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

Great. Good afternoon, everyone. My name is Jess Fye. I'm a biotech analyst at JPMorgan, and we are delighted to be continuing the conference with Halozyme. We're going to stay in this room for Q&A after the presentation. So there's 2 ways to ask a question. [Operator Instructions] So with that out of the way, let me turn it over to Halozyme's CEO, Dr. Helen Torley.

Thank you, Jess. 2022 was a transformative year for Halozyme. We project we'll have grown our total revenues by more than 50% to $655 million and growing our royalty revenues by more than 70% to more than $350 million. And we also strengthened our leadership in drug delivery with the addition of our auto-injector platform. I'm pleased to share with you today how this broadened portfolio is resulting in long-term durable growth in both revenue and EBITDA. In the course of the presentation, I will be making forward-looking statements, and I refer you to our SEC filings for a full listing of risks and uncertainties. For those of you not familiar with Halozyme, let me begin with what we do. We have 2 drug delivery platforms that enable the delivery of drugs subcutaneously or underneath the skin. This is -- the first of these is our ENHANZE platform. We -- this has resulted in 5 approved products in over 100 markets to date. And we also have an auto-injector platform that has both commercialized and development-staged products. Now we license these products to our partners, and we also supply all of the critical parts. We make money in these platforms in 3 ways. The first is through royalty revenues. We receive, on average, a mid-single-digit royalty on net revenues. We receive revenues from milestones that are made -- the development progress is made in fee-for-service that we list under our collaboration revenues. And we also make money from product sales. This includes API that we sell to partners as well as devices. We also have a commercial portfolio that's illustrated on the right, and we promote 3 specialty products, Hylenex, XYOSTED and TLANDO. It's this portfolio that's resulted in, over the last year, a strong revenue and EBITDA growth. And I'm pleased to say for 2023, it's going to be the same strong growth once again. On Slide 4, some highlights from our 2023 guidance. Let me begin with total revenue. Total revenue is projected to grow more than 20% for the fourth straight row -- year in a row. It will grow by $160 million to a projected $815 million to $845 million. Now our royalty revenues are the key driver of our revenues. And again, those are growing strongly, more than 20% year-over-year to $445 million to $455 million. And we're also seeing strong growth in EBITDA with a projected $415 million to $440 million, with the EBITDA margin expected in 2023 to grow to 50% to 55%. Now before I go into detail on each of our platforms, let me just review why Halozyme is such a strong investment opportunity. We are a profitable biotech company. This is a result of our diversified high-growth revenue streams, where a large proportion of our revenues are coming from leading pharma company products. We also have the potential in the next years to have 4 new royalty revenue streams with 2 potential ENHANZE subcutaneous product approvals in 2023 and 2 additional by the end of 2025. Today, we have 5 royalty revenue streams. So this would add another 4 in the near term. And we also, through the acquisition of Antares, created a new opportunity, which is to create and license a large volume auto injector that can inject up to 10 mls in under 1 minute. Now with that overview, let me go into our differentiated growth platforms, what makes them unique and what gives us such confidence in the strong growth we have ahead. I mentioned we have 2 subcutaneous drug delivery platforms. Why does that matter? Well, if you've ever had a friend or a loved one undergoing IV treatment in an infusion center, you know why that matters. With subcutaneous, we can shorten the treatment time for patients and reduce the treatment burden of them receiving their care. Indeed, in multiple studies, patients when asked if they've received both IV and subcu, the vast majority prefer subcutaneous over intravenous. And there's also benefits for the health care system. With the use of subcu, we see less health care resource utilization, less cost, less congestion in the infusion centers and the ability to have higher patient throughput, all important factors in the U.S. and outside the U.S. as well. Now ENHANZE, as I mentioned, is our largest revenue contributor. This is our patented de-risked commercial platform that enables rapid large volume subcutaneous delivery of intravenous drugs. Shown on the left is how it works. ENHANZE, basically, when injected, co-formulated with a partner product creates a temporary space underneath the skin that enables the fluid to disperse in the subcutaneous space be exposed to the lymphatics and get absorbed. It also reduces the back pressure by allowing that spreading. Today, we have 5 approved products at volumes from 5 mls up to hundreds of mls that are injected at a single setting at a rate, in general, about 5 mls per minute. And if you didn't have ENHANZE and you were trying to do a subcutaneous injection, after about 2 milliliters, you'd start to see a lot of pain and swelling, and there will be very strong back pressure that would prevent you from being able to inject anything else. So for the products we have approved today, they simply couldn't have been approved with the way they're used today with the speed they're treated without the benefit of adding ENHANZE. The 5 products are approved in over 100 markets so far, but we're also incredibly excited about the breadth of our portfolio that's in development. We have 2 partner products that are under regulatory review today that I'll review, 4 partner products that are in or will soon start Phase III development, and 8 additional partner products that are in or have completed Phase I. I'll also highlight that our commercial experience is strong with more than 600,000 patients now treated with ENHANZE-enabled products. And that's important because that factor has played a key part in our ability to have signed 12 agreements with leading pharma and biotech companies. I'm often asked with this broad portfolio and so many opportunities in development, is there opportunity for new ENHANZE deals? And the answer is a resounding yes. As is shown on Slide 10, we've done an analysis to look and see what IV targets might be available, drugs that are a specific mechanism of action where they are predicted to be large volume. You can see across areas like oncology, hematology, autoimmune disease, we've identified 60 distinct mechanisms of action where we think there's a potential for ENHANZE to be used. Now our current partners could elect to move forward with these targets as new opportunities for themselves. Or this is also the opportunity we seek with new partners who may want to license the use of ENHANZE with these exclusively or non-exclusively. I'll move now to an overview of our auto-injector platform. We have a number of auto-injectors that are both commercialized and in development. The inject up to volumes of 2.25 mls and so we call these small volume auto-injectors. This is already an established business with more than 8 million units, either sold to our partners or used by Halozyme in our commercial products in 2022. When we saw this auto-injector platform, we were very excited about the potential to use it where the Antares auto-injector that we licensed is or we acquired is differentiated, is that it can be used when drugs are very viscous because it's a very powerful way to inject, but it also is highly reliable. And this is why, as an example, Teva, is using it for the EpiPen, which has to be highly reliable because that's used in situations of allergy. We're very excited to now seek to get some additional partners with this small volume auto-injector, but I will say we were as, if not more, insighted by the potential to combine our 2 platforms, ENHANZE plus this knowledge about auto-injector development to be able to create a new auto-injector. This is the large volume of auto-injector I mentioned earlier. We see the feasibility of being able to inject up to 10 mls in under 1 minute with our auto-injector. And this is something we are uniquely positioned to do because we have ENHANZE, and we've got this great set of engineers who are able to create these very effective auto-injectors. We made super progress since we acquired Antares in the middle of the year, having developed a prototype that we took into some animal testing. And our goal in 2023 is now to move forward into a clinical test by the middle of the year. We've been sharing the prototype as well as the plans with current partners and potential new partners, and we're excited in 2023 to work with some of these partners to move it forward to further develop this exciting new opportunity, which could make a large difference for patients. Now with that, I'll drill in more on to the ENHANZE opportunity. ENHANZE is a remarkable success story, resulting in durable revenue potential and still strong future growth opportunities. This is a result of the breadth of the portfolio we have, but also the structure of the contracts we have. And in particular, the opportunity we have to get co-formulation patents if something novel is identified because for Halozyme, that can result in a longer duration of time we get royalties, but also maintain the royalty rate at a higher level at the mid-single-digit royalty level. We categorize our pipeline in waves based on when we think they can potentially launch and this timing is based on what's been our average time for development so far, which is 5 years from first-in-human to approval. Waves 1 and 2 are on the far left with the Wave 2 products, DARZALEX FASPRO and Phesgo launching relatively recently in mid-2022. This is the group of products that is driving today's royalty revenue growth. If we move to Wave 3, these are the products that we anticipate will be launched between 2023 and 2025. The 4 products here are all approved in at least one indication as an IV, an important derisker. And these, as I mentioned, can launch anytime between '23 and '25. The Wave 4 product is a diverse and large portfolio of 10 products with the potential to launch between '25 and '27. Eight of these products are in or completed Phase I development, and 2 are in or will shortly start the Phase III development. Now progress in our pipeline and development results in milestones. For the 2021 to 2023 period, we're now projecting milestone revenues of $330 million to $360 million, and the 2022 to '24 milestone revenue projection is unchanged at $450 million to $500 million. Now you can imagine this wave upon wave of approvals is going to result in wave upon wave of royalty streams. And this is resulting in a very strong royalty growth story. For 2027, on a non-risk-adjusted basis, we project the potential for $1 billion in royalty revenues coming from that Wave 1 to 4 products and also the impact of the co-formulation patents. I'll point your attention also to 2031. In 2031, we project royalty revenues will be above $1 billion. And the drivers of these are: the continued growth of the Wave 3 and Wave 4 products in particular; new Wave 5 products, so those would be products that enter the clinic this year and next year and the following year that have the potential to be approved and launched at that period of time; and also the continued impact for co-formulation patents and the potential to have signed some deals with partners using our new rHuPH20, which is more room stable and has longer intellectual property. Now these may seem like large numbers to you, the $1 billion and the $1 billion plus, but I'm happy to report we're already almost halfway there with the 5 products we currently have, reminding you that in the next several years, we're expecting an additional 4 products to be approved. For the 2023 period, we project royalty revenues of $445 million to $455 million. If we look back to just 2020, our royalty revenues were under $100 million. What's made the difference here has been the launch of the Wave 2 products, DARZALEX FASPRO and also Phesgo. So -- and I'll go into a little bit more detail on those products now and the continued growth that exists for them before I turn to the Wave 4 products. If we look at DARZALEX, I'm sure everybody is familiar with it. This is Janssen's terrific drug for multiple myeloma. It is continuing its strong growth story with analysts projecting revenues of $14.5 billion in 2028, up from the $8 billion projected for this year. Now what's driving this is their continued penetration into the earlier lines of therapy, gaining more patients and longer duration of therapy. Today, DARZALEX IV is given as an IV infusion. It can take anything from 4 to 6 hours for many patients. DARZALEX subcu, which in the U.S. is also called FASPRO is given in just 3 to 5 minutes as a subcu. So 4 to 6 hours versus 3 to 5 minutes. And this really is a very strong value proposition and why we've seen such strong global conversion to the subcutaneous version. The panel on the right shows DARZALEX FASPRO shares. So that's the U.S. share where it's already at 85% after just 2.5 years. Outside the U.S., the share conversion is also at over 80%. Now we predict continued growth of DARZALEX revenue for Halozyme. The 2 drivers are very clear on this slide. The first one is DARZALEX use is increasing. Even after so many years in the market, there is still strong growth because it's getting more and more patients every year. But we're also going to continue that share conversion and more and more patients are going to be using the subcu version thinking about that value proposition again. I'll move now to Phesgo. This is Roche's fixed-dose combination of Perjeta and Herceptin used in patients with breast cancer. Today, if you receive the IV, you would receive Perjeta and Herceptin sequentially and that would take several hours. For the subcutaneous, it's given in just 5 to 8 minutes. Already, Phesgo has demonstrated strong success annualizing at about $900 million a year. And Perjeta, as you see shown in this slide for 2022, is a $4.4 billion. So still a lot of opportunity for conversion with this slide on the right showing that Roche today estimates that there's about 30% conversion of patients to Phesgo on a global basis in the early launch markets. So once again, strong value proposition, a lot of opportunity ahead of us to convert that Perjeta into more Phesgo sales and royalties for Halozyme. Now with that, let me move to the Wave 3 products, recalling these are the ones that -- are the potential to launch '23 to '25. Just 2 comments on this slide as I'll go into each of these products in a bit more detail in a moment. Firstly, all of the products are approved as an IV in at least one indication. That means they've undergone regulatory review and appropriate risk benefit has been established. That's a derisker for our development as you can imagine. Also, the first 2 products shown here, efgartigimod and atezolizumab have also read out positive subcu Phase III studies and have initiated the regulatory filings. Of note, for argenx, the PDUFA date is coming up in just a few weeks on March 20, 2023. Now again, drilling into these products, each of them is a leader or an emerging leader in their disease area with strong growth ahead. Indeed, analysts are projecting that this group of products will attain $30 billion in revenues by 2028. Now just contrast that to the exciting portfolio in the Wave 2, DARZALEX and Phesgo, this is dramatically higher than that opportunity. Now what's going to matter to Halozyme is obviously going to be what is going to be the rate of conversion and what is going to be the peak of conversion, recalling that we receive, on average, a mid-single-digit royalty on net sales today. And with that, let me go into efgartigimod. This is our next potential launch with that PDUFA date I mentioned coming up in just a few weeks. Analysts project that efgartigimod has the potential to deliver $4.7 billion in revenues in 2028. The 2 leading indications are myasthenia gravis and CIDP and they're making up the majority of this revenue. In the middle panel are the 6 indications we're working on with argenx for subcu development. Notably, in 4 of these indications, they are only developing a subcu, underscoring why we're so excited about this particular indication. Efgartigimod subcu will be delivered in about 1 minute for patients, a strong value proposition versus the hour or more the other available therapies in this area have. And 2023, in addition to the potential approval, we have multiple data readouts expected beginning with CIDP, which is now expected in the second quarter. I'll move to atezolizumab subcu. This is Roche's anti-PD-L1, projected by analysts to be a $7 billion drug by 2028. Now it's used in 2 types of settings. It's often used as monotherapy or with oral therapy. And the indications there would be non-small cell lung cancer and melanoma. So if we can bring in subcu to this, the patient can have a totally non-IV regimen where the subcu Tecentriq is delivered in just 7 minutes, obviously, important for patients. In the IV combinations where Tecentriq is used with other IVs, non-small cell lung cancer and hepatocellular cancer, again, the ability to receive Tecentriq in just 7 minutes will streamline their care and reduce the burden for some patients who can be really very sick indeed. Roche has initiated the regulatory filings, as I mentioned, setting up the potential for a 2023 launch of atezolizumab subcu. Nivolumab is similarly exciting, BMS' leading PD-1 inhibitor. Analysts here project $13.4 billion in sales. Today, BMS' 2 subcu studies ongoing, 1 in renal cell carcinoma and the second in melanoma. That's the easier indications where nivolumab is used alone or with oral therapy again. And analysts project that this actually will be about half of the sales of nivolumab in the future. So once again, a non-IV regimen, which is going to be exciting for patients. Other indications of non-small cell lung cancer and bladder cancer where it's used with other IVs, this is an opportunity to streamline. And the last of our Wave 3 products is ocrelizumab. This is Roche's product from multiple sclerosis, the #1 MS drug in both Europe and the EU5, projected by analysts now to exceed $8 billion by 2028. This is a product that can alleviate the treatment duration for patients. And I took a slide from one of Roche's recent presentations, where you can see the IV regimens today shown in the purple and the orange. The shortest time, if you take the treatment time and the required observation time for a patient receiving ocrelizumab, is 3.5 hours with many patients having to take up to 6 hours for that. Instead shown at the bottom in blue, the goal is that the first 2 treatments with ocrelizumab subcu would be 1 hour, including the treatment and observation time, but subsequent doses would be just 10 minutes. That's going to be a dramatic change for patients, but importantly also, the potential to alleviate some of the capacity constraints in infusion centers. I'll move now to Wave 4. Just a couple of comments here. Firstly, I hope you're struck by how broad and diverse and exciting the opportunities we have in Wave 4. Again, many of these products, as is shown in the bolded letters, are already approved as an IV, an important derisk group. And we're excited that 2 of these products, nivolumab and relatlimab and amivantamab have already moved into or very soon to move into Phase III development, bringing them closer to that decision on approvability and royalty revenues for Halozyme. With that, let me just review our additional revenue streams coming from the acquisition of Antares, and that's the testosterone replacement therapy portfolio. XYOSTED is our once-a-week subcutaneous, virtually painless patient-administered treatment for testosterone replacement. Today, many patients instead are using an IM that has to be given into the buttock, can be difficult to inject and result in pain. It is our goal to grow XYOSTED to over $100 million in revenue in 2023, which represents about 20% growth over the run rate since the acquisition. Our goal is to do that from -- by converting patients from the IM, noting that for each 1% share conversion we get, that is about $20 million in net sales. TLANDO is also a treatment for testosterone replacement. This is an oral therapy. We're continuing to work to get access at the pharmacy benefit managers. We have not reached agreement with them on what's an appropriate rebate rate is. And so until we get to that agreement and access is established, we are projecting low revenues for TLANDO in 2023. I'll close on our revenue durability and financial strength. The story I've shown you with the strong revenue and the strong cash flow resulted in us putting in place a compelling capital allocation strategy. And the priorities are shown here. This has been in place for the last several years. And for 2023, it's unchanged. And first of all, our first priority is to invest to maximize revenue growth and durability across all of the platforms I've discussed. We also are going to continue to return capital to our shareholders, and we've elected to do that through share repurchases. We're in the middle of our second share repurchase program, which was approved at the end of 2021. We've already repurchased $350 million of the target $750 million. And for 2023, it's a goal to repurchase an additional $150 million. And we will also continue to seek to grow through -- external growth through M&A, seeking additional platforms or opportunities where we see them to be de-risked and to provide the opportunity for revenue growth and durability. 2023 is the beginning of the potential acceleration, as I've mentioned already, in the number of royalty generating products. We've got continued expectations of royalty revenue growth for DARZALEX and Phesgo as I described; 2 potential new approvals coming from efgartigimod and atezolizumab; 2 important data readouts that bring into sight very -- in 2024, potential new additional revenue streams; and ongoing Phase IIIs that are coming all more closer to be new royalty streams for Halozyme. In addition to this, we're going to continue to work with our current partners to advance and mature their portfolios and seek to gain new agreements with partners with a goal of achieving one new ENHANZE deal, one new ENHANZE plus high -- low -- sorry, high volume auto-injector deal and one small volume auto-injector deal. Let me close by saying why I think 2023 is going to be such an exciting and compelling year for Halozyme once again, reiterating our guidance. This is our fourth straight year of revenue growth with an expected $815 million to $845 million. It is another year of strong royalty revenue growth, exceeding $445 million. And our EBITDA growth is going to continue to allow us to fuel our growth investments as well as to return capital to our shareholders. With that, I thank you for your attention.

Great. [Operator Instructions]

Jess, if I can just -- this is Nicole LaBrosse. She is our CFO, has been in the role for the last year, and all the terrific financial progress you've seen with the company has been under her leadership.

Great. So I guess the first question would be the total revenue guidance you provided for '23 came in a little below what we were projecting, a little below consensus estimates. It seems like much of that was driven by a delta on the milestone revenue as opposed to the royalty revenue. Is that a deferral of some milestones that had been expected in '23 that maybe now will come in '24? Or what's the right way to think about that?

Yes. Thanks for that. Yes, it was milestones. When we put some of our revenue projections into place, it does based on what we believe and our partners tell us will be their timing for key events such as starting clinical studies and that obviously can shift. So we did see some shifting of milestones that we expected in '23 into '24. And that really is why the '21 to '23 guidance is a little lower, but we're maintaining the '22 to '24 guidance because we're still expecting those milestones to occur.

And then with respect to the royalty outlook for '23, is this still mainly driven by DARZALEX? To what extent are the other products kind of contributors?

Yes. DARZALEX is going to remain the key driver. It's just so large and it's growing very nicely. But Phesgo, as you will have noticed, has become a more important product, annualizing now at $900 million in total sales of which we get the, on average, mid-single-digit royalty. So both of those are key. We have a modest contribution in for efgartigimod, just given we don't know for sure what the timing of launch would be. And we did not include atezolizumab this year because it's timing for approval is very much towards the end of the year. So still a DARZALEX story, but these other products and Phesgo in particular, starting to have more and more impact.

Okay. And you've pointed to XYOSTED number for '23. How should we think about that in the context of the overall Antares kind of product portfolio? Is that the lion's share?

It's certainly on the proprietary product, the largest proprietary product, on the other part of the acquisition that will generate revenues from our partnerships with regard to the auto-injectors. So the other largest product on that product line is EpiPen, where we receive revenues from royalties and for product sales. And so those are the 2 largest current revenue contributors.

Okay. And can you talk about -- I'm trying to kind of calculate margins in my head here. But the EBITDA guidance, I think, is also a little bit lower than we had been expecting. Is that a function of the difference on the top line? Or are there any meaningful changes in kind of profitability in '23 relative to '22?

Yes. I'll let Nicole do that.

I'll probably also just point to not only what we saw on the top line, but also it's now reflecting a full year post acquisition, so a full year of operating expense post acquisition, some changes in transaction costs year-over-year, also cost of goods going up with product sales going up as well.

Okay. So we've talked about DARZALEX kind of being the big driver today. What's the next most important product we need to focus on after DARZALEX?

We do like to think about that as that Wave 3 I talked about because they will all be launching in the next several years upon approval and represent a $30 billion opportunity. And so each of them, as I described, is going to be a multi mega billion dollar brand, and the value proposition for the subcu, we believe, is very strong. So yes, we look at that more as a portfolio and all of them having strong potential to continue to grow as DARZALEX continues to grow. I mean I think -- when you think about daratumumab being approved in 2015, the amount of growth that's having year-over-year, so many years later as a brand because of this ability to penetrate into the earlier lines of therapy and the longer duration of therapy, is lifting our royalty revenues as well because the majority of use is subcu. And I think that's something people, I think, underestimate the impact of that growth.

What about on the kind of corporate development side in terms of signing new deals? Is '23 going to shape up to be an active year on that front in terms of new partnerships?

Yes. We certainly have set a goal internally that we get an ENHANZE deal, an ENHANZE plus high volume deal and a small volume deal. I can say that we're having many conversations. It is a broad set of conversations with different sizes of biotech and pharma that really convinces me there's a lot of opportunity out there. So it definitely is our goal to sign multiple deals in 2023.