Halozyme Therapeutics, Inc. Q1 FY2023 Earnings Call

Good afternoon, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Halozyme First Quarter 2023 Financial and Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Please note this event is being recorded. I'll now turn the call over to Tram Bui, Halozyme's Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator. Good afternoon and welcome to our First Quarter 2023 Financial and Operating Results Conference Call. In addition to the press release issued today after the market 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, will review our financial results for the first quarter of 2023. On today's call, we will be making forward-looking statements as outlined on slide two. I would also refer you to our SEC filings for a full list of risks and uncertainties. During the call, both GAAP and non-GAAP financial measures will be discussed. Certain non-GAAP or adjusted financial measures are reconciled with the comparable GAAP financial measures in our earnings press release and slide presentation. I will now turn the call over to Helen Torley.

Thank you, Tram, and good afternoon, everyone. Let me begin on slide three. Halozyme is a leading drug delivery platform company with a diversified and robust business, which includes our ENHANZE royalty business, our auto-injector technology business, and a specialty commercial portfolio. I'm pleased to report that we executed our plan for the first quarter of 2023, achieving total revenue of $162 million, a 38% increase year-over-year. This performance sets us up well for the year, and we expect strong quarter-over-quarter revenue growth throughout 2023 that will result in another record revenue year. Turning now to slide four. I'm delighted with the momentum of our drug delivery business. Halozyme has established our leadership in rapid subcutaneous drug delivery of ENHANZE and more recently with our differentiated auto injectors. Our partners are making strong progress with their commercialization and development activities that are expected to result in strong and durable long-term growth. Drivers of this growth include the potential approval of efgartigimod subcutaneous and atezolizumab subcutaneous this year that will bring our approved products generating royalties from five products to seven products. Two additional blockbuster drugs OCREVUS subcutaneous and Vivo subcutaneous are continuing Phase 3 development with the potential for launch by 2025. An additional two products, amivantamab subcutaneous and relatlimab/nivolumab subcutaneous fixed-dose combination, are also continuing Phase 3 clinical testing, the final phase before potential launch and royalty generation with the potential to launch between 2025 and 2027. It is our goal to add to our already robust pipeline by adding three new agreements this year for ENHANZE, ENHANZE plus our high-volume auto injector, and a small-volume auto injector agreement. Turning to slide five, let me spend a moment on why so many partners are focused on and excited about subcutaneous drug delivery with ENHANZE. ENHANZE, when co-formulated with our partner products, has demonstrated an ability to differentiate the subcutaneous product from intravenous delivery. Subcutaneous delivery decreases treatment times and treatment burdens for patients, resulting in an improved patient experience with patients stating a strong preference for subcutaneous in surveys. There may also be, as we saw in the case of DARZALEX subcutaneous, a lower rate of infusion-related reactions. This can translate into considerable advantages for the healthcare system, including less use of more costly hospitals and infusion centers, and less use of healthcare practitioner time, a growing consideration in all regions of the world. Moving now to slide six, I'll provide an overview of our ENHANZE pipeline. We describe this in terms of waves, with Waves 1 and 2 being the already launched products. Wave 3 products are those that have the potential to launch between 2023 and 2025. Wave 4 products are those with the potential for launch between 2025 and 2027. I'll go into more detail on Waves 2, 3, and 4 in a moment. But before I do so, let me highlight an exciting event for one of our Wave 1 products. Takeda received FDA approval for an expanded indication for HYQVIA to treat primary immunodeficiency in children. HYQVIA is now available to a broader community impacted by primary immunodeficiency who may prefer flexible treatment options in the management of these disorders. Having the key value driver for our partners and our extensive development pipeline supports our expectations for royalty revenues to reach approximately $1 billion in 2027 with potential for growth beyond that. This projected growth is driven by new launches and the expected impact of co-formulation patents. Let me now move to slide seven for an overview of our royalty revenues. We project $445 million to $455 million in royalty revenue in 2023, representing 23% to 26% growth over 2022. Quarterly royalty revenue increased 43% year-over-year to $99.6 million, and we project strong quarter-on-quarter growth throughout 2023. Five partner products using ENHANZE drug delivery technology and commercialized in approximately 100 global markets are contributing to royalty revenue growth to date, with DARZALEX subcutaneous and Phesgo as Wave 2 products being the key growth drivers. We project the approval of efgartigimod subcutaneous and Tecentriq subcutaneous in the United States in 2023. However, we've seen virtually no royalty revenues in 2023 from these products due to launch timing and the standard time it takes for physicians to be confident regarding reimbursement. Also included in our royalty revenue is revenue from our small-volume auto-injector business, which remains stable and is largely driven by Teva's generic EpiPen. Moving now to slide eight, I'll provide more details on DARZALEX. Janssen's DARZALEX continues its amazing growth story, growing approximately 26% year-over-year on an operational basis in the first quarter 2023 to approximately $2.3 billion. This increase was driven by share gains in all regions, continued growth of the market, and strong adoption of DARZALEX FASPRO, the subcutaneous formulation with ENHANZE. Johnson & Johnson expects DARZALEX to continue to grow in the first-line setting. Analysts are now projecting annual DARZALEX sales to reach $16.5 billion in 2028. DARZALEX subcutaneous is a globally established choice for physicians using DARZALEX for myeloma patients, with a share of 88% in the United States, and as last reported by Janssen, now exceeding 80% outside the United States. The key metric we now track is the overall brand performance, which is driven by the subcutaneous formulation. DARZALEX subcutaneous is a key growth driver of our royalty revenues in 2023 and will continue to contribute meaningfully until at least 2030. Turning now to Roche's Phesgo on slide nine. Phesgo is a combination of Perjeta and Herceptin for subcutaneous injection for patients with early and metastatic HER-2 positive breast cancer. This allows for a single five to eight-minute subcutaneous treatment compared with a lengthier intravenous treatment schedule. Roche recently reported that 85% of patients preferred Phesgo subcutaneous administration over the intravenous formulation of Perjeta and Herceptin. Over the first quarter of 2023, Roche reported Phesgo sales of approximately CHF240 million, an increase of 72% year-over-year. In the initial 30 launch countries, Phesgo's share is now 35%, exceeding 40% outside the United States with the US and Germany approaching 20%. Roche, with their focus on patients, is a pioneer and clearly recognizes the benefits of subcutaneous drug delivery for patients and for the healthcare system overall. We project continued growth from Phesgo in 2023 and beyond. Roche is also developing a path for patient self-administration of Phesgo with an on-body injector and expects pivotal Phase 1 data from this program in the second half of the year. Next up are our Wave 3 products, which are shown on slide 10. These products represent the next set of royalty revenue opportunities for Halozyme, with potential launches projected between 2023 and 2025. The Wave 3 products are subcutaneous efgartigimod, atezolizumab, nivolumab, and ocrelizumab, all of which are proven at least one indication as an intravenous formulation. This gives us confidence in the likelihood of approval for ENHANZE enabled subcutaneous versions of these products. I will summarize the key advancements and events occurring this year with this exciting portfolio, where analysts project total sales, including intravenous and subcutaneous, to approximately $35 billion in 2028. Argenx's subcutaneous efgartigimod for generalized myasthenia gravis has an FDA PDUFA date of June 20, 2023. Argenx has also submitted a marketing authorization application to the European Medical Agency. Analysts predict potential total efgartigimod annual revenue of approximately $7 billion in 2028. The launch of the intravenous formulation is progressing well with a reported $401 million in 2022 and growth of 25% quarter-over-quarter to $218 million in the first quarter of this year. We are excited that subcutaneous efgartigimod has the potential to be the first of our Wave 3 partner launches with US approval and commercial launch projected for mid-year 2023. On their recent quarterly call, Argenx's management commented on the importance of gaining traction in early line patients for the continued trajectory and that the subcutaneous approval may help achieve this. Argenx projects multiple data readouts in 2023, including data in chronic inflammatory demyelinating polyneuropathy scheduled for July 2023. Two additional Phase 3 data readouts are projected for the fourth quarter of 2023 in two additional serious autoimmune conditions, idiopathic thrombocytopenia purpura and pemphigus. I'll move now to Roche. At the beginning of the year, Roche announced their BLA to the FDA for subcutaneous atezolizumab with ENHANZE, which was accepted with a PDUFA date of September 15, 2023. Subcutaneous atezolizumab has the potential to offer greater convenience for patients and physicians with an approximately seven-minute subcutaneous administration time compared to 30 to 60 minutes for intravenous treatment. Roche believes this represents a significant advancement for patients, the healthcare system where resources are constrained, as well as for payers. In the first quarter of 2023, Roche reported IV Tecentriq revenues of CHF920 million, an increase of 15% year-over-year, driven by higher demand in the US and in Europe. Roche also reported first quarter 2023 revenues of CHF1.6 billion for OCREVUS, which represents an increase of 14% year-over-year and annualizes at over $7 billion. OCREVUS is our third Wave 3 opportunity. With more than 300,000 patients treated globally, OCREVUS remains the number one treatment in the US and EU5, both in terms of total share and new-to-brand share, with a higher retention rate than other therapies for multiple sclerosis. The goal with subcutaneous OCREVUS is to significantly shorten the treatment and observation time compared to the intravenous formulation, where the intravenous currently takes 3.5 hours to 6 hours. With the data readout for the Phase 3 trial of subcutaneous ocrelizumab with ENHANZE expected later this year, subcutaneous delivery could lower the target total administration and observation time for the first and second dose to one hour and to just 10 minutes for administration and observation for each subsequent dose. Roche is excited that the subcutaneous data will provide an opportunity to expand the market and provide access to patients for whom intravenous dosing is not viable. Moving now to our fourth Wave 3 product, nivolumab. Bristol Myers Squibb reported OPDIVO intravenous sales of $2.2 billion in the first quarter of 2023, an increase of 15% year-over-year or 17% excluding foreign exchange. BMS believes that subcutaneous delivery of the drug is a step forward, and they are progressing with their Phase 3 registration study of subcutaneous nivolumab utilizing ENHANZE in patients with renal cell carcinoma. Our Wave 3 products represent substantial de-risked near-term new royalty revenue opportunities for Halozyme, driven by two potential approvals this year and the Phase 3 readout of subcutaneous ocrelizumab. The opportunity represented here in terms of analyst projections for total product sales is approximately $35 billion in 2028, significantly higher than the opportunity for our Wave 2 products that are driving our strong royalty revenue growth to date. Moving to Slide 11, I'll review our Wave 4 partner product development pipeline with ENHANZE. Our longer-term growth trajectory is further supported by these Wave 4 products with potential launches in the 2025 through 2027 timeframe. Wave 4 comprises 10 partner products, two of which are in Phase 3, while the remaining eight are in ongoing Phase 1 clinical testing or have completed Phase 1. In 2023 and beyond, our goal is to continue to expand the number of products in development and to advance products through development to regulatory approval and launch, adding multiple new royalty revenue streams. The two most advanced products are Janssen's subcutaneous amivantamab and BMS' fixed-dose combination of nivolumab plus relatlimab with ENHANZE. Both are already approved and showing strong growth as intravenous treatments and are in Phase 3 clinical testing as subcutaneous versions. Janssen initiated their Phase 3 study of lazertinib plus amivantamab with ENHANZE in 2022 in patients with EGFR-mutant advanced or metastatic non-small cell lung cancer. Recently, BMS also initiated the Phase 3 study, RELATIVITY-127, with the goal of demonstrating that drug exposure level of nivolumab plus relatlimab fixed-dose combination with ENHANZE is not inferior to intravenous administration of the same combination with this study being done in patients with previously untreated metastatic or unresectable melanoma. Other notable programs in our Wave 4 pipeline include a focus on innovation for HIV. ViiV's cabotegravir and Janssen's rilpivirine, both already approved as intramuscular and oral delivery, are in Phase 1 development as subcutaneous drugs with ENHANZE. ViiV has stated their goal with subcutaneous delivery is to extend the dosing interval further, thereby reducing the burden of treatment for patients. ViiV is also in Phase 1 development with N6LS, a development stage broadly neutralizing antibody for HIV. I'll move now to our new growth opportunities. We remain highly engaged with new partnership discussions for ENHANZE and our auto-injectors. I'm excited that the funnel of discussions is at an all-time high, driven by high interest in subcutaneous drug delivery. While the timing is always difficult to predict, we are confident that we will achieve our goals for 2023 for one new ENHANZE deal, one new ENHANZE plus high-volume auto-injector deal, and one new small-volume auto-injector deal. We are experiencing strong interest in learning more about our high-volume auto-injector for rapid delivery of up to 10 mL, which is enabled by ENHANZE. This approach will offer a truly differentiated opportunity for patient-friendly, high-volume subcutaneous delivery that can be utilized across the spectrum of disease areas for both small molecule drugs and biologics. We have a working prototype ready for clinical testing and expect to initiate and complete human feasibility studies by mid-year. We look forward to signing an agreement with a current or new partner to collaborate on the custom development and are tracking nicely towards this goal. I'll turn now to our commercial portfolio, which includes XYOSTED and TLANDO and are shown on slide 12. XYOSTED is a weekly, virtually painless subcutaneous testosterone replacement treatment, which is patient-delivered by auto-injector. Our growth strategy remains focused on converting patients from intramuscular injections, the most common treatment approach to date. In the quarter, we saw strong growth of XYOSTED physician demand, achieving new weekly high average prescription performance every month. We successfully navigated the first quarter resetting of the high deductible for commercial patients through our copay card program, helping to ensure affordability was not a barrier for starting or staying on XYOSTED. Sales to wholesalers slightly lagged demand in the quarter as a result of the change in our 3PL distribution channel. Our goal remains to achieve approximately $100 million in XYOSTED revenue in 2023, representing a 20% increase from the run rate following the acquisition. We're also still focused on gaining access for TLANDO, our oral testosterone treatment. To date, we have not yet reached an agreement with pharmacy benefit managers on an appropriate rebate rate. Until access is established, we are projecting no revenues for TLANDO in 2023. Before I hand the call over to Nicole, let me reiterate our commitment to our strategic growth and capital allocation priorities, which is shown on slide 13. We are committed to maximizing our revenue growth and durability to create long-term value for all of our stakeholders. We're investing strategically in ENHANZE and our auto-injector technology while continuing to return capital to shareholders with our share buyback plan. We've completed $500 million of the $750 million three-year share buyback program, which was approved by the Board of Directors in December of 2021, and this includes $150 million of share buybacks completed in the first quarter of 2023. We're also actively evaluating M&A opportunities, focusing on additional platforms or companies with de-risked assets or platforms, or technologies where we see the opportunity for significant revenue growth and durability. I'll now turn the call over to Nicole to discuss our financial results for the first quarter of 2023.

Thank you, Helen. The first quarter of 2023 is on track with our plans and supports our strong financial performance expectations for the full year. As Helen mentioned, we remain committed to our capital allocation strategy. Regarding our share buyback program, we are pleased that within the first quarter, we maximized our repurchase opportunity and completed the full $150 million plan for the year, resulting in the repurchase of 4.2 million shares at an average price per share of $36.01. Our share buyback programs have resulted in the repurchase of 34.8 million shares since 2019, contributing $0.09 to non-GAAP earnings per share in the first quarter. Our cash, cash equivalents, and marketable securities were $275.6 million as of March 31, 2023, compared to $362.8 million on December 31, 2022, due to our Q1 share repurchases. Our balance sheet remained strong with projected cash generation and EBITDA growth in 2023. Our net debt to EBITDA ratio is 3.2 as of March 31, 2023, which is expected to be less than three by the end of the year. While we have completed our share repurchases allocated for the year, we will continuously evaluate our future use of capital and monitor market conditions and other factors while also preserving capital to fund revenue growth and durability via M&A. I'll now move to slide 14 for our detailed financial results for the first quarter of 2023. Revenue for the first quarter was $162 million compared to $117.3 million for the first quarter of 2022. The 38% year-over-year increase was driven by an increase in royalty revenue, primarily attributable to subcutaneous DARZALEX and the addition of product sales as a result of the Antares Pharma acquisition. Royalty revenue for the quarter was $99.6 million, an increase of 43% compared to $69.6 million in the prior year period. I mentioned that royalty revenue for the quarter saw a small sequential decline of 6% from $106 million in the fourth quarter of 2022. This is due to the expected impact of changes in foreign exchange rates, annual royalty rate tiers, and EpiPen seasonality. Some of our contracts include tiered royalties that escalate annually as volumes build over the course of the year. The threshold for increased rates was exceeded in Q1, and therefore the increased rates will apply for the remainder of the year. Amortization of intangibles was $17.8 million in the first quarter due to the acquisition in which Halozyme acquired intangible assets that are amortized over the useful life related to the auto-injector technology platform XYOSTED and TLANDO. We project amortization of intangibles to be similar for each quarter in 2023. Research and development expenses for the first quarter were $18 million compared to $11.9 million in the first quarter of 2022, primarily due to an increase in compensation expense related to the ongoing combined larger workforce to support the device platform in regulatory, quality, and manufacturing as well as planned investments in ENHANZE. SG&A expenses were $37.4 million compared to $13.8 million for the first quarter of 2022, primarily due to an increase in compensation expenses related to the ongoing combined larger workforce, including the addition of commercial resources in sales and marketing for our testosterone replacement therapy products. EBITDA in the quarter was $74.3 million compared to $76.4 million in the first quarter of 2022. A year-over-year comparison reflects a $25 million milestone payment in the first quarter of 2022, which did not repeat in the first quarter of 2023, as well as the impact of year-over-year increases in operating expenses. GAAP diluted earnings per share were $0.29 in the first quarter and non-GAAP diluted earnings per share were $0.47. Turning now to our 2023 guidance on slide 15. We are reaffirming our full-year 2023 guidance. We expect total revenues of $815 million to $845 million, representing growth between 23% to 28% over 2022 total revenue. We expect total revenue to be primarily driven by continued strength in ENHANZE Wave 2 products, DARZALEX subcutaneous and Phesgo, as well as a full year of Antares product sales contributing to auto-injector royalty. We expect revenue from royalties to increase between 23% to 26% over revenue from royalties in 2022 to a range of $445 million to $455 million. Please note again that our 2023 guidance includes milestone payments for the approval of subcutaneous efgartigimod and atezolizumab, with conservative royalty revenue contributions from these two products within this year. We expect EBITDA of $415 million to $440 million, representing growth of more than 30% over 2022 EBITDA, which excludes the impact of amortization costs related to the Antares acquisition. Finally, we expect non-GAAP diluted earnings per share of $2.50 to $2.65. With that, I'll now turn the call back over to Helen.

Thank you, Nicole. I'd like to thank the Halozyme team and our partners and collaborators for the strong progress made in the first quarter of this year, setting us up for such strong growth in 2023. We're looking forward to our commercial product and royalty revenue growth, and we will increase the number of ENHANZE commercial partner products from five to seven products with the approval of subcutaneous efgartigimod and atezolizumab. We also expect pipeline progress and expansion with Phase 3 data for subcutaneous ocrelizumab and for subcutaneous efgartigimod, as well as two new targets entering the clinic from our current partners. Continued progress in the development of our high-volume auto-injector with ENHANZE is expected, as well as adding new collaboration partners with the goal of signing multiple new collaboration agreements across our platform. We continue to expect revenue growth resulting from our commercial products. These events support our strong full-year revenue and EBITDA growth guidance. With that, we would now be delighted to take your questions. Operator, would you please open the call.

Our first question is from Jessica Fye with JPMorgan. Your line is open.

Hey guys, this is Na Sun on for Jessica Fye. I think can you talk about like what have you seen with the IRA impact and like how has it impacted discussions with current partners and/or potential new partners? And then another one is thinking about how we are anticipating a step down in royalty rate for FASPRO in the EU, what does this mean for other J&J targets set to launch after 2024 and 2027 such as amivantamab and (Technical Difficulty)? Thank you.

Thanks, Na. With regard to what we've seen in IRA impact, I think we are making comments very similar to our partners and other people who are talking, that there is still too little detail available yet to make any assessments to understand if there is going to be an impact. The guidance that came out initially really is focused on Part D, and the majority of our products are Part B. I will say that this has very rarely come up from any of our current partners just based on the fact that they are waiting for more details to come out from CMS before really doing any analysis on it to understand any impact. So we continue to be excited about the growth of our products and the royalties as we look forward to the potential for $1 billion in 2027 and project the potential to be higher than that in 2031. Regarding the step-down in royalty rate, the specific details on all of our contracts, as you know, are confidential. So we provided some commentary on the DARZALEX specifically in light of the European patent finding, but we're really not in a position to provide any additional detail beyond that at this time.

The next question is from Corinne Jenkins with Goldman Sachs. Your line is open.

Yeah, good afternoon, everyone. Maybe to one follow-on from the last question. It sounds like your current partners are bringing it up to you, but how is the IRA guidance factoring into any conversations that you're having with potential partners? And then the second one from me. You referenced business development. I’m curious how the integration of Antares and your target leverage goals factor into potential timing for any additional BD?

I'm happy to take the first part, and I'll ask Nicole to discuss the target leverage. Since the guidance came out in March, Corinne, we have been in multiple conversations with potential new partners for ENHANZE and ENHANZE plus HVI. I do not recall IRA coming up, even in those conversations. I really think it is because the majority of people who have drugs that are large volume injectables are in Part B, and everybody recognizes that the guidance that has come out so far isn’t related to that. So, we're really not having frequent conversations regarding that. Nicole, will you take the question on target leverage and thinking about future M&A?

Yes, happy to. Thanks, Corinne. When looking at our leverage for ending the quarter, we were at a 3.2 times net debt to EBITDA ratio, and we're tracking to be deleveraged to less than three times by the end of the year. We are tracking nicely with our expectations and this also provides ample opportunity for future growth via M&A, considering our leverage profile, as well as our expected cash flow generation and expected EBITDA growth.

The next question is from Mohit Bansal with Wells Fargo. Your line is open.

Thank you for taking my question. I have a couple of inquiries. Firstly, regarding IRA, do you anticipate gaining more clarity from CMS about the Part B aspect in the next six to twelve months? Should we expect discussions about this with your partners? Secondly, on a more technical note, you mentioned that sequential royalties reset, which means the royalty revenues remain steady despite higher overall revenues. Are there any additional impacts on Antares revenues or other product revenues related to seasonality that we should consider for the first quarter moving forward? Thank you.

I'll take the question on IRA, and Nicole will talk about the sequential royalties. Mohit, probably as you're seeing with many of our large pharma partners, there simply isn't the information available at the moment as to when CMS is going to provide updates regarding Part B guidance. So, nobody is really talking or speculating about that. ENHANZE is an active ingredient; the subcutaneous injection would not be possible without ENHANZE. We also see benefits, as an example, with DARZALEX regarding reduced infusion-related reactions. We look forward to learning more, but recognize that we will be communicating strongly that ENHANZE provides significant benefits to patients by being part of the new combinations with subcutaneous DARZALEX.

In regards to sequential royalty quarter-over-quarter, we mentioned a few factors driving that, including changes in foreign exchange rates, along with the royalty tiers that escalate during the year, which we see on both the ENHANZE and Antares royalty sides. This is only impactful to the first few months of the year; those thresholds are exceeded within the first quarter, so they do not affect the remainder of the year. We also see that royalties have a seasonal pattern where Q1 is typically the lowest of the year. That's just a little more flavor on seasonality. Overall, our quarterly results for royalties are tracking very nicely to our plans and expectations to meet the guidance we set for the year, which is $445 million to $455 million, representing greater than 20% year-over-year growth for royalties.

The next question is from Michael DiFiore with Evercore ISI. Your line is open.

Hi guys, thanks for taking my question. Two more on IRA, but different versions. So just regarding CMS's Part D guidance document, I think for now everyone is operating under the assumption that Part B will look very much like Part D. Assuming that's true, now that HALO's lawyers and policy teams have had some time to digest the guidance document, are there any nuances contained therein that may make you incrementally more or less confident about how enhanced formulated products may qualify as single source drugs? That's my first question. My other question is just to remind us how the EU, the EPO, DARZALEX/FASPRO patent revocation is specific to just DARZALEX/FASPRO? And why there wouldn't be any read across to your other EU co-formulation patents? Thank you.

All right. Thanks, Mike, for those questions. Yes, there's a lot of interest in the IRA, so we’ve discussed this thoroughly. If there's an interpretation or if Part B guidance indeed comes back similar to Part D, our interpretation, based on experts in Washington D.C., leads us to believe that the guidance discussing the fixed-dose combination is relevant. The example given involves two corticosteroid drugs where use of both active ingredients is not considered the same as single agent use alone. This aligns perfectly with ENHANZE, as the rHuPH20 is recognized in multiple documents as an active ingredient. This is critical because it enables the whole subcutaneous delivery approach, providing a shorter injection time and reduced infusion-related reactions. Patients would not be able to receive their therapy so simply and efficiently, nor would the healthcare system benefit from shorter treatment times. Our reading leads us to believe that should Part B mirror Part D, the subcutaneous formulation will be treated as a separate single source agent compared to intravenous drugs. However, it is important to keep in mind that CMS needs to issue specific guidance for Part B. Regarding the EU patent, Janssen had one of their two approved European co-formulation patents for DARZALEX revoked. We still have another that’s under review. This single revocation occurred because the court found Janssen had published a clinical trial protocol mentioning the invention they relied on in the patent prior to filing. Consequently, they could not use that invention regarding reduced infusion-related reactions to support that patent. Please note, this issue applies to only this single patent for DARZALEX, as our other partners rely on different inventions to support their patents. Co-formulation patents must demonstrate novelty not previously described in the invention. Therefore, there's no read-through to other patents that have been filed or any of our other European partners. Companies are careful to ensure their filings arrive at the patent office before making any data public. I also want to mention that the US does not have the same exact approach as Europe regarding pre-publication and clinical protocol. Therefore, there is no read-through to the United States either. Lastly, regarding the next step in Europe, Janssen could file an appeal. Should they do so, the patent becomes unrevoked, and typically this appeal process can take three to four years. However, Janssen continues to have other patents, and we’re confident in our revenues in '23 and the continued royalty stream from Janssen until at least 2030. So, we're feeling very positive about our Janssen royalties and the strong growth we're seeing there.

The next question is from Jason Butler with JMP. Your line is open.

Hi. It's Roy on for Jason. Thanks for taking our questions. Just a couple. I guess, Helen, you mentioned that the funnel of partnering discussions is at an all-time high. Are those mostly candidates seeking their first approval as ENHANZE formulations?

Sorry, Roy, you cut up a little bit. So you're asking if those companies are looking for approvals of their first indication, so development-stage products or commercial products?

Yes, development stage, correct.

I'm saying it's a mixture. We've traditionally worked with companies getting their Phase 3 approval or those that are already approved, as ENHANZE can really help enhance product competitiveness. We are having more interesting conversations with companies looking to optimize their pharmacokinetics profiles. That’s a different approach, where you’re not trying to bridge to being already approved. Instead, you're improving certain attributes, such as reducing associated toxicity or achieving a very extended dosing interval. So it's a positive mix of discussions, Roy.

Okay. Interesting. And then one on the mention of the 10 mL auto injector collaboration partner's further development. What will they bring to the table that you didn't get from Antares? Thanks.

One of the intriguing aspects of the Antares portfolio of auto-injectors and the engineers we have is the option we offer partners to customize the device for a specific patient population or disease. What we have is a working prototype, and each partner determines the primary container they want, which could be 5 mL, 7 mL, or 10 mL. That will require a degree of customization, including factors like needle depth and other considerations specific to their drug and patient population. Thus, we are addressing customization work to transition from prototype to development-stage auto-injector to a commercial auto-injector.

Okay, great. I'm going to throw in one more. The DARZALEX injection site reaction results you mentioned, is that achievable with a lower dose of ENHANZE than you use to achieve the subcutaneous injection itself? If that makes sense?

I understand your question. I don't think we ever tested that because in our clinical studies of subcutaneous DARZALEX, it was only one dose of the rHuPH20 used in each injection to my knowledge, Roy. So it's a very small dose. I don’t think the dosing was evaluated separately to achieve that. We know the amount it takes, so it was probably never tested. But it’s indeed a very small dose used in all our products.

The next question is from David Risinger with SVB Securities. Your line is open.

Yes, sorry. Thanks very much. I have a couple of questions, please. First, the press release mentions planned investments in ENHANZE. I was hoping that you could provide some more color on that, Helen, particularly since ENHANZE is set to lose US exclusivity in 2027. And then just a couple of financial questions: what was the impact of Antares on the non-GAAP earnings or EPS in the quarter? And regarding share repurchases, did you mention that you have finished that up for the year? Thanks very much.

Regarding planned investments, this relates back to announcements made approximately 18 months ago concerning our development of a high-yield rHuPH20 as well as room-temperature stable rHuPH20. In terms of our royalty term, I would like to emphasize that we typically hold a minimum of 10 years after the first commercial sale. Therefore, 2027 may represent patent expiry, but we will be selling API to our partners and generating royalties well beyond 2030 based on our development portfolio. It's essential to invest in achieving higher yields of API to meet our partners' expectations, and we're also developing a more room temperature-stable version, which may be more suitable for small molecules. Progress is ongoing on the high-yield front with several partners expressing interest in switching once it's approved and available.

Regarding the Antares contribution, it was accretive to both our revenue line and our non-GAAP EPS in the quarter, and we expect it to continue being accretive through our full-year results for 2023. As for share repurchases, we have completed the full allocation we set for the year, totaling $150 million. We maximized our buying opportunities during the first quarter, particularly at lower prices, effectively completing our allocated amount.

The next question is from Eun Yang with Jefferies. Your line is open.

Hi. This is Matt on for Eun. Just continuing on the ENHANZE partnering conversations with the next-gen rHuPH20, have you identified any partners who are specifically interested in these next-gen APIs? And if so, when will the improved products be ready for clinical investigation? Thank you.

So there are different pathways for each. The higher-yield version utilizes the same cell line as our current one, and thus we expect a straightforward compatibility study that will enable its incorporation into our supply chain, which we have done before. This will take several years but should be a seamless transition. Several partners are interested in this once it is approved and available. The more room temperature-stable variant is more specific to small molecules and requires specific staffing for room temperature stability. Therefore, no partners are signed up at this point. However, we do not expect it to drive large revenue numbers as our subcutaneous products are more focused on large-volume biologics, where room temperature stability is not essential.

The next question is from Caroline Palomeque with Berenberg Capital Markets. Your line is open.

Hi, thanks for taking the question. Can you discuss the current IV to subcutaneous conversion rate trajectory for other products aside from the ones in your slide, such as MabThera and HYQVIA? Thanks.

If I understood your question correctly, with the Wave 1 products, we observed that long-term in Europe with Herceptin achieving about a 50% share of sales after two years and 60% after three years. We have seen that share remained sticky in those markets post-conversion, but it did not continue to grow after that. Unfortunately, I do not have specific data on HYQVIA to share. With MabThera, we reached roughly 40% share of sales. We're pleased with the progress seen in DARZALEX, currently at 88% in the US and exceeding 80% outside the US. It's clear that the subcutaneous formulation of DARZALEX is driving significant revenue growth by expanding penetration into frontline and second-line populations. We typically consider a target of around 60% conversion after three years and evaluate whether it will be higher or lower. Overall, we are pleased with the progress we are seeing. I'll also highlight Phesgo, which, after a slow start, is experiencing strong quarter-over-quarter growth and has achieved a 35% share with Roche, and we expect continued conversion as both physicians and patients recognize the benefits, particularly in the adjuvant setting.

We have no further questions at this time and this will conclude today's conference call. Thank you, everyone, for participating. You may now disconnect.