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

Hello. Welcome to the Cantor Global Healthcare Conference for 2021. My name is Charles Duncan. I'm a Managing Director and Senior Biotechnology Analyst with the firm's equity research department. And this is day 2 of the annual event. And I have to say, what a year it has been since we last hosted clients at the 2020 Cantor conference, a year ago or so. It's a pleasure to introduce the next presenting speaker that is -- or the company is called Halozyme. And the speaker is Elaine Sun. Elaine is the company's CFO. Hi, Elaine, good to see you.

Hi, Charles, so nice to be with you today.

Nice to be with you as well. I'm interested to hear a lot about Halozyme, very fresh business, very differentiated. We cover it and enthusiastically so. But before we talk about Halozyme, what you've been up to and perhaps what your staff plans and what you plan to do with the company, I'd like to get some perspective from you. It's been a tough year for a lot of people. But we've also seen some real innovation in biotechnology. Of course, I'm going to miss some of them. But obviously, the COVID vaccine, recent approval of potentially a disease-modifying agent for Alzheimer's and then a transition within oncology driven in part by you folks. So tell me what has been your source of inspiration and resilience over these past few -- well, a couple of quarters, several quarters now?

Well, thanks very much for that question, Charles. And I just want to say what a pleasure it is to be with you and everyone at the Cantor Global Healthcare Conference today. I'm delighted to have the opportunity to share with folks the exciting partner-driven business model at Halozyme. To your question, what inspires me, and I think what inspires the folks at Halozyme is really the mission that our partners have in terms of really changing the treatment paradigm and alternatives for their patients, addressing oncology, but also neurology, autoimmune disease, rare disease and with our most recent partnership with ViiV, now infectious disease. We're excited to be part of their solution to convert existing IV biologics to subcutaneous administration, where our partners have demonstrated the ability to take what were hours long infusions to convert to minutes long subcutaneous administration, which can provide important benefits to patients and help in terms of reducing the capacity issues and cost issues of having patients in the hospital and in the infusion suites. Probably never more important than in the time of COVID. And so we're delighted to be partners with some of the leading pharmaceutical and biotechnology companies out there in helping them deliver subcutaneous alternatives to their patients. And so that certainly inspires me, and I think the team at Halozyme.

It makes sense to me. It seems like Halozyme is certainly part of the solution, not part of the problem in terms of access and delivery of improved health care. And so I congratulate you and the team on that. I want to hear about Halozyme. And so perhaps you would run through a few slides. I may make this much more interactive than it should be. So I apologize for interrupting upfront. But -- why don't you tell us a little bit about Halozyme where it's been and where it's going?

Wonderful. Thanks so much, Charles, and look forward to interactive engagement on this discussion. Before I break into the slides, let me just spend a moment on Page 2. Over the course of this discussion, I will be making forward-looking statements regarding our expected future financial performance and other potential events as well. So please refer to our SEC filings for a list of risk factors and uncertainties. With that, let me just give you and everyone, a snapshot of Halozyme today, which is rooted in our very powerful ENHANZE drug delivery technology, which is the leading IV to subcu conversion technology. We have the only FDA-approved recombinant human hyaluronidase that is co-formulated with our partner's proprietary molecules to deliver subcutaneously administered therapies. And to date, we are -- we have a commercially validated technology with already 5 products that have been marketed in 100 global markets, utilizing our ENHANZE technology. And just these 5 marketed products already address a total addressable market of $18 billion today of the reference products and are expected to grow to $22 billion in just the next 4 years. And then beyond the 5 marketed products that utilize ENHANZE that we expect to have 16 products in clinical development by the end of 2021 of our partners utilizing our ENHANZE technology. And then this translates into a very powerful economic model in terms of milestones, product sales and importantly, the recurring royalty revenues that are projected to reach $1 billion in 2027 or approximately a 40% compound annual growth rate over and above the already substantial royalty revenues that we generated in 2020. So let me now take you through a few of the key themes for the company. We are a uniquely positioned partner-driven, partner-centric business model that allows us to be more risk mitigated and have a very diverse portfolio that is providing this long-term top line and bottom line growth trajectory. We have a scalable business model where we're able to support multiple programs and partners, in their effort to deliver subcutaneous therapies to patients. And again, with a very strong growth trajectory. And I'll dive into each of these themes. But obviously, please interrupt me along the way to the extent you want to dig into any 1 in particular.

We will do.

Okay. So how does the platform technology work? Let me just start with the basics. So we are able to convert what were established IV biologics. If you look up and down our portfolio, you'll see many existing already approved marketed IV biologics, some of the largest products in the world, in fact, and our partners are able to coformulate their proprietary molecules with our recombinant human hyaluronidase to deliver a subcutaneously delivered therapeutic. And how does it work? ENHANZE is essentially able to provide this temporary degradation of the hyaluronan that provides the structure underneath the skin, and that allows for the delivery of large volumes of fluid and that dispersion of drugs that have been co-formulate with ENHANZE. And so this is the simplicity, but also the elegant and powerful aspect of our ENHANZE drug delivery technology. How does this translate? This translates into important benefits for the patients and the health care system overall when you can take what was potentially an hours long IV administration to minutes long subcutaneous delivery, and that's been seen by -- in the examples on Slide 6, by some of our recent partners, including Janssen with their DARZALEX FASPRO for multiple myeloma patients and our partner, Roche, with their Rituxan subcu, Herceptin subcu and most recently, the fixed-dose combination of Perjeta and Herceptin, Phesgo. This also permits getting patients out of the higher cost of care settings in the hospital, the infusion sets. -- into non-hospital or even at home setting. And again, we think this is really supported by the -- some of the ongoing themes in our industry and providing -- and supportive of that overall trend.

Certainly helped during COVID.

Absolutely, absolutely. ENHANZE is still early in its growth cycle, as illustrated on Slide 7. Our first products that utilize ENHANZE technology include our partnership with Roche on Herceptin and Rituxan subcu as well as Takeda's HyQvia. A product that really established the proof-of-concept of the viability of subcutaneously-delivered therapeutics utilizing ENHANZE. And some of these early products were more for life cycle management sort of in the face of biosimilar competition, the development of the subcu therapies. But importantly, when you look to our Wave 2 partner product launches. Most recently, DARZALEX FASPRO launched in the middle of last year in the U.S. by Janssen as well as the fixed-dose combination of Perjeta and Herceptin, Phesgo, launched by our partner, Roche, in third quarter of last year in the U.S. You can see these are examples where our ENHANZE technology has been applied to products much earlier in their growth cycle. And this again is supportive of the real long-term growth potential for our partners and as well as for Halozyme. But this is just the tip of the iceberg in terms of the true broad portfolio of opportunities where ENHANZE can enable subcu therapeutics. And over the years, we anticipate multiple waves of product launches of our partners enabled by ENHANZE, and that is the expectation of providing our long-term sustainable growth.

Elaine, not to ask you too much detail about regulatory interactions, but it would seem to me that not only did Wave 1 establish technical proof of concept, but it also in some ways, really established a regulatory proof of concept because it helped agencies, both here in the United States, and then ex U.S. become comfortable with the technology platform. Wouldn't you say that that's the case? And does that help partners become comfortable with thinking about opportunity identification and combining with ENHANZE?

That's a wonderful point, Charles. And absolutely. So to date, our 5 products of our partners that utilize ENHANZE that have been commercialized to date have been approved in 100 global markets. I think certainly with FDA, with EMEA and other regulatory agencies, it's been important to see and now validated from a regulatory and from a commercial perspective, the approvability of ENHANZE-enabled products. And I do think that, that is 1 of the factors that has resulted in substantial interest from new potential partners, as they're looking at -- as well as our existing partners as they're looking for opportunities to utilize ENHANZE across their pipeline.

Excellent. So beyond clinical and regulatory kind of proof of concept now commercial proof of concept. Why don't we talk a little bit about what you can do for patients and for your partners?

Absolutely. In fact. Let me then turn to some of the additional slides that I think will speak to that. So First of all, where ENHANZE has been utilized is in some of the largest attractive markets blockbuster product opportunities. And the reason why we are utilized now is really expanding because ENHANZE has been demonstrated to deliver very strong advantages to some of our partners in terms of competitive differentiation, in terms of helping to preserve or to enable a market-leading position and the potential to generate additional co-formulation IP that can provide longer-term exclusivity. And so these are some of the advantages. And in fact, let me -- let me perhaps focus on...

It's a big pool. Slide 10 shows that it's a big pool that you're fishing in. I like that.

Yes, absolutely. So ENHANZE is utilized with some of the largest product opportunities out there. And I think reflects where the pharma industry has shifted overall in terms of a focus on antibody-based approaches. In fact, monoclonal antibodies, which are sort of the principal area in which ENHANZE has been utilized to date, if you look at our pipeline portfolio, monoclonal antibodies represent a very large percentage of the total number of FDA approved products as well as products in clinical development, both early and late stage and so this really bodes well for the potential for ENHANZE.

Slide 11 is a favorite of mine because it is a refreshing look at the number, the breadth and the depth of your partnerships.

Yes. We're proud to be able to say that we now work with some of -- with 11 of the leading major pharmaceutical and biotechnology companies in the world. Our 11 partnerships, including our most recent partnership signed with ViiV earlier this year, now encompass some 60 targets, including of those 60, 20 that are still open to nomination. And again, as we've talked about ENHANZE is still early in its growth cycle because 5 have been commercially marketed to date, but our partners continue to work towards developing those other products and programs in their pipelines, utilizing ENHANZE. And as you mentioned, we have a growing area of applicability in terms of the therapeutic areas as well that we address where ENHANZE has historically been utilized is really reflective of the overall pharma -- biopharma market in terms of the heavy focus on cancer. Obviously, some of the largest products in the world today are cancer-based antibody products. And -- but increasingly, with each new partnership and with the expansion of our partnerships with our existing partners, we are increasingly covering a wider set of therapeutic areas now encompassing beyond oncology, neurology, autoimmune disease, rare disease, and again, with our most recent partnership, ViiV, are now in the area of infectious disease. And another reason why we were so delighted to sign up our agreement with ViiV, is clearly, they are a leader in the HIV space, but this is an important illustration of the broader applicability of ENHANZE beyond large molecule and in small molecule where -- licensed ENHANZE exclusively for 4 targets for developing ultra long-acting medicines to treat and prevent HIV and they see this opportunity to really provide important alternatives for HIV with people living with HIV, including the conversion of daily small molecule therapeutics to these ultra-long acting subcu delivered products.

Could be a real game changer for that patient population. I myself, I'm particularly excited to see the traction that you're getting in neurology. But even more so the broad applicability of the technology is very cool. But why don't we move to Slide 13 because that's a great -- you call it case study, picture tells a thousand words here. tell us what you do for patients and partners?

Absolutely. So this relates to your earlier comment about the commercial validation of ENHANZE. And we're just delighted to see the progress and momentum that our partner, Janssen, has had, as they have continued to grow their overall DARZALEX franchise providing really now what is becoming -- rapidly becoming standard of care for multiple myeloma patients. And we've seen the fantastic uptake of DARZALEX FASPRO, subcu DARZALEX. This really, I think, for the first time, I think, has demonstrated receptivity for ENHANZE-enabled products, subcutaneously delivered ENHANZE-enabled products in the U.S. was to see the trajectory of DARZALEX. And analysts estimate overall the DARZALEX franchise could reach over $5 billion in total sales, this year, but growing to $8.5 billion in 2024. We've seen some projections reaching $10 billion or so in the next several years as well. And importantly, Janssen has managed to achieve tremendous uptake in a time of COVID, launched just in the middle of last year and has already reached, within a year of launch, 66% of conversion of their overall franchise to the subcutaneously -- subcutaneous form of DARZALEX in the U.S. and per Janssen's statements as of the second quarter, 60% ex U.S. So seeing fantastic receptivity and acceptance of the subcutaneous form of DARZALEX. And really that value proposition, I think, is reflected on the right side of Slide 13. As you can see, the conversion of the IV form, which has administration times of 3.5 to 7 hours for each IV dose, to 3 to 5 minutes long subcu administration for DARZALEX FASPRO or subcu DARZALEX. So that's a tremendous potential benefit there for patients. And then also, the other thing I would note is the lower rate of infusion-related reactions that they saw with subcutaneous DARZALEX, I think, 13% versus 34% that they saw with the IV form, so important benefits to patients.

Just think about the impact that, that has on a patient who may be struggling with cancer therapy, especially within the COVID time. Think of how many patients may have been saved because they actually took their drugs, were able to take DARZALEX. I mean, obviously, it's tough to know, but this is value creating for a lot of different stakeholders.

Yes, Absolutely. Absolutely.

It turns into revenue. That's a good thing.

Exactly. And so just continuing on, as I mentioned, DARZALEX is seeing fantastic uptake that is -- they're seeing continued growth both in the U.S. and outside of the U.S. And I must say, prior to DARZALEX' launch prior to both DARZALEX and Phesgo's launch, I think we had a more measured view in terms of the time it would take to convert the overall franchise, just recognizing the staging activities that are required before launch or as part of the early launch activities in terms of reimbursement and electronic medical records, et cetera. And really DARZALEX has been a fantastic illustration of the -- of great commercial execution and the potential for subcu-enabled products with ENHANZE.

I imagine on Slide 16, since we're talking to the CFO, it might be great to get some operational metrics in terms of your vision and what this does for Halozyme?

Exactly. So Slide 16 really is a powerful illustration of the economic value streams that are generated and enabled by our ENHANZE technology. So on average, we received $30 million to $40 million in upfront license fees when we enter into a collaboration and roughly $160 million in milestones typically split 50-50 between development and commercial stage milestones. And then on average, we receive mid-single-digit royalties on the end-user product sales of the products. And then in addition, we support our partners in terms of providing them with bulk drug substance, which they used to co-formulate with their proprietary molecules to create the subcutaneously delivered therapies, and we typically provide that API at a cost plus 20% basis. We also sell a small commercial product in the ophthalmic space that utilizes the same technology called Hylenex. Importantly, as you look at the trajectory for our overall revenues, we will see an increasing contribution from the recurring revenues in the form of royalties as more of our partners continue to execute on their pipelines and commercialize ENHANZE-enabled products. And so this is a really powerful illustration of the economic business model.

And since it's an efficient business model, it drops to the bottom line. Slide 18 shows that that's good for shareholders. I want to get to Slides 23 and 29, only because, again, a picture tells a thousand words. And not to fast forward too much, but this is what the future looks like, and I love pipeline slides, particularly those with this large number of candidates. Any perspectives on that?

Yes, absolutely. And thanks for focusing our attention on Page 23, because while there's been understandably a great deal of focus and attention on the 5 marketed products that utilize ENHANZE, notably the Wave 2 product launches, DARZALEX and Phesgo, I think absolutely, I would focus folks' attention on our broad pipeline that addresses the broad therapeutic areas and modalities that we talked about earlier. Our Wave 3, what we call our Wave 3 ENHANZE-enabled product launches by our partners are the products that are currently in Phase III. And you can see we have 3 products of our partners that are addressing 6 indications, including our partner, argenx that is developing their FcRn efgartigimod in a host of different autoimmune conditions including myasthenia gravis, pemphigus vulgaris and foliaceus, ITP and CIDP. And I would note, these are, again, quite derisked the PDUFA date on the IV form of efgartigimod in myasthenia gravis is expected at the end of this year, and these other trials are in Phase III for the subcu form for these other indications as well. Beyond argenx, we also have our partner Roche with atezolizumab or Tecentriq, of which it's in a subcu -- in a Phase III study for non-small cell lung cancer. But obviously, Tecentriq is itself a blockbuster product that encompasses a range of tumor types, and so there is the potential for broader applicability in that broader range of tumor types. And then, of course, our partner, BMS, earlier this year announced that they had initiated Phase II for their subcu nivolumab or Opdivo, also utilizing ENHANZE. So this represents the next wave of potential products that could begin to generate revenues in the '23 to '25 time frame. So very excited about the trajectory there. And then beyond that, we have a large and growing number of Phase I products of our partners that again, encompass a wide range of indications, but include for instance, the subcu TEPEZZA, which is being developed by our partner, Horizon, where they've talked about their Phase I PK study that's underway for a subcu TEPEZZA for thyroid eye disease. And they see that as a $3.5 billion peak potential opportunity for the overall franchise and the important potential from a subcutaneous form of TEPEZZA. As well as you can see other products here from our partners, whether it's argenx, BMS, Janssen, et cetera. So -- and Roche. And so we're very, very excited about the broad and growing pipeline of -- and these make up our potential Wave 4 launches in terms of what could drive the even longer term.

And also ViiV. You've got the 2 HIV candidates as well.

Absolutely, absolutely. Where ViiV -- in fact, we're making wonderful progress with our partner, ViiV, and they are working towards entering into the clinic and see great potential with the utilization of ENHANZE in their HIV portfolio.

I'm intrigued, you do mention not only HIV treatment but vaccine. Are there other vaccine opportunities that you could imagine that could come to pass with using the -- really enhanced by ENHANZE?

So I think there is -- so I should say, that's for treatment and prevention for these oral and large molecule targets for HIV. And also including vaccine. I think we are still in the process of determining the true applicability of ENHANZE multiple modalities.

Okay. Makes sense. And you probably want to hit on a few others, but I'm really intrigued with Slide 29. I know it addresses some of the questions that I get from investors. Although I would say '27 is, again, 1 of those pictures tell a thousand words. But 20 -- after '27 when the -- I guess, the initial patents run out with enhance what happens?

Yes. So we should talk about the long-term durability of our business model and that durability is really provided in a number of respects. First, to your point, with respect to our foundational IP that goes out to '24 in Europe and '27 in the U.S. But in addition to our foundational IP, when our partners co-formulate our recombinant human hyaluronidase utilizing ENHANZE with their proprietary molecules that can generate new co-formulation patents that can potentially extend that royalty runway. We are always careful in terms of stating that it can in some but not all cases, extend that duration of [indiscernible] and can in some, but not all cases, extend the time frame to a step down. That would normally be 50% of the then current royalty rate. But this co-formulation IP can confer that additional exclusivity for our partners and can extend that royalty runway. And then also per our standard contracts, we receive royalties for a minimum of 10 years from first commercial sale or the period in which we have a patent. And so when you think about the waves of product launches, obviously, there's been a lot of focus on Waves 1 and 2. We've just talked about with our pipeline, Waves 3 and 4. And while we haven't mentioned it, but in fact, we see the potential for a Wave 5 set of product launches, which are enabled from new partnerships as well as new target nominations of our existing partners and those could make up additional product launches. And so when you sum up and array those different waves of launches and these minimum of 10 years of first commercial sale or the period in which we have a patent. And you see that, that can result in long-term sustainable top line growth, and then because of our leverageable business model, strong cash flow generation, profitability and cash flow generation.

It's a fabulous business model and 1 that I'm excited to continue to cover. I guess if you want to touch on guidance, we only have about a minute or so left. Or you can tell us what you'd like to talk about at the Cantor Healthcare Conference in '22 because I look forward to hosting you then.

We will certainly look forward to that as well. So just with respect to our guidance earlier this year on our Q2 [ conference call ] we did raise guidance because of the strong trajectory we're seeing in our partners' sales and royalties. As well as the upfront license fee that we received for the signing of the partnership with ViiV. So -- and this really is that illustration of the strong economic business model that is enabled by our platform technology ENHANZE. And you can see top line, bottom line, very strong growth projected over our already substantial critical mass that we achieved in 2020. I think the last thing I would just want to say is perhaps just going back to capital allocation. This ENHANZE-enabled business model is supportive of a balanced capital allocation. We also strengthened our balance sheet earlier this year, taking advantage of a historically strong convertible market to lower our cost of capital and strengthen our balance sheet. And then that, in combination with our strong cash flow generation by our ENHANZE -- enabled by our ENHANZE platform technology enables us to continue to support our ongoing commitment to capital return, which we know has been an important theme for our shareholders. And we've already purchased, repurchased $475 million of our total $550 million 3-year buyback plan as of the second quarter, and we continue to believe in the long-term value potential of Halozyme. This strong cash flow generation also is supportive of funding growth, both internal and external growth. And seeing the value that we've been able to create for our shareholders and drive out of a single platform technology, namely ENHANZE, we believe there is the opportunity to drive [ further value ] by bringing in an additional platform technology and leveraging our existing capabilities and resources to creating new economic value streams that are again supportive of ongoing and long-term capital returns.

Well, very good, Elaine. Unfortunately, we're out of time, but I appreciate you sharing the Halozyme story with me. Excellent diversified way to play biotech. And congratulations to you and your CEO, Helen for executing a transformational period in the company's growth. Thank you for spending time with us.

Thank you so much, Charles.