Halozyme Therapeutics, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Halozyme is a biotechnology company developing oncology therapies and licensing its ENHANZE drug-delivery technology. Financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $35.2m | $33.8m | $66.1m | $63.3m |
| Operating loss | ($20.1m) | ($25.5m) | ($43.8m) | ($53.0m) |
| Net loss | ($22.9m) | ($30.8m) | ($50.4m) | ($63.7m) |
| Net loss per share | ($0.16) | ($0.23) | ($0.35) | ($0.48) |
| Operating expenses | $55.3m | $59.2m | $109.9m | $116.3m |
Revenue rose about 4% in both comparison periods, while losses narrowed. Operating loss was about 57% of revenue in Q2 2018 versus 75% in Q2 2017, and about 66% for the first half versus 84% a year earlier.
- Revenue mix: Q2 royalties were $20.0m, up from $14.7m, reflecting higher sales of Roche’s Herceptin SC and MabThera SC/RITUXAN HYCELA and Baxalta’s HYQVIA. First-half royalties were $40.9m versus $28.7m.
- Product sales: Q2 product sales fell to $4.5m from $12.8m; first-half sales fell to $11.3m from $24.2m, mainly because Roche and Baxalta bought less bulk rHuPH20. Hylenex sales were broadly steady.
- Collaborative revenue: Q2 revenue was $10.7m versus $6.2m, including $10.0m of event-based milestone and other fees. First-half collaborative revenue was $13.9m versus $10.4m, while reimbursed R&D services declined.
- Expenses and interest: First-half R&D increased to $78.1m from $75.3m, principally due to PEGPH20 trial activity; SG&A rose to $27.9m from $25.7m. First-half interest expense declined to $10.0m from $11.0m.
Cash, liquidity and debt
At June 30, 2018, cash and cash equivalents were $55.2m and available-for-sale marketable securities were $343.7m, totaling approximately $398.9m. Current assets were $462.0m and current liabilities $132.4m. Management said available resources were expected to fund operations for at least the next 12 months, while noting ongoing substantial development cash needs.
Net cash used in operating activities was $41.0m for the first half, compared with $39.5m in 2017. Investing activities used $43.5m; financing activities used $29.0m, including $37.1m of long-term debt repayment. Cash, cash equivalents and restricted cash declined by $113.6m during the period; much of the liquidity is held in marketable securities.
Reported debt, net of discounts, was approximately $166.0m: $116.5m on the royalty-backed loan and $49.5m under the Oxford/Silicon Valley Bank facility. The royalty-backed loan carried a 10.25% rate at quarter-end and is repaid from specified Roche and Baxalta royalties. Management estimated repayment in Q1 2020, subject to royalty receipts. The other facility matures January 2021. The company reported covenant compliance on both facilities and no material adverse change.
Material changes, outlook and risks
- Halozyme adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption reduced deferred revenue by $51.8m and accumulated deficit by $71.2m; it increased reported revenue by $7.9m in Q2 and $9.0m in the first half compared with the former accounting rules. Prior-period revenue was not restated, so reported comparisons use different revenue policies.
- Management expected lower bulk rHuPH20 sales to Roche to continue in the second half of 2018 as Roche used existing inventory ahead of a possible manufacturing-site transition. It expected royalties generally to increase with partner product sales, but noted period-to-period variation; Hylenex sales were expected to be flat or grow modestly, with competition a risk.
- Management expected PEGPH20 R&D spending to increase with development activity and SG&A to increase moderately. The company projected the HALO-301 Phase 3 trial’s target PFS events between December 2018 and February 2019 and approximately 500 patients enrolled by year-end 2018. Its safety committee recommended in May that the study proceed as planned.
- PEGPH20 remains clinically and commercially uncertain. The filing describes thromboembolic safety history in an earlier trial and reports that an unrelated SWOG study of PEGPH20 with modified FOLFIRINOX stopped for futility; final reported median overall survival was 7.7 months with PEGPH20 versus 14.4 months without it, with increased gastrointestinal toxicities. Other PEGPH20 studies continued.
- Other risks include trial, regulatory and companion-diagnostic outcomes; dependence on collaborators and contract manufacturers; possible supply disruptions; competition and reimbursement; ongoing losses and potential future financing needs; and debt covenants/default remedies. No legal proceeding with a material adverse outcome was identified. Management said disclosure controls were effective and there were no significant changes in internal control over financial reporting.
- Subsequent developments noted in the filing: Roche initiated a Phase 3 study of a Perjeta/Herceptin fixed-dose combination with ENHANZE in June; in July the FDA accepted a BLA for subcutaneous Herceptin in the U.S.
Key facts for investors to verify
- HALO-301 enrollment, interim PFS timing, safety findings and eventual overall-survival results.
- Commercial sales trends for Herceptin SC, MabThera SC/RITUXAN HYCELA and HYQVIA, which drive royalties and royalty-backed debt repayment.
- Timing and effect of Roche’s manufacturing transition on bulk rHuPH20 sales, and whether expected royalty growth offsets lower product and service revenue.
- Cash burn, planned PEGPH20 spending, funding runway and debt repayment progress; the filing cautions that profitability may never be achieved and additional financing may be needed.
- Effects of ASC 606 on revenue timing and deferred balances when assessing year-over-year performance.