Heron Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018; filed May 10, 2018. The unaudited interim financial statements are prepared under U.S. GAAP.
Business Context
Heron is a commercial-stage biotechnology company developing products using its Biochronomer drug-delivery technology. SUSTOL was approved in 2016 and has been commercially sold in the United States since October 2016. CINVANTI was approved in November 2017 and launched in January 2018. HTX-011, an investigational postoperative-pain treatment, generated positive topline results in two pivotal Phase 3 studies during March 2018.
Financial Performance and Liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net product sales | $11.6 million | $3.6 million | +$7.9 million |
| Cost of product sales | $3.1 million | $1.2 million | +$1.9 million |
| Gross profit | $8.4 million | $2.4 million | +$6.0 million |
| Gross margin | 72.9% | 67.3% | Improved |
| Research and development | $39.6 million | $33.4 million | +$6.2 million |
| Sales and marketing | $13.8 million | $11.6 million | +$2.2 million |
| Loss from operations | $(52.0) million | $(49.3) million | Loss increased |
| Net loss | $(52.3) million | $(50.3) million | Loss increased |
| Net loss per share | $(0.81) | $(1.00) | Improved per share |
| Cash used in operating activities | $(61.7) million | $(50.6) million | Use increased |
Operating expenses totaled $63.6 million, producing an operating margin of approximately negative 449%. The net loss increased primarily because of continued HTX-011 development. R&D spending on HTX-011 increased by $12.8 million, partially offset by lower CINVANTI and SUSTOL development costs.
Cash, cash equivalents and short-term investments totaled $113.9 million at March 31, 2018, compared with $172.4 million at December 31, 2017. Cash and cash equivalents were $46.6 million, and short-term investments were $67.4 million. Total assets were $183.4 million and stockholders’ equity was $92.2 million.
Current liabilities were $91.2 million. Debt included a $25.0 million related-party promissory note and convertible notes with $6.5 million of principal outstanding and a $3.9 million carrying value. The promissory note bears 8% interest, while the convertible notes bear 6% interest and are secured by substantially all of the Company’s assets.
Material Changes Versus the Prior Comparable Period
- Product sales increased substantially, reflecting the January 2018 launch of CINVANTI in addition to SUSTOL sales.
- R&D expense increased 18.5% to $39.6 million, primarily due to HTX-011 Phase 3 development.
- Sales and marketing expense increased 19.1% to $13.8 million to support commercialization of SUSTOL and CINVANTI.
- Operating cash use increased by $11.1 million, driven by the higher net loss and working-capital requirements associated with the product launches.
- Financing cash inflow fell to $4.0 million from $165.6 million because Q1 2017 included a $163.7 million public offering.
- Inventory increased to $19.4 million from $10.1 million at year-end 2017, including $10.9 million related to CINVANTI.
- Heron adopted revenue-recognition Topic 606 using the modified retrospective method, recording a $1.6 million cumulative adjustment to retained earnings. Product sales are now generally recognized when products are sold to customers rather than when customers resell them.
Guidance, Outlook, Risks and Unusual Items
- Management expects to submit an NDA for HTX-011 in the second half of 2018. HTX-011 achieved all primary and key secondary endpoints in the EPOCH1 bunionectomy and EPOCH2 hernia-repair studies and was described as well tolerated.
- Management believes available cash, cash equivalents and short-term investments are sufficient to fund operations for at least one year from the filing date. This assessment includes $168.7 million of net proceeds from an April 2018 common-stock offering. Pro forma liquidity as of March 31, 2018 was $282.6 million.
- The Company expects to make the final payment related to prior employee realignment and severance obligations in the third quarter of 2018. A $0.5 million loss on the Redwood City facility lease was recorded in Q1 2018 after operations there were shut down and the facility was subleased.
- TCP temporarily waived its right to convert the convertible notes through the earliest of a change in control, stockholder approval of an increase in authorized shares, or September 28, 2018. If conversion is later requested and sufficient authorized shares are unavailable, Heron may be required to make a cash payment for undeliverable shares.
- Key risks include dependence on successful commercialization of SUSTOL and CINVANTI, reimbursement and pricing pressure, competition including potential generic competition to SUSTOL, regulatory approval and clinical-development risk for HTX-011, reliance on third-party manufacturers and suppliers, customer concentration, continued operating losses, and the need for future capital.
- Two SUSTOL customers and three CINVANTI customers each represented at least 10% of net product sales during the quarter.
Important Facts for Investors to Verify
- Whether CINVANTI sales continue to expand and whether SUSTOL and CINVANTI achieve sufficient market acceptance, reimbursement and gross margins.
- The timing, contents and FDA response to the planned HTX-011 NDA submission.
- Actual cash burn relative to the stated liquidity runway and the potential need for additional financing.
- The expiration, conversion or refinancing implications of the related-party debt, including potential dilution from approximately 8.1 million shares underlying the convertible notes.
- The effect of Topic 606 revenue recognition, product-return estimates, rebates and other sales allowances on reported revenue and earnings.
- Potential generic and branded competition, manufacturing capacity and single-source supply risks.
- The terms and financial impact of the additional 87-month San Diego office lease entered into in May 2018.