Halozyme Therapeutics, Inc. (HALO) Earnings Call Transcript & Summary

Great. Good morning, everyone. My name is Jess Fye. I'm one of the biotech analysts at JPMorgan, and we're continuing the 2020 health care conference today with Halozyme. We're going to host a Q&A session with the management team right after this presentation. It's just down the hall in the Yorkshire Room. So come to that if you want to hear more. But for the presentation, I'm going to turn it over to the company's CEO, Helen Torley.

Thank you, Jess, and thank you, everybody, for joining us today. In November 2019, after the negative data on PEGPH20, we rapidly transitioned Halozyme to become an ENHANZE-only company, focusing on our ENHANZE business. We rapidly restructured the company, reducing our expense base. And I'm very pleased to announce that 2020 will be our first year of sustainable profitability, with a projection of earnings per share of $0.60 to $0.75 in 2020. And this is just the beginning. As we see the potential for future product launches and an expansion in the number of products in development, we see the potential for our royalty revenues to achieve $1 billion by 2027, with additional milestone revenue on top of that. So I'm delighted to be here today to provide an update on our progress that's resulting in significant near- and long-term opportunity at Halozyme. Now in the course of my presentation, I will be making forward-looking statements, and I'll refer you to our SEC filings for a full listing of the risks and uncertainties. Now the ENHANZE business is now the go-to approach for transforming intravenous drugs to be able to be given subcutaneously. We now have 9 agreements in place that have resulted in 3 approvals in global markets. We're seeing an accelerating progress of our partners as they are moving into future and later stages of development with their products. And that's what's driving near term the increase in our milestone revenues, but longer term, significant potential for our royalty revenues. And our operating model because of our design, as I'll discuss in a few moments, it's lean and scalable, and this is obviously leading to a very highly profitable business for Halozyme. Now in 2019, we saw a remarkable continued progress with our partners. And this is because they have recognized and truly embraced the value and differentiation that ENHANZE can bring to their portfolios. Listed in this slide are just 4 of the potential ways this can happen. If we first focus on the ability of ENHANZE to reduce the treatment burden and health care costs. This actually is the approach that Roche used with their IV Herceptin and IV MabThera, transforming them to subcu therapies in anticipation of the launch of biosimilar product. Now more recently and more and more, our current partners are much more focused on competitive differentiation. Examples are listed here include BMS with its immuno-oncology portfolio and what Janssen is doing with DARZALEX and also what Roche is doing with Perjeta and Herceptin. And what's exciting here is that partners are engaging to use ENHANZE much earlier in the development cycle often at approval or even before approval, which is important for Halozyme because obviously, our royalty revenues begin with the first commercial sale. So for us, it's to our benefit the earlier that they begin to do that. The third area, and this is also compared to the differentiation but a slightly different angle on it, is that partners are exploring the potential to extend the dosing interval, and this is because ENHANZE can facilitate a higher injection volume. This has been demonstrated very well with now Takeda's HYQVIA. And this is the approach that argenx is using for their exciting anti-FcRn inhibitor, efgartigimod, as I'll give a little bit more detail in a moment. And finally, there is also the opportunity, if novelty is found as part of the co-formulation, to gain additional intellectual property exclusivity for the product. And for Halozyme, this can result in a longer term under which we get royalties and a longer duration of time until there's a set time. So we work very hard with our partners to file and seek to get this additional exclusivity. Now I've talked about the promise of ENHANZE. I'm now going to spend the next 3 slides showing some clinical data that demonstrate the true differentiation that ENHANZE can bring to products. I'll begin with daratumumab. I'm sure everybody in the room is familiar with the IV version of daratumumab. What Janssen reported at ASCO this year was a comparative study of IV daratumumab versus subcu daratumumab using ENHANZE, and this is called the COLUMBA study. This was a non-inferiority study, and I'm pleased to say the study was successful in demonstrating the subcu version was non-inferior both in terms of the PK parameter but also in terms of efficacy, which was response rate. The actual administration data is shown on the left panel on the slide. And here is what is, I think, quite remarkable is, instead of the 3- to 4-hour IV infusion, patients were able to receive the subcu daratumumab in just 5 minutes. Now we were talking about differentiation. In this space, where we know there are additional anti-CD20s coming into the marketplace, Janssen has the potential to be the first and only subcu version. And clearly, also for patients, the ability to receive their therapy in this shorter period of time, we believe, will be important as well as providing the potential to reduce the overall cost of delivery of care. The second example I'd like to highlight is Perjeta/Herceptin fixed-dose combination. This is -- instead of the patient receiving sequential separate injections of Perjeta then Herceptin, which can take between 1.5 to 2.5 hours, we have co-formulated Perjeta and Herceptin with ENHANZE. This was also a non-inferiority study that was successful, and the data was reported out at San Antonio Breast just in December. It met the primary endpoint of PK non-inferiority. And again, on the left panel is the administration data, which shows that the subcu was able to be given in between 5 and 8 minutes compared to the 1.5 to 2.5 hours for the IV. Again, for patients, this is important. And for Roche, they have commented that in addition to the potential benefits for patients and the health care system, it also provides them with some pricing optionality as this is a new approach to delivering care into the HER2 market space, which, I think everybody is aware, is becoming more and more crowded. The final example I'll give is efgartigimod. In December, in a KOL presentation that was broadcast, argenx reported the results of their Phase I study, which was conducted in normal volunteers. Based on the data, what argenx stated is they see the feasibility for a 1-minute subcu injection, the fact that they believe the dosing interval can be extended out to 2 weeks based on the data they've seen to date, and also they see the potential for care of patients, too, in the future be delivered at home. And once again, a very competitive area. And so we're very excited to be partnered with argenx in helping them advance their differentiation or their exciting product. Now I'll move now to just an overview of how we work with our partners and our agreements and how they're structured and what the potential of those agreements are. It's summarized on this slide. Our role with our partners is to deliver the API, and we serve as advisers in PK regulatory and clinical development. Our partners are responsible for the actual co-formulation of the product to be used in clinical trials and on the market, the conduct of the clinical trials and the launch. And you see with the contrasting activities why Halozyme's business model is so lean, scalable and leverageable as our team members are working with partners at different parts of the life cycle, and so we're able to have our team members support multiple partners at one time. We have now signed 9 agreements. And with the progress we've seen both regulatory-wise and commercial, we've been able to increase the value with our contracts. Shown in this slide and focusing more on the right-hand side, you can see for the last 6 contracts we've been able to get $160 million in potential milestones for each target that the partner is taking. And just to say what a target is, a target is usually taken exclusively by a partner. Examples would be CD20, PD-1, PD-L1. And so we're very pleased to see this has strong potential increase because if I just focus on the BMS, for example, if BMS were to advance all of the 11 targets they have taken access to and succeed in hitting all of the clinical and commercial milestones, that would be 11x$160 million. So you can see the potential of this milestone. I want to make 2 additional points based on this slide. If I can focus you on the bottom row there, the targets. Current partners have taken now 56 targets then to be accessed. They haven't selected all of those yet. And future growth is going to come in upcoming years by the fact that our current partners have 20 targets that have not been selected. And so as they select those and move those into the clinic, that is going to result in additional growth. And just a word on additional partnerships. We never predict exactly when we'll do a partnership, but I can say that based on the ongoing discussions that we're having with multiple different parties, there remains strong interest in ENHANZE, and I'm very confident that we're going to expand the number of ENHANZE agreements we have in place over time. Now let me talk about how we make money on ENHANZE, and there's 3 core ways that we do that. Beginning with the royalties. We receive on average mid-single-digit royalties on net sales in our agreements. The milestones come in 3 different types. There are the upfronts. These we receive when we sign an agreement with a partner. We generally receive now between $30 million and $40 million of the upfront for access to 1 or 2 nominated targets and exclusive rights to those. The development targets tend to make up about between 40% to 60% of the total potential of $160 million and tend to also increase as the product gets later into development up to either product approval or first commercial sale. And the commercial milestones are the opposite of that, 40% to 60% also of the $160 million with the milestones being tied to achievement of specified sales milestones. And then finally, we, as I mentioned earlier, supply the API to our partners, and we receive a 20% margin on the bulk sales to our partners. Now moving now to the growth in our pipeline. As I mentioned, we've seen tremendous progress in 2019, and we're projecting similar tremendous progress in 2020, increasing the number of products in development to a total of 19. This progress is being seen at all stages through the development cycle. If I begin with the approved products. We're projecting one new approved product in 2020, and that's daratumumab around about mid-2020. There is also the potential that Perjeta/Herceptin fixed-dose combination could be proved either in the fourth quarter of 2020 or the first quarter of 2021. We are projecting growth in the Phase III portfolio, 3 new Phase III trial starts and 1 new Phase II trial start. We've seen Phase III as being a very important derisking time point in the development process for Halozyme with all of the products to date that have entered Phase III being approved. And then finally, we anticipate 5 new Phase I starts, which will take our total Phase I portfolio to 10 products. So before I go into some detail on these -- of different stages of development, I'm often asked, are your partners mostly focused on commercial-stage product. And the answer to that is actually yes. If we look at the products in development today, we have 8 products that are already commercially approved and are very successful products, as is shown here. This is important, obviously, for us as we think about the risk of development. If the product is already approved, the pathway to approval is a non-inferiority PK study to identify the dose, and then usually a Phase III study that focuses on demonstrating non-inferiority of the PK and also efficacy. Now excitingly, many of our current partners are talking with the FDA about more lean, smaller studies that focus more on PK and less on large clinical databases. And so we do see the potential over time and hope to be able to announce soon some newer designs that will result in even faster approval than what to date has been 5 years to go from first-in-human to approval for the pipeline. I'll just finish highlighting on this slide that the potential the products were being developed with is really quite remarkable. If we look at analyst consensus estimates for these products in 2020, it's over $30 billion, and it's projected to grow to over $40 billion by 2024. Recall we receive, on average, a mid-single-digit royalty on the net sales achieved, and you can see exactly why the ENHANZE royalty platform has got such remarkable potential. Now just an overview of the commercial products. I think everybody is aware these are the 3 products that we've had approved to date. These have demonstrated tangible commercial success, with Roche's Herceptin achieving at peak 60% share of sales volume in the European launch markets and MabThera 34%. We actually have more recently seen a decline in sales with the advent of biosimilars. In 2019, our latest guidance for royalty revenues was $67 million to $69 million. And we do anticipate in 2020 we're going to continue to see some pressure, although it is slowing, on the sales of our Roche base that royalty is based, on continued impact of these European biosimilars. Now we're very excited that our next potential launch is daratumumab. This already is a very successful product that used IV. And the consensus sales are that they will grow from $3.7 billion in 2020 to over $6 billion in 2024. And a lot of this growth is going to come from penetration into the frontline treatment setting. Janssen committed their BLA and MAA submissions in July of last year, which is giving us the projection that they could have the potential approval in mid-2020. And as a reminder, the filings were based on 2 different studies. The COLUMBA study, which I already reviewed briefly, which is in relapsed refractory patients; but they also submitted the Phase II PLEIADES Study, which looks at earlier lines of therapy with different combinations of anti-multiple myeloma treatment. The value proposition for daratumumab SC is very strong: The administration time of 5 minutes. But we also saw in the COLUMBA study that there was a lowering in the rate of infusion-related reactions at 12.7% for the subcu compared to over 30% for the IV. And so as we think about the value proposition and what this means for Janssen, we've talked about the differentiation versus other potential competitive products. Janssen has also talked about the key to their growth for daratumumab is to penetrate more into the frontline setting and also have care delivered in the community. And I think you'll agree the profile of daratumumab SC is very well suited to helping them achieve the strong growth projections that they have for daratumumab. After that, the next potential launch we talked about is the Perjeta/Herceptin fixed-dose combination. Once again, Perjeta has really had a very successful launch, already over $3 billion in sales and projected to achieve $5 billion by 2024. It's used in combination with Herceptin and other chemotherapy in adjuvant, neoadjuvant and metastatic HER2-positive breast cancer. We are expecting BLA and MAA submissions to have been completed in the first quarter of this year, which gives the potential, as we mentioned, for a launch by the end of 2020 or early 2021 in the United States. And the value proposition here, the 5 to 8 minutes, I think, is very meaningful for these breast cancer patients who want to get on with their life and not spend time in the infusion suites. Now moving now to the earlier development portfolio. On the left are the Phase I studies that are ongoing or have been completed. And there are 9 products here, 2 of which are currently undisclosed. An exciting array of products here, as you will see. And it's the breadth and diversity of this product portfolio that adds to the exciting launches and gives us the conviction on the $1 billion potential for the royalty revenues for ENHANZE. Now from these group of products, we are projecting that 3 of these will move into Phase III clinical development and one will move into Phase II in 2020. So strong progress and momentum with our development there. And on the right side of the slide are the new Phase Is. We project 5 new Phase I starts in 2020, which is expected to result in 10 studies in Phase I in -- by the end of 2020. Now all of this has resulted in the strong long-term potential of ENHANZE. And this is just an illustration of the potential growth curve we see for our royalty revenues with the potential to achieve $1 billion by 2027 with a strong CAGR. And this is driven by all of the products you've seen, including the 5 new Phase I products that I just talked about. And so this $1 billion is made up of multiple different products launching over time. The inflection point is driven by the launches of daratumumab and Perjeta/Herceptin. And just a word on U.S. launches. We do expect that we will realize the biggest impact of the daratumumab launch in 2021, with 2020 being a year where we believe Janssen will focus on assuring they're on the EMR, they're in their prescribing orders, they've got their permanent J code. So that is the shape of the curve that we at Halozyme are anticipating. But that starts the inflection for Perjeta/Herceptin and then that exciting portfolio I showed you earlier to follow. Now we also are expecting strong growth in our milestones, and this is resulting in near-term revenue growth and also a key driver of our free cash flow as a company. In 2018, I gave a 3-year projection of the milestones of between $225 million and $300 million. We updated that at the end of last year to project that between 2020 and '22, that would increase to $350 million to $450 million. And as I've shown you the progress in our pipeline, you can understand why we're able to project that increase over time. Now we've already realized $55 million in the first 9 months of 2019. That was in line with our expectations. And so we're very excited at what a strong driver of our revenue growth our partner progress in the clinic is driving as a result of these milestones. Now all of this is obviously leading us in a strong position to have growing revenues and free cash flow, and that resulted in us developing a capital allocation approach that we announced at the end of last year with our commitment to returning capital to our shareholders. As shown on this slide, our Board authorized at the end of 2019 the repurchase of up to $550 million worth of shares. As of December 31, 2019, we have repurchased $8.5 million (sic) [ 8.5 million ] shares. As part of our accelerated share repurchase, 2.1 million shares had been delivered, and this has resulted in us having basic shares outstanding at the end of 2019 of 136.7 million shares. Now you may have seen in our press release from earlier this week we do anticipate completing all $200 million of the initial share repurchase in the first quarter of 2020. I'll move now to our guidance. And the story we've told you to date of this growth in our -- both our royalties and revenue milestones is leading, together with our decisive actions on cost reductions, to our first sustainable year of profitability. And so we're focusing on our revenue guidance and our EPS guidance. Revenue guidance is $230 million to $245 million, which is a growth of 18% to 26% over our projected 2019 revenue. So robust growth there. We project a majority of this growth is coming from our milestones based on the clinical progress. And we do project that the royalty revenues are projected to decline modestly with the ongoing impact of European biosimilars I mentioned. As ever, our revenues do not include the potential to sign new ENHANZE deals as we never know the timing where that is going to happen. I'll move now to our EPS. I already mentioned this robust $0.60 to $0.75 per share projected. And this is really driven, obviously, by the strong revenues and our expenses. And we do project by the end of 2020 we will reach our goal of having an annualized expense base of $65 million to $75 million annually, excluding cost of goods sold. Now we also mentioned in our press release we do have a plan to repurchase an additional $150 million of shares depending on market conditions, share price, et cetera. So by the end of 2020, it is our goal to have repurchased $350 million of the authorized $550 million in shares, depending, as I mentioned, on the market conditions. So I could not be more excited about ENHANZE and what it means for Halozyme. Our decisive actions have resulted in a profitable company in 2020. And as many investors have said to me this week, this is remarkable, a biotech company that's already profitable. We're excited to be able to deliver the $0.60 to $0.75 a share of earnings in 2020. But importantly, based on the story I've shown you, we also predict strong growth in our revenues and EPS after that. And this is driven by the royalties and the milestones that will come from our launches; the expansion of our Phase III portfolio, which will lead to near-term future launches; but also the robust pipeline we have in Phase I that will just keep delivering progress in our very long, strong profile for Halozyme. With all of this, we also project keeping our expense base flat at around $65 million to $75 million based on our ENHANZE model. So thank you so much for your attention. I think you will agree we've got a unique and remarkable story here for Halozyme and ENHANZE. Thank you.