Halozyme Therapeutics, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results include Antares Pharma from its May 24, 2022 acquisition date. Unless noted, amounts are in millions of dollars.
Business context
Halozyme licenses its rHuPH20-based ENHANZE drug-delivery technology and earns royalties, milestones and product revenue. The May 2022 acquisition of Antares added auto-injector technologies and marketed products, including XYOSTED, TLANDO and NOCDURNA.
Financial highlights
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $209.0 | $115.8 | $478.6 | $341.3 |
| Operating income | $83.3 | $75.6 | $193.0 | $219.4 |
| Net income | $61.6 | $216.6 | $144.4 | $335.9 |
| Diluted EPS | $0.44 | $1.48 | $1.02 | $2.28 |
| Operating cash flow | Not reported for quarter | $157.7 | $216.9 |
- Revenue mix: Q3 royalties were $99.6, product sales $61.4 and collaborative-agreement revenue $48.0. Nine-month totals were $254.5, $129.9 and $94.3, respectively.
- Revenue drivers: Management attributed royalty growth chiefly to continued sales uptake of Janssen’s DARZALEX FASPRO and Roche’s Phesgo, partly offset by lower Herceptin SC and MabThera SC sales. Product sales rose with Antares products and partnered devices. Q3 collaborative revenue included $44.0 of development milestones; nine-month collaborative revenue was lower year over year, largely reflecting prior-year fees and milestone timing.
- Margins and expenses: Operating margin was approximately 39.9% in Q3 versus 65.2% a year earlier, and 40.3% for nine months versus 64.3%. Higher cost of sales, acquired-intangible amortization, R&D and SG&A contributed; cost of sales also included Antares inventory step-up amortization. The filing does not provide a separately stated gross margin percentage.
- Cash flow: Nine-month operating cash flow was $157.7, down from $216.9, reflecting acquisition transaction expenses and working-capital use, partly offset by higher royalties. Investing cash outflow was $485.3, including the Antares acquisition; financing cash inflow was $356.0.
- Liquidity: Cash, cash equivalents and marketable securities totaled $265.6 at September 30, down from $740.9 at December 31, 2021. Current assets were $653.2 and current liabilities $109.4. Management believed existing cash, securities and anticipated collaboration revenues would fund operations for at least 12 months.
- Debt: Convertible-note carrying value was $1,504.5 (aggregate principal $1,538.5), including $13.5 of 2024 notes, $805.0 of 2027 notes and $720.0 of 2028 notes. The 2024 notes were classified current and convertible. The $575.0 revolving facility was undrawn at quarter-end; the company reported compliance with debt covenants.
Material changes and unusual items
- Antares was acquired for total consideration of approximately $1,045.7. Preliminary acquisition accounting recorded $987.5 of identifiable intangible assets, $199.5 of goodwill and a $129.8 contingent liability related to TLANDO. Values remained subject to final valuation.
- In August, Halozyme issued $720.0 principal amount of 1.00% convertible notes due 2028, receiving approximately $702.0 net proceeds. It used proceeds in part for the Antares financing structure and the induced conversion of $77.4 principal amount of 2024 notes, which involved $77.6 cash and 1.51 million shares. It also paid $69.1 for capped calls.
- Q3 and nine-month 2021 net income benefited from a $142.5 and $142.2 income tax benefit, respectively, following release of a valuation allowance. In 2022 the company recorded tax expense of $12.1 for Q3 and $33.7 for nine months. This substantially affects year-over-year earnings comparisons.
- The company repurchased $200.0 of stock in the first nine months of 2022 under its $750.0 three-year repurchase authorization, including open-market purchases and an accelerated share repurchase.
Outlook, management commentary and risks
- No numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management expected royalty revenue to continue growing as newer ENHANZE launches offset biosimilar effects on mature products; it also expected proprietary-product growth and stated product sales and collaboration revenue may fluctuate.
- Management expected the Antares acquisition to be accretive to 2022 revenue and to support top- and bottom-line growth and cash generation through 2027 and beyond; realization depends on integration and business performance.
- For ATRS-1902, management described a planned pivotal study and expected a 505(b)(2) NDA submission by year-end 2022, subject to study success, completion of human-factors work and product-stability confirmation.
- In October 2022, Halozyme gave notice of termination of its NOCDURNA license, effective October 2023. Also in October, an FDA advisory committee recommended that Makena should not remain on the market; this could affect the partnered product and related device revenue.
- Key risks include dependence on ENHANZE, partner development and commercialization, regulatory approvals, rHuPH20 and third-party manufacturing supply, product safety and market acceptance, Antares integration, reimbursement and pricing pressure, and significant convertible debt. The company reported no legal proceedings expected by management to have a material adverse effect.
Important facts for investors to verify
- How much revenue and cash generation Antares contributes after acquisition, and whether integration delivers expected benefits.
- Whether ENHANZE partner sales, milestones and launches sustain royalty growth amid biosimilar competition and milestone timing variability.
- Debt service, the 2024 notes’ conversion or settlement requirements, potential dilution, and compliance with credit-facility covenants.
- Final Antares purchase-price valuations and changes, if any, to the TLANDO contingent liability and acquired intangible assets.
- Progress and regulatory outcomes for ATRS-1902 and partner programs, as well as the commercial impact of the NOCDURNA termination and Makena developments.