Heron Therapeutics (NASDAQ:HRTX) recently held its Q3 2023 earnings call, highlighting a strategic plan focused on the perioperative space and an optimistic financial outlook. CEO Craig Collard detailed the company's financial performance, strategic initiatives, and future guidance, emphasizing the company's confidence in achieving positive EBITDA by Q4 2024 without additional capital raises.
Key takeaways from the call include:
- Heron Therapeutics has implemented cost-cutting measures, decreasing operational expenses from $182 million in 2022 to $135 million in 2023, with further reductions anticipated in 2024.
- The company reported a product gross profit of $13.2 million for Q3 2023 and $37.6 million for the nine months ending September 30th, 2023.
- The net loss for Q3 2023 was $25 million, a significant decrease from $41.9 million in the same period of 2022.
- The company's products, ZYNRELEF and APONVIE, have achieved record unit sales, targeting orthopedic and above-the-waist surgical procedures, respectively.
- Heron Therapeutics expects a gross margin improvement from 41% in 2023 to 62% in 2024, and over 75% in 2025 and beyond.
Heron Therapeutics reported a Q3 2023 net loss of $25 million, a marked improvement from the $41.9 million loss in the same period of 2022. The company's strategic initiatives, including cost-cutting measures, have resulted in a reduction of operational expenses. The company anticipates further spending reductions in 2024, projecting operating expenses between $108 million to $116 million.
Product sales have increased, with ZYNRELEF and APONVIE hitting all-time highs in unit sales. The company's strategic plan focuses on the perioperative space, with APONVIE targeting above-the-waist surgical procedures and ZYNRELEF focusing on orthopedic surgeries.
The company expects gross margins to improve significantly in the coming years, from 41% in 2023 to 62% in 2024, and over 75% in 2025 and beyond. This improvement is tied to increased efficiency and reduced costs, despite negative impacts from write-offs of ZYNRELEF inventory during the nine months ended September 30th, 2023.
Heron Therapeutics is also preparing for the launch of a virtual alternative to nursing (VAN) in September, expected to enhance case management and simplify product use. The company is optimistic about the expanded label and VAN launch for ZYNRELEF, which are anticipated to drive significant growth.
The company's CEO, Craig Collard, emphasized the competition for ZYNRELEF in the orthopedic space, with generic bupivacaine and Exparel as main competitors. However, he noted that ZYNRELEF has been well-received due to its clinical results, particularly in managing pain during hip and knee surgeries. The company anticipates the expanded label approval in January will enable ZYNRELEF to target additional orthopedic procedures, including shoulders and spine surgeries.
Collard also expressed interest in establishing partnerships with distributor reps to improve case management and generate demand, underscoring that the main challenge has been product preparation rather than clinical competition. He concluded the call expressing optimism about the company's progress and future prospects.
InvestingPro Insights
Heron Therapeutics (NASDAQ:HRTX) has been under the microscope of InvestingPro, revealing some noteworthy insights. The InvestingPro data shows that the company has a market cap of $76.01M and its revenue for the last twelve months as of Q2 2023 was $117.96M, indicating a growth rate of 24.21%. Moreover, the company's price has seen a significant drop in the last three months, with a 67.76% total return, reflecting the challenges it has faced.
InvestingPro Tips highlight that Heron Therapeutics has been operating under a significant debt burden and may have trouble making interest payments on this debt. This is an important consideration given the company's optimism about future growth. The company has also been quickly burning through cash, which could impact its ability to continue operations without additional capital raises. Despite these challenges, the company has been consistently increasing its earnings per share, which could signal potential for growth if the company can manage its financial difficulties effectively.
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Full transcript - HRTX Q3 2023:
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Heron Therapeutics Q3 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.
Jeff Cohen: 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 Collard, Chief Executive Officer; Ira Duarte, Executive Vice President, Chief Financial Officer; and Bill Forbes, Executive Vice President, Chief Development Officer; and Ryan Craig, Vice President, Market. 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 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; does not intend to do so. And with that, I would now like to turn the call over to Craig Collard, Chief Executive Officer.
Craig Collard: Thanks, Jeff. 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 organization. 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 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 spell in over 75% in 2025 and beyond. This change in gross margin has been due to scaling the larger batch sizes being fully realized, negotiations with our manufacturing partners, operational efficiencies, and no more product write-offs was generally due to its high 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, both ZYNRELEF and APONVIE 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 the 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 CINVANTI 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 APONVIE to the quarter were $350,000. Net product sales of ZYNRELEF 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.
Ryan Craig: Thank you, Craig. We've solidified our strategic plan that we're excited to see implemented and grow the acute care franchise. Our sales team is exceptional and the alignment across our commercial organization had never been stronger. The vision for acute care is to own the perioperative space as both the APONVIE and the ZYNRELEF offer a best-in-class 1-2 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 APONVIE, our initial focus is above the waste surgical procedures. These procedures, such as Bariatric, ENT, Neurological, and Plastics, are at a higher sensitivity to post-op nausea and vomiting, as PONV can cause significant concerns if not properly managed. Our early successes with APONVIE have indicated that this is a logical, receptive starting point to get on a formulary and a proven ability to expand beyond this starting point to other surgical ones. In addition to our clinical profile the 2020 PONV guidelines also recommend using three different agents with distinct pathways, which supports the addition of PONVs protocols. With ZYNRELEF, our commercial execution was wide ranging and expanded 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 with 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 sNDA 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. APONVIE 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 PONV and improve its treatment paradigm. Currently, we have 66 P&T reviews requested by targeted customers, 10 P&T reviews that have been scheduled and confirmed with the 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 volumes. To-date, we have had 156 accounts complete this process and ultimately order a PONV. 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 ZYNRELEF. 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 unit. 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 ZYNRELEF adoption through near-term regulatory and development milestones. First is the sNDA PDUFA Date scheduled for January 23, 2024. We anticipate a positive response from the FDA and are excited to offer ZYNRELEF to additional patients that may benefit from the added indications. 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 seconds to 30 seconds. In market research conducted in Q3, as well as current customer feedback, this improvement is significant and would expand utilization. Lastly, the pre-filled syringe is in development and will represent the most meaningful improvement in ZYNRELEF preparation and administration. It takes any time spent in the OR on withdrawal time or preparation out of the equation as ZYNRELEF would immediately be available for application in this product enhancement. Now I'll turn it over to Ira Duarte, our Chief Financial Officer.
Ira Duarte: 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 gross 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 ZYNRELEF inventory during the nine months ended September 30th, 2023. We do not anticipate any large ZYNRELEF write-offs in the future. SG&A expenses for the three and nine months ended September 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 ended 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 ZYNRELEF as production scale-ups, validation activities, and raw material applications 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 force, as well as overall company-wide spend reductions. 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 $116 million and cash burn will decrease every quarter as we have stabilized our spend and revenues have been increasing every quarter. Moving now on to 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 EBITDA 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 improved gross margins between 68% to 70%. Our operating spend, excluding stock compensation, depreciation, and amortization is anticipated to be between $108 million to $116 million. And EBITDA, excluding 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.
Craig Collard: As we move to the key items from today's call you can probably sense the change in confidence and our voices about this business. Our business economy is set and we have a team in place that is executing on the balance sheet to get us the profitability without any expected need for further capital raises. 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 ZYNRELEF and APONVIE have both achieved record unit volume over the last eight weeks. And last, we have a label expansion and the VAN being launched for ZYNRELEF, which should both be significant growth drivers for the product. I would now like to open the line for questions.
Operator: Your first question comes from the line of Carl Byrnes from North Capital Market. Your line is live.
Carl Byrnes: Great, congratulations on the progress and thanks for the questions. First with the gross profit margin for the third quarter excluding the inventory write-offs it would be 66%, if I recall from the press release. And it looks like you're giving guides on the fourth quarter at 62% 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 at 62%. And how do you see gross profit margin progressing over time beyond 2024 in terms of peak gross profit target or margin target?
Craig Collard: Yes, Karl, Thanks for the question. Again, with our gross margin, if you think about CINVANTI 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 2022, really until the start of ‘23, we were finishing scale up and so forth, going from a 400 kilogram batch to a 1,000 kilogram. So, you had a price sort of blend with those two batch sizes. And then beyond that, our primary manufacturer is Alchemy, working now in a 1,000-kilogram batch, and then our secondary manufacturer is at [Indiscernible], where we do a secondary and we make it 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, we will have a, like I say, total gross margin of all products in sort of that mid-70s range. Again, ZYNRELEF is 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 scale and that type of thing is APONVIE, and we're going from 400 kilograms 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 possibly 80% range as we move forward.
Carl Byrnes: Excellent. That's very helpful. And then just a follow-up. I mean, clearly, you could be profitable tomorrow if you were just to focus on the CINV franchise. But clearly, the growth is from the acute care segment with APONVIE and ZYNRELEF. So I'm wondering what your thoughts are in terms of peak sales potential for ZYNRELEF and APONVIE and how the progression might look over time from your internal analysis?
Craig Collard: Yes. No, it's an interesting point because I think -- and look at this from an investor viewpoint, the oncology side of the business really acts as a bit of a hedge, sort of, if you will, protecting your investment. And why -- 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. And -- but again, that's not really where we're going. We think there's a much bigger story here. And really, the growth story's with the two products that have the ability to dominate the perioperative space, and that's APONVIE and ZYNRELEF, which, again, we think could 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 ZYNRELEF with the VAN, the expanded label and then ultimately the prefilled 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 and then you've got a base of business that's generating capital that continues to be more profitable.
Carl Byrnes: Great. Thanks so much. And again, congratulations on the progress.
Craig Collard: Thanks, Carl.
Operator: Your next question comes from the line of Boris Peaker from TD Cowen. Your line is [Technical Difficulty]
Nicholas Lorusso: Thanks very much. This is Nick on for Boris. Just a couple from me on ZYNRELEF. First, with the slow growth of ZYNRELEF 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.
Craig Collard: Yes. So again, we feel pretty confident with 48% growth. Again, especially where the product is trending now. We've done a few days in the field with targeting, alignment and so on and so forth. And so if you look at then the sNDA, which is going to expand the indications. And again, I think assuming PDUFA date of January 23. Between now and then, there's obviously some training and that type of thing that we'll be doing in prep with that. And so that should be felt fairly quickly. And then shortly after that, as you mentioned, we've got the VAN coming in September. And our plan is to try to lead the initial kits that are out there now as far as the inventory, if you will, with ZYNRELEF. And then launch that new kit where it's a little bit more of a seamless transition. And so that should be felt pretty neatly 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 VAN does, it not only improves the sterility issue, but it also improves the pool of the product and just the mechanism of it, if you will, 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 handling through surgeries and getting some other positions and expanding and growing the product. And so it makes that problem much better. And then ultimately, as we move towards a prefilled syringe -- the beauty of the prefilled syringe -- that it really -- it's just as simple as 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 around 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.
Nicholas Lorusso: That's very helpful. And then just sort of a follow-up question. On -- so you mentioned that the sNDA that in January will lead to about 13 million procedures in total now with everything. How many of those would then be orthopedic procedures? And yes?
Ryan Craig: Yes. So probably -- this is Ryan, Craig. So out of the additional 5 million to 6 million procedures, probably about 70% of them are going to be ortho. And so that's what -- when Craig was speaking to our traction, we've got 60% of our current business on ZYNRELEF is orthopedic procedures as well. So assume as we gain approval -- anticipated approval by the end of January 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.
Nicholas Lorusso: Got it. Thanks very much.
Craig Collard: Thank you. Thanks, Nicholas.
Operator: Your next question comes from the line of Serge Belanger from Needham & Company. Your line is live.
Serge Belanger: Hi, this is Serge. A couple of follow-up questions on ZYNRELEF. I assume the orthopedic focus mostly consists of knee and hip surgeries. Curious what you're competing against now? Is it generic bupivacaine or Exparel? And then with the label expansion, what additional orthopedic procedures do you expect that will allow you to target once we get past January, assuming approval?
Craig Collard: Yes. So I think you're right from a competitive standpoint. I mean, it's typically bupivacaine or Exparel, a lot of times now with Exparel being a nerve block-type scenario. So that could be 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 the majority of real pain events within surgery. Hip and knee can be extremely painful. 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 is not as much with the competitors clinically as it has been the own prep of our product. And that's why I continue to stress demand and so forth. And so with the expanded label, we immediately -- we hope will pick up shoulders. And so that will be a direct -- any physician who's doing orthopedic can move right into shoulders with our products, that should be immediate. And then we feel like closely related will hopefully be spine, which again takes us to a different physician group, but a very similar category as far as an area we think we can do quite well with.
Serge Belanger: Okay. And then in terms of potential partnership, you view that as a kind of a nice to have or a priority going forward?
Craig Collard: No, it's a priority. Yes, it's a great question because, again, going back -- I know I keep repeating myself, but the prep of the product and so forth is that if you think about drug reps in general, they are generally not in OR suite. However, in OR suites, specifically the ortho space suites are the medical device reps. They base 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 if we did that on a national basis and could get let's say, a group of 500 or 600 representatives that could complement and be there for case management, it's just an absolutely huge win for us, especially as you look at introducing demand, which should improve upon that anyway. And so to us, it makes all the sense in the world. It is a priority.
Serge Belanger: Okay. Well, thank you. Congrats on the progress and appreciate all the numbers you gave tonight.
Craig Collard: Well, thanks Serge. We appreciate it.
Operator: There are no further questions at this time. I'd like to turn the call over to Craig Collard for closing remarks.
Craig Collard: 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 next quarter's call. Thank you.
Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect. Goodbye.
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