Biosimilar Competition And Pricing Pressures Will Erode Biologic Margins

Key Takeaways

• Heavy dependence on ENHANZE exposes the company to heightened risk from patent expirations, competition, and industry shifts in drug delivery technologies.
  
• Intensifying pricing pressure and pharma sector consolidation threaten future profitability, reducing the value of licensing deals and eroding recurring earnings.
  
• Expanding adoption of Halozyme's drug delivery technology, strong industry trends, and diversification efforts are driving recurring high-margin growth, robust cash flow, and long-term earnings visibility.

Catalysts

A biopharmaceutical company, researches, develops, and commercializes of proprietary enzymes and devices in the United States and internationally.

• The company's heavy reliance on its ENHANZE technology means any disruption-whether from regulatory reform, pricing pressure, or technological obsolescence-could sharply erode royalty and milestone revenues, leading to materially lower top-line growth and significant net margin compression as early as the next decade.
  
• Mounting global efforts to contain healthcare costs and shift reimbursement structures are poised to increase pricing pressure on biologics, potentially forcing both Halozyme and its partners to accept thinner margins, thus diminishing the future profitability and stability of Halozyme's royalty streams.
  
• With key ENHANZE patents expiring in the early 2030s, the company faces a looming cliff where biosimilar and competitor enzyme products could rapidly enter the market, driving down royalty revenues and slashing long-term earnings potential as exclusivity is lost.
  
• The long-term outlook for high-margin growth is undermined by accelerated industry trends toward non-injectable or oral biologic drug delivery and disruptive new therapeutic modalities, which may render subcutaneous platforms like ENHANZE less relevant and sharply reduce demand from current and future partners.
  
• Increasing M&A activity in the broader pharma sector will likely concentrate Halozyme's potential customer base, empowering large pharmaceutical partners to extract more favorable terms, thereby reducing the value of new licensing deals and further compressing Halozyme's future margins and recurring earnings.

Halozyme Therapeutics Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Halozyme Therapeutics compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Halozyme Therapeutics's revenue will grow by 14.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 47.3% today to 59.7% in 3 years time.
• The bearish analysts expect earnings to reach $1.1 billion (and earnings per share of $9.57) by about August 2028, up from $557.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.6x on those 2028 earnings, down from 13.2x today. This future PE is lower than the current PE for the US Biotechs industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Halozyme Therapeutics Future Earnings Per Share Growth

Risks

• Conversion of intravenous to subcutaneous administration is accelerating across major blockbuster therapies, as seen in the near-total adoption with DARZALEX and rapid expansion with products like Phesgo and VYVGART Hytrulo, which is likely to drive recurring high-margin royalty revenue for Halozyme over the coming decade and support growing net margins.
  
• Multiple new drug approvals, expanded indications, and increased product launches incorporating Halozyme's ENHANZE technology-including new launches in neurology, oncology, and autoimmune diseases-are expanding the royalty revenue base, likely resulting in continued topline revenue growth and greater earnings visibility.
  
• Strong secular trends such as the shift to home-based care, the convenience of self-administration, and healthcare provider and payer incentives to minimize infusion time and resource burden are increasing demand for subcutaneous drug delivery solutions, which directly benefits Halozyme's platform revenues and royalty streams.
  
• The company is generating significant free cash flow and has demonstrated operational leverage through robust growth in royalty revenues and EBITDA, enabling large-scale share repurchases and maintaining a strong net leverage profile, which supports potential future increases in net income and earnings per share.
  
• Ongoing business development, robust partner engagement across diverse therapeutic categories, and a pipeline of next-generation delivery technologies (such as high-volume auto-injectors) position Halozyme for further partnership growth and platform diversification, likely underpinning both high-margin recurring revenues and additional sources of topline growth over the long term.

Valuation

• The assumed bearish price target for Halozyme Therapeutics is $51.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Halozyme Therapeutics's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $91.0, and the most bearish reporting a price target of just $51.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $62.9, the bearish analyst price target of $51.0 is 23.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.