Heron Therapeutics, Inc.

day ladies and gentlemen and thank you for standing by. Welcome to the Huron Therapeutics Q3 2023 earnings conference call. As a reminder this conference is being recorded. Now I'd like to turn the call over to Jeff Cohn executive director assistant general counsel and assistant secretary. 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 third quarter ended September 30, 2023. With me today from Heron are Craig Collar, Chief Executive Officer, Yuri Duarte, Executive Vice President, Chief Financial Officer, Bill Forbes, Executive Vice President, Chief Development Officer, and Ryan Craig, Vice President, Markets. 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 State 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 State Harbor Statement in today's press release and in Herron'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 Collar, Chief Executive Officer. Thanks, Joe.

Good afternoon, and welcome to Heron Therapeutics' third quarter 2023 earnings call. Today, we are pleased to update you on our recent strategic initiatives financial performance from the third quarter, and guidance for the rest of 2023, as well as guidance for the full year 2024. Over the past six months since joining Heron as CEO, we have taken significant steps to right-size our business, ensure an alignment with our strategic goals. We've implemented a comprehensive streamlining of our financial processes, enhancing efficiency and accountability across the organizations. As part of our commitment to operational excellence, we've successfully combined various commercial functions, eliminating redundancies and optimizing our overall structure. This consolidation not only enhances efficiency, but also positions us to respond more effectively to market dynamics. Last, we are excited to share that we have developed a new strategic vision that clearly defines our goals and key targets. This vision serves as a roadmap for our future guiding our efforts to achieve sustainable growth and maximize shareholder value. The results of our actions in this short time at Heron have been substantial. Our management team is now in place, and the transformation of Heron into a profitable company is happening. We have reduced operational expenses, excluding stock comp and depreciation and amortization, to $135 million in 2023 versus $182 million just last year. We anticipate a further reduction in spend that will take our operating expenses to a range of $108 million to $116 million in 2024. Our gross margin is also improving from 41% in 2023 to 62% in 2024 and should settle in over 75% in 2025 and beyond. This change in gross margin has been due to scaling to larger vat sizes being fully realized, negotiations with our manufacturing partners, operational efficiencies, and no more product write-offs was in relief due to expiring inventory. With our capital raise back in the summer and our anticipated cash balance of over $65 million at year's end, combined with our spend reduction, we can now illustrate to our investors a pathway to positive EBITDA by Q4 2024. Based on our current plan, we do not anticipate needing any additional capital raises for the foreseeable future. Last, as we have created operational efficiency within our business and laid out our plan internally, we are beginning to see the impact in our product sales. Over the last eight weeks, most interleave and upon me have hit all-time highs in unit sales. We believe this momentum will only continue as we move closer to our anticipated label expansion, launch of the van, and then ultimately the pre-filled syringe, which are all hitting their development timelines. Moving to product performance. The oncology care franchise continues to provide a stable base of revenue for Heron, contributing $26.7 million in net sales for the quarter and $79.9 million in net sales year-to-date. Net product sales of Symbiote for the quarter were $23.3 million, which increased from $21.2 million in the same period in 2022. Net product sales of Sustol were $3.4 million, which increased from $2.7 million in the same period in 2022. The acute care franchise continues to grow, achieving $4.7 million in net sales for the quarter and $12.9 million in net sales year-to-date. We have solidified our new strategic plan and are excited to see these initiatives implemented and contribute to the continued growth of our products. Net product sales of economy for the quarter were $350,000, Net product sales assembly for the quarter were $4.4 million compared to $2.7 million for the same period in 2022. I will now turn the call over to Ryan Craig, our head of marketing, to give you a brief view of our commercial strategy. Go ahead, Ryan.

Thank you, Craig. We have solidified our strategic plan, and we are excited to see it implemented and grow the acute care franchise. Our sales team is exceptional, and the alignment across our commercial organization has never been stronger. The vision for acute care is to own the perioperative space, as both Aponvy and PenRelief offer a best-in-class one-two punch supported by our clinical profile. We are promoting innovative solutions to two of the most burdensome challenges associated with surgical procedures, post-op nausea and vomiting, and pain. For Aponvy, our initial focus is above-the-waist surgical procedures. These procedures, such as bariatric, ENT, neurological, and plastics are at a higher sensitivity to post-op nausea and vomiting, as POMV can cause significant concerns if not properly managed. Our early successes with Oponvy have indicated that this is a logical, receptive starting point to get on formulary and a proven ability to expand beyond this starting point to other surgical lines. In addition to our clinical profile, The 2020 POMV Guidelines also recommend using three different agents with distinct pathways which supports the addition of on-beat protocols. With Den Relief, our commercial execution was wide-ranging and extended across many specialties with varying opportunities of success. Based on our growth, current base of business, as well as growth opportunity, we have determined orthopedic surgeries to be our primary focus. Our execution will be aligned to this customer base more significantly moving forward for many reasons. First, the most significant pain patients may experience is associated with orthopedic procedures versus some of the other indications. Additionally, orthopedic surgeons tend to do a higher volume of procedures, which would include the anticipated indications for spine and shoulder should we receive SMDA approval on January 23rd from the FDA. Focusing on orthopedic surgery also creates an opportunity to partner with distributor representatives, which we have piloted in the field and have had terrific success. The POMV was launched in March of this year, and we are continuing to gain traction in our targeted institution. We continue to identify advocate specialists that aim to address the burden of POMV and improve its treatment paradigm. Currently, we have 66 TNT reviews requested by targeted customers, 10 P&T reviews that have been scheduled and confirmed with a date, and nine new P&T approvals alone in the month of October. The process of requesting P&T, confirming with a date, and ultimately gaining approval can take four to six months in some cases. This is where we are focused currently, building a wide opportunity base that will result in consistent ordering at increasing volume. To date, we have had 156 accounts complete this process and ultimately order upon it. Of those 156 new accounts, we have selected a few accounts as examples that provide encouraging signs of growth. Initial ordering in these four accounts has turned into consistent ordering at increasing levels. These accounts have executed on the plan articulated previously, starting in one surgical line like bariatric surgery, seeing positive results, communicating those results organically to other surgical lines, and adoption then expands. Our strategic plan is aligned to this proven scenario as well as others, and we are excited about what's to come as awareness grows. Momentum is building with recent trends of gender leads. Our streamlined focus on orthopedic procedures is beginning to produce results. with our most recent data week ending November 10th representing all-time highs in normalized units. Additionally, current eight-week volume over the prior eight weeks represents a 16% growth rate. We are encouraged by this recent trend trajectory that we fully expect to continue as we continue to execute against our strategy in the fourth quarter and beyond. On top of the recent trends, there are significant opportunities to increase the relief adoption through near-term regulatory and development milestones. First, is the SMBA CREDUFA date scheduled for January 23rd, 2024. We anticipate a positive response from the FDA and are excited to offer ZEN relief to additional patients that may benefit from the added indication. Should we receive approval, it would increase the opportunity from approximately 7 million procedures covered by our current label to nearly 13 million procedures. Secondly, the vial access needle is currently in development and planned for launch in September of 2024. This improvement will improve withdrawal time from greater than one minute to 20 to 30 seconds. In market research conducted in Q3, as well as current customer feedback, This improvement is significant and will expand utilization. Lastly, the pre-filled syringe is in development and will represent the most meaningful improvement in XenRelief preparation and administration. It takes any time spent in the OR on withdrawal time or preparation out of the equation, as XenRelief would immediately be available for application in this product in hand. Now, I'll turn it over to Ira Duarte, our Chief Financial Officer.

Thank you, Ryan. Craig has covered our product performance in his comments, and I will just add a few additional points about our Q3 2023 results. Our product growth profit for the quarter was $13.2 million and $37.6 million for the nine months ended September 30th, 2023, representing 42% and 41% of net revenue, respectively. These margins were negatively impacted by write-offs of general lift inventory during the nine months ended December 30th, 2023. We do not anticipate any large general lift write-offs in the future. SBA expenses for the three and nine months ended December 30th, 2023 were $24.6 million and $93 million respectively, compared to $28.2 million and $93.3 million in the same period of 2022. Research and development expenses were $13.6 million and $44.9 million for the three and nine months into September 30th, 2023, compared to $25.5 million and $96.4 million in the comparable period of 2022. The decrease in spend was primarily related to decreases in cost related to Zendulis as production scale-up, validation activities, and raw material qualifications were completed in 2022. In addition, overall personnel and related costs decreased due to the 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 efficiency. The net loss was $25 million for Q3 2023 and $41.9 million for the comparable period in 2022. Looking to total year-to-date net loss, 2023 is a net loss of $99.8 million, compared with $152.2 million in the comparable period of 2022. I now would like to give a little bit more clarity on what Craig has been talking about earlier and would like to walk you through the last three quarters and the measures we have taken to reduce our overall operational spend and cash burn. We began implementing our corporate restructuring plan in early June, which included several cost-saving strategies, including a reduction in costs 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 in Q1 2023 was about $46 million, which we reduced to $41 million after excluding the highlighted reorganization charges of $30 million. We further reduced these spends to $34 million in Q3 2023 after excluding the highlighted reorganization charges of $4.1 million. You can see on the slide that our operation loss after excluding stock compensation and depreciation and amortization and the previously mentioned one-time charges, our overall operating cash burn decreased from $90 million in Q1 2023 to $7.2 million in Q2 2023 and $6 million in Q3 2023. Our 2023 operating spend, excluding stock compensation, depreciation and amortization, and the $17.1 million in reorganization costs will be around $180 million. We believe our operational run rate, excluding stock compensation and depreciation and amortization going forward, will be between $108 million to $160 million, and cash burn will decrease every quarter as we have stabilized our spend and revenues have been increasing every quarter. Moving now onto our guidance for the rest of 2023 and 2024. On the left of this slide, we are showing anticipated results for Q4 2023, which indicates net revenues between $30 million and $32 million, and even though excluding stock compensation loss between $10 million and loss of $6 million. We anticipate exiting 2023 with a minimum cash and cash equivalent balance of $65 million. We are guiding to revenue of $138 million to $158 million for 2024 and improve growth margins between 68% to 70%. Our operating spend exceeds stock compensation, depreciation, and amortization, is anticipated to be between $108 million to $160 million, and EBITDA, including stock compensation, will be between a loss of $22 million to income of $3 million. I would like to reiterate that we anticipate getting to positive EBITDA in Q4 2024, and based on this, our strong balance sheet and our current operational plan, we do not anticipate having to raise any additional capital. Back to you, Greg.

As we move to the key items from today's call, you can probably sense the change in confidence in our voices about this business. Our vision for the economy is set, and we have a team in place that is executing on the balance sheet to get us to profitability without any expected need for further capital rates. Our operating expenses, gross margin, and EBITDA are all moving in the right direction on the path to profitability. The oncology franchise continues to outperform, and we are raising guidance for 2023 from $99 million to $103 million to a range of $104 million to $106 million. Our momentum with the acute products is strong as well, as Zimri and Oponib have both achieved record unit volume over the last eight weeks. And last, we have a label expansion and the van being launched for Zimri, which should both be significant growth drivers for the product. I would now like to open the line for questions.

Your first question comes from the line of Carl Burns from North Capital Markets. Your line is live.

Great. Congratulations on the progress, and thanks for the question. First, with the gross profit margin for the third quarter, including the inventory write-offs, it would be 66 percent, as I recall from the press release. And it looks like you're giving guides for the fourth quarter at 62% and for the year 24 of 68 to 70%. I'm wondering if there's mixed issue, what the nuance is between the third quarter and the fourth quarter, you know, 62%, and how do you see gross profit margin, you know, progressing over time beyond 2024 in terms of peak gross profit target or margin target?

Yeah, Carl, thanks for the question. Again, with our gross margin, if you think about Sinvanti first, it's going to have the largest impact because of just total revenue. We basically are making the product currently at two different manufacturers. And in 2022, really until the start of 23, we were finishing scale up and so forth, going from a 400-kilogram batch to 1,000 kilograms. So you had a price sort of blend with those two batch sizes. And then beyond that, you know, our primary manufacturer is Alchemy, where we're now in the 1,000-kilogram batch. And then our secondary manufacturer is at Curia, where we do a secondary and we make it at 300 kilograms. So you also have a blend there. So as that sorts out a bit, that's why it will continue to be more positive moving forward. And, again, as we get into the outer years, you will have a, like I say, a total gross margin of all products in sort of that mid-70s range. Again, similarly, it was pretty fixed, but we just had the write-offs that affected that, so there's really no big changes there. The only other product that will be affected in the future with scales and that type of thing is the Pond B, and we're going from a 400-kilogram to 1,000-kilogram batch there as well, which should take those margins right at that kind of lower 70s percentage. So, again, that's why I say as a whole, we'll be in that mid-70s to, you know, possibly 80% range as we move forward.

Excellent. That's very helpful. And then just to follow up, I mean, clearly, you know, you could be profitable tomorrow if you were just to focus on the CAND franchise. But clearly the growth is from the acute care segment with Pondy and Zendreliv. So I'm wondering what your thoughts are in terms of peak sales potential for Zendreliv and Pondy and how the progression might look over time, you know, from your internal analysis. Thanks.

Yeah, no, it's an interesting point because, you know, I think if I look at this from an investor viewpoint, you know, the oncology side of the business really acts as a bit of a hedge, sort of, if you will, protecting your investment. And what I mean by that, and I think you're kind of hitting on this, is that if this were just about profitability, I mean, we could be a common oncology company tomorrow and be EBITDA positive within the end of the week. But, again, that's not really where we're going. We think there's a much bigger story here. And really the growth story is with the two products that have the ability to dominate the perioperative space, and that's upon being Xenolith, which, again, we think can be multi-hundred-million-dollar products. If you just look at the market size, and, again, we feel with some of these things that we're doing now with certainly with Xenolith, with the band, the expanded label, and then ultimately the pre-filled syringe. So, again, it's going to take a little time to get there, but there's a real growth story here on the acute side of the business. And, again, the beauty being is that you've got a base of business that's generating capital that continues to be more profitable.

Great. Thanks so much, and again, congratulations on the progress. Thanks, Carl.

Your next question comes from the line of Boris Peeker from TD Cohen.

Your line is ... Thanks very much. This is Nick on for Boris. Just a couple from me on general F. First, with the slow growth of Zimmerlof to date so far, really, what's driving that 48% year-over-year increase in acute care franchise? And on that same note, does that have to do mainly with the van and the SNDA? And how quickly do you think that those two will have an effect, like specifically, how quickly will the van be distributed? How quickly will doctors pick up the new procedures for the SNDA? Thanks.

Yeah, so again, we're, you know, we feel... pretty confident with the 48% growth. Again, especially where the product is trending now. We've done a few different things in the field with targeting, alignment, and so on and so forth. And so, you know, if you look at then the SMDA, which is going to expand the indications. And again, I think assuming, you know, we're going to review the date of January 23rd. Between now and then, there's obviously some training and that type of thing that we'll be doing in prep of that. And so that should be felt fairly quickly. And then shortly after that, as you mentioned, you've got the van coming in September. And our plan is to try to bleed the initial kits that are out there now as far as the inventory, if you will, was interleaved, and then launch that new kit where it's a little bit more of a seamless transition. And so that should be felt pretty immediately after that. And the reason that's so important, and again, what we've learned in our market research and the time we've been spending with the reps is that the case management for this product due to the prep of the product is really difficult. And so if you can improve that, and what the band does, it not only improves the sterility issue, but it also improves the pull of the product and just the mechanism of it, if you will, and it really simplifies that. And we think that will really help us with the case management piece, allowing our reps to spend less time in the OR, sort of hand-holding through surgeries and getting to other positions and expanding and growing the product. You know, it makes that problem much better, and then ultimately it'll be moved towards a pre-filled syringe. The beauty of the pre-filled syringe is that really it's just this simple. It takes the device aspect out of the drug.

So instead of us being a device-drug type of combination, we become just a drug.

If you look at our drug on a clinical, just clinically versus other things that are on the market, it really does have a superior play there as far as the clinical data and what it does and so forth. And that's where we get really a lot of good feedback, which is why we're so positive on this.

It's very helpful. And then just a follow-up question. So you mentioned that the second S&DA that's in January will lead to about 13 million procedures in total now with everything. How many of those would then be orthopedic procedures?

Yeah, so probably this is Ryan Craig. So out of the additional, you know, five to six million procedures, probably about 70% of them are going to be ortho. And so that's what, when Craig was speaking to our traction, you know, we've got 60% of our current business on center leave is orthopedic procedures as well. So as soon as we gain approval, anticipated approval by the end of January, it should be a seamless communication point for us. That's where we've had the most success to date, and it's obviously aligned to our strategy as well.

Got it. Thanks very much. Thank you. Thanks for the question.

Your next question comes from the line of Berg Bellinier from Needham and Company. Your line is live.

Hi, this is Serge. A couple of follow-up questions on Zinrillef. I assume the orthopedic focus mostly consists of knee and hip surgeries. Curious what you're competing against now. Is it generic bupivacaine or Xperil? And then with the label expansion, what additional orthopedic procedures do you expect that would allow you to target once we get past January assuming approval?

Yeah, so I think you're right from a competitive standpoint. I mean, it's typically, you know, generic bupivacaine or Xperil. A lot of times now with Expirella, it'll be in a nerve block type scenario. So that could be, you know, an anesthesiologist is involved in that. But the beauty of this product is that once it's used and the clinical results are shown, we really do get a lot of buy-in from the orthopedic surgeons. And so we've had our most, really the most success there. And the other piece that's probably worth mentioning is that this is where you have majority of real pain events within surgeries. You know, hip and knee can be extremely painful. And so, again, we think our product is very conducive for that space. In a funny way, though, yes, that's our competitors. But, again, our issue has not been as much with the competitors clinically as it has been the own prep of our product. And that's why I continue to stress, you know, the band and so forth. And so with the expanded label, we immediately, we hope, will pick up shoulders. And so that will be a direct, you know, any physician who's doing orthopedic could move right into shoulders with our product. So that should be immediate. And then, you know, we feel like closely related will hopefully be spine, which, again, takes us maybe to a different position group, but, you know, very similar category as far as an area we think we can do quite well with.

Okay. And then in terms of potential partnership, do you view that as kind of a nice to have or a priority going forward?

No, it's a priority. Yeah, it's a great question because, again, going back, I know I keep repeating myself, but the the prep of the product and so forth, is that if you think about drug reps in general, they are generally not in OR suites. However, who is in OR suites, specifically the ortho space suites, are the mental device reps. They basically are in all these surgeries. And so for us, we've done this in a few different territories and had success, where we have a partnership with a distributor rep. So our view is that if we did that on a national basis and could get you know, let's say a group of five or six hundred representatives that can complement and be there for case management, it's just an absolutely huge win for us, especially if you look at introducing demand, we should improve upon that anyway. And so, to us, it makes all the sense in the world. And it is a priority.

Okay. Well, thank you. And congrats on the progress and appreciate all the numbers you gave tonight.

No, thanks, sir.

Appreciate it.

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

Thank you, operator. I'd just like to thank everyone for joining the call, and we do appreciate your patience. We think we're making really big strides here with the company and really beginning to turn this around, and we look forward to the next quarter's call. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect. Good.