Halozyme: Growing Biotech Company With Good Upside Potential
Summary
- The financial performance of HALO is growing at an extremely high rate, and this dynamic is expected to continue until at least 2027.
- The company's market prospects are undeniable, with more than 79 drugs approved by the FDA, and the company continues to negotiate agreements and penetrate various segments of the industry.
- According to our valuation, the upside potential to the fair price is 25%. We are bullish on HALO.
Morsa Images/DigitalVision via Getty Images
Investment Thesis
Halozyme (NASDAQ:NASDAQ:HALO) operates in a growing and promising market and shows rapid financial performance growth. According to management's expectations, revenue will grow at a CAGR of 20% (minimum) until 2027. Management's revenue expectations look realistic. By reducing operating costs as a percentage of revenue, the company's profitability is also growing. We expect that the reduction in the share of cash and cash equivalents on the balance sheet will increase asset turnover and ROE. According to our estimate, the company is trading at a 25% discount to the fair price. We are bullish on the company.
Company profile
Halozyme Therapeutics, Inc is an American biopharma technology platform company that develops novel oncology therapies to target the tumor microenvironment - surrounding blood vessels, immune cells, fibroblasts, etc. The company has its own appropriated and patented enzyme - rHuPH20 - which is used to facilitate the delivery of injected drugs and fluids. The company's approved product and its collaborators' approved products and product candidates are based on rHuPH20.
Halozyme licenses its technology to biopharmaceutical companies to collaboratively develop products that combine its ENHANZE drug delivery technology with the collaborators' proprietary compounds.
Revenue breakdown by geographical segments is presented below:
(Source: 10-K filing)
Individual stakeholders own 16.80% of the company's shares. Mutual fund holders own 58.18%, other institutional investors - 33.79%. Therefore, institutional investors own 91.98% of the total float. That is typical for companies in the Biotechnology industry. A list of the main shareholders is presented below.
(Source: CNN Business)
The management of the company is presented below:
- Helen Torley, M.B. Ch. B., M.R.C.P. - President, Chief Executive Officer;
- Elaine Sun - Senior Vice President, Chief Financial Officer;
- Mas Matsuda, Esq. - Senior Vice President, General Counsel, Chief Compliance Officer, and Corporate Secretary;
- Fionnuala Doyle - Senior Vice President, General Manager – ENHANZE;
- Amy Fox - Vice President of Human Resources.
Hylenex and ENHANZE
rHuPH20 can be applied as a drug delivery platform to increase dispersion and absorption of other injected drugs and fluids, potentially reducing the treatment burden. For example, rHuPH20 has been used to convert medicines that must be delivered intravenously into subcutaneous injections or reduce the number of subcutaneous injections needed for effective therapy.
The company licenses the ENHANZE technology to form collaborations with biopharmaceutical companies that develop or market drugs requiring or benefiting from injection via the subcutaneous route of administration.
Halozyme's technology makes it possible to increase the effectiveness of the drugs administered. ENHANZE can provide more flexible treatment options - as home administration by a healthcare professional or potentially the patient. This technology also reduces its time to inject a drug or fluids from a few hours to 5-8 minutes.
Hylenex is the company's first fully owned commercially approved product. Based on management's expectations, the share of product sales in revenue will decrease to only 10% in 2025. Therefore, we believe that the company will not pay much attention to its products and will intensively implement its rHuPH20 based technology — ENHANZE — and maintain collaboration agreements with partners.
The management mentions that the pharma industry shifts from small oral molecules to antibody-based approaches. That allows to significantly accelerate and increase the efficiency of drug administration and make it possible for any patient's health status.
The company has a large potential market for ENHANZE collaborative products. As of 2020, the company has:
- over 79 FDA approved products;
- over 79 monoclonal antibodies in late-stage trials (in particular used for an effective fight against cancer cells);
- over 550 monoclonal antibodies in early clinical trials.
Halozyme has a long history of cooperation with companies from the pharmaceutical industry.
(Source: Company's presentation)
ENHANZE has the potential to Deliver Strong Advantages to Partners:
- Reduced treatment burden and healthcare costs;
- Potential for competitive differentiation;
- Potential to combine two therapeutic antibodies in a single injection;
- Facilitating higher injection volume, potential to extend the dosing interval;
- Potential for new intellectual property for co-formulations.
Industry Opportunity
The global oncology pharmaceuticals market is expected to grow from 177,4 billion in 2021 to 313,7 billion in 2026 at a CAGR of 12,1%.
(Source: PRNewswire)
The main drivers of market growth are developing and approving new technologies. The market is highly competitive, subject to technological advances and scientific discoveries, and significantly affected by new therapies, product development, and commercialization.
The global oncology drugs market size is expected to grow from 188.1 billion in 2021 to 394.2 billion in 2027 at a CAGR of 11.6%.
(Source: GlobeNewswire)
One of the primary growth drivers for the market is an ongoing technological advancement in pharmacy. Also, the growing prevalence of cancer worldwide will spur opportunities for the market during the forecast period.
Halozyme develops its links with pharmaceutical collaborators. The company has 11 partnership agreements. Commercialized products based on the company's technology are used in about 100 countries. The share of royalties in revenue is growing. The company is expected to have ten fully approved products and five products in the third phase of trials by 2025.
Financial Performance
Since 2018, the company's revenue has been growing. In 2020, revenues were 267.6 million, 71.6 million, or 36.53% more than 2019. The revenue in the first three quarters of 2021 is significantly higher than 2020. In the first nine months, the company's revenue was 341.3 million, which is 195.5 million or 135.1% higher than in the same period in 2020.
(Source: Created by the author)
The company's management expects revenue to grow by at least 61.5% in 2021 and will be in the range of 430-445 million. Revenue growth occurs across all primary sources of the company.
(Source: Created by the author)
The main drivers for revenue growth:
- Royalties' revenue: the increase was mainly driven by sales of DARZALEX FASPRO in the U.S. and EU by Janssen due to the product launch in the second quarter of 2020;
- Revenues under collaborative agreements vary from period to period. This period growth was mainly driven by the company’s ability to meet various clinical and regulatory milestones outlined in such agreements and its ability to obtain new collaborative agreements;
- Product sales revenue: the increase was primarily due to higher sales of rHuPH20 to Halozyme’s partners Janssen and Roche.
The company's management expects that the share of royalties in revenue will grow to 60% by 2025, while milestone payments and product sales will decrease to 30% and 10%, respectively. Even if the share of royalties in revenue reaches 100%, the revenue growth rate will be at least 20% until 2027.
FCFE on equity has been showing a positive trend since 2016. In 2021, net cash provided by operations has grown exponentially. If the current and expected dynamics of financial indicators are maintained, we believe that the indicator will continue to grow.
(Source: Created by the author)
Since 2011, the company's asset turnover has not exceeded 0.9. The decrease in the turnover of TTM assets was mainly due to the growth of Cash and cash equivalents and Marketable securities, available-for-sale. We expect the reduction in the share of cash and cash equivalents and the sale of Marketable securities, available-for-sale, will increase turnover.
(Source: Created by the author)
The company's asset-to-equity has been volatile and has fluctuated significantly since 2011. The growth of the indicator is due to the simultaneous decrease in assets and equity. We believe that reducing the share of cash and equivalents and the realization of Marketable securities available-for-sale, will reduce the value of financial leverage.
(Source: Created by the author)
Halozyme has potential for ROE growth. The company's revenue is growing - an increase in the share of royalties and milestone payments will create - according to management expectations - a stable cash flow until at least 2027. Total Cash & ST Investments account for 63.9% of all the company's assets. If the cash on the balance sheet is used to pay off debt, the company can increase the asset turnover ratio.
Valuation
Within our DCF model, we made several assumptions. The revenue growth rate in 2021 is based on management expectations. In the future, the growth rate decreases to 20% - the minimum CAGR expected by management if royalties amount to 100% of revenue. Comparative indicators are based on current trends.
Our assumptions are presented below:
(Source: Created by the author)
With a Stable growth Cost of Equity equal to 10%, the Weighted Average Cost of Capital [WACC] is 8.7%.
(Source: Created by the author)
We have determined that the fair capitalization of the company is $7.5 billion, or $53.38 per share. Thus, the upside potential is about 25% to the fair price.
Conclusion
Halozyme Therapeutics is a growing company in a growing market. The financial performance of HALO is growing at an extremely high rate, and this dynamic is expected to continue until at least 2027. The company's market prospects are undeniable, with more than 79 drugs approved by the FDA, and the company continues to negotiate agreements and penetrate various segments of the industry. According to our valuation, the upside potential to the fair price is about 25%. We are bullish on the company.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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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