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, 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. 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 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 January 2024: • Elected to settle all conversions of the convertible senior notes due May 15, 2024 in cash. April 2024: • 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 Revenues Net Product Sales by Sales Product. Three Months Ended March 31, ( in millions) 2024 2023 INGREZZA $ 506.0 $ 410.4 Other 3.0 4.9 Total net product sales $ 509.0 $ 415.3 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. 18 Collaboration Revenues by Category. Three Months Ended March 31, ( in millions) 2024 2023 Royalty revenue $ 4.1 $ 4.2 Other 2.2 0.9 Total collaboration revenues $ 6.3 $ 5.1 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 Cost of Revenues. Three Months Ended March 31, ( in millions) 2024 2023 Cost of revenues $ 7.5 $ 8.5 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. and Canada. 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) 2024 2023 Late stage $ 24.2 $ 30.1 Early stage 27.2 28.9 Research and discovery 26.2 20.8 Milestone 6.1 — Payroll and benefits 57.6 47.8 Facilities and other 18.1 11.9 Total research and development $ 159.4 $ 139.5 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, 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 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 period last year, the increase in research and discovery expenses primarily reflected increased investment in preclinical development programs. 19 Milestone. Consists of milestone expenses incurred in connection with our collaborative arrangements. 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. (Voyager). 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 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 March 31, ( in millions) 2024 2023 Acquired in-process research and development $ 6.0 $ 143.9 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 March 31, ( in millions) 2024 2023 Selling, general and administrative $ 243.1 $ 242.7 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 March 31, (in millions) 2024 2023 Interest expense $ (1.1) $ (1.1) Unrealized gain on equity securities 1.6 2.2 Charges associated with convertible senior notes (88.7) — Investment income and other, net 23.4 9.8 Total other (expense) income, net $ (64.8) $ 10.9 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. 20 Benefit from Income Taxes. Three Months Ended March 31, (in millions) 2024 2023 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 March 31, (in millions) 2024 2023 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 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, 2024 December 31, 2023 Total cash, cash equivalents and marketable securities $ 1,911.0 $ 1,719.1 Working Capital: Total current assets $ 1,799.0 $ 1,607.0 Less total current liabilities 712.9 654.8 Total working capital $ 1,086.1 $ 952.2 Information Regarding Our Cash Flows. Three Months Ended March 31, (in millions) 2024 2023 Cash flows from operating activities $ 130.3 $ (125.2) Cash flows from investing activities (55.0) (42.1) Cash flows from financing activities 69.9 8.2 Change in cash, cash equivalents and restricted cash $ 145.2 $ (159.1) Cash Flows from Operating Activities. 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. 21 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 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. 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 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. Leases. 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 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 (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, 2024, $170.4 million aggregate principal amount of the 2024 Notes remained outstanding. 22 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. 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 8 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, 2023. 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, 2024, 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