Halozyme Therapeutics, Inc. Q1 FY2022 Earnings Call

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Halozyme First Quarter 2022 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. Don Sharlene, you may begin your conference.

Good afternoon, and welcome to our first quarter 2022 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 Nicole LaBrosse, our Chief Financial Officer, who will review our financial results for the first 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 our CEO, Helen Torley.

Thank you, Don. 2022 has begun strongly for Halozyme, both operationally and in terms of capital allocation. In April, we announced our planned acquisition of Antares Pharma, which is set to close in the second quarter. This acquisition will enhance Halozyme's leadership in drug delivery and contribute to revenue growth and diversification. Both companies share a culture focused on innovating for better patient outcomes. We are eager to strengthen our partnership with Antares and increase our positive impact on patients, customers, and shareholders. Nicole and her finance team have arranged financing for the acquisition, benefiting from a favorable debt structure. She will provide more details during her remarks as we move towards finalizing the Antares acquisition. We have shown executional excellence and met our key milestones in the first quarter. On slide 3, you can see Halozyme's strategic and capital allocation priorities, which include investing to maximize ENHANZE revenue growth, returning capital to shareholders, and pursuing M&A opportunities. We are making significant progress in all these areas. I will start by reviewing our operational performance for Q1. I'm pleased to report that our first-quarter results indicate a strong start to 2022. We achieved revenues of $117.3 million, a 32% year-over-year increase, leading to GAAP Q1 2022 earnings per share of $0.43 and non-GAAP adjusted earnings per share of $0.47. This growth was fueled by robust ENHANZE royalty revenue and a milestone payment from our 12th ENHANZE collaboration agreement with Chugai Pharmaceutical. We are also seeing strong momentum in our ENHANZE development portfolio. Moving to slide 4, we recorded quarterly royalties of $69.6 million, reflecting an 89% increase over Q1 2021 and 11% sequential growth. This growth is primarily driven by the successful global launch of Janssen's subcutaneous DARZALEX and Roche's Phesgo. Given this momentum, we anticipate continued royalty revenue growth in 2022, projecting an increase of around 50% to approximately $300 million. We are thrilled about the strong growth in this high-margin, recurring revenue stream. On slide five, I will highlight some of our key commercialized products that are contributing to this revenue. We have five partner products launched in around 100 global markets utilizing the ENHANZE drug delivery technology, estimated to have treated over 600,000 patients globally. The Wave two products—Janssen's DARZALEX Subcu and Faspro, along with Roche's Phesgo—are our current revenue growth drivers, with substantial growth opportunities ahead. I will provide more details on these shortly. For our Wave one products, Roche continues to commercialize MabThera SC, also known as Rituxan Hycela, and subcutaneous Herceptin, or Herceptin Hylecta. We expect a decline in royalties from these products due to competition from biosimilars. Now, regarding our Wave two product DARZALEX, as shown on Slide 6, Janssen's parent company, Johnson & Johnson, reported worldwide sales of DARZALEX (including IV and subcutaneous versions) of $1.856 billion in Q1 2022, marking a 40.3% year-over-year growth on an operational basis. This growth was largely driven by the subcutaneous formulation's market penetration and gaining market share across various therapies and regions. The subcutaneous share of daratumumab rose to 80% in the U.S. by the end of the first quarter, up from 76% in December 2021. Regarding our second Wave two product, Roche reported that Phesgo is helping drive growth by offering a new delivery option that reduces the overall administration and monitoring time for patients from two to eight hours to merely 20 to 40 minutes. Sales for Phesgo in the quarter reached CHF146 million, reflecting a 410% increase from the previous year. We expect Phesgo to continue its robust quarter-over-quarter growth due to ongoing launches in Europe and other regions as reimbursement policies evolve and its presence in U.S. oncology accounts expands. On slide seven, we illustrate the projected growth of non-risk adjusted royalty revenues over time, driven by several new launches that will add to the revenue from our existing Wave one and two products. These new potential launches form Waves three, four, and five. The Wave three products are in completed Phase III studies, while Wave four consists of 11 products that are currently in Phase 3 and 4. This includes the recent announcement from Argenx regarding their pivotal study of subcutaneous Efgartigimod in Generalized Myasthenia Gravis, which has met its primary endpoint, as well as Roche initiating a Phase III study of a subcutaneous product with ENHANZE and starting a second Phase I study evaluating ENHANZE with N6LS for HIV treatment and prevention. Each of these developments is paving the way for new royalty revenues. Now, let me provide more details on Efgartigimod. The IV version was approved by the FDA in December 2021 for adult patients with Generalized Myasthenia Gravis. Recently, Argenx announced positive results from its Phase 3 ADVANCE study for Efgartigimod IV in adult patients with idiopathic thrombocytopenic purpura. We congratulate them on this significant achievement. Slide 8 summarizes the results of the ADAPT-SC study evaluating Efgartigimod with ENHANZE for Myasthenia Gravis, which is the most advanced of five indications being explored for subcutaneous administration with ENHANZE. The study successfully met its primary endpoint, showing that subcutaneous Efgartigimod achieves a comparable reduction in total IgG levels at day 29 compared to the IV version. As a result, Argenx plans to submit a biologic license application to the FDA by the end of 2022. The subcutaneous version of Efgartigimod is on track to be the first launch in our Wave 3, with projections for approval in 2023. Now turning to Slide 9, I want to discuss the ENHANZE development portfolio. Our goal is to continually expand the number of products in development and to advance them to later stages, as this can often lead to milestone payments for Halozyme. Currently, we have four products in Phase 3 development, including Argenx's Efgartigimod for various indications, BMS's nivolumab, Roche's atezolizumab, and I am happy to report that Roche has initiated the Phase 3 study for subcutaneous Ocrevus. We consider Efgartigimod, nivolumab, and atezolizumab as our Wave 3 launch products anticipated between 2023 and 2025, while Ocrevus falls under Wave 4, with a potential launch timeframe from 2025 to 2027. Analysts predict that the revenue potential for these IV and subcutaneous formulations could exceed $20 billion by 2025. A crucial factor for Halozyme will be the pace of transition from IV to subcutaneous administration and the peak share achieved. On the top of the slide, we list the 11 products currently in or having completed Phase 1 clinical testing. I am also pleased to share that our partner ViiV has begun a Phase 1 study examining the safety and pharmacokinetics of N6LS, administered subcutaneously using ENHANZE technology. This product, N6LS, is a broadly neutralizing antibody for HIV treatment and prevention. These Phase 1 candidates will also be positioned for Wave 4 potential launches. Additionally, we have several already commercialized and successful drugs encompassing a range of therapeutic areas and diseases. Looking ahead to 2022, we expect further progress and expansion in our pipeline, aiming for at least five new Phase 2 or Phase 3 trials for existing ENHANZE partner programs and four new products entering clinical development this year. Moving to Slide 10, in our pursuit of long-term growth, I am excited to announce a new collaboration and licensing agreement with Chugai Pharmaceutical R-12, which further bolsters our royalty business and reinforces Halozyme as a preferred partner for patient-friendly subcutaneous drug delivery. Based on historical timelines for ENHANZE products, a product entering development in 2023 has the potential to launch post-2027, enhancing our revenue pipeline as part of Wave 5. On Slide 11, our pipeline developments and new agreements have historically driven strong milestone revenues for Halozyme, and we anticipate this trend will continue, significantly contributing to our capital allocation strategy. We have either met or are on schedule to meet our previous three-year milestone revenue guidance. For the 2022 to 2024 period, we expect to achieve milestone revenues of $450 million to $500 million from a combination of development, commercial, and new agreement milestones. Finally, I want to discuss the Antares acquisition. A month ago, we announced our plan to acquire Antares Pharma, whose business includes a differentiated royalty-generating auto-injector platform that presents new licensing opportunities and a growing commercial portfolio with three proprietary products. This acquisition aligns perfectly with our stated capital allocation priorities for 2022, which involve investing to maximize ENHANZE revenue growth, returning capital to shareholders through buybacks, and acquiring platform technology that creates additional value and extends our revenue sustainability. Antares meets all our criteria for business development and is expected to enhance Halozyme's revenue and earnings in 2022 while accelerating growth through 2027 and beyond. We plan to leverage Antares' core auto-injector technology to generate incremental, sustainable revenue opportunities, supported by intellectual property protections extending beyond 2030. After 2027, Antares is anticipated to contribute additional growth drivers through its expanding portfolio, partner revenues, and collaborations endorsing subcutaneous administration for small and large molecules. Moving on to Slide 13, the combined company will enhance our leadership as the partner of choice for patient-friendly subcutaneous treatment delivery. We believe Antares' auto-injector technology complements our ENHANZE platform, enabling larger volumes of certain drugs to be injected subcutaneously or facilitating quicker injections. The successful development and partnership of this platform will provide a very licensable suite of products applicable across various market segments. We are enthusiastic about welcoming the Antares team to Halozyme and using our combined expertise to uncover new subcutaneous drug delivery opportunities that can benefit patients around the world. Now, I'll hand the call over to Nicole to discuss our first-quarter financial results.

Thank you, Helen. I'll start on Slide 14, where I'll focus on some highlights from our first quarter results. Total revenue for the first quarter was $117.3 million compared to $89 million in the prior year period. The year-over-year increase of 32% was primarily driven by an increase in royalty revenue, partially offset by a modest decrease in revenue under collaborative agreements. Royalty revenue for the quarter was $69.6 million, an increase of 89% compared to $36.9 million in the prior year period. This was driven primarily by the continued strong uptake of Janssen's subcutaneous DARZALEX utilizing ENHANZE. Cost of product sales for the first quarter was $15.9 million compared to $18.2 million in the prior year period. The year-over-year decrease despite an increase in product sales was primarily driven by the timing of manufacturing overhead costs in the prior year. Operating income was $75.7 million compared to $50.7 million in the prior year period. The year-over-year increase of 49% is driven by growth of recurring royalties in our leverageable business model, which allows us to grow revenue with minimal investments in operating expenses. On a GAAP basis, diluted earnings per share was $0.43 compared with $0.19 in the prior year period. On a non-GAAP basis, diluted earnings per share was $0.47 compared with $0.37 in the prior year period. When comparing to the prior year, it's important to note that the first quarter of 2022 is our first period recording income tax expense, representing $0.10 per share. Now, let me turn to slide 15 for a review of our 2022 financial guidance, which is Halozyme's stand-alone guidance. This guidance remains unchanged from what we provided at the beginning of the year and does not include any contribution from Antares. We plan to provide updated guidance including Antares at a quarterly call after the transaction closes and the two companies are combined. For the full year 2022, we continue to expect total revenues of $530 million to $560 million, representing growth of 20% to 26% over 2021 total revenue. In terms of the components of our revenue, we expect revenue from royalties to increase approximately 50% over revenues from royalties in 2021 to approximately $300 million. Product sales and collaborative revenues in total for 2022 are expected to be at similar levels to what we achieved in 2021 with API being balanced throughout the year and milestones substantially more weighted in the second half of the year based on our expected timing for partner milestone-bearing events. We expect operating income of $350 million to $380 million, representing growth of 27% to 38% over 2021 operating income. This includes an incremental $20 million operating expense investment to maximize ENHANCE and extend royalty revenue durability. Even with this important investment, we expect operating margins of greater than 65%. Moving now to slide 16 and a summary of our capital allocation priorities. We have been consistent regarding our balanced capital allocation priorities, which put us in an advantageous position to acquire Antares using a mix of cash and debt, while remaining committed to our plans of capital return to shareholders. Our balance sheet remains strong with cash, cash equivalents, and marketable securities of $786.1 million on March 31, 2022, compared to $740.9 million on December 31, 2021, further strengthening our financial position as we prepare to close the Antares transaction. We are able to access low-cost pro rata bank debt to finance the transaction and are pleased with the demand in the market and favorable terms of this non-diluted financing. As we stated, we expect to maintain a strong balance sheet with approximately 3.3 times net debt-to-EBITDA ratio at the projected time of close, with a significant decline expected in the quarters following the close. While we will maintain a focus on deleveraging, we will also continue to execute on our previously announced three-year $750 million share repurchase program, inclusive of $150 million accelerated share repurchase program initiated in December 2021. We continue to plan for up to an additional $100 million in share repurchases in 2022, dependent on market conditions and other factors. With that, I'll now turn the call back to Helen.

Thank you, Nicole. I'd like to close by thanking our Halozyme team, our partners, and all of our collaborators for the hard work that resulted in the strong performance this quarter. In 2022, we will continue to deliver growing revenues, growing operating income, and expanding our pipeline resulting in both strong near-term and long-term growth. I'd like to thank everyone for joining us today. And with that, we'd now be delighted to take your questions. Operator, please would you open the call for questions?

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

Okay. Good afternoon, Helen and Nicole. Thanks for taking my questions, and congratulations on a good quarter of progress.

Thank you.

I have a couple of questions. One is about DARZALEX SC. I believe you mentioned that there is now an 80% conversion to the SC version, which is higher than we expected. What do you think the potential is for that to increase, and why might someone choose not to switch to the SC version?

Sure. Thanks, Charles, for that. So, yes, we did indeed find that at the end of the first quarter in the United States, the conversion was about 80% share. Now, we do think that will go higher. And to be very specific about the reasons why people wouldn't convert, there are a small number of patients we hear about anecdotally who may have needle phobia or may be comfortable being in the infusion suite, because of the social aspect of that. But I would say we do see the opportunity to continually grow share in the United States, and importantly, outside the U.S. as well. Janssen has not provided any update on that since the middle of last year when we knew it was lagging the U.S. a bit. So expect continued growth throughout this year as we had projected. It's going to be driven by continued share gains outside the U.S., but also the U.S. as well. And I'll just comment that we're very pleased to see the overall growth of the brand, Charles, because a, if you recall what we talked about in January we've got the overall brand growing as well as SC share growing, which is why we get such confidence and conviction in the continued growth for some time to come.

Okay. That's helpful. And then, I wanted to ask you, Helen, regarding Wave 3. I'm particularly interested in Efgartigimod and in Generalized Myasthenia Gravis. Congrats on the recent data there. But I guess, I'm wondering if you could share with us your perspective of the value proposition, especially as it may relate to the potential pace and ultimate peak of conversion for that drug from the IV?

Yeah. So absolutely, we were very pleased as we said in the prepared remarks to see the positive data for subcu Efgartigimod. Importantly, for anyone who was listening, Argenx also reported that the launch of the IV is off to a very strong start. This obviously is a new mechanism of action offering new hope for patients. So, all very good to see the IV taking off well, and the subcu data is expected to be filed by the end of this year, so we're looking at a 2023 launch. And in terms of the value proposition for patients, the SC does offer the opportunity for a quick, non-complex subcutaneous injection as opposed to a more lengthy IV. We do know based on Argenx' comments in their clinical studies for patients who received both IV and subcu, 70% of patients expressed a preference for the subcu. There are many dynamics that are going to be similar to what we observed with DARZALEX. We see a company that is very motivated to have high success in the market and what is going to be a growingly competitive environment. This is such a strong value proposition for patients. So, we don't give specific guidance as to what we think the conversion rate is, but everything does support the unmet need, and the excitement of patients to be using a subcu in Generalized Myasthenia Gravis and specifically Efgartigimod given the convenience of the once-weekly regimen.

Very good. Could be a neurology game changer. Thanks for taking my questions.

Thank you.

Your next question comes from the line of Mike DiFiore with Evercore. Your line is now open.

Hi, guys. Thanks so much for taking my questions. Two for me. One on Phesgo ex-US launch of Phesgo, if you could provide more color on the actual cadence of EU reimbursement will it be lumpy throughout the rest of the year or evenly distributed? And also, if there's any additional gating factors in the US for continued growth? And I have a follow-up.

All right. For the ex-US launches, Mike, as I'm sure you may be hearing from other companies, while it used to be that you could consider that the top five or six companies would all get reimbursement within 12 months, we do know that is sometimes ticking up to 24 months. Roche has not provided specific comments on that, but we can say that we know that some of the traditionally larger European markets have not yet launched. And so that is taking up to two years. That is why we're excited about the continued growth in Europe, strong performance so far, but with some of the more traditional major markets yet to come. For the United States, we predict continued penetration into accounts and new accounts coming on board. This is a question of them gradually growing throughout the year and adding to the quarter-on-quarter growth that we have projected for the year.

Okay. Very helpful. Thank you. And my final question is regarding the Antares acquisition. You may not be able to comment on this, but I'm not sure if this was commented on during the actual acquisition – the deal call, but Antares has some three very early assets 1901, 1902, and 1903. Do you guys intend to develop those and then thereby incurring more R&D expense, or will those be something that you divest? Any color along those lines would be helpful?

Yeah. Thank you. And Mike, what I will say is I'm very pleased with the progress we're making on our integration. Obviously, before the acquisition, we did diligence. We're continuing in integration work streams, and the R&D program is certainly an area where we are digging in and seeking to understand. No decisions have been made on that and we look forward to continuing to work with Antares colleagues post-close on really making sure we have a full understanding. I will say one differentiation here is the R&D expense. These programs tend to follow ANDA or 505(b)(2) pathways, which are a lot less costly and a lot faster than traditional drug development. That is something we're very much going to be taking into consideration as we look at each of these opportunities, and look at the potential return for investment that would exist with these areas, each of which is in an interesting area of unmet need but no decisions as yet.

Great. Thank you very much. Very helpful.

Thank you.

Your next question comes from the line of Corinne Jenkins with Goldman Sachs. Your line is now open.

Good afternoon everybody. So obviously the FASPRO conversion has been quite high, and I think probably surprised a lot of people for the upside. But as we think about the next launch with Efgartigimod, what are some of the factors that we should keep in mind when thinking about potential conversion there? And what has your market research revealed about the appetite to use the subcutaneous injection in that market versus some of the others we've seen you bring the ENHANZE co-formulation products to bear?

Yeah. Thank you. I'll refer back to comments I made earlier in the year where we see a lot of similarities between the Efgartigimod opportunity and the DARZALEX opportunity. Specifically, we think some of the drivers of DARZALEX that are present with Efgartigimod are C4, C5, and also FcRn products. So having a winning strategy with the most convenient therapy possible is going to be a very important factor. Corinne, we haven't done any detailed market research ourselves, but we can cite comments that Argenx has made on the calls to say that in their clinical studies where patients received both IV and subcu, 70% of patients expressed a preference for the subcu after receiving both forms of therapy. All of these factors and the fact that the treatment is happening in immunologist offices, rheumatologist offices who are not set up necessarily for IV therapy, speaks very well to a robust uptake. I'll just finish on the patients. You can imagine for a patient with chronic disease, the ability to have a simple short subcu injection delivered versus long IV infusions, et cetera, supports a strong winning patient preference.

Thank you for the information. Could you clarify the remaining steps needed to finalize the Antares acquisition? I believe you mentioned it would likely be completed in the first half of this year.

Yes. This perhaps includes the tender offer at completion and also the regulatory reviews, Corinne. Everything is progressing at this point in time. Based on the completion of the conditions as well as regulatory reviews, the earliest time the transaction could close would be 2024, but we've got to wait for those two areas I just mentioned to be satisfactorily completed before we can close.

Thank you.

Your next question comes from the line of Jessica Fye with JPM Chase. Your line is now open.

Hey guys, good afternoon. Thanks for taking my questions. Could subcu Efgartigimod be a candidate for auto-injector delivery and how much work would be required if so? What about for the HIV drugs with Janssen and ViiV? And then lastly following the Antares close, recognizing that you've kind of provided some commentary about share repo this year, thinking in '23 and beyond how will you prioritize paying down debt after the acquisition versus returning cash to shareholders via share repo?

Let me take the auto-injector questions, and then I'll pass it to Nicole for the question on paying down of the debt. Yes, we obviously once the transaction is closed do plan to engage with all of our partners to take a look at their portfolios to see if there might be a match for the auto-injector. The most important thing will be the volume of injection. Immediately upon the close, we would have access to a one ml and a 2.25 ml auto-injector. But as we stated when we announced the transaction, we're very excited about the potential to be developing a 5 ml auto-injector. It's premature to comment specifically on any products that are currently in the portfolio, but we certainly in doing this transaction see the opportunity for both biologics and for small molecules that can be delivered in a volume of up to 5 ml. There is a lot of opportunity out there, we believe.

I'm happy to cover your second question, Jessica. So in regards to our capital allocation priorities, they do remain unchanged. We project availability to continue on all of our objectives here, and we are projecting to be able to address both our share repurchase plans, which are inclusive of the three-year plan that we announced at the end of last year to purchase $750 million, of which $115 million is in progress via an ASR at the moment, but we are still on track with those plans. Additionally, we mentioned that we do plan to quickly deleverage the debt we're taking for the Antares acquisition in the coming quarters, just again driven by our really strong cash flow projections.

Great. Thank you.

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

Hi, good afternoon. Thanks for taking my question. Helen, can I ask you about the guidance? You've provided now, obviously it does not include the assets from Antares, but post-closing in the first half, would that be updated towards the second half of the year?

Yes, we plan to provide an update on guidance after the close at the next earnings call.

Okay. Great. And also regarding your partnerships, I mean historically, HALO has signed on one partnership at least annually with the pharma players. So, going forward, would there be a preference towards signing partnerships using ENHANZE or auto-injector or do you remain kind of agnostic?

It's a great question, and I do think what is exciting for us now is that we have the opportunity. I see three buckets and segments that we're going to seek to address post-close. That would be ENHANZE only, auto-injector only small volume, and ENHANZE plus auto-injector probably the 2.25 and 5 ml. That really is how we're looking at the opportunity as we assess Antares. So we see all three areas where Halozyme has the potential to create new deals.

Great. Thank you.

Your last question today comes from the line of Jason Butler with JMP Securities. Your line is now open.

Hi, it's Roy in for Jason. Thanks for taking our questions. I had a few on the 5 ml. I guess how straightforward do you think it will be? And what remains gating to get the auto-injectors to 5 ml? And based on your preliminary work, what do you think the timelines are to get that option available? And is that going to be generally compatible with the high viscosity formulations? Thanks.

Yes. Thanks, Roy, all great questions and work that is still a little premature for me to be able to comment specifically, but we do expect that we will be able to deliver a range of viscosity. That's a very important consideration for us. We've seen some feasibility testing regarding this. But in terms of a specific timeline, we want to spend a bit more time with the Antares team after the close to build out those plans. This is going to be a priority for us moving forward and I'm very excited about what we've seen so far. The great Antares technology, which we do think will work together with the ENHANZE, will provide a unique offering in the marketplace to be able to deliver a large volume like 5 ml subcutaneously.

Got it. Very good. Thanks.

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

Lovely. Thank you very much. We thank everybody for joining us today and for your attention and support. Obviously, we're off to a very strong start in Q1. We look forward to the close of the Antares transaction and being able to provide you with further updates on our Q2 call later this year. Thank you very much, everybody. Goodbye.

This concludes today's conference call. You may now disconnect.