HRTX - Heron Therapeutics: Look For Continued Limbo Stick Dancing - Extreme Investor Caution Merited

2023-07-07 04:44:25 ET

Summary

• Heron Therapeutics' stock has significantly declined over the past five years, with shares dropping from over $40 to under $1.20.
• Despite struggles, the company's recently approved product, ZYNRELEF, for postoperative pain management, could potentially improve its financial situation.
• The new CEO, Collard, has outlined a revised strategy for commercializing ZYNRELEF, indicating potential future growth for the company.
• Heron has severely constrained liquidity which will make it difficult to realize on ZYNRELEF's potential.

This is my Second Heron (HRTX) article following 12/2020's "Heron Therapeutics: Struggling Unsuccessfully With Its Slate Of Approved Products" ("Struggling"). In this article. I review the multiple recent changes in Heron's investment profile. I will reference developments as reflected in Heron's

1. 05/11/2023 earnings call (the " Call ");
2. 03/29/2023 10-K (the " 10-K ")
3. 05/11/2023 10-Q (the " 10-Q" )
4. 03/10/2023 presentation (the " Presentation ").

Heron has been struggling over recent years

Heron's stock chart points to its distressing path over the last five years. Its share count has nearly doubled as its price has fallen off the map from >$40 to under $1.20. Ouch!

So what are the chances that Heron can regain a >$40 price point? It has been a full five years since Heron last closed >$40 on 07/06/2018. The nearest subsequent Seeking Alpha article , 08/2018's "Heron's Way Ahead: Is There Further Upside?" had a cautiously optimistic take on the company. Writing when Heron traded at $38.50, it viewed the stock as a buy at <$35. It took a little more than two months - on 09/12/2018 - for Heron to close <$35.

Serving as a perfect example of the risks inherent in development stage biopharmas, Heron has never closed above $35 since. Instead, it has moved ever downward as shown by its chart above until it finally found a comfortable perch hovering slightly above $1.00.

Its news flow over this period has focused on its revenues from its approved products, SUSTOL and CINVANTI, and its HTX-011 in development for the management of postoperative pain. HTX-011's NDA had a tough road. It suffered through two CRLs before it finally picked up its approval under the name ZYNRELEF on 05/13/2021.

It's then CEO Quart announced :

The approval of ZYNRELEF marks an exciting milestone for patients, healthcare providers and pain management. Not just because it can reduce postoperative pain for up to 72 hours, but because for many patients it can eliminate the need for opioids after surgery, ... We are in a strong position to launch ZYNRELEF, given our highly successful hospital launch of CINVANTI and our pricing and unprecedented value proposition, which will ensure broad access for patients and healthcare providers. Our existing commercial team will immediately begin working with current accounts to gain formulary access, with full commercial availability expected by July 2021.

Sounds like a slam dunk. Heron closed at $15.54 on the day of the announcement, well below its ~$18.00 open. Thereafter it traded without conviction, closing down to $13.27 on 05/28/2021 and up to $16.62 on 06/25/2021.

Thereafter, it trended down until it closed <$10 on 11/2021. This $10.00 served as a hard ceiling for every subsequent close with only a pair of exceptions flanking Christmas day 2021. By 03/11/2022 it closed <$5.00. It has jiggled a bit around $5.00, then it trended down until it reached $1.19 where it trades as I write on 07/05/2023.

During the Call, recently appointed CEO Collard described a revised path for commercializing ZYNRELEF

In his opening review during the Call CEO Collard dismissed the Oncology side of Heron's business as providing "steady progress". It includes Heron's two FDA approved therapies in treatment of chemotherapy-induced nausea and vomiting [CINV]:

1. SUSTOL (granisetron) extended-release injection is indicated in combination with other antiemetics in adults for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of moderately emetogenic chemotherapy [MEC] or anthracycline and cyclophosphamide [AC] combination chemotherapy regimens, FDA approved it in 2016 after several previous rejections;
2. CINVANTI (aprepitant) injectable emulsion, in combination with other antiemetic agents, is indicated in adults for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of highly emetogenic cancer chemotherapy [HEC] and MEC, FDA approved it in 2017 with approved sNDA in 2019 for more rapid 2-minute IV injection, also referred to as an IV push.

These oldies have provided Heron with net product sales that ballooned as high as ~$145 million in 2019 but under generic competition dropped back to ~$88 million in 2020. The 10-K at page 69 lists them at a total of ~$83.4 million in 2021 and ~$97.5 million for 2022.

Collard's excitement was reserved for Heron's nonopioid analgesic for postoperative pain relief, ZYNRELEF. ZYNRELEF earns high marks not only with Heron's CEO but also with anyone who is eyeing Heron as a potential acquisition target.

ZYNRELEF had an ugly trip through the FDA's birthing canal as described above It was initially approved in 05/2021, Heron was able to obtain a broader label in 12/2021. Certain Wall Street analysts initially saw it as solid blockbuster but its early subpar revenues have caused them to pull back.

Seeking Alpha's Wall Street Analysts ratings page has Heron pegged as a Strong Buy with an average price target of 7.92 for an upside potential of +571.19% as of 07/05/2023.

If ZYNRELEF could live up to its blockbuster potential, this would be a real potential. The 10-K lists Heron's 2022 ZYNRELEF revenues at a paltry $10.2 million pretty dismal for an expected blockbuster's first full year after launch.

CEO Collard addressed the situation head on during the Call. He advised:

1. ZINRELEF's label has limited ZYNRELEF's ability to be the drug of choice across a variety of indications, Heron has filed [another] sNDA with a 10/23/2023 PDUFA date, that if approved, will expand ZINRELEF's indications and number of procedures it can treat;
2. the viscous nature of our ZINRELEF has slowed its withdrawal from its vial, compared to other drugs; Heron has recently started multiple enhancement programs to address some of the issues we have faced in the surgery suite during preparation, including a vial access needle or VAN and ultimately a prefilled syringe that could be game changing.

Implementing fixes to viscosity would require significant delay. During the Call Collard ballparks 1.5 years to implement a VAN solution and another 1.5 years beyond that to implement a prefilled syringe. Looking at it from another point of view he recounts his experience in research when he was able to get in the field and work with sales representatives.

So far, he has seen ZYNRELEF used in 5 knee surgeries during which he tried to understand what really happens in the application of the product. Previously, he had heard mixed messages about the time to draw the product out of the vial, product viscosity and general issues that would make it more difficult to use ZINRELEF.

From watching these surgeries he determined that effective application of ZINRELEF requires staff training. It is different, but not complex. The nursing staff even admitted that after using the product a few times, it became second nature and is now just part of the normal routine and prep before the surgeon arrives.

Early in ZYNRELEF's launch Heron reps needed to address this issue head on. Heron didn't understand that this was going to require more training of its reps so they in their turn could train nursing staffs on proper use of ZYNRELEF.

Collard noted all products generally have challenges when launched. It's not too late to get this launch back on track. Easy for a new CEO to say. Likely not so easy to implement...first impressions are hard to change.

APONVIE is another product which adds grist to Heron's mill

Heron's SUSTOL and CINVANTI in treatment of CINV generate revenues approaching $100 million a year. On 03/23/2023 Heron announced that it was launching APONVIE indicated for Postoperative Nausea and Vomiting [PONV]. This is a huge market with an estimated 36 million with high to moderate risk for PONV, the patients who would benefit most from APONVIE.

APONVIE will compete with current standard of care GSK's oral Zofran and its generics. Two trials comparing it to Zofran showed roughly 50% fewer patients vomiting in the first 24 and 48 hour while maintaining the same safety profile.

During the Call Collard praised APONVIE as an easy sale. He did not provide any revenue guidance for it. His preference is to only give company wide guidance rather than guidance for any product. Heron gave no guidance during the Call either for any of its products or for the company.

Heron epitomizes risk with limited liquidity unproven management and unproven product portfolio

Heron's bargain basement price is unlikely to form a floor. During the Call, COO Szekeres gave a dismal financial report. Heron burned ~$25 million leaving it with $60 million in cash at close of Q1, 2023.

Its new CFO announced on 06/23/2023 will be a busy person. Heron is just months away from running out of liquidity. This can put stress on every aspect of the company from employee morale to customer relations.

In addition to its normal operating expenses, its 10-K Lists its several "Material Cash Requirements" for a variety of significant obligations, most notably $150.0 million of convertible notes which mature on May 26, 2026,

Conclusion

Heron's performance over the last five years has shown a disquieting response to Chubby Checker's hypnotic refrain:

Go low, baby, go lowGo low, baby, go lowIt's time, baby, to showHow low can you go?

The premise of this article is that Heron hovering at ~$1.00 with a market cap of <$150 million is exceptionally dangerous. That is not to say that it totally lacks appeal. It is in fact eerily attractive with its underperforming high potential assets that could be turned around.

The odds-on prognosis for Heron is that it will dip ever lower. Daring folks will be attracted to the huge potential in APONVIE and ZYNRELEF. Me I am mightily tempted but holding back for the moment.

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