Pharming N.V.(PHAR) - 2022 Q4 - Annual Report

Part I Key Information The company faces significant risks including heavy reliance on RUCONEST®, intense market competition, regulatory hurdles, and material weaknesses in internal controls Risk Factors Key risks include heavy dependence on RUCONEST®, intense market competition, material weaknesses in internal controls, customer concentration, and regulatory compliance - The company is heavily dependent on sales of RUCONEST® in the United States and Europe, with its development pipeline reliant on the C1INH franchise, and faces intense competition from other approved acute and prophylactic treatments for Hereditary Angioedema (HAE)[32][33][37] - Management has identified material weaknesses in its internal control over financial reporting across all five components of the COSO framework, potentially affecting accurate and timely financial reporting[167][168] - The company faces significant customer concentration, with two U.S. specialty pharmacies accounting for 84% of revenues in 2022, posing a material risk if volume from these customers is lost or reduced[93] - Commercial success depends on market acceptance by physicians and payors, and the ability to secure adequate coverage and reimbursement, facing pricing pressure from competitors and government cost-containment initiatives[38][46] - The company is subject to complex laws and regulations regarding sales, marketing, data privacy (like GDPR), and anti-corruption (like FCPA), with non-compliance potentially leading to significant fines and reputational damage[125][128][131] Information on the Company Pharming is a global biopharmaceutical company focused on rare diseases, with commercial products like RUCONEST® and newly approved Joenja®, leveraging transgenic manufacturing and pipeline expansion History and Development of the Company Pharming Group N.V. was incorporated in 1988, listed on Euronext and Nasdaq, with capital expenditures detailed from 2020-2022 - Pharming Group N.V. was incorporated in The Netherlands on November 11, 1988, with ordinary shares trading on Euronext Amsterdam and American Depositary Shares (ADSs) listed on the Nasdaq Global Market since December 22, 2020[211][212] Capital Expenditures (2020-2022) | Year | Capital Expenditure (in millions USD) | | :--- | :--- | | 2022 | $1.4 | | 2021 | $10.7 | | 2020 | $4.7 | Business Overview The company's business overview highlights its product portfolio including RUCONEST® and Joenja®, strategic focus on rare diseases, proprietary transgenic manufacturing, and market competition Product Portfolio Overview | Product/Candidate | Indication | Status | | :--- | :--- | :--- | | RUCONEST® | Acute Hereditary Angioedema (HAE) attacks | Commercialized in US, EEA, UK | | Joenja® (leniolisib) | Activated PI3K delta syndrome (APDS) | FDA approved (Mar 2023); EMA review ongoing | | OTL-105 | HAE (Gene Therapy) | Preclinical | | Alpha-Glucosidase | Pompe Disease (Enzyme Replacement) | Preclinical | - Joenja® (leniolisib) was approved by the FDA on March 24, 2023, for treating APDS, marking it as the first and only approved treatment for this rare primary immunodeficiency, with an EMA opinion anticipated in H2 2023[216][223] - The company's strategy focuses on creating long-term value by leveraging its clinical development and commercialization strengths in rare diseases, expanding its pipeline through internal R&D and in-licensing/acquisitions beyond the rhC1INH platform[277][278][279] - The company utilizes a proprietary transgenic manufacturing technology platform for recombinant human proteins produced in transgenic animal milk, while relying on Contract Manufacturing Organizations (CMOs) for small molecules like leniolisib[273][275] - The company faces significant competition in the HAE market from companies like BioCryst, CSL Behring, and Takeda, offering both acute and prophylactic treatments, while for leniolisib, there are currently no known ongoing development programs for APDS[288][289] Organizational Structure Pharming Group N.V. serves as the ultimate parent company, overseeing wholly-owned subsidiaries in the Netherlands and the United States - Pharming Group N.V. is the ultimate parent company, wholly owning several subsidiaries in The Netherlands (e.g., Pharming B.V.) and the United States (e.g., Pharming Healthcare, Inc.)[414] Property, Plant and Equipment The company maintains administrative, laboratory, and production facilities in the Netherlands, France, and the United States, with a notable investment in machinery and equipment in 2022 - The company's administrative offices, laboratories, and production facilities are primarily located in The Netherlands, with additional R&D facilities in France and commercial offices in the United States[415][418][419] - In 2022, the company invested $1.4 million in new machinery and laboratory equipment, a significant decrease from $10.7 million in 2021, and repurposed a newly constructed building in Oss for alternative uses instead of downstream production[420] Operating and Financial Review and Prospects For the fiscal year 2022, the company reported a 3.4% increase in revenues to $205.6 million, driven by higher RUCONEST® sales, but profit decreased to $13.7 million from $16.0 million in 2021, primarily due to a 44.3% increase in marketing and sales expenses related to the anticipated launch of leniolisib, while maintaining a strong liquidity position with $207.3 million in cash and cash equivalents Operating Results Operating results show a 3.4% revenue increase to $205.6 million in 2022, driven by RUCONEST® sales, alongside a 44.3% rise in marketing expenses and a 25.3% decrease in R&D, leading to a profit decline Consolidated Statement of Income (2020-2022) | Amounts in $'000 | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | 205,622 | 198,871 | 212,174 | | Costs of sales | (17,562) | (21,142) | (23,539) | | Gross profit | 188,060 | 177,729 | 188,635 | | Other income | 14,523 | 2,620 | 1,829 | | Research and development | (52,531) | (70,369) | (38,519) | | General and administrative | (46,016) | (36,974) | (24,085) | | Marketing and sales | (85,803) | (59,445) | (51,604) | | Operating profit | 18,233 | 13,561 | 76,256 | | Profit before tax | 14,987 | 23,078 | 44,094 | | Income tax expense | (1,313) | (7,082) | (6,348) | | Profit for the year | 13,674 | 15,996 | 37,746 | - Revenues increased by 3.4% to $205.6 million in 2022 from $198.9 million in 2021, primarily due to higher sales of RUCONEST® in the U.S. market[441] - Marketing and sales costs increased significantly by 44.3% to $85.8 million in 2022, up from $59.4 million in 2021, mainly due to the expansion of the commercial organization in preparation for the launch of leniolisib[457] - Research and development expenses decreased by 25.3% to $52.5 million in 2022 from $70.4 million in 2021, primarily due to reduced share-based compensation and favorable currency effects, partially offset by increased spending on leniolisib[453] - Profit for the year decreased to $13.7 million in 2022 from $16.0 million in 2021, driven by higher operating costs, particularly in marketing and sales, which outpaced revenue and gross profit growth[440] Liquidity and Capital Resources The company maintains a strong liquidity position with $207.3 million in cash, despite a decrease in operating cash flow, supported by €125 million in convertible bonds due 2025 - As of December 31, 2022, the company had cash and cash equivalents of $207.3 million, expected to fund operations for more than twelve months[512][513] Cash Flow Summary (2020-2022) | Amounts in $'000 | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 22,458 | 37,842 | 83,626 | | Net cash from (used in) investing activities | 5,323 | (21,305) | (15,629) | | Net cash from (used in) financing activities | (4,982) | (27,947) | 60,686 | | Net change in cash and cash equivalents | 15,418 | (13,235) | 130,811 | - Net cash from operating activities decreased to $22.5 million in 2022 from $37.8 million in 2021, mainly due to lower profit before tax and changes in non-cash adjustments[518] - The company has €125 million in 3.00% convertible bonds due in 2025, issued in January 2020, with proceeds used to redeem a previous loan and fund capital expenditures and potential acquisitions[524] Directors, Senior Management and Employees The company operates under a one-tier board structure with one executive director (CEO Sijmen de Vries) and seven non-executive directors, with a remuneration policy combining fixed salary with performance-based short-term (cash bonus) and long-term (restricted shares) incentives, and the total number of full-time equivalent employees grew to 332 in 2022, up from 277 in 2021, reflecting business expansion Directors and Senior Management The company operates with a one-tier board structure, comprising one executive director and seven non-executive directors, chaired by Paul Sekhri - The company has a one-tier board structure with a single board of directors, consisting of one executive director (CEO Sijmen de Vries) and seven non-executive directors, chaired by Paul Sekhri, as of December 31, 2022[532][534] Compensation Executive compensation includes fixed salaries, short-term cash bonuses, and long-term performance-based restricted shares, while non-executive directors receive fixed retainers - The executive remuneration policy includes a fixed base salary, a short-term cash bonus (on-target 70% of salary for CEO, 50% for others), and a long-term incentive (LTI) program with performance-based restricted shares vesting over three years[556][565][566] CEO Remuneration (2022) | Amounts in $'000 | Fixed Remuneration | Short-term Bonus | Share-based Payments | Post Employment | Other | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sijmen de Vries, CEO | 636 | 394 | 1,221 | 112 | 34 | 2,396 | - Non-executive directors receive a fixed annual retainer, paid partly in cash and partly in unrestricted shares, and do not participate in performance-based incentive plans to ensure their independence[573][576] Employees The total number of full-time equivalent employees increased to 332 in 2022, reflecting growth across various regions and functions Average Full-Time Equivalent Employees (2020-2022) | Region/Function | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | The Netherlands | 198 | 186 | 145 | | United States | 102 | 77 | 66 | | Other | 32 | 22 | 19 | | Total | 332 | 285 | 229 | Major Shareholders and Related Party Transactions As of March 31, 2023, no single shareholder was known to beneficially own more than 5% of the company's shares, while executive officers and directors as a group beneficially owned approximately 2.35% of outstanding shares, with key related party transactions including fill and finish services with BioConnection B.V., in which Pharming holds a 22.98% stake Major Shareholders As of March 31, 2023, no single shareholder held over 5% beneficial ownership, while executive officers and directors collectively owned 2.35% of outstanding shares - As of March 31, 2023, there were no known beneficial owners of more than 5% of the company's common shares[608] - Executive officers and directors as a group beneficially owned 15,452,443 ordinary shares, representing 2.35% of the total, with CEO Sijmen de Vries being the largest individual holder at 1.66% beneficial ownership[610][611] Related Party Transactions The company engages in related party transactions with BioConnection B.V. for fill and finish services, in which Pharming holds a 22.98% stake - The company engages in transactions with its fill and finish partner, BioConnection B.V., in which it holds a 22.98% stake, paying BioConnection $3.0 million for these services in 2022[614] Financial Information This section confirms that the consolidated financial statements are included at the end of the report, and the company states it is not currently a party to any material legal proceedings and has not declared or paid dividends, with no plans to do so in the foreseeable future - The company has never declared or paid dividends on its ordinary shares and does not anticipate paying any in the foreseeable future, intending to retain earnings for business use[624] - The company is not currently a party to any material legal or administrative proceedings[623] Part II Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were not effective as of December 31, 2022, based on identified material weaknesses in internal control over financial reporting across all five components of the COSO framework, with the independent auditor also issuing an adverse opinion on the effectiveness of internal controls, and a remediation plan is underway to address these deficiencies - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of December 31, 2022, due to material weaknesses in internal control over financial reporting[704] - Material weaknesses were identified across all five components of the COSO framework: Control Environment, Risk Assessment, Control Activities, Information & Communication, and Monitoring, indicating an ineffective control environment and insufficient controls to address risks of material misstatement[707][722] - The independent registered public accounting firm, Deloitte, issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2022, concurring with management's assessment of material weaknesses[715][763] - A remediation plan is in process, including developing a formal risk assessment framework, implementing key controls based on the new SAP ERP system, and hiring a risk and control officer, with implementation proceeding in a phased approach[709][710][711] Corporate Governance and Other Matters This section covers various governance and compliance topics, including the board's determination of an 'audit committee financial expert,' the adoption of a Code of Business Conduct & Ethics, fees paid to the principal accountant Deloitte totaling $1.4 million in 2022, and the company's reliance on home country governance practices as a foreign private issuer in lieu of certain Nasdaq requirements Principal Accountant Fees (Deloitte) | Amounts in $'000 | 2022 | 2021 | | :--- | :--- | :--- | | Audit Fees | (1,357) | (1,201) | | Audit Related Fees | — | (16) | | Total | (1,357) | (1,217) | - The company adopted a Code of Business Conduct & Ethics applicable to all directors, officers, and employees, which was updated in August 2022[727][728] - As a 'foreign private issuer,' the company complies with Dutch home country governance requirements and is exempt from certain Nasdaq corporate governance standards, such as the requirement for shareholder approval of all share option plans[741][742] Part III Financial Statements This section contains the audited consolidated financial statements for the years ended December 31, 2022, 2021, and 2020, prepared in accordance with IFRS, including the report of the independent registered public accounting firm, which provides an unqualified opinion on the financial statements but an adverse opinion on internal controls over financial reporting - The report includes audited consolidated financial statements for the fiscal years 2022, 2021, and 2020, prepared in conformity with International Financial Reporting Standards (IFRS) as issued by the IASB[750][762] - The independent auditor, Deloitte, issued an unqualified opinion on the financial statements, stating they present fairly the financial position of the company, but also issued an adverse opinion on the company's internal control over financial reporting due to identified material weaknesses[762][763]