Heron Therapeutics, Inc. — Q1 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 and postoperative pain. The report covers the three months ended March 31, 2020, and was filed May 6, 2020.
- Commercial products: CINVANTI and SUSTOL.
- Key pipeline product: HTX-011, an investigational non-opioid postoperative pain treatment.
- HTX-034 is an earlier-stage postoperative pain candidate.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net product sales | $25.4 million | $31.6 million | Down 19.6% |
| Cost of product sales | $10.6 million | $15.0 million | Down 29.0% |
| Gross profit | $14.8 million | $16.6 million | Down 10.8% |
| Gross margin | 58.2% | 52.7% | Up approximately 5.5 percentage points |
| Research and development | $36.9 million | $43.0 million | Down 14.1% |
| General and administrative | $10.4 million | $9.6 million | Up 8.0% |
| Sales and marketing | $20.2 million | $28.7 million | Down 29.7% |
| Loss from operations | $(52.7) million | $(64.7) million | Improved by $12.0 million |
| Net loss | $(51.6) million | $(63.0) million | Improved by $11.4 million |
| Net loss per share | $(0.57) | $(0.80) | Improved |
| Cash used in operating activities | $(32.9) million | $(49.0) million | Improved by $16.1 million |
- CINVANTI sales were $25.2 million, compared with $28.0 million in Q1 2019.
- SUSTOL sales were $0.2 million, compared with $3.6 million in Q1 2019.
- As of March 31, 2020, cash, cash equivalents and short-term investments totaled $356.3 million, down from $391.0 million at December 31, 2019.
- Cash and cash equivalents were $103.3 million, while short-term investments were $253.1 million.
- Total assets were $478.9 million and stockholders’ equity was $365.5 million at March 31, 2020.
- Accumulated deficit was $1.217 billion.
- Net cash provided by investing activities was $63.8 million, primarily from $66.8 million of net maturities of short-term investments.
- Net cash provided by financing activities was $0.5 million, primarily from stock option and warrant exercises.
Debt, liquidity and contractual obligations
- Convertible notes payable to related parties had a carrying value of $5.9 million and principal of $7.2 million at March 31, 2020. The notes bear 6% interest, mature May 2, 2021, are secured by substantially all company assets and may be prepaid at the holders’ option.
- The notes were convertible into approximately 9.1 million common shares, creating potential dilution of approximately 9.1% based on shares outstanding after conversion.
- The company was in compliance with all convertible-note covenants at March 31, 2020.
- Operating lease liabilities totaled $19.5 million, including future minimum lease payments of $23.7 million before discounting. The company expanded its San Diego office and laboratory space by 21,180 square feet under a lease running through December 31, 2025.
- Management believes existing cash, cash equivalents and short-term investments are sufficient to meet anticipated cash requirements for at least one year from the filing date.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower CINVANTI sales and a substantial reduction in SUSTOL sales.
- On October 1, 2019, Heron discontinued all SUSTOL discounting, which management expects to continue reducing SUSTOL net sales in future periods.
- Generic competition increased for both products: generic EMEND IV affected CINVANTI, while generic ALOXI and other competing products affected SUSTOL.
- Cost of product sales benefited from the absence of the $1.6 million short-dated SUSTOL inventory write-off recorded in Q1 2019.
- Research and development spending decreased primarily because of lower HTX-011 and CINVANTI-related costs, partly offset by higher personnel and other expenses.
- Sales and marketing expense declined largely because Q1 2019 included one-time costs related to the retirement of the former president, partly offset by HTX-011 launch preparation costs.
- General and administrative expense increased due primarily to expanded San Diego facilities.
- Stock-based compensation declined to $12.0 million from $17.9 million.
Guidance, outlook, commentary and unusual items
- Management expects CINVANTI and SUSTOL net product sales to return to growth in 2021 and beyond, although SUSTOL sales are expected to remain affected by the elimination of discounts and generic competition.
- The FDA extended the review period for HTX-011 by up to three months. The PDUFA goal date was June 26, 2020.
- HTX-011 previously received an FDA Complete Response Letter in April 2019 requesting additional chemistry, manufacturing and controls and non-clinical information. The filing states that no clinical efficacy or safety issues were identified and no additional clinical studies were required.
- The HTX-011 contract manufacturing site was reinspected without Form 483 observations, and the FDA inspector recommended approval of the site; the ultimate regulatory decision remained uncertain.
- An EMA opinion for HTX-011 was anticipated in the second half of 2020, and a Health Canada decision was anticipated in the third quarter of 2020.
- The company continued formal development of HTX-034 based on positive preclinical results.
- COVID-19 created material uncertainty. Potential effects included lower cancer-treatment and elective-surgery volumes, reduced product demand, supply-chain disruption, clinical-trial delays, regulatory delays, workforce limitations and reduced access to capital.
- The company has incurred significant operating losses and negative operating cash flows and expects substantial future losses. Profitability is not assured.
- Three major customers represented 98.4% of Q1 2020 net product sales and 99.3% of accounts receivable, creating customer concentration risk.
- The company reported no material legal proceedings, no defaults on senior securities and no off-balance-sheet arrangements. Management concluded that disclosure controls and procedures were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether HTX-011 received FDA approval by the June 26, 2020 PDUFA date and the final label, launch timing and commercialization costs.
- The durability of CINVANTI sales amid generic EMEND IV competition and whether product sales recovered as projected.
- The effect of discontinued SUSTOL discounting and generic ALOXI competition on future revenue and inventory reserves.
- Whether the $356.3 million liquidity balance is sufficient given ongoing losses, HTX-011 launch spending, clinical programs and COVID-19 disruptions.
- Potential dilution and repayment or conversion terms associated with the secured convertible notes.
- Exposure to the three major customers, reimbursement changes, government pricing programs and product-return or rebate estimates.
- Manufacturing capacity, single-source suppliers and any COVID-19-related interruptions affecting CINVANTI, SUSTOL or HTX-011.
- Progress, final data and regulatory status for HTX-034 and other pipeline programs.