Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Heron Therapeutics Q3 2022 Earnings Conference. As a reminder, this conference is being recorded. Now I would like to turn the call over to David Szekeres, Executive Vice President, Chief Operating Officer. Please proceed.

Thank you, Dennis. Good afternoon, everyone, and thank you for joining us. With me today from Heron are Barry Quart, Chief Executive Officer and Chairman; John Poyhonen, President and Chief Commercial Officer; and Kimberly Manhard, Executive Vice President of Drug Development and Board Director. For those of you participating via conference call, the slides are made available via webcast and can also be accessed by going to the Investor Relations page of our website, following conclusion of today's call. Before we begin, I would like to remind you that this call will contain forward-looking statements concerning Heron's future expectations, plans, prospects, corporate strategy and performance, which constitute forward-looking statements for the purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in our filings with the SEC. In addition, any forward-looking statements represent our views only as of the date of this webcast and should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligations to update such statements. Now, I’ll turn the call over to Barry.

Thank you, David. Welcome everyone. And thank you for joining us. Third quarter has been productive on a number of fronts and disappointing on others. We're obviously delighted with the approval of APONVIE, our fourth commercial product. APONVIE is indicated for the prevention of postoperative nausea and vomiting or PONV in adults. APONVIE will be available in first quarter as a very convenient room temperature stable, ready-to-use 32 milligram single dose vial for direct administration as a 30 second intravenous injection. prior to induction of anesthesia. It will be the only intravenous NK1 receptor antagonist available for PONV. As we discussed on our NDA approval call in September, APONVIE was approved based on the results from two randomized internal trials of aprepitant against the standard-of-care on granisetron in patients undergoing open abdominal surgery. In both studies, more than twice as many patients receiving on granisetron for prophylaxis vomited through 48 hours post-surgery compared to those who received aprepitant. We firmly believe that APONVIE will follow in the footsteps of CINVANTI and quickly becoming an important product for both clinicians and patients. John will describe the commercial opportunity and our pricing strategy. John also touched on our successful -- John will also touch on our successful CINV franchise which continues to show growth in the face of generic competition, as well -- which is well on its way to achieving $93 million to $95 million in net product sales this year. Where we have been less successful is in the launch of ZYNRELEF. We are disappointed in third quarter results. 18% quarter-over-quarter growth in units is not satisfactory. We get it and are doing everything possible to change the launch trajectory. You will hear about good progress in moving IDNs to exchange ZYNRELEF for EXPAREL. We're also taking a page from…

Thank you, Barry. We continue to make progress across our acute care and oncology care franchises. During my presentation, I'll start with a number of updates on key performance metrics related to ZYNRELEF. Then I'll provide an update on our APONVIE pricing strategy and finish with an update on another strong commercial quarter with our oncology care business. I'll start by summarizing ZYNRELEF's quarterly performance of our leading indicators. Despite third quarter performance being impacted by a decline in indicated surgical procedures which I'll describe on the next slide, ZYNRELEF net sales grew to $2.7 million for the quarter, representing an 8% increase over the prior quarter. Third quarter demand units grew to 15,077 units, representing an 18% increase over the prior quarter. This growth was impacted by a much slower than expected July. The difference between the 8% net sales increase and the 18% unit demand increase was a function of lowers ZYNRELEF net price primarily driven by higher 340B sales and an increase in the percentage of 200 milligram SKUs purchased to support the tractions ZYNRELEF is gaining in general surgery and foot and ankle procedures. Totals ZYNRELEF unique ordering accounts grew to 704 with the account reorder rate remaining strong at 84%. Total formulary approvals for ZYNRELEF grew to 416 approvals. Importantly, we're seeing growth with Integrated Delivery Networks or IDNs with 66 IDNs that have added ZYNRELEF to formulary. Getting IDN support is a critical component to drive therapeutic interchanges, with key accounts substituting ZYNRELEF for EXPAREL for indicated procedures in the future. Overall, although we certainly made progress during Q3, we know we can do better and we have refocused our Q4 priorities to accelerate ZYNRELEF sales and our existing user accounts. As I mentioned on the prior slide, we believe third quarter performance was…

Thank you, John. We'll conclude the formal presentation with our financial overview slide. Heron had cash, cash equivalents and short-term investments of $121.7 million as of September 30, 2022. Net cash used for operating activities in third quarter was $37.1 million including restructuring fees in our recent reduction in force. The full impact of reducing headcount by approximately 34% will continue to be realized through this quarter and next. The following slides in the deck contain important safety information for ZYNRELEF and APONVIE. The slides are available on our website. With that, we're ready for your questions. Dennis?

[Operator Instructions] Your first question comes from the line of Brandon Folkes with Cantor Fitzgerald. Please go ahead.

Hi, thanks for taking my questions. And -- I appreciate extended vaccine release performance. But no surprise, I do want to just dig in a little bit. Can you maybe just elaborate what changed so much from the beginning of August when we held the 2Q call and guided to sort of that 40% to 50% quarter-over-quarter growth. We were past July at that stage that recorded on this call today. And then similarly, I mean, any visibility risks into the October figures you mentioned now just in light of sort of that dynamic of August and July. Were you just expecting maybe more of a bounce back in surgery? Any color would be helpful? And then maybe just to add something to that. I mean Pacira did call out an improvement in year-over-year trends in mid-August. Is there anything we should look into sort of in that comment with your results today?

Yes, thanks Brandon. I appreciate the question. And yes, I think that you hit the nail on the head. We had anticipated a much stronger rebound after a week of July and obviously that didn't occur. And it's sometimes not 100% clear on a month-to-month basis in terms of the impact of the macro environment that we're in. You mentioned Pacira, they had indicated a week going into -- weakness going into October [technical difficulty] The second part of the quarter in terms of reasons why we didn't see the rebound that was anticipated. I will also add that we did have a restructuring, which included some of the commercial team has been very successful in terms of really invigorating that group. But with that any kind of restructuring, obviously, there's always some downtime to get things reorganized. So John, do you want anything to add?

Yes. I think the one thing that I would add, Barry, is we feel very good about the direction we're heading in Q4 and really we're starting to see the claims data procedure trend support that Brandon. So if we look at it, what we tend to follow is a five-week over the prior five-week indicated launch procedures. And we're finally starting to see growth of that. That was really reflected after Labor Day. We had a very strong finish to September. and then really have backed that up with our strongest month ever in October and we're a whole one week in now, but November first-week is higher than October was. So we feel good about the statement that we've made that we're looking for 30% to 40% net sales growth for the quarter.

Thanks. I appreciate the color. Maybe just one follow-up there quickly. You put up cash runway guidance previously. Obviously, on a quarter-over-quarter growth, can you sort of follow-up, but not really on dollar denominated amount. So I just -- can you just let us know, do you still stand by that cash runway post this ramp? And then maybe just one more for me, just sort of a more sort of constructive manner. Would the IDNs get evaluating ZYNRELEF now, in these trials. If you are successful in gaining that further label expansion, how should we think about whether these IDNs want to run another round of evaluation? Or do you think they'll just sort of fold it in, or they're running it on a broader set of surgeries maybe then the label? Just any color on that would be helpful too as we think about the ramp in 2023? Thank you.

Thanks, Brandon. Actually, I'll turn it over to John to answer the last question first on IDNs and then I'll take cash runway?

Yes, it's a great question, Brandon. And we believe that it -- unfortunately we'll be dependent on an IDN-by-IDN basis. We've got some accounts that have already gone to the point where they've taken EXPAREL off formulary. And certainly in those accounts that we feel like the additional indicated procedures that we're going to give, or we're going to be able to get a large portion of that business relatively quickly and others it may take a bit longer. So it's a bit early to make that call. But I think we're gratified that in some of the accounts they're having such great results. One in particular that I can think of has got six different hospitals within the IDN. And in three of them they've already removed EXPAREL from formulary and those are the types of results that we get excited about. We're not looking to have EXPAREL removed or looking to grow usage. But in those situations where we actually don't have EXPAREL as a brand or competitor, we think that that business can grow much more rapidly with the further label expansion.

Thanks, John. Yes, on cash runway, obviously cash runway, the levers are cash burn and revenue. We are working very hard to increase revenue numbers as John went through in his presentation and looking at ways to obviously control the burn. We had anticipated seeing an increase in burn this quarter when we gave the original guidance. We were finishing up the validations of large scale manufacturing for both ZYNRELEF and CINVANTI which takes some additional resources. So that was part of the original plan. And so we are doing everything we can to maintain that guidance.

Thank you very much. I appreciate all the color.

Your next question is from the line of Josh Schimmer with Evercore. Please go ahead.

Thanks for taking the questions. I guess the first, do you expect APONVIE revenue to be greater than ZYNRELEF in either 2023or 2024?

Well, it's a little early to be giving revenue guidance, I think the unit volumes certainly could be higher dollar revenue would be a challenging target. John, do you have any other - any additional color on that?

No, I think that's well stated, Barry. I don't have anything to add.

Okay. And then you have not really articulated a clear explanation as to why the ZYNRELEF launch has been so far below expectations and it makes it kind of hard to have a lot of confidence and some of your commentary and optimism that you're going to be able to get back on track if you can't really explain how it got so off track to begin with. So can you maybe kind of list the top three or four dynamics that you think were off relative to the launch and initial expectations and how you're going to be able to correct those? Thank you.

Well, certainly I'll start and John can conclude. As you know, Josh, we got a less than ideal initial label for ZYNRELEF that had a much greater impact on utilization than initial market research would have indicated. And I think you yourself had pointed out that was a clear miss on our part that we should have appreciated that would have a bigger impact. We fumbled the ball there in terms of believing the market research, in terms of surgeons not really carrying what the indication statement was. And certainly that was a reasonable view given off label use of our competitor's product in the nerve block space. So if it seemed reasonable, turned out not to actually be the case. We were fortunate to get the label revised in December. That's helped to expand the utilization and has helped to bring on these therapeutic interchanges from IDNs. We're still somewhat hand strong by the still diminished label. It means that some IDNs are not considering a therapeutic interchange because the scope of the indications isn't broad enough. So we still have obviously efforts in place as already noted to fix that issue and we anticipate that being corrected in the second half of next year. The other challenge that we have identified is that it is taking more sales rep time per surgeons to get them familiarized with the product, to get the staff familiarized with the product. And with the much larger turnover in staff and certainly we never anticipated pre-COVID or even as COVID started to wane, we didn't appreciate the turnover issues that hospitals would have and staff. It's just taking more time of the rep for individual surgeons. And that has resulted in obviously the sales reps getting to fewer new surgeons and not expanding the utilization as quickly as we certainly had projected. John, do you have any other things to add?

Yes, I do, Barry. I think that both of the items that you described were really important. I think the other real big impact has been that what we're finding is that every single account is virtually doing their, own evaluations generally. So even though we have these wonderful well controlled studies against the standard of care bupivacaine and beat them. They're still evaluating the product themselves. And when we ask them that, it's - the reason comes back loud and clear, EXPAREL told us they were 72 hours and they're not, they're 24 to 30 hours. And now we need to prove it with ZYNRELEF that you're actually 72 hours. So I think having to go through that type of evaluation at every single account and in multiple procedures oftentimes. So you might have to do an orthopedic surgeon and a soft tissue has taken far more time than we ever imagined. And I think that's one of the reasons that we're really looking forward to making sure that we have the right resources available through this deployment of flexible resources as we go forward, Josh.

Yes, I would just add that we certainly knew that there would be some trials done at hospitals for the reasons that John articulated, but the size and scope of these trials and the time that it's taken is dramatically longer than we would have projected. We're getting excellent results and certainly positive feedback from these it's just a very timely - time consuming process and a slowdown introduction of the product.

That's very helpful. Thank you.

Your next question is from the line of Serge Belanger with Needham and Company. Please go ahead.

Hi, good afternoon. A couple of quick questions on ZYNRELEF to start off, it looks like the net price movement was a bit of a headwind in the third quarter, just curious if you expect additional movements in net price in the coming quarters. And then secondly, maybe just talk about the -- what kind of market share you have in your targeted indicated procedure? Just trying - and also trying to get an idea where you're displacing EXPAREL? And then finally, I think John mentioned the deployment of additional resources in the fourth quarter kind of reinvigorate ZYNRELEF up here. Curious what that does to OpEx and how many additional people are we talking about here? Thanks.

Hi John, you want to take that?

Sure. So you're right, Serge. There was definitely some impact on net price. I think as we've seen some shift with the broader indication that we received in December, there's been a bit of a change in the SKU mix. In the first six months, it was probably about 80% 400-milligram to 200% or excuse me 20% 200-milligram. This last quarter it was about 67% with a 433%. So just like virtue of that SKU change, you will see a lower net price. If you take a look at that combined with the growth that we've experienced in 340B accounts, 340B accounts between second and third quarter probably grew about 25% which means we're going to be looking at a lower net price. So I would say from a modeling standpoint, probably us to adjust that down as we've shifted to more 200-milligrams SKU to a model price about $175 to $180 for net price per unit. With respect to where we were replacing EXPAREL, I talked a little bit about this concept of branded market share where we look at the percentage of ZYNRELEF units compared to the total of EXPAREL and ZYNRELEF units combined. And if you look at the overall market with that right now ZYNRELEF shows a share of about 3.8%. You compare that to the number that we're showing in the IDNs. And you can see the IDNs even in the 66 IDNs at 8.1% and 12.4%. So we're really seeing very strong growth in those compared to the overall market and that's one of the reasons that will continue to focus on those IDNs and especially those conducting therapeutic interchanges. And I believe your last question was how does it relate to OpEx as we look at these flexible resources. The one thing that…

No, I think that you covered it well. The -- really the incremental cost of these contract personnel are essentially being covered by the original commercial budget. It's not going to have a substantial impact in terms of burn. And as I previously said, controlling burden obviously is very important to us. But I do think it's important to just reiterate that these activities that John has outlined, which are just in early stages, we're seeing clear evidence of the success of these activities in terms of pull through, in terms of getting IDNs moving more quickly with these therapeutic interchanges And we're seeing that in terms of weekly sales increases. And I will say that as I mentioned previously in terms of using additional field representatives and copromote type activities, this is a page out of the EXPAREL playbook in terms of their initial launch. And it did have important impacts in terms of their launch trajectories. And so I think that this is something that we're probably a little late in the game in implementing, but it's clearly having an important impact and we feel very confident that these activities are showing fruit and will continue to in terms of meeting the target growth that we've identified for fourth quarter.

Just one last one to finish off. Clear to see oncology franchise at the guided sales rate of $93 million to $95 million is profitable for the company. [technical difficulty]

I'm not sure we got the end of your question, Serge. Yes, it's a very profitable franchise right now. So I'm not sure if you were looking for something more specific.

Maybe what kind of changes in reimbursements that could drive additional growth for 2023?

Yes. John outlined what is a very important driver we believe and it's to a large extent very similar to an important driver for ZYNRELEF in terms of the reimbursement of CINVANTI and SUSTOL for that matter. In the hospital setting where because of a recent Supreme Court decision, CMS will go back to the original reimbursing 340B hospitals, the full ASP plus 6% rather than minus 22.3% and that's a huge windfall when you have a product like CINVANTI where they can make say $40 and fosaprepitant is not reimbursed at all because it's fallen below the threshold for reimbursement. And so we have a lot of 340B hospitals who move to generic fosaprepitant to take advantage of the arbitrage that are now either coming back or evaluating coming back too soon. And that will certainly be an important driver for us into next year.

Yes, just a little more color on that, Barry, if I could. So those IDNs that moved to generic fosaprepitant during the arbitrage actually with this new reimbursement windfall for 340B hospitals, we've already signed contracts with three IDNs to come back to CINVANTI. Now IDNs because a number of them are over 30 hospitals apiece, it takes a bit of time to get them back in using the product, but we're very optimistic about what this quarter could look like as well as going into next year we think that could help fuel growth and we continue to talk to other IDNs that were former users of APONVIE and it's a perfect discussion because we're going to be out there talking to them about APONVIE as well.

Yes. I'll also add that we have been somewhat resource constrained in terms of CINVANTI up until really this quarter with limited supplies being manufactured at small scale. And so we have kind of slow walked some potential opportunities just because of the fact that there is a limited amount of material that could be manufactured even though we have two contract manufacturers. We've now, as already noted, validated the larger scale manufacturing as the 10x increase, which allows us to greatly expand availability and we've put pedal to the metal in terms of going back out and looking for additional business and we'll continue to do so.

Great, thanks.

At this time, there are no further questions. I will now turn the call back to Barry for any closing remarks.

Yes. Well, I want to thank everyone for joining us on the call today. As noted, obviously, we're very disappointed with the ZYNRELEF results in third quarter, but very optimistic for fourth quarter and beyond. We see that the building the base of business that John defined in the call is starting to bear fruit and with some of the new initiatives we've put in place and the increase in procedures we're extremely positive about the fourth quarter and moving into next year. So thank you very much for tuning in and we look forward to keeping you updated in the future.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect. Goodbye.