Halozyme Therapeutics, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results are presented in U.S. dollars; financial amounts below are in millions unless stated otherwise. Halozyme develops oncology therapies and licenses its ENHANZE drug-delivery technology. Its lead proprietary program is PEGPH20; it also earns product revenue and royalties from partnered products.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $25.6 | $63.7 | $91.6 | $127.0 |
| Operating income (loss) | $(25.5) | $8.1 | $(69.3) | $(44.9) |
| Net income (loss) | $(27.9) | $2.7 | $(78.2) | $(60.9) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(60.0) | $(19.2) |
- Q3 royalties were $18.7 million, up from $17.1 million, driven mainly by Roche product sales. Nine-month royalties rose to $59.6 million from $45.8 million, reflecting higher sales of Roche’s Herceptin SC and MabThera SC and Baxalta’s HYQVIA.
- Q3 product sales fell to $6.3 million from $13.6 million; nine-month product sales declined to $17.6 million from $37.8 million, chiefly because bulk rHuPH20 sales to Roche and Baxalta decreased.
- Collaborative-agreement revenue was $0.6 million in Q3 versus $33.0 million, and $14.4 million for nine months versus $43.4 million. The main comparison was a $30.0 million Roche upfront fee recognized in 2017; 2018 included BMS, Alexion and Roche milestone/license revenue.
- R&D expense increased to $35.5 million in Q3 and $113.6 million for nine months, principally reflecting increased PEGPH20 clinical activity. SG&A was $14.9 million and $42.8 million, respectively, with increases related in part to market research for a potential PEGPH20 launch and compensation.
- Operating margin was approximately negative 99.7% for Q3 and negative 75.6% for the nine-month period. Interest expense was $4.3 million for Q3 and $14.3 million for nine months. No quarterly or nine-month cash-flow margin is presented.
- At September 30, cash and cash equivalents were $55.0 million and marketable securities were $309.3 million, totaling approximately $364.4 million in cash, cash equivalents and marketable securities. Cash, cash equivalents and restricted cash at period-end were $55.5 million.
- Net carrying debt was approximately $146.5 million: $88.5 million current and $57.9 million long-term. The royalty-backed loan carried a 10.25% rate and had an outstanding balance of $101.0 million; the Oxford/SVB loan balance was $45.5 million. The company reported covenant compliance for both facilities.
Changes, outlook and notable items
- Revenue comparisons are affected by the January 1, 2018 adoption of ASC 606 using the modified retrospective method; prior-period amounts were not restated. Adoption reduced deferred revenue by $51.8 million and accumulated deficit by $71.2 million. Management said ASC 606 decreased reported revenue by $6.4 million for Q3 and increased it by $2.6 million for the nine-month period compared with the previous accounting rules.
- Management said existing cash, cash equivalents and marketable securities should fund operations for at least the next 12 months, while noting that resources may not fund operations until profitability, if ever. The company expects PEGPH20 R&D expenses to increase and SG&A expenses to rise moderately.
- Management projected the HALO-301 Phase 3 trial’s target PFS-event count between December 2018 and February 2019 and approximately 500 enrolled patients by year-end 2018. The independent safety committee had recommended the trial proceed as planned.
- Management estimated the royalty-backed loan would be repaid in Q1 2020, but said repayment could take longer if royalty receipts are lower than expected. The Oxford/SVB facility matures January 2021.
- In October 2018, after quarter-end, Halozyme signed a Roche ENHANZE agreement for one additional exclusive target and options for two more, receiving a $25.0 million upfront payment and potential milestones of up to $160–$165 million per target, plus mid-single-digit royalties on commercial sales.
- Clinical and commercial risks include PEGPH20 trial efficacy and safety, regulatory approval and companion-diagnostic performance, collaborator execution, manufacturing supply, and the company’s dependence on partnered royalties and milestone payments. Prior PEGPH20 studies reported thromboembolic safety concerns; the SWOG study of PEGPH20 with modified FOLFIRINOX stopped for futility, with reported median overall survival of 7.7 months versus 14.4 months in the control arm. In the KEYTRUDA study, gastric-cancer response did not meet the company’s threshold for continued development of that combination, and enrollment in both cohorts ended.
- The filing reported no legal proceeding whose adverse outcome management believed would materially affect results or financial position. Disclosure controls were considered effective, and no significant change in internal control over financial reporting was reported.
Important facts for investors to verify
- HALO-301 enrollment, interim PFS-event timing, efficacy, safety and regulatory pathway.
- Whether royalty growth offsets lower and variable bulk rHuPH20 sales and fluctuating collaboration milestones.
- Cash burn, operating runway and the assumptions supporting the Q1 2020 royalty-loan repayment estimate.
- Collaborator progress, product uptake, manufacturing capacity and regulatory approvals, including the U.S. Herceptin SC application.
- ASC 606’s effect on reported revenue, receivables and deferred revenue when comparing periods.