Business Context and Reporting Period
Heron Therapeutics, Inc. (formerly A.P. Pharma, Inc.) filed its Form 10-K for the fiscal year ended December 31, 2013. The company is a clinical-stage specialty pharmaceutical developer focused on its Biochronomer polymer-based drug-delivery platform.
The lead candidate, Sustol (APF530), is a single subcutaneous injection of granisetron designed to maintain therapeutic levels for five days and prevent acute and delayed chemotherapy-induced nausea and vomiting. Sustol had not been approved or commercialized at year-end.
In January 2014, the company changed its name to Heron Therapeutics, effected a one-for-twenty reverse stock split, and began trading on the NASDAQ Capital Market under the symbol HRTX.
Financial Performance and Position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No change |
| Research and development expense | $32.8 million | $15.2 million | Up 116% |
| General and administrative expense | $21.7 million | $8.7 million | Up 150% |
| Operating loss | $54.5 million | $23.8 million | Loss increased $30.6 million |
| Net loss | $55.3 million | $23.3 million | Loss increased $31.9 million |
| Net loss per share | $3.42 | $1.91 | Loss per share increased |
| Cash used in operating activities | $40.8 million | $17.0 million | Use increased $23.8 million |
| Cash and cash equivalents | $72.3 million | $53.5 million | Increased $18.8 million |
Revenue was zero because the prior Merial development arrangement had been terminated in 2011. The company reported no income-tax benefit and maintained a full valuation allowance against deferred tax assets.
At December 31, 2013, total assets were $75.9 million, working capital was $65.9 million, and stockholders’ equity was $68.9 million. Accumulated deficit was $238.9 million.
Convertible notes had a carrying value of approximately $1.0 million, against approximately $5.0 million of principal, after debt discount. The notes bear 6% interest, mature in 2021, are secured by substantially all company assets, and may be required to be prepaid at the holders’ option. The notes could convert into approximately 6.0 million shares, subject to ownership limitations.
The company had no marketable securities at year-end and reported no off-balance-sheet arrangements. Cash provided by financing activities was $61.2 million, including net proceeds of approximately $57.8 million from the November 2013 common-stock offering.
Material Changes Versus the Prior Comparable Period
- Research and development spending more than doubled, driven primarily by Sustol clinical, manufacturing-scale-up, validation, and regulatory-response activities.
- General and administrative expense increased substantially due to increased personnel, stock compensation, consulting, professional fees, market research, and pre-commercialization activities.
- Net cash used in operations increased materially as the company expanded Sustol development and commercialization preparation.
- Shareholders’ equity increased to $68.9 million from $51.8 million, primarily reflecting the 2013 equity offering and other stock issuances, partially offset by the annual net loss.
- Stock-based compensation expense increased to $10.9 million from $5.7 million and represented a significant non-cash expense.
- The 2012 discontinued-operations gain of $1.1 million did not recur in 2013. The gain related primarily to reversal of an accrual after an arbitrator determined that no additional amount was owed under a legacy gross-profit guarantee.
Guidance, Outlook, Risks, and Unusual Items
Management expected to resubmit the Sustol NDA in the second quarter of 2014. The FDA’s March 2013 Complete Response Letter identified unresolved contract-manufacturing deficiencies, required repeat Human Factors testing using commercial-supplier materials, and requested data sets and algorithms for reanalysis under revised ASCO CINV guidelines.
The company planned a 1,000-patient Phase 3 study in the first half of 2014 to evaluate Sustol for delayed CINV in patients receiving highly emetogenic chemotherapy; completion was expected in late 2014. It also planned to optimize a post-surgical pain formulation and begin a Phase 1 study in the second half of 2014.
Management stated that 2014 research and development and general and administrative expenses were expected to increase. Existing working capital was expected to fund essential operations into 2015, but additional capital would be needed if the company pursued additional clinical studies or launched Sustol before then.
- Sustol remained dependent on FDA approval after two Complete Response Letters; approval timing and outcome were uncertain.
- The company relied on a small number of third-party manufacturers, had no long-term manufacturing agreements, and still needed commercial-scale production and validation.
- The company had no product revenue, recurring operating losses, and substantial additional development and commercialization costs ahead.
- Additional equity financing could dilute existing shareholders, while debt or collaboration financing could impose restrictive terms or require surrender of valuable rights.
- Commercial success would depend on market acceptance, reimbursement, pricing, competition from Aloxi and generic antiemetics, manufacturing economics, and the ability to build a sales organization.
- Patents covering Biochronomer technologies and Sustol had expiration dates beginning as early as 2016, creating intellectual-property and lifecycle risks.
Most Important Facts to Verify
- Whether the Sustol NDA was resubmitted on schedule and how the FDA addressed the outstanding manufacturing, administration, and clinical-data issues.
- Actual cash burn and remaining liquidity relative to the stated ability to fund essential operations into 2015.
- Terms, maturity, holder prepayment rights, security interests, and potential dilution from the convertible notes, options, and warrants.
- Progress, cost, enrollment, and results of the planned Phase 3 delayed-HEC study and post-surgical pain program.
- Commercial manufacturing readiness, contract-manufacturer inspection results, scale-up costs, and expected product margins if Sustol is approved.
- Future financing requirements and the potential dilution or strategic concessions associated with raising additional capital.
- Use and expiration limitations applicable to the company’s federal and state net operating losses and research credits.