What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-03 compared with 2021-11-09 · 106 added, 196 removed, 200 unchanged (60% of the section changed)

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Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

As used herein, the terms “Harmony,” “we,” “us,” “our” and “the Company” refer to Harmony Biosciences Holdings, Inc., a Delaware corporation.

As used herein, the terms “Harmony,” “we,” “us,” “our” and “the Company” refer to Harmony Biosciences Holdings, Inc., a Delaware corporation and our operating subsidiary, Harmony Biosciences, LLC.

Company Overview

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commercial launch was initiated in November 2019.

On October 13, 2020, WAKIX was approved by the FDA for the treatment of

cataplexy in adult patients with narcolepsy.

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.

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

Bioprojet amended the protocol and increased the number of patients in the trial which has pushed out the timeline for trial completion and read out of the data.

We and Bioprojet have decided to wait for the read out of the data to inform how best to advance the pediatric narcolepsy program.

We believe that our strategic decision to wait for this data 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 in the coming months.

In October 2020, WAKIX was approved by the FDA for the treatment of cataplexy

in adult patients with narcolepsy.

WAKIX is the first-and-only approved product for patients with narcolepsy that is not scheduled as a controlled substance by the U.S.

Drug Enforcement Administration (the “DEA”).

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

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

We are 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 is the most prudent and thoughtful path forward for pediatric narcolepsy from a development and financial perspective.

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

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”).

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 from this trial in the first 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 the second half of 2022.

In addition to these indications, we intend to further explore pitolisant in other rare neurological diseases in which EDS, fatigue and/or cognitive impairment are prominent symptoms with significant impact on daily functioning.

In December 2020, we initiated a Phase 2 proof-of-concept clinical 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 addition to these clinical programs, we have initiated a Phase 3 registrational trial to evaluate the efficacy and safety of pitolisant in adult patients with idiopathic hypersomnia (“IH”).

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.

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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.

We are currently on track to begin a preclinical proof-of-concept study to assess the effect of HBS-102 on hyperphagia, weight gain, and other metabolic parameters in a mouse model of PWS later in 2022.

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 and in 2021 for the treatment of EDS in adult patient with obstructive sleep apnea.

We acquired an exclusive license to develop, manufacture and commercialize pitolisant in the United States pursuant to our license agreement with Bioprojet (as amended, the “Bioprojet License Agreement”) in July 2017.

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launching and commercializing WAKIX in the United States.

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

Liquidity and Sources of Funding

For the nine months ended September 30, 2021, we generated $214 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 credit agreement (the “Credit Agreement”) with OrbiMed Royalty & Credit Opportunities III, LP (“OrbiMed”), and (ii) our credit agreement (the “Blackstone Credit Facility”) with Blackstone Alternative Credit Advisors LP (“Blackstone”), (c) proceeds from our initial public offering (“IPO”) in August 2020, and (d) proceeds from the sale of common stock to Blackstone.

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 at least 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 pitolisant;

● incur manufacturing costs for WAKIX and any additional product candidates;

● conduct post-approval require studies for WAKIX required by the FDA;

● conduct clinical trials in PWS, DM, and other 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;

● conduct earlier stage research and development activities for HBS-102;

● 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 additional indications for pitolisant, HBS-102, or any additional product candidates that successfully complete clinical development;

● acquire or in-license other assets and technologies;

● incur additional costs associated with being a public company.

Commercial Launch Metrics

As of September 30, 2021, approximately 40% of unique healthcare professionals (“HCPs”) (out of a total of approximately 8,000 HCPs who treat the majority of the diagnosed narcolepsy patient population) have prescribed WAKIX since it became available in November 2019.

The average number of patients on WAKIX at September 30, 2021 was approximately 3,500.

Additionally, as of September 30, 2021, we have secured and maintained formulary access for approximately 80% of all insured lives (Commercial, Medicare and Medicaid) in the United States.

Within these covered lives, we have continued to observe additional favorable access to WAKIX for type 1 narcolepsy patients subsequent to the expanded approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy in October 2020.

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

Commercial Performance Metrics

As of March 31, 2022, we continue to see growth in unique healthcare professional (“HCP”) prescribers of WAKIX.

The average number of patients on WAKIX for the three months ended March 31, 2022 was approximately 3,900.

Additionally, as of March 31, 2022, we have secured formulary access for more than 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

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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.

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

Commercialization

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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.

Although we are beginning to see increased access to HCPs for our sales team and the economy is 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.

Access to HCPs for our sales team is still limited and despite the opening up of the economy, 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 through the fourth quarter of 2022, with additional API on-hand inventory to support at least 24 months beyond this time frame.

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 second 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.

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Research and Development

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

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.

We implemented remote and virtual approaches to clinical trials, including the ability to perform screening remotely and allow electronic signatures on informed consent forms, 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.

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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.

The COVID-19 pandemic has also affected us at the clinical trial site level due to staffing shortages and/or personnel being pulled off clinical trials to care for patients with COVID-19.

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.

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

milestone meetings) and PDUFA action dates.

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Corporate Responsibility Impact

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.

We strive to attract and retain employees that are dedicated to keeping patients at the heart of all we do while also supporting the communities where we live and work.

Our commitment toward this objective has been exemplified during the COVID-19 crisis.

At the onset of the pandemic we took steps to ensure the health, safety and welfare of our employees and their families by abiding by government-issued work-from-home orders and encouraging a flexible work environment, and implementing a COVID-19 leave policy allowing for paid leave for employees affected by the virus outside of their accrued paid leave.

We also made no furloughs, layoffs, or adjustments to salaries as a result of the pandemic.

As pandemic-related restrictions began to and cases began to decline, all of our have returned to in-person operations with flexibility as needed, which we feel is critical to collaboration, innovation, productivity, employee well-being and engagement, and enhances our culture.

We continually look for ways to support our employees in all roles across the organization in balancing their work and personal lives.

Our commitment extends beyond ensuring our that our employees are supported to supporting the communities where we live and work.

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

We made charitable contribution matches to local nonprofit organizations on behalf of our employees, further extending our charitable reach.

We initiated our Progress at the Heart funding program to support nonprofit organizations in their efforts to address disparities, injustice and inequities in rare neurological disease diagnosis and treatment.

These commitments collectively allow us to ensure that our employees are engaged in their communities in ways that make a lasting impact.

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.

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.

Cost of Product Sales

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We began capitalizing inventory upon FDA approval of WAKIX.

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.

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.

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

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 been applied toward the license of the rights to pitolisant, the conduct of 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.

Our research and development expenses generally include development programs for potential new indications for pitolisant in patients with PWS, DM and IH.

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 and our clinical development team to identify potential clinical trial sites.

Research and development costs are expensed as incurred.

We have significantly increased our research and development efforts as we advance our clinical programs in PWS and DM and assess other product candidates to expand our 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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● costs related to packaging and labeling clinical supplies;

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

● other third-party expenses (i.e., consultants, advisors) directly attributable to the development of our product candidates;

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

Currently, we do not track research and development expenses on an indication-by-indication basis.

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

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 programs.

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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, HBS-102, 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, advance HBS-102 from preclinical studies into the clinic, and identify potential new product candidates to develop toward new indications.

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.

There are numerous risks and uncertainties associated with developing product candidates, including uncertainty related to:

● the duration, costs and timing for clinical trials of our current development programs and any further clinical trials related to new product candidates;

● the duration, costs and timing of clinical trials of our current development programs and any further clinical trials related to new product candidates;

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

● the impact of the COVID-19 pandemic, including any future resurgence, 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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● the receipt and maintenance of regulatory and marketing approvals from applicable regulatory authorities;

● establishing agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if any new product candidate is approved;

● entry into collaborations to further the development of our product candidates;

● establishing agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidate is approved;

● the entry into collaborations to further the development of our product candidates;

● obtaining and maintaining patent and trade secret protection or regulatory exclusivity for our product candidates;

● successfully launching any new product candidates and achieving commercial sales, if and when approved.

● successfully launching our product candidates and achieving commercial sales, if and when approved.

A change in the outcome of any of these variables with respect to the development of any of our programs or any product candidate we develop would significantly change the costs, timing and viability associated with the development and/or regulatory approval of such programs or product candidates.

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 or 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.

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

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

We expect our sales and marketing expenses to increase 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.

Sales and marketing expenses include:

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We anticipate that our general and administrative expenses will increase in the future to support our continued commercialization efforts, ongoing and future potential research and development activities, and increased costs of operating as a public company.

These increases will likely include increased costs related to the hiring of additional personnel and fees paid to outside consultants, lawyers and accountants, among other expenses.

These increases will likely be driven by costs associated with the hiring of additional personnel and fees paid to outside consultants, lawyers and accountants, among other expenses.

Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with the requirements of Nasdaq and the SEC, insurance and investor relations costs.

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Paragon Agreements

We were party to a management services agreement (the “Management Services Agreement”) with Paragon Biosciences, LLC (“Paragon”), effective on September 22, 2017 through the consummation of our IPO, 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 were party to a management services agreement with Paragon Biosciences, LLC (“Paragon”), which was terminated upon the consummation of our IPO, pursuant to which Paragon provided us with certain professional services.

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.

For the three months ended September 30, 2021, we paid de minimis fees pursuant to this agreement.

Loss on Debt Extinguishment

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.

For the three months ended March 31, 2022, we paid $0.1 million pursuant to this agreement.

Interest Expense, Net

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The following table sets forth selected items in our unaudited condensed consolidated statements of operations for the periods presented:

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Three Months Ended March 31,

(In thousands)

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Operating income

Loss on debt extinguishment

Other expense, net

Interest expense, net

Net (loss) income before provision for income taxes

Income tax benefit (expense)

Net (loss) income

Net income before provision for income taxes

Income tax expense

Net Product Revenue

Net product revenue increased by $35.1 million, or 77.0%, for the three months ended September 30, 2021 and $110.8 million, or 107.1%, for the nine months ended September 30, 2021 compared to the same periods in 2020.

The increase for both comparable periods was due to the growing commercial sales of WAKIX which was launched on November 1, 2019 and the price increase of WAKIX in connection with the cataplexy indication approval in the fourth quarter of 2020.

Net product revenue increased by $25.6 million, or 43.0%, for the three months ended March 31, 2022 compared to the same period in 2021.

The increase was due to the growth in the average number of patients on WAKIX.

Cost of Product Sales

Cost of product sales increased by $6.7 million, or 85.1%, for the three months ended September 30, 2021 and $19.9 million, or 111.6%, for the nine months ended September 30, 2021 compared to the same periods in 2020.

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

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

Cost of product sales increased by $4.3 million, or 41.4%, for the three months ended March 31, 2022 compared to the same period in 2021.

The increase was due to higher sales of WAKIX.

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

Research and Development Expenses

Research and development expenses increased by $7.5 million, or 177.5%, for the three months ended September 30, 2021 and $11.1 million, or 93.7%, for the nine months ended September 30, 2021 as compared to the same periods in 2020.

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

Research and development expenses increased by $2.9 million, or 62.0%, for the three months ended March 31, 2022 as compared to the same period in 2021.

The increase was due to clinical development work associated with PWS, DM and IH and an increase to stock compensation associated with new awards.

Sales and Marketing Expenses

Sales and marketing expenses increased by $3.9 million, or 30.8% for the three months ended September 30, 2021 and $10.7 million, or 28.0%, for the nine months ended September 30, 2021 as compared

to the same periods in 2020.

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

Sales and marketing expenses increased by $2.1 million, or 13.4% for the three months ended March 31, 2022 as compared to the same period in 2021.

The increase was primarily due to patient engagement and marketing activities driven by our commercialization of WAKIX and an increase to stock-compensation expense associated with new awards.

General and Administrative Expenses

General and administrative expenses increased by $6.3 million, or 60.4% for the three months ended September 30, 2021 and $19.4 million, or 73.9%, for the nine months ended September 30, 2021 as compared to the same periods in 2020.

This 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, offset by 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 $26.1 million, or 100%, for the three months ended September 30, 2021 and increased $3.5 million, or 15.5%, for the nine months ended September 30, 2021 as compared to the same period in 2020.

The three month increase was due to costs of extinguishment of debt during the period related to the prepayment of the OrbiMed Loan Agreement.

The nine month increase was due 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 decreased by $1.5 million, or 100.0%, for the three months ended September 30, 2021 and $3.1 million, or 99.5% for the nine months ended September 30, 2021, as compared to the same periods in 2020.

This is primarily due to the change in the fair value of the warranty liability in 2020.

General and administrative expenses increased by $3.3 million, or 22.9% for the three months ended March 31, 2022 as compared to the same period in 2021.

This increase was primarily due to an increase to stock compensation associated with new awards and an increase in intangible asset amortization as a result

of the $40.0 million milestone payment upon attaining $500.0 million in aggregate net sales of WAKIX in the United States.

Interest Expense, Net

Interest expense decreased by $1.5 million, or 21.8%, or the three months ended September 30, 2021 and $0.5 million, or 2.3%, for the nine months ended September 30, 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.

Interest expense decreased by $3.0 million, or 41.5%, for the three months ended March 31, 2022 as compared to the same period in 2021 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.

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 8.3% and 0.0% for the nine months ended September 30, 2021 and 2020, respectively.

The effective income tax rate was 8.1% and 0.0% for the three months ended March 31, 2022 and 2021, 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

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;

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

From our inception through September 30, 2021, we have received aggregate proceeds of $345.0 million from sales of our convertible preferred stock.

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

From our inception through our IPO, we 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.

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

As of September 30, 2021, we had cash, cash equivalents and restricted cash of $190.5 million and accumulated deficit of $476.3 million.

As of September 30, 2021, we had outstanding debt, net of issuance costs, of $192.1 million.

As of March 31, 2022, we had cash, cash equivalents and restricted cash of $225.2 million and accumulated deficit of $432.1 million.

As of March 31, 2022, we had outstanding debt of $199.0 million.

The unaudited condensed 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 business.

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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 become available on 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.

In August 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 Credit Agreement.

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 and will be guaranteed by our subsidiary Harmony Biosciences, LLC and certain of our future subsidiaries that are required to become a party thereto as guarantors.

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.

OrbiMed Credit Agreement

On February 28, 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 for an aggregate of $200.0 million and paid off all of our obligations under the CRG Loan.

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,

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.

The Company is in compliance with all covenants as of March 31, 2022.

Agreement Related to Intellectual Property

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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 within the accompanying unaudited condensed consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2021.

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.

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 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 pursuant to the terms of the Bioprojet License Agreement.

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.

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.

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

The following table sets forth a summary of our cash flows for the three months ended September 30, 2021 and 2020:

Nine Months Ended September 30,

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

In addition, we made a final $40.0 million milestone payment to Bioprojet in March 2022 upon WAKIX attaining $500.0 million in aggregate net sales in the United States.

The following table sets forth a summary of our cash flows for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

Selected cash flow data

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Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2021 consisted of our net income of $11.8 million adjusted for non-cash items of $26.1 million related to loss on extinguishment of debt, $14.0 million related to intangible amortization and depreciation and $11.7 million related to stock-based compensation expense.

Net cash provided by operating activities for the three months ended March 31, 2022 consisted of our net income of $21.5 million adjusted for non-cash items of $5.2 million related to intangible amortization and depreciation and $4.9 million related to stock-based compensation expense.

Net working capital excluding cash decreased by $3.5 million.

Net cash used in operating activities for the nine months ended September 30, 2020 consisted of our net loss of $36.7 million adjusted for non-cash items of $22.6 million associated with loss on extinguishment of debt and $8.7 million related to intangible amortization and fair value of warrants.

Net working capital excluding cash decreased by $11.2 million due to company growth and the commercial launch of WAKIX.

Net cash provided by operating activities for the three months ended March 31, 2021 consisted of our net income of $7.4 million adjusted for non-cash items of $4.7 million related to intangible amortization and depreciation and $3.3 million related to stock-based compensation expense.

Net working capital excluding cash decreased by $3.7 million.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2021 was $100.3 million, which was primarily attributable to the $100.0 million milestone payment associated with the Bioprojet License Agreement.

There were no significant investing activities for the nine months ended September 30, 2020.

Net cash used in investing activities for the three months ended March 31, 2022 was $40.0 million, which was primarily attributable to a final $40.0 million milestone payment associated with the Bioprojet License Agreement.

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

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2021 was $0.3 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 Credit Agreement.

Net cash provided by financing activities for the nine months ended September 30, 2020 was $210.3 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 $120.6 million of repayment and exit fees associated with the CRG Loan.

Off-Balance Sheet Arrangements

For the nine months ended September 30, 2021 and 2020, 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 three months ended March 31, 2022 was $1.4 million, which primarily consisted of $1.9 million in proceeds from exercised options offset by $0.5 million in principal payments associated with the Blackstone Credit Agreement.

There were no significant financing activities for the three months ended March 31, 2021.

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 (“GAAP”).

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See Note 3 to our unaudited condensed consolidated financial statements for recent accounting pronouncements.

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

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.

We will no longer be an ECG as of December 31, 2021, after which we will not be able to take advantage of the reduced disclosure requirements applicable to an ECG.

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 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 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):

Three Months Ended September 30,

Nine Months Ended September 30,

Net (loss) income

Non-GAAP Adjustments:

Interest expense

Additional Non-GAAP Adjustments:

Stock-based compensation expense

Loss on debt extinguishment

Warrant expense

Non-GAAP adjusted net income

Accumulation of yield on preferred stock

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

GAAP reported net (loss) income 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 (1)

(1) The difference in diluted shares compared to the US GAAP computation for the three months ended September 30, 2021, is because all stock options and warrants have been excluded from the computation of diluted weighted-average shares outstanding.

See Note 14 to the unaudited condensed consolidated financial statements.

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-Q

Item 2. Management’s Discussion and Analysis