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

Good morning, everyone. Welcome to Morgan Stanley's Global Healthcare Conference. I'm Sean Laaman, the Head of the SMid-Cap Biotech Equity Research team here at the firm. For important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. For this session, we have the Halozyme President and CEO, Helen Torley. Thank you for your time today. Greatly appreciate you being here. And maybe just to set the scene a little bit, if you'd like to make some opening remarks, Helen, that would be amazing.

Yes. So Halozyme is a biotech company, and we have a mission to help important therapies fit into the patient's life rather than the recovery be impacted by some restrictive schedule of having to travel for treatment. We do that with 2 drug delivery platforms. The first is our ENHANZE platform, which is based on hyaluronidase enzyme, which facilitate large volume delivery of biologics, delivering up to 15 mls in as little as 3 minutes or 5 mls in just 20 seconds as is the case with VYVGART Hytrulo and the prefilled syringe that you may just have heard about. We also have auto-injectors, a small volume auto-injector, which delivers up to 2.25 mls in just seconds. And we have by bringing together the amazing technology of ENHANZE plus our auto-injector technology created the first ever high-volume auto-injector that has been demonstrated to be able to deliver up to 10 mls of biologic in just 30 seconds. This is a very profitable business for Halozyme in terms of the fact that we earn milestones and royalties. And that has resulted in Halozyme having not just a very high top line revenue growth this year, where we're projecting $1.27 billion to $1.335 billion, strong growth, primarily driven by our royalties, which we project this year at $825 million to $860 million, which is a growth of 44% to 51% year-over-year, really being driven by 3 products that have been run fairly recently: the first one is DARZALEX FASPRO, the second one is PHESGO and the third one is VYVGART Hytrulo from argenx. And so these 3 products still making a remarkable difference in patients' lives and leading to a lot of excellent growth at Halozyme. And in terms of capital allocation, always an important decision when you've got a high cash flow business like we have. First and foremost, we invest in our business. Secondly, we've been returning capital to our investors through share repurchases. And the third one, we have an ambition to add additional drug delivery platform to continue to build on the excellent growth we're seeing today with ENHANZE and our auto-injectors and deliver that long-term durable high profitability growth.

Wonderful. Just some macro considerations that I'd like to start with, but just China's biotech innovation, it's really going hot. And how do you think about Halozyme's competitive positioning here? Are there opportunities there? How does it influence, if at all, your R&D and business development strategy?

Yes. I mentioned we're focused on subcutaneous drug delivery, and that is something that is actually gaining traction globally. You can imagine that instead of lengthy hours long intravenous infusions, we're facilitating simple, short subcutaneous injections in seconds to minutes. And certainly, in China, we're seeing that trend of people wanting subcu therapy, which can perhaps be done in a doctor's office instead of an expensive hospital infusion suite or even in the patient's home. That's a trend that is very much present in China. Just earlier this year, PHESGO, which is actually Roche's product for breast cancer, it's a combination of PERJETA and Herceptin, got national reimbursement. And that actually led to very strong growth of PHESGO in the first and second quarter as China adoption increased. Other products that we have that have very recently been approved in China that we expect to grow in the same way once all of the reimbursement is in place would be argenx for generalized myasthenia gravis and also for CIDP. So China, very much another market that is seeing the benefit of for the patient, for the health care system and for the health care professionals of the short simple subcu injection.

And a question on AI. How do you currently leverage AI or think about leveraging AI in your business? And how do you see it about as a potential future disruptor?

Yes, we've certainly been embracing the innovation that comes with AI, and it's very much in our operations. Areas I can highlight that we're seeing benefits already in terms of efficiency would be in improving document flow in regulatory, signal detection in terms of safety, but also in our operations and manufacturing. And the third one, we're using it to accelerate our decision-making as well in areas like business development screening. And so certainly a huge benefit in terms of efficiency, and we're just planning to keep expanding that with that focus on improving our operations.

Wonderful. And a bit more -- a lot more debate in the market around this next question, though it is on the macro side, how much or how impactful -- what's been most impactful on Halozyme from the regulatory side? Would it be FDA MFN or tariffs?

I'm going to mention FDA, and it's actually coming from a very positive place where we've seen a lot of very positive impact over the last years in the Food and Drug Administration and changes they've made. I'll begin with when thinking about the ease and simplicity of getting a product approved with subcu with ENHANZE. Now for our partners, and I'll use Opdivo, Bristol's Opdivo as an example, with a single study in renal cell carcinoma, the FDA granted them a very broad set of indications in multiple other solid tumors. And we think that recognition as to how to streamline the development of important medicines has been a very positive and welcomed change in terms of FDA mindset. And I think it's really just the beginning if we think about Commissioner Makary's comments also about making drug development flexible and common sense. And so we plan to continue to engage with the FDA and further streamlining those efforts on. I think also, I'll just comment that certainly for us and our partners, we're finding everything proceeding according to the usual time line. So nothing delayed, everything very much according to plan. And so we deeply appreciate that with some of the changes, no impact in how the regulators are interacting with us.

Sure. I have to get more Halo specific, but how confident are you that the ENHANZE will be treated favorably under CMS IRA? And the guidance? And sort of how should we think about the steps unfolding to kind of clear that in investment thesis over the next 3 to 6 months?

Yes. Just a little bit of background context there. Under the IRA, there's an area of it that focuses on treating fixed combination drugs that are made up of 2 active ingredients as a separate drug from the individual ingredients. And when the Part D guidance first came out, that was the language that was used there. Importantly, ENHANZE is an active ingredient. It's designated as such by the FDA. If you look at the labels of our products, it's listed there as an active ingredient. And yet, we have a separate BLA for Hylenex, which is the rHuPH20 enzyme. The area that's under comment at the moment was when the Part B guidance came out a few months ago. While it continued to preserve the recognition of a product with 2 active ingredients as a fixed combination, it brought some questions for the community to comment on does the active ingredient need to have a direct impact on the disease or does it have to have clinical benefit. So we and many of our partners have actually commented to CMS with regard to the fact that the Part B guidance should be kept the same as Part D. There are a number of policy and legal reasons why that makes sense. But very importantly, if you think about the clinical benefit that is and the IRA is looking to see clinically meaningful benefit, which the FDA describes as how a patient feels, functions and survives. We've wrote many, many examples of how ENHANZE subcutaneous delivery has done that. And just to give a few examples, you often hear about infusion-related reactions with drugs. That sounds like, well, that's just a side effect. But it's a side effect that makes the patient feel very unwell. It causes low blood pressure, headache, breathlessness, and it can lead to anaphylaxis and death. When we think about some of the drugs we work with like J&J's terrific drug for lung cancer called amivantamab or RYBREVANT, with the IV, the rate of infusion-related reactions was 67%. It was reduced by a factor of 5% down to just 13% with subcu. Now I think you'll all agree that's a clinically meaningful benefit for patients. Importantly, with RYBREVANT also, there was an overall survival benefit in an analysis and exploratory analysis that was done, another clinically meaningful benefit. And it's been pretty common throughout all of our partner filings that the rate of serious and serious adverse events is also a lot lower with the subcutaneous. So when we think about all of the clinically meaningful benefits, we feel very strongly that the language should be unchanged between D and B. So we've written a comment letter. We have visited with the OMB to present those arguments. We've had conversations with CMS also about those arguments also highlighting the reduced cost of care. We did an analysis in Medicare. And for subcu therapy versus the IV, the average cost savings per year are between $12,000 and $56,000 per patient per year. So if the clinical argument doesn't get you for CNS and for people who are worried about the cost of care, the clinical -- the benefits in terms of cost of care are remarkable as well. So lots of arguments, Sean. We very much hope that we do prevail on that. I'll just mention one thing that's also come out since then, though that has the potential to impact Halozyme that was causing questions. And that relates to what will happen with the orphan drug designation. And if anybody was watching the one big beautiful bill, it actually did make it clear that if a drug has 2 orphan indications, it will be excluded from the IRA. Now that's relevant to Halozyme because DARZALEX was one of the first drugs that we're involved in that could be up for inclusion in the IRA price negotiations. Both of the indications are orphan. So under the big beautiful bill, that will no longer be included in the IRA for consideration. And also Opdivo, actually the first indication for Opdivo was an orphan as well. So that pushes out the time line for Opdivo. So obviously, an area we're watching carefully, Sean, and we're very hopeful that our arguments will prevail. But even beyond that for Halozyme, the clarity of orphan drug has also made the IRA a lot less relevant and impactful to Halozyme.

Sure. That was a wonderfully full answer. But if I can -- I might have missed it, it was so full, but just can I push you on timing. Do you have a view on when this might get resolved?

Yes, there's no official timing comes out with a clock for this. But based on prior precedent of the time between the draft guidance and final, we would expect it in September or October. So in the upcoming weeks will be the final guidance there.

Wonderful. And I guess on guidance, so the company has raised guidance multiple times. And just remind us sort of what have been the key factors behind driving such a big uplift in earnings expectations?

Yes. I mentioned in my introductory remarks, what our updated guidance for the year is. But just to reiterate for total revenue, $1.27 billion to $1.325 billion. And the key driver of that is the royalty revenue, which is growing remarkably to $825 million to $860 million this year. The key drivers of that are the 3 products that were launched in 2020 and 2023. And these are products that we expect to continue to grow for multiple years to come. The first is DARZALEX FASPRO, which is obviously Johnson & Johnson's terrific drug primarily for multiple myeloma patients. The subcu version is now 96% of the use of that. So all of this growth is subcutaneous. And you may say, well, it's already at 96%. Is this going to keep growing? Analysts project that DARZALEX will grow from $13 billion today to $18 billion in 2028. And it's doing that by continuing to increase its penetration into the frontline population. Now the frontline population is the largest population. So there's obviously a lot of growth to come from that. But the compounding effect of the fact that the frontline patients stay on therapy for many years is really, I think, what's causing that accelerated growth over and above, frankly, what we had predicted for this year in terms of a very nice story there that's going to continue to grow for years to come. PHESGO, I mentioned, accelerating this year because of China reimbursement, but also launched in 20 additional countries in the second quarter, growing from 58 launch countries to 78. That's going to continue to grow. And the third one is VYVGART Hytrulo, launched in gMG, more recently launched in CIDP, but we're very excited about the April launch of the prefilled syringe, which has got the formulation of VYVGART Hytrulo with ENHANZE, so delivered subcu in just 20 seconds because of the ENHANZE technology. That, based on argenx's comments, is causing new physicians to come into the market to start using VYVGART and more patients able to access the important therapy being able to receive VYVGART. That's another driver of the growth. So all 3 of those products exceeding our initial expectations for this year, and that's what drove the increase in guidance.

Yes. Wonderful. And we still have long-term guidance out there, 26% to 28%, which hasn't moved yet. But I believe you'll revisit that early in the new year and maybe sort of give us some comments on how to think about that.

Yes. It was actually 2017, where we gave a prediction of being able to achieve $1 billion in royalty revenue by 2027. I think based on my comments I've made, you realized probably that we're probably going to achieve that a bit earlier, and that does bode very well. In addition to these 3 products that we have, there's also 4 additional products that we just launched in 2024 and 2025. Those are going to be beginning to contribute in 2026 and beyond and further fuel the strong growth. So as you say, Sean, what we tended to do is update the guidance during the year for any new insights. And at the beginning of the following year, that's where you'll see us update the guidance. So that will reflect the continued strength of DARZALEX, PHESGO and VYVGART and our expectations for these 4 new launch products.

Sure. And I guess this is one of the hot debates and maybe get tired of talking about it. But just sort of the long-term revenue projections going beyond 2030? And how should investors sort of think about that?

Yes. I think there's 2 key trends that underpin our strong confidence in the durability of our revenues. And the first is that secular trend that I've mentioned a couple of times, which is the increasing interest by pharma companies, but also health care systems and patients for subcutaneous drug delivery. We obviously are in a licensing business. We get many companies now coming to us saying, "Can you help us bring our product subcu? Can you help us extend the dosing interval, so it's easier for patients to do this." And there's a real push for more and more therapies being able to be delivered at home. And so that secular trend is going to continue to have adoption of our current products, but allow us to expand our portfolio and add new royalty streams. The second one is by combining our product with ENHANZE, you can get new inventions, some new benefit that was unexpected for patients. I talked about RYBREVANT a moment ago. That fivefold reduction in infusion-related reactions that increased overall survival, both unexpected and unpredicted if you're delivering a similar amount of the drug as with the IV. That results in new intellectual property for our partners. And for Halozyme, it also results in a longer duration of our royalty and very often can keep the royalty rate maintained at a mid-single-digit level. Those 2 combinations of the increasing trend of subcu use and continued growth of the current products and new products and that durability of revenue, Sean, is what gives us a confidence in very robust revenues continuing in 2030 and well beyond that.

Sure. And I sort of have this question later in my question list, but I think it's kind of relevant now. So when I look at modeling your business, and maybe I'm not the best modeler, but when I think about your -- I'm not -- but when you think about I guess, sort of the gross margin, it seems sort of pretty stable. You don't see too many changes there versus a traditional -- I'll call it, traditional biotech company that's heavily involved in drug development, then your R&D expenditure is probably light on versus a more drug development type company. And you could argue on the SG&A front as well, like it's your partners that really support the OpEx in some senses. And what might get missed about the business, therefore, is the cash flow that's being generated. So even if you took this very pessimistic long-term view that maybe you apply a negative 100% terminal growth rate to Halozyme's business, you look at the cash generation at that period of time, which is on my math, is much bigger than what the current market cap of the company is. So if you stuck at the bank and let it earn an interest rate, you still got like long-term value. So are we thinking about the cash flow generating nature of your business in the right way? Is that the right way to think about it that the cash that is coming out is going to present potentially the ongoing capital return story, the business development opportunities, potentially numerous. Maybe talk us through those big strategic picture.

Yes. I think it's a great observation, Sean, that we have an unusual business model and a very highly leverageable business model because our role with our partners is very much advisory. We don't have the R&D costs. We don't have the commercialization costs, but we do participate in the upside of our partners' commercial success with our royalties. And as an example, our projected adjusted EBITDA margin in 2028 is 73% to 75%, almost all of which is free cash flow to the company. And so it is a very cash flow positive company. So in terms of how we plan to use that cash, we do invest in the business, as I mentioned earlier. We do use it to return capital to our shareholders, and we do want to build on the very strong revenue growth we have by adding new platforms. I will just say, you said even if you applied a terminal -- a negative terminal value to the company. We do, just to reiterate, because of the nature of the business and because of our contractual agreements, have strong royalty revenues continuing well past the 2030s. And just to kind of give a couple of examples, these co-formulation patents that come because we find these innovations, these unexpected benefits, all of our royalty streams will go to at least 2030. Several will go into the mid-2030s and multiple go into the 2040s. And so you're balancing a very strong cash flow business with long durable revenues. It is a great story. And importantly, the opportunity now for us to use M&A to build on that very strong story to add new revenue streams on top of that, looking again for these more royalty-based businesses, which can be so highly profitable.

Sure. Great answer. I think you've got 10 approved products, several more in development, but how do you prioritize further pipeline investments?

Yes. I mean the great news is based on our business model, Sean, we don't really have a challenge with prioritization because it is not a capital-intensive business supporting ENHANZE. This advisory nature that we have really means that our team who are excellent and they work very closely with our partners, they can support multiple partners at once. And so we can add new partnerships without having to expand a lot of people as an example. Because it's an established business, we don't have a lot of capital investment at this stage. So we are obviously continuing to make sure we focus first and foremost on our current business. But beyond that, we have the opportunity to return capital via share repurchases. Now since 2019, we've returned about $1.85 billion to our shareholders with an average price of $33.72, really buying opportunistically. And we found that, and I find our investors very appreciative of just how successful we've been with share buyback. But we also have retained enough capital for acquisitions. We're very mindful of keeping our net debt-to-EBITDA leverage below 3% in terms of where we're going. But today, we are sitting in the position of looking for additional platforms to acquire to add to our attractive business and can do all 3 at the same time because of the strong cash flow of the business.

Wonderful. And jumping the sideways a little bit, but what lessons have you learned from the launch of VYVGART Hytrulo in the prefilled syringe? And can it be applied to other drugs?

Yes. I think first and foremost, argenx has just done a super job with the entire launch, both in gMG and now looking at CIDP. This is a therapy that is transforming the lives of many patients who haven't had terrific options up to this point in time. What the prefilled syringe launch has really just shown not unexpectedly, is that patients are ready to embrace being able to treat themselves at home and the privacy of their own home on their own time and on their own conditions because the prefilled syringe, which includes the ENHANZE technology to make it a simple subcu injection is allowing a 20-second subcu 5 ml injection. But now a patient, and I think actually [ Karl ] mentioned this, a patient is able to, if they're working, do it before they go to work. They don't have that disruption. They don't need to be traveling to the doctor's office or the infusion suite. It's just freeing and allowing patients to get back to their everyday lives. And so I do think that move in inflammation and immunology, neurology, nephrology, cardiovascular to more at-home care. We do see that as just being a great example for other companies to look at and follow and see how argenx is leading in being able to free the patient up even further from the burden of their disease. What the prefilled syringe has also done is expand the number of prescribers. Of the 1,000 people who have prescribed the prefilled syringe, 150 or 15% are new to VYVGART. And that is something that we are seeing with some of our other products, but the ability of the right delivery to expand the number of prescribers. I'm going to talk about Roche's OCREVUS, where today, OCREVUS, which is a great treatment for multiple sclerosis is a multi-hour IV infusion. So a patient, it will take them their entire day. For the subcu version, it's given in just 10 minutes. And so what Roche was hoping they would see with the launch and they're seeing just like for VYVGART is they are getting new prescribers because some doctors don't have a setup or don't want to get involved in IV infusions. Now the subcu is so simple to give, they've seen that of the people who have adopted the OCREVUS subcu, 50% were brand new to using OCREVUS. And so market expansion is the other thing, I think, that is very nicely demonstrated with VYVGART's prefilled syringe, but I'll say it's happening with OCREVUS subcu. So subcu in and of itself, that simplifies care will expand the opportunity for pharmaceutical companies, and that's the other very important lesson we want people to take from this.

Sure. Do you get much inbound on the PFS, the prefilled syringe and the market expansion opportunities? Do you think it's fairly well understood part of the Halozyme story? Or is it something that's yet to come?

It's definitely growing. I mean prefilled syringe just launched in April, and argenx talked about the results in their quarterly call, but they were, I think, early. So I do think companies are coming to terms of it. But if a company is in inflammation and immunology, they're following argenx and they are talking about it. So -- but I don't think everybody has heard about it yet.

Great. What are the most promising areas of innovation with drug delivery platforms that beyond subcutaneous delivery, maybe set the scene for us a little bit there.

Yes. So we talk about adding platforms to our remarkable business. And when we think about drug delivery and did a giant survey to say, well, what else would be helpful, and we actually came up with 30 different areas. And I'll mention a range of them just so you see the bridge of what we consider drug delivery and where we think there could be an opportunity for a similar business, which is where pharma and biotech is not investing themselves in a technology, but they're willing to license it for the drugs in their portfolio they need it. And so there are therapies that are used as an example -- or delivery devices that are used in intraocular delivery, lipid nanoparticles, oral delivery of biologics, long-acting delivery for small molecules. These are all platforms that exist that we are and another 25 on top of that, that we are actively mining to look for the opportunity to either get a platform that is more advanced and derisked if that exists, which is more of a challenge or something earlier on where we can do exactly what we did with ENHANZE, which is take something from the lab or early stage to commercialization using the expertise and the learnings we have as a company to burst a new terrific licensing business model like we've done with ENHANZE. And so that's what we're very actively looking at for M&A. Our business is strong. We've got strong growth projected. So we're not rushing into it. We're going to wait until we find the right type of platform to add to our already terrific business.

Sure. And I guess just generally on that front, when it comes to business development, how competitive a space is it? I think Halozyme is the biggest business that I'm aware of in the drug delivery platform space. How competitive do you think that, that space is in terms of business development opportunities?

Without sounding modest on the part of Halozyme, I don't think there's anyone who is quite like us in terms of being able to take something from the lab to such a broad commercial success. And so for, I think, platforms that have that potential, we don't come across many other companies who are, to our knowledge, kicking the tires and evaluating it because it's not necessarily a business model people have experienced with, and they don't necessarily want to go down that path. And so not too competitive. I think what the art here, Sean, is identifying that asset that is needed by multiple pharma and biotech companies where we can replicate the ENHANZE business model. And obviously, there's a great opportunity there for the relationships we already have and getting some great synergies in terms of the cross-selling. So we're in, I think, a very strong position when we're looking at drug delivery platforms.

Wonderful. You've historically signed, I believe, one ENHANZE deal per year. How do you view the cadence of those deals going forward?

Yes. This year already, I'm very proud to say that we've already signed one small volume auto-injector development agreement, one -- and that's with the current partner, one high-volume auto-injector development agreement with the current partner. And we're very active in a broad set of discussions on ENHANZE. And so I will say based on the cadence and the progress of those conversations, Sean, I'm very confident we will sign another ENHANZE agreement this year and at least one. We are seeing that there's just a certain period of time of going through the decision-making in the pharma and biotech company, so you have to be patient, but we're working through that. So I say at least one, we may be successful with getting more than one over the finish line, but I'll be very happy to have an additional one. I'll just mention, in addition to new deals, and that's an important metric for us for sure, recollect that many of our partners also have open slots. They don't necessarily -- if they want to work in a drug, just take one slot, they take multiple slots. And so we're going to continue to see our pipeline expanding with current partners moving more products into the clinic. One's already happened this year. We're projecting another one by year-end and then another one at the beginning of 2026. And so that's another important source of growth and expansion for our pipeline.

And what criteria do you use to evaluate potential partners for ENHANZE or auto-injector technologies?

Yes. So when partners come to us, I mentioned we've got such a leverageable business model and so much expertise in our team. We actually evaluate everybody. And we're very happy to work with everybody, Sean, in terms of potentially having our therapy extend the use of their product for more patients. And so it's a terrific thing about the leverageability. No challenges there.

Cool. A couple of competitive considerations, but how do you plan to maintain ENHANZE's leadership as competitors explore alternative hyaluronidase?

Yes. We are the pioneer in the hyaluronidases inventing the whole field, if you like. And with that leadership has come many, many years of progress and success. We talked earlier about there being 10 products already approved. With those comes an incredible depth of knowledge and expertise that is valued by our partners in terms of how to get a drug quickly to the clinic and approved, advising on regulatory strategy and CMC strategy. With those 10 approvals has come now an amazing 1 million patients treated. That gives us an extensive safety database. And it's something that isn't talked about often, but there's always a worry when you combine 2 biologics together of a safety issue called immunogenicity. It's an unusual unexpected event where you need to have a lot of exposure to identify whether or not you having a problem of immunogenicity. Every partner who comes to us wants to understand that immunogenicity risk, and we're in a position with this giant safety database to assuage those concerns. I think the third area is continuity of supply. I was just in the argenx talk, and that was one of the top things mentioned by [ Karl ], the CFO. We have 10 years of reliable, high-quality supply, and that's not to be ignored either. That combination, Sean, is what's important to our partners. And because we've been in this leadership position, we have the first-mover advantage, that will be unassailable in terms of people trying to come in and do similar copycat activities.

Wonderful. Next question, it seems like very asymmetric risk. But can you remind us what the current status of the Merck litigation is? And how it might impact your royalty streams?

Yes. We -- I mentioned we're the pioneer in hyaluronidases. When we were inventing ENHANZE, we also did a lot of experiments, thousands of experiments actually looking at different modified hyaluronidases. And by that, ENHANZE is a human truncated hyaluronidase, so identical amino acid structure to the human. Our modified hyaluronidases have got different amino acid sequences from the human. We've patented those modified hyaluronidases. And so the Merck litigation is that we have sued Merck for infringing our MDASE portfolio. Importantly, MDASE is totally separate from ENHANZE. So think about MDASE in this Merck litigation has been all upside. It was 0 risk to it because ENHANZE is separate. But we believe that Merck is infringing. And so we expect to hear about the scheduling of that court case in the next week, Sean. And it will take a number of years to play out unless Merck successful before that, but all upside and protecting our IP.

Wonderful. Just out of time, but is there anything that you'd like to leave the investor base with?

No, I think you've covered it very nicely, Sean. I would just say that we have these 10 amazing products that are going to be resulting in strong durable royalty revenue growth for the company for years to come. And we've got the opportunity to build on top of that with our strong cash flow, allowing us to replicate this brilliant ENHANZE model. And so we're very excited to be focused on that today.

Wonderful. Thank you for your time today, Helen, and thanks for contributing to the conference. Appreciate it. Thank you.

Appreciate it. Take care. Thank you.