HALO - NASDAQ

Good afternoon. My name is Prila, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Halozyme Second Quarter 2024 Financial and Operating 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] Please note this event is being recorded. Thank you. I would now like to turn the conference over to Tram Bui, Halozyme's Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator. Good afternoon, and welcome to our second quarter 2024 financial and operating results conference call. In addition to the press release issued today after the market close, you could find a supplementary slide presentation that will be referenced during today's call in the Investor Relations section of our website. Leading the call would 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 as well as our outlook. 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. Starting on slide three, I'm pleased to report another robust quarter that is a clear demonstration of the strong execution and continued momentum we have across our business. In the second quarter, we achieved multiple key milestones that support our strong growth projections. During the quarter, we added to and further strengthened our ENHAN

Thank you, Helen. Second quarter results are on track with our plans and support our strong financial performance expectations for the full year from the continued momentum in the business. Importantly, adjusted EBITDA and diluted earnings per share growth once again outpaced the top line, reflecting the strength of our business model as we generated significant leverage from continued growth in royalty revenue. Let me start with our capital allocation priorities on slide 10. In the quarter, we completed the $250 million ASR announced last November, bringing our total returns to shareholders via share repurchases to $1.3 billion over the past five years. We have not included future share repurchases in our projections at this time. However, our $750 million share repurchase program authorized by the Board earlier this year allows us to continue to evaluate share repurchases to drive shareholder value depending on market conditions and other factors. We will continue with a balanced approach as we deploy capital to grow the business and evaluate opportunities to unlock additional growth through M&A. We maintain a strong balance sheet with cash, cash equivalents and marketable securities of $529 million on June 30, 2024, compared to $463.5 million on March 31, 2024. The increase was primarily a result of cash generated from operations. Our net leverage ratio was 1.8 times at the end of the quarter, and we expect to continue to reduce our net leverage ratio as EBITDA continues to grow. Turning now to slide 11 for our detailed financial results for the second quarter. Revenue grew 5% to $231.4 million compared to $221 million in the prior year period. Loyalty revenues for the quarter were $124.9 million, an increase of 12% compared to $111.7 million in the prior year period. The commercial success of currently approved Wave 2 products, subcutaneous DAR

Thank you, Nicole. Our second quarter results highlight the strength of our durable high growth business model and successful execution against our growth plan as shown. On slide 13, our strong pipeline of launches this year and beyond gives us both clear line of sight to the growth of our business and confidence in achieving our five-year financial targets. The awareness and appreciation of subcutaneous technology around the globe continues to grow, and we are well positioned to capitalize on these emerging opportunities. I remain confident and very excited for Halozyme's future. I want to close by thanking our terrific Halozyme team and our partners and collaborators for their hard work that resulted in an exciting and strong first half of the year. Operator, we are now ready to open the call for questions.

Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Jason Butler with Citizens JMP. Please go ahead.

Hi, thanks for taking the questions and congrats on the quarter. Helen, wondering if you could just once again give us an overview of, as you look at the new partnership or expanded partnership activities, where is it weighted between ENHAN

Yeah. Thanks, Jason. Yes, we are confident in signing additional deals, and what really gives us that confidence is the breadth of conversations that we're having. I would say the deals are more weighted to ENHAN

Great. And then just one follow up, I think probably for Nicole. Just the API sales were higher than expected in 2Q. What drove that? And I guess just what gives you the line of sight that you'll, you'll be flat quarter-over-quarter into 3Q.

Yeah, thanks for that, Jason. So when we look at our API sales, we do try to lay out that quarterly cadence, but those can shift quarter to quarter. So, we did just see, and we have the ability to do that too, because of our ample supply. So, if a partner needs it a little bit earlier than originally expected, we can make those fluctuations. And so that is what we saw. We do still have line of sight to full year expectations, and that remains unchanged. But we did see a shift earlier in the year. So, from the third quarter to the second quarter, which now leaves our expectations for that flattening because we've accelerated from the third quarter. Previously, the third quarter was going to have growth. Now at this time, we expect a flattening from the second quarter to the third quarter. Really, again, just based on our partners and the orders that we expect at this time.

Okay, great. Thanks for taking the questions.

And your next question comes from the line of Cerena Chen with Wells Fargo. Please go ahead.

Hi, thanks for taking my question. This is Cerena on behalf of Mohit Bansal. Wanted to ask about potential partnerships, especially given all the enthusiasm about the myostatin pathway. It seems like drugs here seem to be very high dose and was wondering if that's something that you could partner with using your technology. Thank you.

Yeah, I can say that we certainly are interested in, obviously, areas of obesity. Obesity with muscle loss are very hot areas, and we do like to target those types of areas to look at the companies who are involved there, look at their products to see if they'd be a good fit for ENHAN

And your next question comes from the line of Jessica Fye with JP Morgan. Please go ahead.

Great. Good afternoon. Thanks for taking my questions. I had a couple. When might we hear more about the undisclosed Roche and Chugai products on your Wave 4 slide? And can you say if those are Sub-Q versions of approved IV drugs or are these products being developed as Sub-Q from the start? And then maybe piggybacking on Jason's question. Last quarter, you came out very strong on the commentary around potential new partnerships, talking about discussions with several companies in the terms stage. What's the latest you can tell us for how many of those conversations are still live? I'm sure maybe new ones have popped up, but I'm curious if there's been any attrition from the ones that were live as of last quarter. And I guess related to partnering. Can you speak to how the PALOMA 3 results have impacted discussions with potential partners, if at all? Thanks.

Yep, great, thanks, Jess. Let me start with the undisclosed targets. You're absolutely right. We've got two undisclosed targets. One Roche, one Chugai, that is on the Wave 4 slide. Unfortunately, because those are partner confidential, we're unable to say anything about them, including whether they are Sub-Q versions of already approved IV products. The partners have given us no indication at this point in time of any near-term plans to disclose what those targets are. So, generally, we find that partners who are feeling they're in a competitive space, or perhaps just because of their preference, choose not to disclose the targets. And we obviously have to abide by that. So, obviously, we're excited to talk about those when we can, but we can't say anything at the moment. With regard to the terms discussion, as we mentioned, we are continuing in terms discussions with companies as well as additional companies that are more in the technical evaluation stage, Jess. So each company is moving at its own pace. While I would love to be able to give more granularity about what exactly is happening, there's not an intermediate place really between initiating the terms discussion and signing the CLA that I can talk about. And so, it does make it seem like when we announce the deal, it appears all of a sudden. But we do want to make sure that we're giving you the most up to date information and so you'll hear about it when the CLAs are actually signed. For PALOMA 3, obviously for everybody, that was exciting data where in addition to expected results, which was a five-fold reduction in infusion related reactions and also the dramatically shorter treatment time, there was an interesting exploratory signal with regard to an improved overall survival in the Sub-Q arm. Two theories circulate about that. One was that perhaps it was the patients had a higher overall exposure while it still hit the non-inferiority margins. It was an over higher exposure. But there's a lot of interest in the idea that it's in part due to increased immune trafficking, which is happening because the drug is delivered subcutaneously and is absorbed through the lymph nodes. Certainly, as it relates to companies who are working in areas such as nucleic acids, mRNA vaccines, Jess, that has created interest. These are early conversations, and obviously there's more data to be generated here, but certainly this is a concept that some people were aware of, more people are becoming aware of, and the potential to end up being able to have a higher production as an example, as a result of Sub-Q delivery with ENHAN

Thank you.

And your next question comes from the line of Michael DiFiore with Evercore ISI. Please go ahead.

Hi guys, thanks so much for taking my question and congrats on the solid quarter. Two for me. Again, just drill down on the partnership discussions. Curious to see how the election uncertainty and looming potential for rate cuts has in any way influenced the amount of incremental inbound partnership interest. And I know, Helen, I think back in 1Q you said that you had 10 unique companies that were kind of being or in the mix for partnership discussions. Has that increased since those 10 companies? And then my follow up is kind of a housekeeping question. Could we expect a true up of EU DAR

All right. I'll take the first one then Nicole can take the second one. I would say the issue of election uncertainty, rate cuts and things aren't really coming up in any of the conversations that we're having, Mike. So, I can't really say I think that is a focus for certainly the people we are talking with in the companies. We are continuing in discussion with around 10 companies. And so, I say it's still that healthy pipeline of conversations that we're having, and we're constantly reaching out to other companies and we do get inbound. Remember, I gave a metric before to say we're probably have more coming from our active outreach than incoming. But I haven't seen any difference in that overall kind of pace and trend at all. And certainly nothing I could attribute to anything like election uncertainty or price cuts. I think for us, as you're seeing, you've heard us talk about, it really is the internal reviews in companies as perhaps part of their governance, perhaps part of their budget cycle that we have gotten used to over the years, that it just takes time. If you look back historically, we've signed about a deal a year on average, and so we're very used to it. We're patiently working through the process with all the companies that we're talking with and remain very excited by the breadth of the conversations, and that gives us confidence in additional new deals.

And Mike, regards to the royalties, we're not expecting to see a true up related to the second quarter later in the year. What you saw in the second quarter was a temporary reduction in the royalties related to our Janssen product and that was because the temporary royalty rate stepped down to 50%. That was in that period from March to June. But now the full rate has been reinstated. So, we will expect to see royalty growth in the remaining quarters of the year, but not expecting to see any true up coming out of the second quarter.

Thanks so much.

And your next question comes from the line of Mitchell Kapoor with H.C. Wainwright. Please go ahead.

Hey, everyone. Thanks for taking the questions. The first one is on the 2024 guidance, since it was reiterated, but given what you're seeing in the pace of revenue categories. I was wondering if you have any updated thoughts and if you could make any comments about how the composition of the revenue line items could look in 2025, potentially.

All right, I'll turn that to Nicole.

Yeah. So, as, since we updated our guidance, you did see us update more specifically just related to royalties. And so, royalties are expected to exceed our prior expectations and have a higher ramp in the third and fourth quarter. But we did not change and don't have substantial changes to the rest of our royalty stream. So, the composition of our revenue mix is largely tracking to our guidance that we put out and reiterated our guidance. So consistent with the guidance we put out in June.

Great. Thanks. And then on the product sales, you were mentioning that sometimes a partner might request product earlier than later. And I was wondering if that shift that we're seeing, if we're seeing that now has any bearing on the level of demand that we could be seeing and how that might read through to the future.

At this time, we don't have a read through on that. And it's really just because we saw -- these orders, especially when they happen close to quarter end, they can just really shift quarter to quarter, but we don't have read through and not expecting it to impact our full year projections.

Yeah. And Mitch, I'd just add that we found that the companies have and can change their buying patterns just based on various things that are going inside the company. They have different amounts of safety stock they want to hold. And so, we have not found API demand a good correlate for changes in the demand that we're going to see, just because not all of it is immediately for use in the market. Some of it is for safety stock.

And your next question comes from the line of Brendan Smith with TD Cowen. Please go ahead.

Hi. Thanks for taking the questions. Congrats on another good quarter. I just have a quick one on OCREVUS and then a follow up on Empasiprubart. We've been assuming that the OCREVUS Sub-Q will still require a visit to the clinic and administration by a healthcare provider. Is that also kind of your expectations at this point? Or are you thinking there might be any flexibility for at home administration? And then just wondering on our argenx Empasiprubart, do you have a sense from them how many of the four indications they've now announced will actually use the ENHAN

Yeah. With regard to OCREVUS, I think based on the clinical study that's been done, Brandon, to date, because it was done with the setting of healthcare practitioner administered, I think it's very likely that the original, the initial labels are going to be for in the physician's office, a simple 10-minute Sub-Q injection, but administered in the office. And every six months, I'll just point out, and that is actually quite a good time point for patients to be in seeing their doctors anyway. And so, you know, I don't know that there'll be any drive on Roche's part to want it in the patient's home because the patient's going to have to see the doctor anyway and it's a nice time for a check in. With the regard to Empasiprubart, argenx has not provided any additional information with regard to that publicly, so we're not in a position to provide anything at this time.

Great. Thank you.

And your next question comes from the line of David Risinger with Leerink Partners. Please go ahead.

Hi, everyone. Congrats on a strong quarter and thank you for taking the questions. It's Jason for David. Two questions for me, please. First one is following the strong 2Q performance. How should we think about maintenance of full year guidance? And what are the third quarter and fourth quarter sequential modeling considerations? And second question is, are you still expecting to sign a major new ENHAN

Yep. I'll ask Nicole to take the first one and just maybe again talk about the maintenance of the failure guidance and just the flavor of the next two quarters.

Yeah, happy to. So, our second quarter performance is tracking with our full year guidance. And so no change to the guidance. It is tracking, as we expected, in support our full year view. And then in particular for cadence for the third quarter and the fourth quarter, we do expect the third quarter to be flat when we look at API sales, as we mentioned. And also when I look at collaboration revenue, I'd also mentioned we saw some milestones pull in that originally were expected in the third quarter. Those happen in the second quarter. And so that is also driving our expectation that milestones are the collaboration revenue will be flat second quarter to third quarter. But when I look at royalties, we know that we expect to see growth in the second half of the year and sequential growth in the third quarter and the fourth quarter. That's really reflecting not only the growth in the underlying brands in our royalty streams, but also reflecting a full quarter of our royalty rate being at the full rate back that was reinstated in June for DAR

All right. And with regard to the deal progress, we certainly are excited to be in a range of discussions, including terms discussions and technical discussions with other companies. And as we talked about predicting the exact timing of a deal is very hard because each company is different and it's influenced very much by their governance, but also their budgeting process. And so, what I can say is that based on the breadth of discussions, we are very confident in new deals. They absolutely could happen this year. There's a range of things to your question on will it be an established product that's already commercialized? Will it be a product that's being Sub-Q right from the start? It certainly could possibly be one or either or both. It really is -- we're at the stage of just working through this within the company and their systems, but we're very pleased to have this range, obviously, of the established blockbuster IV to Sub-Q conversion. That's worked very well for us, but we're seeing so much interest now in Sub-Q extended dosing as a place people are going and offering something very important for patients, but also competitive differentiation for the product. So, all of that is entirely possible. And we were just asked to work through the system. And obviously we're excited to provide updates as soon as we're in a position to move past these terms discussions into the signing of the CLA.

Thank you. Your next question comes from the line of Vikram Purohit with Morgan Stanley. Please go ahead.

Hi, good afternoon. Thank you for taking our question. We had one on capital allocation and business development. So how does potential M&A factor into your thinking. And what profile of business do you think could be a good fit for Halozyme at the company's current stage of maturity? And how much would you be willing to flex that 1.8 x leverage ratio for potential BD? Thanks.

All right. I'll take the first part and I'll ask Nicole to comment on the final question, there on the leverage. So, we continue to be very actively looking and we do believe that if we can find the right M&A, that that is a great use of our capital and a great way to return value to our shareholders. We continue our disciplined approach and we're looking ideally at businesses such as in drug delivery, that are licensing models to be a great fit with our current, our business model, but also our financial profile, given the high margins that exist there. Importantly, we're looking for things that have got a meaningful revenue stream and durable revenue to be a fit with the financial profile of the company as well. So, looking in drug delivery, but we also are looking in, Vik, you can imagine there are other businesses where there are technologies that pharma and biotech needs to license for them to, for, as an example, create new drugs. These are already established businesses and that is another great fit for our skills and for our business model. And so, we're very active looking there as well. As ever we will be patient. We've demonstrated strong patience. We need to have something that's got the right derisk asset with the potential to grow where we see a meaningful contribution to our revenue and durable revenue as a result of it. So hopefully more to come in that, but very active there. Nicole, do you want to talk about leverage?

Yeah. When I look at our current leverage, really what I think about, and Helen discussed is what is the pro forma delevering profile? So that would be a really important factor. When I think about how high I would go from a leverage perspective. I'll give you the example that for the Antares acquisition, we levered up to 3.3 times. And as you mentioned, we were able to delever and we're now at less than two times. So that type of profile where we have line of sight to delevering is what I'd really be focused on.

Understood. Thank you.

And your next question comes from the line of Joe Catanzaro with Piper Sandler. Please go ahead. Joe, you might be on mute.

Sorry, can you hear me now?

Yes, we can.

Great, thanks. Sorry about that. Appreciate you taking the question here. I just had a quick one on the recent FASPRO label expansion to frontline transplant multiple myeloma. I think the Phesgo study did include a maintenance component, but the label does not include maintenance. So, wondering if you think the exclusion of maintenance could have any impact on the longer term outlook for the total DAR

Yeah. It's a good point, Joe. And not one that when we are looking at DAR

Okay, great. That's actually really helpful. Appreciate taking the questions. Thanks again.