# HALOZYME THERAPEUTICS, INC. (HALO) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HALOZYME THERAPEUTICS, INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1159036/000115903622000014/halo-20211231.htm
Accession: 0001159036-22-000014
Filing date: 2022-02-22
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HALO/
All MD&A years: /company/HALO/mda/
Next year: /company/HALO/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the Part I, Item 1A, Risks Factors, and elsewhere in this Annual Report. References to “Notes” are Notes included in our Notes to Consolidated Financial Statements.

Overview

Halozyme Therapeutics, Inc. is a biopharma technology platform company that provides innovative and disruptive solutions with the goal of improving patient experience and outcomes. Our proprietary enzyme, rHuPH20, is used to facilitate the delivery of injected drugs and fluids. We license our technology to biopharmaceutical companies to collaboratively develop products that combine our ENHANZE® drug delivery 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 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. This temporarily increases dispersion and absorption allowing for 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. In the development of proprietary intravenous (IV) drugs combined with our ENHANZE technology, data have been generated supporting the potential for ENHANZE to reduce treatment burden, as a result of shorter duration of subcutaneous (SC) administration. ENHANZE may enable fixed-dose SC dosing compared to weight-based dosing required for IV administration, and potentially allow for lower rates of infusion related reactions. ENHANZE may enable more flexible treatment options such as home administration by a healthcare professional or potentially the patient. Lastly, certain proprietary drugs co-formulated with ENHANZE have been granted additional exclusivity, extending the patent life of the product beyond the one of the proprietary IV drug.

We currently have ENHANZE collaborations with F. Hoffmann-La Roche, Ltd. and Hoffmann-La Roche, Inc. (Roche), Baxalta US Inc. and Baxalta GmbH (members of the Takeda group of companies) (Baxalta), Pfizer Inc. (Pfizer), Janssen Biotech, Inc. (Janssen), AbbVie, Inc. (AbbVie), Eli Lilly and Company (Lilly), Bristol-Myers Squibb Company (BMS), Alexion Pharma International Operations Unlimited Company (an indirect wholly owned subsidiary of AstraZeneca PLC) (Alexion), argenx BVBA (argenx), Horizon Therapeutics plc. (Horizon) and ViiV Healthcare (the global specialist HIV Company majority owned by GlaxoSmithKline) (ViiV). We receive royalties from three of these collaborations, including royalties from sales of one product from the Baxalta collaboration, three products from the Roche collaboration and one product from Janssen collaboration. Future potential revenues from royalties and fees from ENHANZE collaborations and the sales and/or royalties of our approved products 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.

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Our 2021 and recent key events are as follows:

Janssen

•In December 2021, Janssen received FDA approval for DARZALEX FASPRO in combination with Kyprolis® (carfilzomib) and dexamethasone for patients with relapsed or refractory multiple myeloma who have received one to three prior lines of therapy.

•In October 2021, Janssen’s DARZALEX FASPRO was approved by the China National Medical Products Administration (NMPA) for the treatment of primary light chain amyloidosis, in combination with bortezomib, cyclophosphamide and dexamethasone (D-VCd) in newly diagnosed patients. This followed a similar approval Janssen Pharmaceutical K.K. received in August 2021 from Japan’s Ministry of Health, Labour and Welfare for DARZQURO® (Daratumumab SC) for the additional indication of systemic AL amyloidosis.

•In July 2021, Janssen elected the target HIV reverse transcriptase, resulting in a $2.0 million milestone fee. In December 2021, Janssen initiated a Phase 1 study combining Janssen’s rilpivirine and ENHANZE resulting in a $2.0 million milestone payment.

•In July 2021, we announced that Janssen received FDA approval for DARZALEX FASPRO in combination with pomalidomide and dexamethasone (D-Pd) for patients with multiple myeloma after first or subsequent relapse.

•In June 2021, we announced that Janssen was granted two marketing authorizations by the European Commission (EC) for DARZALEX SC in two new indications in the European Union. The first authorization is for use in combination with D-VCd in newly diagnosed adult patients with systemic light chain (AL) amyloidosis. The second authorization is for use in combination with D-Pd in adult patients with relapsed or refractory multiple myeloma.

•In May 2021, Janssen Pharmaceutical K.K. commenced commercial sale for the subcutaneous formulation of DARZALEX (known as DARZQURO® in Japan) for the treatment of multiple myeloma. This followed the March 2021 approval from Japan's Ministry of Health, Labour and Welfare (MHLW) which resulted in a $5.0 million milestone payment.

•In January 2021, we announced that Janssen received accelerated approval from the U.S Food and Drug Administration (FDA) for DARZALEX FASPRO (daratumumab hyaluronidase human-fihj) in combination with D-VCd for the treatment of adult patients with newly diagnosed light chain (AL) amyloidosis. AL amyloidosis is a rare and potentially fatal disease that develops when plasma cells in the bone marrow generate abnormal light chains, which form amyloid deposits in vital organs and lead to organ deterioration. There were no approved therapies for these patients prior to DARZALEX FASPRO.

ViiV

•In December 2021, ViiV initiated enrollment of a Phase 1 study arm to evaluate cabotegravir administered subcutaneously with ENHANZE.

•In June 2021, we entered into a global collaboration and license agreement with ViiV. The license gives ViiV exclusive access to our ENHANZE technology for four specific small and large molecule targets for the treatment and prevention of HIV. These targets are integrase inhibitors, reverse transcriptase inhibitors limited to nucleoside reverse transcriptase inhibitors (NRTI) and nucleoside reverse transcriptase translocation inhibitors (NRTTIs), capsid inhibitors and broadly neutralizing monoclonal antibodies (bNAbs), that bind to the gp120 CD4 binding site. Under the terms of the agreement, we received an upfront payment of $40 million and ViiV is obligated to make potential future payments of up to $175 million in development and commercial milestones per target, subject to achievement of specified development and commercial milestones, including certain specified sales milestones. We will also be entitled to receive mid-single digit royalties on sales of commercialized medicines using the ENHANZE technology.

Roche

•In November 2021, Roche initiated a Phase 1 SC study with an undisclosed exclusive ENHANZE target.

Baxalta

•In October 2021, Baxalta initiated a Phase 1 single-dose, single-center, open-label, three-arm study to assess the tolerability and safety of immune globulin subcutaneous (human), 20% solution with ENHANZE (TAK-881) at various infusion rates in healthy adult subjects.

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BMS

•In June 2021, BMS initiated a Phase 3 study of nivolumab using ENHANZE® technology for patients with advanced or metastatic clear cell renal cell carcinoma, resulting in a $25.0 million milestone payment.

Horizon

•In March 2021, Horizon completed dosing in a Phase 1 study exploring the SC formulation of TEPEZZA for the treatment of thyroid eye disease, a progressive and vision-threatening rare autoimmune disease. The trial is a small, single-dose Phase 1 pharmacokinetic trial which includes evaluating the use of ENHANZE technology for an SC formulation.

NIH CRADA

•In March 2021, the National Institute of Allergy and Infectious Diseases’ Vaccine Research Center (VRC), part of National Institute of Health (NIH), dosed the first patient with N6LS, a broadly neutralizing antibody against HIV, using ENHANZE technology in a Phase 1 study to optimize subcutaneous administration of N6LS for HIV treatment.

argenx

•In February 2021, argenx initiated a Phase 3 study of ARGX-113 using ENHANZE technology for patients with chronic inflammatory demyelinating polyneuropathy (CIDP) and initiated a Phase 3 study of ARGX-113 using ENHANZE technology in myasthenia gravis (MG), an autoimmune disorder of the musculoskeletal system caused by IgG autoantibodies.

•In January 2021, argenx initiated a Phase 3 study of ARGX-113 utilizing ENHANZE in pemphigus vulgaris (PV), a rare autoimmune disease that causes painful blisters on the skin and mucous membranes.

Corporate

•In December 2021, we entered into a credit agreement with Bank of America that provides for secured revolving loans and letters of credit in an aggregate amount of up to $75.0 million. The credit agreement contains an expansion feature, which allows us, subject to certain conditions, to increase the aggregate principal amount of the facility to $250.0 million, provided we remain in compliance with underlying financial covenants on a pro forma basis including the consolidated interest coverage ratio and the consolidated net leverage ratio covenants set forth in the credit agreement.

•In December 2021, we announced our second share repurchase program, to repurchase up to $750.0 million of our outstanding common stock over a three-year period. Also in December 2021, we entered into an ASR agreement with Bank of America to repurchase $150.0 million of common stock under the second share repurchase program.

•In October 2021, we repurchased 0.3 million shares of common stock for $10.3 million, completing our capital return program that began in November 2019 to repurchase up to $550.0 million of outstanding common stock over a three-year period. Under the program we repurchased a total of 22.3 million shares for $550.0 million at an average price per share of $24.72.

•In March 2021, we completed the sale of $805.0 million aggregate principal amount of the 2027 Convertible Senior Notes. We used a portion of the net proceeds to facilitate an induced conversion of 80% of the 2024 Convertible Senior Notes. In connection with the induced conversion, we paid the holders $370.2 million in cash and issued 9.08 million shares.

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Results of Operations

Comparison of Years Ended December 31, 2021 and 2020

Royalties – Royalty revenue was $203.9 million in 2021 compared to $88.6 million in 2020. The increase was mainly driven by sales of DARZALEX FASPRO by Janssen following the product launches in the U.S. and EU in the second quarter of 2020 and sales of Phesgo by Roche following the product launch in the US in the third quarter of 2020 and subsequently in the EU, partially offset by slightly lower sales of Herceptin SC and MabThera SC by Roche. We expect royalty revenue to continue to grow as a result of our recent ENHANZE partner product launches, offsetting the ongoing impact from biosimilars in Europe related to our mature ENHANZE partner products.

Product Sales, Net – Product sales, net were as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","2020","","Dollar Change","Percentage Change"],["Sales of bulk rHuPH20","","$","80,961","","","$","38,956","","","$","42,005","","108","%"],["Sales of Hylenex","","23,263","","","17,031","","","6,232","","37","%"],["Total product sales, net","","$","104,224","","","$","55,987","","","$","48,237","","86","%"]]
[[/GREPCENT_TABLE]]

Product sales, net increased by $48.2 million in 2021 compared to 2020, primarily due to higher sales of rHuPH20 to our partners Janssen and Roche. We expect that product sales of bulk rHuPH20 will fluctuate in future periods based on the needs of our collaborators.

The increase in Product sales, net was also driven in part by an increase in sales of Hylenex, due to an increase in sales in 2021 following a temporary interruption of elective surgeries in 2020. In March 2020, the US Surgeon General advised hospitals to cancel elective surgeries due to COVID-19. Hylenex is used in cataract surgery and other ophthalmologic surgeries, and therefore the advisory resulted in a decrease in sales of Hylenex in the second quarter of 2020. Most states resumed elective surgeries in April and May of 2020 which supported an increase in sales in the second half of 2020 and into 2021. We expect that future product sales of Hylenex to be relatively flat as we experience modest market growth offset by a reduction in COVID-19 backlog.

Revenues Under Collaborative Agreements – Revenues under collaborative agreements were as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","2020","","Dollar Change","Percentage Change"],["Upfront license fees, license fees for the election of additional targets, event-based payments, license maintenance fees and amortization of deferred upfront and other license fees:"],["Janssen","","$","59,000","","","$","42,000","","","$","17,000","","40","%"],["ViiV","","45,000","","","\u2014","","","45,000","","100","%"],["Horizon","","\u2014","","","30,000","","","(30,000)","","(100)","%"],["Roche","","5,000","","","17,000","","","(12,000)","","(71)","%"],["argenx","","\u2014","","","20,000","","","(20,000)","","(100)","%"],["BMS","","25,000","","","12,264","","","12,736","","104","%"],["Other","","\u2014","","","500","","","(500)","","(100)","%"],["Subtotal","","$","134,000","","","$","121,764","","","$","12,236","","10","%"],["Reimbursements for research and development services:","","1,186","","","1,247","","","(61)","","(5)","%"],["Total revenues under collaborative agreements","","$","135,186","","","$","123,011","","","$","12,175","","10","%"]]
[[/GREPCENT_TABLE]]

Revenue from license fees increased $12.2 million in 2021, compared to 2020 mainly due to the recognition of an upfront license fee related to the ViiV collaboration and development and commercial milestones related to the ViiV, BMS and Janssen collaborations in the current year, partially offset by Horizon, argenx and Roche. Revenue from upfront licenses fees, license fees for the election of additional targets, license maintenance fees and other license fees and event-based payments vary from period to period based on our ENHANZE collaboration activity. We expect these revenues to continue to fluctuate in future

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periods based on our collaborators’ ability to meet various clinical and regulatory milestones set forth in such agreements and our ability to obtain new collaborative agreements.

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. Cost of product sales were $81.4 million in 2021 compared to $43.4 million in 2020. The increase of $38.0 million in cost of product sales was mainly due to an increase in aggregate sales of bulk rHuPH20 to Janssen and Roche and an increase in sales of Hylenex.

Research and Development – Research and development expenses consist of external costs, salaries and benefits and allocation of facilities and other overhead expenses related to research manufacturing, preclinical and regulatory activities related to our ENHANZE collaborations and our rHuPH20 platform. Research and development expenses were $35.7 million in 2021 compared to $34.2 million in 2020. The increase of $1.5 million is primarily due to an increase in costs to support additional ENHANZE targets entering clinical development, partially offset by one time costs in the prior year related to the discontinuation of our development activities for PEGPH20 and closure of our oncology operations.

Selling, General and Administrative – Selling, general and administrative (SG&A) expenses consist primarily of salaries and related costs for personnel in executive, selling and administrative functions as well as professional fees for legal and accounting, business development, commercial operations support for Hylenex and alliance management and marketing support for ENHANZE. SG&A expenses were $50.3 million in 2021 compared to $45.7 million in 2020. The increase of $4.6 million, or 10%, was primarily due to an increase in compensation expense, including share-based compensation, for personnel to support additional ENHANZE targets entering clinical development, partially offset by one time costs in the prior year related to the discontinuation of our development activities for PEGPH20 and closure of our oncology operations.

Interest Expense – Interest expense was $7.5 million in 2021 compared to $20.4 million in 2020. The decrease of $12.9 million was primarily due to a decrease in interest expense related to the Convertible Notes as the non-cash interest expense associated with the amortization of the equity component of the Convertible Notes is eliminated upon adoption of ASU 2020-06 and discontinuation in interest expense for the Royalty-backed Loan following the repayment of that obligation.

Income Taxes – Income tax benefit was $154.2 million in 2021 compared to income tax expense of $0.2 million in 2020. The increase in income tax benefit is due to the release of the valuation allowance in the current year.

Comparison of Years Ended December 31, 2020 and 2019

For discussion related to changes in financial condition and the results of operations for fiscal year 2020 compared to fiscal year 2019, refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed with the SEC on February 23, 2021.

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash, cash equivalents and available-for-sale marketable securities. As of December 31, 2021, we had cash, cash equivalents and marketable securities of $740.9 million. We believe that our current cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next twelve months. We expect to fund our operations going forward with existing cash resources, anticipated revenues from our existing collaborations and cash that we may raise through future transactions. We may raise cash through any one of the following financing vehicles: (i) new collaborative agreements; (ii) expansions or revisions to existing collaborative relationships; (iii) private financings; (iv) other equity or debt financings; (v) monetizing assets; and/or (vi) the public offering of securities.

We may, in the future, draw on our existing line of credit, offer and sell additional equity, debt securities and warrants to purchase any of such securities, either individually or in units to raise capital to raise funds for additional working capital, capital expenditures, share repurchases, acquisitions or for other general corporate purposes. Our material cash requirements include the following contractual and other obligations.

Long-term debt

Our long-term debt consists of convertible notes. The aggregate principal amount of our convertible notes is $895.9 million, with $90.9 million classified as short term. Future interest payments associated with our convertible notes total $11.5 million, with $3.1 million payable within 12 months.

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Leases

We have lease arrangements related to our office and research facilities and certain autos under non-cancelable operating leases. As of December 31, 2021, we have lease payment obligations of $2.9 million, with $2.7 million payable within 12 months.

Third-party manufacturing obligations

We have contracted with third-party manufacturers for the supply of bulk rHuPH20 and fill/finish of Hylenex recombinant. Under these agreements, we are required to purchase certain quantities each year during the terms of the agreements. Contractual obligations for purchases of goods or services include agreements that are enforceable and legally binding to us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. For obligations with cancellation provisions, the amounts disclosed here were limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee. As of December 31, 2021, we had third-party manufacturing obligations of $84.6 million, payable within 12 months.

Other purchase obligations

Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services. As of December 31, 2021, we had other purchase obligations of $1.4 million, with $1.1 million payable within 12 months.

The expected timing of payments of the obligations above is estimated based on information we have as of December 31, 2021. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.

Our future capital uses and requirements and anticipated sources of funds to satisfy these requirements depend on numerous forward-looking factors. These factors may include, but are not limited to, the following:

•the costs of investments in our ENHANZE platform and development of new versions of rHuPH20;

•the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

•the costs to develop and validate additional manufacturers of rHuPH20;

•the costs to expand the number of collaboration partner products developed and launched by partners including costs to scale-up manufacturing;

•the amount of royalties and milestones from our collaborators;

•the effect of competing technological and market developments;

•the terms and timing of any collaborative, licensing and other arrangements that we may establish; and

•the extent to which we acquire or in-license new products, technologies or businesses and invest in development.

Cash Flows

Operating Activities

Net cash provided by operations was $299.4 million in 2021 compared to $55.5 million in 2020. The $243.9 million increase in cash provided by operations was mainly due to an increase in collaboration partner license fees, royalties and product sales and a decrease in working capital spend for 2021 compared to the prior year.

Investing Activities

Net cash used in by investing activities was $406.3 million in 2021 compared to net cash provided by investing activities $78.4 million in 2020. The increase in cash used in investing activities was primarily due to an increase in purchase of marketable securities in 2021.

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Financing Activities

Net cash provided by financing activities was $77.9 million in 2021, compared to net cash used in financing activities of $106.3 million in 2020, mainly due to $784.9 million cash received from the 2027 Convertible Notes offering and $19.6 million cash payment for the Royalty-backed loan in the prior year, partially offset by $369.1 million related to the induced conversion of the 2024 Convertible Notes, a $199.9 million increase in repurchase of common stock and a $50.9 million decrease in net proceeds from the issuance of common stock under equity incentive plans.

Share Repurchases

In November 2019, our Board of Directors approved a $550 million share repurchase program, pursuant to which we could repurchase our issued and outstanding shares of common stock from time to time. We completed the share repurchase program in October 2021 and retired the repurchased shares. In December 2021, we announced our second share repurchase program, to repurchase up to $750.0 million of our outstanding common stock over a three-year period. See Note 8. Stockholders’ Equity, within the notes to the consolidated financial statements for additional information regarding our share repurchases.

Long-Term Debt

0.25% Convertible Notes due 2027

In March 2021, we completed the sale of $805.0 million in aggregate principal amount of 0.25% Convertible Senior Notes due 2027 (the “2027 Convertible Notes” and collectively with the 2024 Convertible Notes the “Convertible Notes”). The net proceeds in connection with the 2027 Convertible Notes, after deducting the initial purchasers’ fee of $20.1 million, was approximately $784.9 million. We also incurred additional debt issuance costs totaling $0.4 million. Debt issuance costs and the initial purchasers’ fee are presented as a debt discount.

The 2027 Convertible Notes pay interest semi-annually in arrears on March 1st and September 1st of each year at an annual rate of 0.25%. The 2027 Convertible Notes are general unsecured obligations and will rank senior in right of payment to all indebtedness that is expressly subordinated in right of payment to the 2027 Convertible Notes, will rank equally in right of payment with all existing and future liabilities that are not so subordinated, will be effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness and will be structurally subordinated to all indebtedness and other liabilities (including trade payables) of our current or future subsidiaries. The 2027 Convertible Notes have a maturity date of March 1, 2027.

Holders may convert their 2027 Convertible Notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021, if the last reported sale price per share of common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on our common stock, as described in the offering memorandum for the 2027 Convertible Notes; (4) if we call such notes for redemption; and (5) at any time from, and including, September 1, 2026 until the close of business on the scheduled trading day immediately before the maturity date. The Notes will be convertible, regardless of the foregoing circumstances, at any time from, and including, September 1, 2026 until the close of business on the scheduled trading day immediately preceding the maturity date. As of December 31, 2021, the 2027 Convertible Notes are not convertible.

Upon conversion, we will pay cash for the settlement of principal and for the premium, if applicable, we will pay cash, deliver shares of common stock or a combination of cash and shares of common stock, at our election. The initial conversion rate for the 2027 Convertible Notes is 12.9576 shares of common stock per $1,000 in principal amount of 2027 Convertible Notes, equivalent to a conversion price of approximately $77.17 per share of our common stock. The conversion rate is subject to adjustment.

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1.25% Convertible Notes due 2024

In November 2019, we completed the sale of $460.0 million in aggregate principal amount of 1.25% Convertible Senior Notes due 2024 (“2024 Convertible Notes”). The net proceeds in connection with 2024 Convertible Notes, after deducting the initial purchases’ fee of $12.7 million, was approximately $447.3 million. We also incurred debt issuance cost totaling $0.3 million. Debt issuance costs and the initial purchasers’ fee are presented as a debt discount.

The 2024 Convertible Notes pay interest semi-annually in arrears on June 1st and December 1st of each year, beginning on June 1, 2020, at an annual rate of 1.25%. The 2024 Convertible Notes are general unsecured obligations and will rank senior in right of payment to all indebtedness that is expressly subordinated in right of payment to the 2024 Convertible Notes, will rank equally in right of payment with all existing and future liabilities that are not so subordinated, will be effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness and will be structurally subordinated to all indebtedness and other liabilities (including trade payables) of the our current or future subsidiaries. The 2024 Convertible Notes have a maturity date of December 1, 2024.

Holders may convert their 2024 Convertible Notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2020, if the last reported sale price per share of common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on our common stock, as described in the offering memorandum for the 2024 Convertible Notes; (4) if we call such notes for redemption; and (5) at any time from, and including, June 1, 2024 until the close of business on the scheduled trading day immediately before the maturity date. As of December 31, 2021, the 2024 Convertible Notes are convertible and are classified as a current liability

In January 2021, we notified the note holders of our irrevocable election to settle the principal of the 2024 Convertible Notes in cash and for the premium, if applicable, to deliver shares of common stock. The conversion rate for the 2024 Convertible Notes will be 41.9208 shares of common stock per $1,000 in principal amount of 2024 Convertible Notes, equivalent to a conversion price of approximately $23.85 per share of our common stock. The conversion rate is subject to adjustment.

In March 2021, we completed a privately negotiated induced conversion of $369.1 million principal amount of the 2024 Convertible Notes (“Note Repurchases” or the “Induced Conversion”). In connection with the Induced Conversion, we paid approximately $370.2 million in cash, which includes principal and accrued interest, and issued approximately 9.08 million shares of our common stock representing the intrinsic value based on the contractual conversion rate and incremental shares as an inducement for conversion. As a result of the Induced Conversion, we recorded $21.0 million in induced conversion expense which is included in Other income (expense) of the Condensed Consolidated Statements of Operations for the twelve months ended December 31, 2021. The induced conversion expense represents the fair value of the common stock issued upon conversion in excess of the common stock issuable under the original terms of the 2024 Convertible Notes.

Revolving Credit Facility

In December 2021, we entered into a credit agreement with Bank of America and the other lenders party thereto (the “Credit Agreement”) evidencing a revolving credit facility (the “Facility”) that provides for secured revolving loans and letters of credit in an aggregate amount of up to $75.0 million. The Credit Agreement contains an expansion feature, which allows us, subject to certain conditions, to increase the aggregate principal amount of the Facility to $250.0 million, provided we remain in compliance with underlying financial covenants on a pro forma basis including the consolidated interest coverage ratio and the consolidated net leverage ratio covenants set forth in the Credit Agreement. The facility matures on December 23, 2024.

Borrowings under the Facility bear interest, at our option, at a rate equal to an applicable margin plus: (a) the applicable Bloomberg Short-Term Bank Yield Index rate (or the “BSBY Rate,” as defined in the Credit Agreement), or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the Bank of America prime rate, (3) the BSBY Rate plus 1.00%, and (4) 1.00%. The margin for the Facility ranges, based on our consolidated total net leverage ratio, from 0.00% to 0.75% in the case of base rate loans and from 1.00% to 1.75% in the case of BSBY Rate loans. In addition to paying interest on any outstanding principal under the Facility, we will pay (i) a commitment fee in respect of the unutilized commitments thereunder and (ii) customary letter of credit fees and agency fees. The commitment fees range from 0.15% to

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0.30% per annum based on our consolidated net leverage ratio. As of December 31, 2021, the revolving credit facility was undrawn.

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 were used to repay the principal and interest on the loan (the Royalty Payments). The Royalty-backed Loan bore interest at a per annum rate of 8.75% plus the three-month LIBOR rate. The three-month LIBOR rate was subject to a floor of 0.7% and a cap of 1.5%. In June 2020, we paid the full remaining balance and final payment of $2.9 million thereby satisfying and discharging all obligations under, and terminating, the Royalty-backed Loan.

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Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are outlined in Note 2 to the Consolidated Financial Statements included in the Form 10-K. We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

[[GREPCENT_TABLE]]
[["Revenue Recognition"],["Methodology","","Judgment and Uncertainties","","Effect if Actual Results Differ From Assumptions"],["For collaborative agreements, we are entitled to receive event-based payments subject to the collaboration partner's achievement of specified development and regulatory milestones. We recognize revenue when it is deemed probable that these milestones will be achieved, which could be in a period prior to its actual occurrence. At the end of each reporting period, we re-evaluate the probability of achievement of such milestones, and if necessary, adjust our estimate of the overall transaction price.","","Revenue is recognized when we determine it is probable a milestone will be achieved. This assessment is based on our past experience with our collaboration partners, market insight and partner communication.","","A revenue reversal will be required in the event it is determined that achievement of a milestone, previously deemed probable, will not occur. This reversal may be material."],["For collaborative agreements, royalty revenue is recognized in the period the underlying sales occur, but 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.","","The amount of royalty revenue recognized for the quarter is estimated using our knowledge of past royalty payments, market insight and an estimate made by our collaboration partners provided in a preliminary report.","","A final royalty report and associated royalty payment is received approximately 60 days after quarter-end. If necessary, a true-up is recorded at that time if there is a difference from the initial estimated royalty revenue recorded. To date, the true-up entries have not been material."],["For collaborative arrangements, when necessary, we perform an allocation of the upfront amount based on relative stand-alone selling prices (SSP) of licenses for individual targets. We determine license SSP using an income-based valuation approach utilizing risk-adjusted discounted cash flow projections.","","The inputs used in the valuation model to determine SSP are based on estimates utilizing market data and information provided by our collaboration partners.","","Differences in the allocation of the transaction price between delivered and undelivered performance obligations can impact the timing of revenue recognition but do not change the total revenue recognized under any agreement."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["Share-Based Payments"],["Methodology","","Judgment and Uncertainties","","Effect if Actual Results Differ From Assumptions"],["We maintain a Stock Incentive Plan, which provides for share-based payment awards, including stock options, restricted stock and performance awards. We determine the fair value of our stock option awards at the date of grant using a Black-Scholes model. We determine the fair value of our restricted stock awards at the date of grant using the closing market value of our common stock on the date of grant.","","Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of our stock price, expected dividend yield and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimate. Our performance awards require management to make assumptions regarding the likelihood of achieving long-term Company goals.","","We do not currently believe there is a reasonable likelihood that there will be a material change in estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in share-based compensation expense that could be material. If actual results are not consistent with the assumptions used, the share-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the share-based compensation. A 10% change in our share-based compensation expense for the year ended December 31, 2021 would have affected pre-tax earnings by approximately $2.1 million in 2021."],["Valuation Allowance"],["We periodically re-assess the need for a valuation allowance against our deferred tax assets based on various factors including our historical earnings, forecasts of future pretax income, utilization of net operating losses and tax credits prior to their expiration.","","We will consider future taxable income and tax planning strategies to periodically re-assess the need for a valuation allowance. Both future taxable income and tax planning strategies include a number of estimates.","","Prior to the third quarter of 2021, we had recorded a valuation allowance that fully offset our deferred tax assets. In 2021, based on our evaluation of various factors, such as our profitability and cumulative pretax income as well as forecasted income growth, we released the valuation allowance against federal and state deferred tax assets. Release of the valuation allowance resulted in a net benefit from income taxes of $154.2 million. We will periodically re-assess the need for a valuation allowance against our deferred tax assets."]]
[[/GREPCENT_TABLE]]

Recent Accounting Pronouncements

Refer to Note 2, Summary of Significant Accounting Policies, of our consolidated financial statements for a discussion of recent accounting pronouncements and their effect, if any, on us.

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