Heron Therapeutics - Q2 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Hermione, and I will be your conference operator today. At this time, I would like to welcome everyone to Heron Therapeutics Q2 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. I would now like to turn the call over to Melissa Jarrel, Executive Director, Legal. Please go ahead.

Melissa Jarel (Executive Director, Legal)

Thank you, operator, and good afternoon, everyone. Thank you for joining us on the Heron Therapeutics conference call this afternoon to discuss the company's financial results for the quarter ended June 30, 2024. With me today from Heron are Craig Collard, Chief Executive Officer; Ira Duarte, Executive Vice President, Chief Financial Officer; Bill Forbes, Executive Vice President, Chief Development Officer; and Kevin Warner, Senior Vice President, Medical Affairs, Strategy, and Engagement. For those of you participating via conference call, slides are made available via webcast and can also be accessed via the investor relations page of our website following the conclusion of today's call. Before we begin, let me remind you that during the course of this conference call, the company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement.

This includes remarks about the company's projections, expectations, plans, beliefs, and future performance, all of which constitute forward-looking statements for the purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the safe harbor statement in today's press release and in Heron's public periodic filings with the SEC. Except as required by law, Heron assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so.

With that, I would now like to turn it over to Craig Collard, Chief Executive Officer of Heron.

Craig Collard (CEO)

Thanks, Melissa. Good morning, everyone, and welcome to the Heron Therapeutics second quarter 2024 earnings call. Today, we are pleased to update you on our latest achievements for the second quarter, which includes a narrowing of our financial guidance and a view into our financial performance, discussion of our product performance, progression of the vial access needle, or VAN, towards our September 23rd PDUFA date, the publishing of the long-awaited NOPAIN Act, which includes ZYNRELEF, and last, an update on the building and training of our partners at CrossLink. Now moving to financial performance. I believe this slide demonstrates the impact our new management team has had on this business as we compare first half of 2024 with the first half of 2023. Keep in mind, the management team was not fully in place until August of 2023.

Since arriving, we have been able to establish the proper financial management that has allowed us to reduce spends dramatically while still growing top-line revenue. As you can see from the slide, revenues are up 15%, gross margin has improved from 40% to 73%, and operating expenses have been reduced by over $36 million when comparing the first six months of 2024 to the same period in 2023. Now moving to product performance. The Oncology franchise continues to outpace our expectations, with CINVANTI net revenues of $24.9 million for the quarter and SUSTOL net revenues of $4.3 million for the quarter. We continue to maintain our existing market share in a very competitive environment with the Oncology franchise, and we believe these products will continue to show similar consistency throughout 2024.

Total acute care net revenues for the quarter were $6.8 million, which is record revenue for our acute business. ZYNRELEF net revenues for the quarter were $5.8 million. APONVIE net revenues for the quarter were $1 million, which is double versus Q1 of this year. While we are pleased with the direction we are headed, we realize we are still transitioning with our new expanded ZYNRELEF label, bringing on the CrossLink team, the VAN submission and launch later this year, which will all have a dramatic impact to not only ZYNRELEF as we move later in the year and into 2025, but also APONVIE, as these actions will free up more selling time for our sales team and allow us to create better pull-through with our account wins.

As we think about APONVIE performance, it's important to note that APONVIE is the type of product where systematic wins are possible. What I mean specifically is when we win at the P&P and formulary level, protocols can be put in place where APONVIE is used throughout a hospital system for a specific patient or surgery type. As you can see on this slide, we continue to gain P&P wins and new customers ordering. The goal with any new account win is to establish a protocol, get product ordering set up within our hospital system, and then move to expand usage within the hospital. Slide ten provides a dashboard of how we forecast our APONVIE business. We've established tiering by account size based on the number of surgical procedures within each account. Commercially, this allows us to better focus our sales team and evaluate account performance within each tier.

We believe the greatest opportunity resides in the surgical patients that present to the operating room with moderate and high risk of having postoperative nausea and vomiting. This risk evaluation already happens preoperatively across the country and uses a validated series of questions to reliably classify these patients. The medical literature informs us that approximately one in two patients, or 50%, present as moderate to high risk. Our internal sales target is to achieve market penetration of 40% of that 50% of high-risk patients, or if you will, 20% of the overall surgical opportunity with our converted business. The opportunity we have today reflects a $30 million potential from the 320 accounts currently under contract.

Our confidence in APONVIE is based on the ease of use, the superior onset of action via intravenous administration, the absence of infusion reactions, as well as the absence of certain central nervous system and cardiovascular side effects seen with other agents. We believe there's an opportunity to convert business to the use of APONVIE when other approaches to preventing PONV still report an approximate 30% failure rate in this high-risk population. Of course, slide 10 only takes into account the business Heron has today. There are an estimated 75 million surgical procedures in the U.S. every year. While penetrating 20% of the entire market may not be achievable, Heron does believe that as we convert more accounts, that APONVIE is our hidden gem.

Moving to ZYNRELEF, it's important to note the progress and the number of improvements to the product that we have coming in 2024. In January, it started off with a much-anticipated label expansion, which now allows ZYNRELEF to be used much more broadly throughout the number of surgeries within a given hospital or ASC. Second is the introduction of the VAN, which, if approved in September, will go live in Q4. Next was the inclusion of ZYNRELEF in the much-anticipated NOPAIN Act, which will continue to allow ZYNRELEF to be reimbursed outside the surgical bundle, and last, the CrossLink partnership, which continues to progress. Now, understanding the impact of the VAN is a bit easier when you see both devices depicted together.

Our current configuration with a VVS, or vented vial spike, on the left-hand side of the slide, is much more difficult to use as compared to the VAN or vial access needle on the right-hand side of the slide. The two main advantages that the VAN offers is sterility and speed of product withdrawal from the vial. The preparation of ZYNRELEF has been its Achilles heel since launch. We believe the launch of the VAN later this year, combined with the expanded label and having a CrossLink presence within the OR study, is going to provide a tremendous boost to ZYNRELEF for years to come. Now, moving to NOPAIN Act. CMS recently released its outpatient prospective payment system, OPPS, and ambulatory surgical center, ASC, proposed rule for calendar year 2025.

The rule included the non-opioid policy for pain relief, which was supported by the NOPAIN Act. As expected, ZYNRELEF was a named product in the rule. This will benefit Heron and our patients on multiple levels. The inclusion of ZYNRELEF in the rule will increase awareness, remove financial barriers, encourage adoption, and endorses its use. The acronym NOPAIN stands for Non-Opioids Prevent Addiction in the Nation, which in itself is a strong endorsement. The goal of the act was to ensure patients have access to non-opioid alternatives, and providers are not financially incentivized to utilize opioids instead. To be included, the medications must have an indication for postoperative pain, not act on the body's opioid receptors, and have proven efficacy in the ability to replace, reduce, or avoid intraoperative and postoperative opioid use. CMS agreed that ZYNRELEF's clinical attributes satisfy these requirements.

CMS proposed to include ZYNRELEF in the policy for calendar year 2025, effective April 1, 2025, which will ensure ZYNRELEF is eligible for separate payment outside of the surgical bundle. We believe, based on the CMS action and the endorsement of non-opioid therapies, that many more commercial payers could also follow suit. Overall, we were extremely pleased with the proposed rule, and this will ultimately support increased adoption of ZYNRELEF. Training for the CrossLink team kicked off with the executive team in late February, and with the rest at the beginning of March. As of today, we have 561 CrossLink reps, consisting of joint, trauma, and spine, that have been fully trained and are in the field selling ZYNRELEF in 28 states.

Now, obviously, all of these new sales folks were not in the field in Q2, and while we are pleased with our progress, there is a learning curve as part of this process. As an example, once a new CrossLink group comes out of training, the process begins for our sales teams to interact to determine physician and account targeting, IDN formulary strategy, product messaging to a given account, and ultimately, a plan of attack within a territory. Our plan is still to continue to expand our reach across the country, with over 650 reps being fully trained and integrated before the launch of the VAN in Q4 this year. We continue to be impressed by the CrossLink team and the relationships they have with the orthopedic surgical community, and we realize in time this is going to have a substantial impact on ZYNRELEF revenues.

In Q2 alone, we have over 350 new surgeon introductions, generating 98 new prescribing physicians. That translates to 33 new ordering accounts. It's obvious this has not had a major impact on revenues yet, but we believe the impact will be substantial over time. Many of these new introductions are with top prescribing physicians with deep relationships with CrossLink. As with any new drug, it takes some time for physicians to get comfortable with something new or different, especially due to the unique delivery and application of ZYNRELEF. We are extremely pleased with the progress we have made in getting the CrossLink team trained and in the field. We believe this partnership is going to completely change the direction of ZYNRELEF as we move into 2025 and beyond.

I will now turn the call over to Ira Duarte, our CFO, to cover our financials and update our financial guidance. Go ahead, Ira.

Ira Duarte (EVP and CFO)

Thanks, Craig. Craig has covered our product performance and operating results in his time, and I will add some additional points for our Q2 2024 results. Our product gross profit for the three months ended June 30, 2024, was $25.5 million, or 71%, which increased from 37% for the same period in 2023. This was primarily due to the fact that the current quarter did not see the significant inventory write-offs we experienced in the comparable quarter of 2023. Year to date, our product gross profit was $61.7 million, or 73%, an increase from 40% for the same period in 2023.

SG&A expenses for the three and six months ended June 30, 2024, were $27.5 million and $53.9 million, respectively, compared to $40.8 and 77.8 million, respectively, in the same period in 2023. The decrease was primarily related to decreases in personnel and related costs due to the reductions in force in prior years, as well as improved cost efficiencies along all departments. Research and development expenses were $4.4 and 9 million for the three and six months ended June 30, 2024, compared to $13.2 and 22 million in the comparable periods in 2023. The decrease was primarily related to decreases in personnel and related costs due to the reductions in force implemented in previous years, as well as decreases in development activities.

During the quarter, we incurred inventory write-offs of $1.6 million, but unlike last year's write-offs, these were not related to inventory management. In addition, we also reported an asset impairment write-off of $1.3 million related to projects no longer part of the company's forward-looking strategy. As you will see on the slide, if we had excluded depreciation and amortization, stock-based compensation, the inventory write-off, and the asset impairment write-off, our adjusted operating results would have been a positive $1.7 million operating income, which represents a substantial turnaround in the financial management of our business. As noted in the 10-Q, the condensed consolidated statement of operations and comprehensive loss as of June 30, 2023, reflects reclassification of certain expenses from research and development to general and administrative expenses to align with the function of expenses incurred.

This resulted in no change to total operating expenses. The net loss was $9.2 million for the three months ended June 30, 2024, and $12.4 million for the six months ended June 30, 2024, compared to $42.1 and 74.8 million, respectively, for the comparable period in 2023. Cash and short-term investments as of June 30, 2024, was $62.7 million. As you can see from these results, we have made tremendous progress in cutting expenses and creating efficiencies within the company over the last 12 months. We are therefore narrowing our previously given guidance range of $180-160 million for adjusted operating expenses to a range of $107-111 million.

Adjusted operating expenses exclude stock-based compensation, depreciation, and amortization, and going forward, we will also exclude impairment of long-lived assets and inventory write-offs. We are also narrowing our previously given guidance range for adjusted EBITDA of $22 million loss, $3 million income, to a range of $10 million loss to $3 million income. Adjusted EBITDA excludes stock-based compensation, depreciation, and amortization, and going forward, we will also exclude impairment of long-lived assets and inventory write-offs. And now we would like to open the call for any questions.

Operator (participant)

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue, and your first question comes from the line of Brandon Folkes with Rodman & Renshaw. Please go ahead.

Brandon Folkes (Managing Director)

... and congratulations on a lot of good progress in the quarter. Maybe just firstly for me, on ZYNRELEF, any color on where you're seeing the most uptake across joint, trauma, and spine with the CrossLink partnership?

Craig Collard (CEO)

I'm sorry, Brad, could you say that one more time?

Brandon Folkes (Managing Director)

Any color on where you're seeing the most uptake across joint, trauma, and spine with the CrossLink partnership? Any, anything new there that you've, you wouldn't have expected?

Craig Collard (CEO)

Yeah, no, at this point, again, we've been, as I said in my comments, we've been getting the CrossLink team up to speed, and in Q2, we had, you know, roughly 200 folks sort of, if you will, had gone through training. And so we haven't been able to really dive into the data enough to tell where we're having the largest impact. I mean, obviously, with orthopedic surgeons is where we're spending the majority of time. But at this point, I just can't really dice the data into that sort of level, you know, to determine, you know, specifically or have an impact, you know, in one place more than another.

Brandon Folkes (Managing Director)

Okay. And then maybe just, you know, obviously, did a tremendous job during the quarter on the rep training with CrossLink. Can you just elaborate when you expect to see that revenue trajectory change for ZYNRELEF? Do you have to retrain the CrossLink team when the VAN comes out to market, or how thorough does that training need to be?

Craig Collard (CEO)

Yeah, so we have been, along the way, you know, talking about the VAN, and they know that certainly is coming. And I think it's obviously anticipated. We do anticipate being fully trained by the time the VAN launches. And again, so we think that's, you know, certainly gonna have an impact. But there will be a certainly a briefing post the approval of exactly what we get approved and, and then, you know, sort of the timing to launch and all that. So we'll go through that again with them. But but they are being briefed on, you know, sort of what's going on and what's coming.

Brandon Folkes (Managing Director)

Great. Thanks very much. Congrats on all that progress. Maybe just lastly, one for me. On the gross margin line, you know, obviously tremendous progress year-over-year. Yeah, how should we look at this quarter compared to the go forward? And then that's it from me. Thank you.

Craig Collard (CEO)

You know, at this point, again, we've said all along, we think we'll be somewhere in the low-to-mid 70s. We anticipate that continuing. Again, with product mix and so forth, it may vary a little bit, but we should be in that range.

Brandon Folkes (Managing Director)

Great. Thank you very much.

Craig Collard (CEO)

Thanks, Brad.

Operator (participant)

Next question comes from the line of Serge Belanger with Needham. Please go ahead.

Serge Belanger (Biotechnology Analyst)

Hi, good afternoon, and thanks for taking my question. The first one, Craig, on ZYNRELEF, can you just give us a picture of what the current reimbursement and, and coverage is across the Medicare and commercial segments, and how you think that will change once you switch over to NOPAIN next year? And then secondly, on CINVANTI, I think a bench trial was held last month or June, late June, in the patent infringement lawsuit. Can you just give us an update on when you expect a decision, what the potential outcomes could be and things like that?

Craig Collard (CEO)

Yeah, sure. Actually, Serge, Kevin Warner is on the call as well. I'll let him get the first part of this, and then I'll address the CINVANTI piece.

Kevin Warner (SVP, Medical Affairs, Strategy, and Engagement)

Yeah, thanks, Serge. You know, in regards to the reimbursement picture and how it looks, there's a difference between NOPAIN and a pass-through status product. So currently, right now, ZYNRELEF's reimbursed via the pass-through status, and so that's all our hospital outpatient procedure department patients and all of our ASC patients under Medicare are reimbursed. As far as the commercial payers, it's somewhere between 30% and 50% of the commercial payers. It varies by state by state, region by region. That said, with NOPAIN, that paradigm kind of switches because of how NOPAIN is phrased. And historically, a lot of commercial payers don't come on and always follow these pass-through drug stipulations.

But with the NOPAIN Act and the fact that it has clinical attributes and reasoning for using non-opioids and minimizing the impact of opioids in our nation, there's more, I guess, a push for them to follow along with this statute and the fact that it could be extended in perpetuity and continue to provide that reimbursement. So the commercial payers, if you will, they're gonna wanna be on the right side of the fence on this paradigm. They understand the cost efficacies and the clinical efficacies and the overall economic model. So we'd expect to see more commercial payers to come on board with the NOPAIN Act, and the NOPAIN Act really doesn't change the current reimbursement from the CMS perspective.

Serge Belanger (Biotechnology Analyst)

Great.

Craig Collard (CEO)

As you stated, you know, the trial ended in June. And again, as we've said all along, we feel very comfortable with what happened in the trial. We feel very strong in our positioning. And again, this case really comes down to we have, you know, infringement has sort of been established in the case, and it all really comes down to obviousness. And again, that's where we feel, you know, the invention that we made here was unique. You know, Merck had this product for years as a precedent and was unable to get this in this form. And so... That really is what this comes down to, is burden of proof there. And again, we feel that, you know, Fresenius did not meet that, and we feel very comfortable with our position.

Serge Belanger (Biotechnology Analyst)

Do you expect a court judge decision? I think the current before the 30-month, I would say, expires in December. Do you? Is that when you think you will get a court decision?

Craig Collard (CEO)

Yeah. So there's remaining, you know, to be done are closing arguments, and then we're expecting a decision to be made in Q4 of this year.

Serge Belanger (Biotechnology Analyst)

Got it. Thank you.

Craig Collard (CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Kelly Shi with Jefferies. Please go ahead.

Clara Donald (Analyst)

Hi, this is Clara, for Kelly. Thanks for taking our question. So, could you remind us how many CrossLink reps were in the field selling product during second quarter, and how that number is going to change in the second half of 2024? And based on the experience they have in the field so far, I was wondering if you've heard any feedback and, you know, if there is anything you think could be added to their training for the remaining reps or maybe also the existing reps that would be helpful in selling the product. Thank you.

Craig Collard (CEO)

States with CrossLink, which were North Carolina, South Carolina, and Georgia, and then we moved from there. But we ended up getting, I think, by Q2, we had a couple of hundred reps, and we had just migrated to maybe 12 states. And so where we sit now is 561 reps in 28 states, and that continues to grow. And again, we believe we'll be over 650 at the time of launch with the VAN. And so, you know, if you think about sort of inflection and how this really comes together, we've had a lot of things happen this year, obviously, with the NOPAIN Act, the expansion of our label, getting the CrossLink folks trained.

But there's another piece to this, too, which is really the integration with our sales force and managing that and working together and targeting accounts and all that. Some of that just takes time. So I've said all along that we view that as we launch the VAN and really kind of move out of Q4 into Q1 of 2025, is really when we see, you know, a majority of inflection taking place into next year. Again, some of this just takes time in order to get, you know, all this sort of fully up to speed and integrated.

Clara Donald (Analyst)

Thank you.

Craig Collard (CEO)

Okay, thank you.

Operator (participant)

Again, if you'd like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Carl Byrnes with Northland, Northland Capital Markets. Please go ahead.

Carl Byrnes (Senior Research Analyst)

Thanks for the question, and congratulations on your progress. In the event that we see a generic EXPAREL down the road, how do you see that changing the dynamics, if at all, for ZYNRELEF? Thanks. So then I have a follow-up as well.

Kevin Warner (SVP, Medical Affairs, Strategy, and Engagement)

Hey, Carl, it's Kevin Warner. I'll jump in and take that one. Appreciate that. You know, I guess the question is, if we see a generic and then if at all, how would it impact ZYNRELEF? You know, there's multiple barriers here to the access to the market with them. You know, the current brand of manufacturer has multiple patents that they feel confident in. They've yet to receive a sample or if it's known whether the generic manufacturer would be able to scale, if you will, as they've always cited that as being very challenging. But that said, a generic product, if it did come to market, a second major barrier would be the possible lack of financial benefit.

So historically, most generics come to market obviously as a discount to the brand of product to provide financial advantage to our healthcare system. But in today's current economic climate, specifically with the NOPAIN Act and broadening commercial reimbursement, those advantages would be moot, if you will. So ZYNRELEF for even EXPAREL to that extent, with the reimbursement package from NOPAIN, the follow-on commercials could trump with utilizing a genericized product. You know, when looking at the possibility of more non-opioid analgesics just in general coming to market, I see synergies rather than antagonism. You know, with the practice of medicine moving to opioid-sparing therapies, novel mechanisms, you know, are needed in order to provide the most effective multimodal therapy.

So whether it's generic liposomal bupivacaine as a regional block or an oral NaV1.8 inhibitor like Vertex's suzetrigine, you know, I see opportunities for ZYNRELEF as the best-in-class local instillation product to be combined with the other modalities, as we all seek one common goal, right? And that's to minimize or eliminate the need for opioids. Looking at a fundamental level, though, just briefly, you know, considering liposomal bupivacaine as a competitor or not, you have to look at the key differences of what makes a drug a drug, right, if you will. So these all differ between ZYNRELEF and liposomal bupivacaine. They're different drugs. One's a combo, one's a single agent.

The dose is different, up to 40mg bupivacaine of ZYNRELEF, 266 mg of liposomal bupivacaine. ZYNRELEF is extended-release, liposomal is not. Route of administration is installation for ZYNRELEF, injection for liposomal bupivacaine. Also, the site of action, whether it's local or regional, and then possibly most importantly is who's your, your prescriber, if you will. So for ZYNRELEF, it's the surgeon doing the installation process, and largely with liposomal now, it's mainly the anesthesiologist doing regional blockades with it. So huge differences overall when looking at is it truly a comparator when you look at those fundamentals? And in the end, the last piece I'd mention is the clinical efficacy, right?

ZYNRELEF has it proven through 72 hours over standard of care for pain reduction, severe pain reduction, and opioid reduction across multiple clinical trials, but also real-world trials, even head-to-head against liposomal showing benefit. So it makes those decisions fairly simple for our institutions.

Carl Byrnes (Senior Research Analyst)

Great. Thanks, Kevin. That's very helpful. On a different topic, what are you seeing with respect to opportunities for potential complementary tuck-in acquisitions? And, you know, what sort of timing might we expect in terms of some activity there? Thanks.

Craig Collard (CEO)

Yeah, no, Carl, thanks for the great question. We again, as we really tried to put out there, certainly in this call and prior calls, is really getting our hands around the business and managing it. I think we've shown that, you know, we've certainly done that through the reduction of expenses and that type of thing. And now it's about growing product and, you know, the partnership with CrossLink and some of these things. But really the next phase is what else can we do from an M&A standpoint? And again, this management team has been together before. We've done these things, and we're bringing in... This will be announced, you know, in the next few weeks. We're bringing in a business development person to head that up.

Again, we're gonna get a lot more, I guess, a lot more active, if you will, in that, in that area, looking at things and trying to bring in complementary type of assets and/or companies that would be accretive to what we're doing. We're gonna be fairly active here in a very short timeframe.

Carl Byrnes (Senior Research Analyst)

Excellent. Thanks.