HERON THERAPEUTICS, INC. annual report, FY2021

Heron Therapeutics, Inc. — FY2021 Form 10-K Summary

Business context and reporting period

Heron Therapeutics is a commercial-stage biotechnology company developing and commercializing acute-care and oncology treatments using its Biochronomer drug-delivery technology. This Form 10-K covers the fiscal year ended December 31, 2021, filed February 28, 2022.

Commercial products: CINVANTI and SUSTOL for chemotherapy-induced nausea and vomiting, and ZYNRELEF for postsurgical pain.
ZYNRELEF launched in the U.S. in July 2021 following FDA approval in May 2021. Its U.S. label was significantly expanded in December 2021.
Pipeline products include HTX-019 for postoperative nausea and vomiting and HTX-034 for postoperative pain.

Financial performance and key metrics

Metric	FY2021	FY2020	Change
Net product sales	$86.3 million	$88.6 million	Down $2.3 million
Cost of product sales	$46.0 million	$36.2 million	Up $9.8 million
Gross profit	$40.3 million	$52.4 million	Down $12.1 million
Gross margin	46.7%	59.1%	Down 12.4 percentage points
Research and development	$130.8 million	$174.5 million	Down $43.7 million
General and administrative	$40.2 million	$42.2 million	Down $2.1 million
Sales and marketing	$87.2 million	$63.9 million	Up $23.3 million
Loss from operations	$(217.8) million	$(228.2) million	Improved by $10.3 million
Net loss	$(220.7) million	$(227.3) million	Improved by $6.6 million
Basic and diluted loss per share	$(2.24)	$(2.50)	Improved by $0.26
Net cash used in operating activities	$(203.4) million	$(184.8) million	Use increased by $18.5 million

Calculated operating and net margins remained deeply negative at approximately 252% and 256% of net product sales, respectively. The filing reports an accumulated deficit of $1.6 billion at December 31, 2021.

CINVANTI sales were $73.5 million, down from $87.8 million, primarily due to COVID-19-related reductions in cancer screening and treatment starts and continuing generic competition and reimbursement arbitrage.
SUSTOL sales were $9.9 million, up from $0.8 million after Heron reinstated promotion and contracting in the first quarter of 2021.
ZYNRELEF generated $2.9 million of sales after its July 2021 U.S. launch.
Cost of product sales included a $3.8 million write-off of short-dated SUSTOL inventory, compared with $0.1 million in 2020.
Stock-based compensation expense was $46.9 million, compared with $50.2 million in 2020.

Cash flow, liquidity, debt and commitments

Cash, cash equivalents and short-term investments totaled $157.6 million at year-end, down from $208.5 million at year-end 2020. This included $90.5 million of cash and cash equivalents and $67.0 million of short-term investments.
Operating cash burn was $203.4 million. Investing activities provided $32.7 million, primarily from net maturities of short-term investments, while financing activities provided $156.0 million.
In May 2021, Heron issued $150.0 million of senior unsecured convertible notes, receiving $149.0 million net of issuance costs. The notes bear 1.5% annual interest and mature May 26, 2026, unless earlier converted, redeemed or repurchased.
The notes had a carrying value of $149.1 million at December 31, 2021 and are convertible initially at $15.276 per share. Approximately 9.8 million underlying shares were excluded from diluted loss per share because they were anti-dilutive.
Former secured convertible notes matured and were converted in May 2021, resulting in the issuance of approximately 9.8 million shares and no remaining obligations under those notes.
Operating lease liabilities totaled $10.4 million, and the filing disclosed $2.1 million of capital expenditure commitments due within one year and $98.7 million of non-cancellable purchase obligations due within one to two years.
Management stated that existing liquidity is expected to fund anticipated requirements for at least one year from the filing date, but this assessment depends substantially on assumptions regarding the market opportunity for the recently expanded ZYNRELEF label.

Material changes, outlook and unusual items

R&D spending declined as ZYNRELEF advanced through approval and commercialization; Heron expects R&D expense to decrease in 2022.
Sales and marketing expense increased because of the ZYNRELEF launch and ongoing commercialization of CINVANTI and SUSTOL; Heron expects sales and marketing expense to increase in 2022 because 2021 included only a partial year of acute-care sales-force costs.
General and administrative expense is expected to remain consistent with 2021.
FDA approved larger-scale manufacturing supplements for CINVANTI and ZYNRELEF in the fourth quarter of 2021. Management expects these changes to reduce product costs and support production at commercial scale.
Heron submitted the HTX-019 NDA in November 2021; the FDA accepted the filing and set a Prescription Drug User Fee Act goal date of September 17, 2022.
Heron expects to make ZYNRELEF available in Europe in late 2022. A future U.S. efficacy supplement to further expand the ZYNRELEF indication was planned for submission in the second half of 2022.
The GUARDS-1 Phase 2 CINVANTI study in hospitalized COVID-19 patients was terminated early because declining hospitalizations slowed enrollment.
Work on HTX-034 was temporarily postponed while Heron focused on expanding ZYNRELEF’s indication; the program was being reevaluated.
An October 2021 restructuring generated $1.6 million of expense, primarily severance, including $1.3 million paid by year-end.

Principal risks and contingencies

Heron has a history of substantial losses and negative operating cash flow and may require additional capital. Additional financing could be unavailable or could dilute stockholders or impose restrictive debt covenants.
Commercial performance depends heavily on market acceptance, pricing and reimbursement, formulary access, execution of the ZYNRELEF launch and competition from branded and generic products.
Generic competition has materially affected CINVANTI and SUSTOL sales. The filing also identifies significant competition for ZYNRELEF in postoperative pain management.
Heron relies on a small number of third-party manufacturers and, for certain critical materials and components, single suppliers. Manufacturing scale-up, supply interruptions, quality problems or product inventory write-downs could materially affect results.
COVID-19 may continue to reduce cancer treatments and elective surgeries, disrupt clinical trials and supply chains, and affect regulatory and commercial activities.
HTX-019 remains subject to FDA review, and HTX-034 remains an investigational program. Regulatory approval, clinical success and expanded indications are not assured.
Product sales are concentrated among three customers, which represented 98.8% of FY2021 net product sales and 99.3% of accounts receivable at year-end.
Product returns and other sales allowances totaled $159.7 million in 2021. The auditors identified product-return estimates as a critical audit matter because they require significant judgment.
There were no material legal proceedings reported. Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2021.

Investor verification checklist

Verify whether ZYNRELEF sales accelerate following the December 2021 U.S. label expansion and whether the expected European launch occurs in late 2022.
Monitor CINVANTI sales for stabilization or growth as generic arbitrage effects diminish, and assess whether SUSTOL’s higher sales level is sustainable.
Reconcile operating cash burn, liquidity and the $98.7 million of manufacturing purchase obligations against projected product revenue and gross-margin improvement.
Track the FDA’s action on HTX-019 by the September 17, 2022 goal date and any further regulatory submissions for ZYNRELEF.
Evaluate manufacturing scale-up, supplier concentration, inventory aging and the risk of additional product write-offs.
Review the terms, conversion economics and potential dilution associated with the $150.0 million convertible notes.