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Initiating CoverageFebruary 7, 2017

Heron Therapeutics (HRTX)Initiation Report

LifeSci Investment Abstract

Heron Therapeutics (NasdaqCM: HRTX) is a specialty pharmaceutical company thatdevelops products using its proprietary Biochronomer™ polymer-based drug deliverytechnology. The Company received FDA approval in August 2016 for its chemotherapy-induced nausea and vomiting (CINV) product Sustol (extended-release granisetron), andlaunched it in October. Lead clinical candidate Cinvanti (aprepitant) is in development for theprevention of CINV using the 505b(2) approval pathway. Cinvanti can be used in combinationwith Sustol, which could help to drive adoption of each. Heron filed and NDA for Cinvanti inJanuary 2017, and expects a decision from the FDA in the fourth quarter of 2017. HTX-011is a local anesthetic that utilizes a combined formulation of bupivacaine and meloxicam as apreventative treatment for post-operative pain. Promising Phase II data with HTX-011 hasbeen seen across multiple surgery types, and the Company plans to begin Phase III studiesin 2017 to support an FDA approval.

Key Points of Discussion

■ Sustol was Approved in August 2016 for the Treatment of CINV. Sustol is a long-acting version of granisetron, a 5-HT3 receptor antagonist used for the prevention ofchemotherapy induced nausea and vomiting (CINV). 5-HT3 antagonists are the maintreatment used for CINV, with Eisai’s (TYO: 4523) Aloxi (palonosetron) being the standardof care. US sales of Aloxi totaled more than $500 million in 2015. Sustol was approved inAugust 2016 for the prevention of acute and delayed nausea and vomiting associated withinitial and repeat courses of moderately emetogenic chemotherapy (MEC) or anthracyclineand cyclophosphamide (AC) combination chemotherapy regimens. Notably, this is the onlyextended release 5-HT3 receptor antagonist approved for a 5-day CINV prevention inMEC and AC based regimens. Heron launched Sustol in October 2016.

■ Cinvanti Approval Decision Expected in the Fourth Quarter of 2017. Leaddevelopment candidate Cinvanti (HTX-019) is an intravenous formulation of aprepitant,an approved P/neurokinin-1 (NK-1) receptor antagonist for the prevention of acute anddelayed CINV caused by MEC and HEC. NK-1 antagonists are used in combination with5-HT3 antagonists, and so Cinvanti would not challenge Sustol sales. Merck’s (NYSE: MRK)IV Emend (fosaprepitant dimeglumine) is the leading NK-1 antagonist, and had 2015 salesin the US of approximately $270 million. Cinvanti was designed to offer a more tolerableprofile than IV Emend by excluding polysorbate 80 from the formulation. This excipient isassociated with adverse events such as injection site reactions and hypersensitivity reactions.Positive results from a Phase Ib bioequivalency study reported in February 2016 showedthat Cinvanti has an improved safety profile over Emend. Heron is developing this assetunder a 505(b)(2) registration pathway. The Company submitted an NDA in January of2017, and an approval decision is expected in the fourth quarter of 2017.

Expected Upcoming Milestones

■ Q4 2017 – NDA approval decision for Cinvanti in CINV.■ 2017 – Begin Phase III studies with HTX-011 in post-operative pain.■ 2018 – NDA filing for HTX-011 in post-operative pain.

Analysts

Jerry Isaacson, Ph.D. (AC)(646) [email protected]

Sam Slutsky(212) [email protected]

Patrick Dolezal, M.S.(212) [email protected]

Market Data

Price $13.35Market Cap (M) $712EV (M) $555Shares Outstanding (M) 53.3Fully Diluted Shares (M) 69.8Avg Daily Vol 994,56452-week Range: $12.21 - $25.46Cash (M)* $209.4Net Cash/Share $2.94Annualized Cash Burn (M) $167.0Years of Cash Left 1.3Debt (M) $52.7Short Interest (M) 16.70Short Interest (% of Float) 39.1%*Pro Forma

Financials

FY Dec 2014A 2015A 2016AEPS Q1 (0.74)A (0.70)A (0.92)A

Q2 (0.78)A (0.74)A (1.17)AQ3 (0.66)A (0.63)A (1.24)AQ4 (0.71)A (0.87)A NAFY (2.87)A (2.95)A NA

For analyst certification and disclosures please see page 58

§ Use of Sustol and Cinvanti in Combination Could Increase Physician Adoption. Sustol is a 5-HT3 antagonist currently approved for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of moderately emetogenic chemotherapy (MEC) or anthracycline and cyclophosphamide (AC) combination chemotherapy regimens. For patients receiving regimens with high emetogenic potential, the combination of a 5-HT3 receptor antagonist, an NK-1 antagonist, and dexamethasone is recommended pre-chemotherapy. If Heron’s Cinvanti, an NK-1 antagonist, is approved, it could allow the Company to offer increased discounts from using a certain amount of each drug. This would create an additional incentive for physicians to use Sustol and Cinvanti on top of the promising clinical data.

§ HTX-011 Has the Potential to Become the Standard of Care for Post-Surgical Pain Management. HTX-011 is a local anesthetic that utilizes a combined formulation of bupivacaine and meloxicam as a preventative treatment for post-operative pain. HTX-011 was engineered using Heron’s Biochronomer platform to provide a long-acting effect. It is the only long-acting local anesthetic in late-stage development that is designed to reduce post-operative pain and inflammation. Phase II data from patients undergoing abdominoplasty and bunionectomy showed a reduction in mean pain intensity for between 72 and 96 hours. HTX-011 has also shown a statistically significant advantage compared to both generic bupivacaine, the standard of care, and placebo, while significantly decreasing opioid use through 96 hours. Surgeons and anesthesiologist have continued to shift away from opioid use due to their association with negative adverse events, and HTX-011 could be an attractive alternative.

§ Large Market Opportunity Exists for Post-Operative Pain Management. There is a large market

opportunity for post-surgical pain treatments. Overall, there were 28 million procedures that required post-operative pain relief in 2015, and 32 million are expected to occur in 2020. Post-operative pain occurs after more than 80% of surgical operations and is only controlled in about half of patients. The leading local anesthetics to manage post-operative pain are generic bupivacaine, ropivacaine, and Pacira’s (NasdaqGS: PCRX) Exparel (liposomal bupivacaine). 28,539,647 vials of these agents sold in the US between June 30, 2015 and June 30, 2016. Based on Exparel’s WAC of $285, which is the main branded competitor of HTX-011, a 25% penetration in this market could be a $2.0 billion opportunity for HTX-011.

§ Instillation Aspect of HTX-011 Could Extend Beyond Application of Current Local Anesthetics. HTX-

011 is differentiated from other local anesthetics by having the ability to be administered as both an injection and instillation. Operations that require large incisions, such as abdominoplasty, can be cumbersome to deliver injectable anesthetics. The abdominoplasty incision can be as large as 15-20 inches in length, and require between 50 and 100 injections of local anesthetics. In comparison, the incision size for hernia repair is only 2-3 inches in length. The instillation delivery gives physicians the ability to apply HTX-011 directly onto the wound, which is faster and easier than injection, and could allow HTX-011 to be used more broadly in the surgical setting. Anesthesiologists we spoke with felt that the instillation delivery of HTX-011 would be a favorable option for ER wounds, where injectable local anesthetics are not currently used.

February 7, 2017

Financial Discussion Financial Results for the Third Quarter of 2016 and Full Year 2017 Guidance. On November 8, 2016, Heron reported financial results for the third quarter of 2016. The Company had a net loss of $48.5 million, or $1.24 per share compared to a net loss of $22.7 million, or $0.63 per share for the same period in 2015. The increase in cash used was primarily due to higher research and development expenditures and increased activities pertaining to the launch of Sustol. Research and development costs were $30.2 million for the third quarter of 2016 compared to $14.2 million for the third quarter of 2015. General administrative costs totaled $5.3 million for the three months ended September 30, 2016 compared to $4.1 million for the same period in 2015. Sales and marketing costs were $12.1 million for the third quarter of 2016 compared to $4.1 million in 2015. As of September 30, 2016, the Company had cash, cash equivalents, and short-term investments of $88.9 million, and raised an additional $162 million after fees in January 2017. In August 2016, Heron entered into a $100 million loan agreement to help fund continued operating activities, including the launch of Sustol. This loan has a two-year term, and an annual interest rate of 8%. The first $50 million of the loan has closed, and the second $50 million is dependent on the accomplishment of certain corporate milestones. Notably, there are currently no fees, warrants, or equity conversions associated with the loan. Heron launched Sustol in October of 2016. Approximately 3,200 units were sold in in the fourth quarter, generating around $1.1 million in net sales. The Company has provided 2017 Sustol sales guidance of $15 - $25 million.

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Table of Contents

Company Description .................................................................................................................................................................... 5Biochronomer Technology ................................................................................................................................................................. 6Sustol – 5-HT3 Antagonist Treatment for CINV ..................................................................................................................... 6CINV Background ......................................................................................................................................................................... 8

CINV – Causes and Pathogenesis .......................................................................................................................................... 8Types of CINV – Timing of Onset Relative to Chemotherapy Treatment ..................................................................... 9Types of CINV and Treatment – Emetogenic Potential of Chemotherapy Regimen ................................................... 9Treatment for CINV ............................................................................................................................................................... 10

Market Information – CINV ...................................................................................................................................................... 12Sustol – Clinical Data Discussion ................................................................................................................................................ 14

Phase III Study Comparing Sustol and Aloxi ....................................................................................................................... 15Phase III MAGIC Study in Delayed CINV from HEC .................................................................................................... 20

Competitive Landscape – CINV ................................................................................................................................................ 21Cinvanti – NK-1 Receptor Antagonist for CINV Prevention ................................................................................................ 24Clinical Data Discussion for Cinvanti ......................................................................................................................................... 25Competitive Landscape for NK-1 Antagonists ....................................................................................................................... 26HTX-011: A Long-Acting Bupivacaine and Meloxicam Combination Therapy for the Prevention of Post-Operative Pain ................................................................................................................................................................................................. 27

Preclinical Studies with HTX-011 ......................................................................................................................................... 29Post-Operative Pain – Background ........................................................................................................................................... 31

Treatment- Post-Operative Pain ........................................................................................................................................... 32Market Information - Post-Operative Pain .............................................................................................................................. 34

Market Estimates ..................................................................................................................................................................... 37HTX-011 - Clinical Data Discussion ......................................................................................................................................... 37

Study 201: A Phase II Clinical Trial for Post-Operative Pain from Bunionectomy ..................................................... 38Study 202: A Phase II Clinical Trial for Post-Operative Pain from Hernia Repair ...................................................... 39Study 203: A Phase II Clinical Trial for Post-Operative Pain from Abdominoplasty .................................................. 42Study 208: A Phase II Clinical Trial for Post-Operative Pain from Bunionectomy ..................................................... 43

Other Drugs in Development for Post-Surgical Pain Prevention ........................................................................................ 48Competitive Landscape for Post-Operative Pain Prevention. .............................................................................................. 51Intellectual Property ..................................................................................................................................................................... 54Management Team ....................................................................................................................................................................... 55Risk to an Investment .................................................................................................................................................................. 57Analyst Certification ..................................................................................................................................................................... 58Disclosures ..................................................................................................................................................................................... 58

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Company Description Heron Therapeutics is a specialty pharmaceutical company that develops enhanced versions of approved therapeutics using its proprietary, polymer-based Biochronomer™ drug delivery technology. The Biochronomer technology consists of bio-erodible polymers designed to release drugs over a defined period of time. Heron’s approved drug Sustol is a long-acting version of granisetron, a 5-HT3 receptor antagonist used for the prevention of chemotherapy induced nausea and vomiting (CINV). Sustol was approved in August 2016 for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of moderately emetogenic chemotherapy (MEC) or anthracycline and cyclophosphamide (AC) combination chemotherapy regimens. Notably, this is the only extended release 5-HT3 receptor antagonist approved for a 5-day CINV prevention in MEC and AC based regimens. Heron launched Sustol in October 2016. The Company’s full developmental pipeline is shown in Figure 1.

Figure 1. Heron’s Developmental Pipeline

Source: LifeSci Capital Lead development candidate Cinvanti (HTX-019) is an intravenous formulation of aprepitant, an approved, orally administered P/neurokinin-1 (NK-1) receptor antagonist. It is currently sold under the brand name Emend by Merck (NYSE: MRK) for the prevention of acute and delayed CINV caused by MEC and HEC. Unlike intravenous (IV) Emend (fosaprepitant dimeglumine), Cinvanti does not contain polysorbate 80, an excipient that is associated with adverse events such as injection site and hypersensitivity reactions. Positive results from a Phase Ib bioequivalence study were reported in February 2016 showing that Cinvanti has an improved safety profile over IV Emend. Heron is developing this asset under a 505(b)(2) registration pathway, and intends to submit an NDA in January 2017, with a potential approval expected in the fourth quarter of 2017. Heron’s next developmental asset, HTX-011, utilizes a combined formulation of bupivacaine and meloxicam as a preventative treatment for post-operative pain. HTX-011 was developed using Heron’s Biochronomer platform, and so it was designed to have a long-acting effect. In fact, it is the only long-acting local anesthetic in late-stage development that is designed to reduce post-operative pain and inflammation. Phase II data in abdominoplasty and bunionectomy showed a reduction in mean pain intensity for between 72 and 96 hours. The reduction in pain was statistically significant compared to both bupivacaine and placebo, and HTX-011 also significantly decreased opioid

Sustol

Chemotherapy Induced Nausea and Vomiting

Phase I Phase II Phase III Approved

Chemotherapy Induced Nausea and Vomiting

Cinvanti

HTX-011

Post-Operative Pain in Local Administration

Post-Operative Pain in Nerve Block

February 7, 2017

use through 96 hours. Physicians have continued to shift away from opioid use due to their association with negative adverse events, and HTX-011’s long-acting potential could make it an attractive alternative. There is a large market opportunity for post-surgical pain treatments. Overall, there were 28 million procedures that required post-operative pain relief in 2015, and 32 million are expected to occur in 2020.1 Post-operative pain occurs after more than 80% of surgical operations and is only controlled in about half of patients.2

Biochronomer Technology Heron developed the Biochronomer technology to enable the release of short-acting treatments over long periods of time with a single subcutaneous injection. Both Sustol and HTX-011 utilize this technology, which consists of erodible polymers that undergo hydrolysis over days or weeks after injection. As illustrated in Figure 2, this translates into a controlled, continuous drug release as the polymer erodes. This technology can be used broadly with pharmaceuticals, and more than one drug can be incorporated. In the case of HTX-011, the Biochronomer technology has the potential to reduce or eliminate the need for systemic pain medications after surgery, as it enables the usually short-acting bupivacaine and meloxicam to exert long-lasting effects.

Figure 2. Mechanism of Biochronomer Technology

Source: Company Reports

Sustol – 5-HT3 Antagonist Treatment for CINV Sustol (extended-release granisetron) is an FDA approved prophylaxis treatment for chemotherapy induced nausea and vomiting (CINV). It is a subcutaneous, long-acting formulation of the well-known generic 5-HT3 antagonist, granisetron. Sustol was approved in August of 2016 for use in adults in combination with other antiemetics for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of moderately emetogenic chemotherapy (MEC) or anthracycline and cyclophosphamide (AC) based combination chemotherapy regimens. AC treatment is defined as either doxorubicin or epirubicin with cyclophosphamide. As shown in Figure 3, Sustol has many potential advantages over approved 5-HT3 antagonists, which are the standard of care for preventing CINV. It is the only extended release 5-HT3 receptor antagonist approved for a 5- 1 DRG claims analysis. 2015. 2 Chou, R. et al., 2016. Guidelines on the Management of Postoperative Pain. The Journal of Pain, 17(2), pp131-157.

February 7, 2017

day CINV prevention in MEC and AC based HEC regimens. Eisai’s (TYO: 4523) Aloxi (palonosetron) is a second-generation 5-HT3 antagonist, and is Sustol’s main competitor for MEC and acute HEC CINV. Sustol uses the same active ingredient as Roche’s (VTX. ROG.VX) Kytril (granisetron HCl) but the delivery method extends the efficacy of the drug, making it suitable for delayed CINV. Note that the first generation 5-HT3 antagonists are not indicated for delayed-onset CINV, whereas Aloxi is approved for acute and delayed CINV induced by MEC, but is not indicated for delayed CINV induced by HEC. Heron launched Sustol in the US in October 2016 as the only CINV treatment that is approved for the prevention of acute and delayed CINV caused by MEC and anthracycline and cyclophosphamide (AC) based combination chemotherapy regimens. AC regimens are considered HEC by ASCO and NCCN guidelines.

Figure 3. Approved CINV Indications for 5-HT3 Antagonists

Acute-Onset CINV

Delayed-Onset CINV

MEC

Susto l Aloxi

Generics: granisetron, ondansetronc

Susto l Aloxi

HEC

Susto l : AC-based regimens Aloxi

Generics: granisetron, ondansetronc

Sus to l : AC-based regimens

Source: LifeSci Capital

Launch Strategy. Heron has announced that it will launch Sustol in 2 phases. The first phase will occur during the next 12 to 18 months, and will focus on practices using 1.4 million of the 2.5 million annual Aloxi units. This includes 73 practices that participated in the Phase III MAGIC study.3 By the end of the first quarter of commercialization, roughly 20% of the 1.4 million Aloxi units that the Company is targeting were evaluating Sustol. Notably, many of these clinics have been using exclusively Aloxi in their clinics over generic 5-HT3 antagonists, indicating they have a preference for branded medications. Physicians’ familiarity with Sustol in these clinics, in addition to potential preferences for branded CINV drugs could help drive adoption. Based on the timing of approval, Sustol will not receive a permanent J-code until January 2018 since it missed the March 31, 2016 deadline for the 2017 cycle. Until then, it will have a miscellaneous J-code that can delay payments between 90 and 120 days since payers will have to manually review claims. To alleviate this burden, Heron plans to offer extended payment terms to practices in addition to potentially covering the cost of Sustol for practices that are denied payment from insurers and lose a third party appeal for coverage.

3 https://clinicaltrials.gov/show/NCT02106494

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In addition to helping non-insured patients gain access to Sustol, those who are commercially insured will have no copayment for treatment. Coverage has been well adopted since Sustol’s launch. All 12 Medicare Administrative Contractors (MACs), which cover 44 million lives, have agreed to cover Sustol. Commercial plans that provide healthcare coverage for about 139 million people in the US have also agreed to reimburse Sustol, and the Company is in negotiations with other commercial plans to increase coverage. The WAC for Sustol is $495/unit, which is in-line with Aloxi’s cost of $453/unit.

CINV Background Chemotherapy is the most widely used treatment for cancer. Although effective in many malignancies, they are often associated with debilitating side effects that include CINV. Antiemetic (anti-vomiting) therapy is given prophylactically, and is particularly important for patients receiving moderately or highly emetogenic (vomit-inducing) chemotherapy. In addition to making chemotherapy more tolerable, successful antiemetic therapy confers a pharmacoeconomic advantage. When patients experience severe CINV, they may go to the emergency room, be treated with rescue medication, and/or be admitted to the hospital for dehydration. Therefore, successful prophylaxis of these debilitating symptoms can be beneficial to patients, caregivers, and payers alike. 5-HT3 antagonists are the main treatment for CINV. The market leader for preventing CINV is Eisai’s Aloxi, which is differentiated from the older, generic 5-HT3 antagonists by its long half-life and extended duration of action. Prior to Sustol, it was the only agent approved for use in delayed-onset CINV caused by MEC as well as acute-onset CINV caused by MEC and HEC. 5-HT3 antagonists are typically used in combination with dexamethasone, a generic corticosteroid. When treating patients with highly emetogenic chemotherapy, an NK-1 antagonist like Merck’s (NYSE: MRK) Emend (fosaprepitant dimeglumine) is often added. Even with the availability of several prophylactic treatments for CINV, many patients still experience the condition. In a study of 742 chemotherapy-naïve patients receiving HEC and MEC regimens, 51% (67/132) of patients receiving HEC and 46% (279/610) of patients receiving MEC experienced acute or delayed CINV, despite receiving standard of care CINV prophylaxis.4

CINV – Causes and Pathogenesis Clinical trials and animal models have shown that serotonin (5-hydroxytryptamine, or 5-HT3) is the key chemical mediator of CINV.5 The chemoreceptor trigger zone (CTZ) is located in a medullary center located in the area postrema, which is susceptible to emetic stimuli delivered through the blood system or cerebrospinal fluid (CSF). The chemoreceptor trigger zone stimulates the vomiting center, an area of the medulla oblongata that acts by stimulating the phrenic, spinal, and visceral nerves. These efferent signals induce vomiting by their effects on the diaphragm, abdominal muscles, and stomach. The vomiting center also receives signals of increased intracranial pressure from visceral organs, the inner ear labyrinthine apparatus, and higher CNS structures.

4 Gilmore, J.W. et al., 2014. Antimetic guideline consistency and incidence of chemotherapy-induced nausea and vomiting in US community oncology practice: INSPIRE study. Journal of Oncology Practice, 10(1), pp68-74. 5 Trigg, M.E. & Higga, G.M., 2010. Journal of Oncol Pharm Practice 16, 233-244.

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The mechanism by which individual chemotherapeutic agents affect the chemoreceptor trigger zone is less clear. Chemotherapeutic agents are presumed to cause release of emetic transmitters. These substances bind to receptors in the CTZ and probably bind to other areas of the brain and GI system. The most important transmitters and their receptors include serotonin and the 5-HT3 receptor, dopamine, dopamine receptor and substance P, and the neurokinin 1 (NK-1) receptor. Most antiemetics function as competitors of the emetogenic transmitters; therefore, by binding to the receptors, they prevent binding of the emetogenic transmitters. For this reason, using antiemetics prior to administration of emetogenic chemotherapy is important, and treatment of breakthrough CINV is difficult. This reveals one of the drawbacks of oral CINV therapy, because if a patient forgets to take their pills the day before treatment they may have to delay chemotherapy. The most commonly used class of antiemetics are 5-HT3 antagonists, which are thought to prevent nausea and vomiting by preventing serotonin, which is released from enterochromaffin cells in the gastrointestinal mucosa, from initiating afferent transmission to the CNS via vagal and spinal sympathetic nerves. These agents may also block serotonin stimulation at the CTZ and other CNS structures.

Types of CINV – Timing of Onset Relative to Chemotherapy Treatment CINV begins within a few minutes to several hours or days following the start of chemotherapy. Acute onset CINV is defined as CINV occurring within the first 24 hours. The nausea and vomiting are generally most severe for the first 5 or 6 hours after therapy. 6 Delayed-onset CINV is defined as occurring more than 24 hours after chemotherapy and may continue for several days. The nausea and vomiting is usually most severe about 48 to 72 hours after treatment and can last for up to 6 or 7 days. Notably, Sustol’s extended release formulation provides anti-CINV activity for 5 days, and could be beneficial to many of these patients.

Types of CINV and Treatment – Emetogenic Potential of Chemotherapy Regimen Different cytotoxic drugs induce different patterns of emesis. For example, the difference in emesis between cyclophosphamide and carboplatin is characterized by a monophasic curve. Although most intense in the first 24 hours, symptoms from each may continue for a number of days. The antiemetic response to 5-HT3 receptor antagonists on days 2-5 is good in the case of carboplatin and cyclophosphamide and poor in the case of cisplatin. The frequency with which nausea and vomiting are observed is related to the emetogenic risk of the particular chemotherapeutic agent or combination of drugs being administered. We have summarized which chemotherapies are considered highly emetogenic by ASCO and the NCCN in Figure 4. Cisplatin is one of the most emetogenic agents and is known to produce nausea in more than 99% of patients if no antiemetics are used. Aloxi is approved to prevent acute CINV from all HEC regimens, but is not approved to prevent delayed CINV from HEC. Sustol is the only 5-HT3 antagonist approved to prevent delayed CINV from AC based regimens, which are considered HEC. Notably, Sustol showed an antiemetic effect in patients treated with cisplatin that was numerically higher than the AC population in its Phase III MAGIC trial. This study was not powered to detect a significance difference

6 NCCN Clinical Practice Guidelines in Oncology: Antiemesis. Version 1.2012. Rockledge, Pa: National Comprehensive Cancer Network, 2011.

February 7, 2017

within the HEC groups, and Heron’s management mentioned that the FDA as a result did not approve Sustol for platinum based regimens like cisplatin.

Figure 4. Highly Emetogenic Chemotherapy

NCCN

• AC combination chemotherapy* • Carmustine > 250 mg/m2 • Cisplatin • Cyclophosphamide ≥ 1,500 mg/m2 • Dacarbazine

*Defined as either doxorubicin or epirubicin with

cyclophosphamide

• Doxorubicin ≥ 60 mg/m2 • Epirubicin > 90 mg/m2

• Ifosfamide ��2 g/m2

• Mechlorethamine • Streptozotocin

ASCO

• AC combination chemotherapy* • Carmustine • Cisplatin • Cyclophosphamide ≥ 1,500 mg/m2

*Defined as doxorubicin, epirubicin, idarubicin, or

daunorubicin with cyclophosphamide.

• Dacarbazine • Dactinomycin • Mechlorethamine • Streptozotocin

Source: ASCO and NCCN

Treatment for CINV Guidelines from the National Comprehensive Cancer Network (NCCN), the Multinational Association of Supportive Care in Cancer/European Society for Medical Oncology (MASCC/ESMO) and the American Cancer Society (ACS) recommend that pre-chemotherapy management of CINV be based on the emetogenic potential of the chemotherapy regimen selected. 7,8,9 For patients receiving moderately emetogenic chemotherapy (MEC), the combination of a 5-HT3 receptor antagonist and dexamethasone should be used prior to chemotherapy, with or without lorazepam. Patients receiving the combination of an anthracycline and cyclophosphamide, and select patients receiving certain other agents of moderate emetic risk, such as low dose doxorubicin, should also receive an NK-1 antagonist, such as Emend. Post-chemotherapy, a 5-HT3 receptor antagonist, dexamethasone, or both are recommended for the prevention of delayed emesis. For patients receiving regimens with high emetogenic potential, the combination of a 5-HT3 receptor antagonist, an NK-1 antagonist, and dexamethasone is recommended pre-chemotherapy, and lorazepam may also be used. Aloxi is currently the preferred 5-HT3 antagonist. An NK-1 antagonist and dexamethasone are recommended post-chemotherapy in combination with ongoing 5-HT3 antagonists for the prevention of delayed emesis. Figure 5

7 MASCC/ESMO Antiemetic Guidelines 2011, April 2011, Multilnational Center for Supportive Care in Cancer, available online at www.masc.org. 8 Kris, M.G. et al., 2006. American Society of Clinical Oncology Guideline for Antimentics in Oncology: Update 2006. Journal of Clinical Oncology, 24(18), pp2932-2947. 9 NCCN Clinical Practice Guidelines in Oncology: Antiemesis. Version 1.2012. Rockledge, Pa: National Comprehensive Cancer Network, 2011. Available online. Last accessed August 12, 2011.

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summarizes the standard guidelines for patients at risk of developing CINV who are taking either moderately or highly emetogenic chemotherapy.

Figure 5. Standard Guidelines for Antiemetic Prophylaxis Moderately Emetogenic Chemotherapy Highly Emetogenic Chemotherapy

Acute Onset (Day 1)

5-HT3 antagonist Aloxi 0.25 mg IV (preferred) granisetron

PO: 2mg, or 1mg BID IV: 0.01 mg/kg Transdermal: 24-48 hr prior

ondansetron PO: 16-24mg IV: 8-12mg

dolasetron 100mg PO

5-HT3 antagonist Aloxi 0.25 mg IV (preferred) granisetron

PO: 2mg, or 1mg BID IV: 0.01 mg/kg Transdermal: 24-48 hr prior

ondansetron PO: 16-24mg IV: 8-24mg

dolasetron 100mg PO

AND Dexamethasone

12 mg PO or IV

AND Dexamethasone

12 mg PO or IV Optional: NK-1 antagonist

Emend 125mg aprepitant PO 115mg fosaprepitant IV

AND: NK-1 antagonist

Emend 125mg aprepitant PO 115mg fosaprepitant IV 150mg fosaprepitant IV

Delayed Onset

(Days 2-3 MEC)

(Days 2-4 HEC)

5-HT3 antagonist, if 5-HT3 used on Day 1 is Aloxi àno additional dosing another 5-HT3àcontinue daily

5-HT3 antagonist, if 5-HT3 used on Day 1 is Aloxi àno additional dosing another 5-HT3àcontinue daily

OR Dexamethasone

8 mg PO or IV daily

AND Dexamethasone

8 mg PO daily (w/standard Emend) 8 mg PO Day 2, 8 mg PO BID on days 3&4 (w/high dose Emend)

OR (if NK-1 was used on Day 1) NK-1 antagonist

Emend 80 mg PO daily Varubi 90 mg PO

AND Dexamethasone

8 mg PO or IV daily

AND NK-1 antagonist

Emend 80 mg PO daily Varubi 90 mg PO

Source: LifeSci Capital, NCCN Guidelines10, Kris et al., 2006.11

10 NCCN Clinical Practice Guidelines in Oncology: Antiemesis. Version 1.2012. Rockledge, Pa: National Comprehensive Cancer Network, 2011. Available online at www.nccn.org. Last accessed August 12, 2011.

February 7, 2017

Clear Unmet Medical Need in Prophylactic CINV Treatments. Despite the availability of several prophylactic treatments for CINV, many patients still experience the condition. A study in 4 community hospitals evaluated the incidence of CINV in chemotherapy naïve patients during the first 5 days after treatment.12 The primary endpoint of this trial was the lack of CINV, which was defined as having no emesis or clinically significant nausea following chemotherapy. 132 patients received HEC, and received a 5HT-3 antagonist, an NK-1 antagonist, and corticosteroids on day 1, the NK-1 agonist on days 2 and 3, and corticosteroids on days 2 through 4. 610 patients received MEC, and were treated with a 5HT-3 antagonist, an NK-1 antagonist, and corticosteroids on day 1, and 5-HT3, NK-1, or CS on days 2-3. 51% (67/132) of patients receiving HEC and 46% (279/610) of patients receiving MEC experienced acute or delayed CINV, indicating the need for improved treatments. Sustol is the only 5-HT3 antagonist that is indicated to provide 5-day CINV prevention in MEC and AC based regimens, and could fill this unmet need by providing relief to many of these patients.

Market Information – CINV Heron launched Sustol in October 2016 at a WAC of $495/unit in the US. The target market for the agent is patients’ who are prescribed Aloxi as a preventative treatment for CINV. There are approximately 2.35 million units of Aloxi sold each year in the US that overlap with Sustol’s label. In an 85-physician survey, 56% said they expect Sustol to eventually become their branded 5-HT3 antagonist of choice. If this occurs, the market opportunity for Sustol could be more than $650 million in the US before discounts. Epidemiology. More than 7 million cycles of chemotherapy are administered each year. One study with over 11,000 patients showed that 27% (1.9 million) of doses of chemotherapy doses were highly emetogenic, 46% (3.2 million) of doses were moderately emetogenic, and 26.4% (1.8 million) of doses were low emetogenic chemotherapy or minimum emetogenic chemotherapy LEC/minEC.13 Market Opportunity. CINV occurs in between 70% and 80% of patients receiving chemotherapy.14 5-HT3 antagonists are the most popular category of drugs to prevent the condition, and they are generally used in combination with corticosteroids for both MEC and HEC. IV Emend, an NK-1 antagonist, is typically added as a third agent in more severe cases, generally with HEC. Although NK-1 antagonists are effective in combination with 5-HT3s, they have limited utility as monotherapy, and thus its introduction expanded the overall size of the CINV market without taking share from the 5-HT3 antagonists. As shown in Figure 6, more than 4 million units of 5-HT3 antagonists are prescribed in the US each year, and sales have remained consistent since 2013.

11 Kris, M.G. et al., 2006. American Society of Clinical Oncology Guideline for Antimentics in Oncology: Update 2006. Journal of Clinical Oncology, 24(18), pp2932-2947. 12 Gilmore, J.W. et al., 2014. Antiemetic guideline consistency and incidence of chemotherapy-induced nausea and vomiting in US community oncology practice: INSPIRE study. Journal of Oncology Practice, 10(1), pp68-74. 13 Craver, C. et al., 2011. Clinical and economic burden of chemotherapy-induced nausea and vomiting among patietns with cancer in a hospital outpatient setting in the United States. Journal of Medical Ecnomics, 14(1), pp87-98. 14 Ware, M.A. et al., 2008. A review of nabilone in the treatment of chemotherapy-induced nausea and vomiting. Therapeutics and Clinical Risk Management, 4(1), pp99-107.

February 7, 2017

Figure 6. US Market for Injectable 5-HT3 Antagonists

Source: Company Reports Aloxi is the most commonly used 5-HT3 antagonist on the market. This suggests that physicians have a preference for branded CINV products over generics, which is consistent with the business model of most oncology practices. In 2015, roughly 2.5 million units of Aloxi were used in the US. Aloxi is not approved for the treatment of delayed CINV induced by HEC based treatments, and its use in cisplatin only accounted for about 180,000 of its sales units. This means that Sustol can be used in place of approximately 2.35 million Aloxi units. For the first phase of Sustol’s launch, Heron is targeting practices that use roughly 1.4 million of the 2.35 million units of Aloxi sold annually in the US for MEC and AC based HEC regimens. Notably, this includes all 73 of the clinics that participated in Sustol’s Phase III MAGIC study, which could help to drive early adoption. 56% of Surveyed Physicians Believe Susto l Will Become 5-HT3 Brand of Choice. A survey of 85 physicians was conducted in November 2016 to determine the expected time for Sustol to become each practice’s braded 5-HT3 antagonist of choice. As shown in Figure 7, 6% of physicians said 1-3 months, 27% said 4-6 months, 13% said more than 6 months, and 10% were unsure of the time frame, but thought Sustol would become the brand of choice. Only 5% of answers were that Sustol will not become the brand of choice, and 39% were unsure whether it would become the brand of choice. Aloxi, the leading branded 5-HT3 antagonist, had 2.35 million of its 2.5 million units solid in the US in 2015 overlap with Sustol’s label. If Sustol can capture 56% of this market like the survey indicates, peak sales in the US could be more than $650 million before discounts. Considering 39% of physicians were unsure if Sustol would become the brand of choice, and Aloxi is not approved for preventing delayed CINV caused by HEC, the peak opportunity in the US could be larger than we assess.

8

The Branded 5-HT3 Market (Aloxi) Consists of ~2.5 Million Units

Source: Symphony Health Solutions data, 2016

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16

Injectable 5-HT3 Receptor Antagonists for the Prevention of CINV Number of Vials Sold in the U.S. by Quarter

Aloxi granisetron ondansetron

February 7, 2017

Figure 7. Timing for Susto l to Become Branded 5-HT3 Antagonist of Choice

Source: Company Presentation

Bulk Discounts and Purchasing Process of CINV Drugs may Cause a Slow but Steady Launch. Due to discounts received from favoring a particular CINV drug, many clinics will do this to increase their margins. As an example, some clinics almost exclusively use Aloxi. In order to penetrate clinics that exclusively use a particular CINV drug, Sustol’s added benefits will have to be effectively communicated to nurses and physicians. In addition, practices go through a purchasing process prior to adopting a new drug. During this period, clinics assess coverage, the time to payment, reimbursement rate, and clinical experience before fully adopting the new agent. Heron’s management noted that this process can take several quarters to occur. Physicians who have been using Sustol in their clinics indicated to Heron that they are evaluating it in 5% of patients over a period of 3-6 months prior to determining whether they will incorporate it into their normal treatment regimen for preventing CINV. Due to the mentioned hurdles, we anticipate it will take some time to get clinics to adopt Sustol, but also anticipate that adoption will be rapid in each clinic once it occurs due to the benefits of Sustol and favoring a single therapeutic. The Company anticipates net sales in 2017 to be between $15 and $25 million.

Susto l – Clinical Data Discussion Heron conducted two randomized Phase III trials evaluating Sustol as a treatment for CINV to support its FDA approval. One compared Sustol to Aloxi in 1,341 patients undergoing moderately or highly emetogenic chemotherapy. Data showed that Sustol was numerically better at preventing acute and delayed CINV from MEC and HEC based treatments in addition to patients who were refractory to Aloxi in the first cycle of treatment. Notably, ASCO changed its definition of which chemotherapies were considered MEC and HEC in 2011. As a result, Heron reanalyzed the data from this study using the new guidelines and found that the antiemetic efficacy of Sustol under the new definition of HEC was more favorable than the prior analysis.

6

46 Percent of MDs Evaluating SUSTOL® as Potential Branded Agent of Choice (~6-9 Month Timeline)

13%

7%

23%

5%

11%

23%

17%

0%

20%

40%

60%

80%

100%

5%

39%

10%

13%

27%

6%

0%

20%

40%

60%

80%

100%

23%

31%

31%

46%

38%

38%

8%

8%

15%

23%

31%

31% Efficacy

Safety

Preparation and administration

Payer coverage

Impact to practice

operations

Payer reimbursement

rate / time

8%

8%

8%

8%

8%

15%

Degree of MD Experience With SUSTOL Practice’s Experience With SUSTOL Trial Timing for SUSTOL To Be Brand of Choice

We will try SUSTOL and are operationalizing it

We have decided not to use SUSTOL

I have used SUSTOL but other MDs have not

No discussions regarding SUSTOL to date

I and other MDs in my practice have used SUSTOL

I have not used SUSTOL but other MDs have

SUSTOL is under consideration

1-3 months

4-6 months

> 6 months SUSTOL will probably be our brand of choice but not sure when

Not yet sure if SUSTOL will become our brand of choice

SUSTOL won’t be our brand of choice

In what timeframe do you expect SUSTOL to become the practice’s branded 5-HT3 of choice? - Putnam Physician Survey Nov 2016 (N=85)

What has been the experience with SUSTOL use in your practice? Please rate 1-7. - Putnam Practice Manager Survey Nov 2016 (N=40, n=13)

Which of the following best describes you / your practice? Please select one. - Putnam Physician Survey Nov 2016 (N=85)

Extremely positive (6-7) Positive (5) Negative (3) Extremely Negative (1-2)

February 7, 2017

The second trial compared Sustol to ondansetron as a preventative treatment for delayed HEC. Beginning this was influenced by the updated HEC results from the first Phase III study. This is the only Phase III study in HEC patients that used the recommended three-drug prophylactic regimen of a 5-HT3 antagonist, an NK-1 antagonist, and dexamethasone in the comparator arm. Results showed that the CR rate in delayed CINV for patients treated with Sustol was 64.7% compared to 56.6% for patients treated with the ondansetron regimen (p = 0.014). Several secondary endpoints were also statistically significant favoring Sustol over standard of care treatment.

Phase III Study Comparing Susto l and Aloxi This was a randomized, double-blind Phase III study comparing Sustol to Aloxi in 1,341 patients undergoing moderately or highly emetogenic chemotherapy. The study was initiated in May 2006, and data was presented in September 2008. Notably this was one of the largest ever Phase III trials for a CINV treatment. Data showed that Sustol was numerically better at preventing acute and delayed CINV from MEC and HEC based treatments in addition to patients who were refractory to Aloxi in the first treatment of cycle. Phase III Study Design. This was a randomized, multi-center study comparing the efficacy of Sustol to Aloxi 1,341 patients undergoing treatment with MEC or HEC.15 An outline for the design of this study is shown in Figure 8. Patients were stratified depending on whether they were taking MEC or HEC, and they were assessed for both the acute (Day 1) and delayed (Days 2-5) phases. Patients were treated with 5 mg or 10 mg of subcutaneous Sustol, or 0.25 mg of intravenous Aloxi. Patients receiving Aloxi during cycle 1 were re-randomized into either the 5 mg or 10 mg Sustol cohorts for their respective chemotherapy regimen for cycle 2. All patients were also treated with intravenous dexamethasone, which is a standard component of CINV prophylaxis, and either intravenous or subcutaneous placebo.

Figure 8. Phase III Study Design for Susto l


15 Boccia, R. et al., 2016. Randomized Phase III trial of APF530 versus palonosetron in the prevenetion of chemotherapy-induced nausea and vomiting in a subset of patietns with breast cancer receving moderately or highly emetogenic chemotherapy, 16(166).

Patient Stratification (n = 1,341)

Aloxi Cycle 1

Cycles 2 to 4

Moderately Emetogenic (n = 634)

Sustol (5 mg)

Sustol (10 mg)

Aloxi Sustol (5 mg)

Sustol (10 mg)

Highly Emetogenic (n = 707)

Sustol (5 mg)

Sustol (5 mg)

Sustol (10 mg)

Sustol (10 mg)

February 7, 2017

The primary endpoint for MEC-acute, MEC-delayed, and HEC-acute cohorts was non-inferiority of treatment with Sustol vs. Aloxi. The efficacy measure used was percent of patients achieving a complete response (CR), defined as the absence of emetic episodes (vomiting) or use of anti-emetic rescue medications during the treatment period. For the HEC-delayed subgroup, there was no approved treatment, making a non-inferiority endpoint unfeasible. Instead, Heron chose superiority to Aloxi as the primary endpoint for that group. Secondary endpoints included pharmacokinetic measures and various assessments of safety, tolerability and efficacy. A daily diary was used to collect data pertaining to severity of nausea (mild, moderate or severe), vomiting/retching episodes and use of rescue medication over the 5-day treatment period. Non-inferiority was determined by the position of the lower bound of the exact confidence interval calculated using the difference in CR rate between Sustol and Aloxi in relation to the lower bound of the predefined 15% non-inferiority margin. Results from Susto l Phase III Study - MEC. The complete response results for cycle 1 from patients treated with MEC are shown in Figure 9. Overall, Sustol showed non-inferiority to Aloxi for both acute and delayed-onset CINV. For acute-onset CINV, complete response rate for patients treated with 5 mg of Sustol was 64.8%, 76.9% for the 10 mg Sustol group, and 75% for Aloxi. For delayed-onset CINV, the CR rates for the three groups were 51.4%, 59.0% and 57.7%, respectively. Notably, for both delayed and acute symptoms associated with MEC, the 10 mg dose of Sustol was numerically superior to Aloxi, but the difference was not statistically significant.

Figure 9. Phase III Complete Response Data in Patients Treated with MEC


Results from Susto l Phase III Study - HEC. The complete response results from cycle 1 for patients treated with HEC are shown in Figure 10. Sustol was non-inferior to Aloxi for acute-onset CINV. The CR rate for acute-onset CINV in patients treated with 5 mg of Sustol was 77.7%, 81.3% for 10 mg of Sustol, and 80.7% for Aloxi. For delayed-onset CINV in patients treated with HEC, the CR rates for the three groups were 64.6%, 68.3% and 66.4%, respectively. The CR data for the 10 mg dose of Sustol for delayed-onset CINV in HEC patients was numerically better than Aloxi, but the difference was not statistically significant.

74.80% 76.90% 75.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Sustol(5mg) Sustol(10mg) Aloxi

CRforAcuteCINVwithMEC

51.40% 59.00% 57.70%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%


CRforDelayedCINVwithMEC

February 7, 2017

Figure 10. Phase III Complete Response Data in Patients Treated with HEC


ASCO changed its definition of which chemotherapies were considered MEC and HEC in 2011. As a result, Heron reanalyzed the data from this study using the new guidelines. As shown in Figure 11, the antiemetic efficacy under the new definition of HEC was more favorable for Sustol compared to the prior analysis. This provided the rationale for the Phase III MAGIC trial evaluating Sustol for delayed HEC. 74.5% of acute patients had a CR with 10 mg of Sustol compared to 67.4% for Aloxi. For delayed CINV, 55.8% of patients receiving 10 mg of Sustol had a CR compared to 50.5% of patients receiving Aloxi. As a reminder, Sustol is only approved to prevent acute and delayed CINV in patients receiving AC based HEC regimens.

Figure 11. Reanalysis of Phase III Complete Response Data in Patients Treated with HEC

Source: Company Reports Efficacy in Specific Chemotherapy Regimens. Heron also conducted a subset analysis of patients taking specific chemotherapy regimens. The analysis focused in particular on chemotherapy regimens that are known to induce high rates of CINV. These data are presented in Figure 12, along with the numerical difference in CR compared to the Aloxi arm. In seven out of the ten subgroups analyzed, the 10 mg dose of Sustol was numerically superior to Aloxi.

74.80% 76.90% 75.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%


CRforAcuteCINVwithHEC

51.40% 59.00% 57.70%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%


CRforDelayedCINVwithHEC

74.50%67.40%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Sustol(10mg) Aloxi

CRforAcuteCINVwithHEC

59.00% 57.70%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Sustol(10mg) Aloxi

CRforDelayedCINVwithHEC

February 7, 2017

Figure 12. Susto l Efficacy in Difficult Chemotherapy Regimens

Treatment

Difference

Chemotherapeutic

Regimen Susto l 10

mg Aloxi

0.25 mg

Moderately Emetogenic

Acute Cyclophos./Doxorubicin 70.7% 65.7% +5.0%

All other regimens 84.4% 85.0% -0.6%

Delayed Cyclophos./Doxorubicin 47.4% 46.3% +1.1%

All other regimens 72.9% 70.0% +2.9%

Highly Emetogenic

Acute

Cisplatin regimens 81.1% 75.5% +5.6%

Carboplatin/Paclitaxel 85.4% 89.8% -4.4%


Delayed

Cisplatin regimens 66.0% 60.4% +5.4%

Carboplatin/Paclitaxel 70.8% 71.4% -0.6%


Source: APF530 ASCO Poster #9627, ASCO 2009

Efficacy in Delayed Onset CINV in Repeat Cycles of HEC. Many chemotherapy patients experience increasing CINV symptoms after each additional round of therapy received. As part of the analysis of the Phase III study for Sustol, Heron compared it to Aloxi during the first cycle of chemotherapy, but all patients received Sustol during subsequent cycles. In order to compare efficacy of Sustol to Aloxi in later cycles of chemotherapy, the Company compared their observed efficacy in cycles 1-4 to published results for Aloxi. 16 It is worth noting that the dose for Aloxi (0.75 mg) used in the published trial is higher than the FDA-approved dose administered during cycle 1 of the Sustol trial (0.25 mg). Furthermore, we should exercise caution any time we compare data from different clinical trials. Figure 13 shows the CR rates for delayed-onset CINV in patients receiving repeated cycles of HEC. The table below the figure indicates the number and percentage of patients that received each subsequent cycle of therapy. Importantly, patients receiving Sustol achieved a durable, improving response for subsequent rounds of therapy. Patients receiving Aloxi experienced more CINV overall than those taking Sustol, and while efficacy was sustained in subsequent rounds for both drugs, the CR rate was more robust for patients taking Sustol.

16 Sakai et al., Annals of Oncology 19 (Supplement 8) vii724 (abstracts), 2008.

February 7, 2017

Figure 13. Sustained Efficacy of Susto l in Chemotherapy Cycles 1-4

Therapy Sustol (10 mg) Aloxi (0.75 mg)

Cycle 1 2 3 4 1 2 3 4 N = 240 169 129 94 351 315 254 117

% of Cycle 1 100% 70% 54% 39% 100% 90% 72% 33%

Source: Sakai et al. & LifeSci Capital

Sus to l Activity in Patients Refractory to Aloxi in Cycle 1. Heron’s Phase III trial of Sustol was designed so that patients who received Aloxi in Cycle 1 of therapy were treated with Sustol in later rounds. The Company was thus able to perform a post-hoc analysis on patients who were refractory to Aloxi (defined as failure to achieve a CR) in Cycle 1 to see whether they would respond to Sustol in later rounds. This analysis showed that in MEC and HEC respectively, 40% and 42% of patients that were refractory to Aloxi did achieve a CR in Cycle 2. The success for Sustol in this population is very encouraging for many reasons. First, it shows that progress is being made toward providing all cancer patients with relief from CINV symptoms. It also demonstrates that different patients need tailored treatments. Considering that up to half of chemotherapy patients fail to achieve a response using previously available drugs, there is a large opportunity for Sustol. It may help patients who do not respond to other therapies. In addition, patients can achieve a more durable response using Sustol, and have a reduction in rescue treatments since fewer patients become refractory to Sustol than to current therapies. Susto l Phase III Safety Results. Heron’s Phase III trial showed that Sustol is generally safe and well tolerated. The most common adverse event was injection site reaction, followed by constipation.17 AEs experienced in the trial were mild in severity, and most were not considered treatment related. There was one report of a pulmonary

17 Barr, J.; O’Boyle, E.; Grous J. J.; Supportive Oncology Conference 2009 Poster.

68.3%76.3% 79.1%

87.2%

58.7%54.3%

62.2% 65.0%

0.0%

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CRforMul*pleCyclesofChemotherapy

APF530(10mg)

Aloxi(0.75mg)

February 7, 2017

embolism 15 days after treatment that may have been related to Sustol. Overall, the incidence of AEs was comparable to Aloxi, with no significant differences.

Phase III MAGIC Study in Delayed CINV from HEC This was a randomized, double-blind Phase III study comparing Sustol to ondansetron as a preventative treatment for delayed CINV induced by HEC. This is the only Phase III study in HEC patients that used the recommended three-drug prophylactic regimen of a 5-HT3 anatagonist, an NK-1 antagonist, and dexamethasone in the comparator arm. Notably, Aloxi is not approved to prevent delayed CINV following HEC because it failed to show a significant difference compared to ondansetron in its trial. Results showed that the CR rate in delayed CINV for patients treated with Sustol was 64.7% compared to 56.6% for patients treated with the ondansetron regimen (p = 0.014). Several secondary endpoints were also statistically significant favoring Sustol over standard of care treatment. Prior to this study, there were no 5-HT3 antagonists that showed efficacy in delayed CINV for patients receiving HEC as part of a three-drug regimen. Together, we believe that the data from the two Phase III studies positions Sustol favorably as a preventative treatment for CINV. Phase III Magic Study Design. This was a randomized, double-blind, placebo controlled Phase III study comparing Sustol to ondansetron in the prevention of CINV induced by HEC based treatments.18 An outline of the trial design is shown in Figure 14. 942 patients who were scheduled for HEC were randomized 1:1 to receive standard of care treatment, consisting of 0.15 mg/kg of IV ondansetron plus 150 mg of intravenous fosaprepitant on day 1, plus dexamethasone, or 500 mg subcutaneous Sustol on day 1, plus 150 mg of intravenous fosaprepitant on day 1, and dexamethasone. The primary endpoint of the study was the percent of patients who achieved a CR in the delayed-onset phase. Secondary endpoints included the overall CR rate, the delayed complete control rate, which is defined as CR plus no more than mild nausea, the overall complete control rate, and the rate of emetic episodes. Notably, 27.6% (124/450) of patients in the modified intent-to-treat population received a cisplatin regimen of at least 50 mg/m2 in the Sustol arm, and 28.3% (128/452) in the ondansetron arm.

Figure 14. Trial Design of Phase III MAGIC Study


18 https://clinicaltrials.gov/show/NCT02106494

9

MAGIC Study Design

942 patients scheduled to receive

HEC* randomized 1:1

Standard-of-Care Ondansetron 0.15 mg/kg IV (up to 16 mg IV) d1 + fosaprepitant 150 mg IV d1 + dexamethasone 12 mg IV d1 & 8 mg PO QD d2 + 8 mg PO BID d3-4 + placebo SC d1

SUSTOL (granisetron injection, extended release) SC d1 + fosaprepitant 150 mg IV d1 + dexamethasone 12 mg IV d1 & 8 mg PO QD d2 + 8 mg PO BID d3-4 + placebo IV d1

*HEC agents as defined in the 2011 ASCO CINV guidelines

The First Three-Drug Regimen Versus Three-Drug Regimen Efficacy Study

Prospectively Defined Primary Endpoint: Complete Response in the Delayed-Onset Phase

February 7, 2017

Phase III Magic Study Results. As shown in Figure 15, the CR rate in delayed CINV for patients treated with Sustol was 64.7% compared to 56.6% for patients treated with the ondansetron regimen (p = 0.014).19 Additional data points that were statistically significant in favor of Sustol, were the complete control rate (CC) for delayed CINV (p = 0.022), the number of delayed nausea episodes (p = 0.032), the number of overall nausea episodes (n= 0.048), and a quality of life questionnaire (p = 0.040). Sustol had a numerically better overall CR rate, overall phase CC rate, and overall rate of no emesis than ondansetron, but the results were not statistically significant. Based on these data and the prior Phase III study, the FDA approved Sustol for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of MEC or AC combination chemotherapy regimens. This study was not powered to detect a significance difference within the HEC groups, and Heron’s management mentioned that the FDA as a result did not approve Sustol for platinum based regimens like cisplatin. The delayed-phase CR rate for patients treated with at least 50 mg/m2 of cisplatin was 65.3% (81/124) for Sustol and 54.7% (70/128) for ondansetron. The delayed phase CR rate for patients treated with Sustol who were not treated with at least 50 mg/m2 of cisplatin was 64.4% (210/326) compared to 57.4% (186/324) for the ondansetron arm.

Figure 15. Efficacy of Susto l and Ondansetron in Delayed CINV Following HEC

Parameter Susto l (n= 450) Ondansetron (n= 452) Unadjusted p-value

Delayed CR rate 64.7% 56.6% 0.014 Overall phase CR rate 58.4% 52.9% 0.092 Delayed phase CC rate 60.7% 53.1% 0.022 Overall phase CC rate 54.7% 49.6% 0.123 Overall rate of no emesis 82.2% 79.2% 0.254


In terms of safety, there were no statistically significant differences between the Sustol and ondansetron arms in SAEs, discontinuations, or discontinuations due to AEs. Overall, 90.6% of patients treated with Sustol experience a TEAE compared to 89.5% for ondansetron treated patients. Grade 3 or higher AEs occurred in 19.5% of patients being treated with Sustol, and 19.4% of patients treated with ondansetron. The most common Grade 3 or higher AEs with Sustol were neutropenia in 3.7% of patients, dehydration in 1.1% of patients, and bruising at the injection site in 4.6% of patients. Injection site reactions were mostly mild and resolved prior to the second cycle of chemotherapy. Based on the quality of life questionnaire, 80% of patients were either satisfied or very satisfied with Sustol treatment.

Competitive Landscape – CINV There are currently four classes of drugs marketed for CINV, with most patients receiving a combination of the therapies. Figure 16 lists key 5-HT3 antagonists, and Figure 17 lists corticosteroids, NK-1 antagonists, and dopamine receptor antagonists. Dopamine receptor antagonists have broader clinical application and safety concerns, and so they are not commonly used to treat CINV. Patients who receive a 5-HT3 inhibitor typically do so

19 Schnadig, I.D. et al., 2016. APF530 (granisetron injection extended-release) in a three-drug regimen for delayed CINV in highly emetogenic chemotherapy, Future Oncology, 12(12), pp1469-1481.

February 7, 2017

along with a corticosteroid, usually dexamethasone. For more severe CINV, patients can also receive the NK-1 antagonist Emend. Oral treatments for CINV have historically had low adoption in the market compared to intravenous treatments. Notably, none of the competing 5-HT3 antagonists to Sustol are available as a subcutaneous injection.

Figure 16. Other Marketed 5-HT3 Antagonists for CINV


Class Drug Name Comments Company

5-HT3 Antagonist

Aloxi (palonosetron)

2nd generation Market leader-

IV for acute and delayed; Oral for acute only, but not

marketed in U.S. Generic competition allowed in

2018

Eisai (TYO:4523)/ Helsinn

Zofran (ondansetron)

1st generation Oral and intravenous

GSK (NYSE: GSK) (generic)

Kytril (granisetron)

1st generation Oral and intravenous

Roche (VTX. ROG.VX) (generic)

Anzemet (dolasetron)

IV no longer recommended due to torsade de pointes

Oral still available. Patent expired July, 2011

Sanofi-Aventis (NYSE: SNY)

(generic)

Sancuso Patch (granisetron)

Transdermal patch Slow adoption

ProStrakan (OTCMKTS:

PKNGF)

Zuplenz (ondansetron) Comes in a soluble oral form Midatech Pharma

(NasdaqCM: MTP)

Granisol (granisetron) Liquid formulation for oral delivery

OncBioMune Pharma

(OTCMKTS: OBMP)

5-HT3 Antagonist

/NK-1/Substanc

e P Antagonist

Akynzeo (netupitant/palonestron)

Fixed dose oral combination of a NK-1 antagonist/substance P

antagoinst and a 5-HT3 antagonist

Helsinn Healthcare (private)

February 7, 2017

Figure 17. Marketed Corticosteroids, NK-1 Antagonists and Dopamine Receptor Antagonists for CINV

Class Drug Name Comments Company

Corticosteriod dexamethasone or

methylprednisolone Generally used in

combination with 5-HT3 generic

NK-1/ Substance P Antagonist

Emend (aprepitant - oral)

(fosaprepitant - IV)

Generally used in addition to

5-HT3 and steroids Merck

Varubi (rolapitant) Generally used in addition to

5-HT3 and steroids

Tesaro (NasdaqGS: TSRO)

Dopamine Receptor Antagonist

Reglan (metocloperamide)

Adverse event profile limits use

Baxter (NYSE: BAX) (generic)

Compazine (prochlorperazine)

Oral, IV, IM, suppository

Adverse event profile limits use

GSK (generic)


Decreased Infusion Time Is a Benefit to Patients. Sustol utilizes a unique subcutaneous (SC) mode of administration that differentiates it from other CINV drugs, which could encourage adoption. Intravenous infusion can be painful, time consuming, and burdensome for patients, whereas SC administration is quick, and is typically better tolerated than IV treatments. Sustol is also an alternative to oral agents, since a single SC injection can replace multiple days of oral medication. Patients experiencing symptoms of CINV could be inconvenienced by having to swallow oral drugs. Oral CINV drugs have not been well adopted into the market due to this, lower physician reimbursement, and because if a patient forgets to take their pills the day before treatment they may have to delay chemotherapy. Overall, the Biochronomer-based delivery system of Sustol provides an alternative from currently approved therapies that oncologists can choose based on the needs of individual patients. Sustol Compares Favorably to Market Leader Aloxi . Aloxi is a second generation 5-HT3 antagonist and is currently the market leader in CINV prevention. The drug’s market advantage is due primarily to its longer half-life compared to first-generation 5-HT3 antagonists, and, therefore, extended duration of action. The FDA approved an IV formulation of the compound in 2003 for the prevention of both acute and delayed-onset CINV in MEC and for acute-onset CINV in HEC. It was the first agent to be approved for delayed onset CINV. Sustol provides several benefits over Aloxi that position it well to be adopted by physicians. Sustol is the only extended release 5-HT3 receptor antagonist approved for a 5-day CINV prevention in MEC and AC based regimens. First generation 5-HT3 antagonists are not indicated for delayed-onset CINV, whereas Aloxi is not indicated for delayed CINV induced by HEC. In addition, Sustol utilizes a unique subcutaneous (SC) mode of administration that as mentioned above, differentiates it from Aloxi. Regarding efficacy, a head-to-head Phase III study was done comparing Sustol to Aloxi. The results showed that Sustol was numerically better at preventing CINV than Aloxi for both MEC and HEC treatments.

February 7, 2017

In a survey of 75 oncologists, the most important variables influencing which antiemetic product they used were the ability to prevent delayed CINV, followed by ability to prevent CINV in HEC, safety, ability to prevent CINV in MEC, and efficacy in reducing breakthrough CINV and rescue medication usage. This is shown on the y-axis of Figure 18. The x-axis of the figure depicts the percentage of physicians who ranked Sustol or Aloxi as an 8 or above for each product variable on a 1-10 scale, with 10 being the best. Notably, Sustol was ranked ahead of Aloxi in 7 of the categories, including the following:

§ Ability to prevent delayed CINV. § Ability to prevent CINV in HEC. § Ability to prevent CINV in MEC. § Efficacy in reducing breakthrough CINV and rescue medication use.

Figure 18. Clinical Attributes of Susto l and Aloxi


Cinvant i – NK-1 Receptor Antagonist for CINV Prevention Heron’s lead clinical candidate, Cinvanti (HTX-019), is an intravenous formulation of aprepitant, an orally administered P/neurokinin-1 (NK-1) receptor antagonist that is marketed under the brand name Emend by Merck for the prevention of acute and delayed MEC and HEC CINV. Notably, the composition of matter patent for oral Emend expired in April 2015, with fosaprepitant in IV Emend expiring in 2019. For patients receiving chemotherapy regimens with high emetogenic potential, NK-1 receptor antagonists are recommended pre-chemotherapy in combination with a 5-HT3 receptor antagonist and dexamethasone. An NK-1 antagonist and dexamethasone are often recommended post-chemotherapy in combination with ongoing 5-HT3 therapy for the prevention of delayed emesis. The current standard of care NK-1 antagonist is IV Emend. US sales of IV Emend in 2015 were

18

SUSTOL was Rated Higher than Aloxi® on Most Clinical Attributes Including Those That Influence Product Choice the Most

4.4 Ability to prevent delayed CINV

4.4 Ability to prevent CINV in HEC

4.3 Safety

4.3 Ability to prevent CINV in MEC

4.3 Efficacy in reducing breakthrough CINV and rescue medication usage

4.3 Ability to prevent acute CINV

4.2 Provides extended duration of action

4.1 Can be used across a wide variety of chemotherapy patients

3.7 Convenient dosing / administration

0 20 40 60 80 100

SUSTOL Aloxi

SUSTOL vs. Aloxi Product Attribute Ratings Attribute

influence on product choice

Hig

her

Low

er

% rating product > 8 (on scale 0-10)

Scale 1-5 where 1 is not at all important and 5 is very important

Source: Instar Market Research, Dec 2015, N=75 oncologists

February 7, 2017

approximately 1 million units, or $270 million. Unlike IV Emend, Cinvanti does not contain polysorbate 80, which is associated with adverse events such as injection site and hypersensitivity reactions. In a study of patients in the US and Japan who had anaphylactic reactions to docetaxel, which contains polysorbate 80, between 1997 and 2008, 67 patients had anaphylaxis following drug administration, with 23 dying as a result.20 Interestingly, each of these patients was receiving prophylactic treatment for the reaction. Heron reported positive results from a Phase Ib bioequivalency study in February 2016 comparing Cinvanti to Emend. In January 2017, the Company filed for FDA approval with Cinvanti through section 505(b)(2) regulations of the United States Food and Drug Administration Act. This provides an accelerated path for reformulations of already approved treatments. Since Cinvanti is a reformulation of Emend, which is an already approved treatment for CINV, removing polysorbate 80 from the formulation should qualify Cinvanti for 505(b)(2) approval. Heron expects a decision from the FDA in the fourth quarter of 2017. If approved, Heron would be the first company to have both an NK-1 and 5-HT3 antagonist approved for CINV. This could allow the Company to offer increased discounts from using a certain amount of each drug, which would create an additional incentive for physicians to use Sustol and Cinvanti on top of the promising clinical data.

Clinical Data Discussion for Cinvant i Heron conducted a Phase Ib bioequivalence study comparing Cinvcanti to Emend. 100 patients were randomized to receive one of the two drugs, with a cross-over design. As shown in Figure 19, the area under the curve for each drug was nearly identical over a 72-hour period, indicating that they are bioequivalent. Based on this data, Heron filed for approval with Cinvanti in January 2017 through the 505(b)(2) pathway. Under a 505(b)(2), Heron is allowed to use data from the already approved drug, in this case Emend to support the application.

Figure 19. Aprepitant Concentrations with Cinvant i and Emend


20 Norris, L.B. et al., 2010. Polysorbate 80 hypersensitivity reactions: a renewed call to action. Community Oncology, 7(9), pp425-428. 8

HTX-019 is Bioequivalent to EMEND IV® for Both Aprepitant and Total Aprepitant Equivalents

February 7, 2017

Phase I Safety Data. As shown in Figure 20, Cinvanti had a preferable tolerability profile compared to Emend. 65% fewer AEs occurred in the Cinvanti arm that were possibly related to treatment. Notably, only mild AEs occurred in patients treated with Cinvanti, and no patients discontinued treatment due to hypersensitivity reactions.

Figure 20. Safety Data Comparing Cinvant i and Emend IV

Safety Cinvant i Emend IV

Events Patients Events Patients

Total AEs 27 21% 54 28% TRAEs 18 15% 52 28% SAEs 0 N/A 0 N/A

Moderate AEs 0 N/A 6 2% AEs leading to

discontinuations 0 N/A 2 2%

Source: LifeSci Capital and Company Reports

Competitive Landscape for NK-1 Antagonists NK-1 antagonists are commonly used in combination with a 5-HT3 receptor antagonist and dexamethasone to prevent CINV. The two NK-1 antagonists approved are Merck’s Emend in oral and intravenous forms, and Tesaro’s (NasdaqGS: TSRO) oral Varubi (rolapitant). The IV form of Varubi received a complete response letter from the FDA in January 2017, which could benefit the potential launch of Cinvanti. At the moment, Emend is the only approved injectable NK-1 antagonist. It is considered the standard of care NK-1 antagonist with roughly 1 million units used in the US in 2015. Emend is approved in combination with other antimetic agents for the prevention of acute and delayed nausea and vomiting in adults caused by HEC and MEC based treatments. Emend contains polysorbate 80, which has been associated with several adverse events such as flushing, shortness of breath, itchiness, severe anaphylaxis, and infusion site reactions. Cinvanti is an intravenously administered NK-1 antagonist that does not contain polysorbate 80, which could make it a more tolerable treatment compared to Emend. Oral Varubi was approved in late 2015 for use in combination with other antiemetic agents for the prevention of delayed nausea and vomiting in adults caused by MEC and HEC treatments. As previously mentioned, oral CINV treatments have not been well adopted in the market. Varubi sales through the first 9 months of 2016 totaled only $4.4 million. Varubi may have advantages over Emend that include a longer half-life and fewer drug-drug interactions. Delayed CINV occurs between 2-5 days following MEC and HEC treatments. Oral Emend has a half-life of between 9 and 13 hours, and requires dosing on days 1, 2, and 3 prior to chemotherapy. The half-life of oral Varubi is between 169 and 183 hours (roughly 7 days), and so it needs to be dosed only prior to the start of chemotherapy. Notably, IV Emend only requires a single injection prior to chemotherapy on day 1, and is effective for delayed CINV. Thus, it is unclear if the increased half-life of Varubi is a real clinical benefit over IV Emend. An additional potential benefit of Varubi is that Emend may have interactions with CYP3A4 substrates, which can cause a dexamethasone dose adjustment. Varubi only has interactions with CYP2D6 substrates, and should not affect the dose of dexamethasone.

February 7, 2017

Helsinn Healthcare’s Akynzeo (netupitant/palonestron) is a fixed dose oral combination of a NK-1 antagonist/substance P antagonist and a 5-HT3 antagonist. It was approved in 2014 for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of cancer chemotherapy, including HEC. Like Emend, it could have interactions withCYP3A4 substrates.

HTX-011: A Long-Acting Bupivacaine and Meloxicam Combination Therapy for the Prevention of Post-Operative Pain Heron is developing HTX-011 for the treatment of post-operative pain following a variety of surgeries. Overall, there were 28 million procedures that required post-operative pain relief in 2015, and 32 million are expected to occur in 2020. The main treatment currently used to manage pain in these patients is opioids, which are widely used and effective, but often lead to adverse events. This has led to a continued push by the medical and regulatory community to minimize their use. As an alternative, local anesthetics like bupivacaine and Pacira’s (NasdaqGS: PCRX) Exparel (bupivacaine-liposome injectable solution) are used to prevent post-operative pain from occurring, although the therapeutic effect is not always long enough to curtail opioid use. One contributing factor to the short analgesic activity of local anesthetics is inflammation at the surgical site that prevents delivery of the treatment. HTX-011 is a long-acting formulation of bupivacaine, the current standard of care local anesthetic, and meloxicam, which is a nonsteroidal anti-inflammatory drug (NSAID). When administered in combination, these drugs have a synergistic effect as meloxicam reduces inflammation at the target site, allowing the bupivacaine to have activity for the entirety of its presence. HTX-011 utilizes Heron’s proprietary Biochronomer drug delivery technology, which gives it a long lasting effect. HTX-011 aims to provide long-lasting pain relief while reducing opioid consumption. Together, this could allow it to become the standard of care for preventing post-operative pain. Notably, HTX-011 is being developed as an injectable and an instillation. The instillation administration provides several advantages over currently available local anesthetics. It is easier to administer, can reduce the variability of effect between surgeries types and physicians providing the treatment, and can be used in a wider range of procedures. The potential of Heron’s HTX-011 is most clearly demonstrated by four clinical trials performed for the prevention of post-operative pain following abdominoplasty, bunionectomy, and hernia repair. Results from Phase II studies with HTX-011 in post-operative pain have been positive. Patients treated with 400 mg of HTX-011 via instillation following abdominoplasty surgery demonstrated significant reductions in summed pain intensity (SPI) score through 96 hours as compared to placebo (p=0.0104). Similarly, patients receiving 200 mg of HTX-011 via instillation for post-operative pain after bunionectomy demonstrated significant reductions in SPI through 96 hours relative to participants receiving bupivacaine (p=0.019). In light of these findings, Heron has loosely guided that the summed pain intensity (SPI) score through 72 hours will likely be the endpoint for their Phase III program, using 120 and 200 mg of HTX-011B in two or three of the indications that have been assessed. The Company will likely compare the drug to placebo as well as bupivacaine solution, the current standard of care. Heron has not yet provided guidance on the timing of this program, but we expect an end of Phase II meeting with the FDA and initiation of Phase III studies in 2017. The Company plans to submit an NDA for HTX-011 in 2018. Mechanism of Action. Heron Therapeutics is developing HTX-011 for the treatment of post-operative pain, which occurs after more than 80% of surgical operations and is only controlled in about half of patients.21 HTX-011

21 Chou, R. et al., 2016. Guidelines on the Management of Postoperative Pain. The Journal of Pain, 17(2), pp131-157.

February 7, 2017

is a long-acting formulation of bupivacaine, the current standard of care for post-surgical pain management, and meloxicam, which is an anti-inflammatory agent. Bupivacaine achieves its effect by binding to voltage-gated sodium channels (VGSC) and blocking the influx of sodium, an essential component of the nerve impulses that are ultimately responsible for transmitting a pain signal. Nociceptors are the sensory nerve cells responsible for creating and transmitting a pain signal from the periphery to the central nervous system through a process called nociception. Pain signal transmission relies on VGSCs that allow the rapid influx of sodium to drive nerve impulses.22 The blockage of VGSCs increases the threshold to achieve electrical excitation, slows impulses that are transmitted, and reduces the rate of change of the membrane potential required for a neural impulse. Meloxicam, the other component of HTX-011, is a nonsteroidal anti-inflammatory drug (NSAID) that inhibits cyclooxygenase-1 (COX-1) and COX-2. This drug is also an inhibitor of the synthesis of prostaglandin, an inflammatory mediator that is involved with the sensitization of nerves and potentiation of bradykinin to cause pain. Beyond the independent mechanisms of action of bupivacaine and meloxicam, there is rationale to believe this drug combination may have synergistic effects. Efficacy of local anesthetics such as bupivacaine can be compromised due to surgically induced inflammation that creates an acidic environment.23 Changes in pH are problematic because bupivacaine is only able to freely pass through nerve cell membranes in an uncharged state, but as acidity increases the molecule increasingly exists in an ionized form. The ionization process of bupivacaine is demonstrated in Figure 21. As a cation the drug cannot move through nerve cell membranes to bind VGSC or influence membrane fluidity, which is also a contributor to analgesia. HTX-011 has potential to resolve the issue of inflammatory-associated inhibition of bupivacaine due to the concurrent delivery of the anti-inflammatory agent meloxicam. This unique combination of bupivacaine and meloxicam is encased in Heron’s proprietary Biochronomer drug delivery technology, which gives the product its long-acting effects.

Figure 21. Ionization of Bupivacaine in an Acidic Environment


22 Cummins, T.R. et al., 2007. The roles of sodium channels in nociception: Implications for mechanisms of pain. PAIN, 131(3), pp243-257. 23 Ueno, T. et al., 2008. Local anesthetic failure associated with inflammation: verification of the acidosis mechanism and the hypothetic participation of inflammatory peroxynitrite. Journal of Inflammation Research, 1, pp41-48.

February 7, 2017

PK/PD Data with HTX-011 Supports Heron’s Treatment Approach. Supporting the hypothesis to use the combination of bupivacaine and meloxicam, is PK/PD data from a study with HTX-011 in bunionectomy. As shown in the right panel of Figure 22, the pain score reported by patients in this trial is correlated with the plasma concentration of bupivacaine. The left panel of Figure 22 is data from Exparel’s bunionectomy study showing no correlation between the two variables. This suggests that the effect of bupivacaine was curtailed by a factor outside of bupivacaine plasma concentrations, and is representative of the limited duration of action with the agent. As mentioned, the efficacy of bupivacaine can be compromised due to surgically induced inflammation that creates an acidic environment.24 The depicted PK/PD study with HTX-011 indicates that by incorporating meloxicam, inflammation at the surgical site can be reduced, allowing bupivacaine to have a durable effect.

Figure 22. PK/PD Data with Expare l and HTX-011

Exparel HTX-011


Preclinical Studies with HTX-011 Heron has conducted several preclinical studies with HTX-011 to assess the potential of this compound for the treatment of post-operative pain. In a porcine model of post-operative pain, subjects treated with Biochronomer bupivacaine have demonstrated meaningful improvements in pain tolerance as compared to liposomal bupivacaine. However, the analgesic effect began to taper off after 48 hours, which prompted the company to combine the Biochronomer bupivacaine with meloxicam to mitigate the inhibitory effects of inflammation on analgesia. Data released on January 4th, 2017 highlight the long-lasting effect and synergies achieved with the combination product, HTX-011, compared to its individual components. Furthermore, Heron reported data that highlights the superior efficacy of HTX-011 relative to Biochronomer bupivacaine in combination with intravenous meloxicam. These preclinical studies could have large implications on the future competitive landscape of post-operative pain. The market is currently dominated by bupivacaine, and there are no combination treatments in late stage development that are similar to HTX-011.

24 Ueno, T. et al., 2008. Local anesthetic failure associated with inflammation: verification of the acidosis mechanism and the hypothetic participation of inflammatory peroxynitrite. Journal of Inflammation Research, 1, pp41-48.

February 7, 2017

Studies Utilizing an Animal Model for Post-Operative Pain. Several studies were performed in a pig-model of post-operative pain, which were validated and described by Castel, D. et al.25 Pigs undergo incisions, anesthetic or placebo is administered, and the threshold causing withdrawal is measured via the Von Frey test at baseline and at each subsequent time point. The primary endpoint of these studies was the percentage of maximal force tolerated over time, with a higher percentage representing greater analgesia. Figure 23 presents results of an experiment comparing HTX-011 to its independent components, Biochronomer bupivacaine and Biochronomer meloxicam, as well as a bupivacaine liposome suspension, and saline control. This experiment showed that HTX-011 and Biochronomer bupivacaine have the greatest analgesic effects through 5 hours post-operation, but HTX-011 begins to distinguish itself as the most efficacious therapy from 24-72 hours. Importantly, the bupivacaine liposome suspension shows very little effect beyond 24 hours, and the Biochronomer meloxicam demonstrates minimal analgesia throughout the study as compared to saline control. Taken together, these findings demonstrate that there is a synergistic effect when Biochronomer bupivacaine and meloxicam are combined in HTX-011.

Figure 23. Pig-Model of Postop. Pain with HTX-011 vs. Constituents

Source: Company Presentation Safety. Heron has conducted four Phase II clinical trials with various formulations of HTX-011 and there have not been any major safety signals reported to date. Through these studies, the product was generally well tolerated, with the most commonly reported adverse events (AEs) being headache, nausea, vomiting, constipation, and dizziness. The occurrence of these events has been similar between drug and placebo groups. Importantly, bradycardia has not been observed to occur at a greater frequency in patients treated with HTX-011 than placebo, which was a prior concern. The overall rate of the AE has not been greater than 2%. The safety profile is enhanced by the fact that the

25 Castel, D. et al., 2014. Characterization of a porcine model of post-operative pain. European Journal of Pain, 18(4), pp496-505.

February 7, 2017

active ingredients, bupivacaine and meloxicam, were initially approved in 1972 and 2000, respectively. For this reason, clinical and regulatory personnel likely have a high level of familiarity with these compounds and there are large safety databases available, which bodes well for developmental and commercial prospects

Post-Operative Pain – Background Pain is an unpleasant feeling brought on by noxious stimuli or injury, and serves an important evolutionary role to promote survival. The manifestation of pain drives an individual to withdraw from harmful situations, protect injured tissue, and perhaps, most importantly, avoid similar situations in the future. Pain is typically transient, but can be long-lasting. Post-operative pain is an acute form of pain that can last for several days and occurs following a surgical procedure. In some patients, post-operative pain can become chronic, which can impose economic costs in addition to long-term suffering for the patient. One of the main risk factor for chronic post-operative pain is extensive acute pain following surgery, highlighting the importance of proper post-surgical pain management.26 Overall, there were 28 million procedures that required post-operative pain relief in 2015, and 32 million are expected to occur in 2020.27 Post-operative pain occurs after more than 80% of surgical operations and is only controlled in about half of patients.28 The main treatment used to manage pain in these patients is opioids. Opioids are widely used and effective, but they often lead to adverse events such as addiction, nausea, disorientation, sedation, constipation, vomiting, urinary retention and, in some situations, life-threatening respiratory depression. Due to these adverse effects, there has been a continued push by the medical community to minimize opioid use. Local anesthetics like bupivacaine and Exparel are commonly used intraoperatively to provide pain relief following surgery in addition to delaying the use of opioids, although the longevity of their effect in some surgical procedures is not enough to curtail opioid use. Novel local anesthetics like HTX-011 that can provide longer-lasting pain relief, and reduce opioid consumption in a number of surgical procedures could challenge the local anesthetic market. Proper management of post-surgical pain is essential for a successful recovery. It is associated with clinical outcomes and patient well-being following surgery.29 Roughly half of patients undergoing surgery receive inadequate treatment for their pain, which can lead to a delayed recovery, postponed hospital discharge, increased economic burden, and long-term medical complications that include pneumonia, deep vein thrombosis, infection, chronic pain, which acute pain is a risk factor for, and depression.30,31 Better pain management in the acute phase following surgery with HTX-011 could decrease the described risks.

26 Perkins, F.M. & Kehlet, H. 2000. Chronic pain as an outcome of surgery. A review of predictive factors. Anesthesiology, 93(4), pp1123-1133. 27 DRG claims analysis. 2015. 28 Chou, R. et al., 2016. Guidelines on the Management of Postoperative Pain. The Journal of Pain, 17(2), pp131-157. 29 Vadivelu, N. Mitra, S. et al., 2010. Recent advances in postoperative pain. Yale Journal of Biology and Medicine, 83(1), pp11-25. 30 Chou, R. et al., 2016. Management of postoperative pain: a clinical practice guideline from the American Pain Society, the American Society of Regional Anesthesia and Pain Medicine, and the American Society of Anesthesiologists’ Committee on regional anesthesia, executive committee, and administrative council, The Journal of Pain, 17(2), pp131-157. 31 Meissner, W. et al., 2015. Improving the management of post-operative acute pain: priorities for change. Current Medical Research and Opinion, 31(11), pp2131-2143.

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Pathophysiology of Post-Operative Acute Pain. Acute pain caused by damage at the surgical site activates one or more types of peripheral pain receptors, known as nociceptors. These receptors transmit pain and temperature signals from the body to the spinal cord and then to the brain through the spinothalamic tract. A parallel pathway known as the trigeminothalamic tract handles pain and temperature information from the face. These pathways transmit pain and temperature information to the primary somatosensory cortex. This structure contains a full somatotopic representation of the body, as well as several other cortical, brainstem, and limbic structures important for the processing of pain.

Treatment- Post-Operative Pain Patients undergoing operative procedures typically receive therapeutics to manage pain prior to surgery, intraoperatively, and post-operatively. Notably, there is no standardization for pain management, and treatment paradigms vary both between clinics and within each clinic. Part of the reason for this is that the response to pain medications is patient dependent.32 Figure 24 shows potential treatments that can be used to manage post-surgical pain. Treatment option #1 is based on our conversations with physicians, and treatment option #2 is based on a sample treatment summary published by the University of Rochester Medical Center in 2013.33 Preoperative analgesia occurs in the preoperative holding area, and is intended to reduce the amount of pain and analgesic requirements following surgery.34 Intraoperative treatments include local anesthetics, and are intended to reduce the amount of pain in the first 48 hours following surgery, which is considered the most painful time period, and total opioid consumption. Considering that the currently available local anesthetics often do not block pain long enough to prevent all post surgical pain, patients are typically treated with a multimodal regimen that includes NSAIDs and opioids. Notably, Exparel, which was designed to be a long-acting form of bupivacaine, has not shown a benefit over generic bupivacaine across any of the tested indications. For example, a prospective randomized study in patients receiving total knee arthroplasty showed no statistically significant difference in post-operative daily pain scores, narcotic consumption, or narcotic related side effects between Exparel and generic bupivacaine.35 Based on our discussions with physicians, the duration of Exparel’s effect varies between clinics and physicians. We believe that a local anesthetic that can show a consistent duration of effect between surgeries like HTX-011 has the opportunity to become the preferred local anesthetic of physicians.

32 Kapur, B.M. et al., 2014. Pharmacogenetics of chronic pain management. Clinical Biochemistry, 47(13-14), pp1169-1187. 33 Garimella, V. & Cellini, C. 2013. Postoperative pain control. Clinics in Colon and Rectal Surgery, 26(3), pp191-196. 34 Garimella, V. & Cellini, C. 2013. Postoperative pain control. Clinics in Colon and Rectal Surgery, 26(3), pp191-196. 35 Alijanipour, P. et al., 2016. Periarticular injection of liposomal bupivacaine offers no benefit over standard bupivacaine in total knee arthroplasty: A prospective, randomized, controlled trial, The Journal of Arthroplasty.

February 7, 2017

Figure 24. Proposed Treatment Paradigms for Surgery Treatment Period Treatment Option #1 Treatment Option #2

Preoperative • Oral celecoxib + oral pregabalin

or oral gabapentin + oral acetaminophen

• 1,000 mg of IV acetaminophen

+

• 800 mg of IV ketorolac

Intraoperative

• Lidocaine + epinephrine + opioids

Or • Ropivacaine + ketorolac +

epinephrine + clonidine Or • Exparel Or

• Ropivacaine Or

• Generic Bupivacaine

• 266 mg of Exparel

Post-operative

• IV ketorolac or oral celecoxib + oral acetaminophen + oral gabapentin or oral pregabalin

With or without • Oxycodone if pain higher than a

3, or 1 hour prior to rehab.

• 1,000 mg of IV acetaminophen every 6 hours until patient takes oral meds

+

• 800 mg of IV ibuprofen every 8 hours until patient takes oral meds

With or without

• Morphine or dilaudid for severe pain until patient takes oral meds

Or • 10 mg of oral oxycodone

every 4 hours

Following Discharge

• Oral celecoxib + gabapentin or pregabalin + acetaminophen and/or opioid

Or • Acetaminophen/oxycodone Or

• Acetaminophen/hydrocodone Or

• Oxycodone

N/A


February 7, 2017

New American Pain Society Guidelines Discourage Opioid Use. The American Pain Society (APS) released new guidelines in 2016 for post-surgical pain management that encourages physicians to minimize opioid use, and instead offer multimodal pain management therapies to patients who have post-operative pain.36 Multimodal therapies combine several pain medicines that target different pathways. Using this modality allows dose reductions to occur for individual components, which reduces the risk for adverse effects. Suggested non-opioid medications for post-operative pain include acetaminophen, non-steroidal anti-inflammatory drugs (NSAIDs), and Pfizer’s (NYSE: PFE) Neurotin (gabapentin), Lyrica (pregabalin), and Celebrex (celecoxib). In a survey conducted in 2016 by Decision Resource Group on the future of the pain market, 72% of physicians said they expect to use fewer opioids in the future, and 73% said they expect to use more long-acting local anesthetics. We believe that both the new APS guidelines and physicians’ plan for future pain treatments are beneficial for HTX-011, which is a long-acting local anesthetic designed to reduce both the pain intensity following surgery, and total opioid consumption. Market Information - Post-Operative Pain Epidemiology Overall, there were 28 million procedures that required post-operative pain relief in 2015, and 32 million are expected to occur in 2020.37 Post-operative pain occurs after more than 80% of surgical operations and is only controlled in about half of patients.38 Based on our discussions with anesthesiologists, nearly all patients undergoing surgery that require post-operative pain relief could benefit from a local anesthetic like HTX-011. Market Potential for HTX-011. According to Symphony Health Solutions, there were 28,539,647 vials of generic bupivacaine, ropivacaine, and Exparel sold in the US between June 30, 2015 and June 30, 2016. The market share of each is shown in Figure 25. Exparel currently has 3% of the market. The low penetration is in part due to reimbursement hurdles and a lack of clinical data supporting its superiority over generic local anesthetics. Based on the annual number of local anesthetic vials used in the US, and Exparel’s WAC price of $285, the market potential for branded local anesthetics in the US could be as high as $8.1 billion. Additionally, HTX-011 has the potential to 36 Chou, R. et al., 2016. Management of postoperative pain: a clinical practice guideline from the American Pain Society, the American Society of Regional Anesthesia and Pain Medicine, and the American Society of Anesthesiologists’ Committee on regional anesthesia, executive committee, and administrative council, The Journal of Pain, 17(2), pp131-157. 37 DRG claims analysis. 2015. 38 Chou, R. et al., 2016. Guidelines on the Management of Postoperative Pain. The Journal of Pain, 17(2), pp131-157.

Expert Physician Perspective: We spoke with an orthopedic surgeon who has a lot of experience with Exparel and bupivacaine. He mentioned that despite being an early adopter of Exparel, he has stopped using it, because in his clinic’s experience, it does not work for longer than a day. Instead, his clinic has had the most success using a periarticular injection of lidocaine, epinephrine, and opioids. We spoke with two anesthesiologists who frequently use Exparel in their practice. One mentioned that he uses Exparel in almost every surgical procedure that insurers agree to reimburse, whereas the other anesthesiologist has been using both ropivacaine and Exparel in his practice, but noted that he has been favoring Exparel. Both physicians did state that a new local-anesthetic that could provide pain relief between 72 and 96 hours like HTX-011 would be highly favorable to them over currently available treatments.

February 7, 2017

be used as a nerve block, which Heron intends to evaluate in its Phase III study. Based on the robustness of the Phase II data as a local anesthetic, HTX-011 could also replace the need for nerve block in several procedures. Exparel is currently being used off label by some anesthesiologists as a nerve block due to its perceived long-term effect compared to standard treatments. We do acknowledge that reimbursement for all indications may take time, and that it is unlikely for branded product to be used for all procedures requiring local anesthetics.

Figure 25. Market Share of Local Anesthetics in the US

Source: Company Reports Decision Resources conducted a physician survey in 2014 to determine the future use of long-acting local anesthetics. The survey included 30 qualitative interviews and 184 respondents in a qualitative survey. As shown in Figure 26, 40% of physicians intend to use long-acting local anesthetics more in the future, whereas only 6% stated that they intend to use them less frequently. Based on our discussions with an orthopedic surgeon, several of these procedures are very painful, and under served by currently available local anesthetics. This could mean that a large market opportunity exists for next-generation treatments like HTX-011. Notably, 48.5% of physicians said they would use more long-acting local anesthetics for knee arthroplasty, and 46% said they would use more long-acting local anesthetics for hip replacements. Approximately 720,000-knee replacement and 340,000 hip replacement procedures occur annually in the US.39 These numbers are expected to grow to 3.48 million and 572,000 by 2030.40

39 Kurtz, S.M. et al., 2014. Impact of the economic downturn on total joint replacement demand in the United States: Updated projections to 2021. The Journal of Bone & Joint Surgery, 96(8), pp624-630. 40 Kurtz, S. et al., 2007. Projections of primary and revision hip and knee arthroplasty in the United States from 2005 to 2030. The Journal of Bone & Joint Surgery, 89(4), pp780-785.

19

Market Opportunity for HTX-011 in Post-Operative Pain Management

27.8 28.5 29.2 29.9 30.6 32.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2016 2017 2018 2019 2020 2021

79%

18%

3%

Bupivacaine

Ropivacaine

BupivacaineLiposome

Procedures Requiring Post-Operative Pain Relief 2016-20211

Post-Operative Pain Market Share Last 12 Months2

Pro

cedu

res

(Mill

ions

)

• The number one reason cited by pharmacy directors for not including bupivacaine liposome on formulary is the insufficient advantage versus generic bupivacaine3

1 Decision Resources, Post-Operative Pain Pharmacor; 2 Symphony Health Solutions 12 months ended 6/30/16; 3 Decision Resources Survey of Pharmacy Directors Re: Post-Operative Pain Management (April 2014)

28,539,647 Total Vials

February 7, 2017

Figure 26. Trends in Long-Acting Local Anesthetic Use


45

Across Procedures, Many MDs Expect the Use of Long-Acting Local Anesthetics to Increase

Use of Long-Acting Local Anesthetics in the Future, by Procedure

10%

7%

5%

9%

6%

6%

5%

2%

7%

6%

7%

5%

3%

7%

3%

53%

60%

45%

62%

58%

58%

66%

44%

60%

60%

50%

41%

49%

47%

49%

37%

33%

49%

29%

36%

37%

28%

53%

34%

35%

43%

54%

48%

46%

48%

0% 20% 40% 60% 80% 100%

Cesarean Section

Cholecystectomy (outpatient)

Arthroplasty knee (outpatient)

Other non-OR therapeuticprocedures on musculoskeletal

Treatment, fracture or dislocation ofhip and femur (inpatient)

Other fracture and dislocationprocedure

Repair of toe

Arthroplasty shoulder

Other therapeutic procedures onmuscles and tendons

Cholecystectomy (inpatient)

Arthroplasty other than hip, knee,shoulder, or elbow

Hernia (outpatient)

Hip replacement, total and partial

Hernia (inpatient)

Arthroplasty knee (inpatient)

Less frequently Same amount More frequently

Percentage of physicians indicating how frequently they expect to use long-acting local anesthetics in the future

“Minimizing opioid use by using long-acting local anesthetics is the trend. I think the long-acting local anesthetics have great promise in the future.” – General surgeon

Source: Decision Resources Post-Operative Pain Physician Research Initiative 2014 (N=30 qualitative interviews; N=184 quantitative survey)

Anesthesiologist Expert Perspective: We spoke with an anesthesiologist who specializes in pain management and frequently uses local anesthetics. He mentioned that based on the continued push by the medical community to limit opioid use, the use of local anesthetics intraoperatively has continued to grow, and that nearly all patients undergoing surgery that require post-operative pain relief could benefit from a treatment like HTX-011. He noted that there have been formulary hurdles with branded treatments like Exparel due to a lack of supporting pharmacoeconomic data, but thinks its use will continue to grow across indications. Based on the product profile of HTX-011, the anesthesiologist believes there could be less push back from payers on covering its use.

February 7, 2017

Market Estimates. The most commonly used local anesthetics to prevent post-surgical pain are bupivacaine, ropivacaine, and Exparel. HTX-011 has shown a favorable product profile compared to each of these treatments in Phase II clinical trials across multiple surgery types. Considering HTX-011 could be the longest acting local anesthetic on the market, which most physicians highly prefer, and its ease of use compared to competing treatments, we believe HTX-011 could have a high penetration in the local anesthetic market. We have constructed a scenario analysis in Figure 27 to show potential sales for HTX-011 in the US. Our main assumptions are outlined below:

§ Target population – Based on data from Symphony Health Solutions, there were 28,539,647 vials of these agents sold in the US between June 30, 2015 and June 30, 2016. HTX-011 could in theory be used in place of each vial used.

§ Treatment Cost – We assume an average annual treatment cost of $285, which is the WAC of HTX-011’s branded competitor Exparel.

§ Penetration – Due to HTX-011’s ease of use and promising clinical data compared to competing local anesthetics, we believe adoption will be high amongst physicians. Our scenario analysis uses a penetration of between 10% and 25%. The main pushback from payers on allowing Exparel’s use has been a lack of supporting clinical and pharmacoeconomic data. HTX-011 will likely have a more robust data package following approval compared to Exparel, which could allow a higher penetration to occur.

Depending on the penetration and pricing, HTX-011 could generate $2.0 billion in US sales as a preventative treatment for post-operative pain. While this is a promising opportunity alone, it is important to keep in mind that the instillation aspect of HTX-011 could increase its use beyond procedures that local anesthetics are currently used in, such as emergency room wounds. Also, our assumptions do not include EU sales, where a large market opportunity also exists.

Figure 27. US Scenario Analysis of Market Potential for HTX-011

Penetration 10% 15% 20% 25%

Eligible Vials (28.5 million)

2.9 M 4.3 M 5.7 M 7.1 M

Treatment Cost $285 $285 $285 $285

Yearly Sales $813 M $1.2 B $1.6 B $2.0 B


HTX-011 - Clinical Data Discussion Heron has conducted four phase II trials with HTX-011 for the treatment of post-operative pain following several types of surgeries, including bunionectomy, hernia repair, and abdominoplasty. A summary of the studies conducted to date is presented in Figure 28. In each study, findings indicate significant improvements in pain, and reductions in opioid use, two key goals of the program. In light of these findings, Heron has loosely guided that summed pain intensity (SPI) score through 72 hours will likely be the endpoint for their Phase III program, using 120 and 200 mg

February 7, 2017

of HTX-011B in two or three of the indications that have been assessed. The Company will likely compare the drug to placebo as well as bupivacaine solution, the current standard of care. Heron has not yet provided guidance on the timing of this program, but we expect an end of Phase II meeting with the FDA and initiation of Phase III studies in 2017. The Company plans to submit an NDA for HTX-011 in 2018.

Figure 28. Summary of Phase II Studies with HTX-011

Indication Bunionectomy Hernia Repair Abdominoplasty Bunionectomy

Study Identifier 201 202 203 208 Formulation(s) HTX-011 HTX-011, A, B HTX-011B HTX-011B Dosage 400 mg 200 and 400 mg 400 mg 200 mg

Mode of Administration Injection Injection and Instillation Instillation Instillation

P-Value at SPI 0-72 Hours p= 0.0064 p= 0.0818* p= 0.016 p= 0.004 Placebo or Active Comparator Placebo Placebo Placebo Bupivacaine

* p= 0.0250 at 0-48 hours. Source: LifeSci Capital

Study 201: A Phase II Clinical Trial for Post-Operative Pain from Bunionectomy

Trial Design. This was a randomized, double-blind, placebo controlled Phase II study evaluating HTX-011 as a preventative treatment for post-operative pain following bunionectomy.41 64 participants were enrolled to receive 200 or 400 mg bupivacaine with meloxicam, or placebo. The primary endpoint of this study was the intensity of pain as assessed by Summed Pain Intensity (SPI) score taken during the initial 24 hours following surgery (SPI 0-24). Secondary endpoints included SPI after 48 and 72 hours, time to first use of an opiate as a rescue medication, and the proportion of patients taking opiates as a rescue medication during 72 hours post-operation. Trial Results. This was the first trial to assess the efficacy of HTX-011 as a preventative treatment for post-operative pain, and patients receiving HTX-011 therapy demonstrated significantly lower pain as determined by SPI score. The primary endpoint of this study was met, as patients treated with 200 and 400 mg HTX-011 had SPI differences as compared to placebo (SPID) of 25% (p = 0.022) and 69% (p < 0.0001). The trend of statistically significant SPID continued through 48 and 72 hours in the cohort of patients treated with 400 mg HTX-011, as shown in Figure 29. Notably, participants receiving 200 mg HTX-011 did not have a similar result and SPID 0-24 was the only significant finding for the lower dose cohort.

Figure 29. SPI Scores Through 72 Hours Post-Surgery HTX-011 400 mg Placebo Difference P-value

SPI 0-24 hours* 38.5 124.2 -85.7 (-69%) < 0.0001 SPI 0-48 hours 106.9 224.8 -117.9 (-52%) < 0.0001 SPI 0-72 hours 170.2 285.9 -115.7 (-40%) = 0.0064

*Denotes primary endpoint


41 https://clinicaltrials.gov/ct2/show/NCT02471898

February 7, 2017

The time to first use of an opiate as a rescue medication was 20.8 hours for the 200 mg HTX-011 cohort and 48.2 hours for the 400 mg HTX-011 cohort, as compared to 8.2 hours for placebo (p = 0.15 and p < 0.0001, respectively). Another notable finding was that 32% of patients receiving 400 mg HTX-011 did not use an opiate rescue medication, compared to 5% for placebo (p < 0.0001). This is particularly important from a commercial perspective, as one of the major differentiators of HTX-011 is the potential for patients to avoid use of opiates altogether. Heron reported that the product was generally well tolerated, with the most common adverse events (AEs) including headache, nausea, vomiting, and dizziness. These findings have validated the continued development of HTX-011 and prompted the Company to develop a second-generation formulation, HTX-011B, which is capable of achieving higher drug concentrations more rapidly. Initial findings showed that 400 mg of HTX-011 is similar in potency to 200 mg of HTX-011B, which has been studied in subsequent clinical studies.

Study 202: A Phase II Clinical Trial for Post-Operative Pain from Hernia Repair Heron is currently conducting a three-part Phase II study with multiple formulations of HTX-011 for the treatment of post-operative pain due to inguinal hernia repair. Investigators recently reported interim results from one part of the study at the 2016 PAINWeek conference, which demonstrated the ability of HTX-011 to reduce pain significantly more than placebo up to 48 hours post-surgery. Many secondary endpoints had similarly positive findings, including measures of opioid use following surgery and safety. Trial Design. This is a randomized, double-blind, placebo controlled Phase II study with HTX-011 for the treatment of post-operative pain following a inguinal hernia repair.42 Approximately 333 patients will be enrolled into one of the following parts of the study, which utilize three distinct formulations of HTX-011 and independently contain several treatment arms:

§ Part A: o 200 mg HTX-011 via injection o 200 mg HTX-011 via instillation o 400 mg HTX-011 via injection o 400 mg HTX-011 via instillation o 200 mg HTX-011 via injection and 200 mg HTX-011 via instillation o Saline via injection

§ Part B: o 200 mg HTX-011A via injection o 400 mg HTX-011A via injection o 200 mg HTX-011B via injection o 400 mg HTX-011B via injection o 400 mg HTX-002 via infiltration o 400 mg HTX-011B via instillation o Saline via injection

§ Part C: o 200 mg HTX-002 via infiltration o 200 mg HTX-011B via instillation

42 https://www.clinicaltrials.gov/show/NCT02504580

February 7, 2017

o Saline via instillation o 0.25% bupivacaine hydrochloride injection

The primary endpoint of this study is the intensity of pain as assessed by Summed Pain Intensity (SPI) score taken during the initial 24 hours following surgery (SPI 0-24). Secondary endpoints included SPI after 48 and 72 hours, total opioid consumption, and the proportion of patients taking opiates as a rescue medication during 96 hours post-operation. Interim Results. While the study remains ongoing, investigators recently reported interim data from part B of the study, which compared pain intensity scores in patients receiving 200 or 400 mg HTX-011B, or saline following inguinal hernia repair. Mean pain intensity scores from 0-48 hours post-surgery are presented in Figure 30. These data show clear separation between each arm of the study in a dose-dependent manner, as patients receiving 400 mg HTX-011B had lower mean pain intensity scores than those receiving 200 mg HTX-011B at nearly every data point through 48 hours. Beyond 48 hours the study arms converge on each other, pointing to a diminishing therapeutic effect beyond day two following surgery. Notably, inguinal hernia repair is a less painful procedure than bunionectomy and abdominoplasty, and so the duration of effect compared to placebo is expected to be less for this procedure.

Figure 30. Mean Pain Intensity Scores with HTX-011B to 48 Hours Post-Operation

Source: Winkle, P. et al., 2016.

The primary endpoint was met, as these findings translated into significantly lower SPI scores for patients receiving 400 mg HTX-011B at 0-24 hours and 0-48 hours as compared to placebo (p = 0.0035 and p = 0.0250, respectively). Significance was not maintained beyond 48 hours, and the 200 mg HTX-011B cohort did not achieve significant

Hours

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HTX-011B 200 mg (N=30) HTX-011B 400 mg (N=30) Saline Placebo (N=31)

February 7, 2017

reductions at any time point. However, the scores reported were consistently numerically lower than placebo and a dose-dependent response was maintained for all SPI scores in this part of the study. The full dataset of SPI scores through 96 hours post-operation are presented in Figure 31.

Figure 31. SPI Scores Through 96 Hours Post-Surgery

HTX-011B

200 mg (n=30) P-value

HTX-011B 400 mg (n=30)

P-value Placebo (n=31)

SPI 0-24 hours* 97.8 0.0673 85.7 0.0035 121.6 SPI 0-48 hours 188.6 0.2379 164.9 0.0250 220.4 SPI 0-72 hours 266.0 0.4645 231.1 0.0818 294.5 SPI 0-96 hours 336.6 0.5562 292.7 0.1195 366.5

*Denotes primary endpoint Source: LifeSci Capital

Investigators also reported meaningful trends for secondary endpoints involving opioid usage. The percentage of patients that were opioid-free was 24.1% for 400 mg HTX-011B, as compared to 6.5% for placebo (p = 0.0756). Mean total opioid consumption through 96 hours was 18 mg for 400 mg HTX-011B, as compared to 23.2 mg for placebo (p = 0.3019). The proportion of patients able to avoid using opioids for up to 96 hours post-operation is particularly notable, as this is one of the primary value drivers of HTX-011B in our view. From a safety perspective, HTX-011B was generally well tolerated. One or more AE was reported by 38.7%, 33.3%, and 51.6% of patients receiving 200 mg HTX-011B, 400 mg HTX-011B, and placebo, respectively. The most commonly reported AEs were nausea, headache, and constipation, and there were no reports of serious AEs or early terminations due to AEs. Although these results only pertain to one portion of the trial, the dose-dependent reductions in pain scores, potentially meaningful reductions in opioid use, and absence of AEs are quite validating for the development prospects of HTX-011B. Mode of Administration Assessment. Beyond efficacy and safety measures, this study also aimed to determine the optimal mode of administration, and injection and instillation were assessed. Injections of HTX-011B were administered around the surgical site via a needle, which is more invasive than instillation and comes with the added risk of damaging vasculature. Instillation does not require subcutaneous injections surrounding the surgical site, but rather, drug is administered directly into the surgical site without a needle. This study found that both modes of administration confer a similar pain management benefit, as mean SPI scores of patients receiving 400 mg HTX-011B after 24 hours (SPI 0-24) were 86.2 and 85.2 when administered via injection and instillation, respectively. Investigators also reported similar reductions in opioid usage. Patients receiving HTX-011B had mean opioid consumption at 96 hours post-operation of 17.3 and 18.6 mg when administered via injection and instillation, respectively. Additionally, the proportion of patients not requiring use of opioids were similar, as 28.6% and 20.0% of patients were opioid free at 96 hours when receiving HTX-011B via injection and instillation, respectively. Patients also tolerated the drug similarly, as there were no significant differences in the occurrence of AEs. Thus, investigators concluded that the safety and efficacy of HTX-011B is similar when administered via injection or instillation for patients with post-operative pain due to inguinal hernia repair. These findings are in-line with Study 208, which treated patients following bunionectomy and found similar pain reductions between patients receiving injections and instillations of HTX-011.

February 7, 2017

Study 203: A Phase II Clinical Trial for Post-Operative Pain from Abdominoplasty On January 4th, 2017, Heron reported results from a Phase II study with HTX-011 administered as an instillation for the treatment of post-operative pain due to abdominoplasty surgery, also known as tummy tuck. Data demonstrated significantly greater pain reductions in patients receiving HTX-011 as compared to saline placebo (p<0.05). Although prior results have demonstrated the potential for this compound to produce long-term analgesia in operations with smaller incisions, abdominoplasty requires 15-20 inch incisions from hip to hip across the abdomen. These findings indicate that HTX-011 could be effective in multiple surgery types. Furthermore, administration via instillation represents a more convenient and safer mode of administration over any injected therapy, which could require more than 50 injections with an incision as large as abdominoplasty. Trial Design. This is a randomized, double-blind, placebo controlled Phase II study with HTX-011 for the treatment of post-operative pain following abdominoplasty.43 Approximately 210 patients will be enrolled into one of the following parts of the study, which utilize two distinct formulations of HTX-011 and independently contain multiple treatment arms:

§ Part A: o 200 mg HTX-011A via infiltration o Saline via infiltration

§ Part B: o 200 mg HTX-011B via infiltration o 400 mg HTX-011B via infiltration o 600 mg HTX-011B via infiltration

The primary endpoint of this study is the intensity of pain as assessed by Summed Pain Intensity (SPI) score taken during the initial 24 hours following surgery (SPI 0-24). Secondary endpoints included SPI after 48-96 hours, total opioid consumption, and the occurrence of AEs. Trial Results. The findings of this trial were overwhelmingly positive, as patients treated with 400 mg HTX-011 via instillation showed significantly lower SPI scores from 0-48, 0-72, and 0-96 hours (p=0.018, p=0.016, and p=0.010, respectively). However, the study did not meet the designated primary endpoint of SPI 0-24 (p=0.086). These data are presented in Figure 32. In our view the lack of significance at this endpoint, in light of consistently lower reported mean pain scores, are likely due to small sample size (n=20 for treatment arm), and the initial 6 hours following surgery during which the therapeutic effect of HTX-011, and likely drug concentrations, were still increasing. Due to the large 15-20 inch incisions required for abdominoplasty, these findings indicate that HTX-011 could be used in virtually any incision size. Additionally, HTX-011 was administered via instillation in this study, a far more convenient and safer mode of administration over any injected therapy.


February 7, 2017

Figure 32. Mean Pain Index with HTX-011 via Instillation


Heron also reported that patients receiving HTX-011 had significantly less opioid use than placebo at every time point through 96 hours (p=0.021 or lower at all time points). Treatment-emergent AEs were in-line with findings from previous studies, as there we no significant differences between patients receiving HTX-011 or placebo. The most commonly reported AEs included nausea, headache, and hypotension. These safety and efficacy findings are clearly supportive of continuing the development of HTX-011, and have positive implications for the potential commercialization of the compound in the event of approval.

Study 208: A Phase II Clinical Trial for Post-Operative Pain from Bunionectomy The first part of this study assessed the treatment of post-operative pain due to bunionectomy with two formulations, HTX-011A and HTX-011B. Although both drug variations showed reductions in SPI score over time, HTX-011B was deemed superior in this study and the Company is moving forward with this version. The primary endpoint of SPI-024 was met for patients receiving HTX-011B via both infiltration and nerve block, and investigators also reported concurrent reductions in opioid use. Due to the potency of HTX-011B at 200 mg, the Company decided to assess lower doses of 120 and 60 mg. These data were presented in January 2017, and were similarly positive as the primary endpoint was achieved. A separate study demonstrated the synergistic effects of HTX-011B as compared to its individual components. These findings are greatly supportive of the development of this drug, and have potential to read-through into a larger pivotal study. Trial Design. This was a randomized, double-blind, placebo- and active-controlled Phase II study with HTX-011 for the treatment of post-operative pain following bunionectomy.44 Patients were enrolled into one of the following


February 7, 2017

parts of the study, which utilized two distinct formulations of HTX-011 and independently contained multiple treatment arms. They are shown below, with the study arms discussed in this report displayed in bold:

§ Part A: o 200 mg HTX-011A via nerve block (closed wound) o 200 mg HTX-011A via infiltration (open wound) o 200 mg HTX-011B via nerve block (closed wound) o 200 mg HTX-011B via infiltration (open wound) o 50 mg, 0.5% bupivacaine hydrochloride via nerve block (closed wound) o Saline via injection (closed wound)

§ Part B: o 200 mg HTX-002 (Biochronomer bupivacaine) via nerve block (closed wound) o 200 mg HTX-002 (Biochronomer bupivacaine) via infiltration (open wound)

§ Part C: o 120 mg HTX-011B via nerve block (closed wound) o 120 mg HTX-011B via infiltration (open wound) o 120 mg HTX-011B local administration via instillation o Saline via infiltration (open wound)

§ Part D: o 60 mg HTX-011B via nerve block (closed wound) o 60 mg HTX-011B via infiltration (open wound) o Saline via infiltration (open wound)

§ Part E: o 120 mg HTX-002 (Biochronomer bupivacaine) via nerve block (closed wound) o 120 mg HTX-002 (Biochronomer bupivacaine) via infiltration (open wound) o Saline via infiltration (open wound) and nerve block (closed wound)

§ Part F: o 120 mg HTX-009 (meloxicam bupivacaine) via nerve block (closed wound) o 120 mg HTX-009 (meloxicam bupivacaine) via infiltration (open wound) o Saline via infiltration (open wound) and nerve block (closed wound)

§ Part G: o 30 mg HTX-011B via nerve block (closed wound) o Saline via nerve block (closed wound)

The primary endpoint of this study was the intensity of pain as assessed by Summed Pain Intensity (SPI) score taken during the initial 24 hours following surgery (SPI 0-24). Secondary endpoints included comparisons to bupivacaine solution, time to first opioid use as rescue medication, overall consumption of opioids, and differences in pain intensity with injection versus infiltration as compared to placebo and active comparator. Part A Results: HTX-011B via Infiltration and Nerve Block. The primary endpoint of SPI-024 was met for patients receiving HTX-011B via both infiltration and nerve block. Patients receiving HTX-011B via infiltration showed reductions in SPI 0-24 of 66% and 64% as compared to placebo (p < 0.0001) and bupivacaine solution (p < 0.0001), respectively. The full results are presented in Figure 33.

February 7, 2017

Figure 33. Mean Pain Intensity Scores with HTX-011B via Infiltration


Similar findings were observed for patients receiving HTX-011B via nerve block, with reductions in SPI 0-24 of 69% and 71% as compared to placebo (p < 0.0001) and bupivacaine solution (p < 0.0001), respectively. The full data are shown in Figure 34.

Figure 34. Mean Pain Intensity Scores with HTX-011B via Nerve Block


HTX-011B 200 mg Infiltration (H) Bupivacaine Solution 50 mg (B) Saline Placebo (P)

Hours

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HTX-011B 200 mg Nerve Block (H) Bupivacaine Solution 50 mg (B) Saline Placebo (P)

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February 7, 2017

There was not a significant difference in the amount of SPI reduction between HTX-011B when administered via infiltration or nerve block, and both methods demonstrated significantly lower pain scores than placebo and bupivacaine solution. Notably, this effect was maintained through 96 hours post-surgery (SPI 0-96) for both modes of administration, with significance as compared to placebo (p = 0.005 for infiltration and p = 0.004 for injection) and bupivacaine (p = 0.019 for infiltration and p = 0.007 for injection). These findings are greatly in-line with prior data from study 201 for bunionectomy, as the reductions in SPI scores are similar. However, we note that significance was maintained out to 96 hours in this trial (as compared to 72 hours in study 201), and this effect was achieved at 200 mg (as compared to 400 mg in study 201). Heron has guided that the HTX-011B formulation is more potent than the initial variation of HTX-011 used previously, and we view this trial as confirmatory. The reductions in pain also translated into reductions in opioid use post-surgery. The average time to first use of opioids as a rescue medication in patients receiving HTX-011 was 716% and 167% longer than placebo (p < 0.0001) and bupivacaine (p < 0.036), respectively. This finding is consistent if not superior to study 201, as the relative increase in time prior to first opioid use was greater in this trial. Within the first 24 hours post-operation, participants receiving HTX-011 used 74% and 67% less opioids as compared to placebo (p < 0.0001) and bupivacaine solution, respectively. The full data on opioid use out to 96 hours are presented in Figure 35.

Figure 35. Mean Use of Opioids Over Time

Timeframe Placebo (P) Bupivacaine Solution (B)

HTX-011B 200 mg

Percent Reduction

0-24 hours 20.3 mg 15.9 mg 5.2 mg 74% v P (p < 0.0001) 67% v B (p < 0.0001)





Throughout the length of this study, patients receiving HTX-011B consumed significantly less opioids. This finding is clinically relevant, as less opioid use translates into avoidance of associated AEs and less potential for opioid dependence. Furthermore, in every arm of the study presented above, use of opioids from 72 to 96 hours only marginally increases. This validates 96 hours as a meaningful time point, as patients appear to require less pain management beyond 4 days post-operation in bunionectomy. Investigators also reported that 32% of patients remained opioid free at 24 hours when receiving HTX-011B, significantly more than placebo (p = 0.019). Although this effect wasn’t maintained with significance at 96 hours, 16% of the participants receiving HTX-011B remained opioid free at this point. In our view, a larger trial may be beneficial to achieve significance for this metric at 96 hours, but the substantial reductions in total opioid consumption are a major improvement over the standard of care and are likely more important. Overall, this study showed that patients treated with Heron’s novel HTX-011 formulations reported significantly lower post-operative pain as compared to placebo and the standard of care through 96 hours, with concurrent

February 7, 2017

reductions in opioid use. Both metrics are cornerstones of the HTX-011 program, and this trial has clearly validated the continued development of this compound. As the body of data with HTX-011 continues to grow, the findings continue to increase the likelihood for a successful Phase III study. Results with HTX-011B via Infiltration and Injection (combined). Patients treated with 60, 120, and 200 mg doses of HTX-011 achieved the primary endpoint of lower SPI 0-24 as compared to bupivacaine (p<0.0001, p=0.0002, and p=0.0031, respectively). Significant reductions were also achieved in patients receiving 120 and 200 mg HTX-011 at every other time point as compared to bupivacaine, including SPI 0-48, SPI 0-72, and SPI 0-96. Full data are presented in Figure 36, with p-values relative to bupivacaine (B) and placebo (P). These results demonstrate the ability of HTX-001 to significantly reduce post-operative pain more than bupivacaine, following bunionectomy in a dose-dependent manner through 96 hours. These pain reductions also translated into significant reductions in opioid use. Patients receiving 60 and 120 mg HTX-011 had mean opioid use from 0-72 hours of 20.5 and 23.8 mg, respectively, as compared to 33.2 mg for bupivacaine (p=0.0226 and p=0.0457, respectively). Treatment emergent AEs were also similar between patients receiving placebo and HTX-011, with the most common AEs including nausea, headache, and erythema.

Figure 36. Mean Pain Intensity Scores with HTX-011


The Company also conducted an intriguing assessment to determine the analgesia produced by HTX-011 relative to its individual constituents, Biochronomer meloxicam (HTX-009) and Biochronomer bupivacaine (HTX-002). Findings indicate that patients treated with HTX-011 had significantly lower SPI 0-24 and 0-48 scores relative to patients receiving either Biochronomer meloxicam or Biochronomer bupivacaine alone. Interestingly, this effect was maintained through 96 hours in the HTX-011 cohort as compared to the bupivacaine group, but was not maintained in the meloxicam cohort. Full results are presented in Figure 37. These data are indicative of the synergy produced by administering the combination of Biochronomer bupivacaine with Biochronomer meloxicam, most demonstrated by the clear separation of the HTX-011 arm from the other cohorts through 48 hours.

February 7, 2017

Figure 37. Mean Pain Intensity Scores for HTX-011 and its Components


Other Drugs in Development for Post-Surgical Pain Prevention Due to the large number of patients undergoing surgical procedures that suffer from post-operative pain and the ongoing unmet need in this indication, there is strong patient, physician, and industry interest in novel treatment options. For example, INSYS Therapeutics (NasdaqGM: INSY) is developing a sublingual buprenorphine spray for bunionectomy, however as an opioid agonist there may be safety concerns. Recro Pharma (NasdaqCM: REPH) is developing intravenous meloxicam for post-surgical pain following abdominoplasty and bunionectomy, and Durect Corporation (NasdaqGM: DRRX) is developing bupivacaine for post-surgical pain due to cholecystectomy. This greatly substantiates Heron’s HTX-011, a long-acting formulation of meloxicam and bupivacaine. However, neither the Recro nor Durect therapies will be able to capture potential synergies of combining meloxicam with bupivacaine, which may be driving the efficacy demonstrated by HTX-011 in trials to date. Drugs in Phase II and III of development for the treatment of post-operative pain are presented in Figure 38, and more detailed descriptions of select programs are included below.

February 7, 2017

Figure 38. Late-Stage Assets in Development for the Treatment of Post-Operative Pain

Drug Company Indication Mechanism Stage

IV meloxicam Recro Pharma

(NasdaqCM: REPH) Abdominoplasty &

Bunionectomy COX-1/2 inhibitor

NDA Submission

CR845 Cara Therapeutics

(NasdaqGM: CARA) Abdominal surgery κ opioid agonist Phase III45

Sublingual buprenorphine spray

INSYS Therapeutics (NasdaqGM: INSY)

Bunionectomy Partial µ and κ opioid

agonist Phase III46

Pos imir (Bupivacaine)

Durect Corporation (NasdaqGM: DRRX)

Laparoscopic cholecystectomy

Sodium channel inhibitor

Phase III47

Tramadol Avenue Therapeutics (NasdaqCM: FBIO)

Moderate-severe Post-op. pain

µ opioid agonist Phase III-ready

Fadolmidine Recro Pharma

(NasdaqCM: REPH) Bunionectomy α-2 adrenergic agonist Phase IIb

AYX1 Adynxx (private) Full knee

replacement Early growth response

gene-1 inhibitor Phase IIb48

NTX-510 Nanotherapeutics

(private) Molar extraction

Sodium channel inhibitor

Phase II49

VVZ-149 Vivozon (private) Colorectal surgery,

gastrectomy

5-HT2A receptor & glycine neurotransmitter

transporter Phase II50, 51, 52


Recro Pharma (NasdaqCM: REPH) – Intravenous Meloxicam Recro Pharma is developing IV meloxicam for the treatment of moderate-to-severe post-operative pain. Meloxicam is an NSAID that inhibits COX-1 and COX-2. Notably, meloxicam is one of the two active drugs in Heron’s HTX-011, and we view the development of an intravenous formulation as a point of validation for the Company. Recro Pharma’s formulation utilizes NanoCrystal technology, licensed from Alkermes (NasdaqGS: ALKS), which is intended to enhance the bioavailability of meloxicam. The company is not combining this therapy with bupivacaine and does not have extended-release technology, necessitating drug administration every 24 hours to achieve a therapeutic effect. For this reason, HTX-011 offers substantially greater convenience to patients and physicians, a key point of differentiation. Recro has completed two pivotal Phase III clinical trials with intravenous meloxicam for the treatment of post-operative pain due to abdominoplasty and bunionectomy. The company is expecting results from a safety study in the first half of 2017 and plans to file an NDA in mid-2017. 45 https://clinicaltrials.gov/ct2/show/NCT02542384 46 https://clinicaltrials.gov/ct2/show/NCT02310581 47 https://clinicaltrials.gov/ct2/show/NCT02574520 48 https://clinicaltrials.gov/ct2/show/NCT02081703 49 https://clinicaltrials.gov/ct2/show/NCT02161354 50 https://clinicaltrials.gov/ct2/show/NCT02489526 51 https://clinicaltrials.gov/ct2/show/NCT02992041 52 https://clinicaltrials.gov/ct2/show/NCT02522598

February 7, 2017

Phase III Program Results. Recro Pharma has conducted two randomized, double-blind, placebo controlled Phase III clinical trials with intravenous meloxicam for the treatment of post-operative pain due to abdominoplasty53 and bunionectomy.54. More than 200 patients were randomized in each trial 1:1 to receive 30 mg IV meloxicam or placebo every 24 hours. In July of 2016, the company reported that the bunionectomy study met the primary endpoint, as patients receiving IV meloxicam had significantly lower summed pain intensity differences at 48 hours (SPID48) than placebo (p = 0.0034). This significant effect was consistent with SPID scores at 6, 12, and 24 hours as well. In November of 2016, Recro reported that the abdominoplasty trial met the primary endpoint as well. Participants receiving IV meloxicam had significantly lower SPID24 than placebo (p = 0.0145). This effect was also observed at 12 hours in this trial. Both studies reported that the study drug was generally safe and well tolerated, with similar occurrences of AEs and SAEs between treatment and placebo groups. The company plans to approach the FDA with the data from these trials as well as those from an ongoing safety trial to seek approval with IV meloxicam for the treatment of moderate-to-severe post-operative pain. Durect Corporation (NasdaqGM: DRRX) – Pos imir (bupivacaine) Durect Corporation is developing Posimir (bupivacaine) for the treatment of post-operative pain. Durect’s formulation utilizes their Saber technology to provide pain relief for up to 72 hours. Importantly, bupivacaine is one of the active ingredients in Heron’s HTX-011, though Posimir does not contain meloxicam. This is an important point of distinction, as meloxicam prevents the inflammation-associated inhibition of bupivacaine. For this reason, it seems unlikely that Posimir could achieve better pain reduction than HTX-011. Durect has conducted pivotal trials in hernia repair and shoulder surgery, which showed reductions in pain intensity on movement normalized AUC from 0-72 hours of 38% (p < 0.0001) and 26% (p = 0.0003) as compared to bupivacaine hydrochloride (HCl), respectively. However, these trials did not sufficiently support the approval of this product upon NDA submission. In February of 2014 the company received a complete response letter (CRL) for Posidur, now known as Posimir, citing deficiencies related to safety and requesting that additional clinical safety trials be conducted. As a result of their discussions with the agency, Durect is currently conducting a Phase III trial with Posimir for post-operative pain following laparoscopic cholecystectomy. The company anticipates this trial to complete enrollment in the third quarter of 2017, with potential NDA resubmission shortly thereafter. PERSIST Phase III Trial Design. Durect started this trial in November of 2015 using placebo as a comparator, but upon further FDA guidance modified the trial to compare Posimir to bupivacaine HCl. The amended portion, part two, began in August 2016. This is now a randomized, double-blind, active comparator Phase III trial with Posimir for the treatment of post-operative pain after laparoscopic cholecystectomy.55 Approximately 264 patients will be randomized 1:1 to receive Posimir or bupivacaine HCl via instillation at the end of the surgical procedure. The primary endpoint is pain intensity on movement during the first 72 hours following the operation. The Company anticipates that this trial will support an NDA resubmission. Completion of enrollment is expected in the third quarter of 2017.

53 https://clinicaltrials.gov/ct2/show/NCT02678286 54 https://clinicaltrials.gov/ct2/show/NCT02675907 55 https://clinicaltrials.gov/ct2/show/NCT02574520

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Competitive Landscape for Post-Operative Pain Prevention. Local anesthetics such as mapivicaine, bupivacaine, ropivacaine, and Exparel are commonly used to prevent post-surgical pain. There were 28,539,647 vials of generic bupivacaine, ropivacaine, and Exparel sold in the US between June 30, 2015 and June 30, 2016. Exparel is the leading branded product, and had 2015 sales of $240 million after only 4 years on the market. Exparel has a broad approval to provide analgesia for postsurgical procedures based on data from a bunionectomy and hemorrhoidectomy study comparing it to placebo. The bunionectomy study showed a statistically significant difference over placebo in pain intensity assessed using a numeric rating scale at 36 hours (p< 0.0229), whereas the hemorrhoidectomy study showed a statistically significant difference of opioid rescue medication through 72 hours (p≤ 0.0006).56,57 We want to highlight that both of these studies compared Exparel to placebo, whereas Heron has positive randomized Phase II data with HTX-011 compared to placebo and bupivacaine solution. Despite Exparel’s broad approval, both anesthesiologists we talked to mentioned that payers are not reimbursing the agent for all surgical procedures. According to pharmacy directors, the main reason for this is a lack of evidence supporting the advantage of Exparel over generic bupivacaine. Currently, about 3% of local-anesthetic prescriptions in the US are for Exparel. Exparel’s benefit over generic bupivacaine has not been statistically significant across any of the tested indications. For example, a prospective randomized study in patients receiving TKA showed no statistically significant difference in post-operative daily pain scores, narcotic consumption, or narcotic related side effects between Exparel and generic bupivacaine.58 Because the administration technique is so important for Exparel’s effect, the duration of activity varies between centers and physicians. As mentioned in the treatment portion of this report, Exparel’s effect for one surgeon we spoke with has been less than 24 hours for some orthopedic procedures, whereas an anesthesiologist we spoke with stated that the effect of Exparel in his clinic is between 24 and 36 hours for similar procedures. Both physicians did acknowledge that there is a need for longer lasting local anesthetics for this indication. As shown in Figure 39, 58% of Exparel sales are derived from orthopedic surgeries, which are often considered very painful. This could be indicative of the types of procedures where a longer-acting local anesthetic like HTX-011 would be desired the most. The orthopedic surgeon we spoke with mentioned that patients usually have to take opioids once the effect of available local anesthetics wears off. HTX-011 has shown to have a long lasting effect of between 72 and 96 hours, significantly reduce opioid consumption, and can be administered as either an instillation or injection. Because of this, we believe HTX-011 could challenge the entire local-anesthetic market. Physicians we spoke with stated that if the Phase II results with HTX-011 can be replicated in a Phase III trial, it would be their local anesthetic of choice. 56 Golf, M. et al., 2011. A phase 3, randomized, placebo-controlled trial of DepoFoam bupivacaine (extended-release bupivacaine local analgesic) in bunionectomy. Advances in Therapy, 28(9), pp776-788. 57 Gorfine, S.R. et al., 2011. Bupivacaine extended-release liposome injection for prolonged postsurgical analgesia in patients undergoing hemorrhoidectomy: A multicenter, randomized, double-blind, placebo-controlled trial. Diseases of the Colon & Rectum, 54(12), pp1552-1559. 58 Alijanipour, P. et al., 2016. Periarticular injection of liposomal bupivacaine offers no benefit over standard bupivacaine in total knee arthroplasty: A prospective, randomized, controlled trial, The Journal of Arthroplasty.

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Figure 39. Expare l Sales Breakdown

Source: Pacira Reports Duration of Action with Local Anesthetics Desired by Physicians Benefits HTX-011. A survey was conducted to determine physicians’ minimally acceptable duration of efficacy for long-acting local anesthetics to use in their practice. The survey included 30 qualitative interviews and 184 quantitative interviews. As shown in Figure 40, 45% of physicians said that 48 hours was their time cutoff, whereas 11% said 72 hours. HTX-011’s duration of efficacy has been between 72 and 96 hours in Phase II studies in abdominoplasty and bunionectomy, positioning it favorably compared to current long-acting local anesthetics that fail to last 24 hours in some procedures. Based on our discussions with physicians, we believe that a local-anesthetic that has a longer duration of action compared to currently available treatments will be favored by most of the medical community, and so it is possible that many of the 44% of physicians whose minimally acceptable duration of efficacy was 24 hours or less would adopt HTX-011. The results of this survey indicate that HTX-011 could have a significant penetration in the local-anesthetic market if the Phase II results are replicated in Phase III studies.

Figure 40. Minimally Acceptable Duration of Efficacy for Long-Lasting Local Anesthetics


EXPARELUtilization Data, 12 Months (April 2015 - March 2016)

Sources: Premier, over 500 institutions sourced.In Progress: Currently updating to ICD-10 coding. 5

Soft Tissue (27%)

• Hysterectomy• Gastric• Colon

• Hernia• Anal/rectal• Cholecystectomy• Breast

Orthopedic (58%)

• Shoulder• Foot/ankle

• Knee• Hip • Spine• Fracture

Orthopedics57%

Soft Tissue 27%

Other12%

Cardiothoracic3%

Orthopedic58%

19

>72 Hour Duration of Action Seen as “Ideal”

Ideal Duration of Efficacy for Long-Acting Local Anesthetic

≤ 24 hours 12%

48 hours 27%

72 hours 46%

4 days 9%

5 days 4%

>5 days 2%

Minimally Acceptable Duration of Efficacy for Long-Acting Local

Anesthetic

≤ 24 hours 44%

48 hours 45%

72 hours 11%

Source: Decision Resources Post-Operative Pain Physician Research Initiative 2014 (N=30 qualitative interviews; N=184 quantitative survey)

February 7, 2017

Instillation Use of HTX-011 Provides Competitive Advantage Over Approved Local Anesthetics. An anesthesiologist we spoke with mentioned that one potential explanation for the variability of effect between surgical centers with Exparel is that the administration has to be done in a very specific way to maximize its activity, and some physicians are not properly administering the product. Operations that require large incisions such as abdominoplasty can be cumbersome to deliver injectable anesthetics. For example, the abdominoplasty incision can be as large as 15-20 inches in length, and require more than 50 local-anesthetic injections. In comparison, the incision size for hernia repair is only 2-3 inches in length. HTX-011 is the only local anesthetic to our knowledge that has the ability to be delivered as an instillation and an injectable. The instillation gives physicians the ability to apply HTX-011 directly into the wound, which provides the following advantages over injection:

§ Faster and easier to administer § Less invasive § Reduced risk of venous puncture § Fuller coverage in large incisions § Use in a broader range of procedures

HTX-011 was delivered as an instillation in the abdominoplasty and hernia repair trials, and as an injectable in the bunionectomy study. Positive results were reported in each of these trials, indicating that HTX-011 can be conveniently used in a wide range of surgical procedures. Both anesthesiologists we spoke with felt that the instillation delivery of HTX-011 would be a favorable option for ER wounds, which injectable local-anesthetics are not currently used for. Based on incision size and physician preference, HTX-011 can be administered as an instillation or injection.

Side-by-Side Comparison of HTX-011 vs. Expare l and Other Local Anesthetics The data presented thus far with HTX-011 in abdominoplasty, bunionectomy, and hernia repair compares favorably to currently available local anesthetics. Based on the data, advantages of HTX-011 over competing treatments is shown in Figure 41. They include a consistent 72-hour efficacy, head-to-head superiority over bupivacaine, and flexible administration that has safety advantages.

Orthopedic Surgeon Expert Perspective: We spoke with an orthopedic surgeon who specializes on the hip and knee joints, and has a lot of experience with Exparel and bupivacaine. He mentioned that pain following some of his procedures is still very difficult to manage, and that there is a need for longer-acting local anesthetics. If there were a drug that could show activity for 48-72 hours and work in an orthopedic model such as bunionectomy, then he would be convinced that it could be effective in other orthopedic surgeries as well.

Anesthesiologist Expert Perspective: We spoke with an anesthesiologist who specializes in pain management and has a lot of experience with local anesthetics. He mentioned that if HTX-011 were to be approved, there would likely be little resistance from physicians to adopt since it is administered similarly to currently available treatments.

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Figure 41. Side-by-Side Comparison of HTX-011 and Other Local Anesthetics

Product Attribute Generic Local

Anesthetic Expare l

HTX-011

Extended-release formulation No Yes Yes Synergistic MOA potentiates local anesthetic efficacy by reducing

inflammation No No Yes

Consistent 72 hour efficacy No No Yes Head-to-head superiority vs. bupivacaine N/A No Yes

Applicable in large and small procedures without admixture with bupivacaine solution

N/A No Yes

Flexible administration No No Yes

Source: Company Reports and LifeSci Capital Economic Burden of Opioid Addiction Supports the Switch to Different Pain Management Protocols. By reducing opioid consumption, HTX-011 could reduce healthcare consumption. If a pharmacoeconomic benefit can be demonstrated with HTX-011, it could contribute to increased reimbursement form payers. Each year there are roughly 570,000 opioid related ER visits in the US and 785,000 opioid related hospital stays.59 The average cost per inpatient stay is between $1,800 and $2,300, translating into an annual burden of between $1.4 billion and $1.8 billion from hospital stays alone.60 In addition, opioid related adverse events are related to increase the length-of-stay for inpatients by about 0.5 days, and the cost of care by 7.4%.61 Due to the adverse effects of opioids, there has been a continued push by the medical community to minimize their use, and we believe that a drug like HTX-011 that can reduce opioid use post-surgically is well positioned to be adopted by physicians. Intellectual Property As shown in Figure 42, Heron holds a number of issued and pending US and ex-US patents, related to the composition of various polymers, specific products, product groups, and processing technology. Patents related to the Company’s Biochronomer technology are set to expire from January of 2017 to March of 2026. Heron’s Sustol franchise is currently protected by 7 and 24 patents issued in the US and ex-US, respectively. Patents issued include product composition, methods of use, and methods of preparation. Sustol’s parents are set to expire from May 2021 through November 2024 in the US, and from May 2021 to September 2025 ex-US. Importantly, Heron has filed for 7 patents surrounding HTX-011 that could provide patent protection through at least 2035. 59 Weiss, A.J. et al., 2016. Opioid-related inpatient stays and emergency department visits by state, 2009-2014. Healthcare Cost and Utilization Project. 60 Rappleye, E. 2015. Average cost per inpatient day across 50 states. Becker’s Healthcare: Hospital Review. 61 Odera, G.M. et al., 2007. Opioid-related adverse drug events in surgical hospitalizations: Impact on costs and length of stay. Annals of Pharmacology, 41(3), pp400-407.

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Figure 42. Heron’s Patent Estate

Issued

US 15 Ex-US 47


Management Team Barry Quart, Pharm. D. Chief Executive Officer and Director Barry D. Quart, Pharm.D. has served as a director of Heron since June 2012. Dr. Quart was appointed Chief Executive Officer of the Company in May 2013. Dr. Quart has more than 25 years of experience serving in leadership positions in biotechnology and pharmaceutical companies and developing innovative pharmaceutical products. In 2006, Dr. Quart co-founded Ardea Biosciences, Inc. and served as its President and Chief Executive Officer from its inception through May 2013 and as a director through its acquisition by AstraZeneca PLC in June 2012. Previously, he was with Pfizer, Inc. as Senior Vice President of Pfizer Global Research and Development, and the director of Pfizer's La Jolla Laboratories. Prior to Pfizer's acquisition of the Warner-Lambert Company, Dr. Quart was President of Research and Development at Agouron Pharmaceuticals, Inc., a division of the Warner-Lambert Company. Dr. Quart joined Agouron in 1993 and was instrumental in the development and registration of Viracept® (nelfinavir). Dr. Quart also served as a director of Synageva Biopharma Corp. from June 2012 through its acquisition by Alexion Pharmaceuticals, Inc. in June 2015. Dr. Quart received a Pharm.D. degree from the University of California, San Francisco. Robert Rosen President and Director Robert H. Rosen has served as a director of Heron since July 2012. Mr. Rosen was appointed President in May 2013, and prior to that, served as our Senior Vice President and Chief Commercial Officer since October 2012. Mr. Rosen has more than 25 years of experience serving in leadership positions in biotechnology and pharmaceutical companies and commercializing pharmaceutical products. From March 2012 to October 2012, Mr. Rosen served as Managing Partner of Scotia Nordic LLC, a life science advisory firm. From April 2011 to March 2012, Mr. Rosen served as Senior Vice President of Global Commercial Operations at Dendreon Corporation. From 2005 to 2011, he served as Global Head of Oncology at Bayer HealthCare Pharmaceuticals, where he was responsible for the development of the oncology business unit for regions that included the Americas, Europe, Japan and Asia Pacific. During his tenure at Bayer, Mr. Rosen led the launch of Nexavar® (sorafenib) for the treatment of renal cell carcinoma and hepatocellular carcinoma. From 2002 to 2005, Mr. Rosen was Vice President of the Oncology Business Unit at Sanofi-Synthèlabo Inc., where he was responsible for the development of Sanofi's U.S. oncology business and the launch of Eloxatin®(oxaliplatin) for colon cancer. Mr. Rosen has been a director of La Jolla Pharmaceutical Company since July 2014. From November 2014 to December 2015, Mr. Rosen served as a director of Conkwest, Inc. (now NantKwest, Inc.). Mr. Rosen received a B.S. degree in pharmacy from Northeastern University.

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Kimberly Manhard Executive VP, Drug Development Kimberly J. Manhard joined us as Executive Vice President, Drug Development in January 2016. Ms. Manhard served as a director of Heron from January 2014 until she joined the management team. Ms. Manhard has more than 25 years of experience in drug development, regulatory affairs and pharmaceutical operations. From May 2008 to January 2016, Ms. Manhard served as the Senior Vice President of Regulatory Affairs and Development Operations at Ardea Biosciences, Inc., a wholly-owned subsidiary of AstraZeneca PLC. In her role at Ardea, Ms. Manhard was instrumental in the development and December 2015 regulatory approval of Zurampic® (lesinurad) for the treatment of hyperuricemia associated with gout. Prior to joining Ardea in 2006, Ms. Manhard was President of her own consultancy firm, Vice President of Regulatory Affairs for Exelixis, Inc. and held multiple regulatory positions at Agouron Pharmaceuticals, Inc., a division of the Warner-Lambert Company, supporting development and commercialization of anticancer and antiviral products, including Viracept® (nelfinavir). She was also previously with Bristol Myers Squibb Company in regulatory affairs, responsible for oncology compounds, including Taxol® (paclitaxel) and infectious disease compounds, including Videx® (didanosine) and Zerit® (stavudine). Ms. Manhard began her industry career in clinical research with Eli Lilly and Company and G.H. Besselaar Associates (Covance, Inc.). Ms. Manhard recieved a B.S. degree in zoology and a B.A. degree in French from the University of Florida. Thomas Ottoboni, Ph.D. Senior VP, Pharmaceutical and Preclinical Research and Development Thomas B. Ottoboni, Ph.D. joined us as Vice President of Pharmaceutical Development in March 2012 and was promoted to Senior Vice President of Pharmaceutical and Preclinical Research and Development in July 2014. Dr. Ottoboni has more than 20 years of drug development experience. From 2010 until 2011, Dr. Ottoboni was Vice President of Research and Development at Talima Therapeutics, Inc., where he worked on the develpment of a drug delivery implant to treat onychomycosis. From 1996 to 2008, Dr. Ottoboni served as Executive Vice President of Strategy and Operations at POINT Biomedical Corp., where he developed several imaging and drug delivery systems. From May 1994 through July 1996, Dr. Ottoboni served as Manager of Systems Development and Drug Delivery Research for InSite Vision, Inc., where he developed ophthalmic pharmaceutical delivery systems. He previously served as Director of Drug Delivery at Vitaphore Corp. Dr. Ottoboni is an inventor on more than 20 U.S. patents in organic and macromolecular chemistry. He received a B.S. degree in chemistry and a Ph.D. in organic chemistry from the University of California, Berkeley. David Szekeres Senior VP, General Counsel, Business Development and Corporate Secretary David L. Szekeres joined us as Senior Vice President, General Counsel, Business Development and Corporate Secretary in March 2016. Mr. Szekeres has more than 15 years of legal and industry experience. From February 2014 to December 2015, Mr. Szekeres served as General Counsel, Chief Business Officer, Principal Financial Officer, and Corporate Secretary at Regulus Therapeutics, Inc. In that role, Mr. Szekeres played a critical role in overseeing the company’s business, financial and legal responsibilities as it developed into a clinical-stage corporation. From 2008 through its acquisition by Thermo Fisher Scientific Inc. in 2014, Mr. Szekeres served as Deputy General Counsel, Chief Mergers and Acquisitions Counsel and Assistant Corporate Secretary at Life Technologies Corporation. From

February 7, 2017

2001 to 2006, Mr. Szekeres served as Corporate Attorney at a number of law firms, including O’Melveny & Myers LLP and Latham & Watkins LLP. Prior to 2001, Mr. Szekeres served as Senior Associate in Investment Banking at investment bank Robertson Stephens. Mr. Szekeres received a B.A. degree from the University of California, Irvine and a J.D. degree from Duke University School of Law. Brian Drazba VP, Finance and Chief Financial Officer Brian G. Drazba joined us as Vice President of Finance and Chief Financial Officer in October 2013. Mr. Drazba has more than 25 years of experience in financial management. From June 2009 to December 2012, Mr. Drazba was Vice President of Finance and Chief Accounting Officer for ISTA Pharmaceuticals, Inc., where he led the financial reporting, analysis and tax functions. ISTA Pharmaceuticals was acquired by Bausch + Lomb, Inc. in June 2012. From 1992 to 2009, Mr. Drazba held various positions of increasing responsibility within Insight Health Corp., most recently serving as Senior Vice President and Chief Accounting Officer. Prior to his tenure at Insight Health Corp., Mr. Drazba was employed by Arthur Andersen & Co. Mr. Drazba is a licensed Certified Public Accountant in California and received a B.A. degree in accounting from the University of San Diego. Sean Ristine VP, Human Resources Sean T. Ristine joined us as Senior Director of Human Resources in August 2014 and was promoted to Vice President of Human Resources in September 2015. Mr. Ristine has more than 20 years of experience in human resources and business leadership. From September 2009 to August 2014, Mr. Ristine held key Human Resources positions at Cadence Pharmaceuticals, Inc., most recently as Senior Director of Human Resources and was instrumental in that function as Cadence grew to a commercial-stage company with over 200 employees located throughout the U.S. From 2004 through 2009, Mr. Ristine held Human Resources management roles of increasing responsibility at Kyocera Wireless Corp., including Director of Human Resources and Facilities. Prior to this, from 1995 to 2004, Mr. Ristine held positions at Kyocera America, Inc. including Manager of Human Resources. Mr. Ristine received a B.S. degree in Business and Organization Behavior from Brigham Young University and an M.B.A degree with an emphasis in Human Resources Management from San Diego State University.

Risk to an Investment An investment in Heron is considered to be a high-risk investment. Heron is a cash flow negative company that has 100% of product revenue coming from one approved product. The Company may be unable to successfully overcome competition in its markets to become cash flow positive. Heron also has development programs for which there are regulatory risks, and the Company may not receive FDA approval for its candidates despite significant time and financial investments. Regulatory approval to market and sell a drug does not guarantee that the drug will penetrate the market, and sales may not meet the expectations of investors. Furthermore, unknown competitors may emerge and Heron, like any company, may be required to spend significant capital to maintain its position within the market.

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February 7, 2017

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