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

Thanks, operator, and good day, everybody. My name is Jason Gerberry, mid-cap Biotech Analyst at Bank of America, and I am pleased to be introducing our next company presenter at the Bank of America Annual Healthcare Conference, joined by Halozyme Therapeutics, and CEO, Helen Torley. Helen, thanks so much for joining us. Helen's got a prepared presentation. So I'm going to turn it over to her.

Thank you, Jason, and thanks, everyone, for joining us today. It's really a pleasure to be here to provide an update on Halozyme's strategy and our progress on mission's accomplishments. I'll begin on Slide 2 and just to mention of the forward-looking statements. In the course of the presentation, I will be making forward-looking statements, and I refer you to our SEC filings for full listing of the risks and uncertainties. Next slide. Let me begin with a summary of our business. We are the sole owners of a unique technology, which is the only FDA-approved recombinant human hyaluronidase but when it's combined with certain medicines that today need to be given into the vein can enable them to be given under the skin or subcutaneously. We already have 5 products approved, not just in the U.S. but also in Europe and other regions, meaning that this technology is already significantly derisked, both by regulators, but also by payers. And the final approvals we have today already represent a significant and growing revenue opportunity, with expectations for the sales of the final approved products projected to grow to $22 billion over the next 4 years. Now Halozyme receives on average a mid-single-digit royalty on the net sales of product converted to subcutaneous use. So you can see that, that clearly represents a substantial near-term opportunity. And this really is just the beginning. Today, we have another 11 products in development, which is projected to expand to 16 additional products in total by the end of 2021. And all of this is resulting in the potential for royalty revenue to reach $1 billion in 2027 in a non-risk-adjusted basis, signaling very strong growth potential. Now let me move to Slide 4, and I divided the presentation into 5 separate charters, which are going to describe the opportunities in more detail and then provide the support while we have such conviction on the long-term growth potential for Halozyme. I'll turn now to Slide 5, and let me begin by briefly describing how ENHANZE works. Today, many of the major medicines need to be administered into the vein in a lengthy introduce infusion. And this is because of the large volume of fluid they require for administration. ENHANZE the proprietary enzyme we've talked about, which is also wholly owned by Halozyme, is basically the enzyme called rHuPH20, which when it's combined with these medicines, can allow them to be given subcutaneously or underneath the skin in a shorter and simpler injection. Now let me just move to slide -- the next slide, Slide 6, and review what that can mean for patients. So for patients, instead of spending multiple hours in the infusion suite, receiving the treatment into the vein, as is shown on the left, patients can receive the same therapy at the same dose given into the abdomen or the thigh enabled by ENHANZE in just minutes. This is, obviously, a totally different experience for the patient and has also been shown to result in a reduced use of health care resources and thus costs. Now moving to Slide 7. We have been building momentum on ENHANZE over the last 15 years. And actually, there are now more than 500,000 patients who have been treated with ENHANZE-enabled drugs in the commercial setting. Beginning on the slide on the left, our Wave 1 product launches. These are the ones that have -- were the first ones to demonstrate both regulatory and commercial success and really establish the strong foundation for the ENHANZE technology. If we move now to the middle panel, in 2019, we repositioned the company, restructured and sharpened our focus solely on the ENHANZE drug delivery technology. In 2020, it was our pleasure to support the launches of what we called our Wave 2 launch products, DARZALEX SC, which is also known as DARZALEX FASPRO as well as Phesgo, which is a fixed-dose combination of Herceptin and Perjeta. The launch of these new Wave 2 products is positioning us for strong royalty revenue growth for the next several years, beginning now, as I'll review in a few moments. And if I focus on the right-hand column, based on our broad development pipeline, we project multiple additional potential new launches in the coming years, resulting in a sustained royalty revenue growth. Let me move to Slide 8 now and describe our low-risk business model. Next slide, please -- and which will be Slide 9. Our business model is really designed to focus on targeting large attractive markets, bringing competitive -- meaningful competitive benefits to our partners. And as a result of that, generating substantial revenue, which comes from both milestone revenue as well as royalty revenue. All of this because of our lean business model, results in increasing cash flow, which we have then used to return to our shareholders. Now with that model spread, let me just go into a few more details on each of these elements, beginning with our target market. If we focus on Slide 10, the current market trends replay very much to our strength. There is a strong focus, as you're aware, on developing antibody therapies. Many of which required to be delivered in 10 ml or more of fluid when given subcutaneously. This space of where you need a large volume to be able to inject the drug you want to administer subcutaneously is a space where nobody else can do what Halozyme does. That is really our sweet spot. And monoclonal examples, as we show here, are great example of this type of drug. Today, there are already 79 approved monoclonal antibodies with many in development. And many of these require a large volume because of the concentration ability of the drug to be administered subcutaneously. So what we do is we focus on companies who are developing drugs like these, and we identify for that company how ENHANZE may help create a competitive advantage for that company. Moving now to Slide 11. Today, you can see the terrific set of partners we have. We have 10 leading pharma and biotech companies, who together have taken an option to be able to use ENHANZE with up to 57 different types of treatments or targets. Our partners are focused on a diverse range of diseases. Today, most of our products are in oncology, but there's no reason why ENHANZE should only be in oncology. We're delighted with the broadening all of the areas our partners are now in, including neurology, autoimmune disease and also rare diseases. And for example, just to highlight, is our most recent deal, which we signed with Horizon at the end of 2020. We're now working with them to develop a subcutaneous form of TEPEZZA with ENHANZE which is their great drug, which has been approved for autoimmune disease called thyroid eye disease. This is a very important advance for patients, very high commercial potential with revenue projections of $3.5 billion for this product. And so we're very excited to be working with them to transform what is today an IV drug into one that patients can receive subcutaneously in a shorter and simpler injection. Now we've shown you these 10 partners. Let me just review why these partners want to use ENHANZE. It really comes down to the fact that our partners are excited by the multiple ways that ENHANZE is able to bring meaningful differentiation and true value creation for them. If we begin on the top row, we've already shown you this that ENHANZE can reduce the treatment burden for patients and reduce health care costs. This really was a focus for Roche when they developed Rituxan subcutaneously, which is in advance of the expectation of biosimilar launches. And multiple partners are very focused on the patient today, and this is a core reason for why they want to reduce the treatment burden for their patients. On the next row, today, almost every partner's goal, in using ENHANZE, is for the competitive differentiation, either to create a leading brand performance in the face of competition or to preserve a leading brand performance in the face of competition. If I move now to the third row, we also offer the potential to deliver 2 different compatible anti-therapeutic antibodies in a single injection, thereby simplifying treatment for the patient. This has already been demonstrated with Roche with Phesgo, one of the Wave 2 product launches I just mentioned, where instead of breast cancer patients receiving their IV Perjeta and Herceptin sequentially over what can be up to 2.5 hours, instead, they can receive Phesgo, a fixed-dose combination of both drugs given in just 5 to 8 minutes subcutaneously. On the fourth row, while we mostly focus on IV to subcu drugs, we actually can also reduce the dosing frequency of already approved subcutaneous drugs. And this is being demonstrated with the approved drug we have HyQvia, which is with Takeda. And then finally and importantly, there's also the potential for new intellectual property to be granted to the co-formulated product, providing exclusivity for 20 years from when the application was filed. I think DARZALEX is a great case study to illustrate just some of these advantages that ENHANZE can bring to our partners. So I'll turn now to Slide 13. DARZALEX, as many, I'm sure, of you are aware, is Janssen's monoclonal antibody, which was approved for multiple myeloma in 2015. As an IV drug, it's already very successful. It generated over $4 billion of revenue in 2020, and analysts project strong growth for this to exceed $7 billion by 2024. Now we began working with Janssen in 2014. And really, with a focus on the patients and an eye to future competition is why Janssen choose to engage with Halozyme at that time. We're very pleased to say that we made strong [ perk ] with them. And in 2020, Janssen received approval for the subcutaneous version of DARZALEX called DARZALEX FASPRO, which is administered through ENHANZE in just 3 to 5 minutes. Now this compares, as you see on the slide, with 3.5 to 7.0 hours for the IV. That's really a remarkable transformation. And I want you to just spend a moment thinking about what that can mean for the patients or the caregiver and indeed for the health care system with such a dramatic reduction in the duration of time for administration. Interestingly, we also saw reduced infusion-related reactions, another potential advantage and benefit for our patients. Now with that, let's just turn to Slide 14 and see how the market responded to the subcutaneous version of DARZALEX. And this is data that is from October of last year for the U.S. for FASPRO. And what it shows is that just 5 months after the launch, which had happened in May, 40% of all of the sales of DARZALEX were happening as a subcu, and that is remarkable adoption. And I can tell you, based on our continued royalty reports and additional data, the adoption and use has continued strongly, not just in the United States but also in markets around the world where DARZALEX subcutaneous has been launched. And I think this is -- it's very strong uptake, really does speak for the strong value proposition patients and physicians are seeing for the subcu version. Let me move now to Slide 15. With that, I think, very strong case study, and we'll focus on the role that Halozyme plays on ENHANZE because this helps explain our business model and our lean and leverageable approach. In a nutshell, as shown in 15, our role is predominantly advisory, with the partner accountable for virtually everything operational, from a staffing standpoint, but also from a cost standpoint. And our one operational area where Halozyme is accountable is to oversee the production and the lease of the API by our contract manufacturers, and API is basically the drug product. So as a result of all of this, this important advisory role, it allows us to have a lean, leverageable and scalable business, where each of our team members can support multiple partners at the same time, meaning that we can add new partners and new programs into the clinic with little or no -- no or minimal, sorry, incremental resources required by Halozyme. Now turning to Slide 16 and look at how we make money on ENHANZE. With 3 key sources of revenue on ENHANZE, these are milestones, royalties and then product sales. Let me begin with milestones, which is shown on the top row. In our contracts, we grant exclusive licenses for our partner companies to combine ENHANZE with a specific target, and we won't license use of ENHANZE with that target to any of their competitors. For this, to access use of ENHANZE with 1 to 2 targets, the standard upfront fee is in the range of $30 million to $40 million. Then there's the potential for Halozyme to receive up to $160 million in total development and commercial milestones for each target that enters the clinic as progress is made. And recall, I said we have got up to 57 potential targets that can be taken by our partners. Now if I move to the royalties, which are in the middle world, we receive on average a mid-single-digit royalty on net sales across all of our agreements. This is an important contributor today, but note this is going to be even a stronger contributor where these recurring revenues are projected to become the largest contributor to our annual sales at approximately 60%. And finally, we also receive a markup on our product sales to partners, which is only a modest contributor to our revenues. So if we take the lean and leverageable business model at this period, with the growing revenues from milestones and from royalties, this is resulting in a projected strong increase in our cash flow. And if we move now to Slide 17, illustrated on this slide is our EBITDA by year. This largely mirrors our cash flow. And as you'll note from this slide, we project substantial growth in our EBITDA in 2021. Now with this attractive and growing cash flow picture, let me now turn to focus on our capital allocation priorities. On Slide 18 is a summary of this. Our first priority is assuring we maintain a strong balance sheet. At the end of the first quarter of 2021, we had $764 million in cash and cash equivalents. In addition, we had net convertible debt of $874 million. Now based on the projected free cash flow and aligned to our goal of returning capital to our shareholders, in 2019, we announced and initiated a 3-year $550 million share repurchase program. As of the end of the first quarter of 2021, we have repurchased $426 million at an average share of $21.99 versus our current share price today, which exceeds $40. And I think this supports very nicely. This is an excellent way for us to return capital to our shareholders. The final part of our strategy is to focus on internal and external growth. And we're going to continue to invest to grow ENHANZE. We see a lot of growth potential there. And in addition, we're also considering acquisition of an additional platform that would drive incremental revenue growth. Now our goal with this platform would be to select one where we can apply the Halozyme demonstrated expertise in building a multi-partner, high-value, lean scalable business, and with our expertise, accelerate the growth and potential of that platform. On Slide 19, let me now move to the next chapter, which is to provide additional details on our growing platform, and I'll begin with our marketed product. Our Wave 1 product shown here are the more mature products we reviewed earlier. These are HyQvia, Herceptin and rituximab. The Wave 2 launches, DARZALEX SC and Phesgo, these are the most recent ones, the Wave 2 launches, which occurred in mid-2020. Beginning with Herceptin and MabThera, each of these products have meaningful commercial success in Europe prior to the launch of biosimilars. With Herceptin, as an example, achieving 30% share of sales volume in the end of the first year and 60% share of sales volume about 3 years in the European launch markets. So strong evidence of market adoption there. I would say in 2020, we experienced, as expected, a decline in revenue from these 2 products as a result of ongoing biosimilar impact in the U.S. and Europe. But as we mentioned before, these demonstrated very strongly the commercial potential of subcu products for Halozyme. On Wave 2 product launches, this is just at the beginning. Illustrated on the bar chart to the right, in blue, the revenue of the IV versions of DARZALEX, Perjeta and Herceptin today is substantial at about $8 billion. This is projected to grow to $16 billion by 2024 by analysts. And so for Halozyme, what's going to be key is how much of this total will be converted to subcu sales utilizing ENHANZE because recall, we receive on average a mid-single-digit royalty on the net sales. Let me move now to Slide '21. In 2021, we project a doubling of our royalty revenues, which is driven primarily by the launch of DARZALEX FASPRO and DARZALEX subcu in the U.S., European and other markets. And also by Phesgo, which is now launching in those same regions. I think it's a very strong growth, obviously, in our royalties. As a result of these Wave 1 and Wave 2 launches, as you've seen, we already have a dynamic and exciting in growing royalty revenues. What's going to be important to understand now is when the next waves of launch is coming, and that's what I'm going to review now. On Slide '22, we'll review our exciting pipeline, which really forms the basis for these next series of exciting launches. Slide 23. This is our development pipeline shown by phase of development. What is very exciting is that we project the expansion on maturing over development portfolio to 16 products by the end of 2021. Including an expectation that we'll have 4 products that are in Phase III clinical development and 12 products by the end of this year will be in Phase I clinical development. As highlighted on the slide, in the first quarter, we saw strong progress with 4 new clinical trial starts, which includes 2 new Phase IIIs and 2 new Phase Is. Where we sit today is we have 2 products in Phase III clinical development, as you see at the bottom of the slide, argenx's efgartigimod and Roche's atezolizumab. And we expect 2 additional Phase III starts this year, one of which is on this slide as a Phase I study and then is BMS' nivolumab. So that would be 3 of the 4 expected Phase III starts underway in the near term. The products in Phase III, importantly, comprise the potential next wave of launches, which we call Wave 3. Based on historical development time lines, these 4 Phase III products represent potential launches in the time window of 2023 to 2025, it's just around the corner. And the 12 products that we project will be in Phase I by the end of the year, form the potential with 4 launches, where if development continues for these products would launch in the time frame 2025 to 2027 based on standard development time lines. So this advancing pipeline of products utilizing in hands that's setting us up for the multiple waves of future potential launches that is what is going to deliver the long-term growth in revenues, cash flow and also profitability for Halozyme. So in Slide 24, just to summarize, with all of the progress we're seeing, the 4 potential Wave 3 launches in the '23 to '25 time frame and up to 12 potential Wave 4 launches '25 to '27, we anticipate that by 2025, we would have 10 approved products and the potential for 5 additional products in Wave 3 with the potential to launch by 2027. So this breadth and depth of the pipeline and the progress our partners are showing is what's giving us such excitement and conviction on the future growth potential for ENHANZE. And if I move to Slide 25, we still see untapped growth opportunities. We see a clear opportunity to continue to add new partners. We continue in a very active dialogue with several companies to date, and we're very hopeful that we will sign additional new deals that we can never put a time line on that, but I can say that based on the tone and tenor of the conversations, we will sign additional enhanced deals. And we also have the potential that our current partners still have more than 20 open slots, targets they haven't selected and moved forward and that also forms a basis for future potential growth. Moving to Slide 26. Let me now close the presentation on the strong long-term growth trajectory and guidance for 2021. On Slide 27, we can say that our exciting pipeline progress and the momentum we've seen to date drives a substantial milestone revenue in addition to the royalty revenues we've talked about. Just to give a summary of the milestone revenue, the 3-year milestone revenue projections, beginning in 2019, are illustrated on the slide in the blue bars and shown in green is our progress to date. Just let me make a few points here. The 3-year milestone projections have increased every year, as you would expect with the growth and maturation of our portfolio. We're making excellent progress delivering on the guidance, as is shown in the green bars. And importantly, the '21 to '23 milestone guidance range is higher again than prior years at the $400 million to $450 million cumulatively over this 3-year period. If I turn to Slide 28, turning to the royalties, based on the currently marketed products and the products that we project will be in development by the end of 2021, which are the Wave 1 to 4 products we've discussed over this presentation. We continue to predict the potential of $1 billion in royalty revenues in 2027. And note this is a non risk-adjusted number and assume global launches in all indications. And as we've reviewed earlier, we're already seeing a strong start this year with the projected doubling from 2020 to 2021 in our royalty revenues. Slide 29. We see also a clear path to continued royalty revenue growth even beyond 2027, which is driven by a number of factors that are illustrated on the far right-hand side of the chart here. The way our contracts are structured we receive milestones for a minimal 10-year term or until the last valid patent. That means these upcoming launches we are talking about will have royalty revenues well into the 2030s. We also see the potential for Wave 5 launches, 2 sources for that aren't in the current projections. These include new partners moving targets into the clinic, but our current partners selecting new nominations and moving their targets into the clinic as well. There's also the potential for co-formulation patents to be granted. Those can have the effect of extending the duration of time of our royalty and also can push out the time to the step-down. Another very important factor in thinking about the durability and duration of Halozyme's revenues. So -- and there's also the potential for an acquisition that could further increase our revenues. So let me just summarize by saying, we see a clear path for continued royalty revenue growth for many years to come. This is really going to be driven by the number of product launches we have, the number of co-formulation patents we have. We know exactly what we need to do to continue to drive this growth, and that is a plan we are executing to. Now on Slide 30, let me move now to our guidance. We continue to expect total revenue of $375 million to $395 million, which will represent year-over-year growth of 40% to 48%. We also continue to expect GAAP operating income for 2021 to be in the range of $215 million to $235 million, which would represent 49% to 63% growth over 2020. Moving to earnings per share. We are projecting GAAP EPS of between $1.25 and $1.40 and non-GAAP earnings per share of $1.55 to $1.70. So I think you'll agree that's a very strong financial picture that we have for Halozyme. So let me close on Slide 31. 2021 is already off to a very strong start. I expect this to continue, which is going to be driven by continued DARZALEX SC, revenue and royalty growth in the U.S. and outside the U.S. as more markets launch and more physicians adopt the product. Importantly, we expect Phesgo momentum to accelerate following the recent European Commission approval in December of 2020 and launches in Europe beginning in the first quarter of 2021, with more countries launching throughout the year and also increased penetration in the U.S. We're seeing a maturation in growth in our portfolio with the goal of getting to 16 products in development by the end of 2021. And we will look to sign new collaboration and licensing agreements to be able to bring even more partners the advantages to their portfolio of adding ENHANZE. And as a result of all the strong progress, we're in a position to return value to our shareholders with the goal of completing the $125 million repurchase that we committed to for 2021. And we will seek to acquire a platform that can add to and complement our revenue growth. Thank you for your attention. I certainly cannot be more excited for the progress and potential we're seeing at Halozyme. Thank you very much.

Maybe, Helen, can I squeeze a quick question in?

Sure.

Just how active are you currently in terms of exploring business development opportunities, new platforms, sort of cement the longer, longer-term perspective? It seems like you've got pretty good runway over the next decade to generate a lot of cash flow and play offense? And just sort of thinking about the balance of share repurchase versus investment in the longer term.

Yes. The great story -- chance we have, Jason, with ENHANZE is that we've got a lot of years of growth ahead of us. So we are not feeling in any rush to do M&A. That gives us the advantage of being able to look for the right platform with the right financial profile, where we, by bringing our skills, can result in stronger growth in perhaps the company who has that platform today can. So I can say we're very actively looking, but we're not feeling rushed or pressured to rush into a transaction until we find a right type of opportunity.

Great. And then maybe just one more follow-up. I believe -- so the core ENHANZE's IP platform technology and I think IP runway out to like late 2020s, if I recall, but the ability it sounds like to generate co-formulation IP really -- it sounds like it gives you leverage to have a new product engine that can help your partners have IP that maybe even can go into the 2030s as well?

That is correct. The -- when the co-formulation patent is granted, that actually is granted for 20 years from the time of filing for that co-formulated product. Also for products filing today, these will go into 2040, providing protection for that subcutaneous portion. Now for Halozyme, that's a benefit to us as well because, in general, the co-formulation patents extend the duration of time we get royalties, and we can also push out the time to the stack time, which would otherwise reduce to about 50% when our core patent expires. So there's a mutual win-win for getting this co-formulation patents, and we and our partners are very active in seeking those.

Great. Well, thanks so much for the presentation. We're out of time. I appreciate you joining us at the conference.

Great. Thank you very much. Thanks, Jason.

Right. Have a good day.