Heron Therapeutics, Inc. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed February 24, 2021. The filing is an annual report, not a quarterly filing. Heron is a commercial-stage biotechnology company focused on cancer-supportive care and non-opioid pain management. Commercial products were CINVANTI and SUSTOL in the U.S.; ZYNRELEF received European Commission marketing authorization in September 2020 but was not yet commercially launched.
Financial performance and position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net product sales | $88.6 million | $146.0 million | Down 39.3% |
| Cost of product sales | $36.2 million | $61.6 million | Down 41.3% |
| Gross profit | $52.4 million | $84.3 million | Down 37.9% |
| Approximate gross margin | 59.1% | 57.8% | Up approximately 1.3 percentage points |
| Research and development expense | $174.5 million | $167.4 million | Up 4.3% |
| General and administrative expense | $42.2 million | $37.9 million | Up 11.4% |
| Sales and marketing expense | $63.9 million | $89.8 million | Down 28.9% |
| Loss from operations | $(228.2) million | $(210.7) million | Loss increased |
| Net loss | $(227.3) million | $(204.7) million | Loss increased 11.0% |
| Net loss per share | $(2.50) | $(2.50) | Unchanged |
| Net cash used in operations | $(184.8) million | $(124.6) million | Use increased |
| Cash, cash equivalents and short-term investments | $208.5 million | $391.0 million | Down 46.7% |
Product revenue: CINVANTI sales were $87.8 million, down from $132.2 million, primarily due to generic competition and related generic arbitrage. SUSTOL sales were $0.8 million, down from $13.8 million, following the October 2019 decision to discontinue discounting.
Liquidity: Working capital was $211.7 million at year-end, compared with $382.4 million in 2019. Management stated that existing cash, cash equivalents and short-term investments were sufficient to meet anticipated requirements for at least one year from the filing date. The company nevertheless expects continued losses and may require additional capital.
Debt: Secured convertible notes had $7.6 million of principal outstanding at December 31, 2020, with a $7.1 million carrying value, a 6% interest rate and maturity on May 2, 2021. The notes are secured by substantially all company assets and were convertible into approximately 9.5 million common shares, representing approximately 9.4% dilution after conversion. Holders could require prepayment at their option.
Cash flow and commitments: Investing activities provided $209.0 million, mainly because of net maturities of short-term investments. Financing activities provided $9.1 million, compared with $186.4 million in 2019, when the company completed a $162.2 million public offering. Contractual obligations totaled $109.7 million, including $84.7 million of purchase obligations, $20.8 million of lease obligations and $4.1 million of capital expenditure commitments.
Material changes versus the prior comparable period
- Revenue declined materially because of generic competition affecting CINVANTI and the discontinuation of SUSTOL discounting.
- Operating loss widened despite lower commercial spending, primarily because the revenue decline exceeded the reduction in sales and marketing expense.
- Research and development expense increased to $174.5 million, with HTX-011-related spending of $95.5 million and continued investment in HTX-034 and CINVANTI programs.
- Sales and marketing expense decreased by $25.9 million, partly because 2019 included one-time costs related to the retirement of the former president and higher launch-preparation spending.
- Inventory increased to $41.9 million from $25.0 million, primarily reflecting CINVANTI inventory and manufacturing scale-up. CINVANTI represented $37.8 million of 2020 inventory.
- In October 2020, Heron implemented a reorganization that generated $5.6 million of expense, including $2.5 million of cash severance and $3.1 million of non-cash stock-based compensation.
- Cash and investments fell by $182.5 million, reflecting the substantial operating cash burn and deployment of investment balances, partially offset by investment maturities.
Pipeline, outlook and management commentary
- HTX-011/ZYNRELEF: The FDA issued a Complete Response Letter in June 2020 requesting additional non-clinical information. The FDA identified no clinical safety or efficacy issues and no chemistry, manufacturing and controls issues. Heron met with the FDA in September, addressed the identified items and resubmitted the NDA in November 2020. The PDUFA goal date was May 12, 2021. ZYNRELEF was authorized in Europe, and Heron anticipated European availability during 2022.
- HTX-034: A Phase 1b/2 study began in May 2020. In the 33-patient Phase 1b portion, the company reported improved pain reduction and lower opioid consumption versus bupivacaine solution. Heron expected to begin the expanded Phase 2 portion in the first quarter of 2021.
- HTX-019: The FDA accepted an IND for postoperative nausea and vomiting in September 2020. A Phase 1 study showed bioequivalence to oral aprepitant, and an NDA was planned for late 2021.
- CINVANTI for COVID-19: The GUARDS-1 Phase 2 study was initiated in July 2020 to evaluate CINVANTI added to standard care in early hospitalized COVID-19 patients. The program remained early-stage and required additional testing and funding.
- Management expected research and development expense and general and administrative expense to remain comparable in 2021, while sales and marketing expense was expected to increase significantly to support a potential HTX-011 launch.
- Management expected growth in the CINVANTI franchise in 2021 and beyond, stating that the most significant impact of generic arbitrage was over. This outlook remains dependent on competitive conditions and market demand.
Key risks, contingencies and unusual items
- Heron has a history of substantial losses, negative operating cash flow and an accumulated deficit of $1.4 billion at December 31, 2020; management expects losses to continue for several years.
- Additional financing may be required. Equity financing could dilute shareholders, while debt financing could be constrained by the secured convertible notes and their restrictive covenants.
- Regulatory approval for HTX-011 in the U.S. remained uncertain despite the NDA resubmission and favorable FDA feedback on the deficiencies.
- Generic competition reduced CINVANTI and SUSTOL sales and may continue to pressure pricing, reimbursement and market share. The filing also identifies significant competition for postoperative pain, PONV and COVID-19 treatments.
- The company relies on a small number of third-party manufacturers and single suppliers for certain materials and has no owned manufacturing facilities. Supply interruptions, manufacturing failures or scale-up delays could affect commercialization.
- COVID-19 could reduce cancer treatments and elective surgeries, disrupt clinical trials and manufacturing, delay regulatory reviews and impair access to capital.
- Revenue is highly concentrated: three customers represented 98.3% of 2020 net product sales and 99.6% of accounts receivable at year-end.
- Product sales allowances were $119.1 million in 2020, and estimates for product returns require significant judgment. Changes in these estimates could materially affect revenue and earnings.
- Patent protection for certain Biochronomer technologies and SUSTOL begins expiring in 2021, while other product patents extend into 2034 or 2035. Patent challenges and additional generic entry remain material risks.
- The company reported no material legal proceedings and received unqualified audit opinions on its financial statements and internal control over financial reporting.
Important facts for investors to verify
- Actual 2021 and subsequent CINVANTI sales, including the effect of generic competition and reimbursement trends.
- FDA action on the resubmitted HTX-011 NDA and the commercial launch timing, pricing and manufacturing readiness for ZYNRELEF.
- Cash burn, remaining liquidity and whether additional equity or debt financing is required before sustainable profitability.
- Status, enrollment, results and funding requirements for HTX-034, HTX-019 and the GUARDS-1 COVID-19 study.
- Conversion, repayment or refinancing of the $7.6 million secured convertible notes and the potential dilution of approximately 9.5 million shares.
- Inventory utilization and potential write-downs, particularly the $37.8 million of CINVANTI inventory and the company’s manufacturing commitments.
- Customer concentration, product-return assumptions and the adequacy of the $24.6 million accrued product sales allowances at year-end.