HALO - Halozyme Therapeutics: A Trailblazer But With Lukewarm Financials

Summary

• HALO has mediocre financials, questionable outlook.
• Absolute market share ensures demand for its products.
• Que Capital recommends a strong hold, until profit margins improve.

Thesis

Over the past year, Halozyme Therapeutics' (HALO) stock price has risen by 45.96% reflecting strong earnings and revenue, seeing a staggering leap in Q1-Q3 2022 compared to Q1-Q3 2021 for the company. The positive markers of successful drugs and treatments indicate a positive future for the company. However, there are risk factors present, such as failing to meet the estimated revenues for 2023 and significantly lower profit margins. With these conflicting factors at play, Que Capital recommends a hold rating.

Company Financials Overview

HALO primarily deals in developing and producing recombinant human enzymes, purposed with enhancing the delivery of biologics and drugs. HALO primarily sources their income and business from the formula Hylenex, or rHuPH20, in combination with Enhanze, comprising 62% of their most recent revenue figures in Q3 2022. HALO’s research and development operations are exclusively located in San Diego, California.

From Q3 2021 to Q3 2022 HALO’s financials performed well in multiple areas. Over this period, revenue increased by 40.35%, or $137.5 million, however Net Profit decreased by 57%. In addition, the profit margins also decreased significantly in the same time period, specifically decreasing from 98.5% to 30.18%, due to factors such as amortization of intangible assets and a heavy investment in research and development. This trend differs from previous years, with the company always producing strong financials which indicated solid long-term growth in store.

Tailwinds

Success from Protein Treatment Hylenex:

The largest medical product in Halozyme’s inventory, Hylenex, is utilized to treat severe dehydration in the body among other problems. Additionally, Hylenex can be employed to support the patient’s body during injections of other medicinal drugs and improve clarity and highlight certain classes of x-rays and medial scans. Hylenex is the sole drug available for consumers and medical professionals to make use of, being the only FDA-approved recombinant human hyaluronidase . With total market dominance since its creation in 2005 and reconditioning in 2015, Hylenex is a lead contributor to Halozyme Therapeutics’ $6.96 billion dollar market capitalization. Additionally, Hylenex has demonstrated consistent reliability for consumers, with minimal side affects only located in 0.1% of patients. Ultimately, HALO capitalizes on the consistency and success of Hylenex in combination with total market share.

Increased usage of Drug Delivery Technology Enhanze:

In combination to Hylenex, a form of the protein rHuPH20 (commercially known as hyaluronidase), is used to create Enhanze, a drug delivery technology used in the aid to help the body absorb and spread other medications injected through subcutaneous delivery; subcutaneous delivery is an injection delivered under the tissue of skin , the delivery process of a majority of drug treatments. Enhanze is the delivery variant of the drug Hylenex to enhance the process, f unctioning by clearing the matrix of tissues such as skin , clearing and allowing for the intended medicine to pass through. Contrary to Hylenex, Enhanze is combined into the production of medicinal drugs from pharmaceutical companies, such as Roche. Although Enhanze is not directly sold to consumers, HALO receives commissions through partner distributors and drug manufacturers. A prime example of such partnership is found through Roche and Merck’s Keytruda treatment, a drug used in cancer treatment . Keytruda’s formula utilizes Enhanze as a delivery process, allowing for the treatment to be better implemented in the patients’ cells. Roche and Merck are currently awaiting results from phase 3 trial tests , projected for a 2023-2024 release date. As per past precedent, if said trials receive positive results, expect HALO stock to leap.

Risks

Lower than Estimated Revenue

On January 10, 2023, HALO suffered an 11.92% reduction in stock price, following poor financial results as indicated in earnings releases. For 2023 announcements and estimates, HALO announced an expected total revenue increase of $815 million to $845 million, landing significantly below the consensus revenue estimate of $892.43 million. HALO fell short of expected earnings by over 7.4%, the largest revenue shortcoming in recent history for the company. Additionally, HALO provided a projected 2023 EPS in the $2.50 to $2.65 range, which was an additional 13.8% reduction opposed to the consensus EPS estimate of $2.93. The signified lack of projected business resulted in a salient downturn, with HALO opening price on January 10th valuing at $55.7, and concluding at $50.56. Since then, stock valuation has continued to fall, reducing to $48.81 or by 4.34%. Until positive press release regarding financials or medicinal trial results, expect stock prices to be stagnant.

Significant Problems Regarding Debt

Currently, HALO is suffering from a high amount of debt, only increasing from last year's numbers. In September of 2021, HALO held $875.7 million in debt, but at Q3 2022 reports, HALO held $1.50 billion in debt, or a net debt of $1.24 billion . Despite an $620.4 million or a 71% increase of net debt, Halozyme holds a $6.96 billion market capitalization, making liabilities in debt manageable in upcoming years. With projected continuing successes via Hylenex and Enhanze, HALO will likely be able to overcome the developed debts.

Notable Decline in Profit Margins and Net Profit

Considering current numbers from Q1-Q3 in 2022, profit margins have received a substantial reduction. In Q1-3 2021, net profit margins were 98.5%, as compared to Q1-3 2022 net profit margins of 30.18%. This substantial 69.3% reduction of profit margins can be attributed to the sizeable increase of debt, with operating costs slated to increase as a result. However, as discussed previously, the current market capitalization can lead to debt being resolved, returning the net profit margins to former rates. Additionally, net profit numbers saw a reduction, from close to $336 million in Q1-3 2021 to around $114.5 million. A large contributor to this was amortization of intangibles, along with higher investment into research and development. With amortization of intangible assets, a larger toll was required to sustain patents on developed treatments. However, amortization changes rates per year, and will not be as great a factor next year as it was in Q1-3 2022.

Valuation

HALO's PS Ratio Recently took a dip due to the aforementioned problems with debt and profit margins signifying that the drop in investor confidence has led to a more attractive valuation with the current price being able to be considered a historical bargain.

Yahoo Finance's aggregate of 8 Industry Analysts puts price targets at a high of $68.00 and a low of $26.00 and an average of $56.75 indicating that it is an industry consensus that HALO's stock is undervalued (albeit with a single extreme outlier). This is further supported by JP Morgan and Morgan Stanley's maintenance of "Overweight" valuations of HALO's stock.

ESG

As seen through Halozyme Therapeutics’ ESG standards , Halozyme works towards a more environmentally and socially sustainable future. Environmentally, HALO implements a quality management system , tasked with reviewing all procedural practices within the company, especially on quality, development, and manufacturing activities. In addition, their foremost drug Hylenex is formulated with no animal products in use , further supporting an already eco-friendly trend.

Socially, HALO sponsors and provides for communities with health disparities, humanitarian services, military and veterans, among others. Halozyme has a strong focus on diversity, employing a 43.8% women workforce and 30% of all employees coming from racial minorities .

Conclusion

Overall, HALO benefits from a number of strong tailwinds which paint a positive picture for the company. However, the presence of risks sow doubt in the certainty of such a future especially given their pressing financial nature. With such risks accounted for, HALO is still a stock to hold and worthy of any prospective investors attention.

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