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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-07-31 · 83 added, 58 removed, 167 unchanged (46% of the section changed)

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In particular, our recent acquisitions of Entasis and La Jolla created a robust hospital and infectious disease platform.

Second Quarter 2024 and Recent Highlights:

Third Quarter 2024 and Recent Highlights:

Financial Highlights

• Second quarter 2024 gross royalty revenue from GSK was $67.2 million, compared to $65.7 million for the second quarter 2023.

• Second quarter 2024 net product sales were $21.7 million, which included $13.1 million from GIAPREZA ® , $6.2 million from XERAVA ® , and $2.4 million from XACDURO ® , a 38% increase compared to $15.7 million for the second quarter 2023.

• Third quarter 2024 gross royalty revenue from GSK was $60.5 million, compared to $57.0 million for the third quarter 2023.

• Third quarter 2024 net product sales were $27.8 million, which included U.S.

net product sales of $19.7 million and ex-U.S.

product sales of $8.1 million.

net product sales consisted of $13.1 million from GIAPREZA ® , $2.3 million from XERAVA ® , and $4.3 million from XACDURO ® , a 68% increase compared to $11.8 million for the third quarter 2023.

Key Business and R&D Highlights

• XACDURO ® , co-packaged for intravenous use:

targeted antibacterial for the treatment of patients with hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP) caused by susceptible isolates of Acinetobacter baumannii calcoaceticus complex .

o In May 2024, XACDURO ® was approved in China by the National Medical Products Administration for use in Chinese patients 18 years of age and older.

o In July 2024, XACDURO ® was named as the preferred agent for the treatment of Carbapenem-resistant Acinetobacter baumannii infections, in combination with a carbapenem, in the updated 2024 IDSA treatment guidelines.

o In July 2024, Galien Foundation announced XACDURO ® as a nominee for highly prestigious Prix Galien USA, America’s preeminent prize acknowledging the leading-edge of scientific advances in life sciences, in Best Biotechnology Product category.

o The World Health Organization considers Acinetobacter a top-priority pathogen worldwide that needs novel antibiotics.

• XERAVA ® , for injection is indicated for the treatment of complicated intra-abdominal infections (cIAI) caused by susceptible microorganisms in patients 18 years or older.

o In July 2024, XERAVA ® was named as a recommended agent for empiric therapy in the updated 2024 SIS treatment guidelines for the management of complicated intra-abdominal infections.

SIS also recommended XERAVA ® be reserved for high-risk patients.

• XACDURO ® (sulbactam for injection;

durlobactam for injection), co-packaged for intravenous use, a targeted antibacterial treatment for patients with hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP) caused by susceptible isolates of Acinetobacter baumannii calcoaceticus complex.

o XACDURO ® was recently nominated for the 2024 Prix Galien USA Award for Best Biotechnology Product, which recognizes excellence in scientific innovation that improves the state of human health.

• Zoliflodacin :

a potential first-in-class, single dose, oral antibiotic in development for the treatment of patients with uncomplicated gonorrhea is currently being developed in partnership with The Global Antibiotic Research & Development Partnership

o Zoliflodacin has successfully completed Phase 3 clinical trials and the results were reported at ESCMID Global 2024.

The Company expects to submit an NDA to the U.S.

a potential first-in-class, single dose, oral antibiotic is currently being developed in partnership with The Global Antibiotic Research & Development Partnership (GARDP) for the treatment of patients with uncomplicated gonorrhea.

o In September 2024, we presented additional findings on its investigational agent zoliflodacin at the 2024 Sexually Transmitted Infections Prevention Conference in Atlanta.

The first oral presentation demonstrated that zoliflodacin had potent in vitro activity against 200 clinical isolates, consistent with previous US surveillance data.

The second presentation demonstrated that microbiological cure rates for specific subgroups were comparable to the primary endpoint analysis.

Safety in these subgroups was also comparable.

o In October 2024, we had five clinical presentations at IDWeek 2024, which took place in Los Angeles.

One oral presentation on zoliflodacin included a review of the unique public-private partnership that led the clinical development of zoliflodacin.

The second presentation highlighted the activity of sulbactam-durlobactam and standard-of-care antibiotics against Acinetobacter baumannii-calcoaceticus complex for hospitalized patients in the

Three posters were presented including two on zoliflodacin:

In vitro activity against baseline isolates in US participants from the phase 3 trial and a pharmacometrics analysis supporting dose selection.

Surveillance data of eravacycline against clinical pathogens, collected worldwide from multiple infections sites during 2018-2022 was also presented.

o We continue to advance zoliflodacin following its successful Phase 3 clinical trial results and expect to submit an NDA to the U.S.

FDA in early 2025.

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Total net royalty revenue increased to $63.7 million and $122.2 million for the three and six months ended June 30, 2024, compared to $62.3 million and $119.1 million, respectively, for the same period a year ago.

Total net royalty revenue increased to $57.1 million and $179.2 million for the three and nine months ended September 30, 2024, compared to $53.6 million and $172.7 million, respectively, for the same period a year ago.

The increase of total net royalty revenue was primarily due to sales growth in both RELVAR ® /BREO ® ELLIPTA ® and ANORO ® ELLIPTA ® .

Net Product Sales

Net product sales recognized for the three months ended June 30, 2024 was $21.7 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $13.1 million, $6.2 million and $2.4 million, respectively.

Net product sales recognized for the six months ended June 30, 2024 was $40.7 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $25.2 million, $10.9 million and $4.6 million, respectively.

Net product sales recognized for the three months ended June 30, 2023 was $15.7 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $11.2 million and $4.5 million, respectively.

Net product sales recognized for the six months ended June 30, 2023 was $27.2 million, consisting of net sales of GIAPREZA ® and XERAVA ® for $20.2 million and $7.0 million, respectively.

XACDURO ® was not commercially available until September 2023.

Net product sales recognized for the three months ended September 30, 2024 was $27.8 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $13.8 million, $4.2 million and $9.8 million, respectively.

Net product sales recognized for the nine months ended September 30, 2024 was $68.6 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $39.0 million, $15.2 million and $14.4 million, respectively.

Net product sales recognized for the three months ended September 30, 2023 was $13.7 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $8.0 million, $5.1 million, and $0.6 million, respectively.

Net product sales recognized for the nine months ended September 30, 2023 was $40.9 million, consisting of net sales of GIAPREZA ® , XERAVA ® , and XACDURO ® for $28.2 million, $12.1 million and $0.6 million, respectively.

Our net product sales increased during the periods presented as a result of increased efforts in sales and marketing of our marketed products.

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We also recognized $6.5 million in license revenue for the second quarter of 2024 under the Amended Zai Agreement with Zai Lab.

During the third quarter of 2024, we recognized additional license revenue of approximately $4.6 million from Zai Lab arising from a manufacturing stage transfer agreement and the aforementioned Amended Zai Agreement.

We recognized license revenue of $8.0 million for the first quarter of 2023 and $3.0 million for the second quarter of 2023 as a result of achievement of regulatory milestones under our license agreements with Everest and Zai Lab, respectively.

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Our inventory includes net fair value adjustments resulting from the acquisition of La Jolla, which are being amortized and recognized as cost of products sold when sales occur.

The fair value adjustments recorded as part of cost of products sold amounted to $3.5 million and $10.3 million for the three and six months ended June 30, 2024, respectively, and $7.0 million and $13.8 million for the three and six months ended June 30, 2023, respectively.

The fair value adjustments recorded as part of cost of products sold amounted to $1.8 million and $12.1 million for the three and nine months ended September 30, 2024, respectively, and $5.4 million and $19.2 million for the three and nine months ended September 30, 2023, respectively.

Excluding the impact of the amortized fair value adjustments, our cost of products sold increased during the periods presented in 2024 compared to the same periods in 2023 as a result of higher sales volume.

Research and Development

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Total research and development expense

Research and development expenses, which are mainly attributable to post-marketing commitments required by the FDA and ongoing product developments, were $2.6 million and $6.4 million for the three and six months ended June 30, 2024.

Research and development expenses for the three and six months ended June 30, 2023, which were mainly attributable to the product development efforts for XACDURO ® , were $15.0 million and $27.6 million, respectively.

Research and development expenses, which are mainly attributable to post-marketing commitments required by the FDA and ongoing product developments, were $3.6 million and $10.0 million for the three and nine months ended September 30, 2024.

Research and development expenses for the three and nine months ended September 30, 2023, which were mainly attributable to the product development efforts for XACDURO ® , were $4.0 million and $31.6 million, respectively.

The decrease was primarily a result of the FDA approval of XACDURO ® in May 2023 and personnel transfers from the research development function to general and administrative function after the FDA approval.

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Selling, general and administrative

Selling, general and administrative expenses increased for the three and six months ended June 30, 2024, compared to the same period in 2023, primarily due to the reallocation of resources from the research development function to general and administrative function after the FDA approval of XACDURO ® , as well as increased efforts in sales and marketing of our marketed products.

Our selling, general and administrative expenses are primarily incurred as a result of our ongoing efforts to promote our marketed critical care products and drive revenue, maintain regulatory compliance, and support essential administrative functions for general operations.

The expenses for the three months ended September 30, 2023 were higher compared to the same period this year primarily due to the commercial launch effort of XACDURO ® .

For the nine months ended September 30, 2024, the expenses increased compared to the same period last year due to the ongoing efforts, which led to higher net product sales.

Interest and dividend income and other expense, net

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Other expense, net

Interest and dividend income increased for the six months ended June 30, 2024, compared to the same period a year ago due to higher interest rates and higher average balances of our cash equivalents, money market funds and other interest-bearing investments.

Interest and dividend income increased for the three and nine months ended September 31, 2024, compared to the same period a year ago, due to higher interest rates and higher average balances of our cash equivalents, money market funds and other interest-bearing investments.

Other expense, net, was primarily expenses incurred by ISP Fund LP.

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Interest expense

Interest expense for the three and six months ended June 30, 2024 comprised mainly of the contractual interest expense and the amortization of debt issuance costs for our 2025 Notes and 2028 Notes, as well as effective interest expense on our deferred royalty obligation.

Interest expense for the six months ended June 30, 2023 included the amount on the 2023 Notes until the notes were fully paid off on January 15, 2023.

The increase for the three and six months ended June 30, 2024, compared to the three and six months ended June 30, 2023, was mainly due to higher effective interest rate on our deferred royalty obligation as a result of higher sales performance of GIAPREZA ® .

Interest expense for the three and nine months ended September 30, 2024 comprised mainly of the contractual interest expense and the amortization of debt issuance costs for our 2025 Notes and 2028 Notes, as well as effective interest expense on our deferred royalty obligation.

Interest expense for the nine months ended September 30, 2023 included the amount on the 2023 Notes until the notes were fully paid off on January 15, 2023.

The increase for the three and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023, was mainly due to higher effective interest rate on our deferred royalty obligation as a result of higher sales performance of GIAPREZA ® .

Changes in Fair Values of Equity Method Investments and Equity and Long-Term Investments

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The changes in fair values of equity method investments for the three and six months ended June 30, 2024 were unfavorable mainly due to the decrease in Armata's stock price during this period.

We recorded $60.1 million and $24.8 million in unrealized loss for the three and six months ended June 30, 2024, respectively, and $19.9 million and $4.1 million in unrealized loss for the three and six months ended June 30, 2023, respectively, related to our equity method investments in Armata.

The changes in fair values of equity method investments for the three and nine months ended September 30, 2024 were unfavorable mainly due to the decrease in Armata's stock price during this period.

We recorded $18.2 million and $43.0 million in unrealized loss for the three and nine months ended September 30, 2024, respectively, and $72.0 million and $67.9 million in unrealized gain for the three and nine months ended September 30, 2023, respectively, related to our equity method investments in Armata.

The changes in fair values of other equity and long-term investments primarily reflected the realized gains and losses and net unrealized gains and losses in our strategic investments in Armata, InCarda, Gate, ImaginAb and those investments managed by ISP Fund LP.

We recorded $15.8 million and $42.0 million of net negative changes in fair values of equity and long-term investments related to the investments managed by ISP Fund LP, for the three and six months ended June 30, 2024, respectively.

We also recorded $15.1 million and $1.9 million in net negative changes in fair values of equity and long-term investments for the three and six months ended June 30, 2024, respectively, related to other long-term investments we made in Armata.

We recorded $17.8 million and $59.8 million of net negative changes in fair values of equity and long-term investments related to the investments managed by ISP Fund LP, for the three and nine months ended September 30, 2024, respectively.

We also recorded $1.2 million net positive and $0.8 million net negative changes in fair values of equity and long-term investments for the three and nine months ended September 30, 2024, respectively, related to other long-term investments we made in Armata.

Provision for Income Taxes

We recorded income tax benefit of $4.6 million and income tax expense of $4.0 million for the three and six months ended June 30, 2024, respectively, compared to a provision for income tax expense of $4.5 million and $10.8 million for the three and six months ended June 30, 2023, respectively.

The effective income tax rate for the six months ended June 30, 2024 and 2023 was 68.4% and 25.7%, respectively.

We recorded income tax expense of $5.6 million and $9.6 million for the three and nine months ended September 30, 2024, respectively, compared to income tax expense of $3.9 million and $14.7 million for the three and nine months ended September 30, 2023, respectively.

The effective income tax rate for the nine months ended September 30, 2024 and 2023 was 40.5% and 10.6%, respectively.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through private placements and public offerings of equity and debt securities and payments received under collaboration arrangement.

For the six months ended June 30, 2024, we generated gross royalty revenues from GSK of $129.1 million and net product sales of $40.7 million.

Net cash and cash equivalents totaled $217.0 million, royalties receivables from GSK totaled $67.2 million and accounts receivable associated with our product sales and license revenue totaled $26.8 million as of June 30, 2024.

For the nine months ended September 30, 2024, we generated gross royalty revenues from GSK of $189.6 million, net product sales of $68.6 million and license revenue of $19.1 million.

Net cash and cash equivalents totaled $260.6 million, royalties receivable from GSK totaled $60.5 million and accounts receivable associated with our product sales and license revenue totaled $30.5 million as of September 30, 2024.

Adequacy of Cash Resources to Meet Future Needs

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Cash flows, as compared to the prior year period, were as follows:

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Cash Flows from Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2024 was $80.8 million, consisting primarily of our net income of $1.8 million, adjusted for net non-cash items, which included $68.7 million in changes in fair value of our investments, $12.9 million of amortization of acquired intangible assets, $10.3 million of amortization of inventory fair value step-up adjustment, $7.0 million of amortization of capitalized fees and depreciation of property and equipment, partially offset by $12.0 million of deferred income taxes and $11.9 million in net changes in operating assets and liabilities.

Net cash provided by operating activities for the six months ended June 30, 2023 was $63.9 million, consisting primarily of our net income of $36.1 million, adjusted for net non-cash items, which included $13.8 million of amortization of inventory fair value step-up adjustment, $8.8 million of amortization of acquired intangible assets, $7.0 million of amortization of capital fees and depreciation of property and equipment, $6.3 million of net changes in fair value of our investments, partially offset by decreases of $11.0 million in receivables from collaboration arrangement and $4.7 million in inventory.

Net cash provided by operating activities for the nine months ended September 30, 2024 was $129.5 million, consisting primarily of our net income of $3.1 million, adjusted for net non-cash items, which included $103.8 million in changes in fair value of our investments, $19.4 million of amortization of acquired intangible assets, $12.1 million of amortization of inventory fair value step-up adjustment, $10.5 million of amortization of capitalized fees and depreciation of property and equipment, and $4.7 million of stock-based compensation, partially offset by $15.4 million of deferred income taxes and $9.9 million in net changes in operating assets and liabilities.

Net cash provided by operating activities for the nine months ended September 30, 2023 was $107.8 million, consisting primarily of our net income of $118.2 million, adjusted for net non-cash items, which included $19.2 million of amortization of inventory fair value step-up adjustment, $10.4 million of amortization of capital fees and depreciation of property and equipment, $15.3 million of amortization of acquired intangible assets, partially offset by $63.0 million of net changes in fair value of our investments and $5.0 million net changes in operating assets and liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended June 30, 2024 of $43.0 million primarily consisted of $43.1 million in purchases of trading securities and $30.9 million in purchases of equity and long-term investments managed by ISP Fund LP.

The use of cash for investing activities was partially offset by proceeds of $24.9 million from net sales of other investments managed by ISP Fund LP and $6.0 million from the sales of equity investments managed by ISP Fund LP.

Net cash used in investing activities for the six months ended June 30, 2023 of $35.7 million primarily consisted of $35.7 million in purchases of equity and long-term investments and $17.8 million in purchases of equity investments managed by ISP Fund LP.

The use of cash for investing activities was partially offset by net proceeds of $15.3 million from the purchases and sales of other investments managed by ISP Fund LP.

Net cash used in investing activities for the nine months ended September 30, 2024 of $48.3 million primarily consisted of $48.1 million in purchases of trading securities, $32.3 million in purchases of equity and long-term investments managed by ISP Fund LP and $20.6 million in net purchases of other investments managed by ISP Fund LP.

The use of cash for investing activities was partially offset by proceeds of $52.8 million from the sales of equity investments managed by ISP Fund LP.

Net cash used in investing activities for the nine months ended September 30, 2023 of $61.6 million primarily consisted of $60.1 million in purchases of trading securities, $1.2 million in purchases of equity and long-term investments, $24.9 million in purchases of equity investments managed by ISP Fund LP, and $14.7 million from purchase and sales of other investments managed by ISP Fund LP.

The use of cash for investing activities was partially offset by net proceeds of $39.6 million from the sales of equity investments managed by ISP Fund LP.

Cash Flows from Financing Activities

Net cash used in financing activities for the six months ended June 30, 2024 of $14.2 million was primarily due to $14.8 million for the repurchase of common stock under our stock repurchase program which concluded in April 2024.

Net cash used in financing activities for the six months ended June 30, 2023 of $146.2 million was primarily due to the payments of $96.2 million upon maturity of the 2023 Notes in January 2023 and $50.0 million for the repurchase of common stock under our stock repurchase program.

Net cash used in financing activities for the nine months ended September 30, 2024 of $14.0 million was primarily due to $14.8 million for the repurchase of common stock under our stock repurchase program which concluded in April 2024.

Net cash used in financing activities for the nine months ended September 30, 2023 of $157.3 million was primarily due to the payments of $96.2 million upon maturity of the 2023 Notes in January 2023 and $61.1 million for the repurchase of common stock under our current stock repurchase program.

Contractual Obligations

As of June 30, 2024, our notes payable obligation included $192.5 million related to our 2025 Notes and $261.0 million related to our 2028 Notes, which are due in 2025 and 2028, respectively.

As of September 30, 2024, our notes payable obligation included $192.5 million related to our 2025 Notes and $261.0 million related to our 2028 Notes, which are due in 2025 and 2028, respectively.

Under the terms of the 2025 Notes and 2028 Notes, we will make interest payments of 2.5% and 2.125%, respectively, of outstanding principal.

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Refer to Note 12, “Commitments and Contingencies” to the Condensed Consolidated Financial Statements for more information.

As part of our acquisition of La Jolla, we recognized its deferred royalty obligation in connection with La Jolla Royalty Agreement with HCR.

As part of our acquisition of La Jolla, we recognized its deferred royalty obligation in connection with the La Jolla Royalty Agreement with HCR.

Under the terms of the Agreement, HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA ® until either January 1, 2031 or when the maximum aggregate royalty payments have been made, whichever occurs first.

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Under the agreement, we committed to minimum purchase commitments through December 31, 2027.

As of June 30, 2024, we have approximately $9.7 million, $6.8 million, $7.6 million and $6.1 million in outstanding purchase commitments under the agreement for the remainder of 2024 and for the years 2025, 2026 and 2027, respectively.

We also enter into other agreements in the normal course of business with vendors for manufacturing, clinical trials and preclinical studies, and other services and products for operating purposes.

As of September 30, 2024, we have approximately $9.1 million, $7.1 million, $7.9 million and $6.3 million in outstanding purchase commitments under the agreement for the remainder of 2024 and for the years 2025, 2026 and 2027, respectively.

We also enter into other agreements in the normal course of business with vendors for commercial, manufacturing, clinical trials and preclinical studies, and other services and products for operating purposes.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis