Harmony Stock Tanks On Study Miss For Narcolepsy Drug: Problems May Be Escalating

Harmony Biosciences Overview

Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY) is a Pennsylvania-based, commercial stage pharmaceutical company that joined the Nasdaq back in August 2020, its initial public offering raising ~$148m, via the issuance of ~6.1m shares priced at $24.

In fact, Harmony markets and sells a single product, WAKIX, which was approved by the FDA for Excessive Daytime Sleepiness in August 2019, prior to the company's IPO, and then for treatment of cataplexy in adult patients with narcolepsy in October 2020. According to Harmony's Q2 2023 earnings release, WAKIX has "surpassed $1bn in cumulative net revenue since launch" - last quarter, the company reported:

Net product revenues for the quarter ended March 31, 2023 were $119.1 million, compared to $85.3 million for the same period in 2022. The 39.6% growth versus the same period in 2022 is primarily attributed to strong commercial sales of WAKIX driven by continued organic demand.

The average number of patients on WAKIX increased by approximately 1,200 patients from the quarter ended March 31, 2022 to approximately 5,100 as of the quarter ended March 31, 2023.

Harmony earned net income of $29.5m in in Q2 2023, up from $21.5m in the prior year quarter, for earning per share ("EPS") of $0.49. Non-GAAP adjusted net income was $40.1 million, or $0.66 EPS. The company also recorded a cash position of ~$430m.

Although Harmony has declined to provide guidance for the remainder of 2023, having generated revenues of $499m in 2022, with net income of $200m, you could certainly make the argument that the company fully merited its market cap valuation - at the beginning of this week - of ~$1.9bn, which is ~5x 2022 sales, and ~10x net profit.

Today, however, Harmony's share price has been in free-fall - losing >30% of its value in trading so far today - after the company revealed that pitolisant - the underlying ingredient in Wakix - had failed to meet the primary endpoint in a Phase 3 study of the drug in patients with Idiopathic Hypersomnia ("IH").

The study failure is not the only problem faced by the company - back in April, the activist short seller Scorpion Capital filed a Citizen's Petition with the Food and Drug Agency ("FDA") claiming that pitolisant "poses a grave danger to patients", and requesting that the agency withdraw approval of Wakix. This action resulted in Harmony's share price falling from ~$41, to $30 - a loss of ~27%.

At the end of December 2022, Harmony stock had traded even higher, at >$60 per share, but the news that the company's President and CEO since 2018, who was also a member of the Board of Directors, John Jacobs, had decided to leave his post and join the vaccine specialist Novavax (NVAX), caused the stock to decline >15%.

In summary, it is probably fair to say that Harmony's new CEO Jeffrey M. Dayno, M.D., who was promoted to CEO and President on April 24th, having formerly served as Chief Medical Officer ("CMO") and Executive Vice President, is facing a baptism of fire in his new role. In this post I will dig a little deeper in each of the issues faced by the company, assess the risks, and finally discuss whether today's downward correction represents a buying opportunity, or the beginning of a difficult bear run.

Pitolisant Misses Mark In Idiopathic Hypersomnia Damaging "Product In A Pipeline Thesis"

The phrase "product in a pipeline" often caused me concern when used by a biotech company, because it tends to imply that the company is focused on a single drug, implying a high level of single asset risk - if anything goes wrong with that drug, the company may find itself in trouble.

With 2 FDA approvals behind it, pitolisant could be said to be derisked, with good label expansion prospects, but today's data has clearly set alarm bells ringing amongst investors and the market. Harmony's press release announcing the primary endpoint miss initially praises the results, until, midway through the third paragraph, management writes:

A positive trend favoring pitolisant was observed during the 4-week double-blind randomized withdrawal period, however no statistically significant difference was observed between pitolisant and placebo groups on ESS, the primary endpoint.

Kumar Budur, M.D., Chief Medical Officer at Harmony Biosciences, comments:

We are very encouraged by the magnitude of the response seen in the initial open-label treatment period, where 83% of patients completing this phase responded with an average 9.4 point improvement in the Epworth Sleepiness Scale (ESS). Equally encouraging is the number of patients, almost 90%, electing to continue into the long-term extension study.

Following a thorough review of the full data set, we will work closely with the FDA to discuss next steps and a path forward for pitolisant in IH

In a recent investor presentation, Harmony discusses a $1bn+ net revenue opportunity in narcolepsy - a mark that remains a long way off, suggesting management is confident of further revenue growth in this indication, but also adds that there is an additional $1bn of revenues potentially on the table if approvals in IH "and other current lifecycle management programs" are secured.

The other significant opportunities are in Prader Willi Syndrome ("PWS"), and Myotonic Dystrophy ("DM"). Management expects to initiate a Phase 3 study in the former before the end of the year, and while topline data from the latter is expected this quarter also.

IH is a significantly larger indication - of ~80k potential patients, Harmony believes - than either PWS or DM, which are estimated to have patient populations of ~15-20k, and ~40k. Management has suggested IH could be a >$2bn market opportunity, with only one other approved therapy to compete against, however, revenue opportunity aside, the greater damage done by the study miss may be to the market's perception of pitolisant. In short, the missed endpoint came at the worst possible time for Harmony, given the Citizen's Petition.

Scorpion Capital Attacks - How Seriously Should The Citizen's Petition Be Taken?

This is not the first instance I have come across of a firm using a Citizen's Petition to attack a biotech company and drive its share price downward. A more famous example could be the attack on Cassava Sciences (SAVA) launched by short-sellers back in 2021.

At present, according to Nasdaq.com, short interest in Harmony stock amounts to >7m shares, which is ~10x the average daily share volume, and ~10% of the share float of 60m (according to Google Finance).

Harmony longs will doubtless argue that issuing a Citizen's Petition is akin to throwing mud at the company and hoping something sticks, but Scorpion insists it has "conducted a 4-month-long investigation into pitolisant’s purported safety and efficacy," and has shared a "366-page investigative report" with the FDA.

Scorpion's attack focused on the mechanism of action ("MoA") of pitolisant. In its latest quarterly report, Harmony refers to the drug as "a first-in-class molecule with a novel mechanism of action (“MOA”) specifically designed to increase histamine signaling in the brain by binding to H₃ receptors." Scorpion, on the other had, claims that:

pitolisant poses a grave danger to patients, as evidenced by the inherent and well-documented toxicity of histamine H3 receptor antagonist/inverse agonists as a drug class and by that of pitolisant specifically given its molecular structure, as well as by serious and fatal adverse events that Petitioner has identified through a variety of methods

Scorpion claims to have compiled evidence of dozens of serious side effects, and also suggests that certain prescribing physicians were indulging in a "blatant kickback scheme." Nevertheless, with such a clear vested interest in the value of Harmony shares falling, the market likely expected the FDA to dismiss the case.

That does not appear to have been the case, however, with Scorpion sharing an apparent response from the FDA in September, quoting the agency as stating it "has been unable to reach a decision on your petition because it raises complex issues requiring extensive review and analysis by Agency officials."

This news triggered a slight slip in Harmony's share price, and also prompted Harmony to release a statement stating:

Harmony acknowledges the FDA’s non substantive interim response to the Citizen Petition. The Citizen Petition was filed by a short seller that is attempting to profit from driving down our stock price and deny patients’ access to an innovative and proven therapy. A response of this type is common, uses standard language to provide an explanation for deferral and does not suggest any determination of merit. To date, we have not been contacted by the FDA regarding this matter.

At this time, it is difficult for a retail investor without deep knowledge of the selective histamine 3 receptor antagonist/inverse agonist class of drugs to be sure if Scorpion's accusations have any merit. Pitolisant has been approved in 2 indication by the FDA, with apparently no safety concerns flagged, although Scorpion claims that drugs with a similar MoA have been removed from the market owing to safety concerns.

Today's announcement that pitolisant had missed a key study endpoint was related to efficacy, not safety, with Harmony reporting that the "Safety and tolerability profile in adult patients with idiopathic hypersomnia was consistent with established safety profile of pitolisant"

Concluding Thoughts - Is Today's Selloff In HRMY Stock Is A Sign The Market Is Giving Wakix Thumbs Down?

As mentioned in my intro, looking at Wakix' sales figures and the company's opportunities to grow revenues in the narcolepsy space - a market apparently expected by Harmony to double in size in the coming years, reaching ~$5bn, and expand the drug's label, Harmony would seemingly merit a valuation >$1bn, and perhaps significantly higher.

Today's study failure announcement can certainly be considered a setback, but with 2 approvals already under its belt, and the major revenue opportunity in narcolepsy, perhaps investors would not have dumped Harmony stock at such levels had it not been for the added doubts created by Scorpion's Citizen's Petition.

Scorpion's reports raise apparent concerns around the safety profile of Harmony's lead and only asset, and of course, this could be dismissed as merely the most effective way to spread fear and uncertainty amongst shareholders, but now there are also concerns around efficacy, and perhaps we should also mention that Harmony is carrying ~$180m of long-term debt, although this is more than offset by current cash position.

The FDA could potentially have moved to decisively dismiss Scorpion's Petition, however, creating further uncertainly, although it is worth noting that the agency has apparently not yet made contact with Harmony over the issue.

In terms of what this all means for the direction of Harmony's share price, unfortunately, my suspicion would be that further price corrections may be coming. In the case of Cassava Sciences, the Citizen's Petition triggered a slide in the company's share price from which it has never really recovered, and although the two companies situations are not in any way comparable, the reputational damage - deserved or otherwise - suffered by Harmony in recent weeks, plus the recent departure of its long-time CEO and President, makes this a tricky period for the company to negotiate.

Luckily, perhaps, Harmony will soon have more data to present from its Phase 2 study in Myotonic Dystrophy, and perhaps a positive readout can alleviate many of the company's concerns. At present, however, I would allocate Harmony a Sell recommendation even after today's slide.

The company has been able to turn a drug it acquired from the French Pharma Bioprojet SCR in 2017 into a >$400m per annum selling commercial product, and it is finally worth noting Harmony is set to acquire the biotech Zynerba, and its pipeline of cannabinoid therapies for orphan neuropsychiatric disorders, in a ~$200m deal adding a differentiated product to its pipeline.

Nevertheless, my suspicion that Harmony Biosciences Holdings, Inc. faces potentially the challenging period in its life as a listed company makes me think the share price may fall further in the foreseeable future, and a short-term, or even long-term, recovery is not necessarily guaranteed.

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