Heron Could Be The Next Home Run In Combating The Opiodemic – Heron Therapeutics, Inc. (NASDAQ:HRTX)

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Did Investors Overreact to Heron’s CRL?

It’s never a good sign when a biotech receives a CRL. A CRL is essentially a letter from the FDA that explains why a new drug was not approved. CRLs are issued for various reasons: safety and efficacy problems; problems with chemistry, manufacturing and controls (CMC); concerns with quality control or administrative feasibility; lack of human studies or evidence of success; concerns with dosing or delivery mechanism; etc. When a biotech receives a CRL, its stock usually experiences a major selloff. So it was no surprise when Heron Therapeutics’ (NASDAQ:HRTX) stock plummeted over 25% within a week of receiving its CRL. But not every CRL should lead to this kind of pummeling in the capital markets. In the case of Heron, the issues raised in its CRL shouldn’t be a problem for the company. The FDA “did not identify any clinical safety or efficacy issues, and there is no requirement for further clinical studies or data analyses.” What does this mean for Heron? It means that it won’t be too difficult to provide the CMC and non-clinical information that the FDA wants. In fact, in the company’s press release, Heron emphasizes its confidence in being able to quickly respond to the letter. While a CRL for some companies is the beginning of the end, that doesn’t appear to be the case with Heron and HTX-011.

The FDA is Pulling for HTX-011

The opioidemic is out of control in the United States. People are protesting the FDA to “stop approving dangerous opioids” and the FDA is desperately searching for “innovations that can offer non-addictive alternatives for the treatment of pain.” In the U.S. alone, 130 people die every day from overdosing on opioids. In the last decade, the FDA has been active in this war against opioid addiction, but recently has become involved like never before. Since 2014, the FDA has approved several new opioids, including Embeda, Hysingla ER, MorphaBond, Xtampza ER, Arymo ER, and Vantrela ER. Each of these has its own abuse-deterrent properties, as per the request of the FDA. Yet, people still find ways to misuse opioids. Drugs such as Evzio and Narcan that temporarily stop or reverse the effects of opioid overdoses have also recently been approved. But the problem remains. There’s nothing on the market that prevents opioid use (and misuse) in the first place.

Enter Heron’s HTX-011. Heron uses the company’s proprietary Biochronometer technology to administer the HTX-011 directly to the surgical site via a needleless syringe. The administration is such that it is as if it were administered over an extended period of time. This allows for a one-time administration of the drug in the hospital. And the best part is that in a recent study, “95% of patients receiving HTX-011… did not require opioids to manage their postoperative pain through recovery.” Those are huge results for a drug that has the potential to have a significant impact on the opioidemic in the U.S. So what does the FDA think of HTX-011? Well, the FDA granted HTX-011 Fast Track and Breakthrough Therapy designation and the drug’s NDA received a Priority Review from the FDA. The expedited review process may have been partially to blame for Heron’s CRL, at least that’s what Heron executives believe. Heron is optimistic in its ability to provide the FDA with the information they require in a timely manner. The average response time of biotechs to CRLs is six months, but Heron will likely respond sooner than this because it doesn’t have any major issues to address. And because of HTX-011 Fast Track and Breakthrough Therapy designations, the FDA will likely respond quickly to Heron.

How Have Stocks in Similar Situations Performed in the Past?

Camargo, a consulting firm that helps biotechs navigate regulatory hurdles, identifies several different reasons for receiving Complete Response Letters from the FDA. Realizing the differences in CRLs, I decided to analyze every CRL issued by the FDA in the last 18 months, group them, and compare what happened to stock prices in each group. Of course, all of these companies vary in market cap, product pipeline, and R&D resources, but it is interesting to take note of the patterns. When the FDA cited product quality, safety and efficacy, lack of human factors studies, or high product risks as the cause for the CRL, the companies that received these letters got hammered by investors and their stock prices still have not recovered. This is because the companies that receive this kind of CRL cannot easily resolve the FDA’s concerns. On the other hand, biotechs that received letters that simply requested more information have recovered an average of ~25% to date.

The Kiss-of-Death CRL

Let’s take a look at Aquestive Therapeutics, Inc. (NASDAQ:AQST). Its stock fell an initial 37% after the receipt of its CRL. Now, this CRL cited product specific matters as the issue preventing the drug’s approval. There was something wrong with the drug, suggesting that more clinical trials would be required. AQST proceeded to fall another 56% (to date).

There are several other examples of this kind of CRL in the last 18 months (about 60% of the FDA’s CRLs over that time period were of this nature). Mallinckrodt (NYSE:MNK) is down 73% from its CRL, DURECT Corporation (NASDAQ:DRRX) is down 63%, and scPharmaceuticals (NASDAQ:SCPH) is down 41%. Each of these companies experienced an initial freefall caused by the CRL, but then never recovered. In their CRLs, the FDA’s general message was that the benefits don’t outweigh the risks on these drugs. The CRLs were targeted at safety and efficacy.

The Overreaction CRL

ADMA Biologics, Inc. (NASDAQ:ADMA) received its CRL in December of 2018. The stock went down 45% as investors quickly sold off their shares the next few days. But ADMA’s CRL was different. It didn’t cite any safety or efficacy issues as the reason for not receiving FDA approval; rather, the FDA simply requested more information on their CMC processes. The company quickly responded to the CRL (within a month) and the stock is up about 61% to date from that initial freefall.

Within the last 18 months, Trevena, Inc. (NASDAQ:TRVN), Lipocine Inc. (NASDAQ:LPCN), Recro Pharma, Inc. (NASDAQ:REPH), and Ionis Pharmaceuticals (NASDAQ:IONS), all received CRLs with similar wording: no issues regarding safety and efficacy. The stock of each of these companies has experienced significant gains after its initial CRL-related market overreaction.

What are the Takeaways for Heron Therapeutics?

HTX-011 was granted Breakthrough Therapy and Fast Track designations by the FDA which led to an expedited review process for its NDA. Heron received a CRL in response to this meeting, but it didn’t cite safety or efficacy as the reason why the FDA didn’t approve the drug, and the FDA didn’t require additional clinical tests. The FDA is motivated to approve this drug to help combat the war with opioid addiction and complete the drug’s Fast Track approval process. HTX-011 could revolutionize the way postoperative pain is addressed. All indications point to HTGX’s stock behaving like the “Overreaction CRLs” mentioned above. And that means significant upside potential from where HRTX is currently trading.

Like all development-stage biotechs, Heron has additional risks ahead even if HTX-011 is approved. For example, it will take time for Heron to market and sell the drug. But unlike many other biotechs, Heron Therapeutics isn’t a one-hit wonder. Heron has two other drugs on the market that each experienced 150+% revenue growth in 2018. According to the company’s most recent 10-K, Heron’s total revenue grew from $30.7M in 2017 to $77.5M in 2018. In that respect, even if HTX-011 doesn’t pan out, the company will survive. And at least for the time being, Heron has enough current assets on its books to fund itself for a few years, so there’s no shareholder-diluting capital raise on the short-term horizon. That is, this revenue growth and the company’s $332M in cash and short-term investments can cover its annual operating expenses of $184M without raising funds.

HRTX is trading near its 52-week low. While I believe this stock to be a good buy-and-hold position, our investment time frame is 3-6 months. This is based on our thesis that Heron will be able to quickly respond to its “Overreaction CRL” and be back on the fast track for approval.

Disclosure: I am/we are long HRTX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a financial analyst at Stratesis Fund, LP

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