Neurocrine(NBIX) - 2023 Q2 - Quarterly Report

Part I. Financial Information The company's financial statements for the period ended June 30, 2023, show increased assets and net income, driven by higher product sales despite a significant R&D expense Item 1. Financial Statements The unaudited condensed consolidated financial statements for the period ended June 30, 2023, show a significant increase in total assets to $2.61 billion from $2.37 billion at year-end 2022, with net income of $18.9 million, a turnaround from a net loss of $3.0 million in the same period of 2022, driven primarily by higher product sales, despite a significant one-time expense for acquired in-process research and development Condensed Consolidated Balance Sheets As of June 30, 2023, total assets increased to $2.61 billion, driven by growth in debt securities, accounts receivable, and equity investments, while total liabilities rose to $760.1 million and total stockholders' equity grew to $1.85 billion from $1.71 billion at the end of 2022 Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $160.2 | $262.9 | | Total current assets | $1,496.6 | $1,453.5 | | Total assets | $2,613.1 | $2,368.7 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $582.5 | $537.7 | | Total liabilities | $760.1 | $660.9 | | Total stockholders' equity | $1,853.0 | $1,707.8 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) For the second quarter of 2023, the company reported net income of $95.5 million, a significant improvement from a net loss of $16.9 million in Q2 2022, with the six-month period showing net income of $18.9 million compared to a net loss of $3.0 million year-over-year, primarily fueled by a 27% increase in net product sales for the quarter, though the six-month result was impacted by a $143.9 million charge for acquired in-process R&D Three Months Ended June 30, (in millions, except per share data) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net product sales | $446.3 | $352.0 | | Total revenues | $452.7 | $378.2 | | Total operating expenses | $379.1 | $323.5 | | Operating income | $73.6 | $54.7 | | Net income (loss) | $95.5 | $(16.9) | | Diluted EPS | $0.95 | $(0.18) | Six Months Ended June 30, (in millions, except per share data) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net product sales | $861.6 | $657.0 | | Total revenues | $873.1 | $688.8 | | Acquired in-process R&D | $143.9 | $0.0 | | Total operating expenses | $913.7 | $631.0 | | Operating income (loss) | $(40.6) | $57.8 | | Net income (loss) | $18.9 | $(3.0) | | Diluted EPS | $0.19 | $(0.03) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash from operating activities was $54.4 million, a decrease from $97.6 million in the prior-year period, with cash used in investing activities at $168.0 million, primarily for purchases of debt and equity securities, and cash from financing activities at $11.1 million, a significant shift from a $270.3 million use of cash in 2022 which included a large repurchase of convertible senior notes Six Months Ended June 30, (in millions) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $54.4 | $97.6 | | Net cash from investing activities | $(168.0) | $(0.2) | | Net cash from financing activities | $11.1 | $(270.3) | | Change in cash, cash equivalents and restricted cash | $(102.5) | $(172.9) | Notes to the Condensed Consolidated Financial Statements The notes detail the company's accounting policies, extensive collaboration and license agreements, debt and equity instruments, and other financial details, with a key event in Q1 2023 being the expanded collaboration with Voyager Therapeutics, involving a $175.0 million upfront payment, of which $143.9 million was expensed as acquired in-process R&D, and the company also provided notice to terminate its license agreement for ONGENTYS with BIAL, effective December 2023 - In Q1 2023, the company entered into a new collaboration with Voyager Therapeutics, paying $175.0 million upfront, which included a stock purchase and resulted in a $143.9 million charge for acquired in-process R&D[44] - The company has potential future milestone payment obligations of up to $2.6 billion to Heptares, $1.9 billion to Takeda, $1.7 billion to Idorsia, $1.7 billion to Xenon, $1.3 billion from the 2019 Voyager agreement, and $6.1 billion from the 2023 Voyager agreement[22][27][31] - The company provided BIAL with a written notice of termination for the license agreement to commercialize ONGENTYS in the United States and Canada, with the termination expected to be effective in December 2023[47] - As of June 30, 2023, $170.4 million in aggregate principal amount of the 2.25% convertible senior notes due 2024 remained outstanding[78][79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the strong financial performance in the first half of 2023 to the continued growth of INGREZZA net product sales, which increased 30% year-over-year, despite operating expenses rising due to a $143.9 million IPR&D charge from the Voyager partnership and increased investment in commercial initiatives and clinical programs, with the company's liquidity remaining strong, holding over $1.3 billion in cash, cash equivalents, and marketable securities, believed to be sufficient to fund operations for at least the next 12 months Results of Operations Total revenues for the six months ended June 30, 2023, increased to $873.1 million from $688.8 million in the prior year, driven by a 30% rise in INGREZZA sales, offset by a significant increase in operating expenses, primarily a $143.9 million IPR&D expense related to the Voyager agreement, with SG&A expenses also growing due to continued investment in commercial initiatives for INGREZZA, and other income increasing significantly, reflecting unrealized gains on the Voyager equity investment and higher interest income Net Product Sales (in millions) | Product | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | INGREZZA | $850.1 | $652.2 | | Other | $11.5 | $4.8 | | Total | $861.6 | $657.0 | - The increase in total net product sales was primarily driven by higher INGREZZA prescriptions due to increased customer demand and commercial activities[92] - A $143.9 million IPR&D expense was recognized in Q1 2023 in connection with the upfront fee for the expanded strategic partnership with Voyager[102] - SG&A expenses increased for the six months of 2023, reflecting continued investment in commercial initiatives, including the branded direct-to-consumer INGREZZA advertising campaign and an expanded salesforce[103] - The change in other income for the first six months of 2023 was primarily due to an increase in the fair value of the equity investment in Voyager and increased interest income[104] Liquidity and Capital Resources As of June 30, 2023, the company held $1.32 billion in total cash, cash equivalents, and marketable securities, with working capital at $914.1 million, and management believes existing capital resources are sufficient to fund requirements for at least the next 12 months, with material future cash requirements including potential collaboration milestone payments up to $16.9 billion, lease payments for a new corporate headquarters, and repayment of the remaining $170.4 million of convertible senior notes due in 2024 Financial Condition (in millions) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total cash, cash equivalents and marketable securities | $1,319.3 | $1,288.7 | | Total working capital | $914.1 | $915.8 | - Cash flows from operating activities decreased in the first six months of 2023 compared to 2022, primarily due to higher upfront payments for the Voyager partnership, partially offset by increased INGREZZA sales[110] - The company has potential future milestone payments of up to $16.9 billion related to its various collaboration and license agreements[114] - The company has entered into a lease for a new four-building campus facility in San Diego which will serve as its new corporate headquarters[116] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk through its investment portfolio of low-risk, investment-grade debt securities, with the primary objective to preserve principal and maintain liquidity, and management states that a 1% unfavorable change in interest rates as of June 30, 2023, would not have had a material effect on the fair value of its investment portfolio - The company's investment portfolio consists of low-risk, investment-grade debt securities with maturities up to three years, which are subject to interest rate risk[123] - A hypothetical 1% unfavorable change in interest rates on June 30, 2023, would not have materially affected the fair value of the investment portfolio[123] Item 4. Controls and Procedures Based on an evaluation as of June 30, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level, with no significant changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of the end of the quarter[129] - No significant changes in internal control over financial reporting were identified during the quarter ended June 30, 2023[130] Part II. Other Information This section details ongoing legal disputes, key operational and financial risks, and other corporate disclosures Item 1. Legal Proceedings The company is involved in patent litigation against several pharmaceutical companies, including Teva, Lupin, Sandoz, and Zydus, that have filed Abbreviated New Drug Applications (ANDAs) seeking to market generic versions of INGREZZA, with the lawsuits alleging that the patents covering INGREZZA are invalid or will not be infringed, and the consolidated cases in the District of Delaware are scheduled for trial on January 2, 2024 - The company has filed lawsuits against multiple generic drug manufacturers (Teva, Lupin, Crystal, Sandoz, Zydus) that submitted ANDAs for generic versions of INGREZZA[132][133] - The legal proceedings allege that the ANDA filers' Paragraph IV certifications, which claim certain INGREZZA patents are invalid or not infringed, are incorrect[132] - The consolidated cases are being heard in the U.S. District Court for the District of Delaware, with a trial currently scheduled for January 2, 2024[133] Item 1A. Risk Factors The company faces significant risks, including its ability to successfully commercialize INGREZZA, potential pricing pressures from government and third-party payors, and intense competition, with other key risks involving the uncertainty of clinical trial outcomes, dependence on collaborators like AbbVie, reliance on third-party manufacturing, and the ability to protect its intellectual property, particularly in light of ongoing generic challenges, and the potential impact of healthcare reform, such as the Inflation Reduction Act, and cybersecurity threats also highlighted as major concerns - The company's success is highly dependent on the continued successful commercialization of INGREZZA and securing adequate third-party reimbursement[138] - The Inflation Reduction Act of 2022 (IRA) introduces government price negotiation for certain Medicare drugs, which could significantly impact the pharmaceutical industry, though the company believes it will qualify for a small biotech exception until 2029[211][212] - The company faces intense competition for INGREZZA from Teva's AUSTEDO and off-label use of other medications[150] - The company is dependent on a limited number of specialty pharmacy providers and distributors, with four customers representing approximately 91% of total product revenue for the first six months of 2023[196] - The conflict between Russia and Ukraine has impacted planned clinical trial sites, causing significant delays and increased costs for the development of valbenazine and luvadaxistat[158] Item 5. Other Information During the second quarter of 2023, two company executives, David W. Boyer (Chief Corporate Affairs Officer) and William H. Rastetter (Chair of the Board), adopted Rule 10b5-1 trading plans for the sale of company securities - David W. Boyer, Chief Corporate Affairs Officer, adopted a Rule 10b5-1 plan on May 31, 2023, to sell 11,590 shares[251] - William H. Rastetter, Chair of the Board, adopted a Rule 10b5-1 plan on May 31, 2023, to sell shares related to the exercise of a stock option[250][251] Item 6. Exhibits This section lists the exhibits filed as part of the quarterly report, including the company's Certificate of Incorporation, Bylaws, debt indentures, equity incentive plan, and required CEO/CFO certifications