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, 2022 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, 2022. Overview Neurocrine Biosciences is a neuroscience-focused, biopharmaceutical company with a simple purpose: to relieve suffering for people with great needs, but few options. We are dedicated to discovering and developing life-changing treatments for patients with under-addressed neurological, neuroendocrine and neuropsychiatric disorders. The Company’s diverse portfolio includes 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 advanced clinical-stage programs in multiple therapeutic areas. For three decades, we have applied our unique insight into neuroscience and the interconnections between brain and body systems to treat complex conditions and we will continue to relentlessly pursue medicines to ease the burden of debilitating diseases and 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. INGREZZA net product sales represent nearly all 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 the first quarter of 2023, we provided BIAL with written notice of termination of the license agreement to commercialize and market ONGENTYS ® (opicapone), an approved adjunctive therapy for patients with Parkinson's disease, in the United States and Canada. We determined that continued commercialization of ONGENTYS is unsustainable. The termination is anticipated to be effective in December 2023. We intend to work with BIAL to ensure an orderly transition of the commercialization of ONGENTYS and to ensure patients have continued access to ONGENTYS. Pipeline Highlights Expanded strategic partnership with Voyager Therapeutics Inc., or Voyager, to advance multiple gene therapy programs, each enabled by Voyager's next-generation TRACER TM capsids, for the treatment of neurological diseases. Upfront fee associated with the agreement totaled $175.0 million, including an equity investment valued at $31.3 million on the transaction date, with the remaining $143.9 million of the purchase price, which includes the applicable transaction costs, expensed as in-process research and development in the first quarter of 2023. 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. The extent to which COVID-19 may impact our financial condition and results of operations remains uncertain and is dependent on numerous evolving factors. For more information on the risks and uncertainties associated with the evolving effects of COVID-19 on our business, refer to Part II Item 1A. Risk Factors. 18 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 Months Ended March 31, 2023 and 2022 Revenues Net Product Sales by Sales Product. Three Months Ended March 31, ( in millions) 2023 2022 INGREZZA $ 410.4 $ 302.6 Other 4.9 2.4 Total net product sales $ 415.3 $ 305.0 Compared with the comparable period last year, the increase in total net product sales primarily reflected increased INGREZZA net product sales driven by record total prescriptions on higher customer demand and increased commercial activities. Collaboration Revenues by Category. Three Months Ended March 31, ( in millions) 2023 2022 Total collaboration revenues $ 5.1 $ 5.6 Collaboration revenues primarily consist of royalties earned at tiered percentage rates on AbbVie net sales of elagolix and, beginning in June 2022, MTPC net sales of DYSVAL. Operating Expenses Cost of Revenues. Three Months Ended March 31, ( in millions) 2023 2022 Cost of revenues $ 8.5 $ 4.6 Compared with the comparable period last year, the increase in cost of revenues primarily reflected increased INGREZZA net product sales driven by record total prescriptions on higher customer demand and increased commercial activities, increased manufacturing costs in connection with our supply of valbenazine drug product under our collaboration with MTPC, and amortization costs related to our acquired intangible assets. 19 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 March 31, (in millions) 2023 2022 Late stage $ 30.1 $ 14.4 Early stage 28.9 16.6 Research and discovery 20.8 15.9 Milestone — 7.3 Payroll and benefits 47.8 37.3 Facilities and other 11.9 10.7 Total research and development $ 139.5 $ 102.2 Late Stage. Consists of expenses incurred for product candidates in Phase II registrational studies and all subsequent activities. Compared with the comparable period last year, late-stage expenses primarily reflected increased investment in our Phase III programs for crinecerfont in CAH and valbenazine in schizophrenia. 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 period last year, early-stage expenses primarily reflected increased investment in our Phase II programs for NBI-1117568 in schizophrenia, NBI-921352 in epilepsy and luvadaxistat 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 period last year, research and discovery expenses primarily reflected increased investment in our preclinical development programs, including our epilepsy, VMAT2 and gene therapy programs. Milestone. Consists of milestone expenses incurred in connection with our collaborative arrangements. Milestone expenses for the first quarter of 2022 reflected $7.3 million of expense recognized in connection with the FDA's acceptance of our amended KAYAK TM study protocol in January 2022. 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 primarily reflected higher headcount, including an increase of $1.3 million in non-cash stock-based compensation expense. Acquired In-Process Research and Development, or IPR&D. Three Months Ended March 31, ( in millions) 2023 2022 Acquired in-process research and development $ 143.9 $ — In the first quarter of 2023, we recognized $143.9 million of IPR&D expense in connection with our payment of the upfront fee pursuant to our expanded strategic partnership with Voyager. 20 Selling, General and Administrative, or SG&A. Three Months Ended March 31, ( in millions) 2023 2022 Selling, general and administrative $ 242.7 $ 200.7 Compared with the comparable period last year, SG&A expenses primarily reflected increased payroll and benefits expenses on higher headcount, including the deployment of our expanded sales force in April 2022 and an increase of $1.6 million in non-cash stock-based compensation expense, and continued investment in our commercial initiatives. Other Income (Expense), Net. Three Months Ended March 31, (in millions) 2023 2022 Interest expense $ (1.1) $ (2.6) Unrealized gain on equity security investments 2.2 19.9 Investment income and other, net 9.8 1.0 Total other income, net $ 10.9 $ 18.3 Compared with the comparable period last year, other income, net, primarily reflected periodic fluctuations in the fair values of our equity security investments and increased interest income on our debt security investments. (Benefit from) Provision for Income Taxes. Three Months Ended March 31, (in millions) 2023 2022 (Benefit from) provision for income taxes $ (26.7) $ 7.5 The effective tax rate for the first quarter of 2023 varied from the federal and state statutory rates primarily due to excess tax benefits related to stock-based compensation. For the comparable period last year, the effective tax rate varied from the federal and state statutory rates primarily due to excess tax expense related to stock-based compensation. Net (Loss) Income. Three Months Ended March 31, (in millions) 2023 2022 Net (loss) income $ (76.6) $ 13.9 Compared with the comparable period last year, the net loss for the first quarter of 2023 primarily reflected increased upfront payments pursuant to our expanded strategic partnership with Voyager and continued investment in our commercial initiatives and expanded clinical portfolio, partially offset by increased INGREZZA net product sales. 21 Liquidity and Capital Resources 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 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. Information Regarding Our Financial Condition. (in millions) March 31, 2023 December 31, 2022 Total cash, cash equivalents and marketable securities $ 1,139.2 $ 1,288.7 Working Capital: Total current assets $ 1,432.8 $ 1,453.5 Less total current liabilities 374.1 537.7 Total working capital $ 1,058.7 $ 915.8 Information Regarding Our Cash Flows. Three Months Ended March 31, (in millions) 2023 2022 Cash flows from operating activities $ (125.2) $ (40.5) Cash flows from investing activities (42.1) (31.6) Cash flows from financing activities 8.2 6.1 Change in cash, cash equivalents and restricted cash $ (159.1) $ (66.0) Cash Flows from Operating Activities. Compared with the comparable period last year, cash flows from operating activities primarily reflected increased upfront payments pursuant to our expanded strategic partnership with Voyager, increased INGREZZA net product sales, and continued investment in our commercial initiatives and expanded clinical portfolio. Cash Flows from Investing Activities. Periodic fluctuations in cash flows from investing activities primarily reflect timing differences related to our purchases, sales, and maturities of debt security investments and changes in our portfolio-mix. Cash flows from investing activities for the periods presented also reflected equity investments of $31.3 million in Voyager in the first quarter of 2023 and $7.7 million in Xenon Pharmaceuticals, Inc. in the comparable period last year. Cash Flows from Financing Activities. Cash flows from financing activities reflected proceeds from issuances of our common stock for all periods presented. 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, 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; 22 • 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; and • developments related to any future litigation. 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 $16.9 billion upon the achievement of certain event-based milestones. Refer to Note 2 to the condensed consolidated financial statements for more information on our significant collaboration and license agreements. 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 8 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. 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 2020, we repurchased $136.2 million aggregate principal amount of the 2024 Notes for an aggregate repurchase price of $186.9 million in cash. In 2022, we repurchased $210.8 million aggregate principal amount of the 2024 Notes for an aggregate repurchase price of $279.0 million in cash. As of March 31, 2023, $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. With respect to the 2024 Notes, unless earlier converted, redeemed, or repurchased, we would be required to pay interest of $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. 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 would become due and payable. Refer to Note 9 to the condensed consolidated financial statements for more information on the 2024 Notes. 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, 2022. 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 March 31, 2023, it would not have had a material effect on the fair value of our investment portfolio as of that date. 23 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.”