Halozyme Therapeutics, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Halozyme is a biotechnology company developing oncology therapies, including PEGPH20, and licensing its ENHANZE technology to biopharmaceutical partners. Results are unaudited.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $30.9 million | $29.6 million |
| Operating loss | $23.7 million | $27.5 million |
| Net loss | $27.5 million | $32.9 million |
| Net loss per share, basic and diluted | $0.19 | $0.26 |
| Cash used in operating activities | $22.2 million | $22.5 million |
- Revenue comprised $20.9 million in royalties, $6.8 million in product sales and $3.1 million under collaborative agreements. Gross profit was $27.8 million, approximately 90% of revenue, versus $22.0 million, approximately 75%, in Q1 2017; lower product costs contributed to the improvement.
- At March 31, 2018, cash and cash equivalents were $98.0 million and marketable securities were $335.7 million, totaling $433.7 million. Total assets were $495.5 million and stockholders’ equity was $265.1 million. Management said available funds were expected to support operations for at least 12 months.
- Net debt carrying value was approximately $185.2 million: $131.8 million on the royalty-backed loan and $53.4 million on the Oxford/Silicon Valley Bank loan. Q1 interest expense was $5.2 million. Both loan facilities were in covenant compliance.
- Cash, cash equivalents and restricted cash decreased by $70.7 million during the quarter, reflecting operating cash use, net purchases of securities and debt repayments. Purchases and maturities of marketable securities were investing cash flows, so the decrease in cash alone does not represent total liquidity consumption.
Material changes versus Q1 2017
- Revenue increased 4%, as royalties rose 50% to $20.9 million, driven by sales of Roche’s Herceptin SC and MabThera SC/RITUXAN HYCELA and Baxalta’s HYQVIA.
- Product sales fell 40% to $6.8 million, mainly because bulk rHuPH20 sales to Roche and Baxalta declined. Halozyme expected Roche’s inventory transition to its new manufacturing facility to continue weighing on bulk sales in 2018.
- Collaborative-agreement revenue declined 25% to $3.1 million, largely because Roche-related manufacturing-facility services had wound down; BMS license revenue partly offset the decline.
- Research and development expense rose 3% to $38.0 million. PEGPH20 expense increased 17% to $32.5 million with greater clinical activity. SG&A rose 7% to $13.6 million. Lower product costs and higher royalties helped narrow the net loss.
Outlook, commentary and risks
- Management expected PEGPH20 development spending to increase, SG&A to rise moderately, and royalties generally to grow with partner-product sales, while noting that revenue and partner activity may fluctuate.
- Halozyme projected the HALO-301 Phase 3 trial’s target number of progression-free-survival events between December 2018 and February 2019, and approximately 500 patients enrolled by year-end 2018. The trial evaluates PEGPH20 with gemcitabine and ABRAXANE in stage IV pancreatic cancer patients selected for high tumor hyaluronan.
- In January 2018, SWOG reported final results from its all-comer pancreatic cancer study: median overall survival was 7.7 months with PEGPH20 plus modified FOLFIRINOX versus 14.4 months with modified FOLFIRINOX alone, alongside increased gastrointestinal toxicities. Halozyme said its other PEGPH20 studies would continue unchanged.
- The Phase 1b portion of the PEGPH20/eribulin breast cancer study closed enrollment; Eisai decided not to proceed with Phase 2. Data analysis continued, with results expected to be submitted to a scientific forum in the second half of 2018.
- Halozyme adopted ASC 606 revenue accounting on January 1, 2018 using the modified retrospective method. Adoption increased opening accounts receivable by $19.4 million, reduced deferred revenue by $51.8 million and reduced accumulated deficit by $71.2 million. Applying ASC 606 increased Q1 2018 revenue by $1.1 million. Reported Q1 2017 revenue was not restated, so comparisons are not fully on the same accounting basis.
- Key risks include clinical efficacy and safety, regulatory approval, reliance on collaborators and contract manufacturers, and the possibility that royalty receipts or other financing will not meet cash needs. The royalty-backed loan was estimated to be repaid in Q1 2020, but lower-than-expected royalties could extend repayment. Halozyme reported no material legal proceedings.
Important facts for investors to verify
- HALO-301 enrollment pace, event timing, safety findings and eventual PFS and overall-survival results.
- Commercial sales trends for Roche and Baxalta products and the resulting royalties available to service the royalty-backed loan.
- Whether lower bulk rHuPH20 sales and declining Roche-related service revenue are offset by royalty growth and new collaboration milestones.
- Cash burn and spending against the $433.7 million of cash, cash equivalents and marketable securities, including any future financing needs.
- Implications of ASC 606 for revenue timing and comparability with prior periods.