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Item 7. Management’s Discussion and Analysis

2022-02-11 compared with 2021-02-05 · 187 added, 223 removed, 66 unchanged (86% 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 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.

At Neurocrine Biosciences, our purpose is simple:

to relieve suffering for people with great needs, but few options.

For three decades, we have applied our unique insight into neuroscience to advance medicines for neurological, endocrine and psychiatric disorders.

Our efforts have resulted in United States Food and Drug Administration, or FDA, approved treatments for tardive dyskinesia, Parkinson’s disease, endometriosis* and uterine fibroids* and a diversified portfolio of investigational therapies with the potential to address unmet clinical needs of patients worldwide living with neurological, endocrine and psychiatric disorders.

(*in collaboration with AbbVie Inc., or AbbVie)

We launched INGREZZA ® (valbenazine) in the United States in May 2017 as the first FDA-approved drug for the treatment of tardive dyskinesia and launched ONGENTYS ® (opicapone) in the United States in September 2020 as an FDA-approved add-on treatment to levodopa/carbidopa in patients with Parkinson's disease experiencing motor fluctuations.

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.

Our partner AbbVie launched ORILISSA ® (elagolix tablets) in the United States in August 2018 and launched ORIAHNN ® (elagolix, estradiol and norethindrone acetate capsules and elagolix capsules) in the United States in June 2020.

We receive royalties at tiered percentage rates on AbbVie net sales of elagolix.

Business Highlights

• INGREZZA net product sales for 2021 increased $88.8 million, or 8.9%, to $1.1 billion, primarily driven by increased total prescriptions reflecting higher customer demand and increased commercial activities.

• On February 8, 2022, we entered into a lease agreement for a four-building campus facility to be constructed in San Diego, California, pursuant to which we also secured a 6-year option for the construction of a fifth building and an option to purchase the entire campus facility, which will consist of office space and research and development laboratories, in the future.

Upon completion of construction, we expect to utilize the campus facility as our new corporate headquarters and expect to begin subleasing our existing leased facilities.

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.

• In the fourth quarter of 2021, we announced positive top-line data from the Phase III KINECT-HD study evaluating the efficacy, safety and tolerability of valbenazine in 120 adult patients with chorea in Huntington disease, also known as Huntington chorea.

The study met the primary endpoint of reduction in severity of chorea.

We plan to submit a supplemental new drug application for valbenazine for the treatment of Huntington chorea with the FDA in second half of 2022.

• Completed strategic partnership with Heptares Therapeutics Limited, or Heptares, to expand clinical pipeline for psychiatry disorders.

Upfront fee associated with the agreement totaled $100.0 million, which, including certain transaction-related costs, was expensed as in-process research and development in 2021.

• In 2021, Mitsubishi Tanabe Pharma Corporation, or MTPC, received approvals for marketing authorization for valbenazine for the treatment of tardive dyskinesia in Indonesia, Singapore, South Korea and Thailand.

In addition, MTPC has submitted filings for marketing authorization, which are currently under review, in Japan and Malaysia.

Impact of COVID-19

The 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 purpose remains unchanged:

to relieve suffering for people with great needs, but few options.

Although the initial impact of the pandemic has subsided, we are uncertain as to 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 clinical studies.

Most of our field-based employees have resumed in-person interactions in accordance with location-specific guidance.

Our office-based employees have returned to the office under flexible work arrangement guidelines to help balance business needs, employee health, well-being and safety and the evolving work environment.

However, as the effects of the pandemic continue to rapidly evolve with the emergence of new COVID-19 variants, a remote work model may nevertheless need to be reinstated at some point in the future.

We continue to evaluate the impact of global spikes or surges in COVID-19 infection and hospitalization rates, as well as the impact of emerging COVID-19 variants on the efficacy of vaccines.

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 or regions grapple with 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 2022.

Results of Operations

The following table presents revenues by category.

Net Product Sales by Sales Product.

Year Ended December 31,

(in millions) 2021 2020 2019

INGREZZA product sales, net $ 993.1 $ 752.9 $ 409.6

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.

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

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.

INGREZZA net product sales $ 1,081.9 $ 993.1 $ 752.9

ONGENTYS net product sales 8.2 1.0 —

Total net product sales $ 1,090.1 $ 994.1 $ 752.9

For 2021 compared to 2020, the increase in total net product sales primarily reflected increased INGREZZA net product sales mainly driven by increased total prescriptions reflecting higher customer demand and increased commercial activities.

For 2020 compared to 2019, the increase in total net product sales primarily reflected increased INGREZZA net product sales driven by increased total prescriptions.

Collaboration Revenues by Category.

Year Ended December 31,

(in millions) 2021 2020 2019

Elagolix royalties $ 22.3 $ 19.2 $ 14.3

Milestone 15.0 30.0 20.0

Non-cash collaboration revenue and other

Total collaboration revenue $ 43.4 $ 51.8 $ 35.2

For 2021, total collaboration revenue primarily reflected the achievement of a $15.0 million milestone associated with MTPC's marketing authorization application submission for valbenazine for the treatment of tardive dyskinesia in Japan and royalties earned on AbbVie net sales of elagolix.

For 2020, total collaboration revenue primarily reflected the achievement of a $30.0 million milestone associated with the FDA’s approval of AbbVie’s ORIAHNN for uterine fibroids in 2020 and royalties earned on AbbVie net sales of elagolix.

For 2019, total collaboration revenue primarily reflected the achievement of a $20.0 million milestone associated with the FDA’s acceptance of AbbVie’s new drug application submission for elagolix for uterine fibroids and royalties earned on AbbVie net sales of elagolix.

Operating Expenses

Cost of Sales.

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.

Year Ended December 31,

(in millions) 2021 2020 2019

Cost of sales $ 14.3 $ 10.1 $ 7.4

The increase in cost of sales from 2020 to 2021 and 2019 to 2020 reflected increased INGREZZA net product sales driven by increased total prescriptions.

Research and Development, or R&D, Expenses by Category.

We support our drug discovery and development efforts through the commitment of significant resources to discovery, R&D programs, and business development opportunities.

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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 ongoing 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 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.

These costs are not allocated to a specific program or stage.

The following table presents R&D expense by category:

For several of our programs, the R&D activities are part of our collaborative arrangements.

Year Ended December 31,

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Research and discovery 50.5 43.3 24.6

Milestone payments 20.0 10.0 10.0

Milestone 5.4 20.0 10.0

Payroll and benefits 129.1 95.4 71.3

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Total R&D expense $ 328.1 $ 275.0 $ 200.0

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.

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.

Other Expense

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.

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.

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 tardive dyskinesia and progression of our clinical pipeline.

Consists of costs incurred for product candidates in Phase II registrational studies and all subsequent activities.

For 2021 compared to 2020, the increase in late stage R&D expense primarily reflected continued investment in Phase III programs for crinecerfont in congenital adrenal hyperplasia and valbenazine in Huntington disease and initiation of a Phase III program for valbenazine as adjunctive treatment of schizophrenia, offset by decreased investment associated with the termination of the NBIb-1817 program for Parkinson’s disease, which became effective in August 2021.

For 2020 compared to 2019, the increase in late stage R&D expense primarily reflected increased investment in Phase III programs for crinecerfont in congenital adrenal hyperplasia and continued enrollment in the Phase III program for valbenazine Huntington disease.

Early Stage .

Consists 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.

For 2021 compared to 2020, the increase in early stage R&D expense primarily reflected continued enrollment in Phase II programs for NBI-827104 in epileptic encephalopathy with continuous spike and wave during sleep and essential tremor and initiation of Phase II programs for NBI-921352 in focal onset seizure and SCN8A developmental epileptic encephalopathy.

For 2020 compared to 2019, the increase in early stage R&D expense primarily reflected increased investment in three in-licensed psychiatry clinical development programs beginning in mid-2020 and two in-licensed epilepsy clinical development programs beginning at the end of 2019.

Research and Discovery.

Consists of costs incurred prior to the approval of an investigational new drug application by the applicable regulatory agency.

For 2021 compared to 2020, the increase in research and discovery R&D expense primarily reflected a full year of investment in psychiatry and epilepsy preclinical development programs in-licensed in 2020, offset by decreased investment in preclinical gene therapy programs.

For 2020 compared to 2019, the increase in research and discovery R&D expense primarily reflected increased investment in preclinical gene therapy programs and an epilepsy preclinical development program in-licensed in 2020.

Consists of costs incurred for development and/or regulatory milestones in connection with our collaborative arrangements.

In 2021, we expensed a milestone of $5.4 million associated with the European Union’s approval for the NBI-921352 clinical trial application in September 2021.

In 2020, we expensed a milestone of $20.0 million associated the FDA’s approval for ONGENTYS for Parkinson’s disease.

In 2019, we expensed a milestone of $10.0 million associated with the FDA’s acceptance of the new drug application for opicapone as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in adult Parkinson's disease patients.

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.

For 2021 compared to 2020, the increase in payroll and benefits R&D expense primarily reflected increased personnel expenses on higher headcount and a $14.7 million increase in non-cash share-based compensation expense, including a $6.4 million charge related to the modification of certain share-based awards.

For 2020 compared to 2019, the increase in payroll and benefits R&D expense primarily reflected increased personnel expenses on higher headcount.

Facilities and Other.

Consists of indirect costs incurred for the benefit of multiple programs, including depreciation, information technology and facility-based expenses, such as rent expense.

Acquired In-Process Research and Development, or IPR&D.

Year Ended December 31,

(in millions) 2021 2020 2019

IPR&D expense $ 105.3 $ 164.5 $ 154.3

In 2021, we expensed as IPR&D $100.3 million in connection with the payment of the upfront fee pursuant to our collaboration with Heptares.

In 2020, we expensed as IPR&D $46.0 million and $118.5 million, respectively, in connection with the payments of the upfront fees pursuant to our collaborations with Idorsia Pharmaceuticals Ltd, or Idorsia, and Takeda Pharmaceutical Company Limited, or Takeda.

In 2019, we expensed as IPR&D $118.1 million and $36.2 million, respectively, in connection with the payments of the upfront fees pursuant to our collaborations with Voyager Therapeutics, Inc., or Voyager, and Xenon Pharmaceuticals, Inc., or Xenon.

Selling, General and Administrative, or SG&A.

Year Ended December 31,

(in millions) 2021 2020 2019

SG&A expense $ 583.3 $ 433.3 $ 354.1

For 2021 compared to 2020, the increase in SG&A expense primarily reflected increased investment to support our commercial initiatives, including the May 2021 launch of our INGREZZA direct-to-consumer advertising campaign, "TD Spotlight", increased personnel expenses on higher headcount and a $19.5 million increase in non-cash share-based compensation expense.

For 2020 compared to 2019, the increase in SG&A expense primarily reflected increased personnel expenses on higher headcount and continued investment in INGREZZA marketing.

Other Expense, Net.

Year Ended December 31,

(in millions) 2021 2020 2019

Interest expense $ (25.8) $ (32.8) $ (32.0)

Unrealized gain (loss) on equity securities 20.9 (17.7) (13.0)

Loss on extinguishment of convertible senior notes — (18.4) —

Investment income and other, net 3.8 12.6 19.2

Total other expense, net $ (1.1) $ (56.3) $ (25.8)

For 2021 compared to 2020, the decrease in other expense, net, reflected a net unrealized gain of $20.9 million recognized to adjust our equity investments in Voyager and Xenon to fair value, a non-recurring debt extinguishment charge of $18.4 million in November 2020 associated with the partial repurchase of our convertible senior notes and decreased interest expense resulting from a lower convertible debt balance throughout 2021, partially offset by decreased interest income stemming from lower yields on our debt security investments.

For 2020 compared to 2019, the increase in other expense, net, primarily reflected a debt extinguishment charge of $18.4 million in November 2020 associated with the partial repurchase of our convertible senior notes.

Provision for (Benefit from) Income Taxes.

Year Ended December 31,

(in millions) 2021 2020 2019

Provision for (benefit from) income taxes $ 11.8 $ (300.6) $ 9.5

For 2021, the effective tax rate was lower than federal and state tax rates primarily due to excess tax benefits associated with share-based compensation and research tax credits.

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 tax rates.

Due to the ability to offset any pre-tax income against previously benefited federal net operating losses, no federal cash tax was incurred in 2021.

For 2020, the benefit from income taxes reflected a $296.3 million benefit associated with the release of substantially all of our valuation allowance against our deferred tax assets on December 31, 2020.

The effective tax rate for 2020 varied from the statutory tax rate primarily due to changes in our valuation allowance, net of other permanent book/tax differences, tax credits generated and impacts of changes in tax laws.

For 2019, the provision for income taxes reflected estimated and current state income taxes.

The effective tax rate for 2019 varied from the statutory tax rate primarily due to changes in our valuation allowance, net of other permanent book/tax differences, tax credits generated and impacts of changes in tax laws.

As of December 31, 2019, we had a full valuation allowance against our net deferred tax assets as realization was uncertain.

Net Income and Diluted Earnings per Share.

Year Ended December 31,

(in millions, except per share data) 2021 2020 2019

Net income $ 89.6 $ 407.3 $ 37.0

Diluted earnings per share $ 0.92 $ 4.16 $ 0.39

For 2021 compared to 2020, the decrease in net income and diluted earnings per share primarily reflected a $296.3 million benefit associated with the release of substantially all of our valuation allowance against our deferred tax assets on December 31, 2020, increased investment to support our commercial initiatives, including the May 2021 launch of our INGREZZA direct-to-consumer advertising campaign, "TD Spotlight", and increased investment in our expanded clinical portfolio, partially offset by increased INGREZZA net product sales and decreased IPR&D expense reflecting lower upfront payments for asset acquisitions.

For 2020 compared to 2019, the increase in net income and diluted earnings per share primarily reflected a $296.3 million benefit associated with the release of substantially all of our valuation allowance against our deferred tax assets on December 31, 2020 and increased INGREZZA net product sales, partially offset by ongoing support for the commercial launch of INGREZZA for tardive dyskinesia and progression of our clinical pipeline.

Liquidity and Capital Resources

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.

In February 2017, we filed an automatic shelf registration statement which immediately became effective by rule of the Securities and Exchange Commission, or SEC.

We sold no securities under this shelf registration statement in 2020, 2019 or 2018 .

Sources of Liquidity

We believe that our existing capital resources, funds generated by anticipated INGREZZA net product sales and investment income will be sufficient to satisfy our current and projected funding requirements for at least the next twelve months.

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 seek to access the public or private equity markets whenever conditions are favorable or pursue opportunities to obtain additional debt financing in the future.

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

However, we cannot provide assurance that adequate funding will be available on terms acceptable to us, if at all.

In addition, the disruption of global financial markets caused by the COVID-19 pandemic, if sustained or recurrent, could make it more difficult for us to access capital, which could in the future negatively affect our liquidity.

Information Regarding Our Financial Condition.

(in millions) 2021 2020

Total cash, cash equivalents and marketable securities

$ 1,272.0 $ 1,028.1

Working Capital:

Total current assets $ 972.8 $ 1,016.2

Less total current liabilities 245.8 186.5

Total working capital $ 727.0 $ 829.7

Information Regarding Our Cash Flows.

Year Ended December 31,

(in millions) 2021 2020 2019

Net cash provided by operating activities $ 256.5 $ 228.5 $ 147.0

Net cash (used in) provided by investing activities (130.2) 4.1 (211.1)

Net cash provided by (used in) financing activities 27.4 (157.8) 32.4

Change in cash, cash equivalents and restricted cash $ 153.7 $ 74.8 $ (31.7)

Net Cash Provided by Operating Activities.

For 2021 compared to 2020, the increase in net cash provided by operating activities primarily reflected increased INGREZZA net product sales and lower upfront payments for asset acquisitions, partially offset by increased investment to support our commercial initiatives and advancing our expanded clinical portfolio.

For 2020 compared to 2019, the increase in net cash provided by operating activities primarily reflected increased INGREZZA net product sales, partially offset by incremental INGREZZA investment and progression of our clinical pipeline.

Net Cash (Used in) Provided by Investing Activities.

Periodic fluctuations in net cash (used in) provided by investing activities are generally driven by timing differences related to the purchases, sales and maturities of debt security investments and changes in our portfolio-mix.

For 2021, net cash used in investing activities reflected a $4.6 million equity investment in Xenon associated with the European Union’s approval of our clinical trial application in September 2021 for NBI-921352 for the treatment of focal onset seizures in adults.

For 2019, net cash used in investing activities reflected equity investments of $54.7 million in Voyager and $14.2 million in Xenon associated with newly entered into collaboration and license agreements.

Net Cash Provided by (Used in) Financing Activities.

For 2021 and 2019, net cash provided by investing activities reflected proceeds from issuances of our common stock under benefit plans.

For 2020, net cash used in financing activities primarily reflected the partial repurchase of $136.2 million aggregate principal amount of our convertible senior notes for an aggregate repurchase price of $186.9 million in cash, partially offset by proceeds from issuances of our common stock under benefit plans.

Material Cash Requirements

In the pharmaceutical industry, it can take a significant amount of time and capital resources to successfully complete all stages of research and development and commercialize a product candidate, which ultimate length of time and spend required cannot be accurately estimated as it varies substantially according to the type, complexity, novelty and intended use of a product candidate.

The funding necessary to execute our business strategies is subject to numerous uncertainties and we may be required to make substantial expenditures if unforeseen difficulties arise in certain areas of our business.

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

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

• continued scientific progress in our R&D and clinical development programs;

• the magnitude and complexity of our research and development programs;

• progress with preclinical testing and clinical trials;

• the time and costs involved in obtaining regulatory approvals;

• the cost of commercialization activities and arrangements, including our advertising campaigns;

• the cost of manufacturing of our product candidates;

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

• competing technological and market developments;

• developments related to any future litigation;

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

In addition to the foregoing factors, we have significant future capital requirements, including:

External Business Developments.

In addition to our independent efforts to develop and market products, we may enter into collaboration and license agreements or acquire businesses from time-to-time to enhance our drug development and commercial capabilities.

With respect to our existing collaboration and license agreements, we may be required to make potential future payments of up to $10.9 billion upon the achievement of certain event-based milestones.

Refer to Note 2 to the consolidated financial statements for more information on our significant collaboration and license agreements.

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 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.

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.

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.

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 notes would become due and payable.

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.

As of December 31, 2021, $381.2 million aggregate principal amount of the 2024 Notes remained outstanding.

With respect to the 2024 Notes, unless earlier converted, redeemed or repurchased, we would be required to pay interest of $8.6 million in 2022, $8.6 million in 2023 and $4.3 million in 2024 and pay the aggregate principal amount outstanding of $381.2 million upon maturity of the notes in 2024.

Refer to Note 5 to the consolidated financial statements for more information on the 2024 Notes.

Our operating leases, which have terms that expire beginning 2024 through 2031, consist of office space and research and development laboratories, including our corporate headquarters.

On February 8, 2022, we entered into a lease agreement for a four-building campus facility to be constructed in San Diego, California, pursuant to which we also secured a 6-year option for the construction of a fifth building and an option to purchase the entire campus facility, which will consist of office space and research and development laboratories, in the future.

Upon completion of construction, we expect to utilize the campus facility as our new corporate headquarters and expect to begin subleasing our existing leased facilities.

Refer to Note 10 to the consolidated financial statements for more information on our leases, including a presentation of our approximate future minimum lease payments under non-cancelable operating leases.

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.

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

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The items in our financial statements requiring significant estimates and judgments are as follows:

Product Sales, Net.

Net Product Sales.

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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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.

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Refer to Note 1 to the consolidated financial statements for information on accounting pronouncements that have impacted or are expected to materially impact our consolidated financial condition, results of operations, or cash flows.

Factors That May Affect Future Financial Condition and Liquidity

The funding necessary to execute our business strategies is subject to numerous uncertainties, which may adversely affect our liquidity and capital resources.

Marketing of approved pharmaceuticals and completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate.

It is also important to note that if a clinical candidate is identified, the further development of that candidate can be halted or abandoned at any time due to a number of factors.

These factors include, but are not limited to, funding constraints, safety or a change in market demand.

The nature and efforts required to develop our product candidates into commercially viable products include research to identify a clinical candidate, preclinical development, clinical testing, FDA approval and commercialization.

In the pharmaceutical industry, total R&D spend for a drug candidate that successfully completes all stages of R&D and is commercialized may exceed $2 billion.

Further, it can take in excess of ten years to complete all stages of R&D for a drug candidate.

We test our potential product candidates in numerous preclinical studies to identify disease indications for which our product candidates may show efficacy.

We may conduct multiple clinical trials to cover a variety of indications for each product candidate.

As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus our resources on more promising product candidates or indications.

The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:

• we or the FDA or similar foreign regulatory authorities may suspend the trials;

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

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

• patients may drop out of the trials.

For each of our programs, we periodically assess the scientific progress and merits of the programs to determine if continued R&D is economically viable.

Certain of our programs have been terminated due to the lack of scientific progress and lack of prospects for ultimate commercialization.

Because of the uncertainties associated with R&D of these programs, we may not be successful in achieving commercialization.

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 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 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.

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.

As a result of the uncertainties discussed above, among others, the duration and completion costs of our R&D projects, clinical trials, and post-marketing studies are difficult to estimate and are subject to considerable variation.

Our inability to complete our R&D projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity.

These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy.

Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

We currently have limited experience in marketing and selling pharmaceutical products.

If we fail to maintain successful marketing, sales, and reimbursement capabilities, or fail to enter into successful arrangements with third parties, our product revenues may suffer.

We also may be required to make further substantial expenditures if unforeseen difficulties arise in other areas of our business.

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

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

• debt service obligations on the 2024 Notes;

• continued scientific progress in our R&D and clinical development programs;

• the magnitude and complexity of our research and development programs;

• progress with preclinical testing and clinical trials;

• the time and costs involved in obtaining regulatory approvals;

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

• competing technological and market developments;

• the establishment of additional strategic alliances;

• 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;

• the cost of product in-licensing and any possible acquisitions.

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.

If adequate funds are not available through these means, we may be required to curtail significantly one or more of our research or development programs or obtain funds through arrangements with collaborators or others.

This may require us to relinquish rights to certain of our technologies, products or product candidates.

To the extent that we are unable to obtain third-party funding for such expenses, we expect that increased expenses will result in increased cash flow losses from operations.

We cannot assure you that we will successfully develop our products under development or that our approved products will generate revenues sufficient to enable us to earn a profit.

Contractual Obligations

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.

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.

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.

In addition to minimum rental commitments, these operating leases may require us to pay additional amounts for taxes, insurance, maintenance and other operating expenses.

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.

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