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Item 7. Management’s Discussion and Analysis

2021-02-05 compared with 2020-02-07 · 157 added, 117 removed, 132 unchanged (67% of the section changed)

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Risk Factors.” See “Forward-Looking Statements” in Part I of this Annual Report on Form 10-K.

We are a commercial-stage biopharmaceutical company focused on discovering and developing innovative and life-changing treatments for patients with serious, challenging and under-addressed neurological, endocrine and psychiatric disorders.

We specialize in targeting and interrupting disease-causing mechanisms involving the interconnected pathways of the nervous and endocrine systems.

Currently, we are primarily focused on the commercialization of INGREZZA ® (valbenazine) in the United States, or U.S., our first U.S.

Food and Drug Administration, or FDA, approved product.

In April 2017, we received FDA approval of our first product, INGREZZA, for the treatment of adults with tardive dyskinesia, or TD.

Shortly after receiving FDA approval, we began commercializing INGREZZA in the U.S.

using a specialty sales force primarily focused on educating physicians who treat patients with TD, including psychiatrists and neurologists.

In addition to our first marketed product, our collaboration partner, AbbVie Inc., or AbbVie, received approval of ORILISSA ® (elagolix) for the management of moderate to severe endometriosis pain in women from the FDA in July 2018 and Health Canada in October 2018.

We receive royalties at tiered percentage rates on any net sales of ORILISSA.

Our late-stage pipeline includes opicapone as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in adult Parkinson's disease patients, elagolix for the treatment of heavy menstrual bleeding, or HMB, associated with uterine fibroids in women, valbenazine for the treatment of chorea in adult patients with Huntington’s disease, or HD, and NBIb-1817 (VY-AADC) for the treatment of advanced Parkinson’s disease patients with motor fluctuations that are refractory to medical management.

Our product candidates for uterine fibroids and advanced Parkinson’s disease are partnered with AbbVie and Voyager Therapeutics, Inc., or Voyager, respectively.

In the third quarter of 2019, the FDA accepted our new drug application, or NDA, for opicapone for the treatment of Parkinson’s disease with a Prescription Drug User Fee Act, or PDUFA, target action date of April 26, 2020.

Also, in the third quarter of 2019, the FDA accepted AbbVie’s NDA for elagolix for the treatment of uterine fibroids with a PDUFA target action date in the second quarter of 2020.

Our early-stage clinical pipeline includes crinecerfont (NBI-74788) for the treatment of congenital adrenal hyperplasia, or CAH, elagolix for the treatment of polycystic ovary syndrome, or PCOS, in women and a vesicular monoamine transporter 2, or VMAT2, inhibitor with potential use in the treatment of neurologic and psychiatric disorders.

Our product candidate for PCOS is partnered with AbbVie.

In December 2019, we entered into a license and collaboration agreement with Xenon Pharmaceuticals Inc, or Xenon, a clinical-stage biopharmaceutical company.

Pursuant to the terms of the agreement, we acquired an exclusive license to NBI-921352 (XEN901), a clinical-stage candidate with potential in epilepsy.

In January 2020, we announced a collaboration and optional licensing agreement with Idorsia Pharmaceuticals Ltd, granting us an option to license ACT-709478, a potent, selective, orally active and brain penetrating T-type calcium channel blocker, in clinical development for the treatment of a rare pediatric epilepsy.

The option also includes a research collaboration to discover, identify and develop additional novel T-type calcium channel blockers.

Going forward, we expect to augment our product pipeline by acquiring, through license or otherwise, additional drug candidates for research and development, or R&D, and potential commercialization.

We are a neuroscience-focused, biopharmaceutical company dedicated to discovering, developing and delivering life-changing treatments for people with serious, challenging and under-addressed neurological, endocrine and psychiatric disorders.

Our diverse portfolio includes United States Food and Drug Administration, or FDA, approved treatments for tardive dyskinesia, Parkinson’s disease, endometriosis*, uterine fibroids* and clinical programs in multiple therapeutic areas.

For nearly three decades, we have specialized in targeting and interrupting disease-causing mechanisms involving the interconnected pathways of the nervous and endocrine systems.

(*in collaboration with AbbVie Inc.)

We launched INGREZZA ® (valbenazine) in the U.S.

with our specialty sales force in May 2017, after receiving FDA approval for INGREZZA as the first FDA-approved drug for the treatment of tardive dyskinesia in April 2017.

In September 2020, we launched ONGENTYS ® (opicapone) in the U.S.

leveraging our existing INGREZZA commercial infrastructure after receiving FDA approval for ONGENTYS for Parkinson's disease in April 2020.

INGREZZA net product sales represent the significant majority of our total net product sales.

Our partner AbbVie Inc., or AbbVie, launched ORILISSA ® (elagolix) in the U.S.

and Canada in August and November 2018, respectively, after receiving FDA and Health Canada approval for ORILISSA for endometriosis in July and October 2018, respectively.

In June 2020, AbbVie launched ORIAHNN TM (elagolix, estradiol, and norethindrone acetate;

elagolix) in the U.S.

after receiving FDA approval for ORIAHNN for uterine fibroids in May 2020.

We receive royalties at tiered percentage rates on any net sales of ORILISSA and ORIAHNN.

In addition, we have a rapidly expanding pipeline of potential treatments and gene therapies for diseases such as Huntington’s disease, or HD, Parkinson’s disease, epilepsy, congenital adrenal hyperplasia, or CAH, schizophrenia and depression.

Refer to Part I, Item 1, “Business” for more information about our exclusive and partnered commercial products, clinical development pipeline and research programs.

• INGREZZA net product sales for 2020 increased $240.2 million, or 31.9%, to $993.1 million, primarily reflecting strong refill and persistency rates for existing INGREZZA patients.

• We launched ONGENTYS in the U.S.

in September 2020, after receiving FDA approval for ONGENTYS as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in adult Parkinson's disease patients in April 2020.

• AbbVie launched ORIAHNN in the U.S.

in June 2020, after receiving FDA approval for ORIAHNN as the first FDA-approved non-surgical, oral medication option for the management of heavy menstrual bleeding associated with uterine fibroids in pre-menopausal women in May 2020.

We recognized a $30.0 million event-based milestone as revenue in the second quarter of 2020.

• Completed strategic partnerships with Idorsia Pharmaceuticals Ltd, or Idorsia, and Takeda Pharmaceutical Company Limited, or Takeda, to expand clinical pipeline for epilepsy and psychiatry disorders.

in-process research and development, or IPR&D, expense for 2020 of $164.5 million, related to upfront payments.

• Total debt outstanding decreased by $136.2 million to $381.3 million after repurchase of approximately 26% of our debt outstanding in December 2020.

The total aggregate repurchase price of $186.9 million was paid in cash and resulted in an $18.4 million loss.

• At December 31, 2020, in part because we achieved three years of cumulative pretax income, management determined that there is sufficient positive evidence to conclude that it is more likely than not that deferred tax assets of $319.4 million are realizable.

We therefore reduced the valuation allowance accordingly.

Pipeline Highlights:

• Crinecerfont (NBI-74788):

In July 2020, we initiated the CAHtalyst study, a global registrational Phase III, randomized, double-blind, placebo-controlled clinical study to evaluate the safety and efficacy of crinecerfont in 165 adult patients with classic CAH, followed by an open-label treatment period.

• NBI-827104 (ACT-709478):

In November 2020, we initiated a Phase II clinical study for NBI-827104 in a rare pediatric epileptic encephalopathy known as Continuous Spike and Wave During Sleep.

In February 2021, Mitsubishi Tanabe Pharmaceutical Company, or MTPC, reported positive top-line results from the J-KINECT Phase III study, designed to evaluate the efficacy and safety of valbenazine in tardive dyskinesia.

Detailed results from this trial will be presented at a future medical conference.

With positive data in hand, a marketing authorization with the Ministry of Health and Welfare is planned for 2021 in Japan.

In addition, MTPC submitted filings for marketing authorizations in South Korea, Thailand, Singapore, Indonesia, and Malaysia in 2020.

• NBIb-1817 (VY-AADC):

On February 2, 2021, we notified Voyager Therapeutics, Inc., or Voyager, of our termination of the NBIb-1817 for Parkinson’s disease program.

The effective date of this termination will be August 2, 2021.

The termination does not apply to any other development program other than NBIb-1817 for Parkinson’s disease, and our collaboration and license agreement with Voyager will otherwise continue in effect.

The global COVID-19 pandemic has dramatically changed the ways in which we live and interact with one another.

While we adapt to this new shared reality, our mission remains unchanged:

to discover and develop life-changing treatments for people with serious, challenging and under-addressed disorders.

While we are unable to reliably estimate the duration or extent of any potential business disruption or financial impact during this time, including any impacts on INGREZZA product sales or R&D expense, we remain committed to (1) prioritizing the safety, health and well-being of patients, their caregivers, healthcare providers and our employees;

(2) ensuring patients with tardive dyskinesia are well supported and have continued uninterrupted access to INGREZZA, for which we currently do not expect any supply disruption;

and (3) advancing ongoing clinical studies.

As part of this commitment, we implemented a “Work from Home Policy” in early March 2020 for employees not involved in business-critical activities.

For employees involved in business-critical activities, we implemented safety measures designed to comply with federal, state and local guidelines.

Due to the impact of COVID-19, we initially paused enrollment of new patients in several of our clinical trials.

Beginning in the third quarter of 2020, we began enrolling patients in our HD and CAH studies.

To date, we have not experienced any interruption of our supply of drug products needed to support our ongoing clinical studies, but we expect that completion and data readouts for several of our ongoing and planned studies will be delayed.

We continue to believe that existing funds, cash generated from operations, and existing sources of and access to financing are adequate to satisfy our needs for working capital, capital expenditures, debt service requirements and other business development initiatives that we plan to strategically pursue.

However, should the COVID-19 pandemic and any associated recession or depression continue for a prolonged period, our results of operations, financial condition, liquidity and cash flows could be materially impacted by lower revenues and profitability and a lower likelihood of effectively and efficiently developing new medicines.

Results of Operations

The following table presents our revenues by category.

The following table presents revenues by category.

Year Ended December 31,

(in thousands)

(in millions) 2020 2019 2018

INGREZZA product sales, net $ 993.1 $ 752.9 $ 409.6

Collaboration revenue

ONGENTYS product sales, net 1.0 — —

Collaboration revenues 51.8 35.2 41.6

Total revenues $ 1,045.9 $ 788.1 $ 451.2

Product Sales, net.

In April 2017, the FDA approved INGREZZA for the treatment of TD.

INGREZZA became available for prescription in late April 2017.

Net product sales were $994.1 million for 2020, $752.9 million for 2019 and $409.6 million for 2018.

Collaboration Revenue

Collaboration revenue reflects event-based milestones, royalties and license fees earned under our collaboration agreements with AbbVie and Mitsubishi Tanabe Pharma Corporation, or MTPC.

In the third quarter of 2019, we recognized a $20.0 million event-based milestone as revenue upon the FDA’s acceptance of AbbVie’s NDA submission of elagolix for the treatment of uterine fibroids.

In the third quarter of 2018, we recognized a $40.0 million event-based milestone as revenue upon the FDA-approval of AbbVie’s ORILISSA for the management of moderate to severe endometriosis pain in women.

In the third quarter of 2017, AbbVie’s NDA submission for elagolix in endometriosis was accepted as filed by the FDA, resulting in the achievement of a $30.0 million event-based milestone, which we recognized as revenue in the fourth quarter of 2017.

We also recognized $15.0 million in development event-based payments as revenue in 2017, resulting from Mitsubishi Tanabe Pharma Corporation’s, or MTPC’s, initiation of Phase II/III development of INGREZZA in TD in Asia.

We are eligible to receive royalties at tiered percentage rates on any net sales of ORILISSA.

We recognized royalty revenues on net sales of ORILISSA of $14.3 million for 2019 and $1.6 million for 2018.

We recognized no royalty revenues in 2017.

Collaboration Revenues.

Collaboration revenues reflect the achievement of certain event-based milestones, royalties earned at tiered percentage rates on any net sales of ORILISSA and ORIAHNN and license fees earned under our collaboration agreements with AbbVie and MTPC.

In the second quarter of 2020, we recognized a $30.0 million event-based milestone as revenue upon FDA-approval of AbbVie’s ORIAHNN for uterine fibroids.

In the third quarter of 2019, we recognized a $20.0 million event-based milestone as revenue upon the FDA’s acceptance of AbbVie’s new drug application, or NDA, submission of elagolix for uterine fibroids.

In the third quarter of 2018, we recognized a $40.0 million event-based milestone as revenue upon FDA-approval of AbbVie’s ORILISSA for the treatment of moderate to severe pain associated with endometriosis.

For ORILISSA and ORIAHNN, we recognized royalty revenue of $19.2 million for 2020, $14.3 million for 2019 and $1.6 million for 2018.

Operating Expenses

Cost of Sales.

Cost of sales was $7.4 million for 2019, $4.9 million for 2018 and $1.3 million for 2017.

Cost of sales was $10.1 million for 2020, $7.4 million for 2019 and $4.9 million for 2018, primarily reflecting a higher annual volume of INGREZZA product sales since commercial launch in April 2017.

Research and Development.

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Year Ended December 31,

(in thousands)

(in millions) 2020 2019 2018

Late stage $ 55.1 $ 43.7 $ 14.2

Early stage 30.2 25.3 41.7

Research and discovery 43.3 24.6 17.0

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Total R&D expense $ 275.0 $ 200.0 $ 155.8

R&D expense was $200.0 million in 2019, $155.8 million in 2018 and $91.8 million in 2017.

The increase in R&D expense from 2018 to 2019 was primarily due to funding of development activities in connection with our collaboration with Voyager, ongoing progression of our product candidate pipeline and increased personnel expenses on higher headcount.

The increase in R&D expense from 2017 to 2018 was primarily due to the ongoing progression of our product candidate pipeline and increased personnel expenses on higher headcount.

R&D expense was $275.0 million for 2020, $200.0 million for 2019 and $155.8 million for 2018.

The increase in R&D expense was primarily the result of increased investment to support advancing our expanded clinical portfolio and increased personnel expenses on higher headcount.

Acquired In-Process Research and Development.

In-process research and development, or IPR&D, was $154.3 million for 2019, $4.8 million for 2018 and $30.0 million for 2017.

In connection with the payment of the upfront fee pursuant to our collaboration and license agreement with Voyager, we recorded a

charge of $113.1 million, accounted for as IPR&D, in the first quarter of 2019.

In the second quarter of 2019, we entered into an amendment to the collaboration and license agreement with Voyager, pursuant to which we paid Voyager $5.0 million upfront , accounted for as IPR&D, to obtain outside the U .

rights to the Friedreich’s ataxia program.

In connection with the payment of the upfront fee pursuant to our collaboration with Xenon, we recorded a charge of $36.2 million, accounted for as IPR&D, in the fourth quarter of 2019.

In the third quarter of 2018, we entered into a research collaboration with Jnana Therapeutics Inc., or Jnana, pursuant to which we paid Jnana $4.8 million upfront, accounted for as IPR&D, to obtain access to their proprietary drug discovery platform.

In connection with the payment of the upfront fee pursuant to our exclusive license agreement with BIAL – Portela & Ca, S.A.

, we recorded a charge of $ 30.0 million, accounted for as IPR&D, in the first quarter of 201 7 .

Sales, General and Administrative

Sales, general and administrative, or SG&A, expense was $354.1 million in 2019, $248.9 million in 2018 and $169.9 million in 2017.

IPR&D expense was $164.5 million for 2020, $154.3 million for 2019 and $4.8 million for 2018.

For 2020, we recorded IPR&D expense of $46.0 million and $118.5 million in connection with the payments of the upfront fees pursuant to our collaborations with Idorsia and Takeda, respectively.

For 2019, we recorded IPR&D expense of $118.1 million and $36.2 million in connection with the payments of the upfront fees pursuant to our collaborations with Voyager and Xenon Pharmaceuticals, Inc., or Xenon.

For 2018, we recorded IPR&D expense of $4.8 million in connection with payment of the upfront fee to Jnana to obtain access to Jnana’s proprietary drug discovery platform.

Selling, General and Administrative.

Selling, general and administrative, or SG&A, expense was $433.3 million for 2020, $354.1 million for 2019 and $248.9 million for 2018.

The increase in SG&A expense from 2019 to 2020 was primarily due to increased personnel expenses on higher headcount and continued investment in INGREZZA marketing.

The increase in SG&A expense from 2018 to 2019 was primarily due to the sales force expansion completed in the third quarter of 2018, the national launch of a patient-focused disease state awareness campaign, Talk About TD, and an increase in the Branded Pharmaceutical Drug Fee expense.

The increase in SG&A expense from 2017 to 2018 was primarily due to our commercial launch for INGREZZA in April 2017 and the subsequent sales force expansion in the third quarter of 2018.

Other Expense

Other expense, net, was $25.7 million in 2019, $15.1 million in 2018 and $11.2 million in 2017.

The increase in other expense, net, from 2018 to 2019 was primarily due to an unrealized loss of $13.0 million to adjust our equity investments in Voyager and Xenon to fair value as of December 31, 2019.

The increase in other expense, net, from 2017 to 2018 was primarily due to higher interest expense resulting from our issuance of $517.5 million of 2.25% convertible senior notes due May 15, 2024, or the 2024 Notes, in May 2017.

Provision for Income Taxes

Our provision for income taxes was $9.5 million for 2019 and $0.7 million for 2018, reflecting estimated current state income taxes for both periods.

We did not have a provision for income taxes for 2017.

Other expense, net, was $56.3 million for 2020, $25.8 million for 2019 and $15.0 million for 2018.

Periodic fluctuations in other expense, net, primarily reflect unrealized losses recognized to adjust our equity investments in Voyager and Xenon Pharmaceuticals Inc.

to fair value.

For 2020, other expense, net, also reflects an $18.4 million loss on debt extinguishment recognized for the partial repurchase of the 2024 Notes in November 2020.

(Benefit from) Provision for Income Taxes

Our benefit from income taxes was $300.6 million for 2020, compared to a provision for income taxes of $9.5 million for 2019 and $0.7 million for 2018.

The benefit from income taxes for 2020 included a $296.3 million benefit related to the release of substantially all of our valuation allowance against our deferred tax assets on December 31, 2020.

The decision to release the valuation allowance was made after we determined that it was more likely than not the deferred tax assets, including net operating losses and tax credits, would be realized, and was based on the evaluation and weighting of both positive and negative evidence, such as our achievement of a cumulative three-year income position at December 31, 2020, as well as our consideration of forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration.

The provision for income taxes for 2019 and 2018 reflected estimated current state income taxes for both periods.

At December 31, 2019 and 2018, we had full valuation allowances against our net deferred tax assets as realization was uncertain.

As a result, our tax expense for both periods varies from the statutory tax rate primarily due to changes in our valuation allowances, net of other permanent book/tax differences, tax credits generated and impacts of changes in tax laws.

Net Income (Loss)

Net income was $37.0 million, or $0.39 diluted earnings per share, for 2019 and $21.1 million, or $0.22 diluted earnings per share, for 2018.

We incurred a net loss of $142.5 million, or $1.62 net loss per share, for 2017.

The change from 2018 to 2019 was primarily the result of increased INGREZZA net product sales, offset by $154.3 million of IPR&D in connection with our collaborations with Voyager and Xenon, ongoing support for the commercial launch of INGREZZA for TD and progression of our clinical pipeline.

The change from 2017 to 2018 was primarily the result of increased INGREZZA net product sales, offset by ongoing support for the commercial launch of INGREZZA for TD and progression of our clinical pipeline.

Our tax expense for 2020, 2019 and 2018 varied from the statutory tax rate primarily due to changes in our valuation allowances, net of other permanent book/tax differences, tax credits generated and impacts of changes in tax laws.

Net income was $407.3 million, or $4.16 diluted earnings per share, for 2020, $37.0 million, or $0.39 diluted earnings per share, for 2019 and $21.1 million, or $0.22 diluted earnings per share, for 2018.

The change from 2019

to 2020 was primarily the result of increased INGREZZA net product sales and a non-cash tax benefit of $296.3 million related to the release of substantially all of our valuation allowance against our deferred tax assets on December 31, 2020, offset by $164.5 million of IPR&D in connection with our collaborations with Idorsia and Takeda, ongoing support for the commercial launch of INGREZZA for tardive dyskinesia and progression of our clinical pipeline.

Liquidity and Capital Resources

At December 31, 2019, our cash, cash equivalents and marketable securities totaled $970.2 million, compared with $866.9 million at December 31, 2018.

Net cash provided by operating activities was $152.1 million for 2019 and $101.4 million for 2018.

Net cash used in operating activities was $94.3 million for 2017.

The increase in positive cash flow from 2018 to 2019 was primarily driven by increased INGREZZA net product sales, partially offset by incremental INGREZZA investment and upfront payments of $118.1 million and $36.2 million in connection with our collaborations with Voyager and Xenon, respectively.

The significant change to positive cash flow generated from operations from 2017 to 2018 was primarily driven by increased INGREZZA net product sales and the achievement of a $40.0 million event-based milestone related to the FDA’s approval of ORILISSA.

Net cash used in investing activities was $211.1 million for 2019, $242.9 million for 2018 and $251.3 million for 2017.

The change in net cash used in investing activities for all periods presented resulted primarily from timing differences in purchases, sales and maturities of marketable securities and changes in our portfolio-mix between cash equivalents and short-term and long-term investment holdings.

Net cash used in investing activities for 2019 also reflects equity investments of $54.7 million in Voyager in the first quarter of 2019 and $14.2 million in Xenon in the fourth quarter of 2019.

Net cash provided by financing activities was $27.3 million for 2019, $29.5 million for 2018 and $516.6 million in 2017.

Net cash provided by financing activities for 2019 and 2018 reflected proceeds from stock option issuances.

Net cash provided by financing activities for 2017 primarily reflected net proceeds of $502.8 million associated with our issuance of the 2024 Notes in May 2017.

Cash, cash equivalents and debt securities available-for-sale totaled $1.0 billion and $970.2 million at December 31, 2020 and 2019, respectively.

Net cash provided by operating activities was $228.5 million for 2020, $147.0 million for 2019 and $101.4 million for 2018.

The increase in positive cash flow from 2019 to 2020 was primarily due to increased INGREZZA net product sales partially offset by incremental INGREZZA investment and progression of our clinical pipeline.

The increase in positive cash flow from 2018 to 2019 was primarily due to increased INGREZZA net product sales, partially offset by incremental INGREZZA investment and upfront payments of $154.3 million in connection with our collaborations with Voyager and Xenon.

Net cash provided by investing activities was $4.1 million for 2020, compared with net cash used in investing activities of $211.1 million for 2019 and $242.9 million for 2018.

Periodic fluctuations in cash flows from investing activities primarily reflect timing differences in purchases, sales and maturities of debt securities available-for-sale and changes in our portfolio-mix.

Net cash used in investing activities for 2019 also reflects equity investments of $54.7 million in Voyager and $14.2 million in Xenon.

Net cash used in financing activities was $157.8 million for 2020, primarily reflecting our repurchase of $136.2 million aggregate principal amount of the 2024 Notes for an aggregate repurchase price of $186.9 million in cash in November 2020, compared to net cash provided by financing activities of $32.4 million for 2019 and $29.5 million in 2018.

For 2019 and 2018, periodic fluctuations in cash flows from financing activities reflect proceeds from issuances of our common stock.

Shelf Registration Statement.

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Convertible Senior Notes.

In May 2017, we issued $517.5 million of 2.25% convertible senior notes due May 15, 2024, or the 2024 Notes.

At December 31, 2019, the conditional conversion feature of the 2024 Notes had been triggered, allowing holders of 2024

Notes to convert their 2024 Notes at any time during the period beginning on January 2, 2020 and ending at the close of business on March 31, 2020.

Off-Balance Sheet Arrangements

As of December 31, 2019, we did not have any off-balance sheet arrangements.

In May 2017, we completed a private placement of $517.5 million in aggregate principal amount of 2.25% convertible senior notes scheduled to mature on May 15, 2024, unless earlier converted, redeemed, or repurchased.

We may not redeem the 2024 Notes prior to May 15, 2021.

On or after this date, at our election, we may redeem all, or any portion, of the 2024 Notes under certain circumstances.

The 2024 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by us.

There are customary events of default with respect to the 2024 Notes, including that upon certain events of default, 100% of the principal and accrued and unpaid interest on the 2024 Notes will automatically become due and payable.

Amounts for the 2024 Notes and related interest in the table above assume that the 2024 Notes will be held until maturity.

In November 2020, we entered into separate, privately negotiated transactions with certain holders of the 2024 Notes to repurchase $136.2 million aggregate principal amount of the 2024 Notes for an aggregate repurchase price of $186.9 million in cash.

At December 31, 2020, $381.3 million aggregate principal amount of the 2024 Notes remained outstanding.

Critical Accounting Policies and Estimates

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On an on-going basis, we evaluate these estimates, including those related to revenue recognition and share-based compensation.

Estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

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Product Sales, Net.

Our product sales, net consist of sales of INGREZZA in the U.S.

to a limited network of specialty pharmacy providers, which delivers INGREZZA to patients by mail, and a specialty distributor, which distributes INGREZZA primarily to closed-door pharmacies and government facilities.

Product sales, net are recognized at the time the customer takes possession of the product.

Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, payors and other third parties.

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If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment.

Our significant categories of sales discounts and allowances are as follows:

Product discounts – product discounts are based on payment terms extended to our customers, which include incentives offered for prompt payment.

We maintain a reserve for product discounts based on our historical experience, including the timing of customer payments.

To date, actual product discounts have not differed materially from our estimates.

Product returns – our contracts with customers provide for product returns only if the product is damaged or there has been an error in shipment.

Returns based on product expiry are not permitted.

To date, product returns have not been significant, and a reserve has not been established.

Government rebates – we are obligated to pay rebates for mandated discounts under the Medicaid Drug Rebate Program.

The liability for such rebates consist of invoices received for claims from prior quarters that remain unpaid or for which an invoice has not been received and estimated rebates for the current applicable reporting period.

Such rebates are primarily estimated based upon actual historical rebates, estimated payor mix, state and federal regulations and related contractual terms and are recorded as a reduction of product sales in the same period the related revenue is recognized.

Government Rebates.

We are obligated to pay rebates for mandated discounts under the Medicaid Drug Rebate Program.

The liability for such rebates consists of invoices received for claims from prior quarters that remain unpaid, or for which an invoice has not been received, and estimated rebates for the current applicable reporting period, which are primarily based on actual historical rebates, estimated payor mix, state and federal regulations and related contractual terms.

Estimated rebates are recorded as a reduction of revenue in the period the related sale is recognized.

To date, actual government rebates have not differed materially from our estimates.

Chargebacks – the difference between the list price, or the price at which we sell INGREZZA product to our customers, and the contracted price, or the price at which our customers sell INGREZZA product to qualified healthcare professionals, is charged back to us by our customers.

In addition to actual chargebacks received, we maintain a reserve for chargebacks based on estimated contractual discounts on INGREZZA product inventory levels on hand in our distribution channel.

To date, actual chargebacks have not differed materially from our estimates.

Payor and pharmacy rebates – we are obligated to pay rebates as a percentage of sales under payor and pharmacy contracts.

We estimate these rebates based on actual historical rebates, contractual rebate percentages, sales made through the payor channel and purchases made by pharmacies.

To date, actual payor and pharmacy rebates have not differed materially from our estimates.

Copay assistance – we offer qualified patients financial assistance with prescription drug co-payments required by insurance.

We accrue for copay assistance based on estimated claims and the cost per claim we expect to receive associated with inventory that remains in the distribution channel at period end.

To date, actual copay assistance has not differed materially from our estimates.

Share-Based Compensation.

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For example, an increase in the underlying stock price results in a significant increase in the Black-Scholes option-pricing.

The fair value of performance-based

restricted stock units , or PRSUs , is estimated based on the closing sale price of our common stock on the date of grant.

The fair value of performance-based restricted stock units, or PRSUs, is estimated based on the closing sale price of our common stock on the date of grant.

Expense recognition for PRSUs commences when attainment of the associated performance-based criteria is determined to be probable.

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For actual forfeitures, we recognize the adjustment to compensation expense in the period the forfeitures occur.

Income Taxes.

Our income tax benefit (provision) is computed under the asset and liability method.

Significant estimates are required in determining our income tax benefit (provision).

Some of these estimates are based on interpretations of existing tax laws or regulations.

We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

Under this method, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (temporary differences) at enacted tax rates in effect for the years in which the differences are expected to reverse.

A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets, including net operating losses and tax credits, will not be realized.

We periodically re-assess the need for a valuation allowance against our deferred tax assets based on various factors including our historical earnings experience by taxing jurisdiction, and forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration.

Significant judgment is required in making this assessment and, to the extent that a reversal of any portion of our valuation allowance against our deferred tax assets is deemed appropriate, a tax benefit will be recognized against our income tax provision in the period of such reversal.

Prior to 2020, we recorded a valuation allowance that fully offset our deferred tax assets.

On December 31, 2020, based on our evaluation of various factors, such as our achievement of a cumulative three-year income position as of December 31, 2020, as well as our consideration of forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration, we released substantially all of our valuation allowance against our deferred tax assets and recorded

a corresponding income tax benefit.

We continue to maintain a valuation allowance against our California state deferred tax assets.

Additional Information

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• we may discover that a product candidate may cause harmful side effects;

patient recruitment may be slower than expected;

• patient recruitment and enrollment may be slower or more difficult than expected;

• patients may drop out of the trials.

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As such, the ultimate timeline and costs to commercialize a product cannot be accurately estimated.

Our in-license, research and clinical development agreements are generally cancelable with written notice within 180 days or less.

Our in-license, research and clinical development agreements are generally cancellable with written notice within 180 days or less.

We may be required to pay up to $ 8.5 billion in milestone payments, plus sales royalties, in the event that all scientific research, development and commercialization milestones under these agreements are achieved.

Other than INGREZZA, which has been approved by the FDA for the treatment of TD, and ORILISSA (partnered with AbbVie), which has been approved by the FDA for the management of moderate to severe endometriosis pain in women, our product candidates have not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products in the U.S.

Other than INGREZZA, which has been FDA-approved for the treatment of tardive dyskinesia;

ONGENTYS, which has been FDA-approved as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in adult Parkinson’s disease patients;

ORILISSA (partnered with AbbVie), which has been FDA-approved for the management of moderate to severe endometriosis pain in women;

and ORIAHNN (partnered with AbbVie), which has been FDA-approved for the management of heavy menstrual bleeding associated with uterine fibroids in pre-menopausal women, our product candidates have not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products in the U.S.

In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our clinical data establish safety and efficacy.

We must satisfy the requirements of similar regulatory authorities in foreign countries in order to market products in those countries.

The results from preclinical testing and early clinical trials may not be predictive of results in later clinical trials.

The results from preclinical testing and early clinical trials may not be predictive of results in later

clinical trials.

It is possible for a candidate to show promising results in clinical trials, but subsequently fail to establish sufficient safety and efficacy data necessary to obtain regulatory approvals.

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In particular, our future capital requirements will depend on many factors, including:

the commercial success of INGREZZA and/or ORILISSA;

• the commercial success of INGREZZA, ONGENTYS, ORILISSA, and/or ORIAHNN;

• debt service obligations on the 2024 Notes;

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• the time and costs involved in obtaining regulatory approvals;

whether the FDA approves opicapone for the treatment of Parkinson’s disease and elagolix for the treatment of uterine fibroids, both of which have a PDUFA target action date in the second quarter of 2020;

• the costs involved in filing and pursuing patent applications, enforcing patent claims, or engaging in interference proceedings or other patent litigation;

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• developments related to any future litigation;

• the impact of the COVID-19 pandemic on our business;

• the cost of commercialization activities and arrangements, including manufacturing of our product candidates;

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However, we cannot guarantee that our existing capital resources and anticipated revenues will be sufficient to conduct and complete all of our research and development programs or commercialization activities as planned.

We may require additional funding to effectively commercialize INGREZZA, to continue our research and product development programs, to conduct preclinical studies and clinical trials, for operating expenses, to pursue regulatory approvals for our product candidates, for the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims, if any, the cost of product in-licensing and any possible acquisitions, and we may require additional funding to establish manufacturing and marketing capabilities in the future.

We may seek to access the public or private equity markets whenever conditions are favorable.

The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically.

While the potential economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, the pandemic is currently resulting in disruption of global financial markets.

This disruption, if sustained or recurrent, could make it more difficult for us to access capital, which could in the future negatively affect our liquidity.

In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.

We may require additional funding to continue our research and product development programs, to conduct preclinical studies and clinical trials, for operating expenses, to pursue regulatory approvals for our product candidates, for the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims, if any, the cost of product in-licensing and any possible acquisitions, and we may require additional funding to establish manufacturing and marketing capabilities in the future.

We may seek to access the public or private

equity markets whenever conditions are favorable.

For example, we have an effective shelf registration statement on file with the SEC which allows us to issue an unlimited number of shares of our securities from time to time.

In addition, we issued $517.5 million of convertible debt in May 2017 and we have previously financed capital purchases and may continue to pursue opportunities to obtain additional debt financing in the future.

At December 31, 2020, $381.3 million aggregate principal amount of the 2024 Notes remained outstanding.

We may also seek additional funding through strategic alliances or other financing mechanisms.

We cannot assure you that adequate funding will be available on terms acceptable to us, if at all.

In addition, COVID-19 pandemic is currently resulting in disruption of global financial markets.

This disruption, if sustained or recurrent, could make it more difficult for us to access capital, which could in the future negatively affect our liquidity.

Any additional equity financings will be dilutive to our stockholders and any additional debt may involve operating covenants that may restrict our business.

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Contractual Obligations

Our contractual obligations as of December 31, 2019, are as follows:

(in millions)

The following table presents our contractual obligations at December 31, 2020.

(in millions) Total 2021 2022 2023 2024 2025 and

2024 Notes and related interest (1)

$ 411.5 $ 8.7 $ 8.6 $ 8.6 $ 385.6 $ —

Operating leases (2)

159.6 12.3 14.9 15.5 16.0 100.9

Total contractual obligations $ 571.1 $ 21.0 $ 23.5 $ 24.1 $ 401.6 $ 100.9

(1) In May 2017, we completed a private placement of $517.5 million in aggregate principal amount of 2.25% convertible senior notes scheduled to mature on May 15, 2024, unless earlier converted, redeemed, or repurchased.

At December 31, 2019, the conditional conversion feature of the 2024 Notes had been triggered, allowing holders of 2024 Notes to convert their 2024 Notes at any time during the period beginning on January 2, 2020 and ending at the close of business on March 31, 2020.

We may not redeem the 2024 Notes prior to May 15, 2021.

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Amounts for the 2024 Notes and related interest in the table above assume that the 2024 Notes will be held until maturity.

At December 31, 2020, $381.3 million aggregate principal amount of the 2024 Notes remained outstanding.

(2) We lease our corporate headquarters, which consist of laboratory and office space located San Diego, California, under various operating lease agreements.

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The non-cancelable lease terms for these operating leases expire at various dates between 2025 and 2031 and do not include renewal options.

Amounts for operating leases presented in the

table above reflect future minimum rental commitments under non-cancelable operating leases as of December 31 for each of the periods presented.

Amounts for operating leases presented in the table above reflect future minimum rental commitments under non-cancelable operating leases as of December 31 for each of the periods presented.

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-K

Item 7. Management’s Discussion and Analysis