Heron Therapeutics, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Heron is a commercial-stage biotechnology company focused on acute-care and oncology products using its Biochronomer drug-delivery technology. The filing covers the three and six months ended June 30, 2022, with comparisons to the same periods in 2021. Commercial products are CINVANTI, SUSTOL and ZYNRELEF; key development programs include HTX-019 for postoperative nausea and vomiting and HTX-034 for postoperative pain.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net product sales | $27.6 million | $22.4 million | $51.1 million | $42.5 million |
| Cost of product sales | $16.2 million | $14.5 million | $27.5 million | $23.7 million |
| Gross profit | $11.5 million | $7.9 million | $23.6 million | $18.7 million |
| Gross margin | 41.5% | 35.3% | 46.1% | 44.1% |
| Operating loss | $49.5 million | $60.5 million | $112.4 million | $112.6 million |
| Net loss | $56.4 million | $61.0 million | $120.2 million | $113.6 million |
| Net loss per share | $0.55 | $0.62 | $1.18 | $1.20 |
- CINVANTI sales were $22.7 million in Q2 and $43.0 million for the six months, up from $19.7 million and $38.2 million, respectively.
- SUSTOL sales were $2.4 million in Q2 and $4.5 million year to date; Q2 sales declined versus 2021, while six-month sales increased modestly.
- ZYNRELEF sales were $2.5 million in Q2 and $3.6 million year to date. The product was not sold in the comparable 2021 periods because U.S. commercial sales began in July 2021.
- Research and development expense was $28.8 million in Q2 and $70.9 million year to date. Sales and marketing expense was $22.9 million and $46.4 million, respectively. General and administrative expense was $9.2 million and $18.7 million.
- Other expense increased to $6.9 million in Q2 and $7.8 million year to date, primarily due to a write-off of property and equipment at a third-party manufacturing site.
- Cash used in operating activities was $72.3 million for the six months, compared with $104.9 million in 2021. Investing activities provided $30.7 million, primarily from net maturities of short-term investments.
- Cash, cash equivalents and short-term investments totaled $83.5 million at June 30, 2022, compared with $157.6 million at December 31, 2021. Total current assets were $194.2 million and total current liabilities were $109.5 million.
- Convertible notes had a carrying value of $149.2 million and a principal amount of $150.0 million, bearing interest at 1.5% and maturing May 26, 2026, unless earlier converted, redeemed or repurchased.
- Accumulated deficit was $1.734 billion, and stockholders’ equity was a deficit of $21.7 million at June 30, 2022.
Material changes versus the prior comparable periods
- Net product sales increased 23% in Q2 and 20% for the six months, driven primarily by higher CINVANTI sales and the initial contribution from ZYNRELEF.
- Gross margin improved despite a $2.5 million write-off of primarily short-dated ZYNRELEF inventory. The comparable 2021 periods included a $3.1 million write-off of short-dated SUSTOL inventory.
- Q2 operating loss narrowed by $11.0 million, while the six-month operating loss was broadly unchanged. Net loss improved in Q2 but increased year to date because of higher other expense.
- Research and development expense declined year to date, mainly due to lower PONV and HTX-034 spending, partially offset by increased ZYNRELEF production scale-up, validation and raw-material qualification costs.
- Six-month sales and marketing expense increased $8.9 million, primarily due to ZYNRELEF launch activities and the sales force hired in 2021.
- In June 2022, Heron implemented a workforce reduction expected to eliminate approximately 34% of employees. The company expects total restructuring costs of $5.9 million, including $3.3 million recognized through June 30 and the remainder expected in the third and fourth quarters of 2022.
- Inventory increased to $61.3 million from $48.4 million at year-end, including $37.4 million related to ZYNRELEF.
Guidance, outlook, risks and unusual items
- On August 8, 2022, Heron agreed to sell 16.1 million common shares and 8.5 million pre-funded warrants. Expected net proceeds were $75.2 million, subject to closing conditions. Management stated that, including these proceeds, available cash and investments should fund anticipated requirements for at least one year from the filing date.
- Without the August financing, management concluded that there was substantial doubt about the company’s ability to continue as a going concern for at least one year from the filing date.
- Management expected to submit a ZYNRELEF efficacy supplement in the second half of 2022 to pursue a broader U.S. label. ZYNRELEF availability in Europe and Canada was anticipated in the first half of 2023.
- The FDA’s PDUFA goal date for the HTX-019 NDA was September 17, 2022. The HTX-034 program was paused while Heron focused on ZYNRELEF label expansion.
- Heron received a Paragraph IV notice from Fresenius Kabi regarding a proposed generic version of CINVANTI and filed patent litigation on July 27, 2022. The FDA may be barred from approving the ANDA until the earlier of December 14, 2024 or resolution of the litigation.
- Key risks include continued losses and cash burn, dependence on product acceptance and reimbursement, generic competition, manufacturing and supply constraints, regulatory and clinical uncertainty, reliance on third-party manufacturers and CROs, COVID-19 and geopolitical disruptions, inventory write-downs, and the need for additional capital.
- Customer concentration is significant: three customers represented 98.8% of Q2 net product sales and 98.8% of accounts receivable at June 30, 2022.
- Disclosure controls and procedures were considered effective at the reasonable-assurance level, with no reported material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the August 2022 private placement closed as planned and whether the $75.2 million net proceeds were received.
- Actual cash burn, product sales growth and ZYNRELEF adoption relative to the assumptions supporting management’s liquidity outlook.
- Progress and regulatory outcomes for the ZYNRELEF supplemental filing and HTX-019 NDA.
- The timing, cost and outcome of the CINVANTI Paragraph IV patent litigation and any potential generic entry.
- Whether the workforce reduction produces the anticipated savings without impairing commercialization, regulatory execution or product development.
- Future inventory utilization and any additional ZYNRELEF write-offs, returns or changes in product-sale allowances.
- Ability to service the $150.0 million convertible notes and obtain additional financing if operating losses continue.