Heron Therapeutics, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Heron Therapeutics is a commercial-stage biotechnology company developing and commercializing treatments for cancer-related nausea and vomiting, postoperative pain, and other conditions using its Biochronomer drug-delivery technology. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
- Commercial products were CINVANTI and SUSTOL in the United States.
- ZYNRELEF, also known as HTX-011, received European Commission marketing authorization in September 2020; the company anticipated European availability in the second half of 2021.
- HTX-011 remained investigational in the United States and Canada after the FDA issued a Complete Response Letter in June 2020.
- HTX-034 was in a Phase 1b/2 bunionectomy study initiated in May 2020.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net product sales | $20.0 million | $42.6 million | $68.0 million | $110.9 million |
| Cost of product sales | $7.2 million | $17.2 million | $26.8 million | $45.7 million |
| Gross margin | 64.1% | 59.6% | 60.6% | 58.7% |
| Research and development | $49.2 million | $34.7 million | $130.1 million | $119.1 million |
| General and administrative | $9.5 million | $8.6 million | $29.7 million | $28.0 million |
| Sales and marketing | $12.5 million | $17.0 million | $48.3 million | $69.3 million |
| Loss from operations | $(58.4) million | $(34.9) million | $(166.9) million | $(151.3) million |
| Net loss | $(58.2) million | $(33.6) million | $(165.0) million | $(146.8) million |
| Net loss per share | $(0.64) | $(0.42) | $(1.82) | $(1.85) |
- CINVANTI sales were $19.8 million in Q3 and $67.6 million for the nine months, versus $36.4 million and $97.6 million, respectively, in the prior-year periods.
- SUSTOL sales were $0.2 million in Q3 and $0.4 million for the nine months, versus $6.2 million and $13.3 million, respectively, in 2019.
- Research and development spending increased primarily because of higher HTX-011 and CINVANTI-related costs.
- Stock-based compensation was $11.1 million in Q3 and $34.2 million for the nine months.
Cash flow, liquidity, debt, and balance sheet
- Cash, cash equivalents, and short-term investments totaled $258.1 million at September 30, 2020, down from $391.0 million at December 31, 2019.
- Cash and cash equivalents were $95.1 million, while short-term investments were $163.0 million.
- Net cash used in operating activities was $132.3 million for the nine months, compared with $97.6 million in 2019.
- Investing activities provided $152.2 million, primarily from $156.5 million of net maturities of short-term investments.
- Financing activities provided $3.3 million, principally from stock option, employee stock purchase plan, and warrant exercises.
- Current liabilities were $97.6 million and total liabilities were $112.9 million at September 30, 2020.
- Convertible notes payable to related parties had a $6.6 million carrying value and $7.5 million principal balance. The notes bear 6% interest, mature May 2, 2021, are secured by substantially all company assets, and were convertible into approximately 9.4 million common shares.
- Management stated that existing liquidity was sufficient to meet anticipated cash requirements for at least one year from the filing date.
- The company had an accumulated deficit of $1.3 billion and continued to report significant operating losses and negative operating cash flow.
Material changes versus the prior comparable periods
- Q3 net product sales decreased approximately 53% year over year; nine-month sales decreased approximately 39%.
- The decline primarily reflected increased generic competition affecting CINVANTI and SUSTOL, including generic EMEND IV competition for CINVANTI and generic ALOXI competition for SUSTOL.
- Heron discontinued all SUSTOL discounting beginning October 1, 2019, materially reducing SUSTOL net sales.
- Q3 net loss increased approximately 73% year over year, and nine-month net loss increased approximately 12%.
- Despite lower revenue, gross margin improved because 2019 cost of product sales included $1.7 million and $3.3 million of short-dated SUSTOL inventory write-offs for the quarter and nine months, respectively.
- Sales and marketing expense declined, partly because 2019 included one-time costs related to the retirement of the former president and higher HTX-011 launch-preparation spending.
- Inventory increased to $42.7 million from $25.0 million at year-end 2019, including $39.7 million related to CINVANTI.
- The San Diego office lease was expanded by 21,180 square feet, increasing right-of-use lease assets and future lease obligations.
Guidance, outlook, commentary, risks, and unusual items
- Management expected generic arbitrage effects to be resolved in 2020 and projected a return to growth for CINVANTI and SUSTOL sales in 2021 and beyond; this was company commentary rather than formal financial guidance.
- Following the FDA Complete Response Letter, Heron reported a September 2020 Type A meeting and planned to resubmit the HTX-011 NDA in the fourth quarter of 2020. The FDA identified four non-clinical issues but no clinical safety, efficacy, or chemistry, manufacturing, and controls issues according to the filing.
- Health Canada had accepted the HTX-011 submission, but Heron was responding to regulator questions and anticipated up to a 300-day review after submission of its response.
- The company initiated the GUARDS-1 Phase 2 study evaluating CINVANTI as a potential COVID-19 treatment. The program remained early stage and carried clinical, regulatory, funding, and competitive risks.
- COVID-19 could reduce cancer treatments and elective surgeries, disrupt clinical trials and manufacturing, delay regulatory reviews, and weaken product demand.
- Revenue was highly concentrated: three customers represented 98.2% of Q3 sales, 98.3% of nine-month sales, and 99.0% of accounts receivable at September 30, 2020.
- The company relied on third-party manufacturers and certain single-source suppliers, creating supply, quality, capacity, and regulatory risks.
- Heron reported no material legal proceedings and no off-balance-sheet arrangements. Disclosure controls and procedures were deemed effective at the reasonable assurance level.
- In October 2020, after the reporting date, Heron reorganized its workforce and expected $5.6 million of charges, including $2.5 million of primarily cash severance costs and $3.1 million of non-cash stock-based compensation.
Most important facts for investors to verify
- Whether CINVANTI and SUSTOL sales stabilized or returned to growth after generic competition and the SUSTOL discounting change.
- The timing and outcome of the FDA’s review of the resubmitted HTX-011 NDA and the status of Health Canada’s review.
- European launch timing, pricing, reimbursement, and commercial uptake for ZYNRELEF.
- Operating cash burn, liquidity runway, and the company’s ability to fund development and commercialization without additional capital.
- Repayment, conversion, or refinancing requirements for the secured convertible notes maturing in May 2021.
- Potential inventory write-downs, particularly the concentration of $39.7 million of inventory in CINVANTI.
- Customer concentration, generic competition, reimbursement pressure, COVID-19 effects, clinical trial execution, and third-party manufacturing dependencies.