Halozyme Therapeutics, Inc. Q4 FY2020 Earnings Call

Thank you for joining us for the Halozyme Fourth Quarter 2020 Financial Results Conference Call. All participants are currently in listen-only mode. After the presentation, we will have a question-and-answer session. I would now like to introduce Al Kildani, Vice President of Investor Relations and Corporate Communications for Halozyme Therapeutics. Mr. Kildani, you may proceed.

Thank you. Good afternoon and welcome to our fourth quarter and full year 2020 financial results conference call. In addition to our press release issued today after the close, you can find a supplementary slide presentation that will be referenced on today's call in the Investor Relations section of our website. Leading the call will be Dr. Helen Torley, Halozyme's President and Chief Executive Officer, who will provide an update on our business; and Elaine Sun our Chief Financial Officer, who will review our financial results for the fourth quarter and full year 2020. During the call we will be making forward-looking statements. I refer you to our SEC filings for a full listing of the risks and uncertainties. I'll now turn the call over to Helen.

Thank you, Al. 2020 was a year of significant growth for Halozyme, establishing strong momentum as we move into 2021. I'll start with a quick overview of our 2020 performance. Total revenues for 2020 were $267.6 million, representing a 37% increase from 2019, with earnings per share at $0.91. Both our revenue and earnings per share were within the range of our recent financial guidance. This strong financial performance reflects a pivotal year for Halozyme, marked by major achievements, including two FDA approvals and two European Commission approvals for ENHANZE-based products, such as Janssen's subcutaneous DARZALEX and Roche's Phesgo; a resurgence in royalty revenue growth, fueled by the strong adoption of subcutaneous DARZALEX, known as DARZALEX FASPRO in the U.S. and DARZALEX SC in Europe; an expansion of our development pipeline with two products advancing into Phase 3 development; a new ENHANZE partnership with Horizon Therapeutics to develop a subcutaneous version of TEPEZZA; and successful execution of our capital return program, leading to $150 million in share repurchases during 2020 and a total of $350 million in repurchases since the Board approved a three-year $550 million plan in November 2019. This impressive progress in 2020 was achieved despite the challenges of the global COVID pandemic, which we managed well thanks to the dedication of our partners, suppliers, and employees. The growth of our enhanced partner pipeline provides confidence in our long-term growth potential, as we expect multiple product launches in the coming years. Looking ahead to 2021, we anticipate revenues between $375 million and $395 million, representing a growth rate of 40% to 48%, primarily driven by an expected doubling in royalty revenue. Expected GAAP earnings per share of $1.40 to $1.55 would signify growth of 54% to 70%. Please remember that our guidance does not include any income from potential new ENHANZE deals. Let's now turn to slide three to discuss our projected royalty revenue growth. In 2021, we foresee a doubling of royalty revenues, largely driven by subcutaneous DARZALEX and Phesgo. As illustrated in the left-hand chart, we experienced an 86% year-over-year and 34% sequential growth in revenue from royalties in the fourth quarter. This growth was facilitated by the launch of DARZALEX FASPRO in the U.S. and DARZALEX SC internationally, leading to a total royalty revenue of $88.6 million for 2020. For 2021, we expect continued growth for DARZALEX FASPRO and DARZALEX SC, supported by sustained adoption in existing markets and additional launches globally. We also project strong growth for Phesgo in 2021, driven by increasing adoption in the U.S. and the commencement of European launches following the December 2020 approval. For the entirety of 2021, with the robust launch in 2020, we anticipate that subcutaneous DARZALEX will continue to be the primary driver of royalty revenue, significantly outpacing Phesgo. We are now in a position where the high-margin, recurring part of our revenues is also the fastest-growing segment. Now, let's proceed to slide 4 where I'll highlight our key commercialized products. We currently have five products approved in both the U.S. and Europe that utilize our ENHANZE technology. I'll now provide details on our most recent product launches, which are part of our wave two launches, starting with subcutaneous DARZALEX. During the fourth quarter, Johnson & Johnson, the parent company of Janssen, reported global sales of DARZALEX, including both IV and SC forms, of $1.25 billion, marking a 49% operational growth year-over-year. Although J&J does not disclose the sales split between the IV and SC formulations, data from Symphony Health indicates that by October 2020, just five months post-approval in May, subcutaneous DARZALEX accounted for 40% of overall DARZALEX sales in the United States. This rapid uptake underscores the benefits that the subcutaneous version presents to patients. The anticipated growth aligns with the potential for additional approvals and launches in new countries and expanded indications for subcutaneous DARZALEX. These opportunities include potential regulatory approval in Japan for the subcutaneous form for multiple myeloma patients, as well as growth opportunities from the newly approved indication for newly diagnosed adults with Light Chain Amyloidosis, following accelerated approval in January 2021 for DARZALEX FASPRO when used alongside bortezomib, cyclophosphamide, and dexamethasone. Consistent with the accelerated approval nature, Janssen will conduct a confirmatory trial while making the therapy available in the U.S. For the European market, we also foresee the potential for approval and launch of subcutaneous DARZALEX alongside pomalidomide and dexamethasone for patients with relapsed or refractory multiple myeloma who have had at least one previous therapy. Given the strong initiation of subcutaneous DARZALEX and the high growth within the DARZALEX franchise, coupled with expectations for new indications and various geographical expansions, it’s clear we foresee subcutaneous DARZALEX as a significant revenue growth driver for Halozyme. Now let me turn to Phesgo. This product combines two of Roche's antibodies, Perjeta and Herceptin, and is administered in just five to eight minutes, compared to several hours for the IV formulations. Phesgo was introduced in the U.S. in Q3 of 2020 and received European approval in late December, with its launch anticipated to begin in Q1 of 2021. For Q4, Roche reported Phesgo sales of around CHF 16 million. With the European launch starting in Q1 and expectations of greater adoption in the U.S., we expect robust growth in Phesgo sales and its contribution to Halozyme's royalties in 2021. Let's now proceed to slide 5 to discuss the ENHANZE development portfolio. With our portfolio of five commercialized partner products, we expect to expand our development pipeline to include 16 products by the end of 2021, including five new Phase I study initiations. In June 2020, Bristol-Myers Squibb began a Phase I/II study of ipilimumab in combination with nivolumab using ENHANZE technology. Recently, BMS informed us of their decision to prioritize other projects and discontinue this study, although they will maintain the CTLA-4 target for potential future research. Additionally, we anticipate two products currently in Phase I to progress to Phase III, resulting in four products undergoing evaluation in seven separate Phase III studies applying the enhanced technology by the end of 2021. Based on Halozyme's historical timelines, these four Phase III products could represent our potential wave three launches, anticipating launches between 2023 and 2025. We also expect 12 products to be in or have completed Phase I development within 2021. If these programs advance as expected, they would form our potential wave four launches with anticipated launches between 2025 and 2027. We believe the advancing pipeline of ENHANZE products sets the stage for multiple future product launches that can drive long-term revenue growth, cash flow, and profitability. Now, I'd like to give a brief overview of our key programs with each partner. Starting with argenx, which is currently running four Phase 3 trials for four indications of efgartigimod. This is quite an impressive accomplishment achieved in less than two years since signing the deal. Earlier this month, argenx announced its go decision for the ADHERE trial, which evaluates subcutaneous efgartigimod with ENHANZE in chronic inflammatory demyelinating polyneuropathy or CIDP. They plan to continue enrolling approximately 130 patients following safety and efficacy assessments to support potential registration for SC efgartigimod in treating CIDP. During Q4 of 2020, argenx met with the FDA regarding a potential bridging study for SC efgartigimod in myasthenia gravis or MG. Earlier in 2020, they shared positive results from their ADAPT trial studying the IV version of efgartigimod in MG. After receiving feedback from the FDA, argenx is advancing a focused small trial designed to expedite the registration process for SC efgartigimod. They also commenced their Phase 3 ADDRESS trial for pemphigus vulgaris and foliaceus, both serious skin diseases characterized by painful blistering. Furthermore, argenx is pursuing a fourth indication with a Phase 3 trial examining FCF pertuzumab using ENHANZE in immune thrombocytopenic purpura. We are excited to collaborate with argenx on this promising product, anticipated as one of our wave three launches within the 2023 to 2025 timeframe, with analysts predicting significant revenue potential. Moving to argenx's second nominated target, ARGX-117, which is being evaluated in a newly initiated Phase 1 study with healthy volunteers, and we expect to receive a milestone payment soon related to the subcutaneous element of this study. As you've seen, argenx is advancing rapidly in the clinic with SC formulations of its drugs across various potential indications, aiming to prioritize patient preferences amidst the changing healthcare landscape. During Q4, we were pleased to expand our partnership and licensing agreement with argenx, now covering up to six projects. Next, we will discuss Roche. In Q4, Roche began dosing the first patient in a Phase 3 trial assessing Tecentriq in previously treated patients with locally advanced or metastatic non-small cell lung cancer. This is another of our potential wave three launch products. Roche is also continuing their Phase I study for SC administration of ocrelizumab or Ocrevus using ENHANZE. Turning to Janssen. After successfully launching the subcutaneous form of DARZALEX in November 2020, Janssen initiated a Phase 1 study for amivantamab, an EGFR and MET bispecific antibody utilizing ENHANZE for advanced solid tumors. Moving on to Bristol-Myers Squibb, they are advancing a set of exciting immuno-oncology studies, having publicly announced five of the 11 available targets. BMS is conducting four Phase 1 studies including nivolumab SC in two scenarios: as both a monotherapy and in combination with SC relatlimab, along with studies of subcutaneous anti-CD73 and subcutaneous sensory. Now let's turn to our newest partner, Horizon Therapeutics. In November, we entered a collaboration and licensing agreement with Horizon for exclusive access to ENHANZE for SC formulations targeting IGF-1R. We received an upfront milestone payment of $30 million. Horizon aims to use ENHANZE to develop a subcutaneous formulation of TEPEZZA, indicated for thyroid eye disease, a serious progressive and vision-threatening rare autoimmune condition. Horizon anticipates the TEPEZZA franchise to reach peak sales potential of $3.5 billion. We are excited about our partnership with Horizon and look forward to future clinical milestones. Our growing and developing pipeline is establishing multiple opportunities for potential future approvals and launches, driving long-term revenue growth. Additionally, we see potential for further growth from two avenues. First, new ENHANZE sales, where we are actively engaged in discussions with both biotech and pharmaceutical companies. While I am confident we will secure additional deals, the timing remains uncertain. Second, we see growth from our existing partners who are nominating new targets and moving them into the clinic. With over 20 open slots available, we are enthusiastic about the opportunity for growth in this area as well. The advancement of our entire ENHANZE portfolio is projected to drive substantial growth in milestone revenues in the coming years. Slide 6 illustrates our projected milestone outlook for the years 2021 to 2023, along with comparisons to the previous two years. The green bars show that we are performing well against these projections. We project $400 million to $450 million in milestone revenues from 2021 through 2023, demonstrating continued growth in this area. These short-term milestone revenues are significant indicators for future royalty revenues. We anticipate royalty revenue potential of around $1 billion by 2027 based on our non-risk-adjusted revenue estimates for programs we are currently monitoring and assuming global sales across all indications. Let's move to Slide 7 to discuss our value creation strategy and capital return policy. We focus on three capital allocation priorities: maintaining a strong cash balance, conducting share repurchases, and fostering both internal and external growth. We expect that robust free cash flow from ENHANZE will support our ongoing commitment to capital return and our long-term mergers and acquisitions strategy. As previously noted, we have made significant progress on our three-year $550 million share repurchase program, completing $350 million so far. We plan to repurchase up to $125 million in common shares during 2021, subject to market conditions. Additionally, we continue to assess opportunities for expanding our technology platform through acquisitions aimed at driving long-term revenue growth. We see potential for incremental value creation with other platform technologies while leveraging Halozyme's established partnering and commercialization expertise. With ENHANZE still in its early growth phase, we can afford to be selective in our approach. With that update, I'll now hand the call over to Elaine for an overview of our fourth quarter and full year 2020 financial results.

Thanks very much, Helen. Let me turn to Slide 8 for a review of our fourth quarter revenues. As Helen indicated, we again saw strong growth in the quarter, as our partners continued to execute on their commercial and development plans to establish subcutaneously delivered biologics in the US and globally. Total revenue for the fourth quarter was $121.7 million, an increase of 127% compared to $53.7 million in the prior year period. Let me now take a moment to discuss some of the key drivers of growth. Revenue from royalties for the quarter was $32 million, an 86% increase over the prior year period. This was driven primarily by the continued strong uptake of subcutaneous DARZALEX utilizing ENHANZE by our partner Janssen. Growth in royalties from newly launched partner products subcutaneous DARZALEX and Roche's Phesgo drove overall royalty revenue growth offsetting the impact of the more mature legacy partner product. Product sales were $32.5 million in the quarter, up 43% from the prior year period product sales of $22.7 million. Growth in product sales was driven by additional manufacturing releases of API in support of our partners' products and programs in the fourth quarter. And collaboration revenue in the quarter totaled $57.3 million, up from $13.7 million in the prior year period, primarily as a result of the $30 million upfront payment for the signing of our collaboration and licensing agreement with our newest partner Horizon Therapeutics in November to develop a subcutaneous TEPEZZA. Let me turn to Slide 9 for a more detailed breakdown of our fourth quarter P&L. So I'll start with total operating expenses, which were $44.1 million in the fourth quarter, down 49% from $85.7 million in the prior year period. That overall decrease in total operating expenses resulted from our shift in strategic focus to an ENHANZE-only business model in November of 2019 and related restructuring which has now been completed. Cost of product sales were $26.3 million compared with $16.7 million in the prior year period with the increase attributable to the markedly higher level of API sales versus the prior year in support of our partners' products and programs in the fourth quarter. Research and development expenses of $7.4 million decreased 84% from $45.1 million in the prior year period as a result of halting our PEGPH20 oncology drug development activities in November of 2019. SG&A expenses were $10.4 million, down 56% from $23.9 million in the prior year, primarily due to the reduction in force and discontinuation of PEGPH20-related launch readiness expenses following our restructuring. Total operating expenses excluding COGS were $17.8 million for the fourth quarter compared with $69 million in the prior year period. With our leverageable business model, fourth quarter operating expenses excluding COGS were just below the estimated range of $18 million to $19 million. And that led to operating income for the quarter of $77.6 million, compared to an operating loss of $32.1 million in the prior year period. And net income for the quarter was $73.2 million or $0.50 per share compared to a net loss of $34.4 million or a loss of $0.24 per share in the fourth quarter of 2019. And with that, let me turn to Slide 10 for a snapshot of the full year 2020 results. Total revenues grew 37% to $267.6 million in 2020 off of an already substantial revenue base. The biggest contributor to this increase was higher collaborative revenues driven by our partners' pipeline progress and the collaboration with Horizon, which drove a 105% increase in collaboration revenues for the year. As Helen described, our royalties grew significantly to $88.6 million for the year, 27% over and above 2019. Product sales of $56 million declined slightly given significant API sales in 2019 in support of upcoming partner product launches. And with our highly leverageable business model, we generated $144.3 million in operating income for the year compared with an operating loss of $67.6 million in 2019. Furthermore, net income for the year was a record for Halozyme at $129.1 million, compared with a net loss of $72.2 million in 2019. EPS for the year was $0.91 within our most recent guidance range and compared with a loss of $0.50 per share in 2019. With respect to our cash position, cash, cash equivalents, and marketable securities were $368 million at the end of the year compared to $421.3 million at December 31, 2019. This decrease reflects the substantial share repurchases that we have completed to date. Now I'll turn to Slide 11 for a discussion of our 2021 financial guidance which is based on GAAP financials. We plan in future quarters to report both GAAP and non-GAAP financial results. Our guidance is based on the latest information from our partners and our planned expenditures for the year. We expect total revenues of $375 million to $395 million, which would represent year-over-year growth of 40% to 48%. Let me speak to the components of revenues. We expect revenues from royalties to double from 2020 levels. We expect product sales to increase between 50% and 60% from 2020 levels driven primarily by bulk API sales to our partners. We further expect revenue under collaborations to be in a similar range as the 2020 total driven by new clinical trial starts and commercial milestones. And with regard to operating expenses, I would just note for modeling purposes that the substantially higher product sales we expect will result in commensurately higher cost of goods, which will be an important factor in your EPS calculation. Total OpEx excluding COGS is expected in the range of $80 million to $83 million, and this modest increase from 2020 levels illustrates the strong leverage of our business model. We expect operating income for 2021 to be in the range of $215 million to $235 million, which would represent 49% to 63% growth over 2020. And moving to earnings per share, we are projecting GAAP EPS of between $1.40 and $1.55, which would represent 54% to 70% growth over 2020. As Helen reviewed, we remain committed to returning capital to shareholders. We continue to expect that we will repurchase up to $125 million in common stock this year pending market conditions and other factors, which would leave $75 million worth of shares available for share repurchases remaining under our current authorization. Before closing, I would like to note that we also announced today that we have launched, subject to market conditions, an offering of $500 million of aggregate principal amount of convertible senior notes due 2027. Our intended use of proceeds is to repurchase a portion of our outstanding 1.25% convertible notes due 2024, and the remainder of the proceeds for share buybacks and general corporate purposes. I would encourage everyone to review the press release that we put out this afternoon. Please note that the current guidance in this earnings call does not contemplate the offering or exchange in the press release I just referenced. And with that, let me now turn the call back to Helen.

Thank you, Elaine. As you just heard, our developing pipeline coupled with the financial outlook places Halozyme in the strongest position ever as a company. We look forward to strong growth in revenues, profitability, and cash flow in the coming quarters and years, which will allow us to deliver on our commitment to return capital to shareholders, maintain long-term sustainable growth, and maximize shareholder value. I'll close on slide 12. While 2020 was clearly a transformative year for Halozyme, 2021 is expected to be similarly impactful with several important and value-creating events that are listed on slide 12. We expect the wave two launch momentum to continue with DARZALEX FASPRO and DARZALEX SC continuing to grow in the US and Europe and potentially also in Japan based on the potential for the approval there in 2021. We also expect Phesgo momentum to accelerate following the European Commission approval in December of 2020. We expect two new products to enter phase 3, resulting in four ongoing phase 3 programs across seven separate indications. Recall these will form the mixed potential launches in wave three. We project five new phase 1 starts, resulting in 12 phase 1 products. We will continue to work to sign new collaboration agreements and advance new targets into development. As a result of all of this strong progress, we're in a position to return capital to our shareholders through the $125 million share repurchase program, and we will continue to seek to acquire a platform that can add to our long-term revenue growth. None of this progress to date and the future would be possible without the amazing team at Halozyme. I'd just like to send my sincere thanks to everyone for these terrific results. I thank you everybody for your attention today and we'd now be delighted to take your questions. Operator, please do open the call.

Our first question comes from Charles Duncan from Cantor Fitzgerald. Your line is open.

Hi, Helen and Elaine, and team. Congratulations on a very good quarter. And thank you for taking our questions.

Thank you.

So, first question is not on DARZALEX. It's on argenx and efgartigimod. And I'm just kind of wondering it seems like this is going to become an increasingly large part of the story at least for wave three. Helen, I'm wondering if you could remind us of the IP strategy on subcu efgartigimod and how long that may last? And I also wanted to ask about the new targets that were selected by argenx.

Yes. Thanks for that question, Charles. We agree, efgartigimod is definitely one of the most exciting products in our portfolio certainly based on the range of indications we're working in today. So with regard to the IP related to the royalty revenues for Halozyme, we will continue to receive royalties for 10 years after the first commercial sales or if there is a co-formulation patent that ever issued for it that could have the effect of pushing out the royalty duration even longer than that. So, too soon to talk about co-formulation patents for efgartigimod, Charles. But just as a reminder, based on our contracts, it's 10 years after the first commercial sale. If there are no remaining patents in place, we would get a step down in the royalty to half of the original rate for the time frame from the last remaining patent to the end of that 10-year term, but certainly a very exciting story ahead for efgartigimod.

That's helpful. I think it's still early to discuss core formulation patents, so we will revisit that later. My second question is about the argenx collaboration and the six new targets. I'm curious if those have been revealed or if you could provide any insights on where we might find more information.

Yes. So far they've just selected two of the targets, Charles. So, the FcRn target and the C2 target. So, we look forward to continuing to work with argenx and identify additional targets. Obviously, we are very gratified that they already signaled strong interest in expanding the collaboration to up to six targets, but no additional nominations as yet to announce beyond the first two FcRn and C2.

Okay. Last question and then I'll hop back in the queue, and that is on new collaborations. You've been very productive there with the November Horizon deal. Would you imagine increased visibility on that TEPEZZA SC version progress this year? And then do you have the capacity to bring on new collaborations with the current team and perhaps that being one or two per year?

Yes. So, with regard to Horizon and TEPEZZA, if we think back to what the CEO commented on at JPMorgan, they certainly did indicate they're working hard to get into the clinic with that collaboration. We've certainly done our kickoff meeting and we can expect a steady start for that in 2021. With regard to our ability to add new collaboration partners, I think Elaine mentioned this in her prepared remarks. We do have a lean and leverageable business model where individuals at Halozyme can support multiple partners at different stages of development. I would say we've said that we only need a modest expansion in people if we were to see a significant expansion of the number of products in the clinic or a significant expansion in the number of partners. So, the current operating expense is a good estimate for the next several years unless we see a big expansion in the number of partners and targets.

Very good. Thanks for the color. Great quarter. Congrats.

Thanks, Charles. Appreciate that.

Your next question comes from the line of Do Kim from BMO. Your line is open.

Hi, thank you. Good afternoon and congrats on the quarter. I first wanted to ask about the metric you provided for DARZALEX FASPRO, the 40% US share according to Symphony Health. Just want to understand how reliable that data is in your mind? And I assume it aligns with what you're receiving in royalties for FASPRO?

Yes. I can talk in general terms about that, Do. So yes, it does triangulate for us well with the overall numbers that we are seeing. I do think there's always an adjustment from any of these reported syndicate numbers, but the good news is and this is why we reported it. We see a correlation with the performance we're seeing in the royalty revenues we're receiving.

And can you comment on the launch dynamics for Phesgo and how that compares to DARZALEX FASPRO in the US? Are you seeing similar uptake in conversion? Or are there differences that we should think about between those two therapies?

Yes, based on Roche's report regarding their overall revenues for Phesgo, the launch isn't progressing as quickly as DARZALEX FASPRO. I can say that DARZALEX FASPRO has exceeded our expectations regarding its adoption speed in the United States. We anticipated that Phesgo would take a couple of quarters in 2020 to establish essential logistics, such as working on reimbursement, being included on formularies, and being integrated into electronic medical records. We expected 2021 to be the year when Phesgo would really start to see robust growth. We are well-positioned to witness greater penetration in the US and increased revenues from Europe, which is just beginning its launch. Therefore, we believe this year will be significant for strong growth with Phesgo. DARZALEX FASPRO, however, has had a faster start than any launch I have personally observed, and it will maintain that momentum, driving our royalty revenues. But we also expect Phesgo to make a noteworthy contribution due to the two dynamics I've mentioned.

Okay. Thank you. That makes sense. Last question on the financials. Just based on your guidance, when you back into the operating expenses for 2021, it seems that we should see an increase in spending for the year when you look at the fourth quarter of 2020, maybe a bottom of the reductions in operating expenses. Where should we expect to see the growth in spending in R&D or SG&A?

Yes. Let me turn that one over to Elaine to answer.

So, Do, we don't provide a breakdown between OpEx in terms of the breakdown within OpEx, but what I can say is total OpEx excluding COGS, we've talked about for 2021 being in the $80 million to $83 million range. That's generally consistent with sort of the OpEx for 2020, and again reflects our ability to support multiple products and programs of our partners. Of course, as Helen indicated, should there be a significant expansion in the number of new partners or programs that could be some expansion over time and some growth with inflation over time. But that's a good number for 2021.

Great, thanks for taking my questions as broadly.

Your next question comes from the line of Jim Birchenough from Wells Fargo. Your line is open.

Yes. Hi, everyone. I want to congratulate you on the quarter and the year. I have a few questions. First, regarding the convertible note offering, could you comment on the timing? There’s mention of exchanging some portion of the 1.25% notes. Do you anticipate that these will be entirely replaced, and what will be the mix of shares and cash in that exchange? I have some follow-up questions as well.

Yes. Let me ask Elaine to address what she can in that answer, Jim.

Sure. Unfortunately, I can't provide specific details about the offering. I would recommend checking our press release. However, we did mention that we are offering $500 million in new convertible notes. We indicated that the proceeds will be used to repurchase a portion of the outstanding convertible notes, conduct share buybacks under our current board authorization, and strengthen our balance sheet for general corporate purposes. I can't share more specifics than that; I would just direct you to our press release.

Okay, thanks for that. And then just in terms of the guidance for royalties doubling in 2021, if you could maybe speak, Helen or Elaine, to just the assumptions underlying that and what guides that guidance? Is it the feedback you've got from your partners? And do you look at a range and take the lower end of that range or the midpoint? Is it based on consensus estimates? Is it based on prior experience with launches in Europe? Just trying to understand what guides that doubling of royalties and how conservative or not that may be?

Elaine, do you want to address that?

Certainly. We consider all those factors, as you noted, Jim. We maintain a strong relationship with our partners. Our alliance management team, along with others in the organization, frequently meets with our partners to align on the potential outlook and timing of programs and products. We take into account the royalty outlook from our partners, market research, sales data from sources like Symphony, and analysts' estimates. With all these factors in mind, our close interactions with partners give us confidence in anticipating significant growth in 2021. We've mentioned that recently launched partner products such as Janssen's DARZALEX and Roche's Phesgo are key drivers of that growth.

Terrific. And maybe just one final question, I'll jump back in the queue. Just in terms of thinking about the different waves of launch coming up, how do we think about wave three versus wave two? If you could say anything about the wave four products across seven indications, do you think it's comparable to wave two or bigger? Maybe just qualitatively, if you can comment on that.

Yes. The first two potential launches are obviously ones we know about and we're very excited about that includes efgartigimod, which we mentioned earlier as well as Tecentriq. Each of those, clearly as their analysts project, are multibillion dollars. So, very attractive large markets and I can just say qualitatively, the additional two products that we believe will enter Phase 3 this year are also exciting established blockbuster products, Jim. So it's a very exciting group that's in wave three. Obviously, strong focus on wave two and the execution there, but wave three is also a very exciting portfolio of potential launches.

Okay. Terrific. Thanks for taking the questions.

Thank you.

Your next question comes from the line of Jessica Fye from JPMorgan. Your line is open.

Hey, guys. This is Luke on for Jess. Thanks for taking my follow-up questions. So just to start, you noted that you expect 2021 royalty revenues for FASPRO to be substantially higher than Phesgo. Is that driven more as the EU launch for Phesgo is just getting underway, or do you say that's sort of the same dynamic when you look at just the US? And then looking long term, do you expect that dynamic to sort of persist? Or would you expect them to be at more of an equal level over the long term just given your comments on comparing how fast FASPRO has gotten out of the gate?

Yes. Elaine, would you like to address that question?

I would say, sure. So we see a very meaningful growth in DARZALEX, FASPRO as we've talked about and subcutaneous DARZALEX as we've seen in 2020 and we expect continued growth in 2021. I think Phesgo, as we've talked about 2020 was sort of a year of staging with getting reimbursement formulary access and EMR. With those now in place, we do anticipate meaningful growth in 2021. In addition to, as you rightly point out, they received the approval at the end of 2020 in Europe. We see Europe also being a driver of increasing sales and royalty growth from FASPRO.

Okay. And then just another one. Can you give any more granularity on timing for the ongoing Phase III trials for candidates like Tecentriq and TEPEZZA beyond just them potentially launching between 2023 and 2025 like maybe the release that they could file for these SC formulations? And then is there any potential for efgartigimod to come earlier than that given the pursuit of rapid path to registration in MG that you guys noted today?

Yes. I will say when we come up with the estimate of them being in the 2023 to 2025 timeframe for the wave three launches, it really is based on our standard timelines which has been 4.5 to 5 years from first in human. To the point you made with regard to efgartigimod, if we were for some reason able to have a much faster, smaller, as an example, Phase III, that could potentially mean a shorter timeline and it could potentially launch earlier. I still think those are unknowns. Therefore, we plan conservatively just so we can get to our benchmark. But obviously, there is a potential dynamic there. We can't provide any more granularity on the Phase III data readout. Our partners haven't provided that. Therefore, we're not in a position to share it. If you take a look at clinical trials.gov, you get some estimates there of primary completion dates. But as you know, those aren't always as specific as we would like. Unfortunately, we can't provide any granularity until the partners would talk about their estimated completion date.

All right. Thanks for taking my question.

Thank you.

Our next question comes from the line of Jason Butler from JMP Securities. Your line is open.

Hi, it's Roy for Jason. Thanks for answering my questions. I have a couple that relate to the convertible offering and the buybacks. Do you have any thoughts on a possible dividend? Also, how are you assessing the current M&A environment? Are there many assets available? What are your thoughts on valuation over the past few days? Lastly, I wanted to follow up on Alexion. Have you had any discussions with AstraZeneca? Or do you anticipate any after the closing in the third quarter? Thanks.

Yes. Let me take two of those and I'll ask Elaine to talk about the dividend. Alexion and AZ, absolutely, I think that's post the close, so we are just awaiting the close before we would have a conversation there, Roy. For M&A, we're still in the assessment phase looking to see what's out there. There are some interesting things out there, but I think we're still evaluating the right type of platforms, where we want to play, and where we can see Halozyme's unique talents being able to deliver over and above what the company is able to do today. So definitely an area of active interest for us, but we don't feel in any hurry to do that given the strong growth we see ahead for ENHANZE. But we're actively analyzing and assessing and looking. And Elaine, would you address the dividend question?

Sure, happy to. So Roy, I would just say with our diversified portfolio, strong growth and profitability and cash flow generation, we remain committed to capital return. I think with respect to the form of capital return, we have focused on share buybacks. And as you know, we're very much in the midst of a 3-year buyback plan. We're about a little under 2/3 of the way through that $550 million buyback plan, and we've talked about buying up to $125 million of our common stock this year which would leave $75 million for 2022. While we have made no decisions with respect to going forward beyond that, again, I would say we remain committed to capital return. With respect to dividend versus share buyback, I would say the company is a company with strong growth potential. With ENHANZE frankly still being early in its growth cycle, I would say share buyback tends to be the sort of mode or method of capital return of companies with that kind of strong growth. While we made again no decisions about what lies beyond the current authorization, I think we continue to believe that share buyback is the appropriate method of capital return for a company with not only strong capital cash flow generation but also strong growth prospects.

Okay, thank you.

Your next question comes from the line of Anita Dushyanth from Berenberg Capital. Your line is open.

Hi. Good afternoon, Helen and Elaine. Thank you for taking my question. Just a couple more here. Considering the better-than-expected uptake of fast growth despite the COVID environment, could you talk about the potential of these reformulated therapies eventually moving to an in-home setting? And also regarding the conversion rate going from IV to SC, is there a rate-limiting step in this process if there is any?

With regard to the in-home setting, we actually have two products that are approved today for in-home setting. That would be HYQVIA, which is Takeda's product, and also the Phesgo, which was approved for at home. I think the way to think about that is if there is a product that has got a good safety profile, perhaps no risk of infusion-related reactions or no hypersensitivity reactions, there is a possibility those products could be given at home. Now HYQVIA is given at home by the patient themselves without supervision. Phesgo actually needs to be given with a healthcare professional. So, I think moving forward you're on to something. We're definitely going to see more products being developed to be given at home. Argenx has actually talked about that with efgartigimod and it will really depend on the safety profile, whether the patient is able to administer it themselves or perhaps with the aid of a healthcare professional but in the home. I think it's a trend we're seeing around the world where people want to move care to the least expensive setting. We're very excited to be part of that wave. ENHANZE is going to be a key enabler of that wave. For the conversion rate from IV to subcutaneous, there's a number of factors that we've seen over the years with that. There's always a small proportion of patients who prefer and like the community of going into an infusion suite, and data has shown that so that's perhaps 5% to 10% of patients. Other than that, it can sometimes just be physician inertia frankly that sometimes can slow down the conversion from IV to subcu. But hopefully, those are helpful, Anita. Those are the couple of dynamics we've seen that can impact the rate at which and the ultimate amount of which IV goes to subcu.

Yes. That's helpful. Thank you. And just two more for me. Regarding the Phesgo launch in the European region, should we think about like the time for the logistics to set up to be about a month or possibly most of Q1 and then we see the uptick of Phesgo?

So we don't have specifics on Phesgo, but I can say based on experience with European launches over the years in different companies. It actually can take between nine to 12 months for all of the major European markets to launch. Each of them has a different process for the drug to get reimbursed. For example, the UK and Germany can happen quickly within the first quarter following approval, but countries like France can sometimes take nine to 12 months depending on their reimbursement process. It is a bit more of a staggered launch pattern. We expect to see in Europe with a couple of the countries growing early, but France and Spain being much more towards closer to the end of the year. So, we expect a gradual rollout of countries all through the course of the year with some of the large countries like France being in that nine to 12-month period.

Okay, and thank you. And just one more. Regarding the acquisition of a complementary technology, would it likely be in the oncology autoimmune neurology space to leverage existing relationships with current partners?

We are looking for a platform that we are going to be able to license to different companies. Because we're looking for a platform, it's a little early to say. Ideally that platform would actually have utility across multiple disease states and indications because it would be some form of technology that leading companies can add and integrate into their portfolios. We're certainly not setting out with any goal to restrict ourselves to work in oncology or autoimmune disease and neurology. Think of it more like ENHANZE, a technology that can be applied to all sorts of different drugs and disease areas because it brings is the threshold enabling capability, but it hasn't got anything specific to do with a disease or a disease area.

Okay. That's helpful. Thank you. That will be all for me.

Okay. Thank you.

Your last question comes from the line of Benjamin Paluch from Citi. Your line is open.

Hello. My name is Benjamin Paluch on for Joel. A quick question for us. It looks like greater than 20 targets of the sixty are still to be selected. I'm curious, is there a clock or a point at which a partner must select a target? And then how does this impact the deal terms if a target is not eventually selected?

Actually in general terms, all of our contracts are a little different. But overall, there is a pretty long period of time for partners to select all of their targets within the agreement. We actively work, as we mentioned in the prepared remarks, with each of our current partners to look at their portfolios and identify new targets to move forward into the clinic.

Great. Thank you. And then one last question. So this pertains to argenx. With argenx moving forward with the bridging study, how important is that for presented for other ENHANZE programs? Thank you.

I would say that all of our partners who have commercialized products in the market, such as Roche and Janssen, have utilized a form of bridging. What sets the argenx approach apart is their use of a pharmacodynamic endpoint, while our previous partners relied on pharmacokinetics and efficacy endpoints. This establishes a precedent since the reduction in IgG levels serves as a surrogate for efficacy. The bridging approach itself is what all our partners have utilized, which has enabled a very rapid development timeline of approximately 4.5 to five years to approval. Argenx is the first to employ a pharmacodynamic parameter in this context.

Your last question comes from the line of Ben Shim from Canaccord Genuity. Your line is open.

Hi everybody. Thanks for taking my question and congratulations on the very strong results. Apologies, if I've missed this. Can you give us a little more color on guidance for collaborative revenue in 2021? What are your assumptions for milestones? And what has been earned so far?

All right, I'll turn that one over to Elaine.

Sure. We haven't provided further breakdown of the milestone payments. But what we have indicated is that we're anticipating a comparable level of milestones from collaborations as we had in 2020. Our guidance excludes the potential for any new ENHANZE deals. It excludes any potential upfront payments from a new ENHANZE partnership.

Okay. A couple more for you Elaine, I think you previously communicated your intentions for the outstanding convertible note issue. Do you have any similar guidance for the 27 notes? And maybe can you remind us what the accounting treatment will be for EPS going forward?

Yes. Elaine, would you like to address that?

Sure. I cannot comment on the current proposed offering. I would just refer you to our press release. You may have noticed in our 10-K that we plan to early adopt ASU 2020-06 for convertible accounting, which relates to adding back non-cash interest expense. Of the approximately $20 million in annual interest expense reported, about $12 million is non-cash. That's about all I can share on that topic. Regarding diluted shares, the estimates from analysts on the diluted shares related to our existing converts have varied, which has likely caused some discrepancies in consensus EPS estimates. You can expect that the dilutive impact of our existing converts is one of the issues we are addressing with the proposed transaction. For any other specific details, please refer to the recent press release.

Okay. Thank you very much. That’s very helpful and congrats on a quarter.

Thank you.

Thank you, Ben.

All right. Well, I see that we're at time. I just want to really thank everybody for your attention today. You've heard a story of Halozyme which was tremendous progress and performance in 2020, which has set us up for a similarly impactful 2021. So thanks very much for your attention. We look forward to speaking next quarter. Thank you. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.