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

Good morning, ladies and gentlemen, and welcome to today's meeting. It is now my pleasure to turn the floor over to your host, Dr. Helen Torley. Ma'am, the floor is yours.

Good morning, everyone. My name is Helen Torley, I'm the President and Chief Executive Officer of Halozyme Therapeutics, and I'll be chairing this Annual Meeting of Stockholders. As mentioned in our supplementary proxy materials, due to the public health impact of COVID-19, we're hosting a virtual shareholder meeting this year to support the health and well-being of our stockholders, the employees and also to comply with the state of California's stay-at-home order. I'd like to call this meeting to order. The meeting is being held pursuant to the Notice of the Annual Meeting mailed to all of the company's stockholders on or about March 20, 2020. The polls are now open. And at this time, any stockholders who are present and who would like to vote the shares of this meeting may do so by clicking the Vote Here button that's on your screen. Otherwise, the proxy holders will vote your shares as indicated on the proxy. Mas Matsuda, Halozyme's Senior Vice President, General Counsel and Corporate Secretary, has been appointed Secretary for this meeting to record the minutes, and he's also taken an oath to serve as Inspector of Elections. Mr. Matsuda has previously provided Halozyme with a certificate indicating the number of votes represented by proxy at this meeting. At this time, I would like to take a moment to thank the members of the Board of Directors and the officers of the company who are participating on the call. I'd also like to introduce Doug Rein, from DLA Piper, our outside legal counsel, who is participating in today's call. And finally, I'd like to introduce [ Emma Epps ] and [ Sarah Leichtman ] of Ernst & Young, the company's independent registered public accounting firm Ms. Epps and Ms. Leichtman will be available to answer stockholder questions during the call and during the question-and-answer period which will follow adjournment of the meeting. I'll now ask Mas Matsuda, the Secretary of the Meeting, for his report.

Thank you, Helen. Only holders of record of common stock on the record date are entitled to vote at this meeting. A copy of the notice of this meeting, together with the declaration as to the mailing of a copy of the notice of stockholders who are holders of record at the close of business on March 2, 2020, will be made a part of the record of this meeting. The holders of a total of 126,381,718 shares are represented at the meeting. Since there were 138,069,410 shares of company common stock outstanding at the close of business on March 2, 2020, the record date of this meeting, a majority of the outstanding common stock is present or represented here today. A quorum is therefore present. The meeting is authorized to transact business.

Thank you, Mas. At this time, we will address the items of business that were set forth in the Notice of the Meeting. After the formal business portion of the meeting has been adjourned, I will address our stockholder questions relating to the company after I provide a corporate update. The matters to be considered at the meeting today, which are further described in the proxy statement dated March 20, 2020, which was mailed to all stockholders of record with the notice of the meeting will be: Firstly, the election of 3 Class 1 directors to hold office for a 3-year term and until their successors are elected and qualified. Class 1 consists of 3 directors, and the Board of Directors has nominated those persons set forth in the proxy statement for this meeting. The Class 1 nominees are Bernadette Connaughton, Kenneth J. Kelley, and Matthew L. Posard. These nominations need no second since the company's bylaws require advance notice of additional Board nomination and no such advance notice was given to the Corporate Secretary, the nominations are closed. The second matter to be considered at the meeting is an advisory vote on the company's executive compensation. And the third matter to be considered at the meeting is a proposal to ratify the selection of Ernst & Young LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020. We'll just give the stockholders another minute to complete their voting, if they wish to do so at this time. [Voting]

All right. The polls are now closed, and I will now hear the report from the inspector of elections regarding the results of the elections.

Thank you, Helen. As the Inspector of Elections, I'm pleased to report on the results of this meeting as follows: First, Bernadette Connaughton, Kenneth J. Kelley and Matthew L. Posard have each been elected as Class 1 directors for the company to hold office for a 3-year term and until a successor is elected and qualified; second, the compensation of the company's named executive officers has been approved by a nonbinding advisory vote; and third, the selection of Ernst & Young LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020, has been ratified. The final voting results for each of these matters will be reported on a Form 8-K, which the company will file with the SEC.

Thank you, Mas. That concludes the formal business of the meeting, and I'd like to thank everyone for your continued interest and support of Halozyme. The meeting is now adjourned. It's now my pleasure to provide an update on our recent business activities and our plans for the future. We'll be reporting our first quarter 2020 results in a few days on Monday, March 11. And as such, we're still collecting information in preparation for that update. So in today's comments, I'll be providing a high-level overview of the Halozyme business. On Slide 1 is the forward-looking statements. I'll just say, in the course of this presentation, I will be making forward-looking statements, and I'll refer you to our SEC filings for the full listing of the risks and uncertainties. Moving to Slide 2. For those of you who've been investors for -- in Halozyme for some time, you're aware that 2019 really was a seminal year for the company. If you've not already done so, I highly recommend you take the time to read the letter to our shareholders, which can be found on our corporate website and also with our 2019 annual report that you received with the proxy materials. Since the events of last year were really so extraordinary in terms of shaping the future of Halozyme, I'm going to take a moment to review those events and how they've helped us emerge as a stronger company all the while being able to adhere to our core value of respecting and valuing the team and acting for the benefit of all stakeholders. We entered 2019 with increasing enhanced momentum in the clinic, a new collaboration partner in argenx, and a clear path to profitability as a stand-alone business. In the oncology pillar, we were awaiting pivotal data for the HALO-301 Phase III trial, which was evaluating PEGPH20 for the treatment of metastatic pancreas cancer. Now when we were planning for a positive data scenario, we knew it would also be critical that we be prepared for a negative data scenario, particularly recognizing that pancreas cancer really is one of the most challenging cancers to treat. Throughout the year, our management team and the Board met regularly, working closely to prepare for all scenarios and to establish a specific action plan for each. At the core principle underpinning these plans was a commitment to transparent communication to all of our stakeholders. And as part of our preparation, we regularly communicated to the employees the plans for the company in both the positive data scenario, but also the negative data scenario, doing so through company-wide meetings and other communications. This was fully consistent with our messaging to the investor community in which we stated our intent to restructure and become a company-focused on ENHANZE with a path to future profitability in the event that the PEGPH20 data was negative. With the Board, we developed a clear plan for all of the employees in the event of negative data, including a very competitive and fair severance package and topnotch outplacement services for everybody who would be impacted. Ultimately, as you know, we unfortunately did not achieve the outcome we'd hoped for with the HALO-301 trial. However, due to our extensive preparations, we were able to immediately take decisive actions and communicate them clearly to the investors and also to our employees. In doing so, we were able to treat the employees consistent with our commitment to respecting and valuing the team, while creating additional value for our shareholders with the clear and decisive actions that we took. I will say I've heard from countless employees how much they appreciated the transparency, the rapid and clear communication on their status and the strength of the support that they had received from Halozyme. And I'd just like to take a moment to thank all of the Halozyme employees as well as everybody who was involved in those PEGPH20 clinical studies for their support and participation. We've emerged from all of this as a strong, lean company and are poised for long-term growth and profitability. I'll turn now to Slide 3 and give a brief overview of the Halozyme business. In 2019, we really made progress further establishing ENHANZE as a go-to approach for transforming IV drugs into subcu with 9 partnerships today with leading pharma and biotech companies, and this has already resulted in global approvals for 3 products. Our partner clinical trial activity is a really important driver of our revenue. In the short term, this comes from milestones, and then longer term, it comes from the royalties. Fortunately, we also have a very lean and scalable operating model, which is important as we think about this in the context of the growing revenues combined with a stable and low expense base, and all of that is very positive, obviously, for the future projections of free cash flow. On Slide 4, you can see the ways in which we can create value for our partners. We've seen a large expansion in the number of products utilizing ENHANZE, and this has really been because our partners recognize and appreciate the real value creation that ENHANZE can bring, and in particular, the potential for product differentiation. And they're doing it earlier and earlier in the life cycle of the drug, which is clearly important for Halozyme. Let me just illustrate this with 2 examples of how ENHANZE is creating important differentiation for our partners. We'll turn first to daratumumab, which is on Slide 5. In June of last year, Janssen presented this data, which is from the COLUMBA study at ASCO, where they were evaluating the subcutaneous version of DARZALEX compared with the intravenous version of DARZALEX in a population of patients with relapsed/refractory multiple myeloma. What we were seeking to do was to show that the subcu formulation of DARZALEX was noninferior or, if you like, comparable to the IV formulation in this patient population. This study was successful and met the 2 primary end points that were set for the study. What was remarkable and what's shown in this slide is the duration of time it took for the patients to receive their therapy in the study. With the DARZALEX subcu, it was just 5 minutes. 5 minutes for the first dose and 5 minutes for all subsequent doses, versus the 3 to 4 hours infusion that it took for the intravenous version. Obviously, that's really a remarkable difference for patients and it's also meaningful for our partner, Janssen. They recognized in 2014 that there were additional anti-CD38 drugs with the same mechanism of action that were planning to come to the marketplace with the promise of a shorter infusion time than the often 4 to 6 hours that was required for daratumumab. By working with us early on the subcu formulation, Janssen has the opportunity to be the first, and possibly even the only, subcutaneous anti-CD38 entering the marketplace of treatment for multiple myeloma, which today is predominantly with oral or subcu therapies. I'll move now to Slide 6 and do the second example, and this is Perjeta/Herceptin fixed-dose combination. This is a treatment that's approved for use in HER2-positive early breast cancer. What Roche has done here is to put both of the drugs in a single injection with ENHANZE. Now today, patients receiving Perjeta and Herceptin receive them sequentially in 2 infusions, one after the other, which can take up to 2.5 hours. In the registration study that's shown on this slide that was presented at San Antonio Breast Cancer Conference last year, Roche was able to show that instead of these 2 sequential IV injections, they were able to deliver the therapy in just 5 to 8 minutes with the fixed-dose combination that was administered subcutaneously with the help of ENHANZE. For patients, this really does have a strong potential benefit in terms of the shorter administration time. And for Roche, in addition to that, they have discussed the feasibility with this fixed combination, bringing them some interesting pricing optionality as they are in a very competitive marketplace in the treatment of breast cancer. So with those 2 examples of how we bring differentiation, let me talk about how we work with our partners, as that's important to our lean business model. And this is shown on Slide 7. The key takeaway is that our model is lean, scalable and leverageable, and this is because our role is very distinct from those of our partners. Halozyme is responsible for the oversight and the production of the API, or the drug product, and then we serve more in an advisory role. For example, we advise on the co-formulation of the company's product with ENHANZE or on regulatory strategy. As a result of this advisory role, our team members are able to support multiple partners at the same time. The part of the execution and the cost of the clinical studies and commercialization all sit with the partners. And that is why we have this lean and leverageable model. On Slide 8 is a nice summary of the 9 partnerships that we've signed to date. As we have advanced over time and we've demonstrated regulatory and commercial success, we've been able to gain more and more value with each partnership. As you can see with the partnership examples on the right, we're gaining more value, particularly in the milestones than we did from our earlier agreements. Let me move now to Slide 9, which summarizes the 3 core ways in which we make money with ENHANZE. We receive, on average, a mid-single-digit royalty on net sales. We receive upfront payments when we signed the agreement for the exclusive access to a specific target, and a specific target would be something like anti-CD38 or anti-PD-L1. These have been in the range recently of between $30 million to $40 million for 1 to 2 targets. We then received milestone payments as progress is made. And for each target, this is up to $160 million in the recent agreements. The development milestones, as associated with clinical progress, are approximately 50% of the $160 million per target, and these tend to get larger as development progress is made. The commercial milestones make up the other 50% and these are tied to specific revenue tiers that we agreed to and established with the partners. And finally, we also produce the API, and we received a 20% margin on our sales to partners. I'll turn now to Slide 10. And just an -- it's a nice overview to show some of our core ENHANZE partner products. The majority today are already commercially available as an IV form, with 3 of these products shown in this slide, co-formulated or co-administered and approved with ENHANZE. The products we've shown here are already established, successful blockbuster products. Let me spend now a moment on the commercial products that are already proved with ENHANZE, which are listed on Slide 11. We've seen demonstrable commercial success with these products. In Europe, Roche was able to achieve 60% share of sales volume at peak with Herceptin and 34% with MabThera. More recently, we've seen a decline in sales as Roche has seen the impact of biosimilars, however, a very strong proof-of-concept for the subcutaneous products was established. 2019 revenues for these products was about $70 million, and they continue to represent a substantial revenue contribution to Halozyme. On Slide 12, you can see the next potential launch, subcutaneous daratumumab, an important product for patients with multiple myeloma. 2019 sales for the IV formulation were $3 billion, and analysts project strong continued growth to an $8 billion potential as use increases, particularly in the earlier lines of treatment. Janssen submitted their regulatory filings for daratumumab SC in July of 2019, both in the U.S. and in Europe. And as we've already mentioned, the value proposition for daratumumab SC is very strong, the ability to go from a multi-hour IV infusion to just a 5-minute subcu injection is remarkable. But in addition, there is also the potential for a lower rate of infusion-related reactions. In the COLUMBA clinical study, the rate was 12.7% for the subcutaneous arm in COLUMBA and over 30% for the IV arm. As we've been talking to physicians, this is an important factor when we've been talking to the physicians because the managing and anticipating infusion-related reaction takes time and attention. And so we're very pleased to see that the subcu was able to reduce the rate of this in the COLUMBA study. Let me move now to Perjeta/Herceptin, which is shown on Slide 13, and this is our next anticipated launch. As I mentioned, these 2 therapies are used together to treat HER2-positive early breast cancer. The Perjeta launch is, I think, sometimes underrecognized. This has really been a very successful launch for Roche with 2019 revenues already at $3 billion and analysts projecting strong continued growth. For the U.S. FDA, they have an action date of October 2020. And with the positive data that's been filed, we're very pleased about what the potential approval of Perjeta/Herceptin can mean for patients. And as we look ahead to the rest of the ENHANZE business, we're very excited about the continuing growth of our pipeline, with 8 studies in or having completed Phase I clinical studies at the beginning of this year as we announced. I'll turn now to Slide 14, which is our capital allocation strategy. We have a strong commitment to capital return to our shareholders. Following our restructuring and recapitalization of the company in November of last year, we remain in a very strong financial position. As shown on this slide, our first priority, as we've just discussed, is to drive growth in our ENHANZE business by maximizing the value of the current collaborations and working to sign new collaboration partners. With the resulting strong projected free cash flow, our next priority is returning capital to our investors via share repurchases. We've completed $200 million worth of share repurchases, leaving $350 million available under the $550 million 3-year share repurchase program, which was authorized by our Board of Directors in November of 2019. In January of this year, we announced our plan to repurchase up to an additional $150 million worth of shares during 2020, pending market conditions and other factors. And we've also announced that we will evaluate opportunities to accelerate the growth of Halozyme through the acquisition of new platforms or technologies, seeking to find those that have a similar financial profile to ENHANZE in that they are high-growth, high-margin and derisked. With that overview of the business, let me now close on 2 topics which is our response to business continuity under COVID-19 and our commitment to sustainability and specifically to employee, governance and environmental sustainability. Halozyme takes the health and safety of our employees, our families and the local communities very seriously, which is particularly relevant and important at a time when we're dealing with COVID-19. As we began to see the emerging pandemic, in February we assembled the COVID-19 preparedness team, who developed a plan for maintaining business continuity should the situation worsen. As we all know, that, in fact, did happen, and we activated our updated business continuity plan in March. On March 16, we successfully transitioned the majority of our staff to working from home and implemented a rotation for the small number of essential workers who we needed to have on site. For those employees, in parallel, we also implemented sanitization protocols for the office space and labs multiple times a day to protect them. We're able to do all of this and get ahead of the curve just before the state of California issued a shelter-in-place order on March 19. And I'm also really pleased to report that we were able to quickly and successfully transition the majority of our staff to working from home very successfully, and we've been able to maintain a very high level of productivity. In addition to the proactive planning by the business continuity team and the hard work and commitment of our employees, we're able to do so because of the nature of our business model. During this entire period, we're maintaining a very high transparency with our employees through holding weekly virtual all-hands meetings, and with the leaders frequently meeting with their teams through video conferences to support the team and also to assess and support progress towards our goals. We're also continuing to work very closely with our contract manufacturers, talking multiple times a week to ensure the integrity of our API supply, which is critical for our commercial partners. As discussions start regarding return to work, our preparedness team is already hard at work with a well-developed initial plan that we will continue to refine based on the national, state and local guidance. I'll just close on employee sustainability, which is -- a slide of which is shown on Slide 15. As I mentioned earlier when I reviewed the events for 2019, our commitment to respecting and valuing the team is really critical in our efforts to foster the employee sustainability that's required for success in our competitive but fast-moving industry. Our guiding principles for how we strive to treat our employees include an ongoing commitment to open communication, transparency, accountability and ensure that we are creating a meritocracy within the organization that results in a diverse workforce and an inclusive environment for all. We accomplished this through, obviously, the clear and transparent communication we do. We regularly hold monthly all-hands at meetings where all employees have the chance to ask questions, either face-to-face or they can also do it anonymously. We have a program of ongoing training and development that was actually converted into virtual training, so we continue to expand the employee skill sets and so they can access additional career development opportunities even during these trying times. We always assure we have a diverse candidate pool for any new roles and a diverse interview panel so that we continue to maintain the strong diversity of our team that I think has been such a key to our success. And we also encourage self-appraisal as a part of our rigorous program on review progress -- process to make sure that we are understanding what we can do continuously to improve the performance of individuals and our company. I'm very proud to say that our employee sustainability practices have resulted in a diverse workforce, as is shown in this slide. We remain steadfast in our commitment to supporting the diversity of our workforce and importantly, leveraging that diversity through assuring that we have an inclusive working environment. We're also committed to supporting our local community and in particular at this time of pandemic. Earlier this month, we were delighted to donate personnel protective equipment to the UCSD Jacobs Medical Center to support all of those heroes in the front lines who are fighting this pandemic and who, early on, if you remember in this crisis, did not have adequate PPE equipment. We also provided generous employee and company donations to groups, including Feeding San Diego; Father Joe's Village, which is an organization locally here in San Diego that supports the homeless; and also to Ronald McDonald's House supporting families in need. I'm also very proud that we were able to maintain our commitment to supporting our local vendors who have been scheduled to provide on-site service to Halozyme, but were no longer able to do so as a result of the shelter-in-place order. All of these actions and decisions I've just talked about are guided by our code of ethics and conduct, along with a strong set of governance principles. These are actually all detailed on our website under the Corporate Governance section, and I invite you to take a look at that when you have a moment. We hope that you can see that Halozyme is on a very exciting growth trajectory, with plans in place to ensure sustainability of all key aspects of our business. With that, I'm very happy to now open it up to questions, and I'll begin to answer the questions that you have submitted.

All right. The way this is going to work, I'm being sent these by e-mail so I'll read out the question, and then I'll provide the answer. First one was do we anticipate signing a new ENHANZE partnership in 2020? I do anticipate signing a new ENHANZE partnerships. There is no doubt there is a lot of interest in ENHANZE, and it's probably even higher, I would say, as a result of COVID-19. What we never do, because it's impossible to do, is to put a specific timeline on when we will sign the deal. So yes to signing an ENHANZE partnership, no specific timeline on that. But a lot of very exciting and strong interest in our technology. Can I speak to the progress and describe the timeline for the Bristol targets? If you recall, when we signed these collaboration agreements, we do sign confidentiality. And so what we can communicate with regard to our partner progress, it really has to come first from the partner, and then we're able to repeat that. What I can say at the moment is that Bristol has announced that they have 3 Phase I studies. They have a Phase I study with ENHANZE with Opdivo; they have one with CD73; and they have a third one, which just started towards the end of last year, which is looking at combination of ENHANZE with Opdivo and one of their products called relatlimab, which addresses LAG-3. So 3 Phase I programs is the update I can give you on that. Third question is, on a percentage basis, how much DARZALEX do you think will be delivered SC with ENHANZE? Really, I don't give a specific answer on that, but I will return to the very strong value proposition that we just talked about. Instead of patients requiring what in the COLUMBA study was 3 to 4 hours, but we know from talking to patients, they can be 6 to 8 hours, 4 to 6 hours. The ability to have it delivered in a 5-minute subcu, particularly when patients may not want to be spending as much time in the hospital, I'm very excited about the potential for the subcu and the strong value it's going to bring to patients who want that shorter administration time. It seem to be all of the questions. I will just confirm there's no more questions. I think there are no more questions. So with that, I'd just like to close by thanking all of our shareholders for your support through 2019 and into 2020. As you have heard, we have a very strong story for future growth. We have an incredible employee population who are going to deliver great things as we have done in the past. Thank you, everybody, for your attention.

Thank you, ladies and gentlemen. This does conclude today's meeting. You may disconnect your phone lines at this time, and have a wonderful day.