominent symptoms with significant impact on daily functioning.

We also seek to expand our pipeline through the acquisition of additional assets that focus on addressing the unmet needs of patients with neurological disorders.

We intend to target assets that will be complementary to WAKIX and our expanding list of potential new indications for WAKIX, and assets that will allow us to further leverage the expertise and infrastructure that we have successfully built at Harmony.

We are currently pursuing label expansion for WAKIX in narcolepsy in pediatric patients and have engaged with the FDA in pursuit of pediatric exclusivity.

Our strategic partner, Bioprojet is evaluating pitolisant in pediatric patients with narcolepsy and has completed a Phase 3 trial.

We will be working with Bioprojet to assess the data from the Phase 3 trial to inform how best to advance the pediatric narcolepsy program.

We believe that our strategic decision to assess this data first before advancing the pediatric program is the most prudent and thoughtful path forward from a development and financial perspective.

In the meantime, we are continuing to evaluate regulatory strategies with regard to obtaining pediatric exclusivity.

We anticipate providing an update on the path forward later this year.

We believe that pitolisant’s ability to regulate histamine gives it the potential to provide therapeutic benefit in other rare neurological diseases that are mediated through H 3 receptors and histamine signaling.

Beyond narcolepsy, we are initially focusing on the treatment of EDS associated with Prader-Willi Syndrome (“PWS”) and myotonic dystrophy, otherwise known as dystrophia myotonica (“DM”).

We opened an investigational new drug application (“IND”) for pitolisant for the treatment of PWS in November 2019, completed a Phase 1 PK clinical trial in pediatric patients with PWS in December of 2019, then initiated a long-term, open-label safety trial in those patients who participated in the Phase 1 PK trial.

In December 2020, we initiated a Phase 2 clinical proof of concept trial to evaluate pitolisant for the treatment of EDS and other key symptoms in patients with PWS and anticipate topline results from this trial in the second half of 2022.

In June 2021, we initiated a Phase 2 clinical trial to evaluate pitolisant for the treatment of EDS, fatigue and cognitive

dysfunction in adult patients with DM1 and anticipate topline results in 2023.

In addition to these potential indications, we opened an IND for pitolisant for the treatment of idiopathic hypersomnia (“IH”) in November 2021 and plan to initiate a Phase 3 trial in adult patients with IH in the first half of 2022.

We also seek to expand our pipeline through the acquisition of additional assets that focus on addressing the unmet needs of patients with rare neurological diseases and are targeting assets that will allow us to further leverage the expertise and infrastructure that we have successfully built at Harmony so we can optimize the benefit of internal synergies.

Consistent with this objective, on August 4, 2021, we acquired HBS-102, a Melanin-concentrating hormone receptor 1 (MCHR1) antagonist previously developed as CSTI-100/ALB-127258(a)/ALB-127258 (the “Compound”), along with intellectual property and other assets related to the development, manufacture, and commercialization of the Compound from ConSynance Therapeutics, Inc.

In connection with the acquisition, we made an upfront payment of $3.5 million and will be required to make certain payments upon the achievement of certain development milestones, regulatory milestones, and sales milestones and pay ongoing royalties upon commercialization.

We acquired full development and commercialization rights globally, but we have provided a grant-back license to ConSynance for the development and commercialization of the Compound in Greater China.

We are currently assessing potential clinical targets for HBS-102 which will inform our development strategy going forward.

Pitolisant was developed by Bioprojet and approved by the European Medicines Agency (“EMA”) in 2016 for the treatment of narcolepsy in adult patients with or without cataplexy.

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In February 2020, we changed our name to Harmony Biosciences Holdings, Inc.

Our operations to date have consisted of building and staffing our organization, acquiring the rights to pitolisant, raising capital, opening an IND for pitolisant, initiating an Expanded Access Program (“EAP”) for pitolisant for appropriate patients in the United States, preparing and submitting our NDA for pitolisant, gaining NDA approval for WAKIX for the treatment of EDS or cataplexy in adult patients with narcolepsy, and launching and commercializing WAKIX in the United States.

In addition, we have initiated or intend to initiate clinical development programs in PWS, DM and pediatric narcolepsy to pursue potential new indications.

Our operations to date have consisted of building and staffing our organization, acquiring the rights to pitolisant, raising capital, opening an IND for pitolisant in narcolepsy, conducting an Expanded Access Program (“EAP”) for pitolisant for appropriate patients with narcolepsy in the United States, preparing and submitting our NDA for pitolisant, gaining NDA approval for WAKIX for the treatment of EDS or cataplexy in adult patients with narcolepsy, and launching and commercializing WAKIX in the United States.

In addition, we have opened INDs for development programs in PWS, DM and IH and have initiated clinical trials in PWS and DM in pursuit of potential new indications in those rare disease patient populations.

We also plan to initiate a Phase 3 trial in IH in the first half of 2022.

Initial Public Offering

On August 21, 2020, we completed the initial public offering (“IPO”) of our common stock, in which we sold 6,151,162 shares, including 802,325 shares pursuant to the underwriters’ over-allotment option.

The shares began trading on the Nasdaq Global Market on August 19, 2020.

In August 2020, we completed the initial public offering (“IPO”) of our common stock, in which we sold 6,151,162 shares, including 802,325 shares pursuant to the underwriters’ over-allotment option.

The shares were sold at an IPO price of $24.00 per share for net proceeds of approximately $135.4 million, after deducting underwriting discounts and commissions and offering expenses of approximately $12.2 million.

Upon the closing of the IPO, all outstanding shares of our convertible preferred stock were automatically converted into shares of common stock and the accrued dividend payable to holders of the convertible preferred stock was paid out in shares of common stock, resulting in a total of 42,926,630 shares of common stock being issued to former holders of our convertible preferred stock, and warrants exercisable for convertible preferred stock were automatically converted into warrants exercisable for a total of 410,239 shares of common stock.

Liquidity and Sources of Funding

For the year ended December 31, 2020, we generated $159.7 million of net product revenues.

We have financed our operations primarily with (a) proceeds from sales of our convertible preferred stock, (b) borrowings under (i) our multi-draw term loan agreement (the “Loan Agreement”) with CRG Servicing LLC (“CRG”) and (ii) our credit agreement (the “Credit Agreement”) with OrbiMed Royalty & Credit Opportunities III, LP (“OrbiMed”), and (c) proceeds from our IPO.

As of December 31, 2020, we had cash, cash equivalents and restricted cash of $229.4 million and accumulated deficit of $488.2 million.

As of December 31, 2020, we had outstanding debt, net of issuance costs, of $194.3 million.

We believe that our anticipated cash from operating and financing activities and existing cash and cash equivalents will enable us to meet our operational liquidity needs and fund planned investing activities for the next twelve months.

We have based this estimate on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we expect.

See “—Liquidity and Capital Resources.”

Our revenues and expenses in future quarters may differ from our expectations as we:

commercialize WAKIX in the United States for the treatment of EDS or cataplexy in adult patients with narcolepsy;

incur sales and marketing costs to support the commercialization of WAKIX and any additional product candidates;

pay royalties and make milestone payments to Bioprojet for the license of WAKIX;

incur manufacturing costs for WAKIX and any additional product candidates;

implement post-approval requirements related to WAKIX;

conduct clinical trials in PWS, DM, and potential new indications for pitolisant or any additional product candidates;

conduct a pediatric narcolepsy program in pursuit of an indication and extension of our patents based on pediatric exclusivity;

conduct earlier stage research and development activities for pitolisant;

support independent investigator-initiated research for which there is a valid scientific rationale;

hire additional personnel;

invest in measures to protect and expand our intellectual property;

incur interest expenses in conjunction with our debt facility;

seek regulatory approvals for pitolisant or any additional product candidates that successfully complete clinical development;

conduct additional clinical trials in pursuit of potential new indications for pitolisant;

acquire or in-license other assets and technologies;

incur additional costs associated with being a public company.

Commercial Launch Metrics

As of December 31, 2020, over 2,400 unique healthcare professionals (“HCPs”) (out of a total of approximately 8,000 HCPs who treat approximately 90% of diagnosed narcolepsy patients) have prescribed WAKIX since it became available in November 2019.

As of December 31, 2021, we continue to see growth in unique healthcare professional (“HCP”) prescribers of WAKIX since it became available in November 2019.

The average number of patients on WAKIX at the end of 2021 was approximately 3,800.

We have secured formulary access for approximately 80% of all insured lives (Commercial, Medicare and Medicaid) in the United States.

Additionally, as of December 31, 2021, we have secured formulary access for approximately 80% of all insured lives (Commercial, Medicare and Medicaid) in the United States.

Within these covered lives, we have observed favorable access to WAKIX subsequent to the expanded approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy in October 2020.

COVID-19 Business Update

With the global impact of the COVID-19 pandemic, we have developed a response strategy that includes establishing cross-functional response teams and implementing business continuity plans to manage the impact of the pandemic on our employees, patients, HCPs, and our business.

Despite our response strategy, the COVID-19 pandemic is having an effect on our business and the pharmaceutical industry in general, and is impacting the way stakeholders interact with one another during this pandemic.

We continue to leverage technology and virtual engagement initiatives to offset our reduced in-person access to HCPs.

The COVID-19 pandemic, which has led to high unemployment and corresponding loss of medical insurance, has caused a change in relationship dynamics between patients and their HCPs and has impacted the way patients take, or do not take, their medication.

Based on these factors, we expect that the revenue growth rate in possible future quarters may be adversely impacted by the ongoing COVID-19 pandemic.

We continue to identify new and innovative ways to maintain meaningful engagement, generate awareness and educate our patients, HCPs and payors to minimize the pressure from the COVID-19 pandemic on our business and support our commercial launch performance.

During the COVID-19 pandemic, we developed a response strategy that included establishing cross-functional response teams and implementing business continuity plans to manage the impact of the pandemic on our employees, patients, HCPs, and our business.

Despite our response strategy, the COVID-19 pandemic has had an effect on our business and the pharmaceutical industry in general.

Although the pandemic has impacted the way stakeholders interact with one another, we have leveraged technology and virtual engagement initiatives to offset our reduced in-person access to HCPs.

The COVID-19 pandemic also led to high unemployment and corresponding loss of medical insurance for many patients, caused a change in relationship dynamics between patients and their HCPs, and impacted the way patients took, or did not take, their medication.

As a result, we were not able to adequately gauge our growth rate and believe that our growth may be adversely impacted in the future if there is a reemergence or future outbreak of COVID-19, including any COVID-19 variant.

We intend to maintain meaningful engagement, generate awareness and educate our patients, HCPs and payors to support our commercial launch performance.

Commercialization

With respect to our commercialization activities, we believe the COVID-19 pandemic is putting pressure on top-line prescription demand for WAKIX, primarily due to (i) our field sales team’s reduced ability to access HCPs in person, and (ii) fewer patients seeing HCPs for prescriptions or treatments.

The impact on demand for WAKIX may also be related to a reduced ability of prescribers to diagnose narcolepsy patients given the limitations in access to sleep testing, the reduced ability to see patients due to (i) cancelled appointments and (ii) the reprioritization of healthcare resources toward the treatment of COVID-19, both of which lead to fewer prescriptions.

Despite these challenges, we continue to engage and educate HCPs virtually on the overall benefit/risk profile of WAKIX and continue to provide support for people living with narcolepsy.

As offices, clinics and institutions have begun to allow limited in-person interactions pursuant to health authority and local government guidelines, our field teams continue to re-initiate in-person interactions with HCPs and customers, but the timing and level of engagement vary by account and region and may be adversely impacted in the future where reemergence or future outbreaks of COVID-19 may occur.

High unemployment and the corresponding loss of health insurance is causing some eligible patients to shift from commercial insurance to free goods and patient assistance programs, which impacts our ability to convert demand to revenue.

Depending on the scale and ultimate duration of the COVID-19 pandemic and the extent of an economic slowdown, widespread unemployment and resulting loss of employer-sponsored insurance coverage, we may experience a shift from commercial payor coverage to government payor coverage or continued/increased demand for patient assistance and/or free drug programs, which could further impact our net revenue in the coming quarters.

We currently expect to have adequate supply of WAKIX through the first half of 2022, with additional API on-hand inventory to support 12 to 18 months beyond this time frame.

We are working closely with our third-party manufacturers, distributors and other partners to manage our supply chain activities and mitigate potential disruptions to our product supplies as a result of the COVID-19 pandemic.

We believe that our access to the required production lines to produce additional API and WAKIX finished product throughout the next 12-18 months will not be directly impacted by the potential need to reprioritize manufacturing resources due to the production of materials utilized for COVID-19 vaccines.

With respect to our commercialization activities, we believe the COVID-19 pandemic has put pressure on top-line prescription demand for WAKIX, primarily due to (i) our field sales team’s reduced ability to access HCPs in person, and (ii) fewer patients seeing HCPs for prescriptions or treatments.

The impact on demand for WAKIX may have also been related to a reduced ability of prescribers to diagnose narcolepsy patients given the limitations in access to sleep testing, the reduced ability to see patients due to (i) cancelled appointments and (ii) the reprioritization of healthcare resources toward the treatment of COVID-19, both of which lead to fewer prescriptions.

Despite these challenges, we continued to engage and educate HCPs virtually on the overall benefit/risk profile of WAKIX and continued to provide support for people living with narcolepsy.

As offices, clinics and institutions have increased in-person interactions pursuant to health authority and local government guidelines, our field teams are re-initiating in-person interactions with HCPs and customers, but the timing and level of engagement may vary by account and region and may be adversely impacted in the future where reemergence or future outbreaks of COVID-19, including the rise of variants, may occur.

Access to HCPs for our sales team is still limited and despite the economy beginning to open up, we are still in a transition phase and expect continued, but decreasing, pressure on top line demand in future quarters as the challenges presented by COVID-19 begin to subside.

During the pandemic, elevated unemployment and the corresponding loss of health insurance caused some eligible patients to shift from commercial insurance to free drug and patient assistance programs, which impacted our ability to convert demand into revenue.

Given the high unemployment rates and resulting loss of employer-sponsored insurance coverage, some patients also shifted from commercial payor coverage to government payor coverage, which may have impacted, and may continue to impact, our net revenue.

We currently expect to have adequate supply of WAKIX into the first quarter of 2023, with additional API on-hand inventory to support at least 36 months beyond this time frame.

We continue to work closely with our third-party manufacturers, distributors and other partners to manage our supply chain activities and mitigate potential disruptions to our product supplies as a result of the COVID-19 pandemic.

We believe that our access to the required production lines to produce additional API and WAKIX finished product throughout the next 12 to 18 months may not be directly impacted should there be a need to reprioritize manufacturing resources for the production of materials utilized for COVID-19 vaccines.

Our manufacturing partners in France and the United States continue to be operational.

If the COVID-19 pandemic persists for an extended period of time and/or begins to impact essential distribution systems such as transatlantic freight, FedEx, UPS and postal delivery, we could experience disruptions to our supply chain and operations with associated delays in the manufacturing and supply of our products.

If there is a subsequent outbreak of COVID-19, or if it reemerges for an extended period of time and/or begins to impact essential distribution systems such as transatlantic freight, FedEx, UPS and postal delivery, we may experience disruptions to our supply chain and operations with associated delays in the manufacturing and supply of our products.

Research and Development

The COVID-19 pandemic has negatively impacted the pharmaceutical industry’s ability to conduct clinical trials.

While we initially experienced some challenges due to the COVID-19 pandemic, we have taken measures and put contingency plans in place in order to advance our clinical development programs.

We have implemented remote and virtual approaches to clinical trials, including using telemedicine for remote clinic visits to perform efficacy assessments and sending out licensed HCPs to each patient to collect safety assessments (e.g.

The COVID-19 pandemic has negatively impacted the pharmaceutical industry’s ability to conduct clinical trials and this impact was recently accentuated with the emergence of the Omicron variant during the second half of 2021.

As a result of some challenges that we have experienced due to the COVID-19 pandemic, we have taken measures and put contingency plans in place in order to advance our clinical development programs.

We implemented remote and virtual approaches to clinical trials, including using telemedicine for remote clinic visits to perform efficacy assessments and sending out licensed HCPs to each patient to collect safety assessments (e.g.

labs, electrocardiograms) as required by the protocols.

We are also performing remote site visits and data monitoring where possible.

These measures are being instituted with the intent of maintaining patient safety and trial continuity while preserving study integrity.

One unique challenge we are facing is the ability to access sleep labs during the COVID-19 pandemic in order to conduct objective sleep testing, which is required for some of our clinical trials.

We performed and continue to perform remote site visits and data monitoring where possible.

These measures were instituted with the intent of maintaining patient safety and trial continuity while preserving study integrity.

One unique challenge we continue to face is the ability to access sleep labs during the COVID-19 pandemic in order to conduct objective sleep testing, which is required for some of our clinical trials.

In addition, we rely on contract research organizations (“CROs”) or other third parties to assist us with clinical trials, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic.

If the COVID-19 pandemic continues and persists for an extended period of time, or reemerges in the future, we could experience significant delays in our clinical development timelines, which would adversely affect our business, financial condition, results of operations and growth prospects.

Another impact from COVID has been the challenge at the clinical trial site level due to staffing shortages and/or personnel being pulled off clinical trials to care for patients with COVID.

In addition, the COVID-19 pandemic has resulted in a significant increase in FDA workload as well as the need to reprioritize the projects under review.

As a result, we may experience delays in FDA timelines along the course of the regulatory process (e.g.

milestone meetings) and PDUFA action dates.

If there is a subsequent outbreak of COVID-19 or any variant thereof or if it reemerges for an extended period of time in the future, we may experience significant delays in our clinical development timelines, which would.

adversely affect our business, financial condition, results of operations and growth prospects.

Corporate Development and Other Financial Impacts

The COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of domestic and global financial markets.

If the disruption persists and/or worsens, we may be unable to access additional capital, which could negatively affect our ability to execute on certain corporate development transactions or other important investment opportunities.

The pandemic could also impact our ability to conduct in-person due diligence, negotiations, and other interactions to identify new opportunities.

The COVID-19 pandemic has also affected, and continues to affect, our business operations and financial results.

The extent of the impact of the COVID-19 pandemic on our ability to generate sales of, and revenues from, our approved products, our clinical development and regulatory efforts, our corporate development objectives and the value of and market for our common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of or reemergence of outbreaks, governmental travel restrictions, quarantines, social distancing and business closure requirements in the United States, France, and other countries, and the effectiveness of actions taken globally to contain and treat COVID-19.

The COVID-19 pandemic evolved rapidly and caused a significant disruption of domestic and global financial markets.

In addition, the pandemic limited our ability to conduct in-person due diligence and other interactions to identify new opportunities.

If there is a subsequent outbreak of COVID-19 or any variant thereof or if it reemerges for an extended period of time, we may be unable to access additional capital, which could negatively affect our ability to execute on certain corporate development transactions or other important investment opportunities.

The COVID-19 pandemic has also affected, and may continue to affect, our business operations and financial results.

The extent of the impact of the COVID-19 pandemic or the potential impact of a reemergence or outbreak of the pandemic on our ability to generate sales of, and revenues from, our approved products, our clinical development and regulatory efforts, our corporate development objectives and the value of and market for our common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time.

Corporate Responsibility Impact

We continue to provide support to our local communities, patient-focused organizations and other charitable organizations during the COVID-19 pandemic with relief efforts, including corporate donations, supplying food, medical supplies and other resources.

For the safety and well-being of our employees, consultants and their families, during the COVID-19 pandemic, we have abided by the government issued work from home orders.

We continue to clean and sanitize our offices on a regular basis and have implemented COVID-19 screening procedures and social distancing guidelines before allowing employees or guests to enter our offices.

We have provided support with relief efforts to our local communities, patient-focused organizations and other charitable organizations during the COVID-19 pandemic, including corporate donations, food and medical supplies and other resources.

For the safety and well-being of our employees, consultants and their families, we have abided by government-issued work-from-home orders during the COVID-19 pandemic.

As COVID-19 cases decrease and more individuals are vaccinated, we intend to resume an in-office flexible work schedule.

We will continue to clean and sanitize our offices on a regular basis, and adhere to CDC guidelines

Financial Operations Overview

We did not generate any revenue from inception until the fourth quarter of 2019.

Our current product, WAKIX, was approved by the FDA for the treatment of EDS in adult patients with narcolepsy in August 2019, became commercially available in November 2019 and was approved by the FDA for the treatment of cataplexy in adult patients with narcolepsy in October 2020.

For the years ended December 31, 2020 and 2019, we had $159.7 million and $6.0 million, respectively, of net product revenue.

Total revenue consists of net sales of WAKIX.

Net sales represent the gross sales of WAKIX less provisions for product sales discounts and allowances.

At this time, these provisions include trade allowances, rebates to government and commercial entities, and discounts.

Although we expect net sales to increase over time, the provisions for product sales discounts and allowances may fluctuate based on the mix of sales to different customer segments and/or changes in our accrual estimates.

Net sales represent the gross sales of WAKIX less provisions for product sales discounts and allowances, which includes trade allowances, rebates to government and commercial entities, and discounts.

For further discussion of the components of Revenue, see “—Critical Accounting Policies and Significant Judgments and Estimates.”

We did not generate any revenue from inception until the fourth quarter of 2019.

Cost of Product Sales

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We began capitalizing inventory upon FDA approval of WAKIX.

A portion of the inventory sold during the year ended December 31, 2020 was produced prior to FDA approval and, therefore, expensed previously as research and development expense in 2019 in the amount of $1.3 million.

Excluded from cost of product sold is amortization of acquired developed technology of $9.8 million and $2.8 million in the years ended December 31, 2020 and 2019, respectively.

Previously expensed inventory that was manufactured in anticipation for commercialization preapproval has not had a material impact on our historical results of operations and is not expected to have a material impact on future results of operations.

Further, previously expensed inventory has not had a material impact on our gross margin percentage historically, and we do not anticipate a material impact on our gross margin percentage once our previously expensed inventories have been exhausted.

Previously expensed inventory that was manufactured prior to FDA approval of WAKIX has not had a material impact on our historical results of operations and is not expected to have a material impact on future results of operations.

Further, previously expensed inventory has not had a material impact on our historic gross margin percentage.

Our cost of product sales is increasing moderately as we continue to ramp up production and sales infrastructure to meet expected demand for WAKIX.

The shelf life of our product is three years from date of manufacture, with the earliest expiration of current inventory expected to be May 2022.

As of December 31, 2020, we expect our existing inventory to have minimal obsolescence.

We will continue to assess obsolescence in future periods as demand for WAKIX and the rate of inventory turnover evolves.

The shelf life of our product is three years from date of manufacture, with the earliest expiration of current inventory expected to be April 2023.

We regularly review our inventory levels and expect write-offs from time to time.

We will continue to assess our inventory levels in future periods as demand for WAKIX and the rate of inventory turnover evolves.

Research and Development Expenses

Our research and development expenses have primarily been limited to the license of the rights to pitolisant, the establishment of an EAP to provide appropriate patients with pitolisant at no cost as part of a clinical trial to assess safety prior to the approval of WAKIX, the preparation of the NDA, and the initiation of a development program for new indications for pitolisant in patients with PWS, DM and pediatric narcolepsy.

Our research and development expenses generally include the license of the rights to pitolisant, conducting an Expanded Access Program (“EAP”) to provide appropriate patients with pitolisant at no cost as part of a clinical trial to assess safety prior to the approval of WAKIX, the preparation of the NDA, and the initiation of development programs for potential new indications for pitolisant in patients with PWS and DM.

We also have research and development expenses related to our team of Medical Science Liaisons (“MSLs”) who interact with key opinion leaders, with a focus on the science, the role of histamine in sleep-wake state stability and the novel mechanism of action of pitolisant.

In addition, our MSLs support our market access team with clinical data presentations to payors upon request.

In addition, our MSLs support our market access team with clinical data presentations to payors upon request and our clinical development team to identify potential clinical trial sites.

Research and development costs are expensed as incurred.

We expect to significantly increase our research and development efforts as we advance our clinical programs in patients with PWS, DM and pediatric narcolepsy, and continue to expand our product-candidate pipeline.

Research and development expenses include:

We have significantly increased our research and development efforts as we advance our clinical programs in PWS, DM and IH and assess other product candidates to expand our pipeline.

Research and development expenses also include:

● employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for our research and development personnel;

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● manufacturing costs in connection with producing materials for use in conducting clinical trials;

● costs related to packaging and labeling clinical supplies:

● other third-party expenses directly attributable to the development of our product candidates;

● amortization expense for assets used in research and development activities.

Currently, WAKIX is our only product and we do not currently track our internal research and development expenses on an indication-by-indication basis as they primarily relate to personnel, early research and consumable costs, which are deployed across multiple programs.

A significant portion of our research and development costs are external costs, such as fees paid to CROs and CMOs, central laboratories, contractors, and consultants in connection with our clinical development activities.

We do not track research and development expenses on an indication-by-indication basis.

Internal expenses primarily relate to personnel who are deployed across multiple programs.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, milestone payments, and the cost of submitting an NDA to the FDA (and/or other regulatory authorities).

We expect our research and development expenses to be significant over the next several years as we advance our current clinical development programs and prepare to seek regulatory approval for additional indications for pitolisant as well as potential new product candidates.

We expect our research and

development expenses to be significant over the next several years as we advance our current clinical development programs and prepare to seek regulatory approval for additional indications for pitolisant and, HBS-102, as well as potential new product candidates.

At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of any additional indications for pitolisant or other product candidates that we move forward for regulatory approval.

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● the sufficiency of our financial and other resources to complete the necessary preclinical studies and clinical trials;

the impact of the COVID-19 pandemic on the ability to initiate new clinical trials and/or maintain the continuity of ongoing clinical trials that could be impacted by future shelter-in-place orders and needs of the health care system to focus on managing patients affected by COVID-19;

● the impact of the COVID-19 pandemic, including any future resurgence or new variants, on the ability to initiate new clinical trials and/or maintain the continuity of ongoing clinical trials that could be impacted by future shelter-in-place orders and needs of the health care system to focus on managing patients affected by COVID-19;

● receiving Bioprojet’s consent to pursue additional indications for pitolisant;

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Sales and Marketing Expenses

Our sales and marketing expenses have primarily been limited to the market development and launch activities of WAKIX for the treatment of EDS in adult patients with narcolepsy and cataplexy in adult patients with narcolepsy.

Our sales and marketing expenses have primarily related to the market development and launch activities of WAKIX for the treatment of EDS in adult patients with narcolepsy and cataplexy in adult patients with narcolepsy.

Market development and commercial launch activities account for a significant portion of the overall company operating expenses and are expensed as they are incurred.

Our sales and marketing expenses are increasing in the near- and mid-term to support our indications for the treatment of EDS or cataplexy in adult patients with narcolepsy and to expand our portfolio with the anticipated growth from potential additional indications.

We expect our sales and marketing expenses to increase in the near- and mid-term to support our indications for the treatment of EDS and cataplexy in adult patients with narcolepsy and to expand our portfolio with the anticipated growth from potential additional indications.

Sales and marketing expenses include:

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Paragon Agreements

We were party to a management services agreement (the “Management Services Agreement”) with Paragon Biosciences, LLC (“Paragon”), entered into on September 22, 2017, pursuant to which Paragon provided us with certain professional services.

In exchange for services provided to us under the Management Services Agreement, we paid Paragon a management fee of $0.3 million per each calendar month.

We terminated the Management Services Agreement upon the consummation of our IPO.

In connection with such termination, we paid Paragon a termination fee of $2.6 million.

We were party to a management services agreement (the “Management Services Agreement”) with Paragon Biosciences, LLC (“Paragon”), entered into in September 2017, pursuant to which Paragon provided us with certain professional services, which was terminated upon the consummation of our IPO.

In August 2021, the Company paid a $2,300 advisory fee to Paragon in connection with the Blackstone Credit Agreement (see “Liquidity, Sources of Funding and Capital Resources” below).

We are also party to a right-of-use agreement with Paragon whereby we have access to and the right to use certain office space leased by Paragon in Chicago, Illinois.

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Loss on Debt Extinguishment

Loss on debt extinguishment consists primarily of costs of extinguishment of debt during the period related to the prepayment of Loan Agreement with CRG.

Other Income / Expense, Net

Other income / expense, net consists primarily of costs of the fair value of the warrants associated with the Credit Agreement we entered into with OrbiMed.

Interest Income / Interest Expense

Interest income / expense, net consists primarily of interest expense on debt facilities and amortization of debt issuance costs offset by interest income earned on our cash balances.

Loss on debt extinguishment consists primarily of costs of extinguishment of debt during the period related to the prepayment of our credit agreements.

Other Expense, Net

Other expense, net consists primarily of costs of the fair value of the warrants associated with the Credit Agreement we entered into with OrbiMed.

Interest Expense, net

Interest expense, net consists primarily of interest expense on debt facilities and amortization of debt issuance costs offset by interest income earned on our cash balances.

Results of Operations

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Total operating expenses

Operating income (loss)

Operating income

Loss on debt extinguishment

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Interest expense, net

Net loss before provision for income taxes

Provision for income taxes

Net income (loss) before provision for income taxes

Income tax expense

Net income (loss)

Net Product Revenue

Net product revenue increased by $145.7 million, or 91.2%, for the year ended December 31, 2021 compared to the same period in 2020.

The increase was due to the growing commercial sales of WAKIX which was launched on November 1, 2019.

The increase was primarily due to an increase in the average number of patients on WAKIX and the price increase of WAKIX in connection with the cataplexy indication approval in the fourth quarter of 2020.

Cost of Product Sales

Cost of product sales increased by $27.8 million, or 100.2%, for the year ended December 31, 2021 compared to the same period in 2020.

The increase was due to the growing commercial sales of WAKIX, which was launched on November 1, 2019.

The increase was due to higher sales of WAKIX, which was launched in November 2019.

Cost of product sales is primarily comprised of the royalty payment to Bioprojet.

Research and Development Expenses

Research and development expenses decreased by $50.1 million, or 72.1%, for the year ended December 31, 2020 as compared to the same period in 2019.

The decrease was primarily due to a milestone payment in February 2019 upon the acceptance of our NDA for WAKIX by the FDA in accordance with the Bioprojet License Agreement.

Research and development expenses increased by $10.9 million, or 56.1%, for the year ended December 31, 2021 as compared to the same period in 2020.

The increase was primarily due to clinical development work associated with PWS and DM, $3.5 million asset acquisition of HBS-102 and an increase to stock compensation associated with new awards.

Sales and Marketing Expenses

Sales and marketing expenses increased by $12.3 million, or 22.0%, for the year ended December 31, 2021 as compared to the same period in 2020.

The increase was primarily due to field sales force personnel expenses and related field sales operations associated with the commercialization of WAKIX and patient engagement and marketing activities.

The increase was primarily due to patient engagement and marketing activities and an increase to stock-compensation expense associated with new awards.

General and Administrative Expenses

General and administrative expenses increased by $24.2 million, or 60.8%, for the year ended December 31, 2021 as compared to the same period in 2020.

This is primarily due to intangible asset amortization for a full year in 2020 and the amortization of the Cataplexy Milestone, additional fees associated with our IPO and expenses related to becoming a public company in 2020 and the termination fee in connection with the Management Services Agreement, offset by employee stock awards and the legal settlement with our former CEO.

This increase is primarily due to intangible asset amortization of the milestone payment made in connection with the FDA’s approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy in October 2020, an increase to stock compensation associated with new awards, and the additional cost of public company insurance, partially offset by a decrease in fees paid to Paragon.

Additionally, general expenses have increased due to an increase in headcount year-over-year as well as additional spend in 2021 following the COVID-19 pandemic in 2020.

Loss on Debt Extinguishment

Loss on debt extinguishment increased $22.6 million, or 100%, for the year ended December 31, 2020 as compared to the same period in 2019 due to costs of extinguishment of debt during the period related to the prepayment of the Loan Agreement with CRG.

Loss on debt extinguishment increased $3.5 million, or 15.5%, for the year ended December 31, 2021 as compared to the same period in 2020 due to increased costs relating to the OrbiMed debt extinguishment as compared to the extinguishment of debt pertaining to the Loan Agreement with the multi-draw loan with CRG Servicing LLC (the “CRG Loan”), which occurred in 2020.

Other Expense, Net

Other expense, net increased by $3.1 million, or 100%, for the year ended December 31, 2020, as compared to the same period in 2019 primarily due to the change in the fair value of warrants issued during 2020.

Other expense, net decreased by $3.1 million, or 100%, for the year ended December 31, 2021, as compared to the same period in 2020 primarily due to the change in the fair value of the warranty liability, which was recorded in the year ended December 31, 2020.

Interest Expense, Net

Interest expense increased by $22.1 million, or 364.7%, for the year ended December 31, 2020, as compared to the same period in 2019 primarily due to payment of interest on the Loan Agreement and amortization of debt issuance costs compared to the payment of interest on the Credit Agreement and amortization of debt issuance costs.

This was partially offset by interest income earned on our cash balances.

For interim periods, we estimate the annual effective income tax rate and apply the estimated rate to the year-to-date income or loss before income taxes.

The effective income tax rate was 0.0% for all periods.

Interest expense decreased by $4.3 million, or 15.1%, for the year ended December 31, 2021, as compared to the same period in 2020 primarily due to lower interest rates as a result of entering into the Blackstone Credit Agreement in August 2021, partially offset by an increase in amortization of deferred financing costs.

The effective income tax rate was 7.6% and 0.0% for the year ended December 31, 2021 and 2020, respectively.

Currently, we have recorded a full valuation allowance against our net deferred tax assets, primarily related to federal and state net operating losses.

Liquidity and Capital Resources

To date, we have financed our operations primarily with (a) proceeds from sales of our convertible preferred stock, (b) borrowings under (i) our Loan Agreement with CRG and (ii) our Credit Agreement with OrbiMed, and (c) the proceeds from our IPO.

From our inception through December 31, 2020, we have received aggregate proceeds of $345.0 million from sales of our convertible preferred stock.

On August 21, 2020, we completed the IPO of our common stock, in which we sold 6,151,162 shares of our common stock, including 802,325 shares of our common stock pursuant to the underwriters’ over-allotment option.

The shares began trading on the Nasdaq Global Market on August 19, 2020.

Liquidity, Sources of Funding and Capital Resources

To date, we have financed our operations primarily with (a) proceeds from sales of our convertible preferred stock;

(b) borrowings under our (i) CRG Loan, (ii) our Credit Agreement with OrbiMed and (iii) our Blackstone Credit Agreement;

and (d) the proceeds from the sale of common stock to Blackstone.

From our inception through our IPO, we have received aggregate proceeds of $345.0 million from sales of our convertible preferred stock.

In August 2020, we completed the IPO of our common stock, in which we sold 6,151,162 shares of our common stock, including 802,325 shares of our common stock pursuant to the underwriters’ over-allotment option.

The shares were sold at a price of $24.00 per share for net proceeds of approximately $135.4 million.

As of December 31, 2021, we had cash, cash equivalents and restricted cash of $235.1 million and accumulated deficit of $453.6 million.

As of December 31, 2020, we had outstanding debt, net of issuance costs, of $194.3 million.

The consolidated financial statements have been prepared as though we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of

We have incurred operating losses and negative cash flows from operations since inception resulting in an accumulated deficit of $488.2 million as of December 3 1 , 2020.

We believe that our anticipated cash from operating and financing activities and existing cash and cash equivalents will enable us to meet our operational liquidity needs and fund our planned investing activities for the next 12 months.

As of December 31, 2021, we had outstanding debt of $199.5 million.

We believe that our anticipated cash from operating and financing activities, including as a result of potential availability under the DDTL (defined below), and existing cash and cash equivalents will enable us to meet our operational liquidity needs and fund our planned investing activities for the next 12 months.

We have based this estimate on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we expect.

See “—Overview—Liquidity and Sources of Funding.”

Blackstone Credit Agreement

On August 9, 2021, the Company entered into the Blackstone Credit Agreement that provides for (i) a senior secured term loan facility in an aggregate original principal amount of $200.0 million (the “Initial Term Loan”) and (ii) a senior secured delayed draw term loan facility in an aggregate principal amount up to $100.0 million (the “DDTL” and, together with the Initial Term Loans, the “Loans”).

The DDTL will be available to draw down through August 9, 2022.

We used substantially all of the proceeds from the Blackstone Credit Agreement, and the related sale of our common stock, to repay the balance of the OrbiMed Loan (defined below).

The repayment schedule for the Initial Loan consists of quarterly $0.5 million principal payments commencing on December 31, 2021 and increasing to quarterly $5 million payments beginning on March 31, 2024, with a $145.5 million payment due on the maturity date of August 9, 2026 (“Maturity Date”).

Interest is payable quarterly commencing on November 9, 2021 and continuing through the Maturity Date.

The Initial Loan bears interest at a per annum rate equal to LIBOR, subject to a 1.00% floor, plus 6.50%.

The Loans are guaranteed by our subsidiary Harmony Biosciences, LLC.

The Blackstone Credit Agreement contains affirmative and negative covenants, including limitations on our ability, among other things, to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions and enter into affiliate transactions, in each case, subject to certain exceptions.

In addition, the Blackstone Credit Agreement contains a financial covenant that requires us to maintain at all times cash and cash equivalents in certain deposit accounts in an amount at least equal to $10.0 million.

The Company is compliance with all covenants as of December 31, 2021.

OrbiMed Credit Agreement

On February 28, 2019, we entered into the Loan Agreement with CRG for an aggregate of $200.0 million of which $102.5 million was outstanding as of December 31, 2019.

On January 9, 2020, we entered into the Credit Agreement with OrbiMed for an aggregate of $200.0 million and paid off all of our obligations under the Loan Agreement.

Borrowings under the Credit Agreement are collateralized by all of the Company’s assets, excluding the intellectual property licensed through the Bioprojet License Agreement.

At the time of prepayment or repayment of all or any portion of the principal of the OrbiMed Loan, the Company is required to pay an exit fee of 7.0% of the principal amount of the OrbiMed Loan prepaid, repaid, or required to be prepaid or repaid.

The Credit Agreement matures on January 9, 2026 and bears an interest rate of the greater of (a) LIBOR or (b) 2.00% per annum, plus 11.00% per annum.

When the LIBOR rate is no longer used post-2021, the Prime Rate will be used in the determination of the interest rate.

The Credit Agreement requires compliance with certain financial covenants, including minimum net revenue thresholds and cash balance requirements (which include maintaining minimum liquidity of $12.5 million), and financial reporting requirements.

We have been in compliance with the financial covenants under the Credit Agreement since it was entered into on January 9, 2020.

The Credit Agreement also contains certain negative restrictive covenants that either limit our ability to, or require a mandatory prepayment in the event we, engage in new lines of business, incur additional indebtedness or liens, make certain investments, make certain payments, pay cash dividends, merge with other companies or consummate certain changes of control, acquire other companies, transfer or dispose of certain assets, liquidate or dissolve, amend certain material agreements, enter into sale and leaseback transactions, enter into various other specified transactions, and change our name, location, executive office or executive management without notice.

In February 2019, we entered into the CRG Loan for an aggregate of $200.0 million of which $102.5 million was outstanding as of December 31, 2019.

On January 9, 2020, we entered into the Credit Agreement with OrbiMed (the “OrbiMed Loan”) for an aggregate of $200.0 million and paid off all of our obligations under the CRG Loan.

Borrowings under the Credit Agreement were collateralized by all of the Company’s assets, excluding the intellectual property licensed through the Bioprojet License Agreement.

At the time of prepayment, the Company was required to pay an exit fee of 7.0% of the principal amount of the OrbiMed Loan that was repaid..

Agreement Related to Intellectual Property

In August 2021, the Company entered into an asset purchase agreement with ConSynance Therapeutics, Inc.

to acquire HBS-102 (formerly “CSTI-100”), a potential first-in-class molecule with a novel mechanism of action.

Under the terms of the agreement, the Company acquired full development and commercialization rights globally, with the exception of Greater China, for $3.5 million, which was recorded in research and development expense in the Company’s statement of operations and comprehensive loss for the year ended December 31, 2021.

Additionally, there are payments due upon the achievement of certain milestones including $1.8 million for preclinical milestones, $19.0 million for development milestones, $44.0 million for regulatory milestones and $110.0 million for sales milestones.

Recent Milestone Payment

Upon the Cataplexy Milestone Trigger Date, we became obligated to make the $100.0 million Cataplexy Milestone Payment to Bioprojet pursuant to the terms of the Bioprojet License Agreement.

In October 2020, we made a payment to Bioprojet of $2.0 million to extend the Cataplexy Milestone Payment due date to within 90 days of the Cataplexy Milestone Trigger Date.

On January 6, 2021, we made the $100.0 million Cataplexy Milestone Payment in full to Bioprojet.

Upon FDA approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy in October 2020 (the “Cataplexy Milestone Trigger Date”), we became obligated to make the $100.0 million milestone payment (the “Cataplexy Milestone Payment”) to Bioprojet under the provisions of the Bioprojet License Agreement (“License Agreement”).

Subsequently, in October 2020, we made a payment to Bioprojet of $2.0 million to extend the Cataplexy Milestone Payment due date to within 90 days of the Cataplexy Milestone Trigger Date.

In January 2021, we made the $100.0 million Cataplexy Milestone Payment in full to Bioprojet.

Subsequent to the year ended December 31, 2021, the Company attained $500.0 million in aggregate net sales of WAKIX in the United States, which triggered a $40.0 million payment under the provisions of the License Agreement.

The Company expects to make this payment in March 2022.

The following table sets forth a summary of our cash flows for the years ended December 31, 2021 and 2020:

Year Ended December 31,

(In thousands)

Selected cash flow data

(In thousands)

Cash provided by (used in):

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Operating Activities

Net cash used in operating activities decreased to $3.0 million for the year ended December 31, 2020 as compared to $75.4 million for the same period in 2019.

This decrease was primarily attributable to company revenue growth associated with the commercialization of WAKIX for a full year in 2020.

Net cash provided by operating activities for the year ended December 31, 2021 consisted of our net income of $34.6 million adjusted for non-cash items of $26.1 million related to loss on extinguishment of debt, $18.8 million related to intangible amortization and depreciation and $16.1 million related to stock-based compensation expense.

Net working capital excluding cash increased by $0.6 million.

Net cash used in operating activities for the year ended December 31, 2020 consisted of our net loss of $36.9 million adjusted for non-cash items of $22.6 million associated with loss on extinguishment of debt and $13.0 million related to intangible amortization and fair value of warrants.

Net cash used in operating activities for the year ended December 31, 2019 consisted of net loss of $152.0 million adjusted for a reclassification of $52.0 million to investing activities related to a milestone payment associated with the Bioprojet License Agreement, $9.9 million related to stock compensation expense, and $2.8 million of intangible amortization.

Net working capital excluding cash increased $8.2 million.

Investing Activities

Net cash used in investing activities decreased to $2.0 million for the year ended December 31, 2020 as compared to $127.1 million for the same period in 2019.

This change was primarily attributable to $50.0 million and $75.0 million of milestone payments associated with the Bioprojet License Agreement.

Net cash used in investing activities for the year ended December 31, 2021 was $100.3 million, which was primarily attributable to the $100.0 million milestone payment associated with the Bioprojet License Agreement.

Net cash used in investing activities for the year ended December 31, 2020 was $2 million, which was primarily attributable to the $2 million milestone payment associated with the Bioprojet License Agreement.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2020 was $209.2 million, which primarily consisted of $194.2 million associated with the OrbiMed Credit Agreement net of issuance costs and net proceeds from our IPO of $135.4 million, offset with $120.9 million of repayment and exit fees associated with the CRG Loan Agreement.

Net cash provided by financing activities for the year ended December 31, 2019 was $143.8 million, which primarily consisted of $94.8 million associated with the CRG Loan Agreement net of issuance costs and $48.9 million in proceeds from the issuance of our Series C Preferred Stock net of issuance costs.

Off-Balance Sheet Arrangements

As of and for the years ended December 31, 2020 and 2019, we did not have any off-balance sheet arrangements, as defined under SEC rules.

Critical Accounting Policies and Significant Judgments and Estimates

Net cash provided by financing activities for the year ended December 31, 2021 was $7.4 million, which primarily consisted of $190.9 million in proceeds associated with the Blackstone Credit Agreement, net of issuance costs, and $29.7 million in proceeds associated with issuance of common stock to Blackstone, net of issuance costs.

These proceeds were partially offset by $222.0 million in payments of principal and exit fees associated with the extinguishment of the OrbiMed Loan, $0.9 million in proceeds from exercised options and $0.5 million in principal payments associated with the Blackstone Credit Agreement.

Net cash provided by financing activities for the year ended December 31, 2020 was $209.2 million, which primarily consisted of $194.2 million associated with the OrbiMed Loan net of issuance costs and net proceeds from our IPO of $135.4 million, offset with $120.9 million of repayment and exit fees associated with the CRG Loan Agreement.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.

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Revenue Recognition

Effective January 1, 2019, we adopted ASC 606, Revenue from Contracts with Customers (ASC 606), or ASC 606.

This standard applies to all contracts with customers, except for contracts that are within the scope

of other standards, such as leases, insurance, collaboration arrangements and financial instruments.

We account for contracts with our customers in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), or ASC 606.

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

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We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations.

We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

We have determined that the delivery of our product to our customer constitutes a single performance obligation as there are no other promises to deliver goods or services.

The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under contracts will not occur in a future period.

Our analyses contemplate the application of the constraint in accordance with ASC 606.

Actual amounts of consideration ultimately received may differ from our estimates.

If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

We have determined that the delivery of our product to our customer constitutes a single performance obligation as there are no other promises to deliver goods or services in contracts with our customers.

Shipping and handling activities are considered to be fulfilment activities and are not considered to be a separate performance obligation.

We have assessed the existence of a significant financing component in the agreements with our customers.

The trade payment terms with our customers do not exceed one year and therefore, no amount of consideration has been allocated as a financing component.

The payment terms with our customers do not exceed one year and therefore, no amount of consideration has been allocated as a financing component.

Taxes collected related to product sales are remitted to governmental authorities and are excluded from revenue.

Product Sales, Net

We began commercial sales of WAKIX in November 2019.

We sell WAKIX to our customers (a limited number of specialty distributors) that, in turn, distribute WAKIX to patients.

We recognize revenue on sales of WAKIX when the customer obtains control of the product, which occurs at a point in time, typically upon delivery.

Product revenues are recorded at the product’s wholesale acquisition costs, net of applicable reserves for variable consideration that are offered within contracts between us and our customers, payors, and other indirect customers relating to the sale of WAKIX.

Product revenues are recorded at the product’s list price, net of applicable reserves for variable consideration that are offered within contracts between us and our customers, payors, and other indirect customers relating to the sale of WAKIX.

Components of variable consideration include government and commercial contracts, product returns, commercial co-payment assistance program transactions, and distribution service fees.

These deductions, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as a current liability or reduction of receivables, based on the expected value method and a range of outcomes and are probability weighted in accordance with ASC 606.

Our analyses contemplate the application of the constraint in accordance with ASC 606.

Actual amounts of consideration ultimately received may differ from our estimates.

If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

These deductions, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as a current liability or reduction of receivables.

Government Contracts

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Department of Veterans Affairs, 340b entities and other government agencies, or Government Payors, so that WAKIX will be eligible for purchase by, in partial or full reimbursement from, such Government Payors.

These reserves are recorded in the same period the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included in accounts payable or accrued expenses.

For Medicare Part D, we estimate the number of patients in the prescription drug coverage gap for whom we will owe a payment under the Medicare Part D program.

We estimate the rebates that we will provide to Government Payors for those programs that require rebates.

These rebate estimates are based upon (i) the government-mandated discounts applicable to government-funded programs, (ii) information obtained from its customers and (iii) information obtained from other third parties regarding the payor mix for WAKIX.

The liability for these rebates consists of estimates of claims for the current year and estimated future claims that will be made for product shipments that have been recognized as revenue but remain in the distribution channel inventories at the end of each reporting period.

Accrued Research and Development Expenses

We record reserves for rebates due pursuant to these contracts in the same period the revenue is recognized as a reduction of product revenue.

The liability for government rebates is included in accrued expenses in our consolidated balance sheet.

We estimate rebates due pursuant to government contracts based upon our historical payment and payor mix trends, information obtained from third parties estimating current payor mix, the government-mandated discounts applicable to government-funded programs, as well as information obtained from our customers.

The liability for these government rebates consists of estimates of claims for WAKIX dispensed in the current period, plus an estimate for product which has shipped and has been recognized as revenue, but remains in the distribution channel at the end of a reporting period.

Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses.

This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs.

The majority of our service providers invoice us in arrears for services performed and some require advanced payments.

We make estimates of our accrued expenses of each balance sheet date in our financial statements based on facts and circumstances known to us at that time.

Examples of estimated accrued research and development expenses include fees paid to:

CROs in connection with performing research services on our behalf and any clinical trials;

investigative sites or other providers in connection with studies and any clinical trials;

vendors in connections with the preparation of our NDA file, market and patient awareness programs, website development, market research and analysis and medical education;

vendors related to product manufacturing, development and distribution of clinical supplies.

We base our expenses for services rendered on our estimates of the services received and efforts expended pursuant to quotes, contracts and communicating with our vendors.

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Stock-Based Compensation

We recognize stock-based compensation expense related to stock options granted to employees based on the estimated fair value of the awards on the date of grant.

We estimate the grant date fair value, and the resulting stock-based compensation expense, for stock options that only have service vesting requirements or performance-based vesting requirements without market conditions using the Black- Scholes option-pricing model.

The grant date fair value of the stock-based awards with service vesting requirements is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

Determining the appropriate amount to expense for performance-based awards based on the achievement of stated goals requires judgment.

The estimate of expense is revised periodically based on the probability of achieving the required performance targets and adjustments are made as appropriate.

The cumulative impact of any revisions is reflected in the period of change.

If any applicable financial performance goals are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.

We recognize stock-based compensation expense related to stock options granted to non-employees issued in exchange for services based on the estimated fair value of the awards on the date of grant.

We estimate the grant date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model;

however, the fair value of the stock options granted to non-employees is remeasured each reporting period until the service is complete, and the resulting increase or decrease in value, if any, is recognized as expense or a reduction in previously recognized expense, respectively, during the period the related services are rendered.

The Black-Scholes option-pricing model requires the use of highly subjective assumptions, which determine the fair value of share- based awards.

These assumptions include:

Expected term.

Our expected term represents the period that our stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and

the end of the contractual term).

For stock- based awards granted to non-employees, the expected term represents the contractual term of the award.

Common stock price.

Our board of directors determines the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant.

Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.

Expected volatility.

Prior to the initial public offering of our common stock, we were a privately held company and did not have any trading history for our common stock and the expected volatility was estimated using weighted-average measures of implied volatility and the historical volatility of our peer group of companies for a period equal to the expected life of the stock options.

Our peer group of publicly traded biopharmaceutical companies was chosen based on their similar size, stage in the life cycle or area of specialty.

Risk-free interest rate.

The risk-free interest rate is based on the rates paid on securities issued by the U.S.

Treasury with a term approximating the expected life of the stock options.

Expected dividend.

We have never paid, and do not anticipate paying, cash dividends on our common stock.

Therefore, the expected dividend yield was assumed to be zero.

The following table reflects the range of assumptions used to estimate the fair value of awards.

Dividend yield

Expected volatility

55.00% - 95.80%

95.30% - 99.30%

Risk-free interest rate

0.32% - 0.56%

1.60% - 2.59%

Lack of marketability discount

0.00% - 20.48%

26.00% - 31.00%

Expected term (years)

Common Stock Valuations

Prior to the consummation of our IPO, our common stock was not publicly traded.

As such, we were required to estimate the fair value of our common stock.

Our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including our stage of development or commercial performance;

our actual operating results and financial performance;

the progress of our commercialization and research and development efforts;

conditions in the industry and economy in general;

the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

the likelihood of achieving a liquidity event for the holders of our common stock, such as an initial public offering or a sale of our company, given prevailing market conditions;

equity market conditions affecting comparable public companies;

the lack of marketability of our common stock and the results of independent third party valuations.

Our board of directors also took into consideration the valuations of our common stock that were prepared by an independent third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment.

As a result, if we had used different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.

For our valuations performed as of, and prior to, December 31, 2018, we used the Option Pricing Model Backsolve method to estimate the fair value of our common stock.

In an option pricing method, or OPM, framework, the backsolve method for inferring the equity value implied by a recent financing transaction involves making assumptions for the expected time to liquidity, volatility and risk-free rate and then solving for the value of equity such that value for the most recent financing equals the amount paid.

For our February 13, 2019 valuation, we used an income-based approach of a Discounted Cash Flow, or DCF, method to estimate the fair value of our common stock.

The DCF method is based upon the theory that the value of a business is equal to the present value of its projected future cash flows.

For our valuations performed August 14, 2019 through December 31, 2019, we used a combination of both, Backsolve and DCF, to estimate the fair value of our common stock.

For our valuations performed as of March 31, 2020 and June 30, 2020, we used a DCF to estimate the fair value of our common stock.

Furthermore, as of each of the valuation dates and even being an

early - stage commercial company, the future liquidity events were difficult to forecast.

We applied a discount for lack of marketability to account for a lack of access to an active public market.

For valuations after the completion of the IPO, our board of directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant.

Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.

Options Granted

The following table sets forth by grant date the number of shares of common stock subject to options granted from January 1, 2019 through December 31, 2020, the per share exercise price of the options, the per share fair value of the shares of common stock on each grant date and the per share estimated fair value of the options on each grant date:

Number of Shares Subject to Options Granted

Per Share Exercise Price of Options

Fair Value per Share on Grant Date

Per Share Estimated Fair Value of Options on Grant Date

January 7, 2019

January 28, 2019

February 11, 2019

March 11, 2019

March 25, 2019

April 8, 2019

April 15, 2019

April 22, 2019

April 29, 2019

June 17, 2019

June 24, 2019

August 5, 2019

August 26, 2019

September 30, 2019

October 21, 2019

October 28, 2019

January 1, 2020

January 13, 2020

January 22, 2020

February 26, 2020

March 1, 2020

March 2, 2020

March 4, 2020

March 16, 2020

March 23, 2020

June 23, 2020

August 18, 2020

November 5, 2020

November 11, 2020

December 10, 2020

Stock Appreciation Rights Granted

The following table sets forth by grant date the number of shares of common stock subject to stock appreciation rights, or SARs, granted from January 1, 2019 through December 31, 2020, the per share base price of the SARs, the per share fair value of the shares of common stock on each grant date and the per share estimated fair value of the SARs on each grant date:

Number of Shares Subject to SARs Granted

Per Share Base Price of SARs

Fair Value per Share on Grant Date

Per Share Estimated Fair Value of SARs on Grant Date

January 7, 2019

April 22, 2019

June 23, 2020

The Company recognizes compensation expense relating to stock-based payment transactions in operating results using a fair value measurement method, in accordance with FASB ASC 718, Compensation-Stock Compensation.

ASC 718 requires all stock-based payments to employees to be recognized in operating results as compensation expense based on fair value over the requisite service period of the awards.

The vesting periods have a time-based provision consisting of three to five years and expire no more than 10 years after the date of grant.

Upon a change of control, certain unvested awards will immediately vest.

The Company determines the fair value of stock-based awards using the Black-Scholes option-pricing model, which uses both historical and current market data to estimate fair value.

The method incorporates various assumptions, such as the risk-free interest rate, expected volatility, expected dividend yield, and expected life of the options.

Income taxes are accounted for under the asset and liability method.

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The actual benefits (expense) ultimately realized may differ from our estimates.

In future periods, changes in facts, circumstances, and new information may require us to change the recognition and measurement estimates with regard to individual tax positions.

In future periods, changes in facts, circumstances, and new information may require us to change the recognition

and measurement estimates with regard to individual tax positions.

Changes in recognition and measurement estimates are recorded in the statement of income and balance sheet in the period in which such changes occur.

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Financial Statements and Supplementary Data.” for more information.

We are an “emerging growth company”, or EGC, as defined in the Jumpstart Our Business Startups Act, or JOBS Act, of 2012.

For the year ended December 31, 2020, the Company was an “emerging growth company”, or EGC, as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), of 2012.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

We have previously elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to the JOBS Act.

We will remain an EGC until the earliest of (i) the last day of our fiscal year (a) following the fifth anniversary of the completion of the initial public offering of our common stock, (b) in which we have total annual gross revenues of at least $1.07 billion or (ii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30 th and (iii) the date on which we have issued more than $1.0 billion in non-convertible debt securities over a three-year period.

Non-GAAP Financial Measures

In addition to our GAAP results, we provide certain non-GAAP metrics including adjusted net income and adjusted net income per share.

We believe that the presentation of these measures provides important supplemental information to management and investors regarding our performance.

These measurements are not a substitute for GAAP measurements, and the manner in which we calculate adjusted net income and adjusted net income per share may not be identical to the manner in which other companies calculate adjusted net income and adjusted net income per share.

Management uses these non-GAAP measurements as an aid in monitoring our on-going financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against comparable companies.

EBITDA is intended to provide a measure of the Company’s operating performance as it eliminates the effects of financing and capital expenditures.

EBITDA consists of GAAP net loss excluding:

(i) interest expense, (ii) income tax provision, (iii) depreciation and (iv) amortization of intangibles.

Non-GAAP adjusted net income (loss) and non-GAAP adjusted net income (loss) per share are intended to provide an enduring, normalized view of net income and our broader business operations that we expect to experience on an ongoing basis by removing items which may be irregular, one-time, or non-recurring from net income.

This enables us to identify underlying trends in our business that could otherwise be masked by such items.

Non-GAAP adjusted net income (loss) consists of GAAP net loss excluding:

(i) interest expense, (ii) income tax provision, (iii) depreciation, (iv) amortization of intangibles, (v) stock-based compensation, (vi) loss on debt extinguishment, and (vii) warrant expense.

A reconciliation of GAAP net loss to non-GAAP adjusted net income (loss) appears in the table below (in thousands except share and per share data):

Year Ended December 31,

Non-GAAP Adjustments:

Interest expense

Additional Non-GAAP Adjustments:

Stock-based compensation expense

Loss on debt extinguishment

Warrant expense

Non-GAAP adjusted net income (loss)

Accumulation of yield on preferred stock

Non-GAAP adjusted net income (loss) available to common stockholders

GAAP reported net loss per diluted share

Non-GAAP adjusted net income (loss) per diluted share

Weighted average number of shares of common stock used in non-GAAP diluted per share

Quantitative and Qualitat ive Disclosures About Market Risk.

Interest Rate Fluctuation Risk

We are exposed to market risk related to changes in interest rates.

As of December 31, 2020, our cash and cash equivalents consisted of cash and money market accounts.

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S.

interest rates.

However, because of the short-term nature of the instruments in our portfolio, an immediate 10% change in market interest rates would not have a material impact on the fair market value of our investment portfolio or on our financial position or results of operations.

As of December 31, 2020, we had $200.0 million in borrowings outstanding.

The term loan bears interest at an interest rate of the greater of (a) LIBOR or (b) 2.00% per annum, plus 11.00% per annum.

Based on the $200.0 million of principal outstanding as of December 31, 2020, an immediate 10% change in the Prime Rate would not have a material impact on our debt-related obligations, financial position or results of operations.

Foreign Currency Fluctuation Risk

We are not currently exposed to significant market risk related to changes in foreign currency exchange rates;

however, we have contracted with and may continue to contract with foreign vendors that are located in Europe.

Our operations may be subject to fluctuations in foreign currency exchange rates in the future.

Inflation Fluctuation Risk

Inflation generally affects us by increasing our cost of labor and clinical trial costs.

We do not believe that inflation had a material effect on our business, financial condition or results of operations for the years ended December 31, 2020 or 2019.

We are no longer an EGC as of December 31, 2021 and are no longer able to take advantage of the reduced disclosure requirements applicable to an EGC.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis