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 Report on Form 10-Q for the nine months ended September 30, 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 elagolix. Pipeline Updates: NBI-921352 (XEN901) : In September 2021, we received approval of a clinical trial application, or CTA, submitted in the European Union for NBI-921352 for the treatment of focal-onset seizures in adults. In connection with the approval of the CTA for NBI-921352, we paid Xenon a regulatory milestone of $10.0 million, of which we expensed $4.5 million as research and development in the third quarter of 2021, and purchased 0.3 million shares of Xenon’s common stock (at $19.9755 per share) for $5.5 million. The purchased shares were recorded at a fair value of $4.6 million after considering Xenon’s stock price on the measurement date and certain transfer restrictions applicable to the shares. Further, we recorded a charge of $0.9 million to research and development to reflect the premium paid on our purchase of the shares on the measurement date. COVID-19 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. 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 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 have not experienced and currently do not expect any supply disruption; and (3) advancing ongoing clinical studies. Most of our field-based employees have resumed in-person interactions, and certain of our office-based employees began to return to the office, in each case on a voluntary basis and in accordance with location-specific guidance. We are planning for a larger-scale return of our workforce to our offices before the end of 2021 and have developed flexible work arrangement guidelines to help balance business needs, employee health, well-being and safety and the evolving work environment. 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 16 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 Nine Months Ended September 30, 2021 and 2020 Revenues. Net Product Sales by Sales Product. Three Months Ended September 30, Nine Months Ended September 30, ( in millions) 2021 2020 2021 2020 INGREZZA net product sales $ 286.5 $ 254.0 $ 780.9 $ 752.7 ONGENTYS net product sales 2.3 0.1 5.7 0.1 Total net product sales $ 288.8 $ 254.1 $ 786.6 $ 752.8 • Compared with the comparable period last year, the increase in INGREZZA net product sales for the three months ended September 30, 2021 was primarily driven by record total prescriptions reflecting higher customer demand and increased commercial activities. Collaboration Revenues by Category. Three Months Ended September 30, Nine Months Ended September 30, ( in millions) 2021 2020 2021 2020 Elagolix royalty revenue $ 5.9 $ 3.9 $ 16.3 $ 13.4 Milestone revenue — — 15.0 30.0 Other collaboration revenues 1.3 0.5 3.6 1.8 Total collaboration revenues $ 7.2 $ 4.4 $ 34.9 $ 45.2 • Collaboration revenues for the nine months ended September 30, 2021 primarily reflect the achievement of a $15.0 million milestone associated with MTPC's MAA submission for valbenazine for the treatment of tardive dyskinesia in Japan. • Collaboration revenues for the nine months ended September 30, 2020 primarily reflect 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. Three Months Ended September 30, Nine Months Ended September 30, ( in millions) 2021 2020 2021 2020 Cost of sales $ 4.2 $ 2.7 $ 10.2 $ 7.2 Research and Development, or R&D. 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. R&D expense categories consist of the following: • Late Stage. Consist of costs incurred for product candidates in Phase II registrational studies and all subsequent activities. • Early Stage. Consist of costs incurred for product candidates after the approval of an investigational new drug application by the applicable regulatory agency through Phase II non-registrational studies. • Research and Discovery. Consist of costs incurred prior to the approval of an investigational new drug application by the applicable regulatory agency. • Milestones. Consist of costs incurred for development and/or regulatory milestones in connection with our collaborative arrangements. 17 • P ayroll and Benefits. Consist 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. Consist of indirect costs incurred for the benefit of multiple programs, including depreciation, information technology, and facility-based expenses, such as rent expense. The following table presents R&D expense by category. Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Late stage $ 15.8 $ 15.3 $ 41.9 $ 41.4 Early stage 13.9 9.8 27.8 20.0 Research and discovery 14.8 11.7 35.9 31.6 Milestones 5.4 — 5.4 20.0 Payroll and benefits 32.4 24.8 97.0 73.9 Facilities and other 10.4 7.5 32.7 21.4 Total R&D expense $ 92.7 $ 69.1 $ 240.7 $ 208.3 • Late Stage. Compared with the comparable periods last year, late-stage R&D expense for the three and nine months ended September 30, 2021 primarily reflects decreased investment associated with our termination of the NBIb-1817 program for Parkinson’s disease in February 2021, offset by continued investment in our Phase III programs in congenital adrenal hyperplasia for adults and pediatric patients and our Phase III Huntington Disease trial. • Early Stage. Compared with the comparable periods last year, early-stage R&D expense for the three and nine months ended September 30, 2021 primarily reflects continued enrollment of our Phase II programs in epileptic encephalopathy with continuous spike and wave during sleep, or CSWS, and essential tremor and our initiation of Phase II programs in focal-onset seizure in adults and SCN8A developmental epileptic encephalopathy, or SCN8A-DEE. • Milestones. R&D expense for the three and nine months ended September 30, 2021 reflects $5.4 million associated with our receipt of approval for the NBI-921352 CTA in September 2021. For the nine months ended September 30, 2020, R&D expense reflects $20.0 million associated with our receipt of FDA approval for ONGENTYS for Parkinson’s disease in April 2020. • Payroll and benefits. Compared with the comparable periods last year, payroll and benefits R&D expense for the three and nine months ended September 30, 2021 reflects higher personnel expenses primarily driven by increased headcount. Payroll and benefits R&D expense for the nine months ended September 30, 2021 also reflects 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, or IPR&D. Three Months Ended September 30, Nine Months Ended September 30, ( in millions) 2021 2020 2021 2020 IPR&D expense $ — $ 118.5 $ 5.0 $ 164.5 • IPR&D expense for the three and nine months ended September 30, 2020 reflects $118.5 million of upfront fees paid pursuant to our exclusive license agreement with Takeda Pharmaceutical Company Limited, or Takeda. IPR&D expense for the nine months ended September 30, 2020 also reflects $46.0 million of upfront fees paid pursuant to our collaboration and license agreement with Idorsia. Selling, General and Administrative, or SG&A. Three Months Ended September 30, Nine Months Ended September 30, ( in millions) 2021 2020 2021 2020 SG&A expense $ 154.6 $ 112.5 $ 426.8 $ 326.8 • Compared with the comparable periods last year, SG&A expense for the three and nine months ended September 30, 2021 primarily reflects increased investment to support our commercial initiatives, including the May 2021 launch of our INGREZZA direct-to-consumer advertising campaign, "TD Spotlight". 18 Other Expense, Net. Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Interest expense $ (6.6) $ (8.5) $ (19.2) $ (25.0) Unrealized loss on equity securities (8.2) (7.0) (7.5) (12.2) Investment income and other, net 0.8 2.7 3.1 11.0 Total other expense, net $ (14.0) $ (12.8) $ (23.6) $ (26.2) • Compared to the comparable periods last year, other expense, net, for the three and nine months ended September 30, 2021 reflects periodic fluctuations in unrealized losses recognized to adjust our equity investments in Voyager and Xenon to fair value and decreased interest expense resulting from the November 2020 repurchase of $136.2 million aggregate principal amount of the 2.25% convertible senior notes due May 15, 2024, or the 2024 Notes, for an aggregate repurchase price of $186.9 million in cash. Provision for Income Taxes. Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Provision for income taxes $ 8.0 $ 0.5 $ 18.3 $ 5.6 • The effective tax rate for the three and nine months ended September 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 the ability to offset any pre-tax income against previously benefited federal net operating losses, no federal cash tax is expected in 2021. Net Income (Loss) and Diluted Earnings (Loss) per Share. Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Net income (loss) $ 22.5 $ (57.6) $ 96.9 $ 59.4 Diluted earnings (loss) per share $ 0.23 $ (0.62) $ 0.99 $ 0.61 • Compared with the comparable periods last year, net income and diluted earnings per share for the three and nine months ended September 30, 2021 primarily reflect increased investment to support our commercial initiatives, including the May 2021 launch of our INGREZZA direct-to-consumer advertising campaign, "TD Spotlight", increased investment in our expanded clinical portfolio offset by prior year IPR&D costs. Liquidity and Capital Resources Information Regarding Our Cash Flows. Nine Months Ended September 30, (in millions) 2021 2020 Net cash provided by operating activities $ 252.3 $ 134.0 Net cash (used in) provided by investing activities (153.9) 151.8 Net cash provided by financing activities 25.6 27.2 Change in cash, cash equivalents and restricted cash $ 124.0 $ 313.0 • Compared with the comparable period last year, net cash provided by operating activities for the nine months ended September 30, 2021 primarily reflects increased INGREZZA net product sales and lower upfront payments associated with our collaborations with Idorsia and Takeda, partially offset by increased investment to support our commercial initiatives and advancing our expanded clinical portfolio. • Periodic fluctuations in net cash (used in) provided by investing activities primarily reflect timing differences related to purchases, sales, and maturities of debt security investments and changes in our portfolio-mix. Net cash used in investment 19 activities for the nine months ended September 30, 2021 also reflects a $5.5 million equity investment in Xenon associated with our receipt of approval for the NBI-921352 CTA in September 2021. • Net cash provided by financing activities primarily reflects proceeds from issuances of our common stock for all periods presented. Convertible Senior Notes. In May 2017, we completed a private placement of $517.5 million in aggregate principal amount of 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. As of September 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 September 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 September 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 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 20 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.”