HRMY - Harmony Biosciences: A Balancing Act As Investors Lose Some Sleep

2023-09-24 02:16:31 ET

Summary

• Harmony Biosciences has experienced strong and profitable growth following the approval and commercialization of WAKIX.
• The company's success has allowed for funding of other programs and acquisitions.
• Despite the risks associated with dependency on a single drug, the appeal of Harmony Biosciences lures.

In March of this year, I was loading up on shares of Harmony Biosciences ( HRMY ) as it saw strong and very profitable growth. After the company saw approval for WAKIX in 2019, the company has seen rapid and profitable growth, allowing for further R&D funding and bolt-on dealmaking in an effort to diversify the business.

While the dependency risks on a single drug were large, appeal was imminent in my view. Continued growth is seen in WAKIX sales, but some controversy is seen as well, although the company worked hard to create some diversification. Still upbeat based on the numbers, I fear to increase my position here in this battleground stock.

Neurological Disorders

Harmony focuses on the development and commercialization of neurological disorder therapies, and the business enjoyed strong momentum following FDA approval for WAKIX in 2019, which was designed to increase histamine levels which provide signals to the brain.

The drug is approved for EDS, which stands for excessive daytime sleepiness, an indication which impacts some 150,000 Americans, representing a $2 billion market opportunity, with commercialization starting in November 2019. Being the only dedicated drug for EDS, many patients were using generic and alternative drugs such as Ritalin, Xyrem, Adderall, drugs which create dependency risks and lack efficacy.

Priced at $24, shares doubled on their opening days, granting the business a $3.0 billion valuation, all while WAKIX sales only totaled $6 million in 2019 (which is no surprise with approval only coming in late during the year).

The company saw strong growth with first quarter sales for 2020 coming in at $20 million, to nearly double to $38 million in the second quarter. The $150 million run rate is substantial as the FDA approved the treatment of catapelxy, with third quarter sales increasing to $45 million, and fourth quarter sales reported at $56 million.

After this spectacular growth in 2020, revenues rose further to $305 million for all of 2021, with operating profits reported at $87 million. In February 2023, Harmony posted a 43% increase in 2022 sales to $438 million, with operating profits reported at $120 million, even after accounting a huge R&D charge. Moreover, fourth quarter operating profits of nearly $48 million on $128 million in sales were huge, translating into a profitability run rate of $2.50 per share.

With shares trading at $43 per share, and the company holding about $2 per share in net cash, valuations looked reasonable at 16-17 times earnings, as the business was still posting 40% revenue growth. The issue was that investors were continuously concerned about the business being a one-trick pony, as well as the fact that CEO John Jacobs left the firm.

And Now?

Having been bullish on Harmony at $42 that upbeat stance was a bit too preliminary. By the end of the month, shares plunged to the $30 mark on the back of a short report.

In May, Harmony posted a 40% increase in first quarter sales to $119 million on which the company posted an operating profit of $40 million, with net earnings of nearly $30 million coming in at $0.48 per share. This and some research results made that shares recovered to the $35 mark over the summer, as the company announced a $125 million share buyback program in August.

This buyback program was announced alongside the release of the second quarter earnings report. Total revenues rose some 25% to $134 million, although that the percentage pace of growth slowed down quite a bit. This was achieved based on an average of 5,450 patients during the quarter, with the company ending the quarter with 5,600 patients, as the company refinanced existing debt holdings as well, resulting in an estimated $6 million in annual interest expense savings.

The company continues to be very profitable, positing earnings of $0.56 per share as 61 million shares granted the business a $2.13 billion equity valuation, which even included a $238 million net cash balance, implying that operating assets are valued at $1.9 billion. This is a modest valuation with sales surpassing the half a billion run rate, and being very profitable.

Later that month, Harmony announced the purchase of Zynerba Pharmaceuticals ( ZYNE ) . This was a rather modest deal valued at $60 million, excluding a $140 million contingent value right, although that the business will of course hurt bottom line results a bit for all of Harmony. Zynerba focuses on the development of a treatment for FXS, a gene disorder which affects about 80,000 people in the US.

In September, Harmony announced that the FDA granted the business an Orphan Drug designation for the treatment of idiopathic hypersomnia as IH affects about 80,000 people in the US as well, half of which have been diagnosed.

What Now?

Right now, shares still trade around the $35 mark, with shares down some 15% since March, while the overall results have been quite good. While the company remains a one-trick pony, WAKIX sees continued growth, Harmony has grown earnings power and built up its net cash position.

Furthermore, Harmony announced a big buyback program and a bolt-on deal, while some interesting data is expected in the coming quarters in its R&D programs.

Hence, I find myself performing a balancing act. There are of course concerns being a one-product business and the allegations of a short seller, but on the other hand there is profitable growth, a substantial net cash position, a recent deal, R&D progress, all of which makes that investors have to perform a balancing act here.

I hate to be in such battleground stock and while I hold a long position, I fear to have conviction to add up on the recent dips, as I anxiously await further developments from here.

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