NEUROCRINE BIOSCIENCES INC (NBIX) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations section contains forward-looking statements pertaining to, among other things, the commercialization of our product and product candidates, the expected continuation of our collaborative agreements, the receipt of research and development payments thereunder, the future achievement of various milestones in product development and the receipt of payments related thereto, the potential receipt of royalty payments, preclinical testing and clinical trials of potential products, the period of time that our existing capital resources will meet our funding requirements, and our financial results of operations. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including those set forth in this Annual Report on Form 10-K under the heading “Item 1A. Risk Factors.” See “Forward-Looking Statements” in Part I of this Annual Report on Form 10-K.

Overview

At Neurocrine Biosciences, our purpose is simple: to relieve suffering for people with great needs, but few options. For three decades, we have applied our unique insight into neuroscience to advance medicines for neurological, endocrine and psychiatric disorders. Our efforts have resulted in United States Food and Drug Administration, or FDA, approved treatments for tardive dyskinesia, Parkinson’s disease, endometriosis* and uterine fibroids* and a diversified portfolio of investigational therapies with the potential to address unmet clinical needs of patients worldwide living with neurological, endocrine and psychiatric disorders. (*in collaboration with AbbVie Inc., or AbbVie)

We launched INGREZZA® (valbenazine) in the United States in May 2017 as the first FDA-approved drug for the treatment of tardive dyskinesia and launched ONGENTYS® (opicapone) in the United States in September 2020 as an FDA-approved add-on treatment to levodopa/carbidopa in patients with Parkinson's disease experiencing motor fluctuations. INGREZZA net product sales represent the significant majority of our total net product sales.

Our partner AbbVie launched ORILISSA® (elagolix tablets) in the United States in August 2018 and launched ORIAHNN® (elagolix, estradiol and norethindrone acetate capsules and elagolix capsules) in the United States in June 2020. We receive royalties at tiered percentage rates on AbbVie net sales of elagolix.

Business Highlights

•INGREZZA net product sales for 2021 increased $88.8 million, or 8.9%, to $1.1 billion, primarily driven by increased total prescriptions reflecting higher customer demand and increased commercial activities.

•On February 8, 2022, we entered into a lease agreement for a four-building campus facility to be constructed in San Diego, California, pursuant to which we also secured a 6-year option for the construction of a fifth building and an option to purchase the entire campus facility, which will consist of office space and research and development laboratories, in the future. Upon completion of construction, we expect to utilize the campus facility as our new corporate headquarters and expect to begin subleasing our existing leased facilities.

Pipeline Highlights

•In the fourth quarter of 2021, we announced positive top-line data from the Phase III KINECT-HD study evaluating the efficacy, safety and tolerability of valbenazine in 120 adult patients with chorea in Huntington disease, also known as Huntington chorea. The study met the primary endpoint of reduction in severity of chorea. We plan to submit a supplemental new drug application for valbenazine for the treatment of Huntington chorea with the FDA in second half of 2022.

•Completed strategic partnership with Heptares Therapeutics Limited, or Heptares, to expand clinical pipeline for psychiatry disorders. Upfront fee associated with the agreement totaled $100.0 million, which, including certain transaction-related costs, was expensed as in-process research and development in 2021.

•In 2021, Mitsubishi Tanabe Pharma Corporation, or MTPC, received approvals for marketing authorization for valbenazine for the treatment of tardive dyskinesia in Indonesia, Singapore, South Korea and Thailand. In addition, MTPC has submitted filings for marketing authorization, which are currently under review, in Japan and Malaysia.

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Impact of COVID-19

The COVID-19 pandemic has dramatically changed the ways in which we live and interact with one another. While we adapt to this new shared reality, our purpose remains unchanged: to relieve suffering for people with great needs, but few options.

Although the initial impact of the pandemic has subsided, we are uncertain as to how more transmissible variants may impact our business. We remain committed to (1) prioritizing the safety, health and well-being of patients and their caregivers, healthcare providers and our employees; (2) ensuring patients with tardive dyskinesia are well supported and have continued uninterrupted access to INGREZZA, for which we have not experienced and currently do not expect any supply disruption; and (3) advancing clinical studies.

Most of our field-based employees have resumed in-person interactions in accordance with location-specific guidance. Our office-based employees have returned to the office under flexible work arrangement guidelines to help balance business needs, employee health, well-being and safety and the evolving work environment. However, as the effects of the pandemic continue to rapidly evolve with the emergence of new COVID-19 variants, a remote work model may nevertheless need to be reinstated at some point in the future. We continue to evaluate the impact of global spikes or surges in COVID-19 infection and hospitalization rates, as well as the impact of emerging COVID-19 variants on the efficacy of vaccines.

Most hospitals, community mental health facilities, physicians’ offices, pharmacies and other healthcare facilities have relaxed their policies that limited access of patients and our employees to such facilities and limited the ability of patients, pharmacies and prescribers to interact with each other. However, we anticipate these policies may change from time to time as communities or regions grapple with outbreaks. The ultimate impact of the COVID-19 pandemic, including any lasting effects on our revenue and the way we conduct our business, is highly uncertain and subject to continued change. We recognize that this pandemic will continue to present unique challenges for us throughout 2022.

Results of Operations

Revenues

Net Product Sales by Sales Product.

For 2021 compared to 2020, the increase in total net product sales primarily reflected increased INGREZZA net product sales mainly driven by increased total prescriptions reflecting higher customer demand and increased commercial activities.

For 2020 compared to 2019, the increase in total net product sales primarily reflected increased INGREZZA net product sales driven by increased total prescriptions.

Collaboration Revenues by Category.

For 2021, total collaboration revenue primarily reflected the achievement of a $15.0 million milestone associated with MTPC's marketing authorization application submission for valbenazine for the treatment of tardive dyskinesia in Japan and royalties earned on AbbVie net sales of elagolix.

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For 2020, total collaboration revenue primarily reflected the achievement of a $30.0 million milestone associated with the FDA’s approval of AbbVie’s ORIAHNN for uterine fibroids in 2020 and royalties earned on AbbVie net sales of elagolix.

For 2019, total collaboration revenue primarily reflected the achievement of a $20.0 million milestone associated with the FDA’s acceptance of AbbVie’s new drug application submission for elagolix for uterine fibroids and royalties earned on AbbVie net sales of elagolix.

Operating Expenses

Cost of Sales.

The increase in cost of sales from 2020 to 2021 and 2019 to 2020 reflected increased INGREZZA net product sales driven by increased total prescriptions.

Research and Development, or R&D, Expenses by Category.

We support our drug discovery and development efforts through the commitment of significant resources to discovery, R&D programs, and business development opportunities. Costs are reflected in the applicable development stage based upon the program status when incurred. Therefore, the same program could be reflected in different development stages in the same reporting period. For several of our programs, the R&D activities are part of our collaborative arrangements.

Late Stage. Consists of costs incurred for product candidates in Phase II registrational studies and all subsequent activities.

For 2021 compared to 2020, the increase in late stage R&D expense primarily reflected continued investment in Phase III programs for crinecerfont in congenital adrenal hyperplasia and valbenazine in Huntington disease and initiation of a Phase III program for valbenazine as adjunctive treatment of schizophrenia, offset by decreased investment associated with the termination of the NBIb-1817 program for Parkinson’s disease, which became effective in August 2021.

For 2020 compared to 2019, the increase in late stage R&D expense primarily reflected increased investment in Phase III programs for crinecerfont in congenital adrenal hyperplasia and continued enrollment in the Phase III program for valbenazine Huntington disease.

Early Stage. Consists of costs incurred for product candidates after the approval of an investigational new drug application by the applicable regulatory agency through Phase II non-registrational studies.

For 2021 compared to 2020, the increase in early stage R&D expense primarily reflected continued enrollment in Phase II programs for NBI-827104 in epileptic encephalopathy with continuous spike and wave during sleep and essential tremor and initiation of Phase II programs for NBI-921352 in focal onset seizure and SCN8A developmental epileptic encephalopathy.

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For 2020 compared to 2019, the increase in early stage R&D expense primarily reflected increased investment in three in-licensed psychiatry clinical development programs beginning in mid-2020 and two in-licensed epilepsy clinical development programs beginning at the end of 2019.

Research and Discovery. Consists of costs incurred prior to the approval of an investigational new drug application by the applicable regulatory agency.

For 2021 compared to 2020, the increase in research and discovery R&D expense primarily reflected a full year of investment in psychiatry and epilepsy preclinical development programs in-licensed in 2020, offset by decreased investment in preclinical gene therapy programs.

For 2020 compared to 2019, the increase in research and discovery R&D expense primarily reflected increased investment in preclinical gene therapy programs and an epilepsy preclinical development program in-licensed in 2020.

Milestone. Consists of costs incurred for development and/or regulatory milestones in connection with our collaborative arrangements.

In 2021, we expensed a milestone of $5.4 million associated with the European Union’s approval for the NBI-921352 clinical trial application in September 2021.

In 2020, we expensed a milestone of $20.0 million associated the FDA’s approval for ONGENTYS for Parkinson’s disease.

In 2019, we expensed a milestone of $10.0 million associated with the FDA’s acceptance of the new drug application for opicapone as an adjunctive therapy to levodopa/DOPA decarboxylase inhibitors in adult Parkinson's disease patients.

Payroll and Benefits. Consists of costs incurred for salaries and wages, payroll taxes, benefits and share-based compensation associated with employees involved in R&D activities. Share-based compensation may fluctuate from period to period based on factors that are not within our control, such as our stock price on the dates share-based grants are issued.

For 2021 compared to 2020, the increase in payroll and benefits R&D expense primarily reflected increased personnel expenses on higher headcount and a $14.7 million increase in non-cash share-based compensation expense, including a $6.4 million charge related to the modification of certain share-based awards.

For 2020 compared to 2019, the increase in payroll and benefits R&D expense primarily reflected increased personnel expenses on higher headcount.

Facilities and Other. Consists of indirect costs incurred for the benefit of multiple programs, including depreciation, information technology and facility-based expenses, such as rent expense.

Acquired In-Process Research and Development, or IPR&D.

In 2021, we expensed as IPR&D $100.3 million in connection with the payment of the upfront fee pursuant to our collaboration with Heptares.

In 2020, we expensed as IPR&D $46.0 million and $118.5 million, respectively, in connection with the payments of the upfront fees pursuant to our collaborations with Idorsia Pharmaceuticals Ltd, or Idorsia, and Takeda Pharmaceutical Company Limited, or Takeda.

In 2019, we expensed as IPR&D $118.1 million and $36.2 million, respectively, in connection with the payments of the upfront fees pursuant to our collaborations with Voyager Therapeutics, Inc., or Voyager, and Xenon Pharmaceuticals, Inc., or Xenon.

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Selling, General and Administrative, or SG&A.

For 2021 compared to 2020, the increase in SG&A expense primarily reflected increased investment to support our commercial initiatives, including the May 2021 launch of our INGREZZA direct-to-consumer advertising campaign, "TD Spotlight", increased personnel expenses on higher headcount and a $19.5 million increase in non-cash share-based compensation expense.

For 2020 compared to 2019, the increase in SG&A expense primarily reflected increased personnel expenses on higher headcount and continued investment in INGREZZA marketing.

Other Expense, Net.

For 2021 compared to 2020, the decrease in other expense, net, reflected a net unrealized gain of $20.9 million recognized to adjust our equity investments in Voyager and Xenon to fair value, a non-recurring debt extinguishment charge of $18.4 million in November 2020 associated with the partial repurchase of our convertible senior notes and decreased interest expense resulting from a lower convertible debt balance throughout 2021, partially offset by decreased interest income stemming from lower yields on our debt security investments.

For 2020 compared to 2019, the increase in other expense, net, primarily reflected a debt extinguishment charge of $18.4 million in November 2020 associated with the partial repurchase of our convertible senior notes.

Provision for (Benefit from) Income Taxes.

For 2021, the effective tax rate was lower than federal and state tax rates primarily due to excess tax benefits associated with share-based compensation and research tax credits. Beginning in the first quarter of 2021, we began recording a provision for income taxes using an effective tax rate approximating federal and state statutory tax rates. Due to the ability to offset any pre-tax income against previously benefited federal net operating losses, no federal cash tax was incurred in 2021.

For 2020, the benefit from income taxes reflected a $296.3 million benefit associated with the release of substantially all of our valuation allowance against our deferred tax assets on December 31, 2020. The effective tax rate for 2020 varied from the statutory tax rate primarily due to changes in our valuation allowance, net of other permanent book/tax differences, tax credits generated and impacts of changes in tax laws.

For 2019, the provision for income taxes reflected estimated and current state income taxes. The effective tax rate for 2019 varied from the statutory tax rate primarily due to changes in our valuation allowance, net of other permanent book/tax differences, tax credits generated and impacts of changes in tax laws. As of December 31, 2019, we had a full valuation allowance against our net deferred tax assets as realization was uncertain.

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Net Income and Diluted Earnings per Share.

For 2021 compared to 2020, the decrease in net income and diluted earnings per share primarily reflected a $296.3 million benefit associated with the release of substantially all of our valuation allowance against our deferred tax assets on December 31, 2020, increased investment to support our commercial initiatives, including the May 2021 launch of our INGREZZA direct-to-consumer advertising campaign, "TD Spotlight", and increased investment in our expanded clinical portfolio, partially offset by increased INGREZZA net product sales and decreased IPR&D expense reflecting lower upfront payments for asset acquisitions.

For 2020 compared to 2019, the increase in net income and diluted earnings per share primarily reflected a $296.3 million benefit associated with the release of substantially all of our valuation allowance against our deferred tax assets on December 31, 2020 and increased INGREZZA net product sales, partially offset by ongoing support for the commercial launch of INGREZZA for tardive dyskinesia and progression of our clinical pipeline.

Liquidity and Capital Resources

Sources of Liquidity

We believe that our existing capital resources, funds generated by anticipated INGREZZA net product sales and investment income will be sufficient to satisfy our current and projected funding requirements for at least the next twelve months. However, we cannot guarantee that our existing capital resources and anticipated revenues will be sufficient to conduct and complete all of our research and development programs or commercialization activities as planned. We may seek to access the public or private equity markets whenever conditions are favorable or pursue opportunities to obtain additional debt financing in the future. We may also seek additional funding through strategic alliances or other financing mechanisms. However, we cannot provide assurance that adequate funding will be available on terms acceptable to us, if at all. In addition, the disruption of global financial markets caused by the COVID-19 pandemic, if sustained or recurrent, could make it more difficult for us to access capital, which could in the future negatively affect our liquidity.

Information Regarding Our Financial Condition.

Information Regarding Our Cash Flows.

Net Cash Provided by Operating Activities.

For 2021 compared to 2020, the increase in net cash provided by operating activities primarily reflected increased INGREZZA net product sales and lower upfront payments for asset acquisitions, partially offset by increased investment to support our commercial initiatives and advancing our expanded clinical portfolio.

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For 2020 compared to 2019, the increase in net cash provided by operating activities primarily reflected increased INGREZZA net product sales, partially offset by incremental INGREZZA investment and progression of our clinical pipeline.

Net Cash (Used in) Provided by Investing Activities.

Periodic fluctuations in net cash (used in) provided by investing activities are generally driven by timing differences related to the purchases, sales and maturities of debt security investments and changes in our portfolio-mix.

For 2021, net cash used in investing activities reflected a $4.6 million equity investment in Xenon associated with the European Union’s approval of our clinical trial application in September 2021 for NBI-921352 for the treatment of focal onset seizures in adults.

For 2019, net cash used in investing activities reflected equity investments of $54.7 million in Voyager and $14.2 million in Xenon associated with newly entered into collaboration and license agreements.

Net Cash Provided by (Used in) Financing Activities.

For 2021 and 2019, net cash provided by investing activities reflected proceeds from issuances of our common stock under benefit plans.

For 2020, net cash used in financing activities primarily reflected the partial repurchase of $136.2 million aggregate principal amount of our convertible senior notes for an aggregate repurchase price of $186.9 million in cash, partially offset by proceeds from issuances of our common stock under benefit plans.

Material Cash Requirements

In the pharmaceutical industry, it can take a significant amount of time and capital resources to successfully complete all stages of research and development and commercialize a product candidate, which ultimate length of time and spend required cannot be accurately estimated as it varies substantially according to the type, complexity, novelty and intended use of a product candidate.

The funding necessary to execute our business strategies is subject to numerous uncertainties and we may be required to make substantial expenditures if unforeseen difficulties arise in certain areas of our business. In particular, our future capital requirements will depend on many factors, including:

•the commercial success of INGREZZA, ONGENTYS, ORILISSA and/or ORIAHNN;

•continued scientific progress in our R&D and clinical development programs;

•the magnitude and complexity of our research and development programs;

•progress with preclinical testing and clinical trials;

•the time and costs involved in obtaining regulatory approvals;

•the cost of commercialization activities and arrangements, including our advertising campaigns;

•the cost of manufacturing of our product candidates;

•the costs involved in filing and pursuing patent applications, enforcing patent claims, or engaging in interference proceedings or other patent litigation;

•competing technological and market developments;

•developments related to any future litigation;

•the impact of the COVID-19 pandemic on our business; and

In addition to the foregoing factors, we have significant future capital requirements, including:

External Business Developments. In addition to our independent efforts to develop and market products, we may enter into collaboration and license agreements or acquire businesses from time-to-time to enhance our drug development and commercial capabilities. With respect to our existing collaboration and license agreements, we may be required to make potential future payments of up to $10.9 billion upon the achievement of certain event-based milestones.

Refer to Note 2 to the consolidated financial statements for more information on our significant collaboration and license agreements.

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Convertible Senior Notes. In May 2017, we completed a private placement of $517.5 million in aggregate principal amount of 2.25% convertible senior notes due May 15, 2024, or the 2024 Notes. At our election, we may redeem all, or any portion, of the 2024 Notes under certain circumstances. The 2024 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by us. There are customary events of default with respect to the 2024 Notes, including that upon certain events of default, 100% of the principal and accrued and unpaid interest on the notes would become due and payable. In November 2020, we entered into separate, privately negotiated transactions with certain holders of the 2024 Notes to repurchase $136.2 million aggregate principal amount of the 2024 Notes for an aggregate repurchase price of $186.9 million in cash. As of December 31, 2021, $381.2 million aggregate principal amount of the 2024 Notes remained outstanding. With respect to the 2024 Notes, unless earlier converted, redeemed or repurchased, we would be required to pay interest of $8.6 million in 2022, $8.6 million in 2023 and $4.3 million in 2024 and pay the aggregate principal amount outstanding of $381.2 million upon maturity of the notes in 2024.

Refer to Note 5 to the consolidated financial statements for more information on the 2024 Notes.

Leases. Our operating leases, which have terms that expire beginning 2024 through 2031, consist of office space and research and development laboratories, including our corporate headquarters.

On February 8, 2022, we entered into a lease agreement for a four-building campus facility to be constructed in San Diego, California, pursuant to which we also secured a 6-year option for the construction of a fifth building and an option to purchase the entire campus facility, which will consist of office space and research and development laboratories, in the future. Upon completion of construction, we expect to utilize the campus facility as our new corporate headquarters and expect to begin subleasing our existing leased facilities.

Refer to Note 10 to the consolidated financial statements for more information on our leases, including a presentation of our approximate future minimum lease payments under non-cancelable operating leases.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon financial statements that we have prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses, and related disclosures. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and share-based compensation. Estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Historically, revisions to our estimates have not resulted in a material change to the financial statements. The items in our financial statements requiring significant estimates and judgments are as follows:

Net Product Sales. Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, payors and other third parties. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment.

Government Rebates. We are obligated to pay rebates for mandated discounts under the Medicaid Drug Rebate Program. The liability for such rebates consists of invoices received for claims from prior quarters that remain unpaid, or for which an invoice has not been received, and estimated rebates for the current applicable reporting period, which are primarily based on actual historical rebates, estimated payor mix, state and federal regulations and related contractual terms. Estimated rebates are recorded as a reduction of revenue in the period the related sale is recognized. To date, actual government rebates have not differed materially from our estimates.

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Share-Based Compensation. For purposes of calculating share-based compensation, we estimate the fair value of share-based compensation awards using a Black-Scholes option-pricing model. The determination of the fair value of share-based compensation awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including but not limited to expected stock price volatility over the term of the awards and the expected term of stock options. Our stock options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates. For example, an increase in the underlying stock price results in a significant increase in the Black-Scholes option-pricing. The fair value of performance-based restricted stock units, or PRSUs, is estimated based on the closing sale price of our common stock on the date of grant. Expense recognition for PRSUs commences when attainment of the associated performance-based criteria is determined to be probable.

If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. If there is a difference between the assumptions used in determining share-based compensation expense and the actual factors which become known over time, we may change the input factors used in determining share-based compensation expense for future grants. These changes, if any, may materially impact our results of operations in the period such changes are made. For actual forfeitures, we recognize the adjustment to compensation expense in the period the forfeitures occur.

Income Taxes. Our income tax benefit (provision) is computed under the asset and liability method. Significant estimates are required in determining our income tax benefit (provision). Some of these estimates are based on interpretations of existing tax laws or regulations. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (temporary differences) at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets, including net operating losses and tax credits, will not be realized. We periodically re-assess the need for a valuation allowance against our deferred tax assets based on various factors including our historical earnings experience by taxing jurisdiction, and forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Significant judgment is required in making this assessment and, to the extent that a reversal of any portion of our valuation allowance against our deferred tax assets is deemed appropriate, a tax benefit will be recognized against our income tax provision in the period of such reversal. Prior to 2020, we recorded a valuation allowance that fully offset our deferred tax assets. On December 31, 2020, based on our evaluation of various factors, such as our achievement of a cumulative three-year income position as of December 31, 2020, as well as our consideration of forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration, we released substantially all of our valuation allowance against our deferred tax assets and recorded a corresponding income tax benefit. We continue to maintain a valuation allowance against our California state deferred tax assets.

Additional Information

Refer to Note 1 to the consolidated financial statements for information on accounting pronouncements that have impacted or are expected to materially impact our consolidated financial condition, results of operations, or cash flows.