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 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2024. 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, endometriosis and uterine fibroids in collaboration with AbbVie Inc. (AbbVie), as well as a diversified portfolio of multiple compounds in mid- to late-phase clinical development across our core 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 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 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 • Announced Kevin Gorman, Ph.D., will retire as Chief Executive Officer (CEO) on October 11, 2024. Kyle Gano, Ph.D., currently Neurocrine’s Chief Business Development and Strategy Officer, will succeed him in the CEO role. Dr. Gano will also join the Company’s Board of Directors at that time, and Dr. Gorman will continue to serve on the Company’s Board. • Announced positive topline data for the Phase 2 SAVITRI™ study. This randomized, double-blind, placebo-controlled dose-finding study assessed the efficacy and safety of NBI-1065845 in adult subjects with major depressive disorder (MDD). NBI-1065845 is an investigational alpha-amino-3-hydroxy-5-methyl-4-isoxazole propionic acid (AMPA) positive allosteric modulator (PAM) in development as a potential treatment for patients with MDD who have not benefited from treatment with at least one antidepressant in their current episode of depression. • Announced FDA accepted New Drug Applications (NDAs) and granted Priority Review for crinecerfont for pediatric and adult patients with classic congenital adrenal hyperplasia (CAH). The agency set Prescription Drug User Fee (PDUFA) target action dates of December 29, 2024 for the capsule formulation and December 30, 2024 for the oral solution formulation. • At the Endocrine Society Annual Meeting (ENDO 2024), presented new Phase 3 clinical study data from the CAHtalyst™ registrational studies of crinecerfont in pediatric and adult patients with CAH due to 21-hydroxylase deficiency. In parallel, announced that the primary study results from the CAHtalyst™ registrational studies of crinecerfont in pediatric and adult patients with CAH due to 21-hydroxylase deficiency have been published in The New England Journal of Medicine. • Initiated Phase 2 study of NBI-1070770 in adults with MDD. NBI-1070770 is a novel, selective and orally active, negative allosteric modulator (NAM) of the NR2B subunit-containing N-methyl-D-aspartate (NMDA NR2B) receptor. • Initiated Phase 1 study of NBI-1117567 in healthy adult participants. NBI-1117567 is an investigational, oral, M1/M4 (M1 preferring) selective muscarinic agonist for the potential treatment of neurological and neuropsychiatric conditions. • Initiated Phase 1 study of NBI-1076968 in healthy adult participants. NBI-1076968 is an investigational, oral, M4 subtype-selective muscarinic antagonist for the potential treatment of movement disorders. • Received notification from the Centers for Medicare and Medicaid Services that INGREZZA qualified for the Specified Small Manufacturer Exception pertaining to the Part D redesign of the Inflation Reduction Act. 18 • Settled the convertible senior notes due May 15, 2024 (the 2024 Notes) in full in cash upon maturity. • Announced planned expansion of the INGREZZA psychiatry and long-term care sales teams to better serve patients by accelerating the number of people who are diagnosed and treated for tardive dyskinesia and chorea associated with Huntington's disease with INGREZZA. • Received approval from the FDA for INGREZZA ® SPRINKLE (valbenazine) capsules, a new oral granules formulation of INGREZZA capsules, and subsequently launched new sprinkle formulation of INGREZZA capsules for the treatment of adults with tardive dyskinesia and chorea associated with Huntington’s disease. • Research and development expense for the first six months of 2024 included approximately $30 million of expense for development milestones achieved under our collaborations with Nxera Pharma UK Limited (Nxera), Takeda Pharmaceutical Company Limited (Takeda) and Voyager Therapeutics, Inc. (Voyager). Results of Operations for the Three and Six Months Ended June 30, 2024 and 2023 Revenues Net Product Sales by Sales Product. Three Months Ended June 30, Six Months Ended June 30, ( in millions) 2024 2023 2024 2023 INGREZZA $ 579.5 $ 439.7 $ 1,085.5 $ 850.1 Other 4.3 6.6 7.3 11.5 Total net product sales $ 583.8 $ 446.3 $ 1,092.8 $ 861.6 Compared with the comparable period last year, the increase in total net product sales for the first six months of 2024 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 June 30, Six Months Ended June 30, ( in millions) 2024 2023 2024 2023 Royalty revenue $ 4.7 $ 4.9 $ 8.9 $ 9.0 Other 1.7 1.5 3.8 2.5 Total collaboration revenues $ 6.4 $ 6.4 $ 12.7 $ 11.5 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 June 30, Six Months Ended June 30, ( in millions) 2024 2023 2024 2023 Cost of revenues $ 9.2 $ 11.5 $ 16.7 $ 20.0 Compared with the comparable period last year, the decrease in cost of revenues for the first six months of 2024 primarily reflected the impact of decreased ONGENTYS ® (opicapone) net product sales and lower ONGENTYS inventory reserves in connection with the termination of our license agreement with BIAL, which became effective in December 2023, partially offset by the impact of increased INGREZZA net product sales. 19 Research and Development by Category. We support our drug discovery and development efforts through the commitment of significant resources to discovery, research and development programs, and business development opportunities. Costs are reflected in the applicable development stage based upon the program status when incurred. Therefore, the same program could be reflected in different development stages in the same reporting period. For several of our programs, the research and development activities are part of our collaborative arrangements. Three Months Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 2024 2023 Late stage $ 23.1 $ 27.9 $ 47.3 $ 58.0 Early stage 31.2 23.6 58.4 52.5 Research and discovery 35.6 25.7 61.8 46.5 Milestone 26.5 — 32.6 — Payroll and benefits 54.9 57.4 112.5 105.2 Facilities and other 19.8 11.2 37.9 23.1 Total research and development $ 191.1 $ 145.8 $ 350.5 $ 285.3 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 for the first six months of 2024 primarily reflected the successful completion of the Phase 3 programs for crinecerfont in CAH in the third quarter of 2023 and lower spend on certain of our late-stage VMAT2 programs. 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 increase in early-stage expenses for the first six months of 2024 primarily reflected increased investment in our muscarinic programs and advancing Phase 2 programs in psychiatry, offset by lower 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 for the first six months of 2024 primarily reflected increased investment in preclinical development programs, including our gene therapy programs. Milestone. Consists of milestone expenses incurred in connection with our collaborative arrangements. Compared with the comparable period last year, the increase in milestone expenses for the first six months of 2024 primarily reflected expense recognized in connection with development milestones achieved under our collaborations with Nxera, Takeda and 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 and timing of expense recognition related to performance-based restricted stock units, which is generally recognized ratably over the expected performance period once the predefined performance-based criteria for vesting becomes probable. Compared with the comparable period last year, the increase in payroll and benefits expenses for the first six months of 2024 primarily reflected higher headcount, partially offset by decreased non-cash stock-based compensation expense primarily driven by a charge related to a change in equity grant agreement terms in the second quarter of 2023. 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. Compared with the comparable period last year, the increase in facilities and other expenses for the first six months of 2024 primarily reflected increased rent expense related to our new campus facility. 20 Acquired In-Process Research and Development, or IPR&D. Three Months Ended June 30, Six Months Ended June 30, ( in millions) 2024 2023 2024 2023 Acquired in-process research and development $ 2.5 $ — $ 8.5 $ 143.9 Compared with the comparable period last year, the decrease in IPR&D expense for the first six months of 2024 reflected lower payments for upfront fees in connection with our collaborations. In the first six months of 2023, we recognized $143.9 million of IPR&D expense in connection with payment of the upfront fee pursuant to the expansion of our collaboration with Voyager. Selling, General and Administrative, or SG&A. Three Months Ended June 30, Six Months Ended June 30, ( in millions) 2024 2023 2024 2023 Selling, general and administrative $ 242.0 $ 221.8 $ 485.1 $ 464.5 Compared with the comparable period last year, the increase in SG&A expenses for the first six months of 2024 primarily reflected continued investment in our commercial organization, including pre-launch crinecerfont activities, and impairment charges of $14.0 million associated with leased office space that has been vacated as we continue to occupy our new campus facility, partially offset by decreased non-cash stock-based compensation expense primarily driven by a 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 June 30, (in millions) 2024 2023 2024 2023 Unrealized (loss) gain on equity securities (19.9) 37.3 (18.3) 39.5 Charges associated with convertible senior notes (49.7) — (138.4) — Investment income and other, net 22.8 10.7 45.1 19.4 Total other (expense) income, net $ (46.8) $ 48.0 $ (111.6) $ 58.9 Compared with the comparable period last year, the increase in total other expense, net, for the first six months of 2024 primarily reflected $138.4 million of expense recognized in connection with conversions of the 2024 Notes upon maturity in May 2024 and periodic fluctuations in the fair values of our equity security investments, partially offset by increased interest income on our debt security investments. Provision for (Benefit from) Income Taxes. Three Months Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 2024 2023 Provision for (benefit from) income taxes $ 33.6 $ 26.1 $ 24.7 $ (0.6) The effective tax rate for the second quarter and first six months 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 periods last year, the effective tax rate 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. 21 Net Income. Three Months Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 2024 2023 Net income $ 65.0 $ 95.5 $ 108.4 $ 18.9 Compared with the comparable period last year, the increase in net income for the first six months of 2024 primarily reflected increased INGREZZA net product sales and lower total payments for upfront fees and development milestones achieved in connection with our collaborations, partially offset by $138.4 million of expense recognized in connection with conversions of the 2024 Notes upon maturity in May 2024, periodic fluctuations in the fair values of our equity security investments, and continued investment in our commercial organization, including pre-launch crinecerfont activities, 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 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, 2024 December 31, 2023 Total cash, cash equivalents and marketable securities $ 1,676.7 $ 1,719.1 Working Capital: Total current assets $ 1,669.8 $ 1,607.0 Less total current liabilities 398.5 654.8 Total working capital $ 1,271.3 $ 952.2 Information Regarding Our Cash Flows. Six Months Ended June 30, (in millions) 2024 2023 Cash flows from operating activities $ 194.9 $ 54.4 Cash flows from investing activities (83.2) (168.0) Cash flows from financing activities (223.1) 11.1 Change in cash, cash equivalents and restricted cash $ (111.4) $ (102.5) 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 total payments for upfront fees and development milestones achieved in connection with our collaborations, partially offset by increased cash paid for income taxes and increased investment in our expanded clinical portfolio. Cash Flows from Investing Activities. Periodic fluctuations in cash flows from investing activities primarily reflect timing differences related to our purchases, sales, and maturities of debt security investments and changes in our portfolio-mix. Cash flows from investing activities for the 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. Compared with the comparable period last year, the change in cash flows from financing activities primarily reflected the settlement of the 2024 Notes in full for $308.8 million in cash, partially offset by increased proceeds from issuances of our common stock. 22 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, DYSVAL, and/or any of our other products; • 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 costs involved in filing and pursuing patent applications, enforcing patent claims, or engaging in interference proceedings or other patent litigation; • costs associated with securing adequate coverage and reimbursement for our products; • competing technological and market developments; • developments related to any future litigation; • the cost of commercialization activities and arrangements, including our advertising campaigns; and • the cost of manufacturing our product candidates. 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 $17.7 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 continue 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. 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 June 30, 2024, it would not have had a material effect on the fair value of our investment portfolio as of that date. 23 Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, these forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements. Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “hopes,” “may,” “will,” “plan,” “intends,” “estimates,” “could,” “should,” “would,” “continue,” “seeks,” “proforma,” or “anticipates,” or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, technology enhancements, possible changes in legislation and other statements that are not historical. These statements include but are not limited to statements under the captions “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as other sections in this report. You should be aware that the occurrence of any of the events discussed under the heading in Part II titled “Item 1A. Risk Factors” and elsewhere in this report could substantially harm our business, results of operations and financial condition and that if any of these events occurs, the trading price of our common stock could decline and you could lose all or a part of the value of your shares of our common stock. The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we assume no obligation to update our forward-looking statements, even if new information becomes available in the future. Item 3. Quantitative and Qualitative Disclosures About Market Risk A discussion of our exposure to, and management of, market risk appears in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading “Interest Rate Risk.”