Halozyme Therapeutics, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results are presented against the comparable 2020 periods. Halozyme licenses its ENHANZE drug-delivery technology to biopharmaceutical partners and also sells Hylenex and bulk rHuPH20.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $136.5 million | $55.2 million | $225.5 million | $80.6 million |
| Operating income | $93.0 million | $29.6 million | $143.8 million | $26.3 million |
| Net income | $91.5 million | $25.8 million | $119.4 million | $19.7 million |
| Diluted earnings per share | $0.62 | $0.19 | $0.81 | $0.14 |
| Operating margin | 68.2% | 53.5% | 63.8% | 32.7% |
Q2 revenue rose approximately 147% year over year; first-half revenue rose approximately 180%. Royalties were $45.8 million for Q2 and $82.7 million for the first half, driven mainly by Janssen’s DARZALEX FASPRO launches, partly offset by lower Roche product sales. Product sales were $30.4 million for Q2 and $52.1 million for the first half, largely reflecting increased bulk rHuPH20 supply to collaborators. Collaborative-agreement revenue was $60.3 million for Q2 and $90.7 million for the first half.
Q2 cost of product sales was $23.0 million versus $5.7 million a year earlier; approximate product gross margin was 24% versus 9%. The increase in cost reflected higher bulk rHuPH20 sales. Q2 research and development expense declined to $8.1 million from $9.0 million, primarily following the discontinuation of PEGPH20 development and closure of oncology operations. SG&A increased to $12.3 million from $11.0 million.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $447.0 million and available-for-sale marketable securities were $308.3 million, totaling $755.3 million. Management stated these resources should fund operations for at least the next 12 months.
- First-half operating cash flow was $95.2 million, compared with $1.6 million used in the prior-year period. Investing activities used $89.9 million; financing activities provided $293.9 million. Cash, cash equivalents and restricted cash increased $299.3 million to $447.5 million.
- Debt carrying value was $874.7 million: $805.0 million principal of 0.25% convertible notes due 2027 and $90.9 million principal of 1.25% notes due 2024. The 2024 notes were classified as current because their conditional conversion feature was triggered; the company elected to settle principal in cash and any premium, if applicable, in shares. The 2027 notes were not convertible as of quarter-end.
- Halozyme issued the 2027 notes in March, receiving approximately $784.9 million net proceeds. It also repurchased $125.0 million of shares in the first half, including $48.8 million in Q2.
Material changes, outlook and notable items
- Revenue and earnings growth reflected royalties and partner product supply, alongside collaboration payments. Q2 included a $40 million ViiV upfront payment and a $20 million sales-based milestone; the first half also included $30 million of development and regulatory milestone revenue.
- In March, Halozyme completed an induced conversion of $369.1 million principal of its 2024 notes, paying approximately $370.2 million in cash and issuing about 9.08 million shares. It recorded $21.0 million of induced-conversion expense in the first half.
- Early adoption of ASU 2020-06 on January 1, 2021 changed convertible-debt accounting, including a $52.6 million increase in debt and a $65.6 million decrease in additional paid-in capital. The filing describes these adoption adjustments as non-cash.
- Management expects royalty revenue to grow from recent partner launches, partly offset by biosimilar pressure on mature Roche products. Hylenex sales are expected to be relatively flat, while bulk rHuPH20 and ENHANZE drug-product sales and collaboration milestone/license revenue may fluctuate. The filing provides no numerical revenue or earnings guidance.
- Risks highlighted include dependence on collaborators’ development and commercialization decisions, regulatory and clinical outcomes, third-party manufacturing and supply, COVID-19 disruption, competition and biosimilar pressure, intellectual-property protection, and debt and potential conversion-related liquidity or dilution. The company reported no material legal proceedings and said disclosure controls were effective.
- Management said it had not identified COVID-19 delays expected to materially affect milestone revenue based on partner communications, but continued monitoring; suppliers were operating without COVID-related interruption at the time of the filing.
Most important facts for investors to verify
- Whether partner launches and sales sustain royalty growth, and how biosimilar competition affects Roche-related royalties.
- Timing, amount and recurrence of collaboration milestones and upfront fees, which contributed materially to reported revenue.
- Whether collaborators’ demand and third-party manufacturing capacity support bulk rHuPH20 sales and delivery commitments.
- Debt terms, conversion status of the 2024 notes, future cash settlement requirements, and possible dilution from notes and equity awards.
- Progress toward sustained profitability and any valuation-allowance release: the company maintained a full valuation allowance but said positive earnings could support reconsideration within six months.