Harmony Biosciences (HRMY) attracted my interest when the business went public in August. Shares rose to $38 on their first day of trading, and in the first months of trading, shares have risen gradually to current levels around $48.
This run-up is in part driven by strong market conditions and widened label approval, as further momentum is required to justify the current valuation with the third-quarter sales slightly lagging a bit compared to my own expectations.
A Quick Recap
Harmony Biosciences is a commercial stage pharmaceutical company. The company focuses on the development and commercialisation of rare neurological disorder therapies.
The company has a product called WAKIX (pitolisant) which is a molecule designed to increase histamine, which signals the brain. FDA approval for WAKIX arrived in August 2019 to treat excessive daytime sleepiness (also known as EDS). The commercial launch took place in November of last year, which is the only approved product for EDS, with potential label expansion foreseen for treatment of narcolepsy in pediatric patients (as good news on this front arrived quickly, as discussed below).
EDS is fortunately a rare disorder, yet it still impacts more than 150,000 Americans with less than half being diagnosed. Patients with this disease have an inability to stay awake, or stay alert and sometimes suffer from muscle weakness and lack of alertness, among others.
This market measures nearly $2 billion in the US alone, as currently patients typically take controlled substances which are not specifically designed for this disorder. Therefore, patients resort to substances like Ritalin and Adderall, but mostly Xyrem. None of these solutions are well liked by the patients who often express frustration citing, among others side effects, lost of efficacy, high costs and dependency risks.
The company sold little over 5 million shares at $24 in August, as I pegged the diluted share count of 64 million, while operating with a flattish net cash position. Shares rose to $38 on the first day of trading and now trade at $48, which corresponds to a market value of $3.0 billion.
This is quite steep as the company generated $6.0 million in product sales between the launch in November and the end of 2019, as operating losses were quite steep. First-quarter sales rose to $19.8 million, and product sales nearly doubled on a sequential basis again to $38.0 million in the second quarter. Based on a run rate of $150 million in sales, valuations are quite steep, although the company has already become profitable. At the current run rate and trading at $48, multiples have risen to about 20 times sales based on these numbers.
The All-Important Third Quarter
I was constructive on a speculative basis when reviewing the public offering as I looked forward with great interest to see how product revenues would evolve in the third quarter. Good news arrived quickly as in mid-October the company obtained FDA approval for extended use of WAKIX for treatment of cataplexy.
Third-quarter sales rose further to $45.6 million which marks a bit of a slowdown from the sequential gains seen in recent quarters, yet at the same time reveals a $180 million revenue run rate less than a year since commercial launch. Furthermore, operating earnings for the quarter already come in at more than $10 million, translating into operating margins (on a GAAP basis) in the low-twenties already.
That being said, a current $3.0 billion valuation is quite substantial, working down to 16-17 times annualised sales. With sales up $7.5 million on a sequential basis, we can make some guesstimates if we extrapolate current trends. If the company can grow sales by $7.5 million on a sequential basis for the coming year, the annualised run rate comes in at $300 million in a year from now. This reduces the forward sales multiple to around 10 times sales, while the company is very profitable already.
An Update – Worth Watching, Not Chasing
With shares having risen another 30% since the public offering, I like the widened label approval, yet at the same time I am not very impressed with the sequential sales increase between the second and third quarters.
Here and now, I am not willing to chase the shares given this dynamic. Although the good news of widened approval rolled in, the question is how much and how soon of a revenue impact can be seen from this.
Harmony continues to be a very interesting company as I look forward to keep watching the developments from here onward, although I would be happy to buy on dips towards the $40 mark, or thirties, given the forward sales multiples discussed above.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.