Heron: Strong Position With Product Launch Upcoming

| About: Heron Therapeutics, (HRTX)


Heron Therapeutics boosted its product portfolio with Cinvanti's FDA approval.

The IV drug has a safer profile with polysorbate 80-free formulation.

The company reported strong financial performance for the third quarter.

Heron Therapeutics Inc. (NASDAQ:HRTX) recently announced the FDA approval for its drug candidate for chemotherapy induced nausea and vomiting condition, or CINV. This development is an important milestone for the company which currently has only one marketed drug in its portfolio. The company has shown steady improvement in its financial performance as well and the trend is likely to continue into the coming quarters as well, making this stock an interesting investment opportunity.

FDA Approval for Cinvanti

The company scored a major win as the FDA approved its Cinvanti therapy in November. The company sought approval for the use of drug as a treatment for CINV. Cinvanti is the first polysorbate 80-free IV formulation, making it a more safer option against side effects such as allergic reaction and irregular heartbeat. The approval is also important as it is for the IV formulation which is considered to be a step up from current therapies. With the approval, Heron has become the only company to have injectable therapies with two different mechanisms. The company’s Sustol is a a serotonin-3 (5-HT3) receptor antagonist, and Cinvanti, an NK1 receptor antagonist. This boosts the position of the company in a highly lucrative market as it is believed that a major proportion of chemotherapy patients tend to suffer from CINV.

Market Potential for Cinvanti

The drug has a large market ahead. The cancer drug market is already worth over $100 billion and is expected to touch $147 billion figure in 2018. The market for CINV specifically is also expected to show strong growth rate of 7.1 percent CAGR during 2016 and 2022 time period, which translates to $2.6 billion worth of market by 2022. As the latest approved drug is free from polysorbate 80, which is a toxic agent known to cause a number of complications, it is expected to receive good response in the market. Further, since Cinvanti is Heron’s second treatment for CINV, the company is in position to derive synergies. The company is likely to use its existing marketing infrastructure for promoting Cinvanti, which will help curtail the costs for the company. The company is expected to launch the product in the market during the first quarter of 2018. The launch of the drug and subsequent performance reports will be major catalysts for the stock and will also aid in determining the impact of such revenue increase on the stock price.

Positive Q3 Results

Heron reported encouraging results for its third quarter as it reported $41.9 million in net loss, down from $48.5 million in net loss it had reported for the corresponding quarter of the previous year. Sustol showed strong traction in the market as its revenue stood at $8.6 million for the third quarter. In the second quarter, the revenue grew 134 percent on quarter over quarter basis to $8.5 million. The company is expected to improve its profitability position in the coming quarters as it expands its portfolio with newer drugs. However, Heron has shown impressive performance on cost front too. The company curtailed its R&D expenses to $28.8 million from $30.2 million it had incurred in the corresponding quarter of the previous year. Heron ended the quarter with cash, cash equivalents and short-term investments were $74.0 million as of September 30, 2017. At average cash burn rate of $40 million, Heron is not likely to face any liquidity crunch for next two quarter. While the runway does not seem long enough, it needs to be noted that the company will be adding to its revenue stream in the coming quarters, aiding its liquidity. The company seems to be on the right track as it is consistently reducing its net losses while increasing its revenue. Currently Sustol is the only revenue producing product the company has. However, in the first quarter of the coming year, it will have Cinvanti to further boost its revenue stream. In the coming quarters, the company may also see increase in its sales and marketing expenses due to launch of Cinvanti. However, the increase is likely to be less than proportional as the company may club the marketing efforts for both Cinvanti and Sustol.

Bottom Line

Heron showed strong performance this year which mimicked the company’s operational performance. The stock gained over 25 percent in the past 12 months and the company is performing well on various business fronts. However, there are certain risk factors attached to the stock. The stock showed extremely choppy movements in the market, characterized by deep declines and steep rises, making it a somewhat risky investment. Another point worth noticing is that the stock is currently trading close to its 52 weeks high of $18.40. The stock seems ripe for a meaningful pullback as has been shown by the previous movements in the price. While these risk factors may impact short term investment decision, the medium- to long-term outlook for the stock remains good.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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