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

Well, Good morning, everyone, and thanks for joining us this morning in the 43rd Annual Goldman Sachs Global Healthcare Conference. This morning, I'm pleased to welcome from Halozyme. We've got the CEO, Helen Torley here today. And so maybe with that, we'll just jump right into questions.

First, for those that aren't familiar, could you just provide a brief overview of the HALO business model? I think it's quite unique relative to the rest of the Biotech.

Well, let me start by saying thank you for having us here. And Halozyme is a unique biotech company in that we are profitable. If I give you our guidance for the year before we acquired Antares, we project revenues in the range of $530 million to $560 million. That's resulting in operating income of $350 million to $380 million, and GAAP diluted earnings per share of $1.90 to $2.05. And it is indeed our ENHANZE business model that is driving that prolong revenue performance. ENHANZE is our drug delivery technology. We license it to leading companies for them to be able to transform their IV drugs to be given subcutaneously. This can take treatment from being 4, 6 hours as an IV simply minutes, 3 to 5 minutes as a subcu. And you see how that fits our goal to be disruptive for patients. We have 5 approved products to date. That's what's generating the revenue. But excitingly, we also have 15 products in development. And I'll just highlight that we have 3 products that we call our Wave 3 products that have the potential to launch between 2023 and 2025, that will be generating additional revenues for the company. We rate money in terms of receiving both milestones and royalties from the companies. And we're very excited with the performance of our royalties. Our currently marketed products generated $200 million last year in royalties. Obviously, those are recurring revenues, which we like. This year, we predict that's going to grow to $300 million. And that's really driven by the more recent launches, which we call our Wave 2 products, which is Janssen's Darzalex and also Roche's Phesgo. So this is a unique business model, I think, that is generating revenues through these multiple waves of launches with many more launches to come.

Well, and you mentioned DARZALEX FASPRO. I think it's a really good case study for the model. And we've seen conversion rates with respect to [ subcu ] really exceed expectations. So could you talk a little bit about that product as a case study, why has the conversion been so good? And how do we expect it growing in the next couple of years?

Yes. That is a great example, Corinne. We've got with DARZALEX, as many people know, a terrific product for patients with multiple myeloma. Today, as an IV, it takes on average 4 to 6 hours for patients to receive it. It is a long IV infusion. Working with Janssen, we've created a subcutaneous version that's given in just 3 to 5 minutes underneath the skin as a result of the ENHANZE technology. Importantly, Janssen also found that there was a reduction infusion-related reactions when the drug was given subcu. And so the subcu version launched in the middle of 2020, right in the middle of COVID. But I will say it's been a remarkable success. There at the end of last year was 76% share of sales. We're already converted to the subcu. And in Europe, we estimate it was about 60%. A question I often get is how much more can it grow? And I think there's 2 key dynamics to think about. The first one is what is the overall DARZALEX brand doing? It is growing remarkably from a product that was launched in 2015, the Q1 sales were $2 billion, up 40% year-over-year on an operational basis. It really is quite remarkable, and that's been driven by continued penetration in all lines of therapy. That would annualize out at about $8 billion. An analyst's project that the overall DARZALEX brand is going to exceed $10 billion in the '25-'26 time frame. So if you like, that pie is getting bigger. That pie is also being driven by more use of the subcu. And so looking at 2021, if you look at the average there, it was 58%. And you can see as we play through to higher shares to get to the 76%, for example, that was this year at the end of the year, we're going to see additional revenues by that area under the curve revenue, if you like. But we've got more growth to come, both in the U.S. and outside the U.S. We already know at the end of the first quarter, U.S. share was 80%. So this is just continuing to go -- again, driven by the strong value proposition. But outside the U.S. as well, we expect strong growth. So it is a key driver of our revenue in '22, and we expect it to continue to be so for some time to come.

Wonderful. And in terms of the natural upper limit in terms of the conversion rate, 80%, you still see room to grow. But how do you think about what is the max kind of conversion you could get to? And what are the dynamics that make some people still in the infusion?

Yes. We do hear in research that there are occasional patients who like the community of being an infusion center. That's a small number of patients. And there may be patients who are a bit needle phobic who don't mind having the port. But we do believe, and this is based on research that Roche and others have done the majority of patients prefer subcu. It is less time consuming for themselves. It also impacts the family a lot less. The caregiver doesn't have to be waiting for the day at the infusion suite. Those types of dynamics are incredibly important. And we also have an important thing, I think, that's under recognized and that if you are taking a lot less time to deliver care in the infusion suite, the overall cost of care can be less. Roche has demonstrated that with several of their drugs showing that the reduction in health care utilization, it results in reductions for the community. And we do know particularly outside the U.S., the payers, the health care systems are very supportive of conversion to subcu because of that additional benefit to the health care system.

So, as we look forward to the Wave 3 launches, I think VYVGART is probably top of mind for people. To what extent should we view FASPRO as an analog for these additional products in the Wave 3 launches? And what factors do you think are the same as we think about those? And what factors may be different as we think about potential conversion?

Yes, we're very excited about efgartigimod as you mentioned, positive data amounted by argenx at the end of the first quarter of this year. And argenx will proceed with the subcu filing sometime this year. We actually see a lot of parallels interestingly between what has driven DARZALEX success and what we expect for efgartigimod subcu. Firstly, the product is important to the company. And this is the first launch for argenx. We know the first quarter has gone very well. It's been a labor of love for many years to get to this first launch. So we do expect a lot of care and attention to it. The second one is what is the competitive dynamic? The FcRn space, argenx is first, but we know there are other companies seeking to come forward with a best-in-class FcRn with the best approach for patients. We in argenx build our approach as the best. So that one is going to want to make sure you've converted that market given the competitive pressures that are there. I think the third thing is the patients. Will the patients want to receive a subcu? And we know from a patient preference data that argenx actually reported out in patients who received both IV and subcu in their clinical studies. 70% preferred the subcu. That's another very nice dynamic as well. And then finally, you want to look to see are there any structure or barriers that might slow the uptake. And certainly, in the rheumatologist and immunologist office, they're very comfortable and used to using subcu products. So all of those dynamics, I think, speak very favorably to a strong uptake for efgartigimod.

Very helpful. And you are continuing to sign new partnerships over the past couple of months even, as you've gained success with some of these high-profile drugs like FASPRO, like the clinical data we saw with efgartigimod. Have you seen any differences in the kind of inbounds you're getting with the frequency with what you're getting contact?

Not a difference. It always has been very active, and we have 2 ways to do this. We are very proactive as a company in looking at companies portfolios, looking at their drugs and seeking to identify and ENHANZE bring them competitive differentiation and it helped them get some additional exclusivity. So that action is very, very active. But we certainly always are getting incoming calls. And I would say the one area where we probably have seen a little bit more activity is since we signed the agreement with ViiV. ViiV is a GSK company focused on HIV. And they have a very compelling vision, which is to move treatment of patients with HIV so in every 3 months or in every 6 months index. The only way they can do that is with our technology. And this is a small molecule. And so it really has made other companies perhaps in areas like neurology, psychiatry, take a look and say, good long-acting subcu, be a competitive differentiator, would there be benefits to the patients in terms of compliance and outcomes. And so we are more focused, both inbound and outbound in the small molecule area. But other than that, it does remain a very active on 2 way dialogue and very happy with the progress we're making there and multiple, we call it our deal pipeline pipeline. We always wanted to be in lots of discussions, and I'm happy to report we're in lots of productive discussions at the moment.

Very helpful. And you also have recently announced, let's called them enhancements. So, enhance, but products that are kind of tangential both room temperature stable, rHuPH20 and then the higher yield API. So how did those products going to expand the offering that you can provide to your partners? And where are you seeing conversations around those products?

Yes. I'll start with the higher yield API. It's a niche generation of ENHANZE, so an identical molecule to ENHANZE. And really, the goal with that is to continuously improve our production and process. That's pretty standard with any biologic you're going to want to do that. And for us, the ability to now improve the yield will reduce cost for our partners. That will be viewed favorably and will continue to help us continue to have strong relationships with our key partners who in their own processes are always looking to make process improvements. So it's simply an expectation that we would continue to do that. And we've done that over time. This will be the third generation of ENHANZE. So pretty straightforward process. And partners are pleased that we are doing that. And as I mentioned, it's an expectation, so good partnering behavior. The new rHuPH20 is interesting. Again, this has really risen by the increased discussion that is occurring around small molecules. Up to this point in time, we've mostly partnered with biologics, and it's the biologics need to be refrigerated, there was no question or need for a room temperature stable drug. But with ViiV and other small molecules, companies are thinking more and more about this will be delivered in the home by the patient for safety and protection and making sure nothing would happen to the drug, wouldn't it be great if it was room temperature stable and there was no worry that the patient might leave it out inadvertently. And so we do have this room temperature stable rHuPH20. It is a different molecule than ENHANZE, and it will need a full development program. So we're at the state at the moment of cell scale-up. We'll need to do stability. We'll need to do toxicology and then we'll move into clinical testing with the partners. That is one that has the potential to launch after 2027 because we have to do all of that development. Excitingly, it is a product that has got more extended IP. It goes till 2032 in Europe and 2034 in the United States. And so I would think about that as being an offering not to -- for any of our current partners who are already in development or of commercialized products. They don't need that, but perhaps new partners or current partners who are considering developing a small molecule or for those who might be interested in the more extended IP. Those are the 2 places. So it's an additional offering, but we expect the majority of partners to be continuing with ENHANZE, which fits very well at their needs for the majority of product.

Great. And you mentioned it, because you provided a little bit more context around some of the steps you need to take where we are and when we could expect to see more on things like the toxicology and the clinical studies for [indiscernible] program.

Yes. So with regard to the new rHuPH20, we're really in cell line scale up at this point in time. I would say we would have completed the key steps that would allow us to go into the clinic in early 2024. So you would -- I don't know necessarily that there'll be report outs of these. It's pretty standard stuff to do. But we're very hopeful to be moving into the clinic around the early '24 time frame for the new rHuPH20. The higher yield should be available to the market in 2026. Again, there's nothing very special about that. We will demonstrate comparability of that molecule, and it will seamlessly go into our supply chain.

Wonderful. And one of the things that I think we talked about a lot of -- you got a lot of questions on is what are the implications of the ENHANZE patent loss of exclusivity in '24 in Europe, '27 in the U.S. So how do you think about the potential implications to your business? And then what kind of factors do you think will protect ENHANZE and the franchise post at LOE?

Yes. So it's a question we get a lot because the base composition of matter does expire, as you mentioned, 2024 in Europe and 2027in the U.S. So I think in biotech, there's often a perception that when patents expire, there is a patent cliff. And by that we mean that there are biosimilars who come in and the sales are significantly eroded. For ENHANZE, that simply cannot be the case. And that's, I think, a very exciting thing for us. And the reason for that is while we project in 2027 as an example, we will have $1 billion in royalty revenues on a non-risk-adjusted basis. Instead of being made up of one product that is actually made up of 20 products. And if we start to look into those 20 products, many of them, the parent product is still under exclusivity. So those will not be addressable by a biosimilar company. So that reduces the opportunity down from the $1 billion. Then we expect that many of those products will also be protected with co-formulation patents for the subcu using rHuPH20. So you shrink the pie again. And if you're a biosimilar company, looking at the opportunity here, you're going to look at it and say, well, the revenue is substantially less than $1 billion. I've got 7 or 8 products, as an example, in there that are going to be driving it, what is the FDA going to ask me to do to be able to get my biosimilar approved? Because this isn't a simple one drug versus another drug that are 7 or 8 drugs in there most likely. And so for the time cost complexity, we do not think biosimilar companies are going to find ENHANZE and attractive things. So that patent cliff dynamic is not going to be one that affects us in 2027.

I think another potential source competition would be a pharmaceutical company that would today partner with you. But in the case where ENHANZE is no longer protected by the patent could say we want to do this all ourselves. What keeps the pharma companies for seeing that as a better return on investment than coming to you as a partner?

Yes. As we look at it, one of the key questions, and I can say this for just about every pitch I've done in ENHANZE in partners' minds is, will there be a risk of immunogenicity. Any time you combine 2 biologics together. There is a risk there'll be some form of interaction that you won't discover until you've tested it in many, many patients. And that immunogenicity risk is top of mind for companies. When companies want to use our rHuPH20, when they use ENHANZE, it is coming with 600,000 patients database that have been treated commercially. That is, I think, very reassuring that they can interrogate those databases and answer their own questions with regard to the safety profile of rHuPH20 in different settings. So that is the #1 thing. I think the second thing is, now, we 5 approved products. We're working on 15 other products today. The Halozyme team brings an experience in interacting with regulatory authorities around the world on rHuPH20 and development programs. We really have a superb expertise that goes from formulation to CMC throw to a clinical trial design now, really with all of that expertise. And a company who hasn't got that will probably go back to where we were at the start in terms of those relationships. And so I do believe that certainly, our current partners are very much value what we bring in terms of partners. The reliability we've demonstrated on our API supply. We have a saying of frictionless supply that's really important. And that safety database is a very compelling value proposition for why companies would not do it themselves to save a few pennies. They are putting their -- if they do it, I believe they would be risking their flagship products because they will not know if there's going to be an interaction between the drugs until they've tested many patients.

Wonderful. That's helpful. Maybe this is a good opportunity to shift to the recent acquisition that you announced with Antares Pharma. So provide a bit of a background on that deal, why you found a compelling target.

Yes. As a company in 2019, we had indicated that we were going to use our cash to both do a share buyback, but also seek M&A. And at that time, we had just restructured the company, and we were very clear on our criteria for M&A. What we were looking for was a company that had a licensable platform, which is complementary to ENHANZE that it was derisked. So we weren't waiting for it to say, will this acquisition work? Will it not? We wanted to know that going into it. We wanted it to have meaningful revenues and long revenue durability because obviously, we've got a great story with ENHANZE, and we wanted to add and build on that. And importantly, because at that time, we were projecting becoming profitable, we wanted to find something that was, if not immediately accretive, the year we acquired it accretive soon after. Now we searched for 2 years to find something that fitted all those criteria and Antares turned out to be the perfect fit for us. And what Antares brings to us is an opportunity to further strengthen our leadership in drug delivery. They have a best-in-class auto-injector technology platform and several offerings there and importantly, allowed us to extend our strategy and also diversify our revenues by adding a commercial specialty product business. And so it's a combination of those 2 that made Antares so attractive for us.

And maybe we can just expand a bit on that last point, which is that while you're in the market primarily for a drug delivery business, you did get a commercial capability there. So how do you think about where that commercial specialty pharmaceuticals opportunity fits relative to the ENHANZE model?

I will say, Corinne, we're actually pretty agnostic to the technology we would find. We wanted a licensable derisk business and it's terrific, it turned out Antares was a super fit for our financial criteria, which was really driving us with it. The commercial business is an important part of the story. Given the criteria, we wanted at growing and durable revenues. And so Antares has got 3 products that are commercialized today, focused on the urology specialty group as well as endocrinology. Last year's revenues for their leading product, which is a subcu injectable delivered in their auto-injector technology for low testosterone generated $63 million. We have just launched an oral therapy for testosterone replacement called TLANDO, which will obviously generate new growth. And there's a product called NOCDURNA that is used for nocturnal polyuria. And so it's launching into an underserved market, where there are 8 million scripts to date. Patients receive their testosterone generally intramuscularly or as gels. And patients are dissatisfied with both of those. So our strategy is really to grab share in those dissatisfied patients with the more convenient offerings and frankly, better offerings that we believe Antares can bring for patients. And so we project strong revenue growth over time that's going to come from share gains from these IMs where the patients have to go to the doctor's office often and it's painful. So instead you're getting a virtually painless subcu or the gels where the patients have to apply it, wait 15 minutes, avoid the family in case of some transference, they can simply take a twice-a-day pill. So we see a nice opportunity for growth. And strategically, that's growing revenues, gives us an increasing operating margin in that business and meaningful contributions on revenue over time, which was the strategic goal of the M&A.

Helpful. Maybe you could expand a little bit more on the testosterone replacement market. Where do you stand with respect to share today? And where do you think these products could go?

Yes. Today, with TLANDO, we are in the low to mid-single digit share. So we can go up a lot from that is what I would say. It really is a question of the physicians identifying those patients who are unsatisfied and dissatisfied predominantly with the IM. We think the IM patients are the great fit for this virtually painless subcu that takes seconds to deliver for the patient. So we haven't, I think, stated publicly what the target share gains over time are, but there's substantial growth going to be there, and we know that there is dissatisfaction in this market. For the TLANDO just launched last week, actually. And again, there are about 2 million patients who are -- 2 million scripts a year, all of people receiving the gels. We know there's dissatisfaction there. And certainly, the initial anecdotes coming back from physicians who are being detailed on TLANDO's very positive. So what we're hoping, again, is substantial share gains there over time, really targeting this 8 million scripts and already developed market there with the opportunity to take share.

Great. And so you mentioned that the auto injectors that Antares brings are best-in-class. But what makes an auto-injector best-in-class? And what do you like so much about that particular product?

Yes. When we look -- we've looked at many drug delivery companies as part of our assessment. It was just one of the areas we did look at. So when we came across Antares, what we saw there was, first of all, it is derisked and validated. There are multiple approvals and partners using the Antares device today. That was important because certainly, there are some devices in development, but they didn't have that important fact for us that the FDA has reviewed this and it's derisked. The second thing is there are multiple offerings. There are offerings at the 1 ml and the 2.25 ml volume. And 2.25 ml today is the largest volume people can deliver subcutaneously in a single quick shot. What makes I think the Antares platform unique is the customizability. As I have been working now with members of the Antares legacy team, each partner who comes to us generates just like ENHANZE a conversation to say, what are you -- what are you looking for? What is the drug type? What's the drug viscosity? What is the patient type? What is the desire you have as to how this will be delivered over how much time? And the platform is easily customizable without high expense or high investment. That is very important because we do know that pharma and biotech partners will want an offering that is customized to their particular setting and need. And importantly, their 2.25 device, we believe, is going to be easily customized to develop a 5 ml. Now 5 ml is not available in the market today. We know a number of companies are evaluating it. And the challenge with the 5 ml, we believe, without the ability to use ENHANZE is imagine trying to put down 5 mls into your leg at a very fast pace because the FDA for auto-injectors does want it done fast to make sure the patient delivers all of the drug. I think there is a fear that if it takes minutes, the patient will pull it away and not get the full drug delivered. So you've got to be able to do it fast. I mentioned earlier the maximum volume you can get into the skin in a single subcu index is about 2.25 ml. So where we see the great synergy between Antares and Halozyme is the ability to have drugs coformulated with ENHANZE, which when the auto-injector works, the ENHANZE literally immediately starts to degrade the hyaluronic that is kind of the substance that takes up a lot of the space in the subcutaneous space and create those channels, so there's somewhere for the liquid to go. And that liquid then or drug can get absorbed in the lymphatics. And it doesn't result in a big lump or anything like that. Now we are at prototype testing. We have done some animal studies to support that hypothesis and belief. And we are already making great progress since we closed 3 weeks ago in generating prototypes that we will take into more detailed testing. But that 5 ml is going to be very exciting because it's a space in the market we know people want, but nobody has been able to deliver so far.

Helpful. And then you've also said that the deal is a little bit more about the cross-selling opportunities rather than really being about operating synergies. So could you expand a little bit on what kind of cross-selling opportunities there are with the product?

Yes. Since we did close with actually already been very busy presenting the ENHANZE platform plus the Antares platform to our current partners. We know that they have -- some of them have products that might be suitable for the Antares platform. And again, a lot of interest and excitement in some of the partners to be able to evaluate the -- particularly 5 ml because the current partners really are a bit more focused on higher volume drugs. But we also are taking the opportunity so separate from that cross-selling, Corinne, to be identifying companies to approach for the 1 ml and 2.25 ML without ENHANZE. Because we think this proactive approach we have business development is going to allow us to get even more partners and more royalties because another fact I should have mentioned is that the Antares business model to date has been royalties on the net sales of drug plus device from the partners. And so a lot of parallels to the Halozyme business and healthy royalties at the mid-single digit, escalating potentially into the low teens with certain sales thresholds being met. So the 1 ml and the 2.25 ml is another opportunity we don't want to miss. We will be promoting as we appropriately can, the 5 ml plus ENHANZE. And then we are still talking there will be some products like biologics where the volume may be 15 ml where ENHANZE alone would be a great solution. So what we've done is expanded our ability to address the drug delivery needs of partners in a much more comprehensive way than we've ever been able to do before.

Great. And -- so you mentioned that there's obviously these cross-selling opportunities. But when should we expect to start seeing those come to fruition with things like new deals or newly announced partnered products with your existing partnerships?

Yes. Certainly something I'm very focused on. I think with the close just a couple of weeks ago, we -- it'd be premature to comment, but I can just say that we do have teams already hard at work and both with our current partners, but also seeking out those new potential opportunities and presenting our value proposition. So I can't give an exact date on it, but I'm very excited about the new opportunity this is presenting for Halozyme for additional revenue streams coming from royalties.

Helpful. And then for products that are approved after the 2027 time frame, how do you expect the co-formulation patent protection? Do you establish as prior to when the 2027 LOE happens, how does that kind of all work if they're not coming to market until later?

Yes. Just to say for our agreements, we will always receive royalties for a minimum of 10 years, irrespective of when the launch happens. So that 10 years will be valid even if it's after 2027. And we do expect that partners will want to protect their invention. It's just a thing in biotech. If you invent something that is novel and unique, you want to claim that. And so it would be our expectation that partners after 2027 will continue to seek to get that intellectual property protection for their products.

Helpful. And maybe one last one because we've had this thought experiment before. How should we think about what happens in Europe in 2024 as a proxy for what could happen in the U.S. come 2027?

Yes. I think your question there, Corinne, is what's going to happen to revenues because if there is no co-formulation patent, there could be a step down in royalties for some of our partners. Am I getting the question right?

Yes.

So I think, again, our business model is unique in that we've got multiple launches at multiple different stages and the opportunity for co-formulation patents. So for exactly what will happen in 2024, we need to consider is how many launches there will be in and around that time. What is the rate of growth of the products that are contributing? How many co-formulation patents have been filed at that point in time? And what is the impact of those co-formulation patents on our royalty rate. And so it's quite a dynamic there. So there'll be one dynamic in 2024 and then in 2027, the dynamic will have the same factors, but there'll be many more. We'll have more product launches, we'll have more co-formulation patents. And so I don't think it's an exact proxy because of that opportunity of time. Time is going to give us time for many more product launches. The Wave 4 product launches we haven't talked about. But behind those 3 products I mentioned that we're in Phase III, we have 11 products that are currently in Phase I. We call them our Wave 4 products. They have the potential to launch 25 to 2027 if they proceed in development. So you can imagine that is a large wave of additional launches happening and more time for companies to have identified and filed for and being granted co-formulation patents. So it's an exciting dynamic and an exact dynamic that gives us the confidence of the royalty revenue growth achieving, the $1 billion in 2027 on a non-risk adjusted basis. And going beyond that, importantly, if you -- we've updated our corporate debt, you'll see it on our website, but we have a slide in there that shows our conviction that in 2031, we can see continued royalty revenue growth that is going to be driven by more product launches, more co-formulation patents that are impacting their royalty rate and durability of the revenue, and importantly, some additional new revenue coming in from the new rHuPH20.

Helpful. I think with that, that's the rest of my questions. Is there anything that we should highlight that we haven't talked about yet today?

No, I think a great summary. We're very excited with Halozyme stands. I started by talking about a profitable biotech company. Just based on our ENHANZE business with strong operating income this year, we've used our operating income to acquire Antares. Antares is an acquisition that is adding revenue. It's accretive in terms of non-GAAP EPS this year. And we're very excited about both the growth in revenue and the durability of revenue that Antares is contributing to the overall story for Halozyme.

Thanks with that. I think we're done.

Thanks very much.