Halozyme Therapeutics, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts below are in millions of dollars unless otherwise stated. Financial statements are unaudited.
Business context
Halozyme develops oncology therapies and licenses its ENHANZE technology, based on rHuPH20, to biopharmaceutical partners. It earns revenue from Hylenex and bulk enzyme sales, royalties on partner products, and collaboration fees and reimbursements. Its lead proprietary program, PEGPH20, was in Phase 3 testing for pancreatic cancer; other PEGPH20 studies were in earlier stages.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $63.7 | $31.9 | $127.0 | $107.7 |
| Product sales, net | $13.6 | $13.3 | $37.8 | $40.0 |
| Royalties | $17.1 | $13.0 | $45.8 | $36.7 |
| Collaborative agreement revenue | $33.0 | $5.5 | $43.4 | $31.0 |
| Operating income (loss) | $8.1 | $(22.7) | $(44.9) | $(60.6) |
| Net income (loss) | $2.7 | $(28.9) | $(60.9) | $(75.6) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(19.2) | $(34.6) |
Q3 2017 diluted earnings were $0.02 per share, versus a loss of $0.23 per share a year earlier. Nine-month loss per share was $0.45, versus $0.59. The Q3 and year-to-date revenue comparison benefited from a $30.0 million Roche upfront license fee recognized in Q3. Excluding that fee, reported revenue growth would have been substantially lower; the filing does not provide an adjusted earnings measure.
Product-sales gross margin was approximately 38.7% in Q3 2017 versus 31.5% in Q3 2016, and 37.4% for the first nine months versus 36.9%. These calculations use product sales less cost of product sales and do not represent total-company margin. Overall operating margin was approximately 12.7% in Q3 and negative 35.4% for the nine-month period.
Financial position, liquidity and debt
- At September 30, cash and cash equivalents were $164.4 million and available-for-sale marketable securities were $152.5 million, or $316.9 million combined. Management said these resources were expected to fund operations for at least 12 months.
- Cash, cash equivalents and restricted cash increased $97.6 million in the first nine months. Operating activities used $19.2 million; investing activities used $14.7 million; financing activities provided $131.6 million, primarily reflecting $134.9 million net proceeds from a May stock offering.
- Total debt, net of discounts, was approximately $206.9 million: $61.4 million current and $145.4 million long-term. The royalty-backed loan had a 10.1% stated rate at quarter-end and a $151.3 million reported balance; management estimated repayment in Q1 2020, subject to future royalty receipts. The separate Oxford/SVB loan balance was $55.6 million, with maturity in January 2021.
- Stockholders’ equity was $72.4 million, compared with a $32.5 million deficit at December 31, 2016. The company sold 11.5 million shares in May for $134.9 million net proceeds. Outstanding common shares were 142.3 million at September 30.
Material changes and management outlook
- Revenue rose 100% in Q3, largely because of the $30.0 million Roche license fee. Royalties rose with partner sales of Herceptin SC, MabThera SC/RITUXAN HYCELA and HYQVIA. Nine-month royalties increased 25% year over year.
- Nine-month product sales declined 5%, mainly due to lower bulk rHuPH20 sales to Roche and lower Hylenex sales, partly offset by higher Baxalta sales. Halozyme expected Roche bulk-enzyme purchases to be lower during 2017–2018 as Roche used existing inventory and transitioned to a new manufacturing facility. Hylenex sales were expected to be flat or grow modestly, with possible periods of decline from competition.
- PEGPH20 research and development expense increased 10% year over year for the first nine months as clinical activity expanded. Management expected PEGPH20 spending to increase; it expected collaboration/platform manufacturing expense to decline after Roche facility validation and SG&A to rise moderately.
- The Phase 3 PEGPH20 pancreatic cancer study was proceeding as planned after a September safety review. Management projected reaching the interim PFS-event target in Q4 2018, with approximately 500 patients enrolled by then. These are forward-looking estimates, not assurances.
- In September, Roche agreed to an additional exclusive ENHANZE target for $30.0 million, recognized as Q3 revenue. The BMS collaboration became effective in November 2017; its $105.0 million upfront payment was payable then, with $101.4 million expected to be recognized in Q4 2017. BMS selected several targets, including PD-1, and may select more.
- Notable clinical risk: the independent monitor for the all-comer SWOG PEGPH20/FOLFIRINOX study found preliminary data suggested unlikely efficacy on overall survival and a higher death rate in the PEGPH20 arm; enrollment was stopped. Halozyme said its other PEGPH20 studies continued. A separate KEYTRUDA combination study was modified to exclude at-risk patients and increase liver monitoring after signs of hepato-biliary dysfunction.
- Halozyme planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective approach, and anticipated a material financial-statement impact, including changes to timing of collaboration-license and royalty revenue recognition. It could not yet quantify the impact.
Risks, contingencies and unusual items
The company reported a history of losses and negative operating cash flows and said it may need additional financing; financing may be unavailable or dilutive, and management also cautioned that existing resources may not fund operations until profitability, if achieved. Key risks include clinical efficacy and safety, regulatory approval, reliance on partners and contract manufacturers, royalty variability, debt service and restrictive loan covenants, competition, and the possibility that collaborators terminate or reduce programs. The royalty-backed debt repayment depends on royalties from Roche and Baxalta. The company reported compliance with loan covenants and no material adverse change at quarter-end. It was not party to legal proceedings that management believed would have a material adverse effect.
Important facts for investors to verify
- Whether PEGPH20’s Phase 3 study meets its efficacy and safety endpoints, and whether the projected Q4 2018 interim analysis timing holds.
- How the SWOG safety and futility findings and liver-monitoring changes affect the broader PEGPH20 development program.
- Partner product sales, royalties, and Roche’s manufacturing transition, which may affect bulk sales and repayment of the royalty-backed loan.
- Receipt and Q4 revenue recognition of the BMS upfront payment, and the commercial and development progress of selected collaboration targets.
- Actual cash burn, debt repayment progress, and financing needs against management’s liquidity horizon.
- The quantified effects of adopting the new revenue recognition standard in 2018.