Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. 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, 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. Important factors that could cause such differences include, but are not limited to, statements about:
● our commercialization efforts and strategy for WAKIX;
● the rate and degree of market acceptance and clinical utility of pitolisant in additional indications, if approved, and any other product candidates we may develop or acquire, if approved;
● our research and development plans, including our plans to explore the therapeutic potential of pitolisant in additional indications;
● our ongoing and planned clinical trials;
● our ability to expand the scope of our license agreements with Bioprojet Soci é t é Civile de Recherche ( “ Bioprojet ” );
● the availability of favorable insurance coverage and reimbursement for WAKIX;
● the timing of, and our ability to obtain, regulatory approvals for pitolisant for other indications as well as any other product candidates;
● our estimates regarding expenses, future revenue, capital requirements and additional financing needs;
● our ability to identify, acquire and integrate additional products or product candidates with significant commercial potential that are consistent with our commercial objectives;
● our commercialization, marketing and manufacturing capabilities and strategy;
● significant competition in our industry;
● our intellectual property position;
● loss or retirement of key members of management;
● failure to successfully execute our growth strategy, including any delays in our planned future growth;
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● our failure to maintain effective internal controls; and
● the impact of government laws and regulations.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”, or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the factors described under the section in our most recent Annual Report on Form 10-K entitled “Item 1A. Risk Factors” and the sections in this Quarterly Report on Form 10-Q titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.
Unless otherwise indicated, information contained in this Quarterly Report on Form 10-Q concerning our industry, including industry statistics and forecasts, competitive position and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and other third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data, and our experience in, and knowledge of, such industry and markets, which we believe to be reasonable. In addition, projections, forecasts, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed and forecasts in the estimates made by the independent parties and by us.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. 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 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.
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Company Overview
We are a commercial-stage, pharmaceutical company focused on developing and commercializing innovative therapies for patients living with rare neurological diseases as well as patients living with other neurological who have unmet medical needs. Our product, WAKIX (pitolisant), is a first-in-class molecule with a novel mechanism of action (“MOA”) specifically designed to increase histamine signaling in the brain by binding to H 3 receptors. In August 2019, WAKIX was approved by the U.S. Food and Drug Administration (the “FDA”) for the treatment of excessive daytime sleepiness (“EDS”) in adult patients with narcolepsy, and its U.S. 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. 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 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 identified idiopathic hypersomnia (“IH”), another central disorder of hypersomnolence like narcolepsy, as our next potential new indication for WAKIX, which received Orphan Drug designation by the FDA in September 2023. 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 completed enrollment in the INTUNE study in May 2023 and we announced topline data on October 11, 2023. While the primary endpoint did not meet statistical significance, the totality of the data showed favorable trends for pitolisant in the treatment of adult patients with IH. We are currently analyzing the full data set to determine next steps, which include interactions with the FDA. 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”). Based on the positive signals from the data from our Phase 2 proof-of-concept signal detection 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 was held in June 2023. We aligned with the FDA on the proposed Phase 3 study design to support further investigation of pitolisant as a potential treatment to address the unmet medical need for children, adolescents and adults with PWS experiencing EDS, for which there is currently no approved treatment. In October 2023, we received FDA alignment of the protocol for the Phase 3 TEMPO study in patients with PWS, which will satisfy the requirements for both the registrational trial and pediatric exclusivity. We expect to initiate the Phase 3 study in the first quarter of 2024. 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 we are on track for topline results from this trial in the fourth quarter of 2023.
Our partner, Bioprojet, completed a Phase 3 trial in pediatric patients with narcolepsy and received an approval from the European Medical Agency’s (“EMA”) 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, which we plan to submit in the fourth quarter of 2023. In addition, we made progress with FDA in gaining alignment on the requirements for pediatric exclusivity for WAKIX, which we are actively pursuing.
We are actively working 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 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, in July 2022, we entered into a License and Commercialization Agreement (the “2022 LCA”) with Bioprojet whereby we obtained exclusive rights to manufacture, develop 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. The 2022 LCA has the potential to generate new intellectual property and extend the pitolisant franchise. We are co-developing the new formulations of pitolisant with Bioprojet and work is ongoing. One of the formulations was dosed in a phase 1 pharmacokinetic study in healthy volunteers in October 2023.
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In addition, on October 10, 2023, we completed the acquisition of Zynerba Pharmaceuticals, Inc. (“Zynerba”), a clinical-stage pharmaceutical company focused on innovative pharmaceutically produced transdermal cannabidiol therapies for orphan neuropsychiatric disorders. Zynerba’s drug candidate is Zygel (also known as ZYN002), the first and only pharmaceutically-produced synthetic cannabidiol gel, devoid of THC, and formulated as a patent protected, permeation-enhanced gel for transdermal delivery. Zygel is currently in a pivotal Phase 3 study for the treatment of Fragile X Syndrome.
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. A thirteen week chronic toxicity study was initiated during the third quarter of 2023.
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 patients 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 “2017 LCA”) in July 2017. Pitolisant was granted Orphan Drug Designation for the treatment of narcolepsy by the FDA in 2010. 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.
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, 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 September 30, 2023 was approximately 5,800. Additionally, as of September 30, 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.
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Financial Operations Overview
Revenue
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, 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. 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 January 2025. 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 2025, with additional API on-hand inventory to support at least 36 months beyond this time frame.
Research and Development Expenses
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 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. We have significantly increased our research and development efforts as we advance our clinical programs in IH, PWS and DM 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;
● direct third-party costs such as expenses incurred under agreements with CROs, and contract manufacturing organizations ( “ CMOs ” );
● manufacturing costs in connection with producing materials for use in conducting clinical trials;
● 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; and
● amortization expense for assets used in research and development activities.
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,
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central laboratories, contractors, and consultants in connection with our clinical development programs. Internal expenses primarily relate to personnel who are deployed across multiple programs.
Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, milestone payments, and the cost of submitting an NDA to the FDA (and/or other regulatory authorities). We expect our research and development expenses to be significant over the next several years as we advance our current clinical development programs and prepare to seek regulatory approval for additional indications for pitolisant, 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 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 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;
● the acceptance of INDs for our planned clinical trials or future clinical trials;
● the successful and timely enrollment and completion of clinical trials;
● the successful completion of preclinical studies and clinical trials;
● successful data from our clinical programs that support an acceptable risk-benefit profile of our product candidates in the intended populations;
● 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 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; and
● successfully launching our product candidates and achieving commercial sales, if and when approved.
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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 primarily relate to the market development and commercialization activities of WAKIX for the treatment of EDS and cataplexy in adult patients with narcolepsy. 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 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, marketing and market access personnel;
● healthcare professional-related expenses, including marketing programs, healthcare professional promotional medical education, disease education, conference exhibits and market research;
● patient-related expenses, including patient awareness and education programs, disease awareness education, patient reimbursement programs, patient support services and market research;
● market access expenses, including payor education, specialty pharmacy programs and services to support the continued commercialization of WAKIX; and
● secondary data purchases (i.e., patient claims and prescription data), data warehouse development and data management.
In addition, sales and marketing expenses include external costs such as website development, media placement fees, agency fees for patient, medical education and promotional expenses, market research, analysis of secondary data, conference fees and consulting fees.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for our personnel in executive, legal, finance and accounting, human resources, investor relations, and other administrative departments. General and administrative expenses also consist of office leases, and professional fees, including legal, tax and accounting and consulting fees.
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 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. If any of our current or future indication expansion programs or new product candidates obtain U.S. regulatory approval, we expect that we would incur significantly increased expenses associated with building a sales and marketing team.
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Paragon Agreements
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 and nine months ended September 30, 2023, we paid fees of $0.1 million and $0.2 million, respectively, pursuant to this agreement.
Loss on Debt Extinguishment
Loss on debt extinguishment consists primarily of costs of extinguishment of debt during the applicable period related to the prepayment of our credit agreements.
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 the discount 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,
2023
2022
2023
2022
(In thousands)
(In thousands)
Net product revenues
$
160,268
$
117,206
$
413,610
$
309,547
Cost of product sales
32,296
22,959
78,084
56,596
Gross profit
127,972
94,247
335,526
252,951
Operating expenses:
Research and development
17,499
40,548
45,757
60,794
Sales and marketing
23,418
20,467
70,518
58,210
General and administrative
22,546
21,331
67,417
61,374
Total operating expenses
63,463
82,346
183,692
180,378
Operating income
64,509
11,901
151,834
72,573
Loss on debt extinguishment
(9,766)
—
(9,766)
—
Other (expense) income, net
(5)
56
(34)
96
Interest expense, net
(2,906)
(3,990)
(8,327)
(12,086)
Net income before provision for income taxes
51,832
7,967
133,707
60,583
Income tax (expense) benefit
(13,371)
79,976
(31,461)
72,376
Net income
$
38,461
$
87,943
$
102,246
$
132,959
Net Product Revenues
Net product revenues increased by $43.1 million, or 36.7%, for the three months ended September 30, 2023 and increased by $104.1 million, or 33.6%, for the nine months ended September 30, 2023, compared to the same periods in 2022. The increase for the three months ended September 30, 2023, was primarily due to a 28.2% increase in the number of units shipped, and the net impact of a 7.0% price increase. The increase for the nine months ended September 30, 2023, was primarily due to a 26.9% increase in number of units shipped,
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and the net impact of a 7.0% price increase. The price increase for both comparable periods occurred in January 2023.
Cost of Product Sales
Cost of product sales increased by $9.3 million, or 40.7%, for the three months ended September 30, 2023 and increased by $21.5 million, or 38.0%, for the nine months ended September 30, 2023, compared to the same periods in 2022. Cost of product sales as a percentage of net product revenues was 20.2% and 18.9% for the three and nine months ended September 30, 2023, respectively, compared to 19.6% and 18.3% for the three and nine months ended September 30, 2022, respectively. The increase in cost of product sales in both comparable periods was due to higher royalties as a result of higher sales of WAKIX and the increase in cost of product sales as a percentage of net product revenues was due to entering a higher royalty tier earlier in 2023 compared to 2022.
Research and Development Expenses
Research and development expenses decreased by $23.0 million, or 56.8%, for the three months ended September 30, 2023 and decreased by $15.0 million, or 24.7%, for the nine months ended September 30, 2023, compared to the same periods in 2022. The decrease for the three months ended September 30, 2023 was primarily driven by a $30 million licensing fee incurred upon entering the 2022 LCA with Bioprojet during the three months ended September 30, 2022, partially offset by a $5.7 million increase in clinical development work associated with IH, PWS and DM, a $0.9 million increase in personnel costs and a $0.5 million increase in stock compensation associated with new awards. The decrease for the nine months ended September 30, 2023 was primarily driven by a $30 million licensing fee incurred upon entering the 2022 LCA with Bioprojet during the nine months ended September 30, 2022, partially offset by an $11.0 million increase in clinical development work associated with IH, PWS and DM, a $2.3 million increase in personnel costs, a $1.1 million increase in stock compensation associated with new awards and a $0.8 million IPR&D charge related to preclinical milestones achieved for HBS-102.
Sales and Marketing Expenses
Sales and marketing expenses increased by $3.0 million, or 14.4%, for the three months ended September 30, 2023, and increased by $12.3 million, or 21.1%, for the nine months ended September 30, 2023, compared to the same periods in 2022. The increase for the three months ended September 30, 2023, was primarily due to a $2.3 million increase in personnel costs and a $0.4 million increase in patient engagement and marketing activities. The increase for the nine months ended September 30, 2023, was primarily due to a $7.1 million increase in patient engagement and marketing activities and a $4.8 million increase in personnel costs. The increase in patient engagement and marketing activities for both comparable periods was driven by our continued growth of WAKIX and the increase in personnel costs for both comparable periods was related to our sales force expansion.
General and Administrative Expenses
General and administrative expenses increased by $1.2 million, or 5.7%, for the three months ended September 30, 2023 and increased by $6.0 million, or 9.8%, for the nine months ended September 30, 2023, as compared to the same periods in 2022. The increase in the three months ended September 30, 2023 was primarily due to a $0.9 million increase in personnel costs and a $0.3 million increase in stock compensation associated with new awards. The increase in the nine months ended September 30, 2023 was primarily due to a $2.5 million increase in personnel costs, a $1.5 million increase to stock compensation associated with new awards and a $0.9 million 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.
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Loss on Debt Extinguishment
Loss on debt extinguishment was $9.8 million for the three and nine months ended September 30, 2023. There was no comparable amount in the prior year periods related to the extinguishment of the Blackstone Credit Agreement (defined below).
Interest Expense, Net
Interest expense, net decreased by $1.0 million, or 27.2%, for the three months ended September 30, 2023 and decreased by $3.8 million, or 31.1%, for the nine months ended September 30, 2023, compared to the same periods in 2022. The decrease for the three months ended September 30, 2023, was primarily due to a $2.6 million increase in interest income generated from our investments and cash equivalents, partially offset by $2.0 million in unamortized fees and ticking fees pertaining to the DDTL (defined below). The decrease for the nine months ended September 30, 2023, was primarily due to a $7.4 million increase in interest income generated from our investments and cash equivalents and a $2.0 million increase in accretion of discount on our investments, partially offset by a $3.8 million increase in interest expense due to higher rates and $2.0 million in unamortized fees and ticking fees pertaining to the DDTL (defined below).
Income Taxes
Income tax expense was $13.4 million, representing a 25.8% effective tax rate, for the three months ended September 30, 2023, and $31.5 million, or an effective tax rate of 23.5%, for the nine months ended September 30, 2023. Income tax benefit was $80.0 million and $72.4 million for the three and nine months ended September 30. 2022, respectively. The income tax benefit related to both the three and nine months ended September 30, 2022 was due to the release of the valuation allowance on our deferred tax assets, partially offset by current period provision for state and federal income taxes. The effective tax rate of 23.5% for the nine months ended September 30, 2023 included 21.0% for the provision of federal income taxes and 4.7% for the provision of state income taxes, partially offset by a tax windfall benefit of 0.9% from the exercise of stock options and a 1.6% benefit from credits.
Liquidity, Sources of Funding and Capital Resources
Overview
To date, we have financed our operations primarily with (a) proceeds from sales of our convertible preferred stock; (b) borrowings under our debt agreements; (c) the proceeds from our IPO; 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. In August 2020, we completed the IPO of our common stock, in which we sold 6,151,162 shares of our common stock, including 802,325 shares of our common stock pursuant to the underwriters’ over-allotment option. The shares were sold at a price of $24.00 per share for net proceeds of approximately $135.4 million. As of September 30, 2023, we had cash, cash equivalents, restricted cash and investments of $438.6 million and an accumulated deficit of $169.9 million. As of September 30, 2023, we had outstanding debt of $200.0 million.
We have invested a portion of our available cash in money market funds, U.S. government and agency securities, corporate debt and commercial paper in accordance with our investment policy. 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. 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.
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We believe that our existing cash, cash equivalents and investments on hand as of September 30, 2023, 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.
Term Loan A Credit Agreement
On July 26, 2023, we entered into a Credit Agreement (the “TLA Credit Agreement”) with JPMorgan Chase Bank, N.A., as “Administrative Agent”, and certain lenders. The TLA Credit Agreement provides for a five-year senior secured term loan (the “TLA Term Loan”) in an aggregate principal amount of $185.0 million.
On September 21, 2023, we entered into the First Incremental Amendment (the “First Incremental Amendment”) with the Administrative Agent and Bank of America, N.A., as incremental lender. The First Incremental Amendment provides for an incremental senior secured term loan (the “Incremental Term Loan”) in an aggregate principal amount of $15.0 million. The First Incremental Amendment amends the TLA Credit Agreement and provides that the Incremental Term Loan will have identical terms as the TLA Term Loan.
The repayment schedule for both the TLA Term Loan and the Incremental Term Loan (together, the “Term Loans”) consists of $3.8 million quarterly principal payments, which commence on December 31, 2023, increasing to $5.0 million quarterly principal payments beginning on December 31, 2025, with a $115.0 million payment due on the maturity date of July 26, 2028. The Term Loans bear interest at a per annum rate equal to, at our option, (i) a base rate plus a specified margin ranging from 2.50% to 3.00%, based on our senior secured net leverage ratio (as defined in the TLA Credit Agreement) or (ii) Term SOFR plus a credit spread adjustment of 0.10% plus a specified margin ranging from 3.50% to 4.00%, based on our senior secured net leverage ratio.
The TLA Credit Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties, events of default and other provisions. We were in compliance with all covenants as of September 30, 2023.
Blackstone Credit Agreement
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. In August 2022, we entered into an agreement to extend the expiration date of the DDTL to August 9, 2023, for which we paid a ticking fee at a rate of 1% per annum on the undrawn portion of the DDTL, which commenced on August 10, 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.
In connection with the TLA Credit Agreement, we extinguished the Blackstone Credit Agreement, which required a payoff amount of $207.3 million consisting of principal repayment, interest, exit fees, a ticking fee and a prepayment premium. We recognized a loss on extinguishment of debt of $9.8 million relating to the Blackstone Credit Agreement for the three and nine months ended September 30, 2023.
Share Repurchases
On August 1, 2023, our Board of Directors approved a program providing for the repurchase of shares of common stock in an aggregate amount of up to $125.0 million, excluding commissions and transaction fees. The repurchase program may be suspended, terminated or modified at any time for any reason. During the three and nine months ended September 30, 2023, we repurchased and cancelled 1,439,792 shares of common stock at an aggregate cost of $50.0 million, excluding commissions and transaction fees. As of September 30, 2023 the remaining amount of common stock authorized for repurchases was $75.0 million.
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Acquisitions
On October 10, 2023, we completed a tender offer (the “Tender Offer”) to acquire all of the outstanding shares of common stock of Zynerba Pharmaceuticals, Inc. (“Zynerba Common Stock”).
Under the terms of the Tender Offer, we paid (i) $1.1059 per share of Zynerba Common Stock (the “Common Cash Amount”), plus (ii) one contingent value right (each, a “CVR”) per share of Zynerba Common Stock (the “Common CVR Amount”), which represents the right to receive up to approximately $2.5444 per share of Zynerba Common Stock, subject to the achievement of certain clinical, regulatory and sales-based milestones. Both the Common Cash Amount and Common CVR Amount are to be paid in cash, subject to any applicable withholding of taxes and without interest. The aggregate consideration we paid to acquire the Zynerba Common Stock upon completion of the Tender Offer was $60 million, exclusive of transaction related fees. We financed the acquisition with cash on hand.
Asset Purchase Agreement
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 $1.0 million for additional preclinical milestones (see “Recent Milestone Payments”), $19.0 million for development milestones, $44.0 million for regulatory milestones and $110.0 million for sales milestones.
License Agreement
In July 2022, we entered into the 2022 LCA with Bioprojet whereby we obtained exclusive rights to manufacture, develop 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 was paid 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.
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Cash Flows
The following table sets forth a summary of our cash flows for the nine months ended September 30, 2023 and 2022:
Nine Months Ended September 30,
2023
2022
Selected cash flow data
(In thousands)
Cash provided by (used in):
Operating activities
$
142,722
$
117,788
Investing activities
(10,374)
(94,937)
Financing activities
(52,029)
4,183
Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2023 primarily consisted of net income of $102.2 million adjusted for non-cash items of $14.5 million related to deferred tax assets, $18.2 million related to intangible amortization and depreciation, $22.3 million related to stock-based compensation expense and $9.8 million related to loss on extinguishment of debt. Net working capital excluding cash increased by $3.4 million.
Net cash provided by operating activities for the nine months ended September 30, 2022 consisted of 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.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2023 was $10.4 million, which was primarily attributable to $105.9 million in purchases of debt securities, partially offset by $95.7 million in proceeds from sales and maturities of investments and $0.2 million in purchases of property and equipment.
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.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2023 was $52.0 million, which primarily consisted of $202.3 million in payments of principal and exit fees associated with the extinguishment of the Blackstone Credit Agreement, $50.0 million in share repurchases and $1.0 million in principal payments associated with the Blackstone Credit Agreement, partially offset by $197.0 million in proceeds associated with the TLA Credit Agreement, net of issuance costs, and $4.8 million in proceeds from exercised options.
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 partially offset by $1.5 million in principal payments associated with the Blackstone Credit Agreement.
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Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. 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 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.
We define our critical accounting policies as those under GAAP that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. During the quarter covered by this report, there were no material changes to the accounting policies and assumptions previously disclosed, except as disclosed in Note 3 to the unaudited condensed consolidated financial statements contained herein.
Recent Accounting Pronouncements
See Note 3 to our unaudited condensed consolidated financial statements for recent accounting pronouncements.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.