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Item 2. Management’s Discussion and Analysis

2023-10-31 compared with 2023-08-01 · 65 added, 39 removed, 156 unchanged (40% of the section changed)

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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.

Neurocrine Biosciences is a neuroscience-focused, biopharmaceutical company with a simple purpose:

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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.

The Company’s diverse portfolio includes United States Food and Drug Administration, or FDA, approved treatments for tardive dyskinesia, chorea associated with Huntington's disease, 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.

We launched INGREZZA ® (valbenazine) in the United States in May 2017 as the first FDA-approved drug for the treatment of tardive dyskinesia and in August 2023 for the treatment of adults with chorea associated with Huntington's disease.

INGREZZA net product sales represent nearly all of our total net product sales.

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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

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.

• In August 2023, the FDA approved INGREZZA for the treatment of adults with chorea associated with Huntington's disease.

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.

• In September 2023, we announced the FDA accepted our New Drug Application for INGREZZA oral granules, a new sprinkle formulation of INGREZZA capsules for oral administration.

The agency set a Prescription Drug User Fee Act target action date of April 30, 2024.

• In September 2023, we announced positive top-line data from the Phase III CAHtalyst™ clinical study of crinecerfont in adults with classic congenital adrenal hyperplasia, or CAH, due to 21-hydroxylase deficiency (21-OHD).

The study met its primary as well as important key secondary endpoints.

• In October 2023, we announced positive top-line data from the Phase III CAHtalyst clinical study of crinecerfont in pediatrics with CAH due to 21-hydroxylase deficiency (21-OHD).

The study met both its primary and key secondary endpoint.

Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

Net Product Sales by Sales Product.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

( in millions)

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Total net product sales $ 491.8 $ 379.3 $ 1,353.4 $ 1,036.3

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.

Compared with the comparable periods last year, the increase in total net product sales primarily reflected increased INGREZZA net product sales on higher prescription demand and increased commercial activities.

Collaboration Revenues by Category.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

( in millions)

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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.

Milestone revenue for the first nine 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

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

( in millions)

1 unchanged sentence

Cost of revenues $ 11.2 $ 6.1 $ 31.2 $ 15.5

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.

Compared with the comparable periods last year, the increase in cost of revenues primarily reflected increased amortization costs related to our acquired intangible assets, increases in reserves for obsolescence, increased 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.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2023 2022 2023 2022

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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.

Compared with the comparable periods last year, late-stage expenses primarily reflected increased investment in our Phase III programs in CAH and valbenazine as adjunctive treatment in schizophrenia.

Early Stage .

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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.

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.

Payroll and Benefits.

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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.

Compared to the comparable period last year, payroll and benefits expenses for the first nine months of 2023 primarily reflected higher headcount and an increase of $11.2 million in non-cash stock-based compensation expense primarily driven by an incremental charge related to a change in equity grant agreement terms in the second quarter of 2023.

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

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

( in millions)

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

( in millions)

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Selling, general and administrative $ 204.2 $ 186.3 $ 668.7 $ 569.8

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.

Compared with the comparable period last year, SG&A expenses for the first nine 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, increased payroll and benefits expenses on higher headcount and an increase of $15.4 million in non-cash stock-based compensation expense primarily driven by an incremental charge related to a change in equity grant agreement terms in the second quarter of 2023.

Other (Expense) Income, Net.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2023 2022 2023 2022

Interest expense $ (1.1) $ (1.2) $ (3.5) $ (6.0)

Unrealized gain (loss) on equity security investments 37.3 (7.4) 39.5 12.5

Unrealized (loss) gain on equity security investments (40.1) 11.1 (0.6) 23.6

Loss on extinguishment of convertible senior notes — — — (70.0)

Investment income and other, net 15.6 0.2 37.4 2.8

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.

Provision for (Benefit from) Income Taxes.

Total other (expense) income, net $ (25.6) $ 10.1 $ 33.3 $ (49.6)

Other (expense) income, net, for all periods presented reflected periodic fluctuations in the fair values of our equity investments in Voyager and Xenon Pharmaceuticals Inc, or Xenon.

In addition, compared with the comparable period last year, the change in other (expense) income, net, for the first nine months of 2023 primarily reflected 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.

Provision for Income Taxes.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 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.

Provision for income taxes $ 32.5 $ 29.4 $ 31.9 $ 30.5

The effective tax rate for the third quarter and first nine 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

September 30, Nine Months Ended

September 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.

Net income $ 83.1 $ 68.5 $ 102.0 $ 65.5

Compared with the comparable period last year, net income for the first nine months of 2023 primarily reflected increased INGREZZA net product sales, 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 collaborations, 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

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Information Regarding Our Financial Condition.

(in millions) June 30,

(in millions) September 30,

2023 December 31,

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Information Regarding Our Cash Flows.

Six Months Ended

Nine Months Ended

September 30,

(in millions) 2023 2022

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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.

Compared with the comparable period last year, cash flows from operating activities primarily reflected increased INGREZZA net product sales, lower milestone payments in connection with our collaborations, the timing of payments for sales rebates and a deferral of income taxes due to IRS disaster relief provisions for certain California taxpayers, partially offset by higher upfront payments in connection with our expanded strategic partnership with Voyager, increased accounts receivable on higher 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 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.

Cash flows from financing activities for the nine months ended September 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

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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.

With respect to our existing collaboration and license agreements, we may be required to make potential future payments of up to $17.0 billion upon the achievement of certain milestones.

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

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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.

The construction of the campus facility is phased, with the first phase of construction relating to office space scheduled for completion by the end of 2023.

Refer to Note 9 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.

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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.

As of September 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.

Further, as the conditional conversion feature of the 2024 Notes was triggered as of September 30, 2023, holders of the 2024 Notes may convert the 2024 Notes at any time during the period beginning on October 1, 2023, and ending at the close of business on December 29, 2023.

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.

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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.

If a 1% unfavorable change in interest rates were to have occurred on September 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

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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-Q

Item 2. Management’s Discussion and Analysis