Harmony Biosciences Holdings, Inc. 10-Q

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, the anticipated impact of the novel coronavirus (“COVID-19”) pandemic on our business, business strategy, products, prospective products, product approvals, research and development costs, anticipated timing and likelihood of success of clinical trials, expected timing of the release of clinical trial data, the plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements. 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 WAKIX, 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 agreement with Bioprojet Société Civile de Recherche (“Bioprojet”); • the availability of favorable insurance coverage and reimbursement for WAKIX; • the impact of the COVID-19 pandemic; • the timing of, and our ability to obtain, regulatory approvals for pitolisant for other indications as well as any other product candidates; • our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; • our ability to identify 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; • 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 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.” 19 Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it i s 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. Company Overview We are a commercial-stage pharmaceutical company focused on developing and commercializing innovative therapies for patients living with rare neurological disorders who have unmet medical needs. 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. On October 13, 2020, WAKIX was approved by the FDA for the treatment of cataplexy in adult patients with narcolepsy. WAKIX is the first-and-only approved product for patients with narcolepsy that is not scheduled as a controlled substance. Pitolisant was developed by Bioprojet and approved by the European Medicines Agency (“EMA”) in 2016 for the treatment of narcolepsy in adult patients with or without cataplexy. We acquired an exclusive license to develop, manufacture and commercialize pitolisant in the United States pursuant to our license agreement with Bioprojet (as amended, the “Bioprojet License Agreement”) in July 2017. Our operating subsidiary, Harmony Biosciences, LLC, was formed in May 2017. We were formed in July 2017 as Harmony Biosciences II, LLC, a Delaware limited liability company, and we converted to a Delaware corporation named Harmony Biosciences II, Inc. in September 2017. In February 2020, we changed our name to Harmony Biosciences Holdings, Inc. Our operations to date have consisted of building and staffing our organization, acquiring the rights to pitolisant, raising capital, opening an Investigational New Drug (“IND”) for pitolisant, initiating an Expanded Access Program (“EAP”) for pitolisant for appropriate patients in the United States, preparing and submitting our NDA for pitolisant, gaining NDA approval for WAKIX for the treatment of EDS or cataplexy in adult patients with narcolepsy, and launching and commercializing WAKIX in the United States. In addition, we have initiated or intend to initiate clinical development programs in Prader-Willi Syndrome (“PWS”), myotonic dystrophy, otherwise known as dystrophia myotonica (“DM”) and pediatric narcolepsy to pursue potential new indications. Initial Public Offering On August 21, 2020, we completed the initial public offering (“IPO”) of our common stock, in which we sold 6,151,162 shares, including 802,325 shares pursuant to the underwriters’ over-allotment option. The shares began trading on the Nasdaq Global Market on August 19, 2020. The shares were sold at an IPO price of $24.00 per share for net proceeds of approximately $135.4 million, after deducting underwriting discounts and commissions and offering expenses of approximately $12.2 million. Upon the closing of the IPO, all outstanding shares of our convertible preferred stock were automatically converted into shares of common stock and the accrued dividend payable to holders of the convertible 20 preferred stock was paid out in shares of common stock, resulting in a total of 42,926,630 shares of common stock being issued to former holders of our convertible preferred stock , and warrants exercisable for convertible preferred stock were automatically converted into warrants exercisable for a total of 410,2 39 shares of common stock. Liquidity and Sources of Funding For the three and nine months ended September 30, 2020, we generated $45.6 million and $103.5 million of net product revenues, respectively. We have financed our operations primarily with (a) proceeds from sales of our convertible preferred stock, (b) borrowings under (i) our Loan Agreement with CRG and (ii) our Credit Agreement with OrbiMed, and (c) proceeds from our IPO. As of September 30, 2020, we had cash, cash equivalents and restricted cash of $222.5 million and accumulated deficit of $487.9 million. As of September 30, 2020, we had outstanding debt, net of issuance costs, of $192.9 million. We believe that our anticipated cash from operating and financing activities and existing cash and cash equivalents will enable us to meet our operational liquidity needs and fund planned investing activities for the next 12 months. We have based this estimate on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we expect. See “—Liquidity and Capital Resources.” We expect our expenses to increase as we continue to: • commercialize WAKIX in the United States for the treatment of EDS or cataplexy in adult patients with narcolepsy; • incur sales and marketing costs to support the commercialization of WAKIX and any additional product candidates; • pay royalties and make milestone payments to Bioprojet for the license of WAKIX; • incur manufacturing costs for WAKIX and any additional product candidates; • implement post-approval requirements related to WAKIX; • conduct clinical trials in PWS and DM; • conduct a pediatric narcolepsy program in pursuit of an indication and extension of our patents based on pediatric exclusivity; • conduct earlier stage research and development activities for pitolisant; • hire additional personnel; • invest in measures to protect and expand our intellectual property; • incur interest expenses in conjunction with our debt facility; • seek regulatory approvals for pitolisant or any additional product candidates that successfully complete clinical development; • conduct additional clinical trials in pursuit of potential new indications for pitolisant; acquire certain ex-U.S. rights for WAKIX from Bioprojet and subsequently seek foreign regulatory approvals for WAKIX in certain of those jurisdictions; acquire or in-license other assets and technologies; and • incur additional costs associated with being a public company. Commercial Launch Metrics As of September 30, 2020, over 2,000 unique healthcare professionals (“HCPs”) (out of a total of approximately 8,000 HCPs who treat approximately 90% of diagnosed narcolepsy patients) have prescribed WAKIX since it became available in November 2019. The average number of patients on WAKIX during the third quarter of 2020 was 2,200, representing a 22% increase from the second quarter of 2020. We have secured formulary access for approximately 182 million lives, which represents approximately 80% of our target covered lives, which we define as a group of certain public and private payors that account for approximately 80% of all covered lives in the United States. 21 COVID-19 Business Update With the global impact of the COVID-19 pandemic, we have developed a response strategy that includes establishing cross-functional response teams and implementing business continuity plans to manage the impact of the pandemic on our employees, patients, HCPs, and our business. Despite our response strategy, the COVID-19 pandemic is having an effect on our business and the pharmaceutical industry in general, and is impacting the way stakeholders interact with one another during this pandemic. We continue to leverage technology and virtual engagement initiatives to offset our reduced in-person access to HCPs. The COVID-19 pandemic, which has led to high unemployment and corresponding loss of medical insurance, has caused a change in relationship dynamics between patients and their HCPs and has impacted the way patients take, or do not take, their medication. Based on these factors, we expect the revenue growth rate in the fourth quarter of 2020 and possible future quarters may be adversely impacted by the ongoing COVID-19 pandemic. We continue to identify new and innovative ways to maintain meaningful engagement, generate awareness and educate our patients, HCPs and payors to minimize the pressure from the COVID-19 pandemic on our business and support our commercial launch performance. Commercialization With respect to our commercialization activities, we believe the COVID-19 pandemic is putting pressure on top-line prescription demand for WAKIX, primarily due to (i) our field sales team’s reduced ability to access HCPs in person, and (ii) fewer patients seeing HCPs for prescriptions or treatments. The impact on demand for WAKIX may also be related to a reduced ability of prescribers to diagnose narcolepsy patients given the limitations in access to sleep testing, the reduced ability to see patients due to (i) cancelled appointments and (ii) the reprioritization of healthcare resources toward the treatment of COVID-19, both of which lead to fewer prescriptions. Despite these challenges, we continue to engage and educate HCPs virtually on the overall benefit/risk of WAKIX and continue to provide support for people living with narcolepsy. As offices, clinics and institutions have begun to allow limited in-person interactions pursuant to health authority and local government guidelines, our field teams have started to re-initiate in-person interactions with HCPs and customers, but the timing and level of engagement vary by account and region and may be adversely impacted in the future where reemergence or future outbreaks of COVID-19 may occur. High unemployment and the corresponding loss of health insurance is causing some eligible patients to shift from commercial insurance to free goods and patient assistance programs, which impacts our ability to convert demand to revenue. Depending on the scale and ultimate duration of the COVID-19 pandemic and the extent of an economic slowdown, widespread unemployment and resulting loss of employer-sponsored insurance coverage, we may experience a shift from commercial payor coverage to government payor coverage or continued/increased demand for patient assistance and/or free drug programs, which could further impact our net revenue in the coming quarters. Supply Chain We currently expect to have adequate supply of WAKIX through 2021. We are working closely with our third-party manufacturers, distributors and other partners to manage our supply chain activities and mitigate potential disruptions to our product supplies as a result of the COVID-19 pandemic. Our manufacturing partners in France and the United States continue to be operational. If the COVID-19 pandemic persists for an extended period of time and begins to impact essential distribution systems such as transatlantic freight, FedEx, UPS and postal delivery, we could experience disruptions to our supply chain and operations with associated delays in the manufacturing and supply of our products. 22 Research and Development The COVID-19 pandemic has negatively impacted the pharmaceutical industry’s ability to conduct clinical trials. While we initially experienced some challenges, we have taken measures and put contingency plans in place in order to advance our clinical development programs. We have implemented remote and virtual approaches to clinical trials and other assessments, including using telemedicine for remote clinic visits to perform efficacy assessments and sending out licensed HCPs to each patient to collect safety assessments (e.g. labs, electrocardiograms) as required by the protocols. We are also performing remote site visits and data monitoring where possible. These measures are being instituted to maintain patient safety and trial continuity while preserving study integrity. In addition, we rely on contract research organizations (“CROs”) or other third parties to assist us with clinical trials, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic. If the COVID-19 pandemic continues and persists for an extended period of time, or reemerges in the future, we could experience significant delays in our clinical development timelines, which would adversely affect our business, financial condition, results of operations and growth prospects. Corporate Development and Other Financial Impacts The COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of domestic and global financial markets. If the disruption persists and/or worsens, we may be unable to access additional capital, which could negatively affect our ability to execute on certain corporate development transactions or other important investment opportunities. The pandemic could also impact our ability to conduct in-person due diligence, negotiations, and other interactions to identify new opportunities. The COVID-19 pandemic has also affected, and continues to affect, our business operations and financial results. The extent of the impact of the COVID-19 pandemic on our ability to generate sales of, and revenues from, our approved products, our clinical development and regulatory efforts, our corporate development objectives and the value of and market for our common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of or reemergence of outbreaks, governmental travel restrictions, quarantines, social distancing and business closure requirements in the United States, France, and other countries, and the effectiveness of actions taken globally to contain and treat COVID-19. Corporate Response We have supported our local communities, patient-focused organizations and other charitable organizations with relief efforts, including corporate donations. Financial Operations Overview Revenue We did not generate any revenue from inception until the fourth quarter of 2019. Our current product, WAKIX, was approved by the FDA for the treatment of EDS in adult patients with narcolepsy in August 2019, became commercially available in November 2019 and was approved by the FDA for the treatment of cataplexy in adult patients with narcolepsy in October 2020. For the three months ended September 30, 2020, we had $45.6 million of net product revenue. For the nine months ended September 30, 2020, we had $103.5 million of net product revenue. Total revenue consists of net sales of WAKIX. Net sales represent the gross sales of WAKIX less provisions for product sales discounts and allowances. At this time, these provisions include trade allowances, rebates to government and commercial entities, and discounts. Although we expect net sales to increase over time, the provisions for product sales discounts and allowances may fluctuate based on the mix of sales to different customer segments and/or changes in our accrual estimates. For further discussion of the components of Revenue, see “—Critical Accounting Policies and Significant Judgments and 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 began capitalizing inventory upon FDA approval of WAKIX. A portion of the inventory sold during the three months ended September 30, 2020 was produced prior to FDA approval and, therefore, expensed previously as research and development expense in 2019 in the amount of $1.3 million. Excluded from cost of product sold is amortization of acquired developed technology of $1.9 million and $1.0 million in the three months ended September 30, 2020 and 2019, respectively. 23 Previously expensed invent ory that was manufactured in anticipation for commercialization preapproval has not had a material impact on our historical results of operations and is not expected to have a material impact on future results of operations. Further, previously expensed in ventory has not had a material impact on our gross margin percentage historically, and we do not anticipate a material impact on our gross margin percentage once our previously expensed inventories have been exhausted. O ur cost of product sales is increas i ng moderately as we continue to ramp up production and sales infrastructure to meet expected demand for WAKIX. The shelf life of our product is three years from date of manufacture, with earliest expiration of current inventory expected to be September 2021. As of September 30, 2020, we expect our existing inventory to have minimal obsolescence. We will continue to assess obsolescence in future periods as demand for WAKIX and the rate of inventory turnover evolves. Research and Development Expenses Our research and development expenses have primarily been limited to the license of the rights to pitolisant, the establishment of an EAP to provide appropriate patients with pitolisant at no cost as part of a clinical trial to assess safety prior to the approval of WAKIX, the preparation of the NDA, and the initiation of a development program for new indications for pitolisant in patients with PWS, DM and pediatric narcolepsy. We also have research and development expenses related to our team of Medical Science Liaisons (“MSLs”) who interact with key opinion leaders, with a focus on the science, the role of histamine in sleep-wake state stability and the novel mechanism of action of pitolisant. In addition, our MSLs support our market access team with clinical data presentations to payors upon request. Research and development costs are expensed as incurred. We expect to significantly increase our research and development efforts as we advance our clinical programs in patients with PWS, DM and pediatric narcolepsy, and continue to expand our product-candidate pipeline. Research and development expenses include: • 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 preclinical studies and clinical trials; other third-party expenses directly attributable to the development of our product candidates; and • amortization expense for assets used in research and development activities. Currently, WAKIX is our only product and we do not currently track our internal research and development expenses on an indication-by-indication basis as they primarily relate to personnel, early research and consumable costs, which are deployed across multiple programs. A significant portion of our research and development costs are external costs, such as fees paid to CROs and CMOs, central laboratories, contractors, and consultants in connection with our clinical development activities. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, milestone payments, and the cost of submitting an NDA to the FDA (and/or other regulatory authorities). We expect our research and development expenses to be significant over the next several years as we advance our current clinical development programs and prepare to seek regulatory approval for additional indications for pitolisant as well as potential new product candidates. 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 on the ability to initiate new clinical trials and/or maintain the continuity of ongoing clinical trials that could be impacted by future shelter-in-place orders and needs of the health care system to focus on managing patients affected by COVID-19; 24 • receiving Bioprojet’s consent to pursue additional indications fo r 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. A change in the outcome of any of these variables with respect to the development of any of our programs or any product candidate we develop would significantly change the costs, timing and viability associated with the development and/or regulatory approval of such programs or product candidates. Sales and Marketing Expenses Our sales and marketing expenses have primarily been limited to the market development and launch activities of WAKIX for the treatment of EDS in adult patients with narcolepsy. Market development and commercial launch activities account for a significant portion of the overall company operating expenses and are expensed as they are incurred. Our sales and marketing expenses are increasing in the near- and mid-term to support our indications for the treatment of EDS or cataplexy in adult patients with narcolepsy and to expand our portfolio with the anticipated growth from potential additional indications. Sales and marketing expenses include: • employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for our sales and marketing 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, these 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, consulting fees and travel expenses. 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. 25 We anticipate that our general and administrative expenses will incre ase in the future to support our continued commercialization efforts, ongoing and future potential research and development activities, and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees paid to outside consultants, lawyers and accountants, among other expenses. 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 inc ur significantly increased expenses associated with building a sales and marketing team. Paragon Agreements We were party to a management services agreement (the “Management Services Agreement”) with Paragon Biosciences, LLC (“Paragon”), entered into on September 22, 2017, pursuant to which Paragon provided us with certain professional services. In exchange for services provided to us under the Management Services Agreement, we paid Paragon a management fee of $0.3 million per each calendar month. We terminated the Management Services Agreement upon the consummation of our IPO. In connection with such termination, we paid Paragon a termination fee of $2.6 million. We 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. Since entering into the right of use agreement in November 2019 through September 30, 2020, we paid fees of $0.7 million pursuant to this agreement. Loss on Debt Extinguishment Loss on debt extinguishment consists primarily of costs of extinguishment of debt during the period related to the prepayment of a multi-draw term loan agreement (the “Loan Agreement”) with CRG Servicing LLC (“CRG”). Other Income / Expense, Net Other income / expense, net consists primarily of costs of the fair value of the warrants associated with the credit agreement (the “Credit Agreement”) we entered into with OrbiMed Royalty & Credit Opportunities III, LP (“OrbiMed”). Interest Income / Interest Expense Interest income / expense, net consists primarily of interest expense on debt facilities and amortization of debt issuance costs offset by interest income earned on our cash balances. 26 Results of Operations The following table sets forth selected items in our condensed statements of operations for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) (In thousands) Net product revenue $ 45,609 $ — $ 103,454 $ — Cost of product sales 7,890 — 17,820 — Gross profit 37,719 — 85,634 — Operating expenses: Research and development 4,230 4,336 11,829 62,319 Sales and marketing 12,601 12,908 38,297 27,477 General and administrative 10,508 12,560 26,280 22,415 Total operating expenses 27,339 29,804 76,406 112,211 Operating income (loss) 10,380 (29,804 ) 9,228 (112,211 ) Loss on debt extinguishment — — (22,639 ) — Other expense, net (1,525 ) — (3,071 ) — Interest expense, net (6,946 ) (2,095 ) (20,254 ) (3,326 ) Net income (loss) before provision for income taxes 1,909 (31,899 ) (36,736 ) (115,537 ) Provision for income taxes — — — — Net income (loss) $ 1,909 $ (31,899 ) $ (36,736 ) $ (115,537 ) Net Product Revenue Net product revenue increased by $45.6 million and $103.5 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019 due to the commercial launch of WAKIX on November 1, 2019. Cost of Product Sales Cost of product sales increased by $7.9 million and $17.8 million for the three and nine months ended September 30, 2020, respectively, as compared to the same period in 2019 due to the commercial launch of WAKIX on November 1, 2019. Research and Development Expenses Research and development expenses remained consistent for the three months ended September 30, 2020 as compared to the same period in 2019. Research and development expenses decreased $50.5 million, or 81.0%, for the nine months ended September 30, 2020 as compared to the same period in 2019 primarily due to a milestone payment in February 2019 of $50.0 million associated with the Bioprojet License Agreement upon the acceptance of our NDA for WAKIX by the FDA and an increase in clinical activity. Sales and Marketing Expenses Sales and marketing expenses remained consistent for the three months ended September 30, 2020 as compared to the same period in 2019. Sales and marketing expenses increased by $10.8 million, or 39.4% for the nine months ended September 30, 2020, as compared to the same period in 2019 primarily due to field sales force personnel expenses and related field sales operations associated with the commercial launch of WAKIX. 27 General and Administrative Expenses General and administrative expenses decreased by $2.1 million, or 16.4% for the three months ended September 30, 2020 as compared to the same period in 2019. This is primarily due to a legal settlement with our former CEO and an extension payment to Bioprojet in 2019 offset by the termination fee in connection with the Management Services Agreement. General and administrative expenses increased by $3.9 million, or 17.2% for the nine months ended September 30, 2020 as compared to the same prior-year period in 2019 primarily due to intangible asset amortization for a full nine months in 2020, the termination fee in connection with the Management Services Agreement and additional fees associated with our IPO in 2020, offset by the legal settlement with our former CEO and an extension payment to Bioprojet in 2019. Loss on Debt Extinguishment Loss on debt extinguishment was zero for the three months ended September 30, 2020 compared to the same period in 2019, and increased $22.6 million, or 100%, for the nine months ended September 30, 2020 as compared to the same period in 2019 primarily due to costs of extinguishment of debt during the period related to the prepayment of the Loan Agreement with CRG. Other Income (Expense), Net Other income (expense), net increased by $1.5 million, or 100%, and $3.1 million, or 100%, for the three and nine months ended September 30, 2020, respectively, as compared to the same period in 2019 due to the change in the fair value of warrants. Interest Income (Expense), Net Interest expense increased by $4.9 million, or 231.6%, and $16.9 million, or 509.0%, for the three and nine months ended September 30, 2020, respectively, as compared to the same period in 2019 primarily due to payment of interest on the outstanding debt facility and amortization of debt issuance costs, partially offset by interest income earned on our cash balances. Income Taxes For interim periods, we estimate the annual effective income tax rate and apply the estimated rate to the year-to-date income or loss before income taxes. The effective income tax rate was 0.0% for all periods. Currently, we have recorded a full valuation allowance against our net deferred tax assets, primarily related to federal and state net operating losses. Liquidity and Capital Resources Sources of Liquidity To date, we have financed our operations primarily with (a) proceeds from sales of our convertible preferred stock, (b) borrowings under (i) our Loan Agreement with CRG and (ii) our Credit Agreement with OrbiMed, and (c) the proceeds from our IPO. From our inception through September 30, 2020, we have received aggregate proceeds of $345.0 million from sales of our convertible preferred stock. On August 21, 2020, we completed the IPO of our common stock, in which we sold 6,151,162 shares of our common stock, including 802,325 shares of our common stock pursuant to the underwriters’ over-allotment option. The shares began trading on the Nasdaq Global Market on August 19, 2020. The shares were sold at a price of $24.00 per share for net proceeds of approximately $135.4 million. As of September 30, 2020, we had cash, cash equivalents and restricted cash of $222.5 million and accumulated deficit of $487.9 million. As of September 30, 2020, we had outstanding debt, net of issuance costs, of $192.9 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 have incurred operating losses and negative cash flows from operations since inception resulting in an accumulated deficit of $487.9 million as of September 30, 2020. 28 We believe that our anticipated cash from operating and financing activities and existing cash and cash equ ivalents will enable us to meet our operational liquidity needs and fund our planned investing activities for the next 12 months. We have based this estimate on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we expect. See “—Company Overview—Liquidity and Sources of Funding.” OrbiMed Credit Agreement On February 28, 2019, we entered into the Loan Agreement with CRG for an aggregate of $200.0 million of which $102.5 million was outstanding as of December 31, 2019. On January 9, 2020, we entered into the Credit Agreement with OrbiMed for an aggregate of $200.0 million and paid off all of our obligations under the Loan Agreement. Borrowings under the Credit Agreement are collateralized by all of the Company’s assets, excluding the intellectual property licensed through the Bioprojet License Agreement. The Credit Agreement matures on January 9, 2026 and bears an interest rate of the greater of (a) LIBOR or (b) 2.00% per annum, plus 11.00% per annum. When the LIBOR rate is no longer used post-2021, the Prime Rate will be used in the determination of the interest rate. The Credit Agreement requires compliance with certain financial covenants, including minimum net revenue thresholds and cash balance requirements (which include maintaining minimum liquidity of $12.5 million), and financial reporting requirements. We have been in compliance with the financial covenants under the Credit Agreement since it was entered into on January 9, 2020. The Credit Agreement also contains certain negative restrictive covenants that either limit our ability to, or require a mandatory prepayment in the event we, engage in new lines of business, incur additional indebtedness or liens, make certain investments, make certain payments, pay cash dividends, merge with other companies or consummate certain changes of control, acquire other companies, transfer or dispose of certain assets, liquidate or dissolve, amend certain material agreements, enter into sale and leaseback transactions, enter into various other specified transactions, and change our name, location, executive office or executive management without notice. Upcoming Milestone Payment Upon FDA approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy in October 2020 (the “Cataplexy Milestone Trigger Date”), we became obligated to make the $100.0 million milestone payment (the “Cataplexy Milestone Payment”) to Bioprojet pursuant to the terms of the Bioprojet License Agreement. Subsequently, in October 2020, we made a payment to Bioprojet of $2.0 million to extend the Cataplexy Milestone Payment due date to within 90 days of the Cataplexy Milestone Trigger Date. We expect to make the $100.0 million Cataplexy Milestone Payment to Bioprojet on or before its due date. Cash Flows The following table presents the major components of net cash flows used in and provided by operating, investing and financing activities for the periods indicated. Nine Months Ended September 30, 2020 2019 (In thousands) Selected cash flow data Cash provided by (used in): Operating activities $ (13,032 ) $ (51,449 ) Investing activities (2 ) (50,113 ) Financing activities 210,317 119,559 Net Cash Used in Operating Activities Net cash used in operating activities decreased to $13.0 million for the nine months ended September 30, 2020 as compared to $51.4 million for the same period in 2019. This decrease was primarily attributable to company growth associated with the commercial launch of WAKIX. Net cash used in operating activities for the nine months ended September 30, 2020 consisted of our net loss of $36.7 million adjusted for non-cash items of $22.6 million associated with loss on extinguishment of debt and $8.7 million related to intangible amortization and fair value of warrants. Net cash used in operating activities for the nine months ended September 30, 2019 consisted of net loss of $115.5 million adjusted for a reclassification of $50.0 million to investing activities related to a milestone payment associated with the Bioprojet License Agreement. 29 Net Cash Used in Investing Activitie s Net cash used in investing activities decreased by $50.0 million to a minor amount for the nine months ended September 30, 2020 as compared to $50.1 million for the same period in 2019. This change was primarily due to $50.0 million of milestone payments associated with the Bioprojet License Agreement. Net Cash Provided by Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2020 was $210.3 million, which primarily consisted of $194.2 million associated with the OrbiMed Credit Agreement net of issuance costs and net proceeds from our IPO of $135.4 million, offset with $120.6 million of repayment and exit fees associated with the CRG Loan Agreement. Net cash provided by financing activities for the nine months ended September 30, 2019 was $119.6 million, which primarily consisted of borrowings under the CRG Loan Agreement net of issuance costs and net proceeds from preferred stock. Off-Balance Sheet Arrangements For the three and nine months ended September 30, 2020 and 2019, we did not have, and we do not currently have, any off-balance sheet arrangements. Critical Accounting Policies and Significant Judgments and 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 (“U.S. 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 U.S. GAAP, we evaluate our estimates and judgments on an ongoing basis. Significant estimates include assumptions used in the determination of some of our costs incurred under our Services Agreement and which costs are charged to research and development and general and administrative expense. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We define our critical accounting policies as those under U.S. 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. While our accounting policies are more fully described in Note 3 to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q, we believe the following are the critical accounting policies used in the preparation of our consolidated financial statements that require significant estimates and judgments. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the final prospectus for our IPO, filed pursuant to Rule 424(b) under the Securities Act with the SEC on August 18, 2020 (the “Prospectus”) and the notes to the unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. During the three and nine months ended September 30, 2020, there were no material changes to our critical accounting policies from those discussed in the Prospectus. Recent Accounting Pronouncements See Note 3 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for more information. 30 The JOBS Act We are an “emerging growth company” (“EGC”), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to the JOBS Act. We will remain an EGC until the earliest of (i) the last day of our fiscal year (a) following the fifth anniversary of the completing of this offering, (b) in which we have total annual gross revenues of at least $1.07 billion or (ii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30 th and (iii) the date on which we have issued more than $1.0 billion in non-convertible debt securities over a three-year period. 31 Item 3 . Quantitative and Qualitati ve Disclosures About Market Risk Interest Rate Fluctuation Risk We are exposed to market risk related to changes in interest rates. As of September 30, 2020, our cash and cash equivalents consisted of cash and money market accounts. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, an immediate 10% change in market interest rates would not have a material impact on the fair market value of our investment portfolio or on our financial position or results of operations. As of September 30, 2020, we had $200.0 million in borrowings outstanding. The term loan bears interest at an interest rate of the greater of (a) LIBOR or (b) 2.00% per annum, plus 11.00% per annum. Based on the $200.0 million of principal outstanding as of September 30, 2020, an immediate 10% change in the Prime Rate would not have a material impact on our debt-related obligations, financial position or results of operations. Foreign Currency Fluctuation Risk We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however, we have contracted with and may continue to contract with foreign vendors that are located in Europe. Our operations may be subject to fluctuations in foreign currency exchange rates in the future. Inflation Fluctuation Risk Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations for the three and nine months ending September 30, 2020 and 2019.