Heron Therapeutics, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Heron Therapeutics is a commercial-stage biotechnology company developing treatments for chemotherapy-induced nausea and vomiting, postoperative pain, and other conditions using its Biochronomer drug-delivery technology. This filing covers the three and six months ended June 30, 2020; financial statements are unaudited and amounts are in thousands unless otherwise stated.
Commercial products were CINVANTI and SUSTOL. HTX-011 was under regulatory review for postoperative pain, and HTX-034 was in a Phase 1b/2 clinical study initiated in May 2020.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net product sales | $22.7 million vs. $36.7 million | $48.1 million vs. $68.3 million |
| Cost of product sales | $9.0 million vs. $13.6 million | $19.6 million vs. $28.6 million |
| Gross margin | Approximately 60.3% vs. 62.9% | Approximately 59.2% vs. 58.2% |
| Research and development | $44.0 million vs. $41.4 million | $80.9 million vs. $84.4 million |
| General and administrative | $9.8 million vs. $9.8 million | $20.2 million vs. $19.4 million |
| Sales and marketing | $15.6 million vs. $23.6 million | $35.8 million vs. $52.4 million |
| Net loss | $55.2 million, or $0.61 per share | $106.8 million, or $1.18 per share |
| Net cash used in operating activities | Not separately disclosed | $90.2 million vs. $72.1 million |
CINVANTI generated $22.6 million of second-quarter sales and $47.8 million for the six-month period. SUSTOL generated $0.1 million and $0.3 million, respectively. Operating loss was $55.7 million for the quarter and $108.5 million for the six months.
Cash, cash equivalents and short-term investments totaled $300.8 million at June 30, 2020, compared with $391.0 million at December 31, 2019. Cash and cash equivalents were $80.7 million. Investing activities provided $96.2 million for the six months, primarily from $99.9 million of net maturities of short-term investments. Financing activities provided $2.8 million, principally from equity option and employee stock purchase plan proceeds.
Current assets were $392.9 million and current liabilities were $92.7 million. The company had $6.3 million of current convertible notes payable, representing $7.4 million of principal less $1.1 million of debt discount. The 6% secured convertible notes mature May 2, 2021, may be prepaid at the holders’ option, and were convertible into approximately 9.2 million shares as of June 30, 2020. The notes are secured by substantially all company assets, including bank and investment accounts.
Material changes versus the prior comparable period
- Second-quarter revenue declined 38% and first-half revenue declined 30%, primarily because of lower CINVANTI sales following generic competition and sharply lower SUSTOL sales.
- SUSTOL sales declined approximately 97% in the second quarter and 96% for the six months. Heron discontinued all SUSTOL discounting on October 1, 2019 and stated that generic competition contributed to the decline.
- Research and development expense increased 6% in the quarter but declined 4% for the six months. Quarterly increases reflected higher personnel and HTX-011 costs; six-month decreases primarily reflected lower HTX-011, CINVANTI and HTX-034 costs.
- Sales and marketing expense declined 34% in the quarter and 32% for the six months, partly due to the absence of 2019 executive-retirement-related costs and lower commercialization spending, partially offset by HTX-011 launch preparation.
- Net loss improved for the six-month period but worsened for the quarter. Cash used in operations increased to $90.2 million from $72.1 million, driven primarily by working-capital changes.
- Inventory increased to $41.4 million from $25.0 million at year-end, with $39.7 million related to CINVANTI.
- The company expanded its San Diego facility lease by 21,180 square feet effective January 1, 2020. Total future operating lease payments at June 30, 2020 were $22.8 million, with recognized lease liabilities of $18.8 million.
Guidance, outlook, risks and unusual items
Management did not provide formal revenue or earnings guidance. It expects generic arbitrage pressure to be resolved in 2020 and stated that CINVANTI and SUSTOL sales are expected to return to growth in 2021 and beyond. Management believes existing cash, cash equivalents and short-term investments will fund anticipated requirements for at least one year from the filing date, although the company expects continuing operating losses and negative operating cash flow.
On June 26, 2020, the FDA issued a Complete Response Letter for HTX-011. The FDA cited four additional non-clinical matters and did not identify clinical safety, efficacy, or chemistry, manufacturing and controls issues. The company cannot predict the timing or outcome of a resubmission or eventual approval. In July 2020, the EMA’s CHMP issued a positive opinion for ZYNRELEF, subject to European Commission review. Heron was also responding to Health Canada questions regarding HTX-011.
Heron initiated the GUARDS-1 Phase 2 study evaluating CINVANTI in early hospitalized COVID-19 patients. The program is early-stage and could require substantial additional funding while diverting resources from other programs. COVID-19 may also reduce cancer treatments and elective surgeries, disrupt clinical trials, affect manufacturing and supply, and delay regulatory activity.
Key financial and operating risks include continued dependence on CINVANTI, intense generic and branded competition, uncertain reimbursement and pricing, regulatory approval risk for HTX-011 and HTX-034, reliance on third-party manufacturers and suppliers, potential inventory write-downs, substantial accumulated losses, future financing needs, and dilution or restrictions associated with the secured convertible notes. The accumulated deficit was $1.27 billion at June 30, 2020.
Customer concentration was significant: three customers represented 98.0% of second-quarter sales, 98.1% of six-month sales, and 99.2% of accounts receivable at June 30, 2020. The company reported no material legal proceedings, no defaults, and effective disclosure controls as of June 30, 2020.
Important facts for investors to verify
- Whether CINVANTI revenue recovers after generic competition and whether SUSTOL remains commercially viable after discounting was discontinued.
- The FDA’s requirements, resubmission timing, approval probability, and commercial launch implications for HTX-011.
- Whether the positive European opinion for ZYNRELEF results in final European Commission authorization and acceptable reimbursement.
- The pace, cost, and results of the HTX-034 and GUARDS-1 clinical programs, including any COVID-19-related delays.
- The company’s cash-burn rate, availability of $300.8 million of liquid resources, and funding needs beyond the stated one-year liquidity outlook.
- Repayment, prepayment, covenant, and potential dilution implications of the secured convertible notes due in 2021.
- Inventory aging and potential write-down exposure, particularly the $39.7 million of CINVANTI inventory.
- Exposure to customer concentration, third-party manufacturing, reimbursement changes, generic competition, and COVID-19 disruptions.