Heron Therapeutics, Inc. /De/ Q2 FY2024 Earnings Call

Thank you for joining us. My name is Jermaine, and I will be your conference operator today. I would like to welcome everyone to Heron Therapeutics Q2 2024 Conference Call. All lines are muted to minimize background noise. After the speakers' remarks, we will have a question-and-answer session. Now, I will turn the call over to Melissa Jarel, Executive Director, Legal. Please proceed.

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 and Chief Development Officer; and Kevin Warner, Senior Vice President, Medical Affairs Strategy & 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 inherent 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. And with that, I would now like to turn it over to Craig Collard, Chief Executive Officer of Heron.

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 23 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 illustrates the impact our new management team has had in this business as we compare the 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 spending dramatically while still growing top-line revenue. As you can see from the slide, revenues were up 15%, gross margin has improved from 40% to 73%, and operating expenses have been reduced by over $36 million when comparing the first 6 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 up $24.9 million for the quarter and SUSTOL net revenues at $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 compared to 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, and the advanced submission and launch later this year, which will all have a dramatic impact on not only ZYNRELEF as we move later in the year and into 2025, but also APONVIE. 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 a type of product where systematic wins are possible. What I mean specifically is, when we win at the P&T and formulary level, protocols can be put in place where APONVIE is used through our hospital system for a specific patient or surgery type. As you can see on this slide, we continue to gain P&T wins and new customers ordering. The goal with any new account win is to establish a protocol, get the product already set up in a hospital system, and then move to expand usage within the hospital. Slide 10 provides a dashboard of how we forecast our APONVIE business. We've established sharing 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 is already happening preoperatively across the country and uses a validated series of questions to reliably classify these patients. The medical literature informs us that approximately 1 in 2 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 with 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, APONVIE is well-positioned for growth. Moving to ZYNRELEF, it's important to note the progress and the number of improvements of 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 is the inclusion of ZYNRELEF in the much-anticipated NOPAIN Act, which will continue to allow ZYNRELEF to be reimbursed outside of the surgical bundle. Lastly, the CrossLink partnership, which continues to progress. Now understanding the impact of VAN is a bit easier when you see both devices side by side. Our current configuration with the VVS or Vented Vial Spike on the left-hand side of the slide is much more difficult to use compared to the VAN or Vial Access Needle on the right-hand side of the slide. The two main advantages that the VAN offers are sterility and speed of product withdrawal from the vial. The preparation of ZYNRELEF has been this 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 rules included the non-opioid policy for pain relief, which was supported by the NOPAIN Act. As expected, ZYNRELEF was the main 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 endorse 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 upon 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 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 with 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 that's 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 planned attack within a territory. Our plan is still to continue expanding 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 at this 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, which 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 who have 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've 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.

Thanks, Craig. Craig has covered our product performance and operating results in his comments, and I will add some additional points for our Q2 2024 results. Our product gross profit for the 3 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 $51.7 million or 73%, an increase from 40% for the same period in 2023. SG&A expenses for the 3 and 6 months ended June 30, 2024, were $27.5 million and $53.9 million, respectively, compared to $40.8 million and $77.8 million, respectively, in the same period in 2023. The decrease was primarily related to a drop in personnel and related costs due to reductions in force in the prior years, as well as improved cost efficiencies across all departments. Research and development expenses were $4.4 million and $9 million for the 3 and 6 months ended June 30, 2024, compared to $13.2 million and $22 million in the comparable period in 2023. The decrease was primarily related to decreases in personnel and related costs due to 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-off, these were not related to inventory management. In addition, we also reported asset payment write-offs 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 you exclude depreciation and amortization, stock-based compensation, the inventory write-off, and the asset impairment write-off, our adjusted operating results would have shown 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 the reclassification of certain expenses from research and development to general and administrative expenses to align with the functional expenses incurred. This resulted in no change to total operating expenses. The net loss was $9.2 million for the 3 months ended June 30, 2024, and $12.4 million for the 6 months ended June 30, 2024, compared to $42.1 million and $74.8 million, respectively, for the comparable period in 2023. Cash and short-term investments at 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 have therefore narrowed our previously given guidance range of $180 million to $160 million for adjusted operating expenses to a range of $107 million to $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 a $22 million loss to a $3 million income to a range of $10 million loss to a $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.

And your first question comes from Brandon Folkes with Rodman & Renshaw. Please go ahead.

Congratulations on a lot of good progress in the quarter. Maybe just firstly for me, on ZYNRELEF. Any color on where you see the most uptake across joint trauma and spine with the CrossLink partnership?

I'm sorry, Brandon, could you say it one more time?

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

Yes. No, at this point, again, as I've said in my comments, we've been getting the CrossLink team up to speed. In Q2, we had roughly a couple of hundred folks sort of, if you will, had gone through training. And so we haven't been able to really dive into the data to determine where we have the largest impact. I mean, obviously, with orthopedic surgeons is where we're spending the majority of our time. At this point, I just can't really breakdown the data into that sort of level in order to determine specifics or have an impact in one place more than another.

Okay. And then maybe just, obviously, you did a tremendous job during the quarter on the rep training with CrossLink. Can you just elaborate on when you expect to see that revenue trajectory change with 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?

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

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

At this point, again, we've said all along, we think we'll be somewhere in the kind of 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.

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

The first one, Craig, on ZYNRELEF, can you just give us a picture of what the current reimbursement and coverage looks like 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 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 and what the potential outcomes could be and things like that? Thank you.

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

Thanks, Serge. In regard to the reimbursement picture and how it looks, there's a difference between NOPAIN and a pass-through status product. Currently, right now, ZYNRELEF, to be reimbursed, has pass-through status. So that's all our hospital outpatient procedure department patients and all of our ASC patients under Medicare. As far as the commercial payers, it ranges from 30% to 50% and varies by state and region. That said, with NOPAIN that paradigm kind of switches because of how NOPAIN is phrased, and historically, many commercial payers do not always follow these pass-through drug stipulations. But with NOPAIN 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 of a push for them to follow along with the statute. They understand the cost efficacies, the clinical efficacies, and the overall economic model, so we expect to see more commercial payers come on board with NOPAIN. NOPAIN really doesn't change the current reimbursement from the CMS perspective.

Great. As you stated, the trial ended in June. Again, as we've said all along, we feel very comfortable with what happened in the trial. We feel very strong in our positioning. Again, this change really comes down to infringement that has sort of been established in the case, and it all really comes down to obviousness. We feel the invention that we made here was unique. Merck had this product for years as a product set and was unable to get this in this form. That really is what this comes down to—the burden of proof there. Again, we feel very comfortable with our position.

And do you expect a 30-month expiry in December—is that when you think you will get a court decision?

Yes. Remaining to be done are closing orders, and we are expecting a decision to be made in Q4 of this year.

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

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

CrossLink reps that were in the field in Q2 were a couple of hundred. We had just migrated to maybe 12 states. Now we are sitting with 561 reps in 28 states, and that continues to grow. We believe we'll be over 650 at the time of the launch with the VAN. If you think about sort of the inflection and how this really comes together, we had a lot of things happen this year, obviously, with the NOPAIN Act, the expansion of our label, and getting the CrossLink folks trained. There's another piece of this, too, which is really the integration with our sales force and managing and targeting accounts. That takes time. We've said all along that we view the launch of the VAN and moving out of Q4 into Q1 of '25 as when we see a majority of inflection taking place into next year. Some of this just takes time in order to get fully up to speed and integrated.

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

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. And then I have my follow-up as well.

Hey Carl, it's Kevin Warner. I'll jump in and take that one. The question is if we see a generic and then, if at all, how would it impact ZYNRELEF? There are multiple barriers here to the access to the market, with the current branded manufacturer having multiple patents that they feel confident in. It's challenging for generic manufacturers to scale given those barriers. But that said, if a generic product did come to market, the second major barrier would be the possible lack of financial benefit. Historically, most generics come to market at a discount to the branded product to provide a financial advantage to our healthcare system. However, in today's current economic climate, specifically with the NOPAIN Act and broadening commercial reimbursement, those advantages could become moot. Regarding the possibility of more non-opioid analgesics coming to market, I see synergies rather than antagonism, with the practice of medicine moving towards opioid-sparing therapies. So whether it's generic liposome, bupivacaine as a regional block or an oral NAV1.8 inhibitor, ZYNRELEF can be positioned as the best-in-class local installation product combined with other modalities to achieve the goal of minimizing or eliminating the need for opioids. However, when looking at ZYNRELEF and liposomal bupivacaine, you need to consider the differences in active ingredients, dosage, route, frequency, and prescriber. These differences matter when making decisions on which product to use. ZYNRELEF has proven clinical efficacy over extended periods, significantly reducing pain and opioid use across multiple clinical trials, demonstrating its value in the market.

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

Carl, thanks for the great question. We've really tried to emphasize during this call and prior calls about getting our hands around the business and managing it effectively. I think we've shown that we've done that with the reduction of expenses and that type of thing. Now it's about growing the product and the partnership with CrossLink. The next phase is exploring what else we can do from an M&A standpoint. This management team has worked together before and is capable of executing those deals. We are bringing in a business development person to lead those efforts, and expect to be quite active in that area in the near term. If there are no further questions, we want to thank everybody for being on the call today, and we look forward to next quarter's call.

That will conclude today's call. You may now disconnect.