Earnings Call Transcript - HRTX Q4 2023

Operator, Operator

Thank you for standing by, and welcome to the Heron Therapeutics Fourth Quarter 2023 Conference Call. I would now like to welcome Melissa Durel, Executive Director, Legal to begin the call. Melissa, over to you.

Melissa Durel, 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 fourth quarter ended December 31, 2023. 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 over the call to Craig Collard, Chief Executive Officer of Heron.

Craig Collard, CEO

Good afternoon, and welcome to the Heron Therapeutics fourth quarter 2023 earnings call. Today, we are pleased to update you on our latest achievements in 2023 financial performance, progression on our development projects, CrossLink training and some insight into where we are headed strategically with our products. Since I joined Heron Therapeutics as CEO back in April of 2023, we have taken significant steps to get this business back on track. It started with headcount and expense reduction combined with getting the right management team in place. We've implemented a comprehensive streamlining of our financial processes, enhancing efficiency and accountability across the organization. As you can see from this slide, we have had a number of significant achievements in 2023 that help us be well positioned as we move into 2024 and beyond. We've been able to reduce operational expenses from $182 million in 2022 to $135 million in 2023 and we should be in the range of $108 million to $160 million in operating expenses in 2024. As part of this process, we have also looked to improve our gross margin. Historically, the company has had gross margins in the 50% range. However, through better inventory management and with some renegotiations with our manufacturers, we've been able to reduce COGS and improve gross margins to over 70%. We anticipate future gross margins to continue to improve up to the mid-70s range. We completed a capital raise early in 2023, which will allow us to have enough cash to get to profitability by late 2024. We closed the year in 2023 with over $80 million in cash and cash equivalents, which again is enough cash for us to reach profitability in Q4 of 2024. Moving down the list, we were able to restart the Vial Access Needle, or VAN, project along with the Prefilled Syringe. Both of these projects are progressing nicely with the expected VAN approval by the end of this year and the Prefilled Syringe approval expected in 2026. Both of these projects will provide significant improvement to our product ZYNRELEF, which is indicated for post-operative surgical pain. Our oncology franchise continues to outperform, and I'm happy to report total net revenues of $107.9 million, which exceeded full year 2023 guidance. We're also very pleased with ZYNRELEF performance in Q4 of 2023. For the first time in our history, we were able to generate over $5 million in net revenue for the quarter, even while significant change was happening in the business. Lastly, in January 2024, we were able to sign the CrossLink agreement, combined with getting our label expansion for ZYNRELEF. These two events should have a significant impact on ZYNRELEF revenues as we move through 2024 and beyond. Now moving to product performance. The oncology franchise continues to outperform our expectations with CINVANTI net revenues coming in at $94.9 million for the year and SUSTOL coming in at $13 million. We have been very pleased with the oncology franchise, and we believe these products will continue to show the same consistency as in past years. The acute franchise is where we anticipate the majority of our product growth to come from as we move forward. We were very pleased ZYNRELEF hit a record of $5.6 million in net revenue for the quarter, which is the first time this product has ever surpassed $5 million for the quarter. Total acute care net revenues for the year were $19.1 million, which included APONVIE net revenues of $1.4 million. We believe ZYNRELEF and APONVIE are both well positioned as we move into 2024. With the CrossLink partnership, expanded label, combined with increasing morale, improved sales measures and targeting, we believe this will be a great year for both products. Moving to the CrossLink partnership, this agreement was signed on January 7 and really kicked off in early February. We began the training process with in-person training of the CrossLink executive team, which went extremely well. We will continue this process through March and early April, which will lead to having over 150 sales representatives trained and ready to go. Following this initial group being trained, we will continue to roll out training in other areas of the country. As you look at the slide, it would give you a better understanding of what our footprint post full implementation at CrossLink will look like and consider that this will add an additional 650 representatives across the country that will be fully trained. We anticipate having the entire group fully trained and operational by the end of 2024. We also believe that we will see an impact in 2024 from this number of representatives coming into play. However, I do want to temper the enthusiasm as this will take time before we really start to hit on all cylinders. I strongly believe the inflection for ZYNRELEF will take place as we move into 2025 after the launch of VAN and having all the new representatives fully trained, but we certainly have positive momentum that we believe the CrossLink representatives will have an impact in 2024. We have been focusing more on the ASC level as we have tried to increase our efforts around the orthopedic space. After signing the partnership with CrossLink, it has become increasingly apparent that CrossLink has a significant footprint in this space and that our product mix works in parallel with the ASC's strategy, which is to get these patients out of surgery and into rehabilitation as quickly as possible. Our perioperative one-two punch for APONVIE and ZYNRELEF will be extremely beneficial to our potential partners at the ASC level. I will now pass the call to our newest hire, Kevin Warner, who is our new Senior VP of Medical Affairs, Strategy and Engagement.

Kevin Warner, Senior VP of Medical Affairs, Strategy and Engagement

Thanks, Craig. I am so excited to be joining the Heron Therapeutics team in supporting the commercial portfolio of acute care and oncology care products. I have over 15 years of clinical pharmacy experience with a focus on perioperative care as a pharmacist in addition to over a decade of experience in drug development, discovery, and clinical trials as Director of Pharmaceutical Sciences at Osteal Therapeutics. As Senior Vice President of Medical Affairs, Strategy and Engagement for Heron, it will be my job to support the accurate dissemination of medical information to our team and providers, ensuring patients have access to the best possible care, forming strategic alliances, and collaborating with the medical community to assure Heron's products become part of the standard of care as medical literature dictates. I look forward to working with our team at Heron on expanding indications, access, adoption, and medical literature with our current commercial portfolio and future products. I will focus on our acute care portfolio today, as I have extensive real-world experience with ZYNRELEF and APONVIE, witnessing their positive impact on our patients and health systems. Enhanced recovery after surgery protocols are evidence-based protocols that are essential to patient outcomes and sustaining the financial viability of our health systems. The primary clinical focuses of enhanced recovery after surgery are reducing postoperative pain, while minimizing opioid consumption and controlling postoperative nausea and vomiting. These are two of the most common concerns for both patients and clinicians. ZYNRELEF and APONVIE offer what we consider best-in-class long-acting solutions to these problems. Implementation of ZYNRELEF and APONVIE as the foundation of our enhanced recovery after surgery protocols may improve overall patient satisfaction, clinical outcomes, and quality of life. At an institutional level, while supporting enhanced recovery after surgery, both ZYNRELEF and APONVIE can have a positive financial impact on our institutions. Both products are currently separately payable in the hospital outpatient and ambulatory surgical centers by CMS. Additionally, many commercial payers are providing coverage for ZYNRELEF outside the surgical bundle. Improving the efficacy of our enhanced recovery after surgery protocols, combined with separate reimbursement outside the surgical bundle, is critical to the financial viability of our health system and clinical outcomes for our patients. I want to touch on APONVIE, aprepitant injectable emulsion, and the current unmet need and lack of awareness. Postoperative nausea and vomiting are often overlooked or under-recognized due to the timing and different phases of care in which patients can experience this problem. Postoperative nausea and vomiting are ranked as the number one most undesirable post-operative complications by patients, but they also present clinical risk factors that can increase length of stay, readmissions, and surgical complications. Postoperative nausea and vomiting rates can reach as high as 80% in high-risk patients. Current guidelines recommend the use of three or four agents in patients with risk factors that make them moderate to high risk. In the United States, we perform over 65 million diagnostic and surgical procedures, of which 50% of those patients are at moderate to high-risk for postoperative nausea and vomiting. Aprepitant has been on the market in an oral formulation and as a pro-drug infusion, fosaprepitant. The oral formulation has a delayed onset of action of about one to five hours, and fosaprepitant requires compounding and a 20 to 30-minute infusion, followed by systemic conversion of the prodrug to the active form. Due to these limitations, they have not been widely adopted in the perioperative space despite aprepitant being ranked the number one most effective antiemetic in a large-scale Cochrane-Meta-analysis of nearly 100,000 patients. Along with its efficacy, aprepitant has an excellent safety profile without the typical side effects associated with commonly used antiemetic therapies, such as QT prolongation, sedation, anticholinergic effects, or extrapyramidal side effects. The safety profile is critical since we are combining multiple agents for our moderate and high-risk patients. APONVIE’s 30-second IV push and rapid target receptor occupancy will allow for greater implementation of aprepitant in acute perioperative pain by those providers, primarily anesthesia, who are most likely to prescribe it. APONVIE’s safety and efficacy profile for long-acting solutions with a 48-hour duration addresses one of our most significant postoperative complications: postoperative nausea and vomiting. We are looking forward to the updated guidelines on the prevention of postoperative nausea and vomiting expected in 2024, which will enhance the education and awareness around the impact APONVIE can have. For ZYNRELEF, our focus will be on broadening provider awareness and associated patient impacts. The clinical trials of ZYNRELEF speak for themselves, being the first and only FDA-approved extended-release anesthetic proven to reduce pain and opioid consumption. Today, I want to highlight some of the significant drivers for growth that have been implemented or will be this year. First of all, the significant label expansion for ZYNRELEF approved by the FDA on January 23, 2024, which means ZYNRELEF is now indicated in adults for installations to use post-surgical analgesia for up to 72 hours after soft tissue and orthopedic procedures, including foot and ankle and other procedures in which direct exposure to articular cartilage is avoided. This has essentially doubled the number of significant indicated procedures. As a clinician, when I think of indicated procedures and appropriate use of ZYNRELEF, I consider any procedure for which providers typically prescribe an opioid postoperatively. They should be considering the use of ZYNRELEF as the foundation for postoperative analgesia to minimize or eliminate the need for opioids, thereby minimizing acute pain and the risk of developing chronic pain and supporting clinical recovery. The label expansion will also have a great impact on formulary substitution. Some formularies have been hesitant to adopt it due to the limited number of indications, necessitating the need for having multiple agents on formularies and the associated budget impacts. With the new broad label for ZYNRELEF, other agents that claim to be long-acting but have not proven superior to standard of care anesthetics can be removed from formularies, allowing ZYNRELEF to be adopted as the long-acting foundational element along with cheaper generic anesthetics for the acute phase. Additionally, third-party data continues to show good results that align with our clinical trials, indicating significant impacts on postoperative pain, opioid consumption, length of stay, and functional outcomes. The opioid epidemic continues to dominate our newsfeeds, costing the U.S. health system an estimated $1.5 trillion in 2020, as well as many patient lives. Our major accrediting bodies and government agencies have taken notice and are acting on this issue. The Joint Commission now includes metrics for Opioid Stewardship in order to be accredited, and the No Pain Act, which will begin in 2025, will provide payment for non-opioids in the outpatient surgical setting that have been proven to reduce or eliminate the need for opioids. Additionally, opioid settlement funds currently being distributed to states amounting to $53 million will be utilized to support awareness, prevention, and treatment of the opioid epidemic. All these factors will greatly enhance awareness and adoption of ZYNRELEF. One of the most important factors I believe will be the CrossLink partnership that Craig outlined previously. Having the additional boots on the ground will be critical to the successful implementation of ZYNRELEF as the foundation of multimodal analgesia across the nation to change how we view postoperative pain and the need for opioids across the surgical paradigm. I would like to now turn the call over to Dr. Bill Forbes.

Bill Forbes, EVP, Chief Development Officer

Thank you, Kevin. We are certainly excited to have you join our team. The development opportunities for ZYNRELEF has envisioned three steps. The first was label expansion, which has been realized. The next step involves device modification in the form of the Vial Access Needle or VAN, and the final step concludes with the prefilled syringe or PFS. In regards to the VAN, it is designed to improve efficiency and preparation and it will achieve this in two ways. Firstly, the VAN will substitute the current market presentation of the device which includes a Vented Vial Spike or VVS with the VAN itself. The VAN will provide a more rapid and easy withdrawal of the drug product into the syringe that is used for installation into the patient by the physician. The VAN has been specifically designed for this purpose and in testing, the VAN has outperformed other Vented Vial Spikes available on the market today. Secondly, the VAN will allow for an even more secure presentation of the product into the sterile field present in the surgical room by allowing the ZYNRELEF vial to be placed into the sterile shroud of the VAN. This will result in a more efficient process for operating room staff to prepare the product for physician use. We anticipate the VAN to be approved in Q4 of this year. Of course, the ultimate solution to ease of use of ZYNRELEF is the PFS, and we expect the PFS to be approved in Q4 of 2026. In this product presentation, the entire tray is sterilized and ready for immediate use. The challenges to this program involve a new container closure system and the sterilization process itself. Once this is available, all barriers to preparation will be removed. With that, I will now turn this over to Ira Duarte.

Ira Duarte, CFO

Thanks, Bill. Craig has covered our product performance in his comments, and I will just add a few additional points about our Q4 2023 and year-to-date results. Our product gross profit for the fourth quarter was $24.3 million and $61.9 million for the 12 months ended December 31, 2023, representing 71% and 49% of net revenue, respectively. The annual margins were negatively impacted by write-offs of ZYNRELEF inventory during the year. We do not anticipate any large ZYNRELEF write-offs in the future. SG&A expenses for the three and 12 months ended December 31, 2023 were $23.6 million and $116.7 million respectively, compared to $26.7 million and $119.9 million in the same period of 2022. Research and development expenses were $10.9 million and $55.9 million for the three and 12 months ended December 31, 2023, compared to $11.1 million and $107.5 million in the comparable period of 2022. The decrease in spending was primarily related to cost reductions associated with ZYNRELEF as production scaled up, validation activities, and raw material applications were completed in 2022. Additionally, overall personnel and related costs decreased due to reductions in force implemented in June 2022 and June 2023. We believe we can continue to reduce costs moving forward in this area as we continue to increase efficiencies. The net loss was $10.7 million for Q4 2023 and $19.9 million for the comparable period in 2022. Looking at a total year-to-date net loss, 2023 resulted in a net loss of $110.6 million compared with $182 million in the comparable period of 2022. I would now like to give a little bit more clarity on our overall operational spend and cash burn for 2023. We began implementing our corporate restructuring plan in early June, which included several cost-saving strategies, including a reduction in force as well as overall company-wide spend reduction. We now have much more visibility into our operational spend and see a clear path to profitability. If you look at the slide from left to right, you will see our overall operational spend for 2023 was about $172 million, which we reduced to $155 million after excluding the reorganization charges of $18 million. Reducing these expenses for non-cash stock compensation not related to severance and depreciation and amortization totaling $27 million, our cash operating expenses for the year were $128 million. This compares to $177 million of cash operating expenses for 2022. Please keep in mind that we started implementing our company-wide reduction mid-year 2023 and, as mentioned in our previous earnings call, we believe our operational run rate excluding stock compensation and depreciation and amortization going forward will be between $108 million to $160 million. Cash burn will decrease every quarter as we have stabilized our spend and revenues increase every quarter. Moving now on to our guidance for 2024, we are reaffirming our previously given guidance for revenue of $138 million to $158 million for 2024 and improved gross margins between 68% to 70%. Our operating spend excluding stock compensation and depreciation and amortization is anticipated to be between $108 million to $160 million and EBITDA excluding stock compensation will be between a loss of $22 million to income of $3 million. I would reiterate that we anticipate getting to positive EBITDA in Q4 2024, and based on this strong balance sheet and our current operational plan, we do not anticipate having to raise any additional capital. Now, we would like to open the call for any questions.

Operator, Operator

The floor is now open for your questions. Our first question comes from Serge Belanger with Needham & Company. Please go ahead, your line is open.

Serge Belanger, Analyst

Can you hear me?

Craig Collard, CEO

Yes, we can now. I’m sorry, Serge. We didn’t hear part of that.

Serge Belanger, Analyst

Got it, got it. So, two questions related to ZYNRELEF. The first one, it's been six or seven weeks since the label expansion. Just curious if you've seen any impact in demand or usage since that. And then maybe secondly, if you can just talk about what the No Pain Act means for ZYNRELEF, I guess specifically, what kind of coverage do you have now and how do you think that changes once we flip the calendar to January 25, when the No Pain Act takes effect? Thanks.

Craig Collard, CEO

Okay, sure. Yes. I would say, anecdotally, when we got the label expansion, obviously there's a lot of excitement when we go into centers where we already have some business. It's certainly easier to go deeper into those accounts, and we're seeing some of that. Actually, the day one of the label expansion, I saw our first on-label spine surgery. I was actually in the surgery in Asheville, North Carolina. So we're certainly getting some of that. I think that though, combined with CrossLink, we had a meeting at AAOS out in San Francisco where we were with CrossLink and had some physicians coming by the booth, and the excitement around that was evident. But I don't think you're going to see necessarily a dramatic impact just yet. But we're certainly seeing some positive momentum. However, over time, as I mentioned in my comments, I think with CrossLink, the label expansion, and the launch of VAN later in the year, I believe this really begins to take off late in the year into 2025, when we really start to see an inflection. But we are seeing some positive developments.

Kevin Warner, Senior VP of Medical Affairs, Strategy and Engagement

Yes. Hey, Serge, thanks for that question. The No Pain Act is going to have significant implications for multiple facets. What the No Pain Act does is provide reimbursement in the hospital outpatient procedure department and the ambulatory surgical centers for products that have been proven to reduce the need for opioids. In ZYNRELEF's instance, we're already covered in both the HOPD and ASC through Q1 2025. The No Pain Act will extend through 2027, which ensures reimbursement for our facilities during this period. CMS has even discussed a longer timeframe potentially extending all the way to 2030. We look forward to working with our legislators on that and continuing to ensure reimbursement for our patients to help with adoption and provider utilization.

Serge Belanger, Analyst

Thank you.

Craig Collard, CEO

You’re welcome.

Operator, Operator

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

Carl Byrnes, Analyst

Thanks for the question and congratulations on the results and the progress. Understanding that 2025 is really set up to be the ramp year for ZYNRELEF and APONVIE. How do you see – and I know you touched on this a bit already. How do you see the CrossLink collaboration and label expansion transitioning into ZYNRELEF sales in 2024? I think the prior language was acute care products at 50% year-over-year growth. Are you still comfortable with that number or do you think that's likely to prove conservative? Thanks.

Craig Collard, CEO

Yeah. Again, one of the reasons we provided that range was we weren't sure exactly when and how this may take off. To your point, with the expanded label, the CrossLink partnership has been everything we had hoped for. The personnel have been fantastic, bringing different relationships that we may not have currently with some of the surgeons. So that's been great. I think one of the surprises that we had when we did the initial training — I was there along with our team — was just how receptive everyone was. We did that in person. So, we should have about 150 representatives fully deployed and running in the next 30 days or so. And so we are certainly seeing some impact. I'm just trying to temper expectations a bit because until we really get fully operational and implement these strategies, I don't think we will see significant traction until next year. But look, we are pleased with how things have proceeded so far.

Carl Byrnes, Analyst

Great, thanks. And then just a follow-up. There seems to be, and you touched on this a bit, a significant opportunity in the ASC segment, particularly to cross-sell both ZYNRELEF and APONVIE with your sales force and with the CrossLink collaboration. Can you elaborate a little bit about how big that opportunity might be? Thanks.

Craig Collard, CEO

Certainly, the market is moving in this direction. We've really tried to focus on areas where we think we could be most successful and have positioned our products accordingly. This has led us to penetrate the orthopedic space more deeply, and we see a true opportunity as that space expands. Our goal aligns precisely with the ASC's aim of getting patients out quickly and minimizing post-operative side effects. The perioperative approach combining APONVIE and ZYNRELEF is ideal for ASC prospects, particularly with CrossLink's existing presence in that market, making it easier for us to build strategic partnerships.

Carl Byrnes, Analyst

Great, thanks and congratulations, again.

Craig Collard, CEO

Thanks, Carl.

Operator, Operator

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

Unidentified Analyst, Analyst

Hi, this is Claire on for Kelly. Congrats on the great progress. Just one quick question on the cost reduction. Do you have any plans to further execute your cost reduction plan in 2024? Should we expect R&D and SG&A to continue to decrease in 2024 and 2025? At what point do you think your operating costs will stabilize? Thank you.

Craig Collard, CEO

Thanks, Claire. I appreciate the question. The range we've given from $108 million to $116 million, again, we'd love to be at the lower end of that. As we've made changes, we are trying to ascertain what the future might look like. But I do not anticipate significant cost reductions from here. We're at a level now where you can expect stability going forwards. We feel comfortable within this range.

Unidentified Analyst, Analyst

Got it. Thank you.

Craig Collard, CEO

Okay. Thank you.

Operator, Operator

There are no further questions at this time. I would now like to turn the call over to Craig Collard for closing remarks.

Craig Collard, CEO

I just want to thank everyone for joining the call today, and we really look forward to speaking to everyone next quarter. Thank you.

Operator, Operator

This concludes today's call. You may now disconnect.