Halozyme Therapeutics, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited consolidated financial statements. Halozyme is a biopharmaceutical company developing its own products and licensing rHuPH20/Enhanze technology to collaborators; Hylenex recombinant was its marketed proprietary product.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $12.0 million | $11.8 million; up 1% |
| Product sales, net | $8.6 million | $1.5 million |
| Royalties | $0.8 million | None reported |
| Collaborative agreement revenue | $2.6 million | $10.3 million |
| Cost of product sales | $5.5 million | $0.7 million |
| Product gross profit / margin | $3.0 million / approximately 36% | Calculated from reported product sales and cost |
| Research and development | $21.4 million | $22.0 million |
| Selling, general and administrative | $10.3 million | $7.6 million |
| Operating loss | $25.2 million | $18.5 million |
| Net loss / loss per share | $26.5 million / $0.22 | $19.3 million / $0.17 |
| Cash used in operating activities | $17.6 million | $10.8 million |
At March 31, cash and cash equivalents were $76.6 million and available-for-sale marketable securities were $87.9 million, or $164.5 million combined. Current assets were $190.9 million and current liabilities $36.4 million. Long-term debt was $49.8 million net of discount ($50 million principal); the facility carries 7.55% interest, matures January 2018, and has interest-only payments for the first 12 months. The company reported compliance with material loan covenants. Accumulated deficit was $408.6 million.
Changes and drivers versus the prior-year quarter
- Revenue was nearly flat overall, but its mix changed substantially. Product sales rose by $7.1 million, including $5.9 million of bulk rHuPH20 supplied for Roche’s Herceptin SC and a $1.1 million increase in Hylenex sales. Royalties of $0.8 million reflected collaborator sales in the prior quarter.
- Collaborative agreement revenue fell by $7.7 million, mainly because bulk supply for approved products was reported as product sales rather than collaboration revenue, and collaborator reimbursement and manufacturing activity declined.
- Cost of product sales increased by $4.8 million, principally with Herceptin SC supply. Higher SG&A and interest expense also contributed to the wider loss; R&D expense declined slightly overall, despite increased spending on ultrafast insulin and PEGPH20.
- Operating cash use increased by $6.9 million. The company raised $107.7 million net through a February public offering of 8.85 million shares at $13 per share; cash and cash equivalents consequently increased from $27.4 million at year-end.
Outlook, management commentary and key risks
- Management said available cash, cash equivalents and marketable securities were expected to fund operations for at least the next 12 months. Excluding the February offering proceeds, it estimated 2014 net cash burn of approximately $45–$55 million and expected R&D expense to increase as clinical and manufacturing programs advance. These are estimates, not assurances.
- In March, Roche received European approval for MabThera SC, its second approved European Roche collaboration product using rHuPH20; the first commercial sale would trigger a $5 million sales-based payment to Halozyme, deferred because of continuing involvement obligations. Herceptin SC was already launched in Europe. Baxter’s HyQvia was approved and launched in Europe; its U.S. application was under FDA review following resubmission of additional preclinical data.
- CONSISTENT 1 met its six-month non-inferiority endpoint for A1C in the insulin-pump study. Halozyme was assessing the commercial profile and discussing with FDA what would be required to update the Hylenex label for this use; approval or commercial feasibility was not assured.
- PEGPH20: After quarter-end, Halozyme temporarily halted enrollment and dosing in its Phase 2 pancreatic-cancer study following a data-monitoring committee recommendation to assess a possible difference in thromboembolic events. FDA placed the study on clinical hold. The committee later supported resumption under a revised protocol, but at the filing date FDA still needed to lift the hold.
- ViroPharma gave notice in February to terminate its collaboration, effective after 90 days; Intrexon gave notice in April, effective after 30 days. The filing also highlights potential risks from rHuPH20 antibody findings in other programs, regulatory delays or holds, clinical and safety outcomes, reliance on contract manufacturers and collaborators, and continuing losses and financing needs.
- There were no legal proceedings identified as likely to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether FDA lifts the PEGPH20 clinical hold, and the trial’s revised protocol, safety findings and timing.
- Hylenex CSII labeling requirements, additional regulatory steps and the commercial implications of CONSISTENT 1 results.
- Actual revenue, royalty and milestone contribution from Roche and Baxter launches, and whether collaborator supply and reimbursement revenue recovers or continues to fluctuate.
- Progress and regulatory response on Baxter’s U.S. HyQvia application, and the operational and financial effects of the ViroPharma and Intrexon terminations.
- Cash burn against management’s estimate, the sufficiency of liquidity for development plans, and the cost and covenants of the secured debt.
- Potential dilution from future financing and the accuracy of Hylenex returns and chargeback estimates, which rely on management judgments.