Heron Therapeutics, Inc. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Heron Therapeutics is a commercial-stage biotechnology company focused on cancer supportive care and postoperative pain management. The filing covers the quarter and six months ended June 30, 2019. Commercial products were SUSTOL for chemotherapy-induced nausea and vomiting and CINVANTI, an intravenous aprepitant formulation. The company was also developing HTX-011 for postoperative pain and HTX-034 as a next-generation candidate.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net product sales | $36.7 million vs. $17.3 million | $68.3 million vs. $28.8 million |
| Cost of product sales | $13.6 million vs. $5.2 million | $28.6 million vs. $8.4 million |
| Gross profit | $23.1 million vs. $12.0 million | $39.7 million vs. $20.5 million |
| Approximate gross margin | 63.0% vs. 69.7% | 58.2% vs. 71.0% |
| Research and development expense | $41.4 million vs. $30.2 million | $84.4 million vs. $69.7 million |
| Sales and marketing expense | $23.6 million vs. $14.5 million | $52.4 million vs. $28.4 million |
| Loss from operations | $(51.8) million vs. $(38.9) million | $(116.5) million vs. $(90.8) million |
| Net loss | $(50.2) million vs. $(38.7) million | $(113.2) million vs. $(90.9) million |
| Basic and diluted loss per share | $(0.63) vs. $(0.54) | $(1.43) vs. $(1.33) |
CINVANTI generated $33.2 million of second-quarter sales and $61.2 million for the first six months, compared with $11.2 million and $16.4 million, respectively, in the prior-year periods. SUSTOL sales declined to $3.5 million in the quarter and $7.1 million year to date, compared with $6.1 million and $12.4 million.
Six-month net cash used in operating activities was $72.1 million, compared with $122.4 million in 2018. Investing activities provided $75.9 million, primarily from net maturities of short-term investments, while financing activities provided $17.4 million, primarily from stock-option exercises and employee stock purchases. Cash and cash equivalents were $53.0 million at June 30, 2019; cash, cash equivalents and short-term investments totaled $276.0 million.
Total assets were $411.7 million and total liabilities were $106.3 million at June 30, 2019. The company had $7.0 million of principal outstanding under secured convertible notes, with a $5.1 million carrying value, a 6% interest rate and maturity in May 2021. The notes are secured by substantially all assets and may be prepaid at the holders’ option. They were convertible into approximately 8.7 million shares. The company reported compliance with all note covenants.
Material changes versus the prior comparable period
- Revenue increased approximately 112% in the quarter and 137% for the first six months, driven primarily by CINVANTI growth.
- Gross margin declined because cost of product sales grew faster than revenue; six-month cost of product sales included a $1.6 million write-off of short-dated SUSTOL inventory.
- Operating losses widened as research and development, sales and marketing, and general and administrative expenses increased. HTX-011 and HTX-034 development costs rose, and sales and marketing costs included HTX-011 launch preparation.
- Sales and marketing expense included one-time costs related to the February 2019 retirement of the company’s President, including $8.4 million of stock-based compensation expense year to date.
- Operating cash burn improved year over year, partly because 2018 working-capital requirements associated with the CINVANTI launch were not repeated.
- The balance sheet reflected adoption of ASC 842 on January 1, 2019, resulting in recognition of $12.7 million of right-of-use lease assets and $13.0 million of lease liabilities at June 30, 2019; management stated there was no material impact on results of operations or liquidity.
Guidance, outlook, commentary, risks and unusual items
Management stated that the $276.0 million of cash, cash equivalents and short-term investments at June 30, 2019 was expected to fund operations for at least one year from the filing date. The filing does not provide formal revenue, earnings or product-sales guidance, and the company expects continued substantial losses as it funds commercialization and product development.
On April 30, 2019, the FDA issued a Complete Response Letter for HTX-011. The FDA cited additional chemistry, manufacturing and controls and non-clinical information, but identified no clinical safety or efficacy issues and did not require additional clinical studies or data analyses. The timing and probability of U.S. approval remained uncertain. The HTX-011 marketing application in Europe had been validated by the EMA, with a CHMP opinion anticipated in the first half of 2020.
Generic competition was expected to intensify: generic versions of ALOXI had entered the market, affecting SUSTOL, and generic versions of EMEND IV were expected to launch in September 2019, potentially affecting CINVANTI. Product sales were highly concentrated among three customers, representing 97.5% of second-quarter sales, 97.6% of year-to-date sales and 98.9% of accounts receivable at June 30, 2019.
A purported federal securities class action was filed on June 3, 2019 against the company, its Chief Executive Officer and Chief Financial Officer concerning the decline in the company’s market value following the HTX-011 CRL. The company stated that the proceeding was at an early stage and that potential losses could not reasonably be estimated.
Other material risks include continued operating losses, possible future financing needs and dilution, reliance on third-party manufacturers and single-source suppliers, regulatory and reimbursement uncertainty, clinical and development risk, inventory write-downs, product liability, intellectual-property challenges and competition. Internal disclosure controls and procedures were reported effective at the reasonable assurance level.
Important facts investors should verify
- Progress and timing of the FDA response to the HTX-011 CRL, including completion of CMC and non-clinical requirements.
- EMA review milestones and the anticipated first-half 2020 CHMP opinion for HTX-011.
- CINVANTI sales sustainability after generic EMEND IV competition and the continuing decline in SUSTOL sales.
- Customer concentration, product-return and rebate accruals, and the $39.6 million product-sales allowance balance at June 30, 2019.
- Cash runway relative to the company’s operating cash burn, development spending and any need for additional capital.
- Potential dilution from the convertible notes, which represented approximately 8.7 million underlying shares at June 30, 2019.
- Developments and potential financial exposure in the securities class action related to the HTX-011 CRL.