Halozyme (HALO): Steady Revenue Growth At Reasonable Valuation

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I was drawn to Halozyme (HALO) due to its unique business model that is devoid of in-house drug development. Halozyme reformulates many blockbuster drugs that provided them with significant milestones and royalty payments. In addition, Halozyme does not need to invest their own funds into the development of these drugs, which dramatically reduces risk. What is more, the impressive number of partners diversifies their revenue sources and clinical success. However, its main attraction is the company’s growth trends that have remained intact throughout the pandemic and are projected to endure several more years. These attributes attracted me to HALO and have kept the ticker in my “Bioreactor” growth portfolio for a couple of years now, and will remain in that portfolio for several more years. Now, I’m moving HALO into my “Top Ideas” list considering the company’s recent earnings and commercial success.

I intend to provide a brief background on Halozyme and will discuss its growth story. In addition, I take a look at the company’s valuation and stock charts to determine a buy target.

Background on Halozyme

Halozyme Therapeutics has an attractive business model that focuses on innovative drug delivery solutions. Halozyme’s ENHANZE drug delivery platform is based on a proprietary enzyme called rHuPH20, which works by enhancing the delivery of other injected drugs into an advantageous subcutaneous formulation that improves infusion times. Halozyme’s ENHANZE, is being employed by some of the biggest and best healthcare companies including, Bristol Myers Squibb (BMY), Pfizer (PFE), Johnson & Johnson “Janssen” (JNJ), AbbVie (ABBV), Lilly (LLY), Roche (OTCQX: RHHBY), argenx (ARGX) and Alexion (ALXN). It’s estimated that these products have been used to treat more than 600,000 patients globally.

Reporting Growth

Recently, Halozyme reported their Q4 and full-year 2021 earnings that revealed the company’s impressive financial performance and commercial trends that will keep HALO’s growth narrative intact in 2022. The company finished 2021 with total revenues growing 66% year-over-year to $ 443M . What’s more, operating income ballooned by 91% to $ 276M and the company reported a $ 2 per share non-GAAP earnings for the year.

The company’s revenue growth was driven by royalty revenue growth, which surged 130% year-over-year. Royalties during the fourth quarter were $ 62.6M, which was a 96% increase year-over-year and a 7% sequential growth. This resulted in full-year royalties of $ 204M, signifying around 130% year-over-year growth.

Halozyme

Halozyme’s Quarterly Growth (Halozyme)

Janssen’s DARZALEX is the present royalty revenue growth driver. During their Q4 earnings report, Johnson & Johnson reported total DARZALEX sales for 2021 were $ 6B, which was up 42.3% over 2020.

Chart Showing DARZALEX FASPRO Growth

ARZALEX FASPRO Growth (Halozyme)

DARZALEX FASPRO attained a 76% share of total DARZALEX sales in the US during December, which was up from 72% at the end of September. Halozyme estimates that DARZALEX SC achieved an annualized share of about 58%.

Roche’s Phesgo is another driver of royalty revenue growth. In Q4, Roche reported Phesgo sales came in at 127M Swiss francs, up from 117M Swiss francs in Q3. For the Full-year 2021, Phesgo pulled in 340M Swiss francs in sales.

In addition to royalties, the company collected a $ 40M upfront milestone payment from ViiV Healthcare. Moreover, the company amassed several other development and commercial milestones in 2021 thanks to 10 new partner study starts.

Expecting Growth

For full-year 2022, Halozyme expects revenues of $ 530M- $ 560M, which would be 20% -26% growth over 2021. The company is projecting their growth to be driven mainly by royalty revenue growth of around 50% to be roughly $ 300 M. Plus, Halozyme is expecting potential milestone payments for possible new agreement / s to be signed this year. This revenue growth is projected to boost operating income to $ 350M- $ 380M, which would be a 27% -38% increase. Halozyme expects their non-GAAP earnings to be $ 2.05- $ 2.20 per share.

Chart of ENHANZE Royalty Growth Projections

ENHANZE Royalty Growth Projections (Halozyme)

From 2022 to 2024, Halozyme expects their milestones to increase from $ 450M to $ 500M in total milestones. By 2027, Halozyme sees the potential to achieve around $ 1B in royalty revenues.

Future Growth Opportunities

Trying to project future growth can be difficult due to the numerous unknowns and black swan events that can completely destroy the thesis. However, Halozyme’s growth plan is legitimately ironclad due to the long-term potential of their ENHANZE development portfolio.

Chart Halozyme Partner Products Portfolio

Halozyme’s Partner Products Portfolio (Halozyme)

Obviously, Halozyme is looking to unremittingly expand the number of products that are in development and to launch as many products to increase the milestone and royalty revenue payments to Halozyme. As of February 2022, the company’s ENHANZE partners have initiated four Phase I trials, each for a new product for the development portfolio.

Halozyme expects at least five Phase II or III trial starts for existing ENHANZE partner programs, Furthermore, there are four new ENHANZE products to begin Phase I development by the end of this year. Roche’s Atezolizumab and Bristol Myers Squibb’s Nivolumab are in their Phase III studies evaluating sub-q delivery with ENHANZE, with the potential to launch between 2023 and 2025.

Long-term, the company’s co-formulation patents could help extend the duration of the royalties. According to Halozyme, several of its partners have already filed fresh co-formulation patent applications for their products in the ENHANZE development pipeline. Another potential boost could come from the Halozyme’s new more extended room temperature stable rHuPH20, which could launch after 2027 and has IP to 2032 in Europe and 2034 in the United States.

Infographic Halozyme Capital Allocation

Halozyme Capital Allocation (Halozyme)

Halozyme is evaluating potential M&A opportunities for a new platform technology to help maintain growth into the next decade. Halozyme does have a strong projected free cash flow, so they should have the funds to acquire what they need for growth way down the line.

A Simple Valuation

HALO is overvalued compared to the median sector in several valuations including price-to-sales, price-to-book, EV-to-sales, and price-to-cash flow. However, HALO’s projected growth should improve these valuation metrics in the coming years.

HALO Revenue Estimates

HALO Revenue Estimates (Halozyme)

To determine a rough valuation, I will use the company’s 2022 revenue estimate of ~ $ 550M with the industry standard of 5x price-to-sales with a discount for time, and we get ~ $ 20 per share. So, HALO is quite expensive priced at $ 35 per share. However, long term, it appears the Street expects Halozyme to report growth for the remainder of this decade and top-out around $ 1.21B in 2029. Using the Street’s 2029 revenue estimate of $ 1.21B and the previous valuation method, we get around $ 44 per share.

Indeed, there are numerous other methods that could yield a much higher or might be more appropriate for a growth company that is generating FCF and is expected to see EPS grow in the coming years. In addition, the company had $ 740.92M in cash, cash equivalents, and marketable securities as of the end of the fourth quarter, which equates to $ 5.38 total cash per share. Furthermore, the company has a new three-year $ 760M share repurchase program.

Chart HALO EPS Estimates

HALO EPS Estimates (Seeking Alpha)

Still, the price-to-sales method is easy to follow and does a great job of illustrating how the valuation might increase with the projected revenue growth.

Risks

Despite the company’s expected growth, Halozyme still has some downside risks that investors should consider. Primarily, there is the question of whether Halozyme can continue to report growth in the coming years. The company needs to secure additional partners, and hope those partnered programs make it through the FDA. Obviously, there is a chance that some partnerships will not work out and some programs will not make it through the FDA, so the company is going to have amass partnerships to increase the chances of success and maintain the growth narrative. If the growth narrative is lost, it is very likely that HALO will stop trading at a premium valuation.

My Plan

Halozyme’s long-term prospects appear to be exceptionally positive. Halozyme is a proven company that is profitable and is expected to grow in the coming years. Therefore, HALO has a spot in the Bioreactor Portfolio and will be traded to generate cash while building a substantial position for a long-term investment.

In 2022, Halozyme is anticipated to deliver increased revenues, rising operating income, and growing the company’s pipeline causing both robust near-term and long-term growth. As a result, I am looking to trade HALO almost entirely based on technical analysis and market dynamics.

HALO Daily Chart

HALO Daily Chart (TrendSpider)

Looking at the Daily Chart, we can see HALO has been slowly forming a pennant formation, with some signs of attempts to break out to the upside. Consequently, I am looking to make a considerable addition in the near term in anticipation HALO will ultimately break out under significant volume. I will look to trade a large portion of those newly acquired shares for a profit and reapply the profit on a pullback in the share price.

Overall, I expect to have a position in HALO for at least five more years in anticipation the company will be able to grow into its current valuation.



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