Halozyme Therapeutics Inc

NASDAQ:HALO

Earnings Call Analysis

Halozyme's Robust Q2 2024 Performance Fuels Confident Outlook

Halozyme reported a strong Q2 2024 with revenues reaching $231 million, driven by a 12% increase in royalty revenue to $125 million. EBITDA grew by 19% to $137 million, and non-GAAP earnings per share rose by 23% to $0.91. The company achieved key milestones, including new IP protections and product approvals, bolstering their ENHANZE technology portfolio. For the full year, Halozyme expects 13%-22% revenue growth, 16%-24% royalty growth, and 30%-44% EBITDA growth. Financial guidance for 2024 remains strong, with revenues projected at $935 million to $1,015 million and adjusted EBITDA between $555 million and $615 million, driven by continued advancements in their product pipeline and solid market performance.

Financial Overview

In the second quarter of 2024, the company generated $231 million in total revenue, reflecting a 5% increase from the prior year's $221 million. This growth was driven by a 12% rise in royalty revenues, which reached $124.9 million up from $111.7 million. This uplift was largely attributable to the success of subcutaneous DARZALEX and Phesgo, though this was temporarily offset by a reduction in royalties from DARZALEX SC in Europe, which was reinstated in June. Adjusted EBITDA also grew by 19%, reaching $137 million.

Strategic Achievements

The company made significant strides in its IP portfolio during the quarter, acquiring a new patent for the ENHANZE platform from the European Patent Office. This new patent extends coverage until March 6, 2029, and has led to a revised five-year outlook that projects a 20% compound annual growth rate (CAGR) for royalty revenues, a 25% growth in adjusted EBITDA, and a 23% increase in non-GAAP diluted earnings per share. Additionally, new product approvals and milestone achievements boosted collaboration revenue.

Product Developments

Two new ENHANZE-enabled products were approved, including OCREVUS subcutaneous for multiple sclerosis and VYVGART Hytrulo for chronic inflammatory demyelinating polyneuropathy (CIDP). These developments expanded the company's reach into neurology and further solidified its presence in the autoimmune diseases sector. Notably, DARZALEX FASPRO saw a notable uptake with subcutaneous penetration exceeding 90% in the United States and estimated to exceed 80% globally.

Growth Projections

The company reiterated its full-year 2024 guidance, forecasting total revenues between $935 million to $1,015 million and royalty revenues between $520 million to $555 million. Adjusted EBITDA is projected to be between $555 million and $615 million, with non-GAAP diluted EPS expected to range from $3.65 to $4.05. These projections are underpinned by robust royalty revenue growth, driven by full-rate reinstatement of DARZALEX SC royalties and continued strong performance from other ENHANZE-enabled products.

Future Outlook

The company's Wave 3 and Wave 4 pipelines indicate a promising future. With pivotal Phase III studies underway and several products advancing in development, the firm expects significant growth contributions from new launches between 2026 and 2027. Additionally, the robust interest from potential new partners for the ENHANZE technology suggests further revenue growth opportunities.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. My name is Prilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Halozyme Second Quarter 2024 Financial and Operating Results Conference Call. [Operator Instructions] Please note, this event is being recorded. Thank you.

I'll now turn the call over to Tram Bui, Halozyme's Vice President of Investor Relations and Corporate Communications. Please go ahead.

[Tram Bui, executive]

Thank you, operator. Good afternoon, and welcome to our Second Quarter 2024 Financial and Operating Results Conference Call. In addition to the press release issued today after the market close, you could find a supplementary slide presentation that will be referenced during today's call in the Investor Relations section of our website.

Leading the call will be Dr. Helen Torley, Halozyme's President and Chief Executive Officer, who will provide an update on our business; and Nicole Labrosse, our Chief Financial Officer, will review our financial results as well as our outlook.

On today's call, we will be making forward-looking statements as outlined on Slide 2. I would also refer you to our SEC filings for a full list of risks and uncertainties. During the call, both GAAP and non-GAAP financial measures will be discussed. Certain non-GAAP or adjusted financial measures are reconciled with the comparable GAAP financial measures in our earnings press release and slide presentation.

I will now turn the call over to Dr. Helen Torley.

[Helen Torley, executive]

Thank you, Tram, and good afternoon, everyone.

Starting on Slide 3. I'm pleased to report another robust quarter that is a clear demonstration of the strong execution and continued momentum we have across our business. In the second quarter, we achieved multiple key milestones that support our strong growth projections. During the quarter, we added to and further strengthened our ENHANZE IP portfolio. In addition, we announced a new partner product approval and a new indication approval for a second partner. And there were multiple additional clinical and regulatory advancements of our exciting pipeline. These achievements support and drive our growth trajectory, mark the expansion of ENHANZE into new treatment areas and reinforce the predictability of the regulatory and commercial success of our ENHANZE drug delivery technology.

As a result of this progress, total revenue in the second quarter grew to $231 million, supporting our full year growth expectations of 13% to 22%. We delivered $125 million in royalty revenue, an increase of 12% from the prior year and our 16th consecutive quarter of double-digit year-on-year royalty growth. This supports our expectation for royalty growth of 16% to 24% for the full year.

In the second quarter, our high-margin royalty revenue, combined with the efficient operations of our business, drove EBITDA growth of 19% to $137 million and non-GAAP diluted earnings per share growth of 23% to $0.91. Annual adjusted EBITDA and non-GAAP diluted earnings per share growth will continue to outpace our top line and support 30% to 44% EBITDA growth and 32% to 46% earnings growth year-over-year.

Moving now to Slide 4, and I'll provide some more details on our recent progress. Let me start with the most recent success with regard to our IP portfolio. In June, we were granted a new patent for ENHANZE by the European Patent Office. This patent expressly claims the ENHANZE product that Halozyme provides to its ENHANZE licensees. Based on this new grant, patent coverage in Europe is now extended to March 6, 2029. We have a similar pending reissue patent in the United States, which also if granted with a similar scope will extend patent coverage to March 6, 2029. Our strong ability to continue to protect our intellectual property portfolio has directly and positively impacted our growth profile.

In June, we raised our 5-year outlook based on the new patent and its impact to maintain the DARZALEX subcutaneous and amivantamab subcutaneous royalty rate at the original starting royalty rate until March 6, 2029 in Europe. Importantly, this results in 5 additional years of full royalty rates in Europe for DARZALEX subcutaneous. This, in turn, resulted in an increase in our projected 5-year CAGR for royalty revenue to 20%, an increase in adjusted EBITDA growth to 25% and an increase in non-GAAP diluted earnings per share growth to 23%. We look forward to providing a financial update if the reissue patent, which is pending in the United States, is granted with similar claims to this new European patent.

I'll move now to Slide 5 and review the strong development and regulatory progress that was made in the quarter, all of which support our robust royalty revenue growth outlook. Starting with product approvals. We were delighted to announce 2 new ENHANZE approvals in the quarter. These approvals extended ENHANZE into neurology and expanded our reach in autoimmune diseases, adding to our existing strength in oncology. Roche received EU and U.K. approval for OCREVUS subcutaneous co-formulated with ENHANZE. OCREVUS subcutaneous allows multiple sclerosis patients in those regions to receive their treatment in just 10 minutes twice a year.

For many patients, OCREVUS subcutaneous will allow patient treatment outside the IV infusion facility, potentially allowing new patients to access this important medicine and also allowing treatment closer to home. OCREVUS subcutaneous represents Halozyme's eighth partner product. The second approval was for argenx's VYVGART Hytrulo, which received FDA approval for the treatment of chronic inflammatory demyelinating polyneuropathy, or CIDP, and this marks the second FDA-approved indication for the subcutaneous version of VYVGART with ENHANZE. VYVGART Hytrulo represents the first novel mechanism of action to treat CIDP in 30 years and offers patients a transformational new treatment option with a 30 to 90 second weekly subcutaneous injection.

Moving now to regulatory advancements. Bristol-Myers Squibb received regulatory filing acceptance for nivolumab subcutaneous in the United States. This allowed us to recognize a $15 million milestone payment in the second quarter for this product. In addition, the nivolumab subcutaneous submission in Europe was accepted by the European Medicines Agency in the quarter, resulting in a $7 million milestone payment to Halozyme. Bristol's nivolumab subcutaneous has a PDUFA action date of December 29 of 2024. We're also looking forward to potential approvals for Roche's Tecentriq subcutaneous and OCREVUS subcutaneous in the United States in September based on their September 2024 PDUFA action dates. We are set up for 3 new U.S. approvals this year for our Wave 3 products, which adds to the 2023 VYVGART Hytrulo first approval in generalized myasthenia gravis and this supports our exciting revenue growth projections.

Another important achievement in the quarter was the result of Johnson & Johnson's Phase III PALOMA-3 trial for amivantamab subcutaneous. The PALOMA-3 data was presented at ASCO in May. Notably, the data demonstrated that the subcutaneous delivery of amivantamab with ENHANZE resulted in significant potential benefits for lung cancer patients compared to those receiving IV treatment. Firstly, treatment time was reduced to less than 5 minutes compared to 5 hours for the first infusion of the IV treatment and 2 hours for subsequent IV treatments. Secondly, there was a fivefold reduction in infusion-related reactions from 66% with the IV to 13% with the subcutaneous formulation with ENHANZE. Remember that infusion-related reactions are a potentially serious adverse event that can lead to treatment interruption or even discontinuation.

And thirdly, an exploratory analysis also showed an intriguing improved overall survival rate for the subcutaneous treated patients. It was reported that 65% of patients receiving subcutaneous were still alive at 12 months compared to 51% who received IV treatment with amivantamab. These compelling results are another clear demonstration of the high predictability of our technology and the benefits it could provide to patients and to health care providers. Following on this strong data, Johnson & Johnson announced that they have submitted subcutaneous amivantamab for regulatory approval in both the United States and in Europe.

We were also excited to have Acumen dose their first patient in a Phase I study of subcutaneous sabirnetug, which is their novel therapeutic that targets soluble amyloid beta oligomers for the treatment of Alzheimer's disease. We're very pleased to be supporting this opportunity for a more convenient and accessible option using ENHANZE for patients suffering from this challenging disease.

Moving now to Slide 6. We remain confident in and are on target to achieve $1 billion in royalty revenue in 2027. This will be driven by the continued strong performance of our Wave 2 products plus the addition of 5 new royalty revenue streams following the approval and launch of all 5 of our Wave 3 products.

I'll now provide additional details on the second quarter performance, beginning with the continued momentum from our Wave 2 products, DARZALEX FASPRO and Phesgo. For Johnson & Johnson's DARZALEX, sales in the second quarter were $2.9 billion, an increase of 21.3% year-over-year on an operational basis. This was primarily driven by share gains of 4.6 points across all lines of therapy and continued strong growth in the frontline setting with share gains of 9.4 points. Johnson & Johnson also commented that there continues to be market growth. With subcutaneous penetration in excess of 90% in the United States and estimated to exceed 80% outside the United States, DARZALEX FASPRO with ENHANZE is driving the strong total brand growth.

According to analyst estimates, DARZALEX's annual sales are projected to exceed $17 billion in 2028. This growth from $9.7 billion in 2023 will be driven by continued growth in the frontline setting. In addition, with Johnson & Johnson commenting on 4 positive Phase III readouts in the quarter, growth is projected to also be fueled by potential new indications. We are pleased to note the FDA approval on July 30 for DARZALEX FASPRO with ENHANZE in newly-diagnosed transplant eligible patients with multiple myeloma, further expanding the frontline indications.

I'll move now to Phesgo on Slide 7. Sales of Roche's Phesgo, which is a fixed-dose combination of Perjeta and Herceptin increased 60% to almost CHF 800 million in the first 6 months of this year. With strong growth momentum, the number of launched countries increased to 51 countries and conversion of Perjeta was 41% in the quarter. Roche expects global conversion to reach 50% by 2026. Notably, there remains substantial opportunity with Perjeta revenue of CHF 1.9 billion in the first half of this year.

Let me now turn to our Wave 3 products and product candidates, which are shown on Slide 8. The opportunity for Wave 3 remains meaningful with analysts' and company's projections of total parent product sales of approximately $35 billion in 2028. With 2 of our Wave 3 products already in the market today in at least one major region, we expect launches to continue throughout this year and remain on track to 10 partner products with ENHANZE on the market in 2025.

Let me start with VYVGART Hytrulo, which is the subcutaneous version of VYVGART with ENHANZE. I will begin with the exciting news of the CIDP indication approval. In June, the FDA approval for CIDP added a second indication for VYVGART Hytrulo in the United States. CIDP is a subcutaneous-only indication. argenx also announced that the European regulatory filing for CIDP was submitted to the EMA in June and a decision is anticipated in 2025. VYVGART Hytrulo is the first and only neonatal Fc receptor blocker approved for the treatment of CIDP and represents a promising new treatment option that may provide patients with the ability to treat their disease beyond just managing symptoms.

The [Audio Gap] granted by the FDA supports use across the treatment paradigm. argenx has stated its aspiration for VYVGART Hytrulo to become the standard-of-care for CIDP patients. There are more than 40,000 CIDP patients today in the United States. It has been highlighted that only 24,000 patients are estimated to be receiving some form of treatment for CIDP. Of these, 50% of treated patients are not responding well to the current treatment or are experiencing negative side-effects. All of this supports a high unmet need. argenx has been preparing for this launch and has a strong commercial playbook in place.

Similarly, to generalized myasthenia gravis, they will initially focus on gaining coverage and access by getting payer policies in place. Their commercial strategy will focus on an audience of approximately 10,000 neurologists, of whom about 72% treat both CIDP and myasthenia gravis. Based on the treatment regimen, the annual net revenue per CIDP patient is estimated to be $450,000, which is higher than estimated by analysts, further supporting the brand's growth prospect.

I'll move now to the continued momentum on the generalized myasthenia gravis launch. argenx's VYVGART brand is already a global blockbuster, having generated more than $1 billion in its second year of launch for its first indication in generalized myasthenia gravis and it remains on a strong growth trajectory. In the second quarter of 2024, argenx reported $478 million in global product sales of VYVGART, a robust 20% quarter-over-quarter growth. VYVGART Hytrulo is in its first full year of launch for gMG, and we're very pleased with the growing adoption and use, with the number of patients and prescribing physicians expanding and use increasing in the earlier lines of treatment for this indication.

In the second quarter, argenx reported that more than 50% of the VYVGART Hytrulo patients had switched from orals and 60% of the VYVGART Hytrulo patients were new to VYVGART. This is consistent with the objective to grow the market. We also expect continued ease of access following the granting of the J-code for Hytrulo in January of this year. We are also excited to hear argenx recently update and highlight that they believe the opportunity for myasthenia gravis is higher than their initial expectations. The opportunity increased 3.5x from approximately 17,000 patients at launch for the anti-acetylcholine receptor antibody-positive patients to now up to 60,000 patients, including the expectation for new indications for seronegative and ocular myasthenia gravis, as well as growth driven by the availability of biologics.

Argenx is also planning to introduce a new, more convenient delivery option for VYVGART Hytrulo with a prefilled syringe with the goal of supporting additional patient self-administration. An application for U.S. regulatory approval for the prefilled syringe for VYVGART Hytrulo with ENHANZE in both CIDP and generalized myasthenia gravis was recently submitted. The prefilled syringe is expected to continue to expand and reinforce their momentum as the biologic market continues to grow. argenx also recently initiated 2 registrational studies evaluating VYVGART Hytrulo with ENHANZE administered by prefilled syringe for thyroid eye disease, representing another attractive future opportunity.

Let me move now to Tecentriq subcutaneous with ENHANZE. With approvals already granted in Europe and Great Britain for all approved indications of Tecentriq IV, Roche recently commented on good uptake following the European approval. They highlighted as an example that 32% conversion has already been achieved in the United Kingdom following the late 2023 launch. We're excited for the U.S. approval, which is projected by September 15, 2024, based on the PDUFA action date. Annual sales of Tecentriq IV remained stable and generated CHF 1.8 billion year-to-date. Roche has commented that they expect the majority of the subcutaneous use will come from patients switching from Tecentriq intravenous.

Moving now to OCREVUS subcutaneous with ENHANZE. As I mentioned earlier, in June, Roche received approval of OCREVUS subcutaneous in Europe for relapsing in primary progressive multiple sclerosis. In the United States, OCREVUS subcutaneous has a PDUFA action date of September 13, 2024. The OCREVUS brand remains a market leader in the U.S. and EU5 with 26% global patient share. With 350,000 patients treated to date and 1 million patient years in cumulative exposure, OCREVUS continues to capture a higher retention rate than other multiple sclerosis medicines.

In the first half of the year, OCREVUS sales grew 8% to approximately CHF 3.4 billion. With the recent European and upcoming U.S. approval for the subcutaneous formulation with ENHANZE, OCREVUS subcutaneous presenting meaningful new opportunity to reach more patients to reduce the burden for patients receiving treatment and to release pressures on the health care system. This will drive both the market growth and the conversion opportunity. On its most recent earnings call, Roche noted that they're already seeing strong uptake in the early launch countries in Europe and reiterated that they see OCREVUS subcutaneous being a stand-alone blockbuster opportunity with an incremental $2 billion in sales opportunity beyond the IV.

Turning now to Bristol-Myers Squibb's nivolumab subcutaneous with ENHANZE. In the United States, we look forward to potential FDA approval with the updated action date of December 29, 2024. The European submission was accepted in June and we project potential approval in mid-2025. Nivolumab or Opdivo IV sales grew 16%, excluding FX in the second quarter to $2.4 billion, showing continued strong performance. Subcutaneous nivolumab has the potential to significantly reduce administration times for patients using Opdivo by utilizing a single injection in just 3 to 5 minutes, supporting BMS's expectation that at least 30% to 40% of U.S. patients will convert from IV to subcutaneous with an expectation that the subcutaneous label will cover up to 75% of the IV indications.

I'll move now to amivantamab subcutaneous with ENHANZE. Amivantamab subcutaneous is on track for potential launch in 2025. This could represent our 10th approved product. Johnson & Johnson has commented that this is another blockbuster product opportunity and that amivantamab will have a significant place in frontline non-small cell lung cancer, given the high unmet need and the strength of the PALOMA-3 data. They recently highlighted the reduced treatment administration time and reduced infusion-related reaction as key to supporting this multi-billion-dollar opportunity.

I will now move to Slide 9 for a quick highlight of our Wave 4 pipeline, which is expected to contribute to our future growth trajectory with potential launches for Wave 4 in the 2026 to 2027 time frame. We have 6 products currently in development, reflecting a range of therapeutic areas, including oncology, neurology, immune disease and HIV. Two products are currently in Phase III development, Takeda's immunoglobulin 20%, TAK-881 with ENHANZE, and BMS's nivolumab-relatlimab fixed-dose combination subcutaneous with ENHANZE. These Phase III studies are continuing to progress. These broadly neutralizing antibody N6LS for HIV advanced into Phase II testing several months ago and also continues to progress.

Let me now move to new deal progress. I mentioned earlier that we're delighted that Acumen has progressed into Phase I testing of a subcutaneous version for their development of product for Alzheimer's disease sabirnetug supporting a trend we're increasingly hearing about the introduction of SC early in development of the product. The goal is to provide a more convenient and accessible option for patients with Alzheimer's disease, which Acumen believes will improve treatment adherence through enhanced flexibility for patients, caregivers and for providers.

We continue to discuss terms with companies for ENHANZE. Recall, this is the stage that happens prior to negotiating and signing of the collaboration and licensing agreement. In addition, technical discussions and evaluations for ENHANZE and for our HVAI that I mentioned in our last quarter are ongoing with multiple companies. In terms of the evaluation and decision-making process, as we have described before, each company is unique. They have their own process for technology approval and then for budget approval, each of which moves at a different pace. All of these factors make it difficult to project the exact timing for signing a new deal.

As the gold standard for a rapid subcutaneous delivery, ENHANZE is clearly recognized as a highly derisked product with a strong safety track-record and an unmatched history of global regulatory approvals and commercial success. We were also pleased to note J&J's recent comments that they believe DARZALEX FASPRO with ENHANZE will fall under a separate timeline for drug price negotiation with regard to the Inflation Reduction Act. As we await the Part B guidance, this fully aligns with our expectations and reinforces another potential benefit for ENHANZE and the recognition of the clinical benefit it can bring for patients.

Let me now comment on our commercial portfolio which continues to demonstrate positive momentum. Against the backdrop of a very large and growing market opportunity in testosterone replacement treatment, XYOSTED growth remains strong. We continue to see a clear path for our proprietary products to contribute meaningfully to EBITDA in 2028 with greater than $150 million.

Let me now hand the call over to Nicole to discuss our financial results in more detail.

[Nicole LaBrosse, executive]

Thank you, Helen. Second quarter results are on track with our plans and support our strong financial performance expectations for the full year from the continued momentum in the business. Importantly, adjusted EBITDA and diluted earnings per share growth once again outpaced the top line, reflecting the strength of our business model, as we generated significant leverage from continued growth in royalty revenue.

Let me start with our capital allocation priorities on Slide 10. In the quarter, we completed the $250 million ASR announced last November, bringing our total returns to shareholders via share repurchases to $1.3 billion over the past 5 years. We have not included future share repurchases in our projections at this time. However, our $750 million share repurchase program authorized by the Board earlier this year allows us to continue to evaluate share repurchases to drive shareholder value, depending on market conditions and other factors.

We will continue with a balanced approach as we deploy capital to grow the business and evaluate opportunities to unlock additional growth through M&A. We maintain a strong balance sheet with cash, cash equivalents and marketable securities of $529 million on June 30, 2024, compared to $463.5 million on March 31, 2024. The increase is primarily a result of the cash generated from operations. Our net leverage ratio was 1.8x at the end of the quarter, and we expect to continue to reduce our net leverage ratio as EBITDA continues to grow.

Turning now to Slide 11 for our detailed financial results for the second quarter. Revenue grew 5% to $231.4 million compared to $221 million in the prior year period. Royalty revenues for the quarter were $124.9 million, an increase of 12% compared to $111.7 million in the prior year period. The commercial success of currently approved Wave 2 products, subcutaneous DARZALEX and Phesgo continue to drive royalty revenue growth. Growth in the second quarter was partially offset by a temporary royalty rate reduction for DARZALEX SC in Europe in March, with the full royalty rate reinstated in June.

The second quarter also benefited from higher-than-expected API sales, reflecting a demand shift from the third quarter to the second quarter. Similarly, collaboration revenue was higher-than-anticipated due to the achievement of 2 milestones previously expected to take place in the third quarter, Bristol's MAA acceptance and Acumen's Phase I milestone. Research and development expenses were $21 million compared to $19.7 million in the prior year period. The increase was primarily due to planned investments in ENHANZE related to the development of our new high-yield API manufacturing process.

Selling, general and administrative expenses were down to $35.7 million in the quarter from $38.9 million in the prior year period, primarily due to planned reductions in commercial marketing expense. Adjusted EBITDA increased 19% to $137 million from $115.1 million last year. GAAP diluted earnings per share was $0.72 and non-GAAP diluted earnings per share was $0.91. This is compared with GAAP diluted earnings per share of $0.56 and non-GAAP diluted earnings per share of $0.74 in the second quarter of 2023.

Turning now to Slide 12 and our 2024 guidance. Recall, we previously raised our full year 2024 guidance in June of this year to reflect the issuance of the new European patent for our ENHANZE drug delivery platform. With our solid first half financial performance and upcoming partner milestones, we are reiterating our full year 2024 guidance of revenues of $935 million to $1,015 million, royalty revenues of $520 million to $555 million, adjusted EBITDA between $555 million and $615 million and non-GAAP diluted EPS of $3.65 to $4.05.

As you refine your models, I would also like to reiterate the following. The second quarter benefited from the pull-forward of API sales and 2 milestones achieved previously expected in the third quarter. Therefore, product sales and collaboration revenue in the third quarter is expected to be flat to the second quarter. Royalties are expected to see sequential growth in the third and fourth quarter, driven by a full quarter impact of new EU IP. Non-GAAP diluted EPS growth of 32% to 46% reflects the gross margin expansion from revenue mix and the full year impact of share repurchase activity in 2023.

With that, I will now turn the call back over to Helen.

[Helen Torley, executive]

Thank you, Nicole. Our second quarter results highlight the strength of our durable, high-growth business model, and successful execution against our growth plan. As shown on Slide 13, our strong pipeline of launches this year and beyond gives us both clear line of sight to the growth of our business and confidence in achieving our 5-year financial targets. The awareness and appreciation of subcutaneous technology around the globe continues to grow and we are well-positioned to capitalize on these emerging opportunities. I remain confident and very excited for Halozyme's future.

I want to close by thanking our terrific Halozyme team and our partners and collaborators for their hard work that resulted in an exciting and strong first half of the year. Operator, we are now ready to open the call for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Jason Butler with Citizens JMP.

[Jason Butler, analyst]

Congrats on the quarter. Helen, wondering if you could just, once again, give us an overview of, as you look at the new partnership or expanded partnership activities, where is it weighted between ENHANZE alone versus ENHANZE and auto-injector? And again, understand that timing can't be predicted, but just again, your confidence level on seeing deals this year?

[Helen Torley, executive]

Yes. Thanks, Jason. Yes, we are confident in signing additional deals. And what really gives us that confidence is the breadth of conversations that we're having. I would say the deals are more weighted to ENHANZE on its own, but there are conversations happening, of course, with the HVAI, which requires ENHANZE, and obviously, also conversations related to HVAI with partners who have already taken ENHANZE. So a nice mix of conversations. Large pharmas, also biotech companies and a range from established products and also including products that are early in development, which we do like to see because that is becoming such an increasing trend that everybody is recognizing the value of subcu for patients and for the health care system. So very nice breadth of those conversations, probably more weighted to ENHANZE, Jason.

[Jason Butler, analyst]

Great. And then just one follow-up, I think probably for Nicole. Just the API sales were higher than expected in 2Q. What drove that? And I guess, just what gives you the line of sight that you'll be flat quarter-over-quarter into 3Q?

[Nicole LaBrosse, executive]

Yes. Thanks for that, Jason. So when we look at our API sales, we do try to lay out that quarterly cadence, but those can shift quarter-to-quarter. So we did just see -- and we have the ability to do that too because of our ample supply. So if a partner needs a little bit earlier than originally expected, we can make those fluctuations. And so that is what we saw. We do still have line of sight to full year expectations and that remains unchanged, but we did see a shift earlier in the year. So from the third quarter to the second quarter, which now leaves our expectations for that flattening because we've accelerated from the third quarter. Previously, the third quarter was going to have growth. Now at this time, we expect a flattening from the second quarter to the third quarter, really, again, just based on our partners and the orders that we expect at this time.

[Operator]

And your next question comes from the line of Cerena Chen with Wells Fargo.

[Cerena Chen, analyst]

This is Cerena on behalf of Mohit Bansal. Wanted to ask about potential partnerships, especially given all the enthusiasm about the myostatin pathway. It seems like drugs here seem to be very high dose, and I was wondering if that's something that you could partner with using your technology?

[Helen Torley, executive]

Yes. I can say that we certainly are interested in, obviously, areas of obesity, obesity with muscle loss are very hot areas. And we do like to target those types of areas to look at the companies who are involved there, look at their products to see if they'd be a good fit for ENHANZE and we approach those companies. And so insofar as we're seeing any fits there, Cerena, know that we will be or will have already reached out to those companies to initiate discussions with that because that's exactly how we like to target new opportunities.

[Operator]

And your next question comes from the line of Jessica Fye with JPMorgan.

[Jessica Fye, analyst]

I had a couple. When might we hear more about the undisclosed Roche and Chugai products on your Wave 4 slide? And can you say if those are subcu versions of approved IV drugs? Or are these products being developed as subcu from the start? And then maybe piggybacking on Jason's question.

Last quarter, you came out very strong on the commentary around potential new partnerships, talking about discussions with several companies in the terms stage. What's the latest you can tell us for how many of those conversations are still live? I'm sure maybe new ones have popped up, but I'm curious if there's been any attrition from the ones that were live as of last quarter. And I guess, related to partnering, can you speak to how the PALOMA-3 results have impacted discussions with potential partners, if at all?

[Helen Torley, executive]

Yes, great. Thanks, Jess. Let me start with the undisclosed targets. So you're absolutely right. We've got 2 undisclosed targets, one Roche, one Chugai that is on the Wave 4 slide. Unfortunately, because those are partner confidential, we're unable to say anything about them, including whether they are subcu versions of already-approved IV products. The partners have given us no indication at this point in time of any near-term plans to disclose what those targets are. So generally, we find that partners who are feeling they're in a competitive space or perhaps just because of their preference, choose not to disclose the targets, and we obviously have to abide by that. So obviously, we're excited to talk about those when we can, but no, we can't say anything at the moment.

With regard to the terms discussion, as we -- I mentioned, we are continuing in terms discussions with companies as well as additional companies that are more in the technical evaluation stage, Jess. So each company is moving at its own pace. While I would love to be able to give more granularity about what exactly is happening, there's not an intermediate place really between initiating the terms discussion and signing the CLA that I can talk about. And so it does make it seem like when we announce the deal, it appears all of a sudden, but we do want to make sure that we're giving you the most up-to-date information. And so you'll hear about it when the CLAs are actually signed.

For PALOMA-3, obviously, for everybody that was exciting data where in addition to expected results, which was a fivefold reduction in infusion-related reactions and also the dramatically shorter treatment time, there was an interesting exploratory signal with regard to an improved overall survival in the subcu arm.

Two theories circulate about that. One was that perhaps it was the patients had a higher overall exposure, while it still hit the non-inferiority margins. It was an over -- higher exposure. But there's a lot of interest in the idea that it's in part due to increased immune trafficking, which is happening because the drug was delivered subcutaneously and is absorbed through the lymph nodes.

Certainly, as it relates to companies who are working in areas such as nucleic acids, mRNA vaccines, Jess, that has created interest. These are early conversations and obviously, there's more data to be generated here. But certainly, this is a concept that some people were aware of, more people are becoming aware of and the potential to end up being able to have a higher production as an example, as a result of subcu delivery with ENHANZE is certainly attracting interest. That's about all I can say about that at this time.

[Operator]

And your next question comes from the line of Michael DiFiore with Evercore ISI.

[Michael DiFiore, analyst]

Congrats on the solid quarter. Two for me. Again, just drill down on the partnership discussions. Curious to see if -- how the election uncertainty and looming potential for rate cuts has in any way influencing the amount of incremental inbound partnership interest. And I know in -- and Helen, I think in -- back in 1Q, you said that you had, like, I think, 10 unique companies that were kind of being -- or in the mix for partnership discussions. Has that increased since those 10 companies?

And then my follow-up is kind of a housekeeping question. Could we expect a true-up of EU DARZALEX royalties that were low in 2Q prior to the extension of the EU patent?

[Helen Torley, executive]

All right. I'll take the first one and then Nicole can take the second one. I would say the issue of election uncertainty, rate cuts and things aren't really coming up in any of the conversations that we're having, Mike. So I can't really say I think that is a focus for certainly the people we are talking with in the companies. We are continuing in discussion with around 10 companies. And so I'd say it's still that healthy pipeline of conversations that we're having and we're constantly reaching out to other companies and we do get inbounds.

Remember, I gave a metric before to say we probably have more coming from our active outreach than incoming, but I haven't seen any difference in that overall kind of pace and trend at all and certainly, nothing I could attribute to anything like election uncertainty or price cuts.

I think, for us, as you're seeing, you've heard us talk about, it really is the internal reviews in companies, as perhaps part of the governance, perhaps part of their budget cycle that we have gotten used to over the years that it just takes time. If you look back historically, we've signed about a deal a year on average. And so we're very used to it. We're patiently working through the process with all the companies that we're talking with and remain very excited by the breadth of the conversations and that gives us confidence in additional new deals.

[Nicole LaBrosse, executive]

And, Mike, regards to the royalties, we're not expecting to see a true-up related to the second quarter later in the year. What you saw in the second quarter was a temporary reduction in the royalties related to our Janssen product and that was because the temporary royalty rate stepped down to 50%. That was in that period from March to June. But now the full rate has been reinstated. So we will expect to see royalty growth in the remaining quarters of the year, but not expecting to see any true-ups coming out of the second quarter.

[Operator]

And your next question comes from the line of Mitchell Kapoor with H.C. Wainwright.

[Mitchell Kapoor, analyst]

The first one is on the 2024 guidance since it was reiterated, but given what you're seeing in the pace of revenue categories, I was wondering if you have any updated thoughts and if you can make any comments about how the composition of the revenue line items could look in 2025 potentially.

[Helen Torley, executive]

All right. I'll turn that to Nicole.

[Nicole LaBrosse, executive]

Yes. So since we updated our guidance, you did see us update more specifically just related to royalties. And so royalties are expected to exceed our prior expectations and have a higher ramp in the third and fourth quarter. But we do not change and don't have substantial changes to the rest of our royalty stream. So the composition of our revenue mix is largely tracking to our guidance that we put out and reiterated our guidance, so consistent with the guidance we put out in June.

[Mitchell Kapoor, analyst]

Great. And then on the product sales, you were mentioning that sometimes a partner might request product earlier than later. And I was wondering if that shift that we're seeing, if we're seeing that now have any bearing on the level of demand that we could be seeing and how that might read through to the future.

[Nicole LaBrosse, executive]

At this time, we don't have a read-through on that and it's really just because we saw these orders, especially when they happen close to quarter end, they can just really shift quarter-to-quarter, but we don't have read-through and aren't expecting it to impact our full year projections.

[Helen Torley, executive]

Yes. And Mitch, I'd just add that we found that the companies have and can change their buying patterns just based on various things that are going inside the company. They have different amounts of safety stock they want to hold. And so we have not found API demand a good correlate for changes in the demand that we're going to see just because not all of it is immediately for use in the market. Some of it is for safety stock.

[Operator]

And your next question comes from the line of Brendan Smith with TD Cowen.

[Brendan Smith, executive]

Congrats on another good quarter. I just have a quick one on OCREVUS and then a follow-up on empasiprubart. We've been assuming that OCREVUS subcu will still require visits to the clinic and administration by a health care provider. Is that also kind of your expectations at this point? Or are you thinking there might be any flexibility for at-home administration? And then just wondering on argenx's empasiprubart, do you have a sense from them how many of the 4 indications they've now announced will actually use the ENHANZE subcu? We know they're using it in MMN, but just wondering about DM, DGF and CIDP?

[Helen Torley, executive]

Yes. With regard to OCREVUS, I think based on the clinical study that's been done, Brendan, to date, because it was done with the setting of health care practitioner administered, I think it's very likely that the original -- the initial labels are going to be for -- in the physician's office. A simple 10-minute subcu injection, but administered in the office. And every 6 months, I'll just point out, and that is actually quite a good time point for patients to be in seeing their doctors anyway. And so I don't know that there'll be any drive on Roche's part to want it in the patient's home because the patient is going to have to see the doctor anyway, and it's a nice time for a check-in.

With regard to empasiprubart, argenx has not provided any additional information with regard to that publicly. So we're not in a position to provide anything at this time.

[Operator]

And your next question comes from the line of David Risinger with Leerink Partners.

[Jiexian Zhuang, analyst]

Congrats on a strong quarter. It's Jason for David. Two questions for me, please. First one is following the strong 2Q performance, how should we think about the maintenance of full year guidance? And what are the third quarter and fourth quarter sequential modeling considerations? And second question is, are you still expecting to sign major new ENHANZE deals near-term for this year for future blockbuster drugs?

[Helen Torley, executive]

Yes. I'll ask Nicole to take the first one and just maybe, again, talk about the maintenance of the full year guidance and just a flavor of the next 2 quarters.

[Nicole LaBrosse, executive]

Yes, happy to. So our second quarter performance is tracking with our full year guidance. And so no change to the guidance. It is tracking as we expected and supports our full year view. And then in particular, for cadence for the third quarter and the fourth quarter, we do expect the third quarter to be flat when we look at API sales as we mentioned. And also when I look at collaboration revenue, I'd also mentioned we saw some milestones pull in that originally were expected in the third quarter, those happened in the second quarter. And so that is also driving our expectation that milestones or collaboration revenue will be flat second quarter to the third quarter.

But when I look at royalties, we know that we expect to see growth in the second half of the year and sequential growth in the third quarter and the fourth quarter. That's really reflecting not only the growth in the underlying brands in our royalty streams, but also reflecting a full quarter of our royalty rate being at the full rate back that was reinstated in June for DARZALEX.

[Helen Torley, executive]

All right. And with regard to the deal progress, we certainly are excited to be in a range of discussions, including terms discussions and technical discussions with other companies. And as we talked about, predicting the exact timing of a deal is very hard because each company is different, and it's influenced very much by their governance, but also their budgeting process. And so what I can say is that based on the breadth of discussions, we are very confident in new deals. They absolutely could happen this year. There's a range of things to your question on will it be an established product that's already commercialized, will it be a product that's doing subcu right from the start, it certainly could possibly be one or either or both.

It really is we're at the stage of just working through this within the companies and their systems. But we're very pleased to have this range. Obviously, all of the established blockbuster IV to subcu conversion that's worked very well for us. But we're seeing so much interest now in subcu extended dosing as a place people are going and being -- offering something very important for patients, but also competitive differentiation for the product. So all of that is entirely possible. And we would just have to work through the system and obviously, we are excited to provide updates as soon as we're in a position to move past these terms discussions into the signing of the CLA.

[Operator]

Your next question comes from the line of Vikram Purohit with Morgan Stanley.

[Vikram Purohit, analyst]

We had one on capital allocation and business development. So how does potential M&A factor into your thinking? And what profile of business do you think could be a good fit for Halozyme at the company's current stage of maturity? And how much would you be willing to flex that 1.8x leverage ratio for potential BD?

[Helen Torley, executive]

All right. I'll take the first part and then I'll ask Nicole to comment on the final question there on the leverage. So we continue to be very actively looking, and we do believe that if we can find the right M&A, that is a great use of our capital and a great way to return value to our shareholders. We continue our disciplined approach, and we are looking ideally at businesses such as in drug delivery that are licensing models to be a great fit with our current -- our business model, but also our financial profile, given the high margins that exist there. Importantly, we're looking for things that have got a meaningful revenue stream and durable revenues to be a fit with the financial profile of the company as well.

So looking at drug delivery, but we also are looking in, Vikram, you can imagine, there are other businesses where there are technologies that pharma and biotech needs to license for them to for -- as an example, create new drugs. These are already established businesses and that is another great fit for our skills and for our business model. And so we're very active looking there as well.

As ever, we will be patient. We've demonstrated strong patience. We need to have something that's got the right de-risked asset with the potential to grow where we see a meaningful contribution to our revenue and durable revenue as a result of it. So hopefully, more to come in that, but very active there.

Nicole, do you want to talk about leverage?

[Nicole LaBrosse, executive]

Yes. When I look at our current leverage and really what I think about and as Helen described, is what is the pro forma delevering profile. So that would be a really important factor when I think about how high I would go from a leverage perspective. I'll give you the example that for the Antares acquisition, we levered up to 3.3x. And as you mentioned, we were able to delever and we're now at less than 2x. So that type of profile where we have line of sight to delevering is what I'd really be focused on.

[Operator]

And your next question comes from the line of Joe Catanzaro with Piper Sandler. And Joe, you might be on mute.

[Joseph Catanzaro, analyst]

Hey. Sorry. Can you hear me now?

[Helen Torley, executive]

Yes, we can.

[Joseph Catanzaro, analyst]

Great. Sorry about that. I just had a quick one on the recent FASPRO label expansion into frontline transplant-eligible myeloma. I think the PERSEUS study did include a maintenance component, but the label does not include maintenance. So wondering if you think the exclusion of maintenance could have any impact on the longer-term outlook for the total DARZALEX franchise and its sort of growth trajectory or whether you were considering in your longer-term assumptions, some maintenance usage? Any help there would be appreciated.

[Helen Torley, executive]

Yes. It's a good point, Joe, and not one that when we are looking at DARZALEX, we are -- we're not forecasting on a specific label-by-label basis. I think what we do is we take a look at what the analyst consensus is for patients. And so -- the analyst consensus is for sales. And so we really look to see that across all of the indications that they have in the front line, they're obviously making great share gains at the moment. Last quarter, this quarter, close to 10% share gains in the front line. So I look at this as incremental on a trajectory that's already established with all of the frontline indications and uses that they have in place today.

[Joseph Catanzaro, analyst]

Okay. Great. That's actually really helpful.

[Operator]

Thank you. And we have reached the end of our Q&A session. Ladies and gentlemen, that concludes today's conference call. Thank you all for joining. You may now disconnect.