Eoneren
I covered Halozyme (NASDAQ:HALO) almost 18 months back, and I noted how, despite failing to utilize their ENHANZE platform to develop their own drug candidate, they were able to pivot to a royalty business by licensing the platform. This, coupled with their licenseable autoinjector technology through the Antares Pharma segment, has led them to earn nearly $700mn in revenue this year, which is a really nice number for a company with a $6bn market cap.
Note that while the Antares acquisition is mostly a technology gambit, Antares also has its testosterone replacement therapies which have also been acquired by Halozyme.
The ENHANZE platform is simply a way to convert expensive, time-consuming IV drugs into easier subcutaneous drug delivery using a proprietary enzyme called rHuPH20, which breaks down the extracellular matrix and enables increased fluid flow and dispersion. Platform royalties usually average mid-single digits and continue for 10 years. On top of that, Halozyme also makes money through milestones – typically $160mn per target; and from API sales, which is standardly cost plus 20%. So they make a 20% profit with the API. All in all, the platform provides them with an extensible and variegated revenue stream.
The progression of revenues from ENHANZE has been outstanding. The expected future prospect also looks good. The company divides this into 5 “waves.” Waves 1 and 2 were 5 products – Darzalex, Phesgo, Mabthera, HyQvia and Herceptin – with revenue growth expected till 2021. Then there are 4 more products with launch expected by 2023, which will drive revenue beyond 2023. These are Atezolizumab, Efgartigimod, Nivolumab and Ocrelizumab SC. Argenx just filed a BLA for approval of the SC form of efgartigimod. Roche’s Atezolizumab also came out with new data recently which showed its SC form is equivalent to the IV form in terms of blood serum concentration of the drug. 11 more phase 1 candidates with launch potential between 2025 and 2027 will drive revenue growth beyond 2025. Finally, the company expects new and existing partners to come up with molecules needing the SC format which will drive revenue growth beyond 2027.
A key consideration here should be what sort of IP protects ENHANZE. This is addressed by the company in two ways. ENHANZE itself has its technology-specific IP that protects it till 2027 in the US. This is the first approach. In the second approach, ENHANZE products have co-formulation patents extending beyond 2030. While these may not be composition patents that are difficult to breach, the beauty of a biologic platform like ENHANZE is the competitive hurdle that naturally occurs here through the complexity and high cost of the biologic platform. This will make it difficult for generic companies to easily breach Halozyme and its partner’s co-formulation patents for their SC molecules. On top of that, Halozyme has a new rHuPH20 formulation with extended room temperature stability that is patent protected till 2034 in the US. Existing partners can use this formulation to get a much tougher patent barrier.
Financials
HALO has a market cap of $6bn. Recently the company raised $625mn through convertible senior notes due 2028. What is a company without a pipeline to do with all that money? Here’s a breakdown of their plans:
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The company expects to use approximately $60M of the net proceeds to fund the cost of entering into the capped call transactions and approximately $77.6M of the net proceeds to enter into privately negotiated agreements with certain holders of its outstanding 1.25% convertible senior notes due 2024.
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The company also expects to use a portion of the net proceeds to repurchase $200M shares of its common stock and approximately $90M to repurchase approximately 2.09M of its shares.
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Further, the company expects to use a portion of the net proceeds to repay all of its outstanding $250M term loan facility due 2026 and the remainder for general corporate purposes.
The company has entered into an aggressive share repurchase program to give back excess funds to shareholders. In December last year, the company authorized a $750mn share buyback program. This year’s target was $250mn, which has already been met.
Recently, in March, Chugai, a Roche subsidiary, paid $25mn to Halozyme, with promises of another $160mn in milestone payments, as well as royalties, to use ENHANZE for an undisclosed product. This deal is followed by Roche’s jump to SC Tecentriq and follows from earlier successful ENHANZE products like SC Herceptin and so on. This is also Halozyme’s 12th major collaboration.
Bottomline
HALO looks like a growth story for the next few years. The Antares deal is great, but while it may manage to extend ENHANZE’s IP, it doesn’t replace it. Therefore, HALO’s growth is still limited by ENHANZE’s patent protection. However, until that happens, Halozyme still has a lot of potential and therefore, it remains a buy-the-dip stock.
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