Heron Therapeutics, Inc. (NASDAQ:HRTX) Q2 2023 Earnings Call Transcript

Heron Therapeutics, Inc. (NASDAQ:HRTX) Q2 2023 Earnings Call Transcript August 14, 2023

Heron Therapeutics, Inc. misses on earnings expectations. Reported EPS is $-0.35 EPS, expectations were $0.23.

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Heron Therapeutics Second Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. Now, I would like to turn the call over to Jeff Cohen, Executive Director, Assistant General Counsel and Assistant Secretary. Please proceed.

Jeff Cohen: Thank you, Krista, and good afternoon, everyone. Thank you for joining us this afternoon on the Heron Therapeutics conference call to discuss the company’s financial results for the second quarter ended June 30, 2023. With me today from Heron are Craig Collard, Chief Executive Officer; Ira Duarte, Executive Vice President, Chief Financial Officer; and Bill Forbes, Executive Vice President, Chief Development Officer. For those of you participating via conference call, slides are made available via webcast and can also be accessed via the Investor Relations page of our website following the conclusion of today’s call. Before we begin, let me quickly remind you that during the course of this call, the company will make forward-looking statements.

We caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes remarks about the company’s projections, expectations, plans, beliefs, and future performance, all of which constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the Safe Harbor statement in today’s press release and in Heron’s public periodic filings with the SEC.

Except as required by law, Heron assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes; does not intend to do so. And with that, I would now like to turn the call over to Craig Collard, Chief Executive Officer.

Craig Collard: Thanks, Jeff. Good afternoon, everyone, and thank you for joining us today for our second quarter 2023 earnings call. I’m pleased to share with you some significant developments that have transpired since our last call. Our team has been hard at work and I’m excited to provide you with updates that we believe will lead to transforming Heron into a profitable company with growing revenues, including updates on our cost reduction efforts, financing activities and changes in our executive management team, as well as an update on the status of our pending Hatch-Waxman ANDA patent litigation. On my first earnings call with Heron as CEO, I mentioned that I’d only been here four weeks and most of that time was used to assess the business and determine where we could make improvements quickly.

The first step was assessing the executive leadership and making the proper changes that were needed. We made those changes and we now have a leaner organization with a new CFO, Head of Development, Head of Supply and Vendor Management, and new leadership in Sales and Marketing on the acute side of the business. I’m thrilled to announce that the new team has successfully implemented a cost reduction initiative. Through careful analysis and strategic planning, we have identified areas where we can streamline our operations and enhance efficiencies. Over the next three years, we expect to achieve a remarkable cash savings of approximately $75 million. This initiative reflects our commitment to fiscal responsibility and our dedication to optimizing our resources for sustained growth.

In addition to the cost cutting measures, we were able to bolster the balance sheet by completing a $30 million equity financing with some of our largest shareholders as well as closing on an up to $50 million working capital facility. Based on our current operational plan, we expect that this will provide the company with enough capital to achieve profitability. This achievement underscores the confidence that our investors and partners have on our business strategy and growth potential of our products. We are still in the early stages of revamping Heron into a commercially-focused company with efficient operations. The changes we have made this quarter are significant and has certainly improved the business and set up a solid foundation for the future.

The next phase of improvements will be focused around maximizing the growth potential of all of our products on both the acute care and oncology sides of the business. Even during this recent time of organizational change, the company is still seeing product growth. We expect this to improve dramatically as we implement new strategic plans moving forward. Now moving onto some product highlights from the quarter. On the oncology side of the business, Q2 net product sales combined for CINVANTI and SUSTOL were $27.3 million, which increased from $25.1 million for the same period in 2022. We also grew combined sales by 6% quarter-over-quarter. We are pleased to reiterate our financial guidance for the oncology franchise of $99 million to $103 million in net product sales for the full year 2023.

We also recently had a favorable outcome at the Markman hearing in our pending Hatch-Waxman ANDA litigation against Fresenius to enforce our CINVANTI patents. We are pleased with the outcome and will continue to vigorously enforce and defend our patent portfolio. Moving now to the acute care side of the business, with ZYNRELEF and APONVIE. We continue to see product growth on this side of the business also, even though we have yet to implement many of our planned changes. Once we accomplish, many of the initiatives focused on improving the fundamentals of how we conduct our business, we plan to then move forward with some of the transformational initiatives. Net product sales of ZYNRELEF for the quarter were $4.2 million compared to $2.5 million for the same period in 2022.

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Quarter-over-quarter unit growth was 11%. Net product sales of APONVIE for the quarter were $300,000. APONVIE became commercially available in the U.S. on March 6, 2023. During this launch phase, we were receiving very positive feedback from some customers due to APONVIE’s unique clinical value. In fact, several hospital systems have already adopted for all moderate to severe patients and many others that are currently scheduled for system-wide review. The next phase of business improvement will be focused around product growth and maximizing the value of our assets. With ZYNRELEF, we have three key initiatives underway to expand our business, including our filed sNDA, the vial access needle, or VAN, and a prefilled syringe. ZYNRELEF is a unique product with true 72 hour pain relief.

It also has passed through reimbursement status, allowing our product to be separately reimbursed outside of the surgical bundle in both hospitals and ASCs. All of these product improvements and attributes are part of a new overall company and product strategy and should have a dramatic impact to our growth over the next several years. This growth will not take place overnight, but our products have a great clinical profile, excellent reimbursement status, and with the right commercial plan, we should begin to see massive improvement that will ultimately lead the company to profitability. Regarding the sNDA for our label expansion for ZYNRELEF, we were recently informed by the FDA of a three-month extension of our PDUFA date from October 23, 2023 to January 23, 2024.

The division became aware of our timeline for some new non-clinical data the company was completing, and in the spirit of cooperation, we agreed to submit this new data to the division. The division deemed this submission to be a major amendment to our sNDA and accordingly extended review period by three months. In conclusion, the past quarter has been marked by significant accomplishments and strategic moves that will undoubtedly shape the trajectory of our company. The successful implementation of our cost reduction initiative, the securing of debt and equity financing, the favorable outcome at CINVANTI Markman hearing, and the strengthening of our executive management team, all position us for continued success and growth. While this business will not be transformed overnight, 2023 will prove to be a turnaround year for Heron.

Thank you for your patience and continued support of the company as we move through this transition. I will now turn the call over to Ira Duarte, our CFO. Go ahead, Ira.

Ira Duarte: Thanks, Craig. Our combined product net revenues for the second quarter of 2023 were $31.8 million compared with $27.6 million in Q2 2022, representing an increase of 15% to the same period of 2022. Product net revenues for the first six months of 2023 were $61.4 million compared with $51.1 million for 2022 or an increase of 20%. Our acute care franchise net revenues for the three and six months ended June 30, 2023 were $4.5 million and $8.3 million, respectively, which increased from $2.5 million and $3.5 million, respectively, for the same period in 2022. For the three and six months ended June 30, 2023, oncology care franchise net product sales were $27.3 million and $53.1 million, respectively, which increased from $25.1 million and $47.5 million, respectively, for the same period in 2022.

Our product gross profit for the quarter was $11.6 million, and $24.4 million for the six months ended June 30, 2023, representing 36.5% and 40% of net revenue, respectively. These margins were negatively impacted by write-offs of ZYNRELEF inventory in both Q1 and Q2 of 2023. We believe these margins will improve and stabilize as we are working through some of our ZYNRELEF inventory. We also had a number of initiatives we are working through that we will discuss on future earnings calls that should have a very positive impact on costs moving forward. SG&A expenses for Q2 and six months ended June 30, 2023 were $36.4 million and $68.4 million, respectively, compared to $32.1 million and $64.1 million in the same period of 2022, with the increase primarily resulting from our reduction in force announced in June 2023.

Research and development expenses were $17.6 million and $31.4 million in Q2 and six months ended June 30, 2023, compared to $28.8 million and $70.9 million in the comparable periods of 2022. The decrease in spend was primarily related to decreases in costs related to ZYNRELEF, as production scale up, validation activities and raw materials qualifications were completed in 2022. In addition, overall personnel and related costs decreased due to the reduction in force implemented in June 2022. We believe we can continue to reduce costs moving forward in this area as we continue to increase efficiencies. The operating loss for the quarter was $42.4 million compared with $49.5 million in Q2 2022, and the net loss was $42.1 million for Q2 2023 and $56.4 million for the comparable period in 2022.

Looking to total year-to-date net loss, 2023 is a net loss of $74.8 million compared with $120.2 million in the comparable period of 2022. Our balance sheet at the end of June 30, 2023 shows a cash and short-term investment balance of $33.2 million. However, as Craig mentioned in his earlier comments, we closed capital raise of approximately $30 million in July of 2023 and a working capital facility of up to $50 million in August 2023. These financing combined with our cost savings initiatives position us for future growth and the path to profitability. Back to you, Craig.

Craig Collard: Thanks, Ira. Operator, at this time, we’d like to open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Serge Belanger from Needham & Company. Please go ahead. Your line is open.

Serge Belanger: Hi, good afternoon. Just a couple of questions for us. First one, regarding achieving profitability. I think in the past, you’ve talked about a late 2024 timeline for that. Is that still the target, or has that changed given the regulatory delay around ZYNRELEF? And maybe if you can talk about the assumptions on how we get there? And I guess, secondly, regarding that regulatory delay for ZYNRELEF, maybe just talk about what you expect the label expansion could look like once it gets approved. Thanks.

Craig Collard: Hi, Serge. Thanks for the question. So, regarding profitability, again, we have said that we believe we would achieve profitability in late 2024. I think the takeaway here is based on the monies we’ve raised, again, we don’t think we’ll need to raise any more monies in order to get to that point. And we built that forecast without the upside of the sNDA for the VAN or anything like that. So this is more of just a trend forecast on how the product was performing. And so with the cost reduction efforts we’ve made, we are able to get to profitability within that timeframe. There could be some upside from some things we’re doing. Again, assuming we get the label expansion, we’re anticipating — assuming that some of the things that we implement will have a positive impact on ZYNRELEF when those types of things happen and APONVIE as well.

So from that standpoint, that’s how we’re getting to profitability at the end of ’24. Regarding the sNDA and the expansion, I’d like to — Bill Forbes is here with us in the room. I’d like maybe him to speak a little bit more detail around that and his thoughts.

Bill Forbes: Hi, Serge. This is Bill Forbes. Yes, so the current package insert allows for periarticular instillation for up to 72 hours of analgesia with bunionectomy, open inguinal herniorrhaphy and total knee arthroplasty. What we’re proposing in the sNDA is that we go to postsurgical analgesia for soft tissue in orthopedic. So, maybe I’ll step back a little bit here and just kind of talk broadly about the submission that was put in here at Heron. And ZYNRELEF has actually been studied in 14 clinical trials. Eight unique surgical procedures were contributing to those 14 clinical trials: four soft tissue and four different orthopedic surgical procedures. So, when the supplement went in, it actually went in with data from lumbar spinal surgery, total shoulder surgery, mammoplasty, C-section, abdominoplasty.

The lumbar spinal surgery and total surgery has actually already been presented at Western and Southern Ortho conferences. So that data has already been put out there. And I think in many respects, this is going to broaden our label. Hopefully, we can negotiate a favorable label expansion with this data. I’m going to talk a little bit about what happened with the major amendment. We had been doing and continue to do some studies in some of those preclinical, and we were doing a rabbit study that looked a little further out. This was for intra-articular injection. As I’ve mentioned before, the indication for ZYNRELEF is actually periarticular, not intra-articular. So the label itself actually cautions physicians about the use of using intra-articular.

And I think from that perspective, we consider this class labeling. This particular rabbit study just looked out a little bit further. So while it is new data, it is not actually a new finding, and it’s already accounted for in our label. So I think that was kind of a disappointment on our side. We didn’t feel like it was — it needed — that the agency or the division needed to declare a major amendment or — to this particular filing because of that. So hopefully, that answers your question.