Heron Therapeutics Q3 2023 Earnings Call Transcript

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November 14, 2023

There are 7 speakers on the call.

Operator

Good 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 Cone, Executive Director, Assistant General Counsel and Assistant Secretary. Please proceed.

Speaker 1

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 Q3 ended September 30, 2023. With me today from Heron are Curt Koller, Chief Executive Officer Jero Duarte, Executive Vice President, Chief Financial Officer 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 or Web site following the conclusion of today's call. Before we begin, let me

Speaker 2

quickly remind you that during the course

Speaker 1

of this conference call, the 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 today's press release and in Heron's public periodic filings with the SEC. Except as required by law, Aaron 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 Kaller, Chief Executive Officer.

Speaker 2

Thanks, Joe. Good afternoon and welcome to Heron Therapeutics' 3rd quarter 2023 earnings call. Today, we are pleased to update you on our recent strategic initiatives, financial performance from the Q3 and guidance for the rest of 2023 as well as guidance for the full year 2024. Over the past 6 months since joining Heron as CEO, we have taken significant steps to right size our business, ensuring alignment with our strategic goals. We've implemented a comprehensive streamlining of our financial processes, enhancing efficiency and accountability across the organization.

Speaker 2

As part of our commitment to operational excellence, we've successfully combined various commercial functions, eliminating redundancies and optimize in 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.

Speaker 2

Our management team is now in place and the transformation of Heron into a profitable company that's happening. We have reduced operational expenses excluding stock comp and depreciation and amortization to $135,000,000 in 2023 versus $182,000,000 just last year. We anticipate a further reduction That will take our operating expenses to a range of $108,000,000 to $116,000,000 in 2024. Our gross margin is also improving from 41% in 2023 to 62% in 2024 and should sell 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 expiring inventory.

Speaker 2

With our capital raise back in the summer and our anticipated cash balance of over $65,000,000 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 8 weeks, both Zenerleaf and eponvi 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 prefilled syringe, which are all hitting their development timelines.

Speaker 2

Moving to product performance. The Oncology Care franchise continues to provide a stable base of revenue for Hara, contributing $26,700,000 in net sales for the quarter and $79,900,000 in net sales year to date. Net product sales of SYMPAKIE for the quarter were $23,300,000 which increased from $21,200,000 for the same period in 2022. Net product sales of Sustal were $3,400,000 which increased from $2,700,000 in the same period in 2022. The Acute Care franchise continues to grow, achieving $4,700,000 in net sales for the quarter and $12,900,000 in net sales year to date.

Speaker 2

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 OPONVI for the quarter were $350,000 Net product sales of ZEMBLEY for the quarter were $4,400,000 compared to $2,700,000 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.

Speaker 1

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 strong. The vision for acute care is to own the perioperative space At both the Hanby and Henrelief offer a best in class one-two punch supported by our clinical profile. We are promoting innovative solutions to 2 of the most burdensome challenges associated with surgical procedures, post pop nausea and vomiting and pain.

Speaker 1

For eponvi, 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 PONV can cause significant concerns if not properly managed. Our early successes with EPONVI have indicated that this is a logical, receptive starting point In addition to our clinical profile, The 2020 POMV guidelines also recommend using 3 different agents with distinct pathways, which supports the addition of CONVY's protocols. With Zenerleaf, 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.

Speaker 1

Our execution will be aligned with this customer base more significantly moving forward for many reasons. 1st, 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 23 on the FDA. Focusing on Orthopedic Surgery also creates The Ponzi 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.

Speaker 1

Currently, we have 66 P and T reviews requested by targeted customers, 10 P and T reviews that have been scheduled and confirmed with the date and 9 new P and T approvals alone in the month of October. The process of requesting P and T confirming with a date and ultimately gaining approval can take 4 to 6 months in some cases. This is where we are focused currently building a wide opportunity base will result in consistent ordering and 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.

Speaker 1

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 expand. 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 XENALYST. Our streamlined focus on orthopedic procedures is beginning to produce results.

Speaker 1

With our most recent data week ending November 10 represented all time highs in normalized units. Additionally, current 8 week volume over the prior 8 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 Q4 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 sNDA PDUFA date scheduled for January 23, 2024.

Speaker 1

We anticipate a positive response from the FDA and are excited to offer Zenerleaf to additional patients that may benefit from the added indications. Should we receive approval, it would increase the opportunity from approximately 7,000,000 procedures covered by our current label to nearly 13,000,000 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 1 minute to 20 to 30 seconds. A market research conducted in Q3 as well as current customer feedback, this improvement is significant and will expand utilization.

Speaker 1

Lastly, the prefilled syringe is in development and will represent the most meaningful improvement in generally preparation and administration. It takes any time spent in the OR on withdrawal time or preparation out of the equation as Zenerleaf would immediately be available for application in this product enhancement. Now, I'll turn it over to Ira Duarte, our Chief Financial Officer.

Speaker 3

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 $13,200,000 $37,600,000 for the 9 months ended September 30, 2023, representing 42% 41% of net revenue, respectively. These margins were negatively impacted by write offs of ZenerLift inventory during the 9 months ended December 30, 2023. We do not anticipate any large Zimmerflip write offs in the future.

Speaker 3

SG and A expenses for the 3 9 months ended September 30, 2023 were $24,600,000 $93,000,000 respectively, compared to $28,200,000 $93,300,000 in the Research and development expenses were $13,600,000 $44,900,000 for the 3 and 9 months ended September 30, 2023 compared to $25,500,000 $96,400,000 in the comparable period of 2020 The decrease in spend was primarily related to decreases in costs related to ZenroLift 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 forward implemented in June 2022 June 2023. We believe we can continue to reduce The net loss was $25,000,000 for Q3 2023 $41,900,000 for the comparable period in 2022. Looking to total year to date net loss, 2023 is a net loss of $99,800,000 compared with $162,200,000 in the comparable period of 2022. I now would like to give a little bit more clarity on what CreditGU 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.

Speaker 3

We began implementing our 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 If you look at the slides from left to right, you will see our overall operational spend in Q1 2023 was about $46,000,000 which we reduced to $41,000,000 after excluding the highlighted reorganization charges of $30,000,000 We further reduced these spends to $34,000,000 in Q3 2023 and excluding the highlighted reorganization charge of of $4,100,000 You can see on the slide that our operational loss after excluding stock compensation and depreciation and amortization And the previously mentioned one time charges, our overall operating cash burn decreased from $90,000,000 in Q1 2023 is $7,200,000 in Q2 2023 $6,000,000 in Q3 2023. Our 2023 operating spend excluding stock compensation, depreciation and amortization and the $17,100,000 in reorganization costs will be around $180,000,000 We believe our operational run rate excluding stock compensation and depreciation and amortization going forward will be between $108,000,000 to $160,000,000 and cash burn will decrease every quarter as we have stabilized our spend and revenues have been increasing every quarter.

Speaker 3

Moving now on to our guidance for the rest of 2023 2024. On the left of this slide, we are showing anticipated results for Q4 2023, which indicates net revenues between $30,000,000 and $32,000,000 and EBITDA excluding stock compensation loss between $10,000,000 and loss of $6,000,000 We anticipate exiting 2023 with a minimum cash and cash equivalent balance of $65,000,000 We are guiding to revenue of $138,000,000 to $158,000,000 for 2024 and improved gross margins between 68% to 70%. Our operating spend, excluding stock compensation, depreciation and amortization, is anticipated to be between $108,000,000 to to $160,000,000 and EBITDA, excluding stock compensation, will be between a loss of $22,000,000 to income of $3,000,000 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.

Speaker 1

Back to

Speaker 3

you, Greg.

Speaker 2

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 company 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 raising. 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 $99,000,000 to $103,000,000 to a range of $104,000,000 to $106,000,000 Our momentum with the acute products is strong as well as Emily and Eponbee have both achieved record unit volume over the last 8 weeks. And last, we have a label expansion and the VAN being launched for Zimmerli, which should both be significant growth drivers for the product.

Speaker 2

I would now like to open the line for questions.

Operator

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

Speaker 4

Great. Congratulations on the progress and thanks for the questions. First, with the gross profit margin For the Q3, excluding the inventory write offs, it would be 66%, if I recall from the press release. And it looks like you're giving guidance for the 4th quarter at 62% for the year 2024 of 68% to 70%. I'm wondering if there is mix issue, what The nuances between the Q3 and Q4, you had 62% and how do you see gross profit margin You're progressing over time beyond 2024 in terms of a peak gross profit target or margin target.

Speaker 2

Yes, Karl. Thanks for the question. Again, with our gross margin, if you think about CIMONTI first, I guess, it's going to have the largest impact because of just total revenue. We basically are making the product currently at 2 different manufacturers. And in 2022, really until the start of 2023, we were You know, finished the scale up and so forth going from a 400 kilogram batch to 1,000 kilograms.

Speaker 2

So you had a price sort of blend with those 2 batch sizes. And then beyond that, our primary manufacturer is Alkenny, where we're now in a 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 of it, 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.

Speaker 2

Again, generally, it was pretty fixed, Well, 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 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 possibly 80% range as we move forward.

Speaker 4

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 CIND franchise. But clearly, the growth is from the acute care segment with PONDI and ZENRILEV. So I'm wondering what your thoughts are in terms of Peak sales potential for ZENRILEV and EPONDI and how the progression might look over time from your internal analysis?

Speaker 4

Thanks. Yes.

Speaker 2

No, it's an interesting point because I think If I 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 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 will fit within the 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 is with the 2 products that have the ability to dominate the perioperative space and that's upon being digitally, which again we think could be multi $100,000,000 products. If you just look at the market size Again, we feel with some of these things that we're doing now with certainly with Zenerleaf with the band, the expanded label and then ultimately the prefilled syringe.

Speaker 2

So again, it's 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 This generating capital continues to be more profitable.

Speaker 4

Great. Thanks so much. And again, congratulations on the progress.

Speaker 2

Thanks, Karl.

Operator

Your next question comes from the line of Boris Peaker from TD Cowen. Your line is open.

Speaker 5

Thanks very much. This is Nick on for Boris. Just a couple for me on Zimrilef. First, with the slow growth of Zimilev to date so far really, what's driving that 48% year over year increase in the acute care franchise? And on that same note, does that have to do mainly with BOVAN and the sNDA?

Speaker 5

And how quickly do you think that those 2 will have an effect? Like specifically, how quickly will BOVAN be distributed? How quickly will doctors pick up the new procedures for the sNDA? Thanks.

Speaker 2

Yes. So again, we feel Pretty confident with 48% growth, again, especially with 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 If you look at the SNDA, which is going to expand the indications, and again, I think assuming We've got to do the 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 of that.

Speaker 2

And so that should be felt fairly quickly. And then shortly after that, as you mentioned, you've got the band 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, Zimmerli and then launched 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 rest is that the case management for this product due to the prep of the product is really difficult.

Speaker 2

And so if you can improve that and what the band does, it not only improves the sterility issue, 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 hand holding through surgeries and getting to other physicians and expanding and growing the product. And It makes that problem much better and then ultimately move towards a pre filled syringe. The beauty of the pre filled syringe that really It's just this simple as it takes the device aspect out of the drug. So instead of us being a device drug type of If you look at our drug on a clinical just clinically versus other things around the market, it It really does have a superior play there as far as the clinical data and what it does and so forth.

Speaker 2

And that's where we get really a lot of good feedback, which is why we're so positive on this.

Speaker 5

That's very helpful. And then just a follow-up question. So you mentioned that the second sNDA that In January, it will lead to about $13,000,000 procedures in total now with everything. How many of those would then be orthopedic procedures and get?

Speaker 1

Yes. So probably this is Ryan Craig. So out of the additional $5,000,000 to $6,000,000 procedures, probably about 70% of them are going to be ortho. And so that's what when Craig is speaking to our traction, we've got 60% Our current business on Zenerife 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.

Speaker 1

That's where we've had the most success to date and it's obviously aligned to our strategy as well.

Speaker 5

Got it. Thanks very much.

Speaker 1

Thanks. Thanks for the question.

Operator

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

Speaker 6

Hi, this is Serge. Couple of follow-up questions on Zimrilef. 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?

Speaker 6

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?

Speaker 2

Yes. So I think you're right from a competitive standpoint. I mean, it's Typically, generic Advocating or EXPAREL, a lot of times now with EXPAREL, it will be in a nerve block type scenario. So that could be 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.

Speaker 2

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 surgery. But again, our issue has not been as much with the competitors clinically as it has been the own prep of our product. That's why I continue to stress the ban and so forth. And so with the expanded label, we immediately we hope will pick up shoulders.

Speaker 2

And so that will be a direct Any physician who is doing orthopedic can move right into shoulders with our products, so that should be immediate. And then we feel like closely related will hopefully be fine, which again takes us maybe to a different physician group, But very similar categories for us, but an area we think we can do quite well with.

Speaker 6

Okay. And then in terms of potential partnership, You view that as a kind of a nice to have or a priority going forward? No, it's

Speaker 2

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 suites. However, who is in OR suites, specifically the orthospace suite are the go to medical device reps. They basically run 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 distributor reps.

Speaker 2

So our view is that we did that on a national basis Let's say a group of 500 or 600 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. It is a priority.

Speaker 6

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

Operator

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

Speaker 2

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

Operator

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

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Key Takeaways

  • Heron has reduced operational expenses (ex‐stock comp & D&A) from $182 M in 2022 to $135 M in 2023, targets $108 M–$116 M in 2024, and expects positive EBITDA by Q4 2024 without additional capital raises.
  • Gross margin is set to improve from 41% in 2023 to 62% in 2024 and exceed 75% in 2025, driven by larger batch scales, manufacturing negotiations, operational efficiencies, and no further inventory write-offs.
  • The Oncology Care franchise delivered stable Q3 net sales of $26.7 M (Sympaki $23.3 M, Sustol $3.4 M) and $79.9 M year-to-date, serving as a reliable revenue base.
  • The Acute Care franchise grew 48% year-over-year with Q3 net sales of $4.7 M, as Zenerleaf and Eponvi hit record unit volumes over the past eight weeks (up 16%), with momentum expected to continue in Q4.
  • Key upcoming catalysts for Zenerleaf include a sNDA PDUFA date on January 23, 2024 (expanding addressable procedures from ~7 M to ~13 M), a vial access needle launch in September 2024 to cut prep time, and a prefilled syringe in development to streamline OR administration.
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Earnings Conference Call
Heron Therapeutics Q3 2023
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