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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon and welcome to the Halozyme Therapeutics First Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded.
It is now my pleasure to introduce your host, Jim Mazzola, Vice President of Investor Relations at Halozyme. Mr. Mazzola, you may begin your conference.
Okay, thank you, Brandon. Good afternoon everyone. And welcome to Halozyme’s first quarter 2018 financial results conference call. Following market close today, we issued a news release with a summary of our results and posted a short slide presentation to accompany this call. You will find both on the Investor page at halozyme.com.
Leading our call today as always is Helen Torley, Halozyme’s CEO, who will provide an overview and update on our business; and then Laurie Stelzer, our Chief Financial Officer will review financial results for the March quarter followed by a Q&A period. Demetrius Chondros, our Chief Medical Officer will join for Q&A.
Before we begin, let me remind you that during the conference call, we will be making forward-looking statements. The Company's actual results may differ materially from those expressed in or indicated by such forward-looking statements. For a description of risks, please refer to our quarterly and annual filings with the Securities and Exchange Commission.
Now, let me turn the call over to Helen.
Thank you, Jim, and good afternoon. We started the year executing well across both of our strategic pillars of the company building on the strong momentum we established in 2017. Let me begin with the key takeaways for the quarter.
Firstly, ENHANZE royalties grew 50% over the first quarter of 2017 on a reported basis or 42% adjusting for the change in accounting we implemented this quarter. This royalty growth continued to explore our strong cash position as we ended the quarter with over $430 million.
Secondly, ENHANZE momentum continues to build following the success we have had in 2017. Based on the rate at which our partners are progressing, we now project eight ENHANZE partner products in being clinical studies in 2018, an increase from the six studies in our forecast at the beginning of the year.
And thirdly, we continue to execute well in our HALO-301 registration study. Since our last update, we now expect to achieve the target number of Progression-Free Survival Events between December of 2018 and February of 2019. In April, we reached an important milestone of enrolling more than 350 patients in the study putting us on time with our projection to have approximately 500 patients enrolled by year end.
With those key takeaways, let me now provide some additional color on each pillar. In our ENHANZE strategic pillar, we have licensed our rHuPH20 Enzyme to eight leading companies to-date. As shown in Slide 2, we project ENHANZE’s royalty revenue has the potential to reach approximately $1 billion in 2027.
Halozyme received on average in this single-digit royalty on net product sales at the ENHANZE formulation based on the number of indications approved, geographies launched and the degree of market penetration over time.
Turning now to Slide 3, our focus in 2018 is to support our partners in advancing target towards commercialization. This slide is now updated to reflect the eight products we project will be in clinical studies in 2018.
Let me begin with the product in or soon to be in Phase 3 clinical studies. Janssen’s DARZALEX SC program enters Phase 3 with ENHANZE in 2017. Last December at ASH, Jansen shared clinical data which allowed them to continue their development and registration plan for a 15 ml injection of DARZALEX SC to be delivered in five minutes or less.
Janssen is now studying DARZALEX SC with ENHANZE in four Phase 3 trials evaluating the following patient population, relapsed refractory multiple myeloma, second-line multiple myeloma evaluating DARZALEX SC in combination with pomalidomide and dexamethasone, amyloidosis and Smoldering Myeloma.
In addition, Janssen is planning a Phase 2 study of Darzalex SC with various combination therapies in frontline, and in relapsed or refractory patients. With the ongoing and planned studies for the SC regimen, this program continues to play a key role in Janssen’s development plans for DARZALEX.
Commercialization of DARZALEX IV continues to progress well with reported sales of $432 million in Q1, growing 16% from Q4 of 2017. We were very pleased to see the announcement this week of FDA approval in frontline multiple myeloma too. Recall, analysts project peak sales of DARZALEX of greater than $7 billion.
We also expect ROCHE to initiate a Phase 3 study later this year with the fixed-dose combination of Herceptin SC and Perjeta SC using our ENHANZE technology. This study follows the support of Phase 1 fixed-dose combination results ROCHE shared at the 2017 San Antonio Breast Cancer Symposium, the positive opinion from the CHMP in Europe and the U.S. approval of Perjeta and Herceptin IV in adjuvant HER 2 positive early breast cancer patients.
These Phase 3 studies represent significant derisking events on the path to approval and commercialization with ENHANZE.
Now moving to our early-stage partner programs. In January, we projected four separate ENHANZE enabled SC products to enter or to be in Phase 1 clinical testing in 2018. These included Bristol-Myer’s nivolumab, which is planned to begin a Phase 1 study in the third quarter, Alexion’s ALX1210 with plans to initiate a Phase 1 study later this year, Lilly's investigational target which began clinical testing in 2017 and a new unnamed Roche target, which began clinical testing earlier this year.
During the first quarter, we worked closely with our partners to support additional development targets and now have line of sight to two new study starts in 2018, which were not in our original forecast. One of these studies will be initiated by Bristol-Myer Squibb since the signing of our agreement have moved quickly to build additional product teams that run multiple targets and plans to initiate Phase 1 study to evaluate an undisclosed target with ENHANZE in the second quarter.
The rapid progress partners are making to enter the clinic is a testament to the opportunity we see for strong competitive differentiation with the ENHANZE subcutaneous technology. I look forward to sharing additional information and update in the coming months.
To close on ENHANZE, our focus in 2018 is to unlock value by supporting current partners and moving products into and through the clinics. In parallel, we continue to seek additional collaborations. The timing and scope of new agreements is inherently unpredictable but interest remains strong and I have confidence we will continue to secure additional partnerships as companies looks for competitive differentiation and ways to reduce the treatment burden for patients.
I will now turn to our oncology pillar and our investigational drug PEGPH20. PEGPH20 is a targeted therapy, that temporarily degrades hyaluronan or HA, that can accumulate around certain tumors and constrict the tumor vasculature.
We are studying PEGPH20 with a companion diagnostic, developed with our partner Ventana to identify patients with high HA tumors and project an approximately $1 billion potential global opportunity in pancreas cancer alone.
On Slide 4 is an overview of our Phase 3 study HALO-301 evaluating PEGPH20 in combination with ABRAXANE and gemcitabine in first-line pancreas cancer patients. We continue to see strong progress in both screening and enrollment. With over 350 patients now enrolled, we continue to project, we will enroll approximately 500 patients by year-end.
HALO-301has two primary endpoints, progression-free survival and overall survival. Recall, an interim analysis will be conducted for our first primary endpoint progression-free survival when we achieve the target number of PFS events, which we currently project will occur between December of 2018 and February of 2019.
Upon getting the target number of PFS events, final data collection and the steps required for database clean and lock prior to the interim analysis which will be conducted by the independent data monitoring committee.
At the time of the interim analysis, if the progression-free survival data show a significant benefit in the PEGPH20 treatment arm, and both the overall survival and the overall risk benefit are supportive, these data may form the basis for marketing application in the United States and a conditional marketing authorization in Europe for pancreas cancer.
Let me turn now to Slide 5 and I will provide an update on our clinical development progress to assess the potential of PEGPH20 and other tumor types. Beginning with our trials in combination of checkpoint inhibitors, we are studying PEGPH20 plus KEYTRUDA or pembrolizumab in non-small cell lung and in gastric cancer patients.
Since our last update, we have reached the target enrollment in the gastric cancer arm of the study and have started screening new patients. We continue to follow patients who are still receiving treatment and expect to submit data to our medical forum later this year.
In the non-small cell lung cancer arm, we are studying PEGPH20 plus KEYTRUDA monotherapy in second-line and later-stage patients who have not been previously treated with an immune checkpoint inhibitor. Following the results of Merck’s KEYNOTE-189 study evaluating KEYTRUDA in combination with chemotherapy as a first-line treatment, the standard of care in lung cancer is expected to change.
As a result, we are working with our investigators and our advisors to determine our path forward in non-small cell lung cancer.
I’ll move now to our clinical collaboration with EISAI. In January enrollment in the Phase 1b portion of the study of PEGPH20 plus Eribulin was closed and a total of 14 patients were enrolled. We are encouraged by the response data and we plan to submit the results to the Medical Forum also later this year.
At continuing with our collaboration studies, we and Roche are making good progress in the dose-finding portion of our studies of PEGPH20 and atezolizumab in pancreas cancer, gastric cancer, cholangiocarcinoma and gall bladder cancer.
And so with that, I will now turn the call over to Laurie to discuss our financial results in greater detail. Laurie?
Thank you, Helen. I will begin on Slide 6 where you will see that revenue for the first quarter was $30.9 million, compared to $29.6 million in the prior year period. Royalty revenue totaled $20.9 million, an increase of 50% on an as reported basis from the first quarter of 2017, primarily driven by sales of ENHANZE products outside the U.S. with Herceptin SC remaining the largest contributor.
As Roche highlighted on their recent earnings call, subcutaneous rituximab continues to serve as an important option for patients with sales holding stable for the last four quarters in Europe and growing in the U.S.
We are encouraged by Roche’s comments indicating that the subcutaneous formulations of Rituxan and Herceptin remains sticky as they continue to monitor the launch of IV biosimilar entrants in Europe.
Moving down the income statement, book sales of rHuPH20 totaled $3.4 million, down from $8.2 million in the prior year period due to the planned decline in API product orders we have previously reported as our partners continue their manufacturing transitions. HYLENEX product sales totaled $3.4 million and other collaboration revenue totaled $3.1 million.
As a reminder, this is our first quarter – income FASB topic 606 as it pertains to how we record royalty revenue. Prior to January, we recognized royalty revenue one quarter in arrears due to the timing difference between our financial close and when we received royalty reports from our partners. Under the new guidance, we now estimate royalty revenue for the current reporting quarter and we will true-up this estimate to actual in the subsequent period when the royalty reports are received.
To assist in this transition, Slide 7 includes two comparisons. The first table shows our reported royalties for this quarter, which is our estimate of $20.9 million, an increase of 50% from the $40 million in royalty revenue we reported in the first quarter of 2017.
The second table compares our Q1 estimate of $20.9 million to the actual royalties we received in the prior year of $14.7 million which were recorded in Q2 of 2017 under the prior methodology. This adjusted due shows growth of 42%.
In addition, during our February call, I provided an estimate of $19.4 million for royalties related to fourth quarter 2017 partner sales. The corresponding payments we receive from our partners were in line with that estimate and have been reported as cash on our statement of cash flows and as a reduction of accumulated deficit on the balance sheet.
We plan to provide this level of detail throughout 2018 to help you model and compare year-over-year royalties until we annualize the transition.
Turning to Slide 8 for a more detailed breakdown of our P&L, total operating expenses were $54.6 million, cost of product sales were $3.1 million in the quarter compared to $7.5 million in the prior year period mainly driven by lower API product orders.
Research and development expenses for the quarter were $38 million, a slight increase from $36.9 million in the first quarter of 2017. Selling, general and administrative expenses were $13.6 million, compared to $12.6 million in the prior year period. The increase was primarily due to personnel expenses including stock-based compensation for the period.
Net loss for the quarter was $27.5 million or $0.19 per share, compared to a net loss of $32.9 million or $0.26 per share in the first quarter of 2017 and cash, cash equivalents and marketable securities were $433.7 million at March 31, 2018, compared to $179 million at March 31, 2017.
I would now like to move on to our guidance for 2018 as shown on slide 9 which is unchanged from the guidance we provided at the start of the year. For the full year 2018, we continue to expect net revenue of $115 million to $125 million, which does not include the potential for new ENHANZE deals.
Within the revenue line, we are maintaining our forecast for royalty growth of 25% to 30%. We continue to forecast a decline in API product orders as our partners continue in their manufacturing transition and currently have sufficient API as safety stock to support their near-term plans.
For modeling purposes, we expect the second and third quarters of 2018 to reflect further reductions from the $3.4 million in the first quarter with API beginning to rebound modestly by the end of the year.
We continue to expect operating expenses for 2018 of $230 million to $240 million, flat to both 2017 and 2016 and operating cash burn of $75 million to $85 million. Debt repayment of approximately $95 million which includes principal and interest payments related to our royalty-backed and SVB, Oxford loans and year-end cash balance of $305 million to $315 million, which we project will take us into 2020.
With that, let me turn the call back to Helen, who will provide closing comments.
Thank you Laurie, in summary, we began 2018 on a phase of strong execution and are in a position as a company to create and deliver even greater value than we did in 2017. We continue to build momentum in our ENHANZE pillar highlights including royalties increasing 50% year-on-year on a reported basis and a clear line of sight to multiple study starts in the coming months including two new targets expected to enter the clinic that were not contemplated in our projections at the beginning of the year.
In our oncology pillar we continue to make strong progress in our HALO-301 study and currently project achieving target number of PFS events between December of 2018 and February 2019. In addition, we plan to submit data from two pan-tumor studies to medical fora in the second half of the year. Above all, we remain confident that the investments we're making in both pillars of our strategy will generate near and long-term value for patients, shareholders, and partners.
I want to close by expressing my ongoing gratitude and appreciation to our talented Halozyme team for their continued hard work to advance our programs and in support of our partners and patients.
We are now ready to take your questions, and operator, would you please open the call?
Thank you. [Operator Instructions] The first question will come from Jason Butler with JMP Securities. Please go ahead with your question.
Hi, great. Thanks for taking the question. I had two. First one, can you give us anymore details on the focus for the ASCO biomarker abstract? And then second question, given all the presentations at AICR, can you give any updated thoughts on how you are thinking about non-small cell lung cancer and how PEGPH20 can fit into that? I know it’s still an emerging or evolving landscape, but any updated thoughts after AICR. Thanks.
Yes, Jason, I’ll take the AICR question and I’ll ask Demetrius to comment on the liquid biomarker approach. Obviously, lots of excitement coming out of AICR and as we mentioned in our prepared remarks, we certainly are working with our investigators and advisors to understand the implications. We are studying PEG with KEYTRUDA in a second-line population and obviously some of the data suggest that perhaps the chemotherapy plus KEYTRUDA is going to become the frontline standard.
So we don’t have a specific plan at the moment. But we are deep in discussions and we will provide an update once we have identified what the appropriate and right things to do to continue the evaluation of PEGPH20 in non-small cell lung cancer would be. And then with that, I will turn it over to Demetrius for just a brief update on the biomarker.
Well, thank you very much, Helen. So, in all options of studies, we incorporate an exploratory research approach where we look at different aspects of the disease of PEGPH20 and of course, also to alternative biomarkers, particularly in soluble biomarkers. So this is not the first attempt and this is not the first approach where we publish some of the scientific and intriguing data which we continue to explore on ongoing basis.
Good. Thanks.
Thanks, Jason.
Great. Thanks for the question.
Thank you. The next question will come from Dana Flanders with Goldman Sachs. Please go ahead with your question.
Hi, thank you very much for the questions. I have got two as well. Maybe just the first one, I know there was a positive CHMP role on biosimilar Herceptin. A couple of months ago, and just – maybe just help us understand how you are thinking about the royalties on your subcue product in light of that. And then, my second question just on PEGPH20, I think you had originally said PFS by year-end now saying December to February. So a little bit of a push out there, maybe just some updated thoughts on your PEGPH20 program and what that could mean when that data retell. Thank you very much.
Yes, I’ll ask Laurie to begin by answering the question on Herceptin and biosimilars.
Hi, Dana. I think the best way to think about it, we obviously are still maintaining our robust growth projections for a range of 25% to 30% for the year. We did see very nice growth in Q1 on a year-over-year basis. That growth was really across all of our programs and I think, if you think about where the growth will come from for the year, we have said and we still believe that the primary contributor of year over growth will be high.
But we have been encouraged by the strength that we’ve seen in Q1. We are projecting that the more mature products will grow at a bit slower rate this year. And you can imagine that that’s a result of the time on the market and we did forecast a bit of impact from IV biosimilars on the subcutaneous programs in Europe.
Now with that said, we’ve been very encouraged by what Roche has said about the impact of IV biosimilars in Europe and their comments on their recent call about the stickiness or the stay power if you will of the subcutaneous formulations has been very encouraging. And so we are going to watch that. That stays very closely as it relates to the royalties on the SC version.
Dana, if you recall the value proposition of the subcue that Roche was focused on really was the strong patient preference, the reduced cost of the healthcare system and the ease of use within the clinics. And so, we are delighted to see that today playing out very well in terms of the stickiness as Laurie said of the subcue Herceptin. I’ll turn it to Demetrius just to talk about the move in the latest projection for the PFS timing.
Sure, thank you very much, Helen. So, the slight shift is a function of how the events are coming in, the PFS events are coming in. We pressed this very closely and we update our projections on a regular basis. So currently we project the final number of PFS events to be available between December 2018 and February 2019.
Now there is some variation as the events come in. There are some time periods when more events come in and some time periods where less events come in. So we update this projection on a regular basis. In terms of enrollments, we are very pleased.
There is a strong excitement and strong encouragement at the sites and in April we have enrolled 350 patients but we continue to project to have 500 patients enrolled by the end of this year. So we are very pleased with the overall – enrollment of the study.
Wonderful. Thank you very much.
Thanks, Dana.
Thank you. The next question will come from Jessica Fye with JPMorgan. Please go ahead with your question.
Hey guys. Thanks for taking my question. Just one from me. I just want to make sure I understand the enrollment in the 301 study. I think a couple months ago on clinical trial, the targeted enrollment shifted from 420 to 570. So, I just want to understand, when you talk about enrolling 500 patients by year-end, was that always the plan to enroll beyond the 420 range in advance of turning over the PFS book?
Yes, thanks, Jess. The study was only designed to enroll between 420 and 570 patients. The update we gave was I think a couple of quarters ago, as we listed when we thought we would achieve the target number of PFS events, we provided the update to say that we expect that to coincide with 500 patients.
So, not really a difference. We just updated based on the actual occurrence of PFS events to provide a little bit more color to you. So every things is in line with our expectations in terms of how the enrollment is going and we just had a more clear line of sight as to exactly when the PFS events or the range of when that might occur.
Okay, got it. And what is the target number of PFS events?
We would not provide with that information, Jess.
Okay, no problem. Thank you.
Okay, thanks.
Thank you for your question. Next question will come from Joel Beatty with Citi. Please go ahead.
Hi, guys this is Shawn filling in for Joel. Thanks for taking my question. I have two here.
Hi, Shawn.
The first one regarding the PEGPH20 pivotal study. Now that you have enrolled 350 patients, can you provide any color on whether HA screening failure rates have been in line with your initial assumptions at this point?
I’ll ask Demetrius to address that.
Yes, our initial assumptions were that the HA high rate is between 35% and 40% of the overall population and our ongoing screening activities will support this assumption.
Great, great. And then the second question, just in regards to the HYCELA launch, can you provide any color on how receptive patients and clinicians have been to the subcue formulation in the states and how formulary adoption is going?
Yes, we can only repeat the comments that Roche have made publicly on this. The comments Roche have made is they are pleased with the initial update on the HYCELA launch. We don’t have additional color that we can give other than at this time.
All right. Thank you.
Thanks, Shawn. Next question
Thank you. The next question will come from Gena Wang with Barclays. Please go ahead.
Thank you for taking my questions. Also two questions, maybe first one follow the previous question regarding the HYCELA. I don’t know if, any other colors you can provide, for example, the conversion rate in the U.S. and also in the Europe and also for the HERCEPTIN as well in Europe?
Yes, Gena, it’s the same situation where we are really in a position due to the confidentiality of our agreements where we can only repeat what Roche has said. They haven’t provided a lot of color on the HYCELA launch except to say that they are pleased with the progress.
Probably, at least a year ago with the last update we got on progress in Europe, at that point in time, Herceptin SC represented just slightly over 50% of sales volumes in the European launch countries, and MabThera was 34%. So obviously, supporting the strong conversion of what’s happening in Europe. But we don’t have any public update that we can give you of additional conversions since that time.
Thank you. And then, another question regarding PEGPH20 in pancreatic cancer. Just wondering will outcome whether positive or negative, would that affect your decision on other oncology programs?
As we evaluate the data, we will look at each cancer type differently. Obviously, we are in the position to have some data. We believe that the end of 2018, as we mentioned in the prepared remarks in breast cancer and potentially also in gastric cancer. And so, we will certainly consider each of the tumor type differently as we evaluate the data.
Thank you.
Thanks, Gena.
Thanks, Gena.
Thank you for the question. The next question will come from Arlinda Lee with Canaccord. Please go ahead.
Hi guys. Thanks for taking my question.
Hi, Arlinda.
Hi. I had a couple questions. Maybe on the – on the financial one for Laurie. The royalties, can you maybe point us to what the bump in royalties would have been from? And then, a follow-up on some of your partnered programs. Curious about when we might hear about the identity of some of these undisclosed things that are now in the clinic? Thanks.
All right. I’ll ask Laurie to give an update. I think the question is related to what was driving the 50% year-on-year increase in royalties. Arlinda, am I right with that?
That’s right.
Okay.
Yes, so the 50% increase, this was on an as reported basis. So remember that we were in the prior year reporting on the one quarter lag. It was 42% if you are comparing more of an apples-and-apples and really the biggest driver of the growth was Herceptin as you can imagine that program is one of the largest and it’s contributing the most to sales.
But we did see growth across all of the commercial – our partners’ commercial programs. And so, we are very pleased with that growth. And I can – a comment on the undisclosed programs, obviously, Roche, Lilly and BMS all have an undisclosed program. There are number of reasons for why companies might not want to disclose.
Often it’s competitive reason. So we unfortunately are not in a position to provide any additional information on those other than to say we are very pleased that our partners are continuing to recognize the potential value of ENHANZE and are moving more and more targets into the clinic with greater speeds than I think, we’ve seen historically.
Thank you.
Thanks, Arlinda. Next question.
The next question will come from Gobind Singh with BMO. Please go ahead.
Hi guys, I am on for Do Kim. Thank you. Just had a quick question. I believe kind of came up to the read out with the pancreatic trial, can you remind us what – I know there is only so much you can say, but just help us understand what is the bar to be in terms of what kind of PFS you would think will be good enough in terms of what you are hoping for, I guess.
And I know you have a lot of other trials and combination trials with other chemotherapies that were Phase 1 and Phase 2. Is there any chance we might see from any of those coming in support of the big read outs? Thanks.
Thanks, Gobind. Nice to meet you too. In terms of the PFS data read out what we have made public is the fact that our target hazard ratio was 0.59. And so, that is, I think a useful bit of information to you as we thinking about the potential range of clinical outcome that we might be looking for in that study. We are in a position we believe to be reporting and submitting data to Medical Forum – fora in the second half of 2018 for the gastric arm of the KEYTRUDA study and also our combination study with Eribulin in breast cancer. And so, look for data on those sometime following that.
Thank you.
Great. Operator, I think there are no more questions and so with that, we are probably ready just for – Helen, any closing comments?
That’s great. Well thank you everybody. Obviously, another strong quarter across both of our pillars at Halozyme . We appreciate your attention and your questions and we look forward to updating you next quarter on our continued progress. Thank you.