Halozyme Therapeutics, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Halozyme is a biopharma technology company whose ENHANZE platform uses rHuPH20 to enable subcutaneous drug delivery; it also sells proprietary and partnered products, including products added through its 2022 Antares acquisition. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $221.0 | $152.4 | $383.2 | $269.6 |
| Operating income | $94.5 | $34.1 | $148.3 | $109.7 |
| Net income | $74.8 | $22.7 | $114.4 | $82.8 |
| Diluted EPS | $0.56 | $0.16 | $0.84 | $0.58 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $153.8 | $88.0 |
Q2 revenue increased 45% year over year; six-month revenue increased 42%. Royalties were $111.7 million in Q2 and $211.4 million for six months, up 31% and 36%, respectively. Product sales were $73.9 million in Q2 and $134.7 million for six months. Collaborative-agreement revenue was $35.4 million in Q2 and $37.1 million for six months; Q2 included a $33.0 million argenx milestone associated with VYVGART Hytrulo approval and launch.
Approximate gross margin, calculated as revenue less cost of sales, was 77.3% in Q2 2023 versus 77.7% a year earlier, and 77.8% for the first half versus 81.5%. Operating margin was 42.7% in Q2 versus 22.4%, and 38.7% for six months versus 40.7%. Q2 net margin was 33.8% versus 14.9%. Higher intangible amortization and cost of sales, including Antares acquisition-related effects, weighed on the first-half gross margin. Q2 SG&A declined year over year, primarily because the prior-year period included one-time transaction costs.
Balance sheet, debt and cash
- At June 30, cash and cash equivalents were $221.2 million and available-for-sale marketable securities were $127.1 million, totaling $348.3 million in cash, cash equivalents and securities. Current assets were $765.7 million and current liabilities $116.4 million.
- Long-term debt, net, was $1.496 billion; principal outstanding was $1.525 billion, consisting of $805 million of 2027 notes and $720 million of 2028 notes. The 2024 convertible notes were fully converted in March 2023, with $13.5 million paid in cash and 288,886 shares issued.
- The $575 million revolving credit facility was undrawn. The company reported compliance with debt covenants. The filing states cash, cash equivalents and marketable securities are expected to fund operations for at least the next 12 months.
- First-half investing cash use was $5.2 million; financing cash use was $162.2 million, including $150.1 million of share repurchases. Operating cash flow less property and equipment purchases was approximately $144.1 million for the six months.
Material changes and developments
- Q2 growth reflected higher DARZALEX SC and Phesgo sales, new device royalties, and increased proprietary and partnered product sales. Lower sales of certain mature Roche products partly offset royalty growth.
- Proprietary product sales and device-partnered sales increased substantially, with the Antares portfolio contributing. The 2022 comparison is not fully like-for-like: reported 2022 results include Antares only from its May 24, 2022 acquisition date.
- Halozyme repurchased 4.2 million shares for $150.1 million in the first quarter; no shares were repurchased in Q2. Since the program began, it had repurchased $500 million of the authorized $750 million.
- In March 2023, the European Patent Office revoked a Janssen co-formulation patent for DARZALEX SC, a development relevant to the company’s intellectual-property risks.
Outlook, risks and contingencies
Management expects royalty revenue to continue growing with partner product launches, including 2020 and 2023 launches, while biosimilar competition may pressure mature products. It expects proprietary product sales to grow as it seeks additional testosterone-replacement-therapy market share; bulk rHuPH20 and device-partnered product sales may fluctuate with partner demand. Collaborative revenue is expected to vary with partner milestones and new agreements. Management estimated an approximately 20% effective tax rate for 2023.
Key risks include dependence on ENHANZE and rHuPH20, partner execution and commercialization, regulatory approvals and clinical outcomes, third-party manufacturing and supply, product safety, pricing and reimbursement pressure, patent protection, and competition. The company also highlights significant debt and potential cash or dilution effects if convertible-note conversion conditions are met. NOCDURNA’s license termination was scheduled to take effect in October 2023; Covis terminated its Makena-related arrangement after the FDA ordered withdrawal of Makena’s approval in April 2023. No legal proceeding was identified as having a material adverse effect, and management reported effective disclosure controls.
Investor verification priorities
- Track partner sales, new launches and biosimilar effects underlying royalty growth, particularly the balance between newer products and mature Roche products.
- Separate recurring operating performance from the $33 million argenx milestone and consider the limited comparability of 2022 results following the Antares acquisition.
- Monitor debt service, conversion terms and covenant headroom alongside the company’s cash generation and planned capital returns.
- Assess growth and execution in the Antares-derived specialty and device businesses, including the NOCDURNA transition, supply continuity and material patent developments.