Heron Therapeutics, Inc. /De/ Q1 FY2023 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Heron Therapeutics Q1 2023 Earnings Conference. Before we begin, I would like to remind you that this call will contain forward-looking statements concerning Heron's future expectations, plans, prospects, corporate strategy and performance, which constitute forward-looking statements for the purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Heron's filings with the SEC. In addition, any forward-looking statements represent Heron's views only as of the date of this webcast and should not be relied upon as representing Heron's views as of any subsequent date. Heron specifically disclaims any obligations to update such statements. Now, I'll turn the call over to Craig.

Thank you, operator. Good afternoon, everyone, and welcome to the Heron Therapeutics First Quarter 2023 Earnings Call. I'm Craig Collard, the new CEO of Heron Therapeutics, and I'm thrilled to be leading this organization as we continue to make headway in the hospital and oncology markets. Today, I'll provide an overview of our recent performance, highlight key achievements, but more importantly, give some insight into my assessment of the business in my first four weeks and discuss our strategic vision moving forward. Total product net revenues for the first quarter were $29.6 million, up from $23.5 million in the same quarter last year, an increase of over 26%. We continue to make steady progress on the oncology side of our business, but we remain excited about the market opportunity for both ZYNRELEF and our newly approved product APONVIE, which was launched in March of this year. Starting with ZYNRELEF, I realize the product has had a slow uptake since launch for a variety of reasons. Despite competing in a huge market, the product has a differentiated clinical profile that works well when used. The label has limited our ability to be the drug of choice across a variety of indications. To counter that, we filed an sNDA with an October 23 PDUFA date, that if approved, will expand our indications and number of procedures we can treat. The viscous nature of our products has slowed the withdrawal from the vial compared to other drugs. To improve the handling, we recently started multiple enhancement programs to address some of the issues we have faced in the surgery suite during preparation, including a vial access needle or van and ultimately a prefilled syringe that could be game-changing. Since joining the company, I've been able to get in the field and work with our sales representatives, which I always find helpful when trying to assess product performance issues. I'm happy to report that so far, I have seen ZYNRELEF used in five knee surgeries. I was trying to understand what really happens in the application of the product. Previously, I had heard mixed messages about the time to draw the product out of the vial, product viscosity, and general issues that would make it more difficult to use our product. What I determined from watching these surgeries is that we can replicate the success I saw that day. The application requires training the staff, as it is different but not complex. The nursing staff even admitted that after using the product a few times, it became second nature and is now just part of the normal routine and prep before the surgeon arrives. I think early in the launch of the product, our company did not address this issue head-on and didn't understand that this was going to require more training of our reps and highlighted our own inefficiencies. All products generally have challenges when launched, and the companies that are prepared and can move quickly are generally the companies that ultimately succeed. The good part here is that it's not too late to get this launch back on track. Now, moving to APONVIE, the product was launched a month prior to my joining the company. APONVIE, an injectable emulsion, is the only IV substance NK1 receptor antagonist indicated for postoperative nausea and vomiting. As was mentioned, this is a product with a great clinical profile and marketing advantages and competes in a very large market. We believe that APONVIE will be a very successful product in our portfolio and has great call point overlap with ZYNRELEF. While the receptivity to the initial launch is encouraging, we will look for ways to maximize its potential and update our shareholders as we progress throughout this year. Before turning the call over to David for a financial review, I thought it might be helpful to give some insight into the business as a whole and a view into the strategic direction as we move forward. Since joining the company, I have spent much of my time trying to understand each department's headcount, spend, and how the company functions as a unit. The goal has been to do a thorough internal review to determine the company's business practices and strategies to develop a long-term plan that allows the company to maximize value for all shareholders. Although my review is not complete, I can tell you that I have a much better understanding of the company and many changes will be coming soon, including a reduction of cash burn and improvement of operational efficiency and the implementation of a realistic product forecast to more accurately determine our capital requirements moving forward. Shortly after I joined the company, I implemented the first major change, which was to flatten the executive reporting structure in the company. I hired Jason Grillot, whom I have worked with in the past to lead our sales and marketing efforts. Jason will be improving many things with the commercial structure, including targeting, alignment, accounting support, marketing message, and data to the sales force and management reporting. I believe these changes and many others to be updated later will continue to improve the uptake of our products. Other expense cuts will be implemented, including less outsourcing and dependency on consultants and reduction in headcount. Again, I will provide more detail in the near future. As you know, I've been assessing all aspects of our business to ensure we are well-positioned for the future. I recognize that this process may be causing some uncertainty and concern among our shareholders. We are committed to providing you with as much information as possible about the strategic direction changes that will be coming. We understand that you've invested your time and resources in our company, and we value your input and support. We want to keep you informed every step of the way as we navigate this process. We plan to share more details with you soon about the changes we will implement and the reasons behind them. Our goal is to create a stronger, more sustainable company that is better equipped to meet the needs of our customers and stakeholders. I appreciate your patience and understanding as we work through this process. We are confident that our changes will position us for long-term success, and we look forward to sharing more information with you soon. Go ahead, David.

Thank you, Craig. As Craig mentioned in his remarks, our net product sales for the first quarter of 2023 were $29.6 million compared with $23.5 million in the first quarter of 2022, representing an increase of 26% over the same period in 2022. For the first quarter of 2023, our ZYNRELEF net product sales were $3.5 million. In March 2023, APONVIE became commercially available in the U.S. For the first quarter of 2023, APONVIE net product sales were $244,000. Our Oncology Care franchise net product sales for the first quarter were $25.8 million, which was an increase of 15% over the same quarter in the prior year. For the full year 2023, we expect Oncology Care franchise net product sales of $99 million to $103 million. Cost of product sales for the first quarter of 2023 were $16.9 million, compared to $11.4 million for the same period in 2022. For Q1 2023, cost of product sales included a one-time charge of $5.3 million, resulting primarily from the write-off of short-dated ZYNRELEF inventory. Research and development expense decreased from $42.1 million in Q1 2022 to $13.8 million for the first quarter of 2023, primarily due to a decrease in external development costs related to ZYNRELEF. Our sales and marketing expense decreased slightly from $23.4 million in Q1 2022 to $21.2 million for the first quarter of 2023, primarily due to a decrease in costs to support the ongoing commercialization of ZYNRELEF. We are reporting a loss from operations of $33.1 million for the first quarter of 2023, which compares to an operating loss of $62.9 million for Q1 2022. Our balance sheet at the end of March 2023 shows a cash balance of $60 million, down from $84.9 million at the end of December 2022. Craig, back to you.

Thanks, David. Operator, we'd now like to open things up for questions, and go ahead, please.

Our first question will come from Brandon Folkes with Cantor Fitzgerald. Please go ahead.

Hi. Thanks for taking my questions and Craig, congratulations on the appointment. Maybe just firstly from me, just how quickly do you think we can see a return on the training of staff and then secondly, I know it's early stage and we perhaps need to just be patient here. But any more granularities in terms of going forward and deeper into these accounts and sort of maybe some of the specifics that you think you can do to change the trajectory of ZYNRELEF. And then lastly, maybe just any color, and I know sort of this wasn't given during your time, Craig. But I think we're looking for a 10% volume growth in 1Q 2023 over 4Q 2022, when we report year-end earnings. So just any color, did that volume growth materialize? Were there any movements on price? Just any color there on ZYNRELEF? Thank you very much.

Thank you, Brandon. I want to start by mentioning that we are currently focused on preserving cash and optimizing our resources. In terms of stock price, I believe that as we manage our products and begin to see consistent growth over several quarters, this should positively impact our stock price in the long run. However, I want to emphasize that I wasn’t here during the last quarter, so I can't speak to the specifics of product growth or account performance from that time. Our main goal is to achieve profitability as quickly as possible, and we'll provide more details on this. This includes adopting a leaner organizational structure and maximizing our sales efficiency. Regarding ZYNRELEF, I agree that we can deepen our presence in accounts where we have established usage. During my recent field visit, I focused on identifying areas we can standardize. If one of our representatives doesn’t perform well, we should be able to replicate a successful approach across our sales team. The data suggests we can achieve this. The application issues I've encountered can be addressed with the right preparation and training, making them largely disappear. When the surgeon performed knee surgery that day, the product was seamlessly integrated into the sterile field and utilized effectively. The surgeon expressed appreciation for the product's viscosity, even referring to it as "honey," as he liked how it stays in place. I believe we initially hesitated to embrace this aspect, but we should instead lean into it. Overall, I think the product is still under-optimized, but it's effective and performs well.

Great. Thank you very much for taking my questions.

You're welcome.

Your next question will come from the line of Boris Peaker with TD Cowen. Please go ahead.

Hi. This is Nick on for Boris. Thanks for taking our question. Just quickly on APONVIE, how are you thinking about marketing this moving forward? I know that you mentioned that there are a lot of similarities between like the calls that you'll make with the APONVIE and ZYNRELEF. But I was just thinking about like separately, how would you be planning to market this to potentially have a faster growth in ZYNRELEF?

That's a great question. When I joined the company, I was faced with the decision of where to allocate our resources. Should we continue investing heavily in ZYNRELEF, or shift some focus towards APONVIE? At that time, we were more focused on ZYNRELEF, which is a more complex product to sell. In contrast, APONVIE has a different dynamic; it operates almost like an annuity. Once you manage to get on the formulary, it tends to integrate into the system where it's frequently used. Therefore, I view APONVIE as an easier product to sell. However, I haven't yet had the chance to fully assess customer reactions to it. As part of our strategy to improve communication going forward, we're planning to allocate more resources to APONVIE. Interestingly, the marketing data so far indicates that the oral prepatent market is expanding without any promotional efforts. This suggests that hospitals, physicians, and anesthesiologists are responding positively to the product, resulting in growth despite minimal marketing. Considering the size of the market and the potential to engage patients receiving continued dosing, this could transform APONVIE into a multi-hundred million dollar product. We're currently evaluating how to adjust our sales team and compensation structures accordingly. While everything is still under review, we expect to make some decisions soon.

Great. Thanks for that. For the VAN in prefilled syringe, what are the next steps for approval? When do you expect this to be completed for each of them?

I'm sorry, did you say prefilled syringe?

And the VAN as well.

I have some preliminary timelines in mind. I'm optimistic that we can expedite this process. We've made progress on the prefilled syringe, and from what I've gathered, we're looking at a timeframe around the 26th. However, I hope we can move that date closer. The VAN is likely to fall within that same timeframe. If everything goes as planned, we can expect the VAN to be ready in about 1.5 years, followed by the prefilled syringe approximately 1.5 years later. Additionally, during this period, there could be an opportunity to expand the label with the sNDA filing.

Great. Thank you very much.

You’re welcome. Thank you.

Your next question will come from the line of Rohit Bhasin with Needham & Company. Please go ahead.

Hi. This is Rohit on for Serge. Thanks for taking our questions. For the CINV franchise, the previous management provided prior guidance of $99 million to $103 million. Does this guidance still stand? And then secondly, you mentioned reducing cash burn. Do you have any plans to pull back on the sales force? Thanks.

Yes. Regarding the CINV franchise, I want to clarify that we provided guidance previously, and I believe the CINV franchise is progressing steadily. I was initially uncertain about giving partial guidance on specific products since I prefer a more comprehensive approach. Therefore, my intention is to provide broader guidance as we gain a better understanding of the situation. Overall, I can confirm that things are continuing to progress steadily.

Yes. So you mentioned reducing cash burn. Do you have any plans to pull back on the sales force?

Yes, I apologize for the sales force situation. We are reviewing it as we aim to enhance efficiency. It may involve some realignment. We are definitely not making any changes in the oncology sector. On the acute side, we are evaluating our alignment with the appropriate accounts and what that will entail. There is a possibility of making some short-term adjustments, but our focus is on how to better align with products like APONVIE and ZYNRELEF and determining the best approach. This process will take some time. Jason, who was recently hired, is actively addressing this issue, and I hope to have clearer information on it shortly.

Great. Thank you.

You’re welcome.

Your next question comes from the line of Carl Byrnes with Northland. Please go ahead.

Thanks for the question and congratulations on the promotion. Considering the one-time ZYNRELEF inventory write-off, which I think was referenced at $5.3 million. If we back that out, it looks like the gross profit margin would have been around 61%. Does that sound right? And is that a number that you would expect to be sustainable and for the second going forward in future quarters?

Yes, Carl, it's a great question. You just said some time when you congratulated me on the promotion. I'm hoping the next quarter or quarters after this, what you say is, 'hey, guys, congratulations on a great quarter.' That's what we're striving for. So I'd like to get that out first, I guess. Regarding gross margin, no, we're not where we need to be. I would like to see us move towards under sort of a 20% COGS, which will be 80% gross margins. That's where I'd like to strive for. And I think with what we're doing with batch sizes, you're going to see some of that being reflected. I'm also looking into every manufacturing agreement we have and seeing where we can improve upon that. So ideally, I would like to get us down in sort of that, I would call it, high teens to 20% range. So we're not there yet, but it was affected obviously by this one-time write-off of ZYNRELEF.

Thanks.

You’re welcome. Thank you.

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

Hi. Thanks for taking my question. This is Clara on for Kelly. So, for the same accounts you're targeting for APONVIE and ZYNRELEF, what would be your strategy to maximize the synergy between those two products? And how should we expect the synergy to kind of be reflected on the sales in the coming quarters? And also for the ZYNRELEF, for the sNDA, what are some strategies and efforts to help ZYNRELEF for recognized the additional opportunities indicated by this additional education? Thank you.

Yes. No, thanks for your question. I'll start with the sNDA. I mean, again, as you know, we've filed it with the FDA, and we have a PDUFA date. But outside of that, we cannot predict what indications we will get and how broad the label will ultimately receive approval for. And so, our hope, obviously, is that it broadens, and we get all the indications we ask for, but we just don't know that yet. So it'll be difficult to plan until you really know what you're going to have. So there'll be more to come on that. And really with APONVIE and ZYNRELEF, the synergies there, I mean, if you think about it, there's two products that fit really well together. I think the question we're really struggling with right now is where do we put our resources because when I look at ZYNRELEF and I think about the VAN coming, you've got a positive expansion of sNDA and then you have really what should be game-changing, because it changes the whole sterility problem with the prefilled syringe. And so, one could argue that in this period, should we focus more on resources possibly on APONVIE, which is a much easier sale, quicker, has a bit of an annuity factor to it in a very large market. And so, again, I don't have specifics yet, but that's what we're debating. And I think we'll have answers very shortly. But the good news is the products, as you mentioned, do fit well together. The call points are similar. And again, I think over time, these products should both grow significantly. And it's just a question of which one we focus on first and how we sort of do that.

Very helpful. Thank you.

Okay. Thank you. You’re welcome.

I will now turn the call back over to Craig for any closing remarks.

Yes, thank you, operator. First, I'd like to thank everyone for my first call here as CEO of Heron. And I also really want to thank all the employees here. I mean, change is difficult. And again, there's been a lot of things going on here, and we're putting a lot of information together. And I think what you're going to see in the future is a much, much different company that will head towards profitability and will be a success. And so I'm excited about that. And again, I just want to thank everyone here that's being a part of that thus far. And we'll see you next quarter.

Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.