Pharming N.V.(US:PHAR)2024-04-04 12:03Part I Key Information The company faces significant risks from its reliance on RUCONEST®, competition, and material weaknesses in internal controls Risk Factors Key risks include commercial dependency on RUCONEST®, new product uncertainties, supplier concentration, and financial control deficiencies - The company is heavily dependent on sales of RUCONEST®, which accounted for approximately 92.6% of total revenues in 202339 - Joenja®, approved by the FDA in March 2023, is a new drug and could develop unexpected safety or efficacy concerns, which would pose a material risk40 - The company experiences significant customer concentration, with two U.S. specialty wholesale companies accounting for 83% of revenues in 202392 - Material weaknesses have been identified in the company's internal control over financial reporting across all five components of the COSO framework154718 - RUCONEST® faces intense competition from other approved products for treating Hereditary Angioedema (HAE), including both acute and prophylactic therapies, as well as generic equivalents to competing treatments343536 Information on the Company The company is a global biopharmaceutical firm focused on rare diseases with two commercial products, RUCONEST® and Joenja® History and Development of the Company Pharming Group N.V., incorporated in 1988, trades on Euronext Amsterdam and Nasdaq, with capital expenditures of $1.4 million in 2023 - The company was incorporated in The Netherlands on November 11, 1988201 Capital Expenditures (2021-2023) | Year | Capital Expenditures (in millions) | | :--- | :--- | | 2023 | $1.4 | | 2022 | $1.4 | | 2021 | $10.7 | Business Overview The company's portfolio features RUCONEST® and the newly approved Joenja®, supported by a proprietary manufacturing platform - The company's portfolio is led by two commercialized products: RUCONEST® for HAE and Joenja® for APDS206207208 - Joenja® (leniolisib) received FDA approval on March 24, 2023, for the treatment of APDS in adult and pediatric patients 12 years and older208221 - As of December 31, 2023, Pharming has identified over 840 diagnosed APDS patients globally, including over 200 in the United States, with an estimated total prevalence of approximately 2,000 patients in key markets239 - RUCONEST® is manufactured using a proprietary transgenic platform where recombinant proteins are produced in the milk of rabbits278280 - The company is subject to extensive pre- and post-market regulation by authorities such as the FDA in the U.S. and the EMA in the EU310349 Organizational Structure Pharming Group N.V. is the parent company with wholly-owned subsidiaries in The Netherlands and the United States - Pharming Group N.V. is the parent company with multiple wholly-owned subsidiaries in The Netherlands and the United States419 Property, Plant and Equipment The company's primary facilities are in The Netherlands, with a capital investment of $1.4 million in 2023 - The company's main facilities, including administrative offices, labs, and production sites, are located in The Netherlands421422 - Capital investment in 2023 was $1.4 million, primarily for new machinery and lab equipment427 Operating and Financial Review and Prospects Revenue grew to $245.3 million in 2023, but increased operating expenses for the Joenja® launch resulted in a net loss Operating Results Revenue increased 19.3% to $245.3 million in 2023, but higher launch-related expenses led to a net loss of $10.5 million Consolidated Statement of Income (2021-2023) | Amounts in $'000 | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | 245,316 | 205,622 | 198,871 | | Gross profit | 220,104 | 188,060 | 177,729 | | Operating profit / (loss) | (5,387) | 18,233 | 13,561 | | (Loss) / Profit before tax | (12,012) | 14,987 | 23,078 | | (Loss) / Profit for the year | (10,548) | 13,674 | 15,996 | | Basic (loss) / earnings per share ($) | (0.016) | 0.021 | 0.025 | | Diluted (loss) / earnings per share ($) | (0.016) | 0.019 | 0.023 | Revenues by Product and Geography (2023 vs 2022) | Amounts in US$ '000 | 2023 | 2022 | | :--- | :--- | :--- | | RUCONEST® | 227,134 | 205,622 | | - US | 221,213 | 200,082 | | - Europe and RoW | 5,921 | 5,540 | | Joenja® | 18,182 | — | | - US | 17,894 | — | | - Europe and RoW | 288 | — | | Total revenues | 245,316 | 205,622 | - Marketing and sales costs increased by 44.6% to $124.0 million in 2023, primarily due to the commercial expansion for the launch of Joenja®463 - Research and development costs rose by 31.2% to $68.9 million in 2023, mainly related to leniolisib clinical trials for pediatric APDS patients and research into additional indications461 Liquidity and Capital Resources The company maintains a strong liquidity position with $213.4 million in cash, despite a net cash outflow from operations - The company held $213.4 million in cash, cash equivalents, and marketable securities as of December 31, 2023, which is expected to fund operations for more than 12 months520521 Selected Cash Flow Information (2021-2023) | Amounts in $'000 | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from (used in) operating activities | (17,302) | 22,458 | 37,842 | | Net cash from (used in) investing activities | (129,388) | 5,323 | (21,305) | | Net cash from (used in) financing activities | (1,039) | (4,982) | (27,947) | | Net change in cash and cash equivalents | (145,601) | 15,418 | (13,235) | - The company has €125 million in 3.00% convertible bonds due January 21, 2025534 Critical Accounting Estimates Financial statements rely on critical management judgments and estimates, with details provided in the Annual Financial Statements - The company's financial statements rely on critical accounting estimates and judgments, particularly concerning the value of assets and liabilities, which are reviewed on an ongoing basis542 Directors, Senior Management and Employees The company operates with a one-tier board, and its workforce grew to an average of 382 full-time employees in 2023 Directors and Senior Management Pharming has a one-tier board structure led by CEO Sijmen de Vries and seven non-executive directors - The company has a one-tier board structure with a single executive director, CEO Sijmen de Vries, and seven non-executive directors543546 - Dr. Richard Peters was appointed Chairman of the Board of Directors on September 25, 2023, succeeding Paul Sekhri556 Compensation Executive remuneration includes fixed salary, annual bonuses, and long-term performance-based share incentives CEO Remuneration (2023) | Amounts in $'000 | Fixed Remuneration | Annual Bonus | Share-based Payments | Other | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Dr. Sijmen de Vries | 673 | 615 | 1,371 | 150 | 2,809 | - The executive LTI plan is performance-related, with vesting based on Total Shareholder Return (40% weight) and strategic objectives (60% weight) over a three-year period582 - Non-executive directors receive fixed annual retainers and committee fees, not linked to company performance, to ensure independence584587 Board Practices The Board has established Audit, Remuneration, and Corporate Governance committees composed of non-executive members - The Board has three primary committees: Audit, Remuneration, and Corporate Governance, all composed of non-executive directors600 Employees The company's workforce grew to an average of 382 full-time equivalents in 2023, primarily in The Netherlands and the U.S Average Full-Time Equivalent Employees (2021-2023) | Year | Total Employees | | :--- | :--- | | 2023 | 382 | | 2022 | 332 | | 2021 | 285 | Major Shareholders and Related Party Transactions No shareholder owns over 5%, and the primary related party transaction is with associate company BioConnection Major Shareholders As of March 31, 2024, no shareholder beneficially owned more than 5% of the company's ordinary shares - As of March 31, 2024, there was no known beneficial owner of more than 5% of the company's issued and outstanding common shares617 - Executive officers and directors as a group beneficially owned 2.2% of ordinary shares as of March 31, 2024618 Related Party Transactions The company's main related party transactions are with its fill and finish partner BioConnection, in which it holds a 22.98% stake - Pharming holds a 22.98% stake in its fill and finish partner, BioConnection; in 2023, Pharming paid BioConnection $4.7 million for services623 - The company has adopted a Related Person Policy requiring board or committee approval for all related party transactions628 Financial Information The company has no material legal proceedings and does not anticipate paying dividends, retaining earnings for business use - The company is not currently a party to any material legal or administrative proceedings634 - Pharming has never declared or paid dividends and does not anticipate paying them in the foreseeable future, intending to retain earnings for business investment635 Additional Information Key material contracts include license agreements for leniolisib and OTL-105, with details on Dutch and U.S. tax considerations - The license agreement with Novartis for leniolisib includes up to $200 million in potential milestone payments, plus tiered royalties649 - The collaboration with Orchard for OTL-105 involves an upfront payment of $17.5 million, with up to $189.5 million in potential milestones and royalties651652 - Dividends distributed by the company are generally subject to a 15% Dutch dividend withholding tax, though exemptions or reductions may apply681 Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to liquidity, market (currency and interest rate), and credit risks, managed by the Board - The company's most significant financial risks are identified as liquidity, market risk (currency and interest rate), and credit risk702 Controls and Procedures Disclosure controls were deemed ineffective due to material weaknesses in internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of December 31, 2023715 - Material weaknesses were identified across all five components of the COSO framework: Control Environment, Risk Assessment, Control Activities, Information & Communication, and Monitoring718733737 - The independent registered public accounting firm issued an adverse opinion on the Company's internal control over financial reporting as of December 31, 2023727784 - A remediation plan is underway, which includes implementing key controls, strengthening internal teams, and undergoing effectiveness testing in 2024719720722 Corporate Governance and Other Disclosures As a foreign private issuer, the company follows Dutch governance practices and discloses details on its audit committee and cybersecurity risk management - As a "foreign private issuer," the company complies with its home country (Dutch) governance requirements, exempting it from certain Nasdaq corporate governance standards753 - The Board of Directors has determined that Mr. Leonard Kruimer, Chairman of the Audit Committee, qualifies as an "audit committee financial expert"736 Principal Accountant Fees (2022-2023) | Amounts in $'000 | 2023 | 2022 | | :--- | :--- | :--- | | Audit Fees | (1,328) | (1,357) | | Total | (1,328) | (1,357) | - The Board of Directors, through its Audit Committee, has oversight responsibility for cybersecurity risks767768 Part III Financial Statements The audited IFRS financial statements received an unqualified opinion, but the auditor issued an adverse opinion on internal controls - The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB804 - The independent auditor, Deloitte Accountants B.V., issued an unqualified opinion on the financial statements but an adverse opinion on the company's internal control over financial reporting due to material weaknesses783784 - A critical audit matter was identified related to U.S. Revenue Rebate Accruals due to the significant assumptions and judgments involved in their calculation788789790