HERON THERAPEUTICS, INC. annual report, FY2022

Heron Therapeutics, Inc. — FY2022 Form 10-K Summary

Business context and reporting period

Heron Therapeutics is a commercial-stage biotechnology company developing and commercializing products for acute care and oncology patients. This Form 10-K covers the fiscal year ended December 31, 2022, with comparative results for 2021.

Commercial products: CINVANTI and SUSTOL for chemotherapy-induced nausea and vomiting, and ZYNRELEF for postoperative pain.
APONVIE was approved by the FDA in September 2022 and became commercially available in the U.S. in March 2023.
HTX-034 remains an investigational postoperative pain candidate; development was paused to focus on expanding ZYNRELEF’s indication.
The company employed 203 full-time employees at year-end, including 117 in sales and marketing.

Financial performance and key metrics

Metric	2022	2021	Change
Net product sales	$107.7 million	$86.3 million	+24.7%
Cost of product sales	$54.9 million	$46.0 million	+19.2%
Gross profit	$52.8 million	$40.3 million	+31.0%
Gross margin	49.0%	46.7%	Improved
Research and development	$107.5 million	$130.8 million	-17.8%
General and administrative	$37.4 million	$40.2 million	-6.8%
Sales and marketing	$82.5 million	$87.2 million	-5.4%
Loss from operations	$174.7 million	$217.8 million	Improved
Net loss	$182.0 million	$220.7 million	Improved
Net loss per share	$1.67	$2.24	Improved
Net cash used in operating activities	$146.9 million	$203.4 million	Improved

Calculated operating and net margins remained deeply negative at approximately 162% and 169% of revenue, respectively. Cost of product sales included an $8.9 million charge, primarily for short-dated ZYNRELEF inventory, compared with a $3.8 million SUSTOL inventory write-off in 2021.

CINVANTI sales were $87.3 million, up from $73.5 million.
SUSTOL sales were $10.2 million, compared with $9.9 million.
ZYNRELEF sales were $10.2 million, compared with $2.9 million in 2021, its first partial year of U.S. commercial sales.
Product sales allowances and related accruals totaled $181.1 million during 2022; accrued product sales allowances were $33.3 million at year-end.

Liquidity, debt and cash flow

Cash, cash equivalents and short-term investments totaled $84.9 million at December 31, 2022, consisting of $15.4 million in cash and cash equivalents and $69.5 million in short-term investments.
Net cash used in operations was $146.9 million, indicating substantial ongoing cash burn despite the lower net loss.
Financing activities provided $75.1 million, primarily from the August 2022 private placement of common stock and pre-funded warrants.
The company had $150.0 million aggregate principal amount of 1.5% senior unsecured convertible notes outstanding, with a net carrying value of $149.3 million. The notes mature May 26, 2026, unless earlier converted, redeemed or repurchased.
Management stated that existing liquidity is expected to fund anticipated requirements for at least one year after filing; however, the financial statements identify conditions that raise substantial doubt about the company’s ability to continue as a going concern.
Material obligations included $103.7 million of purchase commitments to third-party manufacturers, $38.7 million of which was due within one year, and $9.1 million of future lease payments.
Stockholders’ equity declined to $13.6 million from $77.6 million, while the accumulated deficit reached $1.8 billion.

Material changes versus the prior comparable period

Revenue increased 24.7%, led primarily by CINVANTI growth and the ramp-up of ZYNRELEF.
Operating loss narrowed by $43.2 million, principally because of lower research and development, general and administrative, and sales and marketing expenses.
Research and development spending declined as APONVIE was approved, manufacturing scale-up activities progressed, and HTX-034 work was paused.
The company reduced headcount by approximately 34% in June 2022 and incurred $5.4 million of restructuring expense, primarily severance.
Large-scale manufacturing of ZYNRELEF and CINVANTI was validated in the fourth quarter, which management expects to reduce future product costs.
Shares outstanding increased to approximately 119.2 million at March 14, 2023, from 102.0 million at December 31, 2021, reflecting the 2022 equity financing and other issuances.

Guidance, outlook, risks and unusual items

Management expects 2023 cost of product sales to decline due to validated large-scale manufacturing of ZYNRELEF and CINVANTI.
Research and development expense is expected to decrease, general and administrative expense to remain comparable, and sales and marketing expense to decrease from 2022 levels.
The FDA accepted the supplemental NDA for a broad expansion of the ZYNRELEF U.S. label and established an October 23, 2023 PDUFA goal date.
APONVIE’s U.S. launch occurred in March 2023 and is expected to leverage the existing acute-care commercial organization.
Management’s liquidity assessment depends materially on assumptions about the market opportunity for an expanded ZYNRELEF label, which the filing characterizes as subject to significant uncertainty.
Additional capital may be required. Potential financing could dilute existing stockholders, impose restrictive debt covenants or require the company to reduce or cease activities if funding is unavailable.
The company relies on a limited number of third-party manufacturers, with some critical materials sourced from single suppliers. Manufacturing, supply-chain, reimbursement, regulatory, competitive and product-acceptance risks are significant.
Fresenius Kabi filed an ANDA seeking approval of a generic CINVANTI before expiration of Heron’s patents. Heron filed patent litigation in July 2022; a five-day bench trial is scheduled for June 2024. FDA approval of the ANDA may be barred until the earlier of December 14, 2024 or resolution of the litigation.
Heron is defending its CINVANTI franchise against generic competition and faces existing generic competition affecting CINVANTI and SUSTOL.
The company reported no material weakness in internal control; management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor was not required to provide an internal-control attestation because Heron is a smaller reporting company.

Most important facts for investors to verify

Whether ZYNRELEF achieves meaningful U.S. label expansion and commercial adoption, including the outcome of the October 2023 regulatory review.
Whether APONVIE’s launch generates sufficient incremental revenue without materially increasing commercial spending.
Cash burn, cash runway and the likelihood, timing and terms of additional financing.
Execution of the $103.7 million of manufacturing purchase obligations relative to available liquidity and product demand.
Results and timing of the CINVANTI patent litigation and any generic launch risk.
Whether large-scale manufacturing produces the expected reduction in product costs and improves gross margins.
Trends in product returns, rebates, discounts and other sales allowances, which materially affect reported net revenue.
Potential inventory write-downs, particularly for ZYNRELEF and other products with uncertain demand or shelf life.
Whether the company can reduce losses while maintaining commercialization and development activities.