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 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2023. 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. Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022 Revenues Net Product Sales by Sales Product. Three Months Ended June 30, Six Months Ended June 30, ( in millions) 2023 2022 2023 2022 INGREZZA $ 439.7 $ 349.6 $ 850.1 $ 652.2 Other 6.6 2.4 11.5 4.8 Total net product sales $ 446.3 $ 352.0 $ 861.6 $ 657.0 Compared with the comparable periods last year, the increase in total net product sales primarily reflected increased INGREZZA net product sales driven by total prescriptions on higher customer demand and increased commercial activities. 18 Collaboration Revenues by Category. Three Months Ended June 30, Six Months Ended June 30, ( in millions) 2023 2022 2023 2022 Royalty revenue $ 4.9 $ 5.2 $ 9.0 $ 9.4 Milestone revenue — 20.0 — 20.0 Other 1.5 1.0 2.5 2.4 Total collaboration revenues $ 6.4 $ 26.2 $ 11.5 $ 31.8 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. Milestone revenue for the first six months of 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. Operating Expenses Cost of Revenues. Three Months Ended June 30, Six Months Ended June 30, ( in millions) 2023 2022 2023 2022 Cost of revenues $ 11.5 $ 4.8 $ 20.0 $ 9.4 Compared with the comparable periods last year, the increase in cost of revenues primarily reflected increased amortization costs related to our acquired intangible assets, an increase in our reserves for obsolescence, increased INGREZZA and other net product sales, and increased manufacturing costs in connection with our supply of valbenazine drug product under our collaboration with MTPC. 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 June 30, Six Months Ended June 30, (in millions) 2023 2022 2023 2022 Late stage $ 27.9 $ 15.7 $ 58.0 $ 30.1 Early stage 23.6 21.7 52.5 38.3 Research and discovery 25.7 15.8 46.5 31.7 Milestone — 30.4 — 37.7 Payroll and benefits 57.4 40.8 105.2 78.1 Facilities and other 11.2 11.5 23.1 22.2 Total research and development $ 145.8 $ 135.9 $ 285.3 $ 238.1 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 in CAH. 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 our Phase II program for NBI-1117568 in schizophrenia and our advancing Phase II programs in psychiatry. 19 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, including our gene therapy, muscarinic, and VMAT2 programs. Milestone. Consists of milestone expenses incurred in connection with our collaborative arrangements. Milestone expenses for the first six months of 2022 primarily reflected $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. 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 periods last year, payroll and benefits expenses for the second quarter and first six months of 2023 primarily reflected higher headcount and increases of $7.6 million and $8.9 million, respectively, in non-cash stock-based compensation expense primarily driven by a charge related to a change in equity grant agreement terms. Acquired In-Process Research and Development, or IPR&D. Three Months Ended June 30, Six Months Ended June 30, ( in millions) 2023 2022 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. Selling, General and Administrative, or SG&A. Three Months Ended June 30, Six Months Ended June 30, ( in millions) 2023 2022 2023 2022 Selling, general and administrative $ 221.8 $ 182.8 $ 464.5 $ 383.5 Compared with the comparable periods last year, SG&A expenses for the second quarter and first six months of 2023 primarily reflected continued investment in our commercial initiatives, including our branded direct-to-consumer INGREZZA advertising campaign and deployment of our expanded salesforce in April 2022, and increased payroll and benefits expenses on higher headcount and increases of $11.4 million and $13.0 million, respectively, in non-cash stock-based compensation expense primarily driven by a charge related to a change in equity grant agreement terms. Other Income (Expense), Net. Three Months Ended June 30, Six Months Ended June 30, (in millions) 2023 2022 2023 2022 Interest expense $ (1.3) $ (2.2) $ (2.4) $ (4.8) Unrealized gain (loss) on equity security investments 37.3 (7.4) 39.5 12.5 Loss on extinguishment of convertible senior notes — (70.0) — (70.0) Investment income and other, net 12.0 1.6 21.8 2.6 Total other income (expense), net $ 48.0 $ (78.0) $ 58.9 $ (59.7) Compared with the comparable period last year, the change in other income (expense), net, for first six months of 2023 primarily reflected an increase in the fair value of our equity investment in Voyager, increased interest income on our debt security investments and decreased debt extinguishment charges in connection with the repurchase of our convertible senior notes in the second quarter of 2022. 20 Provision for (Benefit from) Income Taxes. Three Months Ended June 30, Six Months Ended June 30, (in millions) 2023 2022 2023 2022 Provision for (benefit from) income taxes $ 26.1 $ (6.4) $ (0.6) $ 1.1 The effective tax rate for the second quarter and first six months of 2023 varied from the federal and state statutory rates primarily due to credits generated for research activities, certain nondeductible expenses, the impact of changes in the state effective rate, and losses incurred in foreign jurisdictions for which no tax benefit was recorded as management cannot conclude that it is more likely than not that the tax benefit of such losses will be realized in the future. For the comparable periods last year, the effective tax rate varied 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 in the second quarter of 2022. Net Income (Loss). Three Months Ended June 30, Six Months Ended June 30, (in millions) 2023 2022 2023 2022 Net income (loss) $ 95.5 $ (16.9) $ 18.9 $ (3.0) Compared with the comparable period last year, the change in net income (loss) for first six months of 2023 primarily reflected increased INGREZZA net product sales, an increase in the fair value of our equity investment in Voyager, decreased debt extinguishment charges in connection with the repurchase of our convertible senior notes in the second quarter of 2022 and decreased milestone expenses in connection with our collaboration with Heptares, partially offset by increased upfront payments in connection with our expanded strategic partnership with Voyager in the first quarter of 2023 and continued investment in our commercial initiatives and expanded clinical portfolio. 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) June 30, 2023 December 31, 2022 Total cash, cash equivalents and marketable securities $ 1,319.3 $ 1,288.7 Working Capital: Total current assets $ 1,496.6 $ 1,453.5 Less total current liabilities 582.5 537.7 Total working capital $ 914.1 $ 915.8 Information Regarding Our Cash Flows. Six Months Ended June 30, (in millions) 2023 2022 Cash flows from operating activities $ 54.4 $ 97.6 Cash flows from investing activities (168.0) (0.2) Cash flows from financing activities 11.1 (270.3) Change in cash, cash equivalents and restricted cash $ (102.5) $ (172.9) 21 Cash Flows from Operating Activities. Compared with the comparable period last year, cash flows from operating activities primarily reflected increased INGREZZA net product sales and lower milestone payments in connection with our collaboration with Heptares, partially offset by higher upfront payments in connection with our expanded strategic partnership with Voyager 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 reflected 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. Cash flows from financing activities for the six months ended June 30, 2022 also 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, 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; 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 2025 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 new four-building campus facility in San Diego, California. This campus facility, comprised of office space and research and development laboratories, will serve as our new corporate headquarters upon completion of its construction. Under the terms of the lease, we also secured a six-year option for the construction of a fifth building and an option to purchase the entire campus in the future. 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. 22 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 June 30, 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 $1.9 million in 2023 and 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 June 30, 2023, 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.” 23