Heron Therapeutics(HRTX) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Condensed Consolidated Financial Statements The unaudited condensed consolidated financial statements detail the company's financial position, operational results, equity changes, and cash flows as of September 30, 2019 Condensed Consolidated Balance Sheets The balance sheets show total assets decreased to $393.0 million, liabilities increased, and stockholders' equity declined as of September 30, 2019 Condensed Consolidated Balance Sheets (in thousands) | | September 30, 2019 (unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total current assets | $364,147 | $447,248 | | Total assets | $392,962 | $462,179 | | Total current liabilities | $96,737 | $92,019 | | Total liabilities | $107,520 | $92,019 | | Total stockholders' equity | $285,442 | $370,160 | | Total liabilities and stockholders' equity | $392,962 | $462,179 | Condensed Consolidated Statements of Operations and Comprehensive Loss The statements of operations show significant net product sales growth for the nine months ended September 30, 2019, but also an increased net loss due to higher operating expenses Statements of Operations Highlights (in thousands) | | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net product sales | $42,624 | $19,786 | $110,885 | $48,630 | | Total operating expenses | $77,477 | $61,566 | $262,217 | $181,253 | | Loss from operations | ($34,853) | ($41,780) | ($151,332) | ($132,623) | | Net loss | ($33,595) | ($38,346) | ($146,829) | ($129,281) | | Basic and diluted net loss per share | ($0.42) | ($0.49) | ($1.85) | ($1.81) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity significantly decreased from December 31, 2018, to September 30, 2019, primarily due to the net loss incurred - Total stockholders' equity decreased from $370.2 million at the end of 2018 to $285.4 million as of September 30, 2019[15] - The primary driver of the decrease in equity was the net loss of $146.8 million for the nine months ended September 30, 2019[12][15] Condensed Consolidated Statements of Cash Flows The cash flow statement shows net cash used in operations, cash provided by investing and financing activities, resulting in a net increase in cash and equivalents Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used for operating activities | ($97,603) | ($158,318) | | Net cash provided by (used for) investing activities | $104,576 | ($286,878) | | Net cash provided by financing activities | $21,299 | $354,547 | | Net increase (decrease) in cash and cash equivalents | $28,272 | ($90,649) | | Cash and cash equivalents at end of period | $60,108 | $53,934 | Notes to Condensed Consolidated Financial Statements The notes provide detailed information on the company's business, accounting policies, product pipeline, customer concentration, and significant subsequent events - The company's commercial products are SUSTOL and CINVANTI; its investigational product HTX-011 received a CRL from the FDA in April 2019 but was resubmitted and accepted in October 2019 with a PDUFA goal date of March 26, 2020[21][22][23] - Three major customers accounted for 97.8% of net product sales and 99.0% of accounts receivable for the nine months ended September 30, 2019, indicating significant customer concentration[33] - In October 2019, the company completed a public offering of 9.9 million shares of common stock, receiving net proceeds of $162.2 million[83] - A federal securities class action complaint was filed against the company in June 2019 following the announcement of the CRL for HTX-011[82] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, product portfolio, and liquidity, highlighting significant sales growth, HTX-011 regulatory progress, and increased operating expenses Overview and Product Portfolio This section provides an overview of the company's commercial products, SUSTOL and CINVANTI, and the regulatory status of its investigational product HTX-011 - CINVANTI's administration was expanded to include a 2-minute IV injection (approved Feb 2019) and a 130 mg single-dose regimen for MEC (approved Oct 2019)[91][104] - The FDA accepted the NDA resubmission for HTX-011 in October 2019 and set a PDUFA goal date of March 26, 2020; the initial CRL was due to CMC and non-clinical information needs[92][106] - A Marketing Authorisation Application (MAA) for HTX-011 was validated by the EMA in March 2019, with an opinion anticipated in the first half of 2020[92][107] Results of Operations This section details the company's operational results, including significant growth in net product sales, increased cost of sales, and higher research and development and sales and marketing expenses Net Product Sales (in millions) | Product | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | CINVANTI | $97.6 | $32.8 | | SUSTOL | $13.3 | $15.8 | | Total | $110.9 | $48.6 | - The company decided on October 1, 2019, to discontinue all discounting of SUSTOL, expecting significantly lower net product sales for SUSTOL in future periods[131] Research and Development Expense by Project (in thousands) | Project | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | HTX-011-related costs | $66,665 | $59,264 | | CINVANTI-related costs | $3,900 | $6,094 | | HTX-034-related costs | $3,912 | $— | | SUSTOL-related costs | $1,826 | $2,800 | | Personnel and other | $28,679 | $22,620 | | Stock-based compensation | $14,123 | $9,363 | | Total R&D Expense | $119,105 | $100,141 | - Sales and marketing expenses for the nine months ended Sep 30, 2019, increased to $69.3 million from $44.6 million in 2018, driven by HTX-011 launch preparation and $8.4 million in stock-based compensation for a retiring executive[138] Liquidity and Capital Resources The company's liquidity position improved with existing cash and proceeds from a subsequent stock offering, which management believes are sufficient to fund operations for at least one year - As of September 30, 2019, cash, cash equivalents, and short-term investments totaled $256.3 million[141] - In October 2019, the company raised an additional $162.2 million in net proceeds from a public stock offering, bringing pro-forma cash to $418.5 million[141] - Net cash used for operating activities decreased to $97.6 million for the nine months ended Sep 30, 2019, from $158.3 million in the same period of 2018, primarily due to changes in working capital[143] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate exposure on its investment portfolio, which is mitigated by investing in short-term, investment-grade securities - The company's primary market risk is interest rate risk on its investment portfolio of cash, cash equivalents, and short-term investments[150] - Risk is mitigated by investing in short-term, investment-grade securities; a 50-basis point movement in interest rates would not have a material impact on the portfolio's fair value[150] Controls and Procedures Management evaluated the company's disclosure controls and procedures, concluding they were effective as of September 30, 2019, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period[152] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[153] PART II. OTHER INFORMATION Legal Proceedings The company is facing a purported federal securities class action lawsuit filed in June 2019, alleging violations related to a stock price decline following an FDA Complete Response Letter - A federal securities class action complaint was filed against the Company, its CEO, and CFO on June 3, 2019, following the announcement of the CRL for HTX-011[82][155] Risk Factors The company outlines numerous risks, including dependence on product success, market acceptance, competition, manufacturing reliance, clinical development uncertainties, financial losses, and intellectual property challenges Risks Related to Our Business The company's business success is highly dependent on its key products, facing commercialization challenges, intense competition, reliance on third-party manufacturers, and clinical development uncertainties - The company's success is substantially dependent on its ability to commercialize SUSTOL, CINVANTI, and HTX-011 (if approved), facing risks from market acceptance, pricing, and competition[157] - The company relies on third parties for manufacturing, posing risks related to supply continuity, quality, and cost-effectiveness, with some critical components being single-sourced[177][179][183] - The company faces intense competition for its CINV franchise from products like AKYNZEO® and generics, and HTX-011 will compete with products like EXPAREL® if approved[185][186][187] Risks Related to Our Financial Condition The company has a history of significant operating losses and an accumulated deficit, potentially requiring future capital, and faces risks from product liability claims and investment volatility - The company has a history of losses, with an accumulated deficit of $1.1 billion as of September 30, 2019, and expects to continue generating substantial losses[202] - Additional capital may be needed in the future, but the ability to raise it may be constrained by market conditions or restrictive covenants in existing debt instruments[204][208] Risks Related to Our Industry The pharmaceutical industry involves lengthy, uncertain drug development and regulatory processes, ongoing scrutiny, pricing pressures, and complex compliance with healthcare fraud and abuse laws - Drug development is a lengthy, expensive process with an uncertain outcome, and positive early trial results do not guarantee success in later-stage trials[214] - Obtaining regulatory approval is a major hurdle, and even if granted, it may be limited, delayed, or revoked; the company must also comply with varying international regulatory requirements[222][226] - The company is subject to significant regulation and oversight under anti-kickback laws, false claims statutes, and other healthcare fraud and abuse laws, where violations can lead to substantial penalties[233][234] Risks Related to Our Intellectual Property The company's success depends on protecting its intellectual property, but faces risks from uncertain patent landscapes, potential challenges to patents, and costly litigation over infringement claims - The company's success depends on protecting its intellectual property, but patents may not be issued, may be challenged, or may not provide meaningful protection[248][249] - The company may face costly patent-infringement lawsuits from third parties, potentially leading to product sales cessation, significant damages, or licenses on unfavorable terms[253][255] Risks Related to Our Common Stock The company's common stock price is volatile, and stockholders face risks from anti-takeover provisions, potential dilution from convertible notes, concentrated ownership, and limitations on NOL carry-forwards - The company's stock price is subject to extreme volatility, and it is currently a defendant in a class action lawsuit following a stock price decline[257][258] - Conversion of the outstanding Convertible Notes would result in substantial dilution to existing stockholders, potentially issuing over 8.8 million new shares[261] - Utilization of net operating loss carry-forwards may be subject to substantial annual limitations due to ownership change rules under Section 382 of the Internal Revenue Code[264] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None[271] Defaults upon Senior Securities There were no defaults upon senior securities during the period - None[272] Mine Safety Disclosures This item is not applicable to the company - Not applicable[273] Other Information There was no other information to report for the period - None[274] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files