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

Good morning, everyone. My name is Balaji. I'm the senior analyst for spec pharma for Barclays. And continuing with our next session of the day, we have the management team from Halozyme with us. Let me just get my questions. Looks like I dropped my questions, so I'll need to pull off my -- one there.

Maybe I can start with the disclaimer.

Yes please. I would [indiscernible], you can just start with an introduction and overview and...

Yes. So Halozyme is a biotech company, where we have 2 subcutaneous large-volume drug delivery platforms. One is called ENHANZE. That's an enzyme, we licensed to leading companies to enable them to transform their IV drugs to be given subcu in a shorter, simpler injection. We also have an auto-injector technology for today's small volume auto-injectors up to 2 mls, but we've invented a new auto-injector called our high-volume auto-injector by combining our ENHANZE with our expertise in auto-injectors. And I will say we also have 2 commercial products, XYOSTED and Hylenex. Our business makes money in 3 different ways. We make it from royalties received from partners, milestone payments based on progress in the clinic and also in commercial progress as well as product sales. We've 7 approved products today for ENHANZE, and this is resulting in robust revenues. I'll say, 2023, we delivered more than 20% growth in revenues, total revenues, royalty revenues as well as our adjusted EBITDA. And looking forward to '24, our guidance reflects continued strong growth driven by the strength across all of our businesses with double-digit growth in revenues to $915 million to $985 million. Royalty revenue is projected to grow nicely to $500 million to $525 million. And then our adjusted EBITDA, and this is a part of our business model because we've got this licensing model growing even more strongly than our revenues projected to grow to $535 million to $585 million. And so a very strong business today, and we recently put out a 5-year guidance that is reflecting upcoming expected launches based on recent positive Phase III data where we will achieve $1 billion in revenue in '25, $1.5 billion in revenues in 2027. At that time, we do expect our royalties to be contributing $1 billion. And importantly, our adjusted EBITDA that year is also projected to be $1 billion. So a highly profitable, high margin, rapid growth of the company.

Helen, thank you so much for the overview. Just -- it's pleasure to have you here. And as we think about the business, again, a very unique business model. And clearly, based on your proprietary technology platforms, you're advancing -- when I looked at the projections in the model, it was like literally a sell-side model built in there with this phenomenal growth rate. So I wanted to -- for those of you know, for those not familiar with the story, can you help us understand what the ENHANZE technology is and the high-volume auto-injector is?

Yes. So ENHANZE is an enzyme, it's hyaluronidase. And it basically works to target and degrade a substance called hyaluronan that is found under your skin in the subcutaneous space. If you try to inject more than 1.5 milliliters of fluid under your skin, you'll find that as you approach the 1.5 milliliters, you start to get it to be harder because there's nowhere for the fluid to go. And you'll start to find that your skin expands causing what we call a bleb because there is literally nowhere for it to go. When we inject ENHANZE with a drug product, it works virtually instantaneously to degrade that hyaluronan and create channels in the subcutaneous space. So that when you inject the fluid can spread over a much broader area, and then it's exposed to the lymphatics and is absorbed. Your hyaluronan will generate within 24 to 48 hours. So this is a temporary effect, but the impact of it is obviously that we're able to deliver up to in our labeling actually one product called HyQvia, 600 mls in a single setting into the abdomen used because of the power of our ENHANZE technology. And I mentioned, we licensed it to leading companies to 2 main uses, create a subcutaneous product from a product that is initially IV but we're also able to extend the dosing interval of subcutaneous products by allowing a larger dose to be delivered. And why do partners want that, competitive differentiation, much better for the patient. We can take a 4- to 6-hour DARZALEX IV infusion, and the patient receives the therapy in as little as 3 minutes. That is transformative for the patient and their caregivers, spending less time in an infusion tier or the health care practitioners that takes less resources, and that means less cost. And this is why we're seeing a growing trend of pharma companies really being very interested in it. Moving to the auto-injectors. That's rapid subcu delivery. Imagine being able to get your therapy in just seconds in a single twist and put it on your leg. That really is for, again, patients who have got busy lifestyles or doctor offices who want to see and process lots of patients to treat them, the ability to simply twist off a cap and give an auto-injector, it's freeing up important time and letting people get on with their lives. And so today, we commercialize several small volume ones, including ourselves, but also licensing that to our partners, Teva, for example, their EpiPen, it uses our auto-injector. And our auto-injectors are distinct for their high reliability and their customizability. And we've invented this new one by putting ENHANZE and our knowledge together you can inject now with our auto-injector 10 mls of a biologic with ENHANZE because the ENHANZE is the essential component of it in just 30 seconds. Nobody thought that was possible. We did a clinical study to show it high patient acceptance. And so our work at the moment, Balaji, is really bringing these 2 offerings to current partners to look to advance even more products into the clinic than we have today, but also seeking new partnerships or ENHANZE and ENHANZE Plus our high-volume auto-injector.

Got it. Great. And as I speak to partners about this, clearly the value add with especially the high volume auto-injector is evident. What is the reception for this? And in terms of the business outlook or the impact of this on your next medium-term outlook. How should we think about the impact?

Yes, there's been a very positive reaction. We've had words like breakthrough, didn't think this was possible in terms of the high-volume auto-injector. And so we're at stage now with one partner in particular, who has advanced it into some human factors testing to make sure the patient usability meets their particular patient profile. The next step after that will be partners signing up for development agreements and then commercial supply agreements. What's very important as we think about the high-volume auto-injector, though, it is a way to expand the use of ENHANZE therefore, a way to expand our royalty streams. So I mentioned the current partner. We see the high-volume auto-injector potentially allowing them to take new products into the clinic with each new target they take into the clinic. That's a new royalty revenue stream for us. But also for new partners signing up, that would result in a new ENHANZE deal, which is associated with royalties. And then the model, as you well know, for these devices is much more a cost-plus model, and we would expect that to be on top of it. But as you think about the high-volume auto-injector, think about new royalty revenue streams. And we're talking to multiple parties today. Always hard to peg the timing on exactly when we will sign deals, but I'm very pleased with the interest and the progress we're seeing with those conversations.

Got it. Great. And as you -- as we look at these multiple waves of product opportunities that you have and you've called out, especially in the Wave 3 and Wave 4 assets that including a few biologics in there. So how should we think about the impact of this? And are there any particular assets that you want to highlight that you're most excited and optimistic about?

Yes. We're very lucky to be working with partners like Johnson & Johnson, Roche, Bristol. So we're working on a number of the biggest, most important therapies for patients out there. I'll just start back at Wave 2. So DARZALEX is one of our Wave 2 products that launched in 2020. You'll be familiar with that Johnson & Johnson's drug for myeloma. That's one of the examples where it's 4.5 to 6 hours, down to just 3 to 5 minutes very important, and that is a growing brand because subcu is allowing that to penetrate deeper and deeper into the frontline population. We also have Phesgo, a very exciting drug from Roche. Now that's what's driving our royalty revenues today. This $500 million to $525 million is mostly driven by those 2 products. Between 2023 and '25, we're expecting 5 new launches and that constitutes Wave 3. Again, amazing drugs like VYVGART Hytrulo from argenx, Ocrevus, the multiple sclerosis drug from Roche, that will be as a subcu with us. Tecentriq subcu, Opdivo subcu as well as Amivantamab subcu. Now what's exciting is if we look at the -- as analysts project forward in 2028, they're actually projecting the total opportunity for those drugs is going to be $35 billion. It contrast that to where they are projecting DARZALEX and Phesgo, which is $20 billion. So our next set of launches is actually an even greater opportunity than what's causing such a strong royalty revenue growth today. And this is why we have such confidence in those projections we put out that you referenced earlier. Within that group, I don't have a favorite. I think there's a strong value proposition for each of those exciting products. But I'll highlight 2, Amivantamab. That one is the only one of the group where we're still waiting for Phase III data. But based on Phase I data that was reported at ASCO, the infusion-related reactions, and just to be clear, infusion-related reactions are something that occur when a biologic drug is injected. The patient can have some nausea, some breathlessness. It can lead to ultimately anaphylactic shock. So it's something that clinicians worry about. Their IV drugs associated with 68% IRRs. With the subcu with ENHANZE, it was just 16%. That is going to be a very strong value proposition because a lot of the success of DARZALEX where in the U.S. in under 3 years, 9 out of 10 patients received DARZALEX as a subcu, not as an IV. That was a mass conversion. The reduction in IRRs has been a very strong factor for that. So I'll just highlight that as one of the benefits of going subcu with ENHANZE. A second one would be Ocrevus. I don't think everybody realized just what our remarkable success Ocrevus has been for MS, leading MS drug in the U.S. and EU5, annualizing at over $7 billion today, projected to grow multiple billions above that. Now one of the things Roche has been very clear about is that their growth, particularly outside the U.S., but in the U.S., too, has been filtered due to lack of infusion capacity. The IV, and if you take a look at the treatment time as well as the observation time is anything from 3.5 to 6.5 hours. That means a single patient is taking a chair for the day. Where you got countries and clinics where they have a limited number of chairs, that can mean that there are patients who are waiting and simply don't get referred for therapy or they've got to travel too far for therapy. So what Roche is very excited about with Ocrevus is that this is going to allow because the subcu is a 10-minute treatment compared to 3.5 to 6.5 hours. Those clinics that already have seats can see more patients, but subcu is much more easy to do, so they're going to be opening up, they [ foresee ] of treatment centers in the community hospitals, in the doctor's offices, so closer to the patient's home. So this is going to be an interesting dynamic where we're not going to see Roche focus initially just on converting the market they already have. They're going to use the subcu to expand the market. And frankly, that's what VYVGART is doing, argenx is doing with VYVGART. So yes, subcu does a lot for the patient. It does a lot for the health care system. For our partners, it is allowing and demonstrating in multiple instances now, it can grow the market and extend their opportunity. And so that's why Wave 3 is so exciting. There's lots of dynamics that are just demonstrating the full capability of subcu with ENHANZE and our high-volume auto-injector in the future.

Got it. Great. And probably a nuance question here, but as you think about the current revenue opportunities or revenue of your partners going from $20 billion to $35 billion, are the royalties tiered or is the straight-line correlation with royalties that generate?

Each contract is a little different. We can say that all of our contracts are in the mid-single-digit range, resulting in an on average mid-single-digit royalty across all the contracts, but there is certainly some of our contracts where they're escalating tiers based on certain revenue milestones -- and certain net revenue attainment. So we don't break down which of those, but it's still all within that broad mid-single-digit range.

Okay. One thing that I want to just dig into, you mentioned Teva's about your partnership there on both EpiPen and Forteo, do you see greater potential for expanding this partnership into their pipeline assets? I mean the TL1A is like very much up there or any of the assets that could fit into this?

You -- I can't talk specifically by Teva, but I can say that as we look at business development opportunities as to where we might go next with ENHANZE, certainly, for many of our partners, it has been that IV to subcu conversion taking the hours long treatment to shorter. It has been also being able to take a subcu drug. And because you can deliver more drug extends dosing interval. And so those are 2 features that certainly from a therapeutic have been where people are focused. We also changed the PK profile. So for some partners, they're looking to reduce the Cmax. And so we can do that as well just based on what happens versus a subcu, we can also reduce the cost of goods because the bioavailability is higher. So there's lots of reasons why we go to partners as to why they want to use this. We've mostly worked with large molecules, such as biologics. And we also are working, obviously, at the moment with the bispecific with Amivantamab. Where we're seeing interest also today is in nucleic acids, RNA therapies. There's really an expansion of how people are thinking about and how they're integrating subcu earlier and earlier in development. So I can't say anything about -- specifically about Teva, but we do see that some subcu could help enhance the competitiveness of their profile of some of their -- of the products. And most companies have some products that would benefit from our ENHANZE and [ HVI ] technology.

Great. And as we think about the technology platform that you offer and business development as a priority. I think for you, are there adjacencies that you can extend into other technologies that you want to acquire that can fit well on these current tech.

Yes. We've mentioned -- I mentioned our strong adjusted EBITDA that's translating very much into our cash flow. So you can imagine that we want to deploy that cash and capital to continue to grow our business, add to our revenue and return value for all of our shareholders. And so we're very actively looking at potential additional acquisitions. We made the acquisition of Antares for the auto-injector technology a couple of years ago now. So we defined about 30 areas in drug delivery. It's a very broad area. So it's not all just the physical drug delivery like subcu. And there are things like lipid nanoparticles. There could be ways to improve how drugs cross the blood brain barrier. We look very broadly at it. And importantly, we're looking for assets that are broadly licensable to pharma and biotech because we like the licensing model. It's a very high-margin model, and we'd like to continue that. We want something that's derisked, we're a less risky proposition for investors. So we want to continue that profile if we can find the right assets. And we're looking for platforms that will result in meaningful revenues and durable revenues. And so that's the matrix that we're solving for. And so there are -- we're very busy looking at different opportunities in a very broad drug delivery space that could have direct compatibility with ENHANZE and be something that we'd offer with it. But I think because of our expertise in business development and licensing. We're also comfortable going a little bit outside of that. But becoming a one-stop shop for companies who really are trying to improve the treatment experience for patients. We think there's several other modalities out there that could be very complementary to that, provided that our business objectives.

Of course. Of course. And as you enter these BD discussions and -- how are the valuations been in terms of expectations? Do you think it's reasonable? And give some more insight with the environment around BD discussions?

I would say that the types of companies we look at, so we -- there's probably more volatility in early-stage companies, I would say, over the last 3, 4 years, where we're -- there's been an expansion, contraction, expansion, contraction, because we are looking more in assets that are a little bit more derisked. It's more stable. I mean obviously, there's a range of those valuations, but I think there are nice opportunities out there where we will be looking to see where do we deliver value over or above whatever our purchase price is. And so I will say there are things out there where we do see that pathway being there. So that's really what you've got to live for. Somewhere, you can just no, we don't see based on perhaps some companies who've got an overinflated view of their own valuation versus what we can assess but we will always be looking to be able to have a clear path as to whatever we pay, we're going to be able to deliver nice value over by whatever we're bringing to the table.

Got it. And for -- I mean while capital allocation is a priority for any company, especially with royalty-based companies with a strong EBITDA flow into -- capital allocation takes greater priority, right? And you have been very vocal about returning cash to shareholders. So in terms of technology acquisition, BD, returning cash to shareholders. How do you prioritize your capital allocation?

We have a 3-pillar strategy that we've been executing really for the last 5 years. First of all and foremost, we invest in our business. We want to maximize the current assets we have. Now because of our business model where the partners are playing for the clinical development, they play for the commercialization. They actually do the co-formulation of the drug. We've got to -- don't have a high expense base related to that, and we have a very strong projection that we can keep our expenses relatively flat there. So -- but that's job one. Second has been share buybacks. We've, over the last 4 years, completed $1.3 billion in share repurchases. We're reauthorized for another $750 million just very recently. And so that is -- once we finish our -- the end of our current share repurchase plan, that's something we will evaluate versus the return to our shareholders versus have we found an acquisition that we think has got a higher return than continuing share repurchases. So that is always something that we have assessed very carefully and make the decision based on where the greatest value for our shareholders will come.

Got it. And when I kind of roll all of these and think about, again, your longer-term projections, which is extremely healthy, both in terms of the revenues of $1.5 billion plus within the royalties of $1 billion plus and EBITDA of $1 billion plus, what are the upside risks to these? What is not factored into this, including, of course, any potential newer BD transactions?

Yes, it's a great question because we chose to take a more derisked approach to putting out a 5-year projection. So what you're seeing with the royalties are just based on the products we've talked about today, those launching through 2025. So that's Waves 1, 2 and 3. Behind that, we have something we call Wave 4. We actually have 7 products in Wave 4 that are in -- 2 of them are in a Phase III and the rest are in Phase I development or have completed Phase I development waiting decisions as to will they progress. Because those weren't fully de-risked, we didn't want to put them into our projections. And so as those progress and turn into royalty streams, those would add on top all of the royalties that you've seen. We do have some of the milestones associated with that but in a derisked way where we only contemplated a portion of those, again, as we're putting out a long-term projection. So Wave 4 is something to keep your eye on as additional. You mentioned new deals and new nominations. Our current partners still have open slots, so they can move more products in, but we also are seeking new deals. Those can come with upfront revenue, revenue as they progress through the clinic and then royalties as well. And then acquisitions that would add revenue. So we have multiple ways to add to and build on that already very attractive picture. And that's our goal.

Great. We'll definitely look forward to hearing more on these and follow you very closely. Helen, thank you so much for joining us at the Barclays Healthcare Conference. And I wish you a very productive day at the conference.

Yes. We appreciate the opportunity. Thank you.