Halozyme Therapeutics, Inc. Q3 FY2021 Earnings Call

My name is Frank, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Halozyme Third Quarter 2021 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Mr. Al Kildani, Vice President of Investor Relations and Corporate Communications, please begin your call.

Thank you. Good afternoon and welcome to our third quarter 2021 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 during 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 third quarter. On today’s call, both GAAP and non-GAAP financial measures will be discussed. The non-GAAP or adjusted financial measures are reconciled with the comparable GAAP financial measures in our earnings press release and slide presentation. 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 CEO, Dr. Helen Torley.

Thank you, Al. I'm pleased to report on our strong third quarter financial results which reflect the continued momentum and growth of our ENHANZE business. We reported third quarter revenues of $115.8 million. This revenue was driven by record quarterly royalties of $58.6 million, which represents 145% year-over-year growth, and by collaboration revenue of $32.2 million, which included a $30 million commercial milestone from Janssen resulting from the continued strong growth and performance of DARZALEX subcutaneous. Third quarter GAAP diluted earnings per share was at $1.48, including an income tax benefit related to the release of our tax valuation allowance, and non-GAAP diluted earnings per share was $0.55. As a result of the strong year-to-date performance, we are increasing the lower end of our revenue and operating income guidance for 2021. Revenue guidance is increased to $430 million to $445 million, which represents growth of 61% to 66% over the prior year. Operating income guidance is now $265 million to $280 million, representing 84% to 94% growth over the prior year. In addition, we have one tax-related adjustment to our GAAP earnings per share guidance now that we have demonstrated a pattern of durable profitability. This results in an increase to GAAP earnings per share guidance to a range of $2.60 to $2.70. We're also raising the lower end of our non-GAAP earnings per share guidance to a range of $1.90 to $2. Elaine will discuss our updated guidance in detail along with the rest of our financial results later in the call. Let me turn now to slide three and provide some details on key third quarter progress and events, and I'll begin with royalty revenues. Royalties during the third quarter were $58.6 million. This represents 145% growth year-over-year and 28% sequential growth following what had previously been a record quarterly royalties. Strong royalty growth has been driven primarily by the successful ongoing global launches of Janssen's subcutaneous forms of DARZALEX, which utilize our ENHANZE technology and by increasing contributions from Roche's PHESGO. For the full year 2021, we continue to project an increase of more than double in our royalty revenues over 2020 based on the anticipation of continued growth primarily driven by DARZALEX subcutaneous. We're delighted to see this continued robust growth in this high-margin recurring revenue stream. I'll now provide some highlights of key commercialized products which are listed on slide four. There are five products now approved in most major global markets using our ENHANZE technology. The most recently launched products utilizing the ENHANZE technology, referred to as our Wave 2 products, are DARZALEX SC, also known as DARZALEX Faspro, and PHESGO, which is a fixed-dose combination of Roche's Perjeta and Herceptin. In each case, the subcutaneous version can be administered in just minutes compared to the multi-hour treatment times for the IV versions. This can mean reduced burden of treatment for patients and reduced use of healthcare resources. Globally, more than 500,000 patients have received commercial products utilizing ENHANZE. Turning to slide five, I'll now provide some color on DARZALEX and DARZALEX subcutaneous. During the third quarter, Janssen's parent Johnson & Johnson reported worldwide sales of DARZALEX, including both the IV and subcutaneous forms, of $1.58 billion, an increase of 42.9% year-over-year on an operational basis. On the third quarter conference, J&J further stated this growth was driven by increased penetration of the subcutaneous formulation in the U.S. and Europe, continued launches globally, and share gains with a reported nearly five points of share growth in the United States across all lines of therapy in the third quarter. According to data from Symphony Health in the United States, DARZALEX Faspro achieved a 72% share of sales in the month of September. This is an increase from a 66% share at the end of June. The chart on the right illustrates the percentage of total DARZALEX sales that DARZALEX Faspro represented during the last month of each of the last four quarters in the United States. What you can clearly see is a strong growth trend which we project will continue. Driving potential additional opportunity, Janssen recently announced several regulatory achievements that can support continued growth for subcutaneous DARZALEX. Beginning with multiple myeloma, in July, Janssen received FDA approval for DARZALEX Faspro in combination with Pomalidomide and dexamethasone for patients with multiple myeloma after first or subsequent relapse. Moving now to primary light chain amyloidosis, in October, Janssen received approval from the China National Medical Products Administration for the use of DARZALEX Faspro for the treatment of newly diagnosed primary light chain amyloidosis in combination with bortezomib, cyclophosphamide, and dexamethasone. This followed approval from regulatory authorities in Japan for subcutaneous DARZALEX for systemic light-chain amyloidosis in August. With the demonstrated sales and regulatory momentum, we continue to expect that DARZALEX will be a driver of royalty growth for Halozyme for a long time to come. I'll now move to our second Wave 2 product, PHESGO, which was launched in the third quarter of 2020 in the United States and began launching in the first quarter of 2021 in Europe. In the third quarter, PHESGO built on the momentum we saw in the first and second quarters of the year. Roche reported third quarter PHESGO sales of 117 million Swiss francs, up from 67 million Swiss francs in the second quarter, representing more than 70% sequential growth. We're still early in the rollout of the ex-U.S. country launches, where reimbursement decisions can take a year or longer from the time of regulatory approval. I'll just stay close with a brief comment on the Wave 1 launch product, and sales in Q3 were overall stable compared to Q2. Let me now move to slide six and a discussion of the ENHANZE development portfolio, including a few recent partner highlights. We're excited to predict we will exit 2021 with 16 products in development, including three products in Phase 3. I'll begin my review with the potential next wave of launches, which are our Wave 3 launch products. Based on historical development timelines, products that are in Phase 3 represent potential launches in the 2023 to 2025 timeframe. Today we have three products that are in Phase 3 and these include Bristol's nivolumab, Roche's Tecentriq, and Argenx’s efgartigimod. These three products alone have projected sales of greater than $18 billion in 2024 based on analyst consensus. For Halozyme, where we receive on average a mid-single-digit royalty of net sales of the subcutaneous product, this represents a very attractive new addressable market opportunity upon subcutaneous product approval potentially beginning in 2023. Moving to the earlier pipeline which includes products that are currently in or which have completed Phase 1, these products, if they continue in development based on historical timelines, have the potential to launch in the 2025 to 2027 timeframe forming the Wave 4 launches. Today, we have ten products in Phase 1 and we continue to project we will exit 2021 with 13 Phase 1 studies completed or ongoing, with three new studies expected to start during the remainder of the fourth quarter. This diversified and growing pipeline of products utilizing ENHANZE is set up for the potential for multiple waves of future product launches potentially starting in 2023 that we believe will deliver long-term revenue growth. With our partners making such strong progress advancing studies across the entire portfolio, let me share just a few highlights and updates. I'll begin with our Argenx’s efgartigimod, which is currently leading the race to be our next potential launch with ENHANZE in 2023 and could be the first of the Wave 3 launches. In the United States, the PDUFA date for the IV form of efgartigimod in its first indication of myasthenia gravis is December 17th of this year. Launches outside the United States are projected shortly thereafter, with Japan projected in Q1 2022 and Europe in the second half of 2022. The data readout of the ongoing Phase 3 trial for subcutaneous efgartigimod with ENHANZE in myasthenia gravis is expected by Argenx in mid-2022, supporting the potential for a 2023 launch. Myasthenia gravis was the first of four potential indications currently being evaluated in ongoing Phase 3 clinical studies with the effort to demonstrate subcutaneous delivery. The additional indications are chronic inflammatory demyelinating polyneuropathy, idiopathic thrombocytopenic purpura, and pemphigus. The projected size of the addressable populations and the large unmet need that exists in each of these indications are resulting in analysts projecting a multi-billion dollar opportunity for efgartigimod. We're also pleased to be working with Argenx on a subcutaneous version of ARGX-117, which is a C2 inhibitor. This is a product that has been explored as a treatment for multifocal motor neuropathy. In other news in the quarter, we're pleased to announce that in July, Janssen elected to target HIV reverse transcriptase and plans are already underway to initiate a Phase 1 study. We are very much looking forward to this program with Janssen, which will be the third program in our collaboration following DARZALEX and amivantamab. With this strong progress by our partners, we predict we will have 16 products in clinical development by the end of 2021, including three products in Phase 3, which is forming this exciting set of potential Wave 3 and Wave 4 launches. Now let me just take a moment to talk about three additional drivers of continued royalty revenue growth and durability, beginning with the potential for co-formulation patents. Co-formulation patents can be granted by the patent office for novel or unexpected findings. In general, co-formulation patents, if granted, can have the effect of extending the duration of time that we receive royalties. We typically receive royalties for a minimum of 10 years after the first commercial sale. In addition, co-formulation patents can also potentially delay the timing of the royalty step-down to later than 2024 in Europe and later than 2027 in the United States. I'm pleased to report that several partners have recently filed new co-formulation patent applications related to products in the ENHANZE development pipeline. We look forward to being able to provide further updates on these applications as information becomes public. The next opportunity to increase the revenue durability includes new deals. We see further revenue growth opportunity and durability here too as we continue meeting with several companies and are discussing monoclonal antibodies, bispecifics, small molecules, and cell therapy opportunities for ENHANZE that may result in new collaboration agreements. The third opportunity to drive durability relates to new development programs. New development programs arising from a new potential collaboration agreement are not currently included in Halozyme's long-term royalty projections and these would form what we would call Wave 5 of launches. We can expect that Wave 5 may be further expanded by current partners nominating and developing additional targets from the more than 20 currently available open slots that they have. These three growth drivers are what create the strong royalty revenue trajectory we project to 2027 and beyond. Moving now to slide seven, I'll discuss how this pipeline progress drives revenues for Halozyme. We're again reiterating our three-year outlook for projected revenues for milestones. For 2021 through 2023, we continue to project $400 million to $450 million in milestone revenues. This reflects our expectations for partner development and commercial milestones during that period and new deals. The blue bars represent our three-year outlook since 2019 and the green bars represent actual annual milestone revenues demonstrating that we are performing very well against these projections. This near-term milestone revenue is an important strong indicator for future royalty revenues. We project royalty revenue potential of approximately $1 billion in 2027 based on non-risk-adjusted revenue projections for programs that we currently have line of sight to and assuming global sales in all indications. We're excited by this ongoing momentum and growth potential of our ENHANZE technology franchise. At the same time, we continue to evaluate the potential for new technology platform expansion through acquisition, with the goal of accelerating and extending long-term revenue growth. We see the opportunity to create incremental value for other platform technologies applying Halozyme's proven partnering and commercialization capabilities. As we've mentioned before, ENHANZE is still early in its growth cycle. So we have the opportunity to be highly selective. With that, I'm pleased to turn the call now over to Elaine for a discussion of the third quarter financial results.

Thank you, Helen. Before I begin, I'd like to again note that we now report key measures on a non-GAAP adjusted basis in addition to a GAAP basis, and also provide financial guidance on a non-GAAP basis. We consider these non-GAAP financial measures to be important because they provide useful measures of our operating performance excluding factors that do not directly affect what we consider to be our core operating performance, such as stock-based compensation and amortization, as well as unusual events and their related tax effects. As I turn to slide eight for a review of our third quarter revenues, total revenue for the third quarter was $115.8 million, up 77% from the prior year period of $65.3 million. The biggest driver of our overall revenue growth was from royalties. Recurring revenue accounted for over 50% of total revenue in the third quarter. Royalty revenue for the quarter was $58.6 million, a 145% increase over the prior year period royalty revenue of $23.9 million. This was driven primarily by the continued strong uptake of subcutaneous DARZALEX utilizing ENHANZE by our partner Janssen and to a lesser extent by Roche's ongoing global launches of PHESGO. We also saw strong growth in product sales, which accounted for 22% of total revenues in the third quarter. Product sales, which can fluctuate period-to-period based on partner supply requirements and safety stock levels, were $25 million in the quarter, significantly higher than the prior year period product sales of $9 million. Growth in product sales was primarily driven by higher API sales to our partners Janssen and Roche in support of their ongoing subcutaneous product launches and commercial efforts globally. Highlighting the tremendous commercial potential of ENHANZE, we saw collaboration revenue in the quarter totaling $32.2 million, of which $30 million was related to the achievement of a commercial milestone associated with subcutaneous DARZALEX. This is the second commercial milestone achieved this year from our collaboration with Janssen, in addition to a $20 million milestone which we earned in the second quarter, reflecting the continued momentum of subcutaneous DARZALEX. Collaboration revenue in the third quarter was consistent with the overall magnitude of collaboration revenue from the prior year period of $32.3 million. Let me now turn to slide nine for a more detailed breakdown of our third quarter P&L. I'll begin with total operating expenses, which were $40.2 million in the third quarter, up from $25 million in the prior year period. The overall increase in total operating expenses resulted from higher cost of product sales, which were $18.6 million compared with $5.6 million in the prior year period. The increase in cost of goods was attributable to the markedly higher level of API sales versus the prior year period in support of our ENHANZE partners products and programs in the third quarter. Research and development expenses of $8.5 million increased from $7.7 million in the prior year period. This increase was due to an increase in compensation expense, including stock-based compensation for personnel to support additional ENHANZE targets entering clinical development. SG&A expenses were $13.2 million, up from $11.7 million in the prior year period. Similarly, this increase was primarily due to an increase in compensation expense, including stock-based compensation for personnel to support our ENHANZE franchise. Total operating expenses excluding COGs were $21.7 million dollars for the third quarter compared with $19.5 million in the prior year period and remain consistent with our expected spend for the year. In terms of our operating profitability, GAAP operating income for the quarter was $75.6 million, an increase of 88% compared to GAAP operating income of $40.3 million in the prior year period, reflecting our strong top line growth and leverageable business model. Before we get to net income and earnings per share, let me spend a moment on the valuation allowance release recorded against our deferred income tax assets and the benefit to our financial results and annual guidance. As you saw in our earnings release, and as detailed in our 10-Q filing, we reversed our tax valuation allowance this quarter and recognized an income tax benefit and deferred tax assets of $142.5 million. We will begin recording income tax expense in our P&L in 2022 and going forward, with an expected tax rate that will likely approximate statutory tax rates. We anticipate tax expense to be substantially a non-cash expense until we fully utilize our deferred tax assets. Moving to net income, on a GAAP basis, net income for the quarter was $216.6 million or $1.48 per diluted share reflecting the benefit of the release of the tax valuation allowance that I discussed a moment ago. This compared with GAAP net income of $36.2 million and $0.25 per diluted share respectively in the prior year period. On a non-GAAP or adjusted basis, net income was $80.5 million or $0.55 per diluted share compared to non-GAAP net income of $44 million or $0.31 per diluted share respectively in the prior year period. Let me now turn to slide 10 for an update on our 2021 financial guidance. I'm pleased to report that due to our strong performance year-to-date, we are raising the lower end of our guidance for 2021 revenues. We now expect total revenues of $430 million to $445 million, up from a prior range of $425 million to $445 million. This new range would represent year-over-year growth of 61% to 66% over our already substantial revenues in 2020. Moving to the components of revenue, we continue to expect revenue from royalties to more than double from 2020 levels and product sales to increase 79% to 88% from 2020 levels, driven primarily by API sales in support of our ENHANZE partners. We also continue to expect revenue under collaborations to be higher than the already meaningful collaborative revenue we achieved in 2020. Due to the strong top line growth and profitability enabled by our ENHANZE business model, we now expect GAAP operating income for 2021 to be in the range of $265 million to $280 million, up from a prior range of $260 million to $280 million. This new range would represent 84% to 94% growth over 2020 and a greater than 60% operating margin. As a result of the income tax benefit recorded in the third quarter, we now expect GAAP net income of $380 million to $395 million, up from our prior guidance of $235 million to $255 million. Again, reflecting the strong year-to-date results, we are raising the low end of the range for non-GAAP net income, which we now expect to be $285 million to $300 million, up from our prior guidance of $280 million to $300 million. Moving to earnings per share, we now expect GAAP diluted earnings per share of between $2.60 and $2.70, up from our prior guidance of $1.55 to $1.70 due to the income tax benefit we recorded in the third quarter. Lastly, we are raising the low end of the range for non-GAAP diluted earnings per share to $1.90 to $2 per share, up from our prior guidance of $1.85 to $2 per share. This new range would represent 70% to 79% growth over 2020. I'll now turn to slide 11 for a summary of our approach to value creation and capital return and our strong progress to date. We have been consistent regarding our balanced capital allocation priorities. These include maintaining a strong balance sheet, capital returns via share repurchases, and commitment to driving both internal and external growth. We have a strong balance sheet with cash and cash equivalents as of the end of the third quarter of $815.9 million. We anticipate the strong projected free cash flow driven by our ENHANZE franchise will support both our commitment to capital returns as well as funding both internal and external growth via M&A. In support of our continued commitment to capital return in the third quarter of 2021, we repurchased 1.6 million shares of common stock in open market purchases for $64.7 million at an average price per share of $41.40. Furthermore, in October of 2021, we repurchased an additional $0.3 million shares of common stock for $10.3 million. With those purchases, we have fully completed our three-year board-authorized share repurchase program that began in November of 2019 to repurchase up to $550 million of our outstanding common stock. Under that program, we repurchased a total of $22.3 million shares within two years for $550 million at an average price per share of $24.72. So with that, I'll now turn the call back to Helen.

Thank you, Elaine. I would like to begin by thanking the terrific Halozyme team, our partners, and collaborators for all the hard work that resulted in this very strong performance with growing revenues, growing operating income, and an expanding pipeline that's going to fuel our near and long-term growth. As mentioned on slide 12, we continue to expect multiple important value-driving events in 2021. We expect launch momentum will continue for DARZALEX SC and PHESGO with broadening adoption and use in the already launched markets and through additional global launches. We predict three additional new Phase 1 study starts, resulting in 16 products in development by the end of this year, including three products in Phase 3. In addition, we'll continue to work to create new revenue growth opportunities, seeking to sign new collaboration agreements, advance new targets into development, and seek new co-formulation patent submissions. Finally, we'll continue to seek to identify our platform technology that can add to our long-term revenue growth. With that, I would like to thank you for joining us today, and we'd now be delighted to take your questions. Operator, would you please open the call for questions?

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

Yes. Good afternoon. Thanks for taking the question. Helen and Elaine, really a great quarter. Congratulations.

Yes. Thank you, Charles.

So quick question on DARZALEX. I guess I'm going to ask you to speculate here regarding DARZALEX conversion rate. In your mind, is there any credible reason that the conversion rate couldn't be 100%? And then maybe a little bit more practically, you mentioned a commercial milestone, the second one met this year, about $50 million in revenue to you. Would you anticipate any additional commercial milestones beyond the royalties that you're earning in the next, say, 12 months from this program?

Yes. Thanks, Charles. Thanks for the question. We're obviously delighted to see the 72% conversion rate or share of sales in the United States, and we know the rest of the world is seeing some very strong performance as well. I think there's a lot of growth there, Charles. It's going to get a lot higher than 72%. There may be the occasional patient who does not want to receive subcutaneous treatment. There may be some patients who like going to the infusion suites and spending time there, but that is a tiny minority. So we do see the opportunity for continued growth well beyond the current share. I would also just point out that the overall market is also getting bigger. If you've seen, DARZALEX overall as a product is exceeding analyst expectations due to increased penetration into some of the earlier lines of therapy, with I think some pretty remarkable share growth reported by J&J. So not only is the conversion rate continuing, the overall market is growing as well. This is why we're so excited about that continued growth. We are delighted with the $50 million in milestones, and I think in the next period you're going to see more growth coming predominantly from the royalty revenue growth.

Okay. And one last question regarding Wave 3 launches. What would you like to see out of the upcoming data readout in the subcutaneous data readout mid-next year that could provide you conviction that efgartigimod could add significant value compared to the IV form, much like DARZA SC is compared to DARZA IV?

Yes. I think, obviously, the trial is designed to show non-inferiority with regard to lowering immunoglobulin levels. So, clearly that's the first parameter. But I think what we want to see is a short, simple subcutaneous injection that demonstrates that some patients or their caregivers or healthcare professionals are able to administer this without it interrupting the patient's life, allowing the patient the opportunity to go about their life without having to worry about longer IV infusions. So those are the two key aspects I would be looking for from the data.

Okay. We'll be looking forward to it. Thanks for taking the question. Great quarter.

Thank you.

Your next question comes from the line of Matthew Luchini with BMO. Your line is open.

Hi. Good afternoon. Thank you so much for taking the questions and congrats on the quarter. I guess maybe on guidance first. So you've raised the bottom end but maintained the top end. Just would like to get a little bit more perspective and color on your perspective on the business into year-end, and maybe where you see areas of potential conservatism within your outlook? Secondly, it sounds like, I think this is the first time you've mentioned cell therapy as a potential opportunity for ENHANZE. We'd love to just get a little bit more color on how you see that particular type of product fitting into the broader portfolio and how much of a priority it is relative to, say, antibodies or even small molecules. Thank you.

All right. Let me take the second part first, and then I'll ask Elaine to comment some on the guidance. With regards to cell therapy, yes, I think it's fair to say it's a minority of the conversations. We're having definitely the conversations with bispecifics and monoclonal antibodies probably the largest, followed by small molecules, and then cellular therapy. But I do think that cellular therapies are advancing more and more in the clinic. Matt, we're going to have companies come and want to discuss with us what potential benefits could be provided by ENHANZE. We're delighted with the versatility of the platform. I think that is what we're demonstrating more and more; the broad range of types of molecules that ENHANZE can work with. I would say that these discussions have certainly spurred people's imagination considering small molecules and particularly how a longer-acting therapy could improve the patient experience potentially even enhancing compliance. So we're in a very exciting phase for ENHANZE with a broader type of opportunities being discussed with us, and we look forward to hopefully translating some of those into new deals as we go forward. With that, I'll turn it over to Elaine to comment on the guidance.

Thanks, Helen. So with respect to our guidance, I think we try to be very thoughtful as we formulate that guidance. It reflects our confidence in the growth prospects of our business model as well as the strong year-to-date results. What I would remind folks is that we did raise guidance by $50 million in the second quarter, and we're pleased that, given the strong results in the third quarter, we were able to again raise guidance by increasing the lower end of the range. In terms of total revenues, recall that's an amalgamation of a number of components, some of which can fluctuate period-to-period. Product sales can fluctuate based on orders from partners as well as safety stocking levels. And we certainly saw very strong performance in the last couple of quarters in terms of increased product sales. Milestones can also fluctuate period-to-period. As Helen noted, we're very pleased to see the continued strong growth and momentum of DARZALEX Faspro, which allowed us to achieve two additional commercial milestones in the second and third quarters. But those can certainly vary in timing. Given everything in that full picture, we feel very confident in the revenue guidance, especially in particular royalties, which are the recurring component of our revenues, and they have strong growth potential as reflected in our guidance.

All right. Thank you for taking the questions.

Your next question comes from the line of Roy Buchanan with JMP Securities. Your line is open.

Hey, guys. It's actually Jason. So just a couple questions that are kind of interconnected here. As you wrapped up the share repurchase program, can you talk about your priorities for shareholder capital return? Is it another repurchase? Obviously, M&A comes into play here. So, that's a top priority. But what are the others? And as you think about M&A, to what extent are you willing to invest in R&D work? Thinking about this both from the spending and tax efficiencies but also your operating efficiencies, is there any scenario where you grow the organization, or are there opportunities for further operating efficiencies?

Yes. I'll start with the second part of the question then I'll ask Elaine to talk about the capital return. When we made the transition of the company in 2019, Jason, we said we were moving away from being a high-risk R&D organization where we're waiting for a card turnover for the results of a clinical study. That is not the type of M&A opportunity we're looking at. We're looking at platforms that are somewhat or largely de-risked where we can take our skills and license them to other types of companies. It might involve a smaller amount of additional research we do with regards that platform.. Just like with ENHANZE, there is a smaller amount involved, but we definitely do not want to go back into high R&D risk clinical development, and that is not what we plan to do. We are always very focused on running the business as profitably as possible. ENHANZE is such an attractive large business that there are certain investments we make because we see a long- and durable revenue stream. If those investments support that, then that makes sense. It's always a balance of being prudent and making sure we are investing for future growth while ensuring that every dollar is spent wisely. I'm sure you expect that from a company of our scale. I'll turn it over to Elaine just to talk about the priorities for capital return.

Thanks. As you noted, we completed our $550 million share buyback program. We did that one year early, and that aligns with our commitment to capital return and our confidence in the long-term value potential of Halozyme. What I would emphasize is that we think our ENHANZE business model, because it is capital-efficient and still early in its growth cycle, really supports a balanced capital allocation strategy that can fund both capital return as well as support internal and external growth. Regarding our future plans, it's a little premature to comment, but we would anticipate providing additional perspectives when we provide guidance early next year.

Got it. Great. Thanks for taking the questions.

Your next question comes from the line of Michael DiFiore with Desjardins. Your line is open.

Hi, guys. Congrats on the great quarter and thanks so much for taking my question. Just got two from me. Number one, just on slide number six, I was hoping you could elaborate more on the pre-phase one starts that are to be expected in Q4. So obviously, Alzheimer's is top of mind these days. Is there any updates or has there been any updated conversations on the possibility of a subcutaneous Alzheimer's partnering opportunity? Similarly, not too long ago on Argenx’s phase, they mentioned that the bullous pemphigoid of PHESGO dedication trial is going to start before the end of the year. I was wondering if that also could be part of the three phase 1s. Separately, regarding PHESGO, I realize it's still early days. Any thoughts on the uptake of PHESGO and any incremental insight into its launch compared to DARZALEX at the same point in time?

Right. So, Michael, I'll start with the three Phase 1 initiatives. Until several of them are announced, I can't provide specific information, but as I mentioned at the outset of the year, it was a goal to start one of their clinical studies with cabotegravir this year. That cabotegravir study is one of those studies. But for the other two, the partners have not made those public, so we cannot comment on them now. Likely, we will be able to talk about those sometime early in the first quarter of next year. So you'll learn what they are at that point in time. Regarding bullous pemphigoid, it is not one of the current indications that we are studying with Argenx, so that's my response to that. As for Alzheimer's, I mentioned on the last call, I believe that the amyloid-based target is still available. Therefore, we will be excited to talk with potential partners about that target. But at this point, it remains available. Did I address all your questions about the studies?

Yes. Thanks so much.

All right. Now, regarding PHESGO, it's clear that DARZALEX got off to a stronger start. It got off to an explosive start; frankly, we did not expect even that DARZALEX would achieve such a strong start, particularly in the U.S. and in advance of the permanent J-code. With PHESGO, we've seen a more traditional launch for a new monoclonal antibody drug, where there is a period for logistics to get in place in the United States and that's continuing with that trend. Outside of the U.S., where we're delighted with the progress, we’re seeing it still early in the launch rollout with only a few countries having secured reimbursement and launch. However, we're already seeing some very nice contributions outside the United States. We do predict that over time we're going to see continued growth from more countries in Europe and the rest of the world, in particular, but continued adoption in the other launch markets as well. So I'd say DARZALEX had an explosive start, while PHESGO presents a slower growth story, but we will see continued growth over the long term as it expands in terms of both countries and accounts.

Thanks so much.

Thank you.

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

Hi, good afternoon. Congrats on the quarter and thanks for taking my questions. I just have a couple here. Helen, you spoke about the 10 candidates in Phase 1 potentially reaching 13 by the end of the year. Of these, how many do you think will move into Phase 3 by 2023? We know DARZALEX has become a franchise quite a wide profile off the candidates that are in Phase 3 now. Do you have any idea if any of those have the potential to have a broad label like DARZALEX?

Okay. Let me begin by stating that with regard to the current Phase 1 studies, we are currently in active discussions with our partners to see how many are going to move into Phase 3 in 2022 and then to estimate for 2023. So I can't give you an exact number for Anita, but I would say that by 2023, my projection would be that the majority of these products, if the companies decide to move forward with them, will be in Phase 3 development. That would be the traditional timeline. The products that would be more likely to start in 2023 are the ones that have recently entered Phase 1. So that would be the general pattern we see. So expect the majority by 2023. Regarding the current Phase 3 candidates and which ones we are excited about potentially getting a broad label, I think for both Optivo and Tecentriq, the VFD at the RITUXAN HYCELA ODAC indicated that you don't necessarily need to conduct a separate study for each indication. Each partner can approach the FDA with a tailored clinical development program based on their agreement with the FDA, and that remains confidential to the partner. There's definitely a significant possibility that while our current partners are studying one indication for the solid tumors, they will secure broader solid tumor indications assuming there are no safety questions from the FDA. So we'll wait to see the data, and it will depend on the conversations the partners are having. However, I can say that efgartigimod's case is different because it's still under development. They are conducting subcutaneous studies for four separate indications, as they don’t have already approved IVs to bridge to. But what's very exciting about efgartigimod is its strong potential in the market opportunity, and it's noteworthy that Argenx has integrated subcutaneous development right from the start, with some indications like CIDP being developed solely as a subcutaneous version and not as an IV. This is a model we're excited about, and we’re discussing it with more partners about moving subcutaneous delivery forward even earlier in their pipeline, applying it more broadly. Argenx is a prime example of a company that has truly embraced ENHANZE into their portfolio.

Great. That is very helpful. I just have one more clarification. I know you mentioned the FCOR study for CIDP is the only one being developed as SC. Is there a possibility of other candidates doing the same, especially the ones that are being newly developed, to be developed subcutaneously and not follow the IV route at all?

Yes. Other partners are certainly contemplating that. The development path is slightly different when you pursue subcutaneous development right from the start. We see our partners doing a Phase 1 study to determine the dose, and then they conduct a seamless Phase 2 into Phase 3 as opposed to going straight into Phase 3, as they need to generate a more comprehensive safety data set. However, it’s similar, just with a slightly larger clinical development program if you're pursuing subcutaneous right from the start. But definitely, conversations are active with several partners today regarding this approach.

That's very helpful. Thanks, Helen.

Thanks, Anita.

Your next question comes from the line of Geoffrey Porges with SVB. Your line is open.

Hello. This is Dantargen on for Geoff. Two questions for us please. First, can you provide an update on whether any new options were exercised during the quarter besides what you mentioned for Janssen? Were any additional new contracts signed? And then second, were there any targets for which options expired, and the associated rights were returned to you? Thank you.

Yes. In terms of new options exercised, by that, I believe you're referring to new nominations being announced by partners; to my recollection, no, there were no new collaboration agreements in the third quarter. Again, we generally announce those. But we did have one option returned by a partner; that is great news because if the partner isn’t moving forward with it per our contract, we can license that to another partner who may be interested. Hopefully that gives you a sense of the flow we've seen in the last quarter.

That's helpful. Thank you very much.

Your next question comes from the line of Daniel Wolle with JPMorgan. Your line is open.

Hi. This is Daniel for Jessica Fye. Thanks for taking our question. At a high level, Helen, how should we think about the push-and-pull factors affecting the royalty revenue as we look ahead into 2022? Additionally, as you move the small molecules into the Phase 3 programs, do you expect endpoints to revolve around pharmacokinetics, or do you expect a need to demonstrate benefits on clinical endpoints?

Yes. I'll let Elaine discuss this regarding 2022. However, I should note that she may not be able to provide extensive information in advance of our guidance. Elaine, any comments on the factors affecting royalty revenue?

I would just say we'll provide more guidance when we release our guidance at the beginning of next year. As I noted in my earlier comments, there are some revenue components that can fluctuate period-to-period, such as product sales and milestones. Royalties, which are the recurring component of our revenues, include the growth drivers from our Wave 2 launch products, notably DARZALEX and increasingly PHESGO. The growth from our Wave 2 launch products is offsetting some downward pressure from the legacy products of our Wave 1 launches, notably subcutaneous Herceptin and subcutaneous Rituxan, which is facing similar competition. Clearly, the big drivers of royalties are our Wave 2 launches, and we continue to see evidence of strong growth, especially in DARZALEX and PHESGO, but more information will come early in 2022.

Thanks, Elaine. To Daniel's second question, we are still relatively early; we have only developed a few small molecules in the past. However, from our expectations, we do expect the FDA will focus on pharmacokinetics, absolutely, or to demonstrate non-inferiority if the goal is to conduct a bridging study to an already approved drug. Regarding efficacy, in most of our approved products to date, there has been some form of efficacy endpoint, such as response rate for multiple myeloma. However, in the case of PHESGO, there was no primary efficacy endpoint; efficacy was a secondary consideration. Therefore, this is a case-by-case discussion with the FDA. It will depend on the overall profile of the drug and its risk-benefit ratio. So, while some form of demonstration of efficacy is likely, it is not guaranteed.

Great. Thank you very much.

Your next question comes from Charles Duncan with Cantor Fitzgerald. Your line is open.

Yes. Hi. Thanks, Helen and Elaine, for taking the follow-up. A quick question regarding the continuation of royalty growth as a function of co-formulation patents. You mentioned that some had been filed. Do you anticipate being able to announce any of those as public or granted, say within the next two years?

Yes. The timing is not in our control. Obviously, we're thrilled that the partners filed them. It'll depend on the patent office and in part due to the partner’s strategy. While I can't give you a specific timeline, we are excited to see this progress because of the advantages this has in terms of extending the duration of royalties, while also pushing back the royalty step-down. I can't provide a timeframe, as it will vary on a product-by-product basis.

I know you probably can't disclose identities, but can you share whether any of those are on Wave 2 products?

Yes, I can't disclose that. However, I can say we have a relatively small pool of opportunities regarding this. We're excited that our partners are diligently working with us to find those moments of innovation and novelty. We feel strongly that these co-formulation patents have a good chance of being granted, and we're not finished yet. While several partners have moved forward, we continue to be very active with several others. Expect to see more co-formulation patents being submitted over time based on the novelty that can be discovered when they're co-formulated with ENHANZE.

Okay. Last quick question on a follow-up to a previous question someone asked about the beta target and Alzheimer's. First of all, I'm wondering if alpha-synuclein is available for Parkinson's disease? Secondly, when considering administering antibodies subcutaneously that must be absorbed and penetrate the CNS, do you believe you're able to, I guess, use enough ENHANZE to enable that formulation with one of those two antibody targets?

Yes. I don't think we've tested enough of these molecules to answer your question definitively. However, if the target is to take a product that is already IV and transition it to subcutaneous, we are very confident that ENHANZE can facilitate that. If you were inquiring about achieving higher concentrations into the CNS fluid, we haven't explored that area as most of our programs are primarily focused on demonstrating non-inferiority and the ability to deliver subcu. Thus, I have strong confidence that we can deliver the therapeutic dose subcutaneously. As for alpha-synuclein, I'm currently unsure if that specific target has been taken by a partner; we are in discussions with several companies concerning CNS and psychiatric targets but I cannot recall specifically if that one is available.

Okay. Very good. Thanks for taking the follow-up.

Thank you.

There are no further questions at this time. Dr. Helen Torley, I will turn the call back over to you.

Thank you, everybody. We really do appreciate your attention and your continued support. Clearly, another strong quarter of execution by the terrific team at Halozyme and our partners, and we look forward to continuing this momentum with a very exciting fourth quarter ahead of us as well. Thank you very much. We look forward to speaking to you next quarter.

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