Halozyme Therapeutics – an overlooked bargain? + new stock idea

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Feeling uncomfortable with everybody’s darling stocks, my motivation was and still is to find stock ideas with what I call “an own life”. With that I am looking for companies with internal triggers or catalysts which can influence shares positively (almost) regardless of what broader markets do. While I do not believe (for now) in a hefty stock market crash which pushes down all equities, I cannot rule out a nosebleed correction in the tech sector. In search of uncorrelated stock ideas, I spent some time on the Pharma / biotech sector. Halozyme Therapeutics is a seemingly lowly-valued stock. My Premium PLUS members have already received my latest potential-multi-bagger stock idea in an exclusive research report to kick off the year 2025.

Summary and key takeaways from today’s Weekly
– At first glance, Halozyme looks like a promising pharmaceutical idea.
– It has a very interesting proprietary technology, however, patent protection is only for a few more years with big uncertainty for what comes thereafter.
– That’s why I am not convinced of this stock.

The pharmaceutical sector is known for big moves, up and down.

Not even big conglomerates with several indications and therapies are excluded from this if too much goes wrong, however, they are rather less likely to be affected that much. If one critical patent expires, but there remain say four other therapies with significant sales contribution, the stock will unlikely crater by 50% or even more in a single trading session.

But in case of a successful new indication being given market exclusivity, it is also unlikely that it moves the needle decisively.

The other way around, the smaller and less diversified – i.e. more focussed – a pharmaceutical company is, the higher the risks, but also the potential reward, depending on the setup. If a one-trick pony suddenly approaches its loss of exclusivity (LOE) without a credible replacement, things can turn really sour.

On the positive side, if a company has either a near or even a full monopoly with a long runway to go until LOE, the stock can become a multi-bagger.

Patent protection is the key. It works nicely for as long as it is active.

Often growth rates are strong and reliable. Margins are high and the companies are able to generate strong cash flows. Usually, one would expect high valuation multiples attached to such stocks, because growth generally is traded at a premium. The more so if it is predictable and supported by a strong bottom line.

Not so regarding Halozyme Therapeutics (ISIN: US40637H1095, Ticker: HALO) which sells for only a modest 12x price to earnings – while the business with its proprietary and disruptive technology grows with more than 20% on strong margins. Management even decisively buys back stock.

An undervalued opportunity with little market correlation? Let’s find out!

My Premium PLUS members in the meantime have already received my next stock idea to kick the new year off. For me, it has a strong setup to become a multi-bagger over the next years, regardless of what broader markets will do.

In my latest research report, I am discussing the case of a small pharmaceutical company that has successfully developed and started to commercialize an improved drug for the treatment of a rare and progressing genetic disease. The company has received several market approvals, secured financing and it has patent protection for at least ten years.

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I will show my performance charts again next time, as I am only irregularly at my desk this week and have created this Weekly in advance and it is being published automatically.

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A disruptive solution for emerging and existing therapies

The stock of Halozyme Therapeutics in the long-run does not look extremely spectacular. It clearly shows some ups and downs, but the genreal direction is up. A solid compounder?

As the 6.7 bn. USD pharmaceutical company has been growing its top and bottom line by offering a unique technology, this is little surprising.

That’s just for starters for a first look at the chart and a first feeling.

source: Seeking Alpha, see here

In a nutshell and the best I can in layman’s terms, Halozyme has developed and commercialized a proprietary enzyme called rHuPH20 which allows for an easier, more advantageous and smoother subcutaneous drug administration (i.e. injections).

It is therefore not a standalone drug by itself, but a supportive element.

Its patent-protected product ENHANZE is a drug delivery technology which uses the above mentioned enzyme. It reduces the treatment burden for patients and brings one or the other edge with it. It is combined with other existing, i.e. already marketed drugs and makes them more receptive for the body by breaking down a protective barrier which consists of a carbohydrate called “hyaluronan” or “HA”.

The resulting improved fluid flow allows for a quicker drug delivery, but also higher doses and more treatment flexibility if required.

Subcutaneous, subcu or just SC administrations (injections) often compete against intravenous or IV administrations of drugs. In the case of ENHANZE, by so to speak improving the functionality and also manageability of injections, it is possible for a professional caregiver to administer the drug at the home of the patient, which is more difficult with IV treatments.

Another advantage, just to name one, is that an SC treatment allows for more standardized fixed-dose drug delivery while IV is weight-based, i.e. more complicated and prone to errors.

Halozyme licenses its technology to many of the known big pharmaceutical companies and in return receives royalties. As a positive for the companies, by using ENHANZE and turning a non-SC therapy into a subcu-administered one, a drug can be granted an additional period of exclusivity – due to being then an SC drug instead of a previous IV drug.

That’s in very brief what the company mainly is doing.

source: Antonio Corigliano on Pixabay

In their annual report, Halozyme describes its technology as disruptive which is understandable as it allows for the improvement and so to speak recycling of existing therapies without having to invent them entirely from the get go.

Not only does this lower costs, but it also improves the drug’s effectiveness.

Over the last ten years, Halozyme’s sales have grown meaningfully. The recent numbers were strongly in the double-digits. The majority, more than half of sales is derived from the above mentioned royalties with the rest coming from a few other products. However, royalties are growing the fastest (roughly double the pace of total sales, concrete numbers further below) and are presented to be the key for the future.

Without a question, this is a high-growth company.

source: TIKR

Even better, the company just last week increased its outlook for both, sales and EBITDA, gave a strong guidance for 2025 and it announced another buyback program.

source: Halozyme Therapeutics, see here

Being “at the forefront of drug delivery innovation”, as the CEO is quoted in the press release, the company expects to grow sales between 16–23% in 2025 and EBITDA, i.e. their operational profit figure, even disproportionately higher by 24–32%. Royalties are even expected to be 30–35% higher by the same time next year, effectively increasing their relative share of the pie.

In the corresponding investor presentation from early January 2025, they also show a path for the years until 2028 – strong growth in sales and EBITDA, mainly driven by the growth of royalty income.

source: Halozyme Therapeutics, investor presentation January 2025, see here

All this for a price to earnings ratio of just 12x. Is the pricing not a bit too conservative?

Not if we dig deeper. That’s why it is always necessary to check not only the bold headlines, but also and even more importantly the fine print, respectively one or the other key metric that’s not in the spotlight.

Before I do that, also on the positive is that the company in the recent past has been using parts of its strong cash flow (working capital adjusted ~500 mn. USD over the last twelve months) to repurchase shares. Since 2019, share count has dropped by 10% with the majority having been repurchased more recently.

The just-announced 250 mn. USD program is the equivalent of roughly 3.5% of the current market cap. They are going to do it as a so-called ASR or accelerated share repurchase, meaning they must be very confident in what they are doing.

Given, the valuation at first glance looks at least decent, if not a bit low.

The big problem is: looming patent expiration. But this is a bit tricky. In Europe this (LOE) is already the case and in the US 2027 will be the critical year.

source: Halozyme Therapeutics, annual report 2023, p. 18, see here

They write that there are several patent applications ongoing with the potential for exclusivity into the 2040s. However, this is not safe, but conditional.

At the same time, in the annual report they mention the year 2029 and there’s another slide in a previous presentation from last December showing several patents of those approved medications using ENHANZE reaching beyond the LOE date in 2027 in the US.

source: Halozyme Therapeutics, investor presentation December 2024, see here

From how I understand it, starting from 2027 Halozyme will lose its exclusivity for its licensing of ENHANZE as the supportive additive, i.e. “their share” of the drug.

However, drugs that were approved prior to the LOE date in 2027 using ENHANZE have individual patent lengths each and thus expirations. Many reach into the 2029 / 2030 timeframe.

This means that Halozyme will continue to receive their royalties from drugs that were given approval prior to the 2027 LOE. However, post this date, Halozyme won’t be able to license it exclusively in order to get entirely new products to market with its cooperating partners. It is likely that competition enters the market.

So basically, we have a few more years of joy, followed by a period of uncertainty, respectively no adequate replacement or successor. It seems this is causing uncertainty and thus keeping the stock down. The market clearly expects soon a significant sales decline.

Further evidence of this thesis is a somewhat strange takeover attempt of German pharmaceutical company Evotec (ISIN: DE0005664809, Ticker: EVT) which was cancelled – only a week later.

source: Seeking Alpha, see here
source: Seeking Alpha, see here

Evotec is a company which saw a short-lived boost in 2021–2022, but since then its stock has collapsed from 40 EUR to below 10 EUR. Not only has sales growth come to a halt, the company has been suffering from deteriorating margins for many years and it was even barely profitable over the last couple of years.

Barely a move to reignite the fire for Halozyme.

I haven’t researched Evotec further, but this looks weird and strange to me.

Together with the fact that the CEO of Halozyme owns only 0.5% of the company’s equity, I can not say that I am convinced.

As a last point, Halozyme has some debt on the balance sheet. Gross debt is 1.5 bn. USD which is 3x FCF and thus not little. The net figure subtracting cash is 0.9 bn. USD – however, they intend to do a bigger stock buyback, just as a reminder.

Interestingly, these two convertible bonds are due in 2027 and 2028 – exactly the time windows when LOE hits. Basically, this increases the risk for a big dilution, should the company choose to repay in shares, not cash.

source: Halozyme Therapeutics, annual report 2023, p. 30, see here

Added to the equity market cap, we get an enterprise value of around 7.5 bn. USD for what it looks like a melting ice cube.

All in all, despite the initially interesting profile, too many negatives and especially uncertainties came up. That’s why I am passing on this one. I will put in on my watchlist, but it does not qualify for a more serious consideration to be a member-exclusive idea.

An entirely different caliber is my latest stock idea for my Premium PLUS members. The pharmaceutical company has patent protection until at least 2035 and it stands at the beginning of its commercial journey. For me, it has what it needs to become a multi-bagger. I recommend you to check this one out, as it is a far more convincing case than Halozyme.

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Conclusion

At first glance, Halozyme looks like a promising pharmaceutical idea.

It has a very interesting proprietary technology, however, patent protection is only for a few more years with big uncertainty for what comes thereafter.

That’s why I am not convinced of this stock.

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