Halozyme’s Newfound Credibility: Pfizer

For the most part, 2012 was not a very good year for Halozyme Therapeutics (HALO).

Investors, eagerly anticipating FDA approval of Baxter’s (BAX) immune globulin infusion HyQ, were met with a press release on April 16, which announced that the FDA wanted more information on HyQ, which drew immediate concern for the status of the biologic’s BLA.

Bumps In The Road
HALO and BAX shareholders’ worst fears were confirmed on August 1 when we learned that the FDA issued a complete response letter, saying there was not enough pre-clinical data to support the BLA. Other specific issues were brought up, like the generation of antibodies through usage of HyQ that could potentially have adverse effects on patients in terms of reproduction, development, and fertility. Halozyme doesn’t seem to believe that the antibody in question, anti-rHuPH20, is associated with adverse events, even in large amounts. That is a fairly important stance to take, since Halozyme’s entire Enhanze biologics platform is based on the patented rHuPH20 enzyme.

Due to the failure of HyQ’s BLA last year, HALO lost about half its value by mid-December 2012. BAX, being a much larger company with less dependency on the potential revenues of HyQ, shrugged off the damage. Things could have gotten worse for Halozyme had they not announced a partnership with Pfizer (PFE) on December 21, which sent the stock soaring about 25% higher.

The Pfizer Effect
While the market is still quite skeptical about Halozyme’s Enhanze platform due to the FDA’s concern with the safety of rHuPH20, a good number of people changed their mind after the announced collaboration with Pfizer. Not only did this give Halozyme new opportunity in the future, but it also suggested that Pfizer’s own research indicated that there was nothing wrong with rHuPH20 or the Enhanze platform at all.

Another great aspect of the arrangement is that EPS-negative Halozyme will receive milestone payments from Pfizer. Considering that the company has just $100 million of cash, with an expected cash-burn rate of $45-$50 million in 2013, it’s clear that the company would have had to hold a public offering or secured a private line of financing to sustain operations after 2014. Pfizer’s milestone payments could turn out to be extremely useful as Halozyme as it sustains three of its own drug development programs.

It’s hard to say how high HALO can move on the Pfizer deal alone. HALO isn’t exactly cheap with a market capitalization of $780 million and a lack of a steady revenue stream, although the Pfizer deal could yield as much as $518 million in milestone payments. This is encouraging for investors who are interested in waiting for the full development of the aforementioned drugs that Halozyme is developing. Analog Insulin-PH20 for diabetes, PEGPH20 for cancer, and the dermatology treatment HTI-501 are all in phase II trials and could generate substantial interest in Halozyme with their own prospects in the market. It’s true that Halozyme’s pipeline is also tied to rHuPH20 (the diabetes drug uses it directly), which is why there is still major concern over the FDA’s complete response letter in 2012, but Halozyme should be able to address all the issues well before another BLA is submitted.

Conclusion
I think HALO is undergoing a recovery rally due to the hype about the collaboration with Pfizer, and could see $8/share or more as we head into a new year. Those who are interested in HALO for the long haul should carefully watch developments surrounding the safety profile of rHuPH20, which could make or break Halozyme’s own pipeline. The market seems to think that rHuPH20 is fine, since the FDA’s complete response letter seemed a bit too cautious. Also note that Pfizer’s research indicated that Enhanze was a safe enough biologics development platform to partner with. HALO investors should also keep tabs on the company’s financials, which are stable for the time being but could become an issue if Pfizer’s milestone payments don’t bring in as much income for Halozyme as we are expecting.