HRTX - Heron Therapeutics: Restructuring Brings About A New Dawn

2023-07-28 15:57:50 ET

Summary

• HRTX recently launched a fourth drug, Aponvie, with the first full quarter of product sales to come with Q2'23 earnings.
• An upcoming potential expansion of the Zynrelef label could see the drug used in twice as many surgeries, improving product sales.
• The new management team has led the company through a much-needed private placement to raise $30M in gross proceeds, and start a restructuring to save $75M through 2025.

Looking at the chart for Heron Therapeutics ( HRTX ), the past five years have been a rough ride for shareholders. A recent cash raise, restructuring of the company and new drug approval create a potential bull case for HRTX, which is one focus of this article. Another focus is the existing pipeline, which itself still has potential.

Figure 1: Past 10 years of HRTX trading. A drop from $42 to $1.11 is a 97% change.

The Current Pipeline

The Oncology Care Solutions

HRTX's current pipeline consists of four approved therapeutics. Two of the drugs are used in the prevention of chemotherapy-induced nausea and vomiting ((CINV)) and make up HRTX's oncology care solutions.

HRTX's Sustol is an extended release injection of granisetron, a 5-HT3 receptor antagonist. Sustol was approved by the US Food and Drug Administration (FDA) in August 2016, for the prevention of CINV. While success in phase 3 provided a rally in HRTX's stock in mid-2015 (Figure 1), the drug has gone on to be a fairly weak offering in terms of sales. Indeed, net product sales of Sustol were just under $3M for Q1'23, but notably sales were up 45% relative to the same quarter of 2022.

HRTX's Cinvanti, an injectable emulsion of aprepitant, a neurokinin-1 receptor antagonist, is also used to prevent CINV and received FDA approval in November 2017. In Q1'23, CINVANTI accounted for 77% of HRTX's net product sales, and those sales are still growing six years after launching the drug.

The Acute Care Solutions

Zynrelef, an extended release solution of the local anesthetic bupivacaine and the non-steroidal anti-inflammatory drug (NSAID) meloxicam, is used to produce postsurgical analgesia. Zynrelef was approved in the European Union in August 2020 , by the US FDA in May 2021 , and saw label expansion in the US in December 2021, allowing its use in a wider range of surgeries.

Zynrelef has enjoyed sales growth since its launch, with Q1'23 net product sales of $3.5M, representing a 236% increase over Q1'22 net product sales. That being said Q4'22 net product sales of Zynrelef were in fact higher at $3.9M , although with Q4'22 earnings, HRTX did note seasonality meant that they expected Q1 to be the weakest quarter (there are fewer elective surgeries in Q1 and more in Q4).

There is the prospect for further sales growth however, and HRTX has submitted a second supplemental New Drug Application ((sNDA)), again seeking label expansion for Zynrelef, allowing it to be used in even more surgeries. That sNDA was submitted in late 2022, with October 23, 2023, being the Prescription Drug User Fee Act (PDUFA) goal date.

HRTX notes that the current indication sees Zynrelef indicated in ~7M procedures per year, but with label expansion that number could grow to ~14M. You can see then that approval could be predicted to double Zynrelef sales, and that type of revenue growth is key to HRTX's push for profitability.

Beyond the potential further expansion of the label for Zynrelef, the company has also developed a new vial that makes it easier to remove the solution from the vial. While that won't be available in 2023, a mid-2024 launch of the new vial could create further sales growth as customers have told HRTX they would use more Zynrelef if it was easier to remove from the vial.

Aponvie is the other drug in HRTX's acute care Solutions pipeline, and was only launched on March 6, 2023. Like Cinvanti, the drug is an injectable emulsion of aprepitant (in fact it is the same formulation), but in this case is approved for the prevention of post-operative nausea and vomiting (PONV). It's a little hard to read into the initial sales numbers, given the drug was only on the market for a few weeks in Q1'23. HRTX's Q2'23 earnings then, which could be a week or two away, could provide a near-term catalyst if Aponvie turns out to be off to a strong start.

Financials and Restructuring

While HRTX's approved therapeutics have the company guiding for full-year 2023 net product sales of $99M-$103M in from the oncology care solutions alone, the stock has been falling for a while. The company hasn't provided guidance for the acute care solutions pipeline, however, even modelling for no growth we could expect ~$118.5M for net product sales in 2023.

The issue isn't the revenues alone. While HRTX's net product sales were $29.6M in Q1'23, total operating expenses were $62.7M during the quarter. HRTX reported a net loss of $32.8M in Q1'23.

Of course some of these expenses are non-cash, but net cash used in operating activities was still $24.9M for Q1'23 and at the end of Q1'23, HRTX had cash, cash equivalents and short-term investments of $60M. At that rate, HRTX would be out of cash in two to three quarters.

HRTX has had to do one more raise, with the company announcing on July 24, 2023, that it was doing a private placement worth $30M in gross proceeds (20,734,917 shares at $1.37 and 1,162,891 pre-funded warrants at $1.3699). Those funds should bring pro forma cash to just below $90M.

On the same day, HRTX announced a cost reduction plan and restructuring, expected to bring cash savings of $75M through 2025.

The raise and restructuring came after a string of management changes starting with a new CEO, Craig Collard, and new Chairman of the Board, Adam Morgan, announced on April 3 . A subsequent changes in commercial leadership was announced April 20 , a new Chief Development Officer on June 12 , and a new CFO on June 23 . With the restructuring coming with a 25% reduction in employee base and all the changes to management, HRTX has taken some of the steps necessary to change its reputation. A stock that fall for five years isn't going to have a good reputation. The next step is to show that the company can keep the revenue growth going despite changes to the commercial team, or perhaps even strengthen revenue growth.

There were 119,714,575 shares of HRTX's common stock outstanding as of May 1, 2023. If we add in the shares from the recent private placement, we arrive at ~140.5M shares outstanding and a market cap of $228.9M ($1.63 per share).

Conclusions and Risks

Rating HRTX as a buy

I rate HRTX a buy as I think HRTX's pipeline can continue to see sales growth, particularly given Aponvie is just launching and could become popular given the superiority of aprepitant to the normally used ondansetron for PONV. Secondly, the potential for approval of HRTX's second sNDA for Zynrelef could see the drug used in twice as many surgeries, aiding sales growth from that drug. Last, but certainly not least, HRTX is serious about a push towards profitability with the restructuring and the new management team, coupled with reduced expenses should help change the reputation of the company.

The stock isn't too richly valued, with a market cap of $228.9M, and net product sales of $118.5M for 2023 (based on my conservative calculation using no growth), HRTX is trading currently at under twice 2023 sales. I do see sales as likely to grow as mentioned, and expenses to continue to fall, hence my buy rating.

Risks

There are several risks with any long in HRTX, a few of which I'll discuss.

Firstly, if the company's sNDA for Zynrelef is rejected, then the stock would likely trade down, that would probably be the case even if HRTX reports strong Q2'23 sales showing Zynrelef is growing with the existing label.

Secondly, Q2'23 sales themselves could be lackluster and indeed sales beyond that, such as in Q3'23. For example, if Aponvie's Q2'23 sales are weak, that will greatly change expectations for the drug, as right now we have little data to go off in terms of how well the drug sells.

Lastly, while restructuring could improve HRTX's financials overall, HRTX has guided to a non-recurring cash expense of $5.9M in 2023 related to the restructuring. Much of that could be upfront, so Q3'23 earnings might not come with immediate evidence of a reduction in cash burn. A glance at the financials might not convince new investors to buy the stock.

For further details see: