Heron Therapeutics(HRTX) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements The company reported total assets of $229.2 million and a total stockholders' deficit of $27.8 million as of September 30, 2023, with improved sales and reduced net loss for the nine-month period Condensed Consolidated Balance Sheets As of September 30, 2023, total assets decreased to $229.2 million, total liabilities increased to $257.0 million, resulting in a shift from stockholders' equity to a $27.8 million deficit Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 (Unaudited) | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $34,859 | $15,364 | | Short-term investments | $42,553 | $69,488 | | Total current assets | $193,979 | $205,435 | | Total assets | $229,199 | $250,951 | | Total current liabilities | $79,745 | $82,355 | | Non-current notes payable, net | $24,023 | $0 | | Total liabilities | $256,985 | $237,379 | | Total stockholders' equity (deficit) | ($27,786) | $13,572 | Condensed Consolidated Statements of Operations and Comprehensive Loss Net product sales increased to $92.8 million for the nine months ended September 30, 2023, while net loss significantly narrowed to $99.8 million due to higher gross profit and reduced operating expenses Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net product sales | $31,434 | $26,557 | $92,811 | $77,644 | | Gross profit | $13,226 | $11,840 | $37,591 | $35,397 | | Total operating expenses | $38,155 | $53,722 | $137,986 | $189,700 | | Loss from operations | ($24,929) | ($41,882) | ($100,395) | ($154,303) | | Net loss | ($25,008) | ($41,908) | ($99,835) | ($162,155) | | Basic and diluted net loss per share | ($0.17) | ($0.38) | ($0.75) | ($1.54) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities improved to $61.2 million for the nine months ended September 30, 2023, with financing activities providing $53.9 million, leading to a $19.5 million net increase in cash Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($61,244) | ($109,378) | | Net cash provided by (used in) investing activities | $26,831 | ($5,345) | | Net cash provided by financing activities | $53,908 | $74,620 | | Net increase (decrease) in cash and cash equivalents | $19,495 | ($40,103) | | Cash and cash equivalents at end of period | $34,859 | $50,438 | Notes to Condensed Consolidated Financial Statements (Unaudited) Key notes include 99% revenue concentration from three customers, $20.3 million ZYNRELEF inventory write-offs, $17.3 million in restructuring costs, and new financing from a $50 million facility and $29.8 million private placement - The company is a commercial-stage biotechnology firm with four approved products: ZYNRELEF, APONVIE, CINVANTI, and SUSTOL, and management believes current cash, cash equivalents, and short-term investments of $77.4 million are sufficient to fund operations for at least one year[22][23][24] - The company has a significant concentration of credit risk, with three major customers accounting for 99.0% of product sales and 99.7% of accounts receivable for the nine months ended September 30, 2023[33][34] - Cost of product sales for the nine months ended September 30, 2023 included $20.3 million in charges for the write-off of ZYNRELEF inventory, compared to $4.5 million in the same period in 2022[59] - In 2023, the company incurred $3.9 million in costs for a restructuring plan and an additional $13.4 million in expenses related to the departure of five executive officers, primarily for severance and stock-based compensation[64][66] - In August 2023, the company entered into a $50.0 million working capital facility agreement, drawing an initial $25.0 million, and in July 2023, it raised net proceeds of $29.8 million from a private placement of common stock and warrants[69][83] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 19.6% sales growth to $92.8 million for the first nine months of 2023, a narrowed net loss due to reduced operating expenses, and new financing ensuring sufficient capital for at least one year Overview of Product Portfolio The company's portfolio includes ZYNRELEF, APONVIE, CINVANTI, and SUSTOL, with a pending sNDA for ZYNRELEF, the recent launch of APONVIE, validated large-scale manufacturing, and a paused HTX-034 development - An sNDA to expand ZYNRELEF's indication to broadly cover soft tissue and orthopedic surgical procedures is under FDA review, with a PDUFA goal date extended to January 23, 2024[99] - APONVIE, for prevention of postoperative nausea and vomiting (PONV), was commercially launched in the U.S. in March 2023 and received CMS pass-through payment status effective April 1, 2023[104] - The company has validated larger-scale manufacturing for both CINVANTI and ZYNRELEF, which is expected to significantly reduce the cost of product sales[100][117] - Development of HTX-034, a next-generation product candidate for postoperative pain, has been paused to evaluate the program and market potential[23] Results of Operations Net product sales increased 19.6% to $92.8 million for the nine months ended September 30, 2023, while R&D and Sales & Marketing expenses significantly decreased, and G&A expense rose due to severance costs Net Product Sales by Product (in millions) | Product | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | | CINVANTI | $70.6 | $64.2 | +10.0% | | ZYNRELEF | $12.0 | $6.3 | +90.5% | | SUSTOL | $9.3 | $7.1 | +31.0% | | APONVIE | $0.9 | $0.0 | N/A | | Total | $92.8 | $77.6 | +19.6% | Operating Expenses (in millions) | Expense Category | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | | Research and Development | $44.9 | $96.4 | -53.4% | | General and Administrative | $37.7 | $28.5 | +32.3% | | Sales and Marketing | $55.3 | $64.7 | -14.5% | - The decrease in R&D expense was primarily due to the completion of production scale-up, validation activities, and raw materials qualification for ZYNRELEF and CINVANTI in 2022[128] - The increase in G&A expense was primarily due to severance and non-cash, stock-based compensation expense related to executive departures in 2023, along with ongoing legal costs for CINVANTI patent litigation[129] Liquidity and Capital Resources As of September 30, 2023, the company held $77.4 million in cash and investments, affirming sufficient liquidity for at least one year, bolstered by $53.9 million in financing activities and improved operating cash flow - The company had cash, cash equivalents and short-term investments of $77.4 million as of September 30, 2023[133] - Management believes that existing cash, cash equivalents, and short-term investments will be sufficient to meet anticipated cash requirements for at least one year from the filing date of the 10-Q[133] - In August 2023, the company secured a working capital facility of up to $50.0 million and drew down the initial $25.0 million tranche[139] - Net cash used in operating activities for the nine months ended September 30, 2023, decreased to $61.2 million from $109.4 million in the same period in 2022, primarily due to a lower net loss[135] Item 3. Quantitative and Qualitative Disclosures about Market Risk This disclosure is not required for smaller reporting companies - Disclosure is not required for smaller reporting companies[143] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023[145] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control[146] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is engaged in patent infringement litigation against Fresenius Kabi and Mylan to defend its CINVANTI patents, resulting in FDA approval stays for generic versions until late 2024 and early 2026 - Heron filed a patent infringement complaint against Fresenius Kabi in July 2022 after Fresenius Kabi sought FDA approval for a generic version of CINVANTI, with a five-day bench trial scheduled for June 24, 2024[148][149] - Heron filed a similar patent infringement complaint against Mylan in September 2023 after Mylan also sought approval for a generic CINVANTI[150] - As a result of the lawsuits, the FDA is stayed from approving Fresenius's ANDA until December 14, 2024, and Mylan's ANDA until February 4, 2026, or until the respective litigations are resolved[149][150] Item 1A. Risk Factors No material changes have occurred from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[151] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[153] Item 6. Exhibits This section lists exhibits filed with the quarterly report, including the July 2023 Securities Purchase Agreement, August 2023 Working Capital Facility Agreement, and Sarbanes-Oxley Act certifications - Exhibits filed include the July 2023 Securities Purchase Agreement, the August 2023 Working Capital Facility Agreement, and Sarbanes-Oxley Act certifications[157]