Business context and reporting period
Halozyme Therapeutics, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company licenses its ENHANZE drug-delivery technology, based on rHuPH20, to biopharmaceutical partners and also sells Hylenex and bulk rHuPH20. Reported amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $115.8 | $65.3 | $341.3 | $145.9 |
| Operating income | $75.6 | $40.3 | $219.4 | $66.6 |
| Net income | $216.6 | $36.2 | $335.9 | $55.9 |
| Diluted earnings per share | $1.48 | $0.25 | $2.28 | $0.40 |
| Operating margin | 65.3% | 61.7% | 64.3% | 45.7% |
Revenue growth was driven by royalties and partner supply sales. Q3 royalties were $58.6 million versus $23.9 million; product sales were $25.0 million versus $9.0 million; and collaborative-agreement revenue was $32.2 million versus $32.3 million. For the nine months, royalties were $141.3 million versus $56.6 million, product sales $77.2 million versus $23.5 million, and collaborative-agreement revenue $122.9 million versus $65.8 million.
Q3 operating expenses were $40.2 million, including $18.6 million cost of product sales, $8.5 million research and development, and $13.2 million selling, general and administrative. Nine-month operating expenses were $121.9 million, including $59.8 million cost of product sales, $25.6 million research and development, and $36.5 million selling, general and administrative. Interest expense was $1.8 million in Q3 and $5.5 million for the nine months.
Cash flow and liquidity: Nine-month operating cash flow was $216.9 million, compared with $4.5 million in 2020; investing cash flow was negative $106.8 million, compared with positive $19.9 million; and financing cash flow was positive $233.9 million, compared with negative $78.9 million. Cash, cash equivalents and marketable securities totaled $815.9 million at September 30, 2021. Management said these resources should fund operations for at least the next 12 months.
Debt: Convertible notes had a net carrying value of $875.7 million: $89.3 million of 2024 notes classified as current and $786.5 million of 2027 notes classified as long-term. The 2027 notes carry a 0.25% coupon and mature in March 2027; the remaining 2024 notes carry a 1.25% coupon and mature in December 2024. The 2024 notes were convertible at quarter-end. The company reported compliance with debt covenants. Liquid resources were approximately $59.8 million below the notes’ net carrying value.
Material changes versus the prior comparable period
- Q3 revenue increased 77% year over year; nine-month revenue increased 134%. Higher royalties mainly reflected Janssen’s DARZALEX FASPRO launch, while partner purchases drove bulk rHuPH20 sales growth.
- Nine-month collaborative-agreement revenue increased mainly from $122.0 million of fees associated with ViiV, BMS and Janssen, compared with $64.8 million in the prior-year period. Q3 collaborative revenue included a $30.0 million sales-based milestone.
- Q3 net income included a $142.5 million income-tax benefit from releasing federal and state deferred-tax-asset valuation allowances. This nonrecurring benefit substantially boosted reported earnings; it is not a measure of underlying operating growth.
- In March 2021, Halozyme issued $805.0 million principal amount of 2027 convertible notes, receiving net proceeds of approximately $784.9 million, and converted $369.1 million principal amount of 2024 notes. The conversion generated a $21.0 million induced-conversion expense and involved approximately $370.2 million cash and 9.08 million shares.
- Nine-month share repurchases were $189.7 million. In October, the company repurchased a further $10.3 million, completing its $550 million repurchase program.
- Halozyme early adopted ASU 2020-06 on January 1, 2021, changing convertible-debt accounting and reducing reported interest expense related to noncash discount amortization.
Outlook, management commentary and risks
The filing provides no quantified revenue or earnings guidance. Management expects royalty revenue to grow from recent partner product launches, partly offset by biosimilar competition affecting mature Roche products. Hylenex sales are expected to be relatively flat; bulk rHuPH20 sales may fluctuate with collaborators’ needs. Collaboration fees and milestone revenue are expected to vary with partner development, regulatory and commercial activity. Management said it had not identified COVID-19-related delays expected to materially affect milestones, but continued monitoring potential disruption.
Management expects to begin recording income-tax expense at a rate that will likely approximate statutory rates in 2022, which would reduce net income and EPS relative to periods benefiting from the valuation-allowance release. Key risks include partner clinical or regulatory setbacks and commercialization performance; dependence on third-party manufacturers and supply availability; COVID-19 disruption; competition and biosimilar entry; patent protection; product safety; reimbursement and drug-pricing pressures; and debt conversion, repayment and dilution risks. The filing states that no legal proceeding was expected by management to have a material adverse effect.
Important facts for investors to verify
- Separate the $142.5 million deferred-tax benefit from recurring operating results, and assess the expected tax burden from 2022.
- Track the sales and royalty contribution of DARZALEX FASPRO and the extent to which biosimilar competition offsets growth in established partner products.
- Review partner milestone timing, commercial execution, and the variability of bulk rHuPH20 orders and collaboration fees.
- Monitor the 2024 notes’ conversion and cash-settlement requirements, remaining debt, and potential share dilution.
- Assess manufacturing capacity, inventory sufficiency, and any COVID-19 or other supply-chain effects on Halozyme and its collaborators.