Heron Therapeutics, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Heron Therapeutics is a commercial-stage biotechnology company developing and commercializing treatments for acute care and oncology. This report covers the three and six months ended June 30, 2021; the filing was signed August 9, 2021.
- Commercial products were CINVANTI and SUSTOL in the United States.
- ZYNRELEF received FDA approval in May 2021 and U.S. commercial sales began in July 2021, after the reporting period.
- Pipeline programs included HTX-034 for postoperative pain and HTX-019 for postoperative nausea and vomiting.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net product sales | $22.4 million | $22.7 million | $42.5 million | $48.1 million |
| Gross profit | $7.9 million | $13.7 million | $18.7 million | $28.4 million |
| Gross margin | 35.3% | 60.3% | 44.1% | 59.2% |
| Loss from operations | $(60.5) million | $(55.7) million | $(112.6) million | $(108.5) million |
| Net loss | $(61.0) million | $(55.2) million | $(113.6) million | $(106.8) million |
| Net loss per share | $(0.62) | $(0.61) | $(1.20) | $(1.18) |
| Operating cash flow | Not separately provided | Not separately provided | $(104.9) million | $(90.2) million |
Research and development expense was $35.2 million in Q2 and $73.3 million year to date, while sales and marketing expense was $22.3 million in Q2 and $37.5 million year to date. Cash, cash equivalents and short-term investments totaled $257.7 million at June 30, 2021, including $191.2 million of cash and cash equivalents and $66.5 million of short-term investments.
Total assets were $404.3 million and stockholders’ equity was $160.1 million at June 30, 2021. Total debt was $149.0 million, consisting primarily of senior unsecured convertible notes issued in May 2021. The notes have a 1.5% coupon, mature May 26, 2026, and initially convert at $15.276 per share.
Material changes versus the prior comparable period
- Quarterly revenue was broadly flat, but six-month revenue declined 11.7%, primarily because CINVANTI sales decreased to $38.2 million from $47.8 million. The filing attributes this to reduced cancer screening and treatment starts associated with COVID-19 and lingering generic arbitrage.
- SUSTOL sales increased to $2.7 million in Q2 and $4.3 million year to date, compared with $0.1 million and $0.3 million, respectively, following the reinstatement of promotion and contracting in the first quarter of 2021.
- Cost of product sales increased to $14.5 million in Q2 from $9.0 million and included a $3.1 million write-off of short-dated SUSTOL inventory, materially reducing gross margin.
- Research and development expense declined year to date, mainly due to lower ZYNRELEF-related spending, while sales and marketing expense increased due to preparation for the ZYNRELEF launch and continued commercialization of CINVANTI and SUSTOL.
- Net loss increased by $5.8 million in Q2 and $6.9 million year to date. Operating cash use increased by $14.7 million year to date.
- Cash increased by $86.0 million during the first six months, principally because the $149.0 million convertible-note financing more than offset operating cash burn.
- In May 2021, holders converted the legacy senior secured convertible notes into approximately 9.8 million common shares, eliminating those obligations. The company also issued approximately 9.8 million shares underlying the new convertible notes for resale registration purposes, including potential make-whole shares.
Guidance, outlook, commentary and risks
Management stated that existing cash, cash equivalents and short-term investments were expected to fund anticipated requirements for at least one year from the filing date. The filing does not provide formal revenue, earnings or cash-burn guidance.
- Management expected oncology-care revenue growth in 2021 and beyond, while acknowledging continued effects from generic competition and reimbursement-related generic arbitrage on CINVANTI.
- ZYNRELEF U.S. commercialization began in July 2021; European availability was anticipated during 2022. The Canadian regulatory review could extend up to 300 days following screening of the company’s responses.
- An NDA for HTX-019 was planned for late 2021, and the expanded Phase 2 portion of the HTX-034 study began in the first quarter of 2021.
- The GUARDS-1 Phase 2 CINVANTI COVID-19 study was terminated early because declining hospitalization reduced enrollment.
- Key risks include continued operating losses and negative operating cash flow, the need for future capital, uncertain adoption and reimbursement of ZYNRELEF, generic competition, COVID-19 effects on cancer treatment and elective surgery, manufacturing and supply-chain dependence, clinical and regulatory uncertainty, product liability, intellectual-property challenges and healthcare pricing regulation.
- Three major customers represented 99.2% of Q2 product sales and 99.6% of accounts receivable at June 30, 2021, indicating substantial customer concentration.
Most important facts for investors to verify
- Whether ZYNRELEF achieves commercial uptake and reimbursement following its July 2021 launch.
- Whether CINVANTI sales stabilize or recover despite generic competition and COVID-19-related treatment disruption.
- The pace of cash burn relative to the $257.7 million liquidity balance and the potential timing of additional financing.
- The terms, dilution potential and conversion mechanics of the $150.0 million convertible notes.
- Whether the $3.1 million SUSTOL inventory write-off is isolated or signals continuing inventory or demand risk.
- Progress and regulatory outcomes for HTX-019, HTX-034, ZYNRELEF’s European and Canadian opportunities, and related clinical programs.