Harmony Biosciences: In Harmony

Summary

  • Harmony Biosciences has seen a strong performance of its WAKIX drug since it went public in 2020.
  • This run up made that shares have done quite alright, vastly outperforming most IPOs of the time.
  • After a very strong second quarter, I like the company a lot despite the price of its success, namely dependency on a single drug.
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Hiroshi Watanabe

I have been very appreciative on shares of Harmony Biosciences (NASDAQ:HRMY) as I believed that shares looked very compelling in May 2021. The company has seen its IPO in August 2020, at a time when many companies went public, as it has seen initial momentum offset by a retreat in the share price.

This dip early in 2021 looked very compelling to me as I regarded Harmony to be a quality name, being sold off indiscriminately at the time.

Disorders

Harmony is a commercial stage pharmaceutical company which focuses on the development and commercialization of neurological disorder therapies. The company obtained approval for WAKIX in August 2019, designed to increase histamine levels which provides signals to the brain. This medication is approved for excessive daytime sleepiness (also known as EDS) and commercial launch followed in November that year, with label expansion anticipated in the years following.

The EDS market is very substantial as more than 150,000 Americans suffer from this indication, translating into a $2 billion market potential, with no dedicated drugs designed for this indication, making that patients often resort too well known generic and alternative drugs like Ritalin, Xyrem and Adderall, taking the dependency risks and side effects for granted, not to mention a lack of efficacy.

The company went public at $24 and shares rose to $48 soon thereafter, as that move granted the company a $3.0 billion operating asset valuation, a huge number for a business which posted $6 million in product sales in November and December 2019.

The run rate in sales growth was impressive. First quarter 2020 sales rose to nearly $20 million, to double to $38 million in the second quarter. This $150 million run rate worked down to 20 times sales multiple at the time of the IPO, as growth was spectacular, while the company was profitable already. WAKIX was furthermore approved by the FDA to treat cataplexy in October as third quarter sales were reported at $45 million!

With shares falling to the $30 mark, reducing the valuation to about $2.0 billion, the combination of the modest pullback in the price and strong operating performance made me a buyer at those levels even as the strongest momentum was already a thing of the past. Fourth quarter sales rose to $56 million and change, as first quarter sales came in just below $60 million, despite the wider approval for WAKIX.

With 59 million shares translating into a $1.6 billion valuation at $27 in spring of 2021, I was pleased to see a quarter of a billion run rate in terms of sales. Furthermore, a first quarter operating earnings number of nearly $15 million was pretty solid, translating into after-tax profit potential of around $0.70 per share by my estimates.

Delivering

Having initiated quite aggressively at $27 in spring of 2021, we have seen solid results in terms of the business, but moreover share price performance. Shares recently hit a high of $57 and even at $43 now, these represent meaningful gains, certainly in relation to the wider market.

These solid share price performance have been backed up by strong results. Third quarter sales in 2021 rose 77% to nearly $81 million and in February of this year the company ended the year with a $91 million quarterly revenue number. On annual sales of $305 million, the company posted a GAAP operating profit of $87 million, as net earnings were hurt by debt extinguishment costs and some interest rate charges.

With the company operating with a net cash position, the earnings power is very substantial. Assuming no interest rate expenses are due over time and assuming a 25% tax rate, earnings power has surpassed the dollar per share mark already, with the run rate in the fourth quarter being far higher already.

First quarter sales came in at $85 million, up meaningfully year-over-year, but down on a sequential basis, even as total patient which use WAKIX were up sequentially. Quarterly operating earnings of $27 million reveals potential after-tax earnings at a run rate of more than $1.30 per share, as a modest net cash position was maintained.

Second quarter sales were very strong at $107 million, with many new patients on WAKIX as operating earnings rose to $33 million, despite much more aggressive investments into R&D to further grow the pipeline over time. At this run rate the company is comfortably posting sales in excess of $400 million and earnings above $1.60 per share, as a modest net cash position is slowly starting to grow.

With some 60 million shares trading at $43 right now, a $2.5 billion operating asset valuation comes in at just over 6 times sales, despite the rapid growth, as valuation multiples come in at less than 30 times earnings, despite the rapid growth on this front as well.

What Now?

The core plan for Harmony is to grow sales of WAKIX which makes sense, yet it creates a one-trick pony issue as well. Fortunately, other product candidates find themselves in Phase 2 & 3, yet dependency issues likely will remain for years. Hence, I am very happy with 60% share price performance in less than one and a half year, vastly outperforming the wider market, and certain recent IPOs.

This comes even after shares are down a quarter from a recent high of $57 per share. While current valuations are not cheap, they look cheap given the growth and balance sheet strength, leaving me a happy holder of my long position, albeit that I would be happy to cash out a bit if shares re-test their highs.

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This article was written by

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Finding value that gets unlocked in M&A, IPOs and other corporate events
The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.

Disclosure: I/we have a beneficial long position in the shares of HRMY either through stock ownership, options, or other derivatives. 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.

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