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 (NASDAQ:HRMY)
Q3 2020 Earnings Call
Nov 12, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Harmony third-quarter 2020 financial update conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference may be recorded.

[Operator instructions]. I would now like to hand the conference over to your speaker today, Lisa Caperelli, associate vice president, investor relations. Please go ahead, ma'am.

Lisa Caperelli -- Associate Vice President, Investor Relations

Thank you, Josh. Good morning, everyone, and thank you for joining us today as we review Harmony's third-quarter 2020 performance and provide business updates. Our presenters on today's call are our CEO, John Jacobs; chief medical officer, Dr. Jeffrey Dayno; our chief commercial officer, Jeffrey Dierks; and our CFO, Susan Drexler.

The slides that will be presented on this call can be viewed in the investors section on our website at harmonybiosciences.com. Before we start, I would like to remind you that our discussions during this conference call will include forward-looking statements. All statements that are not historical facts are hereby identified as forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated by such statements.

Additional information regarding these factors and forward-looking statements discussed under the forward-looking statements of the earnings press release that we issued today as well as under the heading risk factors in our quarterly report on Form 10-Q that we filed with the SEC. You are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements during this conference call speak only as of the original date of this call or any earlier date indicated in such statement, and we undertake no obligation to update or revise any of these statements. We will now make prepared remarks, and then we will move to a question-and-answer session.

At this time, I would like to turn the call over to our CEO, John Jacobs. John?

John Jacobs -- Chief Executive Officer

Thank you, Lisa. Good morning, everyone, and thank you for joining us on our first earnings call as a public company. This has been a remarkable year so far for Harmony and for the patients we serve, and I'm proud of our team's accomplishments on another successful quarter. During the third quarter, Harmony delivered a strong performance based on our ongoing successful launch of WAKIX in narcolepsy.

I am pleased with our revenue performance to date as well as our efforts to grow the business and execute on our corporate growth strategy. We came out of the gate strong with our launch for WAKIX, have continued to grow through the COVID-19-related challenges that are not unique to WAKIX or Harmony, and we're optimistic about the future potential of WAKIX, a clearly differentiated product with a novel mechanism of action, which provides the foundation for our continued future growth. Our performance this quarter was built upon the significant momentum we generated during the first half of 2020 and puts us in a position to deliver on the three pillars of our corporate growth strategy, which are designed to increase value and long-term growth for our company and our key stakeholders. Let me now spend a few minutes walking you through the three pillars of our corporate growth strategy and the progress we have made to date.

Our first pillar is to maintain continued strong launch performance of WAKIX in narcolepsy. Today, we reported Q3 revenue of $45.6 million and continued growth in both the average number of patients on drug and the number of healthcare professionals, or HCPs, who are prescribing WAKIX quarter on quarter. The continued growth we are experiencing is a testament to the significant unmet needs in this marketplace and the unique and strongly differentiated product profile of WAKIX that addresses those needs. Our second pillar is to expand the utility of WAKIX in rare neurological disorders by expanding our label.

First, in narcolepsy. In fact, just last month, we received the approval of the cataplexy indication, which broadens the clinical utility of WAKIX and strengthens our corporate -- our competitive advantage for the future. In addition, we continue to progress our plans to initiate a Phase 3 trial in pediatric narcolepsy patients in 2021. Pilar two also includes expanding the utility of WAKIX beyond narcolepsy into other rare orphan neurological disorders, starting with Prader-Willi syndrome, or PWS, and myotonic dystrophy, or DM.

I am proud to share with you that we are on track to initiate our Phase 2 clinical trial for PWS and to submit our IND for DM before the end of this year. Dr. Dayno and his team will certainly be busy as we anticipate being in three mid to late-stage clinical trials next year. And finally, our third pillar is to expand our portfolio through opportunistic acquisitions of business assets to further expand our pipeline and leverage the existing expertise and infrastructure that we've established at Harmony.

We continuously monitor the landscape for future opportunistic acquisitions. At Harmony, patients are truly at the heart of everything we do. This has been our most productive [inaudible] action and I'm very proud of our team and the good work we are doing to advance treatments that have the potential to make a difference in the lives of the patients who are counting on us. As we look forward to 2021 and beyond, we are confident that we're well-positioned to continue the strong launch of WAKIX, and we are committed to advancing our clinical development programs with the goal of making WAKIX to even more patients living with unmet medical needs.

And with that, I will hand it over to Jeff Dierks, our chief commercial officer. Jeff?

Jeff Dierks -- Chief Commercial Officer

Thanks, John. 2020 has been an outstanding year for Harmony, and the third quarter was no different. Net revenues for the third quarter were $45.6 million, representing a 20% increase, quarter over quarter. With most of our customer interactions this past quarter, with healthcare professionals, patients and payers being virtual, our strong performance reflects not only the resilience and commitment of our team and the overall attractiveness of the benefit risk profile of WAKIX, but also underscores the significant unmet need in the narcolepsy market and the value of WAKIX to patients and HCPs.

I'd like to highlight some key performance metrics from Q3. The average number of patients on WAKIX in the third quarter increased to 2,200, representing a 22% increase from the second quarter of 2020. The growth in average number of patients speaks to not only the continued and increased adoption of WAKIX, but also demonstrates durability of patient persistence and compliance. The number of new prescribers of WAKIX continued to increase with more than 2,000 unique prescribers of WAKIX by the end of the third quarter.

This represents more than 25% of the approximately 8,000 HCPs who treat the diagnosed narcolepsy population, having already prescribed WAKIX since launch. And we continue to see growth in favorable market access coverage for WAKIX, with approximately 182 million targeted covered lives having positive formulary access to Wakix by the end of the third quarter, with the vast majority of patients only requiring one or two generic step edits to access WAKIX. A key driver of our strong performance with WAKIX is the overall benefit risk profile of the product and how it aligns the unmet medical need that exists in the narcolepsy market despite the availability of other current approved treatments. WAKIX offers a meaningfully differentiated product profile that offers broad clinical utility to narcolepsy patients and the healthcare professionals who treat them with the following key attributes.

WAKIX is a first-in-class molecule of a novel MOA. The only selected H3 receptor antagonist, inverse agonist approved by the FDA. It's the first and only FDA-approved non-scheduled treatment indicated for excessive daytime sleepiness, also known as EDS, or cataplexy in narcolepsy. WAKIX is not a stimulant with no evidence of drug tolerance or withdrawal symptoms in clinical studies.

WAKIX can be used as monotherapy or administered concomitantly with other narcolepsy treatments with no clinically relevant pharmacokinetic interaction seen in clinical trials. And lastly, WAKIX offers convenient, patient-friendly, once-daily oral tablet administration in the morning upon wakening. Now, the solid performance I've outlined is based solely on WAKIX indication for EDS in adult patients with narcolepsy. Importantly, all patients living with narcolepsy have EDS, which made WAKIX an appropriate treatment option for all adult narcolepsy patients since our launch.

With the recent label expansion of WAKIX to include the treatment of cataplexy in addition to EDS, we anticipate this may lead to additional new prescribers of WAKIX or existing prescribers identifying new patients in their practice for WAKIX. Having indications for both EDS and cataplexy in patients with narcolepsy is expected to not only support the continued growth of WAKIX and strengthen our competitive differentiation as the first and only non-scheduled treatment for EDS or cataplexy narcolepsy, but also strengthen payer formulary position now and in the future as products in development that are pursuing indications for both symptoms come to market. We have strong conviction in WAKIX to provide a meaningfully differentiated treatment option to the narcolepsy community. We've received robust positive feedback from healthcare and the patient community since our launch, and we are excited about the difference we are making in the lives of patients.

In summary, I am extremely pleased with our third-quarter performance. We remain focused and look forward to delivering significant near and long-term growth as we continue to execute on our WAKIX launch, now with an expanded label that includes a cataplexy indication, further adding to the broad clinical utility of WAKIX in adult patients with narcolepsy. I'll now turn the presentation over to Dr. Jeff Dayno for an update on our clinical development program.

Jeff Dayno -- Chief Medical Officer

Thank you, Jeff, and good morning, everyone. I am pleased with the progress we have made on the second pillar of Harmony's growth strategy, expanding the clinical utility of WAKIX. One aspect of this strategy is expanding the label in narcolepsy. And on this point, I first want to acknowledge our recent achievement: the FDA approval of the cataplexy indication for WAKIX.

For this, I want to thank my team for all their hard work and perseverance in pursuing this approval, and I also want to recognize and thank FDA for working with us toward this outcome. This outcome is extremely positive for Harmony in that we were able to achieve this milestone this year without having to conduct an additional clinical trial, which would have added more time and cost to the pursuit of this indication. We are also pursuing label expansion for WAKIX in narcolepsy to include pediatric patients. As we have previously shared, we are working toward initiating a Phase 3 clinical trial in the second half of 2021 in pursuit of a pediatric indication for both excessive daytime sleepiness, or EDS, and cataplexy.

We will provide more color on this development program when we get closer to the initiation of the Phase 3 trial later next year. Turning to our development efforts with WAKIX or pitolisant in additional orphan rare neurological patient populations, our first two lead programs are in patients with Prader-Willi Syndrome and myotonic dystrophy, two conditions which we are very excited about as there are no or limited approved products for these indications, and there remains significant unmet medical need, which we believe pitolisant may be able to address. As background, we view pitolisant as a portfolio and a product opportunity. Based on its novel mechanism of action as a histamine three receptor antagonist inverse agonist, which increases histamine signaling in the brain.

It is for this reason, we are taking a mechanism-based approach to drug development and managing the life cycle of pitolisant. First up in our development program is Prader-Willi syndrome, or PWS, which is a pediatric orphan rare CNS and multi-system disorder that affects approximately 15,000 to 20,000 patients in the United States. PWS is mainly a disorder of hypothalamic dysfunction, similar to what happens in patients with narcolepsy, and some patients with PWS have a narcoleptic phenotype. In addition to hyperphagia, which is defined as an abnormally increased appetite for and consumption of food and the primary symptom in PWS, over half of these patients also experienced EDS, which is the primary focus of our development program with pitolisant.

We are taking a very different approach in other development programs which are focused on hyperphagia as the primary outcome. Based on pitolisant's unique mechanism of action and demonstrated efficacy in improving EDS, our program will focus on EDS as the primary outcome and assess the behavioral consequences and cognitive -- impaired cognitive function as key secondary endpoints. Currently, clinical sites are being activated, and we are on track to initiate our Phase 2 trial in PWS before the end of the year. Our next development program is in patients with myotonic dystrophy, and we plan to study patients with both type one and type two myotonic dystrophy, also known as DM 1 and DM 2.

Myotic dystrophy is another orphan rare CNS disorder and is the most common form of muscular dystrophy in adults. It affects approximately 150,000 patients in the U.S. The primary symptom in patients with DM 1 and DM 2 is myotonia, which is an inability for muscle to relax, that results in progressive muscle weakness. However, beyond the myotonia, the most common symptom in these patients is excessive daytime sleepiness, which is experienced in 80 to 90% of DM patients and causes significant impairment in daily functioning.

Two other common symptoms, which are also thought to be the result of impaired CNS histamine signaling, are fatigue and cognitive impairment, which we will also investigate in this development program. We are currently on track for submitting an IND for myotonic dystrophy before year-end, and then plan to initiate a Phase 2 clinical trial in patients with DM in the first half of next year. We will keep you updated on our progress in this clinical program. In summary, we are pleased with our progress thus far, gaining the initial approval of WAKIX for the treatment of EDS in adult patients with narcolepsy less than two years after harmony was established, followed by the adult cataplexy indication a little over a year later.

However, we are even more excited about the development opportunities ahead of us. This is because pitolisant is clearly a unique molecule. It is first-in-class, with a novel mechanism of action, and offers a portfolio and a product opportunity to optimize the life cycle for WAKIX. My R&D team and I are energized, committed and focused on these clinical programs, with our goal to hopefully gain additional approvals and new indications to make WAKIX available to even more patients living with orphan rare neurological disorders who have unmet medical needs.

Thank you, and I will now turn the call over to our CFO, Susan Drexler, who will provide an update on our financial performance. Susan?

Susan Drexler -- Chief Financial Officer

Thank you, Jeff. As you have heard from my colleagues, we are very excited to report meaningful clinical, operational and financial progress in Q3. Most notably in the third quarter, our revenues for WAKIX continued to show strong growth which significantly bolstered our cash position with our recent IPO, and today, reported net income for the first time in the company's history. This morning, we issued our press release and filed our 10-Q with detailed financial results.

I will use this time to highlight a few key points. We experienced strong financial performance in the third quarter. We recorded $45.6 million in WAKIX net product revenue in the third quarter of 2020, which is a 20% increase over the second quarter of 2020. For the nine months ended September 30, 2020, we reported $103.5 million of net product revenue.

We continued to see an increase in the average number of patients and prescribers on a quarterly basis as WAKIX continues to address the unmet medical needs of patients with narcolepsy. Our cost of products sold for the quarter was $7.9 million with a gross margin of approximately 83%. Now, I'll take a few minutes and walk you through our expenses and resource allocation. Our total operating expenses remained relatively consistent for the three months ended September 30, 2020, compared to the same period in 2019.

The for the nine months ended September 30, 2020, total operating expenses were $76.4 million compared to $112.2 million for the same period in 2019. Let's first discuss the changes in R&D and sales and marketing before moving to G&A. Our R&D and sales and marketing expenses remained consistent for the three months ended September 30, 2020, as compared to the same period in 2019. Research and development expenses decreased by 81% for the nine months ended September 30, 2020, compared to the same period in 2019.

The decrease is primarily due to a $50 million milestone paid in 2019 to our development partner, Bioprojet, which was triggered by the FDA acceptance of the NDA filing for WAKIX. This milestone was recorded in R&D as an expense. Sales and marketing expenses increased by 39.4% for the nine months ended September 30, 2020, as compared to the same period in 2019. This increase is primarily due to sales force personnel expenses and commercial investments to support the ongoing commercialization of WAKIX.

Also included in sales and marketing line are expenses associated with our patient assistance program. At Harmony, we want to ensure that eligible patients in need of WAKIX have access to their medications. With more patients losing their jobs and insurance due to the pandemic, we are seeing an increased demand for patient assistance programs for appropriate eligible patients. Now, with respect to G&A expenses, we recorded a decrease of $2 million in the three months ended September 30, 2020, compared to the same period in 2019.

The decrease was a result of an extension payment to Biprojet in 2019. For the nine months ended September 30, 2020, G&A expenses increased by 17.2%. This increase is primarily due to the intangible asset amortization for the full nine months in 2020 and additional fees associated with our IPO in 2020. For the first time in Harmony's history, we reported net income.

In Q3, that net income was $1.9 million. This important milestone is driven from our strong commercial performance and management of our expenses. As you heard from my colleagues, in October, we received a notification from the FDA to expand our label for WAKIX to include cataplexy in patients with narcolepsy. In connection with that approval, we have to pay $102 million to Biprojet.

We have made the initial $2 million payments and plan to pay the $100 million milestone payment prior to the due date in mid-January. We ended this quarter with $221.7 million in cash, which includes $147.6 million in gross proceeds, which we received when we completed our IPO in August. Our strength in cash position is expected to fund the clinical programs in Prader-Willi syndrome and myotonic dystrophy that Dr. Dayno outlined and sustain our commercial operations.

With the strong balance sheet, solid revenue performance and control over our expenses, we have the financial resources to execute our core strategic priorities as well as the three pillars outlined throughout this call. I will now turn the call back to John for additional remarks before opening the call to Q&A. John?

John Jacobs -- Chief Executive Officer

Thank you, Susan. And also, my thanks to Lisa, Jeff Dierks and Dr. Dayno. 2020, to-date, has been a remarkable year for Harmony.

I am proud of what we have achieved so far, confident in our ongoing success, and excited about what lies ahead in our future. Despite the narcolepsy market being established, there continues to be a significant unmet medical need in patients living with narcolepsy. A product like WAKIX with its unique MOA and differentiated product profile offers an exceptional opportunity for the medical community to help patients who are living with this chronic disorder. We look forward to expanding the clinical utility of WAKIX and believe that WAKIX can potentially help even more patients living with orphan rare neurological disorders with significant unmet medical needs.

Operator, we will now take questions from the audience. Thank you.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from David Amsellem with Piper Sandler. You may proceed with your question.

David Amsellem -- Piper Sandler -- Analyst

Thanks. And just a couple of questions for me. First, could you quantify persistence rates, if possible, and how that's evolved in the life of the product? That's No. 1.

No. 2 is, can you give us a sense of the mix of usage in narcolepsy one and narcolepsy two? And what's your intel telling you regarding the potential for an uptick in usage now that cataplexy is in the label? And then lastly, there's -- talking with key opinion leaders, there's -- it's clear that there are some WAKIX patients who are unconcomitant to oxybate. Do you have a sense of what portion of patients are on the combination, whether they run into any managed care issues, given that the two agents taken together, make up for a pretty expensive regimen? Thanks.

John Jacobs -- Chief Executive Officer

Thank you, David. It's John Jacobs. Appreciate you joining our call here. Why don't I take that second question first just for a moment.

The mix of usage in type one and type two has been roughly 50-50 since the beginning of our launch because every one of those patients has excessive daytime sleepiness, the cardinal symptom of narcolepsy, and that was WAKIX initial indication. For the other questions, I'm going to pass those over to Jeff Dierks, our chief commercial officer. Jeff?

Jeff Dierks -- Chief Commercial Officer

Thanks, John. And thank you for the question, David. So looking at your first question on looking at quantifying persistence rates in the evolution, I think it's fair to say that COVID is certainly having an impact on the entire industry, and that lingering pandemic is really altering the connectivity among key stakeholders in this market. Not only has it impacted our field sales ability to access healthcare professionals, but to get to your question, patients' relationships with how they take their medicines or not are being impacted, including compliance and discontinuation rate.

The data suggests that the DC rate of drugs in the narcolepsy market range is between 30 and 50% prior to COVID, and we know that there's additional pressure being put on that marketplace right now. And then, I guess, your last question with respect to WAKIX use in combination with Xyrem. Certainly, early in our launch, we've sourced patients from across the broad adult narcolepsy patient population. We've seen WAKIX used as monotherapy or in combination with all the other available narcolepsy treatment options, including Xyrem.

And to this point, we have not seen any challenges within the managed care environment with respect to use of WAKIX with any available narcolepsy medications.

David Amsellem -- Piper Sandler -- Analyst

OK, that's great. Helpful. Thanks.

John Jacobs -- Chief Executive Officer

Thank you, David.

Operator

[Operator instructions] Our next question comes from Greg [inaudible] with Goldman Sachs. You may proceed with your question.

Unknown speaker

This is Anna on for Greg. Thank you for taking our questions, and congratulations on the progress. Just to get a little bit more color on the COVID impact, specifically as it pertains to the changes you've seen in the first quarter versus the second versus the third quarter. How should we think about the fourth quarter now.

And potentially any color on 2021 and onwards would be helpful. Thank you.

John Jacobs -- Chief Executive Officer

Anna, first of all, great to have you here with us. Thank you for your question. It's John. Certainly, COVID has impacted the entire industry and all of us, from families, friends, kids going to school, etc., and how we do business.

I'd certainly like to turn that question right now over to Jeff Dierks to address it directly from a commercial perspective. Jeff?

Jeff Dierks -- Chief Commercial Officer

Thanks, John, and good morning, Anna, and thank you very much for your question. So really, building on my response to David, what we've seen is COVID-19 has impeded our ability to optimize the performance of WAKIX during this immediate near-term launch window. So in addition to the impacts on the field sales team, ability to access healthcare professional in person, the patient's relationships with their physicians are changing. And on top of what I shared already about their medication challenges, we've also seen high unemployment rates, leading to loss of insurance and this increased demand for patient assistance and free goods, which is putting pressure on the ability to convert top line demand to revenue.

But despite those headwinds, I think it's important to demonstrate our ability to grow WAKIX consistently quarter over quarter. Right? 20% growth in net revenues from Q2 to Q3, we've seen an increase in 22% in the average number of patients on WAKIX during that time. And importantly, the fundamentals of the value in this market for Harmony and WAKIX remain unchanged. There are significant unmet patient and healthcare professional needs, high level of patient dissatisfaction with long-established therapies.

WAKIX has a differentiated product profile that aligns nicely to those unmet needs. And people living with narcolepsy will be living with this lifelong incurable disorder before, during and after the pandemic. So we remain extremely optimistic that we will continue to sustain the continued growth for WAKIX moving forward.

Unknown speaker

OK. That's really helpful. If I could just follow-up with one question, squeeze one more in there. Have you gotten any feedback from physicians with respect to WAKIX use across patients with cataplexy?

John Jacobs -- Chief Executive Officer

Yes. Thank you, Anna. I think we have -- and initially, when we got the indication, we certainly received a high energy level from the physician community and received several incoming messages from KOLs that we've been working with and expressed extreme excitement about the fact that we got the indication for WAKIX. And of course, our entire company is very excited about it as well.

We share that enthusiasm with the physician community. I'd like to ask Dr. Dayno to add some color to that answer. Jeff?

Jeff Dayno -- Chief Medical Officer

Yeah. Thanks, John. Yeah. Good morning, Anna.

I think the feedback from the medical community has been very positive. I think they were aware of the data. The data have been published in the literature on the cataplexy, the pivotal trial. And I think, fundamentally, what they see is that it broadens the clinical utility, strengthens the overall product profile, the benefit risk profile that Jeff spoke to.

So feedback has been very positive, and we sort of advanced our educational efforts around the cataplexy data consistent with the labeled indication.

Unknown speaker

OK. That's great. Thanks, again, for taking the question, and congratulations.

John Jacobs -- Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Lisa Caperelli -- Associate Vice President, Investor Relations

John Jacobs -- Chief Executive Officer

Jeff Dierks -- Chief Commercial Officer

Jeff Dayno -- Chief Medical Officer

Susan Drexler -- Chief Financial Officer

David Amsellem -- Piper Sandler -- Analyst

Unknown speaker

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