Heron Therapeutics, Inc. (NASDAQ:HRTX) Q4 2022 Earnings Call Transcript

Heron Therapeutics, Inc. (NASDAQ:HRTX) Q4 2022 Earnings Call Transcript March 23, 2023

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Heron Therapeutics Fourth Quarter 2022 Earnings Conference. As a reminder, this conference is being recorded. And now I would like to turn the call over to David Szekeres, Executive Vice President, Chief Operating Officer. Please proceed.

David Szekeres: Thank you, Lisa. Good afternoon, everyone, and thank you for joining us. With me today from Heron are Barry Quart, Chief Executive Officer and Chairman; John Poyhonen, President and Chief Commercial Officer; and Kimberly Manhard, Executive Vice President, Drug Development. For those of you participating via conference call, the slides are made available via webcast and can also be accessed by going to the Investor Relations page of our website following conclusion of today’s call. Before we begin, I would like to remind you that this call will contain forward-looking statements concerning Heron’s future expectations, plans, prospects, corporate strategy and performance, which constitute forward-looking statements for the purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our filings with the SEC. In addition, any forward-looking statements represent our views only as of the date of this webcast and should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligation to update these statements. Now I’ll turn the call over to Barry.

Barry Quart: Thank you, David. Welcome, everyone. Thank you for joining us this afternoon. For those who are wondering why this call is later in the month than usual, we are currently not an accelerated filer, and we wanted to give our newly reconstituted Board of Directors the opportunity to get to know the company before closing the quarter. We had an excellent fourth quarter and are obviously delighted with the strong increase in sales of ZYNRELEF last quarter, along with the growth of our CINV business. This month’s launch of APONVIE, our fourth commercial product, rounds out our portfolio. First quarter has started off more slowly for ZYNRELEF, due to the normal seasonal decline in surgeries in the first quarter of each year.

Even with the expected decline in surgeries, we continue to see growth of ZYNRELEF, albeit at a slower pace than fourth quarter. The Board has been working hard with the management team to develop a strategy to accelerate growth of ZYNRELEF and our other products. The real-world experience with ZYNRELEF continues to show strong efficacy, consistent with our clinical trials, but feedback from customers is that there are two opportunities to improve growth, expanding the label and improving withdrawal of the drug product from the vial. Correcting the limited label is already in progress with our December submission of sNDA number two, requesting a label bringing soft tissue and orthopedic procedures. This requested indications, if approved, would cover essentially all our 14 million target procedures.

We currently provide a vented vial spike in the ZYNRELEF kit designed to withdraw the product as simply as possible. The high turnover of nurses, post-COVID, has added an unexpected complexity. Because ZYNRELEF is viscous, it can still take several minutes to withdraw all the product, and even if the €“ if the nurse doesn’t follow instructions, it can take even longer. This can be annoying and diminished use of the product. With the broader label expected later this year, we want to make sure the product is as easy to use as possible. Optimization will be in two steps. Step one is to complete the development and gain approval of a greatly improved custom device designed to speed the withdrawal of the product with step two being the continued development of a prefilled syringe.

Because customers have indicated that they would use more ZYNRELEF if it was easier to remove from the vial and the prefilled syringe will take a few years, we have developed an innovative vial access needle, or VAN, which not only reduces the withdrawal time from minutes to around 30 seconds. It also covers the vial to eliminate the need for a non-sterile nurse to be involved withdrawing the drug product. This seamless single person withdrawal tested very well by both customers and non-customers. We are pushing hard to get this device approved by the middle of next year. As noted, the prefilled syringe is the optimal presentation for ZYNRELEF, and we have been working on it for several years. We are very familiar with this technology as SUSTOL is provided in a prefilled syringe.

However, ZYNRELEF has proved to be much more complicated and has significant €“ which has significantly lengthened the time to development. The great news is that we have recently overcome several of the most difficult obstacles and are now ready to push this development project forward. An added benefit is that prefilled syringes of ZYNRELEF should also help reduce the cost of goods. I will now turn the call over to John.

John Poyhonen: Thank you, Barry. We made solid progress across our acute care and oncology care franchises during the fourth quarter. During my presentation, I will start with a number of updates on key performance metrics related to ZYNRELEF, then I will provide an update on our APONVIE launch and finish with an update on another strong commercial quarter with our oncology care business. I will start by summarizing ZYNRELEF’s quarterly performance of our lean performance indicators. The fourth quarter has historically been the strongest quarter of our currently indicated surgical procedures. We were able to take advantage of the seasonality as ZYNRELEF net sales grew to $3.9 million for the quarter, representing a 44% increase over the prior quarter, and a 362% increase over the same quarter in the prior year.

Fourth quarter demand units grew to 20,765 units, representing a 38% increase over the prior quarter and a 301% increase over the same quarter in the prior year. Total ZYNRELEF unique ordering accounts grew to 793 through the end of the fourth quarter, compared to 704 through the end of the third quarter. Total formulary approvals for ZYNRELEF grew to 522 through the end of February 2023, compared to 416 approvals through the end of October 2022. Importantly, we’re also seeing growth with integrated delivery networks or IDNs with an updated total of 74 IDNs that have added ZYNRELEF to formulary. Gaining IDN support is a critical component to drive therapeutic interchanges with our key accounts substituting ZYNRELEF or Exparel for indicated procedures in the future.

Overall, we made solid progress in Q4 and are implementing key initiatives to accelerate ZYNRELEF sales in our existing user accounts in 2023. As mentioned on the prior slide, there has been consistent quarterly seasonality in elective procedures. The fourth quarter has always been the highest volume quarter based on patients having met their annual, deductibles during the year along with holiday time off to recover and rehab. The line graph on this slide demonstrates the quarterly seasonality when looking at Exparel historical sales from 2018 through 2022, which have been adjusted by removing 2020 results to eliminate the direct impact of COVID. Historically, the fourth quarter has shown significant growth versus the third quarter only to be followed with a significant reduction in the first quarter results.

As previously mentioned, ZYNRELEF demand units grew by 38% in the fourth quarter over the third quarter. This translates into an average of 1,597 units per week during the quarter. With two weeks remaining in the first quarter of 2023, the ZYNRELEF weekly average is about 1,760 units per week representing a 10% increase over the Q4 weekly average. Next, I wanted to provide an update on a key top-down strategy of targeting integrated delivery networks or IDNs to create new system-wide opportunities for therapeutic interchange from Exparel to ZYNRELEF for indicated procedures. Thus far, 74 IDNs have added ZYNRELEF to their formularies compared to 66 in our last uptake report. These 74 IDNs account for over 1.1 million annual ZYNRELEF indicated procedures.

Finally, our IDN formulary expansion now covers 149 million annual Exparel sales, and we’ve expanded to 17 IDNs at various stages of evaluating switching from Exparel to ZYNRELEF. Previously, we introduced a new metric to help evaluate the impact we’re making with IDNs. As a reminder, the metric to measure performance is branded market share, which is simply ZYNRELEF units divided by the total number of Exparel units plus ZYNRELEF units. In order to benchmark the IDN progress against the entire market basket, we’ve included a total market branded share in addition to the IDN subcategories. The IDN subcategory branded results have not been updated to include the full 74 IDNs with formulary approval and the 17 IDNs evaluating therapeutic interchange, since many of these decisions came light in the fourth quarter or in this quarter.

Photo by National Cancer Institute on Unsplash

We’ll update this numbers to reflect all our IDN wins in our next quarterly earnings report. Overall in the 66 IDNs with formulary approval, we’re demonstrating solid, branded market share growth at 9.1%, which is about twice the level of the total market. Advancing IDNs to evaluation of a therapeutic interchange is an important step in accelerating ZYNRELEF growth. As the table shows the 15 IDNs evaluating TI have combined for a 12.5% branded share in Q4, which is significantly higher than the average for the 66 IDNs, which have ZYNRELEF on formulary. Finally, we’ve also provided ZYNRELEF’s branded market share for the top five IDN accounts out of the 15 IDNs evaluating therapeutic interchange from EXPAREL to ZYNRELEF and this table demonstrates our branded market share can grow very quickly to an approach to a high approaching 50% for the fourth quarter based on our current indicated procedures, 50% is approaching the upper limit of what we expect to receive until an additional label expansion, which is expected in October of this year.

We share different versions of this slide in the past. Today’s version updates the pricing based on WAC price increases effective January 1, 2023. Switching to ZYNRELEF provides a cost savings of 23% to 34% based on wholesale acquisition costs, even with Pacira finally offering 340B pricing in the fourth quarter of 2022, ZYNRELEF’s 340B pricing still provides 340B accounts with a 23% to 32% savings compared to EXPAREL. Many 340B customers that we’ve spoken with have indicated Pacira’s response with the ZYNRELEF pricing strategy just doesn’t allow them to effectively compete based on our clinical and value proposition. Finally, from a reimbursement standpoint, using ZYNRELEF remains much more profitable with Medicare patients and these challenging financial times only ZYNRELEF provides separately reimbursed outside the surgical bundle payment in the hospital outpatient setting of care, which represents about 60% of the market opportunity.

Based on these economic values, it’s not surprising that large IDNs continue to evaluate ZYNRELEF for therapeutic interchange and indicated procedures and are anxious to limit EXPAREL’s usage. With FDA approval of our expanded indications anticipated later this year, we would expect many more IDNs to move towards switching. Our top priority is to build consistent usage in existing ordering accounts. Our sales force is working to increase pull through and build average order size. This can be accomplished by increasing the number of surgeons using ZYNRELEF at each count and the number of surgical procedures were used. During the fourth quarter, we began deploying new flexible resources to ensure that we have additional personnel for in-servicing surgeons and their staff.

We have piloted two types of flexible resources. The hospital implementation team utilizes operating room educators to start new accounts with focus in-services across all indicated surgical lines to establish a strong base for the future. In addition, we have utilized medical device representatives in certain territories to build our orthopedic business with TKA, THA and foot and ankle surgeries. It’s important to note these reps are only paid for incremental growth they’re generating. We’re also focused on increasing communications on a number of outstanding real world evidence studies using ZYNRELEF. For example, Dr. Kevin Warner of Covenant Healthcare presented a poster at Orthopedics Today with preliminary results comparing the use of ZYNRELEF versus a generic joint cocktail.

Their results indicated that ZYNRELEF as part of a multimodal protocol in TKA significantly reduced pain and morphine usage for 24 hours compared to the joint cocktail. Importantly, their patient length of stay was over 24 hours shorter with ZYNRELEF. We believe this type of real world data will change practice, and we’re working with other healthcare providers to share their data. Our efforts with IDNs have produced meaningful results in growing ZYNRELEF branded market share and will continue to look for opportunities to expand our pipeline and pursue therapeutic interchanges with new customers. And finally, as Barry already indicated in his comments, we know that ZYNRELEF works exceptionally well with patients, but some customers would like to see the product easier to withdraw from the vial, and we are committed to enhancing that process going forward.

Now, I’d like to shift the presentation to APONVIE, our new product for the prevention of postoperative nausea and vomiting or PONV. We truly believe that APONVIE and the PONV market is a big opportunity for Heron. Let’s start with the name, APONVIE conveys aprepitant for PONV. The market research on the brand name was extremely positive from healthcare providers, and importantly, differentiates this lower dosage offering of aprepitant emulsion from CINVANTI, our highly effective and successful product for CINV. We’ll be targeting 36 million annual procedures in patients at moderate to high risk of PONV. In this segment, an estimated 12 million moderate to high risk patients are not receiving any prophylaxis at all. One of our goals will be to use the 2020 consensus guidelines to change this practice, growing the market addressing one of the most concerning side effects for patients undergoing surgery.

Market research identified a significant unmet need in the current market, including a more convenient product with faster onset, which APONVIE meets with a rapid IV push, and 97% receptor occupancy within five minutes. A more effective product is desired and aprepitant is the most effective product for PONV prevention alone or in combination and finally, longer lasting treatment with APONVIE providing PONV prevention for up to 48 hours. This last unmet need is especially important with the growth in outpatient surgeries and patients being discharged after surgery. In short, APONVIE is clearly differentiated in this market and positioned for success. APONVIE is also the perfect strategic fit for Heron based on the synergies with our commercial organization.

It starts with tremendous overlaps of accounts we are already targeting for ZYNRELEF. We have existing trusted relationships with anesthesia and pharmacy which is critical for formulary access and usage. In addition, about 65% of our CINVANTI business comes from the hospital market. The existing positive experiences at major hospitals and IDNs should help us jump start upon the access and usage. Next, I wanted to share some early plans and highlights on the APONVIE launch. Our most critical success factor will be accelerating formulary access to APONVIE. It all starts with a strong value proposition. We’ll be offering three 340B pricing, GPO contracts, and full line wholesaler prime vendor discounts. Importantly, APONVIE will be the only product for PONV prevention that will have separate reimbursement outside the surgical bundle payment for PONV prevention for three years based on the pass through for Medicare patients.

Utilizing effective targeting will be key in building early access, and we’ll start with oral aprepitant, CINVANTI and ZYNRELEF user account. Finally, we believe that we can leverage the 2020 consensus PONV guidelines with a focus on high to moderate risk PONV patients. We’ve had prior success promoting the NCCN guidelines where we’re able to grow the NK market by 35% during the first year of the CINVANTI launch. I also want to share some very early commercial progress on APONVIE. On March 6, 2023, we completed initial stocking of the distribution channel and full line in specialty distributors, and several have already placed reorders for APONVIE. As announced last week, CMS has approved pass-through status for APONVIE for three years beginning April 1, 2023, under C-code C9145.

We’re excited about the early customer feedback. On March 7 at the an investor conference, we reported the first formulary approval and first enter end user sale for APONVIE. Now I can report that we’ve achieved our first IDN formulary approval with a nine hospital system, and the medical executive committee approved the formulary addition today with you starting in April. Obviously, this is very early days, but we look forward to reporting additional details as we progressed through the year. Now I’d like to shift gears and review the fourth quarter results for our oncology care franchise. During the fourth quarter, our oncology care team did a tremendous job of growing our CINV business by €“ net sales by 32% over the same quarter in the prior year.

We’re very proud of restoring growth to our CINV franchise following generic arbitrages with both products and believe this will remain a valuable and highly profitable franchise for years to come. For the full year, our CINV franchise net sales were $97.5 million, an increase of 17% over the prior year. The outlook for our CINV products remains positive based on continuing reimbursement tailwinds over the past year. As shown on the table both CINVANTI and SUSTOL are in a very favorable reimbursement position versus the competition. In addition, the elimination of separate reimbursement for generic fosaprepitant in the hospital outpatient segment effective January 1, 2022 continues to make CINVANTI value proposition much more attractive. The new CMS guidelines implemented effective January 1, 2023 that reimburse are 340B accounts that at a rate of ASP plus 6% compared to the prior rate of ASP minus 22% creates a windfall for those customers.

We believe with a significant portion of our CINVANTI demand sales already in 340B accounts. This new opportunity will help us increase unit sales to an even greater extent this year. Finally, large scale CINVANTI manufacturing is now online with product in the distribution channel, resulting in a gross margin increasing from about 50%, moving towards 75%. For the full year 2023, we expect CINV franchise net sales in the range of $99 million to $103 million. That completes my prepared remarks and I’ll now turn the call back over to Barry.

Barry Quart: Thank you, John. We will conclude the formal presentation with our financial overview slide. Heron had cash, cash equivalents and short-term investments of $84.9 million as of December 31, 2022. Net cash used for operating activities for the three months ended December 31, 2022 was $37.5 million, including a payment of approximately $10 million for Polymer. Without the Polymer payment, our underlying burn was about $27 million, and the full impact of reducing headcount by approximately 34% last year will continue to be realized through this year and next. R&D expense declined to $11.1 million in fourth quarter 2022 compared to $28.9 million in fourth quarter of 2021 and $20.5 million last quarter. We are also working with all our manufacturers to reduce external spending over the next few years as sales continue to ramp.

We would expect cash burn in the teens in the second and third quarter. Having spent the last several days with our newly reconstituted Board, I can safely say that they are completely dedicated to extending our cash runway and improving our valuation. After delving into the data and spending time with our sales force, the new Board members continue to be excited about our products. Slides 21 through 24 contain important safety information for ZYNRELEF and APONVIE. The slides are available on our website. With that, we are ready for your questions. Operator?

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Q&A Session

Operator: Thank you. We’ll take our first question from Josh Schimmer with Evercore.

Josh Schimmer: Hey, thanks for taking the questions. First a quick one on the accounts receivable line, it looks like that bumped up quarter-over-quarter. What is that attributable to?

Barry Quart: It’s attributable to just some minor timing in payments, which as you know 100% of that gets paid and also an increase in sales over the course of the year.

Josh Schimmer: Okay. I guess, I’m trying to reconcile, so the comments about the headwinds from the label and the suboptimal device €“ delivery device. In light of the obviously challenging launch thus far, which seemed a little bit juxtaposed to John supremely optimistic adoption metrics in the IDNs. And so trying to figure out,is there any meaningful near-term growth prospects this year? Why continue to push on commercialization until you’ve checked the box on the broader label and the simpler device product profile?

Barry Quart: Well, I’ll let John answer. But I think to start off, we continue to see growth of the product. We’re making significant inroads what we’ve identified, obviously, is an area that €“ two areas that will have impact on accelerating growth over what we’re seeing today. But we want to obviously continue to get the message out, grow the product. As John talked about, there’s an opportunity for dissemination of real-world data that’s now being generated as the product has become available. And as we’ve talked about over the last year, one of the time-consuming aspects of the launch were virtually every large site conducting their own trials before they would start using the product just because of prior experience with other products in this category.

And so there’s now an abundance of data going to be coming out that will continue to support adoption of the product between now and later this year when we get the expanded label and hopefully shortly after adding to the product by making it easier to use the product. So this is obviously a continuum, but we continue to see adoption. And obviously, we want to continue to push that as hard as we can. John, do you want to add to that?

John Poyhonen: Yes, certainly. So, I think if we look at the IDNs, as Barry mentioned, the fact that they are all doing internally valuations, and that takes some time. That’s an important aspect and shown in some of the growth that we’ve seen. But the results that they are generating what generally actually been terrific. And that’s why we continue to add new IDNs. We’ve added some very large ones just at the end of last year. And those accounts are very interested and excited about switching out their Exparel business for ZYNRELEF because of the clinical profile as well as what we have from a value proposition. Now as Barry has pointed out, there are some hurdles from a preparation standpoint. One of the ways that we’re looking to solve that is by utilization of medical device representatives.

They’re in the operating room, especially for orthopedics every single day. So they can help and make sure that the products on the tray when the surgeon needs it. So it’s a short-term solution that can really help us be very effective. The other thing that we think is important is, we expect a label expansion in October, which isn’t that far away. And as accounts and IDNs have been getting great results with ZYNRELEF, they’ll look at adding additional service lines once we get that label expansion. So, I think we can continue to grow. I think the second quarter just based on seasonality has always been stronger than first quarter, and we would certainly expect that as we go forward.