Biotech General Discussion

Monday, June 29, 2020

9:58 AM

We were disappointed to learn today that Heron (HRTX) received a Complete Response Letter (CRL) for its longer acting post-op pain medicine, HTX-011 (See 6/29/20 PRESS RELEASE). A CRL accompanies a rejection by the FDA of a product that was being reviewed for approval after an NDA was accepted. The CRL typically comes around a PDUFA date. It is bad news for a company trying to get approval of a new therapy by the FDA, and bad news for the company's investors because it is usually accompanied by a sharp decrease in stock price, depending on how much derisking the market already priced into the pending FDA approval.

This is the second CRL that HRTX has received for HTX-011. In the first CRL the FDA's issues as reported by the company were broadly described as "the need for additional CMC and non-clinical information" (SEE 5/1/19 PRESS RELEASE). These were difficult for investors to assess at the time since they were so vaguely described, and we saw this as a risk that it could take a year or more to for the company to resolve. It appears that the company resolved the CMC issues, as they and we previously reported (Prior AMP post on 2nd PDUFA extension). And the FDA is not supposed to extend a PDUFA unless "review of the new information could address outstanding deficiencies in the application and lead to approval in the current review cycle (pg 5)" (http://bit.ly/FDA_Extensions). Our research confirms that extension of a PDUFA date usually leads to approval by the FDA (data not shown). However, apparently the company did not resolve all of the non-clinical issues in time, possibly because as HRTX suggests, the FDA was too busy with Covid-related activities to work with the company to resolve the non-clinical issues it had with the HTX-011 NDA.

Unlike the company's report-out of the first CRL, the company has provided specificity of the remaining non-clinical issues. The issues that remain as reported by the company include preclinical toxicity issues on 3 excipients and one manufacturing specification issue. They appear potentially, but not definitely addressable in a short Class 1, CRL response 2 month time frame. The company reported that at least one of the toxicity issues might require a new 6 month study, which of course would push this out into another Class 2, CRL response, and we could be looking at another 12 months before the next PDUFA date. Very importantly, HRTX's CEO clarified on today's call that they have not received any notice from the FDA regarding their proposed label language, which is an important issue as we've previously reported.

This second CRL must be frustrating for HRTX's management, and of course, has been painful for investors like us who have lost money across these 2 HRTX CRLs. On its investor call, the company's CEO indicated that there was no dialog on these issues with the FDA since the February announcement, and the FDA's comments came in at the end of the review. He indicated that this might be Covid-related, as the FDA might have been too swamped to address these with the company. However, that doesn't give us too much comfort, as the company and the agency had months to deal with these issues before COVID affected the U.S., and we suspect the FDA had more to do with the lack of communication than HRTX. However, we still wonder: Does HRTX have the right individuals interacting with the FDA? There does not appear to be a close relationship established that is providing them much insight into, and access to the FDA review team, which is especially surprising given the breakthrough therapy designation.

Unfortunately, the best we can do is use this as a learning opportunity about biopharma/FDA interactions. When companies receive CRLs and they do not clearly and specifically articulate that there remain a small number of easily addressable issues, and especially if they do not receive a Class 1, CRL response from the FDA, it is likely that the issues are not simple to address and investors should plan on at least 12 months for an approval. Plus, as in this situation, the issues might be more complex, or the FDA team reviewing may not communicate well with the company seeking approval, or the FDA team might be a more strict team with respect to FDA requirements. As U.S. taxpayers and as a country not only in the middle of a pandemic, but also still in an opioid crisis, that is very unfortunate, as we delay the time people have access to this opioid-sparing technology. Plus, this situation does not speak well of the FDA's breakthrough therapy designation, which usually in our experience accompanies more likely and rapid approvals. Finally, from a valuation standpoint, any delay typically means decreased valuation because the time to positive cash flow and a possible acquisition, has been pushed out. Having said that, we think today's 28% selloff was a bit overdone.

HRTX plans to conduct a Type A meeting with the FDA within 30 days of receiving the FDA (See our updated HTX-011-Post-op pain AmpCard), and will have a much better understanding at that time, of how long it will be before resubmission, according to company's CEO today. Looking back at our notes from last year, our notes indicated that HRTX's CEO 2 weeks after the CRL on a BofA investor call in May 2019, noted that he expected a 6 month review period after filing their response from that first CRL. Sounds like this time around there is hope that a new toxicity study will not be needed and the FDA might grant a shorter 2-month review period. After licking our wounds on a second big hit to our investment from the latest CRL, we could not resist buying some shares today after the big selloff. However, we are concerned that this FDA review team has not done HRTX any favors and we worry that this might read through to the eventual approved label language too.

See below for the updated HRTX bull case, bear case, and Amp case after this latest CRL:

Heron Bull thesis (updated):

HTX-011 is an exciting asset in the large, non-opioid post-op pain management space that has been 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. Furthermore, the company has a healthy cash position, with what appears to be over 1.5 years of cash. The FDA's second CRL provided a buying opportunity with the stock selloff despite the fact that the company has cleared the major FDA approval hurdles, and has some final I's to dot and T's to cross. Eventually after the likely approval of HTX-011 later this year or next year, 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 (updated):

On the bear side, HRTX's current ~$1.1B enterprise value could still be considered high with $70-$80M revenue in a decreasing revenue dynamic and the possibility of another 12 months or longer before launch of HTX-011. Furthermore, for a company with a minimal R&D pipeline and less than $100M revenue, their $200M/year cash burn seems high. HTRX'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, and will have had years to penetrate and control the market before HTX-011 is available. The company has had 3 CRLS in recent years, and at least its regulatory execution has not been impressive. Bear's worry that this will read-thru to narrow label language for HTX-011 when approved, and poor commercial execution.

Amp View (Updated):

We currently invest in HRTX and have invested in them for a few years now, and recently increased our shares with the sell-off on the day of the 2nd HTX-011 CRL. HTX-011 appears very approvable at this point, and will be good for society in our fight against the opioid crisis, and should compete well in the post-surgery pain market. Furthermore, HRTX should be rewarding for long-term investors too, especially at this further reduced valuation, since despite some rough execution on the regulatory front, HTX-011 approval appears imminent within 12 months, and very possibly in 2020. Just how rewarding, might depend on the exact label language approved by the FDA if the FDA approves HTX-011, which concerns us a bit more due to HRTX's misses with the FDA. However, we remain bullish on HRTX from a long-term perspective, with an apparently differentiated opioid-sparing pain therapeutic into a pretty large post-op pain market, and a commercial team that appears to execute well.

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