Pacira Pharmaceuticals, Inc. Form 10-Q Summary
Business context and reporting period
Pacira is a specialty pharmaceutical company developing, manufacturing and commercializing products using its DepoFoam drug-delivery technology. Its principal commercial product is EXPAREL, launched in April 2012, and it also sells DepoCyt(e) through commercial partners. This unaudited filing covers the quarter and nine months ended September 30, 2014. The filing identifies the registrant as Pacira Pharmaceuticals, Inc.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $52.0 million | $23.3 million | $135.9 million | $52.0 million |
| Net product sales | $50.9 million | $22.4 million | $132.7 million | $49.5 million |
| EXPAREL sales | $50.2 million | $20.0 million | $129.5 million | $45.7 million |
| Gross margin on product-related revenue | 61% | 36% | 57% | 29% |
| Loss from operations | $(1.0) million | $(12.8) million | $(13.1) million | $(43.5) million |
| Net loss | $(3.0) million | $(14.8) million | $(19.5) million | $(52.0) million |
| Net loss per share | $(0.08) | $(0.44) | $(0.56) | $(1.57) |
Revenue increased 124% year over year in the quarter and 161% for the nine-month period, primarily from higher EXPAREL volume, new accounts, increased utilization in existing accounts, reduced formulary restrictions and a 5% price increase implemented in the second quarter. DepoCyt(e) sales declined 71% in the quarter and 18% year to date.
Cost of goods sold increased 38% in the quarter and 61% year to date, but gross margin improved substantially because of higher manufacturing utilization and the commencement of commercial production in Suite C. Selling, general and administrative expense increased 84% in the quarter and 79% year to date, reflecting expanded sales and marketing activities, personnel, regulatory and legal support, and higher stock-based compensation. Research and development expense declined 26% in the quarter and 11% year to date as pivotal nerve-block trials concluded.
Cash provided by operating activities was $12.5 million for the nine months ended September 30, 2014, compared with cash used of $36.9 million in the prior-year period. Investing cash use was $123.4 million, including $14.8 million of capital expenditures, $96.9 million of net investment purchases and $11.7 million of acquisition-related payments. Financing cash provided was $116.1 million, primarily from the $110.4 million net proceeds of a follow-on equity offering.
At September 30, 2014, cash, restricted cash and short- and long-term investments totaled approximately $176.1 million, working capital was $64.0 million, and accumulated deficit was $315.9 million. Convertible senior notes had $120.0 million principal outstanding and $102.1 million carrying value, net of discount. Management stated that available liquidity and product revenue should fund operations, capital expenditures and debt service for at least the next 12 months, although additional financing may ultimately be required.
Material changes versus the prior comparable period
- EXPAREL revenue rose 151% in the quarter and 184% year to date.
- Total revenue growth materially exceeded expense growth, reducing the operating loss and net loss.
- Gross margin increased from 36% to 61% in the quarter and from 29% to 57% year to date.
- Operating cash flow turned positive, improving by $49.4 million year over year for the nine-month period.
- The company completed a $110.4 million net follow-on equity offering, increasing common shares outstanding to approximately 36.0 million at September 30, 2014.
- Goodwill increased to $22.0 million after an $8.0 million Skyepharma milestone payment tied to achieving $100.0 million of EXPAREL net sales collected, plus $3.7 million of percentage-based earn-out payments.
- The company received an $8.0 million non-refundable upfront payment from Mundipharma, which was recorded as deferred revenue and will be recognized over the amended contract term.
Guidance, outlook, risks and unusual items
- Management expects continued investment in EXPAREL commercialization, additional indications, clinical development, sales capabilities and manufacturing capacity.
- An EXPAREL supplemental application for a nerve-block indication was accepted for FDA review, with a stated Prescription Drug User Fee Act action date of March 5, 2015.
- Pacira expects the first Patheon UK manufacturing suite to begin commercial production in the second half of 2016 and the second suite to become operational in 2018 or 2019. The agreements may require termination-related payments of up to $2.0 million in specified circumstances.
- The FDA issued a September 2014 warning letter alleging that certain educational materials promoted unapproved off-label uses and that an advertisement overstated EXPAREL efficacy. The company is working with the FDA, but cannot determine whether further enforcement or material business effects will result.
- The convertible notes became convertible through December 31, 2014 because the stock-price conversion condition was met. A full conversion would require repayment of $120.0 million principal and settlement of an estimated approximately $349 million conversion premium in cash, shares or a combination, potentially causing significant dilution.
- Three customers represented 85% of nine-month revenue, and three customers represented 87% of third-quarter revenue. Three customers also represented 36%, 26% and 25% of accounts receivable at quarter-end.
- A purported securities class action was filed on October 3, 2014 concerning alleged misleading statements and omissions during April 9, 2012 through September 24, 2014. The company could not estimate any potential loss or determine the likelihood of an unfavorable outcome.
- The company remains dependent on EXPAREL, a single primary manufacturing site during capacity expansion, third-party suppliers and regulatory approvals, and has incurred losses since inception.
Most important facts for investors to verify
- Whether EXPAREL demand and account expansion remain sufficient to support revenue growth and continued margin improvement.
- The FDA’s response to the warning letter and any resulting changes to promotional materials, sales practices or product economics.
- The timing, cost and regulatory status of the Patheon manufacturing suites and other capacity investments.
- The conversion status of the $120.0 million notes, including potential cash requirements and shareholder dilution.
- The sustainability of positive operating cash flow after increased selling, marketing, capital expenditure and milestone-payment requirements.
- Customer concentration, wholesaler purchasing patterns and the effect of declining DepoCyt(e) sales.
- The development and potential financial impact of the securities class action and other litigation or contingencies.