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HORIZON THERAPEUTICS PUBLIC LTD CO – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the pending transaction with Amgen Inc., 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 otherwise requires, references to
"Horizon", "we", "us" and "our" refer to
consolidated subsidiaries.
OUR BUSINESS
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. Effective in the fourth quarter of 2022, management realigned our reportable segments to reflect changes in the manner in which the chief operating decision maker, or CODM, assesses financial information for decision-making purposes. We transitioned our two reportable segments, the inflammation segment and the orphan segment, to one reportable segment for the year endedDecember 31, 2022 . All prior year amounts have been reclassified to conform to our current reporting structure. Our commercial portfolio is currently composed of 12 medicines in the areas of rare diseases, gout, ophthalmology and inflammation. OnDecember 12, 2022 , we announced we had entered into a transaction agreement with Amgen Inc., or Amgen, andPillartree Limited , or Pillartree, a wholly owned subsidiary of Amgen. Subject to the terms of the transaction agreement, Pillartree will acquire our company, or the Transaction, pursuant to a scheme of arrangement under Chapter 1 of Part 9 of the Companies Act 2014 ofIreland , or the Scheme. As a result of the Scheme, we would become a wholly owned subsidiary of Amgen.
At the effective time of the Scheme, or the Effective Time, holders of our
ordinary shares will be entitled to receive
or the Consideration. Our equity awards will be treated as set forth in the
transaction agreement, such that:
•
each option to purchase our ordinary shares that is outstanding as of immediately prior to the Effective Time (whether or not vested) will, contingent upon and effective as of the Effective Time, be canceled and converted into the right to receive cash, without interest, in an amount equal to (a) the total number of our ordinary shares subject to such option immediately prior to the Effective Time, multiplied by (b) the excess of (i) the Consideration over (ii) the exercise price payable per share under such option;
•
each of our restricted stock unit, or RSU, awards, excluding PSUs (as defined
below), that is outstanding as of immediately prior to the Effective Time
(whether or not vested) will, contingent upon and effective as of the Effective
Time, (a) if granted to a non-employee member of our board of directors, or held
by a person who, as of the date of the completion of the Transaction, is a
former service-provider of our company, be canceled and converted into the right
to receive a cash amount equal to (i) the total number of our ordinary shares
subject to such RSU immediately prior to the Effective Time multiplied by (ii)
the Consideration, and (b) if not granted to an individual described in clause
(a) above, be canceled and converted into a restricted stock unit, or an Amgen
RSU, denominated in shares of Amgen's common stock. The number of shares of
Amgen common stock subject to each such Amgen RSU will be equal to the product
(rounded down to the nearest whole number) of (a) the total number of our
ordinary shares subject to such RSU immediately prior to the Effective Time
multiplied by (b) the quotient of (i) the Consideration divided by (ii) the
volume weighted average of the per share closing price of Amgen's common stock
on the Nasdaq Global Select Market for five trading days ending on the second
business day prior to the completion of the Transaction. Following the Effective
Time, each Amgen RSU will continue to be governed by the same terms and
conditions (including vesting terms) as were applicable to the applicable RSU
immediately prior to the Effective Time; and
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•
each of our RSU awards with performance-based vesting or delivery requirements, or a PSU, that is outstanding as of immediately prior to the Effective Time (whether or not vested) will, contingent upon and effective as of the Effective Time, be canceled and converted into the right to receive cash, without interest, in an amount equal to (i) the total number of our ordinary shares issuable in settlement of such PSU as determined, in accordance with the terms of such PSU, by the compensation committee of our board of directors prior to the Effective Time multiplied by (ii) the Consideration. OnFebruary 24, 2023 , our shareholders approved the Scheme and certain scheme approval resolutions and amendments to the memorandum and articles of association of Horizon to enable the Scheme to be effected. The closing of the Transaction remains subject to customary closing conditions, including, among other things, (a) the sanction by theIrish High Court of the Scheme and delivery of the court order to the Irish Registrar of Companies, (b) the receipt of required antitrust clearance inthe United States , and the absence of an order or law that prevents consummation of the Transaction or imposes a burdensome condition (as defined in the transaction agreement), (c) absence of any Material Adverse Effect (as defined in the transaction agreement) fromDecember 12, 2022 to the Sanction Date (as defined in the transaction agreement) that is continuing as of the Sanction Date, (d) the accuracy of the other party's representations and warranties subject to certain materiality and material adverse effect exceptions and (e) the performance by each party of all of its covenants and agreements under the transaction agreement in all material respects. In connection with the Transaction, we and Amgen have received clearances or confirmation of non-applicability related to foreign direct investment inDenmark ,Italy ,Germany andFrance and clearances related to antitrust inGermany andAustria . OnJanuary 30, 2023 , we and Amgen received a request for additional information and documentary materials, or a second request, from theFederal Trade Commission , orFTC , in connection with theFTC's review of the Transaction. We and Amgen have been working cooperatively with theFTC in its review and will continue to do so.The Irish High Court has set a hearing date ofMay 22, 2023 to consider our application to sanction the Scheme. We will inform theIrish High Court in advance if the hearing date needs to be adjourned to a later date as a result of a condition to closing, including required regulatory clearances, not having been satisfied by the scheduled hearing date. The Transaction is expected to close shortly after theIrish High Court issues an order sanctioning the Scheme and we continue to expect that the closing of the Transaction will occur during the first half of 2023. Additional information about the transaction agreement and the Transaction is set forth in our filings with theSEC .
As of
medicines:
TEPEZZA® (teprotumumab-trbw), for intravenous infusion
KRYSTEXXA® (pegloticase injection), for intravenous infusion
RAVICTI® (glycerol phenylbutyrate) oral liquid
UPLIZNA® (inebilizumab-cdon) injection, for intravenous use
PROCYSBI® (cysteamine bitartrate) delayed-release capsules and granules, for
oral use
ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous use
PENNSAID® (diclofenac sodium topical solution) 2% w/w, or PENNSAID 2%, for
topical use
RAYOS® (prednisone) delayed-release tablets, for oral use
BUPHENYL® (sodium phenylbutyrate) tablets and powder, for oral use
QUINSAIR™ (levofloxacin) solution for inhalation
DUEXIS® (ibuprofen/famotidine) tablets, for oral use
VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use
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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 expanded our commercial team, continued to invest in our direct-to-consumer marketing activities, refined our marketing and physician education strategies, and conducted extensive market analysis to identify further opportunities to accelerate growth, which we are implementing. These growth opportunities involve increasing adoption by ocular specialists and driving an urgency among ophthalmologists and endocrinologists to diagnose and refer thyroid eye disease, or TED, patients. InApril 2023 , we announced positive topline results from the randomized, double-masked, placebo-controlled Phase 4 clinical trial evaluating TEPEZZA in patients with chronic/low clinical activity score, or CAS, TED. In addition, we receivedU.S. Food and Drug Administration , or FDA, approval to update the TEPEZZA label to specify its use for the treatment of TED "regardless of Thyroid Eye Disease activity or duration," which we believe reinforces the importance of unrestricted access for all eligible patients across the full spectrum of TED and creates an opportunity to ease the access burden for patients and physicians with the goal of decreasing time to therapy for patients who may benefit from TEPEZZA. As part of our strategy to maximize the value of TEPEZZA, we plan to educate key stakeholders, including physicians, patients and payors on the trial results and updated label indication. With respect to KRYSTEXXA, after receivingU.S. Food and Drug Administration approval of our supplemental biologics license application, or sBLA, inJuly 2022 to expand the label to include co-treatment of KRYSTEXXA with the immunomodulator methotrexate, we launched a successful commercial campaign, expanded our commercial team and are focused on promoting the expanded label with physicians and 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. We announced the initiation of five clinical trials in 2022 and expect to initiate several more in 2023, including a planned Phase 3 program for dazodalibep in Sjögren's syndrome. InJanuary 2023 , we announced the initiation of our daxdilimab discoid lupus erythematosus Phase 2 trial. InMay 2023 , we announced the initiation of our TEPEZZA chronic/low CAS TED Phase 3 trial inJapan as well as our daxdilimab lupus nephritis Phase 2 trial. 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 andBrazil this year; (ii) potential approvals and commercial launches of UPLIZNA in additional markets in the coming years; and (iii) potential approvals and full-scale 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. 26
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Impact of COVID-19
The COVID-19 pandemic 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. During the first half of 2022, 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 our 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. In addition, our clinical trials have been and may in the future be affected by the COVID-19 pandemic. 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. We are continuing to actively monitor the possible impacts from the COVID-19 pandemic, including the emergence of new variants of the virus, and may take further actions to alter our business operations as may be required by federal, state, local or foreign 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. For further information on the impact of COVID-19 pandemic, refer to "Risk Factors", included in Item 1A of this Quarterly Report on Form 10-Q. 27
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RESULTS OF OPERATIONS
Comparison of Three Months Ended
Consolidated Results
The table below should be referenced in connection with a review of the
following discussion of our results of operations for the three months ended
For the Three Months Ended
March 31, Change Change
2023 2022 $ %
(in thousands, except percentages)
Net sales $ 832,059 $ 885,245 $ (53,186 ) (6 )%
Cost of goods sold 208,563 215,062 (6,499 ) (3 )%
Gross profit 623,496 670,183 (46,687 ) (7 )%
Operating expenses:
Research and development 134,148 103,132 31,016 30 %
Selling, general and administrative 453,354 372,734 80,620 22 %
Total operating expenses 587,502 475,866 111,636 23 %
Operating income 35,994 194,317 (158,323 ) (81 )%
Other expense, net:
Interest expense, net (15,540 ) (21,256 ) 5,716 27 %
Foreign exchange gain 91 420 (329 ) (78 )%
Other expense, net (1,343 ) (742 ) (601 ) (81 )%
Total other expense, net (16,792 ) (21,578 ) 4,786 22 %
Income before benefit for income taxes 19,202 172,739
(153,537 ) (89 )% Benefit for income taxes (35,482 ) (31,522 ) (3,960 ) (13 )% Net income$ 54,684 $ 204,261 $ (149,577 ) (73 )% Beginning with the third quarter of 2022, we separately present 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 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 consolidated statements of comprehensive income have been reclassified to conform with the new classification. There were no acquired IPR&D and milestones expenses during the three months endedMarch 31, 2023 and 2022. Net sales. Net sales decreased$53.2 million , or 6%, to$832.0 million during the three months endedMarch 31, 2023 , from$885.2 million during the three months endedMarch 31, 2022 . The decrease during the three months endedMarch 31, 2023 was primarily due to a decrease in TEPEZZA net sales of$96.1 million and a decrease in PENNSAID 2% net sales of$26.2 million due to the impact of generic competition, partially offset by an increase in KRYSTEXXA net sales of$46.3 million and an increase in UPLIZNA net sales of$23.4 million .
The following table reflects net sales by medicine for the three months ended
Three Months Ended
March 31, Change Change
2023 2022 $ %
TEPEZZA $ 405,317 $ 501,451 (96,134 ) (19 )%
KRYSTEXXA 186,981 140,704 46,277 33 %
RAVICTI 90,321 78,257 12,064 15 %
UPLIZNA 53,829 30,477 23,352 77 %
PROCYSBI 50,463 49,571 892 2 %
ACTIMMUNE 29,121 31,435 (2,314 ) (7 )%
PENNSAID 2% 9,194 35,368 (26,174 ) (74 )%
RAYOS 4,977 13,487 (8,510 ) (63 )%
BUPHENYL 1,413 2,161 (748 ) (35 )%
QUINSAIR 296 296 - 0 %
DUEXIS 139 1,123 (984 ) (88 )%
VIMOVO 8 915 (907 ) (99 )%
Total net sales $ 832,059 $ 885,245 $ (53,186 ) (6 )%
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-------------------------------------------------------------------------------- TEPEZZA. Net sales decreased$96.1 million , or 19%, to$405.3 million during the three months endedMarch 31, 2023 , from$501.4 million during the three months endedMarch 31, 2022 . Net sales decreased by approximately$101.4 million due to lower sales volume, partially offset by an increase of$5.3 million due to higher net pricing. In the second half of 2022, we identified certain challenges, including the often-burdensome reimbursement process, that we believe have contributed to slower-than-expected growth of TEPEZZA. These challenges, as well as challenges related to a lower rate of adherence to the full course of TEPEZZA therapy, have continued to moderate TEPEZZA net sales growth. We continue to execute on several opportunities to address these challenges and accelerate growth, including significantly expanding the size of our TEPEZZA sales force in late 2022 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 additional 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. InApril 2023 , we announced positive topline results from our Phase 4 clinical trial in chronic/low CAS TED and received FDA approval of an update to TEPEZZA's label specifying the use of TEPEZZA regardless of TED disease activity or duration, which we believe reinforces the importance of unrestricted access for all eligible patients across the full spectrum of TED. We have seen improving trends in patient enrollment forms and patient starts as a result of our strategies and our expansion; however, it is taking longer than initially anticipated for our strategies and our expansion to contribute meaningfully to TEPEZZA net sales growth. KRYSTEXXA. Net sales increased$46.3 million , or 33%, to$187.0 million during the three months endedMarch 31, 2023 , from$140.7 million during the three months endedMarch 31, 2022 . Net sales increased by approximately$31.2 million due to volume growth and$15.1 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 inJuly 2022 , which expanded KRYSTEXXA's labeling to include co-administration with methotrexate. RAVICTI. Net sales increased$12.1 million , or 15%, to$90.3 million during the three months endedMarch 31, 2023 , from$78.2 million during the three months endedMarch 31, 2022 . Net sales increased by approximately$8.8 million due to higher net pricing and$3.3 million due to volume growth. UPLIZNA. Net sales increased$23.4 million , or 77%, to$53.8 million during the three months endedMarch 31, 2023 , from$30.4 million during the three months endedMarch 31, 2022 . Net sales inthe United States increased by$22.0 million , which was composed of an increase of$19.2 million due to higher sales volume and$2.8 million due to higher net pricing. The remaining$1.4 million increase in net sales related primarily to revenue and milestone payments from our international partners recognized during the three months endedMarch 31, 2023 . PENNSAID 2%. Net sales decreased$26.2 million , or 74%, to$9.2 million during the three months endedMarch 31, 2023 , from$35.4 million during the three months endedMarch 31, 2022 . Net sales decreased by approximately$21.9 million due to lower sales volume and by approximately$4.3 million resulting from lower net pricing, as a result of generic competition. RAYOS. Net sales decreased$8.5 million , or 63%, to$5.0 million during the three months endedMarch 31, 2023 , from$13.5 million during the three months endedMarch 31, 2022 . Net sales decreased by approximately$5.8 million due to lower sales volume and by approximately$2.7 million due to lower net pricing. 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, we expect Teva to enter the market with a generic version of RAYOS in 2023. As a result, we expect our net sales for RAYOS to continue declining in future periods. Due to the impact of the at-risk launch of generic PENNSAID 2% during the year endedDecember 31, 2022 , we redeployed a portion of our inflammation commercial team to support our TEPEZZA and KRYSTEXXA expansions. In the fourth quarter of 2022, we substantially completed a wind down of our former inflammation business, including active promotion efforts and associated HorizonCares support, for our inflammation medicines. As a result, sales volumes for PENNSAID 2%, RAYOS and DUEXIS declined significantly since the second quarter of 2022 and we expect net sales of our inflammation medicines to be immaterial going forward. 29
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The table below reconciles our gross to net sales for the three months ended
Three Months Ended Three Months Ended
March 31, 2023 March 31, 2022
% of Gross % of Gross
Amount Sales Amount Sales
Gross sales $ 1,107.0 100.0 % $ 1,231.5 100.0 %
Adjustments to gross sales:
Prompt pay discounts (6.6 ) (0.6 )% (10.2 ) (0.8 )%
Medicine returns (6.9 ) (0.6 )% (4.4 ) (0.3 )%
Co-pay and other patient assistance (32.6 ) (2.9 )% (84.8 ) (6.9 )%
Commercial rebates and wholesaler fees (38.1 ) (3.5 )% (51.3 ) (4.2 )%
Government rebates and chargebacks (190.7 ) (17.2 )% (195.6 ) (15.9 )%
Total adjustments (274.9 ) (24.8 )% (346.3 ) (28.1 )%
Net sales $ 832.1 75.2 % $ 885.2 71.9 %
During the three months ended March 31, 2023 , co-pay and other patient
assistance costs, as a percentage of gross sales, decreased to 2.9% from 6.9%
during the three months ended March 31, 2022 , primarily due to a decreased
proportion of PENNSAID 2% and DUEXIS sold. We expect co-pay and other patient
assistance costs to continue to decrease as a percentage of total gross sales.
On a quarter-to-quarter basis, our net sales can be impacted due to end customer
buying patterns, fluctuations in wholesaler inventory levels, the impact of
benefit plan changes, insurance reverification and increased co-pay expenses as
patients work through deductibles. For example, our net sales in the first
quarter of a year historically represents the lowest net sales quarter as a
result of some of these impacts, and we expect this trend to continue in 2023.
This is primarily due to annual managed care plan changes and the re-setting of
patients' medical insurance deductibles at the beginning of each year, resulting
in higher co-pay and other patient assistance costs as patients meet their
annual medical insurance deductibles during the first and second quarters, and
higher net sales in the second half of the year after patients meet their
deductibles and healthcare plans reimburse a greater portion of the total cost
of our medicines.
Cost of Goods Sold. Cost of goods sold decreased $6.5 million , or 3%, to $208.6
million during the three months ended March 31, 2023 , from $215.1 million during
the three months ended March 31, 2022 . The decrease in cost of goods sold was
primarily due to a decrease in royalty and earnout expense, partially offset by
an increase in inventory step-up expense. Royalty and earnout expense decreased
by $7.1 million primarily due to royalties and earnouts payable on net sales of
TEPEZZA, which decreased during the three months ended March 31, 2023 compared
to the three months ended March 31, 2022 due to lower net sales. Inventory
step-up expense increased by $2.5 million related to acquired units of UPLIZNA
inventory sold, which increased during the three months ended March 31, 2023
compared to the three months ended March 31, 2022 . As a percentage of net sales,
cost of goods sold (excluding intangible amortization expense of $88.3 million
during the three months ended March 31, 2023 and $89.3 million during the three
months ended March 31, 2022 ) was 14% during the three months ended March 31,
2023 and 2022.
Research and Development Expenses. R&D expenses increased $31.0 million , or 30%,
to $134.1 million during the three months ended March 31, 2023 , from $103.1
million during the three months ended March 31, 2022 . The increase was primarily
due to a $23.8 million increase in clinical trial costs and an increase of $7.0
million in personnel and related costs during the three months ended March 31,
2023 compared to three months ended March 31, 2022 , reflecting increased
activity in our R&D pipeline.
We expect our R&D expenses to continue increasing significantly in future
periods as a result of our on-going and planned clinical trials for our
pipeline, including medicine candidates and development programs acquired in
2021.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $80.6 million , or 22%, to $453.3 million
during the three months ended March 31, 2023 , from $372.7 million during the
three months ended March 31, 2022 . The increase was primarily due to costs
associated with the commercialization of our medicines and global expansion
initiatives, including increases of $30.0 million in employee-related expenses
and $24.5 million in marketing program costs. In addition, there was a $9.3
million increase in legal costs primarily relating to costs incurred in
connection with the Transaction with Amgen, including responding to the FTC's
second request.
We expect our selling, general and administrative expenses to increase in future
periods primarily due to continued support for our U.S. commercial and global
expansion activities.
Interest expense, net. Interest expense, net, decreased $5.7 million to $15.5
million during the three months ended March 31, 2023 , from $21.2 million during
the three months ended March 31, 2022 . The decrease was primarily due to an
increase in interest income of $25.8 million , partially offset by an increase in
interest expense of $20.1 million primarily related to increases in interest
rates on the portion of our variable interest debt. Refer to Note 12, 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 three months ended March 31, 2023 , we
recorded a benefit for income taxes of $35.5 million compared to a benefit for
income taxes of $31.5 million during the three months ended March 31, 2022 . The
increase in benefit for income taxes recorded during the three months ended
March 31, 2023 compared to the three months ended March 31, 2022 resulted
primarily from the mix of pre-tax income and losses incurred in various tax
jurisdictions, partially offset by a decrease in the tax benefits recognized on
share-based compensation.
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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, transaction-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, (gain) 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.
Reconciliations of reported GAAP net income to EBITDA, adjusted EBITDA and
non-GAAP net income, and the related per share amounts, were as follows (in
thousands, except share and per share amounts):
For the Three Months Ended March 31,
2023 2022
GAAP net income $ 54,684 $ 204,261
Depreciation (1) 6,246 5,852
Amortization and step-up:
Intangible amortization expense (2) 88,614 89,260
Inventory step-up expense (3) 29,743 27,201
Interest expense, net (including amortization of debt
discount and deferred financing costs)
15,540 21,256
Benefit for income taxes (35,482 ) (31,522 )
EBITDA 159,345 316,308
Other non-GAAP adjustments:
Share-based compensation (4) 58,120 47,300
Transaction-related costs (5) 9,784 -
Manufacturing facility start-up costs (6) 3,476 807
Restructuring and realignment costs (7) 1,822 537
Acquisition/divestiture-related costs (8) 681 1,589
(Gain) loss on equity security investments (9) (352 ) 4,646
Total of other non-GAAP adjustments 73,531 54,879
Adjusted EBITDA $ 232,876 $ 371,187
32
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For the Three Months Ended March 31,
2023 2022
GAAP net income $ 54,684 $ 204,261
Non-GAAP adjustments:
Depreciation (1) 6,246 5,852
Amortization and step-up:
Intangible amortization expense (2) 88,614 89,260
Amortization of debt discount and deferred financing
costs (10)
1,471 1,577 Inventory step-up expense (3) 29,743 27,201 Share-based compensation (4) 58,120 47,300 Transaction-related costs (5) 9,784 - Manufacturing facility start-up costs (6) 3,476 807 Restructuring and realignment costs (7) 1,822 537 Acquisition/divestiture-related costs (8) 681 1,589 (Gain) loss on equity security investments (9) (352 ) 4,646 Total of pre-tax non-GAAP adjustments 199,605 178,769 Income tax effect of pre-tax non-GAAP adjustments (11) (59,943 ) (67,212 ) Total non-GAAP adjustments 139,662 111,557 Non-GAAP net income $ 194,346 $ 315,818 Non-GAAP Earnings Per Share: Weighted average ordinary shares - Basic 228,397,661 229,094,311 Non-GAAP Earnings Per Share - Basic GAAP earnings per share - Basic $ 0.24 $ 0.89 Non-GAAP adjustments 0.61 0.49 Non-GAAP earnings per share - Basic $ 0.85 $ 1.38 Weighted average ordinary shares - Diluted Weighted average ordinary shares - Basic 228,397,661 229,094,311 Ordinary share equivalents 5,390,705 6,859,007 Weighted average ordinary shares - Diluted 233,788,366 235,953,318 Non-GAAP Earnings Per Share - Diluted GAAP earning per share - Diluted $ 0.23 $ 0.87 Non-GAAP adjustments 0.60 0.47 Non-GAAP earnings per share - Diluted $ 0.83 $ 1.34
(1)
Represents depreciation expense related to our property, plant, equipment,
software and leasehold improvements.
(2)
Intangible amortization expenses are primarily associated with our developed technology related to TEPEZZA, KRYSTEXXA, RAVICTI, UPLIZNA, PROCYSBI, ACTIMMUNE, RAYOS and BUPHENYL.
(3)
During the three months endedMarch 31, 2023 and 2022, we recognized$29.7 million and$27.2 million in cost of goods sold, respectively, for inventory step-up expense related to UPLIZNA inventory revalued in connection with theViela Bio, Inc. acquisition. Refer to Note 4, 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 RSU and PSU grants to our employees and non-employee directors, and our employee share purchase plan.
(5)
Primarily represents transaction-related costs, including, advisory, legal and
consulting costs, incurred in connection with the Transaction with Amgen,
including responding to the
(6)
During the three months endedMarch 31, 2023 and 2022, we recorded$3.5 million and$0.8 million , respectively, of manufacturing facility start-up costs related to our drug product biologics manufacturing facility inWaterford, Ireland .
(7)
Primarily represents severance and consulting costs related to the wind down of our former inflammation business during 2022 and rent and maintenance charges as a result of vacating the leasedLake Forest office in the first quarter of 2021.
(8)
Primarily represents transaction and integration costs, including, advisory, legal, consulting and certain employee-related costs, incurred in connection with our acquisitions and divestitures.
(9)
We held investments in equity securities with readily determinable fair values of$7.4 million and$8.5 million as ofMarch 31, 2023 and 2022, respectively, which are included in other long-term assets in the condensed consolidated balance sheet. For the three months endedMarch 31, 2023 and 2022, we recognized a net unrealized gain of$0.4 million and a net unrealized loss of$4.6 million , respectively, due to the change in fair value of these securities.
(10)
Represents amortization of debt discount and deferred financing costs associated
with our debt.
(11)
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.
33
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LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES
OnDecember 12, 2022 , we announced that we had entered into a transaction agreement with Amgen and Pillartree. We have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the transaction agreement and the Effective Time. Outside of certain limited exceptions, we may not take, authorize, commit, resolve, or agree to do certain actions without Amgen's consent, including: (i) acquiring businesses and disposing of significant assets; (ii) incurring capital expenditures above specified thresholds; (iii) issuing equity; (iv) incurring indebtedness; and (v) repurchasing outstanding ordinary shares. We do not believe these restrictions will prevent us from being able to fund our operations, working capital needs or capital expenditure requirements. The following discussion assumes that the Transaction is not consummated and we continue to operate as an independent entity. As ofMarch 31, 2023 , we had retained earnings of$644.7 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 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 ofMarch 31, 2023 , 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 €100.2 million ($108.4 million converted at a Euro-to-Dollar exchange rate as ofMarch 31, 2023 of 1.0820), to be delivered throughMarch 2025 . 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
Inc.
relating to the attainment of various TEPEZZA development and regulatory
milestones is
CHF-to-Dollar exchange rate at
InJuly 2021 , we completed the purchase of a drug product biologics manufacturing facility fromEirGen Pharma Limited for$67.9 million . We expect to incur approximately$30.0 million in capital expenditures during 2023 in order to prepare the drug product facility to manufacture the first medicine for commercial use, which, assuming the timely receipt of regulatory approvals, we anticipate to occur in the second half of 2023. 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 . Based on our current operating plan, we do not anticipate making significant investments in building a drug substance biologics manufacturing facility during 2023. OnJune 18, 2021 , we entered into a global agreement with Arrowhead Pharmaceuticals, Inc., or Arrowhead, for HZN-457, a discovery-stage investigational RNA interference therapeutic being developed by Arrowhead as a potential treatment for uncontrolled gout. Under the terms of the agreement, we paid Arrowhead an upfront cash payment of$40.0 million inJuly 2021 and agreed to pay additional potential future milestone payments of up to$660.0 million contingent on the achievement of certain development, regulatory and commercial milestones, and low to mid-teens royalties on worldwide calendar year net sales of licensed medicines. In addition, we recognized a$15.0 million development milestone in the fourth quarter of 2022. The$15.0 million development milestone was subsequently paid in the first quarter of 2023. 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 ofMarch 31, 2023 , the total carrying amount of our investments in these funds was$27.2 million , which is included in other long-term assets in the condensed consolidated balance sheet, and our total future commitments to these funds are$34.0 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 ofMarch 31, 2023 , we had$2.3 billion in cash and cash equivalents and total debt with a book value of$2.6 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. Because of the short-term maturities of our cash equivalents, we do not believe that a change in interest rates or the risk relating to recent bank failures would have any material negative impact on the fair value of our cash equivalents. 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, recent bank failures, global macro-economic issues or inflationary pressures. 34 -------------------------------------------------------------------------------- We have a significant amount of debt outstanding on a consolidated basis. For a description of our debt agreements, refer to Note 12, 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 and recent bank failures; 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, or 2027 Senior Notes, and our Credit Agreement impose various covenants that limit our ability and/or our restricted subsidiaries' ability to, among other things, pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments, incur additional debt and issue certain preferred stock, incur liens on assets, engage in certain asset sales or merger transactions, enter into transactions with affiliates, designate subsidiaries as unrestricted subsidiaries; and allow to exist certain restrictions on the ability of restricted subsidiaries to pay dividends or make other payments to us. OnApril 18, 2023 , in connection with the potential closing of the Transaction,Horizon Therapeutics USA, Inc. , our wholly owned subsidiary, or the Issuer, directedU.S. Bank Trust Company, National Association (as successor toU.S. Bank National Association ), as trustee, to give a notice of the Issuer's intent, in accordance with the indenture governing the 2027 Senior Notes, to redeem in full the aggregate principal amount of our outstanding 2027 Senior Notes. The redemption is conditioned on, among other things, the consummation of the Transaction. 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 13, 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 three months endedMarch 31, 2023 , we issued an aggregate of 1.3 million of our ordinary shares in connection with stock option exercises and the vesting of restricted stock units and performance stock units. We received a total of$3.4 million in net proceeds in connection with such issuances. During the three months endedMarch 31, 2023 , we made payments of$87.5 million for employee withholding taxes relating to vesting of share-based awards. 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 15, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q. 35
--------------------------------------------------------------------------------
Sources and Uses of Cash
The following table provides a summary of our cash position and cash flows for
the three months ended
For the Three Months Ended
2023
2022
Cash, cash equivalents and restricted cash $ 2,316,400 $
1,647,265 Cash provided by (used in): Operating activities 86,323 215,791 Investing activities (41,751 ) (40,724 ) Financing activities (88,128 ) (110,037 ) Operating Cash Flows Net cash provided by operating activities during the three months endedMarch 31, 2023 of$86.3 million was primarily attributable to cash collections from gross sales, partially offset by payments made related to government rebates and patient assistance costs for our medicines, payments for inventory, payments related to selling, general and administrative expenses and payments related to R&D expenses. During the three months endedMarch 31, 2022 , net cash provided by operating activities of$215.8 million were favorably impacted by higher net sales offset by the timing of working capital cash flows.
Investing Cash Flows
Net cash used in investing activities during the three months endedMarch 31, 2023 of$41.8 million was primarily attributable to payments related to purchases of property, plant and equipment of$24.1 million and milestone-based development funding of$15.0 million paid to Arrowhead in the first quarter of 2023. Refer to Note 15, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q. During the three months endedMarch 31, 2022 , net cash used in investing activities of$40.7 million was primarily attributable to an upfront payment of$25.0 million paid to Alpine Immune Sciences, Inc. in the first quarter of 2022 relating to an exclusive license agreement entered into inDecember 2021 and payments related to purchases of property, plant and equipment of$14.2 million .
Financing Cash Flows
Net cash used in financing activities during the three months endedMarch 31, 2023 of$88.1 million was primarily attributable to$87.5 million in payments of employee withholding taxes relating to share-based awards, partially offset by$3.4 million in proceeds from the issuance of ordinary shares in connection with stock option exercises. During the three months endedMarch 31, 2022 , net cash used in financing activities of$110.0 million was primarily attributable to$115.1 million in payments of employee withholding taxes relating to share-based awards, partially offset by$9.1 million in proceeds from the issuance of ordinary shares in connection with stock option exercises. 36
--------------------------------------------------------------------------------
Financial Condition as of
Accounts receivable, net. Accounts receivable, net decreased$51.6 million , from$676.3 million as ofDecember 31, 2022 to$624.7 million as ofMarch 31, 2023 . The decrease was primarily due to lower gross sales of our medicines during the first quarter of 2023 when compared to the fourth quarter of 2022. Developed technology and other intangible assets, net. Developed technology and other intangible assets, net decreased$88.6 million , from$2,664.8 million as ofDecember 31, 2022 to$2,576.2 million as ofMarch 31, 2023 , primarily related to$88.3 million of amortization of developed technology recorded during the three months endedMarch 31, 2023 . Accounts Payable. Accounts payable decreased$79.2 million , from$155.8 million as ofDecember 31, 2022 to$76.6 million as ofMarch 31, 2023 . The decrease was primarily due to the timing of payments, including a decrease of$68.1 million in accounts payable related to government rebates, co-pay and patient assistance costs and commercial rebates and wholesaler fees. Deferred tax liabilities, net. Deferred tax liabilities, net, decreased$70.4 million from$342.0 million as ofDecember 31, 2022 to$271.6 million as ofMarch 31, 2023 , primarily due to a benefit for income taxes recognized during the three months endedMarch 31, 2023 .
Contractual Obligations
As ofMarch 31, 2023 , 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, 2022 , except as described in Note 15, 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 three months endedMarch 31, 2023 , there were 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, 2022 . 37
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MANCHIN LEADS EFFORT TO BLOCK ESG AGENDA IN STATE-REGULATED INSURANCE
Quarterly Materials Document
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