Halozyme Therapeutics, Inc.
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Halozyme First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker today Al Kildani, Vice President of Investor Relations and Corporate Communications. Thank you. Please go ahead.

[Al Kildani:]

[Helen Torley:]

Thank you, Al. I’m pleased to report that our first quarter results provided a strong start to 2021 for Halozyme. We reported first quarter revenues of $89 million, record quarterly royalties of $36.9 million. GAAP earnings per share of $0.19 and non-GAAP adjusted earnings per share of $0.37. Our partners made critical progress in the clinic with therapies using ENHANZE. In the first quarter, we achieved two of the expected four Phase 3 trial starts for 2021, which is defined as first patient enrolled. And we also achieved, two of the expected five Phase 1 trial starts for 2021. Additionally, we completed a successful convertible note offering of $805 million on attractive terms and use a portion of the proceeds to retire a large portion of our existing convertible note and to repurchase $75 million worth of shares through an accelerated share repurchase, further demonstrating our commitment to capital returns. We achieved these strong results against the backdrop of the ongoing global COVID pandemic. This has been accomplished by the strong performance and hard work of our partners, our contract manufacturers and suppliers, and the entire Halozyme team. Let me know discuss our royalty revenue growth, which is illustrated on Slide 3. We achieved our highest ever level of quarterly royalties during the first quarter at $36.9 million. This represented 119% growth year-over-year and 15% sequential growth following what had previously been our record quarterly royalties. This strong growth is primarily been driven by the successful ongoing global launches of Janssen’s subcutaneous form of DARZALEX which utilized our ENHANZE technology.

[Elaine Sun:]

Thank you, Helen. Before I begin, I'd like to note that with this quarter's results, we'll begin reporting key measures on both a non-GAAP adjusted, as well as the GAAP basis and we will 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, exclusive of factors that do not directly affect what we consider to be our core operating performance, such as stock-based compensation, amortization, as well as non-recurring or unusual events. And I'd ask you to refer to our press release and filing for a reconciliation of GAAP and non-GAAP net income and earnings per share. So, with that, let me now turn to Slide 8 for a review of our first quarter revenues. Total revenue for the first quarter was $89 million, compared to $25.4 million in the prior year period. In terms of revenue composition, we saw growth from all three sources of revenue in the first quarter. Revenue from royalties for the quarter was $36.9 million, a 119% increase over the prior year period. This was driven primarily by the continued strong uptake of subcutaneous DARZALEX utilizing ENHANZE by our partner Janssen. Product sales were $21.8 million in the quarter, up 167% from the prior year period product sales of $8.1 million. Growth in product sales was driven by higher bulk API sales to ENHANZE partners, Janssen, Roche, and organic. Demonstrating continued progress by our partner’s collaboration revenue in the quarter totaled $30.3 million, up from $0.4 million in the prior year period. And during the quarter, we recognized $25 million in milestone revenues from Bristol Myers related to the upcoming start of their Phase 3 trial for subcutaneous nivolumab ENHANZE. In addition, the approval of DARZALEX’s ENHANZE in Japan and it's anticipated launch resulted in $5 million in milestone revenues to Halozyme. Turning to Slide 9, you'll find a more detailed breakdown of our first quarter P&L. Let me begin with total operating expenses, which was $38.3 million in the first quarter, up 34% from $28.6 million in the prior year period. The overall increase in total operating expenses resulted from higher cost of product sales, which were $18.2 million, compared with $5.8 million in the prior year period. And this increase in costs was attributable to the markedly higher level of API sales versus the prior year period, in support of our partners, products, and programs in the first quarter. Research and development expenses of $9 million decreased 11% from $10.2 million in the prior period, and SG&A expenses were $11.1 million, down 12% from $12.6 million in the prior year period. Total operating expenses, excluding COGS were $20.1 million for the first quarter, compared to $22.8 million in the prior year period, consistent with the expectations we laid out as part of our annual guidance last quarter. GAAP operating income for the quarter was $50.7 million, compared to a GAAP operating loss of $3.2 million in the prior year period, reflecting our strong growth in revenues and leverageable business model. On a GAAP basis, net income for the quarter was $27.9 million, or $0.19 cents per diluted share. This compared with a net loss of $6.1 million or $0.04 per share in the prior year period. As I mentioned, we’ll now also be reporting key results such as net income and diluted earnings per share on a non-GAAP adjusted basis. In the first quarter of 2021, the largest adjustment made to arrive at non-GAAP net income and diluted earnings per share was for a $21 million one-time investment expense related to the repurchase of a significant portion of our 2024 convertible notes. This is also a non-cash expense. On a non-GAAP adjusted basis, net income was $54.3 million, or $0.37 per diluted share, compared to net income of $1.9 million or approximately $0.02 per diluted share in the prior period. With that, let me now turn to Slide 10 for a discussion of our 2021 financial guidance. Our guidance is based on the latest information from our partners and our planned expenses for the year. Consistent with the strong growth we're seeing for our business, we are reiterating our guidance for total revenues of $375 million to $395 million, which would represent year-over-year growth of 40% to 48%. Moving to the components of revenues, we expect revenue from royalties to double from 2020 levels. We expect product sales to increase 50% to 60% from 2020 levels, driven primarily by bulk API sales to our ENHANZE partners. We further expect revenue under collaborations to be in a similar range as the significant milestone revenues generated in 2020 driven by new clinical trial starts and commercial milestones of our partners. And reflecting our leverageable business model, we also continue to expect GAAP operating income for 2021 to be in the range of $215 million to $235 million, which would represent 49% to 63% growth over 2020. Moving to net income, we expect GAAP net income of $190 million to $210 million and non-GAAP net income of $235 million to $255 million. Moving to earnings per share, we're projecting GAAP EPS of between $1.25 and $1.40, representing growth of 37% to 54% over 2020 GAAP EPS and non-GAAP earnings per share of $1.55 to $1.70, which would represent 38% to growth over 2020 non-GAAP EPS. As Helen reviewed, we remain committed to returning capital to shareholders. We continue to expect to repurchase up to $125 million in our shares this year, pending market conditions and other factors, which would leave $75 million worth of shares available for share repurchases remaining under our current authorization. In support of our financial and capital return goals, we completed the sale of $805 million of convertible senior notes due 2027. Reflecting the strong cash flow and growth prospects for the company, we were able to secure highly attractive terms with a 25 basis point coupon, and 50% conversion premium. We retired 80% of the previous convertible note, which was deeply in the money. And in doing so we were able to mitigate dilution, we would have otherwise based on the outstanding 2024 convertible senior notes. We also use some of the proceeds to complete a $75 million accelerated share repurchase. So with that, I'll now turn the call back to Helen.

[Helen Torley:]

Thank you, Elaine. As you just heard, the developing pipeline coupled with our financial outlook places Halozyme in the strongest position ever as a company. We look forward to strong growth in revenues, profitability, and cash flow in the coming quarters and years, which will allow us to deliver on our commitment to return capital to our shareholders, maintain long-term sustainable growth, and maximize shareholder value. As summarized on Slide 11, we continue to expect multiple important value driving events throughout 2021. We expect a continued launch momentum for DARZALEX SC and Phesgo with broadening adoption and use in the already launched market and through additional global launches. Two new products are expected to interface redevelopment resulting in a total of four ongoing Phase 3 programs across seven indications. We call these the next Wave of potential launches, Wave 3, with a time window for launch of 2023 to 2025. We project five new Phase 1 starts resulting in a total of 12 products in/or having completed Phase 1 ne testing by the end of the year. These representative development continues our Wave 4 potential launches with the potential to launch in the window of 2025 to 2027. And we will work to create new revenue growth opportunity by seeking to sign new collaboration agreements and advanced new targets into development our Wave 5. As a result of all of this progress, we're in a position to return capital to our shareholders aiming to complete the planned $125 million share purchase for 2021. And finally, we'll continue to seek to identify and acquire a platform that can add to our long-term revenue growth. None of these results would have been possible without the amazing team we have at Halozyme, as I'd like to say my sincere thanks to each and every one of you for these terrific results. And thank you to everyone for your attention today. We'd now be delighted to take your questions. Operator, would you please open the call up for questions.

[Operator:]

Your first question comes from Do Kim from BMO.

[Do Kim:]

Hi, good afternoon. Thanks for taking my question. A question on Opdivo, Bristol is moving forward with the Phase 3 and renal cell carcinoma, can you talk about what their clinical strategy is? Have they shared that with you? And are they looking for this Phase 3 and RCC as an anchor study and do other tumor types and Phase 2s?

[Helen Torley:]

Yeah, thanks Do for the question. We are aware of the strategy, but BMS hasn't publicly commented on it. So unfortunately, we can't share any details. What I think we can talk about is the fact that the Rituxan Hycela ODAC, the FDA said that moving forward because of the more broad experience with rHuPH20, a separate controlled clinical study might not be needed for each and every indication. And we certainly saw that with the approvals of DARZALEX FASPRO and Phesgo while in the same tumor types, we saw a broader indication than the studies conducted. So, I think the way we think about this, though is, I believe that if the FDA would feel that the safety questions, it would be a possibility all abroad are labeled and simply renal cell carcinoma, but it really is going to be based on the discussion between the FDA and Bristol Myers Squibb on the data generated and any outstanding safety questions that might exist.

[Do Kim:]

Any particular reason why they chose renal cell as their first tumor indication?

[Helen Torley:]

None that I can share Do.

[Do Kim:]

Okay. Understand. And on the commercial side of things, it looks like the launch of Phesgo is much slower than FASPRO, could you talk about what's driving that difference, whether it's the different cancer markers, breast cancer versus multiple myeloma, or how your associated partner is executing on the launches?

[Helen Torley:]

Yeah. In terms of the differences between the market, there are several, what we don't have is a specific cause and effect. But, you know, one of the key things is timing. For DARZALEX FASPRO it was approved, both in the U.S. and Europe in June of last year, whereas Phesgo was approved in the third quarter in the U.S., and only in December, and it's only now launching in Europe. And so, I do think we're going to see some strong growth of Phesgo particularly as it starts to roll out in the European launch markets. You highlight some other differences though, multiple myeloma and older population, more Medicare covered, whereas the breast cancer patients, perhaps more of a skew towards commercial payers. So, the two would have been a little bit of more time taken to get on formulary for the commercially focused breast cancer patients, perhaps further, leading to a slowing down with Phesgo. But I'll leave you with the takeaway that yes, that's certainly very strong start to FASPRO, certainly exceeded our expectations for last year, as you know. I think Phesgo having had the set up for all of the reimbursement and logistics in 2020 is going to start to show good growth in the U.S. And we're particularly excited about the launch trajectory that we hope to see in Europe, particularly given the demonstrated success they showed with Herceptin subcu a number of years ago. So, there'll be a good growth happening from Phesgo this year, but as we stated DARZALEX SC will continue to be the dominant driver of our royalty revenues for 2021.

[Do Kim:]

Great, that's helpful. Congrats on the quarter and all the progress.

[Helen Torley:]

Appreciate that Do. Thank you.

[Operator:]

You next question comes from Jessica Fye from JP Morgan.

[Jessica Fye:]

Hi, there. Good afternoon, and thanks for taking my questions. First one is, when you look at Street models, which potential royalty stream do you see as most under appreciated by the Street?

[Helen Torley:]

Yeah. Let me turn that one over to Elaine to see which royalty stream do you feel is the most underappreciated Elaine?

[Elaine Sun:]

Sure. So, I think – Jessie, thanks for that question. I think, as I think we – I think the Street has largely focused on DARZALEX FASPRO, which given Helen’s comments and our public comments, I think is certainly, you know, driven by the strong performance and initial uptake that we've seen with DARZALEX. I think one thing that we'd like folks to appreciate over time is the breadth of our royalty portfolio, and the breadth of the partners. We have, you know, 10 partners, and nearly 60 targets underlying those different partnerships. And that diversity of programs of our partners and products that we expect in these multiple waves of launches over time, that should drive strong royalty growth, beyond you know, DARZALEX Phesgo, etcetera as the larger contributors. I think, certainly as we look to our Wave 3 product launches in particular, as being those next drivers. And as Helen indicated, you know, certainly with the continued progress of Roche's Tecentriq. The argenx programs and indications that are being pursued for efgartigimod, certainly we see those as potential significant drivers, as well as subcutaneous nivolumab with Bristol.

[Jessica Fye:]

Okay, great. Thanks for that. And with respect to the share repo, just given how much you've already completed in the first quarter, is there any chance that you'll pull some of the remaining repo on the plan forward into 2021? And are there any other uses of cash beyond repos that look increasingly appealing?

[Helen Torley:]

Yes, let me Elaine to address that.

[Elaine Sun:]

Sure. So, as you know, Jessica, we have a balanced capital allocation strategy, and that support of both capital return, as well as funding internal and external growth via M&A. We’ve certainly been very focused on capital return, and I think we're just over 75% of our way through the $550 million three-year buyback plan as you alluded to, and we continue to be committed to purchasing up to $125 million for 2021, which would leave $75 million remaining through the end of 2022 through that three-year plan. I would say, you know, the specific timing of repurchases is based on, you know, different factors, including market conditions, etcetera, but we continue to be focused on capital return. I think beyond capital return, we continue to think that there it is appropriate as part of that balanced capital allocation strategy to continue to fund the substantial internal growth drivers that we have fueled by ENHANZE, as well as potential to bring in another external platform technology that can leverage our existing capabilities and expertise to drive additional value long-term for shareholders.

[Jessica Fye:]

Thank you.

[Operator:]

Your next question comes from Jason Butler from JMP Securities.

[Unidentified Analyst:]

Hey, it’s on for Jason. I just want to make sure I was clear on the first line in multiple myeloma 3% market share, is that the overall market or is that the additional portion that's converted to subcutaneous?

[Helen Torley:]

That was the overall market I believe that was being referred. They didn't break-out by subcu, so it is overall.

[Unidentified Analyst:]

Have they never ?

[Helen Torley:]

They didn’t break it. And that was a mixture of the two.

[Unidentified Analyst:]

Okay. They've never broken out subcu?

[Helen Torley:]

They haven't. They have not.

[Unidentified Analyst:]

Okay, great. Can you remind us what the light chain amyloidosis total market opportunity is in their view?

[Helen Torley:]

Yeah. The epidemiology around this is, there's about 4,500 incident light chain amyloidosis patients in the U.S. annually. And it's a similar number in Europe. So, think about this little opportunity, I think globally of being about 10,000 incident patients. The indication is for newly diagnosed. Now, this is an accelerated approval and there's specifically there are some exclusions based on cardiac disease. So, you need to take that 10,000 and reduce it to get the opportunity. So, I think what's exciting here is big unmet need for patients. And a nice incremental add, as this indication is only approved as a subcu not as an IV.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Your next question comes from Anita Dushyanth from Berenberg Capital Markets.

[Anita Dushyanth:]

Hi, good afternoon. Congrats on the progress and thanks for taking my questions. Just wondering how, in the last call you had mentioned about, you know, that you were kind of re-engaging with your partners to, sort of have them revisit their portfolios to see if they will be able to identify new targets that could into the clinic. I was just wondering how many sort of new targets that we are likely to see this year or next, coming into the clinic?

[Helen Torley:]

As we entered this year, Anita, as you know, we’ve said five new Phase 1 starts, which represent the line of sight new targets we had coming in. And we've already started two of those. I can’t tell you our discussions with partners are ongoing. And but we have no updates I can give you with regard to whether we will extend the number of new starts this year, or perhaps some of them could take into next year to actually start just depending on where those targets are in development. But this is an ongoing effort that we were just continuously in. So, we’re excited about the size that will add this year. And I'm very confident we'll be adding more next year just based on the discussions we have. Can't be absolutely sure yet based on timelines that any will start in – any additional ones will start in 2021 yet.

[Anita Dushyanth:]

Okay, great. Thank you. And just one more question on DARZALEX itself. So, I think, from what J&J had or Janssen and I talked about it before, there were about 40% of the patients that converted to the subcu form. So, eventually, we would expect like a majority of the population to adopt this subcu version. And we could kind of think about that for the other candidates using ENHANZE?

[Helen Torley:]

I do think DARZALEX, as you mentioned, is also a strong start. And I think they comment on the 40% actually, I believe was made by us based on data last October that showed that this was from Symphony. They showed that 40% of use in the U.S. was with this subcu. We certainly are delighted with the performance. We know that just based on our royalty revenues, it's even higher than that now in the U.S., and we're seeing good penetration around the world as well. I think if you think about all of the other products in the portfolio, it really will be dependent on the value proposition that physicians see. And there's no doubt that DARZALEX is a very strong value proposition. But we've got very strong value propositions in the rest of our portfolio. And what we do is we take a look at what we think the offering brings versus the competition and for patients, and we do a range or and as to what we think the peak penetration will be. So, you're absolutely right, There’s a great opportunity here for other products to have a strong market uptake as well as just based on what we're seeing for DARZALEX, not just in Europe, where we've seen strong performance before, but also in the U.S.

[Anita Dushyanth:]

Okay, thank you.

[Operator:]

Your next question comes from Graig Suvannavejh from Goldman Sachs.

[Graig Suvannavejh:]

Great, thank you for taking my question. Congrats on all the great progress. I've got two questions, if I could? My first just has to do with the broader portfolio, in particular, the 16 products that you list on Slide 5, so just wondering if you could maybe remind us, if there's certain products where the current IV infusion times are perhaps considered longer, perhaps, than others that might facilitate greater conversion over to any potential substitute, that might get eventually proved? And then my second question, just wanted to revisit the company's prior comments around looking for additional technologies. And I'm just wondering, you know, as we have been talking about this over the past several quarters, I'm curious if there have been any changes in the BD environments, whether it is the number of potential assets, the quality of the assets, or potential the prices on the assets that may have meaningfully changed? Thanks very much.

[Helen Torley:]

All right. So, turning to Slide 5, and Graig is, as we're taking a look at the products that are listed here, there are a whole range of infusion times as you point out, and obviously, some of them are perhaps 30 minute IV, some of them more range towards the one and a half to two hours. What I think is important is, duration of infusion is one aspect, but what we're seeing with our partners is not simply reducing the time of administration, there are other, I think, important strategic plays that they are pursuing here. If we think about some of the products where the goal might be to get the patient to be able to use the products at home more easily, there a subcu is a significant advantage, obviously overnight. We've got other partners who are working to develop drugs in combination. So, similar to what Roche succeeded with Phesgo of two antibodies together, and that was, I’ll mention that Bristol Myers Squibb when they started working with us have a vision to be able to take care more into the community oncology setting to make it easier for patients. And so as you think about what the value proposition is, I think there’s the strategies, there’s the duration of administration, all very important. And for each of the products that we – you see listed here, as well as the side that we expect to start this year. There is a compelling value proposition supply this will bring competitive differentiation for each partner, for them to take it to the market. If I could move to the question of , yes, as we mentioned, our goal is to seek to find another platform that we can do what we've done with ENHANZE, which is licenses to multiple partners, and be able to grow revenues, perhaps beyond whether our originator was able to do and so we are very actively looking at different opportunities at the moment, Graig. I would say the environment has got a good number of assets. Pricing is perhaps a little bit down as to what it was perhaps four or five months ago. So that is a bit of a positive, but, you know, I would say no major change in the overall environment of the assets that we are looking at, and you know, we will take our time. We have the luxury of time based on the strong growth we're projecting for ENHANZE. So, we're not rushing into this, we're looking for something that we feel is a great fit for our capabilities and our business model, and will complement that effectively. So, we're going to find the right thing.

[Graig Suvannavejh:]

That's great. Thank you so much.

[Helen Torley:]

Thank you, Graig.

[Operator:]

Your next question comes from Joe Catanzaro from Piper Sandler.

[Joe Catanzaro:]

Hey, guys, thanks so much for taking my questions here. Just two, somewhat related, I'm wondering if you could help contextualize how much of the growth of FASPRO that you're seeing in its contribution to the top line is perhaps being muted to some degree by the contraction of some of the legacy products. And then somewhat relatedly, I think Genmab said some Nordic countries are seeing 90% FASPRO conversions, while there's around 30. Do you guys have any sense around the overall conversion rates across the full European geography, and can you actually back into that number based on the royalty you receive? Thanks.

[Helen Torley:]

Yeah, I am. I would say, let me take the second part first. Yeah, we heard the comments from Genmab and really echo the Chief Commercial Officer there to say, it is very difficult to get detailed penetration data from Europe. So, we can't really comment on that by geography. We have a general sensor mortalities Joe as to overall share in Europe versus the U.S. But we certainly don't know on a market-by-market basis, unfortunately. But obviously, the core message is that we're delighted with the strong uptake that we're seeing in the U.S. where our last reported data was a 40%. But obviously, that has continued and this sense that they talked about some of the Nordic markets being at 90% and other markets at 30% obviously shows that the value proposition is being well-received around the world. With regard to the growth of FASPRO, we certainly are seeing a contraction to your question on the legacy product. So, the ongoing impact of biosimilars on and also RITUXAN is muting it modestly. So, we did predict and stated this year, we expected to see a continued decline in the royalty revenues that is continuing at the pace we expect it and it does somewhat the DARZALEX FASPRO, but on a relatively modest basis we're obviously very pleased with the growth that we're seeing in FASPRO this year.

[Joe Catanzaro:]

Okay, got it. Thanks for taking my question.

[Helen Torley:]

Thank you.

[Operator:]

That was our last question. At this time, I will now turn the call back over to the presenters.

[Helen Torley:]

We really printed everyone for your support and for your attention. As you've heard, we continue to execute very well against our strategy. And we're excited with the progress that our partners are showing in their development of more ENHANZE-enabled products. We look forward to future launches of Wave 3 and 4 following on the great success we're seeing with our Wave 2’s at launches. Thank you so much for your attention. And we look forward to seeing you next quarter. Good bye now.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.