Halozyme Therapeutics, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Halozyme is a biopharma technology company licensing its ENHANZE drug-delivery technology, based on rHuPH20, to partners; it also sells Hylenex and supplies rHuPH20 and related products. Financial amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $65.3 | $46.2 | $145.9 | $142.3 |
| Operating income (loss) | $40.3 | $(24.5) | $66.6 | $(35.5) |
| Net income (loss) | $36.2 | $(25.0) | $55.9 | $(37.8) |
| Diluted earnings (loss) per share | $0.25 | $(0.17) | $0.40 | $(0.26) |
| Operating cash flow | Not separately reported for quarter | $4.5 | $(58.8) |
Revenue rose 41% in Q3 and 3% for the nine months year over year. Q3 revenue included $32.0 million of development milestone revenue—$17.0 million from Roche and $15.0 million from argenx—alongside $23.9 million of royalties. Nine-month royalties were $56.6 million, up from $52.7 million. Product sales fell to $9.0 million in Q3 from $29.2 million, and to $23.5 million for nine months from $43.4 million, largely because 2019 included a one-time large Janssen bulk rHuPH20 order.
Profitability improved substantially, principally reflecting milestone revenue and lower costs after discontinuation of PEGPH20 development. Nine-month R&D expense fell to $26.9 million from $95.7 million; SG&A declined to $35.3 million from $53.3 million. Interest expense increased to $15.3 million for nine months from $7.9 million, primarily due to the convertible notes. Nine-month operating and net margins were approximately 46% and 38%, respectively, compared with operating and net losses in the prior-year period.
Financial position and liquidity
- At September 30, cash and cash equivalents were $65.7 million and available-for-sale marketable securities were $281.0 million, totaling $346.7 million in cash, cash equivalents and securities. This was down from $421.3 million at December 31, 2019.
- Current assets were $498.9 million and current liabilities were $27.0 million. Stockholders’ equity was $99.0 million, compared with $91.8 million at year-end 2019.
- Long-term debt, net, was $393.6 million, representing $460.0 million principal of 1.25% convertible senior notes due December 2024 less $66.4 million of unamortized discount. The notes’ initial conversion price is approximately $23.85 per share. The royalty-backed loan was repaid in June 2020; the Oxford/SVB loan had previously been repaid.
- Nine-month operating cash flow was $4.5 million. Investing activities provided $19.9 million; financing activities used $78.9 million, including $110.0 million of share repurchases. Cash, cash equivalents and restricted cash ended the period at $66.2 million.
- Inventories increased to $57.7 million from $29.4 million, including a buildup of bulk rHuPH20 intended to meet future demand.
Material changes, outlook and risks
- The company stopped PEGPH20 development after the HALO-301 study failed its overall-survival primary endpoint in 2019. It closed oncology operations and completed a restructuring in Q2 2020, reducing its workforce by approximately 55% and refocusing on ENHANZE and Hylenex.
- Management said existing cash, cash equivalents and marketable securities should fund operations for at least the next 12 months. It expects royalties to benefit from recent partner launches, while noting potential offsets from biosimilars in Europe and COVID-19 effects on mature products. No quantified revenue or earnings guidance is provided.
- Management expects ENHANZE and rHuPH20 R&D spending to increase with partner-program needs. Milestone and bulk-product revenues may fluctuate based on partner development progress and orders.
- Janssen launched DARZALEX FASPRO in the U.S. in Q2 2020; the launch helped lift Q3 royalties. Roche’s Phesgo received U.S. approval in June 2020. In September, Janssen submitted a supplemental application for DARZALEX FASPRO in AL amyloidosis. The October 2020 argenx collaboration expansion occurred after the reporting period.
- COVID-19 had reduced elective procedures, affecting Hylenex sales in Q2; management reported a Q3 recovery as elective surgeries resumed. Suppliers were operating without reported interruption, but the company said the pandemic’s duration and future operational effects remained uncertain.
- Key risks include dependence on partners for development and commercialization, reliance on contract manufacturers for rHuPH20 supply, clinical and regulatory setbacks, competition and biosimilars, patent protection, and debt service or potential cash settlement upon conversion of the notes. No legal proceeding was identified as expected to have a material adverse effect. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether the $32.0 million Q3 milestone revenue and $32.0 million contract asset are collected, and whether further partner milestones are achieved.
- Royalty trends from DARZALEX FASPRO and other partner products, including the effects of COVID-19 and biosimilar competition.
- Progress, supply readiness and regulatory outcomes across partner programs, including the proposed AL amyloidosis indication and Roche’s subcutaneous atezolizumab program.
- Inventory growth and whether accumulated bulk rHuPH20 converts into partner orders and cash receipts.
- Debt terms, conversion conditions and potential liquidity impact, alongside the pace and remaining authorization of the share-repurchase program. At September 30, $237.5 million remained under the announced $550 million program.