Pacira Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017; filed November 8, 2017. The interim financial statements are unaudited. The filing describes a specialty pharmaceutical company focused on EXPAREL and DepoFoam extended-release drug delivery products. The registrant name in the filing is Pacira Pharmaceuticals, Inc.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $67.3 million | $68.4 million | $207.6 million | $203.5 million |
| EXPAREL sales | $66.8 million | $64.9 million | $204.3 million | $194.4 million |
| Gross margin | 73% | 37% | 68% | 57% |
| Operating loss | $3.6 million | $20.9 million | $33.4 million | $29.6 million |
| Net loss | $7.6 million | $22.2 million | $47.2 million | $34.0 million |
| Loss per share | $0.19 | $0.59 | $1.19 | $0.91 |
- Q3 total revenue declined 1%, while nine-month revenue increased 2%. EXPAREL revenue increased 3% in Q3 and 5% year to date, primarily from higher sales volume.
- Cost of goods sold fell 58% in Q3 and 23% year to date. Gross-margin improvement was substantially driven by the $21.9 million EXPAREL inventory and reserve charge recorded in Q3 2016 for an out-of-specification batch.
- Research and development expense increased 21% in Q3 and 65% year to date, reflecting clinical trials, manufacturing scale-up, and product-development spending. SG&A increased 12% in Q3 and 4% year to date.
- Interest expense increased to $5.1 million in Q3 and $12.9 million year to date, primarily due to the 2022 convertible notes and related debt-discount amortization. The company also recorded a $3.7 million year-to-date loss on early extinguishment of debt.
- Net cash provided by operating activities was $0.9 million for the first nine months, compared with $16.1 million in the prior-year period. Investing activities used $232.5 million, principally for investments, capital expenditures, and contingent consideration payments. Financing activities provided $221.9 million.
- At September 30, 2017, cash and cash equivalents were $26.2 million, short-term investments were $267.9 million, and long-term investments were $80.8 million. Total cash and investments were approximately $374.9 million, with working capital of $313.5 million.
- Total assets were $606.1 million and stockholders’ equity was $264.8 million. The accumulated deficit was $393.7 million.
Material Changes Versus the Prior Comparable Period
- EXPAREL continued to grow, but revenue growth was offset by the discontinuation-related decline in DepoCyt(e), lower royalty revenue, and substantially lower collaborative licensing and milestone revenue.
- DepoCyt(e) and other product sales declined 86% in Q3 and 68% year to date. The company discontinued future DepoCyt(e) production in June 2017 because of persistent manufacturing issues.
- The company issued $345.0 million principal amount of 2.375% convertible senior notes due 2022 in March 2017. Proceeds were used partly to repurchase approximately $118.2 million of 2019 notes and related costs. Approximately $0.3 million principal remained outstanding on the 2019 notes at quarter-end.
- Shares outstanding increased to approximately 40.6 million at September 30, 2017, from approximately 37.5 million at December 31, 2016, primarily due to conversion of 2019 notes and equity-plan activity.
- Inventory increased to $39.1 million from $31.3 million at December 31, 2016, while fixed assets increased to $105.9 million, reflecting continued manufacturing-capacity expansion.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that existing cash, investments, and expected product-sale cash flows were sufficient to fund operations, capital expenditures, debt service, and potential note conversions through at least November 8, 2018. The company noted that additional financing might nevertheless be required and that no committed external financing sources existed.
- No formal quantitative revenue or earnings guidance is provided in the filing. Management expects continued investment in EXPAREL commercialization, expanded indications, clinical trials, pipeline products, manufacturing capacity, and regulatory and legal matters.
- The FDA accepted resubmission of an EXPAREL supplemental application for nerve-block use; the stated PDUFA action date was April 6, 2018. Approval and commercial success were not assured.
- The company entered a five-year DePuy Synthes co-promotion arrangement for orthopedic and spine procedures, under which DePuy Synthes receives tiered commissions on qualifying EXPAREL sales.
- DepoCyt(e) discontinuation generated $5.3 million of charges in the first nine months, with $1.9 million of related reserves remaining at September 30, 2017. Additional costs could be material in a future period.
- The company was cooperating with a U.S. Department of Justice inquiry concerning EXPAREL marketing and promotional practices. The filing states that the timing, outcome, and potential impact were uncertain.
- Principal business risks include dependence on EXPAREL, competition, reliance on a single manufacturing site and third-party suppliers, manufacturing scale-up and quality issues, regulatory approval, clinical-trial execution, intellectual-property protection, customer and wholesaler concentration, and potential future milestone payments to Skyepharma of up to $36.0 million.
- In October 2017, after the quarter-end, the company invested $15.0 million in TELA Bio and could invest up to an additional $10.0 million under specified circumstances.
Investor Verification Checklist
- Verify the sustainability of EXPAREL volume growth and the effect of increasing rebates and chargebacks, which represented 5.1% of gross product sales in the first nine months versus 4.4% in the prior-year period.
- Assess recurring gross margins excluding the favorable comparison against the 2016 out-of-specification inventory charge and monitor manufacturing quality and capacity expansion.
- Review the cash requirements and potential dilution or cash settlement associated with the $345.0 million 2022 convertible notes.
- Monitor the DOJ inquiry, DepoCyt(e) discontinuation reserves, potential Skyepharma milestone payments, and other legal or regulatory contingencies.
- Confirm the timing and outcome of the EXPAREL nerve-block supplemental application and the commercial impact of the DePuy Synthes co-promotion arrangement.
- Evaluate whether operating cash generation can support ongoing clinical, commercial, and manufacturing investments without additional debt or equity financing.