Description

HRTX

Heron Therapeutics

$14.02, market cap = $1,428M, cash = $167M, EV = $1,286M, debt = $24M

Heron Therapeutics has been the poster child of underwhelming rides through the FDA approval process. HRTX’s most promising drug Zynrelef is a local anesthetic pain cream that should lead to a significant reduction in opioid usage in the 72 hours following surgery. It was approved by the FDA in mid-May and the stock promptly sold off 20%.

The sell-off was due to Zynrelef receiving approval limited to three surgical procedures rather than the expected all-encompassing broad label usage. These procedures are bunionectomy, hernia repair and Total Knee Arthroplasty (TKA).

The process for expanded usage is straightforward and only requires additional PK and safety data. The market reaction, while understandable, is undoubtedly compounded by yet another frustration in the approval process. Zynrelef, back when it was known as HTX-011.

HTX-011 had originally been fast-tracked with Breakthrough Therapy status in the second quarter of 2018. It was also given other favorable review and (when approved) reimbursement advantages, but then twice received CRL's (Complete Response Letter) from the FDA that postponed approval. These CRL's were received in May 2019 and again in late June 2020.

With last month’s approval, that is a three-year process for a drug which had originally been expected to receive formal approval in a year. For some historical perspective, see booM()’s writeup from March 2019: https://www.valueinvestorsclub.com/idea/HERON_THERAPEUTICS_INC/9275720239. In the interim, the EV has fallen from $1.84B to $1.29B, with the share price falling by half.

Zynrelef:

Leaving aside for the moment Cinvanti and Susto (another HRTX drug which experienced two CRL’s), which are extended-release injections for the prevention of nausea and vomiting associated with chemotherapy regimes, let us focus on Zynrelef.

Zynrelef is a combination of the generic local anesthetic bupivacaine and the anti-inflammatory agent (NSAID) meloxicam. 

The mechanism for action is that when you use a local anesthetic such as bupivacaine, these local anesthetics exist in a balance between ionized and un-ionized forms. Only the un-ionized form can enter the nerve membrane. And then once in the nerve membrane they have to be ionized to block sodium induction and block the pain signal. 

However, when you have an incision which produces inflammatory cytokines, the pH in that incision reduces, and in that lower pH, all the bupivacaine is now ionized. Even though that nerve may be bathed in bupivicaine, it is not getting into the nerve and can't block the pain signal. 

Zynrelef results in a normalization of the pH, and its difference of almost 1 pH unit means potentially 10x as much bupivacaine can enter the nerve with HTX-011 versus products that don't have that property. 

Heron is also developing the next generation of Zynrelef, compound HTX-034, which includes a third ingredient--an additional agent targeting the inflammatory process that further potentiates the activity of bupivacaine. HTX-034 has shown in pig studies an increase in Zynrelef's 72-hour efficacy to 7 days for HTX-034.

Efficacy:

It was not a surprise to see Zynrelef being approved for bunionectomies. When Zynrelef was still the investigational compound HTX-011, the Bunionectomy study was the slide that had the highest pain intensity scores and thus the largest defined spread between the various approaches:

Source: Heron Therapeutics Update in May 2020

Here are results for the other two approved indications, hernia repair and TKA:

And:

The Market:

Heron Therapeutics hopes that Zynrelef will supplant the current $1B of spend on branded pain relief drugs for postoperative pain and have efficacy that will create widespread adoption and result in significantly lower opioid use.

Zynrelef’s primary target is Pacira Biosciences (PCRX) drug Experal, a DepoFoam based extended-release formulation of bupivacaine that generated sales of $400M+ in 2019, is promoted by partner JNJ in the orthopedic segment, and is projected to continue to grow sales at approximately 15% annually.

Experal has been the best post-op pain management option, but it has a cumbersome and time-consuming administration, which can require up to 80 meticulous injections in a specific pattern at the end of procedures. It also reportedly falls well short of 72 hours, generally providing closer to 24 to 36 hours of pain relief.

Given that patient satisfaction and referrals are significantly impacted by pain management, surgeons are probably very open to trying a less tedious application with a longer time frame of pain relief.

HRTX’s commercialization strategy is to launch in July and expand its current sales force with an additional 89 hospital sales reps. They plan to price Zynrelef at a 22% to 28% discount to Experal. For the Medicaid 340B Drug Pricing Program, the price difference is 41% to 46%.

Did the Limited Indication from the FDA Really Change the Timeline?

It was obvious from HRTX’s data that the three indicated procedures were the sweet spot in Zynrelef’s effectiveness. In remarks last week (June 1st) Heron’s CEO, Barry Quant, seemed to indicate that they had always intended to launch Zynrelef with just those procedures.

Still, given Heron’s history of CRLs and FDA push-back, an investor is right to question statements that indicate Heron has a tough time getting on the same page with the FDA, given comments such as “We were surprised by the FDA…we thought we had an agreement previously in terms of getting a label…”

Here are the CEO’s remarks:

And in terms of the indication statement, so, probably the best place to start is an overview of the indicated procedures, which is inguinal hernia, bunionectomy and TKA that shows the magnitude of each of these indications, very large procedures, very painful procedures. And as John talked about when we had our approval call, there is a natural progression without promotion where these procedures be to the use in other similarly related procedures based on having a good outcome when the surgeon uses the product in the indicated procedures.

And which is why our intent from the beginning was to launch to these three indicated procedures where we have exceptional data, and we would expect that the surgeon and the patient would have an outstanding outcome. And that's going to lead to not only great penetration into these three procedures, but a natural progression.

So, obviously, we were surprised by the FDA's decision in terms of the indication statement. We didn't get that information until very late in the game. And obviously, we were excited to get approval and happy with the indication that we got from the point of view of these are important surgeries, but we clearly want to expand it further. And we got some information from the agency in terms of what they're looking for. We need to meet with them to really fine-tune that, get a real commitment from them.

We thought we had an agreement previously in terms of getting a label, and that was based on submitting the data from these procedures, but also data across other procedures. It now looks like the agency wants us to broaden that other procedures bucket. We're happy to do that and it can be done very quickly.

We also have other data already in-house that can help them potentially expand the indications even without generating new data beyond where we are. So, we'll be working on several parallel pathways with the agency. I just don't have a conclusive estimate at this point in terms of how long it will take before we can resubmit -- not resubmit, submit a supplemental NDA to get the expansion.

I think what you'll hear from John when we talk about commercialization is that it really doesn't matter anyway at this moment. Since we plan to launch to these three procedures in green, nothing changes with our launch. And we don't think anything is really going to change in terms of access or penetration, but we're happy to go through that as well.

The latest Heron presentations are worthwhile to review: https://ir.herontx.com/corporate-presentations

Of special note is the failure of Exparel in the Total Knee Arthroplasty (TKA) for Nerve Block Usage:

Heron believes that this data supports their conclusion that Zynrelef will dominate the TKA market of 1,051,000 annual procedures.

Zynrelef’s launch is targeting 2,100,000 procedures with $450M of potential value:

CINV (Chemotherapy-Indusced Nausea and Vomiting) Franchise drugs Sustol and Cinvanti:

Heron also has Sustol and Cinvanti, which are extended-release injections for the prevention of nausea and vomiting associated with chemotherapy:

Heron is developing compound HTX-019 out of their CINV division. HTX-019 is targeted to the postoperative nausea and vomiting (PONV) market. The PONV market is 20x the size of the CINV market, with 53M treatments versus 2.5M treatments.

Aprepitant is becoming a prevalent drug for PONV, and Heron’s HTX-019 is designed to increase the receptor occupancy. This could improve onset of action to 5 minutes versus 1 to 3 hours:

HTX-019 is obviously a good strategic fit for Heron, having the same target accounts.

Valuation:

To quote extensively from the original VIC writeup (https://www.valueinvestorsclub.com/idea/HERON_THERAPEUTICS_INC/9275720239), this is how the author booM() then saw valuation:

The market currently values closest peer PCRX’s enterprise value at 4.4x trailing-twelve-month consensus revenues. The sell side is modeling in revenue growth of 12% annually for the next three years. Comparatively, we think HRTX revenues grow by 80% for 3 years post-launch, with steady-state HTX-011 sales of $750m to $1.0bn. At a conservative 4.0x multiple of annual run-rate revenues of $1.125bn, that gets you fair value of HRTX stock at $62.50. We think Tang and the Board would be sellers in the $60 range.

Those revenue targets and multiples still seem quite reasonable, although the time frame is always a wild guess. For the stock to double from its current price, the EV would have to reach approximately $4B. Getting to $1B in revenues and a 4x multiple as described by the 2019 VIC writeup would represent such a path.

It seems just as likely that this instead becomes an earnings machine and gets priced at some multiple of EPS. One sell-side report models 2023E to 2026E estimated EPS of $0.62, $2.06, $3.72, and $5.40. Time to sharpen the pencil a bit on this, and happy to do so in the comments, but the clock is also ticking on the VIC submission deadline and time’s a-wastin’.  

Finally, the overriding thesis for HRTX is the continued opioid devastation in this country calls for effective responses. Just last week, the American Medical Association updated their report that “Drug overdose epidemic worsened during COVID pandemic”: https://www.ama-assn.org/system/files/2020-12/issue-brief-increases-in-opioid-related-overdose.pdf

Overdose deaths jumped from 70k+ to 90k+ between 2019 and 2020. Preventing opioid addiction by avoiding opioid usage for pain management is an important part of the policy road map.

Catalyst

Recognition that the Zenrelef roll-out has not been materially impacted by the FDA's limitation.

Patient results: if patient feedback consistently reflects superior pain management, surgeon utilization will respond accordingly.