Pacira Pharmaceuticals, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly filing for the three and six months ended June 30, 2014, filed July 31, 2014. Pacira is a specialty pharmaceutical company developing, manufacturing, and commercializing products based on its DepoFoam drug-delivery technology. Commercial products were EXPAREL and DepoCyt(e), with EXPAREL representing the primary growth driver.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $47.2 million, up 175% | $83.8 million, up 192% |
| EXPAREL net sales | $44.9 million, up 195% | $79.3 million, up 209% |
| Net product sales | $46.0 million, up 183% | $81.8 million, up 202% |
| Gross margin on product-related revenue | 57%, versus 40% | 54%, versus 24% |
| Loss from operations | $(2.8) million | $(12.1) million |
| Net loss | $(5.0) million, or $(0.14) per share | $(16.5) million, or $(0.48) per share |
| Net cash from operating activities | $3.5 million for the six-month period, versus $(27.1) million |
Derived margins were approximately negative 6.0% for quarterly operating margin and negative 10.7% for quarterly net margin. Six-month operating and net margins were approximately negative 14.4% and negative 19.7%, respectively.
- Operating expenses were $50.0 million in the quarter and $95.9 million for the six months. Six-month selling, general and administrative expense increased 76% to $47.4 million, primarily from expanded sales, marketing, personnel, regulatory, legal, and support activities.
- Research and development expense declined 3% for the six months to $10.4 million as completed clinical trials reduced development spending, partly offset by higher compensation and stock-option revaluation expense.
- Stock-based compensation was $5.5 million in the quarter and $9.5 million for the six months.
- At June 30, 2014, cash and cash equivalents were $108.2 million, restricted cash was $2.2 million, short-term investments were $55.7 million, and long-term investments were $13.5 million. Total cash, restricted cash, and investments were approximately $179.5 million, with working capital of $79.4 million.
- Convertible senior notes had $120.0 million of principal and a $101.0 million carrying value after debt discount. The notes bear 3.25% interest and mature February 1, 2019, but were classified as current because conversion conditions were met during the quarter. Royalty interest obligations were $0.9 million.
Material Changes Versus the Prior Comparable Period
- EXPAREL sales increased by $29.7 million in the quarter and $53.7 million for the six months, driven by new accounts, hospital formulary wins, orthopedic adoption, and use in abdominal and genitourinary procedures.
- The number of accounts ordering EXPAREL increased to 2,815 from 1,435 at the end of the second quarter of 2013; 363 accounts were added during the 2014 quarter.
- Gross margin improved substantially because higher facility utilization and commercial production in Suite C reduced unit costs.
- Operating cash flow improved by $30.6 million year over year, turning positive, primarily due to increased EXPAREL sales and an $8.0 million upfront payment from Mundipharma.
- The company raised $110.4 million, net of costs, through an April public offering of 1.84 million common shares at $64.00 per share. Shares outstanding increased to approximately 35.8 million at June 30.
- DepoCyt(e) sales increased 70% for the six months to $2.5 million, while collaborative licensing and development and royalty revenue remained comparatively small.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that existing cash, investments, product revenue, and other resources should fund operating expenses, capital expenditures, and debt service for at least the next 12 months. It also noted that additional financing may be required and that no committed external funding sources exist.
- FDA approved Suite C in March 2014, more than doubling manufacturing capacity. Pacira also entered agreements with Patheon to establish two dedicated EXPAREL manufacturing suites in the United Kingdom; the first was expected to begin commercial production in the second half of 2016.
- Pacira submitted an sNDA for an EXPAREL nerve-block indication. The FDA accepted the application and set a Prescription Drug User Fee Act action date of March 5, 2015.
- Mundipharma agreements were extended to June 2033 and expanded geographically. The related $8.0 million non-refundable upfront payment was deferred and will be recognized over the remaining contractual term.
- If all convertible notes were converted, Pacira would need to repay $120.0 million of principal in cash and issue approximately 3.5 million shares for the conversion premium based on June 30 conditions. The notes’ market value substantially exceeded their carrying value.
- Key risks include dependence on EXPAREL and a limited customer base, reliance on major wholesalers, a single manufacturing site during capacity expansion, regulatory and clinical approval risk, competition, third-party suppliers and manufacturers, intellectual-property protection, and continued operating losses.
- The three largest customers represented 85% of revenue for both the quarter and six-month period. No material litigation was reported, and management identified no material changes to previously disclosed risk factors.
- Lease commitments totaled approximately $40.5 million, and Patheon agreements include potential termination or make-good costs of up to $2.0 million under specified circumstances.
Important Facts for Investors to Verify
- Confirm the sustainability of EXPAREL’s rapid sales growth, account additions, formulary adoption, and pricing.
- Assess whether improving gross margins and positive operating cash flow can continue as sales, marketing, clinical, and manufacturing investments expand.
- Monitor the quarterly conversion status and classification of the $120.0 million convertible notes, including potential cash repayment and shareholder dilution.
- Evaluate execution, timing, cost, and regulatory approval of Suite C and the Patheon manufacturing expansion.
- Review customer and receivables concentration, as three customers accounted for 85% of revenue and 89% of accounts receivable at June 30, 2014.
- Verify the treatment and future recognition period of the $8.0 million deferred Mundipharma payment and the remaining EXPAREL-related contingent consideration.