Pacira Biosciences, Inc. annual report, FY2016

Pacira Pharmaceuticals, Inc. 2016 Form 10-K Summary

Business context and reporting period

The filing is an Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed March 1, 2017. Pacira operates as a specialty pharmaceutical company with one reportable segment, developing, manufacturing and commercializing products based on its DepoFoam extended-release delivery technology.

EXPAREL, a long-acting bupivacaine formulation for single-dose administration into the surgical site to produce postsurgical analgesia, is the primary commercial product. DepoCyt(e) is manufactured for commercial partners, while DepoTranexamic Acid is in Phase 2 development and DepoMeloxicam is preclinical. EXPAREL represented 96% of total revenue in 2016.

Financial performance and key metrics

Metric	2016	2015	Change
Total revenue	$276.4 million	$249.0 million	+11%
EXPAREL net sales	$265.8 million	$239.9 million	+11%
Total net product sales	$270.1 million	$244.5 million	+10%
Collaborative licensing and milestone revenue	$3.4 million	$1.4 million	+140%
Royalty revenue	$2.9 million	$3.1 million	-7%
Gross margin	60%	71%	-11 percentage points
Operating income (loss)	$(32.0) million	$9.5 million	Declined
Net income (loss)	$(37.9) million	$1.9 million	Declined
Basic net loss per share	$(1.02)	$0.05	Declined
Net cash provided by operating activities	$33.5 million	$28.0 million	+19%

Cost of goods sold increased 53% to $110.1 million, primarily because of a $20.7 million charge for inventory and related costs associated with an EXPAREL stability-test issue. Research and development expense increased 59% to $45.7 million, driven by Phase 3 nerve-block trials, Phase 4 studies and pipeline development. Selling, general and administrative expense increased 10% to $152.6 million, including a $7.1 million CrossLink contract-termination charge.

At December 31, 2016, cash and cash equivalents were $35.9 million and short-term investments were $136.7 million, for combined cash and short-term investments of $172.6 million. Working capital was $198.3 million, total assets were $391.5 million and stockholders’ equity was $219.0 million. The company reported an accumulated deficit of $346.2 million.

Cash flow, debt and liquidity

• Operating cash flow was $33.5 million, compared with $28.0 million in 2015.
• Investing cash outflow was $61.8 million, including $24.7 million of fixed-asset purchases, $21.2 million of net short-term investment purchases and $15.9 million of payments to Skyepharma.
• Financing cash inflow was $7.3 million, primarily from stock-option exercises and employee stock-purchase-plan issuances.
• Cash and cash equivalents decreased by $21.0 million during 2016.
• Gross consolidated indebtedness was $118.5 million, consisting of 3.25% unsecured convertible senior notes due February 2019. The carrying value of the notes was $108.7 million after discounts and deferred financing costs.
• Management stated that existing cash, investments and expected operating cash flow should fund planned operations, capital expenditures, debt service and potential note conversions through March 1, 2018, although additional financing may be required thereafter.

Material changes versus the prior comparable period

• EXPAREL sales increased 11%, primarily from a 10% increase in sales volume, new accounts and expansion within existing accounts. Pricing increases also contributed, partly offset by lower government pricing.
• Gross margin fell from 71% to 60% because of the $20.7 million EXPAREL inventory and related charge, higher manufacturing cost per vial, Patheon capacity-expansion costs and $2.9 million of unplanned manufacturing shutdown charges.
• The company returned to a substantial net loss after reporting net income in 2015, reflecting higher manufacturing, research and development, and commercial expenses.
• Research and development investment accelerated, with clinical development expense up 87% and product development and other expense up 72%.
• DepoCyt(e) and other product sales declined 8% to $4.3 million, primarily because fewer DepoCyt(e) lots were sold to domestic commercial partners.
• Collaborative licensing and milestone revenue increased because of $2.0 million in Aratana milestones related to veterinary approval and filing activities.
• Inventory declined from $61.6 million to $31.3 million, primarily due to the stability-related reserve and lower inventory investment.

Guidance, outlook, commentary and unusual items

• Management expects continued investment in EXPAREL commercialization, clinical development, manufacturing capacity, regulatory activities and pipeline programs, and expects to continue incurring significant expenses.
• Two pivotal Phase 3 nerve-block trials were initiated. If successful, management intended to submit an EXPAREL supplemental NDA in mid-2017 with an anticipated six-month PDUFA review.
• Management expected top-line data from the spine Phase 4 study in the second half of 2017 and planned Phase 4 studies in C-section, colorectal surgery and breast reconstruction.
• In January 2017, Pacira entered a five-year U.S. co-promotion agreement with DePuy Synthes for orthopedic procedures. DePuy Synthes is entitled to tiered commissions on EXPAREL sales.
• In September 2016, Pacira launched a 133 mg, 10 mL EXPAREL vial for oral and maxillofacial procedures and expected to expand availability to hospital and ambulatory surgery markets in 2017.
• A routine stability test identified one early-2016 EXPAREL batch that was slightly outside one of 21 acceptance criteria. Pacira reserved affected inventory, exchanged a limited number of boxes and agreed with the FDA to apply 12-month expiration dating to EXPAREL manufactured beginning in October 2016 while discussions concerning the specification and analytical testing continued.
• The company was cooperating with an ongoing U.S. Department of Justice inquiry into EXPAREL marketing and promotional practices. The filing states that the potential duration, cost and outcome were not estimable.
• Pacira expected the first Patheon commercial manufacturing suite in Swindon, England to begin production in late 2018, subject to construction and regulatory approvals.
• Potential future Skyepharma milestone payments totaled up to $36.0 million, excluding continuing low-single-digit percentage payments on covered EXPAREL sales. The company also had $39.4 million of lease obligations and $0.6 million of non-cancelable raw-material purchase commitments.

Principal risks and contingencies

• Revenue concentration is substantial: three pharmaceutical wholesalers accounted for 86% of 2016 revenue, and EXPAREL accounted for 96%.
• The company depends heavily on continued market acceptance, reimbursement, formulary access and effective commercialization of EXPAREL.
• Pacira was the sole manufacturer of EXPAREL and DepoCyt(e) at the reporting date, creating manufacturing, supply-chain, quality-control and business-continuity risks.
• Manufacturing expansion at Patheon may be delayed or may not receive required regulatory approvals, and termination could result in make-good and termination costs of up to $2.4 million under the technical-transfer agreement.
• The DOJ inquiry could result in significant fines, penalties, damages, compliance obligations, reputational harm or restrictions on government healthcare-program participation, although the filing does not quantify an exposure.
• EXPAREL patent protection and exclusivity are subject to expiration and third-party challenges. The filing identifies issued U.S. and European patents expiring primarily between 2018 and 2023, while a process patent notified in February 2017 was expected to expire December 24, 2021.
• The convertible notes could require repayment of $118.5 million of principal and approximately $35.7 million of conversion premium in cash, shares or a combination at Pacira’s option, based on December 31, 2016 values.
• The company had significant federal and state net operating loss and tax-credit carryforwards, but recorded a full valuation allowance because realization was not considered sufficiently probable.

Most important facts for investors to verify

• Whether EXPAREL volume growth and adoption offset pricing pressure, rebates, wholesaler fees and reimbursement restrictions.
• The final resolution and financial impact, if any, of the DOJ marketing and promotional-practices inquiry.
• The FDA’s resolution of the EXPAREL stability specification and analytical-test issue, including whether expiration dating returns to prior periods.
• Results and regulatory status of the nerve-block Phase 3 program and the timing and acceptance of any supplemental NDA.
• Progress, cost and FDA approval status of the Patheon manufacturing suites and internal manufacturing-capacity expansion.
• Liquidity available to fund ongoing losses, capital expenditures, potential Skyepharma payments and the February 2019 convertible-note maturity or conversion.
• The durability of EXPAREL patent protection and the timing and likelihood of generic or alternative long-acting bupivacaine competition.
• Whether the $20.7 million stability-related charge and other unusual 2016 costs are nonrecurring or indicate continuing manufacturing-cost pressure.