Heron Therapeutics, Inc. — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Heron Therapeutics is a commercial-stage biotechnology company developing and commercializing therapies for acute-care and oncology patients. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Commercial products were CINVANTI and SUSTOL for chemotherapy-induced nausea and vomiting, and ZYNRELEF for postoperative pain. Product candidates included HTX-019 for postoperative nausea and vomiting and HTX-034 for postoperative pain.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net product sales | $23.5 million | $20.0 million | 17.2% increase |
| Cost of product sales | $11.4 million | $9.2 million | 23.3% increase |
| Gross profit | $12.1 million | $10.8 million | 12.0% increase |
| Gross margin | 51.6% | 54.0% | Down approximately 2.4 points |
| Research and development | $42.1 million | $38.1 million | 10.4% increase |
| Sales and marketing | $23.4 million | $15.2 million | 53.7% increase |
| Loss from operations | $(62.9) million | $(52.1) million | Loss increased |
| Net loss | $(63.9) million | $(52.6) million | 21.4% higher loss |
| Basic and diluted loss per share | $(0.63) | $(0.58) | Higher loss per share |
| Net cash used in operating activities | $(43.9) million | $(41.9) million | Cash use increased |
Approximate operating margin was negative 268.2% in Q1 2022 versus negative 260.3% in Q1 2021. The filing does not present adjusted EBITDA or other non-GAAP profitability measures.
Revenue Composition and Operating Drivers
- CINVANTI sales were $20.3 million, up from $18.5 million.
- SUSTOL sales were $2.1 million, up from $1.5 million.
- ZYNRELEF sales were $1.1 million; there was no comparable Q1 2021 revenue because U.S. commercial sales began in July 2021. Q1 2022 ZYNRELEF sales included $0.3 million of returns for short-dated product.
- Research and development expense increased primarily because of ZYNRELEF production scale-up, validation, and raw-material qualification costs.
- Sales and marketing expense increased primarily because of ZYNRELEF launch activities and the sales force hired in June 2021.
- Stock-based compensation was $10.9 million, compared with $11.5 million in Q1 2021.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash, cash equivalents, and short-term investments totaled $111.9 million at March 31, 2022, down from $157.6 million at December 31, 2021. Cash and cash equivalents alone were $56.9 million.
- Operating cash burn was $43.9 million. Investing activities provided $10.9 million, primarily due to net maturities of short-term investments. Financing activities used $0.6 million.
- Total assets were $273.7 million and total liabilities were $249.8 million at March 31, 2022. Stockholders’ equity declined to $24.0 million from $77.6 million at year-end 2021, principally reflecting the quarterly net loss.
- Inventory increased to $56.5 million from $48.4 million, including $34.3 million related to ZYNRELEF.
- Non-current convertible notes payable, net, were $149.1 million. The $150.0 million senior unsecured convertible notes bear interest at 1.5% and mature in May 2026 unless earlier converted, redeemed, or repurchased. The initial conversion price was $15.276 per share.
- Accounts receivable were $41.1 million, and current liabilities were $93.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue grew 17.2%, led by higher CINVANTI and SUSTOL sales and the initial contribution from ZYNRELEF.
- Despite revenue growth, the net loss increased by $11.3 million because of higher research and development and sales and marketing spending, along with higher cost of product sales and other expense.
- Cash used in operations increased by $2.0 million, while total liquidity declined by $45.7 million from December 31, 2021.
- Product sales allowances increased to $26.4 million at March 31, 2022 from $22.6 million at December 31, 2021.
- The company adopted ASU 2020-06 for convertible-instrument accounting in the first quarter; management reported no material impact.
- There were no material legal proceedings, defaults upon senior securities, or unregistered sales of equity securities reported in the filing.
Guidance, Outlook, Commentary, and Risks
- Management stated that existing cash, cash equivalents, and short-term investments were expected to fund anticipated requirements for at least one year from the filing date, based on the current operating plan and projections.
- This liquidity assessment depends substantially on assumptions regarding the market opportunity for ZYNRELEF’s expanded U.S. label, which management identified as subject to significant uncertainty.
- Management anticipated making ZYNRELEF available in Europe and Canada in late 2022. Health Canada issued a Notice of Compliance in March 2022, and CMS approved three years of transitional pass-through reimbursement beginning April 1, 2022 for qualifying hospital outpatient use.
- The company planned to submit a further ZYNRELEF efficacy supplement in the second half of 2022 to broaden the U.S. indication.
- HTX-019’s NDA was accepted for filing, with an FDA Prescription Drug User Fee Act goal date of September 17, 2022.
- Work on HTX-034 had been temporarily postponed while the company focused on expanding ZYNRELEF’s indication; management was re-evaluating the program.
- Key risks include continued operating losses and cash burn, the need for additional capital, potential dilution or restrictive debt terms, uncertain market acceptance and reimbursement, competition and generic entry, manufacturing and supply-chain dependence, regulatory approval and postmarketing requirements, clinical-development uncertainty, COVID-19 impacts, and reliance on a limited number of customers and third-party manufacturers.
- Three customers represented 98.8% of Q1 2022 net product sales and 98.9% of accounts receivable at March 31, 2022, indicating significant customer concentration.
Most Important Facts for Investors to Verify
- Whether ZYNRELEF sales accelerate following the expanded U.S. label and transitional pass-through reimbursement, and whether inventory levels are converted into revenue without material write-downs or returns.
- Whether the company can reduce its operating cash burn as commercial revenue grows and whether additional financing will be required.
- The timing and outcome of the HTX-019 FDA review and the planned ZYNRELEF efficacy supplement.
- The company’s ability to scale manufacturing and achieve the expected cost reductions for ZYNRELEF and CINVANTI.
- The impact of generic and branded competition on CINVANTI and SUSTOL sales, pricing, and gross margins.
- The terms, covenants, dilution implications, and potential share issuance associated with the $150.0 million convertible notes.
- The concentration of sales and receivables among three customers and the collectability of extended-payment-term receivables.