Heron Therapeutics Stock Is Not Out Of The Woods Yet (NASDAQ:HRTX)

Businessman walking into mysterious maze

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Shares of Heron Therapeutics (NASDAQ:HRTX) are down approximately 20% since my late March article, but the number understates the volatility the stock has experienced, as it has been down as much as 60% at the June lows. In March, I said the company needs to urgently address the cash balance problem. And it did that by raising cash, and it also went a step further by announcing a cost reduction program.

And while it was good to see these measures, they are intended to ensure survival. For significant value creation, much better growth of Zynrelef is needed. And the growth outlook has deteriorated due to Zynrelef’s very slow uptake.

Heron in survival mode – restructuring and dilution

In late June, Heron announced it was planning to reduce its employee headcount by 34% as part of a restructuring and cost reduction plan. The company expects that the restructuring will result in annualized cost savings of $43 million.

The ex-US deals for Zynrelef have not yet materialized and have not brought the much-needed upfront payments, but given Zynrelef’s uptake in the United States to date, I would not expect any of these regional deals to bring material upfront payments anyway.

And in August, Heron announced a private placement to sell 16.1 million shares at an offering price of $3.10 per share and pre-funded warrants of up to 8.55 million shares at a purchase price of $3.01 per pre-funded warrant. Gross proceeds are expected to be approximately $76.5 million, with $75.2 million in net proceeds.

The private placement nearly doubled the company’s cash balance, as it was around $83 million at the end of June.

Cash burn in the second quarter was $28.4 million and the company guided for an increase in cash burn in the third quarter due to the restructuring, followed by approximately $21 million in the fourth quarter and with significant further reductions going into 2023 due to the restructuring itself and due to two other factors – revenue growth and improved gross margins due to moving to large-scale manufacturing for Cinvanti (in the fourth quarter of this year) and Zynrelef which was already recently achieved.

Overall, the company’s financial position has improved considerably. The restructuring and improved margins likely represent a swing of more than $65-70 million to the positive side. And if revenues finally start to increase in a meaningful way, the company may not be far from achieving cash flow breakeven.

Zynrelef continues to disappoint

And while financials have improved, Zynrelef has continued to disappoint. I expected Zynrelef to do better after it received the expanded label. And no, I do not believe macro conditions are a good excuse. Competitor Pacira Biosciences (PCRX) continues to drive Exparel sales higher despite the impact of COVID-19 over the last few years, and Zynrelef is well below levels the company claimed it could achieve when Zynrelef was approved – to do better than the launch of Exparel.

As a reminder, Exparel generated approximately $25 million in net sales in its first quarter on the market and $60 million in net sales in the first six quarters on the market.

Zynrelef generated $6.5 million in cumulative net sales in the first four quarters on the market, well below Exparel’s $25 million.

Management has obviously walked back their claim of beating the launch of Exparel, but they now have a second shot on goal after this year’s label expansion.

The company significantly underperforming its own expectations is yet another example of why we should not rely on physician surveys, surgeon surveys, or surveys of other kinds because what people say and what people do is often very different. Management said their pre-launch surveys indicated a narrow label would not be an impediment to Zynrelef’s launch, and as it turned out, it was.

With a broader label, we could treat the second quarter of this year as Zynrelef’s first launch quarter. And it is at a very similar level to Exparel’s first quarter on the market, as it has generated $2.5 million in its first quarter on the market with a broader label versus Exparel’s 2.3 million.

But it appears Zynrelef will already fall behind Exparel even with this reset as the company has guided for a 50% sequential increase in net sales which would bring Zynrelef sales to $3.7-3.8 million, and it would again be short of Exparel’s $4.6 million in its second quarter on the market.

However, in Heron’s defense, Zynrelef still has a narrower label than Exparel as it still has restrictions and covers approximately half of the 14 million addressable procedures. The company is working to address that with additional studies and expects to submit another supplemental NDA to the FDA by the end of the year, and it hopes to achieve a much broader label in 2023 which would help improve Zynrelef’s uptake by late 2023 and into 2024.

But overall, I am not pleased with the launch progress and sales need to pick up in a material way for Heron to deliver meaningful shareholder value in the following years. I still think it can do that, but I am cutting my previous sales expectations for Zynrelef and the CINV/PONV franchise from a range of $500-600 million to $400-450 million.

This change and the additional shares issued in August bring my projected valuation range to $9 at the low end and around $11 at the high end. This is down from $15 to $20 previously. And the valuation remains at the risk of further reductions unless sales of Zynrelef pick up in the following quarters and if there is no meaningful contribution from Aponvie.

Aponvie’s approval to boost the growth of the PONV/CINV franchise

Last week, Heron announced the FDA approval of Aponvie for the prevention of postoperative nausea and vomiting (‘PONV’) in adults. Aponvie is targeting a very large market but faces an uphill battle against generic products.

The company will initially target the oral aprepitant market which is growing nicely over the last few years without any kind of promotion as oral aprepitant is generic.

Oral aprepitant market growth

Heron Therapeutics presentation

The price of oral aprepitant is $88 per pill (and just one is used before surgery) and Heron is not yet sharing the price of Aponvie for competitive reasons, but they did say we should assume it will be lower for Aponvie to be competitive. So, this is essentially a branded product at a price that needs to compete with an oral generic.

Aponvie has some unique advantages over oral generics and Heron did well in the presentation slide below to communicate them, but I am having a hard time seeing how this becomes a product that creates meaningful profits or meaningful shareholder value.

Aponvie's value proposition for prevention of post-operative nausea and vomiting

Heron Therapeutics presentation

The good thing is that there will be no significant additional cost to promoting Aponvie because of the significant overlap with Zynrelef and Cinvanti. So, any commercial success of Aponvie is a welcome addition to the long-term value of Heron, and at best, I see its sales potential in the tens of millions.

Conclusion

Heron’s financial health has improved considerably after the recent restructuring and capital raise, but the company is not out of the woods yet – at least in terms of shareholder value creation. Zynrelef sales really need to improve considerably in the following quarters if the company is to have a shot at reaching profitability and creating shareholder value. I still think it can achieve that, but with decreased confidence.

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