Halozyme (HALO): Steady Revenue Growth at a Reasonable Valuation
I was drawn to Halozyme (HALO) because of its unique business model with no in-house drug development. Halozyme reformulates many blockbuster drugs that have provided them with milestones and royalty payments. In addition, Halozyme does not need to invest its own funds in the development of these drugs, which significantly reduces risk. In addition, the impressive number of partners diversifies their sources of income and their clinical success. However, its main appeal lies in the company’s growth trends which have remained intact throughout the pandemic and which are expected to persist for several more years. These attributes drew me to HALO and have kept the ticker in my “Bioreactor” growth portfolio for a few years now, and will remain in this portfolio for many more. Now I’m moving HALO to my “Best Ideas” list given the company’s recent revenue and business success.
I intend to provide a brief overview of Halozyme and discuss its growth story. Additionally, I review the company’s valuation and stock charts to determine a buy target.
Halozyme Therapeutics has an attractive business model that focuses on innovative drug delivery solutions. Halozyme’s ENHANZE drug delivery platform is based on a proprietary enzyme called rHuPH20, which works by enhancing the delivery of other injected drugs in a beneficial subcutaneous formulation that improves infusion times. Halozyme’s ENHANZE is employed by some of the biggest and best healthcare companies including Bristol Myers Squibb (BMY), Pfizer (PFE), Johnson & Johnson “Janssen” (JNJ), AbbVie (ABBV), Lilly ( LLY), Roche (OTCQX: RHHBY), argenx (ARGX) and Alexion (ALXN). It is estimated that these products have been used to treat over 600,000 patients worldwide.
Recently, Halozyme released its fourth quarter and full year 2021 results which revealed the company’s impressive financial performance and business trends that will keep HALO’s growth story intact in 2022. The company ended 2021 with revenue totals up 66% year over year to $443 million. . Additionally, operating profit jumped 91% to $276 million and the company reported non-GAAP earnings of $2 per share for the year.
The company’s revenue growth was driven by growth in royalty income, which jumped 130% year-over-year. Royalties during the fourth quarter were $62.6 million, a 96% year-over-year increase and 7% sequential growth. This translated into full-year royalties of $204 million, representing approximately 130% year-over-year growth.
Janssen’s DARZALEX is the current engine of royalty revenue growth. During its fourth quarter earnings report, Johnson & Johnson announced that DARZALEX’s total sales for 2021 were $6 billion, an increase of 42.3% over 2020.
DARZALEX FASPRO achieved a 76% share of total DARZALEX sales in the United States in December, up from 72% at the end of September. Halozyme estimates that DARZALEX SC achieved an annualized share of approximately 58%.
Another driver of royalty revenue growth is Roche’s Phesgo. In the fourth quarter, Roche reported that sales of Phesgo were 127 million Swiss francs, compared to 117 million Swiss francs in the third quarter. For the year 2021, Phesgo achieved a turnover of 340 million Swiss francs.
In addition to royalties, the company received an initial milestone payment of $40 million from ViiV Healthcare. Additionally, the company achieved several other development and commercial milestones in 2021 with the start of 10 new study partners.
For the full year 2022, Halozyme forecasts revenue of $530-560 million, representing growth of 20-26% from 2021. The Company expects its growth to be primarily driven by royalty revenue growth of approximately 50%, or about $300. M Additionally, Halozyme expects potential milestone payments for potential new deals to be signed this year. This revenue growth is expected to increase operating income to $350-380 million, representing a 27-38% increase. Halozyme expects non-GAAP earnings to be $2.05 to $2.20 per share.
From 2022 to 2024, Halozyme expects its milestones to grow from $450M to $500M in total. By 2027, Halozyme sees the potential to reach approximately $1 billion in royalty revenue.
Future growth opportunities
Trying to project future growth can be difficult due to the many unknowns and black swan events that can completely destroy the thesis. However, Halozyme’s growth plan is legitimately rock-solid due to the long-term potential of its ENHANZE development pipeline.
Clearly, Halozyme is looking to relentlessly increase the number of products in development and launch as many products to increase milestone and royalty payments to Halozyme. In February 2022, the company’s ENHANZE partners initiated four Phase I trials, each for a new product in the development pipeline.
Halozyme expects at least five Phase II or III trial initiations for existing ENHANZE partner programs. Additionally, four new ENHANZE products will begin Phase I development by the end of this year. Roche’s Atezolizumab and Bristol Myers Squibb’s Nivolumab are in their Phase III studies evaluating sub-q delivery with ENHANZE, with launch potential between 2023 and 2025.
In the long term, the company’s co-formulation patents could help extend royalty life. According to Halozyme, several of its partners have already filed new co-formulation patent applications for their products in the ENHANZE development pipeline. Another potential boost could come from Halozyme’s new, more extended room temperature stable rHuPH20, which could launch after 2027 and has an IP until 2032 in Europe and 2034 in the United States.
Halozyme is evaluating potential merger and acquisition opportunities for new platform technology to help sustain growth over the next decade. Halozyme has a strong projected free cash flow, so it should have the funds to acquire what it needs for growth down the line.
A simple assessment
HALO is overvalued relative to the industry median on several valuations, including price-to-sales, price-to-book, EV-to-sales, and price-to-cash flow. However, the projected growth of HALO should improve these metrics in the coming years.
To determine a rough valuation, I’ll use the company’s 2022 revenue estimate of approximately $550 million with the industry standard of 5x the price at sales discounted for time, and we get approximately $20 per share. Thus, HALO is quite expensive at a price of $35 per share. However, over the long term, it appears that Street expects Halozyme to grow for the remainder of this decade and top approximately $1.21 billion in 2029. Using Street’s 2029 revenue estimate of $1.21 billion and the previous valuation method, we get about $44 per share.
Indeed, there are many other methods that could yield a much higher return or could be more appropriate for a growing business that generates FCF and is expected to see EPS grow in the years to come. Additionally, the company had $740.92 million in cash, cash equivalents and marketable securities at the end of the fourth quarter, which equates to a total of $5.38 in cash per share. Additionally, the company has a new three-year, $760 million share buyback program.
Nonetheless, the price-to-sales method is easy to follow and does a great job of illustrating how valuation might increase with projected revenue growth.
Despite the company’s expected growth, Halozyme still poses downside risks that investors should consider. The main question is whether Halozyme can continue to register growth in the years to come. The company needs to find additional partners and hopes that these partnership programs will go through the FDA. Obviously, there’s a chance that some partnerships won’t work out and some programs won’t go through the FDA, so the company is going to have massive partnerships to increase the odds of success and maintain the growth narrative. If the growth story is lost, it is very likely that HALO will stop trading at a higher valuation.
The long-term outlook for Halozyme looks exceptionally positive. Halozyme is a proven company that is profitable and expected to grow in the years to come. Therefore, HALO has its place in the Portfolio of bioreactors and will be traded to generate cash while creating a substantial position for long-term investment.
In 2022, Halozyme is expected to generate increased revenue, increased operating income and growth in the company’s pipeline, leading to robust growth in the short and long term. Accordingly, I seek to trade HALO based almost entirely on technical analysis and market momentum.
Looking at the daily chart, we can see that HALO has slowly formed a pennant formation, with some signs of attempted breakouts on the upside. Therefore, I am looking to make a sizable short-term addition in anticipation that HALO will eventually break out in significant volume. I will be looking to trade a large portion of these newly acquired shares for profit and re-apply the profit on a decline in the stock price.
Overall, I expect to hold a position in HALO for at least five more years in anticipation of the company growing to its current valuation.