HALOZYME THERAPEUTICS, INC. 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 withF. Hoffmann-La Roche, Ltd. andHoffmann-La Roche, Inc. (Roche),Baxalta US Inc. andBaxalta 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) andViiV Healthcare (the global specialistHIV 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 ofHalozyme and our collaborators to develop, manufacture, secure and maintain regulatory approvals for approved products and product candidates and commercialize product candidates. 32 --------------------------------------------------------------------------------
Our 2021 and recent key events are as follows:
Janssen
•InDecember 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. •InOctober 2021 , Janssen's DARZALEX FASPRO was approved by theChina 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 approvalJanssen Pharmaceutical K.K . received inAugust 2021 fromJapan's Ministry of Health, Labour and Welfare for DARZQURO® (Daratumumab SC) for the additional indication of systemic AL amyloidosis. •InJuly 2021 , Janssen elected the target HIV reverse transcriptase, resulting in a$2.0 million milestone fee. InDecember 2021 , Janssen initiated a Phase 1 study combining Janssen's rilpivirine and ENHANZE resulting in a$2.0 million milestone payment. •InJuly 2021 , we announced that Janssen received FDA approval for DARZALEXFASPRO in combination with pomalidomide and dexamethasone (D-Pd) for patients with multiple myeloma after first or subsequent relapse. •InJune 2021 , we announced that Janssen was granted two marketing authorizations by theEuropean Commission (EC) for DARZALEX SC in two new indications in theEuropean 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. •InMay 2021 ,Janssen Pharmaceutical K.K . commenced commercial sale for the subcutaneous formulation of DARZALEX (known as DARZQURO® inJapan ) for the treatment of multiple myeloma. This followed theMarch 2021 approval fromJapan's Ministry of Health, Labour and Welfare (MHLW) which resulted in a$5.0 million milestone payment. •InJanuary 2021 , we announced that Janssen received accelerated approval from theU.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
•InJune 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
Baxalta
•In
33
--------------------------------------------------------------------------------BMS
•In
Horizon
•InMarch 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
•InMarch 2021 , theNational Institute of Allergy and Infectious Diseases' Vaccine Research Center (VRC), part ofNational 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 •InFebruary 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
Corporate
•InDecember 2021 , we entered into a credit agreement withBank 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. •InDecember 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 inDecember 2021 , we entered into an ASR agreement withBank of America to repurchase$150.0 million of common stock under the second share repurchase program. •InOctober 2021 , we repurchased 0.3 million shares of common stock for$10.3 million , completing our capital return program that began inNovember 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 . •InMarch 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. 34 --------------------------------------------------------------------------------
Results of Operations
Comparison of Years Ended
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 theU.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 inEurope related to our mature ENHANZE partner products.
Product Sales, Net - Product sales, net were as follows (in thousands):
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 %
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):
Year Ended
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 - 45,000 100 %
Horizon - 30,000 (30,000) (100) %
Roche 5,000 17,000 (12,000) (71) %
argenx - 20,000 (20,000) (100) %
BMS 25,000 12,264 12,736 104 %
Other - 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
10 %
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
35
--------------------------------------------------------------------------------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
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 endedDecember 31, 2020 , which was filed with theSEC onFebruary 23, 2021 .
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and available-for-sale marketable securities. As ofDecember 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. 36 --------------------------------------------------------------------------------
Leases
We have lease arrangements related to our office and research facilities and certain autos under non-cancelable operating leases. As ofDecember 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 ofDecember 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 ofDecember 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
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. 37 --------------------------------------------------------------------------------
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 InNovember 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 inOctober 2021 and retired the repurchased shares. InDecember 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
InMarch 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 onMarch 1st andSeptember 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 ofMarch 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 onJune 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 ofDecember 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. 38 --------------------------------------------------------------------------------
1.25% Convertible Notes due 2024
InNovember 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 onJune 1st andDecember 1st of each year, beginning onJune 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 ofDecember 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 onMarch 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 ofDecember 31, 2021 , the 2024 Convertible Notes are convertible and are classified as a current liability InJanuary 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. InMarch 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 endedDecember 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
InDecember 2021 , we entered into a credit agreement withBank 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 onDecember 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) theBank 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 39 --------------------------------------------------------------------------------
0.30% per annum based on our consolidated net leverage ratio. As of
Royalty-backed Loan
InJanuary 2016 , through our wholly-owned subsidiaryHalozyme Royalty LLC (Halozyme Royalty), we received a$150 million loan (the Royalty-backed Loan) pursuant to a credit agreement (the Credit Agreement) withBioPharma Credit Investments IV Sub, LP andAthyrium 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%. InJune 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. 40 --------------------------------------------------------------------------------
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 withU.S. generally accepted accounting principles, orU.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
Effect if Actual Results Differ
Methodology Judgment and Uncertainties From Assumptions
For collaborative agreements, we are Revenue is recognized when we
A revenue reversal will be
entitled to receive event-based determine it is probable a required in the event it is
payments subject to the collaboration milestone will be achieved. This determined that achievement of a
partner's achievement of specified assessment is based on our past milestone, previously deemed
development and regulatory experience with our collaboration probable, will not occur. This milestones. We recognize revenue when partners, market insight and
reversal may be material.
it is deemed probable that these partner communication.
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.
For collaborative agreements, royalty The amount of royalty revenue A final royalty report and
revenue is recognized in the period recognized for the quarter is associated royalty payment is
the underlying sales occur, but we do estimated using our knowledge of received approximately 60 days
not receive final royalty reports past royalty payments, market after quarter-end. If necessary,
from our collaboration partners until insight and an estimate made by a true-up is recorded at that
after we complete our financial our collaboration partners time if there is a difference
statements for a prior quarter. provided in a preliminary report. from the initial estimated
Therefore, we recognize revenue based royalty revenue recorded. To
on estimates of the royalty earned, date, the true-up entries have
which are based on preliminary not been material.
reports provided by our collaboration
partners.
For collaborative arrangements, when The inputs used in the valuation Differences in the allocation of
necessary, we perform an allocation model to determine SSP are based the transaction price between
of the upfront amount based on on estimates utilizing market delivered and undelivered
relative stand-alone selling prices data and information provided by performance obligations can
(SSP) of licenses for individual our collaboration partners. impact the timing of revenue
targets. We determine recognition but do not change the
license SSP using an income-based total revenue recognized under
valuation approach utilizing any agreement.
risk-adjusted discounted cash flow
projections.
41
--------------------------------------------------------------------------------Share-Based Payments
Effect if Actual Results Differ
Methodology Judgment and Uncertainties From Assumptions
We maintain a Stock Incentive Plan, Option-pricing models and
We do not currently believe there
which provides for share-based generally accepted valuation is a reasonable likelihood that
payment awards, including stock techniques require management to there will be a material change
options, restricted stock and make assumptions and to apply in estimates or assumptions we
performance awards. We determine the judgment to determine the fair use to determine stock-based
fair value of our stock option awards value of our awards. These compensation expense. However, if
at the date of grant using a assumptions and judgments include actual results are not consistent
Black-Scholes model. We determine the estimating the future volatility with our estimates or
fair value of our restricted stock of our stock price, expected assumptions, we may be exposed to
awards at the date of grant using the dividend yield and future changes in share-based
closing market value of our common employee stock option exercise compensation expense that could
stock on the date of grant. behaviors. Changes in these be material.
assumptions can materially affect
the fair value estimate. If actual results are not
consistent with the assumptions
Our performance awards require used, the share-based
management to make assumptions compensation expense reported in
regarding the likelihood of our financial statements may not
achieving long-term Company be representative of the actual
goals. 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 We will consider future taxable Prior to the third quarter of
for a valuation allowance against our income and tax planning 2021, we had recorded a valuation
deferred tax assets based on various strategies to periodically allowance that fully offset our
factors including our historical re-assess the need for a deferred tax assets. In 2021,
earnings, forecasts of future pretax valuation allowance. Both future based on our evaluation of
income, utilization of net operating taxable income and tax planning various factors, such as our
losses and tax credits prior to their strategies include a number of profitability and cumulative
expiration. estimates. 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.
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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