Halozyme Therapeutics - Earnings Call - Q3 2021

Transcript

Operator (participant)

Good afternoon, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Halozyme Third Quarter 2021 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Al Kildani, Vice President of Investor Relations and Corporate Communications, please begin your call.

Al Kildani (VP of Investor Relations and Corporate Communications)

Thank you. Good afternoon, and welcome to our Third Quarter 2021 Financial Results Conference Call. In addition to our press release issued today after the close, you can find a supplementary slide presentation that will be referenced during today's call in the Investor Relations section of our website. Leading the call today will be Dr. Helen Torley, Halozyme's President and Chief Executive Officer, who will provide an update on our business, and Elaine Sun, our Chief Financial Officer, who will review our financial results for the third quarter. On today's call, both GAAP and non-GAAP financial measures will be discussed. The non-GAAP, or adjusted financial measures, are reconciled with the comparable GAAP financial measures in our earnings press release and slide presentation. During the call, we will be making forward-looking statements. I refer you to our SEC filings for a full listing of the risks and uncertainties.

I'll now turn the call over to our CEO, Dr. Helen Torley.

Helen Torley (President and CEO)

Thank you, Al. I'm pleased to report on our strong third quarter financial results, which reflect the continued momentum and growth of our ENHANZE business. We reported third quarter revenues of $115.8 million. This revenue was driven by record quarterly royalties of $58.6 million, which represents 145% year-over-year growth, and by collaboration revenue of $32.2 million, which included a $30 million commercial milestone from Janssen, resulting from the continued strong growth and performance of DARZALEX subcutaneous. Third quarter GAAP diluted earnings per share was at $1.48, including an income tax benefit related to the release of our tax valuation allowance, and non-GAAP diluted earnings per share was $0.55. As a result of the strong year-to-date performance, we are increasing the lower end of our revenue and operating income guidance for 2021. Revenue guidance is increased to $430 million-$445 million, which represents growth of 61%-66% over prior year.

Operating income guidance is now $265 million-$280 million, representing 84%-94% growth over prior year. In addition, we have one tax-related adjustment to our GAAP earnings per share guidance, now that we have demonstrated a pattern of durable profitability. This results in an increase to our GAAP earnings per share guidance to a range of $2.60-$2.70. We're also raising the lower end of our non-GAAP earnings per share guidance to a range of $1.90-$2.00. Elaine will discuss our updated guidance in detail, along with the rest of our financial results, later in the call. Let me turn now to slide three and provide some details on key third quarter progress and events, and I'll begin with royalty revenues. Royalties during the third quarter were $58.6 million. This represents 145% growth year-over-year and 28% sequential growth, following what had previously been our record quarterly royalties.

Strong royalty growth has been driven primarily by the successful ongoing global launches of Janssen's subcutaneous forms of DARZALEX, which utilize our ENHANZE technology, and by increasing contributions from Roche's Phesgo. For the full year 2021, we continue to project a more than doubling in our royalty revenues over 2020, based on the anticipation of continued growth, primarily driven by DARZALEX subcutaneous. We're delighted to see this continued robust growth in this high-margin recurring revenue stream. I'll now provide some highlights on key commercialized products, which are listed on slide four. There are five products now approved in most major global markets using our ENHANZE technology. The most recently launched products utilizing the ENHANZE technology, which we call our Wave Two products, are DARZALEX SC, which is also called DARZALEX FASPRO, and also Phesgo, which is a fixed-dose combination of Roche's Perjeta and Herceptin.

In each case, the subcutaneous version can be administered in just minutes compared to the multi-hour treatment times for the IV versions. This can mean a reduced burden of treatment for patients and reduced use of healthcare resources. Globally, more than 500,000 patients have received commercial products utilizing ENHANZE. Turning to slide five, I'll now provide some color on DARZALEX and DARZALEX subcutaneous. During the third quarter, Janssen's parent, Johnson & Johnson, reported worldwide sales of DARZALEX, including both the IV and subcutaneous forms, of $1.58 billion, an increase of 42.9% year-over-year on an operational basis. On its third quarter conference call, J&J further stated this growth was driven by increased penetration of the subcutaneous formulation in the U.S. and Europe, continued launches globally, and share gains, with a reported nearly five points of share growth in the United States across all lines of therapy in the third quarter.

Turning now to subcutaneous DARZALEX, according to data from Symphony Health, in the United States, DARZALEX FASPRO achieved 72% share of sales in the month of September. This is an increase from 66% share at the end of June. The chart on the right illustrates a percentage of total DARZALEX sales at DARZALEX FASPRO represented during the last month of each of the last four quarters in the United States. What you can clearly see is a strong growth trend, which we project will continue. Driving potential additional opportunity, Janssen recently announced several regulatory achievements that can support continued growth for subcutaneous DARZALEX. Beginning with multiple myeloma, in July, Janssen received FDA approval for DARZALEX FASPRO in combination with pomalidomide and dexamethasone for patients with multiple myeloma after first or subsequent relapse.

Moving now to light chain amyloidosis, in October, Janssen received approval from the China National Medical Products Administration for the use of DARZALEX FASPRO for the treatment of newly diagnosed primary light chain amyloidosis in combination with bortezomib, cyclophosphamide, and dexamethasone. This followed approval from regulatory authorities in Japan for subcutaneous DARZALEX for systemic light chain amyloidosis in August. With the demonstrated sales and regulatory momentum, we continue to expect that DARZALEX will be a driver of royalty growth for Halozyme for much time to come. I'll now move to our second Wave Two product, Phesgo, which was launched in the third quarter of 2020 in the United States and began launching in the first quarter of 2021 in Europe. In the third quarter, Phesgo built on the momentum we saw in the first and second quarters of the year.

Roche reported third quarter Phesgo sales of CHF 117 million, up from CHF 67 million in the second quarter, representing more than 70% sequential growth. We're still early in the rollout of the ex-US country launches, where reimbursement decisions can take a year or longer from the time of regulatory approval. I'll just close with a brief comment on the Wave One launch products, and sales in Q3 were overall stable compared to Q2. Let me now move to slide six and a discussion of the ENHANZE development portfolio, including a few recent partner highlights. Excitingly, we project we will exit 2021 with 16 products in development, including three products in phase III. I'll begin my review with the potential next wave of launches, which are these Wave Three launch products.

Based on historical development timelines, products that are in phase III represent potential launches in the 2023 to 2025 timeframe. Today, we have three products that are in phase III, and these include Bristol's Opdivo, Roche's Tecentriq, and argenx's efgartigimod. These three products alone have projected sales of greater than $18 billion in 2024, based on analyst consensus. For Halozyme, where we receive on average a mid-single-digit royalty of net sales of the subQ product, this represents a very attractive new addressable market opportunity upon FDA product approval, potentially beginning in 2023. Moving to the earlier pipeline, which the products that are currently in or which have completed phase I. These products, as they continue in development based on historical timelines, have the potential to launch in the 2025 to 2027 timeframe, forming the Wave Four launches.

Today, we have 10 products in phase I, and we continue to project we will exit 2021 with 13 phase I studies completed or ongoing, with three new study starts expected during the remainder of the fourth quarter. This diversified and growing pipeline of products utilizing ENHANZE is setting up the potential for multiple waves of future product launches, potentially starting in 2023, that we believe will deliver long-term revenue growth. With our partners making such strong progress advancing studies across the entire portfolio, let me share just a few highlights and updates. I'll begin with argenx's efgartigimod, which is currently leading the race to be our next potential launch with ENHANZE in 2023 and could be the first of the Wave Three launches. In the United States, the PDUFA date for the IV form of efgartigimod, in its first indication of myasthenia gravis, is December 17th of this year.

Launches outside the United States are projected shortly thereafter, with Japan projected in Q1 2022 and Europe in the second half of 2022. The data readout of the ongoing phase III trial for subcutaneous efgartigimod with ENHANZE in myasthenia gravis is expected by argenx in mid-2022, supporting the potential for a 2023 launch. Myasthenia gravis is the first of four potential indications currently being evaluated in ongoing phase III clinical studies with efgartigimod subcutaneous with ENHANZE. The additional indications are chronic inflammatory demyelinating polyneuropathy, idiopathic thrombocytopenic purpura, and pemphigus. The projected size of the addressable populations and the large unmet needs that exist in each of these indications are resulting in analysts projecting a multi-billion-dollar opportunity for efgartigimod, and we're also pleased to be working with argenx on a subcutaneous version of ARGX-117, which is a C2 inhibitor.

This is a product that's being explored as a treatment for multifocal motor neuropathy. And in other news in the quarter, we're pleased to announce that in July, Janssen elected the target HIV reverse transcriptase. Plans are already underway to initiate a phase I study. And we're very much looking forward to this program with Janssen, which will be the third program in our collaboration following DARZALEX and amivantamab. Now, with this strong progress by our partners, we project we will have 16 products in clinical development by the end of 2021, including three products in phase III. And this is what is forming this exciting set of potential Wave Three and Wave Four launches. Now, let me just take a moment to talk about three additional drivers of continued royalty revenue growth and durability, beginning with the potential for co-formulation patents.

Now, co-formulation patents, as you may remember, can be granted by the patent office for novel or unexpected findings. In general, co-formulation patents that are granted can have the effect of extending the duration of time that we receive royalties. As a reminder, we typically receive royalties for a minimum of 10 years after the first commercial sale. In addition, co-formulation patents can also potentially delay the timing of the royalty sunset to later than 2024 in Europe and later than 2027 in the United States. I'm pleased to report that several partners have recently filed new co-formulation patent applications related to products in the ENHANZE development pipeline. We look forward to being able to provide further updates on these applications as information becomes public. The next opportunity to increase the revenue durability includes new deals.

We see further revenue growth opportunity and durability here too, as we continue meeting with a number of companies that are discussing monoclonal antibodies, bispecifics, small molecules, and cell therapy opportunities for ENHANZE that may result in new collaboration agreements, and the third opportunity to drive durability relates to new development programs. As a reminder, new development programs arising from a new potential collaboration agreement are not currently included in Halozyme's long-term royalty projections, and these would form what we would call Wave Five of launches, and we can expect that Wave Five may be further expanded by current partners nominating and developing additional targets from the more than 20 currently available open slots that they have. These three growth levers are what create the strong royalty revenue trajectory we project to 2027 and beyond.

Moving now to slide seven, I'll discuss how this pipeline progress I've just described drives revenues for Halozyme. We're again reiterating our three-year outlook for projected revenues from milestones. For 2021 through 2023, we continue to project $400-$450 million in milestone revenues. This reflects our expectations for partner development and commercial milestones during that period and new deals. The blue bars represent our three-year outlook since 2019, and the green bars represent actual annual milestone revenues, demonstrating that we are performing very well against these projections. This near-term milestone revenue is an important and strong indicator for future royalty revenues. We project royalty revenue potential of approximately $1 billion in 2027, based on non-risk-adjusted revenue projections for programs that we currently have line of sight to and assuming global sales in all indications. We're excited by this ongoing momentum and growth potential of our ENHANZE technology franchise.

Now, at the same time, we continue to evaluate the potential for new technology platform expansion through acquisition, with the goal of accelerating and extending long-term revenue growth. We see the opportunity to create incremental value for other platform technologies, applying Halozyme's proven partnering and commercialization capabilities. As we've mentioned before, ENHANZE is still early in its growth cycle, so we have the opportunity to be highly selective. With that, I'm pleased to turn the call now over to Elaine for a discussion of the third quarter financial results.

Elaine Sun (CFO)

Thank you, Helen. Before I begin, I'd like to again note that we now report key measures on a non-GAAP adjusted in addition to a GAAP basis and also provide financial guidance on a non-GAAP basis.

We consider these non-GAAP financial measures to be important because they provide useful measures of our operating performance, excluding factors that do not directly affect what we consider to be our core operating performance, such as stock-based compensation and amortization, as well as unusual events and their related tax effects. I'd ask you to refer to our press release and filing for a reconciliation of GAAP to non-GAAP net income and earnings per share. With that, let me turn to slide eight for a review of our third quarter revenues. Total revenue for the third quarter was $115.8 million, up 77% from revenue from the prior year period of $65.3 million. The biggest driver of our overall revenue growth was from royalties, recurring revenue, which accounted for over 50% of total revenue in the third quarter.

Royalty revenue for the quarter was $58.6 million, a 145% increase over the prior year period royalty revenue of $23.9 million. This was driven primarily by the continued strong uptake of subcutaneous DARZALEX, utilizing ENHANZE by our partner Janssen and to a lesser extent by Roche's ongoing global launches of Phesgo. We also saw strong growth in product sales, which accounted for 22% of total revenues in the third quarter. Product sales, which can fluctuate period to period based on partner supply requirements and safety stock levels, were $25 million in the quarter, significantly higher than the prior year period product sales of $9 million. Growth in product sales was primarily driven by higher API sales to our partners Janssen and Roche in support of their ongoing subQ product launches and commercial efforts globally.

Highlighting the tremendous commercial potential of ENHANZE, we saw collaboration revenue in the quarter totaling $32.2 million, of which $30 million was related to the achievement of a commercial milestone associated with subcutaneous DARZALEX. This is the second commercial milestone achieved this year from our collaboration with Janssen, in addition to a $20 million milestone, which we earned in the second quarter, reflecting the continued momentum of subcutaneous DARZALEX. Collaboration revenue in the third quarter was consistent with the overall magnitude of collaboration revenue from the prior year period of $32.3 million. Let me now turn to slide nine for a more detailed breakdown of our third quarter P&L. I'll begin with total operating expenses, which were $40.2 million in the third quarter, up from $25 million in the prior year period.

The overall increase in total operating expenses resulted from higher cost of product sales, which were $18.6 million compared with $5.6 million in the prior year period. The increase in cost of goods was attributable to the markedly higher level of API sales versus the prior year period in support of our ENHANZE partners' products and programs in the third quarter. Research and development expenses of $8.5 million increased from $7.7 million in the prior year period. This increase was due to an increase in compensation expense, including stock-based compensation for personnel to support additional ENHANZE targets entering clinical development, and SG&A expenses were $13.2 million, up from $11.7 million in the prior year period. Similarly, this increase was primarily due to an increase in compensation expense, including stock-based compensation for personnel to support our ENHANZE franchise.

Total operating expenses excluding COGS were $21.7 million for the third quarter, compared with $19.5 million in the prior year period and remain consistent with our expected spend for the year. In terms of our operating profitability, GAAP operating income for the quarter was $75.6 million, an increase of 88% compared to GAAP operating income of $40.3 million in the prior year period, reflecting our strong top-line growth and leverageable business model. So before we get to net income and earnings per share, let me spend a moment on the valuation allowance release recorded against our deferred income tax assets and the benefit to our financial results and annual guidance. As you saw in our earnings release and as detailed in our 10-Q filing, we reversed our tax valuation allowance this quarter and recognized an income tax benefit and deferred tax asset of $142.5 million.

We will begin recording income tax expense in our P&L in 2022 and going forward with an expected tax rate that will likely approximate statutory tax rates. We anticipate tax expense to be substantially non-cash expense until we fully utilize our deferred tax assets. Moving to net income on a GAAP basis, net income for the quarter was $216.6 million, or $1.48 per diluted share, reflecting the benefit of the release of the tax valuation allowance that I discussed a moment ago. This compared with GAAP net income of $36.2 million and $0.25 per diluted share, respectively, in the prior year period, and on a non-GAAP or adjusted basis, net income was $80.5 million, or $0.55 per diluted share, compared to non-GAAP net income of $44 million, or $0.31 per diluted share, respectively, in the prior year period.

Let me now turn to slide 10 for an update of our 2021 financial guidance. I'm pleased to report that due to our strong performance year to date, we are raising the lower end of our guidance for 2021 revenues. We now expect total revenues of $430 million-$445 million, up from a prior range of $425 million-$445 million. This new range would represent year-over-year growth of 61%-66% over our already substantial revenues in 2020. Moving to the components of revenue, we continue to expect revenues from royalties to more than double from 2020 levels and product sales to increase 79%-88% from 2020 levels, driven primarily by API sales in support of our ENHANZE partners. We also continue to expect revenue under collaborations to be higher than the already meaningful collaborative revenue we achieved in 2020.

Also, due to the strong top-line growth and profitability enabled by our ENHANZE business model, we now expect GAAP operating income for 2021 to be in the range of $265 million-$280 million, up from a prior range of $260 million-$280 million. This new range would represent 84%-94% growth over 2020 and a greater than 60% operating margin. And as a result of the income tax benefit recorded in the third quarter, we now expect GAAP net income of $380 million-$395 million, up from our prior guidance of $235 million-$255 million. Again, reflecting the strong year-to-date results, we are raising the low end of the range for non-GAAP net income, which we now expect to be $285 million-$300 million, up from our prior guidance of $280 million-$300 million.

Moving to earnings per share, we now expect GAAP-diluted earnings per share of between $2.60 and $2.70, up from our prior guidance of $1.55 and $1.70 due to the income tax benefit we recorded in the third quarter. Lastly, we are raising the low end of the range for non-GAAP-diluted earnings per share to $1.90 $2 per share, up from our prior guidance of $1.85-$2 per share. This new range would represent 70% to 79% growth over 2020. I'll now turn to slide 11 for a summary of our approach to value creation and capital return and our strong progress to date. We have been consistent regarding our balanced capital allocation priorities. These include maintaining a strong balance sheet, capital return via share repurchases, and commitment to driving both internal and external growth.

We have a strong balance sheet with cash and cash equivalents as of the end of the third quarter of $815.9 million. We anticipate the strong projected free cash flow driven by our ENHANZE franchise will support both our commitment to capital return as well as funding both internal and external growth via M&A. And in support of our continued commitment to capital return, in the third quarter of 2021, we repurchased 1.6 million shares of common stock in open market purchases for $64.7 million at an average price per share of $41.40. Furthermore, in October of 2021, we repurchased an additional 0.3 million shares of common stock for $10.3 million. So with those purchases, we have fully completed our three-year board-authorized share repurchase program that began in November of 2019 to repurchase up to $550 million of our outstanding common stock.

And under that program, we repurchased a total of 22.3 million shares within two years for $550 million at an average price per share of $24.72. So with that, I'll now turn the call back to Helen.

Helen Torley (President and CEO)

Thank you, Elaine. I'd like to begin by thanking the terrific Halozyme team, our partners and collaborators, for all of the hard work that resulted in this very strong performance, with growing revenues, growing operating income, and an expanding pipeline that's going to fuel our near and long-term growth. As summarized on slide 12, we continue to expect multiple important value-driving events in 2021. We expect launch momentum will continue for DARZALEX, HYCELA, and Phesgo with broadening adoption and use in the already launched markets and through additional global launches.

We project three additional new phase I study starts, resulting in 16 products in development by the end of this year, including three products in phase III. In addition, we'll continue to work to create new revenue growth opportunities, seeking to sign new collaboration agreements, advance new targets into development, and seek new co-formulation patent submissions. And finally, we'll continue to seek to identify a platform technology that can add to our long-term revenue growth. With that, I would like to thank you for joining us today, and we'd now be delighted to take your questions. Operator, would you please open the call for questions?

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, simply press star, followed by the number one on your telephone keypad, and pause for just a moment to compile our Q&A roster. Your first question comes from the line of Charles Duncan with Cantor Fitzgerald. Your line is open.

Charles Duncan (Managing Director and Analyst)

Yeah, good afternoon. Thanks for taking the question. Helen and Elaine, really a great quarter. Congratulations.

Helen Torley (President and CEO)

Thank you, Charles.

Charles Duncan (Managing Director and Analyst)

So quick question on DARZALEX. I guess I'm going to ask you to wax, I guess, poetic here regarding DARZALEX conversion rate. In your mind, is there any credible reason that conversion rate couldn't be 100%? And then maybe a little bit more practical, you mentioned commercial milestone. The second one met this year about $50 million in revenue to you. Would you anticipate any additional commercial milestones beyond the royalties that you're earning in the next, say, 12 months from this program?

Helen Torley (President and CEO)

Yeah, thanks, Charles. And thanks for the question on DARZALEX. We're obviously delighted to see the 72% conversion rate or share of sales in the United States. And we know the rest of the world is seeing some very strong performance as well. I think there's a lot of growth there. It's going to get a lot higher than 72%. There may be the occasional patient who does not want to receive subQ. There may be some patients who like going to the infusion suites and spending time there, but that is a tiny minority. And so we do see the opportunity for continued growth well beyond the current share. And I would also just point out that the overall pie is also getting bigger.

If you've seen DARZALEX overall as a product is exceeding analyst expectations due to increased penetration into some of the earlier lines of therapy with, I think, some pretty remarkable share growth reported by J&J. So not only is the conversion rate continuing, the pie is getting bigger. So this is why we're so excited about that continued growth. We are delighted with the $50 million in milestones that has. I think in the next period, you're going to see more growth coming predominantly from the royalty revenue growth.

Charles Duncan (Managing Director and Analyst)

Okay. And one last question, efgartigimod, related to wave three launches. What would you like to see out of the upcoming data read and subQ data read mid next year that could provide you conviction that efgartigimod could be another really value-added, value-creating formula relative to the IV form, much like DARZA SC is relative to DARZA IV?

Helen Torley (President and CEO)

Yeah, I think obviously where the trial is designed to show non-inferiority with regard to lowering IgG levels. So clearly, that's the first thing. But I think what we want to see is a short, simple subcutaneous injection test so that patients or their caregivers or healthcare professionals are able to administer this without it interrupting the patient's lives and giving the patient the opportunity to go about their life without having to worry about longer IV infusions. So those are the two things I'd be looking for from the data.

Charles Duncan (Managing Director and Analyst)

Okay. We'll be looking forward to it. Thanks for taking the question. Great quarter.

Helen Torley (President and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Matthew Luchini with BMO. Your line is open.

Matthew Luchini (Analyst)

Hi, good afternoon. Thank you so much for taking the questions and congrats on the quarter. I guess maybe on guidance first. So raise the bottom end, but maintaining the top end. Just would like to get a little bit more perspective on a little bit more color in your perspective on the business into year-end and maybe where you see areas of potential conservatism within your outlook. And then secondarily, it sounds like I think this is the first time you've mentioned cell therapy as a potential opportunity for ENHANZE. We'd love to just get a little bit more color on how you see that particular type of product fitting into the broader portfolio and how much of a priority it is relative to, say, antibodies or even small molecules. Thank you.

Helen Torley (President and CEO)

All right, well, let me take the second part first, and then I'll ask Elaine to comment on the guidance. With regard to cell therapy, yes, I think it's fair to say it's a minority of the conversations we're having.

Definitely the conversations with bispecifics and monoclonal antibodies are probably the largest, followed by small molecules and then cellular therapy. But I do think cellular therapies are advancing more and more in the clinic. Matt, we're going to have companies come and want to discuss with us what potential benefits could be with ENHANZE. And so we're delighted with the versatility of the platform. I think that was what I think we're demonstrating more and more is the breadth of types of molecules that ENHANZE can work with. And I would say the ViiV deal certainly spurred people's imagination on with people thinking about small molecules and in particular thinking about longer duration of therapy and how that could improve the patient experience, potentially even improve compliance.

We're in a very exciting phase for ENHANZE with a broader type of opportunities being discussed with us, and look forward to hopefully translating some of those into new deals as we go forward. With that, I'll turn it over to Elaine to comment on the guidance.

Elaine Sun (CFO)

Thanks, Helen. With respect to our guidance, I think we try to be very thoughtful as we formulate that guidance. It also reflects our confidence in the growth prospects of our business model as well as the strong year-to-date results. What I would remind folks is that we did raise guidance by $50 million in the second quarter. We're pleased that given the strong results in the third quarter, we were able to, again, raise guidance by increasing that lower end of the range.

In terms of total revenues, recall that's an amalgamation of a number of components, some of which can fluctuate period to period. Product sales, as you may have noted in my comments, can fluctuate based on sort of orders from partners as well as safety stocking of our partners. And we certainly saw very strong performance in the last couple of quarters in terms of increase in product sales. Milestones also can fluctuate period to period. As Helen noted, we were very pleased to see the continued strong growth and momentum of DARZALEX FASPRO, which allowed us to achieve two additional commercial milestones in the second and the third quarter. But those can obviously fluctuate. So given everything in that full picture, we feel very confident in the revenue guidance.

And I would note in particular, royalties, which are the recurring component of our revenues, have a strong growth potential and is reflected in our guidance.

Matthew Luchini (Analyst)

All right. Thank you for taking the questions.

Operator (participant)

Your next question comes from the line of Roy Buchanan with JMP Securities. Your line is open. Hey, guys.

Jason Butler (Managing Director)

It's actually Jason. So just a couple of questions that are kind of interconnected here. As you wrapped up the share repurchase program, can you talk about your priorities for shareholder capital return? Is it another repurchase? Obviously, M&A comes into play here. So there's one priority stacked above another. And then as you think about M&A, to what extent are you willing to do R&D work? And thinking about this both from the spend and the tax efficiencies, but also your operating efficiencies, is there any scenario where you grow the organization?

Or on the flip side, are there any opportunities for further operating efficiencies?

Helen Torley (President and CEO)

Yeah. I'll start with the second part of the question, then I'll ask Elaine to talk about the capital return. When we made the transition of the company in 2019, Jason, we said we were moving away from being a high-risk R&D organization where we're waiting for a card to turn over for the results of a clinical study, for example. And so that is not the type of M&A opportunity we're looking at. We're looking at platforms that are somewhat or largely de-risked where we can take our skills and license it to other types of companies. And so there might be a small amount of additional research you do with regards to that platform.

Just like with ENHANZE, there is a small amount, but we definitely do not want to go back into the clinical development high R&D risk business. That is not what we plan to do. We are always very focused on assuring we're running the business as profitably as possible. But again, ENHANZE is such an attractive large business. There are certain investments we make because we see a long and durable revenue stream. And if those investments support that, then that's going to make sense. So it's always a balance of being prudent and making sure we are investing for future growth, but making sure every dollar is spent wisely. I'm sure you expect that from a Scot. So there you are. I'll turn it over to Elaine now just to talk about the priorities for capital return.

Elaine Sun (CFO)

Thanks, Helen. As you noted, we completed our $550 million three-year buyback program. We did that one year early. And really, that's part of our commitment to capital return and our confidence in the long-term value potential of Halozyme. What I would emphasize is that we think our ENHANZE business model, because it is capital efficient and early in its growth cycle, really is able to be supportive of a balanced capital allocation strategy that can fund both capital return as well as funding internal and external growth. With respect to our future plans, it's a little premature to comment, but we would anticipate providing additional perspective when we provide guidance early next year.

Jason Butler (Managing Director)

Got it. All right. Thanks for taking the questions.

Elaine Sun (CFO)

Thanks, Jason.

Jason Butler (Managing Director)

Thanks, Jason.

Your next question comes from the line of Michael Di Fiore with Desjardins. Your line is open.

Michael Di Fiore (Director)

Hi, guys. Congrats on a great quarter. And thanks so much for taking my question. Just two for me. Number one, just on slide number six, I was hoping you could elaborate more on the three phase I starts that are to be expected in Q4. So obviously, Alzheimer's is top of mind these days. Is there any updates or has there been any updated conversations on the possibility of a subcutaneous Alzheimer's partnering opportunity? And similarly, not too long ago on the Genentech recent call, they mentioned that the bullous pemphigoid indication, that phase I trial is going to start before the end of the year.

I was wondering if that also could be part of the three phase Is. Separately, regarding Phesgo, I realize it's still early days. And any thoughts on the uptake of Phesgo and any incremental insight into its launch compared to DARZALEX at the same point in time? Thank you.

Helen Torley (President and CEO)

Right. So Michael, I'll start with the three phase IIIs. Until several of them are ENHANZE, we're not in a position to talk about them, but we can say that as ViiV had mentioned at the start of the year, it was a goal to start one of their clinical studies with cabotegravir this year. Cabotegravir is one of those studies. But the other two, the partners have not made those public, so we cannot announce them, and it's likely we'll be able to talk about those sometime early in the first quarter of next year, so you'll learn what they are at that point in time. Bullous pemphigoid is not one of the current indications that we are studying with argenx. I can answer that question. And with regard to Alzheimer's, I've mentioned on the last call, I believe that the amyloid-based target is still available.

And so we will be excited to talk with people with regards to that target. But at this point in time, it remains available. Did I address all your questions on the studies?

Michael Di Fiore (Director)

Yes. Thanks so much.

All right. Now, Phesgo, it's clear that DARZALEX got off to an explosive start. Frankly, we did not expect even that DARZALEX would get such an explosive start, particularly in the U.S. and in advance of the permanent J-code. What we've seen with Phesgo is a lot more of a traditional new monoclonal antibody drug where there is just a period of time where all of the logistics needed to get in place in the United States. And it's continuing with that trend. Outside the U.S., we're delighted with the progress we're seeing.

Still early in the launch rollout, with only a few countries having got reimbursement and launch, but we're already seeing some very nice contribution outside the United States. And we do predict that over time, we're going to see continued growth by more countries in Europe and rest of the world in particular, but continued adoption and broadened adoption in the other launch markets as well. So I'd say DARZALEX explosive. Phesgo, more of a slower growth story, but we will see continued growth over the long term as it expands in terms of countries and accounts.

Thanks so much.

Helen Torley (President and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Anita Dushyanth with Berenberg. Your line is open.

Anita Dushyanth (Analyst)

Hi. Good afternoon. Congrats on the quarter. And thanks for taking my questions. I just have a couple here. Helen, you spoke about the 10 candidates in phase I, potentially 13 by end of the year. Of these, how many do you think will kind of move into the phase III by 2022? I'm sorry, 2023. And then also, we know that DARZALEX has become a franchise, quite a wide profile of the candidates that are in phase III now. Do you have any idea if any of those have the potential to have a broad labeling like DARZALEX?

Helen Torley (President and CEO)

Okay. Let me begin by saying with regard to the current phase I studies, it's actually a very active discussion at the moment with our partners to look, first of all, to see how many are going to be moving into phase III in 2022, and then to estimate for 2023.

So I can't give you an exact number for that, Anita, but I would say that by 2023, my projection would be the majority of these products, if the company does decide to move forward with them, will be in phase III development. That would be the traditional timeline. And the ones that would be more likely to start in 2023 are the ones that have more recently started phase one. So that would be the pattern that we generally see. So expect the majority by 2023. With regard to phase III candidate, sorry, the current phase III candidates and which ones we're excited about with getting a broad label, I think for both Opdivo and for Tecentriq, what the FDA said at the RITUXAN HYCELA at ODAC was you don't necessarily need to do a separate study for each and every indication.

Now, each of our partners goes to have a separate conversation with the FDA, and their clinical development program is designed based on the agreement they reached with the FDA. That remains partner confidential, but I would say that definitely a good possibility that while our current partners are each studying one indication for the solid tumors, they will get a broader set of solid tumor indications should there be no FDA questions related to safety, because that is always the question that's going to be there, so we'll have to wait and see the data, and it will depend on the conversations the partners are having. But certainly, that is the path and the direction the FDA were giving at the RITUXAN HYCELA at ODAC, so look forward to that. Efgartigimod is a different circumstance because it's still a development product.

They are doing subQ studies in four separate indications, in part because they don't have already approved IVs to bridge to. But what's very exciting about efgartigimod is the strong potential, obviously, here in terms of the market opportunity and that argenx has integrated subQ really right from the start with some indications like CIDP only being developed as a subQ, not as an IV. And so this is really the model that we're excited about, we're talking to more partners about, is potentially moving subQ earlier even in their pipeline and applying it more broadly. And argenx is a super example of a company that has really embraced ENHANZE into their portfolio.

Anita Dushyanth (Analyst)

Great. That is very helpful. I just have one more clarification. I know you mentioned the efgartigimod for CIDP is only being developed as SC. Is there more possibility of other candidates too, especially the ones that are being newly developed, to just sort of be developed as SC itself and not the IV route at all?

Helen Torley (President and CEO)

Yes. Other partners are certainly contemplating that. The development path is just a little bit different when you do subQ right from the start, where we're seeing our partners do a phase I study to pick the dose, and then they do a seamless phase II into phase III as opposed to going straight into phase III because they need to generate generally a broader set of data for safety. But it's similar, just a slightly larger clinical development program if you're doing SC right from the start. But definitely a conversation that's very active with a number of partners today and potential partners.

Anita Dushyanth (Analyst)

That's very helpful. Thanks, Helen.

Helen Torley (President and CEO)

Thanks, Anita.

Operator (participant)

Your next question comes from the line of Geoffrey Porges with SVB Leerink. Your line is open.

Dan Tarjan (Partners)

Hello. This is Dan Tarjan on for Jeff. Two questions for us, please. First, can you provide an update on whether any new options were exercised during the quarter besides what you mentioned for Janssen and were any additional new contracts signed? And then second, were there any targets for which options expired and the associated rights were returned to you? Thank you.

Helen Torley (President and CEO)

Yes. In terms of new options exercised, and by that, I think, Dan, you mean new nominations being announced by partners or and I'd say no. We generally do announce for you when new nominations. So to my recollection, there was just the Janssen one this quarter. There were no new collaboration agreements in the third quarter. Again, we generally announce those. And we did have the return of one option.

I'm trying to remember if it was exactly in the quarter, but there has been one option returned by a partner. And that's great news because if the partner isn't moving forward with it, per our contracts, we are often able to license that to another partner who may have interest in that. So hopefully, that gives you a sense of the flow we've seen in the last quarter.

Dan Tarjan (Partners)

That's helpful. Thank you very much.

Helen Torley (President and CEO)

Your next question comes from the line of Daniel Wolle with J.P. Morgan. Your line is open.

Daniel Wolle (VP)

Hi. This is Daniel for Jessica Fye. Thanks for taking our question. At a high level, Helen, how should we think about the push and pulls affecting the royalty revenue as we look ahead into 2022? Then as you move the small molecules into the phase III programs, do you expect endpoints to revolve around PK, or do you expect a need to demonstrate benefit on clinical endpoints?

Helen Torley (President and CEO)

Yeah. Well, let me ask Elaine just to talk about 2022. I'm afraid I'll just say in advance she's not going to be able to say terribly much because we aren't doing our guidance. But Elaine, any comments on the push and pulls on royalty revenues?

Elaine Sun (CFO)

I would just say we'll be providing more guidance when we provide our guidance at the beginning of next year. What I can say is, as I noted in my earlier comments, there are some components of revenue that can fluctuate period to period, product sales and milestones. And then royalties are obviously the recurring component of our revenues.

And there's the growth drivers really from our wave two launch products, notably DARZALEX and increasingly from Phesgo, as well as you noted in the third quarter of this year. And those growth in our wave two launch products are offsetting some of the downward pressure from the legacy products of our wave one launches, notably subQ Herceptin and subQ RITUXAN, which faced similar competition. But clearly, the big drivers of royalties are wave two launches, and we continue to have evidence of strong growth, notably in DARZALEX and increasingly in Phesgo. But more to come in early 2022.

Helen Torley (President and CEO)

Thanks, Elaine. And Daniel, we still are pretty early. We've only developed in the past a few small molecules.

But I would say from our expectations, we do expect the FDA will focus on PK, absolutely, to show non-inferiority if the goal is a bridging study to an already approved drug. With regard to efficacy, in the majority of our approvals to date, there has been some form of efficacy endpoint, such as response rate for multiple myeloma. But we did see, as an example for Phesgo, there was no efficacy primary endpoint. Efficacy was secondary. And so I think this is a case-by-case discussion with the FDA. It'll depend on the overall profile of the drug. It's a risk-benefit. And so I think it's more likely than not there'll be some form of demonstration of efficacy, but it's not necessarily a given. It'll depend on the profile of the drug.

Daniel Wolle (VP)

Great. Thank you very much.

Operator (participant)

Again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from Charles Duncan with Cantor Fitzgerald. Your line is open.

Charles Duncan (Managing Director and Analyst)

Yeah. Hi. Thanks, Helen and Elaine, for taking the follow-up. Quick question regarding the continuation of royalty growth as a function of co-formulation patents. You mentioned that some had been filed. Do you anticipate being able to say that any of those are public or granted, say that publicly over the course of the next, say, two years?

Helen Torley (President and CEO)

Yes. The timing, Charles, is not in our control. Obviously, we're thrilled that the partners did file them. It'll be down to the patent office and in part due to the partner strategy. So we can't give you a time for it.

But as you know, we're thrilled to see this progress because of the benefit this has, both in terms of the opportunity to extend the duration of time with the royalties, but also push out the times of the step down. But I can't give you a time window. It'll be on a product-by-product basis.

Charles Duncan (Managing Director and Analyst)

I know you probably can't disclose identities, but can you say whether or not any of them are on wave two products?

Helen Torley (President and CEO)

Yeah. I can't say that, Charles, as we have a relatively small pool of opportunities in terms of that. But I'll just say that we are excited that our partners are working very hard with us to find that moment of innovation and novelty that we all feel very strongly about has got a very good chance of getting these co-formulation patents. And we're not done yet.

I think that's another core thing to hear. While several partners have moved forward, we continue to be very active with several others. And so you're going to see more and more of these co-formulation patents being submitted over time based on the novelty that can be found when they're co-formulated with ENHANZE.

Charles Duncan (Managing Director and Analyst)

Okay. Last quick question of follow-up to a previous question someone asked about the A-beta target in Alzheimer's. First of all, I'm wondering if alpha-synuclein is available for Parkinson's disease. And then secondarily, when you think about administering antibodies subcutaneously for that have to be absorbed, have to be CNS penetrant, do you think that you're able to, I guess, use enough ENHANZE to be able to enable that formulation with one of those two antibody targets?

Helen Torley (President and CEO)

Yeah. Charles, I don't think we've tested enough of these molecules to answer your question, but I will say if the goal is to take a product that's already IV subcutaneously, we are very confident that ENHANZE will be able to do that. I don't know if you were kind of wondering more about higher concentrations getting into the CNS fluid. We haven't really done that because more of our programs are focused on non-inferiority and the ability to deliver them subQ. So I have strong confidence, very strong confidence we can take a product and deliver the therapeutic dose subcutaneously. With regard to alpha-synuclein, I'm blanking on if that one is available, I have to say, Chaz. Obviously, there are a lot of targets out there, and we are in dialogue with a number of companies on CNS and neurology/psychiatry type targets.

I cannot recall exactly. Has that one been taken by a partner?

Charles Duncan (Managing Director and Analyst)

Okay. Very good. Thanks for taking the follow-up.

Helen Torley (President and CEO)

Thank you.

Operator (participant)

There are no further questions at this time, Dr. Helen Torley. I will turn the call back over to you.

Helen Torley (President and CEO)

Thank you, everybody. We really do appreciate your attention and your continued support. Clearly, another strong quarter of execution by the terrific team at Halozyme and our partners, and we look forward to this continuing with a very exciting fourth quarter ahead of us as well. Thank you very much. Look forward to speaking to you next quarter.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.