What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-11-01 · 98 added, 156 removed, 170 unchanged (60% of the section changed)

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We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, the anticipated impact of the COVID-19 pandemic on our business, business strategy, products, prospective products, product approvals, research and development costs, anticipated timing and likelihood of success of clinical trials, expected timing of the release of clinical trial data, the plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements.

All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy, products, prospective products, product approvals, research and development costs, anticipated timing and likelihood of success of clinical trials, expected timing of the release of clinical trial data, the plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

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● the availability of favorable insurance coverage and reimbursement for WAKIX;

● the impact of the COVID-19 pandemic;

● the timing of, and our ability to obtain, regulatory approvals for pitolisant for other indications as well as any other product candidates;

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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.

Further, we have in-licensed from Bioprojet the registered trademark product name WAKIX® in the United States.

We also have registered trademark protection in the United States for KNOW NARCOLEPSY®, REM AT THE WRONG TIME® and NON-REM AT THE WRONG TIME®, as well as our brand and logo HB®, HB HARMONY BIOSCIENCES® and HARMONY BIOSCIENCES®.

This report also includes trademarks, service marks and trade names of other companies.

Trademarks, service marks and trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

Company Overview

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commercial launch was initiated in November 2019.

In October 2020, WAKIX was

approved by the FDA for the treatment of cataplexy in adult patients with narcolepsy.

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”).

Regarding pediatric narcolepsy and a pediatric indication for WAKIX, our partner, Bioprojet, has completed a Phase 3 trial in pediatric patients with narcolepsy.

Bioprojet recently submitted the data to the European Medical Agency (“EMA”) seeking approval for a pediatric narcolepsy indication.

The EMA’s decision on Bioprojet’s pediatric narcolepsy submission is expected in the first quarter of 2023 and could help inform our strategy toward submitting the data to the FDA.

In the meantime, we are committed to obtaining pediatric exclusivity for WAKIX and submitted a request for a pediatric written request this quarter.

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.

We are taking a mechanism-based approach to managing the life cycle of pitolisant and have identified idiopathic hypersomnia (“IH”), another central disorder of hypersomnolence like narcolepsy, as our next potential new indication for WAKIX.

In April, we initiated a Phase 3 registrational trial (the “INTUNE Study”) to evaluate the efficacy and safety of pitolisant in adult patients with IH and have seen good momentum in patient enrollment, with over 70% of the targeted clinical trial sites activated.

In April 2022, we initiated a Phase 3 registrational trial, the INTUNE Study, to evaluate the efficacy and safety of pitolisant in adult patients with IH.

We continue to see strong momentum in the INTUNE Study and we anticipate topline data in the fourth quarter of 2023.

We are focusing our development efforts on other rare neurological disorders in which EDS is a prominent symptom, including Prader-Willi Syndrome (“PWS”) and myotonic dystrophy, otherwise known as dystrophia myotonica (“DM”).

We recently received the initial topline data from our Phase 2 proof-of-concept clinical trial to evaluate pitolisant for the treatment of EDS and other key symptoms in patients with PWS.

The topline data showed a positive signal on the primary outcome related to EDS and we look forward to receiving the full data set, which will inform our understanding of the data as we plan to advance our development program in patients with PWS.

In June 2021, we initiated a Phase 2 proof-of-concept clinical trial to evaluate pitolisant for the treatment of EDS, fatigue and cognitive dysfunction in adult patients with DM1 and anticipate topline results from this trial in 2023.

Based on the data from our Phase 2 proof-of-concept clinical trial to evaluate pitolisant for the treatment of EDS and other key symptoms in patients with PWS, an end-of-phase 2 meeting with the FDA is scheduled in late second quarter of 2023.

We intend to advance our development program in patients with PWS to a Phase 3 trial.

Our partner, Bioprojet, completed a Phase 3 trial in pediatric patients with narcolepsy and submitted the trial data to the European Medical Agency (“EMA”) seeking approval for a pediatric narcolepsy indication.

On March 15, 2023, Bioprojet received an approval from the EMA’s Committee for Medicinal Products for Human Use (“CHMP”) for a pediatric narcolepsy indication.

We are working with Bioprojet towards the submission to the FDA of a supplemental NDA for pediatric narcolepsy.

In addition, we are working with the FDA to gain alignment in pursuit of pediatric exclusivity for WAKIX.

We also seek to expand our pipeline through the acquisition of additional assets that focus on addressing the unmet needs of patients living with rare neurological diseases as well as patients living with other neurological diseases who have unmet medical needs.

We 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 July 31, 2022, we entered into a License and Commercialization Agreement (the “2022 LCA”) with Bioprojet whereby we obtained exclusive rights to manufacture, use and commercialize one or more new products based on pitolisant in the United States and Latin America, with the potential to add additional indications and formulations upon agreement of both parties.

In addition, 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 have recently initiated 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.

Pitolisant was developed by Bioprojet and approved by the 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.

Consistent with this objective, in July 2022, we entered into a License and Commercialization Agreement (the “2022 LCA”) with Bioprojet whereby we obtained exclusive rights to manufacture, use and commercialize one or more new products based on pitolisant in the United States and Latin America, with the potential to add additional indications and formulations upon the agreement of both parties.

Formulations related work between us and Bioprojet is ongoing.

In addition, in August 2021, we entered into an asset purchase agreement with ConSynance Therapeutics, Inc.

(the “APA”) to acquire 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.

In connection with the acquisition, we made an upfront payment of $3.5 million and will be required to make additional 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.

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 is ongoing.

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 “2017 LCA”) in July 2017.

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It received Breakthrough Therapy designation for the treatment of cataplexy in patients with narcolepsy and Fast Track status for the treatment of EDS and cataplexy in patients with narcolepsy in April 2018.

Our operating subsidiary, Harmony Biosciences, LLC, was formed in May 2017.

We were formed in July 2017 as Harmony Biosciences II, LLC, a Delaware limited liability company, and we converted to a Delaware corporation named Harmony Biosciences II, Inc.

in September 2017.

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 investigational new drug applications (“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 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.

We were founded in July 2017 as Harmony Biosciences II, LLC, a Delaware limited liability company.

We converted to a Delaware corporation named Harmony Biosciences II, Inc.

in September 2017, and, in February 2020, we changed our name to Harmony Biosciences Holdings, Inc.

Our operations are conducted by our wholly owned subsidiary, Harmony Biosciences, LLC, which was formed in May 2017.

Our operations to date have consisted of building and staffing our organization, acquiring the rights to pitolisant, raising capital, opening an investigational new drug application (“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 the development of 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 September, 30 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 September 30, 2022 was approximately 4,600.

Additionally, as of September 30, 2022, we have secured formulary access for more than 80% of all insured lives (Commercial, Medicare and Medicaid) in the United States.

As of March 31, 2023, we continued to see growth in the number of unique healthcare professional (“HCP”) prescribers of WAKIX since it became available in November 2019.

The average number of patients on WAKIX for the three months ended March 31, 2023 was approximately 5,100.

Additionally, as of March 31, 2023, 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

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 performance.

Commercialization

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 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 into the first quarter of 2024, 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 would not be significantly 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 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 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 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 patients to collect safety assessments (e.g.

labs, electrocardiograms) as required by the protocols.

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.

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 continue to 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 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 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 and cases began to decline, all of our employees returned to in-person operations, with flexibility as needed, which we believe 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 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

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

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

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

Cost of Product Sales

Cost of product sales includes manufacturing and distribution costs, the cost of the drug substance, FDA program fees, royalties due to third parties on net product sales, freight, shipping, handling, storage costs and salaries of employees involved with production.

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 WAKIX is three years from date of manufacture, with the earliest expiration of current inventory expected to be May 2023.

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

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

We expect the cost of product sales to increase as we continue to ramp up production in order to meet future demand for WAKIX and diversify our supply chain for WAKIX.

The shelf life of WAKIX is three years from date of manufacture, with the earliest expiration of current inventory expected to be February 2024.

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

We will continue to assess inventory levels in future periods as demand for WAKIX and the rate

of inventory turnover evolves.

We currently expect to have adequate supply of WAKIX into the first quarter of 2024, with additional API on-hand inventory to support at least 36 months beyond this time frame.

Research and Development Expenses

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

Research and development expenses primarily include development programs for potential new indications for pitolisant in patients with IH, PWS and DM.

We also incur 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.

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

Research and development costs are expensed as incurred.

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

● costs related to packaging and labelling of clinical supplies;

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

● costs related to packaging and labeling of clinical supplies;

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

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

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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, 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;

● 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, including our ability to access sleep labs in order to conduct objective sleep testing, 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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Market development and commercial activities account for a significant portion of our operating expenses and are expensed as 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.

We expect our sales and marketing expenses to increase in the near- and mid-term to support WAKIX’s 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:

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

● employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for our sales, marketing and market access personnel;

● healthcare professional-related expenses, including marketing programs, healthcare professional promotional medical education, disease education, conference exhibits and market research;

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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 and nine months ended September 30, 2022, we paid $0.1 million and $0.2 million, respectively, pursuant to this agreement.

For the three months ended March 31, 2023, we paid fees of $0.1 million pursuant to this agreement.

Interest Expense, Net

Interest expense, net consists primarily of interest expense on debt facilities, amortization of debt issuance costs and amortization of premiums on our debt securities, partially offset by interest income earned on our cash and investment balances and accretion of discounts on our debt securities.

Results of Operations

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 (income), net

Other income (expense), net

Interest expense, net

Net income before provision for income taxes

Income tax benefit (expense)

Income tax expense

Net Product Revenue

Net product revenue increased by $36.5 million, or 45.2%, for the three months ended September 30, 2022 and increased by $95.3 million, or 44.5%, for the nine months ended September 30, 2022, compared to the same periods in 2021.

The increase in both comparable periods was due to the growth in the average number of patients on WAKIX and price increases.

Net product revenue increased by $33.8 million, or 39.6%, for the three months ended March 31, 2023, compared to the same period in 2022.

The increase was due to the growth in the average number of patients on WAKIX from 4,300 during the three months ended March 31, 2022 to 5,100 during the three months ended March 31, 2023, and price increases.

Cost of Product Sales

Cost of product sales increased by $8.4 million, or 57.2%, for the three months ended September 30, 2022 and increased by $18.9 million, or 50.1%, for the nine months ended September 30, 2022, compared to the same periods in 2021.

The increase in both comparable periods was due to higher sales of WAKIX.

Cost of product sales increased by $6.1 million, or 41.2%, for the three months ended March 31, 2023, compared to the same period in 2022.

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 $28.8 million, or 245.4%, for the three months ended September 30, 2022, and increased by $37.9 million, or 165.3%, for the nine months ended September 30, 2022, compared to the same periods in 2021.

The increase for the three months ended September 30, 2022 is primarily related to the $30 million licensing fee incurred upon entering the 2022 LCA with Bioprojet.

The increase for the nine months ended September 30, 2022 is primarily driven by the $30 million licensing fee as well as increased clinical development work associated with IH, PWS and DM and increased personnel costs.

Research and development expenses increased by $5.7 million, or 75.4%, for the three months ended March 31, 2023, compared to the same period in 2022.

The increase for the three months ended March 31, 2023 was primarily driven by increased clinical development work associated with IH, PWS and DM, an IPR&D charge related milestone related to preclinical milestones achieved for HBS-102 and increased personnel costs.

Sales and Marketing Expenses

Sales and marketing expenses increased by $4.0 million, or 24.2%, for the three months ended September 30, 2022, and increased by $9.2 million, or 18.8%, for the nine months ended September 30, 2022,

compared to the same periods in 2021.

The increase in both comparable periods was primarily due to patient engagement and marketing activities driven by our commercialization of WAKIX and increased personnel costs related to sales force expansion.

Sales and marketing expenses increased by $5.0 million, or 28.4%, for the three months ended March 31, 2023, compared to the same period in 2022.

The increase was primarily due to patient engagement and marketing activities driven by our commercialization of WAKIX and increased personnel costs related to sales force expansion.

General and Administrative Expenses

General and administrative expenses increased by $4.5 million, or 26.5%, for the three months ended September 30, 2022 and increased by $15.7 million, or 34.3%, for the nine months ended September 30, 2022, as compared to the same periods in 2021.

The increase in both comparable periods was primarily due to an increase to stock compensation associated with new awards, an increase in intangible asset amortization as a result of the $40.0 million milestone payment upon attaining $500.0 million in life-to-date aggregate net sales of WAKIX in the United States and an increase in personnel costs.

Loss on Debt Extinguishment

There were no extinguishments of debt for the three and nine months ended September 30, 2022.

Loss on debt extinguishment was $26.1 million for the three and nine months ended September 30, 2021, due to the prepayment of the Credit Agreement with OrbiMed.

General and administrative expenses increased by $4.2 million, or 23.4%, for the three months ended March 31, 2023, as compared to the same period in 2022.

The increase was primarily due to an increase to stock compensation associated with new awards, an increase in personnel cost, and an increase in intangible asset amortization as a result of the $40.0 million milestone payment in March 2022 upon attaining $500.0 million in life-to-date aggregate net sales of WAKIX in the United States.

Interest Expense, Net

Interest expense, net decreased by $1.4 million, or 26.5%, for the three months ended September 30, 2022 and decreased by $7.7 million, or 38.9%, for the nine months ended September 30, 2022, compared to the same periods in 2021 primarily due to lower interest rates as a result of entering into the Blackstone Credit Agreement in August 2021 as compared to our previous Credit Agreement with OrbiMed, partially offset by interest income generated from our investments and an increase to the LIBOR.

Income tax benefit increased $79.1 million for the three months ended September 30 2022, and increased $73.4 million for the nine months ended September 30, 2022, as compared to the same periods in 2021.

The increase in both comparable periods was primarily driven by the release of our valuation allowance against our net deferred tax assets.

Interest expense, net decreased by $1.5 million, or 36.6%, for the three months ended March 31, 2023, compared to the same period in 2022 primarily due to interest income generated from our investments and cash equivalents, partially offset by higher interest rates on our debt as a result of the increase to the LIBOR.

Income tax expense was $8.3 million, representing a 22.0% effective tax rate, for the three months ended March 31, 2023, and $1.9 million, or an effective tax rate of 8.1%, as compared to the same period in 2022.

The increase in our effective tax rate was primarily driven by the utilization of net operating loss (“NOL”) carryforwards during 2022, which reduced our effective rate tax in the prior year.

We have utilized all of our federal NOL carryforwards as of December 31, 2022, and the utilization of state NOL carryforwards may be subject to a substantial limitation due to state provisions.

The effective tax rate of 22.0% for the three months ended March 31, 2023 included 6.3% for the provision of state income taxes, partially offset by a tax windfall benefit of 2.8% from the exercise of stock options and a 2.9% benefit from credits.

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;

(b) borrowings under our debt agreements;

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

As of September 30, 2022, we had cash, cash equivalents, restricted cash and investments of $316.8 million and accumulated deficit of $320.6 million.

As of September 30, 2022, we had outstanding debt of $198.0 million.

As of March 31, 2023, we had cash, cash equivalents, restricted cash and investments of $393.2 million and an accumulated deficit of $242.6 million.

As of March 31, 2023, we had outstanding debt of $197.0 million.

We have invested a portion of our available cash in money market funds, U.S.

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Our investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification, and maturities of our investments to preserve principal and maintain liquidity.

All investment securities have a credit

rating of at least A-2/P-2/F2 from at least two National Recognized Statistical Rating Organizations.

All investment securities have a credit rating of at least A-2/P-2/F2 from at least two National Recognized Statistical Rating Organizations.

Our investment portfolio may be adversely impacted by future disruptions in the credit markets.

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.

We believe that our anticipated cash from operating and financing activities, including as a result of potential availability under the DDTL (defined below), existing cash and cash equivalents and investments 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.

We believe that our anticipated cash from operating and financing activities, existing cash, cash equivalents and investments, as well as our ability to borrow additional funds under the Blackstone Credit Agreement, will enable us to meet our operational liquidity needs and fund our planned investing activities for

the next 12 months.

We have based our liquidity and cash flow projections on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we expect.

Blackstone Credit Agreement

In August 2021, we 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”).

In August 2021, we entered into the Blackstone Credit Agreement that provided 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 was initially available to draw down through August 9, 2022.

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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”).

The repayment schedule for the Initial Term Loan consists of quarterly $0.5 million principal payments, which commenced on December 31, 2021 and increases to quarterly $5.0 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.

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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.

We are in compliance with all covenants as of September 30, 2022.

We were in compliance with all covenants as of March 31, 2023.

Agreement Related to Intellectual Property

In August 2021, we 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.

In August 2021, we entered into the APA to acquire HBS-102, a potential first-in-class molecule with a novel mechanism of action.

Under the terms of the agreement, we 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.

Additionally, there are payments due upon the achievement of certain milestones, including $1.0 million for additional preclinical milestones (see “Recent Milestone Payment”), $19.0 million for development milestones, $44.0 million for regulatory milestones and $110.0 million for sales milestones.

License Agreement

On July 31, 2022, we entered into the 2022 LCA with Bioprojet whereby we obtained exclusive rights to manufacture, use and commercialize one or more new products based on pitolisant in the United States and Latin America, with the potential to add additional indications and formulations upon agreement of both parties.

We will pay an initial, non-refundable $30 million licensing fee and additional payments of up to $155 million are potentially due under the 2022 LCA upon the achievement of certain future development and sales-based milestones.

In addition, there are certain payments due upon achievement of development milestones for new indications and formulations agreed upon by both parties.

The 2022 LCA also requires a fixed trademark royalty and a tiered royalty based on net sales upon commercialization, which will be payable to Bioprojet on a quarterly basis.

Upon closing of the 2022 LCA on September 28, 2022, the $30 million licensing fee was recorded in research and development within the unaudited condensed consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2022.

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 under the provisions of the 2017 LCA.

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.

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

The following table sets forth a summary of our cash flows for the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30,

In July 2022, we entered into the 2022 LCA with Bioprojet whereby we obtained exclusive rights to manufacture, use and commercialize one or more new products based on pitolisant in the United States and Latin America, with the potential to add additional indications and formulations upon the agreement of both parties.

We paid an initial, non-refundable $30.0 million licensing fee in October 2022 and additional payments of up to $155.0 million are potentially due under the 2022 LCA upon the achievement of certain future development and sales-based milestones.

In addition, certain payments will become due upon the achievement of development milestones for new indications and formulations as agreed upon by both parties.

The 2022 LCA also includes a fixed trademark royalty and a tiered royalty based on net sales of any new products commercialized, which will be payable to Bioprojet on a quarterly basis.

Recent Milestone Payments

In March 2023, we achieved a preclinical milestone, which triggered a $0.8 million payment under the provisions of the APA, which we expect to pay in April 2023.

In March 2022, we made a final $40.0 million milestone payment to Bioprojet upon WAKIX attaining $500.0 million in life-to-date 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, 2023 and 2022:

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, 2022 consisted of our net income of $133.0 million adjusted for non-cash items of $81.7 million related to deferred tax assets, $17.3 million related to intangible amortization and depreciation and $19.2 million related to stock-based compensation expense.

Net working capital excluding cash increased by $27.9 million, which was partially due to the accrual of the $30.0 million licensing fee associated with the 2022 LCA.

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, 2023 consisted of our net income of $29.5 million adjusted for non-cash items of $3.4 million related to deferred tax assets, $6.1 million related to intangible amortization and depreciation and $6.6 million related to stock-based compensation expense.

Net working capital excluding cash increased by $3.7 million.

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.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2022 was $94.9 million, which was primarily attributable to a final $40.0 million milestone payment associated with the 2017 LCA and $55.6 million in purchases of debt securities, partially offset by $0.9 million in proceeds from sales and maturities of investments.

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 2017 LCA.

Net cash used in investing activities for the three months ended March 31, 2023 was $1.8 million, which was primarily attributable to $47.8 million in purchases of debt securities, partially offset by $46.0 million in proceeds from sales and maturities of investments.

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 2017 LCA.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2022 was $4.2 million, which primarily consisted of $5.3 million in proceeds from exercised options offset by $1.5 million in principal payments associated with the Blackstone Credit Agreement.

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 three months ended March 31, 2023 was $3.4 million, which primarily consisted of $3.9 million in proceeds from exercised options offset by a $0.5 million principal payment associated with the Blackstone Credit Agreement.

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.

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”).

The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of expenses during the reporting periods.

In accordance with GAAP, we evaluate our estimates and judgments on an ongoing basis.

Significant estimates include assumptions used in the determination of some of our costs incurred under our services type agreements and which costs are charged to research and development and general and administrative expense.

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Significant estimates include assumptions used in the determination of the amount of revenue recognized on sales of WAKIX, our costs incurred under services type agreements related to the performance of research and development activities, and the measurement of compensation expense pursuant to stock-based awards.

We base our estimates on contractual terms, historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

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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