Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Halozyme First Quarter 2023 Financial and Operating Results Conference Call. [Operator Instructions] Please note this event is being recorded. I'll now turn the call over to Tram Bui, Halozyme's Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator. Good afternoon, and welcome to our first quarter 2023 financial and operating results conference call. In addition to the press release issued today after the market close, you could find a supplementary slide presentation that will be referenced during today's call in the Investor Relations section of our website. Leading the call will be Dr. Helen Torley, Halozyme's President and Chief Executive Officer, who will provide an update on our business; and Nicole LaBrosse, our Chief Financial Officer, will review our financial results for the first quarter 2023. On today's call, we will be making forward-looking statements as outlined on Slide 2. I would also refer you to our SEC filings for a full list of risks and uncertainties. During the call, both GAAP and non-GAAP financial measures will be discussed. Certain non-GAAP or adjusted financial measures are reconciled with the comparable GAAP financial measures in our earnings press release and slide presentation. I will now turn the call over to Helen Torley.

Thank you, Tram, and good afternoon, everyone. Let me begin on Slide 3. Halozyme is a leading drug delivery platform company with a diversified and robust business, which includes our ENHANZE royalty business, our auto-injector technology business and a specialty commercial portfolio. I'm pleased to report that we executed our plan for the first quarter of 2023, achieving total revenue of $162 million, a 38% increase year-over-year. This performance sets us up well for the year, and we expect strong quarter-over-quarter revenue growth throughout 2023 that will result in another record revenue year. Turning now to Slide 4, I am delighted with the bit the momentum of our direct delivery business. Halozyme has established our leadership in rapid subcutaneous drug delivery of ENHANZE and more recently with our differentiated auto-injectors. Our partners are making strong progress with their commercialization and development activities that are expected to result in strong and durable long-term growth. Drivers of this growth include the potential approval of efgartigimod subcu and atezolizumab subcu this year that will bring our approved products generating royalties from 5 products to 7 products. 2 additional blockbuster drugs, OCREVUS subcu and OPDIVO subcu continuing Phase III development with the potential to launch by 2025, and additional 2 products, amivantamab subcu and relatlimab and nivolumab subcu fixed-dose combination also continuing Phase III clinical testing, the final phase before potential launch and royalty generation with the potential to launch between 2025 and 2027. And it is our goal to add to our already robust pipeline by adding 3 new agreements this year for ENHANZE, ENHANZE plus our high-volume auto-injector and also a small volume auto-injector agreement. Turning to Slide 5, let me spend a moment on why so many partners are focused on and are so excited about subcutaneous drug delivery with ENHANZE.…

Thank you, Helen. The first quarter of 2023 is on track with our plans and supports our strong financial performance expectations for the full year. As Helen mentioned, we remain committed to our capital allocation strategy. In regards to our share buyback program, we are pleased that within the first quarter, we maximized our repurchase opportunity and completed the full $150 million planned for the year, resulting in the repurchase of 4.2 million shares at an average price per share of $36.01. Our share buyback programs have resulted in the repurchase of 34.8 million shares since 2019, which contributed $0.09 to non-GAAP earnings per share in the first quarter. Our cash, cash equivalents and marketable securities were $275.6 million as of March 31, 2023, compared to $362.8 million on December 31, 2022, due to our Q1 share repurchases. Our balance sheet remains strong with projected cash generation and EBITDA growth in 2023. Our net debt to EBITDA ratio is 3.2% as of March 31, 2023, which is expected to be less than 3% by the end of the year. While we have completed our share repurchases allocated for the year, we will continuously evaluate our future use of capital and monitor market conditions and other factors, while also preserving capital to fund revenue growth and durability via M&A. I'll now move to Slide 14 for our detailed financial results for the first quarter of 2023. Revenue for the first quarter was $162 million compared to $117.3 million for the first quarter of 2022. The 38% year-over-year increase was driven by an increase in royalty revenue, primarily attributable to subcutaneous DARZALEX and the addition of product sales as a result of the Antares Pharma acquisitions. Royalty revenue for the quarter was $99.6 million, an increase of 43% compared to $69.6 million…

Thank you, Nicole. I'd like to thank the Halozyme team and our partners and collaborators for the strong progress made in the first quarter of this year that's setting us up for such strong growth in 2023. We're continuing to look forward to our commercial product and royalty revenue growth, projecting we will increase the number of ENHANZE commercial partner products from 5 to 7 products with the approvals of subcutaneous efgartigimod and atezolizumab. We also expect pipeline progress and expansion with Phase III data for subcutaneous ocrelizumab and for subcutaneous efgartigimod as well as 2 new targets ending the clinic from our current partners. Continued progress in the development of our high-volume auto-injector with ENHANZE was expected as well as adding new collaboration partners with the goal of signing multiple new collaboration agreements across our platform, and we continue to expect revenue growth resulting from our commercial products. These events all support our strong full year revenue and EBITDA growth guidance. With that, we would now be delighted to take your questions. Operator, would you please open the call?

[Operator Instructions] Our first question is from Jessica Fye with JPMorgan.

This is Na Sun on for Jessica Fye. I think, can you talk about like what have you seen with the IRA impact? And like how has it impacted discussions with current partners and/or potential new partners? And then another one is thinking about how we are anticipating a step down in volatile rate for FASPRO in the EU? What does this mean for other J&J targets set to launch after 2024 and 2027, such as amivantamab and rilpivirine?

Yes. Thanks, Na. With regard to what we've seen in IRA impact, I think we are making comments very similar to our partners and other people that are talking that there still is too little detail available yet to be able to do any assessment. I say, I understand, if there is going to be impact because recall the guidance that came out initially really is focused on Part D is in drug, and the majority of our products are Part B. I will say that this very rarely has come up from any of our current partners, just I think, really based on the fact that they are waiting for more details to come out from CMS before really doing any analysis on it to understand any impact. So we continue to be excited about the growth of our products and the royalties as we look forward to the potential for $1 billion in 2027 and project the potential to be higher than that in 2031. And with regard to the step down in royalty rate, the specific details in all of our contracts, as you know, are confidential. So we obviously, in light of the European patent finding did give some commentary on the DARZALEX specifically. We're really not in a position to provide any additional detail beyond that at this time.

The next question is from Corinne Jenkins with Goldman Sachs.

Maybe 2 or 1 follow-on from the last question, it sounds like your current partners aren't bringing it up to you, but how is like the IRA guidance factoring into any conversations that you're having with potential partners? And then the second one for me, you referenced business development. I'm curious how the integration of Antares and your target leverage goals factor into potential timing for any additional BD?

Yes. I'm happy to take the first part, and I'll ask Nicole to discuss the target leverage. I would say since the guidance came out in March, Corinne, we have been in multiple conversations with potential new partners for ENHANZE and ENHANZE plus HPI. And I do not believe I can remember IRA coming up even in those conversations. I really think it is because the majority of people who have got drugs that are the large volume injectables are in Part B. And the -- everybody recognizes that the guidance has come out so far isn't related to that. So we're really not having conversations of any frequency with regard to that. Nicole, will you take the question on the target leverage and thinking about future M&A?

Yes, happy to. Thanks, Corinne. When looking at our leverage for ending the quarter, we were at 3.2x net debt to EBITDA ratio, and we're tracking to be delevered to less than 3x by the end of the year. So we are tracking nicely with our expectations and also provides ample opportunity for future growth via M&A, looking at our leverage profile as well as our expected cash flow generation and expected EBITDA growth.

The next question is from Mohit Bansal with Wells Fargo.

I have a couple of questions. So one on IRA just staying with the team here. Do you expect some more clarity over a period of next 6 to 12 months from CMS more about the Part B side of it? Should we expect something like that in your conversations with your partners? And the other question is actually technically in terms of the -- you mentioned that sequential royalties because they get reset, so the royalty revenues are not -- despite the revenues are higher, royalty revenues are not higher. So that explains it. Are there -- is there anything else in terms of the Antares revenues or other product revenues in terms of seasonality we should be aware about in the first quarter as we go forward here?

Yes, I'll take the question on IRA and Nicole will talk about the sequential royalties. Mohit, probably, and as you're probably seeing with many of our large pharma partners, there simply isn't the information available at the moment as to when CMS is going to talk with regard to the Part B guidance. And so nobody is really talking or speculating with regard to that. As you know, ENHANZE is an active ingredient. The subcu injection would not be possible without ENHANZE. We also are seeing benefits as an example of DARZALEX reduced infusion-related reactions. And so we look forward to learning more but recognize that we are good to be communicating very strongly that ENHANZE brings a lot of active benefits to patients with regard to being part of the new combinations with the subcu DARZALEX.

And in regards to sequential royalty quarter-over-quarter, yes, we did mention -- a few factors driving that, one of them being the add-back rates changing year-over-year. The other one being royalty tiers that escalate during the year, that is something that we see on both the ENHANZE and the Antares royalty side, to answer your question there. But importantly, those thresholds is really only impactful to the first few months of the year, and those thresholds are exceeded within the first quarter. So does not impact the remainder of the year. And then also item we see in Q1 is Epi royalties, do have a seasonal pattern, where Q1 is the lowest of the year. So that's just a little bit more flavor on seasonality. But overall, our quarterly results for royalties are tracking very nicely to our plans and our expectations to meet the guidance we set out for the year, which is $445 million to $455 million for the year, representing greater than 20% year-over-year growth for royalties.

The next question is from Michael DiFiore with Evercore ISI.

You had 2 more ones on the IRA but different versions. So just regarding CMS' Part D guidance document, I think for now, everyone is operating under the assumption that Part B will look like very much like Part D. So assuming that's true, now that HALO's lawyers and policy teams have had some time to fully digest the guidance document, are there any nuances contained therein that perhaps make you incrementally more or less confident on how ENHANZE formulated products may qualify as single-source drugs? That's my first question. My other question is that just can you remind us how the EU EPO DARZALEX FASPRO patent revocation is specific to just DARZALEX FASPRO and why there wouldn't be any read across to your other EU co-formulation patents?

All right. Thanks, Mike, for those questions. Yes, a lot of interest, obviously, in the IRA. So we talked about this a lot when the guidance came out. And if we -- if there is an interpretation or the Part B guidance comes out similar to the Part D, our interpretation based on experts in Washington, D.C. is if you focus on the part of the guidance that describes the fixed-dose combination and yet we use an example of 2 corticosteroid drugs and talks about the both active ingredients, not being considered the same as a single agent use alone. I think that is what we see as a perfect description of ENHANZE because the rHuPH20 is designated in multiple documents from the FDA as an active ingredient. Now why is that? It's because, as I mentioned earlier, it does make the whole subcutaneous delivery possible. That allows for a shorter injection. It allows for reduced infusion-related reactions on occasion. And frankly, patients would not be able to receive the therapy in such a simple short way nor with the healthcare system be able to accrue the benefits of the shorter time. So certainly, our reading at this point in time, if it's identical, is that the subcu will be treated as a sacred single-source agent than the IV drugs. But with all the appropriate caveats, let the CMS has to issue the specific guidance for Part B. Moving to the EU patent, yes, I think for people, a few weeks ago, Janssen had one of their 2 approved European co-formulation patents for DARZALEX revoked, and they still have, I'll note another one that's under review. This was a single relocation of the first patent. So they have second patent that remains as well as another patent pending. This was…

The next question is from Jason Butler with JMP.

It's Roy on for Jason. I have just a couple. I guess, Helen, you mentioned that the funnel of partnering discussions are at an all-time high. Just assuming that those are mostly candidates seeking their first approval as ENHANZE formulations?

Sorry, Roy, you cut up a little bit. So you're saying are those companies looking for approvals of their first indication so development stage products or commercial products?

Yes, development stage, correct.

I would say, it's a mixture. It's a mixture of both of those. We traditionally worked with companies where they're getting their Phase III approval or they're already approval or approved and that's because ENHANZE can really help and enhance the competitiveness of a product. And we are talking more and more and have some very interesting conversations ongoing with companies, who are looking at optimizing their PK profile. And so that's a different approach where you're not trying to bridge to be already approved, but you could do something maybe of a Cmax, for example, associated toxicity, ENHANZE can help with that, or you want to get to a very extended dosing interval, so very nice mix of discussions, Roy.

Okay. Interesting. And then one on the -- you mentioned that 10 ml auto-injector collaboration partner further development. Just what are they going to bring to the table that you didn't get from Antares?

So we actually is -- one of the, I think very intriguing things about the Antares portfolio of auto-injectors and the engineers that we have is that we've traditionally offered partners the option to customize the device for a specific patient population or disease. And so what we have as a working prototype, each partner will have to determine what their primary container they wanted to be. There'll be a little bit of customization, some might be 5 ml, 7 ml, 10 ml. So that will take a little bit of work, but specifically the form factors and other factors like needle debts and other are things each partner generally will like to customize to be right for their particular drug in their populations and their target population. So it's simply that customization work for it to move from prototype to development stage auto-injector to a commercial auto-injector.

Okay, great. I'm going to throw in one more. The DARZALEX injection site reaction results that you mentioned, is that achievable with a lower dose of ENHANZE than you use to achieve the subcu injection itself. Is that makes sense?

I understand your question. I don't think we ever tested that because in our clinical studies with subcu DARZALEX, it was only one dose of the rHuPH20 used in each injection to my knowledge, Roy. So I think it's very, very small dose. And so I don't think it was a dose ranging for rHuPH20. We know the amount of takes. So it was probably never tested. But I will say, it's a very small dose that is used in all of our products.

The next question is from David Risinger with SVB Securities.

Yes, sorry. So I have a couple of questions, please. First, the press release mentions planned investments in ENHANZE. I was hoping that you could provide some more color on that, Helen, particularly since ENHANZE is set to lose U.S. exclusivity in 2027. And then just a couple of financial questions, what was the impact of Antares on the non-GAAP earnings or EPS in the quarter? And regarding share repurchases, did you mention that you have finish that up for the year?

Yes. I'll take the first question and then I'll ask Nicole to take the next 2. With regards to the planned investments, this really relates back to announcement we made maybe 18 months ago with regard to starting the development of a high yield rHuPH20 as well as room temperature stable rHuPH20. David, we -- for our royalty term, I will just then highlight that we always received the vast majority of cases a minimum of 10 years and after the first commercial sale. And so 2027 might be patent expiry, but we are going to be selling APIs to our partners and generating royalties to well past 2030 based on our development portfolio. And so we thought it was important for us to continue to invest to get to a higher yields API because that would be the expectation of our partners that we would continue to improve the processes. We also started the development of a more room temperature stable one. That might be more suitable for small molecules and circumstances, where partners might want the patients to be able to carry, for example, an auto-injector around with them. So that one continues in early development. We're making good progress with the high yield one and partners have expressed a lot of interest in that obviously as that -- it just helps us strengthen our ability to continue to supply a very high-quality API for our partners. With that --

Yes. Thanks, David. With regards to the Antares contribution, it was accretive obviously to our revenue line and to our non-GAAP EPS in the quarter and continues to -- our expectations, is that it continues to be accretive for the full year results for 2023. And then in regards to share repurchases, we did complete the full amount that we had allocated for the year, which was $150 million. We took the opportunity in the first quarter to maximize our buying during low prices. And so we were able to accelerate that and buy at the low prices and fully complete the amount that we had allocated for the year.

The next question is from Eun Yang with Jefferies.

This is [ Mac ] on for Eun. Just continuing on the ENHANZE partnering conversations with the next-gen rHuPH20, have you identified any partners who are specifically interested in these next-gen APIs? And if so, when will the improved products be ready for clinical investigation?

Yes. So different pathways for each of them, the higher yields one is the same cell line as our current one. And so it's much more likely that will be a simple comparability study that will be done and it will be then moved into the supply chain and we've done that before. This will take several years, but it should be a pretty seamless transition. And we've got several of our partners who have expressed interest in moving to that, obviously, once it is approved and available. With regard to the more room temperature stable, we continue in discussions on that. That was seen as being a bit more specific to small molecules and a bit of specific staffing for room temperature stability is needed. So nobody has signed up at this point in time, never expected to be a large driver of revenue, because it's -- our subcu products are much more focused on the large volume biologics where room temperature stability is not needed because the product have to be refrigerated. So very pleased with the progress and the interest we've seen on the higher yields, continuing to have this offering for those partners who might want something that's more suitable for a small molecule and patient self-administration.

[Operator Instructions] The next question is from Caroline Palomeque with Berenberg Capital Markets.

Can you discuss the current IV to subcu conversion rate trajectory for other products aside from the ones in your slide such as MabThera and HYQVIA?

So Caroline, if I was understanding your question, what we saw with the Wave 1 products and those were predominantly launched in Europe. Herceptin is a good example of that, they got up by 50% share of sales after 2 years and it go up to 60% share of sales after 3 years. Biosimilars enters the market at that period of time and I can say that we do hear from Roche that the share has remained sticky in those markets where it did convert, but it didn't continue to grow after that. We don't have specific data on HYQVIA for me to be able to share. MabThera, we got to about 40% share of sales. And so we're seeing a range, where obviously, we're very pleased to see DARZALEX up there at 88% in the U.S., greater than 80% outside the U.S. And really it's very clear that the subcu is driving that amazing revenue growth of overall DARZALEX that you're seeing by aiding the penetration into the frontline and second line populations, which are the larger populations and patients stay on therapy longer. And so we usually think about a target of around 60% conversion at 3 years and then we look at the products and we say, do we think it's going to be a bit higher than that, is it going to be a bit lower than that? But overall, very pleased with the progress we're seeing. And I'll just point out Phesgo, after a slow start, some very nice quarter-over-quarter growth and now 35% share with Roche and I was expecting continued conversion as physicians and patients really do see the benefit of this, particularly in the adjuvant setting.

We have no further questions at this time and this will conclude today's conference call. Thank you everyone for participating. You may now disconnect.