# Harmony Biosciences Holdings, Inc. (HRMY) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Harmony Biosciences Holdings, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1802665/000155837024001466/hrmy-20231231x10k.htm
Accession: 0001558370-24-001466
Filing date: 2024-02-22
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HRMY/
All MD&A years: /company/HRMY/mda/
Previous year: /company/HRMY/mda/fy2022/ (FY 2022)
Next year: /company/HRMY/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this Annual Report on Form 10-K. A discussion of the year ended December 31, 2022, compared to the year ended December 31, 2021, has been reported previously under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 21, 2023.

Company Overview

We are a commercial-stage, pharmaceutical company focused on developing and commercializing innovative therapies for patients living with rare neurological diseases as well as patients living with other neurological diseases who have unmet medical needs. Our product, WAKIX (pitolisant), is a first-in-class molecule with a novel mechanism of action (“MOA”) specifically designed to increase histamine signaling in the brain by binding to H3 receptors. In August 2019, WAKIX was approved by the U.S. Food and Drug Administration (the “FDA”) for the treatment of excessive daytime sleepiness (“EDS”) in adult patients with narcolepsy, and its U.S. commercial launch was initiated in November 2019. In October 2020, WAKIX was approved by the FDA for the treatment of cataplexy in adult patients with narcolepsy. WAKIX is the first-and-only approved product for patients with narcolepsy that is not scheduled as a controlled substance by the U.S. Drug Enforcement Administration (the “DEA”).

We believe that pitolisant’s ability to regulate histamine gives it the potential to provide therapeutic benefit in other rare neurological diseases that are mediated through H3 receptors and histamine signaling. We are taking a mechanism-based approach to managing the life cycle of pitolisant and identified idiopathic hypersomnia (“IH”), another central disorder of hypersomnolence like narcolepsy, as our next potential new indication for WAKIX, which received orphan drug designation by the FDA in September 2023 and Fast Track Designation in November 2023. In April 2022, we initiated a Phase 3 registrational trial, the INTUNE Study, to evaluate the efficacy and safety of pitolisant in adult patients with IH. We completed enrollment in the INTUNE study in May 2023 and we announced topline data in October 2023. While the primary endpoint did not meet statistical significance, we believe the totality of the data showed favorable numerical trends for pitolisant in the treatment of adult patients with IH and we have scheduled a meeting with the FDA for March 2024 to discuss the path forward for IH. We anticipate meeting with the FDA towards the end of the first quarter of 2024. We are focusing our development efforts on other rare neurological disorders in which EDS is a prominent symptom, including Prader-Willi Syndrome (“PWS”) and myotonic dystrophy, otherwise known as dystrophia myotonica (“DM”). Based on the positive signals from the data from our Phase 2 proof-of-concept signal detection clinical trial to evaluate pitolisant for the treatment of EDS and other key symptoms in patients with PWS, an end-of-phase 2 meeting with the FDA was held in June 2023. We believe we aligned with the FDA on the proposed Phase 3 registration study design to support further investigation of pitolisant as a potential treatment to address the unmet medical need for children, adolescents and adults with PWS experiencing EDS, for which there is currently no approved treatment. In October 2023, we received FDA alignment regarding the protocol for the Phase 3 TEMPO study in patients with PWS, which we believe will satisfy the requirements for both the registrational trial and one of the two requirements for pediatric exclusivity for pitolisant. In February 2024, the FDA granted Orphan Drug designation to pitolisant for the treatment of PWS. We expect to initiate the Phase 3 study in the first quarter of 2024. In

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June 2021, we initiated a Phase 2 proof-of-concept signal detection clinical trial to evaluate pitolisant for the treatment of EDS, fatigue and cognitive dysfunction in adult patients with DM1 and announced topline results from this trial in the fourth quarter of 2023, in which clinically meaningful improvements were demonstrated in EDS and fatigue. The safety profile was consistent with the established safety profile of pitolisant.

Our partner, Bioprojet completed a Phase 3 trial in pediatric patients with narcolepsy and submitted the trial data to the European Medicines Agency (the “EMA”) seeking approval for a pediatric narcolepsy indication. On January 26, 2023, Bioprojet received a positive opinion from the EMA’s Committee for Medicinal Products for Human Use (“CHMP”) and in March 2023, the EMA granted approval for the marketing authorization of WAKIX for the treatment of narcolepsy in children 6 and older. Based on the data from the positive Phase 3 trial conducted by Bioprojet, we submitted an sNDA for pediatric narcolepsy in December 2023. On February 21, 2024, we announced that the FDA has granted priority review of our pediatric narcolepsy sNDA and has set a Prescription Drug User Fee Act, or target action date, of June 21, 2024. We remain committed to obtaining pediatric exclusivity for WAKIX.

We also seek to expand our pipeline through the acquisition of additional assets that focus on addressing the unmet needs of patients living with rare neurological diseases as well as patients living with other neurological diseases who have unmet medical needs. We are targeting assets that will allow us to further leverage the expertise and infrastructure that we have successfully built at Harmony so we can optimize the benefit of internal synergies. Consistent with this objective, on July 31, 2022, we entered into a License and Commercialization Agreement (the “2022 LCA”) with Bioprojet whereby we obtained exclusive rights to manufacture, use and commercialize one or more new products based on pitolisant in the United States and Latin America, with the potential to add additional indications and formulations upon the agreement of both parties. We have made progress in the development of two new formulations of pitolisant, Next Gen 1 (“NG1”) and Next Gen 2 (“NG2”). Both formulations entered clinical studies in the fourth quarter of 2023 and we anticipate data in the first half of 2024.

In addition, on October 10, 2023, we completed a tender offer to acquire all of the outstanding shares of common stock of Zynerba Pharmaceuticals, Inc. (together with its subsidiary, Zynerba Pharmaceutical Pty, Ltd., “Zynerba”) for $60.0 million, exclusive of transaction related costs of approximately $2.6 million. Zynerba is a clinical-stage pharmaceutical company focused on innovative pharmaceutically produced transdermal cannabidiol therapies for orphan neuropsychiatric disorders, including Fragile X syndrome (“FXS”). The phase 3 RECONNECT registration study in FXS is ongoing.

On August 4, 2021, we acquired HBS-102, a Melanin-concentrating hormone receptor 1 (MCHR1) antagonist previously developed as CSTI-100/ALB-127258(a)/ALB-127258 (the “Compound”), along with intellectual property and other assets related to the development, manufacture, and commercialization of the Compound from ConSynance Therapeutics, Inc. In connection with the acquisition, we made an upfront payment of $3.5 million and will be required to make certain payments upon the achievement of certain development milestones, regulatory milestones, and sales milestones and pay ongoing royalties upon commercialization. We acquired full development and commercialization rights for HBS-102 globally, but we have provided an indication-limited grant-back license to ConSynance for the development and commercialization of the Compound in Greater China. We are conducting a preclinical proof-of-concept study to assess the effect of HBS-102 on hyperphagia, weight gain and other metabolic parameters in a mouse model of PWS and are also conducting a thirteen-week toxicology study. We anticipate data from both studies in the first half of 2024.

Pitolisant was developed by Bioprojet and approved by the EMA in 2016 for the treatment of narcolepsy in adult patients with or without cataplexy and in 2021 for the treatment of EDS in adult patients with obstructive sleep apnea. We acquired an exclusive license to develop, manufacture and commercialize pitolisant in the United States pursuant to our license agreement with Bioprojet (as amended, the “2017 LCA”) in July 2017. See “Part I—Item 1. Business.—Strategic Agreement—License and Commercialization Agreement with Bioprojet” for further information regarding the 2017 LCA. Pitolisant was granted Orphan Drug Designation for the treatment of narcolepsy by the FDA in 2010. It received Breakthrough Therapy designation for the treatment of cataplexy in patients with narcolepsy and Fast Track status for the treatment of EDS and cataplexy in patients with narcolepsy in April 2018.

Our operations are conducted by our wholly owned subsidiaries, Harmony Biosciences, LLC, which was formed in May 2017, and Zynerba.

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Commercial Performance Metrics

As of December 31, 2023, we continued to see growth in the number of unique healthcare professional (“HCP”) prescribers of WAKIX since it became available in November 2019. The average number of patients on WAKIX at the end of 2023 was approximately 6,150. Additionally, as of December 31, 2023, we have secured formulary access for more than 80% of all insured lives (Commercial, Medicare and Medicaid) in the United States. Within these covered lives, we have observed favorable access to WAKIX subsequent to the expanded approval of WAKIX for the treatment of cataplexy in adult patients with narcolepsy in October 2020.

Financial Operations Overview

Net Product Revenue

Net product revenue includes gross product shipments less provisions for sales discounts and allowances, which includes trade allowances, rebates to government and commercial entities, and other discounts. Although we expect net sales to increase over time, provisions for sales discounts and allowances may fluctuate based on the mix of sales to different customer segments and/or changes in our estimates. For further discussion of the components of Revenue, see “—Critical Accounting Policies and Significant Judgments and Estimates.”

Cost of Product Sales

Cost of product sales includes manufacturing and distribution costs, the cost of API, FDA program fees, royalties due to third parties on net product sales, freight, shipping, handling, storage costs and salaries of employees involved with oversight of production. We expect the cost of product sales to increase as we continue to ramp up production in order to meet future demand for WAKIX and diversify our supply chain for WAKIX.

The shelf life of WAKIX is three years from date of manufacture, with the earliest expiration of current inventory expected to be May 2025. We regularly review our inventory levels and expect write-offs from time to time. We will continue to assess inventory levels in future periods as demand for WAKIX and the rate of inventory turnover evolves. We currently have adequate supply of WAKIX to cover demand into the second quarter of 2025, with additional API on-hand inventory to support at least 36 months beyond this time frame.

Research and Development Expenses

Research and development expenses primarily include development programs for potential new indications for pitolisant in patients with IH, PWS and DM. We also incur research and development expenses related to our team of Medical Science Liaisons (“MSLs”) who interact with key opinion leaders, with a focus on the science, the role of histamine in sleep-wake state stability and the novel mechanism of action of pitolisant. In addition, our MSLs support our market access team with the presentation of clinical data to payors upon request and our clinical development team to identify potential clinical trial sites. Research and development costs are expensed as incurred. We have significantly increased our research and development efforts as we advance our clinical programs in IH, PWS and DM and assess other product candidates to expand our pipeline. Research and development expenses also include:

[[GREPCENT_TABLE]]
[["","\u25cf","employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for our research and development personnel;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","direct third-party costs such as expenses incurred under agreements with CROs, and contract manufacturing organizations (\u201cCMOs\u201d);"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","manufacturing costs in connection with producing materials for use in conducting clinical trials;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","costs related to packaging and labeling of clinical supplies;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","other third-party expenses (e.g., consultants, advisors) directly attributable to the development of our product candidates; and"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","amortization expense for assets used in research and development activities."]]
[[/GREPCENT_TABLE]]

We do not track research and development expenses on an indication-by-indication basis. A significant portion of our research and development costs are external costs, such as fees paid to CROs and CMOs, central laboratories, contractors, and consultants in connection with our clinical development programs. Internal expenses primarily relate to personnel who are deployed across multiple programs.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, milestone payments, and the cost of submitting an NDA to the FDA (and/or other regulatory authorities). We expect our research and development expenses to be significant over the next several years as we advance our current clinical development programs and prepare to seek regulatory approval for additional indications for pitolisant, advance HBS-102 from preclinical studies into the clinic, and identify potential new product candidates to develop toward new indications.

At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of any additional indications for pitolisant or other product candidates that we move forward for regulatory approval. There are numerous risks and uncertainties associated with developing product candidates, including uncertainty related to:

[[GREPCENT_TABLE]]
[["","\u25cf","the duration, costs and timing of clinical trials of our current development programs and any further clinical trials related to new product candidates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the sufficiency of our financial and other resources to complete the necessary preclinical studies and clinical trials;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the impact of the COVID-19 pandemic, including any future resurgence or new variants, on the ability to initiate new clinical trials and/or maintain the continuity of ongoing clinical trials, including our ability to access sleep labs in order to conduct objective sleep testing, that could be impacted by future shelter-in-place orders and needs of the health care system to focus on managing patients affected by COVID-19;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","receiving Bioprojet\u2019s consent to pursue additional indications for pitolisant;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the acceptance of INDs for our planned clinical trials or future clinical trials;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the successful and timely enrollment and completion of clinical trials;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the successful completion of preclinical studies and clinical trials;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","successful data from our clinical programs that support an acceptable risk-benefit profile of our product candidates in the intended populations;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the receipt and maintenance of regulatory and marketing approvals from applicable regulatory authorities;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","establishing agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidate is approved;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the entry into collaborations to further the development of our product candidates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","obtaining and maintaining patent and trade secret protection or regulatory exclusivity for our product candidates; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","successfully launching our product candidates and achieving commercial sales, if and when approved."]]
[[/GREPCENT_TABLE]]

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A change in the outcome of any of these variables with respect to the development of any of our programs or any product candidate we develop would significantly change the costs, timing and viability associated with the development and/or regulatory approval of such programs or product candidates.

Sales and Marketing Expenses

Our sales and marketing expenses primarily relate to the market development and commercialization activities of WAKIX for the treatment of EDS and cataplexy in adult patients with narcolepsy. Market development and commercial activities account for a significant portion of our operating expenses and are expensed as incurred. We expect our sales and marketing expenses to increase in the near- and mid-term to support WAKIX’s indications for the treatment of EDS or cataplexy in adult patients with narcolepsy and to expand our portfolio with the anticipated growth from potential additional indications.

Sales and marketing expenses include:

[[GREPCENT_TABLE]]
[["","\u25cf","employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for our sales, marketing and market access personnel;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","healthcare professional-related expenses, including marketing programs, healthcare professional promotional medical education, disease education, conference exhibits and market research;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","patient-related expenses, including patient awareness and education programs, disease awareness education, patient reimbursement programs, patient support services and market research;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","market access expenses, including payor education, specialty pharmacy programs and services to support the continued commercialization of WAKIX; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","secondary data purchases (i.e., patient claims and prescription data), data warehouse development and data management."]]
[[/GREPCENT_TABLE]]

In addition, sales and marketing expenses include external costs such as website development, media placement fees, agency fees for patient, medical education and promotional expenses, market research, analysis of secondary data, conference fees, and consulting fees.

General and Administrative Expenses

General and administrative expenses consist primarily of employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for our personnel in executive, legal, finance and accounting, human resources, investor relations, and other administrative departments. General and administrative expenses also consist of office leases, and professional fees, including legal, tax and accounting and consulting fees.

We anticipate that our general and administrative expenses will increase in the future to support our continued commercialization efforts, ongoing and future potential research and development activities, and increased costs of operating as a public company. These increases will likely be driven by costs associated with the hiring of additional personnel and fees paid to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with the requirements of Nasdaq and the SEC, insurance and investor relations costs. If any of our current or future indication expansion programs or new product candidates obtain U.S. regulatory approval, we expect that we would incur significantly increased expenses associated with building a sales and marketing team.

Paragon Agreement

We are party to a right-of-use agreement with Paragon Biosciences, LLC (“Paragon”) whereby we have access to and the right to use certain office space leased by Paragon in Chicago, Illinois. For the year ended December 31, 2023, we paid fees of $0.3 million pursuant to this agreement. Paragon is related party as they share common ownership with the Company and the Chairman of the Company’s board of directors was the President and owner of the entity.

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​

​

Loss on Debt Extinguishment

Loss on debt extinguishment consists primarily of costs of extinguishment of debt during the applicable period related to the prepayment of our credit agreements.

Interest Expense

Interest expense consists primarily of interest expense on debt facilities, amortization of debt issuance costs and amortization of premiums on our debt securities.

Interest Income

Interest income consists primarily of cash interest earned on our cash and investment balances and accretion of the discount on our investments in debt securities.

Results of Operations

The following table sets forth selected items in our consolidated statements of operations for the periods presented:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

​

Net Product Revenue

Net product revenue increased by $144.2 million, or 32.9%, for the year ended December 31, 2023, compared to the same period in 2022. The increase was primarily due to a 33.5% increase in units shipped, and the net impact of a 7.0% price increase which occurred in January 2023.

Cost of Product Sales

Cost of product sales increased by $37.8 million, or 45.2%, for the year ended December 31, 2023, compared to the same period in 2022. Cost of product sales as a percentage of net product revenue was 20.8% for the year ended December 31, 2023, compared to 19.1% for the year ended December 31, 2022. The increase in cost of product sales was due to higher royalties as a result of higher sales of WAKIX in the current year. Higher sales of WAKIX in the year ended

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December 31, 2023, resulted in us entering a higher royalty tier earlier in 2023 compared to 2022, which also caused royalties to be higher in the current year.

Research and Development Expenses

Research and development expenses increased by $5.2 million, or 7.3%, for the year ended December 31, 2023 compared to the same period in 2022. The increase was primarily driven by a $22.9 million increase in clinical development work associated with PWS, ZYN002, IH, NG1/NG2 and DM1, a $4.0 million increase in personnel costs, a $1.3 million increase in stock compensation associated with new awards, a $3.8 million severance charge, and a $2.3 million IPR&D charge, both related to the acquisition of Zynerba, and a $0.8 million IPR&D charge related to preclinical milestones achieved for HBS-102, partially offset by a $30 million licensing fee incurred upon entering the 2022 LCA with Bioprojet during the year ended December 31, 2022.

Sales and Marketing Expenses

Sales and marketing expenses increased by $18.1 million, or 22.9%, for the year ended December 31, 2023 compared to the same period in 2022. The increase was primarily due to a $7.6 million increase in personnel costs, a $6.5 million increase in patient engagement and marketing activities, a $2.7 million increase in travel, and a $1.2 million increase in stock compensation associated with new awards. The increase in patient engagement and marketing activities for both comparable periods was driven by our continued growth of WAKIX and the increase in personnel costs for both comparable periods was related increased headcount and increased sales force incentives.

General and Administrative Expenses

General and administrative expenses increased by $11.3 million, or 13.4%, for the year ended December 31, 2023 compared to the same period in 2022. The increase was primarily due to a $4.1 million severance charge associated with the acquisition of Zynerba, a $2.9 million increase in personnel costs, a $1.9 million increase in legal and professional fees due to patent lawsuits, a $1.7 million increase to stock compensation associated with new awards and a $0.9 million increase in intangible asset amortization as a result of the $40.0 million milestone payment in March 2022 upon attaining $500.0 million in life-to-date aggregate net sales of WAKIX in the United States.

Loss on Debt Extinguishment

Loss on debt extinguishment was $9.8 million for the year ended December 31, 2023.  There was no comparable amount in the prior year periods.

Interest Expense

Interest expense increased by $5.0 million, or 26.4%, for the year ended December 31, 2023 compared to the same period in 2022. The increase was primarily due to higher interest rates in 2023 compared to 2022 and $2.0 million in unamortized fees and ticking fees pertaining to the DDTL (defined below). 

Interest Income

Interest income increased by $11.6 million, or 371.2%, for the year ended December 31, 2023 compared to the same period in 2022. The increase was primarily due to a $9.2 million increase in cash interest generated from our investments and cash equivalents and a $2.4 million increase in accretion of discount on our investments.

Income Taxes

Income tax expense was $44.5 million, representing a 25.7% effective tax rate, for the year ended December 31, 2023 compared to an income tax benefit of $76.8 million for the year ended December 31, 2022. The income tax benefit related to the year ended December 31, 2022 was due to the release of the valuation allowance on our deferred tax assets, partially offset by current period provision for state and federal income taxes. The effective tax rate of 25.7% for the year ended December 31, 2023 included 21.0% for the provision of federal income taxes and 5.7% for the provision of state income taxes, partially offset by a 2.1% benefit from research and development credits.

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Liquidity, Sources of Funding and Capital Resources

Overview

As of December 31, 2023, we had cash, cash equivalents, and investments of $425.6 million and accumulated deficit of $143.3 million. As of December 31, 2023, we had outstanding debt of $196.3 million.

The consolidated financial statements have been prepared as though we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

We believe that our existing cash, cash equivalents and investments on hand as of December 31, 2023, will enable us to meet our operational liquidity needs for the next 12 months. In addition, we plan to maintain disciplined capital allocation to maximize shareholder value, which includes investing in the expansion of our product portfolio and opportunistically executing on our share repurchase program to return value to shareholders. We have based our liquidity and cash flow projections on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we expect.

Term Loan A Credit Agreement

On July 26, 2023, we entered into a Credit Agreement (the “TLA Credit Agreement”) with JPMorgan Chase Bank, N.A., as “Administrative Agent”, and certain lenders. The TLA Credit Agreement provides for a five-year senior secured term loan (the “TLA Term Loan”) in an aggregate principal amount of $185.0 million.  

On September 21, 2023, we entered into the First Incremental Amendment (the “First Incremental Amendment”) with the Administrative Agent and Bank of America, N.A., as incremental lender. The First Incremental Amendment provides for an incremental senior secured term loan (the “Incremental Term Loan”) in an aggregate principal amount of $15.0 million. The First Incremental Amendment amends the TLA Credit Agreement and provides that the Incremental Term Loan will have identical terms as the TLA Term Loan.

The repayment schedule for both the TLA Term Loan and the Incremental Term Loan (together, the “Term Loans”) consists of $3.8 million quarterly principal payments, which commence on December 31, 2023, increasing to $5.0 million quarterly principal payments beginning on December 31, 2025, with a $115.0 million payment due on the maturity date of July 26, 2028. The Term Loans bear interest at a per annum rate equal to, at our option, (i) a base rate plus a specified margin ranging from 2.50% to 3.00%, based on our senior secured net leverage ratio (as defined in the TLA Credit Agreement) or (ii) Term SOFR plus a credit spread adjustment of 0.10% plus a specified margin ranging from 3.50% to 4.00%, based on our senior secured net leverage ratio.

The TLA Credit Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties, events of default and other provisions. We were in compliance with all covenants as of December 31, 2023.

Blackstone Credit Agreement

In August 2021, we entered into the Blackstone Credit Agreement that provided for (i) a senior secured term loan facility in an aggregate original principal amount of $200.0 million (the “Initial Term Loan”) and (ii) a senior secured delayed draw term loan facility in an aggregate principal amount up to $100.0 million (the “DDTL” and, together with the Initial Term Loans, the “Loans”). The DDTL was initially available to draw down through August 9, 2022. In August 2022, we entered into an agreement to extend the expiration date of the DDTL to August 9, 2023, for which we will pay a ticking fee at a rate of 1% per annum on the undrawn portion of the DDTL, which commenced on August 10, 2022. We used substantially all of the proceeds from the Blackstone Credit Agreement, and the related sale of our common stock, to repay the balance of the OrbiMed Credit Agreement.

In connection with the TLA Credit Agreement, we fully extinguished the Blackstone Credit Agreement, which required a payoff amount of $207.3 million consisting of principal repayment, interest, exit fees, a ticking fee and a prepayment premium. We recognized a loss on extinguishment of debt of $9.8 million relating to the Blackstone Credit Agreement for the year ended December 31, 2023.We have no further obligations under the Blackstone Credit Agreement.

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Share Repurchases

On August 1, 2023, our Board of Directors approved a program providing for the repurchase of shares of common stock in an aggregate amount of up to $125.0 million, excluding commissions and transaction fees. The repurchase program may be suspended, terminated or modified at any time for any reason. During the year ended December 31, 2023, we repurchased and retired 1,439,792 shares of common stock at an aggregate cost of approximately $50.0 million, excluding commissions and transaction fees.

On October 27, 2023, our Board of Directors terminated the August 2023 Repurchase Program and any remaining amount authorized for the repurchase of shares. Simultaneously, our Board of Directors approved a share repurchase program (the “October 2023 Repurchase Program”) providing for the repurchase of shares of common stock in an aggregate amount of up to $200.0 million, excluding commissions and transaction fees. The October 2023 Repurchase Program may be suspended, terminated, or modified at any time for any reason. During the year ended December 31, 2023, the Company repurchased and retired 1,814,653 shares of common stock at an aggregate cost of $50.0 million under the October 2023 Repurchase Program, excluding commissions and transaction fees. As of December 31, 2023, the remaining amount of common stock authorized for repurchase was $150.0 million.

Acquisitions

On October 10, 2023, we completed a tender offer (the “Tender Offer”) to acquire all of the outstanding shares of common stock of Zynerba Pharmaceuticals, Inc. (“Zynerba Common Stock”).

Under the terms of the Tender Offer, we paid (i) $1.1059 per share of Zynerba Common Stock (the “Common Cash Amount”), plus (ii) one contingent value right (each, a “CVR”) per share of Zynerba Common Stock (the “Common CVR Amount”), which represents the right to receive up to approximately $2.5444 per share of Zynerba Common Stock, subject to the achievement of certain clinical, regulatory and sales-based milestones. Both the Common Cash Amount and Common CVR Amount are to be paid in cash, subject to any applicable withholding of taxes and without interest. The aggregate consideration to acquire the Zynerba Common Stock upon completion of the Tender Offer was $60 million, excluding transaction related fees, which we paid using cash on hand.

Asset Purchase Agreement

In August 2021, we entered into the APA to acquire HBS-102, a potential first-in-class molecule with a novel mechanism of action. Under the terms of the agreement, the Company acquired full development and commercialization rights globally, with the exception of Greater China, for $3.5 million, which was recorded in research and development expense in the Company’s statement of operations and comprehensive income (loss) for the year ended December 31, 2021. Additionally, there are payments due upon the achievement of certain milestones including $1.0 million for preclinical milestones, $19.0 million for development milestones, $44.0 million for regulatory milestones and $110.0 million for sales milestones.

License Agreement

In July 2022, we entered into the 2022 LCA with Bioprojet whereby we obtained exclusive rights to manufacture, use and commercialize one or more new products based on pitolisant in the United States and Latin America, with the potential to add additional indications and formulations upon the agreement of both parties. We paid an initial, non-refundable $30.0 million licensing fee in October 2022, and additional payments of up to $155.0 million are potentially due under the 2022 LCA upon the achievement of certain future development and sales-based milestones. In addition, certain payments will become due upon the achievement of development milestones for new indications and formulations as agreed upon by both parties. The 2022 LCA also includes a fixed trademark royalty and a tiered royalty payable on net sales of any new products commercialized, which will be payable to Bioprojet on a quarterly basis. The $30.0 million licensing fee was recorded in research and development expenses within the consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2022.

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Recent Milestone Payments

In March 2023, we achieved a preclinical milestone, which triggered a $0.8 million payment under the provisions of the APA, which was paid in April 2023.  

In March 2022, we made a final $40.0 million milestone payment to Bioprojet upon WAKIX attaining $500.0 million in life-to-date aggregate net sales in the United States.

Cash Flows

The following table sets forth a summary of our cash flows for the years ended December 31, 2023, and 2022:

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Operating Activities

Net cash provided by operating activities for the year ended December 31, 2023, consisted of our net income of $128.9 million adjusted for non-cash items of $24.4 million related to intangible amortization and depreciation and $31.2 million related to stock-based compensation expense. Net working capital excluding cash decreased by $35.0 million.

Net cash provided by operating activities for the year ended December 31, 2022, consisted of our net income of $181.5 million adjusted for non-cash items of $23.4 million related to intangible amortization and depreciation and $26.9 million related to stock-based compensation expense. Net working capital excluding cash decreased by $4.1 million.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2023, was $46.4 million, which was primarily attributable to $127.5 million in purchases of debt securities, $37.0 million related to the acquisition of Zynerba, net of cash received, and $0.3 million in purchases of property and equipment, partially offset by $118.3 million in proceeds from sales and maturities of investments.

Net cash used in investing activities for the year ended December 31, 2022, was $141.8 million, which was primarily attributable to $110.7 million in purchases of debt securities and a final $40.0 million initial payment associated with the 2017 LCA, partially offset by $9.1 million in proceeds from sales and maturities of investments.

Financing Activities

Net cash used in financing activities for the year ended December 31, 2023, was $105.6 million, which primarily consisted of $202.3 million in payments of principal and exit fees associated with the extinguishment of the Blackstone Credit Agreement, $100 million in share repurchases, $1.0 million in principal payments associated with the Blackstone Credit Agreement, and $3.8 million principal payments related to the TLA Credit Agreement, partially offset by $197.0 million in proceeds associated with the TLA Credit Agreement, net of issuance costs, and $5.1 million in proceeds from the exercise of employee stock options.

Net cash provided by financing activities for the year ended December 31, 2022 was $6.8 million, which primarily consisted of $8.8 million in proceeds from the exercise of employee stock options and stock issuances offset by $2.0 million in principal payments associated with the Blackstone Credit Agreement.

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Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of expenses during the reporting periods. In accordance with GAAP, we evaluate our estimates and judgments on an ongoing basis.

Significant estimates include assumptions used in the determination of the amount of revenue recognized on sales of WAKIX, costs incurred under services type agreements related to the performance of research and development activities, and the measurement of compensation expense pursuant to stock-based awards. We base our estimates on contractual terms, historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We define our critical accounting policies as those under GAAP that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. While our accounting policies are more fully described in Note 3 to our consolidated financial statements included herein under “Part II—Item 8. Financial Statements and Supplementary Data”, we believe the following are the critical accounting policies used in the preparation of our consolidated financial statements that require significant estimates and judgments.

Revenue Recognition

We account for contracts with our customers in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), or ASC 606. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services it transfers to the customer. The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under contracts will not occur in a future period. Our analyses contemplate the application of the constraint in accordance with ASC 606. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

We have determined that the delivery of our product to our customer constitutes a single performance obligation as there are no other promises to deliver goods or services in contracts with our customers. Shipping and handling activities are considered to be fulfilment activities and are not considered to be a separate performance obligation. The payment terms with our customers do not exceed one year and therefore, no amount of consideration has been allocated as a financing component. Taxes collected related to product sales are remitted to governmental authorities and are excluded from revenue.

Product Sales, Net

We recognize revenue on sales of WAKIX when the customer obtains control of the product, which occurs at a point in time, typically upon delivery. Product revenue is recorded at the product’s list price, net of reserves for variable consideration that is offered within contracts between us and our customers, payors, and other indirect customers relating to the sale of WAKIX. Components of variable consideration include government (as detailed below) and commercial rebates, commercial co-payment assistance and distribution service fees. These deductions are based on the amounts earned, or to be claimed on the related sales, and are classified as a current liability or reduction of receivables in our consolidated balance sheet.

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Government Contracts

We have entered into contracts (i) to participate in the Medicaid Drug Rebate Program and the Medicare Part D program, and (ii) to sell to the U.S. Department of Veterans Affairs, 340b entities and other government agencies, or government payors, so that WAKIX will be eligible for purchase by, in partial or full reimbursement from, such government payors. We record reserves for rebates due pursuant to these contracts as a reduction of revenue in the same period in which the revenue is recognized. The liability for government rebates is included in accrued expenses in our consolidated balance sheet.

We estimate rebates due pursuant to government contracts based upon our historical payment trends, information obtained from third parties estimating current payment trends, the government-mandated discounts applicable to government-funded programs, as well as information obtained from our customers. The liability for these government rebates consists of estimates of claims for WAKIX dispensed in the current period, plus an estimate for product which has shipped and has been recognized as revenue but remains in the distribution channel at the end of a reporting period.

Research and Development Expenses

We base our expenses for research and development services rendered on estimates of the timing of services received and the total cost of those services pursuant to quotes, contracts and communicating with our vendors. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payments. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the total costs of the services to be performed. If the actual timing of the performance of services, or the total cost of those services is materially different from our estimates, we adjust the accrual or amount of prepaid or accrued expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of research and development expenses.

Stock-Based Compensation

The Company recognizes stock-based compensation expense in operating results using a fair value measurement method, in accordance with FASB ASC 718, Compensation-Stock Compensation. ASC 718 requires all stock-based payments to employees to be recognized in operating results as compensation expense based on fair value over the requisite service period of the awards. The vesting periods have a time-based provision consisting of one to five years and expire no more than 10 years after the date of grant. Upon a change of control, certain unvested awards will immediately vest. The Company determines the fair value of stock-based awards using the Black-Scholes option-pricing model, which uses both historical and current market data to estimate fair value. The method incorporates various assumptions, such as the risk-free interest rate, expected volatility, expected dividend yield, and expected life of the options.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred tax assets may be reduced by a valuation allowance if, based on all available evidence, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management judgment is required in determining the period in which a reversal of a valuation allowance should occur. We are required to consider all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income among other items, in determining whether a full or partial release of its valuation allowance is required. Our accounting for deferred tax consequences represents the best estimate of those future events. We present deferred income taxes on the consolidated balance sheet on a jurisdictional basis as either a net noncurrent asset or liability.

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We record liabilities for uncertain tax positions based on a two-step approach. The first step is recognition, where we evaluate whether an individual tax position has a likelihood of greater than 50% of being sustained upon examination based solely on the technical merits of the position, including resolution of any related appeals or litigation processes. For tax positions that are currently estimated to have less than a 50% likelihood of being sustained, no tax benefit is recorded. For tax positions that have met the recognition threshold in the first step, we perform the second step of the approach of measuring the benefit (expense) to be recorded. The actual benefits (expense) ultimately realized may differ from our estimates. In future periods, changes in facts, circumstances, and new information may require us to change the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recorded in the statement of income and balance sheet in the period in which such changes occur. As of December 31, 2023, we did not have any liabilities for unrecognized tax positions. As it relates to any interest and penalties associated with any uncertain tax positions, our position is to include those interest and penalties as a component of income tax expense.

Business Combinations

We account for business combinations and asset acquisitions in accordance with FASB ASC 805 Business Combinations. The Zynerba Acquisition was accounted for as an asset acquisition under ASC Topic 805, Business Combinations, because substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable IPR&D asset, ZYN002, Zynerba’s lead asset. ZYN002 is the first and only pharmaceutically manufactured, synthetic cannabidiol, a non-euphoric cannabidiol, formulated as a patent-protected permeation-enhanced gel for transdermal delivery through the skin and into the circulatory system and is currently in Phase III clinical trial for the potential treatment of Fragile X Syndrome. The Company recognized the acquired assets and assumed liabilities based on the consideration paid, including transaction costs, on a relative fair value basis, and after first allocating the preliminary excess of the fair value of net assets acquired over the purchase price consideration to certain qualifying assets, principally, the IPR&D asset. In accordance with the accounting for asset acquisitions, an entity that acquires IPR&D assets in an asset acquisition follows the guidance in ASC Topic 730 Research and Development, which requires that both tangible and intangible identifiable research and development assets with no alternative future use be allocated a portion of the consideration transferred and recorded as research and development expense at the acquisition date.

Recent Accounting Pronouncements

See Note 3 to our consolidated financial statements included herein under “Part II—Item 8. Financial Statements and Supplementary Data.” for more information.

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