Pacira Pharmaceuticals, Inc. — Q1 2018 Form 10-Q Summary
Reporting period: Three months ended March 31, 2018. The filing identifies the registrant as Pacira Pharmaceuticals, Inc. (now Pacira BioSciences, Inc.). Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Pacira is a specialty pharmaceutical company focused on its DepoFoam extended-release drug delivery technology. The business is substantially dependent on EXPAREL, an extended-release bupivacaine product used primarily for postsurgical pain management in hospitals and ambulatory surgery centers. EXPAREL represented approximately 99% of net product sales in the quarter.
Financial Performance and Liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $74.6 million | $69.3 million | Up 8% |
| EXPAREL sales | $74.0 million | $67.7 million | Up 9% |
| Gross margin | 69% | 65% | Up 4 percentage points |
| Loss from operations | $(6.9) million | $(14.1) million | Improved |
| Net loss | $(10.7) million | $(19.9) million | Improved |
| Basic and diluted loss per share | $(0.26) | $(0.52) | Improved |
| Operating cash flow | $(2.7) million | $0.0 million | Declined |
- Cost of goods sold decreased 7% to $22.9 million, primarily because Q1 2017 included costs for scrapped DepoCyt(e) lots.
- Research and development expense decreased 14% to $14.4 million as prior EXPAREL Phase 3 nerve-block trials were completed, partially offset by DepoMeloxicam development and regulatory activity.
- Selling, general and administrative expense increased 5% to $44.2 million, including higher legal costs related to the Department of Justice inquiry and higher stock-based compensation.
- Interest expense increased to $5.2 million from $2.6 million following the issuance of the 2022 convertible notes. The prior-year period included a $3.7 million loss on early extinguishment of debt.
- Cash, cash equivalents and investments totaled $361.5 million at March 31, 2018. Working capital was $370.4 million.
- Cash and cash equivalents declined to $41.6 million from $54.1 million at December 31, 2017, while short- and long-term investments totaled $319.9 million.
- Fixed assets, net, increased to $109.2 million, including continued investment in EXPAREL manufacturing capacity and facility upgrades.
Material Changes Versus the Prior Comparable Period
- EXPAREL sales increased 9%, driven primarily by a 10% increase in sales volume and continued adoption in soft-tissue and orthopedic procedures.
- DepoCyt(e) and other product sales decreased 65%, and royalty revenue decreased 51%, primarily because production of DepoCyt(e) was discontinued in June 2017.
- Collaborative licensing and milestone revenue was zero compared with $0.2 million in Q1 2017. Adoption of ASC 606 accelerated approximately $1.0 million of previously deferred revenue into accumulated deficit at January 1, 2018; management stated the income-statement impact was not material.
- Net loss improved by $9.2 million, reflecting higher revenue, improved gross margin, lower R&D expense and the absence of the prior-year debt-extinguishment loss.
- Operating cash flow turned negative, primarily due to higher spending on the EXPAREL nerve-block supplemental application, related advisory committee activity, interest payments and legal expenditures.
- DepoCyt(e) discontinuation generated a $0.1 million charge during the quarter; remaining related reserves were $1.3 million at March 31, 2018.
Outlook, Risks and Unusual Items
- In April 2018, the FDA approved Pacira’s supplemental application to expand EXPAREL use to interscalene brachial plexus block for postsurgical regional analgesia.
- Management expected to continue significant spending on EXPAREL commercialization, Phase 4 trials, pediatric programs, manufacturing expansion, regulatory matters and the DepoMeloxicam pipeline. The filing does not provide quantitative revenue or earnings guidance.
- Management stated that existing cash, investments and expected product-sale cash flows should fund operations, capital expenditures, debt service and potential 2022-note principal payments through at least May 3, 2019. The company noted that additional financing may be required in the future and has no committed external funding sources.
- The company had $345.0 million principal amount of 2.375% convertible senior notes due April 2022 and approximately $0.3 million of 2019 convertible notes outstanding. The 2022 notes were not convertible based on the applicable Q1 stock-price test.
- Potential future obligations include up to $36.0 million of additional Skyepharma milestone payments and potentially up to $10.0 million related to the TELA Bio investment arrangement.
- The Department of Justice continues to investigate marketing and promotional practices related to EXPAREL following a 2015 subpoena. The filing states that the timing, cost and outcome cannot be predicted.
- Revenue and receivables are concentrated among three major wholesalers. The three largest wholesalers processed 91% of sales and represented 92% of accounts receivable at March 31, 2018.
- Other key risks include reliance on EXPAREL, a single manufacturing site and third-party suppliers, competition, regulatory approval, manufacturing expansion execution, intellectual property protection and product liability.
Investor Verification Checklist
- Verify the sustainability of EXPAREL volume growth following the FDA’s expanded nerve-block indication.
- Monitor gross-to-net deductions, particularly chargebacks, rebates and other sales allowances, which were 5.3% of gross product sales versus 4.9% in the prior-year quarter.
- Assess progress, cost and timing of manufacturing-capacity expansion and related capital expenditures.
- Track operating cash flow, investment balances and the company’s ability to fund operations and the 2022 notes without new financing.
- Review the potential financial impact and resolution of the DOJ inquiry.
- Confirm remaining DepoCyt(e) termination costs and any additional obligations following termination notices received from Mundipharma in April 2018.
- Evaluate potential Skyepharma milestone payments, TELA Bio funding obligations and dilution or cash-settlement exposure from convertible notes.