Quarterly Report (10-q)

Date : 11/12/2019 @ 9:25PM
Source : Edgar (US Regulatory)
Stock : Halozyme Therapeutics Incorporated (HALO)
Quote : 19.16  0.1 (0.52%) @ 5:00AM
After Hours
Last Trade
Last $ 19.16 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to             
Commission File Number 001-32335
___________________________
HALOZYME THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
___________________________
Delaware
 
88-0488686
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
11388 Sorrento Valley Road
 
92121
San Diego
 
(Zip Code)
California
 
 
(Address of principal executive offices)
 
 
(858) 794-8889
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
HALO
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x
The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 146,539,590 as of November 7, 2019.
 




HALOZYME THERAPEUTICS, INC.
INDEX
 
 
 
 
Page
 
 
Item 1.
 
 
 
 
 
3
 
 
 
4
 
 
 
5
 
 
 
6
 
 
 
7
 
 
 
8
 
Item 2.
 
26
 
Item 3.
 
53
 
Item 4.
 
53
 
 
 
 
Item 1.
 
54
 
Item 1A.
 
54
 
Item 2.
 
54
 
Item 3.
 
54
 
Item 4.
 
54
 
Item 5.
 
54
 
Item 6.
 
55
 
 
 
56
 

2



PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
 
 
September 30,
2019

December 31,
2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
59,202


$
57,936

Marketable securities, available-for-sale
 
178,796


296,590

Accounts receivable, net
 
40,744


30,005

Inventories
 
36,051


22,625

Prepaid expenses and other assets
 
27,248


20,693

Total current assets
 
342,041


427,849

Property and equipment, net
 
15,398


7,465

Prepaid expenses and other assets
 
12,417


4,434

Restricted cash
 
500


500

Total assets
 
$
370,356


$
440,248

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:




Accounts payable

$
4,314


$
4,079

Accrued expenses

45,679


49,529

Deferred revenue, current portion

3,511


4,247

Current portion of long-term debt, net

54,537


91,506

Total current liabilities

108,041


149,361

Deferred revenue, net of current portion

1,247


5,008

Long-term debt, net

9,308


34,874

Other long-term liabilities

6,407


2,118

Commitments and contingencies (Note 9)
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock - $0.001 par value; 20,000 shares authorized; no shares
     issued and outstanding
 

 

Common stock - $0.001 par value; 300,000 shares authorized; 146,457 and 144,725 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
 
147


145

Additional paid-in capital

814,095


780,457

Accumulated other comprehensive income (loss)

392


(277
)
Accumulated deficit

(569,281
)

(531,438
)
Total stockholders’ equity

245,353


248,887

Total liabilities and stockholders’ equity

$
370,356


$
440,248

See accompanying notes to condensed consolidated financial statements.

3



HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Royalties
 
$
16,609

 
$
18,710

 
$
52,669

 
$
59,643

Product sales, net
 
29,205

 
6,269

 
43,355

 
17,553

Revenues under collaborative agreements
 
416

 
577

 
46,303

 
14,434

Total revenues
 
46,230

 
25,556

 
142,327

 
91,630

Operating expenses:
 
 
 
 
 
 
 
 
Cost of product sales
 
22,333

 
626

 
28,859

 
4,514

Research and development
 
30,455

 
35,540

 
95,693

 
113,602

Selling, general and administrative
 
17,979

 
14,864

 
53,323

 
42,773

Total operating expenses
 
70,767

 
51,030

 
177,875

 
160,889

Operating loss
 
(24,537
)
 
(25,474
)
 
(35,548
)
 
(69,259
)
Other income (expense):
 
 
 
 
 
 
 
 
Investment and other income, net
 
1,613

 
1,910

 
5,653

 
5,561

Interest expense
 
(2,078
)
 
(4,286
)
 
(7,896
)
 
(14,286
)
Net loss before income taxes
 
(25,002
)
 
(27,850
)
 
(37,791
)
 
(77,984
)
Income tax expense
 
13

 

 
52

 
220

Net loss
 
$
(25,015
)
 
$
(27,850
)
 
$
(37,843
)
 
$
(78,204
)
 
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(0.17
)
 
$
(0.19
)
 
$
(0.26
)
 
$
(0.55
)
 
 
 
 
 
 
 
 
 
Shares used in computing net loss per share:
 
 
 
 
 
 
 
 
Basic and diluted
 
146,136

 
143,949

 
145,435

 
143,396

See accompanying notes to condensed consolidated financial statements.

4



HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019

2018
 
2019
 
2018
Net loss
 
$
(25,015
)
 
$
(27,850
)
 
$
(37,843
)
 
$
(78,204
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
 
1

 
256

 
667

 
(17
)
Foreign currency translation adjustment
 
1

 
2

 

 
(11
)
Unrealized gain on foreign currency
 

 

 
2

 

Total comprehensive loss
 
$
(25,013
)

$
(27,592
)

$
(37,174
)

$
(78,232
)
See accompanying notes to condensed consolidated financial statements.

5



HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Nine Months Ended
September 30,
 
 
 
 
2019
 
2018
Operating activities:
 
 
 
 
Net loss
 
$
(37,843
)
 
$
(78,204
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Share-based compensation
 
27,547

 
26,684

Depreciation and amortization
 
3,026

 
1,798

Amortization of debt discount
 
763

 
1,211

Accretion of discounts on marketable securities, net
 
(2,205
)
 
(2,166
)
Deferral of unearned revenue
 

 
3,000

Recognition of deferred revenue
 
(4,497
)
 
(2,333
)
Lease payments (deferred) recognized
 
(304
)
 
78

Other
 
(1
)
 
(10
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(10,739
)
 
13,962

Inventories
 
(13,426
)
 
(13,139
)
Prepaid expenses and other assets
 
(14,310
)
 
(7,477
)
Accounts payable and accrued expenses
 
(6,809
)
 
(3,366
)
Net cash used in operating activities
 
(58,798
)

(59,962
)
Investing activities:
 
 
 
 
Purchases of marketable securities
 
(241,582
)
 
(272,643
)
Proceeds from maturities of marketable securities
 
362,250

 
265,917

Purchases of property and equipment
 
(3,399
)
 
(1,590
)
Net cash provided by (used in) investing activities
 
117,269


(8,316
)
Financing activities:
 
 
 
 
Repayment of long-term debt
 
(63,298
)
 
(57,099
)
Proceeds from issuance of common stock under equity incentive plans, net of taxes paid related to net share settlement
 
6,093

 
11,656

Net cash used in financing activities
 
(57,205
)
 
(45,443
)
Net increase (decrease) in cash, cash equivalents and restricted cash
 
1,266


(113,721
)
Cash, cash equivalents and restricted cash at beginning of period
 
58,436

 
169,240

Cash, cash equivalents and restricted cash at end of period
 
$
59,702


$
55,519

 
 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
 
Amounts accrued for purchases of property and equipment
 
$
251

 
$
2,345

Right-of-use assets obtained in exchange for lease obligation
 
$
897

 
$

Leasehold improvements paid by lessor
 
$

 
$
1,322

See accompanying notes to condensed consolidated financial statements.

6



HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands)
 
 
Three Months Ended September 30, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
BALANCE AS OF JUNE 30, 2019
 
145,859

 
146

 
803,782

 
390

 
(544,266
)
 
260,052

Share-based compensation expense
 

 

 
8,239

 

 

 
8,239

Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units, net
 
604

 
1

 
2,074

 

 

 
2,075

Cancellation of restricted stock awards, net
 
(6
)
 

 

 

 

 

Other comprehensive income
 

 

 

 
2

 

 
2

Net loss
 

 

 

 

 
(25,015
)
 
(25,015
)
BALANCE AS OF SEPTEMBER 30, 2019
 
146,457

 
147

 
814,095

 
392

 
(569,281
)
 
245,353

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019
 
 
Common Stock

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive Loss

Accumulated
Deficit

Total
Stockholders’
Equity
 
 
Shares

Amount

BALANCE AS OF JANUARY 1, 2019
 
144,725

 
145

 
780,457

 
(277
)
 
(531,438
)
 
248,887

Share-based compensation expense
 

 

 
27,547

 

 
 
 
27,547

Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units, net
 
1,657

 
2

 
6,091

 

 
 
 
6,093

Issuance of restricted stock awards, net
 
75

 

 

 

 
 
 

Other comprehensive income
 

 

 

 
669

 
 
 
669

Net loss
 

 

 

 

 
(37,843
)
 
(37,843
)
BALANCE AS OF SEPTEMBER 30, 2019
 
146,457

 
147

 
814,095

 
392

 
(569,281
)
 
245,353

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
Common Stock

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive Loss

Accumulated
Deficit

Total
Stockholders’
Equity
 
 
Shares

Amount

BALANCE AS OF JUNE 30, 2018
 
144,222

 
144

 
756,978

 
(736
)
 
(501,462
)
 
254,924

Share-based compensation expense
 

 

 
8,867

 

 

 
8,867

Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units, net
 
304

 
1

 
3,537

 

 

 
3,538

Cancellation of restricted stock awards, net
 
(4
)
 

 

 

 

 

Other comprehensive income
 

 

 

 
258

 

 
258

Net loss
 

 

 

 

 
(27,850
)
 
(27,850
)
BALANCE AS OF SEPTEMBER 30, 2018
 
144,522

 
145

 
769,382

 
(478
)
 
(529,312
)
 
239,737

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
BALANCE AS OF JANUARY 1, 2018
 
142,789

 
143

 
731,044

 
(450
)
 
(522,371
)
 
208,366

Adjustment to beginning accumulated deficit
 

 

 

 

 
71,263

 
71,263

Share-based compensation expense
 

 

 
26,684

 

 

 
26,684

Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units, net
 
1,720

 
2

 
11,654

 

 

 
11,656

Issuance of restricted stock awards, net
 
13

 

 

 

 

 

Other comprehensive loss
 

 

 

 
(28
)
 

 
(28
)
Net loss
 

 

 

 

 
(78,204
)
 
(78,204
)
BALANCE AS OF SEPTEMBER 30, 2018
 
144,522

 
145

 
769,382

 
(478
)
 
(529,312
)
 
239,737


See accompanying notes to condensed consolidated financial statements.

7




HALOZYME THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business
Halozyme Therapeutics, Inc. is a biotechnology company focused on novel biological and drug delivery approaches. Our proprietary enzyme, rHuPH20, is used to facilitate the delivery of injected drugs and fluids and potentially reduce the treatment burden of other drugs to patients. We license our technology to biopharmaceutical companies to collaboratively develop products that combine our technology with the collaborators’ proprietary compounds.
Our approved product and our collaborators’ approved products and product candidates are based on rHuPH20, our patented recombinant human hyaluronidase enzyme. rHuPH20 is the active ingredient in our first commercially approved product, Hylenex® recombinant, and it works by temporarily breaking down hyaluronan (or “HA”), a naturally occurring carbohydrate that is a major component of the extracellular matrix in tissues throughout the body such as skin and cartilage. We believe this temporary degradation creates an opportunistic window for the improved subcutaneous delivery of injectable biologics, such as monoclonal antibodies and other large therapeutic molecules, as well as small molecules and fluids. We refer to the application of rHuPH20 to facilitate the delivery of other drugs or fluids as our ENHANZE® Drug Delivery Technology (“ENHANZE”). We license the ENHANZE technology to form collaborations with biopharmaceutical companies that develop or market drugs requiring or benefiting from injection via the subcutaneous route of administration.
We currently have ENHANZE collaborations with F. Hoffmann-La Roche, Ltd. and Hoffmann-La Roche, Inc. (“Roche”), Baxalta US Inc. and Baxalta GmbH (now members of the Takeda group of companies, following the acquisition of Shire plc by Takeda Pharmaceutical Company Limited in January 2019) (“Baxalta”), Pfizer Inc. (“Pfizer”), Janssen Biotech, Inc. (“Janssen”), AbbVie, Inc. (“AbbVie”), Eli Lilly and Company (“Lilly”), Bristol-Myers Squibb Company (“BMS”), Alexion Pharma Holding (“Alexion”) and ARGENX BVBA (“argenx”).We receive royalties from two of these collaborations, including royalties from sales of one product from the Baxalta collaboration and two products from the Roche collaboration. Future potential revenues from the sales and/or royalties of our approved products, product candidates, and ENHANZE collaborations will depend on the ability of Halozyme and our collaborators to develop, manufacture, secure and maintain regulatory approvals for approved products and product candidates and commercialize product candidates.
On November 4, 2019, we announced that our HALO-301 Phase 3 clinical study evaluating PEGPH20 as a first-line therapy for treatment of patients with metastatic pancreatic cancer failed to reach the primary endpoint of overall survival. The study failed to demonstrate an improvement in overall survival compared to gemcitabine and nab-paclitaxel alone (11.2 months median overall survival compared to 11.5 months, HR=1.00, p=0.9692). Due to the results of the study, we halted development activities for PEGPH20, closed our oncology operations and have begun to implement an organizational restructuring to focus our operations solely on ENHANZE.
We initiated and instructed our partners to initiate the process to close all ongoing oncology clinical studies including the Phase 3 clinical testing for PEGPH20 with ABRAXANE® (nab-paclitaxel) and gemcitabine in stage IV pancreatic ductal adenocarcinoma (“PDA”) (HALO 109-301), the Phase 1b/2 clinical testing for PEGPH20 with Tecentriq® (atezolizumab) in patients with previously treated metastatic PDA, the Phase 1b/2 clinical testing for PEGPH20 with Tecentriq in patients with gastric cancer and the Phase 1b/2 clinical testing for PEGPH20 with Tecentriq in patients with cholangiocarcinoma and gall bladder cancer (HALO 110-101/MATRIX).
Except where specifically noted or the context otherwise requires, references to “Halozyme,” “the Company,” “we,” “our,” and “us” in these notes to the condensed consolidated financial statements refer to Halozyme Therapeutics, Inc. and its wholly owned subsidiary, Halozyme, Inc., and Halozyme, Inc.’s wholly owned subsidiaries, Halozyme Holdings Ltd., Halozyme Royalty LLC, Halozyme Switzerland GmbH and Halozyme Switzerland Holdings GmbH.

8



2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set of financial statements. These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019. The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Certain reclassifications have been made to the prior period condensed consolidated statement of cash flows within operating activities to conform to the current period presentation. There was no change to net cash used in operating activities. Operating results for interim periods are not necessarily indicative of the operating results for an entire fiscal year.
The accompanying interim unaudited condensed consolidated financial statements include the accounts of Halozyme Therapeutics, Inc. and our wholly owned subsidiary, Halozyme, Inc., and Halozyme, Inc.’s wholly owned subsidiaries, Halozyme Holdings Ltd., Halozyme Royalty LLC, Halozyme Switzerland GmbH and Halozyme Switzerland Holdings GmbH. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of interim unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our interim unaudited condensed consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, which are based on historical and anticipated results and trends and on various other assumptions that management believes to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from management’s estimates.
Cash Equivalents and Marketable Securities
Cash equivalents consist of highly liquid investments, readily convertible to cash, that mature within ninety days or less from the date of purchase. As of September 30, 2019, our cash equivalents consisted of money market funds.
Marketable securities are investments with original maturities of more than ninety days from the date of purchase that are specifically identified to fund current operations. Marketable securities are considered available-for-sale. These investments are classified as current assets, even though the stated maturity date may be one year or more beyond the current balance sheet date which reflects management’s intention to use the proceeds from the sale of these investments to fund our operations, as necessary. Such available-for-sale investments are carried at fair value with unrealized gains and losses recorded in other comprehensive income (loss) and included as a separate component of stockholders’ equity (deficit). The cost of marketable securities is adjusted for amortization of premiums or accretion of discounts to maturity, and such amortization or accretion is included in investment and other income, net in the interim unaudited condensed consolidated statements of operations. We use the specific identification method for calculating realized gains and losses on marketable securities sold. Realized gains and losses and declines in value judged to be other-than-temporary on marketable securities, if any, are included in investment and other income, net in the interim unaudited condensed consolidated statements of operations.
Restricted Cash
Under the terms of the leases of our facilities, we are required to maintain letters of credit as security deposits during the terms of such leases. At September 30, 2019 and December 31, 2018, restricted cash of $0.5 million was pledged as collateral for the letters of credit.
Fair Value of Financial Instruments
The authoritative guidance for fair value measurements establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

9



Our financial instruments include cash equivalents, available-for-sale marketable securities, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses and long-term debt. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of cash equivalents, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on Level 3 inputs and the borrowing rates currently available for loans with similar terms, we believe the fair value of long-term debt approximates its carrying value.
Available-for-sale marketable securities consist of asset-backed securities, corporate debt securities, U.S. Treasury securities and commercial paper, and are measured at fair value using Level 1 and Level 2 inputs. Level 2 financial instruments are valued using market prices on less active markets and proprietary pricing valuation models with observable inputs, including interest rates, yield curves, maturity dates, issue dates, settlement dates, reported trades, broker-dealer quotes, issue spreads, benchmark securities or other market related data. We obtain the fair value of Level 2 investments from our investment manager, who obtains these fair values from a third-party pricing source. We validate the fair values of Level 2 financial instruments provided by our investment manager by comparing these fair values to a third-party pricing source.
Inventories
Inventories are stated at lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories are reviewed periodically for potential excess, dated or obsolete status. We evaluate the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared to quantities on hand, the price we expect to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.
We capitalize inventory costs associated with our drug candidates prior to receipt of regulatory approval, based on management’s judgment of probable future commercialization.  We would be required to expense these capitalized costs upon a change in such judgment, due to, among other factors, a decision denying approval of the drug candidate by regulatory agencies.
Bulk rHuPH20 formulations manufactured for partner use prior to our partner receiving marketing approval from the U.S. Food and Drug Administration (“FDA”) or comparable regulatory agencies in foreign countries and with no alternative future use are recorded as research and development expense. All direct manufacturing costs incurred after the partner receives marketing approval are capitalized as inventory. Bulk rHuPH20 formulations manufactured for general partner and internal use, which can potentially be used by any collaboration partner or by us in any stage of development or in commercial product, and ENHANZE drug product used by our partners in clinical trials, is considered to have alternative future use and all manufacturing costs are capitalized as inventory. Inventories used in our clinical trials are expensed at the time the inventories are packaged for the clinical trials.
As of September 30, 2019, and December 31, 2018, inventories consisted of $1.7 million and $2.2 million, respectively, of Hylenex recombinant inventory, net and $34.4 million and $20.4 million, respectively, of bulk rHuPH20.
Leases

The Company has entered into operating leases primarily for real estate and automobiles. These leases have terms which range from 3 years to 6 years. We determine if an arrangement contains a lease at inception. Right of use (“ROU”) assets and liabilities resulting from operating leases are included in property and equipment, accrued expenses and other long-term liabilities on our condensed consolidated balance sheets. Operating lease ROU assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the discount rate to calculate the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our leases often include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that we will exercise that option. As of September 30, 2019 it is not reasonably certain that these options will be exercised and they are not included within the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as automobiles, we account for the lease and non-lease components as a single lease component.     
    

10



Revenue Recognition
We generate revenues from payments received under collaborative agreements and product sales. We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the promised goods or services in the contract; (ii) identify the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligations.
Royalties and Revenues under Collaborative Agreements
Under these agreements, we grant the collaboration partner a worldwide license to develop and commercialize products using our ENHANZE technology to combine our patented rHuPH20 enzyme with their proprietary biologics directed at up to a specified number of targets. Targets are usually licensed on an exclusive, global basis. Targets selected subsequent to inception of the arrangement require payment of an additional license fee. The collaboration partner is responsible for all development, manufacturing, clinical, regulatory, sales and marketing costs for any products developed under the agreement. We are responsible for supply of bulk rHuPH20 based on the collaboration partner’s purchase orders and may also be separately engaged to perform research and development services. While these collaboration agreements are similar in that they originate from the same framework, each one is the result of an arms-length negotiation and thus may vary from one to the other.
We collect an upfront license payment from the collaboration partner and are also entitled to receive event-based payments subject to the collaboration partner’s achievement of specified development, regulatory and sales-based milestones. In several agreements, collaboration partners pay us annual fees to maintain their exclusive license rights if they are unable to advance product development to specified stages. We earn separate fees for bulk rHuPH20 supplies and research and development services. In addition, the collaboration partner will pay us royalties at an on average mid-single digit percent rate of their sales if products under the collaboration are commercialized. All amounts owed to us are noncancelable after the underlying triggering event occurs, and nonrefundable once paid. Unless terminated earlier in accordance with its terms, the collaboration generally continues in effect until the later of: (i) expiration of the last to expire of the valid claims of our patents covering rHuPH20 or other specified patents developed under the collaboration which valid claim covers a product developed under the collaboration, and (ii) expiration of the last to expire royalty term for a product developed under the collaboration, which is determined separately for each country. In the event such valid claims expire prior to the last to expire royalty term, the royalty rate is reduced for the remaining royalty term following such expiration. The collaboration partner may terminate the agreement prior to expiration for any reason in its entirety or on a target-by-target basis generally upon 90 days prior written notice to us. Upon any such termination, the license granted to the collaboration partner (in total or with respect to the terminated target, as applicable) will terminate provided, however, that in the event of expiration of the agreement, the licenses granted will become perpetual, non-exclusive and fully paid.
Although these agreements are in form structured as collaborative agreements, we concluded for accounting purposes they represent contracts with customers and are not subject to accounting literature on collaborative arrangements. This is because we grant to collaboration partners licenses to our intellectual property, and provide supply of bulk rHuPH20 and research and development services which are all outputs of our ongoing activities, in exchange for consideration. We do not develop assets jointly with collaboration partners, and do not share in significant risks of their development or commercialization activities.
Under all of our collaborative agreements, we have identified licenses to use functional intellectual property as the only performance obligation. The intellectual property underlying the license is our proprietary ENHANZE technology which represents application of rHuPH20 to facilitate delivery of drugs or fluids. The license grants the collaboration partners right to use our intellectual property as it exists on the effective date of the license, because there is no ongoing development of the ENHANZE technology required. Therefore, we recognize revenue from licenses at the point when the license becomes effective and the collaboration partner has received access to our intellectual property, usually at the inception of the agreement.
When collaboration partners can select additional targets to add to the licenses granted, we consider these rights to be options. We evaluate whether such options contain material rights, i.e. have exercise prices that are discounted compared to what we would charge for a similar license to a new collaboration partner. The exercise price of these options includes a combination of the target selection fees, event-based milestone payments and royalties. When these amounts in aggregate are not offered at a discount that exceeds discounts available to other customers, we conclude the option does not contain a material right, and we consider grants of additional licensing rights upon option exercises to be separate contracts (target selection contracts).
We provide standard indemnification and protection of licensed intellectual property for our customers. These provisions are part of assurance that the licenses meet the agreements’ representations and are not obligations to provide goods or services.

11



We also fulfill purchase orders for supply of bulk rHuPH20 and perform research and development services pursuant to projects authorization forms for our collaboration partners, which represent separate contracts. Additionally, we price our supply of bulk rHuPH20 and research and development services at our regular selling prices, called standalone selling price or SSP. Therefore, our collaboration partners do not have material rights to order these items at prices not reflective of SSP. Refer to the discussion below regarding recognition of revenue for these separate contracts.
Transaction price for a contract represents the amount to which we are entitled in exchange for providing goods and services to the customer. Transaction price does not include amounts subject to uncertainties unless it is probable that there will be no significant reversal of revenue when the uncertainty is resolved. Apart from the upfront license payment (or target selection fees in the target selection contracts), all other fees we may earn under our collaborative agreements are subject to significant uncertainties of product development. Achievement of many of the event-based development and regulatory milestones may not be probable until such milestones are actually achieved. This generally relates to milestones such as obtaining marketing authorization approvals and successful completion of clinical trials. With respect to other development milestones, e.g. dosing of a first patient in a clinical trial, achievement could be considered probable prior to its actual occurrence, based on the progress towards commencement of the trial. We do not include any amounts subject to uncertainties into the transaction price until it is probable that the amount will not result in a significant reversal of revenue in the future. At the end of each reporting period, we re-evaluate the probability of achievement of such milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price.
When target exchange rights are held by collaboration partners, and the amounts attributed to these rights are not refundable, they are included in the transaction price. However, they are recorded as deferred revenues because we have a potential performance obligation to provide a new target if the exchange right is exercised. These amounts are recognized in revenue when the right of exchange expires or is exercised.
Because our agreements have one type of performance obligation (licenses) which are typically all transferred at the same time at agreement inception, allocation of transaction price often is not required. However, allocation is required when licenses for some of the individual targets are subject to rights of exchange, because revenue associated with these targets cannot be recognized. We perform an allocation of the upfront amount based on relative SSP of licenses for individual targets. We determine license SSP using income-based valuation approach utilizing risk-adjusted discounted cash flow projections of the estimated return a licensor would receive. When amounts subject to uncertainties, such as milestones and royalties, are included in the transaction price, we attribute them to the specific individual target licenses which generate such milestone or royalty amounts.
We also estimate SSP of bulk rHuPH20 and research and development services, to determine that our collaboration partners do not have material rights to order them at discounted prices. For supplies of bulk rHuPH20, because we effectively act as a contract manufacturer to our collaboration partners, we estimate and charge SSP based on the typical contract manufacturer margins consistently with all of our collaborative partners. We determine SSP of research and development services based on a fully-burdened labor rate. Our rates are comparable to those we observe in other collaborative agreements. We also have a history of charging similar rates to all of our collaboration partners.
Upfront amounts allocated to licenses to individual targets are recognized as revenue when the license is transferred to the collaboration partner, as discussed above, if the license is not subject to exchange rights, or when the exchange right expires or is exercised. Development milestones and other fees are recognized in revenue when they are included in the transaction price, because by that time we have already transferred the related license to the collaboration partner.
Sales-based milestones and royalties cannot be recognized until the underlying sales occur. We do not receive final royalty reports from our collaboration partners until after we complete our financial statements for a prior quarter. Therefore, we recognize revenue based on estimates of the royalty earned, which are based on preliminary reports provided by our collaboration partners. We will record a true-up in the following quarter if necessary, when final royalty reports are received. To date, we have not recorded any material true-ups.
In contracts to provide research and development services, such services represent the only performance obligation. The fees are charged based on hours worked by our employees and the fixed contractual rate per hour, plus third-party pass-through costs, on a monthly basis. We recognize revenues as the related services are performed based on the amounts billed, as the collaboration partner consumes the benefit of research and development work simultaneously as we perform these services, and the amounts billed reflect the value of these services to the customer.
Refer to Note 4 Revenue, for further discussion on our collaborative arrangements.

12



Product Sales, Net
Hylenex Recombinant
We sell Hylenex recombinant in the U.S. to wholesale pharmaceutical distributors, who sell the product to hospitals and other end-user customers. Sales to wholesalers are made pursuant to purchase orders subject to the terms of a master agreement, and delivery of individual packages of Hylenex recombinant represent performance obligations under each purchase order. We use a contract manufacturer to produce Hylenex recombinant and a third-party logistics vendor to process and fulfill orders. We concluded we are the principal in the sales to wholesalers because we control access to services rendered by both vendors and direct their activities. We have no significant obligations to wholesalers to generate pull-through sales.
Selling prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks when wholesalers sell Hylenex recombinant at negotiated discounted prices to members of certain group purchasing organizations (“GPOs”) and government programs. We also pay quarterly distribution fees to certain wholesalers for inventory reporting and chargeback processing, and to GPOs as administrative fees for services and for access to GPO members. We concluded the benefits received in exchange for these fees are not distinct from our sales of Hylenex recombinant, and accordingly we apply these amounts to reduce revenues. Wholesalers also have rights to return unsold product nearing or past the expiration date. Because of the shelf life of Hylenex recombinant and our lengthy return period, there may be a significant period of time between when the product is shipped and when we issue credits on returned product.
We estimate the transaction price when we receive each purchase order taking into account the expected reductions of the selling price initially billed to the wholesaler arising from all of the above factors. We have compiled historical experience and data to estimate future returns and chargebacks of Hylenex recombinant and the impact of the other discounts and fees we pay. When estimating these adjustments to the transaction price, we reduce it sufficiently to be able to assert that it is probable that there will be no significant reversal of revenue when the ultimate adjustment amounts are known.
Each purchase order contains only one type of product and is usually shipped to the wholesaler in a single shipment. Therefore, allocation of the transaction price to individual packages is not required.
We recognize revenue from Hylenex recombinant product sales and related cost of sales upon product delivery to the wholesaler location. At that time, the wholesalers take control of the product as they take title, bear the risk of loss of ownership, and have an enforceable obligation to pay us. They also have the ability to direct sales of product to their customers on terms and at prices they negotiate. Although wholesalers have product return rights, we do not believe they have a significant incentive to return the product to us.
Upon recognition of revenue from product sales of Hylenex recombinant, the estimated amounts of credit for product returns, chargebacks, distribution fees, prompt payment discounts, and GPO fees are included in sales reserves, accrued liabilities and net of accounts receivable. We monitor actual product returns, chargebacks, discounts and fees subsequent to the sale. If these amounts differ from our estimates, we make adjustments to these allowances, which are applied to increase or reduce product sales revenue and earnings in the period of adjustment.
In connection with the orders placed by wholesalers, we incur costs such as commissions to our sales representatives. However, as revenue from product sales is recognized upon delivery to the wholesaler, which occurs shortly after we receive a purchase order, we do not capitalize these commissions and other costs, based on application of the practical expedient allowed within the applicable guidance.
Bulk rHuPH20
We sell bulk rHuPH20 to collaboration partners for use in research and development; subsequent to receiving marketing approval, we sell it for use in collaboration commercial products. Sales are made pursuant to purchase orders subject to the terms of the collaborative agreement, and delivery of units of bulk rHuPH20 represent performance obligations under each purchase order. We provide a standard warranty that the product conforms to specifications. We use a contract manufacturer to produce bulk rHuPH20 and have concluded we are the principal in the sales to collaboration partners. The transaction price for each purchase order of bulk rHuPH20 is fixed based on the cost of production plus a contractual markup and is not subject to adjustments. Allocation of the transaction price to individual quantities of the product is usually not required because each order contains only one type of product.
We recognize revenue from the sale of bulk rHuPH20 as product sales and related cost of sales upon transfer of title to our partners. At that time, the partners take control of the product, bear the risk of loss of ownership, and have an enforceable obligation to pay us.

13



ENHANZE Drug Product
We sell ENHANZE drug product to collaboration partners for use in research and development in early phase clinical studies. Sales are made pursuant to purchase orders subject to the terms of the collaborative agreement, and delivery of units of ENHANZE drug product represent performance obligations under each purchase order. We provide a standard warranty that the product conforms to specifications. We use a contract manufacturer to produce ENHANZE drug product and we concluded we are the principal in the sales to collaboration partners. The transaction price for each purchase order of ENHANZE drug product is fixed based on the cost of production plus a contractual markup and is not subject to adjustments. Allocation of the transaction price to individual quantities of the product is usually not required because each order contains only one type of product.
We recognize revenue from the sale of ENHANZE drug product as product sales and related cost of sales upon transfer of title to our partners. At that time, the partners take control of the product, bear the risk of loss of ownership, and have an enforceable obligation to pay us.
Revenue Presentation
In our statements of operations, we report as revenues under collaborative agreements the upfront payments, event-based development and regulatory milestones and sales milestones. We also include in this category revenues from separate research and development contracts pursuant to project authorization forms. We report royalties received from collaboration partners as a separate line in our statements of operations.
Revenues from sales of Hylenex recombinant, bulk rHuPH20 that has alternative future use and ENHANZE drug product are included in product sales, net.
In the footnotes to our condensed consolidated financial statements, we provide disaggregated revenue information by type of arrangement (product sales, net, collaborative agreements and research and development services), and additionally, by type of payment stream received under collaborative agreements (upfront license fees, event-based development and regulatory milestones and other fees, sales milestones and royalties).
Cost of Product Sales
Cost of product sales consists primarily of raw materials, third-party manufacturing costs, fill and finish costs, freight costs, internal costs and manufacturing overhead associated with the production of Hylenex recombinant and bulk rHuPH20 and ENHANZE drug product that has alternative future use. Cost of product sales also consists of the write-down of excess, dated and obsolete inventories and the write-off of inventories that do not meet certain product specifications, if any. Prior to bulk rHuPH20 and ENHANZE drug product having alternative future use, all costs related to the manufacturing of those products were charged to research and development expenses in the periods such costs were incurred. During the three and nine months ended September 30, 2019, sales of bulk rHuPH20 and ENHANZE drug product included $0.9 million and $1.4 million, respectively, of cost of sales that were previously expensed as research and development. Of the bulk rHuPH20 and ENHANZE drug product that has alternative future use on hand as of September 30, 2019, approximately $0.2 million in manufacturing costs were previously recorded as research and development expenses. We expect to sell this inventory by the end of 2020.
Research and Development Expenses
Research and development expenses include salaries and benefits, facilities and other overhead expenses, external clinical trial expenses, research related manufacturing services, contract services and other outside expenses. Research and development expenses are charged to operating expenses as incurred when these expenditures relate to our research and development efforts and have no alternative future uses. When bulk rHuPH20 is manufactured for use in research and development by us or our partners and the product cannot be redirected for alternative use due to formulation and manufacturing specifications, the manufacturing costs are recorded as research and development expense. Bulk rHuPH20 that is manufactured for partner use prior to our partner receiving marketing approval from the FDA or comparable regulatory agencies in foreign countries and meet these specifications is recorded as research and development expenses. Bulk rHuPH20 formulations manufactured for general partner and internal use, which can potentially be used by any collaboration partner or by us in any stage of development or in commercial products, is considered to have alternative future use and all manufacturing costs are capitalized as inventory. Inventories used in our clinical trials are expensed at the time the inventories are packaged for the clinical trials.
We are obligated to make upfront payments upon execution of certain research and development agreements. Advance payments, including nonrefundable amounts, for goods or services that will be used or rendered for future research and development activities are deferred. Such amounts are recognized as expense as the related goods are delivered or the related services are performed or such time when we do not expect the goods to be delivered or services to be performed.

14



Milestone payments that we make in connection with in-licensed technology for a particular research and development project that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic value are expensed as research and development costs at the time the costs are incurred. We currently have no in-licensed technologies that have alternative future uses in research and development projects or otherwise.
Clinical Trial Expenses
We make payments in connection with our clinical trials under contracts with contract research organizations that support conducting and managing clinical trials. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee, unit price or on a time and materials basis. A portion of our obligation to make payments under these contracts depends on factors such as the successful enrollment or treatment of patients or the completion of other clinical trial milestones.
Expenses related to clinical trials are accrued based on our estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and progress of the clinical trials. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the amounts we are obligated to pay under our clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we adjust our accruals accordingly on a prospective basis. Revisions to our contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain.
Share-Based Compensation
We record compensation expense associated with stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and RSUs with performance conditions (“PRSUs”) in accordance with the authoritative guidance for stock-based compensation. The cost of employee services received in exchange for an award of an equity instrument is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period of the award. Share-based compensation expense for an award with a performance condition is recognized when the achievement of such performance condition is determined to be probable. If the outcome of such performance condition is not determined to be probable or is not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. Forfeitures are recognized as a reduction of share-based compensation expense as they occur.
Income Taxes
We provide for income taxes using the liability method. Under this method, deferred income tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities at each year end and their respective tax bases and are measured using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Significant judgment is required by management to determine our provision for income taxes, our deferred tax assets and liabilities, and the valuation allowance to record against our net deferred tax assets, which are based on complex and evolving tax regulations throughout the world. Deferred tax assets and other tax benefits are recorded when it is more likely than not that the position will be sustained upon audit. While we have begun to utilize certain of our net operating losses, we have not yet established a track record of profitability. Accordingly, valuation allowances have been recorded to reduce our net deferred tax assets to zero, with the exception of the alternative minimum tax ("AMT") credit carryover of $3.1 million. Under the Tax Cuts and Jobs Act (the “Act”) enacted in December 2017, the AMT credit carryover will either be utilized, or if unutilized fully refunded in 2022. For all other deferred tax assets the valuation allowance will reduce the net value to zero until such time as we can demonstrate an ability to realize them.
The Company’s 2015 and 2016 federal returns were selected for audit by the IRS. The audit was completed in September 2019 with no material adjustments.
Net Loss Per Share
Basic net loss per common share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Outstanding stock options, unvested RSAs, unvested RSUs and unvested PRSUs are considered common stock equivalents and are only included in the calculation of diluted earnings per common share when net income is reported and their effect is dilutive. For the three and nine months ended  September 30, 2019 and 2018, approximately 15.0 million and 13.8 million shares, respectively, of outstanding stock options, unvested RSAs, unvested RSUs and unvested PRSUs were excluded from the calculation of diluted net loss per common share because their effect was anti-dilutive.

15



Segment Information
We operate our business in one segment, which includes all activities related to the research, development and commercialization of our proprietary enzymes. This segment also includes revenues and expenses related to (i) research and development and bulk rHuPH20 manufacturing activities conducted under our collaborative agreements with third parties and (ii) product sales of Hylenex recombinant. The chief operating decision-maker reviews the operating results on an aggregate basis and manages the operations as a single operating segment. Our long-lived assets located in foreign countries had no book value as of September 30, 2019 and December 31, 2018.
Adoption and Pending Adoption of Recent Accounting Pronouncements
The following table provides a brief description of recently issued accounting standards, those adopted in the current period and those not yet adopted:
Standard
 
Description
 
Effective Date
 
Effect on the Financial
Statements or Other Significant Matters
 
 
 
 
 
 
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). In July 2018, the FASB issued additional guidance related to Topic 842.
 
The new guidance requires lessees to recognize assets and liabilities for most leases and provides enhanced disclosures.
 
January 1, 2019
 
We implemented the guidance on January 1, 2019 using a modified retrospective transition basis for leases existing as of the period of adoption. In order to adopt the new standard, we used the available practical expedients and newly implemented processes and internal controls for lease accounting. The practical expedients allowed us to carry forward our historical assessment of whether existing agreements are or contain a lease and the classification of our existing lease arrangements. All of our real-estate and automobile operating lease commitments are recognized as lease liabilities with corresponding right-of-use assets, which resulted in an increase in the assets and liabilities of the consolidated balance sheet of $7.2 million, using an assumed weighted average discount rate of 10.0%. The adoption did not have an impact on our consolidated statements of operations and did not require recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We elected to continue applying the guidance under ASC 840 for comparative periods, as allowed through ASC 2018-11.
 
 
 
 
 
 
 
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).
 
The new guidance removes, modifies and adds to certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.
 
January 1, 2020
 
We plan to adopt the new guidance on January 1, 2020. We do not anticipate the adoption will have a material impact on our condensed consolidated financial position or results of operations.

 
 
 
 
 
 
 
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and other Internal-Use Software (Subtopic 350-40)
 
The new guidance aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirement for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).
 
January 1, 2020

 
We plan to adopt the new guidance on January 1, 2020. We do not anticipate the adoption will have a material impact on our condensed consolidated financial position or results of operations.


16



Standard
 
Description
 
Effective Date
 
Effect on the Financial
Statements or Other Significant Matters
 
 
 
 
 
 
 
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments

 
The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized.

 
January 1, 2020

 
We plan to adopt the new guidance on January 1, 2020. We are currently in the process of evaluating the impact of the standard on our accounting policy for losses related to available-for-sale securities and accounts receivable.
      

17



3. Fair Value Measurement
Available-for-sale marketable securities consisted of the following (in thousands):
 
 
September 30, 2019
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Asset-backed securities
 
21,172

 
72

 

 
21,244

Corporate debt securities
 
93,484

 
263

 

 
93,747

U.S. Treasury securities
 
39,848

 
78

 

 
39,926

Commercial paper
 
23,879

 

 

 
23,879

 
 
178,383

 
413

 

 
178,796


 
 
December 31, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Asset-backed securities
 
$
39,787

 
$

 
$
(40
)
 
$
39,747

Corporate debt securities
 
57,860

 

 
(127
)
 
57,733

U.S. Treasury securities
 
84,924

 

 
(87
)
 
84,837

Commercial paper
 
114,273

 

 

 
114,273

 
 
$
296,844

 
$

 
$
(254
)
 
$
296,590


As of September 30, 2019, none of our available-for-sale debt securities were in a gross unrealized loss position.
Contractual maturities of available-for-sale debt securities are as follows (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
Estimated Fair Value
Due within one year
 
$
164,312

 
$
296,590

After one but within five years
 
14,484

 

 
 
$
178,796

 
$
296,590


The following table summarizes, by major security type, our cash equivalents and available-for-sale marketable securities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
Level 1
 
Level 2
 
Total estimated fair value
 
Level 1
 
Level 2
 
Total estimated fair value
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
59,543

 
$

 
$
59,543

 
$
57,987

 
$

 
$
57,987

 
 
 
 
 
 
 
 
 
 
 
 

Available-for-sale marketable
   securities:
 
 
 
 
 
 
 
 
 
 
 

Asset-backed securities
 

 
21,244

 
21,244

 

 
39,747

 
39,747

Corporate debt securities
 

 
93,747

 
93,747

 

 
57,733

 
57,733

U.S. Treasury securities
 
39,926

 

 
39,926

 
84,837

 

 
84,837

Commercial paper
 

 
23,879

 
23,879

 

 
114,273

 
114,273

 
 
$
99,469

 
$
138,870

 
$
238,339

 
$
142,824

 
$
211,753

 
$
354,577


There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2019. We had no instruments that were classified within Level 3 as of September 30, 2019 and December 31, 2018.

18



4. Revenue
Our disaggregated revenues were as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019

2018
 
2019
 
2018
Royalties
 
$
16,609

 
$
18,710

 
$
52,669

 
$
59,643

 
 
 
 
 
 
 
 
 
Product sales, net
 
 
 
 
 
 
 
 
  Sales of bulk rHuPH20
 
$
24,593

 
$
2,402

 
31,145

 
6,350

  Sales of ENHANZE drug product
 
344

 
186

 
669

 
322

  Sales of Hylenex
 
4,268

 
3,681

 
11,541

 
10,881

Total product sales, net
 
29,205

 
6,269

 
43,355

 
17,553

 
 
 
 
 
 
 
 
 
Revenues under collaborative agreements:
 
 
 
 
 
 
 
 
  Upfront license and target nomination fees
 

 

 
40,000

 
1,336

  Event-based development and regulatory milestones and other fees
 

 

 
5,000

 
11,000

  Research and development services
 
416

 
577

 
1,303

 
2,098

Total revenues under collaborative agreements
 
416

 
577

 
46,303

 
14,434

 
 
 
 
 
 
 
 
 
Total revenue
 
$
46,230

 
$
25,556

 
$
142,327

 
$
91,630


During the three months ended September 30, 2019 we recognized revenue related to licenses granted to collaboration partners in prior periods in the amount of $16.6 million, which represents royalties earned in the current period. We recognized revenue of $3.5 million during the three months ended September 30, 2019 that had been included in deferred revenues at December 31, 2018.
During the nine months ended September 30, 2019 we recognized revenue related to licenses granted to collaboration partners in prior periods in the amount of $57.7 million. This amount represents royalties earned in the current period, in addition to $5.0 million of variable consideration in the contracts where uncertainties have been resolved and the development milestones were expected to be achieved or were achieved. We recognized revenue of $4.5 million during the nine months ended September 30, 2019 that had been included in deferred revenues at December 31, 2018. We did not recognize any adjustments to reduce sales reserves and allowances liability related to Hylenex recombinant sales in prior periods.
Accounts receivable, net, and deferred revenues (contract liabilities) from contracts with customers, including collaboration partners, consisted of the following (in thousands):
 
 
September 30, 2019
 
December 31, 2018
Accounts receivable, net
 
$
40,744

 
$
30,005

Deferred revenues
 
4,758

 
9,255


As of September 30, 2019, the amounts included in the transaction price of our contracts with customers, including collaboration partners, and allocated to goods and services not yet provided were $19.4 million, of which $14.6 million relates to unfulfilled product purchase orders and $4.8 million has been collected and is reported as deferred revenues. The unfulfilled product purchase orders are estimated to be delivered during the remainder of 2019. Of the total deferred revenues of $4.8 million, $3.5 million is expected to be used by our customers within the next 12 months.

19



The following table presents amounts under our collaborative agreements included in the transaction price (i.e. cumulative amounts triggered or probable) as of September 30, 2019 (in thousands):
 
 
Upfront
(1)
 
Event-based
(2)
 
Sales
(3)
 
Total
Collaboration partner and agreement date:
 
 
 
 
 
 
 
 
Roche (December 2006, September 2017 and October 2018)
 
$
95,000

 
$
30,000

 
$
22,000

 
$
147,000

Baxalta (September 2007)
 
10,000

 
3,000

 
9,000

 
22,000

Pfizer (December 2012)
 
14,500

 
2,000

 

 
16,500

Janssen (December 2014)
 
15,250

 
15,000

 

 
30,250

AbbVie (June 2015)
 
23,000

 
6,000

 

 
29,000

Lilly (December 2015)
 
33,000

 

 

 
33,000

BMS (September 2017)
 
105,000

 
5,000

 

 
110,000

Alexion (December 2017)
 
40,000

 
5,000

 

 
45,000

argenx (February 2019)
 
40,000

 
5,000

 

 
45,000

Royalties
 
 
 
 
 
 
 
306,055

Total amounts under our collaborative agreements included in the transaction price
 
 
 
 
 
 
 
783,805


(1)
Upfront and additional target selection fees
(2)
Event-based development and regulatory milestone amounts and other fees
(3)
Sales-based milestone amounts
Through September 30, 2019, our collaboration partners have completed development, obtained marketing authorization approvals for certain indications and commenced commercialization of the following products:
Roche, for Herceptin SC in the European Union (“EU”) in August 2013 and in Canada in September 2018, and its equivalent Herceptin Hylecta in the US in February 2019; and MabThera SC in the EU in March 2014 and its equivalent RITUXAN HYCELA in the US in June 2017;
Baxalta, for HYQVIA in the EU and in the US in May 2013.
The remaining targets and products are currently in the process of development by the collaboration partners.
5. Certain Balance Sheet Items
Accounts receivable, net and other contract assets consisted of the following (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Accounts receivable from product sales to collaborators
 
$
21,707

 
$
3,717

Accounts receivable from revenues under collaborative agreements
 
654

 
5,499

Accounts receivable from royalty payments
 
16,690

 
19,199

Accounts receivable from other product sales
 
2,276

 
2,182

     Subtotal
 
41,327

 
30,597

Allowance for distribution fees and discounts
 
(583
)
 
(592
)
     Total accounts receivable, net
 
$
40,744

 
$
30,005


Inventories consisted of the following (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Raw materials
 
$
3,442

 
$
735

Work-in-process
 
17,978

 
11,430

Finished goods
 
14,631

 
10,460

     Total inventories
 
$
36,051

 
$
22,625



20



Prepaid expenses and other assets consisted of the following (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Prepaid manufacturing expenses
 
$
21,523

 
$
8,230

Prepaid research and development expenses
 
7,763

 
7,922

Other prepaid expenses
 
3,567

 
2,513

Other assets
 
6,812

 
6,462

     Total prepaid expenses and other assets
 
39,665

 
25,127

Less long-term portion
 
12,417

 
4,434

     Total prepaid expenses and other assets, current
 
$
27,248

 
$
20,693


Prepaid manufacturing expenses include raw materials, slot reservation fees and other amounts paid to contract manufacturing organizations. Such amounts are reclassified to work-in-process inventory as materials are used or the CMO services are complete.
Property and equipment, net consisted of the following (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Research equipment
 
$
11,653

 
$
9,945

Manufacturing equipment
 
3,838

 
3,979

Computer and office equipment
 
6,157

 
5,211

Leasehold improvements
 
4,864

 
4,569

     Subtotal
 
26,512

 
23,704

Accumulated depreciation and amortization
 
(17,896
)
 
(16,239
)
     Subtotal
 
8,616

 
7,465

Right of use assets
 
6,782

 

     Property and equipment, net
 
$
15,398

 
$
7,465

Depreciation and amortization expense was approximately $1.0 million and $0.6 million, inclusive of ROU asset amortization of $0.5 million and zero for the three months ended September 30, 2019 and 2018 respectively.
Depreciation and amortization expense was approximately $3.0 million and $1.8 million, inclusive of ROU asset amortization of $1.3 million and zero for the nine months ended September 30, 2019 and 2018 respectively.
Accrued expenses consisted of the following (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Accrued outsourced research and development expenses
 
$
11,980

 
$
21,921

Accrued compensation and payroll taxes
 
12,804

 
16,604

Accrued outsourced manufacturing expenses
 
11,635

 
3,975

Other accrued expenses
 
7,237

 
7,623

Lease liability
 
8,430

 

     Total accrued expenses
 
52,086

 
50,123

Less long-term portion
 
6,407

 
594

     Total accrued expenses, current
 
$
45,679

 
$
49,529


Expense associated with the accretion of the lease liabilities was approximately $0.2 million and zero for the three months ended September 30, 2019 and 2018 respectively. Total lease expense for the three months ended September 30, 2019 and 2018 was $0.7 million and $0.6 million respectively.
Expense associated with the accretion of the lease liabilities was approximately $0.6 million and zero for the nine months ended September 30, 2019 and 2018, respectively. Total lease expense for the nine months ended September 30, 2019 and 2018 $2.0 million and $1.8 million respectively.
Cash paid for amounts related to leases for the three months ended September 30, 2019 and 2018 was $0.8 million and $0.7 million, and $2.3 million and $1.7 million for the nine months ended September 30, 2019 and 2018, respectively.

21



Deferred revenue consisted of the following (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Collaborative agreements
 
 
 
 
License fees and event-based payments
 
$
2,264

 
$
2,264

Product sales
 
2,494

 
6,991

Total deferred revenue
 
4,758

 
9,255

Less current portion
 
3,511

 
4,247

Deferred revenue, net of current portion
 
$
1,247

 
$
5,008


6. Long-Term Debt, Net
Royalty-backed Loan
In January 2016, through our wholly-owned subsidiary Halozyme Royalty LLC (“Halozyme Royalty”), we received a $150 million loan (the “Royalty-backed Loan”) pursuant to a credit agreement (the “Credit Agreement”) with BioPharma Credit Investments IV Sub, LP and Athyrium Opportunities II Acquisition LP (the “Royalty-backed Lenders”). Under the terms of the Credit Agreement, Halozyme Therapeutics, Inc. transferred to Halozyme Royalty the right to receive royalty payments from the commercial sales of ENHANZE products owed under the Roche Collaboration and Baxalta Collaboration (“Collaboration Agreements”). The royalty payments from the Collaboration Agreements will be used to repay the principal and interest on the loan (the “Royalty Payments”).  The Royalty-backed Loan bears interest at a per annum rate of 8.75% plus the three-month LIBOR rate. The three-month LIBOR rate is subject to a floor of 0.7% and a cap of 1.5%. The interest rate as of September 30, 2019 was 10.25%.
The Credit Agreement provides that none of the Royalty Payments were required to be applied to the Royalty-backed Loan prior to January 1, 2017, 50% of the Royalty Payments are required to be applied to the Royalty-backed Loan between January 1, 2017 and January 1, 2018 and thereafter all Royalty Payments must be applied to the Royalty-backed Loan. However, the amounts available to repay the Royalty-backed Loan are subject to caps of $13.75 million per quarter in 2017, $18.75 million per quarter in 2018, $21.25 million per quarter in 2019 and $22.5 million per quarter in 2020 and thereafter. Amounts available to repay the Royalty-backed Loan will be applied first to pay interest and second to repay principal on the Royalty-backed Loan. Any accrued interest that is not paid on any applicable quarterly payment date, as defined, will be capitalized and added to the principal balance of the Royalty-backed Loan on such date. Halozyme Royalty will be entitled to receive and distribute to Halozyme any Royalty Payments that are not required to be applied to the Royalty-backed Loan or which are in excess of the foregoing caps.
Because the repayment of the term loan is contingent upon the level of Royalty Payments received, the repayment term may be shortened or extended depending on the actual level of Royalty Payments. The final maturity date of the Royalty-backed Loan will be the earlier of (i) the date when principal and interest is paid in full, (ii) the termination of Halozyme Royalty’s right to receive royalties under the Collaboration Agreements, and (iii) December 31, 2050.  Currently, we estimate that the loan will be repaid in the second quarter of 2020. This estimate could be adversely affected and the repayment period could be extended if future royalty amounts are less than currently expected. Under the terms of the Credit Agreement, at any time after January 1, 2019, Halozyme Royalty may, subject to certain limitations, prepay the outstanding principal of the Royalty-backed Loan in whole or in part, at a price equal to 105% of the outstanding principal on the Royalty-backed Loan, plus accrued but unpaid interest. The Royalty-backed Loan constitutes an obligation of Halozyme Royalty and is non-recourse to Halozyme. Halozyme Royalty retains its right to the Royalty Payments following repayment of the loan.
As of September 30, 2019, we were in compliance with all covenants under the Royalty-backed Loan and there was no material adverse change in our business, operations or financial condition.
We began making principal and interest payments against the Royalty-backed Loan in the first quarter of 2017 and therefore had no capitalized interest in the nine months ended September 30, 2019. In addition, we recorded accrued interest, which is included in accrued expenses, of $0.2 million and $0.4 million as of September 30, 2019 and December 31, 2018, respectively
In connection with the Royalty-backed Loan, we paid the Royalty-backed Lenders a fee of $1.5 million and incurred additional debt issuance costs totaling $0.4 million, which includes expenses that we paid on behalf of the Royalty-backed Lenders and expenses incurred directly by us. Debt issuance costs and the lender fee have been netted against the debt as of September 30, 2019 and are being amortized over the estimated term of the debt using the effective interest method. For the three months ended September 30, 2019 and 2018, the Company recognized interest expense, including amortization of the debt discount, related to the Royalty-backed Loan of $1.3 million and $3.1 million, and $5.3 million and $10.5 million for the nine months ended September 30, 2019 and 2018 respectively. The assumptions used in determining the expected repayment term of the debt and amortization period of the issuance costs requires that we make estimates that could impact the short- and long-term classification

22



of these costs, as well as the period over which these costs will be amortized. The outstanding balance of the Royalty-backed Loan as of September 30, 2019 was $35.3 million, net of unamortized debt discount of $0.1 million.
Oxford and SVB Loan and Security Agreement
In June 2016, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC and Silicon Valley Bank (“SVB”) (collectively, the “Lenders”), providing a senior secured loan facility of up to an aggregate principal amount of $70.0 million, comprising a $55.0 million draw in June 2016 and an additional $15.0 million tranche, which we had the option to draw during the second quarter of 2017 and did not exercise. The initial proceeds were partially used to pay the outstanding principal and final payment of $4.25 million owed on a previous loan agreement with the Lenders. The remaining proceeds are being used for working capital and general business requirements. The senior secured loan facility carries a fixed interest rate of 8.25%. The repayment schedule provides for interest only payments for the first 18 months, followed by consecutive equal monthly payments of principal and interest in arrears through the maturity date of January 1, 2021. The Loan Agreement provides for a final payment equal to 5.50% of the initial $55.0 million principal amount. The final payment is due when the Loan Agreement becomes due or upon the prepayment of the facility. We have the option to prepay the outstanding balance of the Loan Agreement in full.
In connection with the Loan Agreement, the debt offering costs have been recorded as a debt discount in our condensed consolidated balance sheets which, together with the final payment and fixed interest rate payments, are being amortized and recorded as interest expense throughout the life of the loan using the effective interest rate method.
The Loan Agreement is secured by substantially all of the assets of the Company and our subsidiary, Halozyme, Inc., except that the collateral does not include any equity interests in Halozyme, Inc., any of our intellectual property (including all licensing, collaboration and similar agreements relating thereto), and certain other excluded assets. The Loan Agreement contains customary representations, warranties and covenants by us, which covenants limit our ability to convey, sell, lease, transfer, assign or otherwise dispose of certain of our assets; engage in any business other than the businesses currently engaged in by us or reasonably related thereto; liquidate or dissolve; make certain management changes; undergo certain change of control events; create, incur, assume, or be liable with respect to certain indebtedness; grant certain liens; pay dividends and make certain other restricted payments; make certain investments; make payments on any subordinated debt; enter into transactions with any of our affiliates outside of the ordinary course of business or permit our subsidiaries to do the same; and make any voluntary prepayment of or modify certain terms of the Royalty-backed Loan. In addition, subject to certain exceptions, we are required to maintain with SVB our primary deposit accounts, securities accounts and commodities, and to do the same for our subsidiary, Halozyme, Inc.
The Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things, our failure to fulfill certain of our obligations under the Loan Agreement and the occurrence of a material adverse change which is defined as a material adverse change in our business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, a material impairment in the perfection or priority of the Lender’s lien in the collateral or in the value of such collateral or the occurrence of an event of default under the Royalty-backed Loan. In the event of default by us under the Loan Agreement, the Lenders would be entitled to exercise their remedies thereunder, including the right to accelerate the debt, upon which we may be required to repay all amounts then outstanding under the Loan Agreement, which could harm our financial condition.
 As of September 30, 2019, we were in compliance with all covenants under the Loan Agreement and there was no material adverse change in our business, operations or financial condition.
Interest expense, including amortization of the debt discount, related to the Loan Agreement totaled $0.7 million and $1.2 million for the three months ended September 30, 2019 and 2018, and $2.6 million and $3.8 million for the nine months ended September 30, 2019 and 2018 respectively. Accrued interest, which is included in accrued expenses, was $0.2 million and $0.3 million as of September 30, 2019 and December 31, 2018, respectively. The outstanding term loan balance was $28.5 million as of September 30, 2019, inclusive of $2.7 million of accretion of the final payment and net of unamortized debt discount related to offering costs of $0.1 million.
7. Share-based Compensation
Total share-based compensation expense related to share-based awards was comprised of the following (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Research and development
 
$
3,736

 
$
4,407

 
$
12,739

 
$
13,107

Selling, general and administrative
 
4,503

 
4,460

 
14,808

 
13,577

Share-based compensation expense
 
$
8,239

 
$
8,867

 
$
27,547

 
$
26,684



23



Share-based compensation expense by type of share-based award (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019

2018
 
2019

2018
Stock options
 
$
4,744

 
$
4,645

 
$
14,973

 
$
14,026

RSAs, RSUs and PRSUs
 
3,495

 
4,222

 
12,574

 
12,658

 
 
$
8,239

 
$
8,867

 
$
27,547

 
$
26,684


We granted stock options to purchase approximately 0.1 million and 0.4 million shares of common stock during the three months ended September 30, 2019 and 2018, respectively, and 3.0 million and 2.3 million shares of the Company’s stock during the nine months ended September 30, 2019 and 2018, respectively. The exercise price of stock options granted is equal to the closing price of the common stock on the date of grant. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model (“Black-Scholes model”). Expected volatility is based on historical volatility of our common stock. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The dividend yield assumption is based on the expectation of no future dividend payments. The assumptions used in the Black-Scholes model were as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Expected volatility
 
53.78-54.76%
 
58.66-60.57%

 
53.78-56.94%

 
58.66-70.06%

Average expected term (in years)
 
5.5
 
5.4

 
5.5

 
5.5

Risk-free interest rate
 
1.35-1.79%
 
2.75-2.87%

 
1.35-2.56%

 
2.25-2.87%

Expected dividend yield
 
 

 

 


Total unrecognized estimated compensation cost by type of award and the weighted-average remaining requisite service period over which such expense is expected to be recognized (in thousands, unless otherwise noted):
 
 
September 30, 2019
 
 
Unrecognized
Expense
 
Remaining
Weighted-Average
Recognition Period
(years)
Stock options
 
$
41,846

 
2.71
RSAs
 
$
1,178

 
0.44
RSUs
 
$
27,978

 
2.57

8. Stockholders’ Equity
During the nine months ended September 30, 2019 and 2018, we issued an aggregate of 757,275 and 1,280,996 shares of common stock, respectively, in connection with the exercises of stock options at a weighted average exercise price of $10.94 and $11.13 per share, respectively, for net proceeds of approximately $8.3 million and $14.3 million, respectively. For the nine months ended September 30, 2019 and 2018, we issued 899,737 and 438,536 shares of common stock, respectively, upon vesting of certain RSUs for which 133,476 and 138,986 RSUs were withheld from the RSU holders, respectively, to pay for minimum withholding taxes totaling approximately $2.2 million and $4.2 million, respectively. Stock options and unvested restricted units totaling approximately 14.8 million shares and 13.4 million shares of our common stock were outstanding as of September 30, 2019 and December 31, 2018, respectively.

24



9. Commitments and Contingencies
From time to time, we may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of our business. Any of these claims could subject us to costly legal expenses and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position.
Our commitments include payments related to our commenced operating leases. Approximate annual future minimum operating lease payments as of September 30, 2019 are as follows (in thousands; excluding the nine months ended September 30, 2019): 
Year:
 
Operating
Leases
2019
 
$
828

2020
 
3,355

2021
 
2,863

2022
 
2,684

2023
 
112

Total minimum lease payments
 
$
9,842

Less imputed interest
 
$
(1,412
)
Total
 
$
8,430


The weighted-average remaining lease term of our operating leases is approximately 3.1 years.
10. Subsequent Event
On November 4, 2019, we announced that our HALO-301 Phase 3 clinical study evaluating investigational new drug PEGPH20 as a first-line therapy for treatment of patients with metastatic pancreatic cancer failed to reach the primary endpoint of overall survival. Due to the results of the study, we halted development activities for PEGPH20, closed our oncology operations and implemented an organizational restructuring to focus our operations solely on ENHANZE. Headcount will be reduced by approximately 55% or approximately 160 positions. Upon completion of the restructuring and after recording all related one-time charges, we anticipate becoming a sustainably profitable company, beginning in the second quarter of 2020.
We expect we will incur restructuring charges consisting of one-time severance payments and other employee related costs, including non-cash costs related to the acceleration of equity awards for employees affected by the restructuring, of approximately $17.0 million in the fourth quarter of 2019. The majority of the cash payments for employee related restructuring charges will be paid during the first quarter of 2020, with the remainder to be paid in subsequent quarters of 2020. Additionally, we will incur one-time charges related to lease and other contract cancellations of approximately $8.0 million to $10.0 million in the fourth quarter of 2019. We may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the workforce reduction and the cancellation of our PEGPH20 programs.
On November 4, 2019, we also announced the initiation of a capital return program, to repurchase up to $350.0 million of our outstanding common stock over the next three years.


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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this report, unless the context suggests otherwise, references to “Halozyme,” “the Company,” “we,” “our,” “ours,” and “us” refer to Halozyme Therapeutics, Inc., its wholly owned subsidiary, Halozyme, Inc. and Halozyme Inc.’s wholly owned subsidiaries, Halozyme Holdings Ltd., Halozyme Royalty LLC, Halozyme Switzerland GmbH and Halozyme Switzerland Holdings GmbH. References to “Notes” refer to the Notes to Condensed Consolidated Financial Statements included herein (refer to Item 1 of Part I).
The following information should be read in conjunction with the interim unaudited condensed consolidated financial statements and Notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, as well as the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2018, included in our Annual Report on Form 10-K for the year ended December 31, 2018. Past financial or operating performance is not necessarily a reliable indicator of future performance, and our historical performance should not be used to anticipate results or future period trends.
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this report other than statements of historical fact are, or may be deemed to be, forward-looking statements. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “think,” “may,” “could,” “will,” “would,” “should,” “continue,” “potential,” “likely,” “opportunity,” “project” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. Additionally, statements concerning future matters such as the development or regulatory approval of new partner products, enhancements of existing products or technologies, timing and success of the launch of new products by our collaborators, third party performance under key collaboration agreements, revenue, expense and cash burn levels, anticipated profitability and expected trends, expected repayment of the Royalty-backed Loan and trends and other statements regarding matters that are not historical are forward-looking statements. Such statements reflect management’s current forecast of certain aspects of our future, are based on currently available operating, financial and competitive information and are subject to various risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated or implied in our forward-looking statements due to a number of factors including, but not limited to, those set forth below under the section entitled “Risks Factors” and elsewhere in this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report.
Overview
Halozyme Therapeutics, Inc. is a biotechnology company focused on novel biological and drug delivery approaches. Our proprietary enzyme, rHuPH20, is used to facilitate the delivery of injected drugs and fluids and potentially reduce the treatment burden for the delivery of other drugs to patients. We license our technology to biopharmaceutical companies to collaboratively develop products that combine our technology with the collaborators’ proprietary compounds.
Our approved product and our collaborators’ approved products and product candidates are based on rHuPH20, our patented recombinant human hyaluronidase enzyme. rHuPH20 is the active ingredient in our first commercially approved product, Hylenex® recombinant, and it works by temporarily breaking down hyaluronan (or “HA”), a naturally occurring carbohydrate that is a major component of the extracellular matrix in tissues throughout the body such as skin and cartilage. We believe this temporary degradation creates an opportunistic window for the improved subcutaneous delivery of injectable biologics, such as monoclonal antibodies and other large therapeutic molecules, as well as small molecules and fluids. We refer to the application of rHuPH20 to facilitate the delivery of other drugs or fluids as our ENHANZE® Drug Delivery Technology (“ENHANZE”). We license the ENHANZE technology to form collaborations with biopharmaceutical companies that develop or market drugs requiring or benefiting from injection via the subcutaneous route of administration.
We currently have ENHANZE collaborations with F. Hoffmann-La Roche, Ltd. and Hoffmann-La Roche, Inc. (Roche), Baxalta US Inc. and Baxalta GmbH (now members of the Takeda group of companies, following the acquisition of Shire plc by Takeda Pharmaceutical Company Limited in January 2019) (Baxalta), Pfizer Inc. (Pfizer), Janssen Biotech, Inc. (Janssen), AbbVie, Inc. (AbbVie), Eli Lilly and Company (Lilly), Bristol Myers Squibb Company (BMS), Alexion Pharma Holding (Alexion) and ARGENX BVBA (argenx).We receive royalties from two of these collaborations, including royalties from sales of one product from the Baxalta collaboration and two products from the Roche collaboration. Future potential revenues from the sales and/or royalties of our approved products, product candidates, and ENHANZE collaborations will depend on the ability of Halozyme and our collaborators to develop, manufacture, secure and maintain regulatory approvals for approved products and product candidates and commercialize product candidates.

26



On November 4, 2019, we announced that our HALO-301 Phase 3 clinical study evaluating PEGPH20 as a first-line therapy for treatment of patients with metastatic pancreatic cancer failed to reach the primary endpoint of overall survival. The study failed to demonstrate an improvement in overall survival compared to gemcitabine and nab-paclitaxel alone (11.2 months median overall survival compared to 11.5 months, HR=1.00, p=0.9692). Due to the results of the study, we halted development activities for PEGPH20, closed our oncology operations and have begun to implement an organizational restructuring to focus our operations solely on ENHANZE.
We initiated and have instructed our partners to initiate the process to close all ongoing oncology clinical studies including the Phase 3 clinical testing for PEGPH20 with ABRAXANE® (nab-paclitaxel) and gemcitabine in stage IV pancreatic ductal adenocarcinoma (“PDA”) (HALO 109-301), the Phase 1b/2 clinical testing for PEGPH20 with Tecentriq® (atezolizumab) in patients with previously treated metastatic PDA, the Phase 1b/2 clinical testing for PEGPH20 with Tecentriq in patients with gastric cancer and the Phase 1b/2 clinical testing for PEGPH20 with Tecentriq in patients with cholangiocarcinoma and gall bladder cancer (HALO 110-101/MATRIX).
Our third quarter of 2019 and recent key events include:
In November 2019, we announced strategic actions to reposition the Company with a focus solely on ENHANZE. Headcount will be reduced by approximately 55% or approximately 160 positions. Upon completion of the restructuring and after recording all related one-time charges, we anticipate becoming a sustainably profitable company, beginning in the second quarter of 2020.

In November 2019, we announced the initiation of a capital return program, to repurchase up to $350.0 million of our outstanding common stock over the next three years.
In October 2019, Roche nominated a new undisclosed target to be studied using ENHANZE technology, triggering a $10 million milestone payment.
In October 2019, BMS initiated a Phase 1 study for Relatlimab in combination with nivolumab and ENHANZE Technology.
In September 2019, Roche announced that the global Phase 3 FeDeriCa study met its primary endpoint. The FeDeriCa study investigated a fixed-dose combination of pertuzumab (Perjeta®) and trastuzumab (Herceptin®) for subcutaneous administration using Halozyme's ENHANZE drug delivery technology in combination with intravenous chemotherapy. The study results demonstrated non-inferior levels of Perjeta in the blood (pharmacokinetics) compared to standard intravenous (IV) infusion of Perjeta plus Herceptin and chemotherapy in patients with HER2-positive early breast cancer. The study also demonstrated that the safety profile of the fixed dose subcutaneous combination of Perjeta and Herceptin was consistent with the safety profile of Perjeta and Herceptin administered intravenously. Full data from the FeDeriCa study will be submitted for presentation at an upcoming medical meeting and to health authorities worldwide, including the FDA and the European Medicines Agency (EMA).
In August 2019, Roche initiated a Phase 1 study evaluating OCREVUS® (ocrelizumab) with ENHANZE Technology in subjects with multiple sclerosis.
In July 2019, Janssen announced that it submitted a Biological License Application (BLA) to the U.S. Food and Drug Administration (FDA) and an extension application to the European Medicines Agency (EMA) for the subcutaneous delivery of DARZALEX (daratumumab) for patients with multiple myeloma. Janssen’s regulatory submissions follow the announcement of positive results from its phase 3 COLUMBA study, which investigated subcutaneously administered DARZALEX in comparison to intravenous DARZALEX in patients with relapsed or refractory multiple myeloma.
In July 2019, argenx dosed the first subject in a phase 1 clinical trial evaluating the safety, pharmacokinetics and pharmacodynamics of efgartigimod (ARGX-113), using ENHANZE technology, triggering a $5.0 million milestone payment.



27



Product and Product Candidates
We have one marketed proprietary product and three marketed partnered products. The following table summarizes our proprietary product and products and product candidates under development with our collaborators:

SLIDE1A92.JPG

28



SLIDE2A78.JPG
Proprietary Product
Hylenex Recombinant (hyaluronidase human injection)
Hylenex recombinant is a formulation of rHuPH20 that facilitates subcutaneous fluid administration for achieving hydration, to increase the dispersion and absorption of other injected drugs and, in subcutaneous urography, to improve resorption of radiopaque agents. Hylenex recombinant is currently the number one prescribed branded hyaluronidase.
ENHANZE Collaborations
Roche Collaboration
In December 2006, we and Roche entered into a collaboration and license agreement under which Roche obtained a worldwide license to develop and commercialize product combinations of rHuPH20 and up to thirteen Roche target compounds (the Roche Collaboration). Under this agreement, Roche elected a total of eight targets, two of which are exclusive.
In September 2013, Roche launched a subcutaneous (SC) formulation of Herceptin (trastuzumab) (Herceptin SC) in Europe for the treatment of patients with HER2-positive breast cancer followed by launches in additional countries. This formulation utilizes our ENHANZE technology and is administered in two to five minutes, compared to 30 to 90 minutes with the standard intravenous form. Directed at the same target, Roche initiated a Phase 1 study of Perjeta® (pertuzumab) and Herceptin (trastuzumab) using ENHANZE technology in patients with early breast cancer in March 2016.
In June 2018, Roche initiated a global Phase 3 study of a fixed-dose combination of Perjeta and Herceptin using ENHANZE technology in patients with HER2-positive early breast cancer. In August 2019, the global phase 3 study met its primary endpoint. The study results demonstrated non-inferior levels of Perjeta in the blood (pharmacokinetics) compared to standard intravenous (IV) infusion of Perjeta plus Herceptin and chemotherapy in patients with HER2-positive early breast cancer. The study also demonstrated that the safety profile of the fixed dose subcutaneous combination of Perjeta and Herceptin was consistent with the safety profile of Perjeta and Herceptin administered intravenously. Full data from the FeDeriCa study will be submitted for presentation at an upcoming medical meeting and to health authorities worldwide, including the FDA and the EMA.

29



In September 2018, we announced that Roche received approval from Health Canada for Herceptin SC for the treatment of patients with HER2-positive breast cancer. In February 2019, we announced that Roche received approval from the FDA for Herceptin SC under the brand name Herceptin Hylecta™ (trastuzumab and hyaluronidase-oysk). In April 2019, Roche made Herceptin Hylecta available in the U.S.
In June 2014, Roche launched MabThera SC in Europe for the treatment of patients with common forms of non-Hodgkin lymphoma (NHL) followed by launches in additional countries. This formulation utilizes our ENHANZE technology and is administered in approximately five minutes compared to the approximately 1.5 to 4 hour intravenous infusion. In May 2016, Roche announced that the EMA approved Mabthera SC to treat patients with chronic lymphocytic leukemia (CLL). In June 2017, the FDA approved Genentech’s RITUXAN HYCELA™, a combination of rituximab and rHuPH20 (approved and marketed under the MabThera SC brand in countries outside the U.S.), for CLL and two types of NHL, follicular lymphoma and diffuse large B-cell lymphoma.
In September 2017, we and Roche entered into an agreement providing Roche the right to develop and commercialize one additional exclusive target using ENHANZE technology. The upfront license payment may be followed by event-based payments subject to Roche’s achievement of specified development, regulatory and sales-based milestones. In addition, Roche will pay royalties to us if products under the collaboration are commercialized.
In October 2018, we entered into an agreement with Roche for the right to develop and commercialize one additional exclusive target and an option to select two additional targets within four years using ENHANZE technology. The upfront license payment may be followed by event-based payments subject to Roche’s achievement of specified development, regulatory and sales-based milestones. In addition, Roche will pay royalties to us if products under the collaboration are commercialized.
In December 2018, Roche initiated a Phase 1b/2 study in patients with non-small cell lung cancer for Tecentriq (atezolizumab) using ENHANZE technology. In August 2019, Roche initiated a Phase 1 study evaluating OCREVUS (ocrelizumab) with ENHANZE Technology in subjects with multiple sclerosis. In October 2019, Roche nominated a new undisclosed target to be studied using ENHANZE technology, triggering a $10 million milestone payment.
Baxalta Collaboration
In September 2007, we and Baxalta entered into a collaboration and license agreement under which Baxalta obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 with GAMMAGARD LIQUID (HYQVIA) (the Baxalta Collaboration). HYQVIA is indicated for the treatment of primary immunodeficiency disorders associated with defects in the immune system.
In May 2013, the European Commission granted Baxalta marketing authorization in all EU Member States for the use of HYQVIA (solution for subcutaneous use) as replacement therapy for adult patients with primary and secondary immunodeficiencies. Baxalta launched HYQVIA in the first EU country in July 2013 and has continued to launch in additional countries.
In September 2014, HYQVIA was approved by the FDA for treatment of adult patients with primary immunodeficiency in the U.S. HYQVIA is the first subcutaneous immune globulin (IG) treatment approved for adult primary immunodeficiency patients with a dosing regimen requiring only one infusion up to once per month (every three to four weeks) and one injection site per infusion in most patients, to deliver a full therapeutic dose of IG. The FDA’s approval of HYQVIA was a significant milestone for us as it represented the first U.S. approved BLA which utilizes our rHuPH20 platform.
In May 2016, Baxalta announced that HYQVIA received a marketing authorization from the European Commission for a pediatric indication, which was launched in Europe to treat primary and certain secondary immunodeficiencies.
Pfizer Collaboration
In December 2012, we and Pfizer entered into a collaboration and license agreement, under which Pfizer has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with Pfizer proprietary biologics directed to up to six targets in primary care and specialty care indications. Targets may be selected on an exclusive or non-exclusive basis. Pfizer has elected five targets on an exclusive basis and returned two targets.
Janssen Collaboration
In December 2014, we and Janssen entered into a collaboration and license agreement, under which Janssen has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with Janssen proprietary biologics directed to up to five targets. Targets may be selected on an exclusive basis. Janssen has elected CD38 as the first target on an exclusive basis. In October 2017, Janssen initiated its first Phase 3 study of subcutaneous delivery of DARZALEX® (daratumumab), directed at CD38, using ENHANZE technology, in multiple myeloma patients. Janssen has initiated seven Phase 3 studies, two Phase 2 study and one Phase 1 study of daratumumab using ENHANZE technology in patients with amyloidosis, smoldering myeloma and multiple myeloma.

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In February 2019, Janssen’s development partner, Genmab, announced positive Phase 3 trial results from the COLUMBA study evaluating subcutaneous DARZALEX in comparison to DARZALEX IV in patients with relapsed or refractory multiple myeloma. DARZALEX SC (utilizing ENHANZE technology) was found to be non-inferior to Darzalex IV with regard the co-primary endpoints of Overall Response Rate and Maximum Trough concentration. In July 2019, Janssen submitted a BLA to the FDA and an extension application to the EMA for the subcutaneous delivery of DARZALEX for patients with multiple myeloma.
AbbVie Collaboration
In June 2015, we and AbbVie entered into a collaboration and license agreement, under which AbbVie has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with AbbVie proprietary biologics directed to up to nine targets. Targets may be selected on an exclusive basis. AbbVie elected one target on an exclusive basis, TNF alpha, for which it has discontinued development and returned the target.
Lilly Collaboration
In December 2015, we and Lilly entered into a collaboration and license agreement, under which Lilly has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with Lilly proprietary biologics directed to up to five targets. Targets may be selected on an exclusive basis. Lilly has elected two targets on an exclusive basis and one target on a semi-exclusive basis. In August 2017, Lilly initiated a Phase 1 study of an investigational therapy, in combination with rHuPH20.
BMS Collaboration
In September 2017, we and BMS entered into a collaboration and license agreement, which became effective in November 2017, under which BMS has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with BMS immuno-oncology targets directed at up to eleven targets. Targets may be selected on an exclusive basis, with the exception of one co-exclusive target. BMS has designated multiple immuno-oncology targets including programmed death 1 (PD-1) and has an option to select additional targets within five years from the effective date. In October 2018, BMS dosed the first patient in a Phase 1/2a study evaluating the safety, pharmacokinetics and pharmacodynamics of BMS-986179, an investigational anti-CD-73 antibody alone and in combination with nivolumab, using ENHANZE technology. BMS is also conducting a Phase 1/2 study of nivolumab using ENHANZE technology in patients with solid tumors. In October 2019, BMS initiated a Phase 1 study for Relatlimab in combination with nivolumab and ENHANZE Technology.
Alexion Collaboration
In December 2017, we and Alexion entered into a collaboration and license agreement, under which Alexion has the worldwide license to develop and commercialize products combining our rHuPH20 enzyme with Alexion’s portfolio of products directed at up to four targets. Targets may be selected on an exclusive basis. Alexion elected two targets on an exclusive basis, including a C5 complement inhibitor and has an option to select two additional targets within five years from the effective date. In August 2018, Alexion announced that it initiated a Phase 1 trial to study a next-generation subcutaneous formulation of ALXN1210 using ENHANZE technology. Alexion believes this next-generation subcutaneous formulation, called ALXN1810, has the potential to extend the dosing interval from once a week to greater than two weeks between doses. Alexion is evaluating its overall C5 portfolio strategy, including plans for late stage development of ALXN 1810.
argenx Collaboration
In February 2019, we entered into an agreement with argenx for the right to develop and commercialize one exclusive target, the human neonatal Fc receptor, FcRn, which includes argenx's lead asset efgartigimod (ARGX-113), and an option to select two additional targets using ENHANZE technology. In May 2019, argenx nominated a second target to be studied using ENHANZE technology, a human complement factor C2 associated with the product candidate ARGX-117, which is being developed to treat severe autoimmune diseases.
In July 2019, argenx dosed the first subject in a phase 1 clinical trial evaluating the safety, pharmacokinetics and pharmacodynamics of efgartigimod (ARGX-113), using ENHANZE technology.
NIH CRADA
In June 2019, we announced a Cooperative Research and Development Agreement (CRADA) with the National Institute of Allergy and Infectious Diseases’ Vaccine Research Center (VRC), part of National Institute of Health (NIH), enabling the VRC’s use of ENHANZE technology to develop subcutaneous formulations of broadly neutralizing antibodies (bnAbs) against HIV for HIV treatment.
For a further discussion of the collaboration agreements, refer to Note 4, Revenue.

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Results of Operations
Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018
Royalties Royalty revenue was $16.6 million for the three months ended September 30, 2019 compared to $18.7 million for the three months ended September 30, 2018. The decrease was mainly driven by lower sales of Herceptin SC by Roche, partially offset by higher sales of RITUXAN HYCELA in the U.S. by Roche and higher sales of HyQvia by Baxalta. In general, we expect royalty revenue to decline in the near term prior to our next ENHANZE partner product launch, primarily attributable to the ongoing impact from biosimilars in Europe.
Product Sales, Net Product sales, net were as follows (in thousands):
 
 
Three Months Ended
 
 
 
 
September 30,
 
 
 
 
2019
 
2018
 
Change
Sales of bulk rHuPH20:
 
 
 
 
 
 
Janssen
 
22,014

 
1,904

 
20,110

Baxalta
 
1,777

 
&#