Heron Therapeutics, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Heron Therapeutics Second Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. Now I would like to turn the call over to Jeff Cohen, Executive Director, Assistant General Counsel, and Assistant Secretary. Please proceed.

Thank you, Krista, and good afternoon, everyone.

Thank you for joining us this afternoon on the Heron Therapeutics conference call to discuss the company's financial results for the second quarter ended June 30, 2023. With me today from Heron are Craig Collard, Chief Executive Officer, Ira Duarte, Executive Vice President, Chief Financial Officer, and Bill Forbes, Executive Vice President, Chief Development Officer. 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 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 HARON's public periodic filings with the SEC. Except as required by law, HARON assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes. It does not intend to do so. And with that,

I would now like to turn the call over to Craig Collard, Chief Executive Officer. Thanks, Jeff. Good afternoon, everyone, and thank you for joining us today for our second quarter 2023 earnings call.

I am pleased to share with you some significant developments that have transpired since our last call. Our team has been hard at work, and I'm excited to provide you with updates that we believe will lead to transforming Heron into a profitable company growing revenues, including updates on our cost reduction efforts, financing activities, and changes in our executive management team, as well as an update on the status of our pending Hatch Waxman ANDA patent litigation. On my first earnings call with Karen, the CEO, I mentioned that I'd only been here four weeks, and most of that time was used to assess the business and determine where we could make improvements quickly. The first step was assessing the executive leadership, and making the proper changes that were needed. We made those changes, and we now have a leaner organization with a new CFO, head of development, head of supply and vendor management, and new leadership in sales and marketing on the acute side of the business. I am thrilled to announce that the new team has successfully implemented a cost reduction initiative. Through careful analysis and strategic planning, we have identified areas where we can streamline our operations and enhance efficiencies. Over the next three years, we expect to achieve a remarkable cash savings of approximately $75 million. This initiative reflects our commitment to fiscal responsibility and our dedication to optimizing our resources for sustained growth. In addition to the cost-cutting measures, we were able to bolster the balance sheet by completing a $30 million equity financing with some of our largest shareholders, as well as closing on and up to $50 million working capital facility. Based on our current operational plan, we expect that this will provide the company with enough capital to achieve profitability. This achievement underscores the confidence that our investors and partners have in our business strategy and growth potential of our products. We are still in the early stages of revamping Heron into a commercially focused company with efficient operations. The changes we have made this quarter are significant, and has certainly improved the business and set up a solid foundation for the future. The next phase of improvements will be focused around maximizing the growth potential of all of our products on both the acute care and oncology sides of the business. Even during this recent time of organizational change, the company is still seeing product growth. We expect this to improve dramatically as we implement new strategic plans moving forward. Now moving on to some product highlights from the quarter. On the oncology side of the business, Q2 net product sales combined for Cimbonti and Sustalt were $27.3 million, which increased from $25.1 million for the same period in 2022. We also grew combined sales by 6% quarter over quarter. We are pleased to reiterate our financial guidance for the oncology franchise of $99 million to $103 million in net product sales for the full year 2023. We also recently had a favorable outcome at the Markman hearing in our pending Hatch Waxman ANDA litigation against Fresenius to enforce our Sinvanti patents. We are pleased with the outcome and will continue to vigorously enforce and defend our patent portfolio. Moving now to the acute care side of the business was then released upon me. We continue to see product growth on this side of the business also, even though we have yet to implement many of our planned changes. Once we accomplish many of the initiatives focused on improving the fundamentals of how we conduct our business, we plan to then move forward with some of the transformational initiatives. Net product sales is then released for the quarter were $4.2 million compared to $2.5 million for the same period in 2022.

Quarter-over-quarter unit growth was 11%. Net product sales of Oponvy for the quarter were $300,000.

Oponvy became commercially available in the US on March 6, 2023. During this launch phase, we were receiving very positive feedback from some customers due to Oponvy's unique clinical value. In fact, several hospital systems have already adopted for all moderate to severe patients, and many others have it currently scheduled for system-wide review. The next phase of business improvement will be focused around product growth and maximizing the value of our assets. With Zen Relief, we have three key initiatives underway to expand our business, including our cloud SMDA, the vial access needle, or VAN, and the pre-filled syringe. Zimileaf is a unique product with true 72-hour pain relief. It also has pass-through reimbursement status, allowing our product to be separately reimbursed outside of the surgical bundle in both hospitals and ASCs. All of these product improvements and attributes are part of a new overall company and product strategy and should have a dramatic impact to our growth over the next several years. This growth will not take place overnight, but our products have a great clinical profile excellent reimbursement status, and with the right commercial plan, we should begin to see massive improvement that will ultimately lead the company to profitability. Regarding the SMDA for our label expansion presently, we were recently informed by the FDA of a three-month extension of our producer date from October 23, 2023 to January 23, 2024. The division became aware of our timeline for some new non-clinical data the company was completing and in the spirit of cooperation, we agreed to submit this new data to the Division. The Division deemed this submission to be a major amendment to our S&DA and accordingly extended the review period by three months. In conclusion, the past quarter has been marked by significant accomplishments and strategic moves that will undoubtedly shape the trajectory of our company. The successful implementation of our cost reduction initiative, the securing of debt and equity financing, the favorable outcome at the Simbati-Markman hearing, and the strengthening of our executive management team all position us for continued success and growth. While this business will not be transformed overnight, 2023 will prove to be a turnaround year for Heron. Thank you for your patience and continued support of the company as we move through this transition. I will now turn the call over to Ira Duarte, our CFO. Go ahead, Ira.

Thanks, Craig. Our combined product net revenues for the second quarter of 2023 were $31.8 million compared with $27.6 million in Q2 2022, representing an increase of 15% to the same period of 2022. Product net revenues for the first six months of 2023 were $61.4 million compared with $51.1 million for 2022 or an increase of 20%. Our acute care franchise net revenues for the three and six months ended June 30, 2023, were $4.5 million and $8.3 million, respectively, which increased from $2.5 million and $3.5 million, respectively, for the same period in 2022. For the three and six months ended June 30, 2023, Oncology Care franchise net product sales were $27.3 million and $53.1 million respectively, which increased from $25.1 million and $47.5 million respectively for the same period in 2022. Our product gross profit for the quarter was $11.6 million and $24.4 million for the six months ended June 30th, 2023. representing 36.5% and 40% of net revenue, respectively. These margins were negatively impacted by write-offs of generalist inventory in both Q1 and Q2 of 2023. We believe these margins will improve and stabilize as we are working through some of our generalist inventories. We also have a number of initiatives we are working through that we will discuss on future earnings calls that should have a very positive impact on costs moving forward. SD&A expenses for Q2 and six months ended June 30th, 2023 were $36.4 million and $68.4 million respectively, compared to $32.1 million and $64.1 million in the same period of 2022 with the increase primarily resulting from our reduction in force announced in June 2023. Research and development expenses were $17.6 million and $31.4 million in Q2, and six months ended June 30, 2023, compared to $28.8 million and $70.9 million in the comparable period of 2022. The decrease in spend was primarily related to decreases in costs related to Zembola as production scale-ups validation activities, and raw materials qualifications were completed in 2022. In addition, overall personnel and related costs decreased due to the reduction in force implemented in June 2022. We believe we can continue to reduce costs moving forward in this area as we continue to increase efficiencies. The operating loss for the quarter was $42.4 million compared with $49.5 million in Q2 2022 and the net loss was $42.1 million for Q2 2023 and $56.4 million for the comparable period in 2022. Looking to total year-to-date net loss, 2023 is a net loss of $74.8 million compared with $120.2 million in the comparable period of 2022. Our balance sheet at the end of June 30th, 2023 shows a cash and short-term investment balance of $33.2 million. However, as Craig mentioned in his early comments, we closed a capital raise of approximately $30 million in July 2023 and a working capital facility of up to $50 million in August 2023. These financing, combined with our cost savings initiatives, position us for future growth and a path to profitability. Back to you, Craig.

Thanks, Yara. Operating this time, we'd like to open the line for questions.

If you would like to ask a question, please press star 1 on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Serge Boulanger from Needham & Company. Please go ahead. Your line is open.

Good afternoon. Just a couple questions for us. First one, regarding achieving profitability, I think in the past you've talked about a late 2024 timeline, so that, is that still the target or is that change given the regulatory delay around ZINRELF and maybe if you can talk about the assumptions on how we get there. And I guess secondly, regarding that regulatory delay for ZINRELF, maybe just talk about what you expect the label expansion could look like once it gets approved. Thanks.

Hi, Serge. Thanks for the question. So regarding profitability, again, we have said that we believe we would achieve profitability in late 2024. I think the takeaway here is based on the monies we've raised, again, we don't think we'll need to raise any more monies in order to get to that point. And we built that forecast without the upside of the SMBA or the VAN or anything like that. So this was more of just a trend forecast on how the product was performing. And so with the cost reduction efforts we've made, we are able to get to profitability within that timeframe. There could be some upside, you know, from some things we're doing. Again, assuming we get the label expansion we're anticipating, assuming that some of the things that we implement, you know, will have a positive impact on Zenderleaf when those types of things happen, and upon B as well. So from that standpoint, that's how we're getting to profitability at the end of 2024. Regarding the SNDA and the expansion, I like that Bill Forbes is here with us in the room, and I'd like maybe him to speak in a little bit more detail around that and his thoughts.

Hi, Serge. This is Bill Forbes. Yeah, so the current package insert allows for periarticular installation for up to 72 hours of analgesia with bunionectomy open in wino-harniopi and total knee arthro. What we're proposing in the SNDA is that we go to post-surgical analgesia for soft tissue and orthopedic. So maybe I'll step back a little bit here and just kind of talk broadly about the submission that was put in here at Heron. And center left has actually been studied in 14 clinical trials. Eight unique surgical procedures were contributing to those 14 clinical trials. four soft tissue, and four different orthopedic surgical procedures. So when the supplement went in, it actually went in with data from lumbar spinal surgery, total shoulder surgery, mammoplasty, C-section, abdominoplasty. The lumbar spinal surgery and total surgery has actually already been presented at Western and Southern ortho conferences. So that data has already been put out there. And, you know, I think in many respects, this is going to broaden our label. Hopefully, we can negotiate a favorable label expansion with this data. I'm going to talk a little bit about what happened with the major amendment. We had been doing and continue to do some studies and some of those preclinical, and we were doing a rabbit study that looked a little further out. And this was for intraarticular injections. As I mentioned before, the indication for XenLF is actually periarticular, not intraarticular. So the label itself actually cautions physicians about the use of using intraarticular. And I think from that perspective, we consider this class labeling. This particular rabbit study is looked at a little bit further. So while it is new data, it is not actually a new finding. And it's already accounted for in our label. So I think that was kind of a disappointment on our side. We didn't feel like it needed that the agency or the division needed to declare a major amendment to this particular filing because of that. So hopefully that answers your question.

Yes. Thank you.

Your next question comes from the line of Boris Peeker from TD Cowen. Please go ahead. Your line is open.

Great, thanks. Two questions on my end. First, in terms of profitability, I'm just curious, Craig, do you think Heron can become a profitable organization based on supportive care alone, like if we exclude Zinrolab? Is there an opportunity to restructure it such just to profitability without Zinrolab?

Um, we really hadn't looked at it that way, but I mean, again, now you're talking, um, did we put, you know, total focus around a pond B and didn't promote Zin Relief at all? I mean, I think we would have obviously some inventory problems and that type of thing, but we really hadn't analyzed it that way. But, uh, again, we're not looking for, um, you know, superior growth or anything with Zin Relief from, from a profitability standpoint, we're really only trending the product on the current growth trajectory it's on. So, again, I think there's some upside there. And, again, we've been pretty conservative as well with the bond fee. And I think our one surprise is that we still are getting really good results out of some bond fees. So I think there's some upside here that we really haven't accounted for. But I think the point of this that we've been really trying to communicate is that we wanted transparency in the fact that we're trying to dig into this business and put a cost reduction in place that allows us to get to profitability and be fairly conservative about our outlook.

Great, and on Xenolab specifically then, you've obviously talked about the three indications where it's currently approved and the label expansion path going forward, but within the approved indication, do you have a sense of where the sales are coming from right now, just trying to better understand why it may be used in certain areas versus not others?

Yeah, I think where we've had the most success up to this point has really been within me and HIP. I mean, that's where the majority of the procedures are being performed, and Again, once these hospitals or ASCs get past the prep issue, we're seeing data that suggests once we have a four-month usage, we simply keep those customers. So that's where we've had the most success to date.

Great. Thank you very much for taking my questions. Thank you.

If you would like to ask a question, please press star 1 on your telephone keypad. Your next question is... We have no further questions in the queue at this time. Oh, I'm sorry, we do. Carl Bynes from Northland Capital Markets. Please go ahead. Your line is open.

Thanks. Thanks. Congratulations on the progress and thanks for the question. Any thoughts with respect to Zebra Love in terms of potential partnership and what might that look in terms of accelerating and leveraging your existing sales force? And then I have a follow-up as well. Thanks.

Well, thanks, Carl. I'm sorry we almost cut you off there, so I apologize for that. Yeah, you know, one of the things we've been looking to do is, you know, what can we do outside of things that we're used to as far as improving Xen Relief, like, you know, targeting and using better data, positioning our reps, you know, maximizing territory potential, and so on and so forth. We've been looking at, you know, looking at possibilities to partner this product. The biggest issue with Xen Relief is not the clinical story. The true 72-hour pain relief is a big thing. As we look at market research and that type of thing, that seems to, we have no issue there. And I think we've had really good success. The issue has been with the preparation of the product in the surgical suite itself. And the issue with that is the non-sterile to sterile environment and then just the time that it takes to pull the product out of the bottle. And so we've been looking at a number of different surgical companies you know, that would be distributors, if you will, and that we could partner with. We're pretty much living in those surgical suites on a daily basis. I know some of our competitors have done that, and we think by picking a partner in the surgical suite, it would allow our reps to, one, spend more time with physicians detailing the product, but also frees them up a bit to do other things with a Ponviance and Bonzi, and which we think would be, you know, give a lift to those products as well. So I think you'll see over the next, in a fairly short time frame, we will pick a partner of some sort that will add to our footprint within relief that I think should be from the left side of the product.

And again, these are things that we have not forecasted. Got it. Thanks.

And then kind of switching gears a little bit, if we look at SG&A, which is, I think, around 36.4 million and R&D at 17.6 million, can you quantify how much in the quarter was related to severance and potentially kind of one-time extraordinary type charges and what you expect the expense levels to be if you're able to quant them out for the third quarter or if that's not possible or do you expect additional one-time severance and one-time type charges to hit the third quarter? Thanks.

Yeah, we, I think we probably would release, we have about $5.9 million in one-time charge that will come through to the end of this year. So go in 2024, you will see our operating expenses, you know, they've been at bounce, leveling up at $120 for the year, $120 million in 2024, and we believe we can cut probably another $10 million of that going forward.

Got it, thanks.

If you would like to ask a question, please press star 1. Your next question comes from the line of Kelly Shih from Jefferies. Please go ahead. Your line is open.

Hi, this is Clara for Kelly. Thanks for taking my question. So I have two questions. So this is the first full quarter of cells. Seems like you had a lot of positive feedback from physicians. Just wondering how should we think about the sales growth trajectory from now on for PONV?

Yeah, no, it's a great question. You know, we haven't had a ton of time with the PONV, but the biggest difference for the PONV versus ZenRelief is that when we get an IDN or a formulary win with ZenRelief, it's still going to take quite a bit of work with, you know, individual surgeons and that type of thing. It's not necessarily a system-wide conversion. The difference with a PONV is that there are situations where we can get system-wide conversion. And what I mean by that, if you take a hospital system, say like Baylor, and we were to selectively get moderate to severe patients, we can literally get all of those patients. So all high-risk patients may be in a situation to convert to a PONV in the Epic system and so forth. So we get a system win that leads to sort of a conversion, if you will. And so I think what you'll find over the next few quarters is it will begin to get these system-wide orders that create bigger revenues, almost annuities, if you will, in certain accounts going forward. We've had a couple of hospital systems to date that have converted. You haven't really seen that in results yet, but you'll begin to see it. And I think we have another 23 systems right now that are in review. So, again, we really like the progress. I think it's going to take a little more time, obviously, to see the results from that. But, again, in a very short time period, I think you're going to begin to see some of these more, if you will, bigger orders that come through. And ideally, what we want to do as we report going forward, we'll try to give a little more insight in the pipeline, hospital wins, and that type of thing. That way, we'll have a bit more transparency into what's really going on with the product.

Great. And also with Xenrolab, I'm also curious, have you seen or had different physicians' feedback on Xenrolab in terms of different kinds of surgical indications, and also understand, you know, the VAN could be available by mid-2024. How quickly do you think we can see the change on sales growth trajectory after the VAN launch, and what kind of efforts are you making between now and VAN launch for sales improvement? Thank you.

Yeah, well, I think the good news is the VAN is on track from a timeline perspective. We do believe we'll have that out in mid-year of next year. And it does two things. One, it helps with the sterility issue. It makes that much simpler. And two, it's going to change the time to pull the product. So instead of three to four minutes, it could be upwards of 20 to 30 seconds. And so I think it's dramatically going to impact the product from a standpoint of just ease of use. Again, I mentioned before about looking to possibly partner with a surgical partner in the surgical suite. I think that's something as well as we lead into the van with an expanded label and hopefully expanded footprint. All of those things should lead to higher sales and higher sales growth. But again, I want to reiterate, we have not forecasted that as far as getting us to profitability. These would be additional sales. We feel pretty comfortable with that, and again, everything seems to be on track from a timeline perspective.

Super helpful. Thank you.

Thank you. We have no further questions in the queue at this time. Craig, I'll turn it back to you for closing remarks.

I just want to thank everyone again. This is our second earnings call, but we really do appreciate the time and patience. I think the business is making some strides and transforming. It's going to take a little bit of time, but we're getting there, and I think we've had some significant things that have happened this quarter. So we look forward to updating everyone next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Goodbye.