HALOZYME THERAPEUTICS, INC. (HALO) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 the patient experience and potentially outcomes.
Our proprietary enzyme, rHuPH20, is used to facilitate the subcutaneous (“SC”) delivery of injected drugs and fluids. We license our technology to biopharmaceutical companies to collaboratively develop products that combine our ENHANZE® drug delivery technology (“ENHANZE”) with the partners’ proprietary compounds.
Our first commercially approved product Hylenex® recombinant (“Hylenex”), and our ENHANZE partners’ approved products and product candidates are based on rHuPH20, our patented recombinant human hyaluronidase enzyme. rHuPH20 is the active ingredient Hylenex®, that works by breaking down hyaluronan (“HA”), a naturally occurring carbohydrate that is a major component of the extracellular matrix of the SC space. This temporarily reduces the barrier to bulk fluid flow allowing for improved and more rapid SC delivery of high dose, high volume 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 ENHANZE. We license the ENHANZE technology to form collaborations with biopharmaceutical companies that develop or market drugs requiring or benefiting from injection via the SC 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 patient treatment burden, as a result of shorter duration of SC administration with ENHANZE compared to IV administration. ENHANZE may enable fixed-dose SC dosing compared to weight-based dosing typically required for IV administration, extend the dosing interval for drugs that are already administered subcutaneously 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 or caregiver. Lastly, certain proprietary drugs co-formulated with ENHANZE have been granted additional exclusivity, extending the patent life of the product beyond the patent expiry of the proprietary IV drug.
We currently have ENHANZE collaborations and licensing agreements with F. Hoffmann-La Roche, Ltd. and Hoffmann-La Roche, Inc. (“Roche”), Takeda Pharmaceuticals International AG and Baxalta US Inc. (“Takeda”), 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”), ViiV Healthcare (the global specialist HIV Company majority owned by GlaxoSmithKline) (“ViiV”) and Chugai Pharmaceutical Co., Ltd (“Chugai”). In addition to receiving upfront licensing fees from our ENHANZE collaborations, we are entitled to receive event and sales-based milestone payments, revenues from the sale of bulk rHuPH20 and royalties from commercial sales of approved partner products co-formulated with ENHANZE. We currently receive royalties from three of these collaborations, including royalties from sales of one product from the Takeda collaboration, three products from the Roche collaboration and one product from the Janssen collaboration. Future potential revenues from ENHANZE collaborations and from the sales and/or royalties of our approved products will depend on the ability of our partners, in some areas supported by Halozyme, to develop, manufacture, secure and maintain regulatory approvals for approved products and product candidates and commercialize product candidates.
Through our recent acquisition of Antares Pharma, Inc. (“Antares”), we also develop, manufacture and commercialize, for ourselves or with our partners, drug-device combination products using our advanced auto-injector technologies. Also as a result of our acquisition of Antares, our commercial portfolio of proprietary products includes XYOSTED®, TLANDO® and NOCDURNA®. We have commercialized auto-injector products with several pharmaceutical companies including Teva Pharmaceutical Industries, Ltd. (“Teva”), Covis Group S.a.r.l. (“Covis”) and Otter Pharmaceuticals, LLC (“Otter”). We have development programs including auto-injectors with Idorsia Pharmaceuticals Ltd. (“Idorsia”) and Pfizer.
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Our 2022 and recent key events are as follows:
Roche
•In August 2022, Roche announced that the Phase 3 IMscin001 study evaluating a subcutaneous formulation of Tecentriq® (atezolizumab) with ENHANZE met its co-primary endpoints. The study showed non-inferior levels of Tecentriq in the blood (pharmacokinetics), when injected subcutaneously, compared with IV infusion, in cancer immunotherapy-naïve patients with advanced or metastatic non-small cell lung cancer for whom prior platinum therapy has failed. The safety profile of the SC formulation was consistent with that of IV Tecentriq. In November 2022, Roche submitted a BLA to the FDA and a MAA to the EMA for SC atezolizumab with ENHANZE across all approved indications of IV Tecentriq. In January 2023, the FDA accepted the BLA with a PDUFA goal date of September 15, 2023.
•In November 2022, Roche submitted an Initial Market Application (IMA) for Mabthera SC to the Center for Drug Evaluation (CDE) in China.
•In October 2022, Roche Pharmaceuticals China announced the approval of Herceptin SC (trastuzumab injection subcutaneous with ENHANZE) in China for the treatment of patients with early-stage and metastatic HER2-positive breast cancer.
•In July 2022, Roche submitted an IMA for the fixed-dose combination of Perjeta® (pertuzumab) and Herceptin for subcutaneous injection (Phesgo™) to the CDE in China.
•In April 2022, Roche initiated a phase 3 study evaluating OCREVUS (ocrelizumab) with ENHANZE in subjects with multiple sclerosis.
argenx
•In November 2022, argenx announced the acceptance of the BLA for SC efgartigimod for the treatment of adults with generalized myasthenia gravis (gMG). In January 2023, argenx announced that FDA extended the PDUFA date to June 20, 2023.
•In November 2022, argenx announced the submission of a Marketing Authorization Application to the EMA for SC efgartigimod for the treatment of adults with gMG.
•In June 2022, argenx initiated a phase 2 study evaluating efgartigimod with ENHANZE in subjects with bullous pemphigoid.
•In March 2022, argenx announced that data from argenx’s phase 3 ADAPT-SC study evaluating SC efgartigimod (1000mg efgartigimod-PH20) for the treatment of gMG achieved the primary endpoint of total IgG reduction from baseline at day 29, demonstrating statistical non-inferiority to VYVGART® (efgartigimod alfa-fcab) intravenous IV formulation in gMG patients.
Chugai
•In September 2022, Chugai Pharmaceutical Co., Ltd. (a Member of the Roche Group) announced the submission of a NDA in Japan for the fixed-dose SC combination of pertuzumab and trastuzumab (same monoclonal antibodies as in Perjeta and Herceptin) with ENHANZE®.
•In May 2022, Chugai initiated a Phase 1 study to evaluate the pharmacokinetics, pharmacodynamics, and safety of a targeted antibody administered subcutaneously with ENHANZE.
•In March 2022, we entered into a global collaboration and license agreement with Chugai Pharmaceutical Co., Ltd. The license gives Chugai exclusive access to ENHANZE drug delivery technology for an undisclosed target. Under the terms of the agreement, we received an upfront payment of $25 million and Chugai is obligated to make future payments of up to $160 million, in the aggregate, subject to achievement of specified development, regulatory and sales-based milestones. We will also be entitled to receive royalties on sales of commercialized medicines using our ENHANZE technology.
Janssen
•In November 2022, Janssen initiated a Phase 2 study of amivantamab with ENHANZE in multiple regimens in patients with advanced or metastatic solid tumors including epidermal growth factor receptor (EGFR)-mutated non-small cell lung cancer (PALOMA-2).
•In September 2022, Janssen initiated a Phase 3 study of lazertinib and amivantamab with ENHANZE in patients with EGFR-mutated advanced or metastatic non-small cell lung cancer (PALOMA-3).
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ViiV
•In June 2022, ViiV initiated enrollment of a Phase 1 single dose escalation study in subjects with HIV to evaluate pharmacokinetics, safety and tolerability of long-acting cabotegravir administered subcutaneously with ENHANZE.
•In March 2022, ViiV initiated enrollment of a Phase 1 study to evaluate the safety and pharmacokinetics of N6LS, a broadly neutralizing antibody, administered subcutaneously with ENHANZE.
Takeda
•In December 2022, Takeda achieved a sales milestone for HYQVIA, triggering a payment of $10 million.
•In July 2022, Takeda filed a sBLA for the potential expanded use of HYQVIA for pediatric indication for primary immunodeficiency.
•In July 2022, Takeda announced positive topline results from pivotal Phase 3 trial evaluating HYQVIA® (Immunoglobulin infusion 10% (Human) with rHuPH20), for maintenance treatment of chronic inflammatory demyelinating polyradiculoneuropathy (CIDP), and Takeda confirmed its intention to submit regulatory applications in the United States and European Union in its fiscal year 2022.
BMS
•BMS plans to initiate a Phase 3 trial in early 2023 to demonstrate the drug exposure level of nivolumab and relatlimab fixed-dose combination with ENHANZE is not inferior to IV administration in participants with previously untreated metastatic or unresectable melanoma (Relativity-127).
•In August 2022, BMS initiated a Phase 3 trial to compare the drug levels of nivolumab with ENHANZE administered subcutaneously versus IV administration in participants with melanoma following complete resection (CheckMate-6GE).
•In June 2022, BMS nominated an undisclosed target resulting in a $5 million payment.
Corporate
•In January 2023, we elected to redeem on March 17, 2023 all of our remaining outstanding 1.25% convertible senior notes due 2024.
•In August 2022, we completed the sale of $720.0 million aggregate principal amount of the 2028 Convertible Senior Note. We used a portion of the net proceeds to facilitate an induced conversion of a portion of the 2024 Convertible Senior Notes. In connection with the induced conversion, we paid the holders $77.6 million in cash and issued 1.51 million shares. We also used a portion of the net proceeds to repay the $250.0 million term loan facility due 2026 and the $120.0 million revolving credit facility.
•In August 2022, we entered into an amendment to our credit agreement that increased the size of our revolving credit facility from $350 million to $575 million.
•In the third quarter of 2022, we accelerated $100 million share repurchase from 2023 into 2022. We repurchased 2.1 million shares of common stock in open market purchases for $90.2 million at an average price per share of $43.09 and entered into an ASR agreement to repurchase $109.8 million of our common stock for which we took an initial delivery 2.0 million shares. In December 2022, we finalized the ASR transaction and received an additional 0.4 million shares for a total of 2.4 million shares at an average price per share of $45.62. During 2022, we repurchased a total of 4.5 million shares for $200.0 million at an average price per share of $44.44. As of December 31, 2022, we repurchased a total of 8.4 million shares for $350.0 million at an average price per share of $41.69 under our $750 million 3-year share repurchase plan.
•In June 2022, we completed an $150 million ASR that was initiated in December of 2021, resulting in the total repurchase of 3.9 million shares at a price of $38.51 per share.
•In June 2022, we announced the commercial launch of TLANDO® (testosterone undecanoate), an oral treatment indicated for testosterone replacement therapy in adult males for conditions associated with a deficiency or absence of endogenous testosterone (primary or hypogonadotropic hypogonadism). TLANDO® was approved by the U.S. Food and Drug Administration (FDA) on March 28, 2022.
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•In May 2022, we completed the acquisition of Antares resulting in an expansion of our commercial portfolio of proprietary and partnered products and the potential for future growth through new agreements.
•In May 2022, in connection with the closing of Antares acquisition, we entered into a credit agreement that provided for a $350 million revolving credit facility and a $250 million term loan facility. The proceeds from a $120 million draw on the revolving credit facility and the $250 million term facility were used to fund a portion of the Antares acquisition, refinance Antares’ existing debt and pay fees and expenses in connection with the acquisition.
•In March 2022, we entered into an agreement for assignment and assumption of a lease with Seismic Software, Inc. pursuant to which effective January 1, 2023 we assumed Seismic’s office lease, as amended with Kilroy Realty L.P. for approximately 73,238 square feet of space in office and research facilities. The premises are intended to serve as our new headquarters which we occupied on January 1, 2023.
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Results of Operations
Comparison of Years Ended December 31, 2022 and 2021
Royalties – Royalty revenue was $360.5 million in 2022 compared to $203.9 million in 2021. The increase was mainly driven by continued sales uptake of DARZALEX FASPRO by Janssen and Phesgo by Roche in all geographies and contribution from new device royalty revenue as a result of the Antares acquisition, 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 2020 ENHANZE partner product launches, offsetting the ongoing impact from biosimilars related to our mature ENHANZE partner products.
Product Sales, Net – Product sales, net were as follows (in thousands):
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Dollar Change | Percentage Change | |||||||||||
| Sales of bulk rHuPH20 | $ | 82,084 | $ | 80,961 | $ | 1,123 | 1 | % | ||||||
| Sales of proprietary products | 72,849 | 23,263 | 49,586 | 213 | % | |||||||||
| Sales of device partnered products | 36,097 | — | 36,097 | 100 | % | |||||||||
| Total product sales, net | $ | 191,030 | $ | 104,224 | $ | 86,806 | 83 | % |
Total product sales, net increased by $86.8 million in 2022 compared to 2021, primarily due to contribution from our proprietary and device partnered products as the result of the Antares acquisition. We expect that sales of proprietary products will grow in future years as we work to expand market share in the TRT market. We expect that product sales of bulk rHuPH20 and device partnered products will fluctuate in future periods based on the needs of our partners.
Revenues Under Collaborative Agreements – Revenues under collaborative agreements were as follows (in thousands):
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 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: | ||||||||||||||
| BMS | $ | 30,000 | $ | 25,000 | $ | 5,000 | 20 | % | ||||||
| Chugai | 25,000 | — | 25,000 | 100 | % | |||||||||
| Roche | 19,000 | 5,000 | 14,000 | 280 | % | |||||||||
| Janssen | 15,000 | 59,000 | (44,000) | (75) | % | |||||||||
| Takeda | 10,000 | — | 10,000 | 100 | % | |||||||||
| ViiV | — | 45,000 | (45,000) | (100) | % | |||||||||
| Subtotal | $ | 99,000 | $ | 134,000 | $ | (35,000) | (26) | % | ||||||
| Device licensing and development revenue | 9,611 | 1,186 | 8,425 | 710 | % | |||||||||
| Total revenues under collaborative agreements | $ | 108,611 | $ | 135,186 | $ | (26,575) | (20) | % |
Revenue from license fees decreased by $35.0 million in 2022, compared to 2021 primarily due to the timing of milestones driven by partner activities. 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 periods based on our partners’ ability to meet various clinical and regulatory milestones set forth in such agreements and our ability to obtain new collaborative agreements.
Cost of Sales – Cost of 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 our proprietary and device partnered products and bulk rHuPH20. Cost of product sales were $139.3 million in 2022 compared to $81.4 million in 2021. The increase of $57.9 million in cost of product sales was mainly due to an increase in sales in our proprietary, partnered products as a result of the Antares acquisition and amortization of inventory step-up associated with purchase accounting for the Antares acquisition.
Amortization of intangibles – Amortization of intangibles expense was $43.1 million for 2022. The amortization of intangibles expense is due to the acquisition of Antares in May 2022, in which we acquired intangible assets that are amortized over their useful lives.
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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 development platform. Research and development expenses were $66.6 million in 2022 compared to $35.7 million in 2021. The increase of $30.9 million is primarily due to planned investments in ENHANZE and an increase in compensation expense related to the ongoing combined larger workforce as a result of the Antares acquisition.
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 proprietary products and alliance management and marketing support for our collaborations. SG&A expenses were $143.5 million in 2022 compared to $50.3 million in 2021. The increase of $93.2 million, was primarily due to one-time Antares Pharma acquisition costs and an increase in compensation expense related to the ongoing combined larger workforce.
Interest Expense – Interest expense was $16.9 million in 2022 compared to $7.5 million in 2021. The increase of $9.4 million was primarily due an increase in interest expense related to the 2022 term loans, the revolving credit facility and the 2028 Convertible Notes.
Income Taxes – Income tax expense was $46.8 million in 2022 compared to income tax benefit of $154.2 million in 2021. The increase in income tax expense is due to the recording of our first year of income tax expense in the current year whereas in the prior year period there was an income tax benefit due to the release of the valuation allowance.
Comparison of Years Ended December 31, 2021 and 2020
For discussion related to changes in financial condition and the results of operations for fiscal year 2021 compared to fiscal year 2020, 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, 2021, which was filed with the SEC on February 22, 2022.
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, 2022, we had cash, cash equivalents and marketable securities of $362.8 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 $1,538.5 million, with $13.5 million classified as short term. Future interest payments associated with our convertible notes total $48.9 million, with $9.3 million payable within 12 months.
Leases
We have lease arrangements related to our office and research facilities and certain autos under non-cancelable operating leases. As of December 31, 2022, we have lease payment obligations of $47.0 million, with $7.8 million payable within 12 months.
Third-party manufacturing obligations
We have contracted with third-party manufacturers for the supply of bulk rHuPH20, fill/finish of Hylenex recombinant, other proprietary products and partnered products. 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, 2022, we had third-party manufacturing obligations of $97.8 million, payable within 12 months.
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Other purchase obligations and commitments
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. We also have commitments which represents minimum royalty payments to be paid in accordance with the TLANDO exclusive license agreement with Lipocine. As of December 31, 2022, we had other purchase obligations and other commitments of $48.7 million, with $44.2 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, 2022. 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 auto-injector technology including development of new versions of rHuPH20 and auto-injector devices;
•the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
•the costs to develop and validate additional manufacturing processes of rHuPH20, auto-injectors, and testosterone replacement therapies;
•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 partners;
•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 $240.1 million in 2022 compared to $299.4 million in 2021. The $59.3 million decrease in cash provided by operations was mainly due to an increase in transaction expenses associated with the Antares acquisition and an increase in working capital spend, partially offset by an increase in royalties revenue for 2022 compared to the prior year.
Investing Activities
Net cash used in investing activities was $487.0 million in 2022 compared to net cash used in investing activities of $406.3 million in 2021. The increase in cash used in investing activities was primarily due to the acquisition of Antares, partially offset by an increase in cash from the sale of marketable securities and the sale of assets in 2022.
Financing Activities
Net cash provided by financing activities was $362.4 million in 2022, compared to net cash provided by financing activities of $77.9 million in 2021, mainly due to $702.0 million cash received from the 2028 Convertible Notes offering and $291.6 million decrease related to the 2024 Convertible Notes induced conversion, a $150.1 million decrease in repurchase of common stock and a $1.5 million increase in net proceeds from the issuance of common stock under equity incentive plans, partially offset by, $784.9 million cash received from the 2027 Convertible Notes offering in the prior year and a $69.1 million payment for the Capped Call Transactions during the current year.
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 10. Stockholders’ Equity, within the notes to the consolidated financial statements for additional information regarding our share repurchases.
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Long-Term Debt
1.00% Convertible Notes due 2028
In August 2022, we completed the sale of $720.0 million in aggregate principal amount of 1.00% Convertible Senior Notes due 2028 (the “2028 Convertible Notes” and collectively with the 2024 and the 2027 Convertible Notes the “Convertible Notes”). The net proceeds in connection with the issuance of the 2028 Convertible Notes, after deducting the initial purchasers’ fee of $18.0 million, was approximately $702.0 million. We also incurred additional debt issuance costs totaling $1.0 million. Debt issuance costs and the initial purchasers’ fee are presented as a debt discount.
The 2028 Convertible Notes pay interest semi-annually in arrears on February 15th and August 15th of each year at an annual rate of 1.00%. The 2028 Convertible Notes are general unsecured obligations and rank senior in right of payment to all indebtedness that is expressly subordinated in right of payment to the 2028 Convertible Notes, rank equally in right of payment with all existing and future liabilities that are not so subordinated, are effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness, and are structurally subordinated to all indebtedness and other liabilities (including trade payables) of our current or future subsidiaries. The 2028 Convertible Notes have a maturity date of August 15, 2028.
Holders may convert their 2028 Convertible Notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2022, 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 5 consecutive business days immediately after any 5 consecutive trading day period (such 5 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 2028 Convertible Notes; (4) if we call such notes for redemption; and (5) at any time from, and including, February 15, 2028 until the close of business on the second scheduled trading day immediately before the maturity date. As of December 31, 2022, the 2028 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 2028 Convertible Notes is 17.8517 shares of common stock per $1,000 in principal amount of 2028 Convertible Notes, equivalent to a conversion price of approximately $56.02 per share of our common stock. The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued or unpaid interest.
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
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including, September 1, 2026 until the close of business on the scheduled trading day immediately preceding the maturity date. As of December 31, 2022, 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.
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, 2022, 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 (“2021 Note Repurchases” or the “2021 Induced Conversion”). In connection with the 2021 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 2021 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, 2022. 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.
In August 2022, we completed a privately negotiated induced conversion of $77.4 million principal amount of the 2024 Convertible Notes (“2022 Note Repurchases” or the “2022 Induced Conversion”). In connection with the 2022 Induced Conversion, we paid approximately $77.6 million in cash, which includes principal and accrued interest, and issued approximately 1.51 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 2022 Induced Conversion, we recorded $2.7 million in induced conversion expense which is included in other income (expense) of the consolidated statements of income. 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.
In January 2023, we issued a notice for the redemption of 2024 Convertible Notes, and we expect to make cash payment of $13.5 million to effect the redemption in March 2023.
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Revolving Credit and Term Loan Facilities (May 2022)
In May 2022, in connection with the closing of the Antares acquisition, we entered into a credit agreement with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lenders and L/C Issuers party thereto (the “2022 Credit Agreement), evidencing a credit facility (the “2022 Facility”) that provides for (i) a $350 million revolving credit facility (the “Revolving Credit Facility”) and (ii) a $250 million term loan facility (the “Term Facility”). The proceeds from a $120 million draw on the Revolving Credit Facility and the $250 million Term Facility were used to fund a portion of the Antares acquisition, refinance Antares’ existing debt and pay fees and expenses in connection with the acquisition. The 2022 Credit Agreement contains an expansion feature, which allows us, subject to certain conditions, to increase the aggregate principal amount of the 2022 Facility, 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 2022 Credit Agreement. The 2022 Facility will mature on November 30, 2026 unless either the Revolving Credit Facility or the Term Facility is extended prior to such date in accordance with the 2022 Credit Agreement.
The Term Facility requires quarterly scheduled repayments of the term loans in each of the first, second, third and fourth years following the Closing in annual amounts equal to 2.50%, 5.00%, 7.50% and 10.00% of the initial principal amount of the term loans, respectively. The term loans are also subject to mandatory prepayments from the proceeds of certain asset sales, subject to our right to reinvest the proceeds thereof.
Borrowings under the 2022 Facility bear interest, at our option, at a rate equal to an applicable margin plus: (a) the applicable Term Secured Overnight Financing Rate (SOFR) (which includes a SOFR adjustment of 0.10%), 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 Term SOFR rate for an interest period of one month plus 1.10%, and (4) 1.00%. The margin for the 2022 Facility ranges, based on our consolidated total net leverage ratio, from 0.25% to 1.25% in the case of base rate loans and from 1.25% to 2.25% in the case of Term SOFR rate loans. In addition to paying interest on the 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 0.35% per annum based on our consolidated net leverage ratio.
In August 2022, we entered into Amendment No. 1 to the Credit Agreement (the “Amendment”) among the Company, the Guarantors (as defined in the Credit Agreement), each L/C Issuer from time to time party thereto, Bank of America, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”) and swing line lender (in such capacity, the “Swing Line Lender”), and each lender party thereto, which amends the Credit Agreement dated as of May 24, 2022 (the “Credit Agreement”) among the Company, the Guarantors, the Administrative Agent, the Swing Line Lender, each Lender and the L/C Issuers. The Amendment, among other things, increases the size of the revolving credit facility from $350 million to $575 million. The terms of the revolving credit facility are otherwise unchanged. Concurrently with the entry into the Amendment, the Company repaid the entire outstanding term loan facility and repaid all outstanding loans under the revolving credit facility under the Credit Agreement.
As of December 31, 2022, the revolving credit facility was undrawn.
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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.
| 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. |
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| 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, 2022 would have affected pre-tax earnings by approximately $2.4 million in 2022. | ||
| Business Combinations | ||||
| In connection with the Antares acquisition, as disclosed in Note 3, the acquisition of Antares has been accounted for using the acquisition method of accounting in accordance with ASC 805, under the acquisition method of accounting we recognized the identifiable assets acquired and the liabilities assumed at their fair values as of the date of acquisition. We measured the goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. | Significant estimates and assumptions used in estimating the fair value of acquired technology and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. | If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate amortization expense. If our estimates of the economic lives change, amortization expenses could be accelerated or slowed. | ||
| Contingent Liability | ||||
| A contingent liability with a value of $15.7 million was assumed related to TLANDO. The fair value was measured using the income approach, specifically the probability weighted expected return method for the development milestone payments and the option pricing methodology using the Monte Carlo simulation for commercial milestone payments and royalty payments. We remeasure the fair value of the contingent liability on a quarterly basis. | The inputs used in the Monte Carlo simulation include significant estimates and assumptions which include forecasted revenues, cost of debt, risk free rate, weighted average cost of capital, revenue market price risk and revenue volatility. Estimates and assumptions used in the income approach include the probability of achieving certain milestones and a discount rate. | If there is a change in the inputs and assumptions used to fair value the contingent liability, that could have a material impact on our consolidated balance sheet and statements of income. |
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| Goodwill and Intangibles | ||||
|---|---|---|---|---|
| We estimate the fair value of acquired intangible assets that have finite useful lives whenever an event or change in circumstances indicates that the carrying value of the asset may not be recoverable. We test for potential impairment of goodwill and other intangible assets that have indefinite useful lives annually in the second fiscal quarter or whenever indicators of impairment arise. | Significant estimates and assumptions used in estimating the fair value of the intangible assets. | A change in any of the estimates and assumptions used may result an impairment charge in our consolidated statement of income. |
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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