Heron Therapeutics, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Heron Therapeutics is a commercial-stage biotechnology company developing and commercializing products for acute-care and oncology patients. Its marketed products are ZYNRELEF, APONVIE, CINVANTI and SUSTOL. The filing covers the three and nine months ended September 30, 2023; all financial amounts are in thousands unless otherwise stated.
HTX-034 development was paused following changes to the executive management team while the Company evaluates the program and its market potential. APONVIE launched in the United States in March 2023.
Financial performance and position
| Metric | Three months ended September 30 | Change | Nine months ended September 30 | Change |
|---|---|---|---|---|
| Net product sales | $31.4 million | 18.4% increase | $92.8 million | 19.5% increase |
| Gross profit | $13.2 million | 11.7% increase | $37.6 million | 6.2% increase |
| Gross margin | 42.1% | 44.6% prior year | 40.5% | 45.6% prior year |
| Loss from operations | $(24.9) million | Improved from $(41.9) million | $(100.4) million | Improved from $(154.3) million |
| Net loss | $(25.0) million | $(0.17) per share | $(99.8) million | $(0.75) per share |
| Net cash used in operating activities | Not provided for the quarter | — | $(61.2) million | $(109.4) million prior year |
Quarterly sales growth was led by CINVANTI sales of $23.3 million, ZYNRELEF sales of $4.4 million, SUSTOL sales of $3.4 million and APONVIE sales of $0.4 million. Nine-month sales were $70.6 million for CINVANTI, $12.0 million for ZYNRELEF, $9.3 million for SUSTOL and $0.9 million for APONVIE.
Cost of product sales was $18.2 million in the quarter and $55.2 million year to date. These amounts included ZYNRELEF inventory write-offs of $7.5 million and $20.3 million, respectively, compared with $2.0 million and $4.5 million in the comparable 2022 periods.
Research and development expense decreased to $13.6 million for the quarter and $44.9 million year to date, primarily because 2022 scale-up, validation and raw-material qualification activities had been completed and personnel costs declined. General and administrative expense increased to $11.6 million and $37.7 million, primarily due to executive-departure costs and CINVANTI patent litigation. Sales and marketing expense decreased to $13.0 million and $55.3 million, primarily due to improved ZYNRELEF commercialization efficiencies.
At September 30, 2023, cash and cash equivalents were $34.9 million, short-term investments were $42.6 million and total liquidity was $77.4 million. Accounts receivable were $63.8 million and inventory was $42.0 million. Total liabilities were $257.0 million, including $24.0 million of working-capital debt and $149.4 million of senior unsecured convertible notes. Stockholders’ deficit was $27.8 million.
Material changes versus the prior comparable period
- Net product sales increased 18.4% in the quarter and 19.5% for the first nine months, with growth across CINVANTI, SUSTOL and ZYNRELEF and the addition of APONVIE sales.
- Operating and net losses narrowed substantially, primarily because of lower research and development spending and lower sales and marketing costs.
- Gross margin declined because of significant ZYNRELEF inventory write-offs.
- Operating cash burn improved by $48.1 million year to date, although the Company continued to use significant cash in operations.
- In July 2023, Heron raised $29.8 million net through a private placement of common stock and pre-funded warrants. In August 2023, it borrowed $25.0 million under a new working-capital facility, generating $24.4 million net proceeds after debt-related items.
- Common shares outstanding increased to 141.1 million at September 30, 2023 from 119.2 million at December 31, 2022; the filing reported 150.1 million shares outstanding as of November 10, 2023.
- The Company recorded $3.7 million of June 2023 restructuring expense and $13.4 million related to executive departures during the first nine months.
Guidance, outlook, commentary and risks
Management stated that the $77.4 million of cash, cash equivalents and short-term investments is expected to fund anticipated cash requirements for at least one year from the filing date, based on the current operating plan and projections. The filing does not provide formal revenue or earnings guidance.
The FDA extended the PDUFA goal date for the ZYNRELEF supplemental application by three months to January 23, 2024. Heron cancelled its U.K. and European Union ZYNRELEF marketing authorizations and withdrew its Canadian submission because it does not plan to commercially launch there.
The new working-capital facility permits aggregate borrowings of up to $50.0 million in tranches. Borrowings carry cash interest at 9.95% per year as of closing and paid-in-kind interest at 1.5% per year. The facility includes an $8.5 million minimum-cash covenant under specified market-capitalization conditions; Heron was in compliance at September 30, 2023.
Fresenius Kabi and Mylan have each filed paragraph IV challenges relating to CINVANTI patents. Litigation is ongoing, with a Fresenius Kabi bench trial scheduled for June 24, 2024. The patent litigation may delay FDA approval of the respective generic applications, but an adverse outcome could expose CINVANTI sales to generic competition.
Three customers represented 99.4% of quarterly product sales, 99.0% of nine-month product sales and 99.7% of accounts receivable at September 30, 2023. Other key risks include product-market acceptance, reimbursement and pricing, manufacturing and supply constraints, regulatory approval, patent protection, competition, continued operating losses and the need for additional financing.
Most important facts for investors to verify
- Whether the current $77.4 million liquidity balance and operating cash burn support management’s stated one-year funding assessment.
- The scale, timing and potential recurrence of ZYNRELEF inventory write-offs and their effect on gross margin.
- Progress and outcome of the CINVANTI patent litigation and potential timing of generic competition.
- The FDA’s January 23, 2024 PDUFA decision and the commercial implications of any expanded ZYNRELEF label.
- APONVIE adoption, reimbursement and contribution to future revenue growth following its 2023 launch.
- Terms, covenant compliance, interest burden and future availability under the working-capital facility, including the senior convertible notes’ May 2026 maturity.
- The impact of executive turnover, restructuring, the paused HTX-034 program and continued customer concentration.