A Look Back at Halozyme's Volatile but Rewarding 2013

Halozyme Therapeutics (HALO 2.19%) has had an incredible year, rallying more than 100% since the beginning of 2013.

However, the ride up has been a very bumpy one, due to two major developments involving its top collaborators ViroPharma (NASDAQ: VPHM) (recently acquired by Shire (NASDAQ: SHPG)) and Roche (RHHBY 1.20%).

Let's take a look back at Halozyme's volatile but rewarding 2013, and see if we can expect the stock to continue climbing next year.

Turning IVs into regular shots
Halozyme produces human enzymes which help carry drugs into the bloodstream. Its top product, rHuPH20 (branded as Enhanze), is an enzyme that temporarily breaks down hyaluronic acid (HA), a natural substance in the extracellular matrix in the skin and cartilage.

With the help of rHuPH20, intravenous drugs can be converted into subcutaneous ones, which are much easier and faster to administer. That game-changing quality of Halozyme's technology has attracted some major collaborators, such as Roche, Pfizer (PFE 2.40%), Baxter (BAX -0.45%), ViroPharma, and Intrexon.

The majority of Halozyme's revenue has traditionally been generated by research services reimbursements and milestone payments from its collaborators. Over the past year, that top line growth has been very impressive, although it is still far from being profitable.

Source: Halozyme quarterly earnings reports.

Halozyme's consistent double and triple-digit sales growth throughout the year has fueled the stock's big rally throughout 2013. However, considering that Halozyme recently hit a lifetime high and is trading with a P/S ratio of 24, the stock could be due for a pullback.

Source: YCharts.

Now that we've established where Halozyme stands fundamentally, let's take a look at the two companies that influenced Halozyme's price the most in 2013 -- ViroPharma and Roche.

ViroPharma casts doubts on Halozyme's future
Back in August, shares of Halozyme fell after ViroPharma, the manufacturer of the hereditary angioedema (HAE) drug Cinryze, cancelled its phase 2 trial for a subcutaneous version of the drug. HAE is a rare disease which causes uncontrollable, potentially fatal swelling of the extremities, respiratory system, and gastrointestinal system.

Out of the four available HAE treatments, ViroPharma's Cinryze was the top selling drug, with sales rising 25% year-over-year last quarter to $106.5 million. Cinryze is the only drug that can be taken as a preventative measure against HAE, whereas the other three treatments -- Shire's Firazyr, Dyax's Kalbitor, and CSL Behring's Berinert -- are only administered when an acute attack occurs.

Therefore, changing Cinryze from an intravenous drug into a subcutaneous one could have made huge differences in portability and ease of administration for HAE patients. Unfortunately, ViroPharma canceled the trial after antibodies targeting Halozyme's enzyme rHuPH20 emerged in several patients. The cancellation was particularly damaging to Halozyme, since it raised doubts regarding the company's long-term vision of turning intravenous drugs into subcutaneous ones.

In November, Shire acquired ViroPharma for $4.2 billion to become the dominant company in the HAE market. It's possible that Shire could revisit the idea of subcutaneous Cinryze in the future.

Roche to the rescue
However, things got better for Halozyme later that month, when Roche announced that a subcutaneous version of its breast cancer drug Herceptin, created with Halozyme's rHuPH20, had been approved in the EU. In September, Herceptin SC (subcutaneous) was commercially launched, triggering a $10 million milestone payment from Roche to Halozyme.

Herceptin SC was a huge leap forward in breast cancer treatments, cutting the dosage time of 60 to 90 minutes with an IV down to two to five minutes with a single shot.

Herceptin is already one of the top breast cancer drugs in the world, generating $6.6 billion in sales last year. Herceptin SC could be Roche's answer to the intravenous drug's patent expirations in Europe and the U.S. in 2014 and 2019, respectively.

Herceptin is a monoclonal antibody which targets HER2-positive breast cancer, a particularly aggressive form of breast cancer which occurs in approximately 20% of patients. Herceptin "seeks out" cancer cells by targeting the overexpression of HER2 (human epidermal growth factor receptor 2), which promotes cancer growth. When it locates a cancer cell, it binds to its surface, blocking out growth signals while making them visible for the immune system to attack.

Roche's success canceled out the ViroPharma drama, and investors became bullish on Halozyme's growth prospects again. In addition to Herceptin SC, Halozyme is also working on a subcutaneous version of Rituxan, Roche's blockbuster blood cancer and autoimmune disorder drug which generated $6.3 billion in 2012 sales. The drug, known as MabThera SC, is currently in phase 3 trials.

Other collaborations
Looking forward into 2014, Halozyme's revenue sources will shift due to the approval of Herceptin SC. In the third quarter, product revenue, consisting of sales of the rHuPH20 active ingredient to Roche, accounted for 49% of the company's top line. Only 23% came from research services reimbursements.

Meanwhile, Halozyme and Baxter are collaborating on a subcutaneous immune globulin (IG) product known as HyQ. HyQ is used to treat primary immunodeficiency, an umbrella term which includes 150 immune system diseases. Although HyQ was rejected by the FDA last year, Baxter recently submitted an amended biologics license application (BLA) to the FDA to restart the review process.

Last but not least, Pfizer's decision to develop up to six new subcutaneous biologic drugs with Halozyme last December was also a positive catalyst for the stock at the beginning of 2013, helping it bounce back from HyQ's rejection. Pfizer's initial deal included an $8 million upfront payment to Halozyme, future milestone payments up to $507 million, and potential royalties on approved products.

The Foolish bottom line
In closing, Halozyme is a stock defined by its collaborations. In 2012, the disappointing FDA rejection of Baxter's HyQ was offset by Pfizer's support. In 2013, ViroPharma's cancellation of subcutaneous Cinryze was offset by the approval of Roche's Herceptin SC.

As long as the supporters of Halozyme's potentially industry-altering technology outweigh the detractors, I believe that Halozyme will continue to climb and improve the quality of patient lives by turning intravenous drugs into subcutaneous ones.