Halozyme Therapeutics, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods. Unless noted, amounts are in U.S. dollars and millions.
Business context
Halozyme licenses its ENHANZE drug-delivery technology, based on rHuPH20, to biopharmaceutical partners and earns license and milestone fees, product-supply revenue and royalties. It also sells Hylenex. Following the failure of the HALO-301 PEGPH20 study to meet its primary overall-survival endpoint, the company stopped PEGPH20 development and completed a restructuring focused on ENHANZE and Hylenex.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $55.2 | $39.1 | $80.6 | $96.1 |
| Royalties | $15.8 | $18.1 | $32.7 | $36.1 |
| Product sales, net | $6.3 | $5.8 | $14.5 | $14.2 |
| Collaborative-agreement revenue | $33.0 | $15.3 | $33.4 | $45.9 |
| Operating income (loss) | $29.6 | ($14.0) | $26.3 | ($11.0) |
| Net income (loss) | $25.8 | ($14.6) | $19.7 | ($12.8) |
| Diluted EPS | $0.19 | ($0.10) | $0.14 | ($0.09) |
Q2 operating margin was approximately 53.5% (operating income divided by revenue), versus a loss in the prior-year quarter; six-month operating margin was approximately 32.7%, versus a loss. These results include a substantial reduction in operating expenses following PEGPH20 discontinuation. The filing does not present a single overall gross-margin measure; product cost of sales was $5.7 million in Q2 and $11.5 million for the six months.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $133.6 million and available-for-sale marketable securities were $251.8 million, totaling approximately $385.4 million in cash, cash equivalents and securities. Management said these resources should fund operations for at least the next 12 months.
- Six-month operating cash flow was a use of $1.6 million, improved from a use of $29.2 million in 2019. Investing activities provided $50.0 million; financing activities used $35.0 million, including $53.6 million of share repurchases.
- Long-term debt, net of discount, was $390.1 million at June 30. It principally comprises $460.0 million principal of 1.25% convertible notes due December 2024, less a $69.9 million unamortized discount. The notes’ initial conversion price is approximately $23.85 per share. The royalty-backed loan was repaid and terminated in June 2020.
- Current assets were $500.4 million and current liabilities were $26.1 million. Stockholders’ equity was $105.6 million. The company reported compliance with the convertible-note indenture covenants.
Material changes and notable items
- Q2 revenue rose 41% year over year, driven primarily by collaborative-agreement revenue, including $25.0 million of Janssen development/regulatory milestone revenue and BMS-related license revenue. For the first six months, revenue fell 16%, largely reflecting $45.0 million of argenx license revenue recognized in the prior-year period versus $32.3 million associated with Janssen and BMS in 2020.
- Royalties declined in both comparison periods, mainly because of lower Roche Herceptin SC sales. Hylenex sales were also lower; management linked the Q2 decline to COVID-related postponements of elective procedures, including cataract surgery.
- Q2 R&D expense fell to $9.0 million from $33.9 million, primarily because PEGPH20 clinical activity ended. Six-month R&D declined to $19.1 million from $65.2 million. SG&A also declined, to $11.0 million in Q2 and $23.6 million for six months, reflecting lower compensation and discontinued PEGPH20 commercial-preparation spending.
- Interest expense increased to $5.0 million in Q2 and $10.4 million for six months, mainly due to the convertible notes’ accounting discount amortization.
- Inventory increased to $48.3 million from $29.4 million at year-end, mainly reflecting higher bulk rHuPH20 inventory.
Outlook, commentary and risks
Management expects royalty revenue to grow with recent partner launches, while noting that growth may be offset by European biosimilar competition and COVID-related effects on mature products. Product-supply and milestone revenue may fluctuate with partner needs, development progress and regulatory milestones. No numerical revenue or earnings guidance is provided.
Key developments included U.S. approval of Roche’s Phesgo and U.S. and EU approvals/launches of Janssen’s subcutaneous DARZALEX formulations, generating milestone revenue. Management reported that suppliers were operating without COVID-related interruption at the filing date, but cautioned that pandemic duration and effects on partners, clinical programs, regulatory timelines, demand and supply chains remained uncertain. The NIH CRADA study was delayed by COVID-19.
Principal risks include dependence on collaborators for development and commercialization; regulatory, clinical and market-acceptance uncertainty; reliance on third-party manufacturers and suppliers; COVID-19 impacts; restructuring-related disruption and retention of key personnel; and debt service, conversion and potential dilution from the convertible notes. The filing reports no legal proceeding expected by management to have a material adverse effect.
Important facts for investors to verify
- How much of the 2020 earnings and revenue growth depends on milestone and license revenue that may not recur, versus ongoing royalties and product sales.
- Whether new partner launches translate into royalty growth sufficient to offset Roche product pressure, biosimilars and COVID-related demand effects.
- Progress and timing of partner clinical, regulatory and commercial programs, including any COVID-related delays and manufacturing capacity or supply constraints.
- Cash use, inventory levels and the company’s ability to sustain operations while servicing the $460.0 million convertible-note principal and managing potential conversion or dilution.
- Whether restructuring savings are sustained without impairing the company’s ability to support ENHANZE collaborations and retain essential personnel.