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HZNP Horizon Therapeutics

Filed: 4 Aug 21, 7:22am

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-35238

 

HORIZON THERAPEUTICS PUBLIC LIMITED COMPANY

(Exact name of registrant as specified in its charter)

 

 

Ireland

 

Not Applicable

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

Connaught House, 1st Floor

1 Burlington Road, Dublin 4, D04 C5Y6, Ireland

 

Not Applicable

(Address of principal executive offices)

 

(Zip Code)

011 353 1 772 2100

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Ordinary shares, nominal value $0.0001 per share

HZNP

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Number of registrant’s ordinary shares, nominal value $0.0001, outstanding as of July 29, 2021: 225,893,375. 

 

 

 


 

 

                                                                        HORIZON THERAPEUTICS PLC

INDEX

 

 

 

 

 

Page

 

 

 

No.

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

1

 

Condensed Consolidated Balance Sheets as of June 30, 2021 and as of December 31, 2020 (Unaudited)

 

1

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)

 

2

 

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)

 

3

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 (Unaudited)

 

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

55

Item 4.

Controls and Procedures

 

57

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

58

Item 1A.

Risk Factors

 

58

Item 6.

Exhibits

 

114

 

Signatures

 

116

 

 

 

 


 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON THERAPEUTICS PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except nominal value and share data)

 

 

As of

 

As of

 

 

June 30,

 

December 31,

 

 

2021

 

2020

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

$

812,319

 

$

2,079,906

 

Restricted cash

 

3,839

 

 

3,573

 

Accounts receivable, net

 

735,433

 

 

659,701

 

Inventories, net

 

258,676

 

 

75,283

 

Prepaid expenses and other current assets

 

365,113

 

 

251,945

 

Total current assets

 

2,175,380

 

 

3,070,408

 

Property and equipment, net

 

220,142

 

 

189,037

 

Developed technology and other intangible assets, net

 

3,119,709

 

 

1,782,962

 

In-process research and development

 

880,000

 

 

 

Goodwill

 

1,069,031

 

 

413,669

 

Deferred tax assets, net

 

610,559

 

 

560,841

 

Other assets

 

132,595

 

 

55,699

 

Total assets

$

8,207,416

 

$

6,072,616

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

$

51,947

 

$

37,710

 

Accrued expenses and other current liabilities

 

478,499

 

 

485,567

 

Accrued trade discounts and rebates

 

306,364

 

 

352,463

 

Long-term debt—current portion

 

16,000

 

 

 

Total current liabilities

 

852,810

 

 

875,740

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

Long-term debt, net

 

2,560,444

 

 

1,003,379

 

Deferred tax liabilities, net

 

549,078

 

 

66,474

 

Other long-term liabilities

 

171,448

 

 

101,672

 

Total long-term liabilities

 

3,280,970

 

 

1,171,525

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

Ordinary shares, $0.0001 nominal value; 600,000,000 shares authorized at June 30, 2021 and December 31, 2020; 226,099,787 and 221,721,674 shares issued at June 30, 2021 and December 31, 2020, respectively, and 225,715,421 and 221,337,308 shares outstanding at June 30, 2021 and December 31, 2020, respectively

 

22

 

 

22

 

Treasury stock, 384,366 ordinary shares at June 30, 2021 and December 31, 2020

 

(4,585

)

 

(4,585

)

Additional paid-in capital

 

4,260,337

 

 

4,245,945

 

Accumulated other comprehensive loss

 

(1,018

)

 

(145

)

Accumulated deficit

 

(181,120

)

 

(215,886

)

Total shareholders’ equity

 

4,073,636

 

 

4,025,351

 

Total liabilities and shareholders' equity

$

8,207,416

 

$

6,072,616

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


 

 

HORIZON THERAPEUTICS PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands, except share and per share data)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

Net sales

$

832,548

 

 

$

462,779

 

 

$

1,174,954

 

 

$

818,688

 

 

Cost of goods sold

 

200,995

 

 

 

121,515

 

 

 

301,363

 

 

 

218,931

 

 

Gross profit

 

631,553

 

 

 

341,264

 

 

 

873,591

 

 

 

599,757

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

139,834

 

 

 

81,068

 

 

 

197,527

 

 

 

108,277

 

 

Selling, general and administrative

 

355,204

 

 

 

222,332

 

 

 

687,196

 

 

 

470,107

 

 

Impairment of long-lived asset

 

 

 

 

 

 

 

12,371

 

 

 

 

 

Gain on sale of asset

 

(2,000

)

 

 

 

 

 

(2,000

)

 

 

 

 

Total operating expenses

 

493,038

 

 

 

303,400

 

 

 

895,094

 

 

 

578,384

 

 

Operating income (loss)

 

138,515

 

 

 

37,864

 

 

 

(21,503

)

 

 

21,373

 

 

OTHER EXPENSE, NET:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(22,581

)

 

 

(18,571

)

 

 

(36,041

)

 

 

(35,915

)

 

Loss on debt extinguishment

 

 

 

 

(17,254

)

 

 

 

 

 

(17,254

)

 

Foreign exchange (loss) gain

 

(39

)

 

 

283

 

 

 

(887

)

 

 

1,059

 

 

Other (expense) income, net

 

(262

)

 

 

632

 

 

 

2,962

 

 

 

1,074

 

 

Total other expense, net

 

(22,882

)

 

 

(34,910

)

 

 

(33,966

)

 

 

(51,036

)

 

Income (loss) before (benefit) expense for income taxes

 

115,633

 

 

 

2,954

 

 

 

(55,469

)

 

 

(29,663

)

 

(Benefit) expense for income taxes

 

(42,484

)

 

 

82,964

 

 

 

(90,235

)

 

 

63,938

 

 

Net income (loss)

$

158,117

 

 

$

(80,010

)

 

$

34,766

 

 

$

(93,601

)

 

Net income (loss) per ordinary share—basic

$

0.70

 

 

$

(0.42

)

 

$

0.15

 

 

$

(0.49

)

 

Weighted average ordinary shares outstanding—basic

 

225,119,684

 

 

 

192,705,535

 

 

 

224,523,538

 

 

 

191,426,864

 

 

Net income (loss) per ordinary share—diluted

$

0.67

 

 

$

(0.42

)

 

$

0.15

 

 

$

(0.49

)

 

Weighted average ordinary shares outstanding—diluted

 

235,191,860

 

 

 

192,705,535

 

 

 

234,719,830

 

 

 

191,426,864

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

$

235

 

 

$

344

 

 

$

(586

)

 

$

19

 

 

Pension remeasurements

 

 

 

 

 

 

 

(287

)

 

 

 

 

Other comprehensive income (loss)

 

235

 

 

 

344

 

 

 

(873

)

 

 

19

 

 

Comprehensive income (loss)

$

158,352

 

 

$

(79,666

)

 

$

33,893

 

 

$

(93,582

)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


 

 

 

HORIZON THERAPEUTICS PLC

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated Other

 

 

 

 

 

 

Total

 

 

 

Ordinary Shares

 

 

Treasury Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2020

 

 

221,721,674

 

 

$

22

 

 

 

384,366

 

 

$

(4,585

)

 

$

4,245,945

 

 

$

(145

)

 

$

(215,886

)

 

$

4,025,351

 

Issuance of ordinary shares in conjunction with the exercise of stock options

and the vesting of restricted stock and performance stock units

 

 

3,305,947

 

 

 

 

 

 

 

 

 

 

 

 

19,843

 

 

 

 

 

 

 

 

 

19,843

 

Ordinary shares withheld for payment of employees’ withholding tax liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(128,261

)

 

 

 

 

 

 

 

 

(128,261

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62,296

 

 

 

 

 

 

 

 

 

62,296

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(821

)

 

 

 

 

 

(821

)

Pension remeasurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(287

)

 

 

 

 

 

(287

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(123,351

)

 

 

(123,351

)

Balances at March 31, 2021

 

 

225,027,621

 

 

$

22

 

 

 

384,366

 

 

$

(4,585

)

 

$

4,199,823

 

 

$

(1,253

)

 

$

(339,237

)

 

$

3,854,770

 

Issuance of ordinary shares in conjunction with the exercise of stock options

and the vesting of restricted stock and performance stock units

 

 

597,169

 

 

 

 

 

 

 

 

 

 

 

 

7,996

 

 

 

 

 

 

 

 

 

7,996

 

Issuance of ordinary shares in conjunction with Employee Share Purchase Plan

 

 

474,997

 

 

 

 

 

 

 

 

 

 

 

 

11,482

 

 

 

 

 

 

 

 

 

11,482

 

Ordinary shares withheld for payment of employees’ withholding tax liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,388

)

 

 

 

 

 

 

 

 

(13,388

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,424

 

 

 

 

 

 

 

 

 

54,424

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

235

 

 

 

 

 

 

235

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

158,117

 

 

 

158,117

 

Balances at June 30, 2021

 

 

226,099,787

 

 

$

22

 

 

 

384,366

 

 

$

(4,585

)

 

$

4,260,337

 

 

$

(1,018

)

 

$

(181,120

)

 

$

4,073,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated Other

 

 

 

 

 

 

Total

 

 

 

Ordinary Shares

 

 

Treasury Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2019

 

 

188,402,040

 

 

$

19

 

 

 

384,366

 

 

$

(4,585

)

 

$

2,797,602

 

 

$

(1,905

)

 

$

(605,682

)

 

$

2,185,449

 

Issuance of ordinary shares in conjunction with the exercise of stock options

and the vesting of restricted stock and performance stock units

 

 

2,560,573

 

 

 

 

 

 

 

 

 

 

 

 

7,049

 

 

 

 

 

 

 

 

 

7,049

 

Ordinary shares withheld for payment of employees’ withholding tax liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46,664

)

 

 

 

 

 

 

 

 

(46,664

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,421

 

 

 

 

 

 

 

 

 

56,421

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(325

)

 

 

 

 

 

(325

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,591

)

 

 

(13,591

)

Balances at March 31, 2020

 

 

190,962,613

 

 

$

19

 

 

 

384,366

 

 

$

(4,585

)

 

$

2,814,408

 

 

$

(2,230

)

 

$

(619,273

)

 

$

2,188,339

 

Issuance of ordinary shares in conjunction with the exercise of stock options

and the vesting of restricted stock and performance stock units

 

 

1,427,108

 

 

 

 

 

 

 

 

 

 

 

 

18,838

 

 

 

 

 

 

 

 

 

18,838

 

Issuance of ordinary shares in conjunction with Employee Share Purchase Plan

 

 

376,718

 

 

 

 

 

 

 

 

 

 

 

 

7,979

 

 

 

 

 

 

 

 

 

7,979

 

Issuance of ordinary shares in conjunction with 2.5% Exchangeable Senior Notes due 2022

 

 

7,225,368

 

 

 

1

 

 

 

 

 

 

 

 

 

205,649

 

 

 

 

 

 

 

 

 

205,650

 

Ordinary shares withheld for payment of employees’ withholding tax liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,345

)

 

 

 

 

 

 

 

 

(6,345

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,057

 

 

 

 

 

 

 

 

 

27,057

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

344

 

 

 

 

 

 

344

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(80,010

)

 

 

(80,010

)

Balances at June 30, 2020

 

 

199,991,807

 

 

$

20

 

 

 

384,366

 

 

$

(4,585

)

 

$

3,067,586

 

 

$

(1,886

)

 

$

(699,283

)

 

$

2,361,852

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.              

 

3


 

 

HORIZON THERAPEUTICS PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)  

 

For the Six Months Ended June 30,

 

 

2021

 

 

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net income (loss)

$

34,766

 

 

 

 

$

(93,601

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

162,736

 

 

 

 

 

139,396

 

Equity-settled share-based compensation

 

115,590

 

 

 

 

 

83,478

 

Acquired in-process research and development expense

 

46,500

 

 

 

 

 

47,517

 

Impairment of long-lived assets

 

12,371

 

 

 

 

 

 

Amortization of debt discount and deferred financing costs

 

2,240

 

 

 

 

 

10,817

 

Loss on debt extinguishment

 

 

 

 

 

 

17,254

 

Gain on sale of asset

 

(2,000

)

 

 

 

 

 

Deferred income taxes

 

(18,115

)

 

 

 

 

(4,561

)

Foreign exchange and other adjustments

 

(3,452

)

 

 

 

 

661

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(68,014

)

 

 

 

 

(135,125

)

Inventories

 

(31,713

)

 

 

 

 

(12,343

)

Prepaid expenses and other current assets

 

(95,123

)

 

 

 

 

(20,410

)

Accounts payable

 

10,306

 

 

 

 

 

83,555

 

Accrued trade discounts and rebates

 

(48,013

)

 

 

 

 

(177,721

)

Accrued expenses and other current liabilities

 

(24,641

)

 

 

 

 

81,505

 

Other non-current assets and liabilities

 

(7,764

)

 

 

 

 

16,586

 

Net cash provided by operating activities

 

85,674

 

 

 

 

 

37,008

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

(2,775,330

)

 

 

 

 

(262,305

)

Purchases of property and equipment

 

(32,255

)

 

 

 

 

(119,970

)

Payments for long-term investments, net

 

(7,578

)

 

 

 

 

 

Change in escrow deposit for property purchase

 

 

 

 

 

 

6,000

 

Net cash used in investing activities

 

(2,815,163

)

 

 

 

 

(376,275

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net proceeds from term loans

 

1,574,993

 

 

 

 

 

 

Repayment of term loans

 

(4,000

)

 

 

 

 

 

Proceeds from the issuance of ordinary shares in conjunction with Employee Share Purchase Plan

 

11,482

 

 

 

 

 

7,979

 

Proceeds from the issuance of ordinary shares in connection with stock option exercises

 

27,839

 

 

 

 

 

25,887

 

Payment of employee withholding taxes relating to share-based awards

 

(141,648

)

 

 

 

 

(53,009

)

Net cash provided by (used in) financing activities

 

1,468,666

 

 

 

 

 

(19,143

)

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash

 

(6,498

)

 

 

 

 

58

 

Net decrease in cash, cash equivalents and restricted cash

 

(1,267,321

)

 

 

 

 

(358,352

)

Cash, cash equivalents and restricted cash, beginning of the period

 

2,083,479

 

 

 

 

 

1,080,039

 

Cash, cash equivalents and restricted cash, end of the period

$

816,158

 

 

 

 

$

721,687

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

$

32,102

 

 

$

30,068

 

Cash paid for amounts included in the measurement of lease liabilities

 

5,218

 

 

 

3,797

 

Cash paid for income taxes, net of refunds received

 

13,435

 

 

 

597

 

SUPPLEMENTAL NON-CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Lease liabilities arising from obtaining right-of-use assets

$

62,156

 

 

$

 

Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities as of June 30, 2021 and 2020, respectively

 

18,180

 

 

 

2,912

 

Principal amount of 2.5% Exchangeable Senior Notes due 2022 converted into ordinary shares

 

 

 

 

207,044

 

Milestone payments for TEPEZZA intangible asset included in accrued expenses and other current liabilities as of June 30, 2021 and 2020, respectively

 

 

 

 

98,606

 

      

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

HORIZON THERAPEUTICS PLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 – BASIS OF PRESENTATION AND BUSINESS OVERVIEW

Basis of Presentation

Unless otherwise indicated or the context otherwise requires, references to “Horizon”, the “Company”, “we”, “us” and “our” refer to Horizon Therapeutics plc and its consolidated subsidiaries.

On March 15, 2021, the Company completed its acquisition of Viela Bio, Inc. (“Viela”) and acquired all of the issued and outstanding shares of Viela’s common stock for $53.00 per share.  The total consideration for the acquisition was approximately $3.0 billion, including cash acquired of $342.3 million.  Following the completion of the acquisition, Viela became a wholly-owned subsidiary of the Company.  The unaudited condensed consolidated financial statements presented herein include the results of operations of the acquired business from the date of acquisition.

The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair statement of the financial statements have been included.  Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.  The December 31, 2020 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.

Business Overview

Horizon is focused on researching, developing and commercializing medicines that address critical needs for people impacted by rare, autoimmune and serious inflammatory diseases.  The Company’s pipeline is purposeful: it applies scientific expertise and courage to bring clinically meaningful therapies to patients.  Horizon believes science and compassion must work together to transform lives. The Company has 2 reportable segments, the orphan segment and the inflammation segment, and its portfolio is currently composed of 12 marketed medicines in the areas of rare diseases, gout, ophthalmology and inflammation.   

As of June 30, 2021, the Company’s marketed medicines consisted of the following:

 

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

ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous use

UPLIZNA® (inebilizumab-cdon) injection, for intravenous use

BUPHENYL® (sodium phenylbutyrate) tablets and powder, for oral use

QUINSAIR™ (levofloxacin) solution for inhalation

Inflammation

PENNSAID® (diclofenac sodium topical solution) 2% w/w (“PENNSAID 2%”), for topical use

DUEXIS® (ibuprofen/famotidine) tablets, for oral use

RAYOS® (prednisone) delayed-release tablets, for oral use

VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use

 


5


 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Pronouncements

From time to time, the Company adopts new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies.

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplification and reduce the cost of accounting for income taxes (“ASU 2019-12”), which was effective for the Company as of January 1, 2021.  The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

Other recent authoritative guidance issued by the FASB (including technical corrections to the Accounting Standards Codification (“ASC”)), the American Institute of Certified Public Accountants and the Securities and Exchange Commission (“SEC”) did not, or are not expected to, have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

 

Significant Accounting Policies

The Company’s significant accounting policies have not changed from those previously described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.  The following accounting policy relating to intangible assets is disclosed in connection with the Viela acquisition.

 

Intangible Assets

Indefinite-lived intangible assets consist of capitalized in-process research and development (“IPR&D”).  IPR&D assets represent capitalized incomplete research projects that the Company acquired through business combinations.  Such assets are initially measured at their acquisition date fair values and are tested for impairment, until completion or abandonment of research and development efforts associated with the projects.  An IPR&D asset is considered abandoned when research and development efforts associated with the asset have ceased, and there are no plans to sell or license the asset or derive value from the asset.  At that point, the asset is considered to be impaired and is written off.  Upon successful completion of each project, the Company will make a determination about the then remaining useful life of the intangible asset and begin amortization.  The Company tests its indefinite-lived intangibles, including IPR&D assets, for impairment annually during the fourth quarter and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

 

 

NOTE 3 – NET INCOME (LOSS) PER SHARE

The following table presents basic and diluted net income (loss) per share for the three and six months ended June 30, 2021 and 2020 (in thousands, except share and per share data):

 

 

 

For the Three Months Ended

June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

Basic net income (loss) per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator - net income (loss)

 

$

158,117

 

 

$

(80,010

)

 

$

34,766

 

 

$

(93,601

)

 

Denominator - weighted average ordinary shares outstanding

 

 

225,119,684

 

 

 

192,705,535

 

 

 

224,523,538

 

 

 

191,426,864

 

 

Basic net income (loss) per share

 

$

0.70

 

 

$

(0.42

)

 

$

0.15

 

 

$

(0.49

)

 

 

 

 

For the Three Months Ended

June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

Diluted net income (loss) per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator - net income (loss)

 

$

158,117

 

 

$

(80,010

)

 

$

34,766

 

 

$

(93,601

)

 

Denominator - weighted average ordinary shares outstanding

 

 

235,191,860

 

 

 

192,705,535

 

 

 

234,719,830

 

 

 

191,426,864

 

 

Diluted net income (loss) per share

 

$

0.67

 

 

$

(0.42

)

 

$

0.15

 

 

$

(0.49

)

 

 

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of ordinary shares outstanding during the period.  Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised, converted into ordinary shares or resulted in the issuance of ordinary shares that would have shared in the Company’s earnings.

6


 

During the three and six months ended June 30, 2021, the difference between the basic and diluted weighted average ordinary shares outstanding, represents the effect of incremental shares from the Company’s share-based compensation programs.

The computation of diluted net income (loss) per share excluded 0.9 million and 2.9 million shares subject to equity awards for the three and six months ended June 30, 2021, respectively, because their inclusion would have had an anti-dilutive effect on diluted net income (loss) per share.

The computation of diluted net income (loss) per share excluded 9.7 million and 12.0 million shares subject to equity awards for the three and six months ended June 30, 2020, respectively, and 12.4 million and 13.1 million shares (based on the if-converted method) related to the Company’s 2.5% Exchangeable Senior Notes due 2022 (the “Exchangeable Senior Notes”) for the three and six months ended June 30, 2020, respectively, because their inclusion would have had an anti-dilutive effect on diluted net income (loss) per share.  On August 3, 2020, the Exchangeable Senior Notes were fully extinguished through exchanges for ordinary shares or cash redemption.

 

NOTE 4 – ACQUISITIONS, DIVESTITURES AND OTHER ARRANGEMENTS

 

Acquisition of Viela

On March 15, 2021, the Company completed its acquisition of Viela and acquired all of the issued and outstanding shares of Viela’s common stock for $53.00 per share.  The acquisition added an additional rare disease medicine, UPLIZNA, to the Company’s medicine portfolio.  The Viela acquisition provides multiple opportunities to drive long-term growth and solidify the Company’s future as an innovation-driven biotech company.  Viela’s mid-stage biologics pipeline, research and development (“R&D”) team and on-market medicine UPLIZNA, make it a complementary strategic fit with the Company’s pipeline, commercial portfolio and therapeutic areas of focus.  Following completion of the acquisition, Viela became a wholly-owned subsidiary of the Company.  The Company financed the transaction through cash on hand and $1.6 billion of aggregate principal amount of term loans pursuant to Company’s existing credit agreement, as described in Note 13.

The total consideration for the acquisition was approximately $3.0 billion, including cash acquired of $342.3 million, and was composed of the following (in thousands):

 

Equity value (54,988,820 shares at $53.00 per share)

 

$

2,914,407

 

Net settlements on the exercise of stock options

 

 

78,554

 

Consideration for exchange of Viela stock options

 

 

1,130

 

Total consideration

 

$

2,994,091

 

During the six months ended June 30, 2021, the Company incurred $28.6 million in Viela transaction costs, including advisory, legal, accounting, valuation and other professional and consulting fees, which were accounted for as “Selling, General and Administrative Expenses” in the condensed consolidated statement of comprehensive income (loss).

Pursuant to ASC 805, Business Combinations (“ASC 805”), the Company accounted for the Viela acquisition as a business combination using the acquisition method of accounting.  Identifiable assets and liabilities of Viela, including identifiable intangible assets, were recorded based on their estimated fair values as of the date of the closing of the acquisition.  The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill.  The valuation of assets acquired and liabilities assumed has not yet been finalized as of June 30, 2021.  While all amounts remain subject to adjustments, the areas subject to the most significant potential adjustments are inventory, intangible assets, IPR&D and deferred income taxes.  As a result, the Company recorded preliminary estimates for the fair value of assets acquired and liabilities assumed as of the acquisition date.  Such preliminary valuation required estimates and assumptions including, but not limited to, estimating future cash flows and direct costs in addition to developing the appropriate discount rates and current market profit margins.  Accordingly, the purchase price adjustments are preliminary and are subject to further adjustments as additional information becomes available and as additional analyses are performed, and such further adjustments may be material.  The Company’s management believes the fair values recognized for the assets acquired and the liabilities assumed are based on reasonable estimates and assumptions.

During the three months ended June 30, 2021, the Company recorded measurement period adjustments related to deferred tax liabilities, accrued expenses and other current liabilities, accrued trade discounts and rebates, accounts receivable, prepaid expenses and other current assets and inventory, which resulted in a net reduction in goodwill of $7.4 million.


7


 

 

The following table summarizes the preliminary fair values assigned to the assets acquired and the liabilities assumed by the Company along with the resulting goodwill before and after the measurement period adjustments (in thousands):

 

 

 

Before

 

Adjustments

 

After

 

 

Deferred tax liabilities, net

 

$

(457,928

)

$

6,869

 

$

(451,059

)

 

Accrued expenses and other current liabilities

 

 

(73,401

)

 

(335

)

 

(73,736

)

 

Other long-term liabilities

 

 

(22,631

)

 

 

 

(22,631

)

 

Accounts payable

 

 

(4,768

)

 

 

 

(4,768

)

 

Accrued trade discounts and rebates

 

 

(1,492

)

 

(373

)

 

(1,865

)

 

Marketable securities

 

 

400

 

 

 

 

400

 

 

Property, plant and equipment

 

 

1,747

 

 

 

 

1,747

 

 

Other assets

 

 

3,253

 

 

 

 

3,253

 

 

Accounts receivable

 

 

8,053

 

 

(267

)

 

7,786

 

 

Prepaid expenses and other current assets

 

 

16,444

 

 

(837

)

 

15,607

 

 

Inventories

 

 

149,348

 

 

2,300

 

 

151,648

 

 

Cash and cash equivalents

 

 

342,347

 

 

 

 

342,347

 

 

In-process research and development

 

 

910,000

 

 

 

 

910,000

 

 

Developed technology

 

 

1,460,000

 

 

 

 

1,460,000

 

 

(Liabilities assumed) and assets acquired

 

 

2,331,372

 

 

7,357

 

 

2,338,729

 

 

Goodwill

 

 

662,719

 

 

(7,357

)

 

655,362

 

 

Fair value of consideration paid

 

$

2,994,091

 

$

 

$

2,994,091

 

 

Inventories acquired included raw materials, work in process and finished goods for UPLIZNA.  Inventories were recorded at their preliminary estimated fair values.  The fair value of finished goods has been determined based on the estimated selling price, net of selling costs and a margin on the selling activities.  The fair value of work in process has been determined based on estimated selling price, net of selling costs and costs to complete the manufacturing, and a margin on the selling and manufacturing activities.  The fair value of raw materials was estimated to equal the replacement cost.  A step-up in the value of inventory of $149.3 million was originally recorded in connection with the acquisition, which was composed of $10.1 million for raw materials, $119.0 million for work-in-process and $20.2 million for finished goods.  During the three months ended June 30, 2021, the step-up in the value of inventory was increased to $151.6 million following the recording of $2.3 million in measurement period adjustments during the three months ended June 30, 2021, which was composed of $1.9 million for work-in-process and $0.4 million for finished goods.  During the three and six months ended June 30, 2021, the Company recorded inventory step-up expense of $7.1 million and $8.0 million, respectively, related to UPLIZNA based on the acquired units sold during the period.

Other tangible assets and liabilities were valued at their respective carrying amounts as management believes that these amounts approximated their acquisition-date fair values.

Developed technology is an intangible asset that reflects the estimated fair value of the rights to UPLIZNA in the United States.  The preliminary estimated fair values of the developed technology represent preliminary valuations performed with the assistance of an independent appraisal firm based on management’s estimates, forecasted financial information and reasonable and supportable assumptions.  The preliminary fair value of developed technology was determined using an income approach.  The income approach explicitly recognizes that the fair value of an asset is premised upon the expected receipt of future economic benefits such as earnings and cash inflows based on current sales projections and estimated direct costs for UPLIZNA.  Indications of value were developed by discounting these benefits to their acquisition-date fair value at a discount rate of 11.5% that reflects the return requirements of the market.  Some of the most significant assumptions inherent in the development of the asset valuation include the estimated net cash flows for each year (including net sales, cost of goods sold, sales and marketing costs and R&D costs) and the discount rate.  The fair value of the UPLIZNA developed technology was capitalized as of the Viela acquisition date and is subsequently being amortized over approximately 14 years.

IPR&D is related to R&D projects including:

 

 

(i)

Potential regulatory approval of UPLIZNA for neuromyelitis optica spectrum disorder outside of the United States and certain other indications worldwide.  As of the date of the acquisition, UPLIZNA had not been granted regulatory approval in any territory outside the United States.  On March 24, 2021, the Company announced that its strategic partner, Mitsubishi Tanabe Pharma Corporation, had received manufacturing and marketing approval for UPLIZNA in Japan.  Refer to Note 8 for further details.

 

 

(ii)

HZN-7734, an investigational human monoclonal antibody designed to deplete plasmacytoid dendritic cells (pDCs), a cell type believed to be critical to the pathogenesis of multiple autoimmune diseases.

 

8


 

 

 

(iii)

HZN-4920, an investigational fusion protein designed to block a key co-stimulatory pathway involved in many autoimmune and inflammatory diseases.

Each IPR&D asset is considered separable from the business as each project could be sold to a third party.  The fair value of each IPR&D asset was determined using an income approach.  The income approach explicitly recognizes that the fair value of an asset is premised upon the expected receipt of future economic benefits such as earnings and cash inflows based on sales projections and estimated direct costs.  Indications of value are developed by discounting these benefits to their present value at a discount rate of 12.5% that reflects the return requirements of the market.  Some of the most significant assumptions inherent in the development of the asset valuations include the estimated net cash flows for each year (including net sales, cost of goods sold, sales and marketing costs and R&D costs), the discount rate, the assessment of each asset’s life cycle and the potential regulatory and commercial success risk.  The fair value of the various IPR&D assets was recorded as an indefinite-lived intangible asset and will be tested for impairment until completion or abandonment of R&D efforts associated with the project.  The Company reviews amounts capitalized as acquired IPR&D for impairment annually and whenever events or changes in circumstances indicate that the carrying value of the assets might not be recoverable.

Deferred tax assets and liabilities arise from acquisition accounting adjustments where book values of certain assets and liabilities differ from their tax bases.  Deferred tax assets and liabilities are recorded at the currently enacted rates which will be in effect at the time when the temporary differences are expected to reverse in the country where the underlying assets and liabilities are located.  The developed technology, IPR&D assets and inventory acquired through the Viela acquisition were located in the United States as of the acquisition date, where a U.S. tax rate of 23.8% is being utilized and a significant deferred tax liability of $451.1 million was recorded.

Goodwill represents the excess of the total consideration over the estimated fair value of net assets acquired and was recorded in the consolidated balance sheet as of the acquisition date.  The goodwill was primarily attributable to the establishment of a deferred tax liability for the developed technology intangible asset and the IPR&D intangible assets.  Viela’s mid-stage biologics pipeline, R&D team and on-market medicine UPLIZNA, make it a complementary strategic fit with the Company’s pipeline, commercial portfolio and therapeutic areas of focus.  The Company does not expect any portion of this goodwill to be deductible for tax purposes.

The following table presents the pro forma combined results of the Company and Viela for the six months ended June 30, 2021 and 2020 as if the acquisition of Viela had occurred on January 1, 2020:

 

 

 

For the Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

 

As reported

 

 

Pro forma adjustments

 

 

Pro forma

 

 

As reported

 

 

Pro forma adjustments

 

 

Pro forma

 

Net sales

 

$

1,174,954

 

 

$

10,588

 

 

$

1,185,542

 

 

$

818,688

 

 

$

 

 

$

818,688

 

Net income (loss)

 

 

34,766

 

 

 

(30,804

)

 

 

3,962

 

 

 

(93,601

)

 

 

(166,290

)

 

 

(259,891

)

The pro forma combined financial information was prepared using the acquisition method of accounting and was based on the historical financial information of Horizon and Viela.  In order to reflect the pro forma information as if the acquisition occurred on January 1, 2020 as required, the pro forma financial information includes adjustments to reflect incremental amortization expense to be incurred based on the current preliminary fair values of the identifiable intangible assets acquired; the incremental cost of products sold related to the fair value adjustments associated with acquisition date inventory; the additional interest expense associated with the issuance of debt to finance the acquisition; and the reclassification of transaction costs incurred during the six months ended June 30, 2021 to the six months ended June 30, 2020.  Significant non-recurring pro forma adjustments include transaction costs of $86.6 million which were assumed to have been incurred on January 1, 2020 and were recognized as if incurred in the first half of 2020. The pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition actually been completed on January 1, 2020.  In addition, the pro forma financial information is not a projection of future results of operations of the combined company nor does it reflect the expected realization of any synergies or cost savings associated with the acquisition.


9


 

 

Acquisition of Curzion Pharmaceuticals, Inc.

On April 1, 2020, the Company acquired Curzion Pharmaceuticals, Inc. (“Curzion”), a privately held development-stage biopharma company, and its development-stage oral selective lysophosphatidic acid 1 receptor (LPAR1) antagonist, CZN001 (renamed HZN-825).  

Under the terms of the acquisition agreement, the Company acquired Curzion for a $45.0 million upfront payment with additional payments contingent on the achievement of development and regulatory milestones.  Pursuant to ASC 805, the Company accounted for the Curzion acquisition as the purchase of an IPR&D asset and, pursuant to ASC Topic 730, Research and Development, recorded the purchase price as research and development expense during the year ended December 31, 2020.  HZN-825 was originally discovered and developed by Sanofi-Aventis U.S. LLC, which is eligible to receive contingent payments upon the achievement of development and commercialization milestones and royalties based on revenue thresholds.  A member of the Company’s board of directors was also a member of the board of directors of, and held a beneficial interest in, Curzion.  This related party transaction was conducted in the normal course of business on an arm’s length basis.

Refer to Note 15 for further detail on HZN-825 milestone payments.

Sale of RAVICTI and BUPHENYL Rights in Japan

On October 27, 2020, the Company sold its rights to develop and commercialize RAVICTI and BUPHENYL in Japan to Medical Need Europe AB, part of the Immedica Group, for $5.4 million and recorded a gain of $4.9 million on the sale in the fourth quarter of 2020.  The Company has retained the rights to RAVICTI and BUPHENYL in North America.

Acquisition of River Vision

On May 8, 2017, the Company acquired 100% of the equity interests in River Vision Development Corp. (“River Vision”) for upfront cash payments totaling approximately $150.3 million, including cash acquired of $6.3 million, with additional potential future milestone and royalty payments contingent on the satisfaction of certain regulatory milestones and sales thresholds.

Under the acquisition agreement for River Vision, the Company agreed to pay up to $325.0 million upon the attainment of various milestones, composed of $100.0 million related to U.S. Food and Drug Administration (“FDA”) approval and $225.0 million related to net sales thresholds for TEPEZZA.  The agreement also includes a royalty payment of 3 percent of the portion of annual worldwide net sales exceeding $300.0 million.  The Company made the milestone payment of $100.0 million related to FDA approval during the first quarter of 2020 which is now capitalized as a finite-lived intangible asset representing the developed technology for TEPEZZA.

Additionally, under the Company’s license agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (together referred to as “Roche”), the Company made a milestone payment of CHF5.0 million ($5.2 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.0382), during the first quarter of 2020 which the Company also capitalized as a finite-lived intangible asset representing the developed technology for TEPEZZA.

In April 2020, a subsidiary of the Company entered into an agreement with S.R. One, Limited (“S.R. One”) and an agreement with Lundbeckfond Invest A/S (“Lundbeckfond”) pursuant to which the Company acquired all of S.R. One’s and Lundbeckfond’s beneficial rights to proceeds from certain contingent future TEPEZZA milestone and royalty payments in exchange for a one-time payment of $55.0 million to each of the respective parties.  The total payments of $110.0 million were capitalized as a finite-lived intangible asset representing the developed technology for TEPEZZA during the second quarter of 2020.

In addition, during the year ended December 31, 2020, the Company recorded $120.8 million as a finite-lived intangible asset representing the developed technology for TEPEZZA, composed of $67.0 million in relation to the expected future attainment of various net sales milestones payable under the acquisition agreement for River Vision and CHF50.0 million ($53.8 million when converted using a CHF-to-Dollar exchange rate as of the date the intangible asset was recorded) in relation to the expected future attainment of various net sales milestones payable to Roche.  The liabilities relating to these TEPEZZA net sales milestones were recorded in accrued expenses and other current liabilities on the consolidated balance sheet as of December 31, 2020.  The Company paid such TEPEZZA net sales milestones to Roche in February 2021 and to the former River Vision stockholders in April 2021 and, following such payments, there are no further TEPEZZA net sales milestone obligations remaining to Roche and the former River Vision stockholders.  The Company’s remaining obligation to Roche relating to the attainment of various TEPEZZA development and regulatory milestones is CHF43.0 million ($46.5 million when converted using a CHF-to-Dollar exchange rate at June 30, 2021 of 1.0813).  

 


10


 

 

Licensing Agreements

On June 18, 2021, the Company entered into a global agreement with Arrowhead Pharmaceuticals, Inc. (“Arrowhead”) for ARO-XDH, a previously undisclosed discovery-stage investigational RNA interference (“RNAi”) therapeutic being developed by Arrowhead as a potential treatment for uncontrolled gout.  Arrowhead granted the Company a worldwide exclusive license to develop, manufacture and commercialize the RNAi therapeutic products.  Arrowhead will conduct all research and preclinical development activities for the RNAi therapeutic.  The Company must use commercially reasonable efforts in, and will be responsible for, clinical development and commercialization of the RNAi therapeutic products.  Under the terms of the agreement, the Company paid Arrowhead an upfront cash payment of $40.0 million in July 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 products.  The $40.0 million upfront payment was accrued and accounted for as the acquisition of an IPR&D asset and was recorded as a “research and development” expense in the condensed consolidated statement of comprehensive income (loss) during the three and six months ended June 30, 2021.

On November 21, 2020, the Company entered into a global agreement with Halozyme Therapeutics, Inc. (“Halozyme”) that gives the Company exclusive access to Halozyme’s ENHANZE® drug delivery technology for subcutaneous (“SC”) formulation of medicines targeting IGF-1R.  The Company intends to use ENHANZE to develop a SC formulation of TEPEZZA, indicated for the treatment of thyroid eye disease, a serious, progressive and vision-threatening rare autoimmune disease, potentially shortening drug administration time, reducing healthcare practitioner time and offering additional flexibility and convenience for patients.  Under the terms of the agreement, the Company paid Halozyme an upfront cash payment of $30.0 million in December 2020, with additional potential future milestone payments of up to $160.0 million contingent on the satisfaction of certain development and sales thresholds.  Halozyme will also be entitled to receive mid-single digit royalties on sales of commercialized medicines using the ENHANZE technology.  The $30.0 million upfront payment was accounted for as the acquisition of an IPR&D asset and was recorded as a “research and development” expense in the consolidated statement of comprehensive income (loss) during the year ended December 31, 2020.

 

Other Arrangements

On January 3, 2019, the Company entered into an agreement with HemoShear Therapeutics, LLC (“HemoShear”), a biotechnology company, to discover novel therapeutic targets for gout.  The agreement provides the Company with an opportunity to address unmet treatment needs for people with gout by evaluating new targets for the control of serum uric acid levels.  Under the terms of the agreement, the Company paid HemoShear an upfront cash payment of $2.0 million with additional potential future milestone payments upon commencement of new stages of development, contingent on the Company’s approval at each stage.  In June 2019, the Company incurred a $4.0 million progress payment, which was subsequently paid in July 2019.  In June 2020, a $3.0 million progress payment became due, which the Company subsequently paid in July 2020.  In February 2021, a $3.0 million progress payment became due and was paid during the first quarter of 2021.

 


11


 

 

NOTE 5 – INVENTORIES

Inventories are stated at the lower of cost or net realizable value.  Inventories consist of raw materials, work-in-process and finished goods.  The Company has entered into manufacturing and supply agreements for the manufacture of drug substance and finished goods inventories, and the purchase of raw materials and production supplies.  The Company’s inventories include the direct purchase cost of materials and supplies and manufacturing overhead costs.

The components of inventories as of June 30, 2021 and December 31, 2020 consisted of the following (in thousands):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

Raw materials

 

$

53,112

 

 

$

11,760

 

Work-in-process

 

 

90,840

 

 

 

33,167

 

Finished goods

 

 

114,724

 

 

 

30,356

 

Inventories, net

 

$

258,676

 

 

$

75,283

 

 

Raw Materials, work-in-process and finished goods at June 30, 2021 included $10.1 million, $120.9 million and $20.6 million, respectively, of stepped-up UPLIZNA inventory.  The Company recorded $7.1 million and $8.0 million, respectively, of UPLIZNA inventory step-up expense in cost of goods sold during the three and six months ended June 30, 2021.

Because inventory step-up expense is related to an acquisition, will not continue indefinitely and has a significant effect on the Company’s gross profit, gross margin percentage and net loss for all affected periods, the Company discloses balance sheet and income statement amounts related to inventory step-up within the Notes to the Condensed Consolidated Financial Statements.

 

NOTE 6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets as of June 30, 2021 and December 31, 2020 consisted of the following (in thousands):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

Advance payments for inventory

 

$

134,716

 

 

$

137,680

 

Deferred charge for taxes on intercompany profit

 

 

85,070

 

 

 

52,306

 

Prepaid income taxes and income tax receivable

 

 

63,609

 

 

 

102

 

Rabbi trust assets

 

 

23,885

 

 

 

18,423

 

Other prepaid expenses and other current assets

 

 

57,833

 

 

 

43,434

 

Prepaid expenses and other current assets

 

$

365,113

 

 

$

251,945

 

Advance payments for inventory as of June 30, 2021 and December 31, 2020, primarily represented payments made to the contract manufacturer of TEPEZZA drug substance.

 

 

 


12


 

 

NOTE 7 – PROPERTY AND EQUIPMENT

Property and equipment as of June 30, 2021 and December 31, 2020 consisted of the following (in thousands):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

Buildings

 

$

128,266

 

 

$

80,341

 

Land and land improvements

 

 

38,880

 

 

 

38,076

 

Construction in process

 

 

28,377

 

 

 

63,656

 

Machinery and equipment

 

 

16,669

 

 

 

4,695

 

Software

 

 

14,488

 

 

 

14,618

 

Furniture and fixtures

 

 

12,293

 

 

 

5,973

 

Leasehold improvements

 

 

9,847

 

 

 

26,323

 

Other

 

 

5,066

 

 

 

3,146

 

 

 

 

253,886

 

 

 

236,828

 

Less accumulated depreciation

 

 

(33,744

)

 

 

(47,791

)

Property and equipment, net

 

$

220,142

 

 

$

189,037

 

 

Depreciation expense was $3.4 million and $6.9 million for the three months ended June 30, 2021 and 2020, respectively, and was $7.8 million and $14.1 million for the six months ended June 30, 2021 and 2020, respectively.

In February 2020, the Company purchased a 3-building campus in Deerfield, Illinois for total consideration and directly attributable transaction costs of $118.5 million.  The Deerfield campus totals 70 acres and consists of approximately 650,000 square feet of office space.  The Company’s office employees previously located in Lake Forest, Illinois moved to the Deerfield campus in February 2021 and the Company is marketing its Lake Forest office space for sublease.  The increase in amount classified as buildings and the decrease in amount classified as construction in process is primarily due to the Deerfield campus becoming operational in February 2021.  The decreases in leasehold improvements and accumulated depreciation amounts are primarily due to the Company vacating the Lake Forest office building in February 2021.

 

 


13


 

 

NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

The gross carrying amount of goodwill as of June 30, 2021 and December 31, 2020 was $1,069.0 million and $413.7 million, respectively.

The table below presents goodwill for the Company’s reportable segments as of June 30, 2021 (in thousands):

 

 

 

Orphan

 

Inflammation

 

Total

 

Balance at December 31, 2020

 

$

357,498

 

$

56,171

 

$

413,669

 

Goodwill recognized on acquisition of Viela

 

 

662,719

 

 

 

 

662,719

 

Adjustment relating to the acquisition of Viela

 

 

(7,357

)

 

 

 

(7,357

)

Balance at June 30, 2021

 

$

1,012,860

 

$

56,171

 

$

1,069,031

 

 

In March 2021, the Company recognized goodwill with a preliminary value of $662.7 million in connection with the Viela acquisition, which represented the excess of the purchase price over the fair value of the net assets acquired.  During the three months ended June 30, 2021, the Company recorded measurement period adjustments related to deferred tax liabilities, accounts receivable, prepaid expenses and other current assets, accrued expenses and other current liabilities and accrued trade discounts and rebates, which resulted in a net decrease of $7.4 million, to $655.3 million.  See Note 4 for further details.  

As of June 30, 2021, there were 0 accumulated goodwill impairment losses.

Intangible Assets

As of June 30, 2021, the Company’s finite-lived intangible assets consisted of developed technology related to ACTIMMUNE, BUPHENYL, KRYSTEXXA, PROCYSBI, RAVICTI, RAYOS, TEPEZZA and UPLIZNA as well as customer relationships for ACTIMMUNE.  The intangible assets related to PENNSAID 2%, and VIMOVO developed technology were fully amortized as of December 31, 2020.

On March 15, 2021, in connection with the acquisition of Viela, the Company capitalized $1,460.0 million of developed technology related to UPLIZNA.  See Note 4 for further details.

In connection with the acquisition of River Vision, the Company capitalized payments of $336.0 million related to TEPEZZA developed technology during the year ended December 31, 2020.  See Note 4 for further details on the River Vision acquisition.

Intangible assets as of June 30, 2021 and December 31, 2020 consisted of the following (in thousands):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

 

Cost Basis

 

Accumulated

Amortization

 

Net Book

Value

 

 

Cost Basis

 

Accumulated

Amortization

 

Net Book

Value

 

Developed technology

 

$

4,585,524

 

$

(1,468,423

)

$

3,117,101

 

 

$

3,093,886

 

$

(1,313,934

)

$

1,779,952

 

In-process research and development (1)

 

 

880,000

 

 

 

 

880,000

 

 

 

 

 

 

 

 

Customer relationships

 

 

8,100

 

 

(5,492

)

 

2,608

 

 

 

8,100

 

 

(5,090

)

 

3,010

 

Total intangible assets

 

$

5,473,624

 

$

(1,473,915

)

$

3,999,709

 

 

$

3,101,986

 

$

(1,319,024

)

$

1,782,962

 

 

 

(1)

The Company acquired IPR&D of $910.0 million relating to Viela.  On March 24, 2021, the Company announced that its strategic partner, Mitsubishi Tanabe Pharma Corporation, had received manufacturing and marketing approval of UPLIZNA in Japan.  As a result, the Company transferred $30.0 million of IPR&D to developed technology.  As of June 30, 2021, the remaining IPR&D relating to the Viela acquisition was $880.0 million.

 

14


 

 

Amortization expense for the three months ended June 30, 2021 and 2020 was $88.5 million and $66.7 million, respectively, and was $154.9 million and $125.3 million for the six months ended June 30, 2021 and 2020, respectively.  IPR&D is not amortized until successful completion of a project.  As of June 30, 2021, estimated future amortization expense was as follows (in thousands):

 

2021 (July to December)

 

$

179,397

 

2022

 

 

354,891

 

2023

 

 

354,376

 

2024

 

 

352,951

 

2025

 

 

350,700

 

Thereafter

 

 

1,527,394

 

Total

 

$

3,119,709

 

 

NOTE 9 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities as of June 30, 2021 and December 31, 2020 consisted of the following (in thousands):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

Payroll-related expenses

 

$

108,720

 

 

$

121,577

 

Accrued royalties

 

 

68,104

 

 

 

68,006

 

Accrued upfront and milestone payments

 

 

46,500

 

 

 

123,442

 

Allowances for returns

 

 

37,881

 

 

 

40,918

 

R&D and manufacturing programs

 

 

36,992

 

 

 

17,289

 

Advertising and marketing

 

 

28,505

 

 

 

12,428

 

Consulting and professional services

 

 

25,310

 

 

 

21,893

 

Deferred revenues

 

 

20,835

 

 

 

 

Pricing review liability

 

 

20,068

 

 

 

16,046

 

Accrued interest

 

 

15,688

 

 

 

14,207

 

Accrued other

 

 

69,896

 

 

 

49,761

 

Accrued expenses and other current liabilities

 

$

478,499

 

 

$

485,567

 

 

 

NOTE 10 – ACCRUED TRADE DISCOUNTS AND REBATES

Accrued trade discounts and rebates as of June 30, 2021 and December 31, 2020 consisted of the following (in thousands):

 

 

June 30, 2021

 

 

December 31, 2020

 

Accrued government rebates and chargebacks

$

191,663

 

 

$

172,893

 

Accrued co-pay and other patient assistance

 

60,799

 

 

 

96,924

 

Accrued commercial rebates and wholesaler fees

 

53,902

 

 

 

82,646

 

Accrued trade discounts and rebates

$

306,364

 

 

$

352,463

 

Invoiced commercial rebates and wholesaler fees, co-pay

   and other patient assistance costs, and government rebates and

   chargebacks in accounts payable

 

10,324

 

 

 

1,452

 

Total customer-related accruals and allowances

$

316,688

 

 

$

353,915

 

 

15


 

 

The following table summarizes changes in the Company’s customer-related accruals and allowances from December 31, 2020 to June 30, 2021 (in thousands):

 

 

 

Government

 

 

Co-Pay and

 

 

Wholesaler Fees

 

 

 

 

 

 

 

Rebates and

 

 

Other Patient

 

 

and Commercial

 

 

 

 

 

 

 

Chargebacks

 

 

Assistance

 

 

Rebates

 

 

Total

 

Balance at December 31, 2020

 

$

172,893

 

 

$

96,924

 

 

$

84,098

 

 

$

353,915

 

Current provisions relating to sales during the six

     months ended June 30, 2021

 

 

342,609

 

 

 

404,720

 

 

 

145,684

 

 

 

893,013

 

Adjustments relating to prior-year sales

 

 

(9,376

)

 

 

(4,516

)

 

 

(2,361

)

 

 

(16,253

)

Payments relating to sales during the six months

    ended June 30, 2021

 

 

(171,269

)

 

 

(344,328

)

 

 

(83,411

)

 

 

(599,008

)

Payments relating to prior-year sales

 

 

(144,605

)

 

 

(92,012

)

 

 

(79,854

)

 

 

(316,471

)

Viela acquisition on March 15, 2021

 

 

1,411

 

 

 

11

 

 

 

70

 

 

 

1,492

 

Balance at June 30, 2021

 

$

191,663

 

 

$

60,799

 

 

$

64,226

 

 

$

316,688

 

 

 

NOTE 11 – SEGMENT AND OTHER INFORMATION

The Company has 2 reportable segments, the orphan segment and the inflammation segment, and the Company reports net sales and segment operating income for each segment.

On March 15, 2021, the Company completed its acquisition of Viela.  The acquisition expanded the Company’s medicine portfolio by adding an additional rare disease medicine, UPLIZNA, to its orphan segment.

The orphan segment includes the medicines TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI, ACTIMMUNE, UPLIZNA, BUPHENYL and QUINSAIR as well as the Company’s R&D programs.  The inflammation segment includes the medicines PENNSAID 2%, DUEXIS, RAYOS and VIMOVO.

The Company’s chief operating decision maker (“CODM”) evaluates the financial performance of the Company’s segments based upon segment operating income.  Segment operating income is defined as loss before benefit for income taxes adjusted for the items set forth in the reconciliation below.  Items below income from operations are not reported by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s CODM.  Additionally, certain expenses are not allocated to a segment.  The Company does not report balance sheet information by segment as no balance sheet by segment is reviewed by the Company’s CODM.

The following table reflects net sales by medicine for the Company’s reportable segments for the three and six months ended June 30, 2021 and 2020 (in thousands):

 

 

Three Months Ended

June 30

 

 

Six Months Ended

June 30

 

 

 

2021

 

2020

 

 

2021

 

2020

 

 

TEPEZZA

$

453,255

 

$

165,936

 

 

$

455,320

 

$

189,387

 

 

KRYSTEXXA

 

130,317

 

 

75,201

 

 

 

237,074

 

 

168,450

 

 

RAVICTI

 

68,426

 

 

65,550

 

 

 

141,243

 

 

126,738

 

 

PROCYSBI

 

49,775

 

 

41,357

 

 

 

93,138

 

 

79,700

 

 

ACTIMMUNE

 

27,777

 

 

28,299

 

 

 

56,540

 

 

54,840

 

 

UPLIZNA

 

14,475

 

 

 

 

 

16,348

 

 

 

 

BUPHENYL

 

2,262

 

 

2,846

 

 

 

3,922

 

 

5,160

 

 

QUINSAIR

 

222

 

 

59

 

 

 

431

 

 

336

 

 

Orphan segment net sales

$

746,509

 

$

379,248

 

 

$

1,004,016

 

$

624,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENNSAID 2%

 

48,941

 

 

35,048

 

 

 

94,758

 

 

76,611

 

 

DUEXIS

 

22,110

 

 

27,798

 

 

 

41,575

 

 

59,145

 

 

RAYOS

 

13,406

 

 

14,459

 

 

 

28,678

 

 

32,668

 

 

VIMOVO

 

1,582

 

 

6,226

 

 

 

5,927

 

 

25,653

 

 

Inflammation segment net sales

$

86,039

 

$

83,531

 

 

$

170,938

 

$

194,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

$

832,548

 

$

462,779

 

 

$

1,174,954

 

$

818,688

 

 

16


 

 

The table below provides reconciliations of the Company’s segment operating income to the Company’s total income (loss) before expense for income taxes for the three and six months ended June 30, 2021 and 2020 (in thousands):

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Segment operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Orphan

$

321,235

 

 

$

151,541

 

 

$

322,289

 

 

$

205,897

 

   Inflammation

 

46,767

 

 

 

38,096

 

 

 

89,447

 

 

 

90,038

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization and step-up:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Intangible amortization expense

 

(88,523

)

 

 

(66,749

)

 

 

(154,892

)

 

 

(125,324

)

   Inventory step-up expense

 

(7,091

)

 

 

 

 

 

(8,002

)

 

 

 

Share-based compensation

 

(54,424

)

 

 

(27,057

)

 

 

(115,590

)

 

 

(83,478

)

Upfront, progress and milestone payments related to license and collaboration agreements

 

(46,500

)

 

 

(3,000

)

 

 

(49,500

)

 

 

(3,000

)

Acquisition/divestiture-related costs

 

(30,626

)

 

 

(46,988

)

 

 

(80,017

)

 

 

(47,272

)

Interest expense, net

 

(22,581

)

 

 

(18,571

)

 

 

(36,041

)

 

 

(35,915

)

Depreciation

 

(3,393

)

 

 

(6,907

)

 

 

(7,844

)

 

 

(14,072

)

Restructuring and realignment costs

 

(930

)

 

 

 

 

 

(7,023

)

 

 

 

Other (expense) income, net

 

(262

)

 

 

632

 

 

 

2,962

 

 

 

1,074

 

Fees related to refinancing activities

 

 

 

 

 

 

 

 

 

 

(54

)

Foreign exchange (loss) gain

 

(39

)

 

 

283

 

 

 

(887

)

 

 

1,059

 

Loss on debt extinguishment

 

 

 

 

(17,254

)

 

 

 

 

 

(17,254

)

Impairment of long-lived assets

 

 

 

 

(1,072

)

 

 

(12,371

)

 

 

(1,072

)

Drug substance harmonization costs

 

 

 

 

 

 

 

 

 

 

(290

)

Gain on sale of asset

 

2,000

 

 

 

 

 

 

2,000

 

 

 

 

Income (loss) before (benefit) expense for income taxes

$

115,633

 

 

$

2,954

 

 

$

(55,469

)

 

$

(29,663

)

 

 

 

The following table presents the amount and percentage of gross sales to customers that represented more than 10% of the Company’s gross sales included in its two reportable segments and all other customers as a group for the three and six months ended June 30, 2021 and 2020 (in thousands, except percentages):

 

 

 

For the Three Months Ended June 30,

 

 

 

2021

 

 

 

2020

 

 

 

Amount

 

 

% of Gross

 

 

 

Amount

 

 

% of Gross

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

Sales

 

Customer A

 

$

410,436

 

 

 

31

%

 

 

$

314,288

 

 

 

35

%

Customer B

 

 

342,148

 

 

 

26

%

 

 

 

194,576

 

 

 

22

%

Customer C

 

 

240,290

 

 

 

18

%

 

 

 

160,814

 

 

 

18

%

Customer D

 

 

212,820

 

 

 

16

%

 

 

 

112,676

 

 

 

13

%

Other Customers

 

 

117,500

 

 

 

9

%

 

 

 

115,639

 

 

 

12

%

Gross Sales

 

$

1,323,194

 

 

 

100

%

 

 

$

897,993

 

 

 

100

%

 

 

 

For the Six Months Ended June 30,

 

 

 

2021

 

 

 

2020

 

 

 

Amount

 

 

% of Gross

 

 

 

Amount

 

 

% of Gross

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

Sales

 

Customer A

 

$

659,176

 

 

 

32

%

 

 

$

561,063

 

 

 

33

%

Customer B

 

 

526,835

 

 

 

25

%

 

 

 

401,853

 

 

 

24

%

Customer C

 

 

358,327

 

 

 

17

%

 

 

 

294,689

 

 

 

17

%

Customer D

 

 

303,439

 

 

 

15

%

 

 

 

197,464

 

 

 

12

%

Other Customers

 

 

236,949

 

 

 

11

%

 

 

 

246,447

 

 

 

14

%

Gross Sales

 

$

2,084,726

 

 

 

100

%

 

 

$

1,701,516

 

 

 

100

%

17


 

 

Geographic revenues are determined based on the country in which the Company’s customers are located.  The following table presents a summary of net sales attributed to geographic sources for the three and six months ended June 30, 2021 and 2020 (in thousands, except percentages):

 

 

 

Three Months Ended June 30, 2021

 

 

Three Months Ended June 30, 2020

 

 

 

Amount

 

 

% of Total Net Sales

 

 

Amount

 

 

% of Total Net Sales

 

United States

 

$

830,185

 

 

100%

 

 

$

460,827

 

 

100%

 

Rest of world

 

 

2,363

 

 

*

 

 

 

1,952

 

 

*

 

Net sales

 

$

832,548

 

 

 

 

 

 

$

462,779

 

 

 

 

 

*Less than 1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2021

 

 

Six Months Ended June 30, 2020

 

 

 

Amount

 

 

% of Total Net Sales

 

 

Amount

 

 

% of Total Net Sales

 

United States

 

$

1,170,515

 

 

100%

 

 

$

814,843

 

 

100%

 

Rest of world

 

 

4,439

 

 

*

 

 

 

3,845

 

 

*

 

Net sales

 

$

1,174,954

 

 

 

 

 

 

$

818,688

 

 

 

 

 

*Less than 1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 12 – FAIR VALUE MEASUREMENTS

The following tables and paragraphs set forth the Company’s financial instruments that are measured at fair value on a recurring basis within the fair value hierarchy.  Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.  The following describes three levels of inputs that may be used to measure fair value:

Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its money market funds.  The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Other current assets and other long-term liabilities recorded at fair value on a recurring basis are composed of investments held in a rabbi trust and the related deferred liability for deferred compensation arrangements.  Quoted prices for this investment, primarily in mutual funds, are available in active markets.  Thus, the Company’s investments related to deferred compensation arrangements and the related long-term liability are classified as Level 1 measurements in the fair value hierarchy.

Assets and liabilities measured at fair value on a recurring basis

The following tables set forth the Company’s financial assets and liabilities at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 (in thousands):

 

 

 

June 30, 2021

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

643,000

 

 

$

 

 

$

 

 

$

643,000

 

Other current assets

 

 

23,885

 

 

 

 

 

 

 

 

 

23,885

 

Total assets at fair value

 

$

666,885

 

 

$

 

 

$

 

 

$

666,885

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

(23,885

)

 

 

 

 

 

 

 

 

(23,885

)

Total liabilities at fair value

 

$

(23,885

)

 

$

 

 

$

 

 

$

(23,885

)

 

18


 

 

 

 

December 31, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,906,000

 

 

 

 

 

 

 

 

$

1,906,000

 

Other current assets

 

 

18,423

 

 

 

 

 

 

 

 

 

18,423

 

Total assets at fair value

 

$

1,924,423

 

 

$

 

 

$

 

 

$

1,924,423

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

(18,423

)

 

 

 

 

 

 

 

 

(18,423

)

Total liabilities at fair value

 

$

(18,423

)

 

$

 

 

$

 

 

$

(18,423

)

 

 

NOTE 13 – DEBT AGREEMENTS

The Company’s outstanding debt balances as of June 30, 2021 and December 31, 2020 consisted of the following (in thousands):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

Term Loan Facility due 2028

 

$

1,596,000

 

 

 

 

Term Loan Facility due 2026

 

 

418,026

 

 

 

418,026

 

Senior Notes due 2027

 

 

600,000

 

 

 

600,000

 

Total face value

 

 

2,614,026

 

 

 

1,018,026

 

Debt discount

 

 

(13,177

)

 

 

(10,061

)

Deferred financing fees

 

 

(24,405

)

 

 

(4,586

)

Total long-term debt

 

 

2,576,444

 

 

 

1,003,379

 

Less: current maturities

 

 

16,000

 

 

 

 

Long-term debt, net of current maturities

 

$

2,560,444

 

 

$

1,003,379

 

 

Term Loan Facility and Revolving Credit Facility

On March 15, 2021, Horizon Therapeutics USA, Inc. (formerly known as Horizon Pharma USA, Inc.) (the “Borrower” or “HTUSA”), a wholly-owned subsidiary of the Company, borrowed approximately $1.6 billion aggregate principal amount of loans (the “Incremental Loans”) pursuant to an amendment (the “March 2021 Amendment”) to the credit agreement, dated as of May 7, 2015, by and among the Borrower, the Company and certain of its subsidiaries as guarantors, the lenders party thereto from time to time and Citibank, N.A., as administrative agent and collateral agent, as amended by Amendment No. 1, dated as of October 25, 2016, Amendment No. 2, dated March 29, 2017, Amendment No. 3, dated October 23, 2017, Amendment No. 4, dated October 19, 2018, Amendment No. 5, dated March 11, 2019, Amendment No. 6, dated May 22, 2019, Amendment No. 7, dated December 18, 2019 and the Incremental Amendment and Joinder Agreement, dated August 17, 2020 (the “Term Loan Facility”).  Pursuant to Amendment No. 7, the Borrower borrowed approximately $418.0 million aggregate principal amount of loans (the “December 2019 Refinancing Loans”).  Pursuant to Amendment No. 5, the Borrower received $200.0 million aggregate principal amount of revolving commitments, which was increased to $275.0 million aggregate amount of revolving commitments (the “Incremental Revolving Commitments”) pursuant to the Incremental Amendment and Joinder Agreement.  The Incremental Revolving Commitments were established pursuant to an incremental facility (the “Revolving Credit Facility”) and includes a $50.0 million letter of credit sub-facility.  The Incremental Revolving Commitments will terminate in March 2024.  Borrowings under the Revolving Credit Facility are available for general corporate purposes.  As of June 30, 2021, the Revolving Credit Facility was undrawn.  As used herein, all references to the “Credit Agreement” are references to the original credit agreement, dated as of May 7, 2015, as amended through the March 2021 Amendment.

The Incremental Loans were incurred as a separate class of term loans under the Credit Agreement with substantially the same terms of the December 2019 Refinancing Loans.  The Borrower used the proceeds of the Incremental Loans to fund a portion of the consideration payable in the acquisition of Viela.  The Incremental Loans bear interest at a rate, at Borrower’s option, equal to the London Inter-Bank Offered Rate (“LIBOR”), plus 2.00% per annum (subject to a 0.50% LIBOR floor) or the adjusted base rate plus 1.00% per annum, with a step-down to LIBOR plus 1.75% per annum or the adjusted base rate plus 0.75% per annum at the time the Company’s leverage ratio is less than or equal to 2.00 to 1.00.  The adjusted base rate is defined as the greatest of (a) LIBOR (using one-month interest period) plus 1.00%, (b) the prime rate, (c) the federal funds rate plus 0.50%, and (d) 1.00%.


19


 

 

The December 2019 Refinancing Loans were incurred as a separate new class of term loans under the Credit Agreement with substantially the same terms as the previously outstanding senior secured term loans incurred on May 22, 2019 (the “Refinanced Loans”) to effectuate a repricing of the Refinanced Loans.  The Borrower used the proceeds of the December 2019 Refinancing Loans to repay the Refinanced Loans, which totaled approximately $418.0 million.  The December 2019 Refinancing Loans bear interest at a rate, at the Borrower’s option, equal to LIBOR plus 2.25% per annum (subject to a 0.00% LIBOR floor) or the adjusted base rate plus 1.25% per annum, with a step-down to LIBOR plus 2.00% per annum or the adjusted base rate plus 1.00% per annum at the time the Company’s leverage ratio is less than or equal to 2.00 to 1.00.

The loans under the Revolving Credit Facility bear interest, at the Borrower’s option, at a rate equal to either LIBOR plus an applicable margin of 2.25% per annum (subject to a LIBOR floor of 0.00%), or the adjusted base rate plus 1.25% per annum, with a step-down to LIBOR plus 2.00% per annum or the adjusted base rate plus 1.00% per annum at the time the Company’s leverage ratio is less than or equal to 2.00 to 1.00.  The Credit Agreement provides for (i) the Incremental Loans, (ii) the December 2019 Refinancing Loans, (iii) the Revolving Credit Facility, (iv) one or more uncommitted additional incremental loan facilities subject to the satisfaction of certain financial and other conditions, and (v) one or more uncommitted refinancing loan facilities with respect to loans thereunder.  The Credit Agreement allows for the Company and certain of its subsidiaries to become additional borrowers under incremental or refinancing facilities.

The obligations under the Credit Agreement (including obligations in respect of the Incremental Loans, December 2019 Refinancing Loans and the Revolving Credit Facility) and any swap obligations and cash management obligations owing to a lender (or an affiliate of a lender) are guaranteed by the Company and each of the Company’s existing and subsequently acquired or formed direct and indirect subsidiaries (other than certain immaterial subsidiaries, subsidiaries whose guarantee would result in material adverse tax consequences and subsidiaries whose guarantee is prohibited by applicable law).  The obligations under the Credit Agreement (including obligations in respect of the Incremental Loans, December 2019 Refinancing Loans and the Revolving Credit Facility) and any related swap and cash management obligations are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in (i) all tangible and intangible assets of the Borrower and the guarantors, except for certain customary excluded assets, and (ii) all of the capital stock owned by the Borrower and guarantors thereunder (limited, in the case of the stock of certain non-U.S. subsidiaries of the Borrower, to 65% of the capital stock of such subsidiaries).  The Borrower and the guarantors under the Credit Agreement are individually and collectively referred to herein as a “Loan Party” and the “Loan Parties,” as applicable.

The Borrower is permitted to make voluntary prepayments of the loans under the Credit Agreement at any time without payment of a premium, except that with respect to the Incremental Loans, a 1% premium will apply to a repayment of the Incremental Loans in connection with a repricing of, or any amendment to the Credit Agreement in a repricing of, such loans effected on or prior to September 15, 2021.  The Borrower is required to make mandatory prepayments of loans under the Credit Agreement (without payment of a premium) with (a) net cash proceeds from certain non-ordinary course asset sales (subject to reinvestment rights and other exceptions), (b) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions), (c) net cash proceeds from issuances of debt (other than certain permitted debt), and (d) 50% of the Company’s excess cash flow (subject to decrease to 25% or 0% if the Company’s first lien leverage ratio is less than 2.25:1 or 1.75:1, respectively).  The Incremental Loans will amortize in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount thereof, with any remaining balance payable on March 15, 2028, the final maturity date of the Incremental Loans.  The principal amount of the December 2019 Refinancing Loans is due and payable on May 22, 2026, the final maturity date of the December 2019 Refinancing Loans.  

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions.  The Credit Agreement also contains a springing financial maintenance covenant, which requires that the Company maintain a specified leverage ratio at the end of each fiscal quarter.  The covenant is tested if both the outstanding loans and letters of credit under the Revolving Credit Facility, subject to certain exceptions, exceed 25% of the total commitments under the Revolving Credit Facility as of the last day of any fiscal quarter.  If the Company fails to meet this covenant, the commitments under the Revolving Credit Facility could be terminated and any outstanding borrowings, together with accrued interest, under the Revolving Credit Facility could be declared immediately due and payable.


20


 

 

Other events of default under the Credit Agreement include: (i) the failure by the Borrower to timely make payments due under the Credit Agreement; (ii) material misrepresentations or misstatements in any representation or warranty by any Loan Party when made; (iii) failure by any Loan Party to comply with the covenants under the Credit Agreement and other related agreements; (iv) certain defaults under a specified amount of other indebtedness of the Company or its subsidiaries; (v) insolvency or bankruptcy-related events with respect to the Company or any of its material subsidiaries; (vi) certain undischarged judgments against the Company or any of its restricted subsidiaries; (vii) certain ERISA-related events reasonably expected to have a material adverse effect on the Company and its restricted subsidiaries taken as a whole; (viii) certain security interests or liens under the loan documents ceasing to be, or being asserted by the Company or its restricted subsidiaries not to be, in full force and effect; (ix) any loan document or material provision thereof ceasing to be, or any challenge or assertion by any Loan Party that such loan document or material provision is not, in full force and effect; and (x) the occurrence of a change of control.  If one or more events of default occurs and continues beyond any applicable cure period, the administrative agent may, with the consent of the lenders holding a majority of the loans and commitments under the facilities, or will, at the request of such lenders, terminate the commitments of the lenders to make further loans and declare all of the obligations of the Loan Parties under the Credit Agreement to be immediately due and payable.

The interest on the Incremental Loans is variable and, as of June 30, 2021 the interest rate on the Incremental Loans was 2.50% and the effective interest rate was 2.75%.

The interest on the December 2019 Refinancing Loans is variable and as of June 30, 2021 the interest rate on the December 2019 Refinancing Loans was 2.38% and the effective interest rate was 2.67%.

As of June 30, 2021, the fair value of the amounts outstanding under the Incremental Loans and the December 2019 Refinancing Loans were approximately $1,586.0 million and $414.9 million, respectively, categorized as a Level 2 instrument, as defined in Note 12.

 

2027 Senior Notes

On July 16, 2019, HTUSA completed a private placement of $600.0 million aggregate principal amount of 5.5% Senior Notes due 2027 (the “2027 Senior Notes”) to several investment banks acting as initial purchasers, who subsequently resold the 2027 Senior Notes to persons reasonably believed to be qualified institutional buyers.

The Company used the net proceeds from the offering of the 2027 Senior Notes, together with approximately $65.0 million in cash on hand, to redeem or prepay $625.0 million of its outstanding debt, consisting of (i) the outstanding $225.0 million principal amount of its 6.625% Senior Notes due 2023, (ii) the outstanding $300.0 million principal amount of its 8.750% Senior Notes due 2024 and (iii) $100.0 million of the outstanding principal amount of senior secured term loans under the Credit Agreement, as well as to pay the related premiums and fees and expenses, excluding accrued interest, associated with such redemption and prepayment.

The 2027 Senior Notes are HTUSA’s general unsecured senior obligations, rank equally in right of payment with all existing and future senior debt of HTUSA and rank senior in right of payment to any existing and future subordinated debt of HTUSA.  The 2027 Senior Notes are effectively subordinate to all of the existing and future secured debt of HTUSA to the extent of the value of the collateral securing such debt.


21


 

 

The 2027 Senior Notes are unconditionally guaranteed on a senior basis by the Company and all of the Company’s restricted subsidiaries, other than HTUSA and certain immaterial subsidiaries, that guarantee the Credit Agreement.  The guarantees are each guarantor’s senior unsecured obligations and rank equally in right of payment with such guarantor’s existing and future senior debt and senior in right of payment to any existing and future subordinated debt of such guarantor.  The guarantees are effectively subordinated to all of the existing and future secured debt of each guarantor, including such guarantor’s guarantee under the Credit Agreement, to the extent of the value of the collateral securing such debt.  The guarantees of a guarantor may be released under certain circumstances.  The 2027 Senior Notes are structurally subordinated to all of the liabilities of the Company’s subsidiaries that do not guarantee the 2027 Senior Notes.

The 2027 Senior Notes accrue interest at an annual rate of 5.5% payable semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2020.  The 2027 Senior Notes will mature on August 1, 2027, unless earlier exchanged, repurchased or redeemed.

Except as described below, the 2027 Senior Notes may not be redeemed before August 1, 2022.  Thereafter, some or all of the 2027 Senior Notes may be redeemed at any time at specified redemption prices, plus accrued and unpaid interest to the redemption date.  At any time prior to August 1, 2022, some or all of the 2027 Senior Notes may be redeemed at a price equal to 100% of the aggregate principal amount thereof, plus a make-whole premium and accrued and unpaid interest to the redemption date.  Also prior to August 1, 2022, up to 40% of the aggregate principal amount of the 2027 Senior Notes may be redeemed at a redemption price of 105.5% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net proceeds of certain equity offerings.  In addition, the 2027 Senior Notes may be redeemed in whole but not in part at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date, if on the next date on which any amount would be payable in respect of the 2027 Senior Notes, HTUSA or any guarantor is or would be required to pay additional amounts as a result of certain tax related events.

If the Company undergoes a change of control, HTUSA will be required to make an offer to purchase all of the 2027 Senior Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest to, but not including, the repurchase date, subject to certain exceptions.  If the Company or certain of its subsidiaries engages in certain asset sales, HTUSA will be required under certain circumstances to make an offer to purchase the 2027 Senior Notes at 100% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date.

The indenture governing the 2027 Senior Notes contains covenants that limit the ability of the Company and its restricted subsidiaries 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, merge, consolidate with or merge or sell all or substantially all of their assets, 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 the Company.  Certain of the covenants will be suspended during any period in which the 2027 Senior Notes receive investment grade ratings.  The indenture governing the 2027 Senior Notes also includes customary events of default.

As of June 30, 2021, the interest rate on the 2027 Senior Notes was 5.50% and the effective interest rate was 5.76%.

As of June 30, 2021, the fair value of the 2027 Senior Notes was approximately $636.0 million, categorized as a Level 2 instrument, as defined in Note 12.

 


22


 

 

NOTE 14 – LEASE OBLIGATIONS

As of June 30, 2021, the Company had the following office space lease agreements in place for real properties:

 

Location

 

Approximate Square Feet

 

 

Lease Expiry Date

Dublin, Ireland (St. Stephen’s Green) (1)

 

 

63,000

 

 

May 4, 2041

Dublin, Ireland (Connaught House) (1)

 

 

18,900

 

 

November 4, 2029

Lake Forest, Illinois

 

 

160,000

 

 

March 31, 2031

Novato, California

 

 

61,000

 

 

August 31, 2021

South San Francisco, California

 

 

20,000

 

 

January 31, 2030

Rockville, Maryland (2)

 

 

24,500

 

 

August 31, 2023 to

April 30, 2026

Chicago, Illinois

 

 

9,200

 

 

December 31, 2028

Gaithersburg, Maryland (2)

 

 

7,200

 

 

June 30, 2022

Washington, D.C.

 

 

6,000

 

 

September 15, 2022

Mannheim, Germany

 

 

4,800

 

 

December 31, 2022

 

 

(1)

In October 2019, the Company entered into an agreement for lease relating to approximately 63,000 square feet of office space under construction in Dublin, Ireland.  In May 2021, the construction of the office was completed by the lessor and the lease became effective. As a result, the Company recognized $60.9 million as a right-of-use asset and a corresponding lease liability on the condensed consolidated balance sheet.  The lease is due to expire in May 2041.  The Company expects to incur leasehold improvement costs during 2021 in order to prepare the building for occupancy.  The Company plans to move its Connaught House office employees to the St. Stephen’s Green office in the fourth quarter of 2021.  In July 2021, the Company entered into an agreement to assign the Connaught House lease to a third party and the lease assignment will become effective in the fourth quarter of 2021.

 

 

(2)

On March 15, 2021, the Company completed its acquisition of Viela.  As part of the acquisition, the Company assumed 2 leases in Rockville, Maryland for both office and laboratory space and a lease in Gaithersburg, Maryland for office space.  On March 18, 2021, the Company entered into a third lease in Rockville, Maryland for office and laboratory space, with a lease commencement date of April 1, 2021.

As of June 30, 2021 and December 31, 2020, the Company had right-of-use lease assets included in other assets of $85.1 million and $34.4 million, respectively; current lease liabilities included in accrued expenses and other current liabilities of $4.6 million and $4.1 million, respectively; and non-current lease liabilities included in other long-term liabilities of $103.5 million and $43.2 million, respectively, in its condensed consolidated balance sheets.

In February 2021, the Company vacated the Lake Forest leased office building.  As a result of the Company vacating the Lake Forest office, the Company recorded an impairment charge of $12.4 million during the six months ended June 30, 2021, using an income approach based on market prices for similar properties provided by a third-party.  This charge was reported within impairment of long-lived assets in the condensed consolidated statement of comprehensive income (loss).

The Company recognizes rent expense on a monthly basis over the lease term based on a straight-line method.  Rent expense was $2.4 million and $1.8 million for the three months ended June 30, 2021 and 2020, respectively, and $4.0 million and $3.4 million for the six months ended June 30, 2021 and 2020, respectively.

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the lease liabilities recorded on the Company’s condensed consolidated balance sheet as of June 30, 2021 (in thousands):

 

2021 (July to December)

 

$

3,937

 

2022

 

 

7,356

 

2023

 

 

11,030

 

2024

 

 

11,855

 

2025

 

 

11,840

 

Thereafter

 

 

102,726

 

Total lease payments

 

 

148,744

 

Imputed interest

 

 

(40,696

)

Total lease liabilities

 

$

108,048

 

 

The weighted-average discount rate and remaining lease term for leases as of June 30, 2021 was 4.88% and 15.06 years, respectively.  

23


 

 

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Purchase Commitments

Under the Company’s supply agreement with AGC Biologics A/S (formerly known as CMC Biologics A/S) (“AGC Biologics”), the Company has agreed to purchase certain minimum annual order quantities of TEPEZZA drug substance.  In addition, the Company must provide AGC Biologics with rolling forecasts of TEPEZZA drug substance requirements, with a portion of the forecast being a firm and binding order.  At June 30, 2021, the Company had binding purchase commitments with AGC Biologics for TEPEZZA drug substance of €143.9 million ($170.6 million converted at a Euro-to-Dollar exchange rate as of June 30, 2021 of 1.1858), to be delivered through December 2023.  Under the Company’s supply agreement with Catalent Indiana, LLC (“Catalent”), the Company must provide Catalent with rolling forecasts of TEPEZZA drug product requirements, with a portion of the forecast being a firm and binding order.  At June 30, 2021, the Company had binding purchase commitments with Catalent for TEPEZZA drug product of $10.2 million, to be delivered through June 2022.

On December 17, 2020, the Company announced that it expected a short-term disruption in TEPEZZA supply as a result of U.S. government-mandated COVID-19 vaccine production orders pursuant to the Defense Production Act of 1950 (“DPA”) that dramatically restricted capacity available for the production of TEPEZZA at its drug product contract manufacturer, Catalent.  Pursuant to the DPA, Catalent was ordered to prioritize certain COVID-19 vaccine manufacturing at Catalent, resulting in the cancellation of previously guaranteed and contracted TEPEZZA drug product manufacturing slots in December 2020, which were required to maintain TEPEZZA supply.  To offset the reduced slots allowed by the DPA and Catalent, the Company accelerated plans to increase the production scale of TEPEZZA drug product.  In March 2021, the FDA approved a prior approval supplement to the TEPEZZA Biologics License Application (which was previously approved in January 2020), giving the Company authorization to manufacture more TEPEZZA drug product resulting in an increased number of vials with each manufacturing slot.  The Company commenced resupply of TEPEZZA to the market in April 2021.

Under the Company’s agreement with Bio-Technology General (Israel) Ltd (“BTG Israel”), the Company has agreed to purchase certain minimum annual order quantities and is obligated to purchase at least 80 percent of its annual world-wide bulk product requirements for KRYSTEXXA from BTG Israel.  The term of the agreement runs until December 31, 2030, and will automatically renew for successive three-year periods unless earlier terminated by either party upon three years’ prior written notice.  The agreement may be terminated earlier by either party in the event of a force majeure, liquidation, dissolution, bankruptcy or insolvency of the other party, uncured material breach by the other party or after January 1, 2024, upon three years’ prior written notice.  Under the agreement, if the manufacture of the bulk product is moved out of Israel, the Company may be required to obtain the approval of the Israel Innovation Authority (formerly known as Israeli Office of the Chief Scientist) (“IIA”) because certain KRYSTEXXA intellectual property was initially developed with a grant funded by the IIA.  The Company issues eighteen-month forecasts of the volume of KRYSTEXXA that the Company expects to order.  The first nine months of the forecast are considered binding firm orders.  At June 30, 2021, the Company had a total purchase commitment, including the minimum annual order quantities and binding firm orders, with BTG Israel for KRYSTEXXA of $33.0 million, to be delivered through December 2026.  Additionally, there were other purchase orders relating to the manufacture of KRYSTEXXA of $1.6 million outstanding at June 30, 2021.

Under an agreement with Boehringer Ingelheim Biopharmaceuticals GmbH (“Boehringer Ingelheim Biopharmaceuticals”), Boehringer Ingelheim Biopharmaceuticals is required to manufacture and supply ACTIMMUNE and IMUKIN to the Company.  Following the Company’s sale of the rights to IMUKIN in all territories outside of the United States, Canada and Japan to Clinigen Group plc (“Clinigen”), purchases of IMUKIN inventory are being resold to Clinigen.  The Company is required to purchase minimum quantities of finished medicine during the term of the agreement, which term extends to at least June 30, 2024.  As of June 30, 2021, the minimum purchase commitment to Boehringer Ingelheim Biopharmaceuticals was $15.2 million (converted using a Euro-to-Dollar exchange rate of 1.1858 as of June 30, 2021) through June 2024.

Excluding the above, additional purchase orders and other commitments relating to the manufacture of RAVICTI, BUPHENYL, PROCYSBI, PENNSAID 2%, DUEXIS, RAYOS, QUINSAIR and UPLIZNA of $18.7 million were outstanding at June 30, 2021.


24


 

Contingencies

The Company is subject to claims and assessments from time to time in the ordinary course of business.  The Company’s management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.  In addition, the Company from time to time has billing disputes with vendors in which amounts invoiced are not in accordance with the terms of their contracts.

In November 2015, the Company received a subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting documents and information related to its patient assistance programs and other aspects of its marketing and commercialization activities.  The Company is unable to predict how long this investigation will continue or its outcome, but it anticipates that it may continue to incur significant costs in connection with the investigation, regardless of the outcome.  The Company may also become subject to similar investigations by other governmental agencies.  The investigation by the U.S. Attorney’s Office and any additional investigations of the Company’s patient assistance programs and sales and marketing activities may result in damages, fines, penalties or other administrative sanctions against the Company.

On March 5, 2019, the Company received a civil investigative demand (“CID”) from the United States Department of Justice (“DOJ”) pursuant to the Federal False Claims Act regarding assertions that certain of the Company’s payments to pharmacy benefit managers (“PBMs”) were potentially in violation of the Anti-Kickback Statute.  The CID requests certain documents and information related to the Company’s payments to PBMs, pricing and the Company’s patient assistance program regarding DUEXIS, VIMOVO and PENNSAID 2%.  The Company is cooperating with the investigation.  While the Company believes that its payments and programs are compliant with the Anti-Kickback Statute, no assurance can be given as to the timing or outcome of the DOJ’s investigation, or that it will not result in a material adverse effect on the Company’s business.

 

Royalty and Milestone Agreements

TEPEZZA

Under the acquisition agreement for River Vision, the Company agreed to pay up to $325.0 million upon the attainment of various milestones, composed of $100.0 million related to FDA approval and $225.0 million related to net sales thresholds for TEPEZZA.  The Company made the $100.0 million milestone payment related to FDA approval during the first quarter of 2020.

The aggregate potential milestone payments of $225.0 million were payable based on certain TEPEZZA worldwide net sales thresholds being achieved as noted in the following table:  

 

TEPEZZA Worldwide Net Sales Threshold

Milestone

Payment

>$250 million

$50 million

>$375 million

$75 million

>$500 million

$100 million

 

The agreement also includes a royalty payment of 3 percent of the portion of annual worldwide net sales exceeding $300.0 million.  

S.R. One and Lundbeckfond, as two of the former River Vision stockholders, both held rights to receive approximately 35.66% of any future TEPEZZA payments.  As a result of the Company’s agreements with S.R. One and Lundbeckfond in April 2020, the Company’s remaining net obligations to make TEPEZZA sales-based milestone and royalty payments to the former stockholders of River Vision was reduced by approximately 70.25%, after including payments to a third party.

Under the Company’s license agreement with Roche, the Company is required to pay Roche up to CHF103.0 million upon the attainment of various development, regulatory and sales milestones for TEPEZZA.  The Company made a milestone payment of CHF5.0 million ($5.2 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.0382) related to FDA approval during the first quarter of 2020.  The agreement with Roche also includes tiered royalties on annual worldwide net sales between 9 and 12 percent.      

The Company’s remaining obligation to Roche relating to the attainment of various TEPEZZA development and regulatory milestones is CHF43.0 million ($46.5 million when converted using a CHF-to-Dollar exchange rate at June 30, 2021 of 1.0813).

25


 

Under the Company’s license agreement with Lundquist Institute (formerly known as Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center) (“Lundquist”), the Company is required to pay Lundquist a royalty payment of less than 1 percent of TEPEZZA net sales.  The royalty terminates upon the expiration date of the longest-lived Lundquist patent rights, which is December 2021 for the U.S. rights.

Under the Company’s license agreement with Boehringer Ingelheim Biopharmaceuticals, the Company is required to pay Boehringer Ingelheim Biopharmaceuticals milestone payments totaling less than $2.0 million upon the achievement of certain TEPEZZA sales milestones.

License Agreements

On June 18, 2021, the Company entered into a global agreement with Arrowhead for ARO-XDH, a previously undisclosed discovery-stage investigational RNAi therapeutic being developed by Arrowhead as a potential treatment for uncontrolled gout.  Arrowhead granted the Company a worldwide exclusive license to develop, manufacture and commercialize the RNAi therapeutic products.  Arrowhead will conduct all research and preclinical development activities for the RNAi therapeutic products.  The Company must use commercially reasonable efforts in, and will be responsible for, clinical development and commercialization of the RNAi therapeutic products.  Under the terms of the agreement, the Company paid Arrowhead an upfront cash payment of $40.0 million in July 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 products.

On November 21, 2020, the Company entered into a global agreement with Halozyme that gives the Company exclusive access to Halozyme’s ENHANZE drug delivery technology for SC formulation of medicines targeting IGF-1R.  The Company intends to use ENHANZE to develop a SC formulation of TEPEZZA.  Under the terms of the agreement, the Company paid Halozyme an upfront cash payment of $30.0 million in December 2020 and agreed to pay additional potential future milestone payments of up to $160.0 million contingent on the satisfaction of certain development and sales thresholds.

Other Agreements

On April 1, 2020, the Company acquired Curzion for an upfront payment of $45.0 million with additional payments of up to $15.0 million contingent on the achievement of certain development and regulatory milestones.  Under separate agreements with two additional parties, the Company is also required to make contingent payments upon the achievement of certain development and regulatory milestones and certain net sales thresholds.  These separate agreements also include mid to high-single-digit royalty payments based on the portion of annual worldwide net sales.

During the year ended December 31, 2020, the Company 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. and RiverVest Venture Fund V, L.P.  As of June 30, 2021, the total carrying amount of the Company’s investments in these funds was $20.2 million, which is included in other assets in the condensed consolidated balance sheet, and includes $7.6 million in net cash payments for investments made during the first half of 2021.  As of June 30, 2021, the Company’s total future commitments to these funds were $48.1 million.  During the six months ended June 30, 2021, the Company recorded investment income under the equity method of $1.7 million in the other (expense) income, net line item of the Company’s consolidated statement of comprehensive income (loss) related to these funds.

As of June 30, 2021, the Company had $10.7 million of non-cancellable advertising commitments due within one year, primarily related to agreements for advertising for TEPEZZA and KRYSTEXXA.

 

Indemnification

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications.  The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made.  The Company may record charges in the future as a result of these indemnification obligations.

In accordance with its memorandum and articles of association, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity.  Additionally, the Company has entered into, and intends to continue to enter into, separate indemnification agreements with its directors and executive officers.  These agreements, among other things, require the Company to indemnify its directors and executive officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of the Company’s directors or executive officers, or any of the Company’s subsidiaries or any other company or enterprise to which the person provides services at the Company’s request.  The Company also has a director and officer insurance policy that enables it to recover a portion of any amounts paid for current and future potential claims.  All of the Company’s officers and directors have also entered into separate indemnification agreements with HTUSA.    

 

26


 

 

 

NOTE 16 - LEGAL PROCEEDINGS

 

DUEXIS

On May 29, 2018, the Company received notice from Alkem Laboratories, Inc. (“Alkem”) that it had filed an Abbreviated New Drug Application (“ANDA”) with the FDA seeking approval of a generic version of DUEXIS.  The ANDA contained a Paragraph IV Patent Certification alleging that the patents covering DUEXIS are invalid and/or will not be infringed by Alkem’s manufacture, use or sale of the medicine for which the ANDA was submitted.  The Company filed suit in the United States District Court of Delaware against Alkem on July 9, 2018, seeking an injunction to prevent the approval of Alkem’s ANDA and/or to prevent Alkem from selling a generic version of DUEXIS.  The litigation went to trial on September 14, 2020.  On November 30, 2020, the District Court issued an adverse judgment against the Company, invalidating U.S Patent No. 8,607,033 and finding that Alkem’s generic product would not infringe the ‘033 patent.  And following an adverse claim construction ruling, the District Court entered a judgment that the Alkem generic product would not infringe U.S. Patent No. 8,607,451, subject to the Company’s right to appeal the District Court’s claim construction ruling.  On December 23, 2020, the Company initiated an appeal of the adverse judgments on the ‘033 and ‘451 patents with the Federal Circuit Court of Appeals.  

On September 26, 2018, the Company received notice from Teva Pharmaceuticals USA, Inc. (“Teva USA”) that it had filed an ANDA with the FDA seeking approval of a generic version of DUEXIS.  The ANDA contained a Paragraph IV Patent Certification alleging that the patents covering DUEXIS are invalid and/or will not be infringed by Teva USA’s manufacture, use or sale of the medicine for which the ANDA was submitted.  The Company filed suit in the United States District Court of New Jersey against Teva USA on July 2, 2020, seeking to prevent Teva USA from selling a generic version of DUEXIS.  The parties are currently engaged in discovery. The court has not yet set a trial date.

On May 24, 2021, the Company received notice from Torrent Pharmaceuticals Limited (“Torrent”) that it had filed an ANDA with the FDA seeking approval of a generic version of DUEXIS.  The ANDA contained a Paragraph IV Patent Certification alleging that the patents covering DUEXIS are invalid and/or will not be infringed by Torrent’s manufacture, use or sale of the medicine for which the ANDA was submitted.  The Company filed suit in the United States District Court of New Jersey against Torrent on July 7, 2021, seeking to prevent Torrent from selling a generic version of DUEXIS.  

 

VIMOVO

On February 18, 2020, the FDA granted final approval for Dr. Reddy’s Laboratories Inc. and Dr. Reddy’s Laboratories Ltd. (collectively, “Dr. Reddy’s”) generic version of VIMOVO.  On February 27, 2020, Dr. Reddy’s launched its generic version of VIMOVO in the United States, and the Company now faces generic competition with respect to VIMOVO.  The Company continues to assert claims of infringement against Dr. Reddy’s based on U.S. Patent No. 8,858,996 and U.S. Patent No. 9,161,920 in the District Court for the District of New Jersey.

 

PROCYSBI

On June 27, 2020, the Company received notice from Lupin Limited (“Lupin”) that it had filed an ANDA with the FDA seeking approval of a generic version of PROCYSBI.  The ANDA contained a Paragraph IV Patent Certification alleging that the patents covering PROCYSBI are invalid and/or will not be infringed by Lupin’s manufacture, use or sale of the medicine for which the ANDA was submitted.  The Company filed suit in the United States District Court of New Jersey against Lupin on August 11, 2020, seeking to prevent Lupin from selling a generic version of PROCYSBI.

 

 

 


27


 

 

NOTE 17 – SHARE-BASED AND LONG-TERM INCENTIVE PLANS

The Company’s equity incentive plans at June 30, 2021 included its 2011 Equity Incentive Plan, as amended, 2014 Employee Share Purchase Plan, as amended, Amended and Restated 2014 Equity Incentive Plan (“2014 EIP”), 2014 Non-Employee Equity Plan, as amended (“2014 Non-Employee Plan”), 2020 Employee Share Purchase Plan (“2020 ESPP”), Amended and Restated 2020 Equity Incentive Plan (“2020 EIP”) and Amended and Restated 2018 Equity Incentive Plan (“2018 EIP”).  

On February 17, 2021, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) approved amending the 2020 EIP, subject to shareholder approval, including increasing the number of ordinary shares available for the grant of equity awards to the Company’s employees by an additional 7,000,000 shares.  On April 29, 2021, the shareholders of the Company approved such amendment to the 2020 EIP.

As of June 30, 2021, an aggregate of 2,519,726 ordinary shares were authorized and available for future issuance under the 2020 ESPP, an aggregate of 15,929,053 ordinary shares were authorized and available for future grants under the 2020 EIP, an aggregate of 526,895 ordinary shares were authorized and available for future grants under the 2014 Non-Employee Plan and an aggregate of 2,328,059 ordinary shares were authorized and available for future grants under the 2018 EIP.  

Stock Options

The following table summarizes stock option activity during the six months ended June 30, 2021:

 

 

 

Options

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Contractual

Term

Remaining

(in years)

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding as of December 31, 2020

 

 

7,129,615

 

 

$

21.24

 

 

 

4.60

 

 

$

370,073

 

Assumed in acquisition (1)

 

 

1,318,053

 

 

 

41.23

 

 

 

 

 

 

 

Exercised

 

 

(993,945

)

 

 

28.11

 

 

 

 

 

 

 

Forfeited

 

 

(58,301

)

 

 

45.06

 

 

 

 

 

 

 

Expired

 

 

(234

)

 

 

17.31

 

 

 

 

 

 

 

Outstanding as of June 30, 2021

 

 

7,395,188

 

 

 

23.69

 

 

 

4.47

 

 

 

517,258

 

Exercisable as of June 30, 2021

 

 

6,602,752

 

 

$

21.67

 

 

 

4.04

 

 

$

475,154

 

 

Stock options typically have a contractual term of ten years from grant date.

 

 

(1)

On March 15, 2021, the Company completed its acquisition of Viela.  Under the terms of the merger agreement for Viela, all outstanding Viela stock options assumed by the Company with vesting dates after June 1, 2021, were converted into stock options to purchase the Company’s ordinary shares.  As of March 15, 2021, options previously exercisable for an aggregate of 2,180,159 shares of Viela’s common stock that were converted at a rate of 0.60 to 1 based on the merger agreement, into options to purchase 1,318,053 of the Company’s ordinary shares, were outstanding.

 

Restricted Stock Units

The following table summarizes restricted stock unit activity for the six months ended June 30, 2021:

 

 

 

Number of Units

 

 

Weighted Average

Grant-Date Fair

Value Per Unit

 

Outstanding as of December 31, 2020

 

 

5,909,120

 

 

$

27.87

 

Granted

 

 

1,991,241

 

 

 

75.12

 

Vested

 

 

(2,758,014

)

 

 

23.36

 

Forfeited

 

 

(235,032

)

 

 

59.93

 

Outstanding as of June 30, 2021

 

 

4,907,315

 

 

$

48.10

 

 

The grant-date fair value of restricted stock units is the closing price of the Company’s ordinary shares on the date of grant.

 

 


28


 

 

Performance Stock Unit Awards

The following table summarizes performance stock unit awards (“PSUs”) activity for the six months ended June 30, 2021:

 

 

 

Number

of Units

 

 

Weighted

Average

Grant-Date

Fair Value

Per Unit

 

 

Average

Illiquidity

Discount

 

 

 

Recorded

Weighted

Average

Fair Value

Per Unit

 

Outstanding as of December 31, 2020

 

 

2,610,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

450,577

 

 

$

93.73

 

 

 

8.64

%

 

 

$

85.64

 

Forfeited

 

 

(24,450

)

 

 

93.73

 

 

 

9.21

%

 

 

 

85.10

 

Vested

 

 

(2,021,657

)

 

 

21.21

 

 

 

2.66

%

 

 

 

20.65

 

Performance Based Adjustment (1)

 

 

512,819

 

 

 

25.42

 

 

 

7.27

%

 

 

 

23.57

 

Outstanding as of June 30, 2021

 

 

1,528,213

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents adjustment based on the net sales performance criteria meeting 162.5% of target as of December 31, 2020 for the 2020 PSUs (as defined below), the net sales performance criteria meeting 200.0% of target as of December 31, 2020 for the TEPEZZA PSUs (as defined below) and meeting total shareholder return (“TSR”) performance at 200.0% for the PSUs that were awarded to key executive participants on January 5, 2018.

On January 4, 2021, the Company awarded PSUs to key executive participants (“2021 PSUs”).  The 2021 PSUs utilize three long-term performance metrics: a component tied to technical operations milestones for the Company over the next two years, a component tied to research and development milestones for the Company over the next three years and a component tied to relative three-year compounded annual TSR as follows:

 

 

50% of the granted 2021 PSUs that may vest (such portion of the PSU award, the “2021 Relative TSR PSUs”) are determined by reference to the level of the Company’s relative TSR over the three-year period ending December 31, 2023, as measured against the TSR of each company included in the Nasdaq Biotechnology Index (“NBI”) during such three-year period.  Generally, in order to earn any portion of the 2021 Relative TSR PSUs, the participant must also remain in continuous service with the Company through the earlier of January 1, 2024 or the date immediately prior to a change in control.  If a change in control occurs prior to December 31, 2023, the level of the Company’s relative TSR will be measured through the date of the change in control.

 

 

25% of the 2021 PSUs that may vest (such portion of the PSU award, the “2021 Tech Ops PSUs”) are determined by reference to the Company’s achievement of certain performance objectives related to technical operations.

 

 

25% of the 2021 PSUs that may vest (such portion of the PSU award, the “2021 R&D PSUs”) are determined by reference to the Company’s achievement of certain performance objectives related to research and development.

 


29


 

 

On January 3, 2020, the Company awarded PSUs to key executive participants (“2020 PSUs”).  The 2020 PSUs utilize two performance metrics: a short-term component tied to business performance and a long-term component tied to relative compounded annual TSR, as follows:

 

 

30% of the granted 2020 PSUs that may vest (such portion of the PSU award, the “2020 Relative TSR PSUs”) are determined by reference to the level of the Company’s relative TSR over the three-year period ending December 31, 2022, as measured against the TSR of each company included in the NBI during such three-year period.  Generally, in order to earn any portion of the 2020 Relative TSR PSUs, the participant must also remain in continuous service with the Company through the earlier of January 1, 2023 or the date immediately prior to a change in control.  If a change in control occurs prior to December 31, 2022, the level of the Company’s relative TSR will be measured through the date of the change in control.

 

 

70% of the 2020 PSUs that may vest (such portion of the PSU award, the “2020 Net Sales PSUs”) are determined by reference to the Company’s net sales for certain components of its orphan segment.   

As a result of the impact of the COVID-19 pandemic on certain aspects of the Company’s business in 2020, the performance goals associated with certain of the Company’s performance-based equity awards no longer reflected the Company’s expectations, causing the awards to lose their incentive to employees.  Accordingly, on July 28, 2020 the Compensation Committee approved a modification to 57% of the 2020 Net Sales PSUs awarded on January 3, 2020 that were to vest based on KRYSTEXXA 2020 net sales.  Those 2020 Net Sales PSUs related to KRYSTEXXA may now be earned based on net sales of KRYSTEXXA achieved by the end of a modified 18-month performance period that ended on July 1, 2021 instead of a 12-month performance period ending December 31, 2020.  As a result, the first one-third of any 2020 PSUs earned vested on July 1, 2021 and the vesting of the remaining two-thirds is unchanged and will vest one-third each on January 5, 2022 and on January 5, 2023.  There were 12 participants impacted by the modification.  The total compensation cost resulting from the modification was approximately $12.0 million and is being recognized over the remaining requisite service period.

All PSUs outstanding at June 30, 2021 may vest in a range of between 0% and 200%, with the exception of the modified KRYSTEXXA 2020 Net Sales PSUs which are capped at 150%, based on the performance metrics described above.  The Company accounts for the 2020 PSUs and 2021 PSUs as equity-settled awards in accordance with ASC 718, Compensation-Stock Compensation.  Because the value of the 2020 Relative TSR PSUs and 2021 Relative TSR PSUs are dependent upon the attainment of a level of TSR, it requires the impact of the market condition to be considered when estimating the fair value of the 2020 Relative TSR PSUs and 2021 Relative TSR PSUs.  As a result, the Monte Carlo model is applied and the most significant valuation assumptions used related to the 2021 PSUs during the six months ended June 30, 2021, include:

 

Valuation date stock price

 

$

72.54

 

Expected volatility

 

 

45.8

%

Risk free rate

 

 

0.2

%

 

The value of the 2020 Net Sales PSUs related to KRYSTEXXA and 2021 Tech Ops PSUs and 2021 R&D PSUs is calculated at the end of each quarter based on the expected payout percentage based on estimated full-period performance against targets, and the Company adjusts the expense quarterly.

On January 4, 2019, the Company awarded a company-wide grant of PSUs (the “TEPEZZA PSUs”).  Vesting of the TEPEZZA PSUs was contingent upon receiving shareholder approval of amendments to the 2014 EIP, which approval was received on May 2, 2019.  The TEPEZZA PSUs were generally eligible to vest contingent upon receiving approval of the TEPEZZA biologics license application from the FDA no later than September 30, 2020 and the employee’s continued service with the Company.  In January 2020, the Company received TEPEZZA approval from the FDA and the Company started recognizing the expense related to the TEPEZZA PSUs on that date.  As of June 30, 2021, there were 68,459 TEPEZZA PSUs outstanding, for members of the executive committee, expected to vest on January 21, 2022, subject to the employees’ continued service through the vesting date.  For all other participants, one-half of the TEPEZZA PSUs vested on the FDA approval date and one-half vested on the one-year anniversary of the FDA approval date, subject to the employee’s continued service through the vesting date.

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Share-Based Compensation Expense

The following table summarizes share-based compensation expense included in the Company’s condensed consolidated statements of operations for the six months ended June 30, 2021 and 2020 (in thousands):

 

 

 

For the Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

Share-based compensation expense

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

5,080

 

 

$

3,977

 

Research and development

 

 

17,776

 

 

 

8,928

 

Selling, general and administrative

 

 

92,734

 

 

 

70,573

 

Total share-based compensation expense

 

$

115,590

 

 

$

83,478

 

 

During the six months ended June 30, 2021 and 2020, the Company recognized $60.9 million and $19.3 million of tax benefit, respectively, related to share-based compensation resulting primarily from the fair value of equity awards at the time of the exercise of stock options and vesting of restricted stock units and PSUs.  As of June 30, 2021, the Company estimates that pre-tax unrecognized compensation expense of $294.2 million for all unvested share-based awards, including stock options, restricted stock units and PSUs, will be recognized through the second quarter of 2023.  The Company expects to satisfy the exercise of stock options and future distribution of shares for restricted stock units and PSUs by issuing new ordinary shares which have been reserved under the 2020 EIP and the 2018 EIP.

 

NOTE 18 – INCOME TAXES

The Company accounts for income taxes based upon an asset and liability approach.  Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities.  Under this method, deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards.  Deferred tax liabilities are recognized for taxable temporary differences.  Deferred tax assets are reduced by valuation allowances when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are recorded at the currently enacted rates which will be in effect at the time when the temporary differences are expected to reverse in the country where the underlying assets and liabilities are located.  The impact of tax rate changes on deferred tax assets and liabilities is recognized in the period in which the change is enacted.

The following table presents the (benefit) expense for income taxes for the three and six months ended June 30, 2021 and 2020 (in thousands):

 

For the Three Months Ended

June 30,

 

 

For the Six Months Ended

June 30,

 

 

2021

 

 

2020

 

 

2021

 

2020

 

Income (loss) before (benefit) expense for income taxes

$

115,633

 

 

$

2,954

 

 

$

(55,469

)

$

(29,663

)

(Benefit) expense for income taxes

 

(42,484

)

 

 

82,964

 

 

 

(90,235

)

 

63,938

 

Net income (loss)

$

158,117

 

 

$

(80,010

)

 

$

34,766

 

$

(93,601

)

During the three and six months ended June 30, 2021, the Company recorded a benefit for income taxes of $42.5 million and $90.2 million, respectively.  During the three and six months ended June 30, 2020, the Company recorded an expense for income taxes of $83.0 million and $63.9 million, respectively.  The increase in benefit for income taxes recorded during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, resulted primarily from the mix of pre-tax income and losses incurred in various tax jurisdictions, an increase in the tax benefits recognized on share-based compensation and the recognition of a deferred tax asset resulting from an intercompany transfer and license of intellectual property from a U.S. subsidiary to an Irish subsidiary during the three and six months ended June 30, 2021.  These increases in benefit were partially offset by tax expense recognized on U.S. taxable income generated from the intercompany transfer and license of intellectual property.  During the three and six months ended June 30, 2020, we recorded a $15.2 million provision following the publication, on April 8, 2020, by the U.S. Department of the Treasury, of Final Regulations for Section 267A.  The Final Regulations for Section 267A permanently disallow for U.S. tax purposes certain interest expense accrued to a foreign related party during the year ended December 31, 2019.  As a result, we recorded a write off of a deferred tax asset related to this interest expense during the three and six months ended June 30, 2020 and recognized a corresponding tax provision of $15.2 million.  There was 0 similar provision recorded during the three and six months ended June 30, 2021.

 

 

 


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NOTE 19 – SUBSEQUENT EVENT

In July 2021, the Company completed the purchase of a drug product manufacturing facility from EirGen Pharma Limited, a subsidiary of OPKO Health, Inc., based in Waterford, Ireland for an upfront cash payment of $64.8 million.  In addition, there is Industrial Development Agency Ireland (“IDA Ireland”) land available for further manufacturing and development expansion.  The facility, which is located in an IDA Ireland business park, includes a filling line and lyophilizer, or freeze dryer, that can be used for both the Company’s commercial medicines, including its rare disease biologics TEPEZZA, KRYSTEXXA and UPLIZNA, and its development compounds, following build-out, validation and regulatory approval processes.

 

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ITEM 2.  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 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 the Securities and Exchange Commission, or SEC.  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 Horizon Therapeutics plc and its consolidated subsidiaries.

OUR BUSINESS

We are focused on researching, developing and commercializing medicines that address critical needs for people impacted by rare, autoimmune and serious 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 portfolio is currently composed of 12 marketed medicines in the areas of rare diseases, gout, ophthalmology and inflammation.

In July 2021, we completed the purchase of a drug product manufacturing facility from EirGen Pharma Limited, a subsidiary of OPKO Health, Inc., based in Waterford, Ireland for an upfront cash payment of $64.8 million.  See Note 19 of the Notes to the Condensed Consolidated Financial Statements for further details.  

On March 15, 2021, we completed the acquisition of Viela Bio, Inc., or Viela.  The acquisition expanded our marketed medicine portfolio by adding an additional rare disease medicine, UPLIZNA® to our orphan segment.  The Viela acquisition provides multiple opportunities to drive long-term growth and solidify our future as an innovation-driven biotech company.  Viela’s mid-stage biologics pipeline, research and development team and on-market medicine UPLIZNA, make it a complementary strategic fit with our pipeline, commercial portfolio and therapeutic areas of focus.  

As of June 30, 2021, our marketed medicines consisted of the following:

 

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

ACTIMMUNE® (interferon gamma-1b) injection, for subcutaneous use

UPLIZNA (inebilizumab-cdon) injection, for intravenous use

BUPHENYL® (sodium phenylbutyrate) tablets and powder, for oral use

QUINSAIR™ (levofloxacin) solution for inhalation

Inflammation

PENNSAID® (diclofenac sodium topical solution) 2% w/w, or PENNSAID 2%, for topical use

DUEXIS® (ibuprofen/famotidine) tablets, for oral use

RAYOS® (prednisone) delayed-release tablets, for oral use

VIMOVO® (naproxen/esomeprazole magnesium) delayed-release tablets, for oral use


33


 

 

Acquisitions and Divestitures

Since January 1, 2020, we completed the following acquisitions and divestitures:

 

On March 15, 2021, we completed the acquisition of 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.

 

 

On October 27, 2020, we sold our rights to develop and commercialize RAVICTI and BUPHENYL in Japan to Medical Need Europe AB, part of the Immedica Group.  We have retained the rights to RAVICTI and BUPHENYL in North America.

 

 

On April 1, 2020, we acquired Curzion Pharmaceuticals, Inc., or Curzion, a privately held development-stage biopharma company, and its development-stage oral selective lysophosphatidic acid 1 receptor (LPAR1) antagonist, CZN001 (renamed HZN-825), for an upfront cash payment of $45.0 million with additional payments contingent on the achievement of development and regulatory milestones.

 

Impact of COVID-19

Beginning in March 2020, many states and municipalities in the United States took aggressive actions to reduce the spread of the COVID-19 pandemic, including limiting non-essential gatherings of people, ceasing all non-essential travel, ordering certain businesses and government agencies to cease non-essential operations at physical locations and issuing “shelter-in-place” orders which direct individuals to shelter at their places of residence (subject to limited exceptions).  Similarly, the Irish government limited gatherings of people and encouraged employees to work from their homes.  In recent months, vaccines and treatments have enabled a resumption to more normal business practices and initiatives in many countries, including the United States and Ireland.  While our financial results during the six months ended June 30, 2021 were strong and we continue to have a significant amount of available liquidity, the COVID-19 pandemic may have a negative impact on net sales during the second half of 2021, including due to the emergence of new variants of the virus and potential actions to combat their transmission.  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 in the United States and across most of the world are continuing to change rapidly because of the COVID-19 pandemic.  Although COVID-19 is a global issue that is altering business and consumer activity, the pharmaceutical industry is considered a critical and essential industry in the United States and many other countries and, therefore, we do not currently expect any significant extended shut downs of suppliers or distribution channels.  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.


34


 

 

TEPEZZA

The launch of our infused medicine for thyroid eye disease, or TED, TEPEZZA, which was approved by the U.S. Food and Drug Administration, or FDA, on January 21, 2020, significantly exceeded our expectations.  In early 2019, we initiated our pre-launch disease awareness, market development and market access efforts with multi-functional field-based teams beginning to engage with key stakeholders in July 2019.  We believe these pre-launch efforts, the severity and acute nature of TED, and a highly motivated patient population have generated significant demand for the medicine.  For the year ended December 31, 2020, we recorded TEPEZZA net sales of $820.0 million, which was more than 20 times greater than our February 2020 estimate of TEPEZZA full year 2020 net sales of $30.0 million to $40.0 million.  While we experienced a much higher number of new patients in 2020 than our initial estimates, the impact from COVID-19 slowed the generation of patient enrollment forms for TEPEZZA, which drive new patient starts.  

On December 17, 2020, we announced that we expected a short-term disruption in TEPEZZA supply as a result of recent U.S. government-mandated COVID-19 vaccine production orders pursuant to the Defense Production Act of 1950, or DPA, that dramatically restricted capacity available for the production of TEPEZZA at our drug product contract manufacturer, Catalent Indiana, LLC, or Catalent.  Pursuant to the DPA, Catalent was ordered to prioritize certain COVID-19 vaccine manufacturing at Catalent, resulting in the cancellation of previously guaranteed and contracted TEPEZZA drug product manufacturing slots in December 2020, which were required to maintain TEPEZZA supply.  To offset the reduced slots, we accelerated plans to increase the production scale of TEPEZZA drug product at Catalent.

In March 2021, the FDA approved a prior approval supplement to the TEPEZZA Biologics License Application, or BLA (which was previously approved in January 2020), giving us authorization to manufacture more TEPEZZA drug product resulting in an increased number of vials with each manufacturing slot.  We commenced resupply of TEPEZZA to the market in April 2021 and our second quarter 2021 net sales exceeded our expectations due to strong demand and relaunch execution.  In addition, we are making progress with our second drug product manufacturer and estimate that TEPEZZA commercial supply from this manufacturer, assuming FDA approval, will begin shipping by the end of 2021.  Other than Catalent, we are not aware of any manufacturing facilities that are part of the supply chain for our medicines that are being utilized for the manufacture of vaccines for COVID-19.  At this time, we consider the inventories on hand of our medicines to be sufficient to meet our commercial requirements.

As a result of the prior supply disruption, we delayed the start of an FDA-required post-marketing study to evaluate safety of TEPEZZA in a larger patient population and retreatment rates relative to how long patients receive the medicine given the supply disruption.  We also delayed the start of our planned TEPEZZA clinical trial in chronic TED and an exploratory trial of TEPEZZA in diffuse cutaneous systemic sclerosis.  These trials are expected to initiate in the third quarter of 2021.

KRYSTEXXA

KRYSTEXXA is an infused medicine for uncontrolled gout and was also achieving rapid growth prior to the COVID-19 pandemic.  While the vast majority of patients on therapy have maintained therapy, many new patients delayed infusions due to shelter-in-place guidelines and patients voluntarily delaying visits to healthcare providers and infusion centers.  Patient visits to physicians substantially declined during 2020, which resulted in a reduction of new patients.  While there continues to be some impact on demand for KRYSTEXXA, we have seen improvements as healthcare systems have adapted to cope with the pandemic and vaccines have been widely administered in the United States.

 

Our other medicines

Our other orphan segment medicines, RAVICTI, PROCYSBI and ACTIMMUNE, treat serious, chronic diseases with serious consequences if left untreated.  It is therefore critical for patients to maintain therapy.  Patient motivation to continue treatment is high, and therefore net sales for these three medicines were stable during 2020 and the first half of 2021, with less impact from COVID-19 compared to our other medicines.

In regard to the inflammation segment, we are experiencing reduced demand given the absence of in-person engagement by our sales representatives with healthcare providers and reduced levels of non-essential patient visits to physicians.  This impact has been somewhat mitigated by the virtual engagement efforts of our sales representatives, as well as the use of telemedicine by many physicians, which allows them to continue to see patients and prescribe medicines.  In addition, with our HorizonCares program, most patients do not need to physically visit a pharmacy to obtain a prescription because the vast majority of these medicines are delivered to a patient’s home through mail or local courier, depending on the participating pharmacy.

 


35


 

 

Clinical trials

Our clinical trials have been and may in the future be affected by COVID-19.  As referred to above, our clinical trials for TEPEZZA have been delayed due to the impact of the TEPEZZA supply disruption at Catalent.  In addition, clinical site initiation and patient enrollment may be delayed due to 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 quarantines impede patient movement or interrupt healthcare services.  Some clinical sites in the United States 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 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.  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.

Strategy

Horizon is a leading, high-growth, innovation-driven, profitable biotech 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 strategy is to expand our development-stage pipeline for long-term sustainable growth; to maximize the benefit and value of our on-market medicines, with particular focus on our current key rare disease growth driver medicines, TEPEZZA and KRYSTEXXA; and to build a global presence. Our vision is to build healthier communities, urgently and responsibly, which we believe generates value for our many stakeholders, including our shareholders.

Our development strategy is to expand our pipeline with early-to late-stage clinical programs for sustainable growth.  We are pursuing this strategy by acquiring and developing medicines for indications that address unmet needs in rare, autoimmune and severe inflammatory diseases, with a focus on the therapeutic areas of ophthalmology, rheumatology, nephrology and endocrinology.  The March 2021 acquisition of Viela and the addition of its mid-stage biologics pipeline significantly expanded our pipeline.  At the end of the second quarter of 2021 we had 22 pipeline programs, with more than half of these programs in Phase 1, Phase 2 or Phase 3 clinical trials.  Of the 22 programs, we expect to initiate a total of eight clinical trials in 2021, four of which have already been initiated.  For our on-market rare disease medicines, including our current key growth driver medicines, TEPEZZA and KRYSTEXXA, our commercialization strategy includes efforts to increase awareness of the conditions each medicine is designed to treat, enhancing efforts to identify target patients and to maximize the value of the medicines through clinical trials.  In addition, we are pursuing a global expansion strategy, which includes bringing TEPEZZA to patients with TED outside of the United States, including Japan, where we are engaging with the Pharmaceuticals and Medical Devices Agency and the Japanese medical community.  Furthermore, we are investing in our European infrastructure to support the potential first-quarter 2022 approval of UPLIZNA by the European Medicines Agency for neuromyelitis optica spectrum disorder, which has been granted orphan designation by the European Commission.  In addition, to support the global growth of our on-market medicines, including TEPEZZA, KRYSTEXXA and UPLIZNA, and our pipeline biologic medicines, in the second quarter of 2021 we acquired a biologic drug product manufacturing facility in Waterford, Ireland.  Subject to completing build-out, validation and regulatory approval processes, we expect that the first medicine manufactured at the facility to be approved for release in 2023.


36


 

 

RESULTS OF OPERATIONS

Comparison of Three Months Ended June 30, 2021 and 2020

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 June 30, 2021, compared to the three months ended June 30, 2020.  

 

 

 

For the Three Months Ended

June 30,

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

 

 

(in thousands)

 

Net sales

 

$

832,548

 

 

$

462,779

 

 

$

369,769

 

Cost of goods sold

 

 

200,995

 

 

 

121,515

 

 

 

79,480

 

Gross profit

 

 

631,553

 

 

 

341,264

 

 

 

290,289

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

139,834

 

 

 

81,068

 

 

 

58,766

 

Selling, general and administrative

 

 

355,204

 

 

 

222,332

 

 

 

132,872

 

Gain on sale of asset

 

 

(2,000

)

 

 

 

 

 

(2,000

)

Total operating expenses

 

 

493,038

 

 

 

303,400

 

 

 

189,638

 

Operating income

 

 

138,515

 

 

 

37,864

 

 

 

100,651

 

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(22,581

)

 

 

(18,571

)

 

 

(4,010

)

Loss on debt extinguishment

 

 

 

 

 

(17,254

)

 

 

17,254

 

Foreign exchange (loss) gain

 

 

(39

)

 

 

283

 

 

 

(322

)

Other (expense) income, net

 

 

(262

)

 

 

632

 

 

 

(894

)

Total other expense, net

 

 

(22,882

)

 

 

(34,910

)

 

 

12,028

 

Income (loss) before (benefit) expense for income taxes

 

 

115,633

 

 

 

2,954

 

 

 

112,679

 

(Benefit) expense for income taxes

 

 

(42,484

)

 

 

82,964

 

 

 

(125,448

)

Net income (loss)

 

$

158,117

 

 

$

(80,010

)

 

$

238,127

 

 Net sales.  Net sales increased $369.8 million, or 79.9%, to $832.5 million during the three months ended June 30, 2021, from $462.7 million during the three months ended June 30, 2020.  The increase in net sales during the three months ended June 30, 2021 was primarily due to an increase in net sales in our orphan segment of $367.2 million, primarily due to an increase in TEPEZZA net sales of $287.3 million and an increase in KRYSTEXXA net sales of $55.1 million when compared to the three months ended June 30, 2020.

37


 

 

The following table reflects net sales by medicine for the three months ended June 30, 2021 and 2020 (in thousands, except percentages):

 

 

 

Three Months Ended

June 30,

 

 

Change

 

 

Change

 

 

 

2021

 

 

2020

 

 

$

 

 

%

 

TEPEZZA

 

$

453,255

 

 

$

165,936

 

 

$

287,319

 

 

 

173

%

KRYSTEXXA

 

 

130,317

 

 

 

75,201

 

 

 

55,116

 

 

 

73

%

RAVICTI

 

 

68,426

 

 

 

65,550

 

 

 

2,876

 

 

 

4

%

PROCYSBI

 

 

49,775

 

 

 

41,357

 

 

 

8,418

 

 

 

20

%

ACTIMMUNE

 

 

27,777

 

 

 

28,299

 

 

 

(522

)

 

 

(2

)%

UPLIZNA

 

 

14,475

 

 

 

 

 

 

14,475

 

 

 

100

%

BUPHENYL

 

 

2,262

 

 

 

2,846

 

 

 

(584

)

 

 

(21

)%

QUINSAIR

 

 

222

 

 

 

59

 

 

 

163

 

 

 

276

%

Orphan segment net sales

 

$

746,509

 

 

$

379,248

 

 

$

367,261

 

 

 

97

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENNSAID 2%

 

 

48,941

 

 

 

35,048

 

 

 

13,893

 

 

 

40

%

DUEXIS

 

 

22,110

 

 

 

27,798

 

 

 

(5,688

)

 

 

(20

)%

RAYOS

 

 

13,406

 

 

 

14,459

 

 

 

(1,053

)

 

 

(7

)%

VIMOVO

 

 

1,582

 

 

 

6,226

 

 

 

(4,644

)

 

 

(75

)%

Inflammation segment net sales

 

$

86,039

 

 

$

83,531

 

 

$

2,508

 

 

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

832,548

 

 

$

462,779

 

 

$

369,769

 

 

 

80

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Orphan Segment

TEPEZZA.  Net sales increased $287.3 million, or 173%, to $453.2 million during the three months ended June 30, 2021, from $165.9 million during the three months ended June 30, 2020.  Net sales increased by approximately $277.0 million due to volume growth and $10.3 million resulting from higher net pricing primarily due to the utilization of our patient assistance programs being lower than initial expectations.  On December 17, 2020, we announced that we expected a short-term disruption in TEPEZZA supply as a result of recent U.S. government-mandated COVID-19 vaccine production orders pursuant to the DPA, that dramatically restricted capacity available for the production of TEPEZZA at our drug product contract manufacturer, Catalent.  In March 2021, the FDA approved a prior approval supplement to the TEPEZZA BLA (which was previously approved in January 2020), giving us authorization to manufacture more TEPEZZA drug product resulting in an increased number of vials with each manufacturing slot.  We commenced resupply of TEPEZZA to the market in April 2021 and our second quarter 2021 net sales exceeded our expectations due to strong demand and relaunch execution. Refer to the Impact of COVID-19 section above for further information.  Due to the timing of new patients starting therapy and the restarting of therapy for existing patients following the supply disruption, we expect some variability in quarterly net sales of TEPEZZA in the second half of 2021.

KRYSTEXXA.  Net sales increased $55.1 million, or 73%, to $130.3 million during the three months ended June 30, 2021 from $75.2 million during the three months ended June 30, 2020.  Net sales increased by approximately $37.9 million due to volume growth and $17.2 million due to higher net pricing, despite the ongoing challenges associated with the COVID-19 pandemic.

RAVICTI.  Net sales increased $2.9 million, or 4%, to $68.4 million during the three months ended June 30, 2021, from $65.5 million during the three months ended June 30, 2020.  Net sales increased by approximately $8.0 million due to volume growth, partially offset by a decrease of approximately $5.1 million due to lower net pricing.

PROCYSBI.  Net sales increased $8.4 million, or 20%, to $49.8 million during the three months ended June 30, 2021, from $41.4 million during the three months ended June 30, 2020.  Net sales increased by approximately $5.1 million due to higher net pricing and $3.3 million due to volume growth.

ACTIMMUNE.  Net sales decreased $0.5 million, or 2%, to $27.8 million during the three months ended June 30, 2021, from $28.3 million during the three months ended June 30, 2020. Net sales decreased by approximately $1.6 million due to lower sales volume, partially offset by an increase of approximately $1.1 million due to higher net pricing.

UPLIZNA.  Net sales generated for UPLIZNA during the three months ended June 30, 2021 were $14.5 million.  We began recognizing UPLIZNA sales following our acquisition of Viela on March 15, 2021.

 


38


 

 

Inflammation Segment

As a result of the COVID-19 pandemic, sales volumes for our inflammation medicines have been negatively impacted due to reduced demand given a reduced level of both in-person engagement by our sales representatives with health care providers and non-essential patient visits to physicians.

PENNSAID 2%.  Net sales increased $13.8 million, or 40%, to $48.9 million during the three months ended June 30, 2021, from $35.1 million during the three months ended June 30, 2020.  Net sales increased by approximately $10.8 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs and $3.0 million due to volume growth.

DUEXIS.  Net sales decreased $5.7 million, or 20%, to $22.1 million during the three months ended June 30, 2021, from $27.8 million during the three months ended June 30, 2020.  Net sales decreased by approximately $5.5 million resulting from lower net pricing primarily due to higher utilization of our patient assistance programs and $0.2 million due to lower sales volume.

RAYOS.  Net sales decreased $1.1 million, or 7%, to $13.4 million during the three months ended June 30, 2021, from $14.5 million during the three months ended June 30, 2020.  Net sales decreased by approximately $1.9 million due to lower sales volume, partially offset by an increase of $0.9 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs.

VIMOVO.  Net sales decreased $4.7 million, or 75%, to $1.5 million during the three months ended June 30, 2021, from $6.2 million during the three months ended June 30, 2020.  Net sales decreased by approximately $3.3 million due to lower net pricing and $1.4 million due to lower sales volume as a result of generic competition.

The table below reconciles our gross to net sales for the three months ended June 30, 2021 and 2020 (in millions, except percentages):

 

 

Three Months Ended

June 30, 2021

 

 

Three Months Ended

June 30, 2020

 

 

 

Amount

 

 

% of Gross Sales

 

 

Amount

 

 

% of Gross Sales

 

Gross sales

 

$

1,323.2

 

 

 

100.0

%

 

$

898.0

 

 

 

100.0

%

Adjustments to gross sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prompt pay discounts

 

 

(13.5

)

 

 

(1.0

)%

 

 

(12.5

)

 

 

(1.4

)%

Medicine returns

 

 

(5.5

)

 

 

(0.4

)%

 

 

3.9

 

 

 

0.4

%

Co-pay and other patient assistance

 

 

(201.3

)

 

 

(15.2

)%

 

 

(210.3

)

 

 

(23.4

)%

Commercial rebates and wholesaler fees

 

 

(80.1

)

 

 

(6.1

)%

 

 

(78.3

)

 

 

(8.7

)%

Government rebates and chargebacks

 

 

(190.3

)

 

 

(14.4

)%

 

 

(138.0

)

 

 

(15.4

)%

Total adjustments

 

 

(490.7

)

 

 

(37.1

)%

 

 

(435.2

)

 

 

(48.5

)%

Net sales

 

$

832.5

 

 

 

62.9

%

 

$

462.8

 

 

 

51.5

%

During the three months ended June 30, 2021, co-pay and other patient assistance costs, as a percentage of gross sales, decreased to 15.2% from 23.4% during the three months ended June 30, 2020, primarily due to a decreased proportion of inflammation segment medicines sold.

Cost of Goods Sold.  Cost of goods sold increased $79.5 million to $201.0 million during the three months ended June 30, 2021, from $121.5 million during the three months ended June 30, 2020.  The increase in cost of goods sold during the three months ended June 30, 2021 compared to three months ended June 30, 2020, was primarily due to an increase in sales volumes, an increase in royalty expense, an increase in amortization expense and the recording of inventory step-up expense during the three months ended June 30, 2021.  Royalty expense increased by $34.8 million primarily due to royalties payable on net sales of TEPEZZA, which increased significantly in the second quarter of 2021 compared to the second quarter of 2020.  Amortization expense increased $21.8 million primarily due to the acquisition of the UPLIZNA developed technology intangible asset in the first quarter of 2021.  In addition, we recorded inventory step-up expense of $7.1 million related to UPLIZNA based on the acquired units of inventory sold during the three months ended June 30, 2021.  As a percentage of net sales, cost of goods sold was 24.1% during the three months ended June 30, 2021, compared to 26.3% during the three months ended June 30, 2020.  The decrease in cost of goods sold as a percentage of net sales was primarily due to change in the mix of medicines sold.


39


 

 

Research and Development Expenses.  Research and development expenses increased $58.7 million to $139.8 million during the three months ended June 30, 2021, from $81.1 million during the three months ended June 30, 2020.  The increase during the three months ended June 30, 2021 compared to three months ended June 30, 2020, was primarily attributable to recognition of the $40.0 million upfront payment in relation to the agreement with Arrowhead Pharmaceuticals, Inc., or Arrowhead, during the three months ended June 30, 2021, a $37.2 million increase in clinical trial and manufacturing development costs reflecting increased activity in our research and development pipeline as well as the addition of Viela’s medicine candidates and development programs.  In addition, employee-related costs increased by $20.5 million.  This was partially offset by the $45.0 million upfront payment for the acquisition of Curzion, which was expensed as in-process research and development, or IPR&D, during the three months ended June 30, 2020.  

We expect our research and development expenses to significantly increase in the second half of 2021 as a result of our planned additional clinical trials for our pipeline including the addition of Viela’s medicine candidates and development programs. Refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements, for further details of this acquisition.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased $132.9 million to $355.2 million during the three months ended June 30, 2021, from $222.3 million during the three months ended June 30, 2020.  The increase was primarily attributable to costs associated with the Viela acquisition in March 2021 and an increase in TEPEZZA commercial activities.  These include an increase of $55.6 million related to marketing program costs, an increase of $46.7 million in employee-related costs and an increase of $28.3 million in consulting costs, primarily related to the integration of Viela.

We expect our selling, general and administrative expenses to significantly increase in the second half of 2021 as a result of the increase in the U.S. commercial and field-based organization for TEPEZZA, the completion and integration of the Viela acquisition and global expansion activities.  Refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements, for further details of the Viela acquisition.

Gain on sale of asset.  During the three months ended June 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 in July 2021.

Loss on Debt Extinguishment.  During the three months ended June 30, 2020, we recorded a loss on debt extinguishment of $17.3 million in the condensed consolidated statements of comprehensive loss, which reflects the partial exchange of our 2.5% Exchangeable Senior Notes due 2022, or the Exchangeable Senior Notes.  As of June 30, 2020, $207.0 million in aggregate principal amount of Exchangeable Senior Notes had been exchanged for ordinary shares.  During July and August 2020, the remaining $193.0 million of aggregate principal amount of Exchangeable Senior Notes were fully extinguished.

(Benefit) Expense for Income Taxes. During the three months ended June 30, 2021, we recorded a benefit for income taxes of $42.5 million compared to an expense for income taxes of $83.0 million during the three months ended June 30, 2020.  The benefit for income taxes recorded during the three months ended June 30, 2021 resulted primarily from the mix of pre-tax income and losses incurred in various tax jurisdictions and the recognition of a deferred tax asset resulting from an intercompany transfer and license of intellectual property from a U.S. subsidiary to an Irish subsidiary during the three months ended June 30, 2021.  These benefits were partially offset by tax expense recognized on U.S. taxable income generated from the intercompany transfer and license of intellectual property.  The expense for income taxes recorded during the three months ended June 30, 2020 resulted primarily from the mix of pre-tax income and losses incurred in various tax jurisdictions and a $15.2 million provision recorded following the publication, on April 8, 2020, by the U.S. Treasury of Final Regulations for Section 267A, or commonly referred to as the Anti-Hybrid Rules.  The Final Regulations for Section 267A permanently disallow for U.S. tax purposes certain interest expense accrued to a foreign related party during the year ended December 31, 2019. As a result, during the three months ended June 30, 2020 we recorded a write off of a deferred tax asset related to this interest expense and recognized a corresponding tax provision of $15.2 million.


40


 

Information by Segment

See 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 to our total income before expense for income taxes for the three months ended June 30, 2021 and 2020.

Orphan Segment

The following table reflects our orphan segment net sales and segment operating income for the three months ended June 30, 2021 and 2020 (in thousands, except percentages).

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

 

% Change

 

 

Net sales

 

$

746,509

 

 

$

379,248

 

 

$

367,261

 

 

 

97

%

 

Segment operating income

 

 

321,235

 

 

 

151,541

 

 

 

169,694

 

 

 

112

%

 

The increase in orphan segment net sales during the three months ended June 30, 2021 is described in the Consolidated Results section above.

Segment operating income.  Orphan segment operating income increased $169.7 million to $321.2 million during the three months ended June 30, 2021, from $151.5 million during the three months ended June 30, 2020. The increase was primarily attributable to an increase in net sales of $367.2 million as described above, partially offset by an increase in selling, general and administrative expenses of $95.0 million, an increase in research and development expenses of $52.8 million and an increase of $36.8 million in royalty expense, primarily related to an increase in royalties payable on net sales of TEPEZZA during the second quarter of 2021 compared to the second quarter of 2020.  The increase in selling, general and administrative expenses and research and development expenses were mainly due to an increase in the commercial and field-based organization for TEPEZZA, as well as incremental net operating expense from Viela after we acquired it on March 15, 2021.

 

 

Inflammation Segment

The following table reflects our inflammation segment net sales and segment operating income for the three months ended June 30, 2021 and 2020 (in thousands, except percentages).

 

 

For the Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

 

% Change

 

 

Net sales

 

$

86,039

 

 

$

83,531

 

 

$

2,508

 

 

 

3

%

 

Segment operating income

 

 

46,767

 

 

 

38,096

 

 

 

8,671

 

 

 

23

%

 

The decrease in inflammation segment net sales during the three months ended June 30, 2021 is described in the Consolidated Results section above.

Segment operating income. Inflammation segment operating income increased $8.7 million to $46.8 million during the three months ended June 30, 2021, from $38.1 million during the three months ended June 30, 2020.  The increase was primarily attributable to an increase in net sales of $2.5 million as described above, and a decrease in selling, general and administrative expenses of $5.4 million.

 

 

 

 

 

 

 

 

41


 

 

 

Comparison of Six Months Ended June 30, 2021 and 2020

Consolidated Results

The table below should be referenced in connection with a review of the following discussion of our results of operations for the six months ended June 30, 2021, compared to the six months ended June 30, 2020.  

 

 

 

For the Six Months Ended

June 30,

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

 

 

(in thousands)

 

Net sales

 

$

1,174,954

 

 

$

818,688

 

 

$

356,266

 

Cost of goods sold

 

 

301,363

 

 

 

218,931

 

 

 

82,432

 

Gross profit

 

 

873,591

 

 

 

599,757

 

 

 

273,834

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

197,527

 

 

 

108,277

 

 

 

89,250

 

Selling, general and administrative

 

 

687,196

 

 

 

470,107

 

 

 

217,089

 

Impairment of long-lived asset

 

 

12,371

 

 

 

 

 

 

12,371

 

Gain on sale of asset

 

 

(2,000

)

 

 

 

 

 

(2,000

)

Total operating expenses

 

 

895,094

 

 

 

578,384

 

 

 

316,710

 

Operating (loss) income

 

 

(21,503

)

 

 

21,373

 

 

 

(42,876

)

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(36,041

)

 

 

(35,915

)

 

 

(126

)

Loss on debt extinguishment

 

 

 

 

 

(17,254

)

 

 

17,254

 

Foreign exchange (loss) gain

 

 

(887

)

 

 

1,059

 

 

 

(1,946

)

Other income, net

 

 

2,962

 

 

 

1,074

 

 

 

1,888

 

Total other expense, net

 

 

(33,966

)

 

 

(51,036

)

 

 

17,070

 

Loss before (benefit) expense for income taxes

 

 

(55,469

)

 

 

(29,663

)

 

 

(25,806

)

(Benefit) expense for income taxes

 

 

(90,235

)

 

 

63,938

 

 

 

(154,173

)

Net income (loss)

 

$

34,766

 

 

$

(93,601

)

 

$

128,367

 

 

Net sales.  Net sales increased $356.2 million, or 43.5%, to $1,174.9 million during the six months ended June 30, 2021, from $818.7 million during the six months ended June 30, 2020.  The increase in net sales during the six months ended June 30, 2021 was primarily due to an increase in net sales in our orphan segment of $379.4 million, primarily due to an increase in TEPEZZA net sales of $265.9 million and an increase in KRYSTEXXA net sales of $68.6 million when compared to the six months ended June 30, 2020.  This was partially offset by a decrease in net sales in our inflammation segment of $23.2 million.

The following table reflects net sales by medicine for the six months ended June 30, 2021 and 2020 (in thousands, except percentages):

 

 

Six Months Ended

June 30,

 

 

Change

 

 

Change

 

 

 

2021

 

 

2020

 

 

$

 

 

%

 

TEPEZZA

 

$

455,320

 

 

$

189,387

 

 

$

265,933

 

 

 

140

%

KRYSTEXXA

 

 

237,074

 

 

 

168,450

 

 

 

68,624

 

 

 

41

%

RAVICTI

 

 

141,243

 

 

 

126,738

 

 

 

14,505

 

 

 

11

%

PROCYSBI

 

 

93,138

 

 

 

79,700

 

 

 

13,438

 

 

 

17

%

ACTIMMUNE

 

 

56,540

 

 

 

54,840

 

 

 

1,700

 

 

 

3

%

UPLIZNA

 

 

16,348

 

 

 

 

 

 

16,348

 

 

 

100

%

BUPHENYL

 

 

3,922

 

 

 

5,160

 

 

 

(1,238

)

 

 

(24

)%

QUINSAIR

 

 

431

 

 

 

336

 

 

 

95

 

 

 

28

%

Orphan segment net sales

 

$

1,004,016

 

 

$

624,611

 

 

$

379,405

 

 

 

61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENNSAID 2%

 

 

94,758

 

 

 

76,611

 

 

 

18,147

 

 

 

24

%

DUEXIS

 

 

41,575

 

 

 

59,145

 

 

 

(17,570

)

 

 

(30

)%

RAYOS

 

 

28,678

 

 

 

32,668

 

 

 

(3,990

)

 

 

(12

)%

VIMOVO

 

 

5,927

 

 

 

25,653

 

 

 

(19,726

)

 

 

(77

)%

Inflammation segment net sales

 

$

170,938

 

 

$

194,077

 

 

$

(23,139

)

 

 

(12

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

1,174,954

 

 

$

818,688

 

 

$

356,266

 

 

 

44

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


42


 

Orphan Segment

TEPEZZA.  Net sales increased $265.9 million, or 140%, to $455.3 million during the six months ended June 30, 2021, from $189.4 million during the six months ended June 30, 2020.  Net sales increased by approximately $253.1 million due to volume growth and $12.8 million resulting from higher net pricing primarily due to the utilization of our patient assistance programs being lower than initial expectations.  On December 17, 2020, we announced that we expected a short-term disruption in TEPEZZA supply as a result of recent U.S. government-mandated COVID-19 vaccine production orders pursuant to the DPA, that dramatically restricted capacity available for the production of TEPEZZA at our drug product contract manufacturer, Catalent.  In March 2021, the FDA approved a prior approval supplement to the TEPEZZA BLA (which was previously approved in January 2020), giving us authorization to manufacture more TEPEZZA drug product resulting in an increased number of vials with each manufacturing slot.  We commenced resupply of TEPEZZA to the market in April 2021 and our second quarter 2021 net sales exceeded our expectations due to strong demand and relaunch execution. Refer to the Impact of COVID-19 section above for further information.  Due to the timing of new patients starting therapy and the restarting of therapy for existing patients following the supply disruption, we expect some variability in quarterly net sales of TEPEZZA in the second half of 2021.

KRYSTEXXA.  Net sales increased $68.6 million, or 41%, to $237.0 million during the six months ended June 30, 2021 from $168.4 million during the six months ended June 30, 2020.  Net sales increased by approximately $43.3 million due to volume growth and $25.3 million due to higher net pricing.

RAVICTI.  Net sales increased $14.5 million, or 11%, to $141.2 million during the six months ended June 30, 2021, from $126.7 million during the six months ended June 30, 2020.  Net sales increased by approximately $19.4 million due to volume growth, partially offset by a decrease of approximately $4.9 million due to lower net pricing.

PROCYSBI.  Net sales increased $13.4 million, or 17%, to $93.1 million during the six months ended June 30, 2021, from $79.7 million during the six months ended June 30, 2020.  Net sales increased by approximately $7.3 million due to higher net pricing and $6.1 million due to volume growth.

ACTIMMUNE.  Net sales increased $1.7 million, or 3%, to $56.5 million during the six months ended June 30, 2021, from $54.8 million during the six months ended June 30, 2020. Net sales increased by approximately $3.4 million due to higher net pricing, partially offset by a decrease of approximately $1.7 million resulting from lower sales volume.

UPLIZNA.  Net sales generated for UPLIZNA during the six months ended June 30, 2021 were $16.3 million.  We began recognizing UPLIZNA sales following our acquisition of Viela on March 15, 2021.

 

Inflammation Segment

As a result of the COVID-19 pandemic, sales volumes for our inflammation medicines have been negatively impacted due to reduced demand given a reduced level of both in-person engagement by our sales representatives with health care providers and non-essential patient visits to physicians.

PENNSAID 2%.  Net sales increased $18.1 million, or 24%, to $94.7 million during the six months ended June 30, 2021, from $76.6 million during the six months ended June 30, 2020.  Net sales increased by approximately $19.6 million resulting from higher net pricing primarily due to lower utilization of our patient assistance programs, partially offset by a decrease of approximately $1.5 million resulting from lower sales volume.

DUEXIS.  Net sales decreased $17.6 million, or 30%, to $41.5 million during the six months ended June 30, 2021, from $59.1 million during the six months ended June 30, 2020.  Net sales decreased by approximately $17.1 million resulting from lower net pricing primarily due to higher utilization of our patient assistance programs and $0.4 million resulting from lower sales volume.

RAYOS.  Net sales decreased $3.9 million, or 12%, to $28.7 million during the six months ended June 30, 2021, from $32.6 million during the six months ended June 30, 2020.  Net sales decreased by approximately $2.8 million due to lower sales volume and $1.1 million resulting from lower net pricing.

VIMOVO.  Net sales decreased $19.7 million, or 77%, to $5.9 million during the six months ended June 30, 2021, from $25.6 million during the six months ended June 30, 2020.  Net sales decreased by approximately $17.6 million due to lower sales volume as a result of generic competition and $2.1 million due to lower net pricing.

43


 

 

The table below reconciles our gross to net sales for the six months ended June 30, 2021 and 2020 (in millions, except percentages):

 

 

Six Months Ended

June 30, 2021

 

 

Six Months Ended

June 30, 2020

 

 

 

Amount

 

 

% of Gross Sales

 

 

Amount

 

 

% of Gross Sales

 

Gross sales

 

$

2,084.7

 

 

 

100.0

%

 

$

1,701.5

 

 

 

100.0

%

Adjustments to gross sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prompt pay discounts

 

 

(25.5

)

 

 

(1.2

)%

 

 

(25.6

)

 

 

(1.5

)%

Medicine returns

 

 

(7.6

)

 

 

(0.4

)%

 

 

(4.9

)

 

 

(0.3

)%

Co-pay and other patient assistance

 

 

(400.4

)

 

 

(19.2

)%

 

 

(440.4

)

 

 

(25.9

)%

Commercial rebates and wholesaler fees

 

 

(143.2

)

 

 

(6.9

)%

 

 

(137.6

)

 

 

(8.1

)%

Government rebates and chargebacks

 

 

(333.0

)

 

 

(16.0

)%

 

 

(274.2

)

 

 

(16.1

)%

Total adjustments

 

 

(909.7

)

 

 

(43.7

)%

 

 

(882.7

)

 

 

(51.9

)%

Net sales

 

$

1,175.0

 

 

 

56.3

%

 

$

818.8

 

 

 

48.1

%

During the six months ended June 30, 2021, co-pay and other patient assistance costs, as a percentage of gross sales, decreased to 19.2% from 25.9% during the six months ended June 30, 2020, primarily due to a decreased proportion of inflammation segment medicines sold.

Cost of Goods Sold.  Cost of goods sold increased $82.4 million to $301.3 million during the six months ended June 30, 2021, from $218.9 million during the six months ended June 30, 2020.  The increase in cost of goods sold during the six months ended June 30, 2021 compared to the six months ended June 30, 2020, was primarily due to an increase in sales volumes, an increase in royalty expense, an increase in amortization expense and the recording of inventory step-up expense during the six months ended June 30, 2021.  Royalty expense increased by $33.0 million primarily due to royalties payable on net sales of TEPEZZA, which increased significantly in the first half of 2021 compared to the first half of 2020.  Amortization expense increased $29.6 million primarily due to the acquisition of the UPLIZNA developed technology intangible asset in the first quarter of 2021.  In addition, we recorded inventory step-up expense of $8.0 million related to UPLIZNA based on the acquired units on inventory sold during the six months ended June 30, 2021.  As a percentage of net sales, cost of goods sold was 25.6% during the six months ended June 30, 2021, compared to 26.7% during the six months ended June 30, 2020.  The decrease in cost of goods sold as a percentage of net sales was primarily due to change in the mix of medicines sold.

Research and Development Expenses.  Research and development expenses increased $89.3 million to $197.5 million during the six months ended June 30, 2021, from $108.2 million during the six months ended June 30, 2020.  The increase during the six months ended June 30, 2021 compared to six months ended June 30, 2020, was primarily attributable to a $58.3 million increase in clinical trial and manufacturing development costs reflecting increased activity in our research and development pipeline as well as the addition of Viela’s medicine candidates and development programs.  In addition, we recognized $40.0 million of an upfront payment in relation to the agreement with Arrowhead, during the six months ended June 30, 2021 and employee-related costs increased by $25.2 million.  This was partially offset by the $45.0 million upfront payment for the acquisition of Curzion, which was expensed as IPR&D during the six months ended June 30, 2020.

We expect our research and development expenses to significantly increase in the second half of 2021 as a result of our planned additional clinical trials for our pipeline including the addition of Viela’s medicine candidates and development programs.  Refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements, for further details of this acquisition.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased $217.1 million to $687.2 million during the six months ended June 30, 2021, from $470.1 million during the six months ended June 30, 2020.  The increase was primarily attributable to costs associated with the Viela acquisition in March 2021 and an increase in TEPEZZA commercial activities. These include an increase of $72.5 million in employee-related costs, an increase of $64.3 million in marketing program costs and an increase of $39.6 million in consulting costs, primarily related to the integration of Viela.  In addition, $28.6 million of transaction costs were incurred during the six months ended June 30, 2021 relating to the Viela acquisition.

We expect our selling, general and administrative expenses to significantly increase in the second half of 2021 as a result of the increase in the U.S. commercial and field-based organization for TEPEZZA, the completion and integration of the Viela acquisition and global expansion activities.  Refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements, for further details of the Viela acquisition.


44


 

 

Impairment of long-lived assets.  During the six months ended June 30, 2021, we recorded an impairment charge of $12.4 million as a result of vacating the Lake Forest office.  Refer to Note 14 of the Notes to the Condensed Consolidated Financial Statements for further details.

Gain on sale of asset.  During the six months ended June 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 in July 2021.

Loss on Debt Extinguishment.  During the six months ended June 30, 2020, we recorded a loss on debt extinguishment of $17.3 million in the condensed consolidated statements of comprehensive loss, which reflects the partial exchange of our Exchangeable Senior Notes.  As of June 30, 2020, $207.0 million in aggregate principal amount of Exchangeable Senior Notes had been exchanged for ordinary shares.  During July and August 2020, the remaining $193.0 million of aggregate principal amount of Exchangeable Senior Notes were fully extinguished.

(Benefit) Expense for Income Taxes.  During the six months ended June 30, 2021, we recorded a benefit for income taxes of $90.2 million compared to an expense for income taxes of $63.9 million during the six months ended June 30, 2020.  The benefit for income taxes recorded during the six months ended June 30, 2021 resulted primarily from the mix of pre-tax income and losses incurred in various tax jurisdictions, tax benefits recognized on share-based compensation and the recognition of a deferred tax asset resulting from an intercompany transfer and license of intellectual property from a U.S. subsidiary to an Irish subsidiary during the three months ended June 30, 2021.  These benefits were partially offset by tax expense recognized on U.S. taxable income generated from the intercompany transfer and license of intellectual property. The expense for income taxes recorded during the six months ended June 30, 2020 resulted primarily from the mix of pre-tax income and losses incurred in various tax jurisdictions and a $15.2 million provision recorded following the publication, on April 8, 2020, of the Anti-Hybrid Rules.  The Final Regulations for Section 267A permanently disallow for U.S. tax purposes certain interest expense accrued to a foreign related party during the year ended December 31, 2019.  As a result, during the six months ended June 30, 2020 we recorded a write off of a deferred tax asset related to this interest expense and recognized a corresponding tax provision of $15.2 million. These expenses were partially offset by the tax benefits recognized on share-based compensation.


45


 

 

Information by Segment

See 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 to our total income (loss) before expense for income taxes for the six months ended June 30, 2021 and 2020.

Orphan Segment

The following table reflects our orphan segment net sales and segment operating income for the six months ended June 30, 2021 and 2020 (in thousands, except percentages).

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

 

% Change

 

 

Net sales

 

$

1,004,016

 

 

$

624,611

 

 

$

379,405

 

 

 

61

%

 

Segment operating income

 

 

322,289

 

 

 

205,897

 

 

 

116,392

 

 

 

57

%

 

 

The increase in orphan segment net sales during the six months ended June 30, 2021 is described in the Consolidated Results section above.

Segment operating income.  Orphan segment operating income increased $116.4 million to $322.3 million during the six months ended June 30, 2021, from $205.9 million during the six months ended June 30, 2020.  The increase was primarily attributable to an increase in net sales of $379.4 million as described above, partially offset by an increase in selling, general and administrative expenses of $133.7 million, an increase in research and development expenses of $81.1 million and an increase of $36.9 million royalty expense, primarily related to an increase in royalties payable on net sales of TEPEZZA during the first half of 2021 compared to the first half of 2020.  The increase in selling, general and administrative expenses and research and development expenses were mainly due to an increase in the commercial and field-based organization for TEPEZZA, as well as incremental net operating expense from Viela after we acquired it on March 15, 2021.

 

Inflammation Segment

The following table reflects our inflammation segment net sales and segment operating income for the six months ended June 30, 2021 and 2020 (in thousands, except percentages).

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

 

% Change

 

 

Net sales

 

$

170,938

 

 

$

194,077

 

 

$

(23,139

)

 

 

(12

%)

 

Segment operating income

 

 

89,447

 

 

 

90,038

 

 

 

(591

)

 

 

(1

%)

 

 

The decrease in inflammation segment net sales during the six months ended June 30, 2021 is described in the Consolidated Results section above.

Segment operating income.  Inflammation segment operating income decreased $0.6 million to $89.4 million during the six months ended June 30, 2021, from $90.0 million during the six months ended June 30, 2020.  The decrease was primarily attributable to a decrease in net sales of $23.1 million as described above, partially offset by a decrease in selling, general and administrative expenses of $18.5 million.

46


 

 

NON-GAAP FINANCIAL MEASURES

EBITDA, or earnings before interest, taxes, depreciation and amortization, adjusted EBITDA, non-GAAP net income and non-GAAP earnings per share are used and provided by us as non-GAAP financial measures.  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, upfront, progress and milestone payments related to license and collaboration agreements, drug substance harmonization costs, fees related to refinancing activities and restructuring and realignment costs, as well as non-cash items such as share-based compensation, inventory step-up expense, depreciation and amortization, long-lived assets impairment charges, loss on debt extinguishments, (gain) loss on sale of assets 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.  For example, adjusted EBITDA is used by us as one measure of management performance under certain incentive compensation arrangements.  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 (loss) 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 June 30,

 

 

For the Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

GAAP net income (loss)

$

158,117

 

 

$

(80,010

)

 

$

34,766

 

 

$

(93,601

)

Depreciation (1)

 

3,393

 

 

 

6,907

 

 

 

7,844

 

 

 

14,072

 

Amortization and step-up:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible amortization expense (2)

 

88,523

 

 

 

66,749

 

 

 

154,892

 

 

 

125,324

 

Inventory step-up expense (3)

 

7,091

 

 

 

 

 

 

8,002

 

 

 

 

Interest expense, net (including amortization of debt discount and deferred financing costs)

 

22,581

 

 

 

18,571

 

 

 

36,041

 

 

 

35,915

 

(Benefit) expense for income taxes

 

(42,484

)

 

 

82,964

 

 

 

(90,235

)

 

 

63,938

 

EBITDA

 

237,221

 

 

 

95,181

 

 

 

151,310

 

 

 

145,648

 

Other non-GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation (4)

 

54,424

 

 

 

27,057

 

 

 

115,590

 

 

 

83,478

 

Upfront, progress and milestone payments related to license and collaboration agreements (5)

 

46,500

 

 

 

3,000

 

 

 

49,500

 

 

 

3,000

 

Acquisition/divestiture-related costs (6)

 

29,830

 

 

 

47,103

 

 

 

78,938

 

 

 

47,097

 

Restructuring and realignment costs (7)

 

930

 

 

 

 

 

 

7,023

 

 

 

 

Fees related to refinancing activities (8)

 

 

 

 

 

 

 

 

 

 

54

 

Loss on debt extinguishment (9)

 

 

 

 

17,254

 

 

 

 

 

 

17,254

 

Impairment of long-lived assets (10)

 

 

 

 

1,072

 

 

 

12,371

 

 

 

1,072

 

Drug substance harmonization costs (11)

 

 

 

 

 

 

 

 

 

 

290

 

Gain on sale of asset (12)

 

(2,000

)

 

 

 

 

 

(2,000

)

 

 

 

Total of other non-GAAP adjustments

 

129,684

 

 

 

95,486

 

 

 

261,422

 

 

 

152,245

 

Adjusted EBITDA

$

366,905

 

 

$

190,667

 

 

$

412,732

 

 

$

297,893

 

47


 

 

 

 

 

For the Three Months Ended 

June 30,

 

 

For the Six Months Ended 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

GAAP net income (loss)

 

$

158,117

 

 

$

(80,010

)

 

$

34,766

 

 

$

(93,601

)

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation (1)

 

 

3,393

 

 

 

6,907

 

 

 

7,844

 

 

 

14,072

 

Amortization and step-up:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible amortization expense (2)

 

 

88,523

 

 

 

66,749

 

 

 

154,892

 

 

 

125,324

 

Amortization of debt discount and deferred financing costs (13)

 

 

1,467

 

 

 

5,248

 

 

 

2,240

 

 

 

10,817

 

Inventory step-up expense (3)

 

 

7,091

 

 

 

 

 

 

8,002

 

 

 

 

Share-based compensation (4)

 

 

54,424

 

 

 

27,057

 

 

 

115,590

 

 

 

83,478

 

Upfront, progress and milestone payments related to license and collaboration agreements (5)

 

 

46,500

 

 

 

3,000

 

 

 

49,500

 

 

 

3,000

 

Acquisition/divestiture-related costs (6)

 

 

29,830

 

 

 

47,103

 

 

 

78,938

 

 

 

47,097

 

Restructuring and realignment costs (7)

 

 

930

 

 

 

 

 

 

7,023

 

 

 

 

Fees related to refinancing activities (8)

 

 

 

 

 

 

 

 

 

 

 

54

 

Loss on debt extinguishment (9)

 

 

 

 

 

17,254

 

 

 

 

 

 

17,254

 

Impairment of long-lived assets (10)

 

 

 

 

 

1,072

 

 

 

12,371

 

 

 

1,072

 

Drug substance harmonization costs (11)

 

 

 

 

 

 

 

 

 

 

 

290

 

Gain on sale of asset (12)

 

 

(2,000

)

 

 

 

 

 

(2,000

)

 

 

 

Total of pre-tax non-GAAP adjustments

 

 

230,158

 

 

 

174,390

 

 

 

434,400

 

 

 

302,458

 

Income tax effect of pre-tax non-GAAP adjustments (14)

 

 

(37,747

)

 

 

(25,797

)

 

 

(111,251

)

 

 

(57,059

)

Other non-GAAP income tax adjustments (15)

 

 

30,881

 

 

 

15,210

 

 

 

30,881

 

 

 

15,210

 

Total non-GAAP adjustments

 

 

223,292

 

 

 

163,803

 

 

 

354,030

 

 

 

260,609

 

Non-GAAP net income

 

$

381,409

 

 

$

83,793

 

 

$

388,796

 

 

$

167,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average ordinary shares – Basic

 

 

225,119,684

 

 

 

192,705,535

 

 

 

224,523,538

 

 

 

191,426,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Earnings Per Share – Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP earnings (loss) per share – Basic

 

$

0.70

 

 

$

(0.42

)

 

$

0.15

 

 

$

(0.49

)

Non-GAAP adjustments

 

 

0.99

 

 

 

0.85

 

 

 

1.58

 

 

 

1.36

 

Non-GAAP earnings per share – Basic

 

$

1.69

 

 

$

0.43

 

 

$

1.73

 

 

$

0.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income

 

$

381,409

 

 

$

83,793

 

 

$

388,796

 

 

$

167,008

 

Effect of assumed exchange of Exchangeable Senior Notes, net of tax

 

 

 

 

 

1,692

 

 

 

 

 

 

3,567

 

Numerator - non-GAAP net income

 

$

381,409

 

 

$

85,485

 

 

$

388,796

 

 

$

170,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average ordinary shares – Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average ordinary shares – Basic

 

 

225,119,684

 

 

 

192,705,535

 

 

 

224,523,538

 

 

 

191,426,864

 

Ordinary share equivalents

 

 

10,072,176

 

 

 

21,838,670

 

 

 

10,196,292

 

 

 

22,084,476

 

Denominator - weighted average ordinary shares – Diluted

 

 

235,191,860

 

 

 

214,544,205

 

 

 

234,719,830

 

 

 

213,511,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Earnings Per Share – Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP earnings (loss) per share – Diluted

 

$

0.67

 

 

$

(0.42

)

 

$

0.15

 

 

$

(0.49

)

Non-GAAP adjustments

 

 

0.95

 

 

 

0.85

 

 

 

1.51

 

 

 

1.36

 

Diluted earnings per share effect of ordinary share equivalents

 

 

 

 

 

(0.03

)

 

 

 

 

 

(0.07

)

Non-GAAP earnings per share – Diluted

 

$

1.62

 

 

$

0.40

 

 

$

1.66

 

 

$

0.80

 

 

 

(1)

Represents depreciation expense related to our property, equipment, software and leasehold improvements.

 

 

(2)

Intangible amortization expenses are associated with our intellectual property rights, developed technology and customer relationships related to TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI, ACTIMMUNE, UPLIZNA, BUPHENYL, PENNSAID 2% and RAYOS.

 

 

(3)

During the three and six months ended June 30, 2021, we recognized in cost of goods sold $7.1 million and $8.0 million, respectively, for inventory step-up expense related to UPLIZNA inventory revalued in connection with the Viela acquisition.  Refer to Note 5 of the Notes to the Condensed Consolidated Financial Statements, for further details.

 


48


 

 

 

 

(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)

During the six months ended June 30, 2021, we recognized a $40.0 million upfront payment in relation to the agreement with Arrowhead, which was subsequently paid in July 2021.  In addition, we recognized $6.5 million of milestone payments in relation to HZN-7734 and a $3.0 million progress payment with HemoShear Therapeutics, LLC, or HemoShear.  The $3.0 million HemoShear progress payment was paid in the first quarter of 2021.

 

During the six months ended June 30, 2020, we recognized a $3.0 million progress payment in relation to the agreement with HemoShear, which was subsequently paid in July 2020.  

 

 

(6)

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.  In addition, the three and six months ended June 30, 2020 amounts include the Curzion acquisition payment of $45.0 million, which was recorded as a research and development expense.

 

 

(7)

Represents rent and maintenance charges for the leased Lake Forest office that we vacated in the first quarter of 2021.

 

 

(8)

Represents arrangement and other fees relating to our refinancing activities.

 

 

(9)

During the six months ended June 30, 2020, we recorded a loss on debt extinguishment of $17.3 million in the condensed consolidated statements of comprehensive income (loss), which reflects the partial exchange of our Exchangeable Senior Notes.

 

 

(10)

During the six months ended June 30, 2021, we recorded a right-of-use asset impairment charge of $12.4 million as a result of vacating the leased Lake Forest office.  

 

During the three and six months ended June 30, 2020, we recorded an impairment charge of $1.1 million related to the Novato, California office lease, which was obtained through an acquisition.

 

 

(11)

During the year ended December 31, 2016, we entered into a definitive agreement to acquire certain rights to interferon gamma-1b, marketed as IMUKIN in an estimated thirty countries primarily in Europe and the Middle East, or the IMUKIN purchase agreement.  We already owned the rights to interferon gamma-1b marketed as ACTIMMUNE in the United States, Canada and Japan.  In connection with the IMUKIN purchase agreement, we also committed to pay our contract manufacturer certain amounts related to the harmonization of the manufacturing processes for ACTIMMUNE and IMUKIN drug substance, or the harmonization program.  At the time we entered into the IMUKIN purchase agreement and the harmonization program commitment was made, we had anticipated achieving certain benefits should the Phase 3 clinical trial evaluating ACTIMMUNE for the treatment of Friedreich’s ataxia, be successful.  If the study had been successful and if U.S. marketing approval had subsequently been obtained, we had forecasted significant increases in demand for the medicine and the harmonization program would have resulted in significant benefits for us.  Following our discontinuation of the Friedreich’s ataxia program, we determined that certain assets, including an upfront payment related to the IMUKIN purchase agreement, were impaired, and the costs under the harmonization program would no longer have benefit to us and should be expensed as incurred.

 

 

(12)

During the six months ended June 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 triggered during the second quarter of 2021 and it was received in July 2021.

 


49


 

 

 

(13)

Represents 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.

 

 

(15)

During the three months ended June 30, 2021, we recognized a U.S. federal and state tax liability on U.S. taxable income generated from an intercompany transfer and license of intellectual property from a U.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 $34.0 million. We also recognized $3.1 million of tax benefit relating to the release of a valuation allowance which was originally recognized on state net operating losses acquired through the acquisition of Viela. These state net operating losses are now usable, resulting in a non-GAAP tax adjustment of $3.1 million.  

 

During the three months ended June 30, 2020, following the publication of the Anti-Hybrid Rules on April 8, 2020, we recorded a write off of a deferred tax asset related to certain interest expense accrued to a foreign related party during the year ended December 31, 2019 and recognized a corresponding one-time tax provision, resulting in a non-GAAP tax adjustment of $15.2 million.

 

 


50


 

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

We have incurred losses on a GAAP basis in most fiscal years since our inception in June 2005 and, as of June 30, 2021, we had an accumulated deficit of $181.1 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 more than offset by higher net sales and gross profits in future periods.  Additionally, we expect that our research and development costs will 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 Viela’s pipeline of medicine candidates and development programs in on-going and planned clinical trials.

On December 17, 2020, we announced that we expected a short-term disruption in TEPEZZA supply as a result of recent U.S. government-mandated COVID-19 vaccine production orders pursuant to the DPA, that dramatically restricted capacity available for the production of TEPEZZA at our drug product contract manufacturer, Catalent. This short-term supply disruption negatively impacted our net sales of TEPEZZA.  In March 2021, the FDA approved a prior approval supplement to the TEPEZZA BLA (which was previously approved in January 2020), giving us authorization to manufacture more TEPEZZA drug product resulting in an increased number of vials with each manufacturing slot.  We commenced resupply of TEPEZZA to the market in April 2021 and our second quarter 2021 net sales exceeded our expectations due to strong demand and relaunch execution.  Refer to the Impact of COVID-19 section above for further information.  Due to the timing of new patients starting therapy and the restarting of therapy for existing patients following the supply disruption, we expect some variability in quarterly net sales of TEPEZZA in the second half of 2021.

Further, following the highly successful launch of TEPEZZA, which significantly exceeded our expectations, we are in the process of expanding our production capacity to meet anticipated future demand for TEPEZZA.  As of June 30, 2021, we had total purchase commitments, including the minimum annual order quantities and binding firm orders, with AGC Biologics A/S (formerly known as CMC Biologics A/S) for TEPEZZA drug substance of €143.9 million ($170.6 million converted at a Euro-to-Dollar exchange rate as of June 30, 2021 of 1.1858), to be delivered through December 2023.  In addition, we had binding purchase commitments with Catalent for TEPEZZA drug product of $10.2 million, to be delivered through June 2022.

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 this anticipated increase in demand.

In July 2021, we completed the purchase of a drug product manufacturing facility from EirGen Pharma Limited, a subsidiary of OPKO Health, Inc., based in Waterford, Ireland for an upfront cash payment of $64.8 million.  See Note 19 of the Notes to the Condensed Consolidated Financial Statements for further details.  

In February 2020, we purchased a three-building campus in Deerfield, Illinois, for total consideration and directly attributable transaction costs of $118.5 million.  The Deerfield campus totals 70 acres and consists of approximately 650,000 square feet of office space. We made significant capital expenditures during the first quarter of 2021 in order to prepare the Deerfield campus for occupancy. Our office employees previously located in Lake Forest, Illinois moved to the Deerfield campus in February 2021 and we are marketing the Lake Forest office space for sublease.  Vacating the Lake Forest leased office building in February 2021 represented a triggering event for impairment consideration of the right-of-use asset relating to this building.  During the first quarter of 2021, we recorded an impairment charge of $12.4 million as a result of vacating the Lake Forest office.  This charge was reported within impairment of long-lived assets in the condensed consolidated statement of comprehensive income (loss).  In addition, we recorded a liability of $6.1 million in the first quarter of 2021 for maintenance charges as a result of vacating the leased Lake Forest office.

During the first quarter of 2021, under our license agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc., or together referred to as Roche, we made a milestone payment of CHF50.0 million ($56.1 million when converted using a CHF-to-Dollar exchange rate at the date of payment of 1.1228) in relation to the attainment of TEPEZZA net sales milestones.  The liability for this milestone payment was recorded during the year ended December 31, 2020.  In April 2021, under the acquisition agreement for River Vision Development Corp., or River Vision, we made a TEPEZZA net sales milestone payment of $67.0 million.  The liability for this milestone payment was recorded during the year ended December 31, 2020.  There are no further TEPEZZA net sales milestone obligations remaining to Roche and the former River Vision stockholders.  Our remaining obligation to Roche relating to the attainment of various TEPEZZA development and regulatory milestones is CHF43.0 million ($46.5 million when converted using a CHF-to-Dollar exchange rate at June 30, 2021 of 1.0813).

During the year ended December 31, 2020, we 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. and RiverVest Venture Fund V, L.P.  As of June 30, 2021, the total carrying amount of our investments in these funds was $20.2 million, which is included in other assets in the consolidated balance sheet, and our total future commitments to these funds are $48.1 million.

51


 

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 of June 30, 2021, we had $812.3 million in cash and cash equivalents and total debt with a book value of $2,576.4 million and face value of $2,614.0 million.  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 on the financial environment.

We have a significant amount of debt outstanding on a consolidated basis.  For a description of our debt agreements, see 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, 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; 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 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.

During the six months ended June 30, 2021, we issued an aggregate of 3.9 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 $27.8 million in proceeds in connection with such stock option exercises.  During the six months ended June 30, 2021, we made payments of $141.6 million for employee withholding taxes relating to vesting of share-based awards.

 

Sources and Uses of Cash

The following table provides a summary of our cash position and cash flows for the six months ended June 30, 2021 and 2020 (in thousands):

                                                                                          

 

 

For the Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

Cash, cash equivalents and restricted cash

 

$

816,158

 

 

$

721,687

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

 

85,674

 

 

 

37,008

 

Investing activities

 

 

(2,815,163

)

 

 

(376,275

)

Financing activities

 

 

1,468,666

 

 

 

(19,143

)

 

Operating Cash Flows

During the six months ended June 30, 2021, net cash provided by operating activities of $85.7 million was primarily

attributable to cash collections from gross sales, partially offset by payments made related to patient assistance costs for our inflammation segment 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 research and development expenses.

During the six months ended June 30, 2020, net cash provided by operating activities of $37.0 million was primarily attributable to cash collections from gross sales, partially offset by payments made related to patient assistance costs for our inflammation segment medicines and government rebates for our orphan segment medicines, payments related to selling, general and administrative expenses and research and development expenses.

 


52


 

 

Investing Cash Flows

During the six months ended June 30, 2021, net cash used in investing activities of $2,815.2 million was primarily attributable to payments for acquisitions, net of $2,775.3 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 of CHF50.0 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, during the first quarter of 2021.  In April 2021, we made a milestone payment of $67.0 million to the former River Vision stockholders.

During the six months ended June 30, 2020, net cash used in investing activities of $376.3 million was primarily attributable to payments for acquisitions of $262.3 million which consist of $215.2 million of milestone payments associated with the acquisition of River Vision Development Corp., or River Vision, and our agreements with Roche, S.R. One and with Lundbeckfond and $45.0 million due to the acquisition of Curzion in the second quarter of 2020.  Additionally, $112.5 million was paid in the first quarter of 2020 in relation to the purchase of a three-building campus in Deerfield, Illinois.

Financing Cash Flows

During the six months ended June 30, 2021, net cash provided by financing activities of $1,468.7 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 $141.6 million payment of employee withholding taxes relating to share-based awards.

During the six months ended June 30, 2020, net cash used in financing activities of $19.1 million was primarily attributable to payment of employee withholding taxes relating to share-based awards of $53.0 million, partially offset by the proceeds from the issuance of ordinary shares in connection with stock option exercises of $25.9 million.

 

Financial Condition as of June 30, 2021 compared to December 31, 2020

Accounts receivable, net.  Accounts receivable, net, increased $75.7 million, from $659.7 million as of December 31, 2020 to $735.4 million as of June 30, 2021.  The increase was primarily due to higher gross sales of our medicines during the second quarter of 2021 when compared to the fourth quarter of 2020.

Inventories, net.  Inventories, net, increased $183.4 million, from $75.3 million as of December 31, 2020 to $258.7 million as of June 30, 2021.  The increase was primarily due to stepped-up UPLIZNA inventory of $151.6 million, which consisted of $120.9 million of stepped-up work in process, $20.6 million of stepped-up finished goods and $10.1 million stepped-up raw materials.

Prepaid expenses and other current assets.  Prepaid expenses and other current assets increased $113.2 million, from $251.9 million as of December 31, 2020 to $365.1 million as of June 30, 2021.  The increase was primarily due to an increase of $63.5 million in prepaid income taxes and income taxes receivable primarily due to a benefit for income taxes recognized during the six months ended June 30, 2021.  Additionally, deferred charge for taxes on intercompany profits increased by $32.7 million and rabbi trust assets increased by $5.5 million.

Developed technology and other intangible assets, net.  Developed technology and other intangible assets, net, increased $1,336.8 million, from $1,782.9 million as of December 31, 2020 to $3,119.7 million as of June 30, 2021. During the six months ended June 30, 2021, in connection with the acquisition of Viela, we capitalized $1,493.0 million of developed technology related to UPLIZNA.  This was partially offset by amortization of developed technology of $154.9 million during the six months ended June 30, 2021.

In-process research and development. On March 15, 2021, we completed the acquisition of Viela and acquired $910.0 million of IPR&D.  On March 24, 2021, we announced that our strategic partner, Mitsubishi Tanabe Pharma Corporation, had received manufacturing and marketing approval of UPLIZNA in Japan.  As a result, we transferred $30.0 million of IPR&D to developed technology.  As of June 30, 2021, the remaining IPR&D relating to the Viela acquisition was $880.0 million.      

Goodwill.  Goodwill increased $655.3 million, from $413.7 million as of December 31, 2020 to $1,069.0 million as of June 30, 2021 due to the Viela acquisition.  Refer to Note 4 of the Notes to Condensed Consolidated Financial Statements, for further details of this acquisition.

Other assets.  Other assets increased $76.9 million, from $55.7 million as of December 31, 2020 to $132.6 million as of June 30, 2021.  In October 2019, we entered into an agreement for lease relating to approximately 63,000 square feet of office space under construction in Dublin, Ireland.  In May 2021, the construction of the office was completed by the lessor and the lease became effective. As a result, we recognized $60.9 million as a right-of-use asset and a corresponding lease liability on the condensed consolidated balance sheet.                                                                                                                                                                         

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Accrued expenses and other current liabilities.  Accrued expenses and other current liabilities decreased $7.0 million, from $485.5 million as of December 31, 2020 to $478.5 million as of June 30, 2021.  This was primarily due to a net decrease of $76.9 million in accrued upfront and milestone payments, partially offset by the reclassification of deferred revenue from long-term to current liabilities of $20.8 million, an increase of $16.1 million in accrued sales and marketing costs and an increase of $19.7 million in accrued research and development costs.  The net decrease of $76.9 million in accrued upfront and milestone payments was primarily related to payments of $123.1 million of TEPEZZA milestones, partially offset by $40.0 million of an accrued upfront payment due to Arrowhead.  This upfront payment was subsequently paid in July 2021.

Accrued trade discounts and rebates.  Accrued trade discounts and rebates decreased $46.1 million, from $352.4 million as of December 31, 2020 to $306.3 million as of June 30, 2021.  This was primarily due to a decrease in accrued co-pay and other patient assistance costs primarily due to an increased proportion of orphan segment medicines sold and a decrease in accrued commercial rebates and wholesaler fees due to timing of receipt of invoices.

Long-term debt, net.  Long-term debt, net increased $1,557.0 million from $1,003.4 million as of December 31, 2020 to $2,560.4 million as of June 30, 2021.  The increase was primarily related to an additional $1.6 billion aggregate principal amount of term loans we 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. See Note 13, Debt Agreements, of the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q.  

Deferred tax liabilities, net.  Deferred tax liabilities, net, increased $482.6 million from $66.5 million as of December 31, 2020 to $549.1 million as of June 30, 2021 primarily due to the Viela acquisition.  Refer to Note 4 of the Notes to Condensed Consolidated Financial Statements, for further details of this acquisition.

Other long-term liabilities.  Other long-term liabilities increased $69.8 million, from $101.7 million as of December 31, 2020 to $171.5 million as of June 30, 2021.  In October 2019, we entered into an agreement for lease relating to approximately 63,000 square feet of office space under construction in Dublin, Ireland.  In May 2021, the construction of the office was completed by the lessor and the lease became effective.  As a result, we recognized $60.9 million as a right-of-use asset and a corresponding lease liability on the condensed consolidated balance sheet.

Contractual Obligations

During the six months ended June 30, 2021, there were no material changes outside of the ordinary course of business to our contractual obligations as previously disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, except for our entry into the following commitments described below.

On June 18, 2021, we entered into a global agreement with Arrowhead for ARO-XDH, a previously undisclosed 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 in July 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 products. Refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for further details.

On March 15, 2021, we completed the acquisition of 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.  We financed the transaction through cash on hand and $1.6 billion of aggregate principal amount of term loans pursuant to our existing credit agreement.  Refer to Note 4 and Note 13 of the Notes to Condensed Consolidated Financial Statements for further details.

In July 2021, we completed the purchase of a drug product manufacturing facility from EirGen Pharma Limited, a subsidiary of OPKO Health, Inc., based in Waterford, Ireland for an upfront cash payment of $64.8 million.  See Note 19 of the Notes to the Condensed Consolidated Financial Statements for further details.

In October 2019, we entered into an agreement for lease relating to approximately 63,000 square feet of office space under construction in Dublin, Ireland.  In May 2021, the construction of the office was completed by the lessor and the lease became effective.  As a result, we recognized $60.9 million of a lease liability on the condensed consolidated balance sheet.  The lease is due to expire in May 2041.  Refer to Note 14 of the Notes to the Condensed Consolidated Financial Statements, for further details.


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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.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 six months ended June 30, 2021, 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 ended December 31, 2020.

OFF-BALANCE SHEET ARRANGEMENTS

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.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, which include potential losses arising from adverse changes in market rates and prices, such as interest rates and foreign exchange fluctuations.  We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk.  We are subject to interest rate fluctuation exposure through our borrowings under our Credit Agreement and our investment in money market accounts which bear a variable interest rate.  Our approximately $418.0 million aggregate principal amount of senior secured term loans borrowed under our Credit Agreement in December 2019, or the December 2019 Term Loans, and loans under our incremental revolving credit facility, or Revolving Credit Facility, bear interest, at our option, at a rate equal to the London Inter-Bank Offered Rate, or LIBOR, plus 2.25% per annum (subject to a 0.00% LIBOR floor), or the adjusted base rate plus 1.25% per annum with a step-down to LIBOR plus 2.00% per annum or the adjusted base rate plus 1.00% per annum at the time our leverage ratio is less than or equal to 2.00 to 1.00.  The adjusted base rate is defined as the greatest of (a) LIBOR (using one-month interest period) plus 1.00%, (b) the prime rate, (c) the federal funds rate plus 0.50%, and (d) 1.00%.  Our December 2019 Term Loans are based on LIBOR.  The one-month LIBOR rate as of July 19, 2021, which was the most recent date the interest rate on the December 2019 Term Loans was fixed, was 0.13%, and as a result, the interest rate on our December 2019 Term Loans is currently 2.38% per annum.  As of June 30, 2021, the Revolving Credit Facility was undrawn.  Our $1.6 billion aggregate principal amount of senior secured term loans borrowed under our Credit Agreement in March 2021, or the Incremental Loans, bear interest, at our option, at a rate equal to LIBOR, plus 2.00% per annum (subject to a 0.50% LIBOR floor), or the adjusted base rate plus 1.00% per annum with a step-down to LIBOR plus 1.75% per annum or the adjusted base rate plus 0.75% per annum at the time our leverage ratio is less than or equal to 2.00 to 1.00.  Our Incremental Loans are based on LIBOR.  The one-month LIBOR rate as of July 19, 2021, which was the most recent date the interest rate on the Incremental Loans was fixed, was 0.13%, and as a result, the interest rate on our Incremental Loans is currently 2.50% per annum.  Because the United Kingdom Financial Conduct Authority, which regulates LIBOR, intends to phase out the use of LIBOR by the end of 2021, future borrowings under our Credit Agreement could be subject to reference rates other than LIBOR.

An increase in the LIBOR of 100 basis points above the current LIBOR rate would increase our interest expense related to the Credit Agreement by $14.2 million per year.

The goals of our investment policy are to preserve capital, fulfill liquidity needs and maintain fiduciary control of cash.  To achieve our goal of maximizing income without assuming significant market risk, we maintain our excess cash and cash equivalents in money market funds.  Because of the short-term maturities of our cash equivalents, we do not believe that a decrease in interest rates would have any material negative impact on the fair value of our cash equivalents.

Foreign Currency Risk.  Our purchase costs of TEPEZZA drug substance and ACTIMMUNE inventory are principally denominated in Euros and are subject to foreign currency risk.  In addition, we are obligated to pay certain milestones and a royalty on sales of TEPEZZA to Roche in Swiss Francs, which obligations are subject to foreign currency risk.  We have contracts relating to RAVICTI, QUINSAIR and PROCYSBI for sales in Canada which sales are subject to foreign currency risk.  We also incur certain operating expenses in currencies other than the U.S. dollar in relation to our Irish operations and foreign subsidiaries.  Therefore, we are subject to volatility in cash flows due to fluctuations in foreign currency exchange rates, particularly changes in the Euro and the Swiss Franc.


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Inflation Risk.  We do not believe that inflation has had a material impact on our business or results of operations during the periods for which the condensed consolidated financial statements are presented in this report.

Credit Risk.  Historically, our accounts receivable balances have been highly concentrated with a select number of customers, consisting primarily of large wholesale pharmaceutical distributors who, in turn, sell the medicines to pharmacies, hospitals and other customers.  As of June 30, 2021 and December 31, 2020, our top four customers accounted for approximately 92% and 93%, respectively, of our total outstanding accounts receivable balances.          

 


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ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  As required by paragraph (b) of Rules 13a-15 and 15d-15 promulgated under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e).  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2021, the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting.  As discussed above, we completed the Viela acquisition on March 15, 2021.  The results of operations of the acquired Viela business are included in our results of operations beginning on March 15, 2021.  We are currently in the process of evaluating and integrating Viela’s historical internal controls over financial reporting with ours.  

During the quarter ended June 30, 2021, there have been no material changes to our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f), that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II.  OTHER INFORMATION

 

 

For a description of our legal proceedings, see Note 16, Legal Proceedings, of the Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q.

 

 

ITEM 1A: RISK FACTORS

 

Risk Factors Summary

We face many risks and uncertainties, as more fully described in this section under the heading “Risk Factors.” Some of these risks and uncertainties are summarized below. The summary below does not contain all of the information that may be important to you, and you should read this summary together with the more detailed discussion of these risks and uncertainties contained in “Risk Factors.”

 

The COVID-19 global pandemic has and may continue to adversely impact our business, including the commercialization of our medicines, our supply chain, our clinical trials, our liquidity and access to capital markets and our business development activities.

 

Our ability to generate revenues from our medicines is subject to attaining significant market acceptance among physicians, patients and healthcare payers.

 

Our future prospects are highly dependent on our ability to successfully develop and execute commercialization strategies for each of our medicines.  Failure to do so would adversely impact our financial condition and prospects.

 

In order to increase adoption and sales of our medicines, we will need to continue developing our commercial organization as well as recruit and retain qualified sales representatives.

 

Coverage and reimbursement may not be available, or reimbursement may be available at only limited levels, for our medicines, which could make it difficult for us to sell our medicines profitably or to successfully execute planned medicine price increases.

 

Our medicines are subject to extensive regulation, and we may not obtain additional regulatory approvals for our medicines.

 

We may be subject to penalties and litigation and large incremental expenses if we fail to comply with regulatory requirements or experience problems with our medicines.

 

We rely on third parties to manufacture commercial supplies of all of our medicines, and we currently intend to rely, in whole or in part, on third parties to manufacture commercial supplies of any other approved medicines.  The commercialization of any of our medicines could be stopped, delayed or made less profitable if those third parties fail to provide us with sufficient quantities of medicine or fail to do so at acceptable quality levels or prices or fail to maintain or achieve satisfactory regulatory compliance.

 

We face significant competition from other biotechnology and pharmaceutical companies, including those marketing generic medicines and our operating results will suffer if we fail to compete effectively.

 

Clinical development of drugs and biologics involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

 

If we fail to develop or acquire other medicine candidates or medicines, our business and prospects would be limited.

 

We are subject to ongoing obligations and continued regulatory review by the FDA and equivalent foreign regulatory agencies, which may result in significant additional expense and significant penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our medicines.

 

We are subject to federal, state and foreign healthcare laws and regulations and implementation or changes to such healthcare laws and regulations could adversely affect our business and results of operations.

 

If we are unable to obtain or protect intellectual property rights related to our medicines and medicine candidates, we may not be able to compete effectively in our markets.

 

Risk Factors

You should consider carefully the risks described below, together with all of the other information included in this report, and in our other filings with the Securities and Exchange Commission, or SEC, before deciding whether to invest in or continue to hold our ordinary shares.  The risks described below are all material risks currently known, expected or reasonably foreseeable by us.  If any of these risks actually occurs, our business, financial condition, results of operations or cash flow could be seriously harmed.  This could cause the trading price of our ordinary shares to decline, resulting in a loss of all or part of your investment.

The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes, including any material changes, from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC.

 


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Risks Related to Our Business and Industry

The COVID-19 global pandemic has and may continue to adversely impact our business, including the commercialization of our medicines, our supply chain, our clinical trials, our liquidity and access to capital markets and our business development activities.*

On March 11, 2020, the World Health Organization made the assessment that a novel strain of coronavirus, which causes the COVID-19 disease, was a pandemic.  The President of the United States declared the COVID-19 pandemic a national emergency and many states and municipalities in the United States took aggressive actions to reduce the spread of the disease, including limiting non-essential gatherings of people, ceasing all non-essential travel, ordering certain businesses and government agencies to cease non-essential operations at physical locations and issuing “shelter-in-place” orders which direct individuals to shelter at their places of residence (subject to limited exceptions).  Similarly, the Irish government has limited gatherings of people and encouraged employees to work from their homes, and may implement more aggressive policies in the future.  In recent months, vaccines and treatments have enabled a resumption to more normal business practices and initiatives in many countries, including the United States and Ireland.  Restrictions in response to COVID-19, including new variants of the virus, may continue to fluctuate in U.S. states and other geographies and we cannot guarantee that additional U.S. states that have previously reduced restrictions will not reimplement them or that other states will reduce restrictions in the near-term.  The effects of government actions and our policies and those of third parties to reduce the spread of COVID-19 may negatively impact productivity and our ability to market and sell our medicines, cause disruptions to our supply chain and ongoing and future clinical trials and impair our ability to execute our business development strategy.  These and other disruptions in our operations and the global economy could negatively impact our business, operating results and financial condition.

The commercialization of our medicines has been and may continue to be adversely impacted by COVID-19 and actions taken to slow its spread.  For example, patients have postponed visits to healthcare provider facilities, certain healthcare providers have temporarily closed their offices or are restricting patient visits, healthcare provider employees may become generally unavailable and there could be disruptions in the operations of payers, distributors, logistics providers and other third parties that are necessary for our medicines to be prescribed, reimbursed and administered to patients.  In March 2020, we transitioned our sales force to a virtual model such that they no longer had in-person interactions with healthcare professionals and while we have been working on ways to re-engage patients and physicians as certain U.S. states have started to reduce restrictions, the virtual model is still being used.  While we have attempted to maintain the effectiveness of our sales and marketing efforts in the virtual model, it may not be as effective as in-person interactions in terms of conveying key information about our medicines or aiding physicians and their staff in prescribing and helping their patients obtain appropriate reimbursement for our medicines.  Many physicians, in particular in primary care practices that prescribe our inflammation segment medicines, have reduced their operations in light of COVID-19, including delaying patient visits and writing new prescriptions, and this has negatively impacted sales in our inflammation segment.  Similarly, many patients have deferred non-essential visits to healthcare providers, which has had a negative impact on prescriptions being written and filled.  For example, due to reduced willingness of patients to visit physician offices and infusion centers, sales of KRYSTEXXA have been negatively impacted, and this impact may continue in future quarters until healthcare activities and patient visits return to normal levels.  In addition, while we experienced a much higher number of new patients in 2020 for TEPEZZA than our initial estimates, the impact from COVID-19 slowed the generation of patient enrollment forms for TEPEZZA, which drive new patient starts, and this impact may continue following the recent end of the TEPEZZA supply disruption.  It is also possible that a prolonged period of “shelter-in-place” orders and social distancing behaviors and the associated reduction of physician office visits could force various healthcare practices to permanently close or to consolidate with larger practices or healthcare groups, which could cause us to lose previously-established physician relationships.  We cannot predict how long the COVID-19 pandemic will continue to negatively impact sales of our medicines and we expect that even after government-mandated restrictions are lifted, our sales force activities, healthcare provider operations and patients’ willingness to visit healthcare facilities will continue to be limited. We also cannot predict how effective our virtual patient, physician and partner support initiatives will be with respect to marketing and supporting the administration and reimbursement of our medicines, or when we will be able to resume other in-person sales and marketing activities.


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Quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at third-party manufacturing facilities upon which we rely, or the availability or cost of materials, which could disrupt the supply chain for our medicines.  In particular, some of our suppliers of certain materials used in the production of our medicines are located in regions that have been subject to COVID-19-related actions and policies that limit the conduct of normal business operations.  To the extent our suppliers and service providers are unable to comply with their obligations under our agreements with them or they are otherwise unable to deliver or are delayed in delivering goods and services to us due to COVID-19, our ability to continue meeting commercial demand for our medicines in the United States or advancing development of our medicine candidates may become impaired.  For example, On December 17, 2020, we announced that we expected a short-term disruption in TEPEZZA supply as a result of recent U.S. government-mandated COVID-19 vaccine production pursuant to the Defense Production Act of 1950, or DPA, that have dramatically restricted capacity available for the production of TEPEZZA at our drug product contract manufacturer, Catalent Indiana, LLC, or Catalent.  In March 2021, the FDA approved a prior approval supplement to the TEPEZZA Biologics License Application, or BLA (which was previously approved in January 2020), giving us authorization to manufacture more TEPEZZA drug product resulting in an increased number of vials with each manufacturing slot.  We commenced resupply of TEPEZZA to the market in April 2021 and our second quarter 2021 net sales exceeded our expectations due to strong demand and relaunch execution.  However, our ability to continue TEPEZZA supply is dependent on future committed manufacturing slots for TEPEZZA not being cancelled and being run successfully, which could be impacted by additional government-mandated COVID-19 vaccine production orders and other risks associated with our reliance on our third-party manufacturers discussed below.  If we were to experience another disruption of TEPEZZA supply, it would have a material adverse effect on our operating results and ability to achieve our financial projections in 2021.  Refer to the Impact of COVID-19 section in Item 2 of this Quarterly Report on Form 10-Q for further information.  At this time, we consider the inventories on hand of our medicines to be sufficient to meet our commercial requirements.

Our clinical trials may be affected by COVID-19. As described in the Impact of COVID-19 section in Item 2 of this Quarterly Report on Form 10-Q, our clinical trials for TEPEZZA have been delayed due to the impact of the TEPEZZA supply disruption at Catalent.  In addition, clinical site initiation and patient enrollment may be delayed due to 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 precaution against contracting COVID-19.  Further, some patients may not be able or willing to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services.  Some clinical sites in the United States 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.

The spread of COVID-19 and actions taken to reduce its spread may also materially affect us economically.  As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility and disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability.  If the equity and credit markets deteriorate, it may make any additional debt or equity financing more difficult, more costly or more dilutive.  While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, there could be a significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity and financial position or our business development activities.

COVID-19 continues to rapidly evolve. The extent to which COVID-19 may impact the commercialization of our medicines, our supply chain, our clinical trials, our access to capital and our business development activities, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the pandemic, the duration of the pandemic and the efforts by governments and business to contain it, business closures or business disruptions and the impact on the economy and capital markets.

Our ability to generate revenues from our medicines is subject to attaining significant market acceptance among physicians, patients and healthcare payers.*

Our current medicines, and other medicines or medicine candidates that we may develop or acquire, may not attain market acceptance among physicians, patients, healthcare payers or the medical community.  Some of our medicines, in particular TEPEZZA and UPLIZNA, have not been on the market for an extended period of time, which subjects us to numerous risks as we attempt to increase our market share.  We believe that the degree of market acceptance and our ability to generate revenues from our medicines will depend on a number of factors, including:

 

 

timing of market introduction of our medicines as well as competitive medicines;

 

efficacy and safety of our medicines;

 

continued projected growth of the markets in which our medicines compete;

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the extent to which physicians diagnose and treat the conditions that our medicines are approved to treat;

 

prevalence and severity of any side effects;

 

if and when we are able to obtain regulatory approvals for additional indications for our medicines;

 

acceptance by patients, physicians and applicable specialists;

 

availability of, and ability to maintain, coverage and adequate reimbursement and pricing from government and other third-party payers;

 

potential or perceived advantages or disadvantages of our medicines over alternative treatments, including cost of treatment and relative convenience and ease of administration;

 

strength of sales, marketing and distribution support;

 

the price of our medicines, both in absolute terms and relative to alternative treatments;

 

impact of past and limitation of future medicine price increases;

 

our ability to maintain a continuous supply of our medicines for commercial sale;

 

the effect of current and future healthcare laws;

 

the extent and duration of the COVID-19 pandemic, including the extent to which physicians and patients delay visits or writing or filling prescriptions for our medicines, the extent to which operations of healthcare facilities, including infusion centers, are reduced and the length of time and the extent to which our sales force must continue operating in a virtual model;

 

the performance of third-party distribution partners, over which we have limited control; and

 

medicine labeling or medicine insert requirements of the U.S. Food and Drug Administration, or FDA, or other regulatory authorities.

With respect to TEPEZZA, sales will depend on market acceptance and adoption by physicians and healthcare payers, as well as the ability and willingness of physicians who do not have in-house infusion capability to refer patients to infusion sites of care.  With respect to KRYSTEXXA, our ability to grow sales will be affected by the success of our sales, marketing and clinical strategies, which are intended to expand the patient population and usage of KRYSTEXXA.  This includes our marketing efforts in nephrology and our studies designed to improve the response rate to KRYSTEXXA, to evaluate a shorter infusion time, and to evaluate the use of KRYSTEXXA in kidney transplant patients.  With respect to RAVICTI, which is approved to treat a very limited patient population, our ability to grow sales will depend in large part on our ability to transition urea cycle disorder, or UCD, patients from BUPHENYL or generic equivalents, which are comparatively much less expensive, to RAVICTI and to educate patients and physicians on the benefits of continuing RAVICTI therapy once initiated.  With respect to PROCYSBI, which is also approved to treat a very limited patient population, our ability to grow sales will depend in large part on our ability to transition patients from the first-generation immediate-release cysteamine therapy to PROCYSBI, to identify additional patients with nephropathic cystinosis and to educate patients and physicians on the benefits of continuing therapy once initiated.  With respect to ACTIMMUNE, while it is the only FDA-approved treatment for chronic granulomatous disease, or CGD, and severe, malignant osteopetrosis, or SMO, they are very rare conditions and, as a result, our ability to grow ACTIMMUNE sales will depend on our ability to identify additional patients with such conditions and educate patients and physicians on the benefits of continuing treatment once initiated.  With respect to UPLIZNA, sales will depend on market acceptance and adoption by physicians and healthcare payers, as well as the ability and willingness of physicians who do not have in-house infusion capability to refer patients to infusion sites of care.  With respect to each of PENNSAID 2% w/w, or PENNSAID 2%, RAYOS and DUEXIS, their higher cost compared to the generic or branded forms of their active ingredients alone may limit adoption by physicians, patients and healthcare payers.  With respect to DUEXIS, if physicians remain unaware of, or do not otherwise believe in, the benefits of combining gastrointestinal protective agents with NSAIDs, our market opportunity will be limited.  If our current medicines or any other medicine that we may seek approval for, or acquire, fail to attain market acceptance, we may not be able to generate significant revenue to sustain profitability, which would have a material adverse effect on our business, results of operations, financial condition and prospects (including, possibly, the value of our ordinary shares).


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Our future prospects are highly dependent on our ability to successfully develop and execute commercialization strategies for each of our medicines.  Failure to do so would adversely impact our financial condition and prospects.*

A substantial majority of our resources are focused on the commercialization of our current medicines.  Our ability to generate significant medicine revenues and to achieve commercial success in the near-term will initially depend almost entirely on our ability to successfully commercialize these medicines in the United States.  With respect to our rare disease medicines, TEPEZZA, KRYSTEXXA, RAVICTI, PROCYSBI, ACTIMMUNE and UPLIZNA, our commercialization strategy includes efforts to increase awareness of the rare conditions that each medicine is designed to treat, enhancing efforts to identify target patients and in certain cases pursue opportunities for label expansion and more effective use through clinical trials, as well as opportunities for commercialization outside of the United States.  Our comprehensive post-launch commercial strategy for TEPEZZA aims to enable more thyroid eye disease, or TED, patients to benefit from TEPEZZA.  We are doing this by: (i) facilitating continued TEPEZZA uptake in the treatment of acute and chronic TED through continued promotion of TEPEZZA to treating physicians; (ii) continuing to develop the TED market by increasing physician awareness of the disease severity, the urgency to diagnose and treat it, as well as the benefits of treatment with TEPEZZA; (iii) driving accelerated disease identification and time to treatment through our digital and broadcast marketing campaigns; (iv) enhancing the patient journey with our high-touch, patient-centric model as well as support for the patient and site-of-care referral processes; and (v) expanding more timely access to TEPEZZA for TED patients.  Our strategy with respect to KRYSTEXXA includes existing rheumatology account growth, new rheumatology account growth and accelerating nephrology growth, as well as development efforts to enhance response rates through combination treatment with methotrexate and to shorten the infusion time.  With respect to RAVICTI and PROCYSBI, our strategy includes accelerating the transition of patients from first-generation therapies, increasing the diagnosis of the associated rare conditions through patient and physician outreach; and increasing compliance rates.  Our strategy with respect to ACTIMMUNE, includes increasing awareness and diagnosis of chronic granulomatous disease and increasing compliance rates.  With respect to our strategy for UPLIZNA, which leverages the successful strategies we have employed with TEPEZZA and KRYSTEXXA, our aim is to (i) generate greater demand for the medicine by investing in the commercial and clinical support infrastructure; (ii) drive physician awareness of the benefits of UPLIZNA for the treatment of neuromyelitis optica spectrum disorder, or NMOSD, and what differentiates UPLIZNA from other medicines by generating additional trial data analyses and clinical evidence; and (iii) optimize timely access for patients to UPLIZNA with best-in-class patient services, infusion site-of-care referral processes and reimbursement support services.  A key component of the strategy is to complete a comprehensive assessment of the current overall commercial and clinical support infrastructure for UPLIZNA to ensure optimal support for the medicine.

We are focusing a significant portion of our commercial activities and resources on TEPEZZA, and we believe our ability to grow our long-term revenues, and a significant portion of the value of our company, relates to our ability to successfully commercialize TEPEZZA in the United States.  As a newly launched medicine for a disease that had no previously-approved treatments, successful commercialization of TEPEZZA is subject to many risks.  There are numerous examples of unsuccessful product launches and failures to meet high expectations of market potential, including by pharmaceutical companies with more experience and resources than us.  While we have established our commercial team and U.S. sales force, we will need to further train and develop the team in order to successfully commercialize TEPEZZA.  There are many factors that could cause commercialization of TEPEZZA to be unsuccessful, including a number of factors that are outside our control.  Because no medicine has previously been approved by the FDA for the treatment of TED, it is especially difficult to estimate TEPEZZA’s market potential or the time it will take to increase patient and physician awareness of TED and change current treatment paradigms.  For example, shortly after the launch of TEPEZZA, we transitioned our sales force to a virtual model in light of the COVID-19 pandemic, which, combined with physicians generally reducing their own availability, has made it more challenging to execute on our strategy to educate physicians about TEPEZZA and the treatment of TED.  In addition, some physicians that are potential prescribers of TEPEZZA do not have the necessary infusion capabilities to administer the medicine and may not otherwise be able or willing to refer their patients to third-party infusion centers, which may discourage them from treating their patients with TEPEZZA.  The commercial success of TEPEZZA depends on the extent to which patients and physicians accept and adopt TEPEZZA as a treatment for TED.  For example, if the patient population suffering from TED is smaller than we estimate, if it proves difficult to identify TED patients or educate physicians as to the availability and potential benefits of TEPEZZA, or if physicians are unwilling to prescribe or patients are unwilling to take TEPEZZA, the commercial potential of TEPEZZA will be limited.  In addition, the prior disruption in TEPEZZA supply resulted in existing patients stopping therapy and an inability of new patients to initiate therapy.  We began resupplying TEPEZZA to the market in April 2021, and we cannot be certain how many prior TEPEZZA patients will re-initiate therapy or whether or when growth in TEPEZZA adoption will return to levels seen prior to the supply disruption.  We also have limited information regarding how physicians, patients and payers will respond to the pricing of TEPEZZA.  Physicians may not prescribe TEPEZZA and patients may be unwilling to use TEPEZZA if coverage is not provided or reimbursement is inadequate to cover a significant portion of the cost.  Thus, significant uncertainty remains regarding the commercial potential of TEPEZZA.  If the continued commercialization of TEPEZZA becomes unsuccessful or perceived as disappointing, the price of our ordinary shares could decline significantly and long-term success of the medicine and our company could be harmed.

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With respect to our inflammation segment medicines, PENNSAID 2% and DUEXIS, our strategy has included entering into rebate agreements with pharmacy benefit managers, or PBMs, for certain of our inflammation segment medicines where we believe the rebates and costs justify expanded formulary access for patients and ensuring patient assistance to these drugs when prescribed through our HorizonCares program.  However, we cannot guarantee that we will be able to secure additional rebate agreements on commercially reasonable terms, that expected volume growth will sufficiently offset the rebates and fees paid to PBMs or that our existing agreements with PBMs will have the intended impact on formulary access.  In addition, as the terms of our existing agreements with PBMs expire, we may not be able to renew the agreements on commercially favorable terms, or at all.  For each of our inflammation segment medicines, we expect that our commercial success will depend on our sales and marketing efforts in the United States, reimbursement decisions by commercial payers, the expense we incur through our patient assistance program for fully bought down contracts and the rebates we pay to PBMs, as well as the impact of numerous efforts at federal, state and local levels to further reduce reimbursement and net pricing of inflammation segment medicines.

Our strategy for RAYOS in the United States is to focus on the rheumatology indications approved for RAYOS, including our collaboration with the Alliance for Lupus Research, to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus, or SLE, patients.

If any of our commercial strategies are unsuccessful or we fail to successfully modify our strategies over time due to changing market conditions, our ability to increase market share for our medicines, grow revenues and to sustain profitability will be harmed.

We are dependent on wholesale distributors for distribution of our products in the United States and, accordingly, our results of operations could be adversely affected if they encounter financial difficulties.*

During the six months ended June 30, 2021, four wholesale distributors accounted for substantially all of our sales in the United States.  If one of our significant wholesale distributors encounters financial or other difficulties, such distributor may decrease the amount of business that it does with us, and we may be unable to collect all the amounts that the distributor owes on a timely basis or at all, which could negatively impact our business and results of operations.

In order to increase adoption and sales of our medicines, we will need to continue developing our commercial organization as well as recruit and retain qualified sales representatives.*

Part of our strategy is to continue to build a biotech company to successfully execute the commercialization of our medicines in the U.S. market, and in selected markets outside the United States where we have commercial rights.  We may not be able to successfully commercialize our medicines in the United States or in any other territories where we have commercial rights.  In order to commercialize any approved medicines, we must continue to build our sales, marketing, distribution, managerial and other non-technical capabilities.  As of June 30, 2021, we had approximately 475 sales representatives in the field, consisting of approximately 260 orphan segment sales representatives and 215 inflammation segment sales representatives.  We currently have limited resources compared to some of our competitors, and the continued development of our own commercial organization to market our medicines and any additional medicines we may acquire will be expensive and time-consuming.  We also cannot be certain that we will be able to continue to successfully develop this capability.

As we continue to add medicines through development efforts and acquisition transactions and execute on our international expansion initiatives, the members of our sales force may have limited experience promoting certain of our medicines.  To the extent we employ an acquired entity’s sales forces to promote acquired medicines, we may not be successful in continuing to retain these employees and we otherwise will have limited experience marketing these medicines under our commercial organization.  In addition, none of the members of our sales force have promoted TEPEZZA or any other medicine for the treatment of TED prior to the launch of TEPEZZA and prior to completing the acquisition of Viela Bio, Inc., or Viela, in March 2021, we had no experience as an organization commercializing UPLIZNA.  We are required to expend significant time and resources to train our sales force to be credible and able to educate physicians on the benefits of prescribing and pharmacists dispensing our medicines.  In addition, we must train our sales force to ensure that a consistent and appropriate message about our medicines is being delivered to our potential customers.  Our sales representatives may also experience challenges promoting multiple medicines when we call on physicians and their office staff.  We have experienced, and may continue to experience, turnover of the sales representatives that we hired or will hire, requiring us to train new sales representatives.  If we are unable to recruit and retain qualified personnel outside of the United States, we may not be able to execute our global expansion strategy successfully.  If we are unable to effectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate physicians about the benefits of our medicines and their proper administration and label indication, as well as our patient assistance programs, our efforts to successfully commercialize our medicines could be put in jeopardy, which could have a material adverse effect on our financial condition, share price and operations.  For example, we have had to train our sales force to operate in a virtual environment due to the COVID-19 pandemic and are continuing to learn and implement new strategies and techniques to promote our medicines without the benefit of in-person interactions with healthcare providers and their staff.  We may not be successful in finding effective ways to promote our medicines remotely or our competitors may be more successful than we are at adapting to virtual marketing.

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As a result of the evolving role of various constituents in the prescription decision making process, we focus on hiring sales representatives for our inflammation segment medicines with successful business to business experience.  For example, we have faced challenges due to pharmacists switching a patient’s intended prescription from DUEXIS to a generic or over-the-counter brand of their active ingredients, despite such substitution being off-label in the case of DUEXIS.  We have faced similar challenges for PENNSAID 2% and RAYOS with respect to generic brands.  While we believe the profile of our representatives is suited for this environment, we cannot be certain that our representatives will be able to successfully protect our market for PENNSAID 2%, DUEXIS and RAYOS or that we will be able to continue attracting and retaining sales representatives with our desired profile and skills.  We will also have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain commercial personnel.  To the extent we rely on additional third parties to commercialize any approved medicines, we may receive less revenue than if we commercialized these medicines ourselves.  In addition, we may have little or no control over the sales efforts of any third parties involved in our commercialization efforts.  In the event we are unable to successfully develop and maintain our own commercial organization or collaborate with a third-party sales and marketing organization, we may not be able to commercialize our medicines and medicine candidates and execute on our business plan.

Coverage and reimbursement may not be available, or reimbursement may be available at only limited levels, for our

medicines, which could make it difficult for us to sell our medicines profitably or to successfully execute planned medicine price increases.*

Market acceptance and sales of our medicines will depend in large part on global coverage and reimbursement policies and may be affected by future healthcare reform measures, both in the United States and other key international markets.  Successful commercialization of our medicines will depend in part on the availability of governmental and third-party payer reimbursement for the cost of our medicines.  Government health administration authorities, private health insurers and other organizations generally provide reimbursement for healthcare.  In particular, in the United States, private health insurers and other third-party payers often provide reimbursement for medicines and services based on the level at which the government (through the Medicare or Medicaid programs) provides reimbursement for such treatments.  In the United States, the European Union, or EU, and other significant or potentially significant markets for our medicines and medicine candidates, government authorities and third-party payers are increasingly attempting to limit or regulate the price of medicines and services, particularly for new and innovative medicines and therapies, which has resulted in lower average selling prices.  Further, the increased scrutiny of prescription drug pricing practices and emphasis on managed healthcare in the United States and on country and regional pricing and reimbursement controls in the EU and other significant or potentially significant markets will put additional pressure on medicine pricing, reimbursement and usage, which may adversely affect our medicine sales and results of operations.  These pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general.  These pressures may create negative reactions to any medicine price increases, or limit the amount by which we may be able to increase our medicine prices, which may adversely affect our medicine sales and results of operations.

We expect to experience pricing pressures in connection with the sale of our medicines due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals relating to outcomes and quality.  For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization and increased the types of entities eligible for the federal 340B drug discount program.  As concerns continue to grow over the need for tighter oversight, there remains the possibility that the Health Resources and Services Administration or another agency under the U.S. Department of Health and Human Services, or HHS, will propose a similar regulation or that Congress will explore changes to the 340B program through legislation.  For example, a bill was introduced in 2018 that would require hospitals to report their low-income utilization of the program.  Further, the Centers for Medicare & Medicaid Services, or CMS, issued a final rule in 2018 that implemented civil monetary penalties for manufacturers who exceeded the ceiling price methodology for a covered outpatient drug when selling to a 340B covered entity. Pursuant to the final rule, after January 1, 2019, manufacturers must calculate 340B program ceiling prices on a quarterly basis.  Moreover, manufacturers could be subject to a $5,000 penalty for each instance where they knowingly and intentionally overcharge a covered entity under the 340B program.  With respect to KRYSTEXXA, the “additional rebate” methodology of the 340B pricing rules, as applied to the historical pricing of KRYSTEXXA both before and after we acquired the medicine, have resulted in a 340B ceiling price of one penny.  A material portion of KRYSTEXXA prescriptions (normally in the range of low to mid-teens percent) are written by healthcare providers that are eligible for 340B drug pricing and therefore the reduction in 340B pricing to a penny has negatively impacted our net sales of KRYSTEXXA.  The CMS had also finalized a proposal in calendar years 2018, 2019 and 2020 that would revise the Medicare hospital outpatient prospective payment system by creating a new, significantly reduced reimbursement methodology for drugs purchased under the 340B program for Medicare patients at hospital and other settings.  These reductions were upheld by the U.S. Court of Appeals for the D.C. Circuit in July 2020, and it is unclear whether this matter will be subject to further litigation.  Further, the CMS final rule for calendar year 2021 continues these reductions for drugs acquired through the 340B program.

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Patients are unlikely to use our medicines unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our medicines.  Third-party payers may limit coverage to specific medicines on an approved list, also known as a formulary, which might not include all of the FDA-approved medicines for a particular indication.  Moreover, a third-party payer’s decision to provide coverage for a medicine does not imply that an adequate reimbursement rate will be approved.  Additionally, one third-party payer’s decision to cover a particular medicine does not ensure that other payers will also provide coverage for the medicine, or will provide coverage at an adequate reimbursement rate.  Even though we have contracts with some PBMs in the United States, that does not guarantee that they will perform in accordance with the contracts, nor does that preclude them from taking adverse actions against us, which could materially adversely affect our operating results.  In addition, the existence of such PBM contracts does not guarantee coverage by such PBM’s contracted health plans or adequate reimbursement to their respective providers for our medicines.  For example, some PBMs have placed some of our medicines on their exclusion lists from time to time, which has resulted in a loss of coverage for patients whose healthcare plans have adopted these PBM lists.  Additional healthcare plan formularies may also exclude our medicines from coverage due to the actions of certain PBMs, future price increases we may implement, our use of the HorizonCares program or other free medicine programs whereby we assist qualified patients with certain out-of-pocket expenditures for our medicine, including donations to patient assistance programs offered by charitable foundations, or any other co-pay programs, or other reasons.  If our strategies to mitigate formulary exclusions are not effective, these events may reduce the likelihood that physicians prescribe our medicines and increase the likelihood that prescriptions for our medicines are not filled.

In light of such policies and the uncertainty surrounding proposed regulations and changes in the coverage and reimbursement policies of governments and third-party payers, we cannot be sure that coverage and reimbursement will be available for any of our medicines in any additional markets or for any other medicine candidates that we may develop.  Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our medicines.  If coverage and reimbursement are not available or are available only at limited levels, we may not be able to successfully commercialize our medicines.

There may be additional pressure by payers, healthcare providers, state governments, federal regulators and Congress, to use generic drugs that contain the active ingredients found in our medicines or any other medicine candidates that we may develop or acquire.  If we fail to successfully secure and maintain coverage and adequate reimbursement for our medicines or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our medicines and expected revenue and profitability which would have a material adverse effect on our business, results of operations, financial condition and prospects.  

We may also experience pressure from payers as well as state and federal government authorities concerning certain promotional approaches that we may implement such as our HorizonCares program or any other co-pay programs.  Certain state and federal enforcement authorities and members of Congress have initiated inquiries about co-pay assistance programs.  Some state legislatures have implemented or have been considering implementing laws to restrict or ban co-pay coupons for branded drugs.  For example, legislation was signed into law in California that would limit the use of co-pay coupons in cases where a lower cost generic drug is available and if individual ingredients in combination therapies are available over the counter at a lower cost.  It is possible that similar legislation could be proposed and enacted in additional states.  Additionally, numerous organizations, including pharmaceutical manufacturers, have been subject to ongoing litigation, enforcement actions and settlements related to their patient assistance programs and support.  If we are unsuccessful with our HorizonCares program or any other co-pay programs, or we alternatively are unable to secure expanded formulary access through additional arrangements with PBMs or other payers, we would be at a competitive disadvantage in terms of pricing versus preferred branded and generic competitors.  We may also experience financial pressure in the future which would make it difficult to support investment levels in areas such as managed care contract rebates, HorizonCares and other access tools.

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Our medicines are subject to extensive regulation, and we may not obtain additional regulatory approvals for our medicines.*

The clinical development, manufacturing, labeling, packaging, storage, recordkeeping, advertising, promotion, export, marketing and distribution and other possible activities relating to our medicines and our medicine candidates are, and will be, subject to extensive regulation by the FDA and other regulatory agencies.  Failure to comply with FDA and other applicable regulatory requirements may, either before or after medicine approval, subject us to administrative or judicially imposed sanctions.

To market any drugs or biologics outside of the United States, we and current or future collaborators must comply with numerous and varying regulatory and compliance related requirements of other countries.  For example, we are pursuing a global expansion strategy, which includes bringing TEPEZZA to patients with TED outside of the United States, including Japan where we are engaging with the Pharmaceuticals and Medical Devices Agency, or PMDA, and the Japanese medical community.  Furthermore, we are investing in our European infrastructure to support the potential first-quarter 2022 approval of UPLIZNA by the European Medicines Agency, or EMA, for NMOSD, which has been granted orphan designation by the European Commission, or EC.  In addition, on March 24, 2021, we announced that our strategic partner, Mitsubishi Tanabe Pharma Corporation, or MTPC, had received manufacturing and marketing approval of UPLIZNA for NMOSD in Japan. Approval procedures vary among countries and can involve additional medicine testing and additional administrative review periods, including obtaining reimbursement and pricing approval in select markets.  The time required to obtain approval in other countries might differ from that required to obtain FDA approval.  The regulatory approval process in other countries may include all of the risks associated with FDA approval as well as additional, presently unanticipated, risks.  Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others.

Applications for regulatory approval, including a marketing authorization application, or MAA, for marketing new drugs in the European Economic Area (which consists of the Member States of the EU, Iceland, Liechtenstein and Norway), or EEA, must be supported by extensive clinical and pre-clinical data, as well as extensive information regarding chemistry, manufacturing and controls, or CMC, to demonstrate the safety and effectiveness of the applicable medicine candidate.  The number and types of pre-clinical studies and clinical trials that will be required for regulatory approval varies depending on the medicine candidate, the disease or the condition that the medicine candidate is designed to target and the regulations applicable to any particular medicine candidate.  Despite the time and expense associated with pre-clinical and clinical studies, failure can occur at any stage, and we could encounter problems that cause us to repeat or perform additional pre-clinical studies, CMC studies or clinical trials.  Regulatory authorities could delay, limit or deny approval of a medicine candidate for many reasons, including because they:

 

may not deem a medicine candidate to be adequately safe and effective;

 

 

may not find the data from pre-clinical studies, CMC studies and clinical trials to be sufficient to support a claim of safety and efficacy;

 

 

may interpret data from pre-clinical studies, CMC studies and clinical trials significantly differently than we do;

 

 

may not approve the manufacturing processes or facilities associated with our medicine candidates;

 

 

may conclude that we have not sufficiently demonstrated long-term stability of the formulation for which we are seeking marketing approval;

 

 

may change approval policies (including with respect to our medicine candidates’ class of drugs) or adopt new regulations; or

 

 

may not accept a submission due to, among other reasons, the content or formatting of the submission.

Even if we believe that data collected from our pre-clinical studies, CMC studies and clinical trials of our medicine candidates are promising and that our information and procedures regarding CMC are sufficient, our data may not be sufficient to support marketing approval by regulatory authorities, or regulatory interpretation of these data and procedures may be unfavorable.  Even if approved, medicine candidates may not be approved for all indications requested and such approval may be subject to limitations on the indicated uses for which the medicine may be marketed, restricted distribution methods or other limitations.  Our business and reputation may be harmed by any failure or significant delay in obtaining regulatory approval for the sale of any of our medicine candidates.  We cannot predict when or whether regulatory approval will be obtained for any medicine candidate we develop.

The ultimate approval and commercial marketing of any of our medicines in additional indications or geographies is subject to substantial uncertainty.  Failure to gain additional regulatory approvals would limit the potential revenues and value of our medicines and could cause our share price to decline.

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Since a significant proportion of the regulatory framework in the United Kingdom, or UK, applicable to our business and our products is derived from EU directives and regulations, Brexit has materially impacted the regulatory regime with respect to the development, manufacture, importation, approval and commercialization of our products in the UK.  The regulatory changes that are a result of Brexit may also materially impact upon the development, manufacture, importation, approval and commercialization of our products in the EEA, should any development or manufacture of these products take place in the UK.

Great Britain is no longer covered by the EU’s procedures for the grant of marketing authorizations (Northern Ireland is still covered by the centralized authorization procedure which leads to a marketing authorization that is valid throughout the EEA and can participate, with certain restrictions, in the other procedures available to market a medicine in the EU).  Our medicine candidates require a separate marketing authorization for Great Britain, and it is unclear as to whether the relevant authorities in the EU and the UK are adequately prepared for the additional administrative burden caused by Brexit.  Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, could prevent us from or delay us commercializing our medicine candidates in the UK and/or the EEA and restrict our ability to generate revenue and achieve and sustain profitability.  If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the UK and/or EEA for our medicine candidates, which could significantly and materially harm our business.

Brexit may influence the attractiveness of the UK as a place to conduct clinical trials.  The EU’s regulatory environment for clinical trials is being harmonized as part of the Clinical Trial Regulation, which is due to fully apply from January 31, 2022, but it is currently unclear as to what extent the UK will seek to align its regulations with the EU.  Failure of the UK to closely align its regulations with the EU may have an effect on the cost of conducting clinical trials in the UK as opposed to other countries and/or make it harder to seek a marketing authorization for our medicine candidates in the EEA on the basis of clinical trials conducted in the UK.

In the short term there is a risk of disrupted import and export processes due to a lack of administrative processing capacity by the respective UK and EU customs agencies that may delay time-sensitive shipments and may negatively impact our product supply chain.

We may be subject to penalties and litigation and large incremental expenses if we fail to comply with regulatory requirements or experience problems with our medicines.*

Even after we achieve regulatory approvals, we are subject to ongoing obligations and continued regulatory review with respect to many operational aspects including our manufacturing processes, labeling, packaging, distribution, storage, adverse event monitoring and reporting, dispensation, advertising, promotion and recordkeeping.  These requirements include submissions of safety and other post-marketing information and reports, ongoing maintenance of medicine registration and continued compliance with current good manufacturing practices, or cGMPs, good clinical practices, or GCPs, good pharmacovigilance practice, good distribution practices and good laboratory practices, or GLPs.  If we, our medicines or medicine candidates, or the manufacturing facilities for our medicines or medicine candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

impose injunctions or restrictions on the marketing, manufacturing or distribution of a medicine, suspend or withdraw medicine approvals, revoke necessary licenses or suspend medicine reimbursement;

 

 

issue warning letters, show cause notices or untitled letters describing alleged violations, which may be publicly available;

 

 

suspend any ongoing clinical trials or delay or prevent the initiation of clinical trials;

 

 

delay or refuse to approve pending applications or supplements to approved applications we have filed;

 

 

refuse to permit drugs or precursor or intermediary chemicals to be imported or exported to or from the United States;

 

 

suspend or impose restrictions or additional requirements on operations, including costly new manufacturing quality or pharmacovigilance requirements;

 

 

seize or detain medicines or require us to initiate a medicine recall; and/or

 

 

commence criminal investigations and prosecutions.

Moreover, existing regulatory approvals and any future regulatory approvals that we obtain will be subject to limitations on the approved indicated uses and patient populations for which our medicines may be marketed, the conditions of approval, requirements for potentially costly, post-market testing and requirements for surveillance to monitor the safety and efficacy of the medicines.  Physicians nevertheless may prescribe our medicines to their patients in a manner that is inconsistent with the approved label or that is off-label.  Positive clinical trial results in any of our medicine development programs increase the risk that approved pharmaceutical forms of the same active pharmaceutical ingredients, or APIs, may be used off-label in those indications.  If we are found to have improperly promoted off-label uses of approved medicines, we may be subject to significant sanctions, civil and criminal fines and injunctions prohibiting us from engaging in specified promotional conduct.

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In addition, engaging in improper promotion of our medicines for off-label uses in the United States can subject us to false claims litigation under federal and state statutes.  These false claims statutes in the United States include the federal False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf of the federal government alleging submission of false or fraudulent claims or causing to present such false or fraudulent claims for payment by a federal program such as Medicare or Medicaid.  Growth in false claims litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay civil money penalties, settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations and be excluded from Medicare, Medicaid and other federal and state healthcare programs.

The regulations, policies or guidance of regulatory agencies may change and new or additional statutes or government regulations may be enacted that could prevent or delay regulatory approval of our medicine candidates or further restrict or regulate post-approval activities.  For example, in January 2014, the FDA released draft guidance on how drug companies can fulfill their regulatory requirements for post-marketing submission of interactive promotional media, and though the guidance provided insight into how the FDA views a company’s responsibility for certain types of social media promotion, there remains a substantial amount of uncertainty regarding internet and social media promotion of regulated medical products.  We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from pending or future legislation or administrative action, either in the United States or abroad.  If we are unable to achieve and maintain regulatory compliance, we will not be permitted to market our drugs, which would materially adversely affect our business, results of operations and financial condition.

We have rights to medicines in certain jurisdictions but have little or no control over third parties that have rights to commercialize those medicines in other jurisdictions, which could adversely affect our commercialization of these medicines.*

Following our sale of the rights to RAVICTI (i) outside of North America and Japan to Medical Need Europe AB, part of the Immedica Group, or Immedica, in December 2018 and (ii) in Japan to Immedica, Immedica has marketing and distribution rights to RAVICTI in those regions.  Following our sale of the rights to PROCYSBI in the Europe, Middle East and Africa, or EMEA, regions to Chiesi Farmaceutici S.p.A., or Chiesi, in June 2017, or the Chiesi divestiture, Chiesi has marketing and distribution rights to PROCYSBI in the EMEA regions.  MTPC has rights to the development and commercialization of UPLIZNA for NMOSD as well as other potential future indications in Japan and certain other countries in Asia.  Hansoh Pharmaceutical Group Company Limited, or Hansoh, has rights to the development and commercialization of UPLIZNA for NMOSD as well as other potential future indications in China, Hong Kong and Macau.  Miravo Healthcare (formerly known as Nuvo Pharmaceuticals Inc.), or Miravo, has retained its rights to PENNSAID 2% in territories outside of the United States.  In March 2017, Miravo announced that it had entered into an exclusive license agreement with Sayre Therapeutics PVT Ltd. to distribute, market and sell PENNSAID 2% in India, Sri Lanka, Bangladesh and Nepal, and in December 2017 Miravo announced that it had entered into a license and distribution agreement with Gebro Pharma AG for the exclusive right to register, distribute, market and sell PENNSAID 2% in Switzerland and Liechtenstein.  We have little or no control over Immedica’s activities with respect to RAVICTI outside of North America, over Chiesi’s activities with respect to PROCYSBI in the EMEA, over MTPC’s or Hansoh’s activities with respect to UPLIZNA in the certain countries in Asia,  or over Miravo’s or its existing and future commercial partners’ activities with respect to PENNSAID 2% outside of the United States even though those activities could impact our ability to successfully commercialize these medicines.  For example, Immedica or its assignees, Chiesi or its assignees, MTPC or Hansoh or their respective assignees or Miravo or its assignees can make statements or use promotional materials with respect to RAVICTI, PROCYSBI, UPLIZNA or PENNSAID 2%, respectively, outside of the United States that are inconsistent with our positioning of the medicines in the United States, and could sell RAVICTI, PROCYSBI, UPLIZNA or PENNSAID 2%, respectively, in foreign countries at prices that are dramatically lower than the prices we charge in the United States.  These activities and decisions, while occurring outside of the United States, could harm our commercialization strategy in the United States.  In addition, medicine recalls or safety issues with these medicines outside the United States, even if not related to the commercial medicine we sell in the United States, could result in serious damage to the brand in the United States and impair our ability to successfully market them.  We also rely on Immedica, Chiesi, MTPC, Hansoh and Miravo, or their assignees to provide us with timely and accurate safety information regarding the use of these medicines outside of the United States, as we have or will have limited access to this information ourselves.

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We rely on third parties to manufacture commercial supplies of all of our medicines, and we currently intend to rely, in whole or in part, on third parties to manufacture commercial supplies of any other approved medicines.  The commercialization of any of our medicines could be stopped, delayed or made less profitable if those third parties fail to provide us with sufficient quantities of medicine or fail to do so at acceptable quality levels or prices or fail to maintain or achieve satisfactory regulatory compliance.*

The facilities used by our third-party manufacturers to manufacture our medicines and medicine candidates must be approved by the applicable regulatory authorities.  We do not control the manufacturing processes of third-party manufacturers and are currently completely dependent on our third-party manufacturing partners.

We rely on AGC Biologics A/S (formerly known as CMC Biologics A/S), or AGC Biologics, as our exclusive manufacturer of the TEPEZZA drug substance and Catalent, for TEPEZZA drug product.  On December 17, 2020, we announced that we expected a short-term disruption in TEPEZZA supply as a result of recent U.S. government-mandated COVID-19 vaccine production orders pursuant to the DPA that dramatically restricted capacity available for the production of TEPEZZA at our drug product contract manufacturer, Catalent. To offset the reduced slots allowed by the DPA and Catalent, we accelerated plans to increase the production scale of TEPEZZA drug product.  In March 2021, the FDA approved a prior approval supplement to the TEPEZZA BLA (which was previously approved in January 2020), giving us authorization to manufacture more TEPEZZA drug product resulting in an increased number of vials with each manufacturing slot.  We commenced resupply of TEPEZZA to the market in April 2021, but we cannot guarantee that our currently contracted TEPEZZA manufacturing slots at Catalent will not be rescheduled or canceled as a result of additional U.S. government-mandated COVID-19 vaccine production orders, or that they will be completed successfully.  While we are not currently aware of any manufacturing facilities other than Catalent that are part of the supply chain for our medicines that are being utilized for the manufacture of vaccines for COVID-19,  similar circumstances could arise in the future and could result in supply disruption to our other medicines.  

Further, following the highly successful launch of TEPEZZA, which significantly exceeded our expectations, we began the process of expanding our production capacity in 2020 to meet anticipated future demand for TEPEZZA.  If AGC Biologics fails to supply TEPEZZA drug substance or if Catalent fails to supply TEPEZZA drug product for a period beyond our current expectation or either manufacturer is otherwise unable to meet our volume requirements due to unexpected market demand for TEPEZZA, it may lead to further TEPEZZA supply constraints.  In addition, while we are making progress with our second drug product manufacturer and we are on track to begin shipping TEPEZZA supply from this manufacturer, assuming FDA approval, by the end of 2021, it is possible this timeline could be delayed.  We rely on NOF Corporation, or NOF, as our exclusive supplier of the PEGylation agent that is a critical raw material in the manufacture of KRYSTEXXA.  If NOF fails to supply such PEGylation agent, it may lead to KRYSTEXXA supply constraints.  A key excipient used in PENNSAID 2% as a penetration enhancer is dimethyl sulfoxide, or DMSO.  We and Miravo, our exclusive supplier of PENNSAID 2%, rely on a sole proprietary form of DMSO for which we maintain a substantial safety stock.  However, should this supply become inadequate, damaged, destroyed or unusable, we and Miravo may not be able to qualify a second source.  We rely on an exclusive supply agreement with Boehringer Ingelheim Biopharmaceuticals GmbH, or Boehringer Ingelheim Biopharmaceuticals, for manufacturing and supply of ACTIMMUNE.  ACTIMMUNE is manufactured by starting with cells from working cell bank samples which are derived from a master cell bank.  We and Boehringer Ingelheim Biopharmaceuticals separately store multiple vials of the master cell bank.  In the event of catastrophic loss at our or Boehringer Ingelheim Biopharmaceuticals’ storage facility, it is possible that we could lose multiple cell banks and have the manufacturing capacity of ACTIMMUNE severely impacted by the need to substitute or replace the cell banks.  In addition, we rely on AstraZeneca UK Limited for the manufacture of the current clinical and commercial supplies of UPLIZNA, and for the current clinical and nonclinical supplies of the other medicine candidates acquired in the Viela acquisition.

In July 2021, we purchased a biologic drug product manufacturing facility based in Waterford, Ireland, which is intended to be an additional source of manufacturing to supplement the capabilities of our third-party drug product manufacturers.  We are in the process of completing the build-out and validation of this facility and assuming timely receipt of regulatory approvals, we expect that the first medicine manufactured at the facility to be approved for release in 2023.  However, we have no experience as a company in developing, validating, obtaining regulatory approval for or running a manufacturing facility and may not be successful in these activities.  Even if we are successful in producing medicines at the Waterford facility for commercial sale once we receive the required regulatory approvals, we expect to remain dependent on our third-party manufacturing partners in the near-term and potentially longer.


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If we or any of our third-party manufacturers cannot successfully manufacture material that conforms to our specifications and the applicable regulatory authorities’ strict regulatory requirements, or pass regulatory inspection, we or our third-party manufacturers will not be able to secure or maintain regulatory approval for the manufacturing facilities.  In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel.  If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufacture of our medicines or if they withdraw any such approval in the future, or if our suppliers or third-party manufacturers decide they no longer want to supply our primary active ingredients or manufacture our medicines, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our medicines.  To the extent our manufacturing facility of that of any third-party manufacturers that we engage with respect to our medicines are different from those currently being used for commercial supply in the United States, the FDA will need to approve such facilities prior to our sale of any medicine using these facilities.

Although we have entered into supply agreements for the manufacture and packaging of our medicines, our manufacturers may not perform as agreed or may terminate their agreements with us.  We currently rely on single source suppliers for certain of our medicines.  If our manufacturers terminate their agreements with us, we may have to qualify new back-up manufacturers.  We rely on safety stock to mitigate the risk of our current suppliers electing to cease producing bulk drug product or ceasing to do so at acceptable prices and quality.  However, we can provide no assurance that such safety stocks would be sufficient to avoid supply shortfalls in the event we have to identify and qualify new contract manufacturers.

The manufacture of medicines requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls.  Manufacturers of medicines often encounter difficulties in production, particularly in scaling up and validating initial production.  These problems include difficulties with production costs and yields, quality control, including stability of the medicine, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations.  Furthermore, if microbial, viral or other contaminations are discovered in the medicines or in the manufacturing facilities in which our medicines are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination.  We cannot assure that issues relating to the manufacture of any of our medicines will not occur in the future.  Additionally, we or our third-party manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments.  If we or our third-party manufacturers were to encounter any of these difficulties, or our third-party manufacturers otherwise fail to comply with their contractual obligations, our ability to commercialize our medicines or provide any medicine candidates to patients in clinical trials would be jeopardized.

Any delay or interruption in our ability to meet commercial demand for our medicines will result in the loss of potential revenues and could adversely affect our ability to gain market acceptance for these medicines.  In addition, any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely.

Failures or difficulties faced at any level of our supply chain, including any further potential disruption caused by the COVID-19 pandemic, could materially adversely affect our business and delay or impede the development and commercialization of any of our medicines or medicine candidates and could have a material adverse effect on our business, results of operations, financial condition and prospects.

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We face significant competition from other biotechnology and pharmaceutical companies, including those marketing generic medicines and our operating results will suffer if we fail to compete effectively.*

The biotechnology and pharmaceutical industries are intensely competitive.  We have competitors both in the United States and international markets, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions.  Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development, or R&D, staff, experienced marketing and manufacturing organizations and well-established sales forces.  Additional consolidations in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors and we will have to find new ways to compete and may have to potentially merge with or acquire other businesses to stay competitive.  Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries.  Our competitors may succeed in developing, acquiring or in-licensing on an exclusive basis, medicines that are more effective and/or less costly than our medicines.

Although TEPEZZA does not face direct competition, other therapies, such as corticosteroids, have been used on an off-label basis to alleviate some of the symptoms of TED.  While these therapies have not proved effective in treating the underlying disease, and carry with them significant side effects, their off-label use could reduce or delay treatment in the addressable patient population for TEPEZZA.  Immunovant Inc., or Immunovant, is conducting Phase 2 clinical trials of a fully human anti-FcRn monoclonal antibody candidate for the treatment of active TED, also referred to as Graves’ ophthalmopathy.  On February 2, 2021, Immunovant announced a voluntary pause in the clinical dosing of the candidate due to elevated total cholesterol and low-density lipoprotein levels in patients treated with the candidate.  Immunovant has indicated it intends to continue developing the candidate but did not provide an estimate of when the dosing might resume.  Viridian Therapeutics, Inc. is pursuing development of an anti-IGF-1R monoclonal antibody for TED and has announced plans to initiate a Phase 2 trial in the fourth quarter of 2021. While KRYSTEXXA faces limited direct competition, a number of competitors have medicines in clinical trials, including Selecta Biosciences Inc., or Selecta, which has initiated a Phase 3 trial of a candidate for the treatment of chronic refractory gout.  In September 2020, Selecta announced topline clinical data that did not meet the primary endpoint or demonstrate statistical superiority for their Phase 2 trial that compared their candidate, which includes an immunomodulator, to KRYSTEXXA alone.  In July 2020, Selecta and Swedish Orphan Biovitrum AB, or Sobi, entered into a strategic licensing agreement under which Sobi will assume responsibility for certain development, regulatory, and commercial activities for this candidate.  RAVICTI could face competition from a few medicine candidates that are in development, including a gene-therapy candidate by Ultragenyx Pharmaceutical Inc., a generic taste-masked formulation option of BUPHENYL by ACER Therapeutics Inc., an enzyme replacement for a specific UCD subtype (ARG) by Aeglea Bio Therapeutics Inc. and a mRNA-based therapeutic for a specific UCD subtype (OTC) by Arcturus Therapeutics Holdings Inc.  PROCYSBI faces competition from Cystagon® (immediate-release cysteamine bitartrate capsules) for the treatment of cystinosis, Cystadrops® (cysteamine ophthalmic solution) for the treatment of corneal cystine crystal deposits and CystaranTM (cysteamine ophthalmic solution) for treatment of corneal crystal accumulation in patients with cystinosis.  Additionally, we are also aware that AVROBIO, Inc. has a gene therapy candidate in development for the treatment of cystinosis.  UPLIZNA faces competition from eculizumab, marketed as Soliris® by AstraZeneca plc, or AstraZeneca, and satralizumab, marketed as EnspryingTM by Chugai Pharmaceuticals Co., Ltd., or Chugai, a subsidiary of Roche, each for the treatment of patients with NMOSD.  AstraZeneca is also conducting a Phase 3 trial with Ultomiris® (ravulizumab) in NMOSD and, if approved for this indication, UPLIZNA could face additional competition.  UPLIZNA also faces competition from rituximab, an off-label treatment that has been used for years to treat NMOSD given the lack of an approved medicine for this disease prior to 2019.   PENNSAID 2% faces competition from generic versions of diclofenac sodium topical solutions that are priced significantly less than the price we charge for PENNSAID 2%.  The generic version of Voltaren Gel is the market leader in the topical NSAID category.  Legislation enacted in most states in the United States allows, or in some instances mandates, that a pharmacist dispense an available generic equivalent when filling a prescription for a branded medicine, in the absence of specific instructions from the prescribing physician.  DUEXIS faces competition from other NSAIDs, including Celebrex®, marketed by Pfizer Inc., and celecoxib, a generic form of the medicine marketed by other pharmaceutical companies.  DUEXIS also faces significant competition from the separate use of NSAIDs for pain relief and GI protective medications to reduce the risk of NSAID-induced upper GI ulcers.  Both NSAIDs and GI protective medications are available in generic form and may be less expensive to use separately than DUEXIS, despite such substitution being off-label in the case of DUEXIS.  Because pharmacists often have economic and other incentives to prescribe lower-cost generics, if physicians prescribe PENNSAID 2% or DUEXIS, those prescriptions may not result in sales.  If physicians do not complete prescriptions through our HorizonCares program or otherwise provide prescribing instructions prohibiting generic diclofenac sodium topical solutions as a substitute for PENNSAID 2%, the substitution of generic ibuprofen and famotidine separately as a substitution for DUEXIS, sales of PENNSAID 2% and DUEXIS may suffer despite any success we may have in promoting PENNSAID 2% or DUEXIS to physicians.


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We have also entered into settlement and license agreements that may allow certain of our competitors to sell generic versions of certain of our medicines in the United States, subject to the terms of such agreements.  We granted (i) a non-exclusive license (that is only royalty-bearing in some circumstances) to manufacture and commercialize a generic version of DUEXIS in the United States after January 1, 2023, (ii) non-exclusive licenses to manufacture and commercialize generic versions of PENNSAID 2% in the United States after October 17, 2027, (iii) a non-exclusive license to manufacture and commercialize a generic version of RAYOS tablets in the United States after December 23, 2022, and (iv) non-exclusive licenses to manufacture and commercialize generic versions of RAVICTI in the United States after July 1, 2025, or earlier under certain circumstances.

On February 27, 2020, following a judgment in federal court invalidating certain patents covering VIMOVO, Dr. Reddy’s launched a generic version of VIMOVO in the United States.  While patent litigation against Dr. Reddy’s for infringement continues on additional patents in the New Jersey District Court, we now face generic competition for VIMOVO, which has negatively impacted net sales of VIMOVO. As a result, we have repositioned our promotional efforts previously directed to VIMOVO to the other inflammation segment medicines and expect that our VIMOVO net sales will continue to decrease in future periods.

Patent litigation is currently pending in the Federal Circuit Court of Appeals and the United States District Court of New Jersey against Alkem Laboratories, Inc., or Alkem, Teva Pharmaceuticals USA, Inc., or Teva USA, and Torrent Pharmaceuticals Limited, or Torrent, respectively, who each intend to market a generic version of DUEXIS prior to the expiration of certain of our patents listed in the FDA’s Orange Book, or Orange Book.  These cases arise from Paragraph IV Patent Certification notice letters from Alkem, Teva USA, and Torrent advising they had filed an ANDA with the FDA seeking approval to market a generic version of DUEXIS before the expiration of the patents-in-suit.  

On June 27, 2020, we received notice from Lupin Limited, or Lupin, that it had filed an ANDA with the FDA seeking approval of a generic version of PROCYSBI.  The ANDA contained a Paragraph IV Patent Certification alleging that the patents covering PROCYSBI are invalid and/or will not be infringed by Lupin’s manufacture, use or sale of a generic version of PROCYSBI.  Patent litigation is currently pending in the United States District Court of New Jersey against Lupin seeking to prevent Lupin from selling its generic version of PROCYSBI before the expiration of the patents-in-suit.

If we are unsuccessful in any of the DUEXIS cases or PROCYSBI case, we will likely face generic competition with respect to DUEXIS and/or PROCYSBI and sales of DUEXIS and/or PROCYSBI will be substantially harmed.

ACTIMMUNE is the only medicine currently approved by the FDA specifically for the treatment of CGD and SMO.  While there are additional or alternative approaches used to treat patients with CGD and SMO, there are currently no medicines on the market that compete directly with ACTIMMUNE.  A widely accepted protocol to treat CGD in the United States is the use of concomitant “triple prophylactic therapy” comprising ACTIMMUNE, an oral antibiotic agent and an oral antifungal agent.  However, the FDA-approved labeling for ACTIMMUNE does not discuss this “triple prophylactic therapy,” and physicians may choose to prescribe one or both of the other modalities in the absence of ACTIMMUNE.  Because of the immediate and life-threatening nature of SMO, the preferred treatment option for SMO is often to have the patient undergo a bone marrow transplant which, if successful, will likely obviate the need for further use of ACTIMMUNE in that patient.  Likewise, the use of bone marrow transplants in the treatment of patients with CGD is becoming more prevalent, which could have a material adverse effect on sales of ACTIMMUNE and its profitability.  We are aware of a number of research programs investigating the potential of gene therapy as a possible cure for CGD.  Additionally, other companies may be pursuing the development of medicines and treatments that target the same diseases and conditions which ACTIMMUNE is currently approved to treat.  As a result, it is possible that our competitors may develop new medicines that manage CGD or SMO more effectively, cost less or possibly even cure CGD or SMO.  In addition, U.S. healthcare legislation passed in March 2010 authorized the FDA to approve biological products, known as biosimilars, that are similar to or interchangeable with previously approved biological products, like ACTIMMUNE, based upon potentially abbreviated data packages.  Biosimilars are likely to be sold at substantially lower prices than branded medicines because the biosimilar manufacturer would not have to recoup the R&D and marketing costs associated with the branded medicine.  Though we are not currently aware of any biosimilar under development, the development and commercialization of any competing medicines or the discovery of any new alternative treatment for CGD or SMO could have a material adverse effect on sales of ACTIMMUNE and its profitability.  We have licenses to U.S. patents covering ACTIMMUNE.  If not otherwise invalidated, those patents expire in August 2022.


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BUPHENYL’s composition of matter patent protection and orphan drug exclusivity have expired.  Because BUPHENYL has no regulatory exclusivity or listed patents, there is nothing to prevent a competitor from submitting an ANDA for a generic version of BUPHENYL and receiving FDA approval.  Generic versions of BUPHENYL to date have been priced at a discount relative to RAVICTI, and physicians, patients, or payers may decide that this less expensive alternative is preferable to RAVICTI.  If this occurs, sales of RAVICTI could be materially reduced, but we would nevertheless be required to make royalty payments to Bausch Health Companies Inc. (formerly Ucyclyd Pharma, Inc.), or Bausch, and another external party, at the same royalty rates.  While Bausch and its affiliates are generally contractually prohibited from developing or commercializing new medicines, anywhere in the world, for the treatment of UCD or hepatic encephalopathy, or HE, which are chemically similar to RAVICTI, they may still develop and commercialize medicines that compete with RAVICTI.  For example, medicines approved for indications other than UCD and HE may still compete with RAVICTI if physicians prescribe such medicines off-label for UCD or HE.  We are also aware that Recordati S.p.A (formerly known as Orphan Europe SARL), or Recordati, received FDA approval in January 2021 for carglumic acid for the treatment of acute hyperammonemia due to propionic acidemia or methylmalonic acidemia.  Carglumic acid, sold under the name Carbaglu, is also approved for chronic and acute hyperammonemia due to N-acetylglutamate synthase deficiency, a rare UCD subtype.  RAVICTI may face additional competition from this compound.

The availability and price of our competitors’ medicines could limit the demand, and the price we are able to charge, for our medicines.  We will not successfully execute on our business objectives if the market acceptance of our medicines is inhibited by price competition, if physicians are reluctant to switch from existing medicines to our medicines, or if physicians switch to other new medicines or choose to reserve our medicines for use in limited patient populations.

In addition, established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to acquire novel compounds that could make our medicines obsolete.  Our ability to compete successfully with these companies and other potential competitors will depend largely on our ability to leverage our experience in clinical, regulatory and commercial development to:

 

develop and acquire medicines that are superior to other medicines in the market;

 

attract qualified clinical, regulatory, and sales and marketing personnel;

 

obtain patent and/or other proprietary protection for our medicines and technologies;

 

obtain required regulatory approvals; and

 

successfully collaborate with pharmaceutical companies in the discovery, development and commercialization of new medicine candidates.

Our medicine candidates for which we intend to seek approval may face generic or biosimilar competition sooner than anticipated. *

Even if we are successful in achieving regulatory approval to commercialize a medicine candidate ahead of our competitors, certain of our medicine candidates may face competition from biosimilar products. In the United States, certain of our medicine candidates are regulated by the FDA as biological products and we intend to seek approval for these medicine candidates pursuant to the BLA pathway. The Biologics Price Competition and Innovation Act of 2009, or BPCIA, created an abbreviated pathway for FDA approval of biosimilar and interchangeable biological products based on a previously licensed reference product. Under the BPCIA, an application for a biosimilar biological product cannot be approved by the FDA until 12 years after the original reference biological product was approved under a BLA. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty. While it is uncertain when such processes intended to implement BPCIA may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for certain of our medicine candidates.


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We believe that any of our medicine candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity available to reference biological products. However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our medicine candidates to be reference biological products pursuant to its interpretation of the exclusivity provisions of the BPCIA for competing products, potentially creating the opportunity for generic follow-on biosimilar competition sooner than anticipated. Moreover, the extent to which a biosimilar product, once approved, will be substituted for any one of our reference medicines in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing including whether a future competitor seeks an interchangeability designation for a biosimilar of one of our medicines. Under the BPCIA as well as state pharmacy laws, only interchangeable biosimilar products are considered substitutable for the reference biological product without the intervention of the health care provider who prescribed the original biological product. However, as with all prescribing decisions made in the context of a patient-provider relationship and a patient’s specific medical needs, healthcare providers are not restricted from prescribing biosimilar products in an off-label manner. In addition, a competitor could decide to forego the abbreviated approval pathway available for biosimilar products and to submit a full BLA for product licensure after completing its own preclinical studies and clinical trials. In such a situation, any exclusivity to which we may be eligible under the BPCIA would not prevent the competitor from marketing its biological product as soon as it is approved.

In Europe, the EC has granted marketing authorizations for several biosimilar products pursuant to a set of general and product class-specific guidelines for biosimilar approvals issued over the past few years. In addition, companies may be developing biosimilar products in other countries that could compete with our medicines, if approved.

If competitors are able to obtain marketing approval for biosimilars referencing our medicine candidates, if approved, our future medicines may become subject to competition from such biosimilars, whether or not they are designated as interchangeable, with the attendant competitive pressure and potential adverse consequences. Such competitive products may be able to immediately compete with us in each indication for which our medicine candidates may have received approval.

If we are unable to maintain or realize the benefits of orphan drug exclusivity, we may face increased competition with respect to certain of our medicines.*

Under the Orphan Drug Act of 1983, the FDA may designate a medicine as an orphan drug if it is a drug intended to treat a rare disease or condition affecting fewer than 200,000 people in the United States.  A company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years from the date of its approval.  PROCYSBI received ten years of market exclusivity, through 2023, as an orphan drug in Europe.  PROCYSBI received seven years of market exclusivity, through 2022, for patients two years of age to less than six years of age, and seven years of market exclusivity, through 2024, for patients one year of age to less than two years of age, as an orphan drug in the United States.  TEPEZZA has been granted orphan drug exclusivity for treatment of active (dynamic) phase Graves’ ophthalmopathy, which we expect will provide orphan drug marketing exclusivity in the United States until January 2027.  In addition, UPLIZNA was granted orphan drug designation for UPLIZNA for the treatment of patients with NMOSD in February 2016.  However, despite orphan drug exclusivity, the FDA can still approve another drug containing the same active ingredient and used for the same orphan indication if it determines that a subsequent drug is safer, more effective or makes a major contribution to patient care, and orphan exclusivity can be lost if the orphan drug manufacturer is unable to ensure that a sufficient quantity of the orphan drug is available to meet the needs of patients with the rare disease or condition.  Orphan drug exclusivity may also be lost if the FDA later determines that the initial request for designation was materially defective.  In addition, orphan drug exclusivity does not prevent the FDA from approving competing drugs for the same or similar indication containing a different active ingredient.  If orphan drug exclusivity is lost and we were unable to successfully enforce any remaining patents covering the applicable medicine, we could be subject to generic competition and revenues from the medicine could decrease materially.  In addition, if a subsequent drug is approved for marketing for the same or a similar indication as our medicines despite orphan drug exclusivity, we may face increased competition and lose market share with respect to these medicines.


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A Breakthrough Therapy Designation by the FDA may not lead to a faster development or regulatory review or approval process, and does not increase the likelihood that our medicine candidates will receive marketing approval.*

The FDA granted Breakthrough Therapy Designation to TEPEZZA for the treatment of thyroid eye disease and UPLIZNA for the treatment of NMOSD, and we may seek such designation in the future for other medicine candidates.  A Breakthrough Therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.  For drugs that have been designated as Breakthrough Therapies, interaction and communication between the FDA and the sponsor can help to identify the most efficient path for development. Drugs designated as Breakthrough Therapies are also eligible for accelerated approval.

The FDA has discretion to determine whether the criteria for a Breakthrough