Halozyme Therapeutics, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited results; comparisons are with Q1 2018 unless stated otherwise. Halozyme is a biotechnology company developing oncology therapies and licensing its ENHANZE drug-delivery technology. Its lead proprietary program is PEGPH20; partner products and programs provide licensing, supply and royalty revenue.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $56.9 million | $30.9 million | Up $26.1 million |
| Operating income (loss) | $3.0 million | ($23.7 million) | Improved $26.7 million |
| Net income (loss) | $1.8 million | ($27.5 million) | Improved $29.3 million |
| Diluted earnings (loss) per share | $0.01 | ($0.19) | — |
| Net cash used in operating activities | $4.4 million | $22.2 million | Cash use decreased $17.8 million |
Revenue included $18.0 million in royalties, $8.4 million in product sales and $30.6 million under collaborative agreements. The latter included a $30.0 million argenx upfront license fee. Operating margin was approximately 5.2%. Cost of product sales was $4.6 million; the filing does not present a single consolidated gross-margin measure.
At March 31, 2019, cash and cash equivalents were $60.6 million and available-for-sale marketable securities were $268.1 million, or $328.7 million combined. Current assets were $409.0 million and current liabilities $138.7 million. Net carrying value of debt was approximately $105.4 million: $86.7 million current and $18.7 million long-term. Total assets were $429.1 million and stockholders’ equity $260.0 million.
Cash, cash equivalents and restricted cash increased $2.7 million during the quarter. Investing activities provided $28.8 million, principally reflecting marketable-security maturities; financing activities used $21.7 million, including $21.3 million of debt repayments. Inventory increased to $31.2 million from $22.6 million at year-end.
Material changes and drivers
- Total revenue increased primarily because of the argenx upfront payment. In Q1 2018, collaborative revenue included BMS and Roche payments; Q1 2019 had no event-based milestone revenue.
- Royalties declined to $18.0 million from $20.9 million, mainly due to lower Roche Herceptin SC sales, partly offset by higher U.S. RITUXAN HYCELA sales.
- Product sales rose to $8.4 million from $6.8 million, mainly on higher bulk rHuPH20 sales to Roche; Hylenex sales declined.
- R&D expense declined to $31.3 million from $38.0 million, largely due to reduced PEGPH20 trial activity after HALO-301 enrollment completed. SG&A increased to $18.0 million from $13.6 million, including market research for a potential PEGPH20 launch and higher compensation costs.
- Interest expense fell to $3.2 million from $5.2 million, primarily reflecting a lower royalty-backed loan balance.
Outlook, commentary and risks
- Management said existing cash, cash equivalents and marketable securities were expected to fund operations for at least the next 12 months. It also cautioned that resources may not fund operations through profitability and that additional financing may be needed; financing could be unavailable or dilute shareholders.
- Management expected royalty revenue to be flat or decline in the near term, partly due to European biosimilar competition. Hylenex sales were expected to be flat or declining; bulk rHuPH20 and ENHANZE product sales may fluctuate with collaborator demand.
- Management expected PEGPH20 R&D expense to decrease in the near term, ENHANZE/platform R&D to increase, and SG&A to rise moderately.
- HALO-301, a Phase 3 trial of PEGPH20 with chemotherapy in HA-high stage IV pancreatic cancer, was fully enrolled at approximately 500 patients. The company projected reaching the target overall-survival events in Q3 2019 and expected topline results in the second half of 2019. The independent safety committee recommended in January that the study proceed as planned.
- Clinical and safety uncertainty remains material. An earlier SWOG study of PEGPH20 with modified FOLFIRINOX was stopped for futility; reported median overall survival was 7.7 months in the PEGPH20 arm versus 14.4 months in the control arm, with increased gastrointestinal toxicities. In another study, thromboembolic events were more frequent in PEGPH20-containing arms than in the control arm, prompting a change in anticoagulant prophylaxis.
- Other key risks include clinical or regulatory setbacks, collaborator execution or termination, manufacturing and supply interruptions, competition and biosimilars, and debt-service obligations. The royalty-backed loan carried a 10.25% rate at quarter-end; management estimated repayment in Q1 2020, subject to royalty receipts. Both loan facilities were reported in covenant compliance. No material adverse legal proceedings were reported.
- Herceptin Hylecta received U.S. FDA approval in February 2019 and became available in the U.S. in April 2019. Janssen’s partner announced positive Phase 3 results for subcutaneous DARZALEX in February 2019.
Most important facts for investors to verify
- HALO-301’s projected timing, overall-survival results, safety profile and regulatory implications.
- Whether partner product adoption and sales support royalty growth, particularly amid biosimilar competition.
- How much of reported revenue and improved cash flow depends on episodic upfront, milestone and collaborator payments.
- Cash burn, planned R&D and commercialization spending, and whether additional capital will be required.
- Royalty-backed loan repayment progress and the effect of royalty variability on the expected Q1 2020 payoff.
- Manufacturing capacity, inventory build and supply continuity for rHuPH20 and clinical or commercial programs.