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Item 2. Management’s Discussion and Analysis

2024-05-01 compared with 2023-10-31 · 60 added, 88 removed, 133 unchanged (53% 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 six months ended June 30, 2023.

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, 2023 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, 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, 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 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.

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.

The Company’s diverse portfolio includes U.S.

Food and Drug Administration (FDA) approved treatments for tardive dyskinesia, chorea associated with Huntington's disease, adrenal insufficiency, and endometriosis and uterine fibroids in collaboration with AbbVie Inc.

(AbbVie), a European Medicines Agency (EMA) approved treatment for classic congenital adrenal hyperplasia (CAH) and a diversified portfolio of advanced clinical-stage programs in multiple therapeutic areas.

We launched INGREZZA ® (valbenazine) in the U.S.

as the first FDA-approved drug for the treatment of tardive dyskinesia in May 2017 and for the treatment of adults with chorea associated with Huntington's disease in August 2023.

Our partner Mitsubishi Tanabe Pharma Corporation (MTPC) launched DYSVAL ® (valbenazine) in Japan for the treatment of tardive dyskinesia in June 2022 and subsequently in other select Asian markets, where it is marketed as REMLEAS ® (valbenazine).

We receive royalties at tiered percentage rates on MTPC net sales of valbenazine.

Our partner AbbVie launched ORILISSA ® (elagolix tablets) in the U.S.

for the treatment of moderate to severe pain associated with endometriosis in August 2018 and ORIAHNN ® (elagolix, estradiol and norethindrone acetate capsules and elagolix capsules) in the U.S.

for the treatment of heavy menstrual bleeding due to uterine fibroids in June 2020.

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.

• 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

January 2024:

• Elected to settle all conversions of the convertible senior notes due May 15, 2024 in cash.

• Reported positive Phase 2 data for the completed Phase 2 study of NBI-1065845 in adult subjects with major depressive disorder.

The study met its primary and key secondary endpoints.

• Submitted two New Drug Applications to the FDA for crinecerfont as a treatment for adult and pediatric patients with classic congenital adrenal hyperplasia.

• Received approval from the FDA for INGREZZA ® SPRINKLE (valbenazine) capsules, a new oral granules formulation of INGREZZA capsules.

Results of Operations for the Three Months Ended March 31, 2024 and 2023

Net Product Sales by Sales Product.

Three Months Ended

September 30, Nine Months Ended

September 30,

( in millions)

2023 2022 2023 2022

INGREZZA $ 506.0 $ 410.4

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Total net product sales $ 509.0 $ 415.3

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.

Compared with the comparable period last year, the increase in total net product sales primarily reflected increased INGREZZA net product sales driven by strong underlying patient demand and improved gross-to-net dynamics.

Collaboration Revenues by Category.

Three Months Ended

September 30, Nine Months Ended

September 30,

( in millions)

2023 2022 2023 2022

Royalty revenue $ 4.1 $ 4.2

Milestone revenue — — — 20.0

1.4 2.5 3.9 4.9

Total collaboration revenues $ 6.3 $ 5.1

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 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.

Total collaboration revenues for all periods presented primarily reflected royalty revenue earned on AbbVie net sales of elagolix and MTPC net sales of DYSVAL.

Operating Expenses

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Three Months Ended

September 30, Nine Months Ended

September 30,

( in millions)

2023 2022 2023 2022

Cost of revenues $ 7.5 $ 8.5

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

Compared with the comparable period last year, the change in cost of revenues primarily reflected increased INGREZZA net product sales, offset by decreased costs due to the termination of our license agreement with BIAL, which became effective in December 2023, to commercialize and market ONGENTYS ® (opicapone) in the U.S.

Research and Development by Category.

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Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2024 2023

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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 and valbenazine as adjunctive treatment in schizophrenia.

Compared with the comparable period last year, the decrease in late-stage expenses primarily reflected the successful completion of the Phase 3 programs for crinecerfont in CAH in the third quarter of 2023.

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.

Compared with the comparable period last year, the change in early-stage expenses primarily reflected increased investment in advancing Phase 2 programs in psychiatry, offset by decreased spend on early stage programs in epilepsy.

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.

Compared with the comparable period last year, the increase in research and discovery expenses primarily reflected increased investment in preclinical development programs.

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.

Milestone expense for the first quarter of 2024 primarily reflected $5.0 million of expense recognized in connection with our selection of a development candidate under the Friedreich’s ataxia program pursuant to our collaboration with Voyager Therapeutics, Inc.

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 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.

Compared with the comparable period last year, the increase in payroll and benefits expenses primarily reflected higher headcount, including an increase of $3.2 million in non-cash stock-based compensation expense.

Facilities and Other.

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

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

Three Months Ended

September 30, Nine Months Ended

September 30,

( in millions)

2023 2022 2023 2022

Acquired in-process research and development $ 6.0 $ 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.

In the first quarter of 2024, we recognized $6.0 million of IPR&D expense in connection with the payment of the upfront fee pursuant to our collaboration with Biocytogen Pharmaceuticals (Beijing) Co., Ltd.

In the first quarter of 2023, we recognized $143.9 million of IPR&D expense in connection with the payment of the upfront fee pursuant to the expansion of our collaboration with Voyager.

Selling, General and Administrative, or SG&A.

Three Months Ended

September 30, Nine Months Ended

September 30,

( in millions)

2023 2022 2023 2022

Selling, general and administrative $ 243.1 $ 242.7

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.

Compared with the comparable period last year, the change in SG&A expenses primarily reflected continued investment in our commercial organization, including pre-launch crinecerfont activities, offset by decreases in other general and administrative costs.

Other (Expense) Income, Net.

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2024 2023

Interest expense $ (1.1) $ (1.1)

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

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

Unrealized gain on equity securities 1.6 2.2

Charges associated with convertible senior notes

Investment income and other, net 23.4 9.8

Total other (expense) income, net $ (64.8) $ 10.9

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.

Compared with the comparable period last year, the change in total other (expense) income, net, primarily reflected $88.7 million of expense recognized in connection with the bifurcation of the embedded conversion option of the convertible senior notes, partially offset by increased interest income on our debt security investments.

Benefit from Income Taxes.

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2024 2023

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.

Benefit from income taxes

$ (8.9) $ (26.7)

The effective tax rate for the first quarter of 2024 varied from the federal and state statutory rates primarily due to credits generated for research activities, certain nondeductible expenses including debt extinguishment, excess tax benefits related to stock-based compensation, 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 period last year, the effective tax rate varied from the federal and state statutory rates primarily due to excess tax benefits related to stock-based compensation.

Net Income (Loss).

Three Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2024 2023

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.

Net income (loss) $ 43.4 $ (76.6)

Compared with the comparable period last year, the change in net income (loss) primarily reflected increased INGREZZA net product sales and decreased IPR&D expense in connection with our collaborations, partially offset by $88.7 million of expense recognized in connection with the bifurcation of the embedded conversion option of the convertible senior notes and increased investment in our expanded clinical portfolio.

Liquidity and Capital Resources

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Information Regarding Our Financial Condition.

(in millions) September 30,

(in millions) March 31,

2024 December 31,

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Information Regarding Our Cash Flows.

Nine Months Ended

September 30,

Three Months Ended

(in millions) 2024 2023

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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, 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.

Compared with the comparable period last year, the change in cash flows from operating activities primarily reflected increased INGREZZA net product sales and lower upfront payments in connection with our collaborations, partially offset by $88.7 million of expense recognized in connection with the bifurcation of the embedded conversion option of the convertible senior notes and increased investment in our 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 in the first quarter of 2022.

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 comparable period last year also reflected an equity investment of $31.3 million in Voyager in connection with the expansion of our collaboration in the first quarter of 2023.

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 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 $17.0 billion upon the achievement of certain milestones.

With respect to our existing collaboration and license agreements, we may be required to make potential future payments of up to approximately $17.5 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.

Our operating leases that have commenced have terms that expire beginning 2025 through 2036 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.

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.

On February 8, 2022, we entered into a lease agreement for a four-building campus facility to be constructed in San Diego, California, including a six-year option for the construction of a fifth building.

This campus facility, comprised of office space and research and development laboratories, now serves as our corporate headquarters.

The construction of the campus facility is phased.

The first phase of construction, consisting of two buildings relating to office space, was completed in December 2023.

As we begin to occupy our new campus facility, we will sublease certain of our existing leased premises when we determine there is excess leased capacity.

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.

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.

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 (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 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.

As of March 31, 2024, $170.4 million aggregate principal amount of the 2024 Notes remained outstanding.

Until the close of business on the scheduled trading day immediately preceding May 15, 2024, holders of the 2024 Notes may convert the 2024 Notes at any time.

In January 2024, we provided notice to the holders of the 2024 Notes electing to settle all conversions of the 2024 Notes which occur on or after January 15, 2024 in cash.

As a result, upon conversion, holders of the 2024 Notes will receive the principal amount of their 2024 Notes and any conversion premium, calculated based on the per share volume-weighted average price (VWAP) for each of the 30 consecutive trading days during the observation period (as more fully described in the 2017 Indenture), in cash.

As of March 31, 2024, the fair value of the 2024 Notes was $309.5 million.

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.

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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 September 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 March 31, 2024, 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