Halozyme Therapeutics, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results. Halozyme develops oncology therapies and licenses its ENHANZE drug-delivery technology; its lead proprietary program is PEGPH20.
Financial highlights
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $39.1m | $35.2m | $96.1m | $66.1m |
| Operating loss | $14.0m | $20.1m | $11.0m | $43.8m |
| Net loss | $14.6m | $22.9m | $12.8m | $50.4m |
| Net loss per share, diluted | $0.10 | $0.16 | $0.09 | $0.35 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $(29.2)m | $(41.0)m |
For Q2, royalties were $18.1m, product sales $5.8m, and collaborative-agreement revenue $15.3m. Operating expenses totaled $53.1m; R&D was $33.9m and SG&A $17.3m. Q2 gross margin on product sales was approximately 67%. Six-month revenue growth largely reflected $45.0m of upfront and target-related collaboration revenue, including amounts from the new argenx collaboration; it should not be read as equivalent recurring royalty growth.
At June 30, cash and cash equivalents were $67.0m and available-for-sale securities were $220.4m, totaling $287.5m in cash, cash equivalents and marketable securities. Current assets were $391.7m and current liabilities $135.4m. Cash, cash equivalents and restricted cash at period-end were $67.5m. Net cash used in investing was $76.3m, mainly reflecting net maturities of marketable securities; financing used $38.0m, including $42.0m of debt repayments.
Total debt, net, was approximately $85.0m: $70.9m current and $14.1m long-term. The royalty-backed loan carried a 10.25% rate at June 30, with $52.0m outstanding; the Oxford/SVB loan balance was $32.9m. Six-month interest expense was $5.8m. The company reported covenant compliance on both facilities.
Changes and business developments
- Q2 revenue increased 11% year over year, while royalties declined 9%, mainly due to lower Roche Herceptin SC sales, partly offset by higher RITUXAN HYCELA and HYQVIA sales. Management expected near-term royalty pressure, particularly from European biosimilars, before another partner-product launch.
- Six-month revenue increased 45%, primarily because collaboration revenue rose to $45.9m from $13.9m, including $40.0m of upfront and target nomination fees. Royalties fell to $36.1m from $40.9m.
- R&D expense fell 15% in Q2 and 16% for the six-month period, mainly as HALO-301 enrollment was completed and activity in certain other PEGPH20 studies declined. SG&A rose 21% in Q2 and 27% year to date, partly due to preparation for a potential PEGPH20 launch.
- Inventories increased to $43.9m from $22.6m, largely reflecting bulk rHuPH20. Prepaid expenses and other assets rose to $38.7m from $25.1m.
Outlook, risks and contingencies
- Management expected available cash, cash equivalents and securities to fund operations for at least 12 months. It cautioned that resources may not last until profitability, if achieved, and additional financing could be needed, with potential dilution or restrictive debt terms.
- HALO-301 reached its target of 330 overall-survival events in June. Data maturity was projected for mid-September 2019, with top-line results expected by December 2019. The filing does not provide efficacy results for this ongoing pivotal trial.
- Management expected PEGPH20 R&D expense to decline near term as trial activity decreased, ENHANZE/platform R&D to increase modestly or moderately, and SG&A to rise as operations expand. Hylenex sales were expected to be flat or decline; bulk rHuPH20 and ENHANZE drug-product sales may fluctuate with partner demand.
- Halozyme estimated repayment of the royalty-backed loan in Q2 2020, subject to royalty receipts; lower-than-expected royalties could extend repayment. A prepayment would be subject to a 5% premium on outstanding principal, plus accrued interest.
- Key risks include clinical or regulatory failure, safety events, dependence on collaborators and contract manufacturers, biosimilar competition and royalty concentration, and debt service. The filing also reports the unfavorable SWOG study results in which median overall survival was 7.7 months with PEGPH20 plus modified FOLFIRINOX versus 14.4 months with modified FOLFIRINOX alone; the company said other PEGPH20 studies continued.
- The company reported no legal proceeding expected by management to have a material adverse effect. It reported effective disclosure controls and no significant change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- HALO-301 top-line results, the timing of data maturity, and the clinical and regulatory implications.
- Recurring royalty trends, especially Roche product sales and the impact of European biosimilars, versus collaboration fees that can vary substantially by period.
- Cash burn, working-capital needs, and whether the stated 12-month funding runway remains adequate as development and potential commercialization costs evolve.
- Royalty-backed loan repayment timing and the effect of royalty performance on debt balances and cash available to Halozyme.
- Partner progress toward approvals and launches, including the July 2019 DARZALEX SC regulatory submissions, which occurred after quarter-end.