What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-11 compared with 2020-11-12 · 152 added, 135 removed, 208 unchanged (58% of the section changed)

26 unchanged sentences

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.”

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.”

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.

New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.

Unless otherwise indicated, information contained in this Quarterly Report on Form 10-Q concerning our industry, including industry statistics and forecasts, competitive position and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources and management estimates.

12 unchanged sentences

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.

WAKIX is the first-and-only approved product for patients with narcolepsy that is not scheduled as a controlled substance by the Drug Enforcement Administration (the “DEA”).

We plan to pursue label expansion for WAKIX in narcolepsy in pediatric patients and engage with the FDA in pursuit of pediatric exclusivity.

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

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

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

We believe that our strategic decision to wait for this data before advancing the pediatric program is the most prudent and thoughtful path forward from a development and financial perspective.

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

We anticipate providing an update on the path forward in the coming months.

We believe that pitolisant’s ability to regulate histamine gives it the potential to provide therapeutic benefit in other rare neurological disorders that are mediated through H 3 receptors and histamine signaling.

Beyond narcolepsy, we are initially focusing on the treatment of EDS associated with Prader-Willi Syndrome (“PWS”) and myotonic dystrophy, otherwise known as dystrophia myotonica (“DM”).

In December 2020, we initiated a Phase 2 clinical trial to evaluate pitolisant for the treatment of EDS and other key symptoms in patients with PWS and anticipate topline results from this trial in the first half of 2022.

We are also planning to commence a Phase 2 clinical trial in adult patients with DM1 in the first half of 2021, with topline results expected in the second half of 2022.

Beyond these indications, we intend to further explore pitolisant in other

rare neurological disorders in which fatigue and cognitive impairment are prominent symptoms with significant impact on daily functioning.

We also seek to expand our pipeline through the acquisition of additional assets that focus on addressing the unmet needs of patients with neurological disorders.

We intend to target assets that will be complementary to WAKIX and our expanding list of potential new indications for WAKIX, and/or assets that will allow us to further leverage the expertise and infrastructure that we have successfully built at Harmony.

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.

Pitolisant was granted Orphan Drug Designation for the treatment of narcolepsy by the FDA in 2010.

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

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

2 unchanged sentences

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

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.

Our operations to date have consisted of building and staffing our organization, acquiring the rights to pitolisant, raising capital, opening an investigational new drug applications (“IND”) for pitolisant in narcolepsy, initiating 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 development programs in PWS and DM and have initiated, or intend to initiate, clinical trials in PWS, DM and pediatric narcolepsy to pursue potential new indications.

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.

For the three months ended March 31, 2021, we generated $59.7 million of net product revenues.

We have financed our operations primarily with (a) proceeds from sales of our convertible preferred stock, (b) borrowings under (i) our multi-draw term loan agreement (the “Loan Agreement”) with CRG Servicing LLC (“CRG”) and (ii) our credit agreement (the “Credit Agreement”) with OrbiMed Royalty & Credit Opportunities III, LP (“OrbiMed”), and (c) proceeds from our initial public offering (“IPO”) in August 2020.

As of March 31, 2021, we had cash, cash equivalents and restricted cash of $141.9 million and accumulated deficit of $480.8 million.

As of March 31, 2021, we had outstanding debt, net of issuance costs, of $194.9 million.

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:

Our revenues and expenses in future quarters may differ from our expectations as we:

commercialize WAKIX in the United States for the treatment of EDS or cataplexy in adult patients with narcolepsy;

3 unchanged sentences

implement post-approval requirements related to WAKIX;

conduct clinical trials in PWS and DM;

conduct clinical trials in PWS, DM, and potential new indications for pitolisant or any additional product candidates;

conduct a pediatric narcolepsy program in pursuit of an indication and extension of our patents based on pediatric exclusivity;

conduct earlier stage research and development activities for pitolisant ;

support independent investigator-initiated research for which there is a valid scientific rationale;

hire additional personnel;

3 unchanged sentences

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;

1 unchanged sentence

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.

As of March 31, 2021, over 2,700 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 at March 31, 2021 was approximately 2,800.

Additionally, as of March 31, 2021, we have secured formulary access for approximately 80% of all insured lives (Commercial, Medicare and Medicaid) in the United States.

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

COVID-19 Business Update

3 unchanged sentences

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.

Based on these factors, we expect that the revenue growth rate in 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.

2 unchanged sentences

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.

Despite these challenges, we continue to engage and educate HCPs virtually on the overall benefit/risk profile 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 continue 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.

We currently expect to have adequate supply of WAKIX through 2021.

We currently expect to have adequate supply of WAKIX through the third quarter of 2022, with additional API on-hand inventory to support 18 to 24 months beyond this time frame.

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.

We believe that our access to the required production lines to produce additional API and WAKIX finished product throughout the next 12-18 months will not be directly impacted by the potential need to reprioritize manufacturing resources due to the production of materials utilized for COVID-19 vaccines.

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.

If the COVID-19 pandemic persists for an extended period of time and/or 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.

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.

While we initially experienced some challenges due to the COVID-19 pandemic, we have taken measures and put contingency plans in place in order to advance our clinical development programs.

We have implemented remote and virtual approaches to clinical trials, including using telemedicine for remote clinic visits to perform efficacy assessments and sending out licensed HCPs to each patient to collect safety assessments (e.g.

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.

These measures are being instituted with the intent of maintaining patient safety and trial continuity while preserving study integrity.

One unique challenge we are facing is the ability to access sleep labs during the COVID-19 pandemic in order to conduct objective sleep testing, which is required for some of our clinical trials.

In addition, we rely on contract research organizations (“CROs”) or other third parties to assist us with clinical trials, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic.

6 unchanged sentences

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.

Corporate Responsibility Impact

We continue to provide support to our local communities, patient-focused organizations and other charitable organizations during the COVID-19 pandemic with relief efforts, including corporate donations, supplying food, medical supplies and other resources.

For the safety and well-being of our employees, consultants and their families, during the COVID - 19 pandemic, we have abided by government - issued work from home orders.

We continue to clean and sanitize our offices on a regular basis and have implemented COVID-19 screening procedures and social distancing guidelines before allowing employees or guests to enter our offices.

Financial Operations Overview

1 unchanged sentence

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.

For the three months ended March 31, 2021 and 2020, we had $59.7 million and $19.8 million, respectively, of net product revenue.

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

Total revenue consists of net sales of WAKIX.

2 unchanged sentences

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.

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.

Excluded from cost of product sold is amortization of acquired developed technology of $4.6 million and $1.8 million in the three months ended March 31, 2021 and 2020, respectively.

Previously expensed inventory that was manufactured in anticipation for commercialization preapproval has not had a material impact on our historical results of operations and is not expected to have a material impact on future results of operations.

Further, previously expensed inventory has not had a material impact on our gross margin percentage historically, and we do not anticipate a material impact on our gross margin percentage once our previously expensed inventories have been exhausted.

Our cost of product sales is increasing moderately as we continue to ramp up production and sales infrastructure to meet expected demand for WAKIX.

The shelf life of our product is three years from date of manufacture, with the earliest expiration of current inventory expected to be May 2022.

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

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

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.

Our research and development expenses have been applied toward the license of the rights to pitolisant, the conduct of an Expanded Access Program (“EAP”) to provide appropriate patients with pitolisant at no cost as part of a clinical trial to assess safety prior to the approval of WAKIX, the preparation of the NDA, and the initiation of development programs for potential new indications for pitolisant in patients with PWS and DM.

We also have research and development expenses related to our team of Medical Science Liaisons (“MSLs”) who interact with key opinion leaders, with a focus on the science, the role of histamine in sleep-wake state stability and the novel mechanism of action of pitolisant.

1 unchanged sentence

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.

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

Research and development expenses include:

1 unchanged sentence

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;

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

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

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.

Currently, WAKIX is our only product and we do not currently track our internal 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 activities.

Internal expenses primarily relate to personnel, early research and consumable costs, which 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).

2 unchanged sentences

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 duration, costs and timing for 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;

receiving Bioprojet’s consent to pursue additional indications fo r pitolisant;

receiving Bioprojet’s consent to pursue additional indications for pitolisant;

the acceptance of INDs for our planned clinical trials or future clinical trials;

9 unchanged sentences

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.

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

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

11 unchanged sentences

General and administrative expenses also consist of office leases, and professional fees, including legal, tax and accounting and consulting fees.

We anticipate that our general and administrative expenses will 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.

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

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

1 unchanged sentence

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.

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 (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.

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

In exchange for services provided to us under the Management Services Agreement, we paid Paragon a management fee of $0.3 million per each calendar month.

We 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.

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 C hicago, Illinois.

For the three months ended March 31, 2021 , we paid de minimis fees pursuant to this agreement.

Loss on Debt Extinguishment

Loss on debt extinguishment consists primarily of costs of extinguishment of debt during the period related to the prepayment of a multi-draw term loan agreement (the “Loan Agreement”) with CRG Servicing LLC (“CRG”).

Loss on debt extinguishment consists primarily of 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 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”).

Other income / expense, net consists primarily of costs of the fair value of the warrants associated with the Credit Agreement we entered into with OrbiMed.

Interest Income / Interest Expense

1 unchanged sentence

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,

(In thousands)

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

For the Three Months Ended March 31,

(In thousands)

14 unchanged sentences

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.

Net product revenue increased by $39.8 million, or 200.8%, for the three months ended March 31, 2021 compared to the same period in 2020.

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.

Cost of product sales increased by $6.9 million, or 199.6%, for the three months ended March 31, 2021 compared to the same period in 2020.

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

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

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.

Research and development expenses increased by $1.2 million, or 36.4%, for the three months ended March 31, 2021 as compared to the same period in 2020.

The increase was primarily due to clinical development work associated with PWS and DM.

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.

Sales and marketing expenses increased by $2.3 million, or 17.0%, for the three months ended March 31, 2021 as compared to the same period in 2020.

The increase was primarily due to patient engagement and marketing activities.

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.

General and administrative expenses increased by $5.3 million, or 56.6%, for the three months ended March 31, 2021 as compared to the same period in 2020.

This is primarily due to intangible asset amortization of the milestone payment made in connection with the FDA’s approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy in October 2020, stock compensation associated with new awards, and the additional cost of public company insurance, offset by fees paid to Paragon.

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.

Loss on debt extinguishment decreased $22.6 million, or 100%, for the three months ended March 31, 2021 as compared to the same period in 2020 due to costs of extinguishment of debt during the period related to the prepayment of the Loan Agreement with CRG.

Other Expense, Net

Other expense remained relatively flat for the three months ended March 31, 2021, as compared to the same period in 2020.

Interest Expense, Net

Interest expense increased by $0.8 million, or 11.8%, for the three months ended March 31, 2021, as compared to the same period in 2020 primarily due to payment of interest on the Loan Agreement and amortization of debt issuance costs compared to the payment of interest on the Credit Agreement and amortization of debt issuance costs.

For interim periods, we estimate the annual effective income tax rate and apply the estimated rate to the year-to-date income or loss before income taxes.

2 unchanged sentences

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.

From our inception through March 31, 2021, 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.

1 unchanged sentence

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.

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.

As of March 31, 2021, we had cash, cash equivalents and

restricted cash of $141.9 million and accumulated deficit of $480.8 million .

As of March 31, 2021 , we had outstanding debt, net of issuance costs, of $194.9 million .

The 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 $480.8 million as of March 31, 2021.

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 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.”

See “—Overview—Liquidity and Sources of Funding.”

OrbiMed Credit Agreement

2 unchanged sentences

Borrowings under the Credit Agreement are collateralized by all of the Company’s assets, excluding the intellectual property licensed through the Bioprojet License Agreement.

At the time of prepayment or repayment of all or any portion of the principal of the OrbiMed Loan, the Company is required to pay an exit fee of 7.0% of the principal amount of the OrbiMed Loan prepaid, repaid, or required to be prepaid or repaid.

The Credit Agreement matures on January 9, 2026 and bears an interest rate of the greater of (a) LIBOR or (b) 2.00% per annum, plus 11.00% per annum.

3 unchanged sentences

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

“Cataplexy Milestone Payment”) to Bioprojet pursuant to the terms of the Bioprojet License Agreement.

Recent Milestone Payment

Upon FDA approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy in October 2020 (the “Cataplexy Milestone Trigger Date”), we became obligated to make the $100.0 million milestone payment (the “Cataplexy Milestone Payment”) to Bioprojet pursuant to the terms of the Bioprojet License Agreement.

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.

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,

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

The following table sets forth a summary of our cash flows for the three months ended March 31, 2021 and 2020:

For the Three Months Ended March 31,

(In thousands)

4 unchanged sentences

Financing activities

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.

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.

Operating Activities

Net cash provided by operating activities increased to $12.5 million for the three months ended March 31, 2021 as compared to net cash used in operation activities of $26.7 million for the same period in 2020.

This decrease was primarily attributable to company revenue growth and net income associated with the commercialization of WAKIX.

Net cash provided by operating activities for the three months ended March 31, 2021 consisted of our net income of $7.4 million adjusted for non-cash items of $3.3 million related to stock compensation expense and $4.6 million related to intangible amortization and fair value of warrants.

Net cash used in operating activities for the three months ended March 31, 2020 consisted of our net loss of $38.6 million adjusted for non-cash items of $22.6 million associated with loss on extinguishment of debt and $3.0 million related to intangible amortization and fair value of warrants.

Net working capital excluding cash decreased by $14.6 million due to company growth and the commercial launch of WAKIX.

Investing Activities

Net cash used in investing activities increased to $100.0 million for the three months ended March 31, 2021 as compared to $0.0 million for the same period in 2020.

This change was primarily attributable to the $100.0 million milestone payment associated with the Bioprojet License Agreement.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2021 was $0.0 million, as compared to $73.7 million for the same period in 2020.

This change was primarily attributable to $194.2 million associated with the OrbiMed Credit Agreement net of issuance, offset with $120.9 million of repayment and exit fees associated with the CRG Loan Agreement.

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.

For the three months ended March 31, 2021 and 2020, we did not have any off-balance sheet arrangements, as defined under SEC rules.

Critical Accounting Policies and Significant Judgments and Estimates

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.

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.

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

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

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

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.

We define our critical accounting policies as those under GAAP that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles.

During the quarter covered by this report, there were no material changes to the accounting policies and assumptions previously disclosed, except as disclosed in Note 3 to the unaudited condensed consolidated financial statements contained herein.

Recent Accounting Pronouncements

See Note 3 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for more information.

We are an “emerging growth company” (“EGC”), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).

We are an “emerging growth company”, or EGC, as defined in the Jumpstart Our Business Startups Act, or JOBS Act, of 2012.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

2 unchanged sentences

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.

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.

We will remain an EGC until the earliest of (i) the last day of our fiscal year (a) following the fifth anniversary of the completion of the initial public offering of our common stock, (b) in which we have total annual gross revenues of at least $1.07 billion or (ii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30 th and (iii) the date on which we have issued more than $1.0 billion in non-convertible debt securities over a three-year period.

Non-GAAP Financial Measures

In addition to our GAAP results, we provide certain non-GAAP metrics including adjusted net income and adjusted net income per share.

We believe that the presentation of these measures provides important supplemental information to management and investors regarding our performance.

These measurements are not a substitute for GAAP measurements, and the manner in which we calculate adjusted net income and adjusted net income per share may not be identical to the manner in which other companies calculate adjusted net income and adjusted net income per share.

Management uses these non-GAAP measurements as an aid in monitoring our on-going financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against comparable companies.

EBITDA is intended to provide a measure of the Company’s operating performance as it eliminates the effects of financing and capital expenditures.

EBITDA consists of GAAP net loss excluding:

(i) interest expense, (ii) income tax provision, (iii) depreciation and (iv) amortization of intangibles.

Non-GAAP adjusted net income (loss) and non-GAAP adjusted net income (loss) per share are intended to provide an enduring, normalized view of net income and our broader business operations that we expect to experience on an ongoing basis by removing items which may be irregular, one-time, or non-recurring from net income.

This enables us to identify underlying trends in our business that could otherwise be masked by such items.

Non-GAAP adjusted net income (loss) consists of GAAP net loss excluding:

(i) interest expense, (ii) income tax provision, (iii) depreciation, (iv) amortization of intangibles, (v) stock-based compensation, (vi) loss on debt extinguishment, and (vii) warrant expense.

A reconciliation of GAAP n et l oss to non-GAAP a djusted net income (loss) appears in the table below (in thousands except share and per share data ):

For the Three Months Ended March 31,

Net income (loss)

Non-GAAP Adjustments:

Interest expense

Additional Non-GAAP Adjustments:

Stock-based compensation expense

Loss on debt extinguishment

Warrant expense

Non-GAAP adjusted net income (loss)

Accumulation of yield on preferred stock

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

GAAP reported net income (loss) per diluted share

Non-GAAP adjusted net income (loss) per diluted share

Weighted average number of shares of common stock used in non-GAAP diluted per share

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