Halozyme Therapeutics, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
Halozyme licenses its ENHANZE drug-delivery technology, based on recombinant human hyaluronidase (rHuPH20), to biopharma partners and sells Hylenex and bulk rHuPH20. It reported royalties from five marketed partner products. In March, it signed an ENHANZE agreement with Chugai, receiving a $25 million upfront payment. In April, after quarter-end, it agreed to acquire Antares Pharma.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $117.3 | $89.0 |
| Royalties | $69.6 | $36.9 |
| Product sales, net | $22.1 | $21.8 |
| Revenue under collaborative agreements | $25.5 | $30.3 |
| Operating expenses | $41.6 | $38.3 |
| Operating income | $75.7 | $50.7 |
| Net income | $60.1 | $27.9 |
| Diluted EPS | $0.43 | $0.19 |
| Net cash from operating activities | $47.8 | $58.3 |
Revenue increased 31.7%, led by higher royalties, principally from continued sales growth of Janssen’s DARZALEX FASPRO and Roche’s Phesgo. Operating margin was approximately 64.5%, versus 57.0% a year earlier; net margin was approximately 51.3%, versus 31.3%. The 2021 comparison included a $21.0 million inducement-conversion expense on convertible notes, while 2022 included $14.3 million of income tax expense versus $0.2 million in 2021. The filing cautions that the 2021 release of substantially all deferred-tax valuation allowance disproportionately increased reported net income.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $117.8 million; available-for-sale marketable securities were $668.3 million, for combined cash and investments of $786.1 million at March 31, 2022.
- Total assets were $1.162 billion and stockholders’ equity was $260.3 million. Current assets were $988.7 million and current liabilities were $111.7 million.
- Convertible-note principal totaled $895.9 million; carrying value, net of debt discounts, was $877.6 million. The 2024 notes, with $90.9 million principal, were classified as current and were convertible at quarter-end. The $805.0 million 2027 notes were not convertible at that date.
- The $75 million revolving credit facility was undrawn and could be expanded to $250 million subject to conditions. The company reported compliance with debt covenants.
- Management said existing cash, cash equivalents and marketable securities were sufficient to fund operations for at least 12 months. This assessment should be considered alongside the planned Antares acquisition and its financing needs.
Cash flow and material changes
Operating cash flow fell $10.5 million year over year, mainly due to increased working-capital use, partly offset by higher royalty revenue. Investing cash use was $49.3 million, primarily reflecting net purchases of marketable securities. Financing provided $0.6 million, compared with $338.7 million in Q1 2021, when financing included the 2027 note issuance and related note-conversion and share-repurchase activity.
- Royalties rose $32.7 million; product sales increased $0.4 million, with Hylenex growth partly offset by slightly lower bulk rHuPH20 sales.
- Collaborative-agreement revenue declined $4.8 million: Q1 2022 included Chugai’s $25 million upfront fee, while Q1 2021 included $30 million of event-based milestone and other fees.
- R&D expense increased $2.8 million to $11.9 million, mainly due to compensation and investment in ENHANZE. SG&A increased $2.8 million to $13.8 million, reflecting compensation and acquisition-related diligence activity.
- Marketable securities had $2.8 million of gross unrealized losses at quarter-end. Management attributed none to credit loss and said it did not intend, and was not more likely than not required, to sell before recovery of amortized cost.
Outlook, risks and unusual items
Management expected royalty revenue to continue growing as newer partner products expand, partly offset by biosimilar effects on mature ENHANZE products. It expected bulk rHuPH20 sales to fluctuate with partner demand and Hylenex sales to be relatively flat, with modest market growth offset by a reduction in the COVID-19 backlog. Collaboration-fee revenue is expected to fluctuate with partner milestones and new agreements. The filing gives no clear numerical full-year revenue or earnings guidance.
On April 12, 2022, Halozyme agreed to acquire Antares for $5.60 per share, a stated transaction value of approximately $960 million, with closing expected in the first half of 2022. The company described the acquisition as expected to be accretive to revenue and non-GAAP earnings and to enhance growth and cash generation. It also disclosed a financing commitment for a $375 million secured term loan and a $75 million revolving facility. Completion, financing, integration and realization of expected benefits remain uncertain.
Principal risks include dependence on partner development, regulatory approvals and commercialization; rHuPH20 and contract-manufacturer supply continuity; competition and biosimilar pressure; patent protection; COVID-19-related disruption; and substantial debt, potential note conversion and acquisition execution. The company reported no legal proceedings expected by management to have a material adverse effect and no material changes in market risk during the quarter. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether Antares closed on the expected timetable, the final funding mix and terms, and post-close integration results.
- Whether royalty growth from DARZALEX FASPRO and Phesgo continues to offset biosimilar pressure on older products.
- Cash generation and working-capital trends, including partner purchase commitments and bulk rHuPH20 demand.
- Convertible-note conversion conditions, cash settlement exposure and dilution implications, particularly for the 2024 notes.
- Whether partner clinical, regulatory and supply milestones—and management’s non-numeric outlook assumptions—are achieved.