Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company | |||||||||||||
| ☒ | ☐ | ☐ | ☐ | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | |||||||||||||||||
Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨☐ Yes x☒ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 20182020 was approximately $2.1$2.9 billion based on the closing price on the NASDAQ Global Select Market reported for such date. Shares of common stock held by each officer and director and by each person who is known to own 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 145,033,173135,276,380 as of February 14, 2019.17, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to be filed subsequent to the date hereof with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s 20192021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report.
HALOZYME THERAPEUTICS, INC.
INDEX
| Page | |||||||||||
| Item 1. | |||||||||||
| Item | |||||||||||
| Item | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item 5. | |||||||||||
| Item 6. | |||||||||||
| Item 7. | |||||||||||
| Item 7A. | |||||||||||
| Item 8. | |||||||||||
| Item 9. | |||||||||||
| Item 9A. | |||||||||||
| Item 9B. | |||||||||||
| Item 10. | |||||||||||
| Item 11. | |||||||||||
| Item 12. | |||||||||||
| Item 13. | |||||||||||
| Item 14. | |||||||||||
| Item 15. | |||||||||||
| Item 16. | |||||||||||
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the “safe harbor” provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. All statements, other than statements of historical fact, included herein, including without limitation those regarding our future product development and regulatory events and goals, product collaborations, our business intentions and financial estimates and anticipated results, are, or may be deemed to be, forward-looking statements. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “think,” “may,” “could,” “will,” “would,” “should,” “continue,” “potential,” “likely,” “opportunity”“opportunity,” “project” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, statements concerning future matters such as the development or regulatory approval of new partner products, enhancements of existing products or technologies, timing and success of launch of new products by our collaborators, third party performance under key collaboration agreements, revenue, expense, profitability and expensecash flow levels, and expected trends and other statements regarding matters that are not historical are forward-looking statements.
Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading “Risk Factors” in Part I, Item 1A below, as well as those discussed elsewhere in this Annual Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
References to “Halozyme,” “the Company,” “we,” “us,” and “our” refer to Halozyme Therapeutics, Inc. and its wholly owned subsidiary, Halozyme, Inc., and Halozyme, Inc.’s wholly owned subsidiaries, Halozyme Holdings Ltd., Halozyme Royalty LLC, Halozyme Switzerland GmbH and Halozyme Switzerland Holdings GmbH. References to “Notes” refer to the Notes to Consolidated Financial Statements included herein (refer to Part II, Item 8).
PART I
Item 1.Business
Overview
Halozyme Therapeutics Inc. is a biotechnologybiopharma technology platform company focused on developing and commercializing novel oncology therapies. We are seeking to translate our unique knowledge of the tumor microenvironment to create therapies that have the potential to improve cancer patient survival. Our research primarily focuses on human enzymes that alter the extracellular matrix and tumor microenvironment. The extracellular matrix is a complex matrix of proteins and carbohydrates surrounding the cell that provides structural support in tissuesinnovative and orchestrates many important biological activities, including cell migration, signalingdisruptive solutions with the goal of improving patient experience and survival. Over many years, we have developed unique technology and scientific expertise enabling us to pursue this target-rich environment for the development of therapies.
outcomes. Our proprietary enzymes areenzyme, rHuPH20, is used to facilitate the delivery of injected drugs and fluids, potentially enhancing the efficacy and the convenience of other drugs or can be used to alter tissue structures for potential clinical benefit.fluids. We exploit our technology and expertise using a two pillar strategy that we believe enables us to manage risk and cost by: (1) developing our own proprietary products in therapeutic areas with significant unmet medical needs, with a focus on oncology, and (2) licensinglicense our technology to biopharmaceutical companies to collaboratively develop products that combine our ENHANZE® drug delivery technology with the collaborators’ proprietary compounds.
We currently have ENHANZE collaborations with F. Hoffmann-La Roche, Ltd. and Hoffmann-La Roche, Inc. (Roche), Baxalta US Inc. and Baxalta GmbH (now members of the Takeda group of companies, following the acquisition of Shire plc by Takeda Pharmaceutical Company Limited in January 2019) (Baxalta), Pfizer Inc. (Pfizer), Janssen Biotech, Inc. (Janssen), AbbVie, Inc. (AbbVie), Eli Lilly and Company (Lilly), Bristol-Myers Squibb Company (BMS), Alexion Pharma Holding (Alexion) and, ARGENX BVBA (argenx) and Horizon Therapeutics plc. (Horizon). We receive royalties from twothree of these collaborations, including royalties from sales of one product from the Baxalta collaboration, and twothree products from the Roche collaboration and one product from the Janssen collaboration. Future potential revenues from royalties and fees from ENHANZE collaborations and the sales and/or royalties of our approved products product candidates, and ENHANZE collaborations will depend on the ability of Halozyme and our collaborators to develop, manufacture, secure and maintain regulatory approvals for approved products and product candidates and commercialize product candidates.
Our principal offices and research facilities are located at 11388 Sorrento Valley Road, San Diego, California 92121. Our telephone number is (858) 794-8889 and our e-mail address is info@halozyme.com. Our website address is www.halozyme.com.Information found on, or accessible through, our website is not a part of, and is not incorporated into, this Annual Report on Form 10-K. Our periodic and current reports that we filed with the SEC are available on our website at www.halozyme.com, free of charge, as soon as reasonably practicable after we have electronically filed such material with, or furnished them to, the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports.
Technology
rHuPH20 can be applied as a drug delivery platform to increase dispersion and absorption of other injected drugs and fluids that are injected under the skin or in the muscle thereby potentially enhancing efficacy or convenience.reducing treatment burden. For example, rHuPH20 has been used to convert drugs that must be delivered intravenously into subcutaneous injections or to reduce the number of subcutaneous injections needed for effective therapy. When ENHANZE Technologytechnology is applied subcutaneously, the rHuPH20 acts locally and hastransiently, with a tissue half-life of less than 15 minutes. HA at the local site reconstitutes its normal density within a few days and, therefore, we anticipate that anythe effect of rHuPH20 on the architecture of the subcutaneous space is temporary.
2
We are expandinga leader in converting IV biologics to subcutaneous delivery using our scientific workcommercially-validated ENHANZE technology. We collaborate with leading pharmaceutical and biotechnology companies to help them develop products that combine our ENHANZE technology with their proprietary compounds. We target large, attractive markets, where ENHANZE-enabled subcutaneous delivery has the potential to deliver competitive differentiation and other important benefits to our partners, such as larger injection volumes administered rapidly, extended dosing intervals, and reduced treatment burden and healthcare costs. In addition, ENHANZE has been demonstrated to enable the combination of two therapeutic antibodies in a single injection, as well as the development of new co-formulation intellectual property. We leverage our strategic, technical, regulatory and alliance management skills in support of our partners' efforts to develop other enzymes and agents that target the extracellular matrix’s unique aspects, giving rise to potentially new molecular entities with a particular focus on oncology. We are developing a PEGylated version of the rHuPH20 enzyme (PEGPH20), that lasts for an extended period in the bloodstream (half-life of one to two days), and may therefore better target solid tumors that accumulate HA by degrading the surrounding HA and reducing the interstitial fluid pressure within malignant tumors to allow better penetration by co-administered agents.
3
Product and Product Candidates
We currently have one marketed proprietary product threeand five marketed partnered products, one proprietary product candidate targeting several indications in various stages of development, and one preclinical product candidate.products. The following table summarizes our proprietary product, and product candidate as well asmarketed partnered products and product candidates under development with our collaborators:
4
Proprietary PipelineProduct
Hylenex Recombinant (hyaluronidase human injection)
Hylenex recombinant is a formulation of rHuPH20 that has received U.S. Food and Drug Administration (FDA) approval to facilitatefacilitates subcutaneous fluid administration for achieving hydration, to increase the dispersion and absorption of other injected drugs and, in subcutaneous urography, to improve resorption of radiopaque agents. Hylenex recombinant is currently the number one prescribed branded hyaluronidase.
ENHANZE Collaborations
Roche Collaboration
In December 2006, we and Roche entered into a collaboration and license agreement under which Roche obtained a worldwide license to develop and commercialize product combinations of rHuPH20 and up to thirteen Roche target compounds (the Roche Collaboration). Under this agreement, Roche elected a total of eight targets, two of which are exclusive.
In September 2013, Roche launched a subcutaneous (SC) formulation of Herceptin (trastuzumab) (Herceptin SC) in Europe for the treatment of patients with HER2-positive breast cancer followed by launches in additional countries. This formulation utilizes our ENHANZE technology and is administered in two to five minutes, compared to 30 to 90 minutes with the standard intravenous form. In September 2018, we announced that Roche received approval from Health Canada for Herceptin SC for the treatment of patients with HER2-positive breast cancer. In February 2019, we announced that Roche received approval from the U.S. Food and Drug Administration (FDA) for Herceptin SC under the brand name Herceptin Hylecta™ (trastuzumab and hyaluronidase-oysk). In April 2019, Roche made Herceptin Hylecta available in the U.S.
Directed at the same target, Roche initiated a Phase 1 study of PERJETA®Perjeta® (pertuzumab) and Herceptin (trastuzumab) withusing ENHANZE technology in patients with early breast cancer in March 2016. In June 2018, Roche initiated a global Phase 3 study of a fixed-dose combination of PERJETAPerjeta and Herceptin withusing ENHANZE technology in patients with HER2-positive early breast cancer. In July 2018, we announcedAugust 2019, the global phase 3 study met its primary endpoint. The study results demonstrated non-inferior levels of Perjeta in the blood (pharmacokinetics) compared to standard intravenous (IV) infusion of Perjeta plus Herceptin and chemotherapy in patients with HER2-positive early breast cancer. The study also demonstrated that the safety profile of the fixed dose subcutaneous combination of Perjeta and Herceptin was consistent with the safety profile of Perjeta and Herceptin administered intravenously. In June 2020, the FDA accepted a BLA from Genentech (a memberapproved the fixed-dose combination of the Roche Group)Perjeta and Herceptin for Herceptin SC in its FDA-approved breast cancer indications. Approval of the BLA is expected in March 2019. In September 2018, we announced that Roche received approval from Health Canada for Herceptin SCsubcutaneous injection utilizing ENHANZE technology (Phesgo®) for the treatment of patients with HER2-positive breast cancer. In December 2020, the European Commission (EC) also approved Phesgo for the treatment of patients with early and metastatic HER2-positive breast cancer.
In June 2014, Roche launched MabThera SC in Europe for the treatment of patients with common forms of non-Hodgkin lymphoma (NHL) followed by launches in additional countries. This formulation utilizes our ENHANZE technology and is administered in approximately five minutes compared to the approximately 1.5 to 4 hour intravenous infusion. In May 2016, Roche announced that the EMAEuropean Medicines Agency (EMA) approved Mabthera SC to treat patients with chronic lymphocytic leukemia (CLL). In June 2017, the FDA approved Genentech’s RITUXAN HYCELA™, a combination of rituximab and rHuPH20using ENHANZE technology (approved and marketed under
the MabThera SC brand in countries outside the U.S.) and Canada), for CLL and two types of NHL, follicular lymphoma and diffuse large B-cell lymphoma. In March 2018, Health Canada approved a combination of rituximab and rHuPH20 (approved and marketed under the brand name RITUXAN® SC) for patients with CLL.
In September 2017, we and Roche entered into an agreement providing Roche the right to develop and commercialize one additional exclusive target using our ENHANZE technology. The upfront license payment may be followed by event-based payments subject to Roche’s achievement of specified development, regulatory and sales-based milestones. In addition, Roche will pay royalties to us if products under the collaboration are commercialized.
In January 2018, Roche initiated a Phase 1 study of an undisclosed target with ENHANZE technology. In February 2019, Roche canceled development of the undisclosed target following discontinuation of the proprietary program.
5
In December 2018, Roche initiated a Phase 1b/2 study in patients with non-small cell lung cancer for Tecentriq (atezolizumab) in combination with ourusing ENHANZE technology. In September 2020, Roche presented a poster with data from Part 1 of its Phase 1b study (IMscin001) evaluating atezolizumab (Tecentriq) for subcutaneous administration utilizing ENHANZE technology in patients with locally advanced or metastatic non-small cell lung cancer at the ESMO Virtual Congress 2020. The poster concluded that atezolizumab utilizing ENHANZE technology provided similar exposure as atezolizumab IV and that results support further development of subcutaneous atezolizumab in IMscin001 Part 2, a confirmatory Phase 3 study. In December 2020, Roche initiated a Phase 3 study in patients with non-small cell lung cancer for Tecentriq using ENHANZE technology.
In August 2019, Roche initiated a Phase 1 study evaluating OCREVUS (ocrelizumab) with ENHANZE technology in subjects with multiple sclerosis.
In October 2019, Roche nominated a new undisclosed target to be studied using ENHANZE technology, triggering a $10 million milestone payment.
Baxalta Collaboration
In September 2007, we and Baxalta entered into a collaboration and license agreement under which Baxalta obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 with GAMMAGARD LIQUID (HYQVIA) (the Baxalta Collaboration). HYQVIA is indicated for the treatment of primary immunodeficiency disorders associated with defects in the immune system.
In May 2013, the European Commission granted Baxalta marketing authorization in all EU Member States for the use of HYQVIA (solution for subcutaneous use) as replacement therapy for adult patients with primary and secondary immunodeficiencies. Baxalta launched HYQVIA in the first EU country in July 2013 and has continued to launch in additional countries.
In September 2014, HYQVIA was approved by the FDA for treatment of adult patients with primary immunodeficiency in the U.S. HYQVIA is the first subcutaneous immune globulin (IG) treatment approved for adult primary immunodeficiency patients with a dosing regimen requiring only one infusion up to once per month (every three to four weeks) and one injection site per infusion in most patients, to deliver a full therapeutic dose of IG. The FDA’s approval of HYQVIA was a significant milestone for us as it represented the first U.S. approved BLA which utilizes our rHuPH20 platform.
In May 2016, Baxalta announced that HYQVIA received a marketing authorization from the European Commission for a pediatric indication, which was launched in Europe to treat primary and certain secondary immunodeficiencies. In September 2020, Takeda announced that the EMA approved a label update for HYQVIA broadening its use and making it the first and only facilitated subcutaneous immunoglobulin replacement therapy in adults, adolescents and children with an expanded range of secondary immunodeficiencies (SID).
Pfizer Collaboration
In December 2012, we and Pfizer entered into a collaboration and license agreement, under which Pfizer has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with Pfizer proprietary biologics directed to up to six targets in primary care and specialty care indications. Targets may be selected on an exclusive or non-exclusive basis. Pfizer has elected five targets on an exclusive basis and has returned two targets.
Janssen Collaboration
In December 2014, we and Janssen entered into a collaboration and license agreement, under which Janssen has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with Janssen proprietary biologics directed to up to five targets. Targets may be selected on an exclusive basis. Janssen has elected CD38 as the first target on an exclusive basis. In October 2017, Janssen initiated its first Phase 3 study of subcutaneous delivery of DARZALEX® (daratumumab), directed at CD38, using ENHANZE technology, in multiple myeloma patients. Janssen has initiated sixseven Phase 3 studies, onetwo Phase 2 study and one Phase 1 study of daratumumab combined with theDARZALEX® (daratumumab), directed at CD38, using ENHANZE technology in patients with amyloidosis, smoldering myeloma and multiple myeloma.
In February 2019, Janssen’s development partner, Genmab, announced positive Phase 3 trial results from the COLUMBA study evaluating subcutaneous DARZALEX in comparison to DARZALEX IV in patients with relapsed or refractory multiple myeloma. DARZALEX SC (utilizing ENHANZE technology) was found to be non-inferior to Darzalex IV with regard the co-primary endpoints of Overall Response Rate and Maximum Trough concentration. In May 2020, we announced that Janssen received US FDA approval and launched the commercial sale of DARZALEX FASPRO in four regimens across five indications in multiple myeloma patients, including newly diagnosed, transplant-ineligible patients as well as relapsed or refractory patients. As a fixed-dose formulation, DARZALEX FASPRO can be administered over three to five minutes, significantly less time than IV DARZALEX which requires multi-hour infusions. In June 2020, we announced that Janssen received European marketing authorization and launched the commercial sale of DARZALEX SC utilizing ENHANZE in the European Union. In April 2020, we announced the submission of a New Drug Application (NDA) to Japan's Ministry of Health, Labour and Welfare (MHLW) by Janssen seeking approval of DARZALEX SC. In November 2020, Janssen announced it submitted a Type II variation application to the EMA seeking European approval of DARZALEX SC to be used in the
6
treatment of patients with AL amyloidosis, a rare and potentially fatal disease for which there are no currently approved therapies. In August 2020, Janssen announced that Health Canada approved DARZALEX SC in four regimens across five indications in patients with multiple myeloma, most notably newly diagnosed, trans-plant-ineligible patients as well as relapsed or refractory patients. In November 2020, Janssen filed for approval of DARZALEX FASPRO/Darzalex SC with pomalidomide and dexamethasone for patients with relapsed or refractory multiple myeloma in the U.S. and EU. In January 2021, Janssen received FDA approval for DARZALEX FASPRO in combination with bortezomib, thalidomide, and dexamethasone in newly diagnosed multiple myeloma patients who are eligible for autologous stem cell transplant. In January 2021, Janssen received accelerated approval from the FDA for DARZALEX FASPRO in combination with bortezomib, cyclophosphamide and dexamethasone (D-VCd) for the treatment of adult patients with newly diagnosed AL amyloidosis (not recommended for the treatment of patients with AL amyloidosis who have NYHA Class IIIB or Class IV cardiac disease or Mayo Stage IIIB outside of controlled clinical trials).
In December 2019, Janssen elected targets EGFR and cMET on an exclusive basis as part of the bispecific antibody (amivantamab), which is being studied in solid tumors. In November 2020, Janssen initiated a Phase 1 study of amivantamab and ENHANZE.
AbbVie Collaboration
In June 2015, we and AbbVie entered into a collaboration and license agreement, under which AbbVie has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with AbbVie proprietary biologics directed to up to nine targets. Targets may be selected on an exclusive basis. AbbVie elected one target on an exclusive basis, TNF alpha, for which it has discontinued development and returned the target.
Lilly Collaboration
In December 2015, we and Lilly entered into a collaboration and license agreement, under which Lilly has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with Lilly proprietary biologics directed to up to five targets. Targets may be selected on an exclusive basis. Lilly has elected two targets on an exclusive basis and one target on a semi-exclusive basis. In August 2017, Lilly initiated a Phase 1 study of an investigational new therapy in combination with rHuPH20.
BMS Collaboration
In September 2017, we and BMS entered into a collaboration and license agreement, which became effective in November 2017, under which BMS has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with BMS immuno-oncology targetsproducts directed at up to eleven targets. Targets may be selected on an exclusive basis, with the exception of one co-exclusive target.basis. BMS has designated multiple immuno-oncology targets including programmed death 1 (PD-1) and has an option to select additional targets within five years from the effective date. In October 2018, BMS dosed the first patient in a Phase 11/2a study evaluating the safety, pharmacokinetics and pharmacodynamics of BMS-986179, an investigational anti-CD-73 antibody alone and in combination with nivolumab, using ENHANZE technology. BMS is currentlyalso conducting a Phase 1/2 study of nivolumab using ENHANZE technology in patients with solid tumors. In October 2019, BMS initiated a Phase 1 study for relatlimab in combination with nivolumab using ENHANZE technology. In June 2020, BMS initiated a Phase 1/2 study of OPDIVO® (nivolumab)ipilimumab in combination with ENHANZE.nivolumab using ENHANZE technology, but has recently made a portfolio prioritization decision to not continue the study. In June 2020, BMS selected 3 targets on an exclusive basis and exercised their option to convert a co-exclusive license to an exclusive license. BMS has selected eight targets on an exclusive basis to-date.
Alexion Collaboration
In December 2017, we and Alexion entered into a collaboration and license agreement, under which Alexion has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with Alexion’s portfolio of products directed at up to four targets. Targets may be selected on an exclusive basis. Alexion elected two targets on an exclusive basis, including a C5 complement inhibitor and has an option to select two additional targets within five years from the effective date. In August 2018, Alexion announced that it initiated a Phase 1 trial to study a next-generation subcutaneous formulation of ALXN1210 using ENHANZE technology (ALXN1810). In April 2020 Alexion announced it would no longer proceed with a study of ALXN1810 in renal disease. Following a portfolio prioritization, Alexion has made the decision to not proceed with further development of ALXN1810, subcutaneous ULTOMIRIS co-administered with ENHANZE technology. Alexion is evaluating additional development options for ENHANZE.
7
argenx Collaboration
In February 2019, we and argenx entered into an agreement with argenx for the right to develop and commercialize one exclusive target, the human neonatal Fc receptor FcRn, which includes argenx's lead asset efgartigimod (ARGX-113), and an option to select two additional targets using ENHANZE technology. In May 2019, argenx nominated a second target to be studied using ENHANZE technology, a human complement factor C2 associated with the product candidate ARGX-117, which is being developed to treat severe autoimmune diseases.
In July 2019, argenx dosed the first subject in a phase 1 clinical trial evaluating the safety, pharmacokinetics and pharmacodynamics of efgartigimod (ARGX-113), using ENHANZE technology. In December 2019, argenx reported that based on data from the phase 1 study and internal company analysis, a one minute injection administered every 2 weeks may be possible. In December 2020, argenx initiated a Phase 3 study of ARGX-113 using ENHANZE technology for patients with immune thrombocytopenia (ITP), an immune disorder in which the blood does not clot normally. In January 2021, argenx initiated a Phase 3 study of ARGX-113 using ENHANZE technology in pemphigus vulgaris and foliaceus (PV), a rare autoimmune disease that causes painful blisters on the skin and mucous membranes. In February 2021, argenx initiated a Phase 3 study of ARGX-113 using ENHANZE technology for patients with chronic inflammatory demyelinating polyneuropathy (CIDP) and initiated a Phase 3 study of ARGX-113 using ENHANZE technology in myasthenia gravis (MG), an autoimmune disorder of the musculoskeletal system caused by IgG autoantibodies.
In October 2020, we and argenx entered into agreement to expand the collaboration relationship. Under the newly announced expansion, argenx gained the ability to exclusively access our ENHANZE technology.technology for three additional targets upon nomination for a total of up to six targets under the existing and newly expanded collaboration.
Horizon Collaboration
In November 2020, we and Horizon entered into a global collaboration and license agreement that gives Horizon exclusive access to Halozyme's ENHANZE technology for subcutaneous formulation of medicines targeting IGF-1R. Horizon intends to use ENHANZE to develop a SC formulation of TEPEZZA (teprotumumab-trbw), indicated for the treatment of thyroid eye disease, a serious, progressive and vision-threatening rare autoimmune disease, potentially shortening drug administration time, reducing healthcare practitioner time and offering additional flexibility and convenience for patients.
NIH CRADA
In June 2019, we announced a Cooperative Research and Development Agreement (CRADA) with the National Institute of Allergy and Infectious Diseases’ Vaccine Research Center (VRC), part of National Institute of Health (NIH), enabling the VRC’s use of ENHANZE technology to develop subcutaneous formulations of broadly neutralizing antibodies (bnAbs) against HIV for HIV treatment. The initiation of this study has been impacted by COVID-19 and is delayed.
CAPRISA
In September 2020, we entered into a collaboration with the Centre for the AIDS Programme of Research in South Africa (CAPRISA), a non-profit company, to evaluate safety, tolerability and pharmacokinetics of a human monoclonal antibody (CAP256V2LS) in HIV-negative and HIV-positive women in South Africa. In October 2020, we were notified that the first patient was dosed with PH20 in a Phase I Dose-Escalation Study for CAP256V2LS.
For a further discussion of the collaboration agreements, refer to Note 2, Summary of Significant Accounting Policies - Revenues under Collaborative Agreements.
| Year Ended December 31, | ||||||||
| 2018 | 2017 | 2016 | ||||||
| Roche | 72 | % | 38 | % | 63 | % | ||
| Baxalta | 7 | % | 7 | % | 12 | % | ||
| BMS | 4 | % | 32 | % | — | |||
| Alexion | 3 | % | 13 | % | — | |||
In March 2020, the World Health Organization declared a disease caused by a strain of novel coronavirus (“COVID-19”) to be a pandemic. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. In an effort to protect the health and safety of our employees and in compliance with state regulations, we instituted working from home, limited the number of people that work on site at any one time, and suspended employee travel. We anticipate that the global health crisis caused by COVID-19 will continue to have an impact across the globe. As an organization we continue to effectively operate with the majority of our employees working from home and not traveling, which we expect will continue for the foreseeable future. Importantly, our suppliers continue to operate without interruption related to COVID-19. However, the duration of the pandemic and its continued impact on the global economy as a whole is unknown at this time. We are not clear the extent to which near term and long term operational and economic impacts of COVID-19, if any, will have on our business, including the effects on our suppliers, collaborators, customers, employees, and prospects. We will continue to monitor the COVID-19 situation closely.
8
Patents and Proprietary Rights
Patents and other proprietary rights are essential to our business. Our success will depend in part on our ability to obtain patent protection for our inventions, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. Our strategy is to actively pursue patent protection in the U.S. and certain foreign jurisdictions for technology that we believe to be proprietary to us and that offers us a potential competitive advantage. Our patent portfolio includes 3943 issued patents in the U.S., more than 390460 issued patents in Europe and other countries in the world and more than 10050 pending patent applications. In general, patents have a term of 20 years from the application filing date or earlier claimed priority date. Our issued patents will expire between 20222023 and 2033.2035. While we recently abandoned a number of patents related to PEGPH20 as a result of its failed Phase 3 clinical trial for the treatment of pancreatic cancer, we continue to file and prosecute patent applications to strengthen and grow our patent portfolio pertaining to our recombinant human hyaluronidase. We have multiple patents and patent applications throughout the world pertaining to our recombinant human hyaluronidase and methods of use and manufacture, including an issued U.S. patent which expires in 2027 and an issued European patent which expires in 2024, which we believe cover the products and product candidates under our existing collaborations Hylenex recombinant and PEGPH20.Hylenex recombinant. In addition, we have, under prosecution throughout the world, multiple patent applications that relate specifically to individual product candidates under development, the expiration of which can only be definitely determined upon maturation into our issued patents. We believe our patent filings represent a barrier to entry for potential competitors looking to utilize these hyaluronidases.
In addition to patents, we rely on unpatented trade secrets, proprietary know-how and continuing technological innovation. We seek protection of these trade secrets, proprietary know-how and innovation, in part, through confidentiality and proprietary information agreements. Our policy is to require our employees, directors, consultants, advisors, collaborators, outside scientific collaborators and sponsored researchers, other advisors and other individuals and entities to execute confidentiality agreements upon the start of employment, consulting or other contractual relationships with us. These agreements provide that all confidential information developed or made known to the individual or entity during the course of the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and some other parties, the agreements provide that all inventions conceived by the individual will be our exclusive property. Despite the use of these agreements and our efforts to protect our intellectual property, there will always be a risk of unauthorized use or disclosure of information. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, our competitors.
We also file trademark applications to protect the names of our products and product candidates. These applications may not mature to registration and may be challenged by third parties. We are pursuing trademark protection in a number of different countries around the world. There can be no assurances that our registered or unregistered trademarks or trade names will not infringe on rights of third parties or will be acceptable to regulatory agencies.
Research and Development Activities
Our research and development expenses consist primarily of costs associated with the product development, quality and regulatory work required to maintain the ENHANZE platform, development and manufacturing of our product candidates performed on behalf of our partners, compensation and other expenses for research and development personnel, supplies and materials, costs for consultants and related contract research, clinical trials, facility costs and amortization and depreciation. We charge all research and development expenses to operations as they are incurred. OurPrior to our November 2019 restructuring, our research and development activities arewere primarily focused on the development of our various product candidates.
Manufacturing
We do not have our own manufacturing facility for our product and our partners’ products and product candidates, or the capability to package our products. We have engaged third parties to manufacture bulk rHuPH20 PEGPH20 and Hylenex recombinant.Hylenex.
We have existing supply agreements with contract manufacturing organizations Avid Bioservices, Inc. (Avid) and Catalent Indiana LLC (formerly Cook Pharmica LLC) (Catalent) to produce supplies of bulk rHuPH20. These manufacturers each produce bulk rHuPH20 under current Good Manufacturing Practices (cGMP) for clinical and commercial uses. Catalent currently produces bulk rHuPH20 for use in Hylenex recombinant, product candidates and collaboration product candidates. Avid currently produces bulk rHuPH20 for use in collaboration products. We rely on their ability to successfully manufacture these batches according to product specifications. In addition, we validated and qualified a new facility operated by Avid as a manufacturer of bulk rHuPH20 for use in the products and product candidates under the ENHANZE collaborations. It is important for our business for Catalent and Avid to (i) retain their status as cGMP-approved manufacturing facilities; (ii) successfully scale up bulk rHuPH20 production; and/or (iii) manufacture the bulk rHuPH20 required by us and our collaborators for use in our proprietary and collaboration products and product candidates. In addition to supply obligations, Avid and Catalent will also provide support for data and information used in the chemistry, manufacturing and controls sections for FDA and other regulatory filings.
We have a commercial manufacturing and supply agreement with Patheon Manufacturing Services, LLC (Patheon) under which Patheon will provide the final fill and finishing steps in the production process of Hylenex recombinant. Under our commercial services agreement with Patheon, Patheon has agreed to fill and finish Hylenex recombinant product for us until December 31, 2019, subject to further extensions in accordance with the terms of the agreement. In addition, we scaled up our manufacturing of PEGPH20 with third party suppliers to support additional clinical trials, including the Phase 3 trial, and ultimately, if approved, potential commercial supply.recombinant.
9
Sales, Marketing and Distribution
Hylenex Recombinant
Our commercial activities currently focus on Hylenex recombinant. We have a team of sales specialists that provide hospital and surgery center customers with the information about Hylenex recombinant and information needed to obtain formulary approval for, and support utilization of,Hylenex recombinant. Our commercial activities also include marketing and related services and commercial support services such as commercial operations, managed markets and commercial analytics. We also employ third-party vendors, such as advertising agencies, market research firms and suppliers of marketing and other sales support related services to assist with our commercial activities.
We sell Hylenex recombinant in the U.S. to wholesale pharmaceutical distributors, who sell the product to hospitals and other end-user customers. We engage Integrated Commercialization Solutions (ICS), a division of AmerisourceBergen Specialty Group, a subsidiary of AmerisourceBergen, to act as our exclusive distributor for commercial shipment and distribution of Hylenex recombinant to our customers in the United States. In addition to distribution services, ICS provides us with other key services related to logistics, warehousing, returns and inventory management, contract administration and chargebacks processing and accounts receivable management. In addition, we utilize third parties to perform various other services for us relating to regulatory monitoring, including call center management, adverse event reporting, safety database management and other product maintenance services.
Competition
The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary therapeutics. We face competition from a number of sources, some of which may target the same indications as our product or product candidates, including large pharmaceutical companies, smaller pharmaceutical companies, biotechnology companies, academic institutions, government agencies and private and public research institutions, many of which have greater financial resources, drug development experience, sales and marketing capabilities, including larger, well established sales forces, manufacturing capabilities, experience in obtaining regulatory approvals for product candidates and other resources than us. We face competition not only in the commercialization of Hylenex recombinant, but also for the in-licensing or acquisition of additional product candidates, and the out-licensing of our ENHANZE Technology.technology. Our ENHANZE technology may face increasing competition from alternate approaches and/or emerging technologies to deliver medicines SC. In addition, our collaborators face competition in the commercialization of the product candidates for which the collaborators seek marketing approval from the FDA or other regulatory authorities.
Hylenex Recombinant
Hylenex recombinant is currently the only FDA approved recombinant human hyaluronidase on the market. The competitors for Hylenex recombinant include, but are not limited to, Valeant Pharmaceuticals International, Inc.’s product, Vitrase®, an ovine (ram) hyaluronidase, and Amphastar Pharmaceuticals, Inc.’s product, Amphadase®, a bovine (bull) hyaluronidase. In addition, some commercial pharmacies compound hyaluronidase preparations for institutions and physicians even though compounded preparations are not FDA approved products.
Government Regulations
The FDA and comparable regulatory agencies in foreign countries regulate the manufacture and sale of the pharmaceutical products that we or our partners have developed or that our partners currently are developing. The FDA has established guidelines and safety standards that are applicable to the laboratory and preclinical evaluation and clinical investigation of therapeutic products and stringent regulations that govern the manufacture and sale of these products. The process of obtaining regulatory approval for a new therapeutic product usually requires a significant amount of time and substantial resources. The steps typically required before a product can be introduced for human use include:
Regulatory obligations continue post-approval and include the reporting of adverse events when a drug is utilized in the broader patient population. Promotion and marketing of drugs is also strictly regulated, with penalties imposed for violations of FDA regulations, the Lanham Act and other federal and state laws, including the federal anti-kickback statute.
We currently intend to continue to seek, directly or through our collaborators, approval to market our products and product candidates in foreign countries, which may have regulatory processes that differ materially from those of the FDA. We anticipate that we willOur partners may rely upon independent consultants to seek and gain approvals to market our proposed products in foreign countries or may rely on other pharmaceutical or biotechnology companies to license our proposed products. We cannot guarantee that approvals to market any of our proposedpartners’ products can be obtained in any country. Approval to market a product in any one foreign country does not necessarily indicate that approval can be obtained in other countries.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency or reviewing courts in ways that may significantly affect our business and development of our partners’ product candidates and any products that we may commercialize. It is impossible to predict
10
whether additional legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of any such changes may be.
Information about our Executive Officers of the Registrant
Information concerning our executive officers, including their names, ages and certain biographical information can be found in Part III, Item 10, Directors, Executive Officers and Corporate Governance. This information is incorporated by reference into Part I of this report.
The experience, expertise and dedication of our employees drive the progress and accomplishments of Halozyme.
As of February 14, 2019,17, 2021, we had 281136 full-time employees. None of our employees are unionized and we believe our employee relations to be good.
Recognizing the value of our employees and the contributions they make in achieving our business objectives and overall success, we focus on creating and providing an inclusive and safe work environment where employees are respected and rewarded for their contributions, work together as one team, have opportunities to grow and develop their careers, and support the communities in which we work. We also believe this approach to human capital management is essential to attracting and retaining employees in the highly competitive biotechnology and pharmaceutical labor market. To achieve this supportive working environment, our human capital management efforts focus on:
Corporate Values and Ethics:
The foundation of our human capital management strategy is contained in our corporate values statement and our Code of Conduct and Ethics (the “Code of Conduct”), both of which provide uniform guidance to all our employees regarding expectations for proper workplace behavior. Our corporate values emphasize respecting and valuing fellow team members and acting with integrity and honesty to uphold the highest ethical standards. We believe these values provide an environment in which all employees can feel proud and motivated to contribute their valued talents to achieving corporate goals and objectives. Our values also emphasize empowering employees and personal accountability as a means to fulfill our commitments to patients, partners, shareholders and each other.
Our Board of Directors adopted and regularly reviews the Code of Conduct, which applies to all of our employees, officers and directors. Adherence to the Code of Conduct helps ensure that all employees can feel a part of an organization that emphasizes adherence to laws and policies covering the industry in which we work. Our Code of Conduct also emphasizes each employee’s accountability for making decisions and taking actions in a highly ethical manner with a focus on honesty, fairness and integrity and treating all fellow employees in a respectful and inclusive manner. We have established a reporting hotline that enables employees to file anonymous reports of any suspected violations of the Code of Conduct. We believe that providing an ethical environment in which to work is vital to our efforts to attract, retain and develop our employees.
Diversity and Inclusion:
We seek to build and maintain a diverse team of employees that is passionate about and committed to having a positive impact on the lives of patients and their families. We value and celebrate the unique talents, backgrounds and perspectives each employee contributes to achieving our mission and corporate objectives. In support of this philosophy, we adopted the Biotechnology Innovation Organization’s principles on workforce development, diversity and inclusion. Our diverse and inclusive culture is key to attract, develop and retain our talent pool within the globally competitive biotechnology industry. Our dedication to these principles has resulted in a diverse and inclusive employee base consisting of 51% female and 40% non-white/Caucasian employees as of February 17, 2021.
As an equal opportunity employer, we strive to attract and connect with diverse talent who best match our core values and who will be successful and thrive at Halozyme. Our recruiting team partners with hiring managers and with our diverse interview panels to provide support at every stage of the process. We strive to ensure we evaluate a diverse group of candidates for every role with the goal of identifying the best possible candidate – whether internal or external – to fill open roles in the company. We are also committed to providing a positive candidate experience and endeavor to be transparent and respect the time each candidate gives us throughout the process. We evaluate our recruitment and retention efforts based on a variety of metrics, including offer acceptance rate, time-to-hire, turnover and diversity of our employees.
Professional Development for Employees at All Levels:
We are firmly committed to employee development because it is essential to the future growth and overall success of Halozyme. We understand that high performing employees are always searching for ways to broaden and develop their skills. To support our employees, we conduct an individual development plan process to give employees the opportunity and accountability to document their career goals and the actions necessary to achieve those goals. Our senior leader development program is focused on advancing business acumen and leadership skills. Our talent development curriculum for the entire organization is focused on professional, team and leadership development opportunities and grounded in our established leadership attributes which identify the knowledge, skills, abilities and behaviors that contribute to individual and organizational performance. In addition, we provide an online learning platform where employees can access training or
11
programs on a variety of topics whenever they choose. We offer education assistance for college and university courses, training seminars and educational conferences to all employees.
To monitor progress, we review our succession plan for key senior management positions as part of our annual talent review and identify development opportunities to help ensure potential successor readiness.
Employee Engagement:
In order to ensure we are delivering on our human capital initiatives and better understand our employees’ experience, we regularly conduct employee engagement surveys. In 2019, we achieved a 97% response rate with our survey with more than 90% of our employees indicating:
•They are aware of the company mission and vision and have a clear understanding of the goals and objectives of the company;
•Their team is committed to doing high quality work; and
•Their manager treats them with respect and cares about them.
With the goal of continuous performance improvement we are focused on further strengthening cross-functional team work including how team members communicate and hold each other accountable. Examples of specific actions we have taken in response to employee survey feedback include institution of all-employee training on cross-functional teamwork and how to have crucial conversations.
We hold frequent all-employee meetings that serve as a forum to share progress on strategy and corporate goals, celebrate achievements, and share best practices and learnings. In 2020 and continuing in 2021 we have increased the frequency of our all-employee meetings from monthly to every other week while implementing our work-from-home strategy in response to COVID-19, in order to keep employees well-informed and connected and to addresses their questions.
Management tracks and assesses retention and attrition and interviews departing employees in order to identify any addressable trends.
Compensation & Benefits:
Our compensation and benefits programs, with oversight from the Compensation Committee of our Board of Directors, are designed to attract, retain and reward employees through competitive salaries, annual bonus eligibility, stock awards grants to all employees, a 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, and employee assistance programs. Each year we conduct surveys to benchmark our salaries and benefits and confirm we are satisfied with the competitiveness of our total compensation offering. We also provide a variety of peer-to-peer and corporate recognition programs to celebrate and recognize our employees for their hard work and contributions.
Employee Health and Safety:
We are dedicated to promoting the health and safety of our employees because we believe it fosters employee productivity and job performance. We have developed and implemented annual workplace safety training which is intended to remind our employees of workplace safety procedures that may be useful in the event of emergency situations and to assist our employees in helping to prevent workplace accidents. We have established a Safety Committee which meets on a quarterly basis to review workplace safety and adherence to safety policies. Further, our Code of Conduct emphasizes our commitment to preventing unlawful employment discrimination and workplace harassment including mandatory, on going sexual harassment training and provides a mechanism for reporting any violations of this policy.
Our response to COVID-19:
Because we take the health and safety of our employees, their families and our local communities very seriously, we have implemented the following actions to protect against the transmission of COVID-19 in our office and in the local community, while ensuring that critical work continues:
•Restricted access to our office to only Halozyme personnel necessary to carry out essential activities. All other employees are currently working from home.
•Required self-health check, and on-site temperature screening for all on-site personnel.
•Required virtual, rather than in-person, interactions to continue to meet the needs of our customers, partners and contractors.
•Restricted all air travel.
•Disinfection of all common areas, door handles, restrooms, and kitchens multiple times daily, and regular after-hours disinfection of all non-laboratory areas with state-of-the-art electrostatic sanitization.
•Upgraded all HVAC systems to MERV-13 filtration throughout our campus and introduction of supplementary HEPA filtration in conference rooms and select open office areas.
Corporate Citizenship:
We believe in supporting the community in which we work and provide our employees multiple opportunities to contribute to the community, including providing company-wide community service days/volunteerism supporting:
•STEM education;
12
•Human services (e.g., food drives, home builds, meal services);
•Environmental organizations (e.g., lagoon cleanup events, park restoration);
•Children/Military (e.g., school supply drives, holiday adopt-a-family, playhouse builds, paracord builds);
•Cultural/diversity relations; and
•Patient/healthcare advocacy groups.
13
Item 1A.Risk Factors
Risks Related To Our Business
Business interruptions resulting from the COVID-19 outbreak or similar public health crises could cause a disruption of the development of our collaboration partners’ product candidates and commercialization of approved products, impede our ability to supply bulk rHuPH20 to our partners or procure and sell Hylenex and otherwise adversely impact our business and results of operations.
Public health crises such as pandemics or similar outbreaks could adversely impact our business and results of operations by, among other things, disrupting the development of our collaboration partners’ product candidates and commercialization of our partners’ approved products, disrupting our ability to enter into new ENHANZE collaborations with potential partners in a timely manner, causing disruptions in the operations of our third party contract manufacturing organizations upon whom we rely for the production and supply of our commercial product Hylenex and the bulk rHuPH20 we supply to our partners, and causing other disruptions to our operations. For example, the outbreak of a coronavirus, which causes COVID-19, has rapidly evolved into a global pandemic and has spread to most regions of the world including the city of San Diego, California where our main office is located.
The COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures. The extent to which COVID-19 and its variants impacts our operations and/or those of our collaboration partners will depend on future developments, which are highly uncertain and unpredictable, including the duration or recurrence of the outbreak, additional or modified government actions, new information that will emerge concerning the severity and impact of COVID-19 and the actions to contain COVID-19 or address its impact in the short and long term, among others.
We have responded to the COVID-19 pandemic by taking a number of actions including closing our offices in San Diego in March 2020, requesting that most of our personnel work remotely and restricting access to our facilities mostly to personnel who perform critical activities that must be completed on-site in accordance with California’s initial statewide shelter-in-place order and ongoing guidances. Increased reliance on personnel working from home may have a negative impact on productivity, or disrupt, delay or otherwise adversely impact business, by, among other things, increasing cyber security risk, impeding access to information that would be helpful to pursue our business objectives or disrupting our communications. We are continuing to monitor the situation and currently do not have an estimate of the timing for all employees returning to the office for work.
The business disruptions associated with a global pandemic could impact the business, product development priorities and operations of our collaboration partners, including potential delays in manufacturing their product candidates or approved products. For example, some of our collaboration partners are conducting or are planning to conduct clinical trials in geographies affected by the COVID-19 pandemic. The progress or completion of these clinical trials could be adversely impacted by the pandemic. Additionally, interruption or delays in the operations of the FDA, the EMA and other similar foreign regulatory agencies, or changes in regulatory priorities to focus on the COVID-19 pandemic, may affect required regulatory review, inspection, clearance and approval timelines. Disruptions such as these could result in delays in the development programs of our collaboration products or impede the commercial efforts for approved products, resulting in potential reductions or delays in our revenues from collaborator royalty or milestone payments.We do not know the extent to which our collaboration partners’ development programs or product commercialization efforts will be impacted or delayed.
We rely on third party manufacturers to manufacture the bulk rHuPH20 that we supply to our collaboration partners for their commercial products and product candidates, as well as our commercial product Hylenex. If any such third party manufacturer is adversely impacted by the COVID-19 pandemic and related consequences, including staffing shortages, production slowdowns and disruptions in delivery systems, availability of raw materials, reagents or components or if they divert resources or manufacturing capacity to accommodate the development of coronavirus treatments or vaccines, our supply chain may be disrupted, limiting our ability to sell Hylenex or supply bulk rHuPH20 to our collaboration partners. Any such disruptions could result in reductions or delays in our revenues.
The effects of COVID-19 could worsen in countries that are already afflicted with the coronavirus which could further adversely impact our ability to conduct our business and could have a material adverse impact on our operations, financial condition and results. We do not yet know the full extent of the impact that COVID-19 may or will have on our business.
In addition, the trading prices for our common shares and other biopharmaceutical companies have been highly volatile as a result of market and investor reactions to the COVID-19 pandemic and its potential consequences. As a result, access to sources of financing, should those be needed, may be more difficult and/or expensive. In addition, a recession, depression or
14
other sustained adverse market event resulting from the spread of the coronavirus could materially and adversely affect our business and the value of our common shares.
We have generated only limited revenues from product sales to date;date and we have a history of net losses and negative cash flows and we may never achieve or maintain profitability..
Relative to expenses incurred in our operations, we have generated only limited revenues from product sales, royalties, licensing fees, milestone payments, bulk rHuPH20 supply payments and research reimbursements to date and we may never generate sufficient revenues from future product sales, licensing fees and milestone payments to offset expenses. Even if we ultimately do achieve significant revenues from product sales, royalties, licensing fees, research reimbursements, bulk rHuPH20 supply payments and/or milestone payments, we expect to incur significant operating losses over the next few years and we may never become profitable on an extended basis.date. Through December 31, 2018,2020, we have incurred aggregate net losses of $531.4$474.6 million. Although we expect to maintain sustainable profitability, unexpected declines in revenues and increases in expenses could inhibit our ability to sustain profitability.
If ourpartners’ product candidates do not receive and maintain regulatory approvals, or if approvals are not obtained in a timely manner, such failure or delay would substantially impair our ability to generate revenues.
Approval from the FDA or equivalent health authorities is necessary to manufacture and market pharmaceutical products in the U.S. and the other countries in which we anticipate doing business have similar requirements. The process for obtaining FDA and other regulatory approvals is extensive, time-consuming, risky and costly, and there is no guarantee that the FDA or other regulatory bodies will approve any applications that may be filed with respect to any of our partners’ product candidates, or that the timing of any such approval will be appropriate for the desired product launch schedule for a product candidate. We and our collaborators attempt to provide guidance as to the timing for the filing and acceptance of such regulatory approvals, but such filings and approvals may not occur when we or our collaborators expect, or at all. The FDA or other foreign regulatory agency may refuse or delay approval of our partners’ product candidates for failure to collect sufficient clinical or animal safety data and require us or our collaborators to conduct additional clinical or animal safety studies which may cause lengthy delays and increased costs to our partners’ development programs. For example, the approval of Baxalta’s HYQVIA BLA in the U.S. was delayed until we and Baxalta provided additional preclinical data sufficient to address concerns regarding non-neutralizing antibodies to rHuPH20 that were detected in the registration trial. Although these antibodies have not beenAny such issues associated with any known adverse clinical effects, and the HYQVIA BLA was approved by the FDA in September 2014, we cannot assure you that they will not arise andrHuPH20 could have an adverse impact on future development of our partners’ products which include rHuPH20, future sales of Hylenex recombinant, or our ability to maintain our existing collaborations or enter into collaborations, or be raised by the FDA or other health authorities in connection with testing or approval of products including rHuPH20.new collaborations.
We and our collaborators may not be successful in obtaining approvals for any additional potential products in a timely manner, or at all. Refer to the risk factor titled “Our proprietary and collaboration product candidates or companion diagnostic assays may not receive regulatory approvals or their development may be delayed for a variety of reasons, including delayed or unsuccessful clinical trials, regulatory requirements or safety concerns” for additional information relating to the approval of product candidates.
Additionally, even with respect to products which have been approved for commercialization, in order to continue to manufacture and market pharmaceutical products, we or our collaborators must maintain our regulatory approvals. If we or any of our collaborators are unsuccessful in maintaining our regulatory approvals, our ability to generate revenues would be adversely affected.
As with most pharmaceutical products, use of ourHylenex and the products and product candidates or those of our collaborators could be associated with side effects or adverse events which can vary in severity (from minor reactions to death) and frequency (infrequent or prevalent). Side effects or adverse events associated with the use of ourHylenex and the products or product candidates or those of our collaborators may be observed at any time, including in clinical trials or when a product is commercialized, and any such side effects or adverse events may negatively affect our or our collaborators’ ability to obtain or maintain regulatory approval or market oursuch products and product candidates. Side effects such as toxicity or other safety issues associated with the use of ourHylenex and the products and product candidates or those of our collaborators could require us or our collaborators to perform additional studies or halt development or commercialization of these products and product candidates or expose us to product liability lawsuits which will harm our business. For example, several years ago we experienced a clinical hold on patient enrollment and dosing in our phase 2 study of PEGPH20 in patients with PDA (a discontinued program), which was not resolved until we implemented steps to address an observed possible difference in TE event rates between the arms of the study. We or our collaborators may be required by regulatory agencies to conduct additional animal or human studies regarding the safety and efficacy of our pharmaceutical products or product candidates which we have not planned or anticipated. Furthermore, there can be no assurance that we or our collaborators will resolve any issues related to any product relatedor product candidate side effects or adverse events to the satisfaction of the FDA or any regulatory agency in a timely manner or ever, which could harm our business, prospects and financial condition. For example, in April 2014, a clinical hold was placed on patient enrollment and dosing of PEGPH20 in Study HALO-202 as a result of a possible difference in the TE event rate that had been observed at that time in the trial between the group of patients treated with PEGPH20 versus the group of patients treated without PEGPH20. The clinical hold was lifted by the FDA in June 2014, and we have completed Study HALO-202.
If our contract manufacturers or vendors are unable to manufacture and supply to us bulk rHuPH20 or other raw materials, reagents or components in the quantity and quality required by us or our collaborators for use in the production of Hylenex or our partners’ products and product candidates, our Hylenex Commercialization efforts or our partners’ product development and commercialization efforts could be delayed or stopped and our business and results of operations and our collaborations could be damaged.harmed.
We have existing supply agreements with contract manufacturing organizations Avid Bioservices, Inc. (Avid) and Catalent Indiana LLC (formerly Cook Pharmica LLC) (Catalent) to produce bulk rHuPH20. These manufacturers each produce bulk rHuPH20 under cGMP for clinical uses. Catalent currently produces bulk rHuPH20 for
15
use in Hylenex recombinant, product candidates and collaboration product candidates. Avid currently produces bulk rHuPH20 for use in collaboration products and collaboration product candidates. We rely on their ability to successfully manufacture bulk rHuPH20 according to product specifications. In addition to supply obligations, Avid and Catalent willour contract manufacturers also provide support for the chemistry, manufacturing and controls sections for FDA and other regulatory filings. We also rely on their abilityvendors to successfully manufacture these batches accordingsupply us with raw materials to product specifications.produce reagents and other materials for bioanalytical assays used to support our partners’ clinical trials. We also have a commercial manufacturing and supply agreement with Patheon under which Patheon provides the final fill and finishing steps in the production process of Hylenex recombinant. If either Avidany of our contract manufacturers or Catalent:vendors: (i) is unable to retain its status as an FDA approved manufacturing facility; (ii) is unable to otherwise successfully scale up bulk rHuPH20 production to meet corporate or regulatory authority quality standards; (iii) is unable to procure raw materials, reagents or (iii)components necessary to produce bulk rHuPH20, Hylenex recombinant or our bioanalytical assays or (iv) fails to manufacture and supply bulk rHuPH20 in the quantity and quality required by us or our collaborators for use in our proprietaryHylenex and collaboration products and product candidates for any other reason, our business will be adversely affected. In addition, a significant change in such parties’ or other third party manufacturers’ business or financial condition could adversely affect their abilities to fulfill their contractual obligations to us. We have not established, and may not be able to establish, favorable arrangements with additional bulk rHuPH20 manufacturers and suppliers of the ingredients necessary to manufacture bulk rHuPH20 should the existing manufacturers and suppliers become unavailable or in the event that our existing manufacturers and suppliers are unable to adequately perform their responsibilities. We have attempted to mitigate the impact of a potential supply interruption through the establishment of excess bulk rHuPH20 inventory where possible, but there can be no assurances that this safety stock will be maintained or that it will be sufficient to address any delays, interruptions or other problems experienced by Avid and/or Catalent.any of our contract manufacturers. Any delays, interruptions or other problems regarding the ability of Avid and/or Catalentany of our contract manufacturers to supply bulk rHuPH20 or the ability of other third party manufacturers, to supply other raw materials or ingredients necessary to produce our products on a timely basis could: (i) cause the delay of our partners’ clinical trials or otherwise delay or prevent the regulatory approval of proprietary or collaborationour partners’ product candidates; (ii) delay or prevent the effective commercialization of proprietaryHylenex or collaboration products;products and product candidates; and/or (iii) cause us to breach contractual obligations to deliver bulk rHuPH20 to our collaborators.
Such delays would likely damage our relationship with our collaborators, and they would have a material adverse effect on royalties and thus our business and financial condition. Additionally, we rely on third parties to manufacture, prepare, fill, finish, package, store and ship our product and partners’ product candidates on our behalf. If the third parties we identify fail to perform their obligations, the progress of partners’ clinical trials could be delayed or even suspended and the commercialization of our product and partner products could be delayed or prevented.
If we or any party to a key collaboration agreement fail to perform material obligations under such agreement, or if a key collaboration agreement, is terminated for any reason, our business could significantly suffer.
We have entered into multiple collaboration agreements under which we may receive significant future payments in the form of milestone payments, target designation fees, maintenance fees and royalties. We are heavily dependent on our collaborators to develop and commercialize product candidates subject to our collaborations in order for us to realize any financial benefits from these collaborations. Our collaborators may not devote the attention and resources to such efforts that we would ourselves, change their clinical development plans, promotional efforts or simultaneously develop and commercialize products in competition to those products we have licensed to them. Any of these actions could not be visible to us immediately and could negatively impact our ability to forecast and our ability to achieve the benefits and revenue we receive from such collaboration. In addition, in the event that a party fails to perform under a key collaboration agreement, or if a key collaboration agreement is terminated, the reduction in anticipated revenues could delay or suspendnegatively impact our product development activities for some of our product candidates, as well as our commercialization efforts for some or all of our products. Specifically,operations. In addition, the termination of a key collaboration agreement by one or more of our collaborators could materiallyhave a material adverse impact our ability to enter into additional collaboration agreements with new collaborators on favorable terms, if at all. In certain circumstances, the termination of a key collaboration agreement would require us to revise our corporate strategy going forward and reevaluate the applications and value of our technology.
rHuPH20 is a key technological component of Hylenex and our ENHANZE technology and our most advanced proprietary andof our collaboration products and product candidates, including the current and future products and product candidates under our ENHANZE collaborations, our PEGPH20 program, and Hylenex recombinant.collaborations. If there is an adverse development for rHuPH20 (e.g., an adverse regulatory determination relating to rHuPH20, if we are unable to obtain sufficient quantities of rHuPH20, if we are unable to obtain or maintain material proprietary rights to rHuPH20 or if we discover negative characteristics of rHuPH20), multiple areas of our business, including current and potential collaborations, as well as proprietary programs would be substantially impacted. For example, elevated anti-rHuPH20 antibody titers were detected in the registration trial for Baxalta’s HYQVIA product as well as in a former collaborator’s product in a Phase 2 clinical trial with rHuPH20, but have not been associated, in either case, with any adverse events. We monitor for antibodies to rHuPH20 in our collaboration and proprietary programs, and although we do not believe at this time that the incidence of non-neutralizing anti-rHuPH20 antibodies in either the HYQVIA program or the former collaborator’s program
16
will have a significant impact on our other proprietary product and other collaborationour partners’ product and product candidates, there can be no assurance that there will not be other such occurrences in the foregoing programs or our other programs or that concerns regarding these antibodies will not also be raised by the FDA or other health authorities in the future, which could result in delays or discontinuations of our Hylenex commercialization activities, the development or commercialization activities of our partners, or deter our entry into additional collaborations with third parties.
We routinely evaluate our business strategy, and may modify this strategy in the future in light of our assessment of unmet medical needs, growth potential, resource requirements, regulatory issues, competition, risks and other factors. As a result of these strategic evaluations, we may focus our resources and efforts on one or a few programs or fields and may suspend or reduce our efforts on other programs and fields. For example, in the thirdfourth quarter of 2014,2019, we decided to focus our resources on advancing PEGPH20 and expanding utilization of our ENHANZE technology. While we believe these are applications with the greatest potential value, we have reduced the diversification oftechnology and our programs and increased our dependence on the success of the areas we are pursuing.commercial product, Hylenex. By focusing on one or a fewthese areas, we increase the potential impact on us if one of those partner programs or product candidates does not successfully complete clinical trials, achieve commercial acceptance or meet expectations regarding sales and revenue. Our decision to focus on one or a few programsWe may also reduce the value of programs that are no longer withinexpand our
Our proprietary and collaboration product candidates or companion diagnostic assays may not receive regulatory approvals or their development may be delayed for a variety of reasons, including delayed or unsuccessful clinical trials, regulatory requirements or safety concerns.
Clinical testing of pharmaceutical products is a long, expensive and uncertain process, and the failure or delay of a clinical trial can occur at any stage, including the patient enrollment stage. Even if initial results of preclinical and nonclinical studies or clinical trial results are promising, we or our collaborators may obtain different results in subsequent trials or studies that fail to show the desired levels of dose safety and efficacy, or we may not, or our collaborators may not, obtain applicable regulatory approval for a variety of other reasons. Preclinical, nonclinical, and clinical trials for any of our proprietary or collaboration product candidates or development of any collaboration companion diagnostic assays could be unsuccessful, which would delay or preclude regulatory approval and commercialization of the product candidates or companion diagnostic assays.candidates. In the U.S. and other jurisdictions, regulatory approval can be delayed, limited or not granted for many reasons, including, among others:
•during the course of clinical studies, the final data may differ from initial reported data, and clinical results may not meet prescribed endpoints for the studies or otherwise provide sufficient data to support the efficacy of our collaborators’ product candidates;
•clinical and nonclinical test results may reveal inferior pharmacokinetics, side effects, adverse events or unexpected safety issues associated with the use of our collaborators’ product candidates; for example, in April 2014, a clinical hold was placed on patient enrollment and dosing of PEGPH20 in Study HALO-202 as a result of a possible difference in the TE event rate that had been observed at that time in the trial between the group of patients treated with PEGPH20 versus the group of patients treated without PEGPH20. The clinical hold was lifted by the FDA in June 2014, and Study HALO-202 is completed;
•regulatory review may not find that the data from preclinical testing and clinical trials justifies approval;
•regulatory authorities may require that weour partners change ourtheir studies or conduct additional studies which may significantly delay or make continued pursuit of approval commercially unattractive;
•a regulatory agency may reject ourpartner trial data or disagree with ourtheir interpretations of either clinical trial data or applicable regulations;
•a regulatory agency may approve only a narrow use of our product or may require additional safety monitoring and reporting through Risk Evaluation and Mitigation Strategies or conditions to assure safe use programs;
•a regulatory agency may not approve our manufacturing processes or facilities, or the processes or facilities of our collaborators, our contract manufacturers or our raw material suppliers;
•a regulatory agency may identify problems or other deficiencies in our existing manufacturing processes or facilities, or the existing processes or facilities of our collaborators, our contract manufacturers or our raw material suppliers;
•a regulatory agency may change its formal or informal approval requirements and policies, act contrary to previous guidance, adopt new regulations or raise new issues or concerns late in the approval process; or
•a partner product candidate may be approved only for indications that are narrow or under conditions that place the product at a competitive disadvantage, which may limit the sales and marketing activities for such product candidate or otherwise adversely impact the commercial potential of a product.
If a proprietary or collaboration product candidate or companion diagnostic assay is not approved in a timely fashion or obtained on commercially viable terms, or if development of any product candidate or a companion diagnostic assay is terminated due to difficulties or delays encountered in the regulatory approval process, it could have a material adverse impact on our business, and we would become more dependent on the development of other proprietary or collaboration product candidates and/or our ability to successfully acquire other products and technologies. There can be no assurances that any proprietary or collaboration product candidate or companion diagnostic assay will receive regulatory approval in a timely manner, or at all. There can be no assurance that wepartners will be able to gain clarity as to the FDA’s requirements or that the requirements may be satisfied in a
17
commercially feasible way, in which case our ability to enter into collaborations with third parties or explore other strategic alternatives to exploit thisan opportunity will be limited or may not be possible.
We anticipate that certain proprietary and collaboration products will be marketed, and perhaps manufactured, in foreign countries. The process of obtaining regulatory approvals in foreign countries is subject to delay and failure for the reasons set forth above, as well as for reasons that vary from jurisdiction to jurisdiction. The approval process varies among countries and jurisdictions and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. Foreign regulatory agencies may not provide approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA.
Our third party collaborators are responsible for providing certain proprietary materials that are essential components of our collaboration products and product candidates, and any failure to supply these materials could delay the development and commercialization efforts for these collaboration products and product candidates and/or damage our collaborations.
Our development and commercialization collaborators are responsible for providing certain proprietary materials that are essential components of our collaboration products and product candidates. For example, Roche is responsible for producing the Herceptin and MabThera required for its subcutaneous products and Baxalta is responsible for producing the GAMMAGARD LIQUID for its product HYQVIA. If a collaborator, or any applicable third party service provider of a collaborator, encounters difficulties in the manufacture, storage, delivery, fill, finish or packaging of the collaboration product or product candidate or component of such product or product candidate, such difficulties could (i) cause the delay of clinical trials or otherwise delay or prevent the regulatory approval of collaboration product candidates; and/or (ii) delay or prevent the effective commercialization of collaboration products. Such delays could have a material adverse effect on our business and financial condition.
If we or our collaborators fail to comply with regulatory requirements applicable to promotion, sale and manufacturing of approved products, regulatory agencies may take action against us or them, which could significantly harm our business.
Any approved products, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for these products, are subject to continual requirements and review by the FDA, state and foreign regulatory bodies. Regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to continual review and periodic inspections. We, our collaborators and our respective contractors, suppliers and vendors, will be subject to ongoing regulatory requirements, including complying with regulations and laws regarding advertising, promotion and sales of drug products, required submissions of safety and other post-market information and reports, registration requirements, cGMP regulations (including requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation), and the requirements regarding the distribution of samples to physicians and recordkeeping requirements. Regulatory agencies may change existing requirements or adopt new requirements or policies. We, our collaborators and our respective contractors, suppliers and vendors, may be slow to adapt or may not be able to adapt to these changes or new requirements.
In particular, regulatory requirements applicable to pharmaceutical products make the substitution of suppliers and manufacturers costly and time consuming. We have minimal internal manufacturing capabilities and are, and expect to be in the future, entirely dependent on contract manufacturers and suppliers for the manufacture of our products and for their active and other ingredients. The disqualification of these manufacturers and suppliers through their failure to comply with regulatory requirements could negatively impact our business because the delays and costs in obtaining and qualifying alternate suppliers (if such alternative suppliers are available, which we cannot assure) could delay our partners’ clinical trials or otherwise inhibit our or partners’ ability to bring approved products to market, which would have a material adverse effect on our business and financial condition. Likewise, if we, our collaborators and our respective contractors, suppliers and vendors involved in sales and promotion of our products do not comply with applicable laws and regulations, for example off-label or false or misleading promotion, this could materially harm our business and financial condition.
Failure to comply with regulatory requirements may result in any of the following:
•restrictions on our or our partners’ products or manufacturing processes;
•warning letters;
•withdrawal of theour or our partners’ products from the market;
•voluntary or mandatory recall;
•fines;
•suspension or withdrawal of regulatory approvals;
•suspension or termination of any of our partners’ ongoing clinical trials;
•refusal to permit the import or export of our or our partners’ products;
•refusal to approve pending applications or supplements to approved applications that we submit;
•product seizure;
•injunctions; or
18
•imposition of civil or criminal penalties.
We may need to raise additional capital in the future and there can be no assurance that we will be able to obtain such funds.
We may need to raise additional capital in the future to fund our operations and for general corporate purposes if revenues do not occur as expected. Our current cash reserves and expected revenues may not be sufficient for us to fund general operations and conduct our business at the level desired. In addition, if we engage in acquisitions of companies, products or technologies in order to execute our business strategy, we may need to raise additional capital. We may raise additional capital in the future through one or more financing vehicles that may be available to us including (i) new collaborative agreements; (ii) expansions or revisions to existing collaborative relationships; (iii) private financings; (iv) other equity or debt financings; (v) monetizing assets; and/or (vi) the public offering of securities.
If we are required to raise additional capital in the future, it may not be available on favorable financing terms within the time required, or at all. If additional capital is not available on favorable terms when needed, we will be required to raise capital on adverse terms or significantly reduce operating expenses through the restructuring of our operations or deferral of strategic business initiatives. If we raise additional capital through a public offering of securities or equity, a substantial number of additional shares may be issued, which may negatively affect our stock price and these additional shares will dilute the ownership interest of our current investors.
We currently have significant debt and failuremay incur additional debt. Failure by us to fulfill our obligations under the applicable loandebt agreements may cause the repayment obligations to accelerate.
•limit our ability to convey, sell, lease, transfer, assignborrow additional funds for working capital, capital expenditures, acquisitions or otherwise dispose of certainother general corporate purposes;
•limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions, share repurchases or other general business purposes;
•require us to use a portion of our assets; engage in any business other than the businesses currently engaged in by uscash flow from operations to make debt service payments;
•limit our flexibility to plan for, or reasonably related thereto; liquidate or dissolve; make certain management changes; undergo certain change of control events; create, incur, assume, or be liable with respectreact to, certain indebtedness; grant certain liens; pay dividends and make certain other restricted payments; make certain investments; make payments on any subordinated debt; and enter into transactions with any of our affiliates outside of the ordinary course of business or permit our subsidiaries to do the same. In addition, subject to certain exceptions, we are required to maintain with SVB our primary deposit accounts, securities accounts and commodities, and to do the same for our domestic subsidiary. Complying with these covenants may make it more difficult for us to successfully execute our business strategy.
•place us at a materialcompetitive disadvantage compared to our less leveraged competitors; and
Our ability to make payments on our existing or any future debt will depend on our future operating performance and ability to generate cash and may also depend on our ability to obtain additional debt or equity financing. It will also depend on financial, business or other factors affecting our operations, many of which are beyond our control. We will need to use cash to pay principal and interest on our debt, thereby reducing the funds available to fund our research and development programs,operations, strategic initiatives and working capital requirements. If we are unable to generate sufficient cash to service our debt obligation,obligations, an event of default may occur. In the eventoccur under any of default by us under the Credit Agreement or the Loan Agreement, the lenders would be entitled to exercise their remedies thereunder, including the right to accelerate theour debt instruments which could result in an acceleration of such debt upon which we may be required to repay all the amounts then outstanding under the Credit Agreementsome or the Loan Agreement whichall of our debt instruments. Such an acceleration of our debt obligations could harm our financial condition. From time to time, we may seek to retire or repurchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Any such repurchases or exchanges would be on such terms and at such prices as we determine, and will depend on current market conditions, our liquidity needs, any restrictions in our contracts and other factors. The amounts involved in such transactions could be material.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Notes is triggered, holders of the Convertible Notes will be entitled to convert the notes at any time during specified periods at their option. If one or more holders elect to convert their notes, we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. Even if holders of the Convertible Notes do not elect to convert their notes, we are required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability when the conditional conversion feature is triggered, which results in a material reduction of our net working capital. For example, as of December 31, 2020, the conditional conversion feature was triggered and our notes are classified as a current liability.
19
Conversion of our Convertible Notes may dilute the ownership interest of existing stockholders or may otherwise depress the price of our common stock.
The conversion of some or all of our Convertible Notes, to the extent we deliver shares upon conversion, will dilute the ownership interests of existing stockholders. Any sales in the public market of the Convertible Notes or our common stock issuable upon conversion of the Convertible Notes could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could be used to satisfy short positions, or anticipated conversion of the Convertible Notes into shares of our common stock could depress the price of our common stock.
The accounting method for the Convertible Notes could have a material effect on our reported financial results.
Pursuant to Financial Accounting Standards Board Accounting Standards Codification Subtopic 470-20, Debt with Conversion and Other Options (“ASC 470-20”), an entity must separately account for the liability and equity components of convertible debt instruments whose conversion may be settled entirely or partially in cash (such as our Convertible Notes) in a manner that reflects the issuer’s economic interest cost for non-convertible debt. The liability component of our Convertible Notes was initially valued at the fair value of a similar debt instrument that does not have an associated equity component and was reflected as a liability in our consolidated balance sheet. The equity component of the Convertible Notes was included in the additional paid-in capital section of our stockholders’ equity on our consolidated balance sheet, and the value of the equity component was treated as original issue discount for purposes of accounting for the debt component. This original issue discount will be amortized to non-cash interest expense over the term of the notes, and we will record a greater amount of non-cash interest expense in current periods as a result of this amortization. Accordingly, we will report lower net income in our financial results because ASC 470-20 will require the interest expense associated with the notes to include both the current period’s amortization of the debt discount and the notes’ coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Convertible Notes.
If proprietary or collaboration product candidates are approved for marketing but do not gain market acceptance resulting in commercial performance below that which was expected or projected, our business may suffer and we may not be able to fund future operations.
Assuming that our proprietaryexisting or future collaboration product candidates obtain the necessary regulatory approvals for commercial sale, a number of factors may affect the market acceptance of these existing product candidates or any othernewly-approved products, which are developed or acquired in the future, including, among others:
•the degree to which the use of these products is restricted by the approved product label;
•the price of these products relative to other therapies for the same or similar treatments;
•the extent to which reimbursement for these products and related treatments will be available from third party payors including government insurance programs and private insurers;
•the introduction of generic or biosimilar competitors to these products;
•the perception by patients, physicians and other members of the health care community of the effectiveness and safety of these products for their prescribed treatments relative to other therapies for the same or similar treatments;
If these collaboration products do not gain market acceptance resulting in commercial performance below that which was expected or projected, the royalties we may notexpect to receive from these products will be ablediminished which could harm our ability to fund future operations, including the developmentconduct acquisitions, execute our planned share repurchases, or acquisition of new product candidates and/oraffect our salesability to use funds for other general corporate purposes and marketing efforts for our approved products, which would cause our business to suffer.
In addition, our proprietary and collaborationpartners’ product candidates will be restricted to the labels approved by FDA and applicable regulatory bodies, and these restrictions may limit the marketing and promotion of the ultimate products. If the approved labels are restrictive, the sales and marketing efforts for these collaboration products may be negatively affected.
Our ability to license our ENHANZE technology to our collaboration partners depends on the validity of our patents and other proprietary rights.
Patents and other proprietary rights are essential to our business. Our success will depend in part on our ability to obtain and maintain patent protection for our inventions, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We have multiple patents and patent applications throughout the world pertaining to our recombinant human hyaluronidase and methods of use and manufacture, including an issued U.S. patent which expires in 2027 and an issued European patent which expires in 2024, which we believe cover the products and product candidates under our existing collaborations, and Hylenex. Although we believe our patent filings represent a barrier to entry for potential competitors looking to utilize these hyaluronidases, upon expiration of our patents other pharmaceutical companies may (if they do not
20
infringe our other patents) seek to compete with us by developing, manufacturing and selling biosimilars to the active drug ingredient in our ENHANZE technology used by our collaboration partners in combination with their products. Any such loss of patent protection or proprietary rights could lead to a reduction or loss of revenues, incentivize one or more of our key ENHANZE collaboration partners to terminate their relationship with us and impact our ability to enter into new collaboration and license agreements.
Developing and marketing pharmaceutical products for human use involves significant product liability risks for which we currently have limited insurance coverage.
The testing, marketing and sale of pharmaceutical products involves the risk of product liability claims by consumers and other third parties. Although we maintain product liability insurance coverage, product liability claims can be high in the pharmaceutical industry, and our insurance may not sufficiently cover our actual liabilities. If product liability claims were to be made against us, it is possible that the liabilities may exceed the limits of our insurance policy, or our insurance carriers may deny, or attempt to deny, coverage in certain instances. If a lawsuit against us is successful, then the lack or insufficiency of insurance coverage may not be sufficient and could materially and adversely affect our business and financial condition. Furthermore, various distributors of pharmaceutical products require minimum product liability insurance coverage before purchase or acceptance of products for distribution. Failure to satisfy these insurance requirements could impede our ability to achieve broad distribution of our proposed products, and higher insurance requirements could impose additional costs on us. In addition, since many of our collaboration product candidates include the pharmaceutical products of a third party, we run the risk that problems with the third party pharmaceutical product will give rise to liability claims against us.
If we or our collaborators do not achieve projected development, clinical, regulatory or salesregulatory goals in the timeframes we publicly announceannounced or otherwise expect,expected, the commercialization of our collaboration products and the development of our product candidates may be delayed and, as a result, our stock price may decline, and we may face lawsuits relating to such declines.
From time to time, we or our collaborators may publicly articulate the estimated timing for the accomplishment of certain scientific, clinical, regulatory and other product development goals. The accomplishment of any goal is typically based on numerous assumptions, and the achievement of a particular goal may be delayed for any number of reasons both within and outside of our and our collaborators’ control. If scientific, regulatory, strategic or other factors cause usa collaboration partner to not meet a goal, regardless of whether that goal has been publicly articulated or not, our stock price may decline rapidly. For example, the announcement in April 2014 of the temporary halting of our Phase 2 clinical trial for PEGPH20 caused a rapid decline in our stock price. Stock price declines may also trigger direct or derivative shareholder lawsuits. As with any litigation proceeding, the eventual outcome of any legal action is difficult to predict. If any such lawsuits occur, we will incur expenses in connection with the defense of these lawsuits, and we may have to pay substantial damages or settlement costs in connection with any resolution thereof. Although we have insurance coverage against which we may claim recovery against some of these expenses and costs, the amount of coverage may not be adequate to cover the full amount or certain expenses and costs may be outside the scope of the policies we maintain. In the event of an adverse outcome or outcomes, our business could be materially harmed from depletion of cash resources, negative impact on our reputation, or restrictions or changes to our governance or other processes that may result from any final disposition of the lawsuit. Moreover, responding to and defending pending litigation significantly diverts management’s attention from our operations.
In addition, the consistent failure to meet publicly announced milestones may erode the credibility of our management team with respect to future milestone estimates.
Future acquisitions could disrupt our business and harm our financial condition.
In order to augment our product pipeline or otherwise strengthen our business, we may decide to acquire additional businesses, products and technologies. As we have limited experience in evaluating and completing acquisitions, our ability as an organization to make such acquisitions is unproven. Acquisitions could require significant capital infusions and could involve many risks, including, but not limited to, the following:
•we may have to issue additional convertible debt or equity securities to complete an acquisition, which would dilute our stockholders and could adversely affect the market price of our common stock;
•an acquisition may negatively impact our results of operations because it may require us to amortize or write down amounts related to goodwill and other intangible assets, or incur or assume substantial debt or liabilities, or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges;
•we may encounter difficulties in assimilating and integrating the business, products, technologies, personnel or operations of companies that we acquire;
•certain acquisitions may impact our relationship with existing or potential collaborators who are competitive with the acquired business, products or technologies;
•acquisitions may require significant capital infusions and the acquired businesses, products or technologies may not generate sufficient value to justify acquisition costs;
•we may take on liabilities from the acquired company such as debt, legal liabilities or business risk which could be significant;
21
•an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;
•acquisitions may involve the entry into a geographic or business market in which we have little or no prior experience; and
•key personnel of an acquired company may decide not to work for us.
If any of these risks occurred, it could adversely affect our business, financial condition and operating results. There is no assurance that we will be able to identify or consummate any future acquisitions on acceptable terms, or at all. If we do pursue any acquisitions, it is possible that we may not realize the anticipated benefits from such acquisitions or that the market will not view such acquisitions positively.
Risks Related To Ownership of Our Common Stock
Our stock price is subject to significant volatility.
We participate in a highly dynamic industry which often results in significant volatility in the market price of common stock irrespective of company performance. The high and low sales prices of our common stock during the twelve months ended December 31, 20182020 were $21.48$44.53 and $13.24,$12.71, respectively. We expect our stock price to continue to be subject to significant volatility and, in addition to the other risks and uncertainties described elsewhere in this Annual Report on Form 10-K and all other risks and uncertainties that are either not known to us at this time or which we deem to be immaterial, any of the following factors may lead to a significant drop in our stock price:
•the presence of competitive products to those being developed by us;our partners;
•failure (actual or perceived) of our collaborators to devote attention or resources to the development or commercialization of products or product candidates licensed to such collaborator;
•a dispute regarding our failure, or the failure of one of our third party collaborators, to comply with the terms of a collaboration agreement;
•the termination, for any reason, of any of our collaboration agreements;
•the sale of common stock by any significant stockholder, including, but not limited to, direct or indirect sales by members of management or our Board of Directors;
•the resignation, or other departure, of members of management or our Board of Directors;
•general negative conditions in the healthcare industry;
•pandemics or other global crises;
•general negative conditions in the financial markets;
•the cost associated with obtaining regulatory approval for any of our proprietary or collaboration product candidates;
•the failure, for any reason, to secure or defend our intellectual property position;
•identification of safety or tolerability issues;
•failure of our partners’ clinical trials to meet efficacy endpoints;
•suspensions or delays in the conduct of our partners’ clinical trials or securing of regulatory approvals;
•adverse regulatory action with respect to our and our collaborators’ products and product candidates such as loss of regulatory approval to commercialize such products, clinical holds, imposition of onerous requirements for approval or product recalls;
•our failure, or the failure of our third party collaborators, to successfully commercialize products approved by applicable regulatory bodies such as the FDA;
•our failure, or the failure of our third party collaborators, to generate product revenues anticipated by investors;
•disruptions in our clinical or commercial supply chains, including disruptions caused by problems with a bulk rHuPH20 contract manufacturer or a fill and finish manufacturer for any product or product collaboration candidate;
•the sale of additional debt and/or equity securities by us;
•our failure to obtain financing on acceptable terms or at all; or
•a restructuring of our operations.operations;
•an inability to execute our share repurchase program in the time and manner we expect due to market, business, legal or other considerations; or
•a conversion of the Convertible Notes into shares of our common stock.
Future transactions where we raise capital may negatively affect our stock price.
We are currently a “Well-Known Seasoned Issuer” and may file automatic shelf registration statements at any time with the SEC. In February 2017, we filed an automatic shelf registration statement on Form S-3 (Registration No. 333-216315) with the SEC. Sales of substantial amounts of shares of our common stock or other securities under our current or future shelf registration statements could lower the market price of our common stock and impair our ability to raise capital through the sale of equity securities.
22
Anti-takeover provisions in our charter documents, the Indenture and Delaware law may make an acquisition of us more difficult.
Anti-takeover provisions in our charter documents, the Indenture and Delaware law may make an acquisition of us more difficult. First, our boardBoard of directorsDirectors is classified into three classes of directors. Under Delaware law, directors of a corporation with a classified board may be removed only for cause unless the corporation’s certificate of incorporation provides otherwise. Our amended and restated certificate of incorporation, as amended, does not provide otherwise. In addition, our bylaws limit who may call special meetings of stockholders, permitting only stockholders holding at least 50% of our outstanding shares to call a special meeting of stockholders. Our amended and restated certificate of incorporation as amended, does not include a provision for cumulative voting for directors. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more directors. Finally, our bylaws establish procedures, including advance notice procedures, with regard to the nomination of candidates for election as directors and stockholder proposals.
These provisions in our charter documents may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These
provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors other than the candidates nominated by our board of directors.
Further, in connection with our recent Convertible Notes issuance, we entered into an indenture, dated as of November 18, 2019, (“Indenture”) with The Bank of New York Mellon Trust Company, N.A., as trustee. Certain provisions in the Indenture could make it more difficult or more expensive for a third party to acquire us. For example, if a takeover would constitute a fundamental change, holders of the Convertible Notes will have the right to require us to repurchase their Convertible Notes in cash. In addition, if a takeover constitutes a make-whole fundamental change, we may be required to increase the conversion rate for holders who convert their Convertible Notes in connection with such takeover. In either case, and in other cases, our obligations under the Convertible Notes and the Indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders from consummating a merger with, or acquisition of, us.
These provisions may deter an acquisition of us that might otherwise be attractive to stockholders.
Risks Related to Our Industry
Our partners’ products must receive regulatory approval before they can be sold, and compliance with the extensive government regulations is expensive and time consuming and may result in the delay or cancellation of collaboration product sales, introductions or modifications.
Extensive industry regulation has had, and will continue to have, a significant impact on our business. All pharmaceutical companies, including ours, are subject to extensive, complex, costly and evolving regulation by the health regulatory agencies including the FDA (and with respect to controlled drug substances, the U.S. Drug Enforcement Administration (DEA)) and equivalent foreign regulatory agencies and state and local/regional government agencies. The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other domestic and foreign statutes and regulations govern or influence the testing, manufacturing, packaging, labeling, storing, recordkeeping, safety, approval, advertising, promotion, sale and distribution of our products.product and our partners’ products and product candidates. We are dependent on receiving FDA and other governmental approvals, including regulatory approvals in jurisdictions outside the United States, prior to manufacturing, marketing and shipping our products. Consequently, there is always a risk that the FDA or other applicable governmental authorities, including those outside the United States, will not approve our partners’ products or may impose onerous, costly and time-consuming requirements such as additional clinical or animal testing. Regulatory authorities may require that weour partners’ change our studies or conduct additional studies, which may significantly delay or make continued pursuit of approval commercially unattractive.unattractive to our partners. For example, the approval of Baxalta’s HYQVIA BLA was delayed by the FDA until we and Baxalta provided additional preclinical data sufficient to address concerns regarding non-neutralizing antibodies to rHuPH20 that were detected in the registration trial. Although these antibodies have not been associated with any known adverse clinical effects, and the HYQVIA BLA was ultimately approved by the FDA, in September 2014, the FDA or other foreign regulatory agency may, at any time, halt our and our collaborators’ development and commercialization activities due to safety concerns. In addition, even if our product or partners’ products are approved, regulatory agencies may also take post-approval action limiting or revoking our or our partners’ ability to sell ourthese products. Any of these regulatory actions may adversely affect the economic benefit we may derive from our product or our partners’ products and therefore harm our financial condition.
23
Under certain of these regulations, in addition to our partners, we and our contract suppliers and manufacturers are subject to periodic inspection of our or their respective facilities, procedures and operations and/or the testing of products by the FDA, the DEA and other authorities, which conduct periodic inspections to confirm that we and our contract suppliers and manufacturers are in compliance with all applicable regulations. The FDA also conducts pre-approval and post-approval reviews and plant inspections to determine whether our systems, or our contract suppliers’ and manufacturers’ processes, are in compliance with cGMP and other FDA regulations. If our partners, we, or our contract supplier,suppliers, fail these inspections, weour partners may not be able to commercialize our producttheir products in a timely manner without incurring significant additional costs, or at all.
In addition, the FDA imposes a number of complex regulatory requirements on entities that advertise and promote pharmaceuticals including, but not limited to, standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities, and promotional activities involving the internet.Internet.
We may be subject, directly or indirectly, to various broad federal and state healthcare laws. If we are unable to comply, or have not fully complied, with such laws, we could face civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate.
Our business operations and activities may be directly, or indirectly, subject to various broad federal and state healthcare laws, including without limitation, anti-kickback laws, the Foreign Corrupt Practices Act (FCPA), false claims laws, civil monetary penalty laws, data privacy and security laws, tracing and tracking laws, as well as transparency laws regarding payments or other
items of value provided to healthcare providers. These laws may restrict or prohibit a wide range of business activities, including, but not limited to, research, manufacturing, distribution, pricing, discounting, marketing and promotion and other business arrangements. These laws may impact, among other things, our current activities with principal investigators and research subjects, as well as sales, marketing and education programs. Many states have similar healthcare fraud and abuse laws, some of which may be broader in scope and may not be limited to items or services for which payment is made by a government health care program.
Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. While we have adopted a healthcare corporate compliance program, it is possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws. If our operations or activities are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to, without limitation, civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate.
In addition, any sales of products outside the U.S. will also likely subject us to the FCPA and foreign equivalents of the healthcare laws mentioned above, among other foreign laws.
We may be required to initiate or defend against legal proceedings related to intellectual property rights, which may result in substantial expense, delay and/or cessation of the development and commercialization of our products.
We primarily rely on patents to protect our intellectual property rights. The strength of this protection, however, is uncertain. For example, it is not certain that:
•we will be able to obtain patent protection for our products and technologies;
•the scope of any of our issued patents will be sufficient to provide commercially significant exclusivity for our products and technologies;
•others will not independently develop similar or alternative technologies or duplicate our technologies and obtain patent protection before we do; and
•any of our issued patents, or patent pending applications that result in issued patents, will be held valid, enforceable and infringed in the event the patents are asserted against others.
24
We currently own or license several patents and also have pending patent applications applicable to rHuPH20 and other proprietary materials. There can be no assurance that our existing patents, or any patents issued to us as a result of our pending patent applications, will provide a basis for commercially viable products, will provide us with any competitive advantages, or will not face third party challenges or be the subject of further proceedings limiting their scope or enforceability. Any weaknesses or limitations in our patent portfolio could have a material adverse effect on our business and financial condition. In addition, if any of our pending patent applications do not result in issued patents, or result in issued patents with narrow or limited claims, this could result in us having no or limited protection against generic or biosimilar competition against our product candidates which would have a material adverse effect on our business and financial condition.
We may become involved in interference proceedings in the U.S. Patent and Trademark Office, or other proceedings in other jurisdictions, to determine the priority, validity or enforceability of our patents. In addition, costly litigation could be necessary to protect our patent position.
We also rely on trademarks to protect the names of our products (e.g. Hylenexrecombinant). We may not be able to obtain trademark protection for any proposed product names we select. In addition, product names for pharmaceutical products must be approved by health regulatory authorities such as the FDA in addition to meeting the legal standards required for trademark protection and product names we propose may not be timely approved by regulatory agencies which may delay product launch. In addition, our trademarks may be challenged by others. If we enforce our trademarks against third parties, such enforcement proceedings may be expensive.
We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect with confidentiality agreements with employees, consultants and others with whom we discuss our business. Disputes may
arise concerning the ownership of intellectual property or the applicability or enforceability of these agreements, and we might not be able to resolve these disputes in our favor.
In addition to protecting our own intellectual property rights, third parties may assert patent, trademark or copyright infringement or other intellectual property claims against us. If we become involved in any intellectual property litigation, we may be required to pay substantial damages, including but not limited to treble damages, attorneys’ fees and costs, for past infringement if it is ultimately determined that our products infringe a third party’s intellectual property rights. Even if infringement claims against us are without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from other business concerns. Further, we may be stopped from developing, manufacturing or selling our products until we obtain a license from the owner of the relevant technology or other intellectual property rights. If such a license is available at all, it may require us to pay substantial royalties or other fees.
Patent protection for protein-based therapeutic products and other biotechnology inventions is subject to a great deal of uncertainty, and if patent laws or the interpretation of patent laws change, our competitors may be able to develop and commercialize products based on our discoveries.
Patent protection for protein-based therapeutic products is highly uncertain and involves complex legal and factual questions. In recent years, there have been significant changes in patent law, including the legal standards that govern the scope of protein and biotechnology patents. Standards for patentability of full-length and partial genes, and their corresponding proteins, are changing. Recent court decisions have made it more difficult to obtain patents, by making it more difficult to satisfy the patentable subject matter requirement and the requirement of non-obviousness, have decreased the availability of injunctions against infringers, and have increased the likelihood of challenging the validity of a patent through a declaratory judgment action. Taken together, these decisions could make it more difficult and costly for us to obtain, license and enforce our patents. In addition, the Leahy-Smith America Invents Act (HR 1249) was signed into law in September 2011, which among other changes to the U.S. patent laws, changes patent priority from “first to invent” to “first to file,” implements a post-grant opposition system for patents and provides for a prior user defense to infringement. These judicial and legislative changes have introduced significant uncertainty in the patent law landscape and may potentially negatively impact our ability to procure, maintain and enforce patents to provide exclusivity for our products.
There also have been, and continue to be, policy discussions concerning the scope of patent protection awarded to biotechnology inventions. Social and political opposition to biotechnology patents may lead to narrower patent protection within the biotechnology industry. Social and political opposition to patents on genes and proteins and recent court decisions concerning patentability of isolated genes may lead to narrower patent protection, or narrower claim interpretation, for isolated genes, their corresponding proteins and inventions related to their use, formulation and manufacture. Patent protection relating to biotechnology products is also subject to a great deal of uncertainty outside the U.S., and patent laws are evolving and undergoing revision in many countries. Changes in, or different interpretations of, patent laws worldwide may result in our inability to obtain or enforce patents, and may allow others to use our discoveries to develop and commercialize competitive products, which would impair our business.
25
If third party reimbursement and customer contracts are not available, Hylenex and our partners’ products may not be accepted in the market.market resulting in commercial performance below that which was expected or projected.
Our ability to earn sufficient returns on Hylenex and our partners’ ability to earn sufficient returns on their products will depend in part on the extent to which reimbursement for ourthese products and related treatments will be available from government health administration authorities, private health insurers, managed care organizations and other healthcare providers.
Third-party payors are increasingly attempting to limit both the coverage and the level of reimbursement of new drug products to contain costs. Consequently, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Third party payors may not establish adequate levels of reimbursement for the products that we and our partners commercialize, which could limit their market acceptance and result in a material adverse effect on our revenues and financial condition.
Customer contracts, such as with group purchasing organizations and hospital formularies, will often not offer contract or formulary status without either the lowest price or substantial proven clinical differentiation. If, for example, Hylenex is compared to animal-derived hyaluronidases by these entities, it is possible that neither of these conditions will be met, which could limit market acceptance and result in a material adverse effect on our revenues and financial condition.
The rising cost of healthcare and related pharmaceutical product pricing has led to cost containment pressures from third-party payers as well as changes in federal coverage and reimbursement policies and practices that could cause us and our partners to sell our products at lower prices, and impact access to our and our partners’ products, resulting in less revenue to us.
Any of theour proprietary or collaboration products that have been, or in the future are, approved by the FDA may be purchased or reimbursed by state and federal government authorities, private health insurers and other organizations, such as health maintenance organizations and managed care organizations. Such third party payors increasingly challenge pharmaceutical product pricing. The trend toward managed healthcare in the U.S., the growth of such organizations, and various legislative proposals and enactments to reform healthcare and government insurance programs, including the Medicare Prescription Drug Modernization Act of 2003 and the Affordable Care Act of 2010 (ACA), could significantly influence the manner in which pharmaceutical products are prescribed and purchased, resulting in lower prices and/or a reduction in demand. Such cost containment measures and healthcare reforms could adversely affect our ability to sell our product and our partners’ ability to sell their products.
In March 2010, the U.S. adopted the Patient Protection and Affordable Care Act,, our business may be impacted by changes in federal reimbursement policy resulting from executive actions, federal regulations, or federal demonstration projects.
The federal administration and/or agencies, such as amended by the Health Care and Education Reconciliation Act (the PPACA). This law substantially changes the way healthcare is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The PPACA containsCMS, have announced a number of provisionsdemonstration projects, recommendations and proposals to implement various elements described in the drug pricing blueprint. CMS, the federal agency responsible for administering Medicare and overseeing state Medicaid programs and Health Insurance Marketplaces, has substantial power to implement policy changes or demonstration projects that can quickly and significantly affect how drugs, including our products, are expectedcovered and reimbursed. For example, in November 2020, former President Trump announced the interim final rule to impact our businessimplement the Most Favored Nations drug pricing model seeking to tie Medicare payment rates to an international index price. This final rule is currently subject to a preliminary injunction. Additionally, a number of Congressional committees have also held hearings and operations, in some cases in ways we cannot currently predict. Changes thatevaluated proposed legislation on drug pricing and payment policy which may affect our business include those governing enrollment in federal healthcare programs, reimbursement changes, fraud and abuse and enforcement. These changes will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program.
In this dynamic environment, we will alsoare unable to predict which or how many federal policy, legislative or regulatory changes may ultimately be required to provide a discount on branded prescription drugs dispensed to beneficiaries under this prescription drug program. Recently, Congress andenacted. To the current administration have proposed and taken various steps to revise, repealextent federal government initiatives decrease or delay implementationmodify the coverage or reimbursement available for our or our partners’ products, limit or impact our decisions regarding the pricing of various aspectsbiopharmaceutical products or otherwise reduce the use of the Healthcare Reform Act. We expect that the PPACA, as it may be amended, and other healthcare reform measures that may be adopted in the futureour or our partners’ U.S. products, such actions could have a material adverse effect on our industry generallybusiness and on our ability to maintain or increase our product sales or successfully commercialize our product candidates and could limit or eliminate our future spending on development projects.results of operations.
26
Furthermore, individual states are considering proposed legislation and have become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third party payors or other restrictions could negatively and materially impact our revenues and financial condition. We anticipate that we will encounter similar regulatory and legislative issues in most other countries outside the U.S.
In addition, private payers in the US, including insurers, pharmacy benefit managers (PBMs), integrated healthcare delivery systems, and group purchasing organizations, are continuously seeking ways to reduce drug costs. Many payers have developed and continue to develop ways to shift a greater portion of drug costs to patients through, for example, limited benefit plan designs, high deductible plans and higher co-pay or coinsurance obligations. Consolidation in the payer space has also resulted in a few large PBMs and insurers which place greater pressure on pricing and utilization negotiations for our and our partners’ products in the U.S., increasing the need for higher discounts and rebates and limiting patient access and utilization. Ultimately, additional discounts, rebates and other price reductions, fees, coverage and plan changes, or exclusions imposed by these private payers on our and our partners’ products could have an adverse event on product sales, our business and results of operations.
We also face risks relating to the reporting of pricing data that affects the reimbursement of and discounts provided for our products. Government price reporting regulations are complex and may require a manufacturer to update certain previously submitted data. If our submitted pricing data are incorrect, we may become subject to substantial fines and penalties or other government enforcement actions, which could have a material adverse effect on our business and results of operations. In addition, as a result of restating previously reported price data, we also may be required to pay additional rebates and provide additional discounts.
We face intense competition and rapid technological change that could result in the development of products by others that are competitive with or superior to our proprietary and collaboration products, including those under development.
Our proprietary and collaboration products have numerous competitors in the U.S. and abroad including, among others, major pharmaceutical and specialized biotechnology firms, universities and other research institutions that have developed competing products. Many of these competitors have substantially more resources and product development, manufacturing and marketing experience and capabilities than we do. The competitors for Hylenexrecombinant include, but are not limited to, Valeant Pharmaceuticals International, Inc.’s FDA-approved product, Vitrase®, an ovine (ram) hyaluronidase, and Amphastar Pharmaceuticals, Inc.’s product, Amphadase®, a bovine (bull) hyaluronidase. For our PEGPH20 product candidate and our ENHANZE technology, such competitors may include major pharmaceutical and specialized biotechnology firms. These competitors may develop technologies and products that are more effective, safer, or less costly than our current or future proprietary and collaboration products and product candidates or that could render our and our partners’ products, technologies and product candidates obsolete or noncompetitive. Many
General Risks
Our inability to attract, hire and retain key management and scientific personnel could negatively affect our business.
Our success depends on the performance of these competitors havekey management and scientific employees with relevant experience. We depend substantially on our ability to hire, train, motivate and retain high quality personnel, especially our scientists and management team. If we are unable to identify, hire and retain qualified personnel, our ability to support current and future alliances with strategic collaborators could be adversely impacted. Our use of domestic and international third-party contractors, consultants and staffing agencies also subjects us to potential co-employment liability claims.
27
Furthermore, if we were to lose key management personnel, we may lose some portion of our institutional knowledge and technical know-how, potentially causing a disruption or delay in one or more resourcesof our partnered development programs until adequate replacement personnel could be hired and product development, manufacturing and marketing experience and capabilities than we do.trained. In addition, manywe do not have key person life insurance policies on the lives of any of our competitors have significantly greater experience than we do in undertaking preclinical testing and clinical trialsemployees which would help cover the cost of pharmaceutical product candidates and obtaining FDAassociated with the loss of key employees.
Our operations might be interrupted by the occurrence of a natural disaster or other catastrophic event.
Our operations, including laboratories, offices and other research facilities, are located in multiple buildings in San Diego, California. We depend on our facilities and on our collaborators, contractors and vendors for the continued operation of our business. Natural disasters or other catastrophic events, pandemics, interruptions in the supply of natural resources, political and governmental changes, wildfires and other fires, floods, explosions, actions of animal rights activists, earthquakes and civil unrest could disrupt our operations or those of our collaborators, contractors and vendors. Even though we believe we carry commercially reasonable business interruption and liability insurance, and our contractors may carry liability insurance that protect us in certain events, we may suffer losses as a result of business interruptions that exceed the coverage available under our and our contractors’ insurance policies or for which we or our contractors do not have coverage. Any natural disaster or catastrophic event could have a significant negative impact on our operations and financial results. Moreover, any such event could delay our partners’ research and development programs.
Cyberattacks, security breaches or system breakdowns may disrupt our operations and harm our operating results and reputation.
We and our partners are subject to increasingly sophisticated attempts to gain unauthorized access to our information technology storage and access systems and are devoting resources to protect against such intrusion. Cyberattacks could render us or our partners unable to utilize key systems or access important data needed to operate our business. The wrongful use, theft, deliberate sabotage or any other type of security breach with respect to any of our or any of our vendors and partners’ information technology storage and access systems could result in the breakdown or other service interruption, or the disruption of our ability to use such systems or disclosure or dissemination of proprietary and confidential information that is electronically stored, including intellectual property, trade secrets, financial information, regulatory approvalsinformation, strategic plans, sales trends and forecasts, litigation materials or personal information belonging to us, our staff, our patients, customers and/or other business partners which could result in a material adverse impact on our business, operating results and financial condition. We continue to invest in monitoring, and other security and data recovery measures to protect our critical and sensitive data and systems. However, these may not be adequate to prevent or fully recover systems or data from all breakdowns, service interruptions, attacks or breaches of productsour systems. Furthermore, any physical break-in or trespass of our facilities could result in the misappropriation, theft, sabotage or any other type of security breach with respect to our proprietary and therapies for use in healthcare.confidential information, including research or clinical data or damage to our research and development equipment and assets. Such adverse effects could be material and irrevocable to our business, operating results, financial condition and reputation.
Item 1B.Unresolved Staff Comments
None.
Item 2.Properties
Our administrative offices and research facilities are currently located in San Diego, California. We leaseDuring 2020 we leased an aggregate of approximately 80,00050,000 square feet of office and research space. In addition, we have an office in South San Francisco, California, where we lease approximately 10,000 square feet of office space. We believe our facilities are adequate for our current and near-term needs, and, if necessary, we will be able to locate additional facilities as needed.needs.
Item 3.Legal Proceedings
From time to time, we may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of our business. Any of these claims could subject us to costly legal expenses and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position.
Item 4.Mine Safety Disclosures
Not applicable.
28
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the symbol “HALO.” As of February 14, 2019,17, 2021, we had approximately 18,25052,081 stockholders of record and beneficial owners of our common stock.
Dividends
We have never declared or paid any dividends on our common stock. We currently intend to retain available cash for funding operations;operations and stock repurchases; therefore, we do not expect to pay any dividends on our common stock in the foreseeable future. In addition, the provisions of our borrowing arrangements limit, among other things, our ability to pay dividends and make certain other payments. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contract restrictions, business prospects and other factors our board of directors may deem relevant.
Purchase of Equity Securities by the Issuer
In November, 2019, we announced that the Board of Directors authorized the initiation of a capital return program to repurchase up to $550.0 million of outstanding common stock over a three-year period. During 2019, we repurchased approximately 11.1 million shares of common stock for $200.0 million at an average price of $18.03.
During 2020, we repurchased 6.5 million shares of common stock for $150.0 million at an average price of $23.05. The shares were purchased through open market transactions and through an Accelerated Share Repurchase (ASR) agreement with Bank of America in December 2020, for which we repurchased $21.7 million of common stock and received 0.5 million shares. We retired the repurchased shares and they resumed the status of authorized and unissued shares.
The table below sets forth information regarding repurchases during the three months ended December 31, 2020:
| Period | Total Number of Shares Purchased | Weighted-Average Price paid per share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares That May Yet Be purchased under the Programs | ||||||||||||||||||||||
| October 1, 2020 through October 31, 2020 | 531,674 | $ | 27.69 | 531.674 | $ | 222,798 | ||||||||||||||||||||
| November 1, 2020 through November 30, 2020 | 43,247 | $ | 27.79 | 43.247 | $ | 221,595 | ||||||||||||||||||||
December 1, 2020 through December 31, 2020 (1) | 520,445 | $ | 41.71 | 520.445 | $ | 199,885 | ||||||||||||||||||||
| Total | 1,095,366 | 1,095.366 | ||||||||||||||||||||||||
(1) These shares were repurchased through the December 2020 ASR.
29
Stock Performance Graph and Cumulative Total Return
Notwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information relating to the price performance of our common stock shall not be deemed to be “filed” with the SEC or to be “soliciting material” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and it shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.
The graph below compares Halozyme Therapeutics, Inc.’s cumulative five-year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite Index and the NASDAQ Biotechnology Index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 20132015 to December 31, 2018.2020. The historical stock price performance included in this graph is not necessarily indicative of future stock price performance.
| 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | |||||||||||||||
| Halozyme Therapeutics, Inc. | $100 | $57 | $117 | $84 | $102 | $246 | ||||||||||||||
| NASDAQ Composite | $100 | $109 | $141 | $137 | $187 | $272 | ||||||||||||||
| NASDAQ Biotechnology | $100 | $79 | $96 | $87 | $109 | $138 | ||||||||||||||
30
| 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | |
| Halozyme Therapeutics, Inc. | $100 | $64 | $116 | $66 | $135 | $98 |
| NASDAQ Composite | $100 | $115 | $123 | $134 | $173 | $158 |
| NASDAQ Biotechnology | $100 | $134 | $150 | $118 | $144 | $140 |
Item 6.Selected Financial Data
The selected consolidated financial data set forth below as of December 31, 20182020 and 2017,2019, and for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, are derived from our audited consolidated financial statements included elsewhere in this report. This information should be read in conjunction with those consolidated financial statements, the notes thereto, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data set forth below as of December 31, 2016, 20152018, 2017 and 2014,2016, and for the years ended December 31, 20152017 and 2014,2016, are derived from our audited consolidated financial statements that are contained in reports previously filed with the SEC, not included herein.
Summary Financial Information
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| Statement of Operations Data: | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
| (in thousands, except for per share amounts) | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 267,594 | $ | 195,992 | $ | 151,862 | $ | 316,613 | $ | 146,691 | ||||||||||||||||||||||
| Net income (loss) | $ | 129,085 | $ | (72,240) | $ | (80,330) | $ | 62,971 | $ | (103,023) | ||||||||||||||||||||||
| Net income (loss) per share, basic | $ | 0.95 | $ | (0.50) | $ | (0.56) | $ | 0.46 | $ | (0.81) | ||||||||||||||||||||||
| Net income (loss) per share, diluted | $ | 0.91 | $ | (0.50) | $ | (0.56) | $ | 0.45 | $ | (0.81) | ||||||||||||||||||||||
| Shares used in computing net income (loss) per share, basic | 136,206 | 144,329 | 143,599 | 136,419 | 127,964 | |||||||||||||||||||||||||||
| Shares used in computing net income (loss) per share, diluted | 141,463 | 144,329 | 143,599 | 139,068 | 127,964 | |||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| Statement of Operations Data: | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| (in thousands, except for per share amounts) | ||||||||||||||||||||
| Total revenues | $ | 151,862 | $ | 316,613 | $ | 146,691 | $ | 135,057 | $ | 75,334 | ||||||||||
| Net (loss) income | $ | (80,330 | ) | $ | 62,971 | $ | (103,023 | ) | $ | (32,231 | ) | $ | (68,375 | ) | ||||||
| Net (loss) income per share, basic | $ | (0.56 | ) | $ | 0.46 | $ | (0.81 | ) | $ | (0.25 | ) | $ | (0.56 | ) | ||||||
| Net (loss) income per share, diluted | $ | (0.56 | ) | $ | 0.45 | $ | (0.81 | ) | $ | (0.25 | ) | $ | (0.56 | ) | ||||||
| Shares used in computing net (loss) income per share, basic | 143,599 | 136,419 | 127,964 | 126,704 | 122,690 | |||||||||||||||
| Shares used in computing net (loss) income per share, diluted | 143,599 | 139,068 | 127,964 | 126,704 | 122,690 | |||||||||||||||
| As of December 31, | ||||||||||||||||||||||||||||||||
| Balance Sheet Data: | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents and available-for-sale marketable securities | $ | 368,013 | $ | 421,262 | $ | 354,526 | $ | 469,214 | $ | 204,981 | ||||||||||||||||||||||
| Working capital | $ | 133,379 | $ | 457,799 | $ | 278,488 | $ | 379,044 | $ | 201,947 | ||||||||||||||||||||||
| Total assets | $ | 579,924 | $ | 565,874 | $ | 440,248 | $ | 519,945 | $ | 261,515 | ||||||||||||||||||||||
| Deferred revenue | $ | 5,772 | $ | 5,259 | $ | 9,255 | $ | 60,865 | $ | 44,618 | ||||||||||||||||||||||
| Long-term debt, net | $ | — | $ | 383,045 | $ | 34,874 | $ | 125,140 | $ | 199,228 | ||||||||||||||||||||||
| Total liabilities | $ | 428,877 | $ | 474,109 | $ | 191,361 | $ | 311,579 | $ | 293,996 | ||||||||||||||||||||||
| Stockholders’ equity (deficit) | $ | 151,047 | $ | 91,765 | $ | 248,887 | $ | 208,366 | $ | (32,481) | ||||||||||||||||||||||
31
| As of December 31, | ||||||||||||||||||||
| Balance Sheet Data: | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Cash and cash equivalents and available-for-sale marketable securities | $ | 354,526 | $ | 469,214 | $ | 204,981 | $ | 108,339 | $ | 135,623 | ||||||||||
| Working capital | $ | 278,488 | $ | 379,044 | $ | 201,947 | $ | 109,315 | $ | 136,990 | ||||||||||
| Total assets | $ | 440,248 | $ | 519,945 | $ | 261,515 | $ | 181,789 | $ | 165,977 | ||||||||||
| Deferred revenue | $ | 9,255 | $ | 60,865 | $ | 44,618 | $ | 53,223 | $ | 54,634 | ||||||||||
| Long-term debt, net | $ | 34,874 | $ | 125,140 | $ | 199,228 | $ | 27,971 | $ | 49,860 | ||||||||||
| Total liabilities | $ | 191,361 | $ | 311,579 | $ | 293,996 | $ | 138,790 | $ | 124,625 | ||||||||||
| Stockholders’ equity (deficit) | $ | 248,887 | $ | 208,366 | $ | (32,481 | ) | $ | 42,999 | $ | 41,352 | |||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the Part I, Item 1A, Risks Factors, and elsewhere in this Annual Report. References to “Notes” are Notes included in our Notes to Consolidated Financial Statements.
Overview
Halozyme Therapeutics, Inc. is a biotechnologybiopharma technology platform company focused on developingthat provides innovative and commercializing novel oncology therapies.disruptive solutions with the goal of improving patient experience and outcomes. Our proprietary enzymes areenzyme, rHuPH20, is used to facilitate the delivery of injected drugs and fluids, potentially enhancing the efficacy and the convenience of other drugs or can be used to alter tissue structures for potential clinical benefit.fluids. We exploit our technology and expertise using a two pillar strategy that we believe enables us to manage risk and cost by: (1) developing our own proprietary products in therapeutic areas with significant unmet medical needs, with a focus on oncology, and (2) licensinglicense our technology to biopharmaceutical companies to collaboratively develop products that combine our ENHANZE® drug delivery technology with the collaborators’ proprietary compounds.
We refer to the application of rHuPH20 to facilitate the delivery of other drugs or fluids as our ENHANZE® Drug Delivery Technology (ENHANZE) drug delivery technology (“ENHANZE”). We license 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. In the development of proprietary intravenous (IV) drugs combined with our ENHANZE technology, data have been generated supporting the potential for ENHANZE to reduce treatment burden, as a result of shorter duration of subcutaneous (SC) administration. ENHANZE may enable fixed-dose SC dosing compared to weight-based dosing required for IV administration, and potentially allow for lower rates of infusion related reactions. ENHANZE may enable more flexible treatment options such as home administration by a healthcare professional or potentially the patient. Lastly, certain proprietary drugs co-formulated with ENHANZE have been granted additional exclusivity, extending the patent life of the product beyond the one of the proprietary IV drug.
We currently have ENHANZE collaborations with F. Hoffmann-La Roche, Ltd. and Hoffmann-La Roche, Inc. (Roche), Baxalta US Inc. and Baxalta GmbH (now members of the Takeda group of companies, following the acquisition of Shire plc by Takeda Pharmaceutical Company Limited in January 2019) (Baxalta), Pfizer Inc. (Pfizer), Janssen Biotech, Inc. (Janssen), AbbVie, Inc. (AbbVie), Eli Lilly and Company (Lilly), Bristol-Myers Squibb Company (BMS), Alexion Pharma Holding (Alexion) and, ARGENX BVBA (argenx).We and Horizon Therapeutics plc. (Horizon). We receive royalties from twothree of these collaborations, including royalties from sales of one product from the Baxalta collaboration, and twothree products from the Roche collaboration and one product from Janssen collaboration. Future potential revenues from royalties and fees from ENHANZE collaborations and the sales and/or royalties of our approved products product candidates, and ENHANZE collaborations will depend on the ability of Halozyme and our collaborators to develop, manufacture, secure and maintain regulatory approvals for approved products and product candidates and commercialize product candidates.
32
Our 20182020 and recent key events are as follows:
•In February 2019,January 2021, we entered into an agreementannounced that Janssen received accelerated approval from the FDA for DARZALEX FASPRO in combination with argenxbortezomib, cyclophosphamide and dexamethasone (D-VCd) for the righttreatment of adult patients with newly diagnosed light chain (AL) amyloidosis. AL amyloidosis is a rare and potentially fatal disease that develops when plasma cells in the bone marrow generate abnormal light chains, which form amyloid deposits in vital organs and lead to developorgan deterioration. There were no approved therapies for these patients prior to Darzalex FASPRO.
•In December 2020, Janssen achieved the first sales milestone for Darzalex FASPRO/Darxalex SC, triggering a payment of $15.0 million.
•In November 2020, Janssen initiated a Phase 1 study of amivantamab using ENHANZE technology.
•In November 2020, we announced that Janssen submitted regulatory applications to the FDA and commercializeEMA seeking approval of the DARZALEX FASPRO in the U.S. and as DARZALEX SC in the European Union (EU) in combination with pomalidomide and dexamethasone (D-Pd) for the treatment of patients with relapsed or refractory multiple myeloma who have received at least one exclusive target,prior line of therapy.
•In November 2020, Janssen announced it submitted a Type II variation application to the EMA seeking European approval for the DARZALEX SC to be used in the treatment of patients with AL amyloidosis.
•In August 2020, Janssen announced that Health Canada approved DARZALEX SC in four regimens across five indications in patients with multiple myeloma, most notably newly diagnosed, transplant-ineligible patients as well as relapsed or refractory patients.
•In June 2020, we announced that Janssen received European marketing authorization and launched the commercial sale of DARZALEX SC in the European Union, triggering a $10.0 million milestone payment. The approval applies to all current daratumumab indications in frontline and relapsed/refractory settings.
•In May 2020, we announced that Janssen received US FDA approval of DARZALEX FASPRO in four of six regimens approved for the intravenous form in multiple myeloma patients, including newly diagnosed, transplant-ineligible patients as well as relapsed or refractory patients and launched the commercial sale, triggering a $15 million milestone payment.
•In April 2020, we announced the submission of a New Drug Application (NDA) to Japan's Ministry of Health, Labour and Welfare (MHLW) by Janssen seeking approval of a new SC formulation of daratumumab, an intravenous (IV) treatment approved for patients with multiple myeloma.
Argenx
•In January 2021, argenx initiated a Phase 3 study of ARGX-113 utilizing ENHANZE in pemphigus vulgaris (PV), a rare autoimmune disease that causes painful blisters on the skin and mucous membranes.
•In December 2020, argenx initiated a Phase 3 study of ARGX-113 using ENHANZE technology for patients with immune thrombocytopenia (ITP), an immune disorder in which the blood does not clot normally, triggering a $15.0 million payment.
•In October 2020, we announced that argenx expanded the existing global collaboration and license agreement that was signed in February 2019. Under the newly announced expansion, argenx gained the ability to exclusively access our ENHANZE technology for three additional targets upon nomination, for a total of up to six targets. To date, argenx has nominated two targets including the human neonatal Fc receptor FcRn which includes argenx's lead asset efgartigimod (ARGX-113), and an option to select two additional targets using our ENHANZE technology for an upfront payment of $30.0 million. We will receive payments of $10.0 million per target for future target nominations and potential milestone payments of up to $160.0 million per target, subject to the achievement of specific development, regulatory and sales-based milestones. We will receive mid-single digit royalties on sales of commercialized products.complement component C2.
Roche
•In December 2018,2020, Roche initiated a Ph1b/2Phase 3 study start in patients with non-small cell lung cancer for TECENTRIQ (atezolizumab) in combination with ourTecentriq using ENHANZE technology, triggering a $5.0$17.0 million milestone payment.
33
•In October 2018,December 2020, we entered into an agreementannounced that the European Commission approved Roche's Phesgo, a fixed-dose combination of Perjeta (pertuzumab) and Herceptin(trastuzumab) with RocheENHANZE technology, administered by subcutaneous injection for the right to developtreatment of patients with early and commercialize one additional exclusive target and an option to select two additional targets within four years using our ENHANZE technology for an upfront payment of $25.0 million. We will receive potential milestone payments of up to $160.0 million to $165.0 million per target, subject to the achievement of specific development, regulatory and sales-based milestones. We will also receive mid-single digit royalties on sales of commercialized products.
•In September 2018,June 2020, we announced that Roche received FDA approval from Health Canada for a subcutaneous formulation of Herceptin (trastuzumab)Phesgo utilizing ENHANZE technology for the treatment of patients with HER2-positive breast cancer. This is
Horizon
•In November 2020, we announced a co-formulation with ourglobal collaboration and license agreement that gives Horizon exclusive access to ENHANZE technology.
Baxalta
•In September 2020, Takeda announced that the EMA approved a label update for HYQVIA broadening its use and making it the first and only facilitated subcutaneous immunoglobulin replacement therapy in adults, adolescents and children with ENHANZE technology,an expanded range of secondary immunodeficiencies (SID).
BMS
•In June 2020, BMS selected 3 targets on an exclusive basis and exercised their option to convert a co-exclusive license to an exclusive license, triggering a $5.0 million milestone payment. BMS has selected eight targets on an exclusive basis to date.
Corporate
•In July 2018, we announced the FDA accepted aMarch 2020, Hylenex, which was approved in an NDA, was deemed to be an approved Biologics License Application (BLA) from Genentech, a memberunder section 351(a) of the Roche Group, for a subcutaneous version of Herceptin in its FDA-approved breast cancer indications. This is the same co-formulation with ENHANZE technology marketed under the Herceptin SC brand in many countries outside the U.S.
•During 2020 we repurchased 6.5 million shares of common stock in HER2-negative metastatic breast cancer closed enrollment. Asopen market and accelerated share repurchases for $150.0 million at an average price per share of $23.05. Since the inception of our capital return program in November 2019 to repurchase up to $550.0 million of outstanding common stock over a resultthree-year period, we have repurchased a total of 17.6 million shares for $350.0 million at an Eisai portfolio decision, no further clinical development is planned onaverage price per share of $19.88 as of December 31, 2020.
34
Results of Operations
Comparison of Years Ended December 31, 2018, 20172020 and 20162019
Royalties– Royalty revenue was $79.0$88.6 million in 20182020 compared to $63.5$69.9 million in 2017 and $51.0 million in 2016.2019. The increase was mainly driven by highersales of DARZALEX FASPRO in the U.S and EU by Janssen due to the product launch in the second quarter of 2020, partially offset by slightly lower sales of Herceptin SC and MabThera SC (RITUXAN HYCELA™ in the U.S.) by Roche and of HYQVIA by Baxalta.Roche. In general, we expect royalty revenue to increasegrow as a result of our recent ENHANZE partner product launches, offsetting the ongoing impact from biosimilars in future periods reflecting expected increases in sales of collaboration products, although there may be periods with flat or declining royalty revenue as sales of products under collaborations vary.Europe related to our mature ENHANZE partner products.
Product Sales, Net– Product sales, net were as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | Dollar Change | Percentage Change | ||||||||||||||||||||
| Sales of bulk rHuPH20 | $ | 38,237 | $ | 48,285 | $ | (10,048) | (21) | % | |||||||||||||||
| Sales of ENHANZE drug product | 719 | 768 | (49) | (6) | % | ||||||||||||||||||
| Sales of Hylenex | 17,031 | 16,995 | 36 | — | % | ||||||||||||||||||
| Total product sales, net | $ | 55,987 | $ | 66,048 | $ | (10,061) | (15) | % | |||||||||||||||
| 2018 | Change | 2017 | Change | 2016 | ||||||||||||||
Sales of Hylenex | $ | 15,045 | (1 | )% | $ | 15,150 | (6 | )% | $ | 16,157 | ||||||||
| Sales of bulk rHuPH20: | ||||||||||||||||||
| Roche | 6,767 | (70 | )% | 22,325 | (10 | )% | 24,786 | |||||||||||
| Janssen | 2,510 | n/a | — | n/a | — | |||||||||||||
| Baxalta | 1,820 | (84 | )% | 11,717 | 5 | % | 11,117 | |||||||||||
| Other | 1,632 | 36 | % | 1,204 | (10 | )% | 1,332 | |||||||||||
| Sales of ENHANZE drug product | 460 | n/a | — | n/a | — | |||||||||||||
| Total product sales, net | $ | 28,234 | (44 | )% | $ | 50,396 | (6 | )% | $ | 53,392 | ||||||||
Product sales, net decreasedwas lower by $10.1 million in 20182020 compared to 2017, primarily2019, due to a decrease in thelower sales of bulk rHuPH20 to Roche and Baxalta, partiallyoffset by an increaseas a result of a one-off large partner order in sales of bulk rHuPH20 to Janssen. As previously anticipated, Roche and Baxalta are depleting their existing inventory of rHuPH20 ahead of planned transitions to new manufacturing facilities, which resulted in lower bulk rHuPH20 product sales during 2018. Product sales, net decreased in 2017 compared to 2016, mainly due to decreases in the sales of bulk rHuPH20 to Roche and Hylenex, partially offset by an increase in sales of bulk rHuPH20 to Baxalta.2019. We expect that product sales of bulk rHuPH20 and ENHANZE drug product will fluctuate in future periods based on the needs of our collaborators. We expect that future productIn March 2020, the Surgeon General advised hospitals to cancel elective surgeries due to COVID-19. Hylenex is used in cataract surgery and other ophthalmologic surgeries, and therefore the advisory resulted in a decrease in sales of Hylenex to be flat or declining as we experience competition for market share. in the second quarter of 2020. Most states resumed elective surgeries in April and May of 2020 which supported an increase in sales in the second half of 2020.
Revenues Under Collaborative Agreements – Revenues under collaborative agreements were as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Dollar Change | Percentage Change | ||||||||||||||||||||||||||||||||||||||
| Upfront license fees, license fees for the election of additional targets, event-based payments, license maintenance fees and amortization of deferred upfront and other license fees: | 2018 | Change | 2017 | Change | 2016 | Upfront license fees, license fees for the election of additional targets, event-based payments, license maintenance fees and amortization of deferred upfront and other license fees: | |||||||||||||||||||||||||||||||||||
| Janssen | Janssen | $ | 42,000 | $ | — | $ | 42,000 | 100 | % | ||||||||||||||||||||||||||||||||
| Horizon | Horizon | 30,000 | — | 30,000 | 100 | % | |||||||||||||||||||||||||||||||||||
| Roche | $ | 31,000 | (7 | )% | $ | 33,330 | 902 | % | $ | 3,328 | Roche | 17,000 | 10,000 | 7,000 | 70 | % | |||||||||||||||||||||||||
| argenx | argenx | 20,000 | 45,000 | (25,000) | (56) | % | |||||||||||||||||||||||||||||||||||
| BMS | 6,336 | (94 | )% | 101,400 | n/a | — | BMS | 12,264 | — | 12,264 | 100 | % | |||||||||||||||||||||||||||||
| Alexion | 5,000 | (88 | )% | 40,000 | n/a | — | |||||||||||||||||||||||||||||||||||
| Other | — | (100 | )% | 15,810 | (10 | %) | 17,515 | Other | 500 | 3,500 | (3,000) | (86) | % | ||||||||||||||||||||||||||||
| 42,336 | (78 | )% | 190,540 | 814 | % | 20,843 | |||||||||||||||||||||||||||||||||||
| Subtotal | Subtotal | 121,764 | 58,500 | 63,264 | 108 | % | |||||||||||||||||||||||||||||||||||
| Reimbursements for research and development services: | Reimbursements for research and development services: | 1,247 | 1,545 | (298) | (19) | % | |||||||||||||||||||||||||||||||||||
| Roche | 1,369 | (80 | )% | 6,900 | (63 | %) | 18,700 | ||||||||||||||||||||||||||||||||||
| Other | 942 | (82 | )% | 5,270 | 90 | % | 2,772 | ||||||||||||||||||||||||||||||||||
| 2,311 | (81 | )% | 12,170 | (43 | %) | 21,472 | |||||||||||||||||||||||||||||||||||
| Total revenues under collaborative agreements | $ | 44,647 | (78 | )% | $ | 202,710 | 379 | % | $ | 42,315 | Total revenues under collaborative agreements | $ | 123,011 | $ | 60,045 | $ | 62,966 | 105 | % | ||||||||||||||||||||||
Revenue from license fees decreasedincreased $63.3 million in 2018,2020, compared to 20172019 mainly due to $41.0the recognition of $121.3 million related to the Janssen, Horizon, Roche, argenx and BMS collaborations in upfront license fees and milestone revenue for the Roche, BMS and Alexion Collaborations recognized in 2018,current year, as compared to $186.4$55.0 million in upfront license fees
35
our abilitiesability to obtain new collaborative agreements.
Cost of Product Sales–Cost of product sales were $10.1$43.4 million in 20182020 compared to $31.2$45.5 million in 2017 and $33.2 million in 2016.2019. The decrease of $21.1$2.1 million in cost of product sales in 2018 compared to 2017 and the decrease of $2.0 million in 2017 compared to 2016 werewas mainly due to a decrease in sales of bulk rHuPH20 to Roche and Baxalta. There were $2.6 millionJanssen, partially offset by an increase in costssales of bulk rHuPH20 to Baxalta and ENHANZE drug product sales for the year ended December 31, 2018 that were previously expensed as research and development.Roche.
Research and Development– Research and development expenses consist of external costs, salaries and benefits and allocation of facilities and other overhead expenses related to research manufacturing, clinical trials, preclinical and regulatory activities. Research and development expenses incurred were as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||
| 2018 | Change | 2017 | Change | 2016 | 2020 | 2019 | Dollar Change | Percentage Change | |||||||||||||||||||||||||||||||||
| Programs | Programs | ||||||||||||||||||||||||||||||||||||||||
| PEGPH20 | $ | 131,064 | 6 | % | $ | 123,932 | 15 | % | $ | 108,102 | PEGPH20 | $ | 7,201 | $ | 103,150 | $ | (95,949) | (93) | % | ||||||||||||||||||||||
| Restructuring | Restructuring | — | 17,201 | (17,201) | (100) | % | |||||||||||||||||||||||||||||||||||
| ENHANZE collaborations and rHuPH20 platform | 17,242 | (10 | )% | 19,197 | (37 | )% | 30,398 | ENHANZE collaborations and rHuPH20 platform | 26,002 | 18,896 | 7,106 | 38 | % | ||||||||||||||||||||||||||||
| Other | 1,946 | (74 | )% | 7,514 | (39 | )% | 12,342 | Other | 1,033 | 1,584 | (551) | (35) | % | ||||||||||||||||||||||||||||
| Total research and development expenses | $ | 150,252 | — | $ | 150,643 | — | % | $ | 150,842 | Total research and development expenses | $ | 34,236 | $ | 140,831 | $ | (106,595) | (76) | % | |||||||||||||||||||||||
Research and development expenses relating to our PEGPH20 program increased in 2018programs for 2020 decreased by 6%93%, compared to 2017,the same period in 2019, primarily due to increased clinical trial activities related to the HALO-301 study and the HALO 110-101 study, partially offset by decreased clinical trial activities. On November 4, 2019, we announced that the HALO-301 clinical study failed to reach the primary endpoint of overall survival. As a result, we halted development activities relatedfor PEGPH20, closed our oncology operations and began the close out process for all our clinical trials. We implemented an organizational restructuring to focus our operations solely on ENHANZE, which was completed in the HALO-202 study, the HALO 107-101 study,second quarter of 2020 and the Eisai clinical collaboration. Researchresulted in a reduction in research and development expenses relating to our PEGPH20 program increased in 2017 by 15% compared to 2016, primarily due to increased clinical trial activities. We expect these expenses to continue to increase in the near term.expenses.
Research and development expenses relating to our ENHANZE collaborations and our rHuPH20 platform in 2018 decreasedfor 2020 increased by 10%38%, compared to 2017,2019, primarily due to increased costs to support additional ENHANZE targets and a higher allocation ofoverhead costs. The rHuPH20 platform includes research and development expenses related to our proprietary rHuPH20 enzyme that were not designated to a specific program at the time the expenses were incurred.
Selling, General and Administrative– Selling, general and administrative (SG&A) expenses were $45.7 million in 2020 compared to $77.3 million in 2019. The decrease of $31.6 million, or 41%, was primarily due to a decrease in expenses incurred to establish an additional contract manufacturing facility, which was completedcompensation expense, one time restructuring cost in the second quarterprior year and discontinuation of 2017, and a decrease in manufacturing inventory with no alternative use, partially offset by increased costs to support new partners and targets related to our ENHANZE collaboration activity. Research and development expenses relating to our ENHANZE collaborations and our rHuPH20 platform in 2017 decreased by 37% compared to 2016, primarily due to a decrease in manufacturingcommercial expenses related to the new contract manufacturing facility. We expectmarket research and development expenses relating to our ENHANZE collaborations and our rHuPH20 platform to increase in the near termeducational activities as we support our collaboration partners advancing through clinical development and preparation for commercialization. The rHuPH20 platform includes research, development and manufacturing expenses related to our proprietary rHuPH20 enzyme. When these expenses were incurred, they were not designated to a specific program.
Interest Expense– Interest expense including stock compensation. SG&A expenses increasedwas $20.4 million in 20172020 compared to
36
Comparison of Years Ended December 31, 2019 and 2018
For discussion related to changes in financial condition and the results of operations for fiscal year 2019 compared to income tax benefitfiscal year 2018, refer to Part II - Item 7. Management’s Discussion and Analysis of $1.4 million in 2017. The 2018 amount was comprised primarilyFinancial Condition and Results of state income tax while the 2017 benefit was primarily comprised of U.S. federal alternative minimum tax expenseOperations included in the amount of $4.1 million offset by a U.S federal alternative minimum tax credit of $5.5 million. Income tax expense of $1.2 million in 2016 comprised of U.S. federal alternative minimum tax. The U.S. federal AMT was eliminated viaCompany’s Annual Report on Form 10-K for the Tax Cuts and Jobs Act that was enacted on December 22, 2017. The AMT credit carryovers will be used to offset regular tax liability for any taxablefiscal year beginning after 2017. If not utilized before 2022, any remaining AMT credit carryforward amount is fully refundable. The remaining AMT credit carryforward of $3.0 million was recognized as a deferred tax asset at December 31, 2018 as realization is certain. For the years ended December 31, 2018, 2017 and 2016, we generated taxable income in the U.S.,2019, which was partially offset by utilizing net operating losses carried forward from earlier years.filed with the SEC on February 24, 2020.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and available-for-sale marketable securities. As of December 31, 2018,2020, we had cash, cash equivalents and marketable securities of $354.5$368.0 million. We will continue to have significant cash requirements to support product development activities. The amount and timing of cash requirements and cash on hand will depend on the progress and success of our clinical development programs, regulatory and market acceptance, the resources we devote to research and commercialization activities and the achievement of various milestones and royalties under our existing collaborative agreements.
We believe that our current cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next twelve months. We expect to fund our operations going forward with existing cash resources, anticipated revenues from our existing collaborations and cash that we may raise through future transactions. We may raise cash through any one of the following financing vehicles: (i) the public offering of securities; (ii) new collaborative agreements; (iii)(ii) expansions or revisions to existing collaborative relationships; (iv)(iii) private financings; (v)(iv) other equity or debt financings; (v) monetizing assets; and/or (vi) monetizing assets.
We may, in the future, offer and sell additional equity, debt securities and warrants to purchase any of such securities, either individually or in units to raise capital to fund the continued development of our product candidates, the commercialization of our productsraise funds for additional working capital, capital expenditures, share repurchases, acquisitions or for other general corporate purposes.
Cash Flows
Operating Activities
Net cash used in operations was $49.5 million in 2018 compared to net cash provided by operations of $134.1 million in 2017. The increase in utilization of cash in operations was mainly due to lower net income as a result of reduced revenues combined with an increase in working capital for the year ended December 31, 2018 compared to the prior year.
Investing Activities
Net cash provided by investing activities was $2.5$78.4 million in 20182020 compared to net cash used in by investing activities of $163.7$5.5 million in 2017.2019. The increase in net cash provided by investing activities was primarily due to anthe increase in proceeds from maturities of marketable securities and less purchases of marketable securities.
Financing Activities
Net cash used in financing activities was $63.8$106.3 million in 2018,2020, compared to net cash provided by financing activities of $131.7$153.2 million in 2017,2019, mainly due to $134.9a decrease in cash proceeds from issuance of long-term debt, offset by a decrease of $49.9 million in repurchase of common stock, a $49.2 million increase in net proceeds from the saleissuance of common stock inunder equity incentive plans and a public offering in May 2017 compared to no sale of common stock in a public offering occurring and an increasedecrease in the amount of repayments of long-term debt repayment in 2018.
Share Repurchases
The Board of Directors approved a share repurchase program, pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time. The Company retired the repurchased shares. See Note 8. Stockholders’ Equity, within the notes to the consolidated financial statements for additional information regarding our share repurchases.
37
Debt
Convertible Notes
In November 2019, we completed the sale of $460.0 million in aggregate principal amount of 1.25% Convertible Senior Notes due in 2024 (Convertible Notes) in a private placement to $134.9 million inqualified institutional buyers. We received net proceeds from the saleoffering of approximately $447.4 million. We used $200.0 million of the net proceeds from the offering to repurchase shares of our common stock, including approximately $143.1 million to repurchase approximately 8.1 million shares of common stock concurrently with the offering in May 2017, compared to cash provided by financing activities of $150.6privately negotiated transactions, $6.9 million in 2016, when we drewopen market purchases and $50.0 million to repurchase approximately 2.6 million shares of common stock through an accelerated share repurchase agreement.
We used approximately $26.1 million of the net proceeds from the offering to repay all outstanding amounts under our loan agreement with Oxford Finance and Silicon Valley Bank and intend to use the remainder of $148.0 millionthe net proceeds for general corporate purposes, including additional share repurchases subsequent to the offering, and working capital.
The Convertible Notes will pay interest semi-annually in arrears on June 1st and December 1st of each year, beginning on June 1, 2020, at an annual rate of 1.25% and will be convertible into cash, shares of common stock or a combination of cash and shares of common stock, at our election, based on the Royalty-backed Loan.applicable conversion rate at such time. The Convertible Notes are general unsecured obligations and will rank senior in right of payment to all indebtedness that is expressly subordinated in right of payment to the Convertible Notes, will rank equally in right of payment with all existing and future liabilities that are not so subordinated, will be effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness and will be structurally subordinated to all indebtedness and other liabilities (including trade payables) of our current or future subsidiaries.
In January 2021, we notified the note holders that we will settle the principal of the Convertible Notes in cash. Therefore, upon conversion, the principal value of the Convertible Notes will be paid in cash and depending on our stock price, any additional amount over principal amount will be settled in shares of common stock. The initial conversion rate for the Convertible Notes will be 41.9208 shares of common stock per $1,000 in principal amount of Convertible Notes, equivalent to a conversion price of approximately $23.85 per share of our common stock. The conversion rate is subject to adjustment as described in the Indenture.
Upon the occurrence of certain circumstances, holders of the Convertible Notes may require us to purchase all or portion of their notes for cash, which may require the use of a substantial amount of cash. As of December 31, 2020, the conditional conversion feature was triggered and our notes are classified as a current liability. At December 31, 2020, we had a working capital position of $133.4 million, which includes the Convertible Notes that are currently redeemable as of December 31, 2020 but excludes another $65.6 million that is classified as equity. The debt may change from current to non-current period over period, primarily as a result of changes in our stock price. We believe that it is remote that holders of the notes would choose to convert their notes early because the fair value of the security that a note holder can currently realize in an active market is greater than the conversion value the note holder would realize upon early conversion. In the unlikely event that all the debt was converted, we will have two business days following a forty trading day observation period from the conversion date to pay the
38
principal in cash. For the year ended December 31, 2020, we have positive operating income and positive cash flow from operations and, accordingly, while there can be no assurance, we believe we have the ability to generate sufficient cash flows from operations or to raise additional capital through a variety of financing arrangements to satisfy early conversion of the Convertible Notes.
Royalty-backed Loan
In January 2016, through our wholly-owned subsidiary Halozyme Royalty LLC (Halozyme Royalty), we received a $150 million loan (the Royalty-backed Loan) pursuant to a credit agreement (the Credit Agreement) with BioPharma Credit Investments IV Sub, LP and Athyrium Opportunities II Acquisition LP (the Royalty-backed Lenders). Under the terms of the Credit Agreement, Halozyme Therapeutics, Inc. transferred to Halozyme Royalty the right to receive royalty payments from the commercial sales of ENHANZE products owed under the Roche Collaboration and Baxalta Collaboration (Collaboration Agreements). The royalty payments from the Collaboration Agreements will bewere used to repay the principal and interest on the loan (the Royalty Payments). The Royalty-backed Loan bearsbore interest at a per annum rate of 8.75% plus the three-month LIBOR rate. The three-month LIBOR rate iswas subject to a floor of 0.7% and a cap of 1.5%. The interest rate asIn June 2020, we paid the full remaining balance and final payment of December 31, 2018 was 10.25%. The outstanding balance of$2.93 million thereby satisfying and discharging all obligations under, and terminating, the Royalty-backed Loan as of December 31, 2018 was $85.0 million, net of unamortized debt discount of $0.3 million.
Oxford and SVB Loan and Security Agreement
In June 2016, we entered into a Loan and Security Agreement (the Loan Agreement) with Oxford Finance LLC (Oxford) and Silicon Valley Bank (SVB) (collectively, the Lenders), providing a senior secured loan facility of up to an aggregate principal amount of $70$70.0 million, comprising a $55.0 million draw in June 2016 and an additional $15.0 million tranche, which we had the option to draw during the second quarter of 2017 and did not exercise. The proceeds were partially used to pay the outstanding principal and final payment owed on a previous loan agreement with the Lenders. The remaining proceeds are beingwere used for working capital and general business requirements. The Loan Agreement repayment schedule providesprovided for interest only payments for the first 18 months, followed by consecutive equal monthly payments of principal and interest in arrears through the maturity date of January 1, 2021. The Loan Agreement providesprovided for a final payment equal to 5.50% of the initial $55 million principal amount. The final payment iswas due when the Loan Agreement becomes due or upon the prepayment of the facility. We havehad the option to prepay the outstanding balance of the Loan Agreement in full. The outstanding term loanfull and exercised this option in November 2019, at which point we paid the full remaining balance was $41.4 million as of December 31, 2018, inclusive of $2.2 million of accretion of theand final payment of $26.1 million, thereby satisfying and net of unamortized discount related to offering costs of $0.2 million.
Off-Balance Sheet Arrangements
As of December 31, 2018,2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
39
Contractual Obligations
As of December 31, 2018,2020, future minimum payments due under our contractual obligations are as follows (in thousands):
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations(1) | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||||||
Long-term debt, including current portion(2) | $ | 127,642 | $ | 91,506 | $ | 36,136 | $ | — | $ | — | ||||||||||
Interest on long-term debt(3) | 10,191 | 8,664 | 1,527 | — | — | |||||||||||||||
Operating leases(4) | 11,123 | 2,953 | 8,058 | 112 | — | |||||||||||||||
Third-party manufacturing obligations(5) | 14,985 | 14,985 | — | — | — | |||||||||||||||
| Purchase obligations | 2,862 | 327 | 2,535 | — | — | |||||||||||||||
| Total | $ | 166,803 | $ | 118,435 | $ | 48,256 | $ | 112 | $ | — | ||||||||||
| Payments Due by Period | ||||||||||||||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||||||||||||||||||
Short-term debt(1) | $ | 460,000 | $ | 460,000 | $ | — | $ | — | $ | — | ||||||||||||||||||||||
Interest on short-term debt(2) | 5,750 | 5,750 | — | — | — | |||||||||||||||||||||||||||
Operating leases(3) | 5,277 | 2,563 | 2,714 | — | — | |||||||||||||||||||||||||||
Third-party manufacturing obligations(4) | 77,530 | 46,884 | 30,646 | — | — | |||||||||||||||||||||||||||
| Purchase obligations | 1,168 | 524 | 644 | — | — | |||||||||||||||||||||||||||
| Total | $ | 549,725 | $ | 515,721 | $ | 34,004 | $ | — | $ | — | ||||||||||||||||||||||
_______________
(1).Short-term debt consists of the Convertible Notes.
(2).Interest on short-term debt includes semi-annual interest payments on the Convertible Note. The Convertible Note bears interest at an annual rate of 1.25%.
(3).Includes minimum lease payments related to leases of our office and research facilities and certain autos under non-cancelable operating leases. (4).We have contracted with third-party manufacturers for the supply of bulk rHuPH20 and fill/finish of Hylenex recombinant. Under these agreements, we are required to purchase certain quantities each year during the terms of the agreements. The amounts presented represent our estimates of the minimum required payments under these agreements. |
Contractual obligations for purchases of goods or services include agreements that are enforceable and legally binding to us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. For obligations with cancellation provisions, the amounts included in the preceding table were limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee.
For certain restricted stock units and performance stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The obligation to pay the relevant taxing authority is not included in the preceding table, as the amount is contingent upon continued employment. In addition, the amount of the obligation is unknown, as it is based in part on the market price of our common stock when the awards vest.
The expected timing of payments of the obligations above is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.
40
Our future capital uses and requirements depend on numerous forward-looking factors. These factors may include, but are not limited to, the following:
•the rate of progress and cost of research and development activities;
•the number and scope of our research and development activities;
•the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
•our ability to establish and maintain product discovery and development collaborations, including scale-up manufacturing costs for our collaborators’ product candidates;
•the amount of royalties and milestones from our collaborators;
•the amount of product sales for Hylenex recombinant;
•the costs of obtaining and validating additional manufacturers of rHuPH20;
•the effect of competing technological and market developments;
•the terms and timing of any collaborative, licensing and other arrangements that we may establish; and
•the extent to which we acquire or in-license new products, technologies or businesses.
41
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are outlined in Note 2 to the Consolidated Financial Statements included in the Form 10-K. We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
| Revenue Recognition | ||||||||||||||
| Methodology | Judgment and Uncertainties | Effect if Actual Results Differ From Assumptions | ||||||||||||
| For collaborative agreements, we are entitled to receive event-based payments subject to the collaboration partner's achievement of specified development and regulatory milestones. We recognize revenue when it is deemed probable that these milestones will be achieved, which could be in a period prior to its actual occurrence. At the end of each reporting period, we re-evaluate the probability of achievement of such milestones, and if necessary, adjust our estimate of the overall transaction price. | Revenue is recognized when we determine it is probable a milestone will be achieved. This assessment is based on our past experience with our collaboration partners, market insight and partner communication. | A revenue reversal will be required in the event it is determined that achievement of a milestone, previously deemed probable, will not occur. This reversal may be material. | ||||||||||||
| For collaborative agreements, royalty revenue is recognized in the period the underlying sales occur, but we do not receive final royalty reports from our collaboration partners until after we complete our financial statements for a prior quarter. Therefore, we recognize revenue based on estimates of the royalty earned, which are based on preliminary reports provided by our collaboration partners. | The amount of royalty revenue recognized for the quarter is estimated using our knowledge of past royalty payments, market insight and an estimate made by our collaboration partners provided in a preliminary report. | A final royalty report and associated royalty payment is received approximately 60 days after quarter-end. If necessary, a true-up is recorded at that time if there is a difference from the initial estimated royalty revenue recorded. To date, the true-up entries have not been material. | ||||||||||||
For collaborative arrangements, when necessary, we perform an allocation of the upfront amount based on relative stand-alone selling prices (SSP) of licenses for individual targets. We determine license SSP using an income-based valuation approach utilizing risk-adjusted discounted cash flow projections. | The inputs used in the valuation model to determine SSP are based on estimates utilizing market data and information provided by our collaboration partners. | Differences in the allocation of the transaction price between delivered and undelivered performance obligations can impact the timing of revenue recognition but do not change the total revenue recognized under any agreement. | ||||||||||||
42
| Methodology | Judgment and Uncertainties | Effect if Actual Results Differ From Assumptions | ||||||||||||
| We maintain a Stock Incentive Plan, which provides for share-based payment awards, including stock options, restricted stock and performance awards. We determine the fair value of our stock option awards and performance awards at the date of grant using a Black-Scholes model. We determine the fair value of our restricted stock awards at the date of grant using the closing market value of our common stock on the date of grant. | Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of our stock price, expected dividend yield and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimate. Our performance awards require management to make assumptions regarding the likelihood of achieving long-term Company goals. | We do not currently believe there is a reasonable likelihood that there will be a material change in estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in share-based compensation expense that could be material. If actual results are not consistent with the assumptions used, the share-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the share-based compensation. A 10% change in our share-based compensation expense for the year ended December 31, | ||||||||||||
| 2020. | ||||||||||||||
| Valuation Allowance | ||||||||||||||
| We have considered future taxable income and | ||||||||||||||
| Given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the | ||||||||||||||
Recent Accounting Pronouncements
Refer to Note 2, Summary of Significant Accounting Policies, of our consolidated financial statements for a discussion of recent accounting pronouncements and their effect, if any, on us.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2018,2020, our cash equivalents and marketable securities consisted of investments in money market funds, asset-backed securities, U.S. Treasury securities, corporate debt obligations and commercial paper. These investments were made in accordance with our investment policy which specifies the categories, allocations, and ratings of securities we may consider for investment. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. Some of the financial instruments that we invest in could be subject to market risk. This means that a change in prevailing interest rates may cause the value of the instruments to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of that security will probably decline. Based on our current investment portfolio as of December 31, 2018,2020, we do not believe that our results of operations would be materially impacted by an immediate change of 10% in interest rates.
We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. Further, we do not believe our cash, cash equivalents and marketable securities have significant risk of default or illiquidity. We made this determination based on discussions with our investment advisors and a review of our holdings. While we believe our cash, cash equivalents and marketable securities do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. All of our cash equivalents and marketable securities are recorded at fair market value.
Item 8.Financial Statements and Supplementary Data
Our financial statements are annexed to this report beginning on page F-1.
Item 9.Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
44
Item 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decision regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting that occurred during the quarter ended December 31, 20182020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018.2020. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework) (the COSO criteria). Based on our assessment, management concluded that, as of December 31, 2018,2020, our internal control over financial reporting is effective based on the COSO criteria. The independent registered public accounting firm that audited the consolidated financial statements that are included in this Annual Report on Form 10-K has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2018.2020. The report appears below.
45
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Halozyme Therapeutics, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Halozyme Therapeutics, Inc.’s internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Halozyme Therapeutics, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20182020 and 2017,2019, and the related consolidated statements of operations, comprehensive (loss) income, cash flows, and stockholders’ equity (deficit) for each of the three years in the period ended December 31, 2018 ,2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a) and our report dated February 21, 201923, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ Ernst & Young LLP | ||
San Diego, California
February 21, 2019
23, 2021
46
Item 9B.Other Information
None.
PART III
Item 10.Directors, Executive Officers and Corporate Governance
The information required by this item regarding directors is incorporated by reference to our definitive Proxy Statement (the Proxy Statement) to be filed with the Securities and Exchange Commission in connection with our 20192021 Annual Meeting of Stockholders under the heading “Election of Directors.” The information required by this item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference to the information under the caption “Compliance with Section 16(a) of the Exchange Act” to be contained in the Proxy Statement. The information required by this item regarding our code of ethics is incorporated by reference to the information under the caption “Code of Conduct and Ethics and Corporate Governance Guidelines” to be contained in the Proxy Statement. The information required by this item regarding our audit committee is incorporated by reference to the information under the caption “Board Meetings and Committees—Audit Committee” to be contained in the Proxy Statement. The information required by this item regarding material changes, if any, to the process by which stockholders may recommend nominees to our board of directors is incorporated by reference to the information under the caption “Board Meetings and Committees—Nominating and Governance Committee” to be contained in the Proxy Statement.
Executive Officers
Helen I. Torley, M.B. Ch. B., M.R.C.P. (56)(58), President, Chief Executive Officer and Director. Dr. Torley joined Halozyme in January 2014 as President and Chief Executive Officer and as a member of Halozyme’s Board of Directors. Throughout her career, Dr. Torley has led several successful product launches, including Kyprolis®, Prolia®, Sensipar®, and Miacalcin®. Prior to joining Halozyme, Dr. Torley served as Executive Vice President and Chief Commercial Officer for Onyx Pharmaceuticals (Onyx) from August 2011 to December 2013 overseeing the collaboration with Bayer on Nexavar® and Stivarga® and the U.S. launch of Kyprolis. She was responsible for the development of Onyx's commercial capabilities in ex-US markets and in particular, in Europe. Prior to Onyx, Dr. Torley spent 10 years in management positions at Amgen Inc., most recently serving as Vice President and General Manager of the US Nephrology Business Unit from 2003 to 2009 and the U.S. Bone Health Business Unit from 2009 to 2011. From 1997 to 2002, she held various senior management positions at Bristol-Myers Squibb, including Regional Vice President of Cardiovascular and Metabolic Sales and Head of Cardiovascular Global Marketing. She began her career at Sandoz/Novartis, where she ultimately served as Vice President of Medical Affairs, developing and conducting post-marketing clinical studies across all therapeutic areas, including oncology. Dr. Torley serves on the board of directors of Quest Diagnostics Incorporated, a diagnostic information services company. Within the past five years, Dr. Torley served on the board of directors of Relypsa, Inc., a biopharmaceutical company. Before joining the industry, Dr. Torley was in medical practice as a senior registrar in rheumatology at the Royal Infirmary in Glasgow, Scotland. Dr. Torley received her Bachelor of Medicine and Bachelor of Surgery degrees (M.B. Ch.B.) from the University of Glasgow and is a Member of the Royal College of Physicians (M.R.C.P).
47
and consumer products industries.at Pillsbury Winthrop Shaw Pittman LLP from June 1996 to June 1998. Mr. LeonhardtMatsuda received a B.S. in Pharmacyhis Juris Doctor from the University of California, Hastings College of the SciencesLaw and a Juris Doctoratehis Bachelor of Science Degree in Business Administration from the University of Southern California School of Law.California.
Item 11.Executive Compensation
The information required by this item is incorporated by reference to the information under the captioncaptions “Executive Compensation and Related Information” and “Compensation Committee Interlocks and Insider Participation” to be contained in the Proxy Statement.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Other than as set forth below, the information required by this item is incorporated by reference to the information under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” to be contained in the Proxy Statement.
Equity Compensation Plan Information
The following table summarizes our compensation plans under which our equity securities are authorized for issuance as of December 31, 2018:2020:
| Plan Category | Number of Shares to be Issued upon Exercise of Outstanding Options and Restricted Stock Units (a) | Weighted Average Exercise Price of Outstanding Options(2) (b) | Number of Shares Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Shares Reflected in Column (a)) (c) | Plan Category | Number of Shares to be Issued upon Exercise of Outstanding Options, Restricted Stock Units and Performance Stock Units (a) | Weighted Average Exercise Price of Outstanding Options(2) (b) | Number of Shares Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Shares Reflected in Column (a)) (c) | |||||||||||||||||||||||||
Equity compensation plans approved by stockholders (1) | Equity compensation plans approved by stockholders (1) | 13,400,723 | $13.81 | 12,299,463 | Equity compensation plans approved by stockholders (1) | 6,704,330 | $15.83 | 10,806,631 | ||||||||||||||||||||||||
| Equity compensation plans not approved by stockholders | Equity compensation plans not approved by stockholders | — | — | — | Equity compensation plans not approved by stockholders | — | — | — | ||||||||||||||||||||||||
| 13,400,723 | $13.81 | 12,299,463 | 6,704,330 | $15.83 | 10,806,631 | |||||||||||||||||||||||||||