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Item 2. Management’s Discussion and Analysis

2024-04-30 compared with 2023-10-31 · 129 added, 142 removed, 168 unchanged (62% of the section changed)

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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.

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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.

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 and Fast Track Designation in November 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 completed enrollment in the INTUNE study in May 2023 and we announced topline data in October 2023.

While the primary endpoint did not meet statistical significance, we believe the totality of the data showed favorable numerical trends for pitolisant in the treatment of adult patients with IH and we met with the FDA in March 2024 to discuss the path forward for IH.

Following our meeting with the FDA, we plan to submit a supplemental NDA (“sNDA”) for IH in the second half of 2024 based on the totality of the data obtained from the INTUNE study and from other sources.

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 aligned with the FDA on the proposed Phase 3 registration 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 regarding the protocol for the Phase 3 TEMPO study in patients with PWS, which we believe will satisfy the requirements for both the registrational trial and one of the two requirements for pediatric exclusivity for pitolisant.

In February 2024, the FDA granted Orphan Drug designation to pitolisant for the treatment of PWS.

The Phase 3 registrational trial, the TEMPO study, was initiated in March 2024.

In June 2021, we initiated a Phase 2 proof-of-concept signal

detection clinical trial to evaluate pitolisant for the treatment of EDS, fatigue and cognitive dysfunction in adult patients with DM1 and announced topline results from this trial in the fourth quarter of 2023, in which clinically meaningful improvements were demonstrated in EDS and fatigue.

The safety profile was consistent with the established safety profile of pitolisant.

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

In January 2023, Bioprojet received a positive opinion from the EMA’s Committee for Medicinal Products for Human Use (“CHMP”) and in March 2023, the EMA granted approval for the marketing authorization of WAKIX for the treatment of narcolepsy in children 6 and older.

Based on the data from the positive Phase 3 trial conducted by Bioprojet, we submitted an sNDA for pediatric narcolepsy in December 2023.

On February 21, 2024, we announced that the FDA has granted priority review of our pediatric narcolepsy sNDA and has set a Prescription Drug User Fee Act, or target action date, of June 21, 2024.

We remain committed to obtaining pediatric exclusivity for WAKIX .

The initiation of the PWS Phase 3 registrational trial, the TEMPO study, and pediatric narcolepsy sNDA are supportive of our efforts in obtaining 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, 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.

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.

We have made progress in the development of two new formulations of pitolisant, Next Gen 1 (“NG1”) and Next Gen 2 (“NG2”).

Both formulations entered clinical studies in the fourth quarter of 2023 .

We received data from the NG1 pilot bioequivalence study, which supports further development of NG1.

We anticipate data from the NG2 pilot pharmacokinetics study in the second half of 2024.

These formulations are expected to generate new IP to extend the pitolisant franchise out beyond 2040.

In addition, in October 2023, we completed the acquisition of Zynerba Pharmaceuticals, Inc.

(together with its subsidiary, Zynerba Pharmaceutical Pty, Ltd., “Zynerba”), a clinical-stage pharmaceutical company focused on innovative pharmaceutically produced transdermal cannabidiol therapies for orphan neuropsychiatric disorders.

Zynerba’s drug candidate is 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.

ZYN002 is currently in a pivotal Phase 3 trial, the RECONNECT study, for the treatment of Fragile X Syndrome (“FXS”).

Topline data from this Phase 3 study is anticipated in mid-2025.

ZYN002 has patent protection for the treatment of FXS until 2038.

In August 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.

We acquired full development and commercialization rights for HBS-102 globally, but we have provided an indication-limited grant-back license to ConSynance for the development and commercialization of the Compound in Greater China.

We are conducting 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.

We anticipate data from both studies in the first half of 2024 .

A 13-week toxicology study is completed and the preliminary results are encouraging.

In April 2024, we entered into a sublicense agreement with Bioprojet for an orexin-2 receptor agonist (OX2R) (the “Licensed Compound”) to be evaluated for the treatment of narcolepsy and other potential indications (the “Sublicense”).

Under the Sublicense, the Company obtained the exclusive right to develop,

manufacture and commercialize the Licensed Compound in the United States and Latin American territories, which are rights that Bioprojet originally licensed from Teijin Pharma, the innovator of the Licensed Compound.

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.

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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 .

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.

Our operations are conducted by our wholly owned subsidiaries, Harmony Biosciences, LLC and Zynerba.

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.

As of March 31, 2024, 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, 2024, was approximately 6,300.

Additionally, as of March 31, 2024, 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.

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.

Net Product Revenue

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

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

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

We currently have adequate supply of WAKIX to cover demand into the third 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.

Research and development expenses primarily include development programs for potential new indications for pitolisant in patients with IH, PWS, DM and the development of ZYN002 in patients with FXS.

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.

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.

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

Research and development expenses also include :

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

● costs related to packaging and labeling of clinical supplies;

● costs related to packaging and labelling of clinical supplies;

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

● acquired in-process research and development;

● 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,

central laboratories, contractors, and consultants in connection with our clinical development programs.

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

Product candidates in later stages of clinical development generally have higher development costs in the current period 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, complete the Phase 3 clinical trial for ZYN002, and advance NG1, NG2, ZYN002 and HBS-102 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.

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regulatory approval, we expect that we would incur significantly increased expenses associated with building a sales and marketing team.

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.

Paragon Agreement

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

For the three months ended March 31, 2024, we paid fees of $0.1 million pursuant to this agreement.

Interest Expense

Interest expense consists primarily of interest expense on debt facilities, amortization of debt issuance costs and amortization of premiums on our debt securities.

Interest Income

Interest income consists primarily of cash interest earned on our cash and investment balances and accretion of the discount on our investments in 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)

Net product revenues

Net product revenue

Cost of product sales

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Operating income

Loss on debt extinguishment

Other (expense) income, net

Interest expense, net

Interest expense

Interest income

Net income before provision for income taxes

Income tax (expense) benefit

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,

and the net impact of a 7.0% price increase.

The price increase for both comparable periods occurred in January 2023.

Net Product Revenue

Net product revenue increased by $35.5 million, or 29.8%, for the three months ended March 31, 2024 compared to the same period in 2023.

The increase was primarily due to a 28.3% increase in the number of units shipped, and the impact of a 7% price increase partially offset by higher rebates to commercial entities, which resulted in a decrease to net product revenue of approximately 4%.

The price increase occurred in January 2024.

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.

Cost of product sales increased by $6.7 million, or 32.3%, for the three months ended March 31, 2024, compared to the same period in 2023.

Cost of product sales as a percentage of net product revenue was 17.8% for the three months ended March 31, 2024, compared to 17.4% for the three months ended March 31, 2023.

The increase in cost of product sales in the period was due to higher sales of WAKIX.

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.

The following table is a summary of our research and development expenses:

Three Months Ended March 31,

(in thousands)

Other research and development

Personnel expenses

Stock-based compensation

Research and development expenses increased by $8.9 million, or 67.0%, for the three months ended March 31, 2024, compared to the same period in 2023.

The increase for the three months ended March 31, 2024 was primarily driven by $3.9 million in research and development expenses for ZYN002, which did not have any expenses in the prior year, a $2.9 million increase in clinical development and regulatory work associated with pitolisant, driven by increases for PWS and DM indications, a $1.8 million increase in personnel costs associated with higher headcount and a $0.4 million increase in stock compensation associated with new awards, partially offset by a $0.8 million IPR&D charge related to preclinical milestones achieved for HBS-102 during the three months ended March 31, 2023.

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.

Sales and marketing expenses increased by $4.7 million, or 20.6%, for the three months ended March 31, 2024, compared to the same period in 2023.

The increase for the three months ended March 31, 2024, was primarily due to a $2.7 million increase in patient engagement and marketing activities, a $0.9 million increase in personnel costs, and a $0.9 million increase in stock compensation associated with new awards.

The increase in patient engagement and marketing activities for the period was driven by our continued growth of WAKIX and the increase in personnel costs for the period was related to increased headcount.

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.

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 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.

General and administrative expenses increased by $3.6 million, or 16.4%, for the three months ended March 31, 2024, compared to the same period in 2023.

The increase in the three months ended March 31, 2024, was primarily due to a $2.6 million increase in stock compensation associated with new awards and a $0.8 million increase in legal fees, primarily associated with patent lawsuits.

Interest Expense

Interest expense decreased by $1.2 million, or 20.9%, for the three months ended March 31, 2024, compared to the same period in 2023.

The decrease for the three months ended March 31, 2024, was primarily due to lower interest rates as a result of refinancing into the TLA Credit Agreement (defined below).

Interest Income

Interest income increased by $1.3 million, or 43.5%, for the three months ended March 31, 2024, compared to the same period in 2023.

The increase for the three months ended March 31, 2024, was primarily a result of having higher invested balances, and higher investment yields on those balances, compared to the prior year period.

Income tax expense was $13.5 million, representing a 26.0% effective tax rate, for the three months ended March 31, 2024, compared to $8.3 million, representing a 22.0% effective tax rate, for the three months ended March 31, 2023.

The increase in our effective tax rate was due to a 2.8% tax benefit from the exercise of stock options in the prior year period and a 1.9% benefit from estimated tax credits.

The effective tax rate of 26.0% for the three months ended March 31, 2024, included 5.1% for state income taxes, partially offset by a 1.0% 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 debt agreements;

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.

As of March 31, 2024, we had cash, cash equivalents, and investments of $453.6 million, outstanding debt of $192.5 million and an accumulated deficit of $104.9 million.

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

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 believe that our existing cash, cash equivalents and investments on hand as of March 31, 2024, 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.

In July 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.

In September 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.

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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.

We were in compliance with all covenants as of March 31, 2024.

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.

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.

In October 2023, the Company’s Board of Directors approved a share repurchase program (the “October 2023 Repurchase Program”) providing for the repurchase of shares of common stock in an aggregate amount of up to $200,000, excluding commissions and transaction fees.

The October 2023 Repurchase Program may be suspended, terminated, or modified at any time for any reason.

During the three months ended March 31, 2024, the Company repurchased and cancelled no shares of common under the October 2023 Repurchase Program.

As of March 31, 2024, the remaining amount of common stock authorized for repurchases was $150.0 million.

Zynerba Acquisition

In October 2023, we completed a tender offer (the “Tender Offer”) to acquire all of the outstanding shares of common stock of Zynerba (“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”), the aggregate amount of which was $60,000 and was paid at closing, 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.

The Common CVR Amounts 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.

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

(the (APA”) to acquire HBS-102, a potential first-in-class molecule with a novel mechanism of action.

Under the terms of the APA, 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 below, 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 Agreements

Under the Sublicense, the Company obtained the exclusive right to develop, manufacture and commercialize the Licensed Compound in the United States and Latin American territories (the “Licensed Territories”), which are rights that Bioprojet originally licensed from Teijin Pharma, the innovator of the Licensed Compound.

The Licensed Compound is currently in pre-clinical development with an Investigational New Drug application currently anticipated in the second half 2025.

Under the Sublicense, the Company will pay Bioprojet an upfront license fee of $25.5 million and will also be obligated to pay up to $127.5 million upon achievement of development and regulatory milestones and up to $240.0 million upon achievement of sales-based milestones, as well as royalty rates in the mid-teens on potential sales in the Licensed Territories.

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.

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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.

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,

The following table sets forth a summary of our cash flows for the three months ended March 31, 2024, and 2023:

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, 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 cash provided by operating activities for the three months ended March 31, 2024, primarily consisted of net income of $38.3 million adjusted for non-cash items of $10.4 million related to stock-based compensation expense, $6.1 million related to intangible amortization and depreciation, and $3.5 million related to deferred tax assets.

Net working capital excluding cash decreased by $20.3 million.

Net cash provided by operating activities of $42.6 million for the three months ended March 31, 2023, consisted of 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 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.

Net cash used in investing activities for the three months ended March 31, 2024, was $6.2 million, which was primarily attributable to $25.1 million in purchases of debt securities, partially offset by $18.9 million from maturities of investments.

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 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.

Net cash used in financing activities for the three months ended March 31, 2024, was $3.6 million, which primarily consisted of $3.7 million in principal payments associated with the TLA Credit Agreement, partially offset by $0.1 million in proceeds from the exercise of stock options.

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 the exercise of stock options partially offset by a $0.5 million principal payment associated with the Blackstone Credit Agreement.

Critical Accounting Estimates

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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.

Significant estimates include assumptions used in the determination of the amount of revenue recognized on sales of WAKIX, 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 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