Halozyme(US:HALO)2023-02-21 21:27PART I Business Halozyme Therapeutics licenses its ENHANZE® drug delivery technology and expanded its portfolio with the 2022 Antares Pharma acquisition, focusing on a capital-light model - The company's core business is licensing its ENHANZE® drug delivery technology, which uses the rHuPH20 enzyme to convert intravenous (IV) drugs to subcutaneous (SC) injections, to major biopharmaceutical companies27 - In 2022, Halozyme acquired Antares Pharma, Inc., adding advanced auto-injector technologies and a portfolio of commercial products (XYOSTED®, TLANDO®, NOCDURNA®) to its business28380 - The company operates a capital-light model by outsourcing all manufacturing of its rHuPH20 enzyme and device components to third-party contract manufacturing organizations like Avid Bioservices, Catalent, and Phillips-Medisize909194 - As of February 14, 2023, the company had 393 full-time employees, with a workforce composition of 45% female and 31% non-white/Caucasian105109 Risk Factors The company faces significant risks from partner dependence, technology concentration, debt, and Antares acquisition integration challenges - A primary risk is the heavy reliance on partners (e.g., Roche, Janssen) to successfully develop and commercialize products using ENHANZE® technology; failure or termination of these collaborations would significantly harm the business130 - The business is highly concentrated on the rHuPH20 enzyme; any adverse development, such as safety issues or manufacturing disruptions with contract manufacturers (Avid, Catalent), could impact the entire ENHANZE® platform and Hylenex®127131 - The company has significant debt, totaling approximately $1.5 billion as of December 31, 2022; this includes multiple series of convertible notes and covenants under a credit agreement, which could restrict operations and require substantial cash for debt service149150 - Failure to successfully integrate the Antares business, or underperformance of its products and technologies, could adversely impact future business, operations, and the ability to realize anticipated revenue diversification and growth141142 Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments210 Properties Halozyme operates from approximately 194,000 square feet of leased facilities across San Diego, Ewing, and Minnetonka - The company leases all its facilities, totaling approximately 194,000 square feet as of December 31, 2022211 - Key locations include administrative and research facilities in San Diego, CA, an office in Ewing, NJ, and a multi-purpose facility (office, lab, manufacturing, warehouse) in Minnetonka, MN211 Legal Proceedings Halozyme is not currently involved in any legal proceedings expected to materially impact its financial position - As of the report date, Halozyme is not a party to any legal proceedings expected to have a material adverse effect on the company212 Mine Safety Disclosures This item is not applicable to the company - Not applicable213 PART II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Halozyme's common stock trades on NASDAQ, with a focus on share repurchases rather than dividends, and strong stock performance - The company's common stock is listed on the NASDAQ Global Select Market under the symbol "HALO"216 - Halozyme has never paid dividends and does not intend to in the foreseeable future, prioritizing reinvestment and share repurchases217 - In December 2021, the Board authorized a new three-year, $750 million share repurchase program; as of December 31, 2022, the company had repurchased 8.4 million shares for $350.0 million under this program219 Q3 2022 Share Repurchase Details | Period | Total Number of Shares Purchased | Weighted Average Price paid Per Share | Total Cost (in thousands) | | :--- | :--- | :--- | :--- | | Q3 2022 | 4,500,216 | $44.44 | $200,000 | (Reserved) This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Halozyme's 2022 revenues grew significantly due to royalties and Antares acquisition, though operating income slightly decreased due to increased expenses Results of Operations Halozyme's 2022 financial performance saw strong royalty and product sales growth, but increased operating expenses and a one-time tax benefit reversal impacted net income Financial Performance Summary | Financial Metric (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $660,116 | $443,310 | 48.9% | | Royalties | $360,475 | $203,900 | 76.8% | | Product sales, net | $191,030 | $104,224 | 83.3% | | Revenues under collaborative agreements | $108,611 | $135,186 | (19.7)% | | Total operating expenses | $392,585 | $167,408 | 134.5% | | Cost of sales | $139,304 | $81,413 | 71.1% | | Amortization of intangibles | $43,148 | $0 | N/A | | Research and development | $66,607 | $35,672 | 86.7% | | Selling, general and administrative | $143,526 | $50,323 | 185.2% | | Operating income | $267,531 | $275,902 | (3.0)% | | Net income | $202,129 | $402,710 | (49.8)% | - The significant decrease in net income from $402.7 million in 2021 to $202.1 million in 2022 was primarily due to a one-time income tax benefit of $154.2 million in 2021 from the release of a valuation allowance, compared to an income tax expense of $46.8 million in 2022245365 Liquidity and Capital Resources Halozyme maintains strong liquidity with $362.8 million in cash, managing cash flows from operations, investing, and financing activities - The company held $362.8 million in cash, cash equivalents, and marketable securities as of December 31, 2022247 Cash Flow Activities | Cash Flow Activity (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $240.1 | $299.4 | | Net cash used in investing activities | ($487.0) | ($406.3) | | Net cash provided by financing activities | $362.4 | $77.9 | - Material future cash requirements include long-term debt service, lease payments ($47.0 million), third-party manufacturing obligations ($97.8 million), and other purchase commitments ($48.7 million)249250251252 Long-Term Debt Halozyme's long-term debt primarily consists of convertible senior notes, with recent issuance of 2028 notes and repayment of other facilities Convertible Notes Summary | Convertible Note Series | Principal Amount (in millions) | Interest Rate | Maturity Date | | :--- | :--- | :--- | :--- | | 2028 Notes | $720.0 | 1.00% | Aug 15, 2028 | | 2027 Notes | $805.0 | 0.25% | Mar 1, 2027 | | 2024 Notes | $13.5 | 1.25% | Dec 1, 2024 | - In August 2022, the company issued $720.0 million of 1.00% Convertible Senior Notes due 2028 and entered into Capped Call Transactions for $69.1 million to reduce potential dilution upon conversion258516 - The company completed induced conversions of its 2024 notes, paying down $77.4 million in principal in August 2022 and $369.1 million in March 2021270271 - In August 2022, the company repaid its entire outstanding term loan facility and all outstanding loans under its revolving credit facility; the revolving credit facility was increased to $575 million and was undrawn as of December 31, 2022276277 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its investment portfolio, which management deems immaterial - The primary market risk is interest rate fluctuations affecting the value of the company's cash equivalents and marketable securities portfolio284 - Management estimates that a hypothetical 10% change in interest rates would not have a material impact on the company's financial results284 - The company does not hold or issue derivative instruments for speculative or trading purposes285 Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and the independent auditor's report for 2022 - This section includes the audited consolidated financial statements and the report from the independent registered public accounting firm, Ernst & Young LLP286299 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None reported287 Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective, excluding the recently acquired Antares Pharma - Management concluded that both disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2022290296 - The assessment of internal control over financial reporting explicitly excluded the operations of Antares Pharma, Inc., acquired in May 2022; Antares constituted 9% of total assets and 17% of total revenues for the year291295302 - The independent auditor, Ernst & Young LLP, provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022301 Other Information The company reports no other information under this item - None309 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports no information under this item, indicating it is not applicable - None310 PART III Directors, Executive Officers and Corporate Governance This section provides executive officer biographies and incorporates director and governance information by reference from the 2023 Proxy Statement - Dr. Helen I. Torley has served as President and CEO since January 2014, bringing experience from leadership roles at Onyx, Amgen, and Bristol-Myers Squibb312 - Nicole LaBrosse was appointed SVP, Chief Financial Officer in February 2022, having been with the company since 2015 and previously working as an auditor at PricewaterhouseCoopers, LLP313 - Information concerning directors, the code of conduct, and board committees is incorporated by reference from the forthcoming 2023 Annual Meeting Proxy Statement311 Executive Compensation All executive compensation information is incorporated by reference from the company's 2023 definitive Proxy Statement - All information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement318 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the company's equity compensation plans, including shares available for future issuance, and incorporates other ownership data by reference Equity Compensation Plan Information | Plan Category | Shares to be Issued (a) | Weighted-Average Exercise Price of Options (b) | Shares Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 6,550,450 | $24.99 | 17,413,834 | - The shares available for future issuance include 2,650,103 shares available under the Employee Stock Purchase Plan (ESPP)320 Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's 2023 definitive Proxy Statement - All information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement323 Principal Accounting Fees and Services Details on fees paid to the independent accounting firm are incorporated by reference from the company's 2023 definitive Proxy Statement - All information regarding principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement324 PART IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits included in the Annual Report on Form 10-K - This section provides an index of all financial statements, schedules, and exhibits filed with the 10-K report326327329 Form 10-K Summary No summary is provided under this item - None335