Halozyme Therapeutics, Inc. (HALO) Q3 2012 Earnings Report, Transcript and Summary

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

Good afternoon, everyone. Thank you for joining Halozyme's quarterly update conference call. With me on the call today are Gregory Frost, President and Chief Executive Officer; and Kurt Gustafson, Chief Financial Officer. This afternoon, Halozyme released third quarter 2012 financial results. If you've not received this news release or if you'd like to be added to the company's distribution list, please e-mail me directly 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'll be making forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements. The company's actual results may differ materially from those expressed in or indicated by such 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 release. 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're glad that you've joined us for our third quarter call for 2012. Today, I'll provide you with an update on the business and a recap of the quarter's highlights, and then Kurt Gustafson, Halozyme's CFO, will review the quarter's underlying financial results with you. Halozyme's continuing into the fourth quarter on track and progressing very well towards some important milestones for 2013. Let's begin focusing first on the late-stage programs with our partner, Roche. The subcutaneous formulations of Herceptin and MabThera Roche has developed with Halozyme's enhanced technology represent near-term revenue streams for us, with the European Medicines Agency or EMA's decision on Herceptin estimated for early next year and the MabThera marketing application anticipated to be filed with the EMA by the end of this year. As you may have seen the abstracts on subcu MabThera are now available on the American Society of Hematology or ASH website, Roche will be presenting data from 3 subcu MabThera studies at the meeting in early December. Roche continues to reiterate their intent to file the marketing authorization application for subcu MabThera to the EMA by the end of this year. This could be an important opportunity for patients with non-Hodgkin lymphoma, as this therapy could reduce infusion times from several hours with the IV formulation to just 5 to 7 minutes with the subcu formulation, providing an easier, less invasive and more efficient route of administration without compromising the established safety and efficacy of the intravenous product. It's worth noting that Roche continues to make significant investments in the clinical development programs for both subcu Herceptin and MabThera, with numerous studies that range in focus from efficacy and safety to health economics and patient preference. As many of you have seen, Roche presented half a dozen posters on the subcu Herceptin program at the European Society for Medical Oncology meeting a few weeks ago in Vienna. They presented additional data from the HannaH registration trial, as well as detail on the 2,500 patients SafeHer trial, which we believe should adequately evaluate any questions physicians may have about self administration of the subcutaneous therapy for eligible patients. Roche is putting significant resources behind this program to help patients make the transition from IV to subcutaneous administration as smooth as possible, and we look forward to being able to provide women with HER2-positive breast cancer a more convenient treatment option for this disease. On our side, we continue working closely with the Roche Genentech CMC teams to ensure adequate prelaunch bulk enzyme inventories to support potential launches. In summary, subcu Herceptin and MabThera are progressing on track, and we're working with Roche to advance these programs through their final stages. Both of these subcutaneous products could be very important to Halozyme. As combined, worldwide sales of the intravenous administered forms are [ph] $13 billion in sales. Royalty streams and milestone payments from the subcu formulations of these products, once approved, will drive our near-term profitability and help fund future growth and innovation. To round out updates on our partnered programs, I'll quickly touch on HyQ and Cinryze, the development programs with our partners, Baxter and ViroPharma, respectively. To summarize, FDA has requested additional pre-clinical data to complete their review of the HyQ Biologics License Application. This request came in August in the form of a Complete Response Letter. We're currently working with Baxter to meet with the agency and propose studies we believe can address their questions. Additionally, at the time of the HyQ CRL, FDA placed a temporary clinical hold on the subcu Cinryze study that included our enzyme, rHuPH20. That hold has since been released, and ViroPharma will be initiating the Phase II Cinryze plus PH20 combination study in Europe shortly. And we'll be phasing in the U.S. site as quickly as they can. On their latest earnings call, ViroPharma indicated that they'll have data available from this study in 2013. We're committed, both HyQ and subcu Cinryze, we look forward to working with our partners to enhance these important programs on behalf of the patients who can benefit from these life-saving therapies. Now switching over to our proprietary programs. As you may have heard at our Analyst/Investors Day, Halozyme is putting an experienced commercial organization in place to support our proprietary recombinant human hyaluronidase product, Hylenex. We're seeing success with the first wave of commercialization, with an initial focus on hospitals, emergency departments for regional anesthesia, drug extravasations and fluid administration in patients with difficult venous access. In just 10 months, we've captured 1/4 of the hyaluronidase market and are forecasting a 50% share by the of the year. While we've always said the initial targeted markets are not large, we expect that Hylenex will be profitable in these domains by the end of the year, which really sets the stage for future growth. In order to continue to grow the Hylenex brand, we recently announced that we're pursuing an additional market opportunity for the product. We believe the pre-administration of Hylenex in insulin pumps is a large, attractive and obtainable market opportunity. While this indication is on-label today, there are a number of elements we're currently putting in place to ensure a successful commercial launch in the insulin pump market. These activities include: gaining approval of the simple tubing and vial connector that would be required for administration; scaling up drug product manufacturing processes and ensuring there's enough supply to support market demand; and finally, completing Phase IV studies that will support effective commercialization and provide health care providers with the exposure data in relevant patient populations that they need in order to prescribe. You can expect that we'll be providing definitive timing on product introduction by the beginning of next year. The decision to pursue this commercial opportunity supports our strategy of complementing the partnered revenue streams we've discussed with our own products in order to drive sustained growth. We believe that this will put the company on a growth trajectory beyond what it could achieve if only focused on proprietary or partnered programs alone. We are confident that guiding some of our own programs for approval and onto commercial success will be the best way to transform our innovations into reality, and will ultimately result in greater returns for our shareholders. Lastly, our Phase II PEGPH20 chemotherapy study in patients with stage 4 previously untreated pancreatic cancer continues to progress steadily. We expect to complete the running cohort of this trial before year-end, and then we'll progress into the randomized portion of the trial. We expect to present data from the running cohort in the first half of 2013. There's a significant unmet medical need with pancreatic cancer, and the standard of care is evolving. For patients presenting with metastatic disease, unfortunately, Gemcitabine has been the only tool available for many years, with a median survival rate around just 1 year. However, there's some chemotherapy backbones that could change the future therapeutic landscape. FOLFIRINOX, for example, is a regimen which demonstrates superior activity that is, today, limited to patients that can tolerate the aggressive regimen. The Gemcitabine and Abraxane combination is being watched closely as results of the randomized Phase III trial should be announced this year. As we look at the future of care with this devastating disease, we're monitoring the treatment landscape carefully to see how it evolves and whether or not Gemcitabine plus Abraxane is going to become the backbone of therapy for patients that cannot tolerate FOLFIRINOX. We expect to integrate the most current standard of care when we initiate the randomized Phase II portion of our ongoing trial in 2013. In addition to our current Phase II trial, we're also considering 2 additional investigator-sponsored trials of PEGPH20 in pancreatic cancer, with the FOLFIRINOX regimen in metastatic and with Gemcitabine and Abraxane for locally advanced disease, in an effort to advance our knowledge regarding the right therapeutic approach to make significant advancements against this devastating disease. Now before I turn the call over to Kurt, I want to reemphasize that we're very excited by all the programs we have in our pipeline and the future of our organization. We've had many significant scientific breakthroughs that have brought us to this point. But I look forward to the future breakthroughs that will take Halozyme to the next level. I'll now turn the call over to Kurt.

Thanks, Greg, and hello to everyone. Earlier today, we announced our financial results for the third quarter of 2012. The net loss for the third quarter of 2012 was $20 million or $0.18 per share compared with a net income for the third quarter of 2011 of $5.2 million or $0.05 per share. The net loss for the 9 months ended September 30, 2012 was $49.1 million or $0.44 per share compared to a net loss of $1.4 million or $0.01 per share for the comparable period in 2011. Revenue for the third quarter of 2012 was $5.3 million compared to $22.9 million for the third quarter of 2011. Revenue in the third quarter of 2012 primarily consisted of research and development reimbursements from partners. The third quarter last year was unusually high quarter due to the recognition of deferred revenue associated with the termination of the Hylenex agreement with Baxter. Research and development expense for the third quarter of 2012 was $19.5 million compared with $13.5 million for the third quarter of 2011, primarily due to an increase in manufacturing activities, most of which relates to building launch inventory for Roche. As I've indicated before, this material will be expensed as R&D expense until the product is approved, at which point, it will be put on the balance sheet as inventory. SG&A expense for the third quarter of 2012 was $5.6 million compared to $4.3 million for the third quarter of 2011. Cash and cash equivalents were $87.6 million as of September 30, 2012 compared with $66.3 million as of September 30 last year. And net cash used in the third quarter was $14.4 million. With regards to our cash burn guidance, we are leaving this unchanged at $60 million to $65 million for the year.

Thanks, Kurt. We appreciate your support of Halozyme. The next few months leading up to the year-end and beginning of 2013, we anticipate hitting some key milestones. In addition to what I've already updated you on, we also expect to have top line results from the Phase II portion of the HTI-501 trial for cellulite. That trial is progressing nicely, and we look forward to sharing data with you. Thanks for listening. And I'll now hand the call over to the operator for managing the Q&A.

[Operator Instructions] Our first question comes from the line of Matthew Harrison with UBS.

Question on cellulite. Could you help us think about what the data is that we're going to get from that trial and how you're going to decide on the decision to move forward with that?

Sure. So as you may have recalled, we've started a single arm escalation phase of this last year, and that was to go through an -- it's a valuation of both 2 different modulators, the concentration of the drug and the activator, if you will. And that came up with a recommended Phase II dose, which then folded out into a multi-field injection of either placebo or an -- the active agent. So those are dual arm blinded studies, and we will have the readout on that, that has both pharmacologic endpoints with regards to imaging based sensitivity, as well as clinical outputs. So from this, essentially, what we'll have is a good read in a randomized design that will allow us to establish both the safety of the product from the standpoint of local tolerability, as well as the pharmacodynamic and pharmacologic activity as assessed by the clinicians and patients.

And then just in terms of the efficacy, can you give us any sense for what sort of hurdle you're looking for there?

Sure. Well, if you take a look at the simplest level, there is a 5-point scale that's involved on this. And essentially, there is -- we've done some ad boards and others have kind of weighed in on this, what sort of magnitude of change is clinically relevant. That's typically looked at as far as the 2-point change in median. So obviously, the first point, it's safety, number 1, and then the secondary point is, the pharmacologic activity. And from there, we then make our strategic decisions on that specific product between regional [indiscernible] discussions, as well as development activities from there. But that's essentially the kind of the key driving point as far as what puts us in a position of deciding go/no gos and opportunities for that program.

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

So first of all, can you, categorically speaking, talk about the antibody levels that were observed in the SABRINA trial? Because we looked for that information in the abstracts, and it's conspicuously not there. And then secondly, in terms of the HyQ update. I know, Greg, you were talking about the gap analysis. Can you confirm whether you guys have finished that analysis or not? And does FDA have this information in hand or not? And then lastly, on HTI-501, do you think the imaging endpoint will be acceptable by FDA as a approval endpoint?

All right, so 3 different questions in there. As far as the first component regarding the MabThera abstracts, obviously, those are live on the ASH website. But as far as the details that go into those presentations, we're embargoed from any speculation outside of the 4 corners of the published abstracts until ASH. So unfortunately, up to this point, all I can tell you is that the teams are very confident that the data being generated keeps us on track for the plan regulatory filings. And we look forward to seeing, obviously, the trials continuing and further results from these studies. But there's not that something conspicuously absent from the standpoint of a safety concern or anything of that nature. With regards to your HyQ question, all I can tell you at this point, obviously, is that we're working very carefully from the standpoint of the gap analysis components, but Baxter has not provided an update on scheduling of any meetings with FDA. And so, we can't provide any additional information at that time, other than we continue to work with them to define those pre-clinical studies that will address the questions raised by FDA in the CRL. But I do feel that we've made very good progress as far as the overall gap analysis. And finally, regarding 501, between imaging versus clinical assessment scores, I don't think there's any established path that we can talk to at this point, as far as registration pathways, except that the clinical assessment scores are probably the -- are more valid than imaging, if you will, as far as just historically when you look at these sorts of things from a drug development perspective.

So you're talking about the 5-point scale scores, I guess.

The global assessment scores are typically the sorts of things that come into play there. But I think it's too early to be talking about regulatory endpoints for this as far as in the POC-type studies.

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

Just a few questions. In terms of the R&D expense, it jumped up about $3.4 million sequentially. Is that all due to building inventory and supply for Herceptin subcu and MabThera subcu? And then, just on the cellulite program, are you going to be looking at antibody levels and inflammatory mediators? I think those have been important things for other drugs that are being developed for cellulite.

Sure, Jim. I'll let Kurt take the first question there.

Yes. I think it's a good question, Jim. And, as I've said, yes, the vast majority of the increase in R&D expense that you're seeing there is related to building inventory or -- inventory is probably the wrong word, but because we're not putting it on the balance sheet, you're seeing it as an R&D expense. But it's building material for our partners.

And maybe just before the second question, Kurt, how do you -- how is that expensed? Is it at cost? Or can you maybe take us through the accounting of what does that represent exactly?

Yes, sure. And I think I've said, a really good -- probably about 1/3 of our R&D expense this year is based on building this material for our partners. The way that it's expensed is, we will expense this material over the course of the batch, if you will, so it's expensed kind of along the way. Then, once the batch is finished and released by us, it's then shipped out to our partners. And when it is shipped, it -- you'll see the revenue come in to the reimbursement in our corporate partner revenues. And that will change once the product is approved. So we'll still make the same stuff, but then, it will be inventory on the balance sheet. And what you'll see when we actually ship it is you'll see sales and associated cost of goods for that.

And just so I understand, when you ship it to Roche and it's recorded as revenue, you're selling it to Roche?

That's correct.

And when you book the R&D cost associated with it now, is that booking at it -- booking it at the prescribed selling price you sell it to Roche at?

No, it's not.

Any detail on what drives that expense?

Well, we're -- as we're making the batch, we amortize the batch costs over the life of the batch. So, therefore, we're booking the expense. The revenue that comes in through our -- you'll see the line revenues under collaborative agreements, that's where it's coming in today. And we earn a markup on that. And I think, as I said at Analyst Day, I want to be sure that you understand this, Jim, that this is not stuff that we're making based on kind of a guess at what Roche will want or Baxter will want. We are making this material based on firm purchase orders from these guys.

Got it. Okay. And the second question on the cellulite?

Sure, Jim. So, obviously, the 2 components regarding laboratory assessments of these types of programs, obviously, both for ADA, as well as looking at any changes from the standpoint of serum chemistry, those are monitored throughout. So you'll have those pieces coming up as well. But from a challenge perspective and the mechanism of action of this conditionally active biologic, one, as far as the very precise nature of how the enzyme works where it's turned off outside of the site of injection. And secondly, from the standpoint of recombinant human enzyme, there's some differences there, maybe from some other products that you might be thinking of.

Our next question comes from the line of Jason Butler with JMP Securities.

Understanding that this is new information and you're probably still digesting it, could you maybe talk about the outcome today from the endo division and the apparent move towards requiring cardiovascular outcome studies for insulin drugs, and how you think that might impact how you partner the pan component of that market?

Sure, Jason. It's clear that you were listening to that, too. First and foremost, from the cardiovascular standpoint, the answer is, no because, as you know, the compound that was reviewed today as a new molecular entity. So the insulin APIs that we've evaluated as previously -- are previously approved entities that have a long history of use in patients with type 1 and type 2 diabetes. So the agency has given us guidance towards insulin mixes for our co-formulations with enzyme. And then, obviously, in the case of insulin pump therapy where the initial focus is on the type 1 population, the safety concerns are usually more directed towards hypoglycemia risk with glycemic control. So with regards to partnership-related elements there, that's not something that we've seen coming up as a challenge from that perspective as far as the MDI market.

[Operator Instructions] Our next question comes from the line of Richard Reznick with William Blair.

This is Rich Reznick, William Blair, for John Sonnier. It has to do with the ASH abstracts from MabThera subcutaneous. We were intrigued by the differences, although not significant, in complete response rates between MabThera subcutaneous and MabThera IV in the SABRINA trial. We were also -- remember that from the Phase III trial with Herceptin subcutaneous and Herceptin IV that there was a similar trend, even though it's less pronounced. So I was wondering if you could talk about that trend and what you think might be driving it, if you have any thoughts on that.

Thanks, Rich. Obviously, you're referring to data that's in the ASH abstracts. But -- and obviously, we're enthusiastic about the data sets and tracking for filing, but unfortunately, as you kind of mentioned, we're embargoed from really getting into speculation outside the 4 corners of the published abstracts until ASH. But we're certainly confident that the data is keeping us on track. So certainly, I think we can go through, and it's -- from a data set perspective, it isn't something we can really speculate on right now.

Dr. Frost, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thanks. This concludes today's conference call. Thank you for joining us.