HERON THERAPEUTICS, INC. /DE/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the U.S. Securities and Exchange Commission (“SEC”) on March 12, 2024 (the "2023 Annual Report"). This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. In some cases, you can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “will,” “would,” “could,” “should,” “may,” “might,” “plan,” “assume” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business and commercialization strategy, products and product candidates, research pipeline, ongoing and planned preclinical studies and clinical trials, regulatory submissions and approvals, addressable patient population, research and development expenses, timing and likelihood of success, as well as plans and objectives of management for future operations, are forward-looking statements. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from our anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Factors that might cause these differences include the following: • our ability to successfully commercialize, market and achieve market acceptance of ZYNRELEF ® (bupivacaine and meloxicam) extended-release solution (“ZYNRELEF”), APONVIE ® (aprepitant) injectable emulsion (“APONVIE”), CINVANTI ® (aprepitant) injectable emulsion (“CINVANTI”), and SUSTOL ® (granisetron) extended-release injection (“SUSTOL” and together with ZYNRELEF, APONVIE and CINVANTI, our "Products") in the United States (“U.S.”) , and our positioning relative to products that now or in the future compete with our Products or product candidates; • our estimates regarding the potential market opportunities for our Products and our product candidates, if approved, and our ability to capture the potential additional market opportunity from the expanded ZYNRELEF label recently approved in the U.S.; • our ability to establish satisfactory pricing and obtain adequate reimbursement from government and third-party payors of our Products and product candidates that receive regulatory approvals; • whether study results of our Products and product candidates are indicative of the results in future studies; • the results of the commercial launch of APONVIE in the U.S.; • the potential regulatory approval for, and commercial launch, of our product candidates, if approved; • our competitors’ activities, including decisions as to the timing of competing product launches, generic entrants, pricing and discounting; • whether safety and efficacy results of our clinical studies and other required tests for expansion of the indications for our Products and approval of our product candidates provide data to warrant progression of clinical trials, potential regulatory approval or further development of any of our Products or product candidates; • our ability to develop, acquire and advance product candidates into, and successfully complete, clinical studies, and our ability to submit for and obtain regulatory approval for product candidates in our anticipated timing, or at all; • our ability to meet the postmarketing study requirements within the mandated timelines of the U.S. Food and Drug Administration ("FDA")and to obtain favorable results and comply with standard postmarketing requirements, including U.S. federal advertising and promotion laws, federal and state anti-fraud and abuse laws, healthcare information privacy 18 and security laws, safety information, safety surveillance and disclosure of payments or other transfers of value to healthcare professionals and entities for Products or any of our product candidates; • our ability to successfully develop and achieve regulatory approval for any product candidates utilizing our proprietary Biochronomer ® drug delivery technology (“Biochronomer Technology”); • our ability to establish key collaborations and vendor relationships for our Products and our product candidates; • our ability to successfully develop and commercialize any technology that we may in-license or products we may acquire; • our reliance on third-party contract manufacturers to supply our Products and product candidates, if approved; • unanticipated delays due to manufacturing difficulties, supply constraints or changes in the regulatory environment, including as a result of geopolitical uncertainty; • our ability to successfully operate in non-U.S. jurisdictions in which we may choose to do business, including compliance with applicable regulatory requirements and laws; • uncertainties associated with obtaining and enforcing patents and trade secrets to protect our Products, our product candidates, our Biochronomer Technology and our other technology; • our ability to successfully defend ourselves against unforeseen third-party infringement claims and other litigation involving our Products and product candidates; • our estimates regarding our capital requirements; • the impact of our restructuring activities, including the reduced headcount and external spend; • the impact of evolving legal and regulatory requirements, including emerging environmental, social and governance requirements; • our ability to obtain additional financing and raise capital as necessary to fund operations or pursue business opportunities; and • those risks listed under the section entitled "risk Factors" in Part I, Item 1A of the 2023 Annual Report. Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements were based on information, plans and estimates as of the date of this Quarterly Report on Form 10-Q, and except as required by law, we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. These risk factors may be updated by our future filings under the Securities Exchange Act of 1934, as amended (“Exchange Act”). You should carefully review all information therein. 19 Overview We are a commercial-stage biotechnology company focused on improving the lives of patients by developing and commercializing therapeutic innovations that improve medical care. Our advanced science, patented technologies, and innovative approach to drug discovery and development have allowed us to create and commercialize a portfolio of products that aim to advance the standard of care for acute care and oncology patients. Acute Care Product Portfolio Our Acute Care Product Portfolio consists of ZYNRELEF, which is approved in the U.S. for the management of postoperative pain and APONVIE, which is approved in the U.S. for the prevention of postoperative nausea and vomiting. ZYNRELEF ZYNRELEF was initially approved by the FDA in May 2021, and we commenced commercial sales in the U.S. in July 2021. In each of December 2021 and January 2024, the FDA approved an expansion of ZYNRELEF's indication. ZYNRELEF is approved for small-to-medium open abdominal, lower extremity total joint arthroplasty, soft tissue and orthopedic surgical procedures including foot and ankle, and other procedures in which direct exposure to articular cartilage is avoided. ZYNRELEF is a dual-acting local anesthetic that delivers a fixed-dose combination of the local anesthetic bupivacaine and a low dose of the nonsteroidal anti-inflammatory drug meloxicam. ZYNRELEF is the first and only modified-release local anesthetic to be classified by the FDA as an extended-release product because ZYNRELEF demonstrated in Phase 3 studies significantly reduced pain and significantly increased proportion of patients requiring no opioids through the first 72 hours following surgery compared to bupivacaine solution, the current standard-of-care local anesthetic for postoperative pain control. In January 2024, we entered into a five-year distributor partnership with CrossLink Life Sciences, LLC (“Crosslink”) to expand the sales network supporting ZYNRELEF. Crosslink will be the lead partner in the U.S. to expand ZYNRELEF promotion for orthopedic indications. The partnership will launch in several phases, initially at a regional level, followed by an expanded national rollout. In total, we anticipate that approximately 650 representatives will be added to Heron’s sales network over 2024. In March 2022, the Centers for Medicare and Medicaid Services (“CMS”) approved a 3-year transitional pass-through status of ZYNRELEF, which became effective on April 1, 2022, for separate reimbursement outside of the surgical bundle payment in the Hospital Outpatient Department (“HOPD”) setting of care. In addition, in December 2022, H.R. 2617, the omnibus spending bill was approved by Congress that includes a provision requiring CMS to pay for certain non-opioids outside the existing bundled payment for surgeries for the period January 1, 2025 through December 31, 2027. APONVIE APONVIE was approved by the FDA in September 2022 and became commercially available in the U.S. in March 2023. APONVIE is indicated for the prevention of postoperative nausea and vomiting (“PONV”) in adults. CMS granted pass-through payment status for APONVIE, effective April 1, 2023. APONVIE is the first and only intravenous formulation of a substance P/neurokinin-1 (“NK1”) receptor antagonist indicated for PONV. Delivered via a single 30-second intravenous (“IV”) injection, APONVIE has demonstrated rapid achievement of therapeutic drug levels ideally suited for the surgical setting. 20 Oncology Care Product Portfolio Our Oncology Care Product portfolio consists of SUSTOL and CINVANTI, which are both approved in the U.S. for the prevention of chemotherapy-induced nausea and vomiting. SUSTOL SUSTOL was approved by the FDA in August 2016, and we commenced commercial sales in the U.S. in October 2016. SUSTOL 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. SUSTOL is an extended-release, injectable 5-hydroxytryptamine type 3 (“5-HT3”) receptor antagonist that utilizes our Biochronomer Technology to maintain therapeutic levels of granisetron for ≥5 days. The SUSTOL global Phase 3 development program was comprised of two, large, guideline-based clinical studies that evaluated SUSTOL’s efficacy and safety in more than 2,000 patients with cancer. SUSTOL’s efficacy in preventing nausea and vomiting was evaluated in both the acute phase (0–24 hours following chemotherapy) and the delayed phase (24–120 hours following chemotherapy). SUSTOL is the first extended-release 5-HT3 receptor antagonist approved for the prevention of acute and delayed nausea and vomiting associated with both MEC and AC combination chemotherapy regimens. A standard of care in the treatment of breast cancer and other cancer types, AC regimens are among the most commonly prescribed HEC regimens, as defined by both the National Comprehensive Cancer Network (“NCCN”) and the American Society of Clinical Oncology (“ASCO”). In February 2017, the NCCN included SUSTOL as a part of its NCCN Clinical Practice Guidelines in Oncology for Antiemesis Version 1.2017. The NCCN has given SUSTOL a Category 1 recommendation, the highest-level category of evidence and consensus, for use in the prevention of acute and delayed nausea and vomiting in patients receiving HEC or MEC regimens. The guidelines now identify SUSTOL as a “preferred” agent for preventing nausea and vomiting following MEC. Further, the guidelines highlight the unique, extended-release formulation of SUSTOL. In January 2018, a product-specific billing code, or permanent J-code (“J-code”), for SUSTOL became available. The new J-code was assigned by CMS and has helped simplify the billing an d reimbursement process for prescribers of SUSTOL. CINVANTI CINVANTI was approved by the FDA in November 2017, and we commenced commercial sales in the U.S. in January 2018. In each of February 2019 and October 2019, the FDA approved an expansion of CINVANTI of its administration and indication, respectively. CINVANTI, 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) including high-dose cisplatin as a single-dose regimen, delayed nausea and vomiting associated with initial and repeat courses of moderately emetogenic cancer chemotherapy (MEC) as a single-dose regimen, and nausea and vomiting associated with initial and repeat courses of MEC as a 3-day regimen. CINVANTI is an IV formulation of aprepitant, a substance NK1 receptor antagonist. CINVANTI is the first IV formulation to directly deliver aprepitant, the active ingredient in EMEND® capsules. Aprepitant (including its prodrug, fosaprepitant) is a single-agent NK1 receptor antagonist to significantly reduce nausea and vomiting in both the acute phase (0–24 hours after chemotherapy) and the delayed phase (24–120 hours after chemotherapy). CINVANTI is the first IV formulation of an NK1 receptor antagonist indicated for the prevention of acute and delayed nausea and vomiting associated with HEC and nausea and vomiting associated with MEC that is free of synthetic surfactants, including polysorbate 80. 21 NK1 receptor antagonists are typically used in combination with 5-HT3 receptor antagonists. The only other injectable NK1 receptor antagonist currently approved in the U.S. for both acute and delayed chemotherapy induced nausea and vomiting (“CINV”), EMEND® IV (fosaprepitant), contains polysorbate 80, a synthetic surfactant, which has been linked to hypersensitivity reactions, including anaphylaxis, and infusion site reactions. The CINVANTI formulation does not contain polysorbate 80 or any other synthetic surfactant. Our CINVANTI data has demonstrated the bioequivalence of CINVANTI to EMEND IV, supporting its efficacy for the prevention of both acute and delayed nausea and vomiting associated with HEC and nausea and vomiting associated with MEC. Results also showed CINVANTI was better tolerated in healthy volunteers than EMEND IV, with significantly fewer adverse events reported with CINVANTI. In January 2019, a J-code for CINVANTI became available. The new J-code was assigned by CMS and has helped simplify the billing and reimbursement process for prescribers of CINVANTI. Biochronomer Technology Our proprietary Biochronomer Technology is designed to deliver therapeutic levels of a wide range of otherwise short-acting pharmacological agents over a period from days to weeks with a single administration. Our Biochronomer Technology consists of polymers that have been the subject of comprehensive animal and human toxicology studies that have shown evidence of the safety of the polymer. When administered, the polymers undergo controlled hydrolysis, resulting in a controlled, sustained release of the pharmacological agent encapsulated within the Biochronomer-based composition. Furthermore, our Biochronomer Technology is designed to permit more than one pharmacological agent to be incorporated, such that multimodal therapy can be delivered with a single administration. Critical Accounting Estimates The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to revenue recognition, investments, inventory and the related reserves, accrued research and development expenses, income taxes and stock-based compensation. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. Our critical accounting estimates include: revenue recognition, investments, inventory and the related reserves, accrued research and development expenses, income taxes, and stock-based compensation. There have been no material changes to our critical accounting estimates disclosures included in our 2023 Annual Report. Recent Accounting Pronouncements See Note 3 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. 22 Results of Operations for the Three Months Ended March 31, 2024 and 2023 Net Product Sales For the three months ended March 31, 2024 and March 31, 2023, net product sales were $34.7 million and $29.6 million, respectively. Net Product Sales – Acute Care For the three months ended March 31, 2024 and March 31, 2023, net product sales of ZYNRELEF were $5.0 million and $3.5 million, respectively. For the three months ended March 31, 2024 and March 31, 2023, net product sales of APONVIE were $0.5 million and $0.3 million, respectively. The increase in net product sales for both ZYNRELEF and APONVIE is attributed to an increase in the units sold in 2024 as compared to 2023. Net Product Sales – Oncology Care For the three months ended March 31, 2024 and March 31, 2023, net product sales of CINVANTI were $25.6 million and $22.8 million, respectively. For the three months ended March 31, 2024 and March 31, 2023, net product sales of SUSTOL were $3.6 million and $3.0 million, respectively. The increase in net product sales for both CINVANTI and SUSTOL is attributed to an increase in the units sold in 2024 as compared to 2023. Cost of Product Sales For the three months ended March 31, 2024 and March 31, 2023, cost of product sales was $8.4 million and $16.9 million, respectively. Cost of product sales primarily included raw materials, labor and overhead related to the manufacturing of our Products, as well as shipping and distribution costs. For the three months ended March 31, 2023, cost of product sales also included charges of $5.3 million, resulting primarily from the write-off of short-dated ZYNRELEF inventory. There were no charges related to the write-off of inventory during the three months ended March 31, 2024. The remaining decrease in cost of product sales is attributed to a decrease in cost per units for CINVANTI and ZYNRELEF, as large-scale manufacturing was validated and approved in late 2022. Research and Development Expense Research and development expense consisted of the following (in thousands): Three Months Ended March 31, 2024 2023 ZYNRELEF-related costs $ 636 $ 2,156 CINVANTI-related costs 471 824 APONVIE-related costs 202 693 SUSTOL-related costs 90 281 Personnel costs and other expenses 2,508 3,147 Stock-based compensation expense 701 1,736 Total research and development expense $ 4,608 $ 8,837 For the three months ended March 31, 2024 and March 31, 2023, research and development expense was $4.6 million and $8.8 million, respectively. The decrease in research and development expense was primarily due to our decreased headcount and related costs as a result of the restructuring implemented in 2023, as well as a decrease in non-cash, stock-based compensation expense. The decrease is also due to decreases in costs related to ZYNRELEF and CINVANTI, as large-scale manufacturing was approved in 2022 and APONVIE as a result of the product becoming commercially available in March 2023. General and Administrative Expense For the three months ended March 31, 2024 and March 31, 2023, general and administrative expense was $15.0 million and $15.8 million, respectively. The decrease was primarily due to our decreased headcount and related costs as a result of the restructuring implemented in 2023. 23 Sales and Marketing Expense For the three months ended March 31, 2024 and March 31, 2023, sales and marketing expense was $11.4 million and $21.2 million, respectively. The decrease was primarily due to our decreased headcount and related costs as a result of the restructuring implemented in 2023. Other Income, Net For the three months ended March 31, 2024 and March 31, 2023, other income, net was $1.6 million and $0.3 million, respectively. The increase is primarily attributed to a one time settlement gain contingency related to a legal dispute, during the three months ended March 31, 2024. Restructuring Plans See Note 8 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for discussion of the June 2023 Reorganization. Liquidity and Capital Resources The Company's short-term and long-term liquidity requirements primarily arise from funding (i) sales and marketing expenses, (ii) general and administrative expenses including salaries, bonuses and commissions, (iii) working capital requirements, and (iv) research and development expenses, and (v) payments related to our outstanding convertible notes. As of March 31, 2024, we had cash, cash equivalents and short-term investments of $71.5 million. Based on our current operating plan and projections, management believes that the Company's cash, cash equivalents and short-term investments will be sufficient to meet the Company's anticipated cash requirements for a period of at least the next twelve months from the date this Quarterly Report on Form 10-Q is filed with the SEC. Our future cash requirements and the adequacy of our available funds will depend on many factors, primarily including our ability to generate revenue and the scope and costs of our commercial and research and development activities. Our net loss for the three months ended March 31, 2024 and March 31, 2023 was $3.2 million, or $0.02 per share, and $32.8 million, or $0.27 per share, respectively. Our net cash used in operating activities for the three months ended March 31, 2024 and March 31, 2023 was $9.5 million, compared to $24.9 million. The decrease in net cash used in operating activities was primarily due to a decrease in net loss as a result of decreases in operating spend, partially offset by changes in working capital, specifically accounts receivable due to timing of collections, inventory as a result of write-offs incurred during Q1 2023 which did not reoccur during Q1 2024, accounts payable due to timing of payments and accrued payroll and employee liabilities due to reduced headcount. Our net cash provided by investing activities for the three months ended March 31, 2024 and March 31, 2023 was $1.3 million, compared to $36.8 million. The decrease in cash provided by investing activities was primarily due to net maturities of short-term investments of $37.1 million for the three months ended March 31, 2023 compared to $1.3 million for the three months ended March 31, 2024. Our net cash provided by financing activities for the three months ended March 31, 2024 was $0.01 million, compared to net cash used in financing activities of $0.2 million for the same period in 2023. Historically, we have financed our operations, including technology and product research and development, primarily through sales of our common stock, product sales and debt financings. 24 ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK Not required for smaller reporting companies.