Halozyme Therapeutics Inc

NASDAQ:HALO

Earnings Call Transcript 2019-Q3

[Operator]

Good afternoon everyone. I would now like to turn the conference over to Al Kildani, Vice President of Investor Relations and Corporate Communications for Halozyme Therapeutics. Mr. Kildani, please begin.

[Albert Kildani]

Good afternoon, and welcome to our Third Quarter 2019 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 on 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 Laurie Seltzer, our Chief Financial Officer, who will review our financial results for the second quarter 2019.

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 Helen.

[Helen Torley, President and Chief Executive Officer]

Thank you, Al. As we announced on November 4, following the negative results in HALO-301, we have stopped development of PEGPH20 and are in the process of closing our oncology operations and are now focused solely on our enhanced direct delivery technology. With this change in focus, for those of you who are less familiar with it, I'm going to begin the call with a detailed overview of our enhanced business. Then I'll provide an update on the recent and upcoming events. I'll then transition over to Laurie who'll provide more detail on our third quarter financial results, the restructuring our capital return plan, and 2019 updated guidance.

Beginning on Slide 3, our strong expansion of partners and programs in development has been driven by our partners' recognition of an excitement for the value that ENHANZE can add to their business. Let me highlight four ways ENHANZE offers true differentiation and real value. It reduces both treatment time and associated costs burden. This was a key part of the life cycle strategy Roche employed for Herceptin and MabThera in anticipation of biosimilars. At peak Herceptin SC held 60% share of sales volume in the EU launched markets, demonstrating the strong market acceptance for this delivery method.

Secondly, ENHANZE offers the potential for competitive differentiation. As an example Janssen began development of an SC version of DARZALEX early in the IV product lifecycle before their IV products approval. With the recognition that a shorter, simpler, subcutaneous delivery would not only reduce the burden on patients, but it would also provide DARZALEX with a more competitive profile in the face of potential future competition. Bristol-Myers Squibb is an example of a company evaluating SC as their first go-to-market formulation for certain targets. For Halozyme, we're excited to see the strong focus on adding hands early in the lifecycle.

Thirdly, ENHANZE offers the potential for new intellectual property and exclusivity, providing up to 20 years of exclusivity from the filing date for the co-formulated product. And finally, ENHANZE could be a strong fit for those currently experiencing challenges in delivering oncology care. In our recent primary market research with oncologists, we heard again and again of the staffing, share capacity and time constraints facing many practices today as a result of therapies requiring long infusion times and supervision.

Turning now to Slide 4, let me say a few words and our operating model. From the very start of the process to access rights, utilize ENHANZE technology through to BLA filing and approval, Halozyme's technical experts are sitting side-by-side with our partners providing input, advice and ideas. As demonstrated on Slide 4, different specialists are needed to engage at different stages of the development process, a summary of which is illustrated across the top row. This is why our operating model is so scalable and efficient, with individuals supporting multiple partners and programs at the same time.

Now, moving to how we are paid for ENHANZE. In summary, and as shown in Slide 5, we receive royalties, milestone payments and payments for the sale of API to partners. In general, are partners license exclusive rights for use of ENHANZE associated with a specific target. Example of targets, that partners have gained exclusive rights for use to with ENHANZE include, HER2, anti-CD38, PD-1 and PD-L1.

I'll begin with the royalties, across all of our agreements we receive on average a mid single digit royalty on net sales. Milestones are also a key revenue contributor. We receive upfront payments for access to the technology and for the nomination of the initial selected target or targets. In our most recent agreements, this has been in this $30 million to $40 million range for one to two targets. We receive increasing development milestone payments as a partner makes progress to approval and for sale.

In recent agreements this is generally been 40% to 60% of the 160 million total potential milestones per target and receive commercial milestone payments as sales thresholds are achieved. This is also in the 40% to 60% range of total potential milestones per target in the recent agreements. And finally, it was Halozyme is accountable to oversee the production, release and quality control of the API or active pharmaceutical ingredients, which is manufactured at two contract manufacturing organizations. We receive a 20% margin on bulk sales partners.

As is illustrated on Slide 6, to date, we have signed nine ENHANZE licensing and collaboration agreements with the marquee pharma and biotech companies that are listed here. As you will note, in recent years, we've substantially increased the potential value for each target being developed, boring from initial milestones per target of $30 million to $50 million to now $160 million per target. Royalty rates have remained in the range that is maintaining the average of the single digit royalty across all contracts.

I'll now provide an update on the substantial progress that would be making on the platform beginning with the approved products that utilize ENHANZE. To date, three products have been approved in global markets utilizing ENHANZE and have demonstrated tangible commercial success. These are listed on Slide 7. Sales of these products have resulted in cumulative lifetime royalty payments to Halozyme from time of launch to today of approximately $305 million.

After achieving strong market acceptance we've reported peak share for Herceptin SC of 60% of the EU market total sales volume and 34% per MabThera, revenues for SC has since declined with the emergence of European biosimilars. The most recent impact is reflected in the updated guidance that Laurie will discuss in a moment.

Turning now to Slide 8, we're very excited for the next potential launches utilizing ENHANZE, which will begin an important inflection in our royalty revenue growth. Based on the COLUMBA Phase III data, daratumumab SC can be given in three to five minutes subcutaneously. There may also be the potential for a lower rate of infusion related reactions.

Janssen completed regulatory submissions in the US and in Europe for this subcutaneous formulation for DARZALEX in July of 2019, supporting the potential for mid 2020 approvals, assuming standard regulatory review times. With DARZALEX currently projected by analysts to exceed $3 billion in sales in 2020. Janssen has stated that SC is a core part of their future growth strategy, supporting their goals of expansion into frontline settings and treatment in the community setting.

Moving now to the right column, Perjeta-Herceptin fixed-dose combination is the next potential launch. This is an important first combining to therapeutic antibodies in a single fixed-dose formulation utilizing ENHANZE, enabling a five minute subcutaneous injection, compared with the up to two and a half hours for the sequential IV administration of Herceptin and Perjeta.

The HER2 positive early breast cancer population is estimated at 75,000 patients in the US and EU. Perjeta has already reached more than 50% of patients who are at high risk of recurrence in the early launch countries in the US and Europe. According to Roche's third quarter earnings report Perjeta sales grew 33%, driven by the uptick of the affinity, Perjeta and Herceptin regimen and HER2 positive early breast cancer.

Moving now to the development pipeline, what has really been remarkable in the last couple of years has been the acceleration and the number of products entering the clinic utilizing ENHANZE. In 2019, we predicted we would have 12 products in clinical development and I'm delighted to say that we're currently having 11 in development with DARZALEX, Perjeta-Herceptin and nine products that are currently in Phase I testing.

Illustrated on Slide 9, are the nine programs that are in or completed Phase I clinical testing. Excitingly, based on current partner plans, we see the potential for at least four Phase II or III clinical trial starts in 2020 and already have line of sight for the potential for at least five new Phase I starts also in 2020. We had expected to announce a Phase III study start in 2019. This program is now expected to start in mid 2020, as the Phase I study is taking longer to complete than had originally been planned.

Now, let me turn to the revenue potential for the ENHANZE platform shown on Slide 10. We continue to project the potential for $1 billion in royalty revenues in 2027. Included in this predictions are the three curves, the commercialized products, the development products we just discussed excluding Alexion and five products that are planning to start Phase I testing in 2020. We've temporarily removed Alexion as we anticipate an update from Alexion in 2020 on their development plans for Alexion1810, including the potential indications.

And just a brief reminder on the proofs we use for this known risk adjusted projection. Where available, we utilize analysts' consensus sales estimates. We apply available information and our knowledge on the potential launch timing, and then apply our assumptions on peak conversion and time to peak conversion. We also assume global launches in all indications.

The impact of a new product approvals, including daratumumab and Perjeta-Herceptin are illustrated with a clear revenue inflection occurring after a period of modest royalty declined with the current products. Our broad earlier pipeline has been at its contribution.

And now I'd like to just briefly review our royalty term. The rHuPH20 patent expires in Europe in 2024 and in the US and 2027. In general, our royalty term continues until the latter of the last expiring rHuPH2020 patent, or 10 years post first commercial sale. If rHuPH20 passivity expires during this 10 year term, there was a step down in the royalty rate approximately 50% from expiry until the end of the 10 year term. And it's this design that allows us to project meaningful royalty revenues even beyond 2027.

And there's also the potential to obtain additional co-formulation patent on certain novel F partner products, potentially extending the mid single digit royalty term up to 20 years post patent filing date. While, each agreement is negotiated separately, and terms and conditions vary across agreements, in general, the co-formulation patents have the favorable effect on the duration of the royalty term and potentially delay the timing of the royalty step down.

Now, we'll move on to the anticipated contribution from our milestones. Recall, we receive upfront payments from the signed new deals, and then development and commercial milestone payments when development programs progress to launch. Milestone payments play a key role in driving Halozyme revenue and our free cash flow.

Turning to Slide 11, in 2018, we projected 2019 to 2022 milestone revenues of $225 million to $300 million. In 2019, from January to October, we have received $55 million and our tracking well to our three year projection. Today, I'm pleased to update our three year milestone projections based on the strong development momentum we're seeing across the entire ENHANZE portfolio.

Based on current partner plans for the period of 2020 to 2022, we project strong milestone revenues in the range of $350 million to $450 million. Our revenue growth driven by both royalty and milestone growth, places Halozyme in a strong position to return capital to our shareholders and we're committed to creating value for shareholders and do capital returns as a key component.

Turning now to Slide 12, we now have in place a plan to repurchase up to $550 million in shares over the next three years. As announced today, we're offering a $400 million aggregate principal amount in convertible senior notes due in 2024. We plan to use up to 200 million of the net proceeds from the offering to repurchase shares of the company's common stock concurrently or shortly after the pricing of the offering.

Now importantly, this is in addition to the November 4 announcement of the authorization by our board of directors of a share repurchase program of $350 million over the next three years. Issuing this convertible note to help fund share buybacks is an opportunity to immediately return capital to investors as we transition to a profitable and hands only company. And Laurie will be providing some additional color on this and her section in just a moment.

Before I move to the discussion of the third quarter and upcoming enhanced development, let me just summarize the investment thesis for Halozyme on Slide 13. ENHANZE is a commercially validated platform with three globally approved products that have generated approximately $305 million in cumulative royalty payments since the first SC product launch.

We're approaching a royalty revenue inflection point with near term potential approvals for daratumumab SC and Perjeta-Herceptin fixed-dose combination. Strong future growth potential is fueled by the deep pipeline of partner products that are in development. And all of the above are resulting in a potential royalty revenue CAGR of approximately 40% between now and 2027.

As I move now to the operating expenses, our lean scalable operations with annual OpEx excluding cost of goods sold of $65 million to $75 million by the fourth quarter of 2020 provides strong operating leverage for future years. This operating leverage is projected to generate strong free cash flow from operations which serves as a basis for the approval by the board of directors of the capital return plan for shareholders that we announced on November 4, and also today.

Now, with that summary of the ENHANZE value proposition and our business model, I'll turn to Slide 14 and provide an update on the recent and upcoming partner activities. Beginning with Janssen, according to the most recent update provided by JNJ, DARZALEX IV continued its strong growth trajectory in the third quarter, with 42% adjusted sales growth globally. With the regulatory submissions completed in July of 2019, we look forward with excitement to potential regulatory approvals in 2020.

Moving now to Roche, now, following the announcement of positive results in September data from the Phase III FeDeriCa study, evaluating the fixed-dose combination of Perjeta-Herceptin will be presented at the San Antonio Breast Conference in December. Roche's indicated plans to begin regulatory submissions for this product in early 2020. Roche's Phase I study of using Tecentriq with ENHANZE is ongoing.

Roche is assessing the next steps with this program including discussions with authorities. And in addition we're very pleased to announce that the first patient in our Phase I study is already using Ocrevus with ENHANZE was dosed in August. And finally, Roche selected an additional target for development under our existing collaboration triggering $10 million milestone payments to Halozyme. The target selected is currently undisclosed.

I'll move now to Bristol-Myers Squibb. In addition to the ongoing Phase I study with Nivolumab, BMS recently completed a Phase I study with their anti-CD73. And earlier this quarter, a Phase I trial was initiated for a third Bristol-Myers Squibb target being studied with ENHANZE, relatlimab and this is in combination with an Nivolumab.

And our newest partner argenx recently announced plans to share the results from Phase I study of efgartigimod with ENHANXE in healthy volunteers before year end. And we also discussed the potential of a bridging study for myasthenia gravis. Recall that the results of their ADAPT trial in myasthenia gravis are expected in the second half of 2020. And finally, argenx plans to initiate a first in human study with ENHANZE for its complement factor C2 candidates, argenx-117 in the first quarter of 2020.

As you've just heard, our partners are making tremendous progress with their studies of their ENHANZE co-formulated products. Based on the plans our partners have shared with us, we expect a growing portfolio of development programs. Now, let me just close this update with a potential for new enhanced deals. We're in dialogue with multiple companies and continue to see potential new partner agreements based on the ENHANZE value proposition.

With that, I'd like to turn the call over to Laurie for a discussion of our third quarter financial results and the outlook.

[Laurie Stelzer, Chief Financial Officer]

And thank you, Helen, and good afternoon, everyone. Turning to Slide 15, for a discussion of our third quarter financial results, total revenue for the third quarter was $46.2 million, compared to $25.6 million in the prior year period. This 81% increase was primarily driven by higher API sales to partners as we discussed on our last call.

Royalty revenue for the quarter was $16.6 million, a decrease of 11% primarily driven by lower sales of Herceptin SC by Roche, reflecting the ongoing impact from biosimilars. Product sales at $29.2 million in the quarter compared to $6.3 million in the year ago period, mainly due to an increase in the sale of bulk rHuPH20 to Janssen.

We expect that product sales of API will fluctuate in future periods based on the needs of our collaboration partners. Collaboration revenue in the quarter totaled $0.4 million, compared with point $0.6 million a year ago.

Turning to Slide 16, for a more detailed breakdown of our P&L, I'll now move on to total operating expenses, which were $70.8 million in the third quarter, up from $51 million in the prior year period. The increase in total operating expenses was driven by a higher cost of product sales, which were $22.3 million, up from $0.6 million in the prior year period, again, driven by the higher sales of API.

Research and development expenses of $30.5 million declined from $35.5 million in the prior year period, reflecting a planned reduction in clinical trial activity as we near the top line results readout from HALO-301.

SG&A of $18 million, compared with $14.9 million in the prior year, primarily due to an increase in compensation expense, including stock compensation related to initial support of our oncology operation.

Net loss for the quarter was $25 million, or $0.17 per share compared to a net loss of $27.9 million or $0.19 per share in the third quarter of 2018. Cash, cash equivalents and marketable securities were $238 million at September 30, compared to $364.5 million at December 31, 2018.

Now, now turning to Slide 17, for an update on our 2019 financial guidance, we now expect total revenue to be in the range of $195 million to $205 million compared to our prior guidance of $205 to $215 million, driven by the movement of the planned Phase III start from 2019 into 2020, offset in part by the new target nomination by Roche.

Royalty revenue is expected to be in the range of $67 million to $69 million compared to prior guidance of $72 million to $74 million, a reflection of the projected ongoing impact of biosimilars. We continue to expect operating expenses of $255 million to $265 million and operating expenses excluding cost of goods sold of $215 million to $225 million.

A restructuring cost of $25 million to $27 million will be booked in the fourth quarter, and these costs are offset by lower operating expenses in Q3 and expense savings as a result of closing our oncology operation. As a result, operating cash burn is now expected to be $50 million to $60 million compared to prior guidance of $40 million to $50 million.

Furthermore, we expect to continue to make quarterly payments on our royalty backed debt and expect to pay off the remainder of this debt by the second quarter of 2020. Finally, we continue to expect our year in cash balance to be $220 million to $230 million.

Now, as you have just heard, Halozyme is in a strong financial position as a company focused solely on ENHANZE. With our current strong financial position and outlook for growth in cash flows, we are committed to maximizing value for shareholders and be returning capital as an important part of our strategy.

As mentioned earlier in the call, we are offering a $400 million aggregate principal amount of convertible senior notes due in 2024. We plan to use up to $200 million of the net proceeds from the offering to repurchase shares of the company's common stock concurrently or shortly after the pricing of the offering. This is in addition to the November 4 announcement of the authorization by our board of directors of a share repurchase program of $350 million over the next three years.

The company intends to use the remainder of the net proceeds from the offering for general corporate purposes, including share repurchases subsequent to the offering, working capital and the retirement of the existing debt obligation under our loan agreement with Oxford Finance and Silicon Valley Bank, with interest expense savings of $1.4 million.

As we previously guided we expect to be cash flow positive in Q2 2020 as we transition to an ENHANZE only company. Issuing this convertible note now will allow us to recapitalize the company, immediately return capital to shareholders, and lower our overall cost of capital, while ensuring that we can continue to opportunistically return capital as we transition to a positive cash flow.

And with that, let me turn the call back to Helen who'll provide closing comments.

[Helen Torley, President and Chief Executive Officer]

Thank you, Laurie. As you've heard our transition to focus solely on ENHANZE comes at a time when we have a record number of products in the clinic, two upcoming potential launches and line of sight to multiple new Phase I and later stage trial starts in 2020, with the potential for new agreements to be signed. None of this would be possible without the strong talented Halozyme team. And I'd like to end my prepared remarks by thanking everyone for the tremendous efforts and the strong results.

With that, Operator, would you please open up the call for questions? Thank you.

[Operator]

Certainly. [Operator Instructions] And your first question comes from Charles Duncan with Cantor Fitzgerald. Your line is open.

[Charles Duncan, Cantor Fitzgerald]

Hi, guys. Good afternoon. Thanks for taking my questions. So quick question regarding the pipeline, I'm wondering about a clinical trial that was started I believe by JNJ and – or listed by JNJ in China and just kind of wondering if in your estimates as to the potential for daratumumab, are you including Asian revenues in that with regard to the enhanced version of daratumumab?

[Helen Torley, President and Chief Executive Officer]

Hey, thanks Charles. Yes, we do as I mentioned in the prepared remarks, we do some – in our projections consider global launches and all indications. As you mentioned, JNJ has got a very extensive program of DARZALEX SC, not just programs in China, but also in Japan and studies in all lines of therapy and so the with an extensive clinical program all of those sales are reflected in our projections as well.

[Charles Duncan, Cantor Fitzgerald]

Okay and then the second question is related to kind of the guidance. I'm wondering if you could provide a little bit more granularity on the top line in terms of kind of the contributions of different aspects of top line.

[Laurie Stelzer, Chief Financial Officer]

Hi, Charles, this is Laurie. So as far as top line goes, the change in our top line was really due to the movement of a Phase III start that we had anticipated in 2019 moving to 2020. And it's partially offset by the new target nomination that Helen mentioned in the prepared remarks from Roche. The components, we do guide on royalties, so we did give the 67 to 69 million of royalties. We've also talked about the milestones and upfronts and if you recall from Helen's remark, to date we've received $55 million. And again, we do anticipate some additional study – I'm sorry, additional nomination. And then API is considerably more this year than it has been in past years. If you notice in the quarter, we did book, almost $30 million in API. And so that's a substantial part of the total revenue line as well.

[Charles Duncan, Cantor Fitzgerald]

Okay, and sorry, if I missed that, Laurie and Helen, I'm running through the report. So my last question, and I appreciate you taking them all is regarding business development activities. I think, Helen, you mentioned that you had active discussions on going and I know that depends on timing with a potential partner. But would you anticipate or how would you think about success in that business development effort over the course of say the next 12 months? Could we anticipate another partnering to come to fruition in that time?

[Helen Torley, President and Chief Executive Officer]

Absolutely, true Charles just based on the conversations that we have going on today. Our challenge is always the timing is not in our control, but definitely based on the asset wide conversations it's possible.

[Charles Duncan, Cantor Fitzgerald]

Okay, very good, thanks for taking my questions.

[Helen Torley, President and Chief Executive Officer]

Thanks Charles.

[Operator]

Your next question comes from Jim Birchenough with Wells Fargo. Your line is open.

[Jim Birchenough, Wells Fargo]

Hi, guys. Congrats on all the progress a lot to digest. I guess the first question is just on your milestone guidance within the three year period, based on what you know about the cadence of programs underlying that, should we evenly distribute it across years or does that get a little more back end weighted, does it increase over the course of the three years.

[Helen Torley, President and Chief Executive Officer]

Yes, Jim, thanks for the question. It does increase a bit over the next three years, you can imagine that our milestones tend to increase as products move into later stages of development, and then to approvals and launches and first sale. And so the amount increase, which is what leads to it always kind of being a little bit larger as you move out, but we do see very nice year-on-year growth, they just will get larger with that progress in the pipeline.

[Jim Birchenough, Wells Fargo]

And then maybe a question as we look ahead to the approvals and launches of DARZALEX SubQ and Perjeta-Herceptin SubQ, we've had questions on the expectation for conversion rate. Could you maybe go through how you think about conversion rates of those two products perhaps benchmarking against what you've seen in Europe or how do you think about relative conversion rates for those two drugs. And in particular Perjeta-Herceptin, I think a lot of people are trying to figure out how to think about that. Does that convert like Herceptin did in Europe or what's some guidance you can give us there?

[Helen Torley, President and Chief Executive Officer]

Yeah, thanks. We do benchmark exactly as you think. And our best example, we believe, is the perception of taking Europe where it got to 60% share sales volume. And we look at that and say, well, what was the value proposition there? That's the about 10 minutes SubQ versus what is often a 60 to 90 minutes IV. And so we do our judgment based on the value proposition, the patient population and frankly, the competitive environment to say, what is it going to be? Is it going to be higher than that 60% or is it going to be lower than 60%? And that's kind of where we use our judgment. I think for Perjeta-Herceptin that's obviously early breast cancer population, it's a fit and mobile population who definitely don't want spend two and a half hours getting sequential IV and that doesn't count additional monitoring that might have to be required. So we do look at that as being very similar to perhaps the Herceptin and maybe even a little bit higher potentially. But that's kind of the methodology that we consider as we look at it.

[Jim Birchenough, Wells Fargo]

And then maybe a final question, Helen, just in terms of the five new Phase I's next year, do we need to wait for those to posted to clinical trials.gov? Or do you expect those to be pre-identified by partners and any visibility on what they might be?

[Helen Torley, President and Chief Executive Officer]

Yeah, I think the partners generally like to keep it confidential until they're ready to start. So if it is a study in a patient population, it will be posted on clinical trials.gov immediately beforehand. If they are – some studies are normal volunteers, you won't find it being posted, or if it's being conducted in Europe, it may not be posted, but based on our knowledge today, the majority of them will be posted on clinical trials.gov.

[Jim Birchenough, Wells Fargo]

Great, well, thanks for taking the question.

[Helen Torley, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from a Jason Butler with JMP Securities. Your line is open.

[Jason Butler, JMP Securities]

Hi, thanks for taking the question. And thanks for all of the details around the ENHANZE platform. Just one on combination strategies, you were able to comment on how other partners are looking at combinations similar to the Herceptin-Perjeta in a fixed-dose combination. I think you mentioned relatlimab and the combination, is that a fixed-dose combination that could be a single administration and others we might learn about? Thanks.

[Helen Torley, President and Chief Executive Officer]

Yeah, Jason as often our partners' plans are confidential for various competitive reasons. So other than being able to update you that there is that study that started with relatlimab and Nivolumab, we're not really in a position to say anything more on that. I do think this idea of being able to combine two biologics together in a single injection has definitely got people's attention. But unfortunately, I can't provide any more updates.

[Jason Butler, JMP Securities]

Okay, great. Maybe a quick follow up, could you maybe speak to feasibility of these combinations? Are there any kind of product attributes that would limit the potential for certain products being used in a fixed dose combination?

[Helen Torley, President and Chief Executive Officer]

Now, the first thing we test is to make sure that the two biologics themselves don't have any interaction. So that is probably going to be one of the most important part. We found an extensive clinical testing with rHuPH20 peers very well with most antibody and biologics. So I think the Phase III issue obviously [ph] is that the two products are combining have no reason to interact with each other. So that would be the key thing.

[Jason Butler, JMP Securities]

Okay, great. Thanks for taking the questions.

[Helen Torley, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question is from Jessica Fye with JP Morgan. Your line is open.

[Jessica Fye, JP Morgan]

Hey there. Good afternoon. Thanks for taking my questions. At the risk of asking kind of an overly simplistic one, can you spend a little more time elaborating on the decision to use 200 million or up to 200 million of the convert proceeds for share repo?

[Laurie Stelzer, Chief Financial Officer]

Hi, Jessica, this is Laurie. We are committed to returning value to shareholders and we think that doing it through share repurchase is the appropriate structure for us. And so doing the convert with a concurrent share repurchase, allowed us to do that today. We are not cash flow positive, but we've got that very near line of sight to cash flow positive growth. So that's the decision on the 200 for today.

[Jessica Fye, JP Morgan]

Okay, and how do you decide whether to go all the way up to 200 million of repurchase or not, and I think the release also mentions this use of proceeds for repo could result in the higher effective conversion price. So how would that work?

[Helen Torley, President and Chief Executive Officer]

Yeah, it should – this should not at all affect the conversion price. So it's a pretty – it's a straightforward conversion with the ability to use the convertible and the delta hedge for the share repurchase.

[Jessica Fye, JP Morgan]

Okay, another question on the prior milestone production of to 225 to 300 million from 2019 to 2021, it's sort of written in the past tense on the slides. Do you still expect milestone in that range for that timeframe?

[Helen Torley, President and Chief Executive Officer]

We do. We just wanted to refresh it because obviously, we're coming up to 2020. But we're very much in that range.

[Jessica Fye, JP Morgan]

Okay and I think Charles was trying to ask this at the beginning of the call, but is there any way you can help us think about the relative revenue contribution of ENHANZE, royalties versus milestones over the next two to three years?

[Helen Torley, President and Chief Executive Officer]

Yeah. So I mean, that's a terrific question. I think the milestones will be a significant part of the revenue story for us, as we are hitting that inflection on the royalties. And so I think about milestones as a very meaningful portion. We'll be approaching that inflection on royalties and starting up that curve toward the billion dollars.

[Jessica Fye, JP Morgan]

Okay, got it. And maybe just the last one on the royalties, you mentioned this quarter, I think some of the Roche contribution was under pressure a little bit. Do you expect your Roche royalties to be up or down in 2020 relative to 2019.

[Helen Torley, President and Chief Executive Officer]

We're not giving detailed guidance for 2020, but based on the trends that Roche just discussed on their quarterly call stating that they're continuing to see some pressure in Europe, although it's slowing. We do think we'll continue to see some pressure although a more modest amount of pressure on the Roche realities in 2020.

[Jessica Fye, JP Morgan]

Okay, great. Thanks so much for answering all my questions.

[Helen Torley, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question is from Gena Wang with Barclays. Your line is open.

[Gena Wang]

Hi, thank you for taking my questions. This is David for Gena. My first question is on – revenue driver of 2020. What would be the revenue driver for you for 2020 before the daratumumab approval?

[Helen Torley, President and Chief Executive Officer]

I'm sorry, would you do repeat your question. We're finding very hard to hear?

[Unidentified Analyst]

I'm sorry. So the first question is on revenue driver for 2020. What would be the revenue driver for you for 2020 before the daratumumab approval?

[Helen Torley, President and Chief Executive Officer]

So in '20 – so we aren't in a position to give guidance for 2020. Again, I think that you can think about our revenue in a very similar fashion with the royalties, API and milestones kind of contributing to that growth, but more details than that. We just haven't given any 2020 guidance.

[Unidentified Analyst]

Okay, got it. Second question is, if can just remind us on the IP expiration for the core ENHANZE technology?

[Helen Torley, President and Chief Executive Officer]

Yeah and just to add to Laurie's comments on the revenues, we are predicting that they will be higher than this year, although we aren't giving specifics on the guidance as yet. So with the – the core technology for ENHANZE is the base composition of master patent will expire in 2024 in Europe and 2027 in the United States. As I mentioned in my prepared remarks that we will even the face of patent experts, we continue to receive royalties for 10 years after the first commercial sale, but there will be a step down to approximately half at the time of the patent expiry until the 10 years. And there's also the potential to extend the term if we get co-formulating patents as well.

[Unidentified Analyst]

Got it, great. Thank you so much.

[Operator]

Your next question is from Joel Beatty with Citi. Your line is open.

[Joel Beatty, Citi]

Hi, thanks for taking the questions. The first one is a follow up to that most recent question on the IP exclusivity of the core ENHANZE technology. As we get closer to those dates, does that affect the attractiveness of the partners or potential partners to use your technology for certain of – different uses of ENANZE like for example, for lifecycle management as the core technology is expiring did that affect that attractiveness?

[Helen Torley, President and Chief Executive Officer]

Yeah, I will say Joel that since Roche – we actually see most of our partners are much more focused on products much earlier in the development pipeline where their primary goal is competitive differentiation. So we actually more talk to companies with some very early lifecycles – the very early plans. And so the whole lifecycle topic doesn't come up. We can use argenx as an example with our latest deal signed this year. They're working obviously on efgartigimod, the particular product that hasn't been approved and certainly they were very excited to license our technology and are moving rapidly as you've seen into the clinic with multiple targets.

[Joel Beatty, Citi]

Okay, I appreciate that. And then a simpler question on the 200 million in share repurchase that was announced today. Would that be the first share repurchase after the Phase III PEGPH20 results were announced or have there been additional share purchases going on since that time.

[Helen Torley, President and Chief Executive Officer]

Yes, Joel, this will be the first share repurchase after that announcement.

[Joel Beatty, Citi]

Great, thanks so much.

[Helen Torley, President and Chief Executive Officer]

And just to repeat it up to 200 million as part of a concurrent with the convert or shortly after.

[Joel Beatty, Citi]

Okay, got it.

[Operator]

[Operator Instructions] Ladies and gentlemen, this does conclude the Q&A period. I will now turn it back over to Dr. Helen Torley, Halozyme's President and CEO for any closing remarks.

[Helen Torley, President and Chief Executive Officer]

Well, thank you everybody. I thank you for joining us for this call. This obviously has been an exciting period for Halozyme where our strategy has resulted in us focusing now to become an ENHANZE only company. We are delighted to be in a position to be able to return value to shareholders with this comprehensive $550 million up to share repurchase plan, which is based on our projected free cash flow, giving us the ability to do this at this time. So thank you for your ongoing support and we look forward to providing further updates on the strong development plans we're seeing with our partners with ENHANZE. Thank you very much.

[Operator]

This does conclude today's conference call. Thank you for your participation and you may now disconnect.