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Heron Therapeutics, Inc. - Initiation Note

Heron Therapeutics, Inc.

BUY (HRTX, $13.35)

Financing Overhang Removed, HTX-011 Delivering Consistently, CINV Franchise Materializing: Intiating BUY/$28 TP 

February 13, 2017

Jonathan Aschoff, Ph.D.


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We are initiating coverage of Heron Therapeutics with a Buy rating and a 12-month target price of $28. Our valuation includes US revenue from Sustol, Cinvanti and HTX-011. All 3 drugs benefit from Heron’s proprietary long acting Biochronomer drug delivery technology. Both Sustol (launched 4Q16) and Cinvanti (NDA filed 1Q17) prevent chemotherapy-induced nausea and vomiting (CINV), and are drugs that would typically be used in combination, thereby leveraging Heron’s salesforce, and HTX-011 (Phase 3 starts 2017) is in development for post-operative pain. We expect 2017 to bring additional Phase 2 and potentially initial Phase 3 HTX-01r1 data, Cinvanti approval and launch, and steadily increasing Sustol adoption.

Sustol, Cinvanti and HTX-011 address significant markets, and we project combined peak sales of about $1.1 billion. Sustol, a subcutaneously administered long-acting 5-HT3 antagonist, is differentiated in being approved for delayed-onset CINV in most highly emetogenic chemotherapy (HEC) and all moderately emetogenic chemotherapy (MEC) regimens, as well as for immediate-onset CINV after such chemotherapeutic regimens. Cinvanti, an NDA for which was filed in 1Q17, is differentiated from closest peer, Emend, by its lack of polysorbate 80, which may cause hypersensitivity and infusion site reactions. HTX-011, with four positive Phase 2 trials in multiple surgical models spanning small to large incisions, is differentiated from postoperative
standards of care by its ability to better control pain for an extended time.

We note that under buy-and-bill reimbursement, community oncologists should prefer Sustol to lower cost branded Aloxi and generic players. We believe that the clinically proven advantages of Sustol versus ondansetron (and by extension versus Aloxi, albeit arguably a lesser difference), has allowed Sustol’s WAC to be enough of a premium to Aloxi’s ASP such that Heron can attractively rebate the drug. Despite no reimbursement J-code until January 2018, Sustol’s attractive net cost
recovery in the community oncologist setting against other competitors should grant enough of an incentive to do some extra paperwork to receive a highly favorable reimbursement. The same metrics should facilitate Cinvanti adoption by YE17.

Comparative data are important when selling into a competitive market and Heron has demonstrated favorable comparisons for its drugs, particularly Sustol and HTX-011. Sustol as part of a triple regimen for CINV statistically beat a standard of care triple regimen in Phase 3. In Phase 2, HTX-011 in post-hernia surgery pain statistically beat generic bupivacaine, even when the data were not manipulated to exclude the beneficial effects of the much greater rescue opioid use in the active control arms. Another HTX-011 Phase 2 in post-bunionectomy pain demonstrated the drug’s ability to alleviate severe pain for 3 days, with 19 of 20 patients taking 400mg HTX-011 being opioid free during the entire 72-hour period post-surgery. This and future results should compare very favorably to competitor Exparel.


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