Biotech General Discussion

Heron has an upcoming PDUFA date for its longer acting post-op pain medicine, HTX-011. This is the second time around for HTX-011 as the first time unfortunately resulted in a CRL. See below for the current HRTX bull case and bear case, detailed considerations, and where we come out on HRTX going into the PDUFA.

Heron Bull thesis: HTX-011 is an exciting asset in the large, non-opioid post-op pain management space that has shown in numerous clinical trials across numerous surgery types, to reduce pain better than generic bupivicaine, with virtually an identical and acceptable side-effect profile. It is especially effective when combined with over-the-counter pain medicines to reduce patients' needs for opioids for their pain relief. Although its CINV franchise basically includes older technologies in a genericized market, HRTX has been able to grow market share at least in its CINVANTI franchise, which will provide the company $70-$80M revenue in 2020, and SUSTOL revenue will start up again in 2021. After the likely approval of HTX-011 later this month, HRTX appears to be a good acquisition target for a large company who already has a sales force in the elective surgery market.

HRTX Bear thesis: On the bear side, HRTX's current ~$1.6B enterprise value could be considered high with $70-$80M revenue in a decreasing revenue dynamic. It's therapies use old active ingredients and are not very sexy or incredibly differentiated. The competition for HRTX's lead asset, HTX-011, is significant and includes generics. The company has had several PDUFA misses in its recent history and there are no guarantees for the current PDUFA. Finally, even if approved, they are launching a new product into a Covid-crushed elective surgery market.

HRTX - Our take: We currently invest in HRTX and have invested in them for a few years now. We think HRTX has a very good chance of approval by the FDA by the June 26, 2020 PDUUFA date for its non-opioid pain therapy, HTX-011. This would be good for society in our fight against the opioid crisis. Furthermore, it could be rewarding for investors too, since this derisking event if the FDA approves HTX-011 should increase the value of HRTX. Just how rewarding, might depend on the exact label language approved by the FDA if the FDA approves HTX-011. Furthermore, in this pandemic situation, the short-term upside even with approval with a broader label, may be muted. However, we remain bullish on HRTX from a long-term perspective, with an apparently differentiated post-op, opioid sparing pain therapeutic.

DETAILED ANALYSIS

More info on HTX-011: HTX-011 is a long-acting, extended-release formulation of the local anesthetic bupivacaine in a fixed-dose combination with the anti-inflammatory agent meloxicam for the management of postoperative pain. Safety and efficacy data have looked very good in 7 Phase 2 or Phase 3 clinical trials (see exemplary data in knee replacement below), which is probably one reason the FDA did not convene an Advisory Committee meeting in advance of its PDUFA date last year or this year's PDUFA. Furthermore, its safety and efficacy is probably a bit less surprising to the FDA since HTX-011 is a combination of approved drugs in an improved formulation using a better pH and extended release Biochronomer technology (see here) that is already in an approved drug (i.e. CINVANTI). HTX-011 along with over-the-counter pain meds like Tylenol and Ibuprofen, have the ability to eliminate the need for opioids for most patients at least in some post-surgical settings (e.g. see studies cited in our HTX-011 pain AmpCard here). Therefore, this possible approval would be good for society in our battle with the opioid addiction epidemic, a fact that is important to the FDA too. Indeed based on its impressive clinical data, HTX-011 has received breakthrough therapy designation and Priority Review from the FDA (see here).

Competition for HRTX: The non-opioid post-surgical pain market is very competitive. The most competitive product is likely Pacira's EXPAREL® (bupivacaine liposome injectable suspension). Other competitive products include generic and over-the-counter pain meds such as Bupivacaine. See our AmpCard on HTX-011 for more info on competitors and more data links for HTX-011.

Cash and Valuation of HRTX:

HRTX ended Q1 2020 with ~$350M cash and short-term investments. Since HRTX has burned thru around $200M in cash per quarter and had over $350M in cash as of the end of Q1 2020, they seem to be in good financial shape going into the possible HTX-011 launch. However, with less than 2 years of cash/equivalents, if there is a relatively significant stock move up after the readout, they might decide to raise cash/dilute current investors.

The current value of HRTX is difficult to calculate with much certainty, as expected for a biopharma company whose major commercial asset has not yet been commercialized. At its current (6/18/20) market cap of about $1.8B, similar to its market cap approach its first HTX-011 PDUFA, and enterprise value of about $1.6B, HRTX is valued at less than 1/2 of its peak valuation in 2018, despite numerous positive HTX-011 readouts with over-the-counter pain medicines in opioid sparing studies since then, and near the finish line with the FDA.

PCRX achieved Exparel revenue of about $400M in 2019 and guiding for similar revenue in 2020 (SEE HERE), in the U.S. market only. However, Exparel has both a broad post-surgical pain indication and a nerve block indication (See INDICATIONS AD USAGE in Exparel label), which according to HRTX is about 15% of procedures (See HRTX March 2019 corporate presentation slide 55). Exparel appears to have less than 10% of the current market extrapolating from HRTX's data showing that Exparel had 4% of the local anesthetic market in 2016 with $276M total Exparel revenue. Thus, there is probably at least a $1B plus commercial opportunity for HTX-011. By our rough revenue multiple models, depending on commercial success, HRTX value sits between $2B and $4B currently, and with a regulatory approval with a favorable label, both regulatory and commercial risk decrease and HRTX's value range should increase. Of course, being in the middle of a pandemic and trying to launch into a elective surgical procedure market may hurt HRTX's valuation/revenue for the next 12 months. Finally, we never trade for an M&A opportunity, but if HTX-011 is approved, although it will be in a difficult commercialization spot (new therapy in a COVID-impacted space), the company should be a pretty attractive acquisition target, especially for a large-cap healthcare company that has reps in the elective surgery space.

What to watch in this PDUFA:

Remaining CMC and non-clinical Risk: At this point, the odds seem very high that the FDA will approve HTX-011. The FDA found no clinical/safety issues last year when it issued the CRL to HRTX based on CMC and non-clinical issues. In its recent quarterly update the company reiterated with respect to the status of the FDA review:

"Contract Manufacturing Site for HTX-011: In February 2020, Heron announced that the contract manufacturing site used to manufacture HTX-011 has been reinspected by the FDA with no Form 483 observations issued and with a recommendation by the FDA inspector for approval of the site. Heron has not been informed of any other manufacturing concerns."

Plus, our data and experience with FDA PDUFA extensions are that those almost always result in approval. Thus, it seems very likely that HRTX will be approved, especially given HRTX's press release earlier this year reiterated in their quarterly statement above, that there were no remaining manufacturing issues at its HTX-011 manufacturing plant. However, there is still some risk that the FDA will not approve HTX-011 for other CMC or nonclinical issues, for example related to use of the needle-free applicator for HTX-011.

Label language: The bigger issue that will affect HRTX stock price from this PDUFA in our view is the market's perception of the precise wording of the label that is approved by the FDA. It will likely have the typical heart-attack, stroke warning of NSAID's since one of the ingredients, Meloxicam, is an NSAID (See warning on Meloxicam label, which is not that different than warnings on over-the-counter NSAIDs in our reading). This shouldn't spook knowledgeable investors. However, the bigger questions: Will the label mention the ability of HTX-011 to eliminate the need for opioids in many post-surgical patients when combined with over-the-counter pain medicines? Will it cover all post-surgical indications or just some/all of those where HRTX has clinical data - hernia repair, abdominoplasty, bunionectomy, total knee arthroplasty and breast augmentation? These details will be important to investors in assessing HTX-011's value should it get approved.

HRTX - Our take: We currently invest in HRTX and have invested in them for a few years now. We think HRTX has a very good chance of approval by the FDA by the June 26, 2020 PDUUFA date for its non-opioid pain therapy, HTX-011. This would be good for society in our fight against the opioid crisis. Furthermore, it could be rewarding for investors too, since this derisking event if the FDA approves HTX-011 should increase the value of HRTX. Just how rewarding, might depend on the exact label language approved by the FDA if the FDA approves HTX-011. Furthermore, in this pandemic situation, the short-term upside even with approval with a broader label, may be muted. However, we remain bullish on HRTX from a long-term perspective, with an apparently differentiated post-op, opioid sparing pain therapeutic.

#HRTX, #HTX-011, #Post_operative_pain, #PDUFA, #FDA,