Edison Research Template - Edison Investment Research

Halozyme Therapeutics

Initiation of coverage

A well-diversified investment choice

Pharma & biotech

Halozyme Therapeutics has to date been successful in generating revenues from its platform technology, which has generated milestone payments of $135m. The launch of HyQvia by Baxter and Herceptin SC and MabThera SC by Roche in the EU has validated Halozyme’s ENHANZE delivery platform as a key enabling technology for biologicals. Positive late-stage clinical data for Hylenex as an adjuvant for pump insulin injection and early encouraging Phase Ib data for PEGPH20 in pancreatic cancer (a clinical hold has now been lifted) now also add compelling product development opportunities. The combination of its proprietary pipeline and revenue-generating platform makes Halozyme an attractive investment. Year end

Revenue ($m)

PBT* ($m)

EPS* ($)

DPS ($)

P/E (x)

Yield (%)

12/12

42.3

(53.5)

(0.48)

0.0

N/A

N/A

12/13

54.8

(83.5)

(0.74)

0.0

N/A

N/A

12/14e

67.6

(68.4)

(0.55)

0.0

N/A

N/A

12/15e

89.0

(55.5)

(0.44)

0.0

N/A

N/A

30 June 2014

Price

US$9.93 US$1,231m

Market cap

Net cash ($m) at 31 March 2014

115.2

Shares in issue

124.0m

Free float

78.9%

Code

HALO

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

PEGPH20 a key value driver PEGPH20’s promising data (ORR of 42% and RR 83% in HAhigh patients) in a Phase Ib trial set the foundation of the currently on-hold Phase II trial in first-line pancreatic cancer, with top-line data to be released in H215, assuming enrolment of another 100 patients is complete before the end of 2014. Data from another Phase I trial, which is to be started in Q414 in patients with a high level of hyaluronan (HA), the drug’s target, should establish it as a widely applicable therapeutic, as HA is expressed in c 30% of tumours.

Royalties from three drugs with sales up to $3.5bn Sales of Herceptin SC, MabThera SC and HyQvia, from which Halozyme receives mid-single-digit royalties, should help investors recognise the value of the ENHANZE platform (a total of 10 undisclosed targets from four collaborators), which we estimate conservatively at $607m. Clinical and regulatory progress of the target portfolio should generate further milestone payments as well enhance credibility when a collaborator reveals a drug’s identity and its indication.

%

1m

3m

12m

Abs

23.0

(19.3)

55.9

Rel (local)

20.0

(23.9)

28.2

52-week high/low

US$17.6

US$6.7

Business description Halozyme Therapeutics focuses on development of extracellular matrix-based drugs. Its rHuPH20based delivery platform has been used by partners, including Roche, Baxter and Pfizer, to develop SC injection of IV drugs such as Herceptin, Rituxan (Roche) and GAMMAGARD (Baxter). Its pipeline consists of Hylenex, approved for hydration, PEGPH20 in Phase II trials for pancreatic cancer, and HTI-501 in Phase II trials for cellulite.

Next events FDA BPAC panel on HyQvia

7/14

Valuation: Upside remains

Potential HyQvia US approval

Q314

We value the company using our DCF method, evaluating its platform and its own pipeline separately. We arrive at a value of $752m for its own pipeline, including PEGPH20 (remaining at a 25% probability of clinical success considering it is has just restarted after a clinical hold) for pancreatic cancer and Hylenex for use with pump insulin. We value the platform at $607m, represented mainly by three key collaborative products. Our total firm value is $1,445m, or $11.6 per basic share ($11.4 per diluted share).

Initiation of second PEGPH20 trial

Q414

Analysts Jason Zhang PhD Dr Mick Cooper

+1 646 653 7027 +44 (0)20 3077 5734

[email protected] Edison profile page

Halozyme Therapeutics is a research client of Edison Investment Research Limited

Investment summary Company description: A well-balanced company Halozyme is a biopharmaceutical company developing and commercialising products targeting the extracellular matrix for the oncology, diabetes, dermatology, and drug delivery markets. Its ENHANZE technology has been used by companies including Roche, Pfizer, Baxter and Intrexon to develop subcutaneous (SC) forms of intravenously (IV) administered biological therapeutics, including Herceptin, MabThera, and immunoglobulin (IgG). Its own proprietary pipeline drugs include Hylenex, a recombinant human protein formulation of hyaluronidase, which is approved as an adjuvant in subcutaneous fluid administration and in development to aid insulin injection. Other drugs include PEGPH20, a PEGylated form of rHuPH20, which is in Phase II development for pancreatic cancer, and HTI-501, a recombinant human cathepsin-L, in Phase I development for cellulite. Halozyme is headquartered in San Diego, CA. Exhibit 1: Halozyme pipeline and key collaborative products Drug Hylenex PEGPH20

Indication Peptide, small molecule and fluid delivery Adjuvant for pump insulin injection Pancreatic cancer Other HA expressing tumour Cellulite

HTI-501 Collaborative products Roche: Herceptin SC Her2-positive breast cancer Roche: MabThera SC Non-Hodgkin's lymphoma (NHL) Baxter: HyQvia Primary immunodeficiency Pfizer: 4 specified (incl. PCSK-9) and 2 pending

Status Approved Late stage Phase II Phase I Phase II

Note

Approved Approved Approved N/A

EU EU EU approved; US pending

Met primary endpoint Top-line data in H215 Initiation expected in Q414 Strategic decision pending

Source: Company reports and Edison Investment Research

Valuation: Upside remains We value the company using our discount cash flow method, evaluating its platform and its own pipeline separately. We value the platform at $607m, represented mainly by three key collaborative products. We arrive at a value of $752m for its own pipeline, including PEGPH20 for pancreatic cancer (25% probability of clinical success reflecting the re-start of a clinical “hold” that was just lifted) and Hylenex for use with pump insulin. Adding net cash of $86.3m at end of 2014, we get a firm value of $1,445m, or $11.6 per basic share ($11.4 per diluted share).

Financials: Sufficient cash beyond 2015 Halozyme reported a net loss of $26.5m, with revenue of $12m, SG&A of $10.3m and R&D of $21.4m in Q114. Operating cash burn for the quarter was $17.6m. The company ended the quarter with cash and marketable securities of $164.5m, including the net proceeds of $107.8m by offering 8.8m shares at $13 per share in February 2014. We estimate the company’s cash is sufficient to support its clinical development of PEGPH20 and its operation beyond 2015.

Sensitivities: PEGPH20 trial and collaborative product sales Halozyme’s investment case rests on the progress of PEGPH20 for pancreatic cancer and commercial success of the three key collaborative products. Key catalysts for the shares include the completion of patient enrolment of the Phase II PEGPH20 trial, which has just restarted after a clinical hold due to high incidences of thromboembolic events and data read-out in H215. A positive Phase II would increase the share valuation to $17.0, a 47% appreciation. A failure would decrease the share valuation to $8.3, slightly below the current market price, suggesting the market has largely written off this product.

Halozyme Therapeutics | 30 June 2014

2

Company description: A well-balanced company Halozyme has to date been successful in generating revenues from its platform technology, which has generated milestone payments of $135m. The launch of HyQvia by Baxter and Herceptin SC and MabThera SC by Roche in the EU has validated Halozyme’s ENHANZE delivery platform as a key enabling technology for biologicals. The positive Phase Ib pancreatic cancer (PC) trial results of PEGPH20 and the positive late-stage trial results of Hylenex as an adjuvant for pump insulin injection now also add a compelling product development opportunity. We value the company at $1,445m, which should increase significantly if the PEGPH20 Phase II data (2015) are positive and the performance of collaborator-launched products exceed market expectations.

ENHANZE Technology: Under your skin The ENHANZE Technology is a proprietary delivery platform using Halozyme’s first approved enzyme, recombinant human hyaluronidase – rHuPH20. Hyaluronidase degrades hyaluronan (also called hyaluronic acid, HA), a sugar polymer that is a major component of connective (cartilage), epithelial (skin) and neural tissues. Application of rHuPH20 to the skin causes temporary increase of skin tissue permeability by degrading HA under the skin, so that large molecules that typically require intravenous injection can be delivered subcutaneously. The skin tissue’s HA reconstitutes its normal density within several days, and doing so avoids any long-term harm of permanent HA deficiency. Halozyme’s business strategy centres on leveraging its technology and expertise on human enzymes on extracellular matrix (ECM), particularly rHuPH20. Internally it is developing PEGPH20, which is a pegylated form of rHuPH20, in cancers with high level of HA; Hylenex (rHuPH20), as an adjuvant for pump insulin; and HTI-501, a recombinant human cathepsin-L, for cellulite. Externally it has entered into collaborations with pharma and healthcare companies to develop subcutaneous (SC) forms of intravenously (IV)-delivered biological drugs. This balanced strategy, in our opinion, helps the company diversify drug development risks and maximise the value of the ECM to investors.

PEGPH20: A proprietary drug for pancreatic and other cancer PEGPH20, a pegylated (pegylation is a process that attaches polyethylene glycol [PEG] to another molecule to increase the molecule’s stability) form of rHuPH20, has a longer half-life than rHuPH20, and is intended for systemic treatment. It is being developed as an anti-cancer drug in combination with other chemotherapy in tumours with accumulated HA, such as pancreatic cancer, and potentially other types of cancer. Hyaluronan, a key component of the extracellular matrix (ECM), is found to be accumulated in 2030% (Maneval et al., 2012 AACR abs#2672 and Exhibit 2) of tumours and is often associated with poor prognosis. High levels of HA were documented, for example, in 87% of pancreatic cancer samples and patients with a high level of HA (HA+) fare significantly worse than those with a low level (HA-), with a median overall survival (Exhibit 2) of 299 days (9.97 months) vs 738 days (24.6 months). 1 The precise contribution of HA to tumour progression is not completely understood, and in some instances remains controversial. Emerging evidence supports the hypothesis that HA accumulation in the tumour microenvironment (TME) creates an infrastructure that is protective of certain tumours, achieved by elevated interstitial fluid pressure (IFP) of the tumour foci. Furthermore, HA accumulation may interfere with cell–cell contact and promote the epithelial– mesenchymal transition (a process that transforms normal cells into tumour stem cells), recruit

1

Whatcott et al. Cancer Res April 15, 2011; 71(8 Supplement): LB-307.


3

tumour-associated macrophage, and promote the development of regulatory T-cells, perhaps promoting immune tolerance to cancer cells. Since high levels of HA are associated with tumour progression, application of hyaluronidase, which depletes HA from ECM, should lead to tumour growth inhibition. Treatment of tumour mouse models with rHuPH20, indeed, led to tumour regression, supported by observed reduction of HA in TME, decreased tumour water content and IFP, and tumour vascular flow and perfusion of chemotherapy. Furthermore, treatment with rHuPH20 caused inhibition of DNA synthesis in xenograft tumour cells, suggesting an impact beyond just alternation of tumour cell structure.

SCLC

Ovarian

Colon

NSCLC

Multiple myeloma

Tumour type

Mesothelioma

Gastric

RCC

Prostate

Breast

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Pancreatic

Percentage positive

Exhibit 2: HA accumulation in cancer (left) and HA-OS correlation (right) in pancreatic cancer

Source: Thompson C.B. et al, 2013 AACR meeting Abs# 4955 and Jiang P. et al, 2011 AACR-EORTC meeting Abs# B35

In a Phase Ib, open-label, multicentre study, PEGPH20 (twice weekly and weekly IV) was given in combination with gemcitabine (Gemzar, Lilly) to first-line pancreatic patients. From 24 (Exhibit 3) evaluable patients, 10 (42%) achieved a partial response (PR) and nine (37.5%) achieved stable disease (SD). At the selected Phase II dose of PEGPH20, 3µg/kg, 8/20 (40%) achieved PR. These response rates are comparable to the current standard of care regimen, Abraxane/gemcitabine (ORR of 48% in a Phase Ib and 29% in a Phase III trial, respectively), in our opinion. Furthermore, PEGPH20 response correlated with HA level, with ORR of 83% (5/6) in HA+ patients, vs only 36% (4/11) in HA- patients. Preliminary analysis of PFS and OS showed that patients with a high level of HA at baseline (HA+) lived longer (PFS 219 days and OS 529 days) vs those with HA- (PFS 108 days and OS 174 days) after treatment with PEGPH20/gem. This is in stark contrast to previous analysis (Exhibit 2), which showed that pancreatic cancer patients live for less time with a high level of HA, suggesting that HA is an important driver of pancreatic cancer progression and PEGPH20’s ability to reduce it in tumour cells can significantly arrest this cancer’s progression. Exhibit 3: PEGPH20 Phase Ib pancreatic cancer data N (evaluable) PR based on dose PR based on HA level PFS OS (data not mature at time of presentation) SD

24 Overall 10/24 (42%) Overall 10/24 (42%) ITT 154 days 200 days

at 3.0 µg/kg 8/13 (62%) HAhigh 5/6 (83%) HAhigh 219 days 529 days

1.6 µg/kg 2/5 (40%) HAlow 4/11 (36%) HAlow 108 days 174 days

1 µg/kg 0/2 HAna 1/7 (14%)

9 (38%)

Source: Hingorani, SR et al., ESMO 2013 Abs#2.598

The current standard of care treatment of first-line pancreatic cancer in the US and EU is the combination of gemcitabine and nab-paclitaxel (Abraxane, Celgene), hence Halozyme decided to test PEGPH20 with Abraxane/gem in a randomised Phase II trial (HALO-109-202, Exhibit 4). The trial, with first patient dose started in Q313, will test the three-drug combination, PEGPH20 +


4

Abraxane + gem vs Abraxane + gem in 124 first-line pancreatic cancer patients, aiming to demonstrate a benefit in progression-free survival (PFS). On 9 April 2014, the FDA put the Phase II trial on a clinical hold, following a voluntary halt of the trial by Halozyme due to observed higher incidences of thromboembolic events in the PEGPH20 arm. Recently, the FDA has lifted the clinical hold after the trial’s Data Monitoring Committee (DMC) confirmed its support of continuing patient enrolment in the trial with protocol amendments. Key protocol amendments include the addition of a second primary endpoint in thromboembolic event rate, the exclusion of patients who may be at higher risk of thromboembolic events and the use of low-molecular weight heparin as a prophylaxis to prevent thromboembolic events. Halozyme has disclosed that it has enrolled 100 patients so far into the trial and plans to enrol another 100. We now expect the company to complete enrolment by year end 2014 or early 2015, with top-line data available in H215. In addition, a collaborative group, Southwest Oncology Group, is conducting a 172-patient, Phase Ib/II trial (S1313) of PEGPH20 with Modified FOLFIRINOX (mFOLFIRINOX, fluorouracil, irinotecan, leucovorin, and oxaliplatin) vs mFOLFIRINOX in first-line pancreatic cancer. mFOLFIRINOX is another commonly used combination regimen mainly for patients with good performance status. The trial will test the combination’s tolerability at the Phase I and OS at the Phase II phase. OS data is expected by 2017 to 2019 per the collaborative group’s estimate. Exhibit 4: Halozyme sponsored PEGPH20 Phase II trial details

N Patients Primary endpoint Secondary endpoints Estimated study completion date

Treatment Control PEGPH20 /Abraxane/gemcitabine (PAG) Abraxane/gemcitabine ~100 ~100 Stage IV previously untreated pancreatic cancer Estimated duration of progression free survival; thromboembolic event rate ORR, OS and safety September 2015

Source: Company report and Clinicaltrials.gov

Because HA accumulation is found in many other cancer tissues (Exhibit 2), Halozyme plans to test PEGPH20 in other types of cancer, with another trial to be started by the end of 2014, in an indication likely to be one of the four high HA expressers listed in Exhibit 2. Further efficacy data from this trial, likely to be available in 2015, will be a key catalyst for the company.

Competitive landscape of pancreatic cancer Pancreatic cancer (PC) is a lethal disease and remains one of the most resistant cancers to traditional therapies. It is rarely curable and has a five-year survival rate of less than 4%. The majority of tumours (c 80%) are malignant adenocarcinomas of ductal epithelium and very few (c 2%) are benign. In the US, PC is the 10th most common site of cancer (c 3% of cases) but the fourth leading cause of cancer death (c 6% of all cancer-related deaths). In 2013, the National Cancer Institute (US) estimated 45,000 new cases in the US were diagnosed and 38,500 died from the disease. Most patients are either locally advanced (c 25%) or metastatic (c 50%) at the time of diagnosis. In these patients, systemic chemotherapy provides a limited survival benefit (Exhibit 5). Recommended first-line options include gemcitabine monotherapy (Eli Lilly’s Gemzar), gemcitabine-based combination therapy (ie gemcitabine + erlotinib) or the FOLFIRINOX regimen (5-FU, leucovorin, oxaliplatin and irinotecan). In metastatic disease, gemcitabine plus erlotinib (Roche’s Tarceva) was approved based on modest OS (6.4 vs. 6.0 months) benefit. More recently, FOLFIRINOX demonstrated a significant OS benefit (11.1 vs.6.8 months) over gemcitabine, but with a significantly higher incidence of adverse events. The newest regimen, Abraxane in combination with gemcitabine, demonstrated an improvement of OS of 1.8 months (mature data showed a median OS difference of 2.1 months) over gemcitabine, and was approved in the US in September 2013


5

and in the EU in February 2014. Celgene reported Abraxane 2013 global sales of $649m, an increase of 52% y-o-y, largely from growth in pancreatic cancer sales since the start of 2013.

Pancreatic cancer market – modelling PEGPH20 global peak sales of $1.5bn We model a 2018 launch for PEGPH20 in first-line pancreatic cancer (locally advanced and metastatic disease) and peak sales of $1.5bn worldwide by 2027. Despite the current hold, our timeline assumes positive Phase II data in H215, initiation of Phase III in H215, positive OS data in H217 and regulatory approvals/launches in H218. We estimate that the addressable market for first-line pancreatic cancer is around 36,180 patients annually in the US based on a National Cancer Institute estimate of 45,220 new cases and 38,460 deaths in 2013. With an estimated total cost of treatment at $60,000 to $75,000 per patient, the total market in the US is $2.53bn. Assuming a c 25% market share, we estimate the drug’s US peak sales to be $687m. We estimate the ex-US sales to be c 1.2x that of US, at $824m, and arrive at total worldwide peak sales of $1.5bn. This estimate is based on an OS benefit over Abraxane/gem, the current standard of care of first-line treatment. We are estimating peak sales based on a penetration of the pancreatic cancer market of 25% with pricing of $60,000 to $75,000 per patient, in part to recognise the potential in other cancers. We assume that Halozyme will commercialise the product itself in major markets such as North America and the EU. If the company elects to partner this drug with another company, it most likely will do it after results from the Phase II trial become available. Exhibit 5: Approved and under-developed (Phase III stage) drugs/regimens for pancreatic cancer Product/ Company regimen Gemzar Eli Lilly (gemcitabine) Tarceva Roche (erlotinib) FOLFIRINOX Abraxane

Status

Celgene

TH-302/ EMD Threshold Serono NC-6004

Orient Europharma Algenpantucel New Link -L Genetics IMMU-107 Immunomedics

Ongoing trial description or relevant data

Market In Phase III trial, Gem vs 5-FU: OS 5.7 vs 4.2m, HR=N/A, 1-yr survival 18% vs 2%, ORR: N/A (generic ) Market in 569-pt Phase III trial, Erl + Gem vs Gem: OS 6.4 vs 6.0m, (HR=0.81, p=0.028), PFS 3.8 vs 3.5m (HR=0.76, p=0.006), 1-yr survival 23% vs 19%, ORR 8.6% vs 7.9% Market In 342-pt Phase III PRODIGE trial, FOLF vs Gem: OS 11.1 vs 6.8m, (HR=0.57, p<0.001), PFS 6.4 vs 3,3m (HR=0.47, p<0.001), 1-yr survival 48% vs 20%, ORR: 31.6% vs 9.4% Market In 861-pt Phase III MPACT trial, Abr + Gem vs Gem: OS 8.5 vs 6.7m, (HR=0.72, P = 0.000015), 1-yr survival 35% vs 22%, ORR: 23% vs 7%, PFS 5.5 vs 3.7m (HR 0.69; P = 0.000024) Phase III 660-pt Phase III (MAESTRO) of Gem + TH-302 vs In Phase IIb Gem + TH-302 vs Gem trial: PFS 6 vs 3.6m Gem in first-line. Primary endpoint: OS. Start: (p=0.008), OS 9.2 vs 6.9m (p=0.8) 1-yr survival 38% vs 26% 12/2012, data 5/2017 (p=0.13), ORR 26% vs 10% (p=0.021) Phase III 290-pt Phase III study of NC-6004 + Gem vs Gem in first-line (Asian). Primary endpoint: OS. Start: 1/2014, data: 6/2017 Phase III Phase III

MM-398

Merrrimack

Phase III

Glufosfamide

Phase III

Jakafi

Eleison Pharma. Incyte

Momelotinib

Gilead

PEGPH20

Halozyme

PEGPH20

Halozyme

280-pt Phase III (PILLAR) study of A-L + chemo vs chemo in unresectable first-line. Primary endpoint: OS. Start: 4/2013, data 6/2017 440-pt Phase III (PANCRIT-1) study of IMMU-107 In 38-pt Phase I, the combo showed: six (16%) had PR, 16 (42%) + Gem vs Gem in first-line. Primary endpoint: had SD, OS 7.7m OS, Start: 1/2014, data: 10/2015 405-pt Phase III (NAPOLI 1) study of MM-398/5- In Phase II single arm trial, 1-yr survival 25%, OS 5.2m, DCR 50%; FU/LV vs 5-FU/LV in second-line. Primary In Phase III NAPOLI 1, OS was 6.1m vs. 4.2m in treatment vs. endpoint: OS. Start: 11/2011, data 6/2014 control; p=0.012 and HR 0.67 480-pt Phase III study of Glu vs 5-FU in second-line. Primary endpoint: OS. Start: 9/2013, data: 5/2015

Phase III

310-pt Phase III study (JANUS1) of Jakafi/ In a 127-pt Phase II, OS HR of 0.47, and p=001 in subgroup (N=60) capecitabine vs. cape in 2nd-line patients. of elevated C-reactive protein (CRP). In ITT, OS HR of 0.79 and Primary end point: OS; Start: 3/2014, data 2/2016 p=0.25 Phase II 336-pt Phase II study of Mom/ Abraxane/Gem vs Abraxane/Gem in first-line patients. Primary end point: OS (2nd phase). Start: 4/2014, data: 8/2021 Phase II C 200-pt Phase II study (HALO-109-202) of PH20/Abraxane/Gem vs Abraxane/Gem in first-line patients. Co-Primary endpoint: PFS and thromboembolic event rate. Start: 4/2013, data: 9/2015 Phase I/II 172-pt Phase I/II study of PH20/MFOLFIRINOX vs MFOLFIRINOX in first-line patients. Primary endpoint: OS (Phase II). Start: 1/2014, data 5/2019 90

Source: Company reports, Edison Investment Research and clinicaltrials.gov. Note: IMMU-107= Y-clivatuzumab tetraxetan.

Hylenex: Delivering ultra-fast insulin with rHuPH20 Hylenex (rHuPH20) received FDA approval in December 2005 as an adjuvant in subcutaneous fluid administration (an alternative to IV) for achieving hydration, to increase the dispersion and


6

absorption of other injected drugs. Halozyme licensed Hylenex as a standalone drug to Baxter in 2007, which introduced the drug to the US market in 2009. Sales of the drug never really took off and Baxter had a product recall in May 2010 because a portion of the Hylenex manufactured by Baxter was not in compliance with regulatory requirements. In December 2011 Baxter returned the rights to Halozyme, which owns and sells the product with a small sales team, achieving sales of $6.8m in 2013. Upon further analysis of commercial opportunities, Halozyme has determined that Hylenex could be used in conjunction with fast insulin (or insulin analogues) to achieve better glucose control.

rHuPH20 as an adjuvant for pump insulin Insulin, typically administered through SC injection, can also be delivered via an infusion pump. Insulin pumps can deliver insulin intermittently (as bolus) before meals (mealtime insulin or prandial insulin) or continuously to provide patients with essential basal insulin. Modern insulin pumps, with their small sizes, accurate administration of insulin and data storage capability, have become more and more popular among patients with diabetes, reaching total of units of 375,000 in 2007 from 130,000 in 2002 (FDA General Hospital and Personal Use Medical Devices Panel, 5 March 2010) in the US among type I diabetes patients. The growth trend has continued, with total units in the US reaching c 400,000 in 2013 among Type I diabetes, according to Halozyme’s market research. Typical insulin infusion pumps require change and clean of infusion site every three days to prevent infection. Another reason for infusion site changes is that insulin absorption varies as infusion sites age, resulting in blood insulin levels outside of the ideal range. Halozyme demonstrated in a Phase II trial 2 pre-administration of rHuPH20 resulted in better postprandial glucose control and lower incidences of glucose excursion over three days compared to pump delivered insulin analogues, without increasing incidences of adverse events. Based on these results, the company has initiated a late-stage trial of pre-administering Hylenex at CSII (continuous subcutaneous insulin infusion) site in subjects with Type 1 diabetes (T1DM). The 456-patient trial (CONSISTENT 1) is to demonstrate non-inferiority (non-inferiority margin of 0.4%) of A1C reduction between rapid insulin analogues alone vs rapid insulin analogue and rHuPH20 at six months (increased from four months in the trial’s original protocol based on feedback from the FDA). Halozyme announced on 31 March 2014 that the trial met its primary endpoint, as well as several secondary endpoints. Specifically, pre-treatment with Hylenex resulted in a statistically significant reduction of nocturnal hypoglycaemia and hypoglycaemic events where serum glucose was ≤56mg/dL as compared to control. The treatment also achieved numerical (but failed to meet statistical significance) reduction of overall hypoglycemic and severe hypoglycemic events. Based on these data, Halozyme has decided to seek a label update of Hylenex to include the data from this trial, which we expect to take 10-12 months. Given the trial’s success of meeting its primary endpoint and some of the pre-defined secondary endpoints, we have assumed an 85% probability of approval. If the label update is approved, we believe Halozyme plans to build up a special diabetes sales force (c 100, $15m to $20m annually) in the US to promote Hylenex to endocrinologists and diabetologists. Among the 400,000 type I diabetics who use insulin pumps to deliver the drug, approximately 130,000 are using the pumps to achieve better glucose control, and therefore are the primary focus of Halozyme for Hylenex. With an average price of c $17 a day for Hylenex (150 units per injection, one injection every three days), the total market opportunity is c $900m. Based on the top-line data released so far, we assume the drug could penetrate up to 20% of the total market, with peak sales of $240m in the US and $295m worldwide.

2

Vaughn D. et al., 2012 ADA annual meeting, Abs#905-P.


7

Multi-day injection opportunity needs a pharma partner The second opportunity Halozyme envisions for rHuPH20 is with the regular injection of fast-acting insulin analogues, such as Humalog (insulin lispro, Eli Lilly), Novolog (insulin aspart, Novo Nordisk) and Apidra (insulin glulisine, Sanofi), to accelerate their action. In one 120-patient Type II diabetes 3 Phase II trial conducted by Halozyme, Humalog+rHuPH20 and Novolog+rHuPH20 were compared to Humalog alone. In addition to achieving non-inferiority on A1C reduction at 12 weeks, the combination resulted in a 21% reduction of postmeal glucose excursion, no difference in hypoglycaemia rate and similar weight gain. In another 117-patient Type I diabetes Phase II trial, 4 Humalog+rHuPH20 demonstrated non-inferiority over Humalog alone on A1C at 12 weeks, and showed a significant reduction of hypoglycemic rates, a significant 82% reduction of postmeal glucose excursion and a trend of reduced insulin utilisation. Given that the daily insulin injection market is dominated by three key players, ie Lilly, Novo Nordisk and Sanofi, each with large sales forces to support their respective products, we believe Halozyme decided a partnership with any of these three players would be the best option for this indication. While we believe rHuPH20 is a nice addition to the available insulin analogues, a deal has yet to be signed. We therefore have not considered any value in our valuation model for this indication before such a deal is signed.

ENHANZE: Turning rHuPH20 into a powerful delivery tool Large molecular therapies, such as antibodies and proteins, are typically delivered intravenously (IV) because the two other common routes, parental (oral) and subcutaneous (SC), are not efficient enough to deliver sufficient large molecule drugs to the blood stream. IV administration typically requires supervision of healthcare providers at a special setting, which adds additional costs to the treatment. Furthermore, IV drugs are not convenient to patients because of required travel to and from the treatment centres and time taken for IV administration. A traditional way of turning IV drugs into SC is to change the solvent to increase the drug’s concentration in the solution so large amounts of drugs can be injected though the skin and hope that enough does reach the blood stream. Such an approach may not work for all IV drugs because one may not be able to find a perfect solvent to a specific drug. Injection of large amounts of drugs in a short period of time could also cause unwanted side effects such as pain and other skin related abnormalities. rHuPH20, because of its transient digestion of HA under the skin, makes the skin permeable so large molecules can pass through more efficiently, and can be utilised to aid IV drugs delivered SC, without the need to change solvent or increase the drug’s concentration. Halozyme has optimised this platform, called ENHANZE, and formed several collaborations with Pharma companies to quickly develop SC forms of these companies’ important IV biological drugs. Such collaborations enable Halozyme to leverage ENHANZE without heavy investment and the need to bear all clinical risks. For collaborators, ENHANZE helps them develop an SC version of their important IV drugs quickly and cost effectively. The platform is particularly attractive to companies with near-term patent expirations, because these companies can quickly launch the SC drug based on the new drug’s convenience factor and cost savings to healthcare providers.

Roche: An early believer of ENHANZE Roche, a pioneer of protein and antibody therapy, is one of the earliest licensees of Halozyme’s ENHANZE technology. As of December 2013, Roche has selected five exclusive targets with rHuPH20 and retains the option to select three additional targets. Among the five drugs, Roche has launched Herceptin SC and is expected to launch MabThera SC in 2014 (Exhibit 6).

3

Bergenstal R. et al., 2012. ADA annual meeting, Abs#822-P.

4

Hirsch I.B. et al., 2012. ADA annual meeting.


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Roche started the development of Herceptin SC in 2007 and moved into a pivotal Phase III trial in October 2009, which tested Herceptin SC vs Herceptin IV in Her2 positive (Her2+) breast cancer patients with a primary endpoints of bioequivalence (trastuzumab blood concentration) and pathological complete response (pCR). Roche filed a line extension application in 2012 for Herceptin SC to the European Medicines Agency (EMA), which formally approved the drug in August 2013. Roche’s ability to finish the trial in less than three years, on primary endpoints that are easy to meet, validated rHuPH20 as an attractive and cost-effective tool turning a drug from IV to SC. In addition to Herceptin, Roche also applied ENHANZE to MabThera (Rituxan in US). Roche started a two-stage, 405-patient Phase III (SABRINA) comparing MabThera SC to MabThera IV in non-Hodgkin’s lymphoma (NHL) in February 2011 and presented positive data of the stage one of the trial at the 2012 ASH (12/2012) annual meeting. A line extension application in EMA was filed in December 2012, less than two years after the start of the Phase III trial, and an approval was granted to Roche in March 2014. In addition to the two drugs mentioned above, Roche has also selected three other targets, for which it has already paid licence fees and annual maintenance fees. Halozyme has received a total of $71.75m upfront and milestone payments from Roche and could potentially receive up to $154m in future milestone payments. Exhibit 6: Roche collaboration details ($m)

Herceptin, MabThera, Actemra Three declared targets Options for three Total

Upfront 20 20 0.75 71.75

Achieved Clinical Regulatory Sales-based 13 8 10

Clinical 10

Future Regulatory Sales-based Royalty 4 71 Mid-single digit 8 56 N/A

149


Herceptin SC: Peak sales $1.6bn Roche reported Herceptin global sales of $5.65bn (CHF6.079bn), with c $2.04bn from the EU and $1.68bn from international markets (excluding Japan). Herceptin is approved globally for treatment of Her2 positive, metastatic BC and gastric cancer in combination with chemotherapy, as well as an adjuvant therapy (in combination with chemo or alone) for BC patients undergoing surgery. Roche has three Her2-targeted drugs, including Herceptin IV, Perjeta and Kadcyla (TD-M1), with combined sales of $6.174bn (CHF6.639bn) in 2013. In two Phase III EU trials, Roche showed Herceptin SC was preferred by patients (92% preference) over Herceptin IV. It also took significantly less time (5 min vs 30 min or 90 min) to administer than Herceptin IV. Despite these benefits, Roche priced Herceptin SC on par with Herceptin IV in EU, with the clear intent to switch patients from IV to SC, as Herceptin IV’s patent expires in the EU in July 2014. So far the response to the introduction of Herceptin SC has been positive, with several large payers, including England’s NHS, having come out with positive comments. To further boost the drug’s clinical and patient preference profile, Roche is conducting nine trials (Exhibit 7), including one testing at-home injection of the drug. We project Herceptin SC’s peak sales to reach $1.6bn (royalty to Halozyme of $64.1m based on a royalty rate of 4%) by 2027, which equals 78% Herceptin IV’s EU sales, 43% of total Herceptin IV’s ex US/ex Japan sales and 28% of Herceptin IV’s global sales in 2013. Our estimate assumes the majority of Herceptin SC’s sales coming from the EU, some from other international markets and none from the US (Herceptin patent expires in 2019) and Japan (per Roche analyst presentation). Our conservative estimates assume less than a 100% conversion in the EU because we have taken into our considerations entries of trastuzumab biosimilars and the evolving landscape of Her2-based therapy. At Roche’s Q114 conference call, it disclosed that Herceptin SC has been


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launched in 18 countries so far, and, in certain territories, it has achieved c 30-35% of conversion from Herceptin IV to Herceptin SC. Exhibit 7: Ongoing Herceptin SC trials sponsored by Roche Trial name ML28851

Patients HER2-positive early BC

ML28794

HER2-positive early BC

MO22982 ChangHER-SC ML28589 SafeHer

HER2-positive early BC HER2-positive advanced BC HER2-positive mBC, IV Herceptin responding Early HER2-positive BC

HerSCin HOMERUS

HER2-positive early BC Early HER2-positive BC

SCHEARLY

Early HER2-positive BC

Trial description 162-pt, open-label, Phase IIIb study of Herceptin SC. Primary endpoint: patient satisfaction. Start: 2/2014; data 4/2018 100-pt, Phase III of Herceptin SC administration at home vs Herceptin IV. Primary endpoint: adverse events. Start: 1/2014, data 7/2017 488-pt, Phase III of Herceptin SC vs IV. Primary endpoint: overall preference. Start: 10/2011, data 12/2015 160-pt, Phase III, Herceptin SC vs IV. Primary endpoint: overall preference. Start: 9/2013, data: 5/2016 200-pt, Phase III, Herceptin SC vs IV. Primary endpoint: overall preference. Start: 6/2013, data 4/2018 2,500-pt, Phase III, assisted- vs self-administered Herceptin SC. Primary endpoint: incidences of adverse events (AEs). Start 5/2012, data 12/2019 960-pt, Phase III, observational study of Herceptin SC. Primary endpoint: pCR. Start: 9/2013, data: 9/2018 128-pt, Phase III, at home Herceptin SC (single injection device). Primary endpoint: incidences of sAEs. Start: 1/2014, data 1/2017 240-pt, Phase III, Herceptin SC. Primary endpoint: incidences of AEs. Start: 11/2013, data 4/2018

Source: Clinicaltrials.gov and Edison Investment Research

We are aware several players, including Mylan (via collaboration with India-based Biocon), Actavis and Amgen, Celltrion (a South Korea company) and Pfizer, have either introduced trastuzumab biosimilars in emerging markets, or have been vying for EU approval. However, based on our experience of other biosimilars, such as those of Amgen’s Epogen, Neupogen, Neulasta and J&J’s Remicade, the impact of biosimilars on branded biological drug sales is small and gradual, very different from the drastic takeover of the market by generic versions of chemical drugs. Therefore, although we recognise that trastuzumab biosimilars will have a negative impact on Herceptin SC sales, the impact should be small and gradual. Another factor that could potentially affect Herceptin SC sales is the changing dynamic of Her2based therapy, driven by Roche’s own pipeline. Among the two new Her2-based drugs, Kadcyla would eventually be positioned as a replacement of Herceptin, while Perjeta is more or less used sequentially or concomitantly with Herceptin. Kadcyla is currently approved as the second-line mBC treatment but Roche is conducting a series of trials testing the drug against Herceptin in earlier stages of BC treatment. Roche projects that the earliest it can introduce Kadcyla as an early BC treatment is 2017. Would Kadcyla completely replace Herceptin (including Herceptin SC) in early stages of BC treatment (majority of Herceptin sales are from early stages of BC treatment) worldwide? We think the answer is “unlikely”, particularly in places such as the EU and many emerging countries. We believe Roche will take a “region by region” approach in positioning its entire Her2 franchise. In places such as the US where clinical efficacy (assuming Kadcyla beats Herceptin in the ongoing Phase III trials) drives the adoption of a drug, promoting Kadcyla ahead of Herceptin would make economic sense to Roche. In regions such as the EU where the cost of drugs (Kadcyla is priced at a 30% premium over Herceptin IV) is equally important as drug efficacy, it would be beneficial to Roche to promote Herceptin SC as the choice for early stage treatment, and Kadcyla as choice of later-stage treatment where a higher cost is more justifiable. We consider our estimate of Herceptin SC to be conservative because it does not assume any contribution from the US, even after Herceptin’s patent expiration in 2019. Although we cannot rule out a US launch of Herceptin SC completely, we believe the economic incentive to Roche is less compelling if it can position Kadcyla as a Herceptin replacement.

MabThera SC: Peak sales of $1.4bn MabThera (Rituxan in the US) is an antibody against CD20, an abundant surface protein of B-cells. MabThera (Rituxan) is approved globally for the treatment of CD20-positive non-Hodgkin’s


10

lymphoma (NHL), CD20-positive chronic lymphocytic leukaemia (CLL), Rheumatoid arthritis (RA) and a rare disease called granulomatosis with polyangiitis (GPA). Roche reported global sales of $6.64bn (CHF6.951bn) in 2013, with EU sales of $1.78bn and international (ex Japan) sales of $1.35bn. Sales from NHL are estimated to be 80% of total sales. Similar to Herceptin SC, Roche demonstrated in Phase III trials that MabThera SC had a better response rate, less time (5-7 mins vs on average 2.5 hrs) for infusion and higher patient preference than MabThera IV. We expect Roche to price MabThera SC at par with MabThera IV and start aggressively switching and putting new NHL patients on MabThera SC. Once Phase III trials comparing MabThera SC to IV in CLL are completed (2017), we expect Roche to seek approval for that indication in the EU and possibly other emerging markets. We forecast MabThera SC’s peak sales to be $1.4bn ($56.1m royalty to Halozyme based on a 4% royalty rate) by 2027, which equals 78% of EU sales, 45% of ex US/ex.Japan sales and 21% of total MabThera sales in 2013. We assume the majority of sales are from the EU (MabThera’s patent expired in November 2013) for the indication of NHL, with the rest from the EU indication of CLL and from emerging markets, but none from the US (Rituxan patent expires in December 2015) and Japan. We also believe Roche’s strategy on Gazyva, the company’s next-generation anti-CD-20 antibody, will be similar to that of Kadcyla and have a limited impact on MabThera SC’s sales in the EU and emerging markets. We are aware a new class of oral drugs, such as J&J’s Imbruvica (ibrutinib) and Gilead’s Idelalisib, might change the landscape of CLL treatment, but the high costs associated with these drugs will limit their uses mainly in markets in the US (efficacy driven) and Japan (patients overwhelmingly favour oral drugs). While these drugs have also shown efficacy for subsets of NHL in various trials, they are unlikely to replace anti-CD-20-based therapy due to their high costs in cost conscious markets such as the EU and emerging markets. Exhibit 8: Ongoing MabThera SC trials sponsored by Roche Trial name BO25341

Patients First-line CLL

BO22334

First-line follicular NHL

MO28457 MabRella

First-line diffuse large B-cell lymphoma and follicular NHL First-line lymphoma

MO28107 MO25455

First-line diffuse large B-cell lymphoma Maintenance therapy in NHL

Trial description 240-pt Phase III study testing SC vs IV. Primary endpoint: non-inferiority of C trough level of SC MabThera. Start: 4/2011, data: 11/2017 410-pt Phase III study of SC vs IV. Primary endpoint: C trough level of MabThera and ORR. Start: 2/2011, data 12/2017 900-pt Phase III of SC vs IV. Primary endpoint: patient preference. Start: 12/2012, data: 7/2016 139-pt Phase IIIb single arm study of switching from IV to SC. Primary endpoint: Incidence of administration-associated reactions (AARs). Start: 11/2013, data: 5/2017 600-pt Phase III study of SC vs IV. Primary endpoint: CR/Cru. Start: 8/2012, data 8/2016 700-pt Phase IV study of SC as maintenance. Primary endpoint: PFS. Start: 12/2011, data: 3/2019

Source: Clinicaltrials.gov and Edison Investment Research

Baxter: HyQvia in EU market; HyQ pending in US Baxter and Halozyme started their relationship in 2007, to develop a new SC formulation, called HyQvia, of Baxter’s drug, Gammagard SC 10%. HyQvia consists of rHuPH20 and Gammagard SC 10%, which are injected sequentially using the same injection needle. Gammagard liquid (both IV and SC), a sterilised solution made from human plasma that contains antibodies, is approved for patients with primary immune-deficiency diseases (PI). Baxter completed a Phase III trial in 2010, which compared HyQvia to Gammagard SC 10% and Gammagard IV in patients with PI. Based on positive data from this trial, Baxter filed a Biologics License Application (BLA) for the treatment of PI to the FDA in mid-2011 and the European authorities in Q3 of 2011. HyQvia’s US approval is pending after the FDA extended the PDUFA date by three months on 21 May 2014. Baxter now expects the drug to be reviewed by the Blood Products Advisory Committee (BPAC) at a meeting scheduled for 31 July 2014. The drug gained its EU approval in May 2013 and Baxter launched the drug in Q313. Halozyme has received a total of $27m upfront and milestone payments and could potentially receive up to $30m future milestone payments (Exhibit 9).


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Exhibit 9: Baxter collaboration details ($m) Upfront 10 10 27

HyQvia Hylenex (rights returned) Total

Achieved Clinical Regulatory 3

Sales-based 4

Clinical

Future Regulatory Sales-based Royalty 30 Mid-single digit

30


HyQvia: A $500m opportunity Gammagard is Baxter’s fractioned human immune globulin (Ig) indicated as a replacement therapy for primary humoral immunodeficiency (PI). PI is a collection of disorders resulted from deficiencies of antibody production, with symptoms of recurrent infections, among others. Intravenously administered (weekly or every two to three weeks), life long, human globulin (IVIG) is the first-line therapy for PI but increasingly patients are switching to subcutaneous IgG (SCIG) because of not only patient convenience (administered at home), but also lower incidences of systemic reactions, presumably due to lower peak IgG concentrations. Total global sales of human immune globin are estimated to be $5bn, with the majority coming from the IV forms. Baxter reported 2013 total sales of bio-therapeutics, comprised primarily of its immune globin franchise, of $2.12bn. In 2012, the last year that Baxter broke down details of its antibody sales, total sales were $1.59bn, with $1.163bn from the US and $430m from international markets. Another major player in the human immunoglobin field is CSL Behring, which reported sales of Hizentra (20% SCIG) and Vivaglobin (16% SCIG) of $400m and IVIG of $1.5bn in 2013. Baxter demonstrated 5 that HyQvia can achieve bioequivalence at a dose of only 108% of that of IVIG, and at a schedule of every three to four weeks. Therefore, in addition to savings of drug materials, HyQvia allows for up to a full one-month dose of IgG in a single SC administration, a significant improvement of patient convenience compared to Gammagard SC 10%. This is also a distinct advantage compared to other currently available subcutaneous IG products that are typically dosed once a week through multiple needles. We expect Baxter to receive HyQvia’s approval in the US in 2014, after the FDA extended the drug’s PDUFA date by three months into August 2014. As the drug is to be reviewed by the FDA’s BPAC at its July meeting, the committee’s vote at the meeting becomes an important catalyst for Halozyme. Given that Baxter’s antibody franchise had the majority of its sales from the US as compared to international markets ($1.163bn vs $430m), we expect the majority of HyQvia sales will also be from the US, with peak sales of HyQvia of $501m by 2027. We consider our sales estimate conservative because HyQvia’s dosing schedule (every three or four weeks) is a big advantage over CSL’s Hizentra (weekly), which achieved global sales of c $400m in 2013, with the majority of that coming from the US.

Pfizer: A new heavyweight licensee In December 2012, Pfizer entered into collaboration with Halozyme to apply rHuPH20 to three of Pfizer’s biological products, with options to extend the collaboration to three other targets. Pfizer has since declared a fourth target. The Pfizer deal represented the first collaboration deal that Halozyme signed with a major pharmaceutical company since the Roche deal. The addition of a fourth target in September 2013 also takes away some of the concerns in the market place about the technology stemming from HyQvia’s CRL from the FDA and the termination of the collaboration between ViroPharma and Halozyme (ViroPharma cited uncertainties of resolving the issues of nonneutralising antibodies observed in the Phase II trial). One of the Pfizer’s declared target is PCSK9, a protein that decreases the level of low-density lipoprotein cholesterol (LDL-C). Several companies, including Sanofi/Regeneron, Amgen and Pfizer, are developing PCSK-9 protein 5

Stein M. et al., 2012 Annual Meeting of the American Academy of Allergy, Asthma & Immunology. Abs#55.


12

therapeutics as cholesterol-lowing drugs. Halozyme has received upfront payments of $11m and could receive up to $148m in future milestone payments. Exhibit 10: ENHANZE collaboration (Pfizer and Intrexon) financial details ($m) Upfront

Pfizer: Four targets Total Pfizer ViroPharma (terminated) Cinryze Total Viropharma Total

Clinical

Regulatory

11 11 9 14 11

Future Clinical 20 148

3

Regulatory 16

Sales-based Royalty 112

2 148

Source: Company reports

Sensitivities In our view, the investment case rests on a timely re-start and successful execution of the Phase II trial of PEGPH20 for pancreatic cancer and commercial success of the three key collaborative products. As PEGPH20 accounts for 30.6% of the company’s pipeline value, success of the Phase II trial and the subsequent initiation of a Phase III trial would increase the per share value to $17.0, a 47% appreciation. PEGPH20 approval would increase the share to $21.7, an 87% appreciation. Obviously, a failure would decrease the share value, to $8.3, a 28% loss. We realise this price is close to the current market price, suggesting the market is not giving the drug any value, leaving it as a free option. The three approved collaborative products collectively account for 34.9% of the pipeline value. The only regulatory risk is HyQvia’s US approval. A rejection or delay of it could affect our HyQvia estimate but the impact to the share value is c 2%. The main risks are sales of these products in the market as compared to market expectation because of either market competition or collaborators’ business strategy changes. As the market may have attributed a significant portion of the company’s value to collaborative products, as exemplified by the c 50% share loss after Halozyme announced the FDA has requested additional information on HyQvia to complete the drug’s BLA review in April 2012, underperformance of any of the approved collaborative products could lead to larger than intrinsic share loss. For example, if we reduced sales of all three products by half in 2014 and total peak sales by half by 2027, a psychologically very negative matrix for the stock, the intrinsic value decrease based on our model is only 15%. As we gain more clarity on sales potential of these drugs towards the end of year, the value of these collaborative products will become clearer to investors, in our opinion.

Valuation We value the company (Exhibit 11) using our discount cash flow method, evaluating its platform and its own pipeline separately. We forecast PEGPH20 and Hylenex (with pump insulin) sales up to 2027. With a 25% probability of success (taking into consideration of the recent clinical hold) for PEGPH20 and 85% (based on success of the late-stage clinical trial) for Hylenex (with pump insulin), and our standard discount rate of 12.5%, we arrived at risk-adjusted, after tax rNPVs of $416m and $336m, respectively. For collaborative products, we focused mainly on Herceptin SC, MabThera SC and HyQvia, as they are either approved or pending approval. Based on our estimates of revenue of these products, 100% (85% for HyQvia) probability of success and a 12.5% discount rate, we arrive at an rPV of $475m. We also arrive at a value of $132m for the remaining collaborative products. Adding $86.3m end of 2014, debt-free cash, we get a total firm value of $1,445m, or $11.6 per basic share ($11.4 per diluted share).


13

We have also provided a scenario analysis based on PEGPH20’s probability of success and peak sales estimates (Exhibit 12). As expected, the value is more sensitive to probability of success as the drug moves from Phase II to Phase III. Exhibit 11: Halozyme valuation model ($m except for per share data) Product

Main Indication

PEGPH20 First-line pancreatic cancer Hylenex (pump insulin) Type I diabetes Herceptin SC Breast cancer MabThera SC NHL HyQvia Primary immune deficiency Future milestone payments (for above three) Other collaborative products Total Cash and cash equivalents (YE 14) Total firm value Total basic shares (m) Value per basic share ($) Stock options (31 December 2013, m) Cash on exercise Total firm value inc proceeds from options Total number of shares (m) Diluted value per share ($)

Status

Prob. of success 25% 85% 100% 100% 85% 100% 65%

Phase II Late-stage Approved Approved Approved/pending Various

Launch year 2018 2015 2013 2014 2013 N/A 2018

Peak sales $m 1,510 295 1,603 1,403 751 N/A 3,010

Patent protection >2027 >2027 >2027 >2027 >2027 N/A >2027

Royalty Fully own Fully own 4% 4% 4% 4% 4%

rNPV $m 416 336 218 181 34 42 132 1,358 86.3 1,445 124.0 11.6 7.4 51.7 1,496 131.4 11.4

Source: Edison Investment Research

Exhibit 12: Scenario analysis based on PEGPF20 probability of success and peak sales

PEGPH20 peak sales ($bn)

1.00 1.25 1.50 1.75 2.00

0% 8.3 8.3 8.3 8.3 8.3

15% 9.4 9.8 10.3 10.8 11.3

PEGPF20 probability of success 25% 35% 65% 10.2 10.9 13.1 10.8 11.8 14.7 11.6 13.0 17.0 12.5 14.2 19.2 13.4 15.4 21.6

85% 14.6 16.7 19.7 22.5 25.7

100% 15.7 18.2 21.7 25.0 28.7

Source: Edison Investment Research

Financials Halozyme reported a net loss of $26.5m, with revenue of $12m, SG&A of $10.3m and R&D of $21.4m in Q114. Operating cash burn for the quarter was $17.6m. The company ended the quarter with cash and marketable securities of $164.5m, including the net proceeds of $107.8m by offering 8.8m shares at $13 per share in February 2014. As of March 2014, the company carried long-term debt of $47.4m and deferred revenue of $44.9m, resulting mainly from milestone payments Halozyme received from its collaborators. We forecast total revenue of $67.6m in 2014, including $35m net product sales (sales of rHuPH20 to collaborators and Hylenex) and $32.6m royalties and research collaborative revenue. Our R&D estimate is $93m, slightly lower than that of 2013, because 2013’s R&D included the manufacturing cost of rHuPH20 for collaborators, which is included in COGS going forward, offset by increased PEGPH20 expense. We estimate the company’s cash utilisation will be $50.3m in 2014 and it will end the year with cash and cash equivalents of c $135.6m, which is sufficient to support the company’s clinical development of PEGPH20 and its operation beyond 2015.


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Exhibit 13: Financial summary Year end 31 December

$m

PROFIT & LOSS Revenue Cost of Sales Gross Profit EBITDA Operating Profit (before amort. and except.) Intangible Amortisation Exceptionals Other Operating Profit Net Interest Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3)

2010 IFRS

2011 IFRS

2012 IFRS

2013 IFRS

2014e IFRS

2015e IFRS

13.6 (1.0) 12.6 (60.6) (54.3) 0.0 0.0 2.0 (52.3) 0.0 (54.2) (52.2) 0.0 (52.2) (52.2)

56.1 (0.3) 55.8 (26.5) (19.8) 0.0 0.0 0.1 (19.8) 0.1 (19.7) (19.7) 0.0 (19.7) (19.7)

42.3 (1.1) 41.2 (63.1) (53.6) 0.0 0.0 0.1 (53.5) 0.1 (53.5) (53.5) 0.0 (53.5) (53.5)

54.8 (6.2) 48.6 (91.2) (80.4) 0.0 0.0 (3.3) (83.7) 0.2 (83.5) (83.5) 0.0 (83.5) (83.5)

67.6 (9.5) 58.1 (81.4) (66.9) 0.0 0.0 (3.0) (69.9) 1.5 (68.4) (68.4) 0.0 (68.4) (68.4)

89.0 (9.6) 79.3 (65.5) (53.5) 0.0 0.0 (3.0) (56.5) 1.0 (55.5) (55.5) 0.0 (55.5) (55.5)

Average Number of Shares Outstanding (m) EPS - normalised ($) EPS - normalised and fully diluted ($) EPS - (IFRS) ($) Dividend per share ($)

94.36 (0.55) (0.51) (0.06) 0.0

102.57 (0.19) (0.18) (0.19) 0.0

111.08 (0.48) (0.46) (0.48) 0.0

112.81 (0.74) (0.70) (0.74) 0.0

124.00 (0.55) (0.52) (0.55) 0.0

126.50 (0.44) (0.41) (0.44) 0.0

Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%)

92.8 -445.0 -398.2

99.5 (47.3) (35.4)

97.4 (149.0) (126.7)

88.6 (166.4) (146.8)

85.9 (120.4) (99.0)

89.2 (73.6) (60.1)

BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments Current Assets Inventory Accounts receivable, net Cash and cash equivalents Other Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets

1.8 0.0 1.8 0.0 89.5 0.2 2.3 83.3 3.7 (15.3) (15.3) 0.0 (55.7) 0.0 (55.7) 20.4

1.8 0.0 1.8 0.0 64.0 0.6 2.3 52.8 8.3 (17.3) (17.3) 0.0 (37.6) 0.0 (37.6) 10.9

3.7 0.0 3.7 0.0 131.0 2.7 15.7 99.9 12.8 (18.9) (18.9) 0.0 (66.9) (29.7) (37.3) 48.9

6.6 0.0 3.4 3.2 95.2 6.2 9.1 71.5 8.4 (25.5) (25.5) 0.0 (96.3) (49.8) (46.6) (20.0)

5.1 0.0 3.0 2.1 161.7 6.5 9.5 135.6 10.1 (25.6) (25.6) 0.0 (100.3) (49.3) (51.0) 40.9

5.9 0.0 2.5 3.4 131.3 10.0 11.4 97.8 12.1 (29.6) (29.6) 0.0 (98.8) (48.8) (50.0) 8.9

CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Net Cash Flow Opening net debt/(cash) HP finance leases initiated Other Closing net debt/(cash)

(45.4) 0.0 0.0 (0.6) 0.0 61.8 0.0 15.8 (67.5) 0.0 0.0 (83.3)

(34.4) 0.1 0.0 (0.8) 0.0 4.7 0.0 (30.4) (83.3) 0.0 (0.1) (52.8)

(64.3) 0.1 0.0 (1.4) 0.0 83.2 0.0 17.5 (52.8) 0.0 (0.1) (70.2)

(49.3) 0.2 0.0 (2.3) 0.0 5.1 0.0 (46.3) (70.2) 0.0 (2.2) (21.7)

(50.3) 1.5 0.0 0.0 0.0 114.3 0.0 65.5 (21.7) 0.0 (1.0) (86.3)

(45.3) 1.0 0.0 0.0 0.0 7.5 0.0 (36.8) (86.3) 0.0 (0.5) (49.0)

Source: Halozyme reports, Edison Investment Research


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Contact details

Revenue by geography

11388 Sorrento Valley Road San Diego, CA 92121 US +1 858 794-8889 www.halozyme.com

N/A

CAGR metrics

Profitability metrics

EPS 10-14e EP 12-14e EBITDA 10-14e EBITDA 12-14e Sales 10-14e Sales 12-14e

N/A N/A N/A N/A N/A N/A

ROCE 14e Avg ROCE 10-14e ROE 14e Gross margin 14e Operating margin 14e Gr mgn / Op mgn 14e

Balance sheet metrics 254.9% 126.9% 417.6% 85.9% N/A N/A

Gearing 14e Interest cover 14e CA/CL 14e Stock days 14e Debtor days 14e Creditor days 14e

Sensitivities evaluation 108.6% 350.9 3.7 41.1 60.6 20.9

Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices

     

Management team President, CEO: Helen Torley, MB ChB, MRCP

VP and CFO: David A Ramsay

Dr Torley joined Halozyme as president and CEO in January 2014. Previously she was executive VP and chief commercial officer for Onyx Pharmaceuticals, general manager of both the US Nephrology and Bone Health business unit of Amgen, and regional VP of Cardiovascular and Metabolic Sales of BMS. Dr Torley received her MB and ChB degrees from the University of Glasgow.

Mr Ramsay joined Halozyme in 2003 as CFO, was later appointed VP of corporate development, and became CFO again in 2013. He was previously VP and CFO of Lathian Systems, VP and treasurer of ICN Pharma, and manager of financial planning of ARCO. He received a BS in business administration from UC Berkeley and an MBA from the Wharton School at the University of Pennsylvania.

Vice President, General Counsel: Jean I Liu, MS, JD

VP and Chief Scientific Officer: H Michael Shepard, PhD

Ms Liu joined Halozyme in 2011. She was previously the chief legal officer and secretary of Durect Corporation. She also worked at Pillsbury, Madison & Sutro (now Pillsbury Winthrop) and the Venture Law Group. Ms Liu obtained her BS from the University of Michigan, her MS from Stanford University, and her JD from Columbia University.

Dr Shepard joined Halozyme in 2009 and was promoted to CSO in December 2010. He was a founder or co-founder of several biotech companies including Receptor BioLogix, NewBiotics, Canji, and worked at Genentech, sharing the Warren Alpert Prize from Harvard Medical School. He received his BS from UC Davis and his PhD from Indiana University.

Principal shareholders

(%)

Randal J. Kirk BlackRock Baker Brothers Advisors LLC Vanguard Group Inc. BB Biotech AG

15.90 5.18 5.06 4.25 3.80

Companies named in this report Roche (RHHBY), Pfizer (PFE-NYSE), Baxter (BAX-NYSE), Eli Lilly (LLY-NYSE), Celgene (CELG-NASDAQ), Threshold (THLD-NASDAQ)

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