Item 2. Management’s Discussion and Analysis
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, 2021 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, 2021 and our Quarterly Report on Form 10-Q for the six months ended June 30, 2022.
Overview
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 neurology, neuroendocrinology and neuropsychiatry-related disorders and diseases. 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 for 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 Mitsubishi Tanabe Pharma Corporation, or MTPC, launched DYSVAL ® (valbenazine) in Japan in June 2022 for the treatment of tardive dyskinesia. We receive royalties at tiered percentage rates on MTPC net sales of DYSVAL.
Our partner AbbVie launched ORILISSA ® (elagolix tablets) in the United States in August 2018 for the treatment of moderate to severe pain associated with endometriosis and launched ORIAHNN ® (elagolix, estradiol and norethindrone acetate capsules and elagolix capsules) in the United States in June 2020 for the treatment of heavy menstrual bleeding related to uterine fibroids in premenopausal women. We receive royalties at tiered percentage rates on AbbVie net sales of elagolix.
Business Highlights
• In October 2022, we submitted a supplemental new drug application, or sNDA, with the FDA for valbenazine for the treatment of chorea associated with Huntington disease.
• On November 1, 2022, we acquired Diurnal Group plc in an all-cash transaction, for an aggregate value of approximately £48.3 million GBP, or approximately $56 million USD. We believe the transaction presents an opportunity to accelerate the establishment of our clinical development and commercial capabilities in the United Kingdom to the benefit of patient communities and other stakeholders.
Impacts of Macro-Economic Factors on Our Business
COVID-19 Global Pandemic.
We continue to monitor the impact of the COVID-19 pandemic on our business, including our clinical trials, third-party manufacturers, suppliers and service providers. The extent to which COVID-19 may impact our financial condition and results of operations remains uncertain and is dependent on numerous evolving factors, including the measures being taken by authorities to mitigate against the spread of COVID-19, the emergence of new variants and the availability and successful administration of effective vaccines. For more information on the risks and uncertainties associated with the evolving effects of COVID-19 on our business, our ability to generate sales of and revenues from our approved products and our clinical development and regulatory efforts, refer to Part II Item 1A. Risk Factors.
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Russia/Ukraine Conflict.
In February 2022, Russia commenced a military invasion of Ukraine. The ongoing geopolitical turmoil and continuing military action in the region, together with widening sanctions imposed on Russia, have caused us to suspend all planned clinical trial activities for valbenazine and luvadaxistat in Russia and Ukraine.
The duration and impact of the conflict between Russia and Ukraine is highly unpredictable and the extent to which the conflict may impact certain of our clinical development and regulatory efforts remains uncertain. For more information on the risks and uncertainties associated with the evolving effects of the conflict between Russia and Ukraine on our business and certain of our clinical development and regulatory efforts, refer to Part II Item 1A. Risk Factors.
Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021
Revenues
Net Product Sales by Sales Product.
Three Months Ended
September 30, Nine Months Ended
September 30,
( in millions)
2022 2021 2022 2021
INGREZZA net product sales $ 376.4 $ 286.5 $ 1,028.6 $ 780.9
ONGENTYS net product sales 2.9 2.3 7.7 5.7
Total net product sales $ 379.3 $ 288.8 $ 1,036.3 $ 786.6
Compared with the comparable periods last year, the increase in INGREZZA net product sales was driven by increased new patient starts and 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)
2022 2021 2022 2021
Royalty revenue $ 6.1 $ 5.9 $ 15.5 $ 16.3
Milestone revenue — — 20.0 15.0
Other
2.5 1.3 4.9 3.6
Total collaboration revenues $ 8.6 $ 7.2 $ 40.4 $ 34.9
Royalty revenue. Consists of royalties earned at tiered percentage rates on AbbVie net sales of elagolix and, beginning in June 2022, MTPC net sales of DYSVAL.
Milestone revenue. Consists of license fees earned under the terms of our license agreements with AbbVie and MTPC.
Milestone revenue for the nine months ended September 30, 2022 reflected the achievement of a $20.0 million milestone in connection with MTPC's first commercial sale of DYSVAL in Japan in June 2022. For the comparable period last year, milestone revenue reflected the achievement of a $15.0 million milestone in connection with MTPC's submission of a marketing authorization application for valbenazine for the treatment of tardive dyskinesia with the Ministry of Health and Welfare in Japan in April 2021.
Operating Expenses
Cost of Revenues.
Three Months Ended
September 30, Nine Months Ended
September 30,
( in millions)
2022 2021 2022 2021
Cost of revenues $ 6.1 $ 4.2 $ 15.5 $ 10.2
Compared with the comparable periods last year, the increase in cost of revenues primarily reflected increased manufacturing costs in connection with our supply of valbenazine drug product under our collaboration with MTPC and increased INGREZZA net product sales driven by increased new patient starts and record total prescriptions, reflecting higher customer demand and increased commercial activities.
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Research and Development by Category.
We support our drug discovery and development efforts through the commitment of significant resources to discovery, research and development 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 research and development activities are part of our collaborative arrangements.
Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2022 2021 2022 2021
Late stage $ 18.1 $ 15.8 $ 48.2 $ 41.9
Early stage 18.1 13.9 56.4 27.8
Research and discovery 13.5 14.8 45.2 35.9
Milestone 5.0 5.4 42.7 5.4
Payroll and benefits 41.6 32.4 119.7 97.0
Facilities and other 11.4 10.4 33.6 32.7
Total research and development $ 107.7 $ 92.7 $ 345.8 $ 240.7
Late Stage. Consists of expenses incurred for product candidates in Phase II registrational studies and all subsequent activities.
Compared with the comparable periods last year, late-stage expenses primarily reflected increased investment in our Phase III programs for valbenazine in schizophrenia and crinecerfont in classic congenital adrenal hyperplasia, partially offset by lower spend related to the completion of the Phase III KINECT-HD study in the first quarter of 2022.
Early Stage . Consists of expenses incurred for product candidates after the approval of an investigational new drug application by the applicable regulatory agency through Phase II non-registrational studies.
Compared with the comparable periods last year, early-stage expenses primarily reflected increased investment in support of our advancing Phase II programs in epilepsy and luvadaxistat and NBI-1117568 in schizophrenia.
Research and Discovery. Consists of expenses incurred prior to the approval of an investigational new drug application by the applicable regulatory agency.
Compared with the comparable periods last year, research and discovery expenses primarily reflected increased investment in our preclinical development programs.
Milestone. Consists of milestone expenses incurred in connection with our collaborative arrangements.
Milestone expenses for the nine months ended September 30, 2022 primarily reflected $5.0 million of expense recognized in connection with the approval of our clinical trial application for NBI-1070770 for the treatment of major depressive disorder in July 2022, $30.0 million of expense recognized in connection with the FDA's acceptance of our investigational new drug application for NBI-1117568 for the treatment of schizophrenia in June 2022 and $7.3 million of expense recognized in connection with the FDA's acceptance of our amended KAYAK TM study protocol in January 2022. For the nine months ended September 30, 2021, milestone expenses reflected $5.4 million of expense recognized in connection with the European Union's approval of our clinical trial application for NBI-921352 for the treatment of focal onset seizures in adults in September 2021.
Payroll and Benefits. Consists of costs incurred for salaries and wages, payroll taxes, benefits and stock-based compensation associated with employees involved in research and development activities. Stock-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 stock-based grants are issued.
Compared to the comparable period last year, payroll and benefits expenses for the nine months ended September 30, 2022 primarily reflected higher headcount and an increase of $7.4 million in non-cash stock-based compensation expense primarily related to an August 2021 equity grant of approximately 0.5 million restricted stock units to our full-time employees other than our executive officers, which are vesting over a 2-year period, and unvested performance-based restricted stock units to our executive officers for which attainment of the performance-based criteria was determined to be probable. The nine months ended September 30, 2021 included a non-cash stock-based compensation charge of $6.4 million related to the modification of certain stock-based awards.
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Selling, General and Administrative.
Three Months Ended
September 30, Nine Months Ended
September 30,
( in millions)
2022 2021 2022 2021
Sales, general and administrative $ 186.3 $ 154.6 $ 569.8 $ 426.8
Compared with the comparable periods last year, the increase in sales, general and administrative expense was primarily driven by increased investment in ongoing commercial initiatives, including our TD Spotlight-branded direct-to-consumer INGREZZA advertising campaign, which launched in May 2021, and deployment of our expanded sales force. Compared with the comparable period last year, sales, general and administrative expense for the nine months ended September 30, 2022, also reflected increased personnel expenses driven by higher headcount and an increase of $23.6 million in non-cash stock-based compensation expense primarily related to an August 2021 equity grant of approximately 0.5 million restricted stock units to our full-time employees other than our executive officers, which are vesting over a 2-year period, and unvested performance-based restricted stock units to our executive officers for which attainment of the performance-based criteria was determined to be probable.
Other Income (Expense), Net.
Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2022 2021 2022 2021
Interest expense $ (1.2) $ (6.6) $ (6.0) $ (19.2)
Unrealized gain (loss) on equity securities 11.1 (8.2) 23.6 (7.5)
Loss on extinguishment — — (70.0) —
Investment income and other, net 0.2 0.8 2.8 3.1
Total other income (expense), net $ 10.1 $ (14.0) $ (49.6) $ (23.6)
Compared with the comparable periods last year, the change in other income (expense), net, was driven by periodic fluctuations in the fair values of our equity security investments and decreased interest expense in connection with our adoption of ASU 2020-06 on January 1, 2022. Compared with the comparable period last year, other expense, net, for the nine months ended September 30, 2022, also reflected a $70.0 million loss on extinguishment in connection with the repurchase of $210.8 million aggregate principal amount of our convertible senior notes for an aggregate repurchase price of $279.0 million in cash in the second quarter of 2022.
Provision for Income Taxes.
Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2022 2021 2022 2021
Provision for income taxes $ 29.4 $ 8.0 $ 30.5 $ 18.3
The provision for income taxes for the three and nine months ended September 30, 2022, reflected an effective tax rate that differs from the federal and state statutory rates primarily due to credits generated for research activities and certain nondeductible expenses, including the premium paid on the repurchase of our convertible senior notes. The provision for income taxes for the three and nine months ended September 30, 2021, reflected an effective tax rate that was lower than the federal and statutory rates primarily due to excess tax benefits related to stock-based compensation. Based upon available Federal net operating losses and tax credits, we expect to begin making cash payments for Federal income tax beginning in 2022.
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Net Income.
Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2022 2021 2022 2021
Net income $ 68.5 $ 22.5 $ 65.5 $ 96.9
Compared with the comparable periods last year, the change in net income primarily reflected increased INGREZZA net product sales driven by increased new patient starts and record total prescriptions, reflecting higher customer demand and increased commercial activities, partially offset by increased investments in ongoing commercial initiatives and our expanded clinical portfolio. Compared to the comparable period last year, net income for the nine months ended September 30, 2022, also reflected a $70.0 million loss on extinguishment recognized in connection with the repurchase of our convertible senior notes in the second quarter of 2022 and increased milestone expenses incurred in connection with certain of our collaborative arrangements.
Liquidity and Capital Resources
Sources of Liquidity
We believe that our existing capital resources and anticipated revenues will be sufficient to satisfy our current and projected funding requirements for at least the next 12 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) September 30,
2022 December 31,
2021
Total cash, cash equivalents and marketable securities
$ 1,162.0 $ 1,272.0
Working Capital:
Total current assets $ 1,205.5 $ 972.8
Less total current liabilities 485.1 245.8
Total working capital $ 720.4 $ 727.0
Information Regarding Our Cash Flows.
Nine Months Ended
September 30,
(in millions) 2022 2021
Cash flows from operating activities $ 196.4 $ 252.3
Cash flows from investing activities (61.5) (153.9)
Cash flows from financing activities (258.9) 25.6
Change in cash, cash equivalents and restricted cash $ (124.0) $ 124.0
Cash Flows from Operating Activities.
Compared with the comparable period last year, cash flows from operating activities primarily reflected increased INGREZZA net product sales driven by increased new patient starts and record total prescriptions, reflecting higher customer demand and increased commercial activities, partially offset by increased investments in ongoing commercial initiatives and our expanded clinical portfolio. In addition, we experienced an increase in accounts receivable due to extended customer payment terms attributed to the expansion of our distribution network at the end of fiscal 2021.
Cash Flows from Investing Activities.
Periodic fluctuations in cash flows from investing activities primarily reflect timing differences related to purchases, sales and maturities of debt security investments and changes in our portfolio-mix.
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Cash Flows from Financing Activities.
Compared with the comparable period last year, cash flows from financing activities primarily reflected the repurchase of $210.8 million aggregate principal amount of our convertible senior notes for an aggregate repurchase price of $279.0 million in cash in the second quarter of 2022.
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, ORIAHNN and/or DYSVAL;
• continued scientific progress in our research 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; and
• 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 $10.8 billion upon the achievement of certain event-based milestones.
On November 1, 2022, we acquired Diurnal Group plc in an all-cash transaction, for an aggregate value of approximately £48.3 million GBP, or approximately $56 million USD. We believe the transaction presents an opportunity to accelerate the establishment of our clinical development and commercial capabilities in the United Kingdom to the benefit of patient communities and other stakeholders.
Refer to Note 2 to the condensed consolidated financial statements for more information on our significant collaboration and license agreements.
Convertible Senior Notes. On May 2, 2017, we completed a private placement of $517.5 million in aggregate principal amount of 2.25% fixed-rated convertible senior notes due May 15, 2024, or the 2024 Notes. In the fourth quarter of 2020 and second quarter of 2022, we entered into separate, privately negotiated transactions with certain holders of the 2024 Notes to repurchase $136.2 million and $210.8 million, respectively, aggregate principal amount of the 2024 Notes for an aggregate repurchase price of $186.9 million and $279.0 million, respectively, in cash. As of September 30, 2022, $170.4 million aggregate principal amount of the 2024 Notes remained outstanding.
At our election, we may redeem all or any portion of the 2024 Notes under certain circumstances. Further, as the conditional conversion feature of the 2024 Notes was triggered as of September 30, 2022, holders of the 2024 Notes may convert the 2024 Notes at any time during the period beginning on October 3, 2022, and ending at the close of business on December 30, 2022 . With respect to the 2024 Notes, unless earlier converted, redeemed, or repurchased, we would be required to pay interest of $1.9 million in 2022, $3.8 million in 2023, and $1.9 million in 2024 and pay the aggregate principal amount outstanding of $170.4 million upon maturity of the 2024 Notes.
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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 notes would become due and payable.
Refer to Note 8 to the condensed consolidated financial statements for more information on the 2024 Notes.
Leases. Our operating leases that have commenced have terms that expire beginning 2024 through 2031 and 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 six-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 7 to the condensed 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
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, 2021.
Interest Rate Risk
We maintain a diversified investment portfolio consisting of low-risk, investment-grade debt securities with maturities of up to three years, including investments in commercial paper, securities of government-sponsored entities and corporate bonds that are subject to interest rate risk. The primary objective of our investment activities is to preserve principal and maintain liquidity. If a 1% unfavorable change in interest rates were to have occurred on September 30, 2022, it would not have had a material effect on the fair value of our investment portfolio as of that date.
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 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.”
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