Business Context and Reporting Period
Heron Therapeutics, Inc. (formerly A.P. Pharma, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company is a pre-commercial biotechnology developer focused on its Biochronomer polymer-based drug-delivery platform. Its lead candidate, APF530, intended to be marketed as SUSTOL, targets chemotherapy-induced nausea and vomiting (CINV).
In 2014, Heron initiated a Phase 3 study in patients receiving highly emetogenic chemotherapy. The company also advanced HTX-011 for postoperative pain and announced the HTX-019 intravenous aprepitant program in November 2014.
Financial Highlights
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | No revenue reported | No revenue reported |
| Research and development expense | $14.7 million, versus $6.2 million | $40.9 million, versus $24.2 million |
| General and administrative expense | $4.2 million, versus $6.4 million | $14.1 million, versus $16.5 million |
| Net loss | $19.2 million, versus $12.9 million | $55.7 million, versus $41.2 million |
| Net loss per share | $0.66, versus $0.84 | $2.17, versus $2.69 |
| Net cash used in operating activities | Not separately provided | $47.4 million, versus $31.1 million |
Cash was $86.2 million at September 30, 2014, compared with $72.3 million at December 31, 2013. Total assets were $92.3 million and total stockholders’ equity was $81.0 million. The accumulated deficit was $294.6 million.
Financing activities provided $61.8 million during the first nine months, primarily from the June 2014 common stock and pre-funded warrant offering, which generated net proceeds of approximately $58.9 million, and stock option exercises of approximately $2.8 million. Capital expenditures were $0.4 million.
Convertible notes payable to related parties had a carrying value of $1.45 million, representing $5.26 million of principal less a $3.81 million debt discount. The notes bear 6% interest, are secured by substantially all company assets, and may be required to be prepaid at the holders’ option. If converted, the notes would result in approximately 6.6 million shares of common stock, creating substantial dilution.
Material Changes Versus the Prior Comparable Period
- Research and development expense increased 137% for the quarter and 69% for the nine-month period, primarily because of the Phase 3 HEC study and other SUSTOL activities, as well as new product development and increased personnel costs.
- General and administrative expense decreased 35% for the quarter and 14% for the nine-month period, principally because 2013 included higher stock-based compensation associated with the former chief executive officer’s resignation.
- Net loss increased by $6.3 million for the quarter and $14.5 million for the nine-month period.
- Operating cash use increased by $16.3 million for the nine-month period, reflecting higher development spending.
- Cash increased by $13.9 million, despite operating cash use, because of the June 2014 equity financing and stock option exercises.
- Weighted-average shares increased to 29.0 million for the quarter and 25.7 million for the nine-month period, compared with 15.4 million and 15.3 million, respectively, reflecting equity issuances and exercises.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to complete enrollment in the HEC study in the first quarter of 2015 and intended to resubmit the SUSTOL NDA shortly thereafter, including the study results.
- The FDA issued a Complete Response Letter in March 2013 identifying unresolved issues involving manufacturing, administration, and efficacy analysis. Approval remained uncertain, and another Complete Response Letter or additional regulatory requirements could delay commercialization.
- Management believed existing working capital was sufficient to fund operations into 2015, including SUSTOL regulatory activities and initial human studies for HTX-011 and HTX-019. Additional capital would be required for broader development, strategic acquisitions, or significant commercialization investment.
- The company had no material operating revenue or current means of generating material operating cash flow and expected to continue incurring substantial losses.
- Key risks include clinical-trial failure or delay, FDA approval uncertainty, third-party manufacturing and supply constraints, dependence on contract research organizations, competition in CINV and pain management, reimbursement and market-acceptance risk, intellectual-property challenges, and the need for additional financing.
- Contractual operating lease obligations totaled approximately $1.75 million, including $0.83 million due within one year. Clinical-trial and contract research organization commitments were variable and not reliably quantifiable.
- The company reported no legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls at September 30, 2014.
- The filing includes a 1-for-20 reverse stock split effective January 13, 2014; historical share and per-share amounts were adjusted retrospectively.
Important Facts for Investors to Verify
- Current status and results of the APF530/SUSTOL Phase 3 HEC study and the timing and contents of any NDA resubmission.
- Whether the FDA accepted the company’s responses to the March 2013 Complete Response Letter, particularly manufacturing and efficacy issues.
- Cash-burn trends and the date by which additional financing may be required.
- Terms, holder prepayment rights, collateral, and potential dilution associated with the secured convertible notes.
- Manufacturing readiness, supplier concentration, and regulatory inspection status for SUSTOL.
- Clinical progress, funding requirements, and competitive positioning of HTX-011 and HTX-019.
- Potential dilution from approximately 6.6 million shares underlying the convertible notes, outstanding warrants, stock options, and future equity offerings.