HRTX - NASDAQ

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Heron Therapeutics Q3 2023 Earnings Conference Call. As a reminder, this conference is being recorded. Now, I would like to turn the call over to Jeff Cohen, Executive Director, Assistant General Counsel and Assistant Secretary. Please proceed.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on the Heron Therapeutics conference call this afternoon to discuss the company's financial results for the third quarter ended September 30, 2023. With me today from Heron are Craig Collard, Chief Executive Officer; Ira Duarte, Executive Vice President, Chief Financial Officer; and Bill Forbes, Executive Vice President, Chief Development Officer; and Ryan Craig, Vice President, Market. For those of you participating via conference call, slides are made available via webcast and can also be accessed via the Investor Relations page of our website following the conclusion of today's call. Before we begin, let me quickly remind you that during the course of this call, the company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes remarks about the company's projections, expectations, plans, beliefs, and future performance, all of which constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the Safe Harbor statement in today's press release and in Heron's public periodic filings with the SEC. Except as required by law, Heron assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes; does not intend to do so. And with that, I would now like to turn the call over to Craig Collard, Chief Executive Officer.

Thanks, Jeff. Good afternoon, and welcome to Heron Therapeutics' third quarter 2023 earnings call. Today, we are pleased to update you on our recent strategic initiatives, financial performance from the third quarter, and guidance for the rest of 2023, as well as guidance for the full-year 2024. Over the past six months since joining Heron as CEO, we have taken significant steps to right size our business, ensure an alignment with our strategic goals. We've implemented a comprehensive streamlining of our financial processes, enhancing efficiency and accountability across the organization. As part of our commitment to operational excellence, we've successfully combined various commercial functions, eliminating redundancies, and optimizing our overall structure. This consolidation not only enhances efficiency, but also positions us to respond more effectively to market dynamics. Last, we are excited to share that we have developed a new strategic vision that clearly defines our goals and key targets. This vision serves as a roadmap for our future, guiding our efforts to achieve sustainable growth and maximize shareholder value. The results of our actions in this short time at Heron have been substantial. Our management team is now in place and the transformation of Heron into a profitable company is happening. We have reduced operational expenses excluding stock comp and depreciation and amortization to $135 million in 2023 versus $182 million just last year. We anticipate a further reduction spend that will take our operating expenses to a range of $108 million to $116 million in 2024. Our gross margin is also improving from 41% in 2023 to 62% in 2024 and should spell in over 75% in 2025 and beyond. This change in gross margin has been due to scaling the larger batch sizes being fully realized, negotiations with our manufacturing partners, operational efficiencies, and no more product write-offs was generally due to its high inventory. With our capital raise back in the summer and our anticipated cash balance of over $65 million at year's end, combined with our spend reduction, we can now illustrate to our investors a pathway to positive EBITDA by Q4 2024. Based on our current plan we do not anticipate needing any additional capital raises for the foreseeable future. Last, as we have created operational efficiency within our business and laid out our plan internally, we are beginning to see the impact in our product sales. Over the last eight weeks, both

Thank you, Craig. We've solidified our strategic plan that we're excited to see implemented and grow the acute care franchise. Our sales team is exceptional and the alignment across our commercial organization had never been stronger. The vision for acute care is to own the perioperative space as both the APONVIE and the

Thank you, Ryan. Craig has covered our product performance in his comments, and I will just add a few additional points about our Q3 2023 results. Our product gross profit for the quarter was $13.2 million and $37.6 million for the nine months ended September 30th, 2023, representing 42% and 41% of net revenue respectively. These margins were negatively impacted by write-offs of

As we move to the key items from today's call you can probably sense the change in confidence and our voices about this business. Our business economy is set and we have a team in place that is executing on the balance sheet to get us the profitability without any expected need for further capital raises. Our operating expenses, gross margin, and EBITDA are all moving in the right direction on the path to profitability. The oncology franchise continues to outperform, and we are raising guidance for 2023 from $99 million to $103 million to a range of $104 million to $106 million. Our momentum with the acute products is strong as well, as

Your first question comes from the line of Carl Byrnes from North Capital Market. Your line is live.

Great, congratulations on the progress and thanks for the questions. First with the gross profit margin for the third quarter excluding the inventory write-offs it would be 66%, if I recall from the press release. And it looks like you're giving guides on the fourth quarter at 62% for the year ‘24 of 68% to 70%. I'm wondering if there's mixed issue, what the nuance is between the third quarter and the fourth quarter at 62%. And how do you see gross profit margin progressing over time beyond 2024 in terms of peak gross profit target or margin target?

Yes, Karl, Thanks for the question. Again, with our gross margin, if you think about CINVANTI first, it's going to have the largest impact because of just total revenue. We basically are making the product currently at two different manufacturers. And 2022, really until the start of ‘23, we were finishing scale up and so forth, going from a 400 kilogram batch to a 1,000 kilogram. So, you had a price sort of blend with those two batch sizes. And then beyond that, our primary manufacturer is Alchemy, working now in a 1,000-kilogram batch, and then our secondary manufacturer is at [Indiscernible], where we do a secondary and we make it 300 kilograms, so you also have a blend there. So as that sorts out a bit, that's why it will continue to be more positive moving forward. And again, as we get into the outer years, we will have a, like I say, total gross margin of all products in sort of that mid-70s range. Again,

Excellent. That's very helpful. And then just a follow-up. I mean, clearly, you could be profitable tomorrow if you were just to focus on the CINV franchise. But clearly, the growth is from the acute care segment with APONVIE and

Yes. No, it's an interesting point because I think -- and look at this from an investor viewpoint, the oncology side of the business really acts as a bit of a hedge, sort of, if you will, protecting your investment. And why -- what I mean by that, and I think you're kind of hitting on this is that if this were just about profitability, I mean, we could be a common oncology company tomorrow and be EBITDA-positive within the end of the week. And -- but again, that's not really where we're going. We think there's a much bigger story here. And really, the growth story's with the two products that have the ability to dominate the perioperative space, and that's APONVIE and

Great. Thanks so much. And again, congratulations on the progress.

Thanks, Carl.

Your next question comes from the line of Boris Peaker from TD Cowen. Your line is [Technical Difficulty]

Thanks very much. This is Nick on for Boris. Just a couple from me on

Yes. So again, we feel pretty confident with 48% growth. Again, especially where the product is trending now. We've done a few days in the field with targeting, alignment and so on and so forth. And so if you look at then the sNDA, which is going to expand the indications. And again, I think assuming PDUFA date of January 23. Between now and then, there's obviously some training and that type of thing that we'll be doing in prep with that. And so that should be felt fairly quickly. And then shortly after that, as you mentioned, we've got the VAN coming in September. And our plan is to try to lead the initial kits that are out there now as far as the inventory, if you will, with

That's very helpful. And then just sort of a follow-up question. On -- so you mentioned that the sNDA that in January will lead to about 13 million procedures in total now with everything. How many of those would then be orthopedic procedures? And yes?

Yes. So probably -- this is Ryan, Craig. So out of the additional 5 million to 6 million procedures, probably about 70% of them are going to be ortho. And so that's what -- when Craig was speaking to our traction, we've got 60% of our current business on

Got it. Thanks very much.

Thank you. Thanks, Nicholas.

Your next question comes from the line of Serge Belanger from Needham & Company. Your line is live.

Hi, this is Serge. A couple of follow-up questions on

Yes. So I think you're right from a competitive standpoint. I mean, it's typically bupivacaine or Exparel, a lot of times now with Exparel being a nerve block-type scenario. So that could be an anesthesiologist is involved in that. But the beauty of this product is that once it's used and the clinical results are shown, we really do get a lot of buy in from the orthopedic surgeons. And so we've had our most -- really, the most success there. And the other piece that's probably worth mentioning is that this is where you have the majority of real pain events within surgery. Hip and knee can be extremely painful. So again, we think our product is very conducive for that space. In a funny way though, yes, that's our competitors. But again, our issue is not as much with the competitors clinically as it has been the own prep of our product. And that's why I continue to stress demand and so forth. And so with the expanded label, we immediately -- we hope will pick up shoulders. And so that will be a direct -- any physician who's doing orthopedic can move right into shoulders with our products, that should be immediate. And then we feel like closely related will hopefully be spine, which again takes us to a different physician group, but a very similar category as far as an area we think we can do quite well with.

Okay. And then in terms of potential partnership, you view that as a kind of a nice to have or a priority going forward?

No, it's a priority. Yes, it's a great question because, again, going back -- I know I keep repeating myself, but the prep of the product and so forth is that if you think about drug reps in general, they are generally not in OR suite. However, in OR suites, specifically the ortho space suites are the medical device reps. They base all these surgeries. And so for us, we've done this in a few different territories and had success where we have a partnership with a distributor rep. So our view is if we did that on a national basis and could get let's say, a group of 500 or 600 representatives that could complement and be there for case management, it's just an absolutely huge win for us, especially as you look at introducing demand, which should improve upon that anyway. And so to us, it makes all the sense in the world. It is a priority.

Okay. Well, thank you. Congrats on the progress and appreciate all the numbers you gave tonight.

Well, thanks Serge. We appreciate it.

There are no further questions at this time. I'd like to turn the call over to Craig Collard for closing remarks.

Thank you, operator. I'd just like to thank everyone for joining the call, and we do appreciate your patience. We think we're making really big strides here with the company and really beginning to turn this around, and we look forward to next quarter's call. Thank you.