Harmony Biosciences Holdings, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Harmony Biosciences is a commercial-stage pharmaceutical company focused on developing and commercializing innovative therapies for patients with rare neurological diseases and other unmet medical needs.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

  • Focus: Harmony Biosciences Holdings, Inc. (HRMY) is a biopharmaceutical company with a focus on developing and commercializing innovative therapies for patients with rare neurological disorders and other conditions with significant unmet needs. Their commercialized product is WAKIX, and they have an additional investigational drug candidate in the pipeline.
  • Product Focus: The company’s sole marketed product is WAKIX, a first-in-class medication for the treatment of excessive daytime sleepiness or cataplexy in adult patients with narcolepsy. It is also approved for children 6 and older with narcolepsy. The company is working to expand the use of WAKIX into additional indications.
  • Revenues: The company’s revenue is derived primarily from the sale of its sole marketed product, WAKIX. This is a crucial point, as it highlights the company’s dependence on a single product for revenue generation.
  • Trends in Industry: The pharmaceutical industry has been characterized by a push towards orphan drugs and treatments for specialized markets. This is partially due to the potential for orphan drug designations, which may grant the company market exclusivity for a period. The development pipeline is increasingly important.
  • Margins: The company has high operating margins and gross margins. The ability to achieve and sustain high gross margins in the pharmaceutical industry is important to the company’s ability to generate significant returns.
  • Competitive Landscape: Competitors include drugs for narcolepsy from companies such as Avadel and Takeda. For instance, the company’s drug WAKIX is the only non-controlled substance drug to treat EDS and cataplexy in patients with narcolepsy. This drug has a favorable market position within narcolepsy as a non-controlled substance and as such has a competitive advantage over others in the space. While their product might have been favored as a result of this, it also places the company at a disadvantage for other treatments with a similar mechanism of action.
  • Differentiation: Harmony Bio’s primary point of differentiation lies in the mechanism of action of their treatment which is non-stimulant, which avoids controlled-substance classification. The company is focused on creating novel treatments for rare neurological diseases. Further, the company is working towards expanding WAKIX’s use in other indications. The focus of developing additional indications of WAKIX gives an opportunity to expand the revenue potential of the company.

Financials:

  • Revenue Growth: In the 3rd quarter of 2023, Harmony Bio reported a 34% increase in net product revenue to $162 million. This strong revenue growth shows the robust demand for WAKIX.
  • Profitability: The company has a 63.8% operating margin, showing strong operational performance. Profitability allows them to invest in R&D and explore new opportunities, which also makes the company’s financials attractive.
  • Cash Position: The company has a strong cash position, with $317 million in cash, cash equivalents and marketable securities at the end of December 31st, 2022, enabling them to continue growth and acquisition opportunities.
  • Debt: The company has minimal debt, with approximately $175 million in long-term debt (including current portion). While a bit on the high side, it is still below 50% of the company’s liquidity. In light of high liquidity and positive cash flow, debt is not a huge concern for the business.
  • Investments: Investments in marketable securities are worth around $200m which will provide additional liquidity. The company recently recorded a loss on debt extinguishment of $16.1m.

Moat Analysis:

  • Intangible Assets (Limited): WAKIX has patent protection, but this is time-limited, and they must prove to regulatory agencies that other similar medications do not infringe on their intellectual property. Additionally, as a single product, there is not a portfolio of intellectual property. While the medication is unique in its drug class, a new competitor in the same class would be able to directly challenge them without any further need to develop their own alternative. Therefore this moat is considered narrow.
  • Switching Costs (Weak): The product itself has some habit-forming/stickiness, especially for those whose sleep or cataplexy issues are well-managed. However, it is highly likely that any new competing treatment with the same mechanism of action and good results will reduce the dependence on this drug, and thus the switching costs will likely not be a huge factor.
  • Network Effects (None): The company’s current business model does not have any network effects.
  • Cost Advantages (Weak): Because the company has a single product that has a higher operating margin than its competitors and there is a degree of regulatory protection, one could argue a form of cost advantage. However, as they are not a generic producer, they can not rely on lower cost. This is also not an incredibly strong moat.

Based on the above points, it would be justified to give HRMY a Moat rating of 2 / 5.

Risks to the Moat and Business Resilience

  • Competition: The pharmaceutical industry is fiercely competitive. New entrants with innovative treatments that may be as efficacious or more efficacious than WAKIX could challenge Harmony. Further, a drug that has similar mechanisms of action but also the advantages of WAKIX (non-stimulant and with good patient outcomes), could erode the company’s moat further.
  • Price Regulations and Government Pressures: Increased scrutiny by governments and regulatory bodies over drug pricing, a growing trend, could limit profits. There may be significant pressure on the company to lower the price of their product, which could severely reduce profits.
  • Single Product Dependency: The company’s sole reliance on WAKIX for revenue makes them very vulnerable. Any adverse news or competition regarding this drug could impact their financials. Also, the potential is always there that any pipeline product development will fail.
  • Clinical Trial Success: The clinical trial pipeline is crucial for growth and long-term sustainability of the business. Therefore, clinical trials, if unsuccessful, could hurt the market price. The management has expressed confidence in their pipelines and the success of their drug candidates, but there is no guarantee.
  • Reliance on Third-Party Manufacturers: The company relies on third-party manufacturers, which gives the company less control of their supply chain, thus could lead to supply issues or delays.
  • Regulatory Approvals: The company is subject to the whims of regulatory bodies, including the FDA. Negative feedback or failed approvals for any new drug could be detrimental.
  • Patent Expiry: While patents provide protection for a defined time, other companies may attempt to create variations and obtain their own patents for use in the market. In addition, once the company’s patents expire, they can then directly be challenged by generic pharmaceutical manufacturers.

Business Understandability:

While the company’s stated mission and marketed product are relatively simple, the regulatory environment, pipeline risk, and clinical trial processes make the overall business rather complex. An average investor would have to understand more than just the surface level. Based on this, Understandability = 3 / 5.

Balance Sheet Health:

The company has a healthy balance sheet, with a sizable amount of cash and little debt. The company has demonstrated the ability to generate good profits, which has allowed them to build the cash balance on hand. Based on these factors, Balance Sheet Health = 4 / 5.

Recent Concerns/Controversies and Problems:

  • 2023 Earnings Call: Management has expressed confidence about WAKIX’s sales and their pipeline. However, they also stated they expect a slowdown in revenue growth which led to analysts being less excited about the stock.
  • Debt Increase: The company has had a significant debt issuance in the year 2023 for acquisition purposes. The company’s overall debt is still low relative to its assets, and it does not pose a huge risk, however, this is a signal that could cause concern among investors.
  • Competition: Competitors have started to focus on the narcolepsy market as well, which makes the situation more competitive. The company has yet to prove its long-term sustainability in a competitive market space, without any further patent protection or unique mechanisms of action.
  • Acquisition: The company acquired a drug called Pitolisant, and this will require integration efforts into their own business. Though management has expressed confidence in the growth potential, it may still lead to some problems.

Conclusion Harmony Biosciences is a profitable pharmaceutical company in a high-growth industry. It has a unique product with a degree of protection, however its high reliance on a single product, as well as the growing competition, create substantial risks to its long-term success. For more conservative investors, the risks probably outweigh the positives, but for enterprising investors, there is still a good chance of success and reward.