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Halozyme Therapeutics, Inc.

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Msg  795 of 802  at  10/3/2021 5:09:26 AM  by

Biotech2050


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Halozyme Therapeutics: Low Risk Buy And Hold

Small Pharma Analyst profile picture.
Small Pharma Analyst
1.51K Followers

Growth, Long/Short Equity, Biotech, Healthcare

Contributor Since 2010

A veteran of the pharma industry. Specializing in the analysis of small pharma companies with a focus on the pipeline and opportunities for licensing or major deals with large pharma. Financial analysis including burn rate, venture capital funding, and cash flow.

Summary

  • Low risk biotech with steadily increasing revenue and earnings from ENHANZE drug delivery.
  • Revenue and earnings are expected to peak at end of the decade with a long tail into the mid-2030s.
  • Sizeable earnings provide ample cash for acquisitions or partnerships that will likely keep earnings growing beyond this decade.
  • HALO is undervalued given the low-risk nature of the business and annual EPS earnings growth of 15-20%.
  • Recommendation: long-term buy and hold.
Human skin anatomy

Rasi Bhadramani/iStock via Getty Images

Halozyme Therapeutics' (NASDAQ:HALO) ENHANZE system is a phenomenal advance in drug delivery, allowing many drugs to transition from IV to subcutaneous (sc) delivery. The delivery time is often reduced from hours to minutes and drug administration may be at home instead of a clinic or hospital. HALO has established long term contracts for nearly every top selling IV drug, providing significant revenue from royalties, milestone payments, and the sale of PH20. We believe revenues in the $1.5-2 billion range are likely by 2030, with earnings of $7-8/share. Earnings from ENHANZE may peak by 2030, but should have a long tail well into the 2030's.

HALO share price touched $50 in February and April 2021 but has since declined to near $40 where it has hovered for the past several months. We believe Wall Street is overly worried about the loss of ENHANZE patent protection in Europe in 2024 and US in 2027, and "what's next" after ENHANZE. Based on comments from CEO Torley, published guidance, and patent applications that have been filed, we believe royalty and milestone payments will continue to grow at least through the end of the decade and perhaps longer. At $40 per share HALO trades at a P/E less than 20 based on anticipated 2021 earnings. You won't find many companies, large or small, with a clear path to growth for the next decade, but that's what we have with HALO. Jim Cramer refers to these type of companies as boring, "with no surprises, no craziness, no win-lose." As Wall Street begins to recognize the durability of the ENHANZE portfolio and the IP surrounding it, the share price should increase accordingly. With safe and steady growth, we see HALO share price increasing 15-20% on an annual basis over the next decade. Recommendation: buy and hold for long term capital appreciation.

Brief Background

Halozyme owns the intellectual property for the ENHANZE drug delivery technology that uses recombinant human hyaluronidase PH20 enzyme to degrade hyaluronan in the subcutaneous space below the skin. The transient degradation of hyaluronan allows larger volumes of fluids to be delivered and absorbed subcutaneously in a single injection. Many drugs that were originally formulated as IV drugs have now transitioned to subcutaneous delivery using ENHANZE. Halozyme has established contracts with many small and large pharmaceutical companies to use this technology, beginning about a decade ago. The two charts below, from HALO's corporate presentation, shows the 5 projects that have been approved and are currently marketed and the 16 projects currently in clinical development.

HALO 5 approved projects

HALO 16 projects in development

Forward Revenue Estimates

HALO has four primary sources of revenue: royalties, milestone payments, sale of PH20/Hylenex. We discuss each below.

Royalties - $1 billion in royalties by 2027, real or fantasy?

For the past few years HALO has been guiding to $1 billion in royalties by 2027. Based on the products that have been approved recently (PHESGO and DARZALEX FASPRO) and those coming in waves 3 and 4, the $1 billion forecast is looking more and more credible. The wave 3, 4, and 5 products will likely provide a high level of royalty revenue well past the PH20 patent expiries of 2024 in Europe and 2027 in the US. The reason for this is because, according to CEO Torley and 10K filings:

  • Contracts are effective for at least 10 years of commercial sales;
  • A 50% stepdown in royalty will occur at time of expiry unless a patent is granted on the co-formulation. Every drug that uses PH20 is going to have a formulation patent since the primary purpose of the subcutaneous formulation is to extend the drug's patent life beyond the composition of matter expiration. U.S. Patent 10,385,135 has been granted for the co-formulation of Darzalex and PH20. The priority date for this patent is 01Nov2016 which means its expiry date is 01Nov2036. A patent has also been filed for Phesgo, US 2021/0085597. If granted this patent will extend the patent life of Phesgo until 2037. We expect similar patents to be filed and granted for all products in development using ENHANZE. Below is a quote clarifying co-formulation patents from CEO Torley on the 3Q19 earnings conference call:

And there's also the potential to obtain additional co-formulation patents on certain novel partner products, potentially extending the mid single digit royalty term up to 20 years post patent filing date. While each agreement is negotiated separately, and terms and conditions vary across agreements, in general, the co-formulation patents have the favorable effect on the duration of the royalty term and potentially delay the timing of the royalty step down.

Halozyme notes that the royalty rate for most products are in the mid-single digits. We are assuming this means approximately 3-7%. Based on the sales of Darzalex Faspro in 2Q21 and the royalties HALO received, we believe the royalty rate is 4% for the current level of sales of this product. For the royalty estimates provided in the chart below we use a conservative royalty rate of 4% knowing that the composite rate over the next decade will likely be higher. We are assuming no step down in royalty rate based on the previous discussion since we believe all co-formulated products will be patent protected.

HALO estimated royalty revenue

Some of the key points:

  • Royalty revenue continues to rise to 2030 with a peak at $1.2 billion.
  • Royalties just under $1 billion are projected for 2027 in line with HALO guidance
  • Two major projects provide a large percentage of the royalty revenue: Darzalex $433 million in 2027; and Opdivo, $300 million by 2030 as BMY rapidly converts treatment from IV to subcutaneous given the composition of matter expiry in 2028. Both of these products are expected to have total sales >$10 billion annually by 2025 and perhaps $15 billion by 2030.
  • Wave 3 approvals (dates) include efgartigimod (2022), Opdivo (2025), and Tecentriq (2025).
  • Wave 4 approvals (dates) include one per year in 2025, 2026, and 2027. Likely candidates for wave 4 include Ocrevus, Roche's best selling medicine in 2020 at $4.65 billion; Tepezza (Horizon); and Opdivo:relatlimab combination.

Darzalex is projected to generate 30-40% of the royalty revenue through the end of the decade. The chart below from the HALO corporate presentation shows the rapid acceptance of the subcutaneous (sc) formulation of Darzalex after approval in May 2020. By June 2021 the sc formulation accounted for 66% of all sales. We are projecting growth to 80% market share over the next 2 years. Total sales of Darzalex in the first 6 months of 2021 were $2.8 billion. Assuming similar sales in the second half of the year with the sc formulation having a 66% share, we can estimate royalties as follows: $5.6 billion in sales x 0.66 market share x 0.04 royalty rate = $148 million for HALO for 2021. By 2027 we expect sales to be $13.5 billion with the sc formulation accounting for 80% market share, leading to royalties of $433 million.

Total sales of Darzalex in the first 6 months of 2021

Milestones

HALO has indicated that most contracts are established with milestones totaling approximately $160 million, although some of the more recent ones are higher ($175-210 million). This includes an upfront payment followed by significant milestones such as Phase 3 start, approval, and achieving sales targets. Currently, 16 projects are in clinical development for 12 drugs or drug candidates. If all projects meet all milestones, total revenue could be 12 x 160 = $1920 million. In addition, we expect new products to contribute to milestones over the next decade. HALO has provided some visibility to milestone projections over the next several years, as shown in the slide below from their corporate presentation.

Halo milestones

In 5 years they expect milestones to continue about half of royalty revenue.

Based on this guidance we are modeling revenue split as shown in the table below through 2030.

Table: Revenue Split, 2020-2030

Year

Milestones

Royalties

PH20/Hylenex sales

2020

45%

35%

20%

2021

42%

40%

18%

2022

39%

45%

16%

2023

36%

50%

14%

2024

33%

55%

12%

2025

30%

60%

10%

2026

28%

63%

9%

2027

26%

66%

8%

2028

24%

69%

7%

2029

22%

72%

6%

2030

20%

75%

5%

Summary of Revenue Estimates, 2021-2030

Based on the estimated royalty revenue, we can then estimate revenue from milestones and PH20/Hylenex sales based on the percentages in the table above. These are rolled up in the following table, showing the contribution each year from royalties, milestone payments, and PH20/Hylenex sales. Even though the company will be selling much larger quantities of PH20 over this period, the revenue estimates do not increase, suggesting they are realizing cost savings from economies of scale and passing on those savings to their customers.

Table: Projected Revenue, 2021-2030 (millions)

Year

Royalties

Milestones

PH20/Hylenex

Total

2021

198

208

89

495

2022

276

239

98

613

2023

353

254

99

706

2024

448

269

98

815

2025

557

278

93

928

2026

725

322

104

1151

2027

963

379

117

1459

2028

1108

385

112

1605

2029

1208

369

101

1678

2030

1233

329

82

1644

For 2021 the company is guiding to revenues of $425-445 million. The company has generally under-promised and over-delivered, so we think our estimate of $495 million is reasonable. For the first half of 2021, $90 million in milestone payments were recorded so another $118 is required to reach the estimate. The company does not provide visibility into upcoming milestones and we know these will vary from quarter to quarter.

The revenues are expected to peak in 2029 but this does not include any new contracts that are likely to be signed over the next few years. It is likely that revenue from ENHANZE can continue to grow beyond this decade.

Earnings Estimates, 2021-2030

Assumptions for earnings estimates include the following:

  • Net operating loss carryover is $528 million from 2006 to 2020; income taxes will be paid after earnings exceed that loss starting in 2022
  • Income tax rate of 20%
  • Assuming diluted share count stays constant at 148 million
  • R&D costs and SG&A costs increase 5% per year
  • Cost of goods (COGs) are 83% of PH20/Hylenex sales (reflects a 20% markup)

Table: Earnings Estimates, 2021-2030

Year

Revenue

Costs

Pre-Tax Income

After Tax Income

Non-GAAP EPS

Annual EPS growth

COGs

R&D

SG&A

2021

495

74

35

50

336

336

2.27

249%

2022

613

81

37

53

442

392

2.65

17%

2023

706

82

39

55

530

424

2.86

8%

2024

815

81

41

58

635

508

3.43

20%

2025

928

77

43

61

747

598

4.04

18%

2026

1151

86

45

64

956

765

5.17

28%

2027

1459

97

47

67

1248

998

6.75

30%

2028

1605

93

49

70

1393

1114

7.53

12%

2029

1678

84

52

74

1468

1174

7.94

5%

2030

1644

68

54

78

1444

1155

7.81

-2%

Based on these assumptions we expect HALO to grow earnings by 15-20% annually through the end of the decade. The dip in the growth rate in 2023 is simply due to HALO generating enough earnings that they will have to pay taxes. As mentioned above, new ENHANZE projects should continue to provide earnings growth beyond this decade but we are not modeling this given the high level of uncertainty.

Other Opportunities for ENHANZE

HALO has now established partnerships with nearly every top selling IV drug to develop a subcutaneous delivery based on PH20. As shown with the development work with Argenx, they are also looking to partner early in development to enable a subcutaneous formulation at time of initial filing. We expect they will continue to establish similar development projects over the next few years that will provide additional milestone and royalty revenue.

The major IV drug that has not yet used PH20 for the development of a subcutaneous formulation is Keytruda. The current IV dosage for Keytruda is 200 mg once every 3 weeks or 400 once every 6 weeks. Merck is pursuing their own subcutaneous formulation at a 285 mg dose with 64% bioavailability, which will be a substitute for the 200 mg IV dose. Substituting the 400 mg will require two injections. They may still want PH20 as a single injection for the 400 mg dose but will need to start soon if they want to convert patients to this formulation well before the 2027 composition of matter patent expiry.

HALO has been granted recent patents for modified PH20 where a few amino acids have been exchanged in the protein to make it more stable to temperature, excipients, and salts. Since most of the antibodies that are currently formulated with PH20 require refrigerated storage, this modification will not offer much advantage. However, HALO and their partners may find creative ways of using the modified PH20 to further extend patent life or use with the newly partnered drug candidates over the next few years. As the company moves into small molecule development, such as with ViiV, the modified PH20 may provide a way to prepare formulations stable at room temperature. HALO may also be able to formulate a room temperature version of their Hylenex product. The patents for the modified PH20 do not expire until late 2030's. I expect HALO will find ways to monetize this modified PH20 over the next decade.

Competition

Related to the discussion of modified PH20, Alteogen, a South Korean company, has also developed a proprietary modified PH20 they have named ALT-B4. The company claims ALT-B4 has improved thermal stability, reduced hypersensitivity, and enhanced enzymatic activity versus PH20. The company signed a contract in 2019 with a major unnamed pharmaceutical company and unnamed product to develop a subcutaneous formulation for a product currently delivered via IV injection. Alteogen indicated milestones and royalties up to $3.8 billion could be achieved under the agreement. With numbers that high, it is possible this drug could be Merck's Keytruda. In any event, this appears to be a company that will be competing for new contracts with HALO in the years to come.

Summary and Conclusions

There are not many biotech investments that one would categorize as "safe" but HALO is about as safe of an investment that can be found in today's market. They have a diversified portfolio that includes conversion of almost all major IV drugs to subcutaneous delivery, each with high growth anticipated for years to come. The IP position via co-formulation patents appears secure for these drugs through the mid-2030's.

Opportunities to grow outside of the current portfolio of drugs includes the potential for a contract with Merck's Keytruda, transition of products to a more robust second generation PH20, and partnering with new development candidates, including both small and large molecules. Some of these opportunities, and likely others, will be realized, further increasing revenue and earnings growth.

HALO will be building a large amount of retained earnings over the next few years. They have already spent some of this to buy back shares and will likely continue to do so. Most of the cash, however, will be held for expanding their portfolio beyond ENHANZE, as CEO Torley has suggested. What and when that might happen is unknown; the CEO has indicated they are in no rush. Since the earnings from ENHANZE can carry the company for a long time, it makes sense to survey a wide range of opportunities with deep due diligence to find the right deal or deals.

HALO is not a get-rich-quick stock but one that should reward an investor with steady growth over time. Our recommendation is to buy and hold.

This article was written by

Small Pharma Analyst profile picture.
1.51K Followers
A veteran of the pharma industry. Specializing in the analysis of small pharma companies with a focus on th...

Growth, Long/Short Equity, Biotech, Healthcare

Contributor Since 2010

A veteran of the pharma industry. Specializing in the analysis of small pharma companies with a focus on the pipeline and opportunities for licensing or major deals with large pharma. Financial analysis including burn rate, venture capital funding, and cash flow.

Disclosure: I/we have a beneficial long position in the shares of HALO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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