Harmony Biosciences Holdings, Inc. Q3 FY2023 Earnings Call

Good morning. My name is Ashley, and I'll be your conference operator today. At this time, I would like to welcome everyone to Harmony Biosciences Third Quarter 2023 Financial Results Conference Call. All participant lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Please be advised that today's conference call may be recorded. I will now turn the call over to Luis Sanay, Head of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us today as we review Harmony Biosciences third quarter 2023 financial results and provide a business update. Before we start, I encourage everyone to go to the Investors section of our website to find the materials that accompany our discussion today, including a reconciliation of our GAAP to non-GAAP financial measures. At this stage of our life cycle, we believe non-GAAP financial results better represent the underlying business performance. Our speakers on today's call are Dr. Jeffrey Dayno, President and CEO; Jeffrey Dierks, Chief Commercial Officer; Dr. Kumar Budur, Chief Medical Officer; and Sandip Kapadia, Chief Financial Officer and Chief Administrative Officer. As a reminder, we will be making forward-looking statements today, which are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties. Our actual results may differ materially, and we undertake no obligation to update these statements even if circumstances change. We encourage you to consult the risk factors referenced in our SEC filings for additional details. I would now like to turn the call over to Dr. Jeffrey Dayno. Jeff?

Thank you, Luis, and thanks, everyone, for joining our conference call today. Q3 2023 was the strongest revenue quarter in Harmony's history. The pace of growth in net revenue and average number of patients on WAKIX is rarely seen in year four of commercialization of an orphan rare disease product. What is driving this strong continued growth of WAKIX in narcolepsy is the meaningfully differentiated product profile, the strong underlying patient demand, the sizable market of 80,000 patients diagnosed with narcolepsy in the U.S., and the consistent executional excellence of our commercial organization. I am proud of this accomplishment and even more important, I am pleased that our efforts continue to help even more people living with narcolepsy. I also know that there are many more people living with narcolepsy who could potentially benefit from WAKIX and that is what we are focused on. For the third quarter of 2023, we reported WAKIX net revenue of $160.3 million, an increase of 37% year-over-year. We believe that the vast market opportunity, which remains in narcolepsy, along with the differentiated product profile of WAKIX provides us the ability to grow the franchise for years to come, and we remain confident that WAKIX represents a $1 billion plus opportunity in adult narcolepsy alone, and we are well on our way. In addition to our very strong commercial performance in Q3, we also continue to advance our current pitolisant life cycle management programs as well as expand our pipeline and diversify our portfolio beyond sleep wake. Kumar will provide additional details on our clinical development programs later in the call. Earlier this month, we reported top line results from the Phase 3 INTUNE study of pitolisant in patients with idiopathic hypersomnia or IH. While the primary endpoint did not reach statistical significance during the randomized withdrawal phase, a robust clinical effect was demonstrated in the open-label phase of the study and almost 90% of the patients who completed the trial elected to continue into the long-term extension study, which is ongoing. I want to reiterate our commitment to the IH patient community as we are actively pursuing an indication for pitolisant and IH and are optimistic in our ability to bring a non-scheduled treatment option to patients living with IH and the health care professionals who treat them. We believe that based on the totality of the evidence that we have seen thus far along with the pitolisant receiving orphan drug designation for IH, there is an opportunity for us to work with the FDA on a path forward. Once we have completed our review of all the data, we will engage with the agency with this goal in mind. Our current lifecycle management programs for pitolisant represent about 100,000 diagnosed patients in the U.S. So if successful, these could contribute up to an additional $1 billion of revenue to the WAKIX franchise. Moving to the ongoing work with our partner, Bioproject, on new formulations of pitolisant with the goal to potentially extend the pitolisant franchise with new IP out beyond 2040. We are advancing these programs into the clinic, and Kumar will provide more detail on them later in the call. Another key component of our growth strategy is acquiring new assets through business development, to expand our pipeline beyond WAKIX, and diversify our portfolio beyond sleep wake. On that front, I'm excited to report that we recently closed the acquisition of Zynerba Pharmaceuticals and have added the investigational product Zygel to our pipeline. This acquisition represents an excellent strategic fit for Harmony, with development programs focused on orphan rare neuropsychiatric disorders with significant unmet medical needs. With Zygel, we added a novel product candidate and two late-stage development programs that could potentially launch during the WAKIX lifecycle. Zygel is currently in a pivotal Phase 3 trial for patients with Fragile X syndrome with another opportunity based on positive Phase 2 data in patients with 22q deletion syndrome. Both of these indications, if successful, represent a significant market opportunity with the potential to serve 80,000 U.S. patients living with Fragile X syndrome and another 80,000 with 22q deletion syndrome. We have welcomed former Zynerba members to the Harmony team and are excited to work with them to advance the Zygel development programs and bring a potential new treatment option to patients living with orphan rare neuropsychiatric disorders with high unmet medical needs. As for business development, we are not stopping with the Zynerba acquisition, but remain very active with a dedicated business development team, which is continually assessing the BD landscape. We remain focused on orphan rare neurology assets and our assets and other neurological diseases where we can leverage our existing expertise and infrastructure. We are looking for assets across a range of development stages, including both early and late stage with the potential to launch both during and after the WAKIX lifecycle. And finally, given our continued confidence in the underlying strength of the business and our conviction in the growth potential for the company, this morning, we announced a new share repurchase program of $200 million. Given our financial flexibility, we are committed to deploying capital to maximize shareholder value. In conclusion, Q3 2023 was the strongest revenue quarter in Harmony's history and our business is strong. We are committed to bringing a non-scheduled treatment option to patients with IH and are advancing every aspect of our business, including our pipeline programs and business development efforts. I am very proud of the dedication and commitment across our organization as we remain focused on developing and commercializing innovative treatments for patients living with rare neurological diseases who have unmet medical needs. I will now turn the call over to Jeffrey Dierks, our Chief Commercial Officer, to provide more details on our strong third quarter commercial performance. Jeff?

Thanks, Jeff. Q3 was another strong quarter for WAKIX. We had the strongest revenue quarter in our history with continued growth and momentum in our underlying business fundamentals and top line performance metrics. Net sales for the third quarter were $60.3 million, which represents a 37% growth from the same quarter prior year and the first quarter of over $150 million in net sales. We continue to see strong double-digit growth in net sales for WAKIX in year four of our commercialization, which reflects the high interest of WAKIX in the narcolepsy market. The consistent growth in the business reinforces our long-term belief that WAKIX represents a $1 billion plus opportunity in adult narcolepsy alone. I'd like to share a few key highlights from our performance in the third quarter on Slide 5. The average number of patients on WAKIX in the third quarter increased to approximately 5,800, an increase of approximately 350 average patients sequentially from what we reported last quarter. This impressive growth in average patients in the third quarter was driven by strong top line demand and new patient starts that offset typical summer seasonality, yielding quarterly results consistent with the results we saw in Q2. The growth in average patients on WAKIX speaks to continued product adoption. And most importantly, the large remaining diagnosed opportunity that we continue to tap into each quarter as the market allows. Strong patient interest and prescriber adoption continue to be key drivers of the growth in the average number of patients on WAKIX. We saw continued strengthening of the WAKIX prescriber base in Q3, both in depth and breadth of prescribing. The number of unique prescribers on WAKIX increased again in the third quarter. And importantly, we continue to see growth in the WAKIX prescriber base expand beyond health care professionals enrolled in the oxybate REMS program. In addition, we saw growth in the depth of prescribing within the oxybate enrolled health care professionals, even with the availability of new and generic oxybate options. As we continue to share the meaningfully differentiated product profile of WAKIX and the unique feature of being the only FDA-approved treatment for EDS and cataplexy that is not scheduled as a controlled substance, offers broad clinic utility and appeals to a broader narcolepsy health care professional audience and patient base, which is a driver of our continued growth. We continue to see meaningful penetration and growth across the approximately 9,000 narcolepsy treating health care professional prescriber base. And recent market research conducted in October of this year supports our view of continued future growth in WAKIX prescribing. Research conducted with approximately 70 health care professionals with or without experience with WAKIX prescribing shows the following: 100% of the health care professionals surveyed with WAKIX clinical experience stated they would prescribe the same or increased prescribing of WAKIX in the next six months; more than 40% of those health care professionals surveyed who had not prescribed WAKIX to date indicated the intent to prescribe WAKIX in the next six months; nearly 60% of those health care professionals who prescribed WAKIX to date, stated they were likely to recommend WAKIX to peers and colleagues. And consistent with previous waves of research, one of the highest performing drivers and differentiators for WAKIX was the unique feature as the only non-scheduled treatment option. The availability of new and generic oxybate options hasn't impacted the continued growth or existing strong payer coverage for WAKIX given the meaningfully differentiated product profile. Our ability to reach and educate the broad narcolepsy treating health care professional universe, as we tapped into the full diagnosed adult narcolepsy patient opportunity, gives us confidence in continued growth and the long-term growth potential for WAKIX. In summary, I'm excited by the strong commercial performance in the third quarter. In fact, the strongest revenue quarter for Harmony to date. We saw a strong growth of 37% in net sales versus the same quarter prior year. We saw strong growth in the average number of patients on WAKIX to approximately 5,800, an increase of approximately 350 sequentially from what we reported last quarter. We saw continued expansion and strengthening of the WAKIX prescriber base within and beyond oxybate REMS enrolled health care professionals, and payer coverage remains strong even with the availability of new and generic oxybate options. I appreciate the dedication and impact to the entire commercial team and the passion that they have for our business and the narcolepsy patient community. This strong performance gives us confidence in the long-term growth potential for WAKIX and reinforces our belief that WAKIX represents a $1 billion-plus opportunity in adult narcolepsy alone. I would like to now turn the presentation over to Kumar Budur, our Chief Medical Officer, to provide an update on our clinical development pipeline. Kumar?

Thank you, Jeff. Good day, everyone, and thank you for joining the call. Moving on to our clinical development pipeline, as shown on Slide number 7. Starting with our development program in idiopathic hypersomnia, we saw a robust clinical effect in the Phase 3 INTUNE study, with almost 83% of the patients responding in the initial 8-week open-label treatment period with an average of 9.4 points improvement in sleepiness scores. In addition, almost 90% of patients elected to participate in the long-term extension study. While no statistically significant difference was observed between the pitolisant and placebo groups on the primary endpoint of ESS at the end of the four-week double-blind randomized withdrawal period, positive trends favoring pitolisant were observed across all relevant endpoints, including the idiopathic hypersomnia severity scale, which approached statistical significance at a p-value of 0.06 as well as on other endpoints, including PROMISE SRI, FOSC 10, and sleepiness share questionnaires (ph). The safety profile of pitolisant in patients with idiopathic hypersomnia is consistent with the established safety profile of pitolisant, and no new adverse events were observed. Almost 90% of the patients who completed the double-blind randomized withdrawal period elected to participate in the ongoing long-term extension study, and we continue to collect safety and effectiveness data from this study. We remain committed to the idiopathic hypersomnia community and are focused on pursuing an indication for pitolisant in patients with idiopathic hypersomnia. We are in the process of conducting a thorough review of the full data set, which will inform the next steps for the program. We believe that based on the totality of the evidence that we have seen thus far, along with pitolisant receiving orphan drug designation for idiopathic hypersomnia, we look forward to engaging with the FDA. In Prader-Willi syndrome, we received FDA alignment on the protocol for the Phase 3 study in patients with PWS, which will satisfy the requirements for both the registrational trial and now pediatric exclusivity as well. We expect study initiation in the first quarter of 2024. In myotonic dystrophy Type 1 or DM1, we are on track for top line data from this Phase 2 proof-of-concept segmentation study in the fourth quarter. As for pediatric narcolepsy, we are on track to submit a supplemental new drug application to the FDA for an indication in pediatric narcolepsy in the fourth quarter. In addition to our current lifecycle management program for pitolisant, we continue to make progress on new pitolisant-based formulation with our partner Bioproject with a goal to generate new IP and extend the pitolisant franchise beyond 2040. Let me take a moment and take you through the strategy for this new pitolisant-based formulation and provide an update on the status of the program, as shown on Slide number 8. We have advanced the first formulation into the clinic this quarter. The first formulation is an enhanced pitolisant-based formulation designed to deliver an optimized pharmacokinetic profile and higher dosage strength. The opportunity here is to extend the pitolisant franchise beyond 2040 with the potential for new IP and explore additional indications. This formulation will have a full development program. The second formulation is on track for advancement into the clinic later this quarter. The second formulation is a pitolisant-based modified formulation with a potential for clinical differentiation. The opportunity here is a fast-to-market strategy for patients with narcolepsy within the lifecycle of WAKIX. This formulation will have an abbreviated development program. We are also pleased to expand and diversify our pipeline with the recent acquisition of Zynerba. We closed the acquisition just about three weeks ago, and we look forward to providing a more detailed update on the Zygel program at our next earnings call. We have seen a seamless transition of activities and continued engagement with the clinical trial site and investigators. The Zynerba acquisition provides another innovative product candidate, Zygel. Zygel is the first and only pharmaceutically manufactured synthetic cannabidiol, devoid of THC and formulated as a patent-protected formulation designed for transdermal delivery. Zygel is manufactured through a synthetic process in a GMP facility. Therefore, it is devoid of THC and has the potential to be a non-scheduled product if approved. Similar to WAKIX, Zygel represents a portfolio and a product opportunity and is currently in a pivotal Phase 3 clinical trial for patients with Fragile X syndrome called the RECONNECT trial. Additionally, Zygel was studied in an open-label Phase 2 proof-of-concept study in patients with 22q Deletion syndrome known as the INSPIRE trial. Both of these indications, if successful, represent a significant market opportunity with the potential to serve 80,000 U.S. individuals with Fragile X syndrome and another 80,000 individuals with 22q Deletion syndrome. To conclude, we have made great progress, not only in advancing our pipeline but also expanding and diversifying it with the addition of Zygel. I look forward to sharing additional updates as we continue to make progress on our clinical development programs. On behalf of Harmony, I would like to thank all patients and their families who are participating in our clinical trials as well as clinical investigators and site personnel for their efforts and commitment to helping us advance our development programs. I'll now turn the call over to our CFO, Sandip Kapadia, for an update on our financial performance. Sandip?

Thank you, Kumar, and good morning, everyone. This morning, we issued our third quarter press release and filed our 10-Q, where you'll find the details for our financial and operating results. Our financial performance is also shown on Slide 9, 10 and 11. We're pleased to report another quarter of strong revenue growth, improved profitability, and continued cash generation. We also made continued progress across many of our business priorities, including completing the Zynerba acquisition, refinancing our debt at a lower cost of capital as well as executing on our share repurchase program. Overall, we remain confident in the continued growth in the business. So let me take a moment to take you through the details of our financial results. For the third quarter of 2023, we reported our strongest revenue quarter in company history, with net revenues of $160.3 million compared to $117.2 million in the prior year quarter, representing a growth of 37%. Performance in the quarter reflects the continued strong underlying demand for WAKIX. In the third quarter, we did see a partial recovery in trade inventory levels of a couple of days compared to the second quarter, which we noted on our previous Q2 earnings call. In the third quarter of 2023, operating expenses were $63.5 million compared to $82.3 million in the prior year quarter. The lower operating expenses were primarily driven by the $30 million licensing fee incurred last year as part of the 2022 LCA with Bioprojet, partially offset by expenses related to the commercialization of Latex and the advancement of our clinical development programs. Operating income improved for the third quarter 2023, operating income of $64.5 million compared to $11.9 million in the prior year quarter. Non-GAAP adjusted net income for the third quarter of 2023 was $58.8 million or $0.97 per diluted share compared to $58.1 million or $0.95 per diluted share in the prior year quarter. The prior year quarter included a $74.5 million benefit related to a valuation allowance and a $30 million licensing fee related to the 2022 LCA with Bioprojet. We believe non-GAAP adjusted net income better reflects the underlying business performance. Please see our press release for a reconciliation of GAAP to non-GAAP financial results. For the third quarter of 2023, we ended the quarter with $438.4 million of cash, cash equivalents and investment securities on the balance sheet. The balance reflects continued cash generation with $63 million in cash from operations, partially offset by share repurchase activities. During the third quarter, we executed our share repurchase program and repurchased approximately 1.4 million shares of common stock for $50 million. As you heard from Jeff, this morning, we announced a new share repurchase program of $200 million. The new program demonstrates our continued confidence in the underlying strength of our business and our conviction in the growth potential for the company. Our strong balance sheet allows us not only to execute on a return of capital but maintain flexibility to also execute on business development. For us, it's not an either/or scenario and we're in a fortunate position, given our profitability and growing cash balance. Looking at that, we expect quarter-over-quarter growth for WAKIX in Q4. We also expect to continue to invest in R&D and SG&A as we advance our clinical development program, which now includes Zygel and supports the continued commercialization of WAKIX. As a reminder, we paid approximately $60 million in Q4 for the acquisition of Zynerba using cash from our balance sheet. Pending final determination, we expect to account for the transaction as an asset acquisition, which would result in a significant one-time charge in the fourth quarter, along with related restructuring costs. Overall, we remain confident in WAKIX representing a $1 billion-plus opportunity in adult narcolepsy alone, and we are well on our way given the strong results this quarter, with the potential to contribute up to an additional $1 billion if approved in other current lifecycle pitolisant programs. In conclusion, we're very pleased with our strong financial performance year-to-date and remain well positioned for continued growth. And with that, I'd like to turn the call back over to Jeff for his closing remarks. Jeff?

Thank you, Sandip. In summary, Q3 2023 was the strongest revenue quarter in Harmony's history, and we continue to execute on our growth strategy across the business. We remain focused on growing our core business and helping even more adult patients living with narcolepsy with WAKIX, advancing our pipeline across both our pitolisant and Zygel clinical development programs. Working with our partner, Bioprojet, on new formulations to extend the pitolisant franchise to help even more patients living with rare neurological diseases. Building out our pipeline further through business development efforts in order to create a robust portfolio of orphan rare disease assets covering all stages of development and deploying capital to maximize shareholder value through our share repurchase program and business development activities. This concludes our planned remarks for today. Thank you for joining our call. And I will now turn the call back over to the operator to facilitate the Q&A session. Operator, can you please open the call to questions?

Thank you. We'll take our first question from Francois Brisebois. Please go ahead. Your line is open with Oppenheimer.

Hi. Thanks for taking the questions. Congrats on the quarter here. So just a couple of things, Sandip mentioned it. And so in terms of the trade inventory, small issues or things in the second quarter. I was just wondering how much did that create kind of a boost maybe in this quarter, obviously, not the patient adds, but maybe in terms of the cost, if you look at it that way? And just maybe the impact there going forward, you mentioned you're expecting growth in the fourth quarter, quarter-over-quarter. Is that growth in terms of patient adds or in terms of revenues? Thank you.

Yeah. Good morning, Frank. Thanks for the question. I’ll have Sandip provide some more explanation on that for you.

Yeah, Frank, as we mentioned last quarter, we did see a partial normalization of inventory that we saw a bit of a draw down last quarter. As we mentioned last quarter, it was about a week, that was in Q2. And we saw roughly about half a bit recovered in this quarter. So again, it's a small impact overall. We feel that it's important to keep investors updated on the impact generally. As you know, these fluctuations quarterly are completely part of our business depending on where the quarter ends and so forth. With respect to Q4, we continue to expect top line growth from revenues as well as we continue to expect patient adds. And then maybe, Jeff Dierks, you want to comment kind of on the expectations on Q4?

So Frank, I would reiterate, yes, we did see a benefit of a couple of days of inventory, but you couple that with the strong top line performance in new patient starts. That really drove that highest quarter of net revenue that we've seen since our launch. And as Sandip explained, you typically see a little bit of an incremental build in inventory at the end of the year, which is traditional across the inventory, but we're anticipating growth across all of our key fundamental metrics, average number of patients, unique prescribers, as well as net sales.

Thank you. Regarding the new formulation, could you clarify the IP situation and update us on the progress of the new formulations? Also, could you provide a bit more detail on the 2040 metric? Thank you.

Yes, Frank, just to clarify. In terms of the IP situation with WAKIX or the new formulations?

Sorry, I mean just the IP with WAKIX and what new formulations could do to it?

Sure, Okay. So in terms of the IP situation with Wakix, we believe in the strength of our IP. And that goes out based on the polymorph patent with patent term extension to March of 2030. And then I think, as you're aware, we're pursuing pediatric exclusivity which would provide an additional six months' protection out to September of 2030. So that is our base case on our IP situation for Wakix. Turning to the new formulations, I'll have Kumar sort of comment on those efforts. But by design the intent there and what we're working was generating new IP guards to enhance the novel formulations based on pitolisant. And Kumar can provide a little more color on those programs.

Sure. Thank you, Jeff. Hey, good morning, Frank. Thanks for the question. Yeah, we are working on two formulations with our partner, Bioprojet, and pleased to share the update on this. We have made substantial progress over the past few months. The first formulation is an enhanced pitolisant-based formulation that is designed to deliver an optimized PK profile and a higher dosage strength, but the opportunity here really is to generate new IP and extend the pitolisant franchise beyond 2040. We are looking for new indications with this particular formulation, and this formulation will have a full clinical development program. That is formulation one. In terms of formulation two, we are on track to advancing this formulation into the clinic toward the latter half of this quarter. This is a pitolisant-based modified formulation with a potential for clinical differentiation, and the opportunity here is a fast-to-market strategy for patients with narcolepsy within the Wakix life cycle. This formulation will have an abbreviated development program. So overall, two formulations making steady progress.

Thank you.

Thanks, Frank.

Thank you. I have a couple of questions. First, regarding prescriber dynamics, can you share your penetration of Wakix among providers not enrolled in the oxybate REMS? I'm interested in understanding how you're performing with that segment of prescribers. Secondly, concerning the formulations, given the setback in narcolepsy, should we logically assume that if you decide to proceed, you would explore it with one of the new formulations? How should we interpret that? Thank you.

Yeah. Thanks, David. I'll ask Jeff Dierks to respond to the first question about the prescriber dynamics, the prescribers outside the oxybate REMS.

Sure. So David, we're extremely pleased with the growth in the new prescriber base of Wakix. And obviously, as we continue to add new prescribers, the vast majority of them or those healthcare professionals that are not enrolled in the oxybate REMS program, as we've disclosed, there's about approximately 5,000 of those healthcare professionals that are not enrolled in the oxybate REMS program. And we continue to see meaningful penetration in that group. I think at the last earnings call, David, we talked about being about 20% penetrated within that audience. It's closer to about 25%. But we continue to see very steady growth and adoption within that audience, and it really gives us and affords us the opportunity based on the overall benefit/risk profile, the broad clinical utility of the product for Wakix, that we can tap into that broad 9,000 approximate healthcare professional prescriber universe, and we can tap into the full diagnosed narcolepsy patient opportunity, and that gives us a ton of confidence. As we look at Wakix represented $1 billion-plus opportunity in adult narcolepsy alone.

Yeah. So David, let me address the second question with regards to new formulations in IH. So the new formulation of pitolisant, the thinking there is, obviously, we have an innovative product with a novel mechanism of action and the opportunity for formulation work in new IP to extend the pitolisant franchise out, not just beyond 2030, but 2040. With regards to idiopathic hypersomnia, let me be clear in terms of where we are coming off the INTUNE study. We saw a robust clinical effect in the trial in the open-label phase, and we are going through the full data set and reviewing that which will inform our strategy in terms of approaching the FDA as we continue to pursue the indication for IH based on the INTUNE study and those data. So at this point, we expect to complete the review of the data by the end of November, and then we're going to prepare briefing documents, meeting requests soon after that and approach the agency. We remain committed to the IH patient community. We are actively pursuing an indication as a nonscheduled sort of product and the opportunity given the current treatment options for patients with IH. So we are not looking to new formulations, but we will pursue the IH indication based on the work that we've done thus far.

Okay. Thank you.

Thank you. We'll take our next question from Ami Fadia at Needham and Co. Please go ahead.

Hi. Good morning. This is Eason Lee on for Ami. Congrats on the Wakix growth in the quarter, and thanks for taking our questions. Two, if I can. Historically, it looks like kind of the sequential adds in average patients on Wakix from Q2 to Q3 turn out similar to that from Q3 to Q4. Any factors this quarter you'd highlight, such that we would not expect a similar dynamic to occur this year? And then maybe my second question is, as we're nearing the end of the year, would love to know your latest thinking on potentially providing 2024 Wakix sales guidance at the next earnings update or otherwise. Thank you.

Mr. Eason, thanks for the question. Jeff Dierks, on the first one.

Sure. So Eason, with respect to thinking about Q4 with respect to average number of patient growth adds per quarter, so again, we continue to be extremely pleased with the continued growth in the average number of patients and our obviously underlying strong business fundamentals. We saw a sequential add of approximately 350 average patients from what we reported in Q2. And I think the impressive growth that we're seeing in the average patients in the third quarter was driven by strong top-line demand and new patient starts that offset the typical summer seasonality that we usually see every year. And it speaks to really not only continued product adoption, but most importantly, the large remaining diagnosed patient opportunity that we continue to tap into as the market allows. While we're not providing forward-looking guidance, we are pleased with the momentum heading into Q4, and we do anticipate and fully expect continued growth for WAKIX for the remainder of '23.

Okay. Sandip, any comments or thoughts?

I believe our guidance is naturally geared toward early next year. Reflecting on our performance over the past year and the analyst estimates, we've been quite consistent overall, despite some fluctuations in inventory from quarter to quarter. We remain confident that Wakix can generate over $1 billion from adult narcolepsy alone, and that serves as our mid- to long-term guidance. Additionally, we see the potential to add another $1 billion from other ongoing programs, assuming they are approved. Therefore, we are optimistic about the long-term growth prospects for Wakix. In terms of short-term guidance, we consider early next year to be a reasonable timeframe.

Okay. Thanks, Sandip.

Thank you.

Yes, good morning, Jeff and team. First of all, congratulations on a successful commercial quarter, and thank you for taking my question. I don't have any commercial questions to ask, so I'll inquire about the pipeline, specifically regarding the INTUNE study. We recently had a call with a key opinion leader, and they were quite enthusiastic about the results they observed. My question for you is, when you engage with the agency, what will the focus be? Will it be on possibly conducting a new study, or evaluating the data from the INTUNE study and its open-label extension? Thank you.

Hey. Good morning, Charles. Thank you for your question and sort of the feedback that you received on the INTUNE study. I mean, I think that the approach with the agency is really, first, as I mentioned, and I'll turn it to Kumar, looking at all the data and understanding, obviously, the robust clinical effect that we saw upfront in the eight-week open-label phase and almost 90% of patients electing to go into the long-term extension, that continues on. And we also continue to collect long-term safety and effectiveness data that we could use to go to the agency, in addition to the data from the INTUNE study. The approach is to build a strong case with regards to the totality of the evidence coming out of the trial, along with the pitolisant-received orphan drug designation for IH that the FDA granted. And then you look at the current treatment options. You look at overall benefit/risk. You look at the need, and we build the case and discuss that with the agency, where it could fit into treatment options. So that is the overall approach. And Kumar, I ask if you have any additional thoughts on strategy.

No. I think that you covered everything. Thank you.

Okay. And then, as a follow-up, I guess you probably can't provide any information on the persistence within that IH open-label extension. But I guess I'm wondering, if you think about the mechanism and utility in IH, how would you think that compares to, say, narcolepsy and the potential for persistence being greater in IH than even it is in narcolepsy? Thanks.

Good morning, Charles. Thank you for your question. Narcolepsy and idiopathic hypersomnia are both central disorders of hypersomnolence, and there is strong evidence to support the maintenance of effect in narcolepsy patients based on our clinical trials. In particular, the INTUNE study showed significant clinical impact during the open-label phase. We found that eight to nine patients who finished the eight-week open-label treatment period met our stringent response criteria based on the ESS, which is more rigorous than the guidelines from the American Academy of Sleep Medicine. Additionally, there was a notable response magnitude, with a drop of 9.4 points from baseline to the end of the treatment period. Regarding the long-term extension study, as Jeff mentioned earlier, nearly 90% of patients chose to participate, and we are still gathering data on safety and efficacy. Although we do not have that data yet, we plan to have our data cut by the end of November, at which point we will begin analyzing the safety and efficacy results from the long-term extension study.

And can we assume that meeting happens in, say, possibly the first quarter? Obviously, it depends, not only on your schedule, but is that kind of the target?

Good question, Charles. Right now, we are focused on a thorough review of the data which will inform the strategy when we meet the FDA. Right now, we are planning to complete all the assessment and analysis by the end of November. And immediately after that, we will start working on the meeting request, briefing document, and request a meeting with the FDA in early first quarter of 2024.

Yeah, Charles. I would just add, so yeah, so we're moving sort of expeditiously. This is obviously a high priority for us, so we're moving quickly to review all the data, put in the meeting request, and get in front of the agency to have this discussion as we actively pursue the indication for pitolisant in IH.

Hi. This is Daniel Nee filling in for Danielle. Congratulations on the strong quarter. We have a question about any new updates on the citizen petition. Additionally, we noticed there were no reports of patients on Wakix exiting this quarter, and there was only an average number of patients reported. Is this the new standard for future earnings as well? Thank you very much.

Sure. Thanks for your question. Jeff, could you address the number of patients exiting first? Then I'll discuss the citizen petition.

Sure. I mean, the existing number of patients for this quarter was approximately 5,900 patients. We disclosed exiting patients in the previous two quarters to really help to frame the dynamics in those quarters. You tend to see the typical payer seasonality in Q1. And obviously, we had an inventory dynamic in Q2. But we've always historically reported average number of patients because we believe that average number of patients on WAKIX is the best metric to assess the continued growth and uptake of the brand, given that it takes into account new patient starts, continuing patients, and all the patient medication behavior, compliance, persistency, discontinuation rate. And I think that what we're seeing in that strong growth in average number of patients demonstrates, not only the strong interest in the narcolepsy community, but really highlights that large remaining diagnosed patient opportunity that we continue to tap into as the market allows.

Thank you, Jeff. Regarding the citizens petition, I wanted to provide an update. As you may remember, the FDA responded to the petition in September, fulfilling its requirement for a 180-day response. The agency indicated it needed more time to review the petition, which is a common practice in over half of the cases. While we initially preferred to allow the FDA sufficient time for its review, the absence of a defined timeline for their response has prompted us to take action. We are exploring options to encourage the FDA to provide a timely final response. We believe that WAKIX is the only nonscheduled treatment approved for adults with narcolepsy, and it would be detrimental for patients and healthcare professionals to be affected by the unfounded claims in the petition concerning the safety and efficacy of WAKIX, as this could influence treatment decisions. We stand by the regulatory validity of the WAKIX NDA and maintain confidence in its overall risk/benefit profile, supported by our comprehensive clinical development program and post-marketing safety data regularly submitted for FDA review. Up to this point, the agency has not reached out to us concerning the citizens petition. Going forward, we will collaborate with the FDA and appreciate their close examination, as we believe that upon reviewing the baseless allegations against WAKIX in light of all available information, they will ultimately dismiss the petition due to its lack of merit. That concludes the update on the citizens petition.

Very helpful. Thank you very much.

Thank you.

Good morning, everyone. I appreciate you taking my questions. My first inquiry is about your annual net sales capture per patient and the average patient number. It appears that the revenue capture is improving, providing a significant advantage year-over-year, and it has been steadily increasing. Can you elaborate on whether this is a consistent trend or simply seasonal? I've noticed that the difference between net sales capture per patient in the first half versus the second half continues to grow, and I am curious about how you view this as we head into 2024. Additionally, regarding the share buyback, how do you prioritize the buyback in relation to mergers and acquisitions? It seems like the buyback is primarily aimed at defending the stock when it's underperforming, while M&A might take precedence over buybacks. Could you please provide some clarification on this? Thank you.

Yeah. Thanks, Jason for your question. Sandip, do you want to speak to revenue per patient first?

Sure. Typically, we see a decline in the first half of the year, especially in the first quarter, due to higher growth in net deductions, but this improves as the year progresses. Gross and net deductions generally stabilize by the third and fourth quarters. Compared to last year, we have seen an increase of about 8% in that metric, along with a price increase of around 10% we implemented earlier this year. Adjusting for the effects of the price increase and some fluctuations in inventory explains the 8% year-over-year growth.

And the way to think about it going forward and generally, like I said, gross net is relatively flat for Q3, Q4, second half of the year. And then of course, as we go into Q1 of next year, you'll see the same dynamic again, where we'll have higher net deductions and so forth. So it's following the natural seasonality and pattern that we observed over the last couple of years for this product, which, again, is not product specific. It's really industry specific, I would say, overall. I don't know, Jeff, was there anything else you wanted to comment on that?

So I mean, Jason, I think the only other factor just to consider when you're looking at average revenue per patient is the patient assistance program engagement that we've seen has been relatively consistent. And so as the number of patients on average patients continues to grow and the participation in the free goods program is relatively flat, you'd see a slight incremental benefit as we're adding more revenue-generating patients. It's nominal, but I think to Sandip's point, when you couple that with the gross to net and the price increase, that's really what's kind of driving. So you should anticipate a slight increase in the average revenue per patient moving forward based upon traditional price increases that we would take, as well as just a relatively flat participation in our free goods program, as we continue to grow the average number of patients on Wakix.

Yeah. And with regards to the share buyback, I'll just start and hand it over to Sandip. Jason, I think, as Sandip mentioned in his comments, it's not sort of an either/or. I think that obviously, we're in a strong position with regards to deploying capital, either toward share repurchase or business development efforts. And, Sandip, further thoughts on that?

I believe that's accurate. It's not simply a matter of one or the other. Considering our company's profile, as I noted earlier, we produced $63 million in cash from operations last quarter, demonstrating strong cash generation and profitability. Our company has a unique profile, and we believe we are well-equipped to pursue both share buybacks and business development. However, this will vary each quarter, and we will keep investors updated as we make progress in both areas.

Yeah. And I think we remain committed in terms of our business development efforts and understanding the importance of growing the pipeline and diversifying our portfolio to drive long-term growth.

Hi. Good morning. Thanks for taking the question. Congrats on the progress. Two quick questions, if I could. First, just going back to the new share repurchase and comments around potential flexibility around BD, should we assume or any comments you want to provide on kind of the size of the deals going forward? Certainly, Zynerba was, I think, as you mentioned, about a $60 million transaction, given that you got a new $200 million share repurchase. Is that $60 million kind of the happy place for you guys in terms of the types of deals and the size of deals you want to do? So that's my first question. And then second, just on patent litigation with the P4s that have been filed. I just wanted to ask if you could confirm whether you have initiated patent litigation or patent infringement lawsuit yet? And any thoughts around timelines with respect to that? Thanks so much.

Hey, Graig. Thanks for your question. Sandip?

I would not interpret the Zynerba transaction as indicative of our future actions. Currently, we have $438 million at the end of last quarter and are still generating positive cash flow. We also have access to public markets if necessary. This positions us to pursue larger transactions than we have previously. Ultimately, the types of opportunities we encounter will guide our decisions, and we have considerable flexibility in how we deploy our capital.

And, Graig, with regards to your question on patent litigation and Paragraph 4 filings, I think as we previously have communicated, based on the commercial success with Wakix, we fully expected to see Paragraph 4 filings, and we received additional filings beyond the first two that we initially received and have shared and disclosed. So I think that we'll provide updates on the process as it moves forward. This is a long process, I think, as you're aware. We prepared for the generic filers, and this is really the start of the process. We have 45 days from the date of each of the Paragraph 4 notification to file the lawsuits, which invokes the 30-month stay, which, obviously, prevents the FDA from approval of that generic file during that timeframe. So we've engaged expert IP counsel to represent both Harmony and Bioprojet in the patent litigation. And we are confident in the strength of our IP, prepared to vigorously defend it. And we'll provide updates as that process moves forward.

Good morning, everyone. Could you just maybe clarify, I think, for formulation 2, you highlighted an abbreviated development program. So what does that actually mean in terms of the need for in size of Phase 1, Phase 2, and Phase 3 studies? And how quickly do you think you can kind of get a program like that to market? And then, I guess as a follow-on to that question, do you primarily see this launch would be a switch campaign ahead of generic and launches? And what lessons can you win for other switch campaigns that you would apply there?

Good morning, Corinne. I'll have Kumar sort of comment on the approach to the second formulation quick-to-market strategy. From a commercial perspective, I'll ask Jeff Dierks to share thoughts on what that could offer to the market.

Good morning, Corinne. The formulation 2 is the pitolisant-based modified formulation, and we are on track to get into the clinic in the second half of this quarter. In terms of the attributes and the potential clinical differentiation, we do believe that this particular formulation will have different attributes and several different clinical differentiations, but we are not in a position to comment on that one because of the IP and competitive reasons. But this will be a fast-to-market strategy, and we anticipate launch within the Wakix life cycle.

And Corinne, from the commercialization strategy with the new formulation 2, it will not be a switch strategy. This is a brand new product. And given the level of dissatisfaction that we see in the marketplace, the significant unmet need, people living with narcolepsy need new treatment options. And so we see this as a unique option that will be differentiated from Wakix and providing a new therapeutic option for patients. So we see Wakix and this new formulation being able to coexist and provide two unique options to people looking for a therapeutic treatment for EDS or cataplexy and adult narcolepsy.

And just to clarify, when you say within the Wakix life cycle, I assume you mean your base case, which is late mid-2030?

That's correct. Yeah, that's correct, Corinne.

I'm showing no further questions. At this time, I would like to turn the call back to management for closing remarks.

Thank you, operator, and thanks, everyone, for joining our call today and for your interest in Harmony. As you heard from us this morning, our business remains strong, and we have confidence in the long-term growth potential of our company. We look forward to providing updates as our business advances. Thank you, and have a great day.

Thank you. This does conclude today's Harmony Biosciences third quarter 2023 financial results conference call. You may now disconnect your lines, and have a wonderful day.