HRMY - Harmony Biosciences: 4 Problems With Investing (Rating Downgrade)

2023-12-27 12:41:31 ET

Summary

• Harmony Biosciences Holdings, Inc. is facing challenges including a failed Phase 3 study, doubts about its patent estate, and competition from rivals.
• The company's drug, Wakix, has been successful in generating revenue, but its monopoly is being challenged.
• Harmony's acquisition of Zynerba is also facing doubts, as the key asset, Zygel, has not produced robust data in clinical trials.

Harmony Biosciences Holdings, Inc. ( HRMY ) is staying depressed because of the failure of a Phase 3 study for pitolisant in patients with Idiopathic Hypersomnia, challenges from short sellers, increasing doubts about its patent estate, doubt about the value of its Zynerba acquisition, and increasing competition from a few rivals, including Axsome Therapeutics (AXSM). The stock is down a few percentage points from when I last covered it in May, but that's because it was already down by then. In October this year, after its phase 3 study failed to meet its primary endpoint, the stock shed 40% of its value. That it didn't lose more is probably because pitolisant, branded Wakix, is a moderately strong revenue generator. As I wrote last year:

Excessive daytime sleepiness can be caused by narcolepsy, obstructive sleep apnea, and a host of other factors. Wakix is approved to treat EDS or cataplexy (brief attacks of weakness on emotional arousal) in adult narcolepsy patients. It is currently the only FDA-approved non-scheduled narcolepsy drug with a convenient, once-daily dosing. The narcolepsy market is large, at $2bn, and Wakix with its convenient dosing and novel mechanism of action is well-positioned to capture a good chunk of that market.

Wakix is a successful drug. In its 4+ years of market existence, the asset has made over $1bn for Harmony. Although its monopoly has come under challenge from junior peers, Harmony's plan was to get it approved for newer indications and grow its topline. That plan has come under considerable cloud with the trial failure in Idiopathic Hypersomnia.

On October 13, the company announced this data in the header of its release thusly:

Although primary outcome for excessive daytime sleepiness ((EDS)) between pitolisant and placebo did not reach statistical significance in the randomized withdrawal phase, further data analysis is ongoing to inform next steps

Positive trends favoring pitolisant were observed in other prespecified endpoints including Idiopathic Hypersomnia Severity Scale ((IHSS)) and Sleep Inertia Questionnaire ((SIQ))

Safety and tolerability profile in adult patients with idiopathic hypersomnia was consistent with established safety profile of pitolisant

The totality of evidence from INTUNE study and the Orphan Drug Designation for pitolisant provides optimism for next steps with FDA

Thus, there was no clear win, making the situation risky for pitolisant in this indication. The company now has to run with "the totality of evidence," instead of the much more robust "primary endpoint win."

Wakix has a number of advantages over its peers, the most important of which is its non-scheduled nature. That means, it is not prone to abuse like its rivals. Xyrem and FT-218, for example, are versions of sodium oxybate, and are schedule 3 controlled substances, while AXS-12 is a schedule 4 controlled substance. Thus, to a varying extent, these drugs are prone to abuse while wakix is not. This has broad implications for insurance as well as prescriptions.

The problem for Harmony is that Wakix is its one-trick pony. There are two ways to succeed: one is label expansion, where they currently have two labels and need this one for further growth. The other is acquiring new assets. This they endeavored to do by acquiring Zynerba.

However, there are some doubts about this one as well. Harmony acquired Zynerba for $200mn earlier this year, however, its key asset, Zygel, has its doubters, including analysts at Goldman Sachs who recently said that Zygel's data isn't robust. Zygel is currently running a Phase 3 trial for patients with Fragile X syndrome, a rare behavioral disorder with no FDA-approved therapies. In 2020, it missed a pivotal trial in the same indication, attaining neither the primary nor any of the secondary endpoints. While Zynerba recovered enough to produce solid data in April this year, those doubts remain.

A third problem is the short attack from Scorpion Capital . I discussed this in my previous article, so, for background, I will simply reproduce the title of the short report, and let you decide for yourself whether you can trust a report with a title like this:

The Latest Price-Gouging Ploy By The Grifter Who Inspired Convicted Felon Martin Shkreli, But This Time People Have Blood On Their Hands: A $175,000 Per Year Drug With Alarming Toxicity And A Trail Of Covered-Up Deaths And Injuries; No Efficacy; A Non-Existent Mechanism Of Action; Sham Patents; Based On Scam Clinical Trials In Places Like Russia And Turkey By A French Quack; Pushed Via False Advertising And A Vast Off-Label And Physician Kickback Scheme

Yes, that is the title in its entirety. In August, Harmony won a small victory over Scorpion Capital after an appeal against the validity of its key patent was rejected by the USPTO. Another citizen's petition filed by Scorpion was termed "nonsubstantive" by the FDA.

The final problem here is patent expiry. Their key patent expires in 2028, and while there are other ways to attain market exclusivity, none are as robust as a composition of matter patent.

Financials

HRMY has a market cap of $2bn and a cash balance of $438mn. Net product revenues for the quarter ended September 30, 2023, were $160.3mn. Research and Development expenses were $17.5 million in the third quarter of 2023, sales and Marketing expenses were $23.4 million, and general and Administrative expenses were $22.5 million. Total operating expenses were $63mn. That gives them a cash runway of several quarters.

Bottom Line

HRMY has had its ups and downs over the last 18 months, and there was a time when I thought I should have bought the stock. Right now, though, I am not so sure. The stock is not trading at its yearly lows, and the trial failure has weighed on its value proposition. Until Harmony Biosciences Holdings, Inc. meets with the FDA and comes out with a strong plan for this program, I don't believe it is adequately de-risked.

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