Halozyme Therapeutics, Inc. (HALO) Q1 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Halozyme Therapeutics First Quarter 2012 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anne Erickson, Executive Director of Investor Relations at Halozyme. Thank you. Ms. Erickson, you may begin now.

Good afternoon, and welcome to Halozyme's quarterly update conference call. Joining me on the call today are Gregory Frost, President and Chief Executive Officer; and Kurt Gustafson, Chief Financial Officer. This afternoon, Halozyme released the first quarter 2012 financial results. If you have not received this news release or if you'd like to be added to the company's distribution list, please e-mail me at aerickson@halozyme.com. This call is also being webcast live over the Internet at www.halozyme.com, and a replay will be available on the company's website for the next 14 days. Before we begin, let me remind you that during this conference call, we will be making forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides the Safe Harbor for forward-looking statements. All statements made during this conference call that are not statements of historical fact constitute forward-looking statements. The matters referred to in forward-looking statements could be affected by the risks and uncertainties of Halozyme's business, both known and unknown. Such risks inherent in the company's business are described in our filings with the Securities and Exchange Commission, as well as in our news releases. The company's actual results may differ materially from those expressed in or indicated by such forward-looking statements. With that, I would like to turn the call over to Gregory Frost, Halozyme's President and CEO.

Thanks, Anne, and good afternoon to everyone. We appreciate you joining us on our first quarter call for 2012. Elaborating on the press release from today, I will outline the progress we've made with some of our near-, mid-, and longer-term value drivers, and Kurt Gustafson, Halozyme's CFO, will review the quarter's underlying financial results with you. Before I update you on the progress we've made with our development programs, I'd also like to share some recent news regarding our general patent portfolio. As many of you know, we have multiple patent applications on file with the European Patent Office, or EPO, that protect our rHuPH20 enzymes through 2024 and beyond. As noted in prior filings, one of our core granted patents in Europe was opposed with proceeding schedule for this month. I'm happy to report that this opposition has been withdrawn, the hearing canceled and the EPO has acknowledged the patentability of the claims. In our interactions with the EPO, we agreed to make some minor changes to the patent claims and description. We anticipate the next steps for the EPO to issue a final written decision affirming the claims. This is very positive news, as it will mean that the rHuPH20 enzyme, part of our core technology, will have patent protection exclusivity until at least 2027 in the U.S. and at least 2024 in Europe. Now regarding the recent development activities within the first quarter, we've already achieved 2 major milestones that we set for the year, both which involve a near-term value driver with our partner, Roche, the subcutaneous Herceptin program. First, in early March, we announced that Roche submitted the Line Extension Application for the subcutaneous formulation of Herceptin to the European Medicines Agency for the treatment of patients with HER2-positive breast cancer. This formulation of Herceptin uses Halozyme's Enhanze Technology to enable the subcutaneous injection of a full intravenous dose of medication. This was a pivotal milestone in the subcutaneous Herceptin development program, and we're confident in the strength of the regulatory application submitted for review. Notably, on Roche's recent earnings call, they communicated that discussions with the European regulators were going well and progressing as expected. Secondly, a few weeks ago, Roche presented the Phase III subcutaneous Herceptin registration data from 596 patients at the European Breast Cancer Conference with a median follow-up of 12 months. The trial, called HannaH, met its co-primary endpoints of PK based upon blood serum levels and efficacy, based upon pathologic complete response or complete eradication of the tumor cells in the breasts. Efficacy results were comparable, with 45.4% of patients in the subcutaneous arm achieving pathologic complete response and 40.7% of patients in the IV arm achieving pathological complete response. As for PK, measured by drug concentrations in the blood just before surgery, the subcutaneous administration is compared to the IV formulation at 69 micrograms per mL in the subcutaneous arm and 51.8 micrograms per mL in the IV arm. Additionally, the HannaH trial also demonstrated that the overall safety profile of subcutaneous Herceptin was consistent with a known safety profile of the current standard IV formulation. We're very excited about this program and believe the subcutaneous formulation of Herceptin may provide tangible benefits to patients, healthcare providers and payers. Patients may benefit from a therapy that has increased convenience over IV administration. Subcutaneous Herceptin will offer a less invasive route of administration, as well as a shorter duration of administration, 5 minutes versus 30 to 90 minutes, and provide a more efficient route of administration as a fixed-dose regimen. Additionally, patients deemed eligible may have the option for at-home self-administration of their therapy with a fixed-dose device Roche is developing. We believe that Roche is taking the right steps to adequately address any questions that physicians may have about self-administration and is putting significant resources behind a program to help patients make the transition from IV to subcutaneous as smooth as possible. In fact, Roche recently announced a large clinical trial called SafeHer, where approximately 2,500 patients across 60 countries will self-administer their therapy under the supervision of a physician to compare the safety of assisted and self-administered subcutaneous Herceptin, using both the device and vial. In terms of healthcare provider benefits, physicians could see increased convenience as well, as a subcutaneous administration requires lower resource utilization. For example, pharmacists will be able to provide a ready-to-use fixed-dose administration device instead of preparing an infusion that will allow physicians and nurses to conduct fewer infusions in the hospital, freeing up resources for other procedures. For payers, less resource utilization results in reduced healthcare costs, making subcutaneous Herceptin an attractive option for reimbursement. The other near-term value driver we have with Roche is also progressing very well. In Roche's latest earnings call, they reiterated an on-track status for a 2012 submission of MabThera, or rituximab, Line Extension Application to the European Medicines Agency. That submission will be a key milestone for the rituximab development program and an important step for patients living with non-Hodgkin's lymphoma, chronic lymphocytic leukemia and follicular lymphoma. Moving on to our other late-stage partner programs, I want to comment on the recent update with our partner, Baxter, on the HyQ biologics license application. FDA recently requested additional information regarding the investigational therapy, HyQ, in order to complete its review of the application to treat patients with primary immunodeficiency. As a reminder, HyQ is a product that is co-administered and includes Baxter's immunoglobulin and Halozyme's recombinant human hyaluronidase, for which a BLA was submitted to FDA for the treatment of primary immunodeficiency. We continue to work closely with Baxter to clarify FDA's questions, development an action plan and generate data to satisfy their request. FDA indicated in the request that additional information could be satisfied, through pre-clinical or clinical studies, the clarifying discussions will be required before we can provide a more definitive timeline. However, currently we anticipate the potential approval of timeline to extend beyond 2012. In closing out our update on the HyQ regulatory status, I want to reiterate that along with Baxter, we remain optimistic about the HyQ development program and believe it could offer an important new treatment option for patients with primary immunodeficiency. Halozyme has many years of experience researching and developing the rHuPH20 enzyme and has conducted longer-term repeat-dose trials combining rHuPH20 with other agents, such as insulin, and in partner with other recombinant products. For example, through various clinical studies, we've accumulated safety data on approximately 1,200 patients dosed with rHuPH20 for more than 6 months and nearly 940 patients dosed for one year. Specifically, in studies with Roche, the combination of rHuPH20 in Herceptin has been studied with repeat dosing every 3 weeks for one year, with the safety profile of subcutaneous Herceptin having been shown to be consistent with that of IV-administered Herceptin. Details of this 2-arm trial were presented in Vienna last March. Additionally, with 2 large-scale trials that Roche recently announced they're initiating, the 400-patient PrefHer trial and the 2,500-patient SafeHer trial, will continue to build out the established safety profile of the rHuPH20 enzyme. Now let's turn the conversation to our proprietary revenue stream, Hylenex, our wholly owned product, a low unit-dose liquid formulation of recombinant human hyaluronidase. We’re starting to gain a foothold within hospitals and emergency departments for applications such as drug extravasations, most commonly used in the NICU in regional blocks. Hylenex is FDA-approved for the dispersion and absorption of other injected drugs and fluids. And while we're initially focusing on drug extravasation, we'll work to expand sales in the future through regional anesthesia and fluid administration indications in the hospital with patients with difficult venous access. In working closely with FDA, we also recently received approval on the supplemental NDAs that update the Hylenex label to include instructions for pre-administration of the enzyme in advance of other injected or subcutaneously infused drugs, as well as to include information from the multiple non-clinical studies that provide further data on the safety profile of Hylenex. As a reminder, we have an appropriate and experienced commercial infrastructure in place to support this relatively small market, and we believe this product will be profitable. Switching gears now, let's talk briefly about our mid-term value driver, our diabetes platform. I'd like to quickly review our presence at the upcoming 72nd Scientific Sessions of the American Diabetes Association that will be held June 8 through 12 in Philadelphia. We're excited to have a robust showing at the meeting, and I'm pleased to announce that we have 4 abstracts accepted, including one leg breaker. Once ADA lifts the embargo, we'll post the titles of the abstracts to our corporate website. Of particular note, Halozyme management will be hosting an analysts' cocktail reception during the conference to review meeting highlights from our diabetes development programs. The reception will be held at ADA in Philadelphia. We'll provide more information regarding this event in the near future. We look forward to seeing you in Philadelphia. Also we're pleased to announce that on October 2 of this year, we'll host an analysts' day in Manhattan, where you'll hear more about the company's overall business strategy, as well as our specific plans for Hylenex in the insulin pump market. We'll provide more details regarding this event in the near future. Lastly, I want to take a quick minute to review some of the catalysts from our longer-term value drivers. Throughout the remainder of the year, we expect to present results from the HTI-501 Phase II clinical trial in patients with moderate to severe fibrosclerotic panniculopathy, more commonly known as cellulite. That portion of the trial has begun and we anticipate data by end of the year. Our PEGPH20 program in patients with stage 4 previously untreated pancreatic ductal adenocarcinoma is advancing well in the 1b run-in portion. We've also decided to expand the numbers on the run-in portion of the trial in order to gain more experience with the drug at higher doses before moving into the randomized placebo-controlled phase. This will ensure we maximize the opportunity for patients in the randomized phase and have more unblinded data before doing so. We expect to wrap up the run-in phase before the end of the year. Additional PK and PD data from the single-agent Phase I trial will also be presented at ASCO this year. Finally, earlier in the year, our partner, ViroPharma, announced that based upon positive Phase II data, the clinical development program for Cynrize with rHuPH20 warrants further development. They recently announced that they expect to begin a larger Phase II dose-ranging study this summer. Through our proprietary pipeline that focuses on research with recombinant human enzymes that alter the extracellular matrix, Halozyme is working on a truly unique programs in therapeutic areas with significant market potential and value for patients. Our diversified R&D structure, one that's balanced evenly between partnered and proprietary programs, enables us to expand our reach, as well as balance financial and technical risk. While regulatory delays like with the HyQ program are certainly disappointing. We believe Halozyme's pipeline is appropriately structured to provide long-term value and sustainable growth for our shareholders. Our focus remains the same. We will continue to secure revenue from existing channels, pursue additional high-value partnerships, work diligently to advance our proprietary pipeline, all what's driving towards positive cash flow. With that, I'll now turn the call over to Kurt Gustafson, who'll provide more detail on our financial results for the first quarter of 2012.

Thanks, Greg, and hello to everyone. Earlier today, we announced our financial results for the first quarter of 2012. Net loss for the first quarter of 2012 was $15.1 million or $0.14 per share, compared with a net loss for the first quarter of 2011 of $9.6 million or $0.10 per share. Revenues for the first quarter of 2012 were $7.4 million compared to $7.5 million for the first quarter of 2011. Revenues in the first quarter of 2012 primarily consisted of a milestone payment from Roche of $4 million, the research and development reimbursements from our partners. Research and development expenses for the first quarter of 2012 were $15.9 million, compared with $13.8 million for the first quarter of 2011. The increase is primarily due to additional manufacturing activities and compensation costs, partially offset by a decrease in clinical trial activities. Selling, general and administrative expenses for the first quarter of 2012 were $6.6 million, compared to $3.4 million for the first quarter of 2011. The increase for SG&A was a result of higher compensation costs and higher marketing and market research expenses during the quarter. Cash and cash equivalents were $117 million as of March 31, 2012, compared with $74 million as of March 31, 2011. Excluding the net proceeds of $81.5 million from the financing in February 2012, net cash used in the first quarter of 2012 was approximately $17.7 million. Lastly, due to the HyQ regulatory delays that Greg has outlined, the company has revised cash burn guidance for 2012. The guidance has been increased to $55 million to $60 million from $50 million to $55 million. I'll now turn the call back over to Greg.

Thanks, Kurt. We're encouraged by the progress we've made with the late-stage Roche programs, subcutaneous Herceptin and subcutaneous MabThera. We've already delivered on 2 of the 8 major milestones set for the year, and we intend to work diligently with Baxter to complete the necessary work for the HyQ BLA and submit the additional data to FDA expeditiously as possible. Throughout the next few quarters, we'll continue to advance the company's key value drivers that we believe are achievable and will ultimately advance our mission of developing and commercializing innovative products to improve health care for millions of people worldwide. I'll now ask the operator to open the lines for questions.

[Operator Instructions] Our first question comes from the line of John Sonnier from William Blair.

Just a couple. First, I think there's a common perception out there that Hylenex is not approved for chronic use. Can you talk a little bit about this label expansion and just a little bit on what the limitations are in the current Hylenex label relative to chronic use?

Sure, John. The 150-unit dosage form Hylenex is approved for the dispersion and absorption of other injected drugs and fluids. There are no limitations within the label for duration of use, acute or chronic. The regulatory pathway which Hylenex was approved is based on more than 60 years of hyaluronidase use. It's not that different to how recombinant human insulin, for example, was originally approved relative to historical animal-derived insulins. But we're always committed and continue to expand the exposure and safety database for rHuPH20 in different applications and in different patient populations. For example, we recently just updated our label to Hylenex with some of our longer-term safety studies through an sNDA with SEDAR and have multiple Phase IV programs under way under the label. And as I mentioned previously more broadly through various clinical trial studies, we've accumulated safety data on about 1,200 patients dosed with rHuPH20 for more than 6 months and nearly 940 patients dosed for a year.

It's really a question leading out to the ultimate question what the street, I think, desperately wants is some assurance that what you're dealing with, with the FDA is HyQ specific. So I guess, what assurance can you offer as to these questions that are coming from the FDA for HyQ don't affect Roche and don't affect your other partnerships?

Sure, John. So for a number of reasons, we believe that the agency's questions are not relevant to our other products or programs. This is based on the nature of questions in the RFI, subsequent conversations with FDA and evaluation of all the data we have on our various combinations. We continue progressing all of the other programs as planned. And it's notable, we have over 40 clinical trials with rHuPH20 in different settings completed or under way, with some studies up to 2 years. So actively, with Roche, we've built a very large safety database of this enzyme in specific formulations and with other recombinant products.

Our next question comes from the line of Jim Birchenough from BMO Capital.

A couple to just to follow on John's questions. I guess, the first thing is, is there anything in the issues or questions posed by FDA in the HyQ letter that might impact further development of the insulin program? And by that, I mean, are there any studies that you may do to satisfy FDA at HyQ that you may then feel compelled to do for things like your proprietary programs like insulin and [indiscernible] and insulin pump.

Yes. Jim, I think very specifically for a number of the reasons that we've looked at and the nature of the RFI that basically, this is a very specific set of questions related to the HyQ program. And until we’ve had a meeting with the agency regarding data proposals for this specific combination, I'm not going to go any speculative comments out than details we've already given. But look, both companies are still very optimistic about the development program and are committed to the common goal of bringing to that opportunity to patients. But for our other programs, this is something that is very unique to this combination.

And then maybe just sticking with the Ultrafast Insulin program, what are the next steps for that program? And any update on how you're thinking about partnership there?

Sure. Well, obviously, we're excited to be presenting 3 posters and an oral at this year's scientific sessions in Philadelphia. And obviously -- and we'll update those as they become through the embargo. And we'll be obviously having an analysts' cocktail reception at ADA. But effectively, as we look at this between the opportunities with regards to the co-formulation, obviously, we have 220 patients from the 2 Phase II trials that were run last year, that we look forward to presenting this year. And then regarding Hylenex and pumps, we have some Phase IV studies that are under way, and we look forward to providing an update on this at our analysts' meeting in October. So that's a point at which we'll give some specific details on the pump side of things.

Our next question comes from the line of Ying Huang from Barclays Capital.

This is Christina Zhang calling in for Ying Huang. I was just wondering if you or Baxter has scheduled a conference call with the FDA to discuss the data required yet and if the FDA has been updated on the results from the extension trial on HyQ.

Yes. So I mean, basically, where we are right now? Well, I think we're encouraged by the ongoing constructive discussions with the agency. First, timeline is to respond to their request. They're going to require a proposal from our side. So no -- again, no toxicologic findings or adverse events are linked in here. But given some of the unique aspects of this particular combination in the patient population, we plan to be very thorough in our response to the questions raised by the agency. But until we've had a meeting, I don't think there's a whole lot more that we can go into from a timing perspective. And really, this is something where we need to go and bring our proposals to them.

That's very helpful. I was also wondering if in light of the roughly, call it 17,500 U.S. patients on the chronic IVIG for PID, what do you think constitutes the safety -- on appropriate safety database?

Well, look, every product I think in patient population is unique from that perspective. And I think number one, we're all committed to patient safety. Obviously, we'd not gone through and presented to the agency the extension data or any other data. But until we sat down to have a meeting with them, I don't want to speculate on that, and I certainly don't think it's my position to speculate on the agency's position.

Okay. And I have one more quick one around your initial communications between the Roche and the EMA, did they raising any safety concerns on the subcu Herceptin?

No. Well, I think what you heard from Roche is that number one, that they have a very exhaustive package that they put together on that, both looking for the dose and intended duration of patient population. But my understanding, essentially, is if you take a look at Roche's statements is that those programs are continuing well and initial discussions with the regulators had been positive.

Our next question comes from the line of Dan Chung from Jefferies & Co.

First question is about you guys' subcutaneous technology, regarding Actemra, could you guys just comment on how that differs from Halo's PH20-formulated technology?

Sure, absolutely. I mean, this is a -- as I think Roche has defined, this is a traditional subcutaneous formulation. So I think folks have seen, for example, the data that was presented from looking at the monthly, twice monthly versus weekly with our technology compared to a weekly dosage formulation of Actemra subcu, and this is in a simple 1 mL injection. So there is -- it's a traditional injection and from that standpoint, it's weekly dosing and basically a 1-mL syringe type sort of thing.

Okay. And does Roche plan on continuing Halo's formulation in the near-term?

I think from the standpoint of the timing on that, that we look from the perspective of Roche should be someone to look to from the standpoint of guidance on that. Obviously, I think the opportunities of looking between the weekly versus monthly or weekly versus twice monthly is something that they look at carefully, as for as their overall lifecycle management, but that's obviously their strategic direction.

Okay. Another question on cash guidance. Given that there's a $5 million increase in cash burn guidance for 2012, were you guys expecting a $5 million milestone for HyQvia?

I'll let Kurt cover that one.

Yes. So Dan, clearly, the -- we had built into our forecast the fact that we would receive a milestone but we haven't disclosed the specific dollar amount of that. So all in all, it's yes, that the change in the guidance was due to the fact that we now no longer expect to receive that milestone, but I can't dispose the specific number.

Okay. And lastly, for stock option expenses, are you guys expecting around $5 million to $6 million again, historically?

I would say that the -- without giving kind of detailed guidance on that, the number of employees is a little higher this year than it was last year. So I would think it would be fair to say that, that number maybe goes up a little bit but not substantially so.

[Operator Instructions] Our next question comes from the line of Chris Holterhoff from Oppenheimer.

You talked a little bit about this but just, I guess, kind of ask you another way. I'm wondering if you've had any conversation with Roche regarding how the FDA's request for additional data for HyQvia might affect at all any Roche's strategy to come to the U.S. with Herceptin or any of their other products?

Yes. Of course, we're synchronized from the standpoint of regulatory harmonization of these things. And as I talked about previously, the questions that we have here aren't relevant to other products or programs. So the issue as far as Roche in the U.S., they've got other specific issues as far as [indiscernible] designs, pathologic complete response and other things I think that they've highlighted before. But those are really unrelated to this.

Okay. And then just one follow-up. I know you changed your cash burn guidance a bit this year and I think as far as the last conference call, I think you were -- we were told to be -- to expect cash flow positivity by 2013 and I see that's not really stated in this release. So just wondering if your thoughts there have changed and obviously, is this dependent somewhat on HyQvia. But just, I guess, any way we can think about that would be helpful.

Yes. I think that's right, Chris. Until we get more clarity from the agency on the path forward with HyQ, it's probably not prudent for me to comment specifically on 2013. Although I would add that the expected launches that we have from Roche, both for Herceptin and MabThera, it certainly drives the future profitability of the company by themselves. So long term, we don't see any issue. But 2013, I'd like to get some more clarity from the agency to -- before I comment further on that.

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Thanks. This concludes today's conference call, and thanks for joining us.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.