Shares of Halozyme Therapeutics (HALO) gained more than 23% after it signed a collaborative deal with drug giant Pfizer (PFE) to develop injectable medicines using its proprietary biologics platform, called Enhanze. A close look at payment terms suggest, however, that investors have exaggerated the commercial viability of the drug delivery company’s technology.
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The Enhanze delivery system is based on Halozyme’s patented recombinant human hyaluronidase (rHuPH20) – an enzyme that when injected under the skin has been shown to facilitate absorption and dispersion of biologics. By using Enhanze, therapeutics that could normally only be injected intravenously might instead be administered subcutaneously, resulting in a number of benefits (such as improved patient compliance, better efficacy, product lifecycle extensions, and reduced costs).
Pfizer’s move is being viewed as a positive for the struggling San Diego-based biotech, which in 2012 witnessed U.S. regulators reject an investigational immune-deficiency treatment (called “HyQ”) being developed jointly with Baxter International (BAX). The FDA’s Center for Biologics Evaluation and Research (CBER) division has expressed concerns regarding the potential long-term risk of anti- rHuPH20 non-neutralizing antibodies associated with the use of Halozyme’s recombinant enzyme.
Halozyme gained more than $147 million in market cap on investor excitement that sales from the Pfizer collaboration could total $507 million. However, this is an earn-out deal, and most of these millions will only show up on the income statement if – and only if – future development, regulatory and sales-based milestones are reached.
Though Pfizer owns directed rights for up to six product candidates with rHuPH20, initial terms of the agreement call for the development of just two proprietary biologics – with an upfront payment to Halozyme of just $8 million: one product candidate will be for primary care and the other for a specialty-care indication. Given Pfizer’s current portfolio of injectable products and core R&D emphasis, it’s highly probable that the drug maker will focus on subcutaneous products for oncology, CNS or anti-inflammatory-related diseases (rheumatoid arthritis and psoriasis).
That the bulls have overestimated the worth of this collaboration can also be framed in the context of prior collaborative agreements for the Enhanze technology:
• In September 2007, the company received a $10 million upfront license fee from Baxter International for the previously mentioned (and ill-fated) HyQ collaboration.
• In the last six years, Halozyme received $40 million in upfront license fees from the Swiss drug company Roche for the exclusive application of rHuPH20 in five product candidates – and just $13 million and $4 million, respectively, in clinical development and regulatory milestone payments (two oncology and one rheumatoid arthritis products); and,
• in May 2011, Viropharma (VPHM) paid the company a $9 million license fee for the use of the rHuPH20 enzyme in the development of a subcutaneous, injectable version of its inflammatory inhibitor Cinryze (used in people with hereditary angioedema, a rare condition where the immune system attacks the body, leading to swelling, particularly of the face and airways).
Pfizer recently posted a year-on-year 16% drop in third-quarter revenue to $13.9 billion, primarily the result of a loss of marketing exclusivity of several blockbuster drugs, including the world’s best-selling medication, the cholesterol-lowering medication Lipitor, and the psychotropic drug Geodon and glaucoma medicine Xalatan. Pfizer CEO Ian Read said in an interview last June that the company’s “willingness to do deals externally is driven by the value of the deals.” That the world’s largest drug manufacturer with more than $23 billion in cash – and invests approximately $7 billion annually on R&D – would pay just $8 million (for two product candidates!) is less an endorsement of the Enhanze drug platform’s prospects than a classic example of “hedging one’s bets.”
With accumulated net losses of $294.2 million through September 2012, an annual cash burn rate that exceeds $60 million, and few prospects for near-term milestone payments (only two collaborative products are currently in the regulatory approval process), the $87 million in cash on Halozyme’s balance sheet (raised in a secondary stock offering last February) won’t last much beyond 2013. Consequently, this rekindled optimism for Halozyme and its rHuPH20 enzyme could likely prove as fleeting as a “candle in the wind” (Elton John).
David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at firstname.lastname@example.org.