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

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1 Heron Therapeutics, Inc February 7, 2017 BUY (HRTX, $13.35) Financing Overhang Removed, HTX-011 Delivering Consistently, CINV Franchise Materializing: Initiating BUY/$28 TP Jonathan Aschoff, Ph.D We are initiating coverage of Heron Therapeutics with a Buy rating and a 12-month target price of $28. Our valuation includes US revenue from Sustol, Cinvanti and HTX-011. All 3 drugs benefit from Heron s proprietary long acting Biochronomer drug delivery technology. Both Sustol (launched 4Q16) and Cinvanti (NDA filed 1Q17) prevent chemotherapyinduced nausea and vomiting (CINV), and are drugs that would typically be used in combination, thereby leveraging Heron s salesforce, and HTX-011 (Phase 3 starts 2017) is in development for post-operative pain. We expect 2017 to bring additional Phase 2 and potentially initial Phase 3 HTX-01r1 data, Cinvanti approval and launch, and steadily increasing Sustol adoption. Sustol, Cinvanti and HTX-011 address significant markets, and we project combined peak sales of about $1.1 billion. Sustol, a subcutaneously administered long-acting 5-HT3 antagonist, is differentiated in being approved for delayed-onset CINV in most highly emetogenic chemotherapy (HEC) and all moderately emetogenic chemotherapy (MEC) regimens, as well as for immediate-onset CINV after such chemotherapeutic regimens. Cinvanti, an NDA for which was filed in 1Q17, is differentiated from closest peer, Emend, by its lack of polysorbate 80, which may cause hypersensitivity and infusion site reactions. HTX- 011, with four positive Phase 2 trials in multiple surgical models spanning small to large incisions, is differentiated from postoperative standards of care by its ability to better control pain for an extended time. We note that under buy-and-bill reimbursement, community oncologists should prefer Sustol to lower cost branded Aloxi and generic players. We believe that the clinically proven advantages of Sustol versus ondansetron (and by extension versus Aloxi, albeit arguably a lesser difference), has allowed Sustol s WAC to be enough of a premium to Aloxi s ASP such that Heron can attractively rebate the drug. Despite no reimbursement J-code until January 2018, Sustol s attractive net cost recovery in the community oncologist setting against other competitors should grant enough of an incentive to do some extra paperwork to receive a highly favorable reimbursement. The same metrics should facilitate Cinvanti adoption by YE17. Comparative data are important when selling into a competitive market and Heron has demonstrated favorable comparisons for its drugs, particularly Sustol and HTX-011. Sustol as part of a triple regimen for CINV statistically beat a standard of care triple regimen in Phase 3. In Phase 2, HTX-011 in post-hernia surgery pain statistically beat generic bupivacaine, even when the data were not manipulated to exclude the beneficial effects of the much greater rescue opioid use in the active control arms. Another HTX-011 Phase 2 in post-bunionectomy pain demonstrated the drug s ability to alleviate severe pain for 3 days, with 19 of 20 patients taking 400mg HTX-011 being opioid free during the entire 72-hour period post-surgery. This and future results should compare very favorably to competitor Exparel. Rev ($M) 2016E 2017E 2018E Ticker HRTX 1Q 0A 2.1E - Last Price $ Q 0A 3E - Mkt Cap ($M) $708 3Q 0A 6.1E - Fiscal YE 31-Dec 4Q 1.1E 8.1E - 50d ADV (000) 1,035 Annual 1.1E 19.2E 104.9E Short int (M) 16.7 S/O (M) 53 EPS 2016E 2017E 2018E Annual Hi $ Q -0.92A -1.17E - Annual Lo $ Q -1.17A -0.93E - Cash ($M) $210 3Q -1.24A -0.88E - Debt ($M) $50 4Q -1.25E -0.85E - Source: Big Charts Annual -4.59E -3.78E -2.14E Please see pages for Important Disclosures 1

2 Exhibit 1: Product pipeline Valuation We derive our price target of $28 through a DCF analysis, assuming a 5% discount rate that is applied to all cash flows, and the terminal value, which is based on an 8 multiple of the projected 2020 EBITDA of $230 million. According to CDC, about 1 million patients receive CINV therapy along with their chemotherapy in the US annually, usually with multiple (an average of 5 to 6) cycles with a combination of chemotherapy drugs. Assuming 5 to 6 million cycles of emetogenic chemotherapy are performed in the US each year and given the wholesale acquisition cost (WAC) of $495 for Sustol, followed by a progressively declining average selling price (ASP), we project that Sustol will achieve peak-year sales of about $341 million in Heron will initially target about 1.4 million of the 2.5 million annual Aloxi units currently sold in the community setting, and in early 2018 will begin to target all 2.5 million units. Competitor Aloxi has a current ASP of about $200, which is roughly half of what we project the initial ASP pricing to be for Sustol, thus with just half the market penetration of Aloxi, Sustol can generate similar peak sales. Aloxi s ASP has remained stable in recent years given the balance between most doctors receiving discounts to the ASP and some private insurers paying the full WAC. We view our valuation to be conservative in that we project Sustol at its peak will have about a 25% share of the injectable 5-HT3 antagonist market, versus Aloxi s current market share of about 50-60% based on units (currently about 700,000 units per quarter). We are modeling market penetration for Sustol to increase gradually from 1% in 2017 to 5% in For 6 months starting in 4Q18 when we expect generic Aloxi to enter the market, it will become highly financially advantageous for physicians to prescribe generic Aloxi, because it takes Medicare 6 months to substantially reduce reimbursement down to the generic price plus a small percent profit once generics enter the market. Thus, Sustol sales should rebound in 2Q19 with a peak projected market share of about 25% in Our valuation includes US Sustol revenue, but does not include Sustol sales from ex-us territories, even though Heron plans to seek a partner in Japan. Our valuation also includes US sales for both Cinvanti (formerly HTX-019) and HTX-011, with any ex-us economics remaining as potential upside. We do not include any collaborative revenue relating to any Heron program, which would be a potential source of non-dilutive funding. Sustol (long acting injectable granisetron) Market opportunity for Sustol Chemotherapy-induced nausea and vomiting (CINV) are the most frequent side-effects experienced by 70-80% of chemotherapy patients. Acute-onset CINV occurs within the first 24 hours following chemotherapy treatment, whereas delayed-onset CINV occurs 24 hours following treatment and may last up to six days. The American Society of Clinical Oncology (ASCO) classifies chemotherapy agents into four categories: high, moderate, low, and minimal risk of emesis. Highly emetogenic chemotherapies (HEC), such as cisplatin and cyclophosphamide, cause nausea and vomiting (emesis) in more than 90% of patients, while moderately emetogenic chemotherapies February 7,

3 (MEC), such as carboplatin and doxorubicin, induce nausea and vomiting in 30% to 90% of patients. The dose and schedule of chemotherapy also plays a role. An agent with a low emetogenic potential given in high doses, or a combination of several chemotherapy agents, may increase the risk of emesis. Despite the number and array of approved CINV drugs, there remains an unmet need in breakthrough CINV, especially in the delayed phase after MEC or HEC. We believe that Sustol, being the only single agent 5-HT3 antagonist approved for delayed HEC, has a unique opportunity to address this need. Chemotherapy is given in cycles, with one cycle often defined as a month. Each cycle includes doses of drugs given over the course of a single day, several days in a row, every week, or every other week, followed by a rest period of no treatment. Chemotherapy used in most non-hematologic and some hematologic cancers is generally administered intravenously over the course of a single day; in this case a 5-HT3 antagonist should be given on day 1, before HEC or MEC is administered. Some chemotherapy is administered on multiple consecutive days, where the most emetogenic agents are given on day 1; in such cases, a single-day antiemetic treatment will also suffice. For chemotherapy that is given every week or every other week, one dose of a 5-HT3 antagonist should be administered prior to each dose of chemotherapy. More than 7 million cycles of chemotherapy are administered each year in the US (27% of which are HEC and 46% are MEC), and an injectable 5-HT3 antagonist is co-administered with about 90% of MEC and HEC regimens. Most chemotherapy patients will undergo 4 to 15 cycles of chemotherapy. Of cancer patients receiving antiemetic treatments, 60% were treated with HEC and 24% with carboplatin, a common MEC. In the 1 million annual US patients receiving emetogenic chemotherapy, a total of about 5 to 6 million doses of 5-HT3 antagonists are currently given for the prevention of CINV. Current market leader Aloxi had US sales of $456 million in 2015, with a WAC of $454 (0.25mg/5mL vial), but with an ASP of less than half that (about $200), and sales have been flat in recent years given Eisai s lack of promotion (for example, sales were $442 million from April 2012 to March 2013). History of Sustol Subcutaneously administered Sustol is Heron s approved agent to prevent both acute- and delayed-onset CINV in patients receiving either moderately or highly emetogenic chemotherapy. In the drug s label, Sustol is specifically indicated in combination with other antiemetics in adults for 1) moderately emetogenic chemotherapy (MEC) prevention of acute and delayed nausea and vomiting associated with initial and repeat courses, and 2) anthracycline and cyclophosphamide (AC) combination chemotherapy regimens prevention of acute nausea and vomiting associated with initial and repeat courses. Sustol is the 5-HT3 antagonist granisetron formulated in Heron s proprietary Biochronomer polymer-based drug delivery system, which starts releasing granisetron shortly following a single injection and maintains drug exposure for six days. Granisetron was selected to be the active pharmaceutical ingredient (API) for Sustol because it has a well-established record of safety and efficacy, and lost its US patent protection in December While the generic formulation of granisetron has a half-life of about 5 hours in young healthy subjects and about 9 hours in cancer patients (meaning that >80% of the drug is gone after 24 hours and about 95% is gone after 36 hours), Sustol is still near its peak concentration 24 hours postdose and above the minimum threshold concentration for antiemetic activity for almost 6 straight days (see Exhibit 3). One cannot easily calculate a terminal half-life for Sustol because that calculation is complicated by the slow release of granisetron from hours after dosing. Chemotherapeutic agents stimulate enteroendocrine cells in the gut to release large amounts of neurotransmitter, such as 5-HT and substance P, which then bind to their appropriate receptors (5-HT3 receptors for 5-HT and NK-1 receptors for substance P) on vagal fibers in the wall of the bowel. Vagal fibers project to the dorsal brain stem, initiating the vomiting reflex. These systems, along with other central and peripheral neurotransmitters such as dopamine and prostaglandins, work in concert to escalate the sensation of nausea and induce vomiting, constituting the body s natural reflex to try to protect itself from foreign toxins. Among all neurotransmitters, 5-HT (aka serotonin), located in the enterochromaffin cells, is believed to play the most important role. The 5-HT3 receptor antagonists suppress nausea and vomiting by inhibiting 5-HT from binding to the 5-HT3 receptors. Compared to other 5-HT3 antagonists, granisetron is highly specific for all subtypes of 5-HT3 receptors but has little or no affinity for 5-HT1 or 5-HT2 receptors, suggesting a mechanism for its favorable side-effect and safety profiles. February 7,

4 Exhibit 2: The mechanism of CINV Exhibit 3: Sustol pharmacokinetics Competitive landscape for Sustol Injectable and oral 5-HT3 antagonists are standard-of-care for CINV. The FDA-approved 5-HT3 antagonists include Aloxi (palonosetron), Zofran (ondansetron), Kytril (granisetron), and Anzemet (dolasetron), with the longer-acting agent Aloxi being the market leader in the US. NK-1 antagonists are also indicated for CINV but are recommended for use in combination with 5-HT3 antagonists. Despite the use of 5-HT3 antagonists and NK-1 antagonists, the control of acute CINV and especially delayed CINV is still suboptimal, with a complete response rate of 54-74% with Aloxi for the delayed-onset CINV in MEC. Additionally, subcutaneous administration may be more convenient for physicians than the market dominating intravenously injected 5-HT3 antagonists. We therefore believe that cancer patients undergoing chemotherapy need another option, preferably administered subcutaneously, for the prevention of delayed-onset CINV, and that Sustol meets this need. The oral, fixed combination of netupitant-palonosetron (AKYNZEO) was approved by the FDA in In 2015, the FDA approved rolapitant (Varubi) in both IV and tablet forms to prevent delayed CINV. Neither of these oral agents has made comparable sales with the injectable 5-HT3 antagonists mentioned above thus far, and in the community oncologist setting where net cost recovery is a motivating factor, orals should remain underutilized. First-generation, short-acting 5-HT3 antagonists. First-generation 5-HT3 antagonists, including Zofran (ondansetron), Kytril (granisetron), and Anzemet (dolasetron), were introduced in the 1990s for acute-onset CINV in MEC and HEC patients. They can be administered either orally or intravenously 30 minutes before the start of chemotherapy. Zofran and Kytril went generic in 2006 and late 2007, respectively. February 7,

5 IV Anzemet is no longer recommended by the FDA for acute-onset CINV because it was found to be associated with increased risk of abnormal heart rhythms in late Moreover, the single IV dose of 32mg Zofran was removed from the US market in 2012 because it caused QT interval prolongation and thus 16mg is the maximum allowed single IV dose of Zofran. Second-generation, long-acting 5-HT3 antagonist. Aloxi (palonosetron) is an injectable second-generation 5-HT3 antagonist approved by the FDA in It was developed by Helsinn and is currently marketed in the US by Eisai, Helsinn s US partner. Compared to firstgeneration 5-HT3 antagonists, Aloxi has a much longer half-life of 40 hours (versus a mean of less than 10 hours for first-generation 5-HT3 antagonists) and binds more tightly to its receptor. As such, it additionally prevents delayed-onset CINV in MEC patients. Nonetheless, Aloxi generated a complete response for delayed-onset CINV in only 54-74% of the patients receiving MEC in its registration trials. Sustol s approval adds another long-acting 5-HT3 antagonist that directly competes with Aloxi for the prevention of both acute and delayed-onset CINV in MEC patients, as well as the prevention of acute-onset CINV in most HEC patients. Although the oral formulation of Aloxi was FDA approved in 2008 for the prevention of acute-onset CINV, oral Aloxi was not marketed in the US due to its lack of efficacy in delayed-onset CINV. Aloxi US sales were $456 million in 2015 ($330 million for 1Q16-3Q16), with a WAC of $454 (0.25mg/5mL vial), but with an ASP of less than half that ($200). The majority of Aloxi sales come from chemotherapy cycles that contain one chemotherapy dose followed by three weeks of rest, where one dose of Aloxi is given before the start of chemotherapy. Aloxi s first patent expired in April 2015, and a pediatric trial completed last year should extend this patent by six months to October Aloxi is additionally covered by four patents expiring in January 2024, two of which are being challenged by several generic manufacturers. We believe a settlement after appeals between all parties involved should ultimately allow Aloxi to go generic in 4Q18, and thus its 2024 patents would not hold. The benefit to Sustol from generic injectable Aloxi is simply that community oncologists can more gainfully use Sustol, and the absence of Aloxi as the closest net cost recovery competitor also reduces the slope of Sustol s ASP decline thereafter. NK-1 antagonists. NK-1 antagonists should always be used in combination with other antiemetic agents such as a 5-HT3 antagonist and a corticosteroid prior to chemotherapy. While a 5-HT3 antagonist blocks nausea and vomiting signals from the stomach, an NK-1 antagonist helps block nausea and vomiting signals from the brain, because NK-1 receptors are widely present throughout the central nervous system. Due to their complementary nature, NK-1 antagonists in general do not directly compete with Sustol. Oral and IV Emend (aprepitant) were approved by the FDA in 2003 and 2008 respectively, making Emend the first NK-1 antagonist to prevent CINV. An NK-1 antagonist, rolapitant (Tesoro s Varubi), was approved by the FDA in 2015 in tablet form to prevent delayed CINV, and Tesoro is currently in registration with the FDA seeking approval of an intravenous formulation (still expected in 1H17 despite recent Complete Response Letter from FDA) that can benefit from net cost recovery. In addition, netupitant-palonosetron fixed-dose combination (AKYNZEO), an oral tablet that combines Aloxi with an NK-1 antagonist netupitant, was approved by the FDA in 2014 after showing that AKYNZEO plus dexamethasone was superior to palonosetron plus dexamethasone in preventing CINV following HEC and MEC. We are not concerned so much with competition from AKYNZEO given that net cost recovery does not apply to oral medications, as there is no buyand-bill for drugs not directly administered by the physician. Exhibit 4: US injectable drugs for the prevention of CINV (number of package units sold by quarter) February 7,

6 Economics of Sustol We believe oncologists would prefer Sustol to both branded Aloxi and generic players under buy-and-bill reimbursement in the community oncology setting, from which we expect the overwhelming majority of Sustol sales would stem. We also believe that the clinically proven advantages of Sustol versus ondansetron (and by extension versus Aloxi, albeit arguably to a lesser extent), has allowed Sustol to establish a WAC price of $495. This premium to Aloxi s current ASP allows Heron to discount from launch to 4Q18 (when we expect Aloxi to go generic) and still in the end preserve an attractive ASP. Starting in 2Q19, (4Q18 generic release plus 6 months of highly beneficial generic Aloxi reimbursement), we anticipate that community oncologists would revert to prescribing Sustol rather than generic Aloxi, because they would profit far more from prescribing Sustol than generic Aloxi. We also believe that the delay of the unique J-code until January 2018 is a non-issue, especially given that Sustol s attractive net cost recovery in the buy-and-bill system against other competitors should grant community oncologists enough incentive to complete some extra paperwork to receive reimbursement. Until January 2018, Sustol will be reimbursed under a miscellaneous J-code. Buy-and-bill reimbursement from Medicare Part B dictates that physicians first purchase drugs from drug manufacturers, and then receive reimbursement from Medicare in the form of net cost recovery, meaning cost of the drug to the physician plus 4.3%. The cost basis used to calculate reimbursement is initially the WAC and after a few months the ASP, which is recalculated quarterly based upon actual average per unit dollar sales of the drug after accounting for rebates and discounts. With a WAC of $495 for Sustol at its launch, community oncologists prescribing Sustol would receive net cost recovery of $ %, or $516, from Medicare. In addition, assuming a 15% discount negotiated between Heron and group purchasing organizations (GPOs) for Sustol, community oncologists would only have to pay 85% of $495, or $421, for Sustol, thereby making a profit of $95 per injection. On the other hand, community oncologists prescribing Aloxi are reimbursed by Medicare based on the $200 ASP of Aloxi, not the $454 WAC. The Aloxi WAC and ASP differ by so much because Eisai has been discounting Aloxi for years, and continued discounting eats away at the ASP. Assuming a 10% discount for Aloxi, community oncologists would pay 90% of $200, or $180, and receive net cost recovery of $ %, or $209, thereby making a profit of only $29 per injection. Therefore, community oncologists would clearly benefit more from prescribing Sustol rather than Aloxi, and there are no data showing that Aloxi is the better drug such that doctors would have any defendable ethical objection to substituting Sustol for Aloxi. Moreover, GPOs would likely prefer to promote premium-priced Sustol to their member physicians due to the greater compensation GPOs would receive because drug manufacturers usually compensate GPOs with administration fees of about 3% of the negotiated unit price. As such, GPOs would receive a higher compensation by advocating the premium-priced Sustol than they would by advocating Aloxi. Aloxi currently has no net cost recovery driven reimbursement competition from other branded 5-HT3 antagonists, but with Sustol that all changes. Aloxi s ASP has held steady in recent years despite giving most oncologist discounts because a large enough minority of private insurer reimbursement is at prices as high as the $454 WAC, thereby maintaining that $200 ASP. We also note that Sustol is clinically superior to ondansetron (and by extension to Aloxi), as well as approved in acute and delayed-onset CINV in MEC and 93% of HEC, which speaks in favor of Sustol over Aloxi from an efficacy perspective, given that Aloxi is not approved for delayed-onset CINV in HEC). In response to the competition from Sustol, Helsinn/Eisai may offer a greater discount to community oncologists to maintain Aloxi s market share before it goes generic, but by doing so, Aloxi s ASP would drop, thereby reducing the reimbursement that physicians would receive shortly thereafter when the ASP is recalculated. As the launch of Sustol continues, the ASP would kick in to replace WAC as the cost basis for reimbursement and generic Aloxi would be available around 4Q18. In the first two quarters after Aloxi goes generic, physicians would be reimbursed based on the ASP of Aloxi despite only paying the low price for generic Aloxi. We therefore expect unit sales to jump for generic Aloxi but decrease for Sustol just for that six-month period over 4Q18 and 1Q19. Beyond those initial two quarters, the ASP of generic Aloxi would become so close to the actual price of generic Aloxi that community oncologists would receive very little net cost recovery from using generic Aloxi. We believe community oncologists would therefore largely switch back to Sustol for economic reasons, as their practices are often economically pressured such that profit is taken wherever it can be achieved. When Zofran became generic in late 2006, Aloxi sales took a 35% hit from 4Q06 to 2Q07 but quickly rebounded in 3Q07, whereas generic Zofran sales jumped from 4Q06 to 2Q07 but subsequently decreased thereafter. Medicare did not question the use of premium-priced Aloxi over the use of cheaper generic Zofran, likely because CINV drugs are far too small a fraction of the cost of overall cancer care to be on their radar. Currently, generic Zofran is still prescribed but mostly in the hospital setting, where a capitated pricing procedure rather than the buyand-bill community setting procedure is used. This is a drastically different reimbursement situation from one that favors Sustol use. Under the capitated pricing procedure, hospitals are reimbursed a fixed amount for a given procedure, regardless of how much they February 7,

7 spend, and therefore the less a drug costs, the greater the profit a very different model. Due to the tight reimbursement in the EU, it is more difficult to sell Sustol in these territories where generic Zofran is predominantly used. Heron does see opportunities in Asia, and the company may partner with Japanese companies to that end. With regard to AKYNZEO, despite its proven clinical efficacy, its oral formulation should make it uncompetitive compared to injectable drugs, because physicians do not benefit from prescribing orals as they do under the buy-and-bill procedure for drugs that physicians physically administer to patients. An injectable AKYNZEO would be much more attractive in the community oncologist's reimbursementdriven setting. This is why Tesoro is seeking approval by mid-2017 of an intravenous Varubi despite having received approval for the oral version in 3Q15. Approval of Sustol Heron received FDA approval for Sustol in August Sustol is the first and only approved 5-HT3 agent with an extended-release effect and 5 days of CINV prevention in MEC and most HEC regimens. It is indicated for both acute and delayed MEC, and acute and delayed ACbased HEC regimens. We note that an AC-based regimen is dominant in treating breast cancer patients. The label did not include all of HEC (includes 93% of HEC), because the FDA decided that there were not enough patients on platinum-based HEC regimens in the Phase 3 MAGIC trial, even though there was a strong response rate to Sustol in these cisplatin-treated patients. This may cut the target HEC market by about 7%, but oncologists often prescribe drugs off-label, as we note with Aloxi, which has been used off-label for delayed HEC, and the net cost recovery financial incentive should make Sustol commercially attractive enough to promote off-label use. With a trained sales team ready for launch, Heron made Sustol commercially available in the beginning of 4Q16. The first months of the launch will focus on 1.4 million of the total 2.5 million units that Aloxi is currently selling, of which 700,000 are prescribed at 535 sites, so a relatively small sales force should be sufficient. Heron has not disclosed a specific discounted price or range of discounts to its $495 WAC, but the initial sales data for 4Q16 implies a $344 unit price, which we expect to increase as Sustol gains acceptance. In 1Q17, Heron pre-released 4Q16 Sustol net sales of about $1.1 million, resulting from approximately 3,200 units sold. Regarding Sustol s 2017 outlook, Heron expects steady but measured growth in Sustol trial and adoption and anticipates $15 to $25 million in Sustol net sales for 2017, which was substantially lower than the 2017 consensus but is now conveniently priced into the stock (we model about $19 million). Over the initial 3 to 6 months of launch, Heron is evaluating Sustol in 75 practices where the drug is to be used in about 5% of the total patient population, with projected expanded use thereafter driving Heron s 2017 revenue guidance. Heron will ensure a $0 co-pay for commercially insured patients to facilitate adoption. The miscellaneous J-code for Sustol now generally results in a 90-day reimbursement delay and Heron will offer extended payment terms to accommodate that potential reservation. Heron will also appeal any insurer nonpayment on behalf of doctors and, if need be, will cover the cost if such an appeal is unsuccessful. Sustol s approval was based on a randomized, controlled, multi-center Phase 3 trial involving 1,341 patients taking MEC or HEC, and the subsequent Phase 3 MAGIC trial in over 900 patients receiving HEC agents for various tumor types. In the first Phase 3 trial, patients were randomized to receive Sustol high dose (10mg), low dose (5mg), or the approved dose of Aloxi on day one. In subsequent chemotherapy treatment cycles (up to 3 additional cycles), Aloxi patients were re-randomized to either of the 2 Sustol doses on day 1 of each chemotherapy cycle. The primary endpoint was complete response in both the acute (day 1) and delayed (days 2-5) phases in the first cycle of chemotherapy, with complete response defined as no emesis and no rescue medications. Patients were stratified by MEC and HEC using the protocol-specified definition. Sustol 10mg achieved non-inferiority to Aloxi for the prevention of acute- and delayed-onset CINV for both MEC and HEC. For delayedonset CINV in HEC, Sustol 10mg demonstrated a complete response rate that was 6% and 8% higher than for Aloxi, with cisplatin regimens and with all other regimens, respectively. Sustol 10mg, however, did not achieve statistical superiority over Aloxi for the prevention of delayed-onset CINV in HEC, and superiority was required for Sustol 10mg to obtain the corresponding label claim, since Aloxi is not FDA approved for this indication. Sustol was generally well tolerated, with a safety profile consistent with previous human use of granisetron and only one serious adverse event (pulmonary embolism) possibly related to Sustol. A patient on 5mg Sustol developed pulmonary embolism on day 16 and recovered uneventfully. Although we believe there should be no residual Sustol in the blood by day 16, the investigator nonetheless cautiously deemed this event to be possibly drug related. Sustol also had a slightly higher incidence rate of AEs than Aloxi. The most common gastrointestinal disorders were constipation (15.4% for Sustol versus 13.4% for Aloxi), diarrhea (9.4% for Sustol versus 8.4% for Aloxi), and abdominal pain (2.8% for Sustol versus 6% for Aloxi). Also, 10% of Sustol patients and 9.7% of Aloxi patients reported headache. More than 90% of injection site reactions (recorded on days one and five of each treatment cycle) February 7,

8 were mild in severity, with the most common reactions being redness and bruising. Moreover, the frequency of injection site reactions decreased with each additional cycle of treatment with Sustol, indicating that the drug can be administered for multiple cycles. One patient on 10mg Sustol discontinued due to injection site reaction. Four occurrences of injection site pain (recorded on days one and five of treatment) were moderate with the rest being mild. On day one, less than 0.1% of injections produced any reports of pain; on day five, 4% of injections produced reported pain. Based on the positive Phase 3 results, Heron submitted an NDA for Sustol in May 2009 under section 505(b)(2) of the FDCA, whereby Heron could rely on the significant amount of pre-existing clinical data for safety and efficacy of Sustol s active ingredient, granisetron. The company received a CRL in March 2010, and resubmitted its NDA for Sustol in September We will not elaborate on the initial CRL because the only relevant outstanding issues comprised the second CRL. In March 2013, Heron received a second CRL, where the FDA requested 1) the refinement of one product quality method and the correction of deficiencies identified during facility pre-approval inspections, 2) a human factors validation study evaluating the commercial Sustol syringe, and 3) a re-analysis of the existing Phase 3 data using the ASCO 2011 guideline that categorizes patients into those receiving MEC and HEC. Several differences exist between the ASCO 2011 guideline and the protocol-specified guideline (see Exhibit 6). The carboplatin/paclitaxel regimen is considered a MEC under the ASCO 2011 guideline, but a HEC under the protocol-specified guideline; also, the cyclophosphamide/doxorubicin regimen is considered a HEC under the ASCO 2011 guideline, but a MEC under the protocol-specified guideline. After adjusting for these differences, Sustol was numerically better than Aloxi for delayed-onset CINV in HEC, and we believe that the data showing this difference will facilitate use in that setting over Aloxi, in addition to Sustol being approved in delayed HEC, whereas Aloxi is used off label in that setting. Exhibit 5: Design of the first Phase 3 trial (Sustol was formerly called APF530) Exhibit 6: Re-analysis of complete response rate in patients receiving HEC in cycle 1 February 7,

9 Exhibit 7: Adverse events reported in cycle 1 Exhibit 8: Overall complete response rates for Sustol To address all outstanding issues, Heron switched manufacturing to another company and conducted its Phase 3 MAGIC (Modified Absorption Granisetron in the Prevention of Chemotherapy Induced Nausea and Vomiting) trial (n=942; exclusively US enrolled in 83 sites) to demonstrate superiority to ondansetron in HEC and thus justify better label claims. In Heron s Phase 3 MAGIC trial, Sustol in combination with other standard CINV therapy (Sustol/fosaprepitant/dexamethasone) achieved its primary endpoint of superiority over standard of care (ondansetron/fosaprepitant/dexamethasone), making it the only 5-HT3 antagonist to show superiority to standard of care for delayed nausea and vomiting after HEC, and demonstrating the drug s clear utility even against the normalizing effect of substantial background therapy. The primary endpoint of complete response was defined as no emesis and no rescue medications February 7,

10 required during the delayed-onset phase of CINV, occurring hours after administration of HEC agents. Importantly, the trial was 90% powered for a 10% relative difference in response rate and was able to show a 14.3% relative difference (64.7% vs. 56.6%, p=0.014). The secondary endpoint of patients achieving complete control (i.e., complete response and at worst mild nausea during the delayedonset phase) was also statistically met (p=0.022), and the percentage of patients who experienced no nausea or infrequent nausea during the delayed-onset phase was met as well (p=0.032). Also, statistically, more patients in the SUSTOL arm were satisfied with their therapy, based on a QOL questionnaire (p=0.040). Importantly, there were no clinically significant differences in the rate or severity of adverse events between the treatment arms. Regarding acute HEC, there was a highly consistent benefit that either statistically met or strongly trended in favor of Sustol. Efficacy data from the MAGIC trial were not included in the Sustol label, but the indication of AC-based chemotherapy regimens (again, 93% of HEC regimens) was clearly driven by the trial. Exhibit 9: Design of the MAGIC Phase 3 trial HTX-011 HTX-011 is Heron s proprietary long-acting formulation of bupivacaine/meloxicam delivered via Biochronomer for post-operative pain. In August 2016, Heron announced positive top-line results from two Phase 2 trials (Study 202 in hernia and Study 208 in bunionectomy) of HTX-011 for post-operative pain. HTX-011 was statistically superior not only to placebo but also to standard-of-care 50mg bupivacaine solution regarding pain intensity and rescue opioid use after bunionectomy, and was statistically superior to placebo after hernia surgery. Importantly, pain scores were not adjusted for rescue medicine use, demonstrating the durable potency of HTX-011 against a real world control. Pain reductions were statistically and clinically significant through 96 hours after bunionectomy and 48 hours after the typically less painful hernia surgery. HTX-011 worked equally well when given as either an injection (local infiltration), or as an easier instillation. The latter provides a less invasive and potentially safer means of administration compared with competitor Exparel s injection route of administration, given the much reduced chance for systemic toxicity from venous puncture. HTX-011 also showed significant benefit when given as a nerve block, which offers a potential opportunity to cover a broad range of surgeries. We believe that one point of contention with selling Exparel to a new account is the lack of Phase 3 results against a standard of care like inexpensive generic bupivacaine or opioids. In 1Q17, Heron announced additional data from its Phase 2 trial (Study 208) of HTX-011 in patients undergoing bunionectomy that establishes, for the first time, the synergy between the local anesthetic bupivacaine and the anti-inflammatory meloxicam that comprise HTX-011. The additional data from this trial demonstrate that a 60mg dose of HTX-011 produced a statistically significant reduction in both pain and opioid use compared to a 50mg dose of bupivacaine solution, further supporting the synergy observed between the two components of HTX-011. In addition to these clinical data, Heron also announced in 1Q17 preclinical data from a validated pig model demonstrating that the activity of bupivacaine and meloxicam in HTX-011 cannot be replicated by administering bupivacaine locally along with systemic administration of meloxicam. Heron initiated a placebo-controlled, dose-finding Phase 2 trial (Study 203) of HTX-011 in February 2016 in abdominoplasty (n=200), and announced positive topline results from this trial regarding the instillation route of administration in 1Q17. The Summed Pain Intensity (SPI) score through 96 hours post-surgery (SPI 0-96) was significantly reduced with HTX-011 (p=0.010) conveniently given as an February 7,

11 instillation, producing a 36.6% reduction in pain through 96 hours following surgery (see Exhibit 10). Pain was consistently reduced through 96 hours with statistically significant reductions observed between 24 to 48 hours (p=0.007), 48 to 72 hours (p=0.038), and 72 to 96 hours (p=0.016) after a single administration of HTX-011, as well as from 0 to 48 and 0 to 72 hours. Although HTX-011 did not achieve statistical significance in the 0-24 hour time segment (p=0.086), which happens to also be the primary endpoint of choice for abdominoplasty trials, we note that the small number of patients per arm (20 or 21) was the most likely explanation for the miss, and that Heron can easily run pivotal trials large enough to generate statistical significance. HTX-011 given as an instillation also produced significant reductions (p=0.011) in the use of opioid rescue medication through 96 hours following abdominoplasty, as compared to placebo (see Exhibit 11). Study 203 initially showed that HTX-011 given as an injection statistically beat placebo over 0-24 hours for pain control (p=0.012), and given the strong trend shown when HTX-011 is given as an instillation, we fully expect positive Phase 3 results in abdominoplasty when given as an instillation. HTX-011 continued to be generally well-tolerated in Phase 2, with no resurfacing of any bradycardia concerns that came up in Phase 2 data presented in 3Q16. Exhibit 10: HTX-011 is significantly better for pain relief than unadjusted placebo through 96 hours post-abdominoplasty Exhibit 11: HTX-011 significantly reduces opioid use versus placebo through 96 hours post-abdominoplasty February 7,

12 Heron presented two posters at PAINWeek 2016, detailing positive results from Part B of Study 202 of the planned Phase 3 formulation, HTX-011B, at 200mg (n=30) and 400mg (n=30) compared to placebo (n=31) in patients after hernia surgery. Recall that the hernia trial evaluated the efficacy and safety of 2 doses of HTX-011 compared to placebo, of which 400mg will be the preferred hernia dose going forward. These presentations provide further support to our belief that the HTX-011 program is substantially derisked. Detailed analysis of the 400mg HTX-011B arm showed that there was a 29.5% reduction in pain measured by SPI 0-24 (p=0.0035, met primary endpoint), and that the efficacy was sustained through 48 hours measured by SPI 0-48 with a 25.2% reduction (p=0.025, see Table 1). 400mg HTX-011B also showed a numerical effect in lowering opioid consumption, which could free patients from a number of side effects and long-term dependency associated with opioid use. Mean total opioid consumption was reduced by 22.4% with HTX-011B compared to placebo through 96 hours post-surgery (see Exhibit 12), and the percentage of opioid-free patients were 24.1% vs. 6.5% (see Exhibit 13). HTX-011B was generally well tolerated, with the most frequent TEAEs being nausea, headache, and constipation (see Table 2). No deaths, treatment-related AEs or AEs led to early termination. Two routes of administration, injection and instillation, were equally effective with 400mg HTX-011B. This interim analysis included 14 patients who received 400mg HTX-011B injection, 16 patients via instillation and 31 patients who received saline placebo. No significant differences between different administrations of HTX-011B were identified, as the patients had a mean SPI 0-24 of 86.2 and 85.2, respectively (see Exhibit 14). Considering HTX-011 s favorable comparison thus far versus Exparel, despite cross-trial comparison caveats and the smaller sample size in the HTX-011 trials, we project HTX-011 will justify at least similar pricing and drive significant value for Heron. In 1Q17, Heron initiated Study 209, a Phase 2b, randomized, double-blind, placebo- and active-controlled, and multi-center trial of HTX- 011 via infiltration for post-operative analgesia in subjects undergoing total knee arthroplasty. The trial will enroll approximately 120 patients to assess NRS-R pain intensity scores as the primary endpoint. Thus far, with 4 positive Phase 2 trials in multiple surgical models spanning small to large incisions, we believe that there is a well-defined rationale for advancing HTX-011 into a broad Phase 3 program in Heron will proceed with instillation into the incision site as the route of administration and will request of the FDA that SPI 0-72 be acceptable as the primary endpoint in future Phase 3 trials, regardless of surgical setting. We are unaware of any competing product that can usefully treat local pain over 3 days with only one administration. The company anticipates filing a NDA in 2018 for HTX-011 and we estimate a mid-2019 launch for HTX-011, if successful. Table 1: SPI through 24, 48, 72 and 96 hours post-hernia Source: Poster Local Administration of HTX-011, a Long-Acting Biochronomer -Based Bupivacaine/Meloxicam Combination, in Hernia Repair: Preliminary Results of an Interim Analysis at PAINWeek 2016 February 7,

13 Exhibit 12: Mean total opioid consumption in patients receiving HTX-011B 400mg Source: Poster Local Administration of HTX-011, a Long-Acting Biochronomer -Based Bupivacaine/Meloxicam Combination, in Hernia Repair: Preliminary Results of an Interim Analysis at PAINWeek 2016 Exhibit 13: Percentage of opioid-free patients receiving HTX-011B 400mg Source: Poster Local Administration of HTX-011, a Long-Acting Biochronomer -Based Bupivacaine/Meloxicam Combination, in Hernia Repair: Preliminary Results of an Interim Analysis at PAINWeek 2016 February 7,

14 Exhibit 14: Mean SPI 0-24 following surgery with different administration Source: Poster Local Administration of HTX-011, a Long-Acting Biochronomer -Based Bupivacaine/Meloxicam Combination, in Hernia Repair Provides Similar Initial Results Whether Injected or Instilled at PAINWeek 2016 Cinvanti Cinvanti, also known as HTX-019, is Heron s proprietary intravenous formulation of aprepitant, a neurokinin-1 (NK1) receptor antagonist for the prevention of chemotherapy-induced nausea and vomiting (CINV). NK1 receptor antagonists are generally used along with 5-HT3 receptor antagonists, so our aforementioned market opportunity for Sustol units would apply equally to Cinvanti. For example, Merck s oral Emend (fosaprepitant) and Emend for Injection generated US sales of about $535 million in 2015, according to FactSet Research Systems, Inc. NK1 receptor antagonists such as Cinvanti, and 5-HT3 receptor antagonists such as Sustol, act synergistically on two critical pathways involved in the vomiting reflex to alleviate one of the key treatment-limiting side effects of chemotherapy. At present, the only injectable NK1 receptor antagonist approved in the US, Emend IV, contains polysorbate 80, a surfactant, which may cause hypersensitivity and infusion site reactions. Cinvanti does not contain polysorbate 80, and Heron s bioequivalence study in healthy volunteers was shown to be well-tolerated, with the pharmacokinetic profile of Cinvanti being comparable to IV fosaprepitant. Cinvanti was also shown to have a substantially improved safety profile compared to Emend IV, presumably owing to the absence of polysorbate 80. The FDA has agreed that a successful bioequivalence study comparing Cinvanti to IV fosaprepitant would be sufficient for approval under the 505(b)(2) pathway, and in 1Q17, Heron submitted the NDA for Cinvanti for the prevention of CINV. The NDA filing included data demonstrating the bioequivalence of Cinvanti to Emend IV, supporting its efficacy for the prevention of both acute and delayed CINV with both moderately emetogenic chemotherapy (MEC) and highly emetogenic chemotherapy (HEC). Results also showed that Cinvanti was better tolerated than Emend IV, with significantly fewer adverse events reported with Cinvanti. If approved, Cinvanti would mostly compete against the injectable formulations of EMEND and Tesoro s VARUBI (rolapitant). February 7,

15 Exhibit 15: Bioequivalence study data for Cinvanti Exhibit 16: Bioequivalence study safety results for Cinvanti February 7,

16 Intellectual Property Heron has filed a number of US patent applications on inventions relating to the composition of a variety of polymers, specific products, product groups and processing technology. As of September 30, 2016, Heron had a total of 14 issued U.S. patents and an additional 47 issued (or registered) foreign patents. The patents on the bioerodible technologies expire between January 2017 and March Currently, Sustol is covered by 7 issued US patents and by 26 patents issued in foreign countries including Austria, Belgium, Canada, Denmark, the EU, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, Switzerland, Taiwan, and the United Kingdom. US patents covering Sustol have expiration dates ranging from May 2021 to November 2024; foreign patents covering Sustol have expiration dates ranging from May 2021 to September Examples of US Sustol patents that expire in 2021 are #US and #US , both titled Pharmaceutical compositions using semi-solid delivery vehicle and claiming a pharmaceutical composition that comprises an active agent and a semi-solid delivery vehicle. Examples of US Sustol patents that expire in 2024 are #US Process for preparing a semi-solid delivery vehicle comprising granisetron, #US Methods of treating emesis utilizing semi-solid pharmaceutical compositions comprising granisetron, and #US Semi-solid delivery vehicle and pharmaceutical compositions for delivery of granisetron. These three patents were issued in 2012 and collectively claim a pharmaceutical composition that comprises granisetron and a semi-solid delivery vehicle, as well as the process of preparing that pharmaceutical composition and the use of that pharmaceutical composition as a method for treating emesis. We believe these three patents are the strongest and should extend Sustol s exclusivity for a full three years from 2021 into We also note that Heron filed a patent in 2012 for a new formulation of Sustol which should be easier to use and cheaper to make. The approval of this formulation would only require a bioequivalence study. Heron plans to transition to the new formulation a few years after the initial Sustol launch, thereby extending the patent life of the company s CINV franchise. Financials Revenue. Projected revenue stems from US sales Sustol and Cinvanti in CINV, and HTX-011 in post-operative pain. We currently do not model any sales from ex-us territories, although the company may seek Japanese partnerships in the future. Also, we model that Heron continues to commercialize Sustol itself in the US, and therefore our model excludes any potential US upfront license fees and milestone payments from any potential US partner. Sustol began selling in early 4Q16 with an ASP per treatment of $344, which we believe will increase as the initially intense discounting declines, and we project Sustol reaching peak-year sales of $341 million in Expenses. We project the COGS for Sustol to start out around 20% for at least the first few years of commercialization, and for Cinvanti and HTX-011 COGS to be around 10%. We project SG&A expense to increase going forward as Heron launches Sustol and eventually Cinvanti and HTX-011. Sustol and Cinvanti can be sold by the same oncology salesforce, but HTX-011 requires a separate pain salesforce. We also project total R&D expense to increase given HTX-011 pivotal trials, and development of an improved Sustol formulation (less viscous). We are not projecting income tax until after 2020, given the magnitude of NOLs. Bottom Line. We project Heron to be profitable in 2019, due to Sustol and Cinvanti sales in the US. As of October 27, 2016, Heron had 39.2 million shares outstanding, but its recent capital raise of $164 million in net proceeds added another 14.1 million shares for a total of 53.2 million shares. The 2019 diluted share count also takes into consideration outstanding warrants for 600,000 shares, outstanding options for 8.5 million shares, as well as outstanding notes convertible into 7.4 million shares, all as of September 30, Balance Sheet. Heron had $88.9 million in cash as of September 30, 2016, which should be sufficient to fund its operations into 2Q17, but it can borrow another $50 million from Tang Capital Partners upon achieving an undisclosed milestone (the first $50 million was borrowed in 3Q16). The potential total debt funding of $100 million bears an annual 8% interest but has no other associated fees or equity conversion feature. Heron brought in an additional $164 million in cash in January 2017 from an equity raise. February 7,

17 Risks Clinical risk. HTX-011 and Cinvanti could fail to deliver statistically significant results in late-stage clinical trials, substantially reducing the value of Heron and our target price. Regulatory risk. HTX-011 and Cinvanti could fail to be approved by domestic and/or foreign regulatory bodies, which would reduce Heron s value and our target price. Financing risk. Heron will need capital to fund its operations, and thus is reliant on obtaining additional outside funding, which may not occur or which could be substantially dilutive to existing investors. Competitive risk. Sustol (and HTX-011 and Cinvanti, if approved) may not be well adopted in a competitive marketplace, which would adversely affect Heron s value and our target price. High stock price volatility. This issue is common among small-cap biotechnology companies with relatively low trading volumes. February 7,

18 Heron Therapeutics, Inc. Income Statement Fiscal Year ends December (in 000, except per share items) 2011A 2012A 2013A 2014A 2015A 1Q16A 2Q16A 3Q16A 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E 2018E 2019E 2020E Sustol revenue 1,104 1,104 2,070 2,978 6,117 8,071 19,235 86, , ,906 Cinvanti revenue 18,626 55,878 83,817 HTX-011 revenue 81, ,084 Contract revenue 646 Total revenues 646 1,104 1,104 2,070 2,978 6,117 8,071 19, , , ,807 COGS ,223 1,614 3,342 19,109 43,265 62,155 R&D 8,207 15,045 31,808 55,124 61,183 16,092 27,286 30,242 30, ,467 30,878 30,909 29,981 29, , ,764 97,888 88,099 G&A 3,501 8,786 22,649 19,437 35,742 17,220 15,780 17,492 18,367 68,859 19,285 20,249 21,262 22,325 83,120 91, , ,633 Total Operating Expenses 11,708 23,831 54,457 74,561 96,925 33,312 43,066 47,734 49, ,325 50,370 51,456 52,466 53, , , , ,888 Operating Income (11,062) (23,831) (54,457) (74,561) (96,925) (33,312) (43,066) (47,734) (48,109) (172,221) (48,300) (48,478) (46,350) (44,950) (188,077) (114,449) 59, ,920 Other income (loss), net (16) Interest income (expense), ne (373) (599) (826) (1,806) (666) (133) (160) (775) (1,150) (2,218) (1,500) (1,500) (1,500) (1,500) (6,000) (6,000) (6,000) (4,000) Pretax income (11,435) (24,430) (55,283) (76,367) (97,591) (33,445) (43,226) (48,525) (49,259) (174,439) (49,800) (49,978) (47,850) (46,450) (194,077) (120,449) 53, ,920 Income tax (benefit) Gain (loss) from disc. ops (379) 1,082 Net Income (11,814) (23,348) (55,283) (76,367) (97,591) (33,445) (43,226) (48,525) (49,259) (174,439) (49,800) (49,978) (47,850) (46,450) (194,077) (120,449) 53, ,920 EPS (1.96) (1.91) (3.42) (2.87) (2.95) (0.92) (1.17) (1.24) (1.25) (4.59) (1.17) (0.93) (0.88) (0.85) (3.78) (2.14) EPS diluted, GAAP (1.96) (1.91) (3.42) (2.87) (2.95) (0.92) (1.17) (1.24) (1.25) (4.59) (1.17) (0.93) (0.88) (0.85) (3.78) (2.14) Basic shares outstanding 6,013 12,223 16,163 26,569 33,056 36,229 37,048 39,113 39,504 37,974 42,610 53,634 54,170 54,712 51,282 56,354 58,044 59,785 Diluted shares outstanding 6,013 12,223 16,163 26,569 33,056 36,229 37,048 39,113 39,504 37,974 42,610 53,634 54,170 54,712 51,282 56,354 74,562 76,303 Source: Company reports, estimates February 7,

19 IMPORTANT DISCLOSURES: is a DBA for National Securities Corporation 410 Park Avenue, 14th Floor, New York, NY REG AC ANALYST CERTIFICATION The research analyst named on this report, Jonathan Aschoff, Ph.D., certifies the following: (1) that all of the views expressed in this research report accurately reflect his personal views about any and all of the subject securities or issuers; and (2) that no part of his compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by him in this research report. IMPORTANT DISCLOSURES This publication does not constitute and should not be construed as an offer or the solicitation of any transaction to buy or sell any securities or any instruments or any derivatives of the securities mentioned herein, or to participate in any particular trading strategies. Although the information contained herein has been obtained from recognized services, and sources believed to be reliable, its accuracy or completeness cannot be guaranteed. Opinions, estimates or projections expressed in this report may make assumptions regarding economic, industry, company and political considerations, and constitute current opinions, at the time of issuance, which are subject to change without notice. This report is being furnished for informational purposes only, and on the condition that it will not form a primary basis for any investment decision. Any recommendation(s) contained in this report is/are not intended to be, nor should it / they construed or inferred to be, investment advice, as such investments may not be suitable for all investors. When preparing this report, no consideration to one s investment objectives, risk tolerance and other individual factors was given; as such, as with all investments, purchase or sale of any securities mentioned herein may not be suitable for all investors. By virtue of this publication, neither the Firm nor any of its employees shall be responsible for any investment decisions. Before committing funds to ANY investment, an investor should seek professional advice. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice, or to be used by anyone to provide tax advice. Investors are urged to consult an independent tax professional for advice concerning their particular circumstances. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, either expressed or implied, is made regarding future performance. National Securities Corporation (NSC) and its affiliated companies, shareholders, officers, directors and / or employees (including persons involved with the preparation or issuance of this report) may, from time to time, have long or short positions in, and buy or sell the securities or derivatives (including options) thereof, of the companies mentioned herein. One or more directors, officers, and / or employees of NSC and its affiliated companies, or independent contractors affiliated with NSC may be a director of the issuer of the securities mentioned herein. NSC and / or its affiliated companies may have managed or February 7,

20 co-managed a public offering of, or acted as initial purchaser or placement agent for a private placement of any of the securities of any issuer mentioned in this report within the last three (3) years, or may, from time to time, perform investment banking or other services for, or solicit investment banking business from any company mentioned in this report. This research may be distributed by affiliated entities of National Securities Corporation (NSC). Affiliated entities of NSC may include, but are not limited to, vfinance Investments, Inc., National Asset Management and other subsidiaries of our parent company, National Holdings Corporation. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and the income they produce if any, may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors. Furthermore, NSC may follow emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. This report does not take into account the particular investment objectives, financial situation or needs of individual investors. Before acting on any advice or recommendation in this material, the investor should exercise independent judgment as to whether it is suitable in light of his/her particular circumstances and, if necessary, seek professional advice. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Additional information relative to securities, other financial products, or issuers discussed in this report is available upon request. Neither this entire report, nor any part thereof, may be reproduced, copied or duplicated in any form or by any means without the prior written consent of National Securities Corporation. All rights reserved. NSC is a member of both the Financial Industry Regulatory Authority (FINRA) and the Securities Investors Protection Corporation (SIPC). For disclosures inquiries, please call us at and ask for your NSC representative, or write us at National Securities Corporation, Attn. Richard Cohen - Research Department, 410 Park Avenue, 14th Floor, New York, NY 10022, or visit our website at Research Disclosures Legend Relevant Disclosures: 1, 7, & 10 1 National Securities (NSC) is a market-maker in the securities of the subject company 2 In the past twelve (12) month period, NSC and / or its affiliates have received compensation for investment banking for services from the subject company 3 In the past twelve (12) month period, NSC and / or its affiliates have received compensation from the subject company for services other than those related to investment banking 4 In the past twelve (12) month period, NSC was a manager or a co-manager of a public offering of one or more of the securities of the issuer 5 In the past twelve (12) month period, NSC was a member of the selling group of February 7,

21 a public offering of the security (ies) of the issuer 6 One or more directors, officers, and / or employees of NSC and / or its affiliated companies is / are a director (s) of the issuer of the security which is the subject of this report 7 NSC and / or its affiliates expects to receive or intends to seek compensation for investment banking services from the subject company at some point during the next three (3) months 8 A research analyst or a member of his / her household has a financial interest in the securities of the subject company as follows: a) long common stock; b) short common stock; c) long calls; d) short calls; e) long puts; f) short puts; g) long rights; h) short rights; i) long warrants; j) short warrants; k) long futures; l) short futures; m) long preferred stock; n) short preferred stock 9 As of the end of the month immediately preceding the date of publication of this report or the end of the prior month if the publication is within ten (10) days following the end of the month, NSC and / or its affiliates beneficially owned one percent (1%) or more of any class of common equity securities of the subject company. 10 Please see below for other relevant disclosures Shares of this security may be sold to residents of all 50 states, Puerto Rico, Guam, the US Virgin Islands and the District of Columbia. Distribution of Ratings Investment Banking* Rating # % # % BUY % 5 9.4% NEUTRAL % 3 5.7% SELL 3 5.7% 1 1.9% *Investment banking services provided in the previous 12 months MEANING OF RATINGS: BUY: the stock is likely to generate a total return of at least 10% over the next 12 months and should outperform relative to the industry. NEUTRAL: the stock is likely to perform in-line with the industry over the next 12 months. SELL: the stock is likely to underperform (from a total return perspective) relative to the industry over the next 12 months. NR: Not Rated SP: Suspended February 7,

22 Charts HRTX Source: Big Charts HRTX Date Rating Price Target Initiation February 7, 2017 BUY $28 February 7,