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1 Great Biotech Stock You Have Never Heard Of

By Brian Feroldi - Updated Oct 3, 2017 at 3:52PM

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Big pharma companies have thrown hundreds of millions of dollars at this small biotech. Should retail investors follow suit?

About 90% of drug candidates that enter clinical trials never make it to market. That brutal fact makes the small-cap biotech sector a tough place for investors to put their money to work.

However, one way investors can increase their odds of success is to watch where big pharma companies are putting their own money. After all, if a deep-pocketed drugmaker with massive expertise likes a small biotech enough to throw tens of millions of dollars at it, that should indicate the company is worthy of a closer look.

That's why I think retail investors should get to know Halozyme Therapeutics (HALO 1.09%). This commercial-stage biotech has developed an innovative product that makes other drugs more effective. As a result, Halozyme has been able to attract capital from a who's who of pharmaceutical giants that includes Roche, Johnson & Johnson, Eli Lilly, and Bristol-Myers Squibb.

Halozyme scientist working in a lab

Image source: Halozyme Therapeutics.

So how does the technology work and what is the opportunity ahead for investors? To answer these questions I reached out to Jim Mazzalo, Halozyme's vice president of investor relations. Below are some highlights from our conversation (which have been lightly edited for clarity).

The science

I first asked Jim to provide us an overview of the science that underpins Halozyme's technology. (Please note that ENHANZE is the name for the company's drug development platform, and that PEGPH20 is the company's lead clinical compound.)

Our ENHANZE technology and PEGPH20 are both based on Halozyme's proprietary rHuPh20 enzyme, which temporarily degrades hyaluronic acid (HA). HA is chain of natural sugars that are found throughout the body and attract water molecules to form a gel-like substance under the surface of the skin and in other areas of the body. 

While HA provides structure to the skin, it also becomes a physical barrier to the administration of large amounts of fluid or medicine under the skin. The ENHANZE technology temporarily degrades the HA, enabling medicines to be delivered subcutaneously that previously could only be delivered via an infusion directly into a vein.

With PEGPH20, the rHuPh20 enzyme is "pegylated", a process that allows it to circulate in the body longer and degrade the HA that accumulates around certain solid tumors.

In essence, Halozyme discovered that its enzyme can be used to alter certain microenvironments in the body. That allows other drugs to be absorbed more easily, which can increase their effectiveness.

Halozyme created a great video that illustrates how the rHuPh20 enzyme works, but here's a nice visual that helps to show what PEGPH20 can do to the microenvironment around a cancerous tumor. 

before and after picture of cell structure after adding PEGPH20

Image source: Halozyme Therapeutics.

Next, I asked Jim to explain the clinical benefits of the company's technology.

The potential benefit of the ENHANZE technology is a reduction in administration time and in the treatment burden for patients. For companies that partner with Halozyme, the ENHANZE technology may provide a strong differentiator for their intravenous therapies by converting them to a subcutaneous route of delivery. 

The potential benefit of PEGPH20 is to improve the efficacy of today's standard-of-care therapies. In preclinical models, Halozyme has measured an increased concentration of co-administered chemotherapies or immunotherapies in solid tumors. Data from a Phase 2 study in advanced pancreatic cancer is encouraging in its support of this hypothesis. In addition, HA may also be an immune checkpoint, inhibiting immune cells from attacking certain solids tumors. Degrading HA in the tumor may increase the immune response, as Halozyme has shown in certain preclinical models.

The opportunity 

Given these clinical benefits, Halozyme has decided to take a two-pronged approach to growing its business.

First, Halozyme reaches out to big pharma companies to convince them to co-develop drugs using the company's ENHANZE platform. Halozyme has had a lot of success with this strategy, and it now counts many big pharma companies as partners. These deals are wonderful for Halozyme because they often come with tens of millions in upfront payments (or, in some cases, more than a hundred million) plus the potential for the company to earn milestone payments and royalties down the road.

business men shaking hands and exchanging money

Image source: Getty Images.

What's more, Halozyme now offers its partners (and potential partners) proof that the ENHANZE platform actually works: The company has already crossed the finish line with a handful of products that came out of its early partnered programs.

Next, I asked Jim for an overview of the drugs that have already made it to market using its technology:

The ENHANZE technology is attractive because it has become a proven standard to enable intravenous therapies to be converted to subcutaneous administration. Halozyme has seven licensing partnerships for the ENHANZE platform, all with products in various stages of development. The marketed products are Shire's HyQvia, Roche's Herceptin SC, and Roche's Rituxan Hycela/Mabthera SC. 

What's so exciting about those seven licensing agreements is that they potentially cover 46 additional targets. This means that Halozyme has the potential to pull in a huge amount in milestone payments (and royalties) in the years ahead if the drugs work out.

So how big is this opportunity for Halozyme?

Each target has potential milestone payments that range from $37 million per target to up $160 million per target. If we consider only those products already approved, in development, or planned for development, Halozyme has the potential to realize $1.3 billion if all developmental and commercial milestones are achieved.

That's a big number, especially when compared to Halozyme's current market cap of $2.3 billion.

Drug bottles being manufactured with money rolled up in them

Image source: Getty Images.

While the ENHANZE platform provides investors with reasons to be bullish, the company has a second pillar of growth: its PEGPH20 compound. Here's what Jim had to say about it:

PEGPH20 is an attractive platform because it shows promising potential benefits for increasing the effectiveness of co-administered chemotherapies and immunotherapies, a hypothesis Halozyme continues to study in a Phase 3 clinical trial.

The trial he's referring to, called HALO-301, is studying PEGPH20 in combination with Celgene's Abraxane and gemcitabine in treating pancreatic cancer. Halozyme has high hopes because data from a phase 2 study showed that adding PEGPH20 to an Abraxane and Gemzar regimine nearly doubled progression-free survival rates in patients who displayed high levels of hyaluronan. 

What is the revenue potential of PEGPH20 if the trial is a success? While it's still a guessing game at this point, some analysts believe that peak sales of PEGPH20 could reach $1.5 billion in pancreatic cancer.

To add even more fuel to the fire, Halozyme has several phase 1 trials running that are studying PEGPH20's potential to improve treatments for lung cancer, breast cancer, and more. Needless to say, success in any of those indications could potentially move that peak sales number much higher.

Show me the money

While Halozyme's marketed products provide the company with several revenue streams, it is worth noting that the company is still losing money. That's not unexpected given Halozyme's status as a small-cap biotech and the large number of trials that it's running, but this is a certainly a risk investors need to consider. 

Thankfully, the company recently offered some good news on this front. At the start of the year, management had estimated that its yearly cash burn would be around $80 million for the full year 2017. However, thanks to the company's recently announced partnership deals with Roche and Bristol-Myers Squibb, that forecast was recently changed to a positive operating cash flow of $50 million to $60 million for the year.

Taking it all in, Halozyme expects to end 2017 with a cash balance between $380 million to $395 million. That should be enough capital to provide the company with several years of runway. 

Halozyme is a buy

Between its ENHANZE platform and PEGPH20, I think investors have plenty of reasons to bullish about Halozyme's future. I'm also encouraged by the fact that it has already proven its technology by crossing the finish line with a handful of products. That puts this company on much firmer footing than the average small-cap biotech.

While Halozyme is far from completely safe, I think that there is enough upside potential here to compensate investors for the risk. That's why the stock is a buy in my book.

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Stocks Mentioned

Halozyme Therapeutics, Inc. Stock Quote
Halozyme Therapeutics, Inc.
$44.48 (1.09%) $0.48
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$92.42 (1.37%) $1.25
Johnson & Johnson Stock Quote
Johnson & Johnson
$179.52 (1.13%) $2.01
Bristol Myers Squibb Company Stock Quote
Bristol Myers Squibb Company
$76.84 (-0.21%) $0.16
Roche Holding AG Stock Quote
Roche Holding AG
$42.01 (0.72%) $0.30
Celgene Corporation Stock Quote
Celgene Corporation
Eli Lilly and Company Stock Quote
Eli Lilly and Company
$324.71 (0.15%) $0.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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