The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements include, but are not limited to, statements concerning our strategy and other aspects of our future operations, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our medicines, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words "anticipates", "believes", "estimates", "expects", "intends", "may", "plans", "projects", "will", "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, "Risk Factors" in this report and in our other filings with theSecurities and Exchange Commission , orSEC . We do not assume any obligation to update any forward-looking statements.
Unless otherwise indicated or the context requires otherwise, references to “Horizon”, “we”, “us” and “our” refer to
OUR BUSSINES
We are a global biotechnology company focused on the discovery, development and commercialization of medicines that address critical needs for people impacted by rare, autoimmune and severe inflammatory diseases. Our pipeline is purposeful: we apply scientific expertise and courage to bring clinically meaningful therapies to patients. We believe science and compassion must work together to transform lives. We have two reportable segments, the orphan segment and the inflammation segment, and our commercial portfolio is currently composed of 12 medicines in the areas of rare diseases, gout, ophthalmology and inflammation.
From
Orphan
TEPEZZA® (teprotumumab-trbw), for intravenous infusion KRYSTEXXA® (pegloticase injection), for intravenous infusion RAVICTI® (glycerol phenylbutyrate) oral liquid PROCYSBI® (cysteamine bitartrate) delayed-release capsules and granules, for oral use UPLIZNA® (inebilizumab-cdon) injection, for intravenous use ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous use BUPHENYL® (sodium phenylbutyrate) tablets and powder, for oral use QUINSAIR™ (levofloxacin) solution for inhalation Inflammation RAYOS® (prednisone) delayed-release tablets, for oral use PENNSAID® (diclofenac sodium topical solution) 2% w/w, or PENNSAID 2%, for topical use DUEXIS® (ibuprofen/famotidine) tablets, for oral use VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use Acquisitions and Divestitures
As
•
In
•
InMarch 2021 , we completed the acquisition ofViela Bio, Inc. , or Viela, in which we acquired all of the issued and outstanding shares of Viela's common stock for$53.00 per share in cash. The total consideration for the acquisition was approximately$3.0 billion , including cash acquired of$342.3 million . 34
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Impact of COVID-19
The COVID-19 pandemic has had a negative impact on our operations and net sales during 2022, including due to the emergence of new variants of the virus and resulting disruptions in healthcare operations and employee absences among our commercial team. In addition, our clinical trials have been and may in the future be affected by the COVID-19 pandemic as referred to below. Economic and health conditions inthe United States and across most of the world are continuing to change because of the COVID-19 pandemic. Although COVID-19 is a global issue that has altered business and consumer activity, the biopharmaceutical industry is considered a critical and essential industry inthe United States and many other countries and, therefore, we do not currently expect any government-imposed extended shutdowns of suppliers or distribution channels, although our suppliers and other third parties on which we rely could be impacted by employee absences due to COVID-19 illnesses. While certain of our contract manufacturers are involved in manufacturing vaccines for COVID-19, we do not currently expect these activities to impact the future supply of our medicines. In respect of our medicines, we believe we have sufficient inventory of raw materials and finished goods and we expect patients to be able to continue to receive their medicines at a site of care, for our infused medicines, and from their current pharmacies, alternative pharmacies or, if necessary, by direct shipment from our third-party providers that have such capability, for our other medicines.
TEPEZZA, KRYSTEXXA and UPLIZNA
In the first half of 2022, demand for TEPEZZA, KRYSTEXXA and UPLIZNA was negatively impacted by the omicron variant of COVID-19. The omicron variant resulted in significant employee absences in our commercial organization due to illness and also impacted operations at sites of care that infuse these medicines and patient access to and willingness to visit healthcare providers. These events resulted in lower new patient enrollment forms, delays in new patients starting infusions and disruptions in therapy.
Our other medicines
Patient motivation to continue treatment remains high for our other orphan segment medicines, RAVICTI, PROCYSBI and ACTIMMUNE, and therefore net sales for these three medicines were stable during 2020, 2021 and the nine months endedSeptember 30, 2022 , with less impact from COVID-19 compared to our other medicines.
clinical trials
Our clinical trials have been and may in the future be affected by COVID-19.We experienced enrollment delays in our TEPEZZA clinical trial in chronic/low clinical activity score, or CAS, thyroid eye disease, or TED, due to the impacts of the omicron variant of COVID-19 and in our UPLIZNA clinical trial in myasthenia gravis due to government ordered COVID-19 lockdowns inChina , combined with other negative impacts related to the conflict inUkraine . As a result, we expect data from our TEPEZZA clinical trial in chronic/low CAS TED in the second quarter of 2023 and topline data for our clinical trial of UPLIZNA in myasthenia gravis in 2024. In addition, clinical site initiation and patient enrollment may be delayed due to staffing shortages or prioritization of hospital and healthcare resources toward COVID-19. Current or potential patients in our ongoing or planned clinical trials may also choose to not enroll, not participate in follow-up clinical visits or drop out of the trial as a result of, or a precaution against, contracting COVID-19. Further, some patients may not be able or willing to comply with clinical trial protocols if healthcare services are interrupted due to COVID-19. Some clinical sites inthe United States and other countries have slowed or stopped further enrollment of new patients in clinical trials, denied access to site monitors or otherwise curtailed certain operations. Similarly, our ability to recruit and retain principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, may be adversely impacted. These events could delay our clinical trials, increase the cost of completing our clinical trials and negatively impact the integrity, reliability or robustness of the data from our clinical trials. We are continuing to actively monitor the possible impacts from the COVID-19 pandemic, including the emergence of new variants of the virus such as omicron subvariants, and may take further actions to alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of patients, healthcare providers and our employees. There is significant uncertainty about the duration and potential impact of the COVID-19 pandemic. This means that our results could change at any time and the contemplated impact of the COVID-19 pandemic on our business results and outlook represents our estimate based on the information available as of the date of this Quarterly Report on Form 10-Q. 35
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Strategy
Horizon is a leading high-growth, innovation-driven, profitable global biotechnology company. We are focused on the discovery, development and commercialization of medicines that address critical needs for people impacted by rare, autoimmune and severe inflammatory diseases. Our three strategic goals are to: (i) maximize the value of our on-market rare disease medicines through commercial execution and clinical investment; (ii) expand our research and development, or R&D, pipeline through significant internal investment and external business development; and (iii) build a global presence in targeted international markets. Our vision is to build healthier communities, urgently and responsibly, supported by our philosophy to make a meaningful difference for patients and communities in need. We believe this generates value for our multiple stakeholders, including our shareholders. Our commercialization strategy for our on-market rare disease medicines, including our key growth drivers TEPEZZA, KRYSTEXXA and UPLIZNA, includes initiatives to increase awareness of the conditions each medicine is designed to treat, enhancing efforts to identify target patients and in certain cases pursue opportunities for international commercialization and more effective uses through clinical trials. For TEPEZZA and KRYSTEXXA, initiatives include promoting earlier treatment by driving awareness of the benefits of the medicines, and for UPLIZNA, initiatives include increasing awareness of what differentiates our medicines from other available therapies. Additional strategies for our on-market rare disease medicines include optimizing timely access for patients to the medicines and maximizing the value of the medicines through investment in clinical trials. Specifically, with respect to TEPEZZA, we are further expanding our commercial team and continuing to invest in our direct-to-consumer marketing activities, as well as refining our marketing and physician education strategies to address challenges we identified earlier this year in driving adoption by ocular specialists and driving an urgency among ophthalmologists and endocrinologists to diagnose and refer TED patients. Our R&D strategy is to expand our pipeline of preclinical and clinical development programs to drive sustainable growth, as well as maximizing the benefit and value of our existing medicines through development programs. We are (i) acquiring, licensing and developing medicines for indications that address unmet needs in rare, autoimmune and severe inflammatory diseases, particularly those in our therapeutic areas of focus; (ii) maximizing our pipeline candidates through internal R&D; (iii) expanding our early-stage pipeline through partnerships and collaborations; and (iv) continuing to build out our research capabilities to generate discovery-stage candidates internally. Our R&D pipeline includes more than 20 programs, and we have initiated enrollment in three clinical trials since the start of the year. The aim of our global expansion strategy is to build a global presence in targeted international markets to support the (i) continued launch of UPLIZNA in certain European markets this year; (ii) potential approvals and commercial launches of UPLIZNA in other markets, includingBrazil , in the coming years; and (iii) potential approvals and commercial launches of TEPEZZA inJapan ,Brazil ,Europe and other international markets over the next several years. We plan to use a combination of direct marketing and partnerships for our global expansion efforts and are establishing the infrastructure needed to support these activities. 36 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Comparison of three months ended
Consolidated Results
Reference should be made to the following table in connection with a review of the following discussion of our results of operations for the three months ended
For the Three Months Ended
September 30, Change Change
2022 2021 $ %
(in thousands, except percentages)
Net sales $ 925,359 $ 1,036,992 $ (111,633 ) (11 )%
Cost of goods sold 234,132 251,640 (17,508 ) (7 )%
Gross profit 691,227 785,352 (94,125 ) (12 %)
Operating expenses:
Research and development 114,058 89,549 24,509 27 %
Acquired in-process research and development
and milestones 19,000 4,000 15,000 375 %
Selling, general and administrative 397,563 360,260 37,303 10 %
Total operating expenses 530,621 453,809 76,812 17 %
Operating income 160,606 331,543 (170,937 ) (52 )%
Other expense, net:
Interest expense, net (22,480 ) (22,977 ) 497 2 %
Foreign exchange loss (768 ) (476 ) (292 ) (61 )%
Other expense, net (2,277 ) (849 ) (1,428 ) (168 )%
Total other expense, net (25,525 ) (24,302 ) (1,223 ) (5 )%
Income before benefit for income taxes 135,081 307,241 (172,160 ) (56 )%
Benefit for income taxes (758 ) (19,302 ) 18,544 96 %
Net income $ 135,839 $ 326,543 $ (190,704 ) (58 )%
Beginning with the third quarter of 2022, we are separately presenting upfront,
milestone, and similar payments pursuant to collaborations, licenses of
third-party technologies, and asset acquisitions as "Acquired in-process
research and development and milestones" expenses in the condensed consolidated
statement of comprehensive income. Amounts recorded in this line item for the
three and nine months ended September 30, 2022 would have historically been
recorded to R&D expenses. We believe the new classification assists users of the
financial statements in better understanding the payments incurred to acquire
in-process research and development, or IPR&D. Prior period condensed
consolidated statements of comprehensive income have been reclassified to
conform with the new classification.
Net sales. Net sales decreased $111.6 million , or 11%, to $925.4 million during
the three months ended September 30, 2022 , from $1,037.0 million during the
three months ended September 30, 2021 . The decrease in net sales during the
three months ended September 30, 2022 was primarily due to a decrease in net
sales in our inflammation segment of $65.3 million and a decrease in net sales
in our orphan segment of $46.3 million when compared to the three months ended
September 30, 2021 . The decrease in our orphan segment was primarily due to a
decrease in TEPEZZA net sales of $125.5 million , partially offset by an increase
in KRYSTEXXA net sales of $33.5 million and an increase in UPLIZNA net sales of
$25.1 million .
37
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The following table reflects the net sales per drug for the three months ended
For the Three Months Ended September
30, Change Change
2022 2021 $ %
TEPEZZA $ 490,935 $ 616,361 $ (125,426 ) (20 )%
KRYSTEXXA 191,610 158,097 33,513 21 %
RAVICTI 84,202 76,323 7,879 10 %
PROCYSBI 57,784 49,346 8,438 17 %
UPLIZNA 43,780 18,677 25,103 134 %
ACTIMMUNE 34,438 30,063 4,375 15 %
BUPHENYL 1,722 1,868 (146 ) (8 )%
QUINSAIR 222 302 (80 ) (26 )%
Orphan segment net
sales $ 904,693 $ 951,037 $ (46,344 ) (5 )%
RAYOS 10,566 14,873 (4,307 ) (29 )%
PENNSAID 2% 7,605 47,963 (40,358 ) (84 )%
DUEXIS 2,017 20,915 (18,898 ) (90 )%
VIMOVO 478 2,204 (1,726 ) (78 )%
Inflammation segment
net sales $ 20,666 $ 85,955 $ (65,289 ) (76 )%
Total net sales $ 925,359 $ 1,036,992 $ (111,633 ) (11 )%
Orphan Segment
TEPEZZA. Net sales decreased $125.5 million , or 20%, to $490.9 million during
the three months ended September 30, 2022 , from $616.4 million during the three
months ended September 30, 2021 . Net sales decreased by approximately $139.6
million due to lower sales volumes, which was partially offset by a $14.1
million increase due to higher net pricing. The decrease in sales volume growth
during the three months ended September 30, 2022 compared to the three months
ended September 30, 2021 was primarily a result of TEPEZZA net sales in the
third quarter of 2021 accounting for a larger share of full-year 2021 net sales
due to a supply disruption caused by the U.S. government-mandated COVID-19
vaccine orders and our subsequent resupply of TEPEZZA to the market in April
2021 . We identified certain challenges, including the often-burdensome
reimbursement process, that we believe contributed to slower-than-expected
growth of TEPEZZA in the first half of 2022 which will continue to moderate
TEPEZZA net sales growth for the remainder of the year. We began executing on
several opportunities to accelerate growth, including significantly expanding
the size of our TEPEZZA sales force to allow our representatives more time with
core TEPEZZA prescribers while educating other key physicians, including
ophthalmologists and endocrinologists, about TED and TEPEZZA. We are also
spending more time and focus on the reimbursement process to more effectively
support the patient access journey. We also continue to invest significantly in
direct-to-consumer advertising based on the returns we have seen to date.
However, it will continue to take some time for these strategies to contribute
meaningfully to TEPEZZA net sales growth.
KRYSTEXXA. Net sales increased $33.5 million , or 21%, to $191.6 million during
the three months ended September 30, 2022 , from $158.1 million during the three
months ended September 30, 2021 . Net sales increased by approximately $27.7
million due to volume growth and $5.8 million due to higher net pricing. We
expect net sales for KRYSTEXXA to continue to increase in future periods
primarily due to the use of KRYSTEXXA with methotrexate following the approval
of our supplemental biologics license application, or sBLA, in July 2022 , which
expanded KRYSTEXXA's labeling to include co-administration with methotrexate.
RAVICTI. Net sales increased
PROCYSBI. Net sales increased$8.5 million , or 17%, to$57.8 million during the three months endedSeptember 30, 2022 , from$49.3 million during the three months endedSeptember 30, 2021 . Net sales increased by approximately$10.6 million due to higher net pricing, partially offset by a decrease of$2.1 million due to lower sales volume. The$10.6 million impact from higher net pricing was primarily driven by a benefit from a$7.5 million partial release in the pricing review liability recorded during the three months endedSeptember 30, 2022 , as a result of a decision made by thePatented Medicine Prices Review Board , or PMPRB, inSeptember 2022 relating to PROCYSBI pricing inCanada . UPLIZNA. Net sales increased$25.1 million , or 134%, to$43.8 million during the three months endedSeptember 30, 2022 , from$18.7 million during the three months endedSeptember 30, 2021 . Net sales inthe United States increased by$22.5 million , which was composed of an increase of$19.1 million due to higher sales volume and$3.4 million due to higher net pricing. The remaining$2.6 million increase in net sales related primarily to revenue from our international partners recognized during the three months endedSeptember 30, 2022 . 38
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inflammation segment
RAYOS. Net sales decreased$4.3 million , or 29%, to$10.6 million during the three months endedSeptember 30, 2022 , from$14.9 million during the three months endedSeptember 30, 2021 . Net sales decreased by approximately$3.5 million due to lower net pricing and by approximately of$0.8 million due to lower sales volume. We have an exclusive license toU.S. patents and patent applications from Vectura Group plc covering RAYOS. Under our settlement agreement withTeva Pharmaceuticals Industries Limited (formerly known asActavis Laboratories FL, Inc. , which itself was formerly known asWatson Laboratories, Inc. -Florida ), or Teva, Teva may enter the market onDecember 23, 2022 , or earlier under certain circumstances. As a result, we expect our net sales for RAYOS to decline in future periods. PENNSAID 2%. Net sales decreased$40.4 million , or 84%, to$7.6 million during the three months endedSeptember 30, 2022 , from$48.0 million during the three months endedSeptember 30, 2021 . Net sales decreased by approximately$29.5 million resulting from lower net pricing and by approximately$10.9 million due to lower sales volume. InMay 2022 ,Apotex Corp. and its affiliate,Apotex Inc. , or collectively Apotex, initiated an at-risk launch of a generic version of PENNSAID 2% inthe United States . We subsequently initiated patent infringement litigation against Apotex and Apotex agreed to a voluntary injunction against further sales of the generic product pending the outcome of a motion for summary judgment. The injunction prevents further sales by Apotex but does not prevent wholesalers from continuing to resell the initial generic product inventory Apotex sold to them prior to the injunction. The generic competition reduced our PENNSAID 2% sales, resulting in increased utilization of co-pay and other patient assistance programs for PENNSAID 2%, which negatively impacted net pricing. We expect our net sales for PENNSAID 2% to continue declining in future periods primarily due to generic competition and the wind down of our inflammation segment, as described below.
DUEXIS. net sales decreased
Due to the impact of the at-risk launch of generic PENNSAID 2%, we redeployed a portion of our inflammation commercial team to support our TEPEZZA and KRYSTEXXA expansion. We began winding down activities, including active promotion efforts and associated HorizonCares support, for our inflammation segment, which we expect to be substantially complete in the fourth quarter of 2022. As a result, we expect that sales volumes for PENNSAID 2% and RAYOS will decline significantly for the remainder of 2022.
The following table reconciles our gross to net sales for the three months ended
For the Three Months Ended September 30, For the Three Months Ended September 30,
2022 2021
Amount % of Gross Sales Amount % of Gross Sales
Gross sales $ 1,268.4 100.0 % $ 1,444.4 100.0 %
Adjustments to gross sales:
Prompt pay and other
discounts (1.1 ) (0.1 )% (11.5 ) (0.8 )%
Medicine returns (6.1 ) (0.5 )% (4.4 ) (0.3 )%
Co-pay and other patient
assistance (90.1 ) (7.1 )% (114.9 ) (7.9 )%
Commercial rebates and
wholesaler fees (48.0 ) (3.7 )% (77.6 ) (5.4 )%
Government rebates and
chargebacks (197.8 ) (15.6 )% (199.0 ) (13.8 )%
Total adjustments (343.1 ) (27.0 )% (407.4 ) (28.2 )%
Net sales $ 925.3 73.0 % $ 1,037.0 71.8 %
39
-------------------------------------------------------------------------------- Cost of Goods Sold. Cost of goods sold decreased$17.5 million , or 7%, to$234.1 million during the three months endedSeptember 30, 2022 , from$251.6 million during the three months endedSeptember 30, 2021 . The decrease in cost of goods sold during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , was primarily due to a decrease in royalty and earnout expense and a decrease in total cost of medicines sold, partially offset by an increase in inventory step-up expense. Royalty and earnout expense decreased by$13.8 million primarily due to royalties payable on net sales of TEPEZZA, which decreased in the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 due to lower net sales. Total cost of medicines sold decreased by$12.4 million primarily due to lower net sales volumes for TEPEZZA during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . Inventory step-up expense increased by$12.9 million related to UPLIZNA based on the acquired units of inventory sold during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . As a percentage of net sales, cost of goods sold (excluding intangible amortization expense of$91.9 million during the three months endedSeptember 30, 2022 and$89.9 million during the three months endedSeptember 30, 2021 ) was 15% during the three months endedSeptember 30, 2022 , compared to 16% during the three months endedSeptember 30, 2021 . The decrease in cost of goods sold as a percentage of net sales was primarily due to a change in the mix of medicines sold, partially offset by an increase in inventory step-up expense related to UPLIZNA as noted above. Research and Development Expenses. R&D expenses increased$24.6 million , or 27%, to$114.1 million during the three months endedSeptember 30, 2022 , from$89.5 million during the three months endedSeptember 30, 2021 . The increase was primarily due to a$17.8 million increase in clinical trial costs reflecting increased activity in our R&D pipeline during the three months endedSeptember 30, 2022 compared to three months endedSeptember 30, 2021 .
We expect our R&D expenses to continue to increase significantly in future periods as a result of our ongoing and planned clinical trials for our portfolio, including drug candidates and development programs acquired in 2021.
Acquired In-Process Research and Development and Milestones Expenses. Acquired IPR&D and milestones expenses increased$15.0 million , or 375%, to$19.0 million during the three months endedSeptember 30, 2022 , from$4.0 million during the three months endedSeptember 30, 2021 . The increase was due to the recognition of the$15.0 million upfront payment made pursuant to the collaboration and option agreement entered into withQ32 Bio Inc. , or Q32, during the three months endedSeptember 30, 2022 . Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased$37.3 million , or 10%, to$397.6 million during the three months endedSeptember 30, 2022 , from$360.3 million during the three months endedSeptember 30, 2021 . The increase was primarily due to costs associated with the commercialization of our medicines and global expansion initiatives, including increases of$11.6 million in employee-related expenses,$7.6 million in marketing program costs and$3.7 million for consultancy costs. In addition, we incurred severance and consulting costs of$7.6 million during the three months endedSeptember 30, 2022 , related to the winding down of our inflammation segment. We expect our selling, general and administrative expenses to increase in future periods primarily due to continued support for ourU.S. commercial and global expansion activities. Benefit for Income Taxes. During the three months endedSeptember 30, 2022 , we recorded benefit for income taxes of$0.8 million compared to a benefit for income taxes of$19.3 million during the three months endedSeptember 30, 2021 . The benefit for income taxes recorded during the three months endedSeptember 30, 2022 , resulted primarily from the release of a valuation allowance previously recognized on certain state net operating losses, partially offset by tax expense resulting from the mix of pre-tax income and losses incurred in various tax jurisdictions. 40
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Information by Segment
Refer to Note 11, Segment and Other Information, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of our segment operating income (loss) to our total income before benefit for income taxes for the three months endedSeptember 30, 2022 and 2021.
orphaned segment
The following table reflects our orphan segment net sales and segment operating income for the three months endedSeptember 30, 2022 and 2021 (in thousands, except percentages). For the Three Months Ended September 30, 2022 2021 Change % Change Net sales$ 904,693 $ 951,037$ (46,344 ) (5 %) Segment operating income 366,888 476,225 (109,337 ) (23 %)
Segment operating income. Orphan segment operating income decreased$109.3 million to$366.9 million during the three months endedSeptember 30, 2022 , from$476.2 million during the three months endedSeptember 30, 2021 . The decrease was primarily attributable to an increase in selling, general and administrative expenses of$53.1 million , a decrease in net sales of$46.3 million as described above and an increase in R&D expenses of$34.1 million , partially offset by a decrease in royalty expenses of$13.0 million primarily related to a decrease in royalties payable on net sales of TEPEZZA.
inflammation segment
The following table reflects our inflammation segment net sales and segment operating income (loss) for the three months ended
For the Three Months Ended September
30,
2022 2021 Change % Change
Net sales $ 20,666 $ 85,955 $ (65,289 ) (76 %)
Segment operating (loss) income (10,776 ) 34,129
(44,905) (132%)
Segment operating (loss) income. Inflammation segment operating (loss) income decreased$44.9 million to a$10.8 million operating loss during the three months endedSeptember 30, 2022 , from$34.1 million in operating income during the three months endedSeptember 30, 2021 . The decrease was primarily attributable to a decrease in net sales of$65.3 million as described above, partially offset by a decrease in selling, general and administrative expense of$11.4 million . 41
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Nine Months Ended Comparison
Consolidated Results
Reference should be made to the following table in connection with a review of the following discussion of our results of operations for the nine months ended
For the Nine Months Ended
September 30, Change Change
2022 2021 $ %
(in thousands, except percentages)
Net sales $ 2,687,015 $ 2,211,946 $ 475,069 21 %
Cost of goods sold 679,410 553,003 126,407 23 %
Gross profit 2,007,605 1,658,943 348,662 21 %
Operating expenses:
Research and development 320,436 244,076 76,360 31 %
Acquired in-process research
and development and milestones 19,000 47,000 (28,000 ) (60 )%
Selling, general and
administrative 1,168,518 1,047,456 121,062 12 %
Impairment of goodwill 56,171 - 56,171 100 %
Impairment of long-lived asset - 12,371 (12,371 ) (100 )%
Gain on sale of asset - (2,000 ) 2,000 100 %
Total operating expenses 1,564,125 1,348,903 215,222 16 %
Operating income 443,480 310,040 133,440 43 %
Other expense, net:
Interest expense, net (65,145 ) (59,018 ) (6,127 ) (10 )%
Foreign exchange loss (320 ) (1,363 ) 1,043 77 %
Other (expense) income, net (5,408 ) 2,113 (7,521 ) (356 )%
Total other expense, net (70,873 ) (58,268 ) (12,605 ) (22 )%
Income before benefit for
income taxes 372,607 251,772 120,835 (48 )%
Benefit for income taxes (28,467 ) (109,537 ) 81,070 74 %
Net income $ 401,074 $ 361,309 $ 39,765 11 %
Beginning with the third quarter of 2022, we are separately presenting upfront,
milestone, and similar payments pursuant to collaborations, licenses of
third-party technologies, and asset acquisitions as "Acquired in-process
research and development and milestones" expenses in the condensed consolidated
statement of comprehensive income. Amounts recorded in this line item for the
three and nine months ended September 30, 2022 , would have historically been
recorded to R&D expenses. We believe the new classification assists users of the
financial statements in better understanding the payments incurred to acquire
IPR&D. Prior period condensed consolidated statements of comprehensive income
have been reclassified to conform with the new classification.
Net sales. Net sales increased $475.1 million , or 21%, to $2,687.0 million
during the nine months ended September 30, 2022 , from $2,211.9 million during
the nine months ended September 30, 2021 . The increase in net sales during the
nine months ended September 30, 2022 , was primarily due to an increase in net
sales in our orphan segment of $625.3 million . Growth was primarily due to an
increase in TEPEZZA net sales of $400.5 million , an increase in KRYSTEXXA net
sales of $104.9 million and an increase in UPLIZNA net sales of $77.9 million ,
partially offset by a decrease in net sales in our inflammation segment of
$150.2 million when compared to the nine months ended September 30, 2021 which
was primarily driven by a decrease in net sales of PENNSAID 2% and DUEXIS due to
the impact of generic competition.
42
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The following table reflects the net sales per drug for the nine months ended
For the Nine Months Ended
September 30, Change Change
2022 2021 $ %
TEPEZZA $ 1,472,200 $ 1,071,681 $ 400,519 37 %
KRYSTEXXA 500,069 395,171 104,898 27 %
RAVICTI 238,181 217,566 20,615 9 %
PROCYSBI 155,061 142,484 12,577 9 %
UPLIZNA 112,855 35,025 77,830 222 %
ACTIMMUNE 95,862 86,603 9,259 11 %
BUPHENYL 5,270 5,790 (520 ) (9 )%
QUINSAIR 853 733 120 16 %
Orphan segment net sales $ 2,580,351 $ 1,955,053 $ 625,298 32 %
PENNSAID 2% 66,559 142,721 (76,162 ) (53 )%
RAYOS 35,203 43,551 (8,348 ) (19 )%
DUEXIS 3,210 62,490 (59,280 ) (95 )%
VIMOVO 1,692 8,131 (6,439 ) (79 )%
Inflammation segment net sales $ 106,664 $ 256,893 $ (150,229 ) (58 )%
Total net sales $ 2,687,015 $ 2,211,946 $ 475,069 21 %
Orphan Segment
TEPEZZA. Net sales increased $400.5 million , or 37%, to $1,472.2 million during
the nine months ended September 30, 2022 , from $1,071.7 million during the nine
months ended September 30, 2021 . Net sales increased by approximately $361.7
million due to volume growth and $38.8 million due to higher net pricing. Net
sales growth for TEPEZZA was negatively impacted by the omicron variant of
COVID-19 in the first half of 2022 and additional commercial challenges we
identified, as described above. We identified certain challenges, including the
often-burdensome reimbursement process, that we believe contributed to
slower-than-expected growth of TEPEZZA in the first half of 2022 which will
continue to moderate TEPEZZA net sales growth for the remainder of the year. We
began executing on several opportunities to accelerate growth, including
significantly expanding the size of our TEPEZZA sales force to allow our
representatives more time with core TEPEZZA prescribers while educating other
key physicians, including ophthalmologists and endocrinologists, about TED and
TEPEZZA. We are also spending more time and focus on the reimbursement process
to more effectively support the patient access journey. We also continue to
invest significantly in direct-to-consumer advertising based on the returns we
have seen to date. However, it will continue to take some time for these
strategies to contribute meaningfully to TEPEZZA net sales growth.
KRYSTEXXA. Net sales increased $104.9 million , or 27%, to $500.1 million during
the nine months ended September 30, 2022 , from $395.2 million during the nine
months ended September 30, 2021 . Net sales increased by approximately $81.3
million due to volume growth and $23.6 million due to higher net pricing. We
expect net sales for KRYSTEXXA to continue to increase in future periods
primarily due to the use of KRYSTEXXA with methotrexate following the approval
of our sBLA in July 2022 , which expanded KRYSTEXXA's labeling to include
co-administration with methotrexate.
RAVICTI. Net sales increased $20.6 million , or 9%, to $238.2 million during the
nine months ended September 30, 2022 , from $217.6 million during the nine months
ended September 30, 2021 . Net sales increased by approximately $13.8 million due
to volume growth and $6.8 million due to higher net pricing.
PROCYSBI. Net sales increased $12.6 million , or 9%, to $155.1 million during the
nine months ended September 30, 2022 , from $142.5 million during the nine months
ended September 30, 2021 . Net sales increased by approximately $9.2 million due
to higher net pricing and $3.4 million due to volume growth. The $9.2 million
impact from higher net pricing was primarily driven by a benefit from a $7.5
million partial release in the pricing review liability recorded during the nine
months ended September 30, 2022 , as a result of a decision made by the PMPRB in
September 2022 relating to PROCYSBI pricing in Canada .
UPLIZNA. Net sales increased $77.9 million , or 222%, to $112.9 million during
the nine months ended September 30, 2022 , from $35.0 million during the nine
months ended September 30, 2021 . Net sales in the United States increased by
$61.4 million , which was composed of an increase of $55.6 million due to higher
sales volume and $5.8 million due to higher net pricing. The remaining $16.5
million increase in net sales related primarily to revenue and milestone
payments from our international partners recognized during the nine months ended
September 30, 2022 .
43
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inflammation segment
Our interim goodwill impairment test in the second quarter of 2022 indicated an impairment of the inflammation reporting unit. As a result, we recognized an impairment charge of$56.2 million inJune 2022 representing the full amount of goodwill for the inflammation reporting unit. Refer to Note 8,Goodwill and Intangible Assets, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details. PENNSAID 2%. Net sales decreased$76.1 million , or 53%, to$66.6 million during the nine months endedSeptember 30, 2022 , from$142.7 million during the nine months endedSeptember 30, 2021 . Net sales decreased by approximately$57.6 million resulting from lower net pricing and by approximately$18.5 million due to lower sales volume. InMay 2022 , Apotex initiated an at-risk launch of a generic version of PENNSAID 2% inthe United States . We subsequently initiated patent infringement litigation against Apotex and Apotex agreed to a voluntary injunction against further sales of the generic product pending the outcome of a motion for summary judgment. The injunction prevents further sales by Apotex but does not prevent wholesalers from continuing to resell the initial generic product inventory Apotex sold to them prior to the injunction. The generic competition reduced our PENNSAID 2% sales, resulting in increased utilization of co-pay and other patient assistance programs for PENNSAID 2%, which negatively impacted net pricing. We expect our net sales for PENNSAID 2% to continue declining in future periods primarily due to generic competition and the wind down of our inflammation segment, as described below. RAYOS. Net sales decreased$8.4 million , or 19%, to$35.2 million during the nine months endedSeptember 30, 2022 , from$43.6 million during the nine months endedSeptember 30, 2021 . Net sales decreased by approximately$8.5 million due to lower net pricing, partially offset by an increase of$0.1 million due to higher sales volume.
We have an exclusive license to
DUEXIS. Net sales decreased$59.3 million , or 95%, to$3.2 million during the nine months endedSeptember 30, 2022 , from$62.5 million during the nine months endedSeptember 30, 2021 . Net sales decreased by approximately$54.0 million resulting from lower sales volume, primarily due to the impact of generic competition, and by approximately$5.3 million due to lower net pricing. Due to the impact of the at-risk launch of generic PENNSAID 2%, we redeployed a portion of our inflammation commercial team to support our TEPEZZA and KRYSTEXXA expansion. We began winding down activities, including active promotion efforts and associated HorizonCares support, for our inflammation segment, which we expect to be substantially complete in the fourth quarter of 2022. As a result, we expect that sales volumes for PENNSAID 2% and RAYOS will decline significantly for the remainder of 2022.
The following table reconciles our gross to net sales for the nine months ended
For the Nine Months Ended September 30 ,
For the Nine Months Finished
2022 2021
Amount % of Gross Sales Amount % of Gross Sales
Gross sales $ 3,741.2 100.0 % $ 3,529.1 100.0 %
Adjustments to gross sales:
Prompt pay and other
discounts (21.3 ) (0.6 )% (37.0 ) (1.0 )%
Medicine returns (18.3 ) (0.5 )% (12.0 ) (0.3 )%
Co-pay and other patient
assistance (273.7 ) (7.3 )% (515.3 ) (14.6 )%
Commercial rebates and
wholesaler fees (150.4 ) (4.0 )% (220.8 ) (6.3 )%
Government rebates and
chargebacks (590.5 ) (15.8 )% (532.1 ) (15.1 )%
Total adjustments (1,054.2 ) (28.2 )% (1,317.2 ) (37.3 )%
Net sales $ 2,687.0 71.8 % $ 2,211.9 62.7 %
During the nine months ended September 30, 2022 , co-pay and other patient
assistance costs, as a percentage of gross sales, decreased to 7.3% from 14.6%
during the nine months ended September 30, 2021 , primarily due to a decreased
proportion of inflammation segment medicines sold. Due to the impacts described
above with respect to the inflammation segment, we expect co-pay and other
patient assistance costs to continue to decrease as a percentage of total gross
sales.
44
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Cost of Goods Sold. Cost of goods sold increased $126.4 million , or 23%, to
$679.4 million during the nine months ended September 30, 2022 , from $553.0
million during the nine months ended September 30, 2021 . The increase in cost of
goods sold was primarily due to an increase in royalty and earnout expense, an
increase in inventory step-up expense and an increase in amortization expense.
Royalty and earnout expense increased by $57.2 million primarily due to
royalties payable on net sales of TEPEZZA, which increased during the first nine
months of 2022 compared to the first nine months of 2021 due to higher net
sales. Inventory step-up expense increased by $49.4 million related to UPLIZNA
based on the acquired units of inventory sold during the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 .
Amortization expense increased $26.7 million primarily due to the acquisition of
the UPLIZNA developed technology intangible asset in March 2021 . In addition, we
recorded a $10.3 million PENNSAID 2% inventory reserve due to the impact of
generic competition on PENNSAID 2% sales. As a percentage of net sales, cost of
goods sold (excluding amortization expense of $271.0 million during the first
nine months of 2022 and $244.4 million during first nine months of 2021) was 15%
during the nine months ended September 30, 2022 , compared to 14% during the nine
months ended September 30, 2021 . The increase in cost of goods sold as a
percentage of net sales was primarily due to a change in the mix of medicines
sold and increases in inventory step-up expense related to UPLIZNA as noted
above.
Research and Development Expenses. R&D expenses increased $76.3 million to
$320.4 million during the nine months ended September 30, 2022 , from $244.1
million during the nine months ended September 30, 2021 . The increase was
primarily attributable to a $45.5 million increase in clinical trial costs
reflecting increased activity in our R&D pipeline as well as the addition of
certain medicine candidates and development programs following the acquisition
of Viela in March 2021 , and an increase of $18.1 million in consultant costs.
We expect our R&D expenses to continue to increase significantly in future periods as a result of our ongoing and planned clinical trials for our portfolio, including drug candidates and development programs acquired in 2021.
Acquired In-Process Research and Development and Milestones Expenses. Acquired IPR&D and milestones expenses decreased$28.0 million to$19.0 million during the nine months endedSeptember 30, 2022 , from$47.0 million during the nine months endedSeptember 30, 2021 . The$19.0 million of acquired IPR&D and milestones expenses during the nine months endedSeptember 30, 2022 , was primarily related to$15.0 million recognized in relation to the collaboration and option agreement entered into with Q32. During the nine months endedSeptember 30, 2021 , we recognized a$40.0 million upfront payment in relation to the global agreement with Arrowhead Pharmaceuticals, Inc., or Arrowhead. Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased$121.1 million to$1,168.5 million during the nine months endedSeptember 30, 2022 , from$1,047.4 million during the nine months endedSeptember 30, 2021 . The increase was primarily attributable to costs associated with the commercialization of our medicines and global expansion initiatives. These include an increase of$94.9 million in marketing program costs and an increase of$21.7 million in employee-related costs, partially offset by a decrease of$28.6 million in transaction costs which were incurred during the nine months endedSeptember 30, 2021 relating to the Viela acquisition. In addition, we incurred severance and consulting costs of$7.6 million during the nine months endedSeptember 30, 2022 , related to the winding down of our inflammation segment. We expect our selling, general and administrative expenses to increase in future periods primarily due to continued support for ourU.S. commercial and global expansion activities. Impairment of goodwill. During the nine months endedSeptember 30, 2022 , we recorded an impairment charge of$56.2 million in relation to our inflammation reporting unit. Refer to Note 8,Goodwill and Intangible Assets, of the Notes to the Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. Impairment of long-lived asset. During the nine months endedSeptember 30, 2021 , we recorded an impairment charge of$12.4 million as a result of vacating theLake Forest office. Refer to Note 15, Lease Obligations, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. 45 -------------------------------------------------------------------------------- Gain on sale of asset. During the nine months endedSeptember 30, 2021 , gain on sale of asset represents a$2.0 million contingent consideration payment related to the sale of MIGERGOT in 2019. The contingent consideration was earned during the second quarter of 2021 and it was received inJuly 2021 . Interest Expense, Net. Interest expense, net, increased$6.1 million to$65.1 million during the nine months endedSeptember 30, 2022 , from$59.0 million during the nine months endedSeptember 30, 2021 . The increase was primarily due to an increase in interest expense of$17.7 million , primarily related to increases in interest rates on the portion of our variable interest debt, partially offset by an increase in interest income of$11.6 million . Refer to Note 13, Debt Agreements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. Benefit for Income Taxes. During the nine months endedSeptember 30, 2022 , we recorded a benefit for income taxes of$28.5 million compared to a benefit for income taxes of$109.5 million during the nine months endedSeptember 30, 2021 . The benefit for income taxes recorded during the nine months endedSeptember 30, 2022 , resulted primarily from tax benefits recognized on share-based compensation and the release of a valuation allowance previously recognized on certain state net operating losses, partially offset by tax expense resulting from the mix of pre-tax income and losses incurred in various tax jurisdictions. 46
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Information by Segment
Refer to Note 11, Segment and Other Information, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of our segment operating income (loss) to our total income before benefit for income taxes for the nine months endedSeptember 30, 2022 and 2021. Orphan Segment The following table reflects our orphan segment net sales and segment operating income for the nine months endedSeptember 30, 2022 and 2021 (in thousands, except percentages). For the Nine Months Ended September 30, 2022 2021 Change % Change Net sales$ 2,580,351 $ 1,955,053 $ 625,298 32 % Segment operating income 1,033,477 798,514 234,963 29 %
Segment operating income. Orphan segment operating income increased$235.0 million to$1,033.5 million during the nine months endedSeptember 30, 2022 , from$798.5 million during the nine months endedSeptember 30, 2021 . The increase was primarily attributable to an increase in net sales of$625.3 million as described above, partially offset by an increase in selling, general and administrative expenses of$241.9 million , an increase of$91.4 million in R&D expenses and an increase of$59.2 million in royalty expense primarily related to an increase in royalties payable on net sales of TEPEZZA during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . Inflammation Segment
The following table reflects our inflammation segment net sales and segment operating income (loss) for the nine months ended
For the Nine Months Ended September
30,
2022 2021 Change % Change
Net sales $ 106,664 $ 256,893 $ (150,229 ) (58 %)
Segment operating (loss) income (1,979 ) 123,576
(125,555) (102%)
Segment operating (loss) income. Inflammation segment operating (loss) income decreased$125.6 million to a$2.0 million operating loss during the nine months endedSeptember 30, 2022 , from$123.6 million in operating income during the nine months endedSeptember 30, 2021 . The decrease was primarily attributable to a decrease in net sales of$150.2 million as described above, partially offset by a decrease in selling, general and administrative expenses of$19.3 million . 47
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NON-GAAP FINANCIAL MEASURES
We provide certain non-GAAP financial measures, including EBITDA, or earnings before interest, taxes, depreciation and amortization, adjusted EBITDA, non-GAAP net income and non-GAAP earnings per share. These non-GAAP financial measures are intended to provide additional information on our performance, operations and profitability. Adjustments to our GAAP figures as well as EBITDA exclude acquisition/divestiture-related costs, manufacturing facility start-up costs and restructuring and realignment costs, as well as non-cash items such as share-based compensation, inventory step-up expense, depreciation and amortization, non-cash interest expense, long-lived assets impairment charges, loss on equity security investments and other non-cash adjustments. Certain other special items or substantive events may also be included in the non-GAAP adjustments periodically when their magnitude is significant within the periods incurred. We maintain an established non-GAAP cost policy that guides the determination of what costs will be excluded in non-GAAP measures. We believe that these non-GAAP financial measures, when considered together with the GAAP figures, can enhance an overall understanding of our financial and operating performance. The non-GAAP financial measures are included with the intent of providing investors with a more complete understanding of our historical financial results and trends and to facilitate comparisons between periods. In addition, these non-GAAP financial measures are among the indicators our management uses for planning and forecasting purposes and measuring our performance. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, non-GAAP financial measures used by other companies. Beginning in the fourth quarter of 2021, following consultation with the staff of theDivision of Corporation Finance of theU.S. Securities and Exchange Commission , we no longer exclude acquired IPR&D and milestones expenses from our non-GAAP financial measures and its line item components. For purposes of comparability, non-GAAP financial measures for the three and nine months endedSeptember 30, 2021 have been updated to reflect this change. Acquired IPR&D and milestones expenses continue to be excluded from our segment operating income (loss) and from certain measures contained in our credit agreement that are relevant to, among other things, the calculation of the interest rate.
Reconciliations of reported GAAP net income to EBITDA, Adjusted EBITDA, and non-GAAP net income, and related per share amounts, were as follows (in thousands, except share and per share amounts):
For the Nine Months Ended September
For the Three Months Ended September 30, 30,
2022 2021 2022 2021
GAAP net income $ 135,839 $ 326,543 $ 401,074 $ 361,309
Depreciation (1) 6,130 4,112 18,073 11,956
Amortization and step-up:
Intangible amortization expense
(2) 92,951 90,368 273,546 245,260
Inventory step-up expense (3) 21,779 8,912 66,342 16,914
Interest expense, net
(including amortization of debt
discount and deferred financing
costs) 22,480 22,977 65,145 59,018
Benefit for income taxes (758 ) (19,302 ) (28,467 ) (109,537 )
EBITDA 278,421 433,610 795,713 584,920
Other non-GAAP adjustments:
Share-based compensation (4) 45,066 54,804 137,515 170,394
Restructuring and realignment
costs (5) 7,731 680 9,521 7,703
Manufacturing facility start-up
costs (6) 2,024 1,712 4,413 1,712
Loss on equity security
investments (7) 1,247 - 6,331 -
Related to acquisitions/divestments
costs (8) 825 9,228 3,437 88,166 Impairment of goodwill (9) - - 56,171 - Impairment of long-lived asset (10) - - - 12,371 Litigation settlement (11) - 5,000 - 5,000 Gain on sale of asset (12) - - - (2,000 ) Total of other non-GAAP adjustments (16) 56,893 71,424 217,388 283,346 Adjusted EBITDA (16) $ 335,314 $ 505,034$ 1,013,101 $ 868,266 48
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For the Three Months Ended For the Nine Months Ended September
September 30, 30,
2022 2021 2022 2021
GAAP net income $ 135,839 $ 326,543 $ 401,074 $ 361,309
Non-GAAP adjustments:
Depreciation (1) 6,130 4,112 18,073 11,956
Amortization and step-up:
Intangible amortization expense (2) 92,951 90,368 273,546 245,260
Amortization of debt discount and
deferred financing costs (13) 2,232 1,500 6,136 3,740
Inventory step-up expense (3) 21,779 8,912 66,342 16,914
Share-based compensation (4) 45,066 54,804 137,515 170,394
Restructuring and realignment costs
(5) 7,731 680 9,521 7,703
Manufacturing facility start-up
costs (6) 2,024 1,712 4,413 1,712
Loss on equity security investments
(7) 1,247 - 6,331 -
Related to acquisitions/divestments
costs (8) 825 9,228 3,437 88,166 Impairment of goodwill (9) - - 56,171 - Impairment of long-lived asset (10) - - - 12,371 Litigation settlement (11) - 5,000 - 5,000 Gain on sale of asset (12) - - - (2,000 ) Total of pre-tax non-GAAP adjustments (16) 179,985 176,316 581,485 561,216 Income tax effect of pre-tax non-GAAP adjustments (14) (24,623 ) (36,602 ) (121,754 ) (141,665 ) Other non-GAAP income tax adjustments (15) 2,079 (56,007 ) 2,079 (25,126 ) Total non-GAAP adjustments 157,441 83,707 461,810 394,425 Non-GAAP net income (16)$ 293,280 $ 410,250 $ 862,884 $ 755,734 Non-GAAP Earnings Per Share: Weighted average ordinary shares - Basic 230,333,287
226,096,747 229,820,406 225,053,704
Non-GAAP Earnings Per Share - Basic GAAP earnings per share - Basic $ 0.59 $ 1.44 $ 1.75 $ 1.61 Non-GAAP adjustments (16) 0.68 0.37 2.00 1.75 Non-GAAP earnings per share - Basic (16) $ 1.27 $
$1.81 $3.75 $3.36
Weighted average ordinary shares - Diluted Weighted average ordinary shares - Basic 230,333,287
226,096,747 229,820,406 225,053,704 Equivalents of common shares
5,052,283 10,102,042 6,102,624 10,202,720 Weighted average ordinary shares - Diluted 235,385,570
236,198,789 235,923,030 235,256,424
Non-GAAP Earnings Per Share - Diluted GAAP earnings per share - Diluted $ 0.58 $ 1.38 $ 1.70 $ 1.54 Non-GAAP adjustments (16) 0.67 $ 0.36 1.96 $ 1.67 Non-GAAP earnings per share - Diluted (16) $ 1.25 $ 1.74 $ 3.66 $ 3.21 (1)
Represents depreciation expense related to our property, plant, equipment, software, and leasehold improvements.
(two)
Intangible amortization expenses are primarily associated with our developed technology related to TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI, UPLIZNA, ACTIMMUNE, BUPHENYL and RAYOS.
(3)
During the three and nine months endedSeptember 30, 2022 , we recognized in cost of goods sold$21.8 million and$66.3 million , respectively, for inventory step-up expense related to UPLIZNA inventory revalued in connection with the Viela acquisition. We recorded$8.9 million and$16.9 million , respectively, of UPLIZNA inventory step-up expense in cost of goods sold during the three and nine months endedSeptember 30, 2021 . Refer to Note 5, Inventories, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details.
(4)
Represents share-based compensation expense associated with our stock option, restricted stock unit and performance stock unit grants to our employees and non-employee directors, and our employee share purchase plan.
(5)
Primarily represents severance and consulting costs related to the winding down of our inflammation segment in the third quarter of 2022 and rent and maintenance charges as a result of vacating the leasedLake Forest office in the first quarter of 2021. 49
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(6)
During the three and nine months endedSeptember 30, 2022 , we recorded$2.0 million and$4.4 million , respectively, of manufacturing facility start-up costs related to our drug product biologics manufacturing facility inWaterford, Ireland . During the three and nine months endedSeptember 30, 2021 , we recorded$1.7 million of manufacturing facility start-up costs related to the purchase of our drug product biologics manufacturing facility inWaterford, Ireland from EirGen inJuly 2021 .
(7)
We held investments in equity securities with readily determinable fair values of$6.9 million as ofSeptember 30, 2022 , which are included in other long-term assets in the condensed consolidated balance sheet. For the three and nine months endedSeptember 30, 2022 , we recognized a net unrealized loss of$1.2 million and$6.3 million , respectively, due to the change in fair value of these securities.
(8)
Primarily represents transaction and integration costs, including, advisory, legal, consulting and certain employee-related costs, incurred in connection with our acquisitions and divestitures. Costs recovered from subleases of acquired facilities and reimbursed expenses incurred under transition arrangements for divestitures are also reflected in this line item.
(9)
Our interim goodwill impairment test in the second quarter of 2022 indicated an impairment which represented the difference between the estimated fair value of the inflammation reporting unit and its carrying value. As a result, we recognized an impairment charge of$56.2 million inJune 2022 representing the full amount of goodwill for the inflammation reporting unit. Refer to Note 8,Goodwill and Intangible Assets, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details.
(10)
During the nine months that ended
(eleven)
we record
(12)
During the nine months that ended
(13)
Represents the amortization of debt discount and deferred financing costs associated with our debt.
(14)
Income tax adjustments on pre-tax non-GAAP adjustments represent the estimated income tax impact of each pre-tax non-GAAP adjustment based on the statutory income tax rate of the applicable jurisdictions for each non-GAAP adjustment.
(fifteen)
During the three and nine months ended
During the three and nine months endedSeptember 30, 2021 , other non-GAAP income tax adjustments resulted primarily from the recognition of a reduction in the state tax rate expected to apply to the reversal of temporary differences between the book values and tax bases of certain assets acquired through the Viela acquisition. The reduction in state tax rate resulted in a reduction in the deferred tax liability relating to these assets and a non-GAAP tax adjustment of$51.3 million . In addition, during the nine months endedSeptember 30, 2021 , we recognized aU.S. federal and state tax liability onU.S. taxable income generated from an intercompany transfer and license of intellectual property from aU.S. subsidiary to an Irish subsidiary which was partially offset by the recognition of a deferred tax asset in the Irish subsidiary, resulting in a non-GAAP tax adjustment of$26.2 million .
(sixteen)
As discussed above, following consultation with the staff of theDivision of Corporation Finance of theU.S. Securities and Exchange Commission , we no longer exclude acquired IPR&D and milestones expenses from our non-GAAP financial measures and its line item components. Adjusted EBITDA and non-GAAP net income for the three and nine months endedSeptember 30, 2021 , includes$4.0 million and$47.0 million , respectively, of acquired IPR&D and milestones expenses. These amounts continue to be excluded from our segment operating income (loss) and from certain measures contained in our credit agreement that are relevant to, among other things, the calculation of the interest rate. 50
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LIQUIDITY, FINANCIAL SITUATION AND CAPITAL RESOURCES
As ofSeptember 30, 2022 , we had retained earnings of$606.3 million . We expect that our sales and marketing expenses will continue to increase as a result of the commercialization of our medicines and global expansion initiatives, but we believe these cost increases will be offset by higher net sales and gross profits in future periods. Additionally, we expect that our R&D and acquired IPR&D and milestones expenses will continue to increase as we acquire or develop more development-stage medicine candidates and advance our candidates through the clinical development and regulatory approval processes. In particular, we expect to incur substantial costs in connection with advancing our pipeline of medicine candidates and development programs in on-going and planned clinical trials. We are in the process of expanding our production capacity to meet anticipated future demand for TEPEZZA, primarily for 2023 and beyond. As ofSeptember 30, 2022 , we had total purchase commitments, including the minimum annual order quantities and binding firm orders, withAGC Biologics A/S (formerly known as CMC Biologics A/S) for TEPEZZA drug substance of €68.1 million ($66.8 million converted at a Euro-to-Dollar exchange rate as ofSeptember 30, 2022 of 0.9815), to be delivered throughSeptember 2024 . We also expect to incur additional costs and to enter into additional purchase commitments in connection with our efforts to expand TEPEZZA production capacity in order to meet anticipated increases in demand.
Under our license agreement with
InJuly 2021 , we completed the purchase of a drug product biologics manufacturing facility from EirGen for$67.9 million . Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. We expect to incur approximately$17.2 million in capital expenditures during the fourth quarter of 2022 in order to complete the drug product facility. InAugust 2022 , we submitted a planning application to build a drug substance biologics manufacturing facility adjacent to our existing drug product biologics manufacturing facility inWaterford, Ireland . We expect the facility will add approximately 320,000 square feet to the existing drug product biologics manufacturing facility and will be used to manufacture a portion of our on market rare disease biologics as well as development-stage medicines. We expect to incur between €500 million and €600 million in total construction costs during the next several years in order to build the drug substance biologics manufacturing facility. OnAugust 12, 2022 , we entered into a collaboration and option agreement with Q32 related to its pipeline candidate ADX-914, a monoclonal antibody antagonist of the interleukin-7 receptor for the treatment of autoimmune and inflammatory diseases. An upfront payment of$15.0 million was paid in the third quarter of 2022 and recorded as acquired IPR&D and milestones expenses in the condensed consolidated statement of comprehensive income. In addition, milestone-based development funding of$17.5 million is expected to be paid in the fourth quarter of 2022. We may also be obligated to pay up to$22.5 million in the form of additional milestone-based development funding. If we exercise the option, we may be obligated to make up to an additional$645.0 million in closing and milestone payments, as well as tiered royalties on net sales from a high single-digit to a low double-digit percentage, inclusive of certain amounts payable to a third party under a pre-existing license agreement. Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. We are committed to invest as a strategic limited partner in four venture capital funds: Forbion Growth Opportunities Fund I C.V., Forbion Capital Fund V C.V.,Aisling Capital V, L.P. andRiverVest Venture Fund V, L.P. As ofSeptember 30, 2022 , the total carrying amount of our investments in these funds was$23.7 million , which is included in other long-term assets in the condensed consolidated balance sheet, and our total future commitments to these funds are$36.3 million . We have financed our operations to date through equity financings, debt financings and the issuance of convertible notes, along with cash flows from operations during the last several years. As ofSeptember 30, 2022 , we had$2.1 billion in cash and cash equivalents and total debt with a book value of$2.5 billion and face value of$2.6 billion . We believe our existing cash and cash equivalents and our expected cash flows from our operations will be sufficient to fund our business needs for at least the next 12 months from the issuance of the financial statements in this Quarterly Report on Form 10-Q. We do not have any financial covenants or non-financial covenants that we expect to be affected by the economic disruptions and negative effects of the COVID-19 pandemic, global macro-economic issues or inflationary pressures. 51 -------------------------------------------------------------------------------- We have a significant amount of debt outstanding on a consolidated basis. For a description of our debt agreements, refer to Note 13, Debt Agreements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q. This substantial level of debt could have important consequences to our business, including, but not limited to: making it more difficult for us to satisfy our obligations; requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund acquisitions, capital expenditures, R&D and future business opportunities; limiting our ability to obtain additional financing, including borrowing additional funds; increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions, including rising interest rates; limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and placing us at a disadvantage as compared to our competitors, to the extent that they are not as highly leveraged. We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness.
In addition, the indenture governing our 5.5% Senior Notes due 2027 and our Credit Agreement impose various provisions that limit our ability and/or the ability of our restricted subsidiaries to, among other things, pay dividends or distributions, repurchase shares, prepay junior debt and make certain investments, incur additional debt and issue certain preferred shares, incur liens on assets, engage in certain asset sales or merger transactions, enter into transactions with affiliates, designate subsidiaries as unrestricted subsidiaries; and allow certain restrictions on the ability of restricted subsidiaries to pay dividends or make other payments to us.
OnApril 25, 2022 , we entered into two interest rate swap agreements with notional amounts totaling$800.0 million , effectiveJune 24, 2022 , to hedge or otherwise protect against interest rate fluctuations on a portion of our variable rate debt. The agreements effectively fix LIBOR at approximately 2.8% throughDecember 24, 2026 . These agreements were designated as cash flow hedges of the variability of future cash flows subject to the variable monthly interest rates on$800.0 million of our senior secured term loans borrowed under our Credit Agreement inDecember 2019 andMarch 2021 . Refer to Note 14, Derivative Instruments and Hedging Activities, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. During the nine months endedSeptember 30, 2022 , we issued an aggregate of 3,115,180 of our ordinary shares in connection with stock option exercises, the vesting of restricted stock units and performance stock units, and employee share purchase plan purchases. We received a total of$37.2 million in net proceeds in connection with such issuances. During the nine months endedSeptember 30, 2022 , we made payments of$123.9 million for employee withholding taxes relating to vesting of share-based awards. InSeptember 2022 , our board of directors authorized a share repurchase program pursuant to which we may repurchase up to$500.0 million of our ordinary shares. Under the program, we may repurchase ordinary shares from time to time on the open market or through privately negotiated transactions or structured repurchase transactions. In the third quarter of 2022, we executed open market share repurchases of 1.8 million ordinary shares under this repurchase program for total consideration of$113.4 million . As ofOctober 31, 2022 , we had repurchased 3.9 million of our ordinary shares under this program for total consideration of$250.0 million . All ordinary shares repurchased were subsequently retired. The timing and amount of future repurchases, if any, will depend on a variety of factors, including the price of our ordinary shares, alternative investment opportunities, our cash resources, restrictions under our debt agreements, corporate and regulatory requirements and market conditions. We expect to continue to fund the repurchase of our ordinary shares, if any, under the program with existing cash and cash equivalents. Refer to Note 18, Shareholders' Equity, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities, other than the indemnification agreements discussed in Note 16, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q. 52
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Sources and uses of cash
The following table provides a summary of our cash position and cash flows for the nine months ended
For the Nine Months Ended
2022
2021
Cash, cash equivalents and restricted cash $2,135,270 $
1,072,386 Cash provided by (used in): Operating activities 831,451 496,714 Investing activities (84,930 ) (2,957,267 ) Financing activities (186,992 ) 1,460,411 Operating Cash Flows During the nine months endedSeptember 30, 2022 , net cash provided by operating activities of$831.5 million was primarily attributable to cash collections from gross sales, partially offset by payments made related to government rebates for our orphan segment medicines and patient assistance costs for our inflammation segment medicines, payments for inventory, payments related to selling, general and administrative expenses and payments related to R&D expenses. During the nine months endedSeptember 30, 2021 , net cash provided by operating activities of$496.7 million was primarily attributable to cash collections from gross sales, partially offset by payments made related to patient assistance costs for our medicines and government rebates for our orphan segment medicines, payments related to selling, general and administrative expenses, including transaction costs related to the Viela acquisition, and payments related to R&D expenses. Investing Cash Flows During the nine months endedSeptember 30, 2022 , net cash used in investing activities of$84.9 million was primarily attributable to an upfront payment of$25.0 million paid to Alpine Immune Sciences, Inc., or Alpine, in the first quarter of 2022 relating to an exclusive license agreement entered into inDecember 2021 , an upfront payment of$15.0 million relating to a collaboration and option agreement entered into with Q32 in the third quarter of 2022, and payments related to purchases of property, plant and equipment of$39.2 million . Refer to Note 4, Acquisitions, Divestitures and other Arrangements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details on the Alpine license agreement and collaboration and option agreement with Q32. During the nine months endedSeptember 30, 2021 , net cash used in investing activities of$2,957.3 million was primarily attributable to payments for acquisitions, net of$2,843.3 million which was primarily attributable to$2.6 billion paid in relation to the Viela acquisition, net of acquired cash. In addition, we made a milestone payment ofCHF50.0 million ($56.1 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.1228) under our license agreement with Roche and we made a milestone payment of$67.0 million to the former River Vision stockholders during the nine months endedSeptember 30, 2021 . In the third quarter of 2021, we completed the purchase of a drug product biologics manufacturing facility from EirGen for$67.9 million , which included an upfront cash payment of$64.8 million and$3.1 million of additional transaction costs, legal fees and liabilities assumed and we paid an upfront cash payment of$40.0 million in relation to the global agreement with Arrowhead inJuly 2021 . Financing Cash Flows During the nine months endedSeptember 30, 2022 , net cash used in financing activities of$187.0 million was primarily attributable to$123.9 million in payments of employee withholding taxes relating to share-based awards, partially offset by$37.2 million in proceeds from the issuance of ordinary shares in connection with stock option exercises and employee share purchase plan purchases. In addition, in the third quarter of 2022, we executed open market share repurchases of 1.8 million of our ordinary shares for total consideration of$113.4 million , of which$88.2 million was settled as ofSeptember 30, 2022 . Refer to Note 18, Shareholders' Equity, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details on our share repurchase program. During the nine months endedSeptember 30, 2021 , net cash provided by financing activities of$1,460.4 million was primarily attributable to an additional$1.6 billion aggregate principal amount of term loans borrowed pursuant to an amendment to our Credit Agreement, the proceeds of which, in addition to a portion of our existing cash on hand, was used to pay the consideration for the Viela acquisition, partially offset by the payment of$158.1 million payment of employee withholding taxes relating to share-based awards. 53
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Financial condition as of
Prepaid expenses and other current assets. Prepaid expenses and other current assets increased$83.0 million , from$357.1 million as ofDecember 31, 2021 to$440.1 million as ofSeptember 30, 2022 . The increase was primarily due to an increase of$83.0 million in deferred charges for taxes on intercompany profits and an increase of$7.2 million in advance payments for inventory, partially offset by a decrease in prepaid income taxes and an income tax receivable of$24.4 million . Developed technology and other intangible assets, net. Developed technology and other intangible assets, net, decreased$202.4 million , from$2,960.1 million as ofDecember 31, 2021 to$2,757.7 million as ofSeptember 30, 2022 , primarily related to a decrease of$273.5 million related to amortization of developed technology during the nine months endedSeptember 30, 2022 . This was partially offset by$70.0 million of IPR&D reclassified to developed technology in the second quarter of 2022 due to theEuropean Commission issuing a legally binding decision to grant a Centralized Marketing Authorization for UPLIZNA for the treatment of adult patients with neuromyelitis optica spectrum disorder in theEuropean Union inApril 2022 . Refer to Note 8,Goodwill and Intangible Assets, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details. In-process research and development. IPR&D decreased$70.0 million , from$880.0 million as ofDecember 31, 2021 to$810.0 million as ofSeptember 30, 2022 , primarily related to the reclassification of$70.0 million of IPR&D relating to UPLIZNA to developed technology in the second quarter of 2022. Refer to Note 8,Goodwill and Intangible Assets, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details.Goodwill .Goodwill decreased$56.2 million , from$1,066.7 million as ofDecember 31, 2021 to$1,010.5 million as ofSeptember 30, 2022 . Our interim goodwill impairment test in the second quarter of 2022 indicated an impairment which represented the difference between the estimated fair value of the inflammation reporting unit and its carrying value. As a result, we recognized an impairment charge of$56.2 million inJune 2022 representing the full amount of goodwill for the inflammation reporting unit. Refer to Note 8,Goodwill and Intangible Assets, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for further details. Accrued expenses and other current liabilities. Accrued expenses and other current liabilities decreased$65.7 million , from$523.0 million as ofDecember 31, 2021 to$457.3 million as ofSeptember 30, 2022 . The decrease was primarily due to a decrease in accrued payroll-related expenses of$35.5 million , a decrease in accrued upfront and milestone payments of$31.1 million , a decrease in accrued consulting and professional services of$17.0 million and a decrease in accrued royalties of$14.4 million , partially offset by accrued expenses related to our share repurchase program of$25.2 million . Refer to Note 18, Shareholders' Equity, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q for further details. Contractual Obligations As ofSeptember 30, 2022 , there were no material changes to our contractual obligations as previously disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , except as described in Note 16, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance withU.S. GAAP principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. Certain of these policies are considered critical as these most significantly impact a company's financial condition and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results may vary from these estimates. During the nine months endedSeptember 30, 2022 , there have been no significant changes in our application of our critical accounting policies. A summary of our critical accounting policies is included in Item 7 to our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 54
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