Business Context and Reporting Period
Heron Therapeutics, Inc. is a commercial-stage biotechnology company focused on acute-care and oncology treatments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
- Commercial products: CINVANTI, SUSTOL and newly launched ZYNRELEF.
- ZYNRELEF received FDA approval in May 2021 and commercial sales began in July 2021. The company submitted an FDA supplemental application in September 2021 to expand its U.S. indication.
- HTX-019, an investigational treatment for postoperative nausea and vomiting, was on track for NDA filing in the fourth quarter of 2021.
- Work on HTX-034 was temporarily postponed while management focused on ZYNRELEF indication expansion.
Financial Results and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net product sales | $23.2 million | $20.0 million | $65.7 million | $68.0 million |
| Cost of product sales | $11.4 million | $7.2 million | $35.1 million | $26.8 million |
| Gross margin | Approximately 51.1% | Approximately 64.1% | Approximately 46.6% | Approximately 60.6% |
| Loss from operations | $(51.7) million | $(58.4) million | $(164.3) million | $(166.9) million |
| Net loss | $(52.4) million | $(58.2) million | $(166.0) million | $(165.0) million |
| Basic and diluted loss per share | $(0.51) | $(0.64) | $(1.71) | $(1.82) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(158.1) million | $(132.3) million |
Q3 operating expenses were $74.9 million, including research and development of $28.6 million, general and administrative expense of $9.8 million, and sales and marketing expense of $25.2 million. Nine-month operating expenses were $230.0 million.
- CINVANTI sales were $18.0 million in Q3 and $56.2 million for the first nine months, compared with $19.8 million and $67.6 million, respectively, in 2020.
- SUSTOL sales were $3.1 million in Q3 and $7.4 million for the first nine months, compared with $0.2 million and $0.4 million, respectively, in 2020.
- ZYNRELEF generated $2.1 million of sales in both Q3 and the first nine months; there was no comparable 2020 revenue.
- Cost of product sales included SUSTOL inventory write-offs of $0.4 million in Q3 and $3.5 million for the first nine months.
Liquidity, Cash Flow and Debt
- Cash, cash equivalents and short-term investments totaled $202.8 million at September 30, 2021, compared with $208.5 million at December 31, 2020.
- Cash and cash equivalents were $159.6 million, and short-term investments were $43.3 million.
- Operating cash burn increased to $158.1 million for the first nine months of 2021 from $132.3 million in the prior-year period.
- Investing activities provided $57.0 million, primarily from net maturities of short-term investments.
- Financing activities provided $155.5 million, principally from $149.0 million of net proceeds from senior unsecured convertible notes issued in May 2021.
- The notes have $150.0 million of principal, bear interest at 1.5%, mature in May 2026, and have an initial conversion price of $15.276 per share. Their carrying value was $149.0 million at September 30, 2021.
- Former senior secured convertible notes matured in May 2021 and were converted into approximately 9.8 million common shares; no obligations remained under those notes.
- Total liabilities were $233.5 million and stockholders’ equity was $118.8 million at September 30, 2021. The accumulated deficit was $1.56 billion.
- Management stated that existing liquidity is expected to fund anticipated requirements for at least one year from the filing date.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 16.4%, but nine-month revenue declined 3.4%, reflecting lower CINVANTI sales offset by higher SUSTOL sales and the initial contribution from ZYNRELEF.
- CINVANTI sales were pressured by COVID-19-related reductions in cancer screening and treatment starts, as well as continuing generic arbitrage following generic fosaprepitant launches.
- SUSTOL sales improved following reinstatement of promotion and contracting in the first quarter of 2021.
- Sales and marketing expense increased 101.4% in Q3 and 29.8% for the first nine months, primarily due to ZYNRELEF launch activities and ongoing commercialization efforts.
- Research and development expense decreased 41.9% in Q3 and 21.6% for the first nine months, primarily due to lower ZYNRELEF-related development costs.
- Gross margin declined materially because of higher product costs, ZYNRELEF launch and manufacturing costs, and SUSTOL inventory write-offs.
- The company raised $149.0 million net through convertible debt financing and increased its share count following conversion of the legacy notes.
Guidance, Outlook, Risks and Unusual Items
- Management expected oncology-care franchise sales to grow in 2022 and beyond, while continuing to identify generic arbitrage as a CINVANTI headwind.
- Management anticipated making ZYNRELEF available in Europe in late 2022, subject to commercialization and manufacturing preparations.
- An FDA-approved secondary supplier for ZYNRELEF’s proprietary polymer is expected to support millions of annual doses at a significantly lower product cost.
- The company expects to submit a further ZYNRELEF supplemental application in the second half of 2022 for broader surgical-use indications.
- In October 2021, the company reduced its San Diego leased space and entered into a sublease. It also implemented a restructuring plan expected to cost $1.6 million, including $1.5 million of primarily cash severance costs.
- Key risks include continued operating losses and cash burn, dependence on commercial acceptance of ZYNRELEF, CINVANTI and SUSTOL, pricing and reimbursement pressure, generic competition, COVID-19 effects, regulatory approval and indication-expansion uncertainty, manufacturing and supply-chain dependence, clinical-development risk, and potential need for additional capital.
- Product sales are highly concentrated: three customers represented 98.4% of Q3 sales, 98.9% of nine-month sales and 98.9% of accounts receivable at September 30, 2021.
- No material legal proceedings, defaults upon senior securities, or off-balance-sheet arrangements were reported.
Investor Verification Checklist
- Verify the pace and profitability of ZYNRELEF commercialization, including whether manufacturing scale-up produces the expected cost reductions.
- Monitor CINVANTI trends, generic competition and the recovery of cancer screening and treatment volumes.
- Assess whether SUSTOL sales growth is sustainable after reinstated promotion and contracting, and track additional inventory write-offs.
- Reconcile operating cash burn against the company’s liquidity statement and evaluate the timing of any future financing requirement.
- Review the terms, dilution potential and maturity risks associated with the $150.0 million convertible notes.
- Track FDA review of the ZYNRELEF supplemental application and the planned HTX-019 NDA filing.
- Evaluate customer concentration, product-return and rebate accrual estimates, contract manufacturing commitments, and the October 2021 restructuring and lease changes.