Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Heron Therapeutics Second Quarter 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, Krista, and good afternoon, everyone. Thank you for joining us this afternoon on the Heron Therapeutics conference call to discuss the company's financial results for the second quarter ended June 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. 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, everyone, and thank you for joining us today for our second quarter 2023 earnings call. I'm pleased to share with you some significant developments that have transpired since our last call. Our team has been hard at work and I'm excited to provide you with updates that we believe will lead to transforming Heron into a profitable company with growing revenues, including updates on our cost reduction efforts, financing activities and changes in our executive management team, as well as an update on the status of our pending Hatch-Waxman ANDA patent litigation. On my first earnings call with Heron as CEO, I mentioned that I'd only been here four weeks and most of that time was used to assess the business and determine where we could make improvements quickly. The first step was assessing the executive leadership and making the proper changes that were needed. We made those changes and we now have a leaner organization with a new CFO, Head of Development, Head of Supply and Vendor Management, and new leadership in Sales and Marketing on the acute side of the business. I'm thrilled to announce that the new team has successfully implemented a cost reduction initiative. Through careful analysis and strategic planning, we have identified areas where we can streamline our operations and enhance efficiencies. Over the next three years, we expect to achieve a remarkable cash savings of approximately $75 million. This initiative reflects our commitment to fiscal responsibility and our dedication to optimizing our resources for sustained growth. In addition to the cost cutting measures, we were able to bolster the balance sheet by completing a $30 million equity financing with some of our largest shareholders as well as closing on an up to $50 million working capital facility. Based on our…

Thanks, Craig. Our combined product net revenues for the second quarter of 2023 were $31.8 million compared with $27.6 million in Q2 2022, representing an increase of 15% to the same period of 2022. Product net revenues for the first six months of 2023 were $61.4 million compared with $51.1 million for 2022 or an increase of 20%. Our acute care franchise net revenues for the three and six months ended June 30, 2023 were $4.5 million and $8.3 million, respectively, which increased from $2.5 million and $3.5 million, respectively, for the same period in 2022. For the three and six months ended June 30, 2023, oncology care franchise net product sales were $27.3 million and $53.1 million, respectively, which increased from $25.1 million and $47.5 million, respectively, for the same period in 2022. Our product gross profit for the quarter was $11.6 million, and $24.4 million for the six months ended June 30, 2023, representing 36.5% and 40% of net revenue, respectively. These margins were negatively impacted by write-offs of ZYNRELEF inventory in both Q1 and Q2 of 2023. We believe these margins will improve and stabilize as we are working through some of our ZYNRELEF inventory. We also had a number of initiatives we are working through that we will discuss on future earnings calls that should have a very positive impact on costs moving forward. SG&A expenses for Q2 and six months ended June 30, 2023 were $36.4 million and $68.4 million, respectively, compared to $32.1 million and $64.1 million in the same period of 2022, with the increase primarily resulting from our reduction in force announced in June 2023. Research and development expenses were $17.6 million and $31.4 million in Q2 and six months ended June 30, 2023, compared to $28.8 million and $70.9 million in…

Thanks, Ira. Operator, at this time, we'd like to open the line for questions.

[Operator Instructions] Your first question comes from the line of Serge Belanger from Needham & Company. Please go ahead. Your line is open.

Hi, good afternoon. Just a couple of questions for us. First one, regarding achieving profitability. I think in the past, you've talked about a late 2024 timeline for that. Is that still the target, or has that changed given the regulatory delay around ZYNRELEF? And maybe if you can talk about the assumptions on how we get there? And I guess, secondly, regarding that regulatory delay for ZYNRELEF, maybe just talk about what you expect the label expansion could look like once it gets approved. Thanks.

Hi, Serge. Thanks for the question. So, regarding profitability, again, we have said that we believe we would achieve profitability in late 2024. I think the takeaway here is based on the monies we've raised, again, we don't think we'll need to raise any more monies in order to get to that point. And we built that forecast without the upside of the sNDA for the VAN or anything like that. So this is more of just a trend forecast on how the product was performing. And so with the cost reduction efforts we've made, we are able to get to profitability within that timeframe. There could be some upside from some things we're doing. Again, assuming we get the label expansion, we're anticipating -- assuming that some of the things that we implement will have a positive impact on ZYNRELEF when those types of things happen and APONVIE as well. So from that standpoint, that's how we're getting to profitability at the end of '24. Regarding the sNDA and the expansion, I'd like to -- Bill Forbes is here with us in the room. I'd like maybe him to speak a little bit more detail around that and his thoughts.

Hi, Serge. This is Bill Forbes. Yes, so the current package insert allows for periarticular instillation for up to 72 hours of analgesia with bunionectomy, open inguinal herniorrhaphy and total knee arthroplasty. What we're proposing in the sNDA is that we go to postsurgical analgesia for soft tissue in orthopedic. So, maybe I'll step back a little bit here and just kind of talk broadly about the submission that was put in here at Heron. And ZYNRELEF has actually been studied in 14 clinical trials. Eight unique surgical procedures were contributing to those 14 clinical trials: four soft tissue and four different orthopedic surgical procedures. So, when the supplement went in, it actually went in with data from lumbar spinal surgery, total shoulder surgery, mammoplasty, C-section, abdominoplasty. The lumbar spinal surgery and total surgery has actually already been presented at Western and Southern Ortho conferences. So that data has already been put out there. And I think in many respects, this is going to broaden our label. Hopefully, we can negotiate a favorable label expansion with this data. I'm going to talk a little bit about what happened with the major amendment. We had been doing and continue to do some studies in some of those preclinical, and we were doing a rabbit study that looked a little further out. This was for intra-articular injection. As I've mentioned before, the indication for ZYNRELEF is actually periarticular, not intra-articular. So the label itself actually cautions physicians about the use of using intra-articular. And I think from that perspective, we consider this class labeling. This particular rabbit study just looked out a little bit further. So while it is new data, it is not actually a new finding, and it's already accounted for in our label. So I think that was kind of a disappointment on our side. We didn't feel like it was -- it needed -- that the agency or the division needed to declare a major amendment or -- to this particular filing because of that. So hopefully, that answers your question.

Yes. Thank you.

Your next question comes from the line of Boris Peaker from TD Cowen. Please go ahead. Your line is open.

Great. Thanks. Two questions on my end. First, in terms of profitability. I'm just curious, Craig, do you think Heron can become a profitable organization based on supportive care alone? Like if we exclude ZYNRELEF, is there an opportunity to restructure it such just to profitability without ZYNRELEF?

We really hadn't looked at it that way. But I mean, again, now you're talking if we put total focus around APONVIE and didn't promote ZYNRELEF at all, I mean, I think we would have obviously some inventory problems and that type of thing. But we really haven't analyzed it that way. But again, we're not looking for superior growth or anything with ZYNRELEF. From a profitability standpoint, we're really only trimming the product on the current growth trajectory it's on. So again, I think there's some upside there. And again, we've been pretty conservative well -- with APONVIE. And I think our one surprise is that we still are getting really good results out of CINVANTI. So, I think there's an upside here that we really haven't accounted for. But I think the point of this that we've been really trying to communicate is that we wanted transparency and the fact that we're trying to dig this business and put a cost reduction in place that allows us to get to profitability and be fairly conservative about our outlook.

Great. And on ZYNRELEF, specifically, then, you've obviously talked about the three indications where it's currently approved and the label expansion path going forward. But within the approved indication, do you have a sense of where the sales are coming from right now? Just trying to better understand why maybe you in certain areas versus not others.

Yes. I think where we've had the most success to this point has really been within knee and hip. I mean that's where a majority of the procedures are being performed. And again, once these hospitals or ASCs get passed sort of the prep issue, we're seeing data that suggest once we have a sort of four-month usage, we typically keep those customers. So that's where we've had the most success to date.

Great. Thank you very much for taking my questions.

Thank you.

[Operator Instructions] Your next question -- we have no further questions in the queue at this time. Oh, I'm sorry, we do. Carl Byrnes from Northland Capital Markets. Please go ahead. Your line is open.

Thanks. Congratulations on the progress, and thanks for the question. Any thoughts with respect to ZYNRELEF in terms of potential partnership? And what might that look in terms of accelerating and leveraging your existing sales force? And then, I have a follow-up as well. Thanks.

Well, thanks, Carl. Sorry, we almost cut you off there, so I apologize for that. Yes, one of the things we've been looking to do is what can we do outside of things that were used as far as improving ZYNRELEF like targeting and using better data, position our reps, maximizing territory potential and so on and so forth. We've been looking at possibilities to partner this product. The biggest issue with ZYNRELEF is not the clinical story. The true 72-hour pain relief is a big thing. And as we look at market research and that type of thing, that seems to -- we have no issue there. And I think we've had really good success. The issue has been with the preparation of the product in the surgical suite itself. And the issue with that is the non-sterile to sterile environment and then just the time that it takes to pull product out of the vial. And so, we've been looking at a number of different surgical companies that would be distributors, if you will, and that we could partner with who are pretty much living in those surgical suites on a daily basis. I know some of our competitors have done that. And we think by picking a partner in the surgical suite, it would allow our reps to want to spend more time with physician detailing the product, but also frees them up a bit to do other things with APONVIE and CINVANTI. And [our true] (ph) thing would be -- give a lift on those products as well. So, I think you'll see over the next fairly short timeframe, we will pick a partner of some sort that will add to our footprint with ZYNRELEF that I think it should be [indiscernible] side of the product. And again, these are things that we have not forecasted in.

Got it. Thanks. And then kind of switching gears a little bit. If we look at SG&A, which is around -- I think, around $36.4 million and R&D at $17.6 million, can you quantify how much in the quarter was related to severance and potentially kind of one-time extraordinary-type charges? And what you expect the expense levels to be, if you're able to quantify for the third quarter? Or if that's not possible? Or do you expect additional one-time severance and one-time type charges to hit the third quarter? Thanks.

Yes. I think we publicly released, we have about $5.9 million in one-time charge that will come through to the end of this year. So, go in 2024, you will see our operating expenses -- they've been [advanced, levelling] (ph) up at $120 million for the year, $120 million in 2024, and we believe we cut probably another $10 million of that going forward.

Got it. Thanks.

[Operator Instructions] Your next question comes from the line of Kelly Shi from Jefferies. Please go ahead. Your line is open.

Hi. This is [Clara] (ph) on for Kelly. Thanks for taking my question. So, I have two questions. For APONVIE, so this is the first full quarter of sales. Seems like you had a lot of positive feedback from physicians. So, just wondering how should we think about the sales growth trajectory from now on for APONVIE.

Yes. No, it's a great question. We haven't had a ton of time with APONVIE, but the biggest difference with APONVIE versus ZYNRELEF is that when we get an IDN or a formulary win with ZYNRELEF, it's still going to take quite a bit of work with individual surgeons and that type of thing. It's not necessarily a system-wide conversion. The difference with APONVIE is that there are situations where we can get system-wide conversion. And what I mean by that, if you take a hospital system, say like Baylor, and we were to selectively get moderate-to-severe patients, we can literally get all of those patients, so all high-risk patients, maybe in the situation they convert to APONVIE and the EBIC system and so forth. So, we get a system win that leads to sort of a conversion, if you will. And so I think what you'll find over the next few quarters is that we'll begin to get the system-wide orders that create bigger revenues, almost annuities, if you will, in certain accounts going forward. We've had a couple of hospital systems to date that have converted. You haven't really seen that in the results yet, but you'll begin to see it. And I think we have another 23 systems right now that are in review. So again, we really like the progress. I think it's going to take a little more time, obviously, to see the results from that. But again, in a very short time period, I think you're going to begin to see some of these more, if you will, bigger orders that come through. And ideally, what we want to do as we report going forward, we'll try to give a little more insight in the pipeline, hospital wins and that type of thing, that way, we'll have a bit more transparency in what's really going on with the product.

Great. And also for ZYNRELEF, also curious, have you seen or had different physician feedback on ZYNRELEF in terms of different kinds of surgical indications? And also understanding the VAN could be available by mid-2024. How quickly do you think we can see the change on sales growth trajectory after the VAN launch? And what kind of efforts are you making between now and VAN launch for sales improvement? Thank you.

Yes. Well, I think the good news is the VAN is on track from a timeline perspective. We do believe we'll have that out in midyear of next year. And it does two things. One, it helps with the sterility issue, it makes that [indiscernible]. And two, it's going to change the time to pull the product. So instead of three to four minutes, it could be upwards of 20 to 30 seconds. And so I think it's dramatically going to impact the product from a standpoint of just ease of use. Again, our -- I mentioned before about looking to possibly partner with a surgical partner in the surgical suite. I think that's something as well as we lead into the VAN and with an expanded label and hopefully expanded footprint. All of those things should lead to higher sales and higher sales growth But again, I want to reiterate, we have not forecasted that as far as getting us to profitability. These would be additional sales. So, we feel pretty comfortable with that. And again, everything seems to be on track from a timeline perspective.

Okay. Very helpful. Thank you.

Thank you.

We have no further questions in the queue at this time. Craig, I'll turn it back to you for closing remarks.

I just want to thank everyone again. This is our second earnings call, but we really do appreciate the time and patience. I think the business is making some strides in transforming. It's going to take a little bit of time, but we're getting there. And I think we've had some significant things that have happened this quarter. So, we look forward to updating everyone next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Goodbye.