Heron Therapeutics, Inc. /De/ Q3 FY2024 Earnings Call

Thank you for standing by and welcome to Heron Therapeutics Third Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Melissa Jarel, Executive Director. Please go ahead.

Thank you, operator and good morning, everyone. Thank you for joining us on the Heron Therapeutics conference call this morning to discuss the company's financial results for the quarter ended September 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 quickly 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. And with that, I would now like to turn the call over to Craig Collard, Chief Executive Officer of Heron.

Thanks, Melissa. Good morning, everyone and welcome to the Heron Therapeutics third quarter 2024 earnings call. Today, we are pleased to update you on our latest achievements for the third quarter which includes a narrowing of our financial guidance, including net revenue, adjusted operating expenses and adjusted EBITDA. We have also given a Q4 2024 net revenue guidance range of $37 million to $43 million based on the early success achieved already in Q4. We also received FDA approval of the Vial Access Needle or VAN, on September 24 and we have been included in the final version of the NOPAIN Act which goes into effect in January of 2025. Last, our partnership with CrossLink continues to progress and we are now beginning to see the positive impact that this could have for ZYNRELEF as we move forward. As I move through my comments today, I will speak in greater detail about each of these achievements for Q3. Moving to financial performance. We continue to improve on our financial efficiency while growing revenues. Over the past 9 months, during a time of change and disruption at the company, we grew revenues over 12%, improved gross margin from 41% to just over 72% and doubled gross profit from $37 million to $75 million. More importantly, we did this and burned less than $10 million in cash for 2024. Now that we have expenses in line, all of our efforts have been focused on driving revenue growth of our product portfolio. We have already begun to see growth based on our weekly sales which is why we felt it was important to give an early view into Q4 which we anticipate is going to be an excellent quarter based on our net revenue guidance of $37 million to $43 million. I would now like to spend a few moments discussing why we believe the VAN and the NOPAIN Act will have a very positive impact on ZYNRELEF. First, the VAN which was officially approved on September 24. One of the main issues with ZYNRELEF has been the preparation around drawing the drug itself out of the vial while maintaining sterility. As you can see, depicted from the left to right on this slide, we have improved the time of withdrawal from a couple of minutes to less than 45 seconds with a simplistic, easy-to-use device that creates a sterile environment once the vial is snapped into the VAN. We are now in the launch process and anticipate having the VAN on the market by the first week of December. Now, moving to the NOPAIN Act. CMS recently released a proposed rule for the NOPAIN Act for the calendar year 2025 back in June. The final version of the act was just released this past month and ZYNRELEF was included in the final rule. The goal of the act is to assure patients have access to non-opioid alternatives and providers are not financially incentivized to utilize opioids instead. We believe, based on CMS action and endorsement of non-opioid therapies, that many more commercial payers could also follow suit. This is a major accomplishment for Heron and will certainly provide a nice tailwind for ZYNRELEF when combined with the VAN, our expanded label and the increased commercial footprint due to the CrossLink partnership. Total acute care net revenues for the quarter were $7.4 million. ZYNRELEF net revenues for the quarter were $6.3 million. APONVIE net revenues for the quarter were $1.1 million. While we are pleased with our progress, we also knew that we were still transitioning in Q3. We believe that moving forward, our quarterly growth should start to increase dramatically with the many things we have going on promotionally. These items will not only have an impact on ZYNRELEF but across our entire product portfolio. Earlier, I spoke about the VAN and the NOPAIN Act, both of which will have an impact in 2025. Right now, we are seeing early results that the CrossLink partnership is beginning to drive ZYNRELEF growth. Our team has trained almost 700 CrossLink distributors and contractors whose early impact is shown here. When a CrossLink rep makes a material impact on an account like a key introduction or a trial from a new surgeon, our sales force marked that account as a CrossLink account. On the left, you can see that there is a growing number of these CrossLink accounts that are ordering ZYNRELEF. We are currently adding an average of 21 newly ordering CrossLink accounts per month. If we set a threshold of 20 units in the first month, we are currently averaging 7 of these qualified CrossLink accounts per month. These metrics are key drivers of our forecast for 2025. In the middle chart, we see a steady increase in monthly units among CrossLink accounts as a whole. And on the right, another way to look at this contribution is the cumulative number of ZYNRELEF units since the CrossLink program began in April. Nearly 40,000 units have been ordered in CrossLink accounts to date, amounting to roughly $4.4 million in net revenue. Annualizing the October units would result in over $10 million in net revenue. I want to emphasize that this program is just getting underway and these are early results. We are very excited about how this partnership will perform once we are running on all cylinders for a quarter or two. Now, moving to APONVIE. Throughout 2024, we have been integrating our business units under the One Heron initiative I've discussed previously. As a reminder, the One Heron approach was implemented, so all of our customer-facing teams would sell our entire product portfolio versus having 2 divisions within a small company only focused around acute or oncology. Again, our mantra internally is accountability and efficiency. One of the key benefits of this approach has been the cooperation among the teams on gaining access and adoption of APONVIE. Our top-down national accounts team and specialty access teams are working hand-in-hand with our on-the-ground territory business managers to generate wins and coordinate pull-through. When you look at the 2 charts shown here, it is clear that APONVIE is growing and we expect to be entering 2025 on a new trajectory. The number of accounts ordering APONVIE has tripled over the last 12 months but even 182 ordering in October is just scratching the surface for what we think this product can do. As more and more providers gain access to APONVIE in their hospitals, the number of average daily units sold of APONVIE has really accelerated in 2024. This is where I think the new trajectory can really be seen. If you simply annualize the 652 average daily units in October, this would translate to over $7 million in sales. The team is really motivated by the momentum we've gained with APONVIE. Just like with ZYNRELEF, we are excited for what is to come. Moving on to product performance with our oncology franchise. The oncology franchise continues to provide a strong foundational base for our company. CINVANTI produced net revenues of $22.6 million for the quarter and SUSTOL had net revenues of $2.8 million for the quarter. Although net revenues were down a bit from Q2, we anticipate bouncing back strong in Q4 and throughout 2025. As we have stated before, we are in a very competitive market with CINVANTI which can cause quarterly fluctuations but the clinical value that CINVANTI brings has allowed us to maintain around a 20% share of this market. We also still believe that we will prevail in the ANDA litigation and anticipate that CINVANTI will have full protection until patent expiry in 2035. I will now turn the call over to Ira Duarte, our CFO, to cover our financials and update our financial guidance. Go ahead, Ira.

Thank you, Craig. Our product gross profit for the 3 months ended September 30, 2024, was $23.4 million or 71% which increased from 42% 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 $75.1 million or 73%, an increase from 41% for the same period in 2023. SG&A expenses for the 3 and 9 months ended September 30, 2024, were $23.3 million and $77.3 million, respectively, compared to $28.8 million and $106.7 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 among all departments. Research and development expenses were $4.5 million and $13.5 million for the 3 and 9 months ended September 30, 2024, compared to $9.3 million and $31.3 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 a decrease in development activities. As noted in the 10-Q, the condensed consolidated statements of operations and comprehensive loss as of September 30, 2023, reflect the reclassification of certain expenses from research and development to general and administrative expenses to align with the function of the expenses incurred. This resulted in no change to total operating expenses. The net loss was $4.8 million for the 3 months ended September 30, 2024 and $17.2 million for the 9 months ended September 30, 2024, compared to $25 million and $99.8 million, respectively, for the comparable periods in 2023. Cash and short-term investments at September 30, 2024, was $70.9 million. The overall year-to-date cash burn for the business was less than $10 million. Year-to-date, we incurred inventory write-offs of $2.4 million. Unlike last year's write-offs, current year write-offs were not related to inventory management. In addition, we also recorded asset impairment write-offs of $2.1 million, primarily related to projects no longer part of the company's forward-looking strategy. As you will see on the slide, if you had excluded depreciation, stock-based compensation, inventory write-offs and the asset impairment write-offs, our adjusted EBITDA results would have been a positive $1.4 million operating income which represents a substantial turnaround in the financial management of the business. As a result of our year-to-date cost efficiency measures and overall performance, we are revising our guidance for the rest of the year. We are narrowing our net revenue range from our Q2 guidance of $138 million to $158 million to a revised range of $140 million to $146 million net revenue. We are narrowing our Q2 guidance for adjusted operating expenses which excludes stock compensation, depreciation and fixed asset write-offs from our previous range of $107 million to $111 million to a revised range of $101 million to $105 million. Lastly, we are narrowing our Q2 adjusted EBITDA guidance range which excludes inventory write-offs, stock compensation, depreciation and fixed asset write-offs of negative $10 million to positive $3 million to a revised range of positive $2 million to positive $5 million. And now, we'd like to open the call for any questions.

And our first question for today comes from the line of Kelly Shi from Jefferies.

This is Jose for Kelly. Now that VAN is approved, how should we think about the uptake curve moving forward? And what is your anticipation of the customer mix between existing ZYNRELEF users and new users?

Yes, thanks for the question. So currently, with the VAN, we anticipate having the VAN in the market in customers' hands by the first week of December. And the plan with that is to really start off with a few accounts and to get folks comfortable with that to make sure that there's no issue in launching the product and so forth. We're going to places before that are very comfortable with the product. Beyond that, we're then going to accounts where we've had an issue. And what I mean by that is, an account that maybe walked away before due to the preparation of the product. And so again, we have a number of accounts that fall into that category. So I think you have that. And then obviously, with any new accounts that we have that CrossLink has brought on, we've been talking about the fact that this device is coming out and will improve the prep time. So we're extremely excited about the potential of this because it really does solve an issue that has been out there for quite a while and with the prep time of the product and also really addressing a significant concern.

And our next question comes from the line of Carl Byrnes from Northland Capital Markets.

My questions on VAN have been answered. So I wanted to kind of circle back to CINVANTI. I'm wondering if you could comment a little bit on the nuances in the third quarter in terms of the sequential decline and then your outlook for the fourth quarter, given the guidance that you provided.

Yes, thank you, Carl. As we have mentioned previously, CINVANTI operates in a highly competitive market. There are many factors at play regarding ASP reimbursement and the emergence of new competitors. Historically, we have maintained about 28% market share, though there are quarterly changes as we gain and lose accounts. Unfortunately, we did lose a significant account in Q3, which affected our net revenues. One reason for the guidance we provided for the fourth quarter is related to our new unified approach with CINVANTI and our entire product portfolio. We are now focused on selling across the product range with greater coordination among our commercial teams. This strategy is enabling us to tap into opportunities within the 340B hospital market for CINVANTI, and we are already noticing considerable growth in Q4. Therefore, we expect CINVANTI to recover strongly and continue to perform well into next year.

Our next question comes from Serge Belanger from Needham.

I guess the first one on 3Q results. OpEx also took a tick down from second quarter. Just wondering if this is a function of lower sales in the third quarter or it's a new base level we should think of going forward? And then, Craig, going back to the litigation around CINVANTI, do you still expect a court decision next month or by the end of the year?

Yes, thanks, Serge. It's good to hear from you. I want to clarify your question. The first part was about OpEx. We are continuing to manage OpEx as efficiently as possible. It did decrease a little in Q3, and that's mainly due to our management efforts. I believe it will stabilize in the current framework we're in. I'll let Ira address that further. Now, regarding the litigation, we still feel very confident about our case. We had closing arguments in August, and we believe that we will ultimately win. This matter needs to be resolved by December 14 of this year, so we could receive a decision at any time. We expect to win the case and continue with the patent extending to 2035.

Serge, the operational expenses for the third quarter did change, but I wouldn't consider it a new baseline. It's essentially a mix of the second and third quarters. The timing of a few items in the third quarter led to lower expenses. So, this is not the new standard for the future.

Okay. Maybe one last question. As we consider NOPAIN for 2025, how beneficial could this be? I believe you currently have extensive coverage in the ASC setting and HOPDs, so I'm curious about any changes. How much of an advantage could it really be for the ZYNRELEF franchise?

Are you referring to NOPAIN? I'm sorry, I missed the first part of that.

The NOPAIN Act, how much of a tailwind...

Yes. No, look, I think, again, with CrossLink with VAN and now NOPAIN, I think it's going to be a tremendous help to us. I mean we do have reimbursement now but one of the issues we've really suffered from for quite a while is just awareness. And I think the fact that we're mentioned in the NOPAIN Act that's being talked about a lot. We're now talking about opioid abuse and so forth. And I think having us in that conversation and the fact that we are the longest-acting pain relief product out there, I think, is going to provide significant awareness and is going to create a significant tailwind. So we see it as really a big plus for us going forward.

And our next question comes from the line of Brandon Folkes from Rodman & Renshaw.

I would like to ask about the guidance. When discussing the sequential revenue from the third quarter to the fourth quarter, could you provide more details about the recovery of CINVANTI compared to the uptake of VAN for ZYNRELEF? Additionally, how should we view the timing of the tailwind from VAN? Are you expecting the impact to start in the fourth quarter, or should we consider it more of a 2025 event?

Thank you, Brandon. It's great to hear from you. To start with CINVANTI, we experienced an account loss in Q3, but we have successfully gained several new accounts in Q4. We have been promoting this product across our portfolio for a few months, not just in Q4, and we've seen positive results in the hospital sector. Quarterly revenues have rebounded to levels similar to those before Q3, and we believe this momentum can continue into 2025, potentially surpassing previous performance. CINVANTI's performance is also linked to managing its average selling price, which we have historically handled well. If we can sustain our pricing and expand in these accounts, we are optimistic about CINVANTI's ongoing success. Additionally, I view CINVANTI as a foundational business for us, providing the necessary resources to support our efforts with ZYNRELEF and APONVIE. Moving to ZYNRELEF, we are seeing an increase in activity, likely driven by the CrossLink partnership. The VAN product has yet to hit the market, so its impact on Q4 may not be as significant. I expect the real upward trend from the VAN to emerge in Q1 2025 and beyond, in conjunction with CrossLink.

Our next question is a follow-up from the line of Carl Byrnes from Northland Capital Markets.

I'm wondering if you can give us a bit of an update on the development of the Prefilled Syringe.

Yes, we continue to progress the Prefilled Syringe program. I mentioned earlier that sterilization and stability were the challenges associated with that. We've made some great progress in the last quarter along those lines. We have had a slight delay because of machine parts and being back ordered but we're moving through that as well. So overall, the program is progressing as expected and we're very hopeful for it because we think it's going to be an advancement even beyond what the VAN is going to give us. Prefilled Syringes, obviously, are going to be the gold standard. The approval date, by the way, we're targeting approval at the very end of 2026, first quarter 2027.

This does conclude the question-and-answer session of today's program. I'd now like to hand the program back to management for any further remarks.

No, we just want to thank everyone for the questions today and we appreciate you joining the call. And we look forward to speaking to everyone next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.