HALOzyme Therapeutics, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The interim financial statements are unaudited. Halozyme is a biopharmaceutical company developing its own enzyme-based therapies and licensing rHuPH20 technology to collaborators; Hylenex recombinant was its marketed proprietary product.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $16.0 million | $5.3 million | $42.3 million | $20.5 million |
| Product sales, net | $10.0 million | $0.7 million | $14.6 million | $1.4 million |
| Collaborative revenue | $6.0 million | $4.6 million | $27.7 million | $19.1 million |
| Operating expenses | $34.5 million | $25.4 million | $101.4 million | $69.8 million |
| Operating loss | $(18.5) million | $(20.0) million | $(59.1) million | $(49.2) million |
| Net loss | $(19.3) million | $(20.0) million | $(61.5) million | $(49.1) million |
| Net loss per share | $(0.17) | $(0.18) | $(0.55) | $(0.44) |
Q3 product sales included $7.9 million of Herceptin SC API sales; Hylenex sales also increased. Nine-month collaborative revenue rose, primarily from increased Roche manufacturing and research reimbursements. Product sales costs were $0.7 million in Q3 and $2.7 million for the nine months; the filing notes that much collaboration API manufacturing cost incurred before European approvals had already been expensed as R&D, limiting current-period product costs. Nine-month R&D expense increased to $75.7 million from $51.5 million, and SG&A rose to $23.0 million from $17.8 million.
Cash flow: Operating activities used $34.1 million in the first nine months, versus $47.4 million in 2012. Investing activities used $49.9 million, largely reflecting $48.9 million of marketable-security purchases. Financing activities provided $2.0 million, compared with $83.1 million in 2012, which included public-offering proceeds. Cash and cash equivalents were $17.5 million at September 30; marketable securities were $47.8 million, for combined cash, equivalents and securities of approximately $65.3 million.
Balance sheet and debt: Total assets were $110.1 million, down from $134.7 million at December 31, 2012. Current liabilities were $39.6 million and current assets $102.8 million. Stockholders’ equity was a deficit of $3.5 million, compared with equity of $48.9 million at year-end. Net long-term debt was approximately $29.8 million, including $6.0 million classified as current; the loan carries a 7.55% fixed rate and matures January 1, 2017. The agreement also requires a $2.55 million final payment. Nine-month interest expense was $2.5 million. No clear standalone gross-margin figure is presented.
Material changes and business developments
- Revenue increased substantially year over year, especially product sales following European approvals of Roche’s Herceptin SC and Baxter’s HyQvia and increased Hylenex sales.
- Roche’s first commercial sale of Herceptin SC triggered a $10 million payment, and Baxter’s first HyQvia sale triggered a $4 million payment. Both were treated as sales-based payments and deferred for recognition over the remaining collaboration terms.
- Pfizer selected a fourth exclusive target in September, generating a $1.5 million license fee.
- R&D spending increased, including higher activity in the insulin and PEGPH20 programs and collaboration manufacturing. SG&A also rose with headcount, marketing and professional-service costs.
Outlook, risks and contingencies
- Management expected 2013 net cash burn of approximately $45 million to $50 million and stated existing cash and cash equivalents should fund operations for at least the next 12 months. The company did not expect revenue to fund operations until 2014 at the earliest. Management cautioned that cash resources may not last until the company becomes cash-flow positive, if ever.
- Management expected product sales, product costs, R&D expenses and SG&A to increase through the end of 2013. Revenue from collaborator-requested services, API supply, milestones and royalties remains dependent on collaborator activity and is difficult to predict.
- Regulatory and safety risks are prominent: the FDA had issued a complete response letter for Baxter’s U.S. HyQvia application, requesting additional preclinical data regarding non-neutralizing anti-rHuPH20 antibodies. Baxter expected to resubmit before year-end 2013. ViroPharma discontinued its Phase 2 subcutaneous Cinryze study after an unexpected incidence and titer of such antibodies; no associated adverse clinical effects had been reported. The filing warns these issues could affect other programs.
- Other material risks include clinical-trial failure or delay, dependence on collaborators and contract manufacturers, commercialization and reimbursement uncertainty, potential need for additional financing and possible dilution, and secured-loan covenant/default risk. The company reported compliance with material loan covenants and no material adverse change at quarter-end.
- No legal proceeding was identified as likely to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether collaborator launches translate into sustained API sales, royalties and cash receipts, and how deferred revenue is recognized.
- Progress on Baxter’s FDA response and U.S. HyQvia resubmission, and any further findings concerning anti-rHuPH20 antibodies across programs.
- Actual cash burn versus management’s $45–$50 million 2013 estimate, and whether the stated liquidity runway remains adequate.
- Clinical and regulatory progress in the insulin, PEGPH20 and HTI-501 programs, including the limitations of early or exploratory clinical results.
- Debt repayment obligations, loan covenants, manufacturing capacity and the potential need for financing that could dilute shareholders.