HALO - NASDAQ

Hello and welcome to the Halozyme Third Quarter 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Tram Bui, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator. Good afternoon and welcome to our third quarter 2023 financial and operating results conference call. In addition to the press release issued today after the market close, you can find a supplementary slide presentation that will be referenced during today's call, in the Investor Relations section of our website. Leading the call will be Dr. Helen Torley, Halozyme's President and Chief Executive Officer who will provide an update on our business. And Nicole LaBrosse, our Chief Financial Officer, who will review our financial results for the third quarter 2023. On today's call we will be making forward-looking statements as outlined on slide two. I would also refer you to our SEC filings for a full list of risks and uncertainties. During the call, both GAAP and non-GAAP financial measures will be discussed. Certain non-GAAP or adjusted financial measures are reconciled with the comparable GAAP financial measures in our earnings press release and slide presentation. I'll now turn the call over to Dr. Helen Torley.

Thank you, Tram. And good afternoon, everyone. We're very pleased with our third quarter and year-to-date 2023 financial and operating results, which reflect the continued strength and durability of our business. We remain focused on supporting our growth trajectory and are well positioned for another record year. We are on track to meet our recently updated revenue guidance and deliver greater than 25% revenue growth for the year, including greater than 23% royalty revenue growth. I'm also pleased to announce that as a result of our operational performance and close attention to expenses we are raising EBITDA and non-GAAP EPS guidance. EBITDA guidance has increased from $420 million to $440 million to $430 million to $445 million. And non-GAAP EPS guidance from $2.65 to $2.75 to $2.70 to $2.80. I'm pleased to forecast a strong performance on both top and bottom line growth this year. Moving to slide three. In addition, today we announced an acceleration of the $250 million share repurchase remaining under the approved $750 million share repurchase plan that we announced in 2021. This $251 million share repurchase will be executed through an accelerated share repurchase with a finance institution this week, subject to market conditions. We have a disciplined and balanced capital allocation strategy at Halozyme, investing to grow the business, return capital to shareholders through share repurchases and seek new growth opportunity through M&A. Our investments grow the business in 2023 have resulted in substantial accomplishments, including our high volume auto injector. We plan to invest at similar levels to grow the business in 2024. Our balance sheet is strong with continued projected EBITDA growth and cash generation throughout 2023. We have reduced our net leverage substantially and consistently each quarter from 3.2 times at the end of 2022 to 2.4 times at the end of the third quarter of this year. Given our strong balance sheet, decreasing leverage and continued EBITDA and cash generation, we decided to implement the announced $250 million ASR using cash on hand. As we believe Halozyme is trading at a significant discount to our valuation making share repurchases, a high return on investment opportunity. We will continue to seek growth opportunities through M&A and have increased our technical search and evaluation due diligence capabilities with the addition of Manuel Sanchez-Felix, who is a renowned leader in drug delivery technology and a prior senior fellow of novel drug delivery technologies at the Novartis Institute for Biomedical Research. At this time, we do not project any near-term M&A transactions that would add to our leverage. I would note the highlights in the third quarter which are shown on slide four. We reported total revenue of $216 million, which gives us confident to achieve our full year revenue guidance of $825 million to $845 million, representing greater than 25% year-over-year growth. With operating expense management is strong focus in 2023 and with EBITDA and non-GAAP EPS trending to above the lower end of our recently updated guidance, today we increased guidance on these key measures of profitability. Moving now to slide five. As an industry leading drug delivery platform company, Halozyme has built a diversified and robust portfolio. Our ENHAN

Thank you, Helen. Our financial performance in the third quarter sets us up well for another record year. We achieved top and bottom line growth in line with our plan in supporting our financial performance expectations for the full-year. Our balance sheet remains strong with continued projected EBITDA growth and cash generation in 2023 and beyond. Our cash, cash equivalents and marketable securities were $483.3 million as of September 30, 2023, completed $348.3 million as of June 30, 2023. Our net leverage ratio is 2.4 times as of September 30, 2023 compared to 2.9 times as of June 30, 2023. We expect to continue to decrease net leverage with EBITDA growth. Turning to slide 14. And as Helen mentioned, today we announced an acceleration of the $250 million of share repurchases remaining under the approved $750 million share repurchase plan announced in 2021. The $250 million share repurchase will be conducted under an ASR. This brings our total share buyback since the inception of the first program in 2019 to $1.3 billion, which has benefited the current quarter non-GAAP EPS by $0.15. Given our strong balance sheet, decreasing leverage and continued EBITDA and cash generation, we decided to implement the $250 million ASR now take advantage of the buying opportunity. We will continue to have a disciplined and balanced focus on our capital allocation efforts, with the focus on driving value for shareholders through investing to grow the business. Shareholder return and seeking new growth opportunities through M&A with no near-term plans to add to our leverage. Turning now to slide 15 for our detailed financial results for the third quarter of 2023. Revenue for the third quarter was $216 million, compared to $209 million in the prior year period. The revenue increase was primarily driven by higher enhanced product sales, royalty growth and the XYOSTED sales growth, offset by the timing of milestones recognized in the prior year period. Recall that the timing of the milestone for Tecentriq SC in the U.S. with plans for the third quarter and is now expected in 2024. Royalty revenue for the quarter was $114.4 million, an increase of 15%, compared to $99.6 million in the prior year period. Driven by continued strong uptake of J&J's subcutaneous DAR

Thank you, Nicole. It has been another strong quarter of execution. Significantly advancing our royalty revenue generating portfolio and growth opportunity. We're excited to further expand current and new partner opportunities for ENHAN

Thank you. [Operator Instructions] Your first question comes from the line of Mohit Bansal with Wells Fargo. Your line is open.

Great. Thank you very much for taking my question. And congrats on all the progress. I have a two-part question regarding the Auto-Injector, so the part that you mentioned, who is looking at Auto-Injector, could you help us understand, is it related to like someone who -- so is it for a products, which already is using enhanced technology and that now could be converted into an Auto-Injector or something like that? And then the other part of the question is, could you help us understand how much time does it take for an Auto-Injector technology like when someone conceptualizes that to actually converting it into a real product, what is the process there? How much time does it take? Thank you.

Thanks, Mohit. And thanks for those two questions. With regard to the two updates we gave on the high volume auto-injector progress, one partner moving into a clinical study as a first step before moving forward to the development of a custom auto-injector for one of their patient populations. And the second one, which is also a current partners who's evaluating moving forward into a development agreement. As those have not advance sufficiently just signed a deal, I'm unable to provide any additional information, but they are both partners who are very experienced with our ENHAN

Thank you very much. Appreciate it.

Your next question comes from the line of Michael DiFiore with Evercore ISI. Your line is open.

Hi, guys. Thanks so much for taking my question. And congrats on all the progress. Especially congrats on today's newly announced deal with Acumen. My first question is, why is this deal non-exclusive? Is the A beta target still up for grabs from any other manufacturer and if so, would this potential future manufacturer have the option of securing an exclusive deal outside of Acumen, of course. And my second question is regarding subcu OCREVUS, how should we think about the maximum IV to subcu conversion rate in the U.S. assuming that launches next year. I mean, if we think back to rituximab high sellers launch in the EU, Roche adopted a much more proactive biosimilar defense strategy compared to the US and launched high seller roughly four years prior to biosimilar entry and as a result the MAX IV to subcu conversion rate in Europe with 60% and I guess my ultimate question is, could we expect a similar 60% conversion here in the US? Thank you.

All right. Thank you for that question, Michael. We actually do have another partner that is confidential who has the non-exclusive access to the amyloid beta. And in light of that, the opportunity with Acumen was non-exclusive given that we already had somebody who has the target non-exclusively. And I think that's a nice example as to how we're able to do non-exclusive deals, we can licensed to multiple different partners. So I think that answered that question. And we're excited to be working with Acumen on their novel approach to this very dreaded disease where we're seeing significant advances and support all fee amyloid beta hypothesis as a key mechanism where we may be able to see real benefits for patients. With regard to subcutaneous OCREVUS, what we're hearing from Roche if you've been listening to the prepared remarks is Roche felt that their growth of -- OCREVUS has been a little limited by the lack of infusion, the seat capacity both outside the U.S. and in the U.S. And also sites who are able to have IV infrastructure. In light of that is a lot of commentary from Roche to think about this a little bit like FASPRO became after the conversion was done which is there going to be trying to grow the overall market as a primary goal and also have some twitch but it's going to be a little bit of a different dynamic than the one you mentioned for rituximab high seller where it was switched before biosimilars. I think we're going to see both dynamics happening and we're very excited by that because it means that patients who are living far away on a per access such as patients in rural communities or countries where there isn't good access to IV therapies are going to be able to start on OCREVUS which is the leading therapy for multiple sclerosis in the U.S. and EU-5. So we'll see a market growth strategy and the conversion strategy because we haven't seen exactly this dynamic happened before. It's hard to peg exactly how much conversion will happen, but we certainly are seeing for FASPRO, I can turn your attention to that. The availability of FASPRO is what's been fueling the dramatic growth we're seeing of DAR

Super helpful. Thanks so much.

Your next question comes from the line of Corinne Jenkins with Goldman Sachs. Your line is open.

Great. Maybe a couple from us. First, could you just talk to us about some of the drivers of the XYOSTED gross this quarter's I think pretty meaningful. Are you seeing an inflection and what pockets are driving that?

Yes, with -- Thanks, Corinne. What I said, with a focus on two drivers. First one is driving that conversion in the physician's office to get the patient some identified who are not doing well on their IM XYOSTED and getting them on to -- sorry, their IM testosterone therapy and getting them on to XYOSTED. And the second one is very careful attention in the office to make sure the office is filling in any prior operations of authorizations that might be required. But also making sure when the patient gets a prescription filled, they're being more successfully connected with the copay assistance and other programs we put in place. So it's that some pull through of all of the programs and a higher rate of identification of patients. But really is driving the growth that we're seeing and we do predict, we're still under 5% share. All of this overall market which is dominated by the IM security, which is our conversion target that's what we're trying to switch patients from. So in lot of growth still to come with that this strategy that is beginning to really pay dividends.

Yes. Helpful. Thank you. And maybe one last one from us. It sounds like there is a number of partners that are kind of circling around the auto-injector, what's your sense of some of the gating factors are things they'd like to better understand before actually signing on the deal. And what will they be exploring with the studies next year?

Yes. As I mentioned in the prepared remarks. Really when we've been presenting it, we've had comments like fantastic breakthrough, never felt this was possible. And I think is a degree of innovation that's referenced here, Corinne, that like with any new innovation there is always a period of inertia. And we'll see is exactly what we saw with ENHAN

Helpful. Thanks.

Your next question comes from the line of Jason Butler with JMP Securities. Your line is open.

Hi, thanks for taking the question. Just one on the accelerated buyback. I mean, now that you're wrapping up this buyback, can you just talk to us about how you're thinking about future return of shareholder capital. And I guess put that in the context of your appetite for bringing on new technologies. Thanks.

Yes, I'll ask Nicole to address that.

Yes. Thank you, Jason. So as we think about our capital allocation strategy. It really remains unchanged. We're focused on the three pillars that we've been focused on, which is really continuing to invest in our current platforms, continuing to return capital to shareholders and we're very excited to take advantage of this buying opportunity now and accelerate the remaining portion on the current plan to do that starting this quarter. And then also again very much continuing to look for growing that revenue growth, that durability long term via M&A. We implemented the ASR this quarter because there are no near-term plans to grow via M&A and we wanted to deploy our capital in the best way to return value to shareholders, but that will very much continue to be a focus in those longer term as we grow the business.

Great. And then just one more from me on Phesgo. Can you just speak to how you think about peak adoption here and how the self-administration product could drive whether it could drive further adoption subcu?

Yes, Thanks, Jason. On Phesgo, on Roche's comments obviously what we're seeing every quarter is an increase in the overall conversion, but I'll just mention that every quarter there's always four to six countries being added which is diluting the overall conversion. So that 37%, 38% reflects a range from very recent start of conversion up all the way up to I think mentioned 92% conversion in Europe with a U.S. based on latest comments, maybe two quarters ago at 20% at that time. Roche has commented that they expect up to get to 50% conversion with that, obviously continuing to be a range of recently launched markets and also high conversion in those markets where we're seeing resource constraints, nursing shortages, ID capacity constraints. And so, we're obviously delighted with the very strong progress we're seeing and the continuous growth to come as we get to that 50% overall conversion of the market. And I wouldn't be surprised myself if it was able to go even further than that based on the value proposition that we're seeing here and just to reiterate that, for breast cancer patients, many of them -- many of them working instead of having to be an infusion center for the treatment which can take up to 1.5 hours. But then there is the observation that injection of Phesgo is given in just five minutes or so with a shorter observation time. That means a mum can go in before work at lunch time after work and not be able to take -- have to take so much time. So it's a strong value proposition, and I am expecting more growth to come. The focus of the on-body which does include Phesgo so sometimes people ask is that ENHAN

Okay, great. Thank you.

Your next question comes from the line of Vikram Purohit with Morgan Stanley. Your line is open.

Hi, good evening. Thanks for taking our questions. So we had two. One on capital allocation, one on the auto-injector. So going back to some of your prepared remarks, it sounded like there is a renewed focus on business development and M&A and so while we understand that you're not anticipating any near-term M&A, could you speak generally about the profile of businesses and the profile of assets that you'd find additive to pulled into Halozyme. And then on the auto-injector just a clarification, are the economic terms associated with these potential initial contracts? Would they be in line with economics in terms associated with your current ENHAN

All right. With regard to BD and M&A. As Nicole mentioned, we didn't find any near-term opportunities, but we are continuing to look because that remains one of our three core pillars, which is to seek growth through deploying our capital for M&A. As a leader in drug delivery, we are looking for derisked broadly licensable assets where we can see a path to near-term accretion. So some form of drug delivery that is something major pharma, major biotech cannot do themselves and which they would be needing to license from a company that has that specific asset. There are assets out there to anticipate that question. It just has to fit a grid of criteria for us, including that has the near-term accretion. So we will keep looking, we spent a number of years looking for the Antares acquisition and so we will just keep focusing on that. But also as Nicole mentioned the -- what we consider to be the undervaluation of the Halozyme stock made the share repurchase, the right thing, we believe to return capital to shareholders, given the strong opportunity that that represented. With regard to the high volume auto-injector what we're going to see it because the high volume auto-injector has to be used with ENHAN

Got it. Thank you.

[Operator Instructions] Your next question comes from the line of Nason with JPM Chase. Your line is open. Q - Unidentified Analyst Hey, guys. This is [Nason] (ph) on for Jess Fye. Question on the non-exclusive deal, I guess is there more, are you seeing more interest in non-exclusive deals from potential partners? And then another one on the auto-injector. What is the pathway for developing the auto-injector into a self-administered auto-injector, the first -- the first auto-injector Phase I is still administered by a physician. Thanks.

All right. I will take the one on the auto-injector maybe I'll ask Nicole to comment afterwards on the -- the non-exclusive deals. Because this was a prototype now, and the first time visit ever been done to attempt to deliver 10ml in 30 seconds, we thought it was prudent and appropriate for patients that we had a health care administered approach to it. What we will find now is that some partners are going to be moving at the partner that we mentioned is likely going to move into the clinic to do a patient self-administered. And frankly there's nothing additional that has to be done other than take right the protocol that way. It's very simple, it's a injector or place the device on the auto-injector on the abdomen and click a button and hold it there. So it's going to be very straightforward for patients to do, but the only reason we didn't do in the first study was because it's never been done before having seen how well tolerated it was and how well it worked, we have no hesitation in supporting patient studies at this stage them. So there will simply be the patient does that themselves. And well, this is a larger volume than some other auto-injectors, the actual mechanism of doing it is tried and tested. I'll say tried and tested by -- it seems like hundreds of thousand patients around the world with GLP-1, it's very similar to that, it's just a larger volume and a longer hold time. Nicole, do you want to comment on the interest in non-exclusive deals at the moment?

Yes, happy to non -- So I will say, historically we always have tried to market exclusive and non-exclusive deal. I think historically the interest has been on the exclusive side, but obviously that comes with a higher price tag as well. We are very interested in non-exclusive deals, we see the benefit of reaching more partners and more patients that way. So I think both you'll see coming through and we'll continue to pursue both types of models.

Thank you.

Your next question comes from the line of Mitchell Kapoor with H.C Wainwright. Your line is open.

Hi, everyone. Thanks for taking the questions. I wanted to ask about the evolution of the royalty revenue business. And right now we have a lot of it coming from DAR

Okay. All right. With regard to the evolution and thanks for asking that question because we're very excited that the Wave 3 products are now all four of them largely derisked with one approval and three positive Phase III study. So looking very encouraging, four launches of these products in the 2023 to 2025 timeframe. And importantly as I mentioned if you look at where these products are projected to be in terms of size by 2028, it's $35 billion in sales of the product, which is substantially higher than the $20 million we're seeing with DAR

Great. Thank you. And on the centric new date for potential approval, is that something more narrow that you'll have a timeline on as we get closer to that? Or do we have an assigned date at this point?

Yes. As far as we're aware versus not communicated any assigned date, what they did state was the filing will go in, by year-end this year and assuming a standard 10 month review time. Mitch, I mean, we take it into, let's say the September-October timeframe. But Roche has not communicated anything about that as yet.

Okay, great. Thank you all very much.

Thank you.