NEUROCRINE BIOSCIENCES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations section contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part II, Item 1A under the caption “Risk Factors.” The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are contained in our Annual Report on Form 10-K for the year ended December 31, 2020 and our Quarterly Reporting on Form 10-Q for the three months ended March 31, 2021. Overview 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 United States, or US, in May 2017 as the first FDA-approved drug for the treatment of tardive dyskinesia. In September 2020, we launched ONGENTYS ® (opicapone) for Parkinson's disease in the US, leveraging our existing INGREZZA commercial infrastructure. INGREZZA net product sales represent the significant majority of our total net product sales. Our partner AbbVie Inc., or AbbVie, launched ORILISSA ® (elagolix tablets) in the US and Canada in August and November 2018, respectively. In June 2020, AbbVie launched ORIAHNN ® (elagolix, estradiol and norethindrone acetate capsules and elagolix capsules) in the US. We receive royalties at tiered percentage rates on AbbVie 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, congenital adrenal hyperplasia, or CAH, epilepsy, schizophrenia and depression. Pipeline Updates: INGREZZA : • In April 2021, Mitsubishi Tanabe Pharma Corporation, or MTPC, submitted a Marketing Authorization Application, or MAA, with the Ministry of Health and Welfare in Japan for valbenazine for the treatment of tardive dyskinesia. The MTPC submission of valbenazine triggered a milestone payment of $15.0 million, which we recognized as collaboration revenue in the second quarter of 2021. Luvadaxistat (NBI-1065844/TAK-831) : • On March 2, 2021, we announced that investigational drug luvadaxistat did not meet its primary endpoint in the Phase II INTERACT study in adults with negative symptoms of schizophrenia. Luvadaxistat met both secondary endpoints of cognitive assessment. We plan to initiate a Phase II study for the treatment of cognitive impairment associated with schizophrenia, or CIAS, by the end of 2021. NBIb-1817 (VY-AADC) : • In February 2021, we notified Voyager Therapeutics, Inc., or Voyager, of the termination of our rights to the NBIb-1817 for Parkinson’s disease program, which became effective 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. COVID-19 The global COVID-19 pandemic 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. Although the initial impact of the COVID-19 pandemic has subsided, we are uncertain how more transmissible variants may impact our business. We remain committed to (1) prioritizing the safety, health and well-being of patients and their 17 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. We have developed and implemented plans regarding the partial opening of our sites to enable our employees to return to work in our corporate offices and the field, which plans take into account applicable public health authority and local government guidelines and which are designed to ensure community and employee safety. We continue to evaluate our hybrid work model and the impact of spikes or surges in COVID-19 infection and hospitalization rates. Most hospitals, community mental health facilities, physicians’ offices, pharmacies, and other healthcare facilities have relaxed their policies that limited access of patients and our employees to such facilities and limited the ability of patients, pharmacies, and prescribers to interact with each other. However, we anticipate these policies may change from time to time as communities grapple with local or regional outbreaks. The ultimate impact of the COVID-19 pandemic, including any lasting effects on our revenue and the way we conduct our business, is highly uncertain and subject to continued change. We recognize that this pandemic will continue to present unique challenges for us throughout 2021, and potentially into 2022. Results of Operations for the Three and Six Months Ended June 30, 2021 and 2020 Revenues The following table presents revenues by category. Three Months Ended June 30, Six Months Ended June 30, ( in millions) 2021 2020 2021 2020 INGREZZA product sales, net $ 264.8 $ 267.6 $ 494.4 $ 498.7 ONGENTYS product sales, net 2.0 — 3.4 — Collaboration revenue 22.1 34.8 27.7 40.8 Total revenues $ 288.9 $ 302.4 $ 525.5 $ 539.5 Product Sales, Net. Net product sales were $266.8 million and $497.8 million for the three and six months ended June 30, 2021, respectively, compared with $267.6 million and $498.7 million in the comparable periods last year, reflecting a slowdown in INGREZZA sales volume growth, largely attributable to the impact of COVID-19 on our customers. Collaboration Revenue. Collaboration revenue reflects royalties earned on AbbVie net sales of ORILISSA and ORIAHNN and license fees earned under our collaboration agreements with AbbVie and MTPC. Collaboration revenue was $22.1 million and $27.7 million for the three and six months ended June 30, 2021, respectively, primarily reflecting the achievement of a $15.0 million milestone associated with MTPC's MAA submission for valbenazine for the treatment of tardive dyskinesia in Japan. For the three and six months ended June 30, 2020, collaboration revenue was $34.8 million and $40.8 million, respectively, primarily reflecting the achievement of a $30.0 million milestone associated with AbbVie’s receipt of FDA approval for ORIAHNN for uterine fibroids in May 2020. Operating Expenses Cost of Sales. Cost of sales was $3.1 million and $6.0 million for the three and six months ended June 30, 2021, respectively, compared with $2.4 million and $4.5 million in the comparable periods last year. Research and Development. We support our drug discovery and development efforts through the commitment of significant resources to discovery, R&D programs and business development opportunities. Costs are reflected in the applicable development stage based upon the program status when incurred. Therefore, the same program could be reflected in different development stages in the same reporting period. For several of our programs, the R&D activities are part of our collaborative and other relationships. Late stage consists of costs incurred related to product candidates in Phase II registrational studies and onwards. Early stage consists of costs incurred related to product candidates in post-investigational new drug application, or IND, through Phase II non-registrational studies. Research and discovery consists of pre-IND costs. Milestone expenses reflect payments made in connection with our collaborative and other relationships. Payroll and benefits consists of costs incurred for salaries and wages, payroll taxes, benefits and share-based compensation associated with employees involved in R&D activities. Share-based compensation may fluctuate from period to period based on factors that are not within our control, such as our stock price on the dates share-based grants are issued. Facilities and other consists of indirect costs incurred in support of overall 18 R&D activities and non-specific programs, including activities that benefit multiple programs, such as management costs, as well as depreciation, information technology and facility-based expenses. Such costs are not allocated to a specific program or stage. The following table presents R&D expense by category: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2021 2020 2021 2020 Late stage $ 13.1 $ 13.1 $ 26.1 $ 26.1 Early stage 8.4 5.7 13.9 10.3 Research and discovery 11.7 10.6 21.1 19.8 Milestone expenses — 20.0 — 20.0 Payroll and benefits 29.1 25.2 64.5 49.1 Facilities and other 12.5 6.3 22.4 13.9 Total R&D expense $ 74.8 $ 80.9 $ 148.0 $ 139.2 R&D expense was $74.8 million and $148.0 million for the three and six months ended June 30, 2021, respectively, compared with $80.9 million and $139.2 million in the comparable periods last year, primarily reflecting increased investment and headcount to support advancing our expanded clinical portfolio. R&D expense for the six months ended June 30, 2021, also reflects higher personnel expenses driven by a non-cash share-based compensation charge of $6.4 million related to the modification of certain share-based awards. Acquired In-Process Research and Development. Acquired in-process research and development, or IPR&D, expense was $5.0 million for the three months ended June 30, 2021. In the comparable period last year, IPR&D expense was $46.0 million in connection with the payment of the upfront fee pursuant to our collaboration and license agreement with Idorsia. Selling, General and Administrative. Selling, general and administrative, or SG&A, expense was $143.2 million and $272.2 million for the three and six months ended June 30, 2021, respectively, compared with $96.5 million and $214.3 million in the comparable periods last year, primarily reflecting increased investment to support our commercial initiatives, including the May 2021 launch of our INGREZZA direct-to-consumer advertising campaign, "TD Spotlight". Other (Expense) Income, Net Other expense, net, was $5.3 million and $9.6 million for the three and six months ended June 30, 2021, respectively, compared with other income, net, of $6.6 million for the three months ended June 30, 2020, and other expense, net, of $13.4 million for the six months ended June 30, 2020. Periodic fluctuations in other expense, net, primarily reflect unrealized gains or losses recognized to adjust our equity investments in Voyager and Xenon Pharmaceuticals Inc. to fair value. Provision for Income Taxes Our provision for income taxes was $15.2 million and $10.3 million for the three and six months ended June 30, 2021, respectively, compared with $3.6 million and $5.1 million in the comparable periods last year. Our effective tax rate for the three and six months ended June 30, 2021 was lower than federal and state statutory rates primarily due to excess tax benefits related to share-based compensation. On December 31, 2020, we released substantially all of our valuation allowance against our net operating losses and other deferred tax assets. Beginning in the first quarter of 2021, we began recording a provision for income taxes using an effective tax rate approximating federal and state statutory rates. Due to our ability to offset our pre-tax income against previously benefited federal net operating losses, no federal cash tax is expected in 2021. Net Income Net income was $42.3 million, or $0.43 diluted earnings per share, and $74.4 million, or $0.76 diluted earnings per share, for the three and six months ended June 30, 2021, compared with $79.6 million, or $0.81 diluted earnings per share, and $117.0 million, or $1.20 diluted earnings per share, in the comparable periods last year, primarily reflecting increased investment to support our commercial initiatives, including the May 2021 launch of our INGREZZA direct-to-consumer advertising campaign, "TD Spotlight", investment in our expanded clinical portfolio and an increase in our provision for income taxes. Liquidity and Capital Resources At June 30, 2021, our cash, cash equivalents and debt security investments totaled $1.2 billion compared with $1.0 billion at December 31, 2020. 19 Net cash provided by operating activities was $190.5 million for the six months ended June 30, 2021, compared with $154.4 million in the comparable period last year, primarily reflecting timing of working capital receipts and payments partially offset by lower net income on increased investment to support our expanded clinical portfolio and commercial initiatives. The six months ended June 30, 2020 includes $46.0 million of upfront fees paid to Idorsia in connection with the execution of our collaboration and license agreement in May 2020. Net cash used in investing activities was $27.7 million for the six months ended June 30, 2021, compared with net cash provided by investing activities of $126.6 million in the comparable period last year, reflecting timing differences related to purchases, sales, and maturities of debt securities available-for-sale and changes in our portfolio-mix. Net cash provided by financing activities was $18.1 million for the six months ended June 30, 2021, compared with $21.8 million in the comparable period last year, primarily reflecting proceeds from issuances of our common stock. Convertible Senior Notes. In May 2017, we completed a private placement of $517.5 million in aggregate principal amount of 2.25% convertible senior notes due May 15, 2024, or the 2024 Notes. 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 June 30, 2021, $381.2 million aggregate principal amount of the 2024 Notes remained outstanding. On or after May 15, 2021, we may redeem for cash all or part of the 2024 Notes if the last reported sale price (as defined in the 2024 Indenture) of our common stock has been at least 130% of the conversion price then in effect (equal to $98.70 as of June 30, 2021) for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending on, and including, the trading day immediately before the date which we provide notice of redemption. 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. Critical Accounting Policies and Estimates There were no changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. Interest Rate Risk We are exposed to interest rate risk on our short-term investments. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid and high-quality government and other debt securities. To minimize our exposure due to adverse shifts in interest rates, we invest in short-term securities and ensure that the maximum average maturity of our investments does not exceed twelve months. If a 1% change in interest rates were to have occurred on June 30, 2021, it would not have had a material effect on the fair value of our investment portfolio as of that date. Due to the short holding period of our investments, we have concluded that we do not have a material financial market risk exposure. Recently Issued Accounting Pronouncements For a summary of new accounting pronouncements which may be applicable to us, see Note 1 to the condensed consolidated financial statements included in this report. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, these forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements. Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “hopes,” “may,” “will,” “plan,” “intends,” “estimates,” “could,” “should,” “would,” “continue,” “seeks,” “proforma,” or “anticipates,” or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, technology enhancements, possible changes in legislation and other statements that are not historical. These statements include but are not limited to statements under the captions “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as other sections in this report. You should be aware that the occurrence of any of the events discussed under the heading in Part II titled “Item 1A. Risk Factors” and elsewhere in this 20 report could substantially harm our business, results of operations and financial condition and that if any of these events occurs, the trading price of our common stock could decline and you could lose all or a part of the value of your shares of our common stock. The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we assume no obligation to update our forward-looking statements, even if new information becomes available in the future. Item 3. Quantitative and Qualitative Disclosures About Market Risk A discussion of our exposure to, and management of, market risk appears in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading “Interest Rate Risk.”