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  "documentTitle": "Harmony Biosciences (HRMY)",
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  "authorName": "Scorpion Capital",
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  "presentationDate": "2023-03-28 00:00:00",
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      "kind": "callout",
      "text": "Critical Audit Matter in auditor opinion letter, per 10K filed last month",
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      "text": "Medicaid rebate accrual: $28MM",
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      "text": "The first Harmony 10K filed under his tenure – for 2021, filed in March 2022 – contained a surprise: a “Critical Audit Matter” flagged in the auditor opinion, which refers to items that are “material to the financial statements” and involve “especially challenging, subjective, or complex judgments.” It’s flagged again in the 10K last month, concerning the gross-to-net rebate accrual for Medicaid. The issue is cloaked with complexity and lack of detail, but concerns a massive rebates bucket within accrued expenses - $28MM as of 12/22. It’s impact on revenue “growth” is as hard to discern as that of price increases. Harmony conceals Wakix’s price from doctors and its own sales reps. From one state’s data, we see a WAC of $136K for 2019, $155K for 2020/2021, and $175K for 2023 – a price hike of 14% in 2020/2021 and 13% in 2022. While HRMY’s 2022 revenue grew 43%, a rough estimate – the best one can do with crumbs – suggests that volume growth was far lower at ~25%.",
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      "kind": "paragraph",
      "text": "Rebate Accrual for Medicaid – Refer to “Note 3-Product Sales, Net” to the financial statements",
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      "text": "As more fully disclosed in Note 3 to the financial statements, the Company recognizes revenue on sales of WAKIX when the customer obtains control of the product, which occurs at a point in time, typically upon delivery. Product revenues are recorded at the product's wholesale acquisition costs, net of applicable reserves for variable consideration that are offered within contracts between the Company and its customers, payors, and other indirect customers relating to the sale of WAKIX. Components of variable consideration include government and commercial contracts, commercial co-payment assistance program transactions, and distribution service fees.\n\nThe rebate provision and related liability related to the Medicaid Drug Rebate Program (the “Medicaid rebate accrual”) involves the use of significant assumptions and judgments in the Company's calculation. These significant assumptions and judgements include consideration of legal interpretations of applicable laws and regulations, historical claims experience, payer channel mix, current contract prices, unbilled claims, claims submission time lags, and inventory levels in the distribution channel.\n\nGiven the complexity involved in determining the significant assumptions used in calculating the Medicaid rebate accrual, auditing these estimates involved especially subjective judgment.",
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      "text": "Source: Harmony 10K filing; https://www.dshs.texas.gov/prescription-drug-price-disclosure-program/data-overview",
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