Pacira Pharmaceuticals, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
Pacira is a specialty pharmaceutical company focused on DepoFoam extended-release drug delivery products for hospitals and ambulatory surgery centers. The filing covers the fiscal year ended December 31, 2013, with quarterly data for the three months ended December 31, 2013. EXPAREL, approved in October 2011 and commercially launched in April 2012, was the principal growth driver. DepoCyt(e) remained a marketed product manufactured for commercial partners.
- EXPAREL FY2013 net sales were $76.2 million; fourth-quarter net sales were $30.5 million.
- Since launch, 2,106 accounts had ordered EXPAREL; 374 new accounts were added in the fourth quarter.
- The company operated in one reportable segment and had 310 employees at year-end.
Financial performance and key metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $85.6 million | $39.1 million | +119% |
| Net product sales | $82.0 million | $18.2 million | +351% |
| EXPAREL sales | $76.2 million | $14.6 million | +422% |
| DepoCyt(e) sales | $5.7 million | $3.5 million | +62% |
| Collaborative licensing and development revenue | $1.0 million | $18.4 million | -95% |
| Cost of revenues | $54.8 million | $32.1 million | +70% |
| Research and development | $21.6 million | $9.9 million | +117% |
| Selling, general and administrative | $62.5 million | $46.3 million | +35% |
| Operating loss | $53.3 million | $49.3 million | Loss increased |
| Net loss | $63.9 million | $52.3 million | Loss increased 22% |
| Basic and diluted loss per share | $1.93 | $1.72 | Loss increased |
Approximate FY2013 margins were 36% gross margin, negative 62% operating margin and negative 75% net margin. Fourth-quarter revenue was $33.6 million, cost of revenues was $18.4 million, total operating expenses were $43.4 million and net loss was $12.0 million, or $0.36 per share.
- Cash used in operating activities improved to $43.2 million from $70.1 million in 2012, primarily due to higher EXPAREL collections.
- Cash used in investing activities was $43.6 million, including $12.8 million of fixed-asset purchases and net investment activity.
- Financing activities provided $89.2 million, principally from the convertible-notes offering.
- Year-end cash, restricted cash and short-term investments totaled $73.8 million, including $12.5 million of cash and cash equivalents and $59.6 million of short-term investments.
- Working capital was negative $15.2 million, compared with positive $46.8 million in 2012, primarily because the convertible notes were classified as current.
- Total assets were $169.8 million and stockholders’ equity was $41.2 million at December 31, 2013.
Debt, liquidity and obligations
- In January 2013, Pacira issued $120.0 million of 3.25% convertible senior notes due February 2019 and received net proceeds of $115.3 million.
- The notes were carried at $99.0 million net of discount and classified as current at year-end because holders met the conditions to convert during the first quarter of 2014.
- The initial conversion price was approximately $24.82 per share. The company stated that conversion could require cash payment of principal and potentially a significant conversion premium; management estimated approximately $158 million of cash or 2.8 million shares for the conversion premium at year-end.
- Pacira used approximately $30.2 million of note proceeds to repay the Oxford credit facility and recorded a $3.4 million loss on extinguishment of debt.
- Management stated that existing liquidity and product revenue were expected to fund planned operations, capital expenditures and debt service through at least December 31, 2014, but acknowledged that additional financing could be required.
- Contractual obligations included $120.0 million of note principal, $19.8 million of note interest and $33.7 million of lease payments. Potential SkyePharma milestone payments of up to $52.0 million were excluded from that table.
Material changes versus the prior comparable period
- EXPAREL became the dominant revenue source, representing approximately 89% of total revenue in 2013 versus 37% in 2012.
- Revenue growth accelerated substantially, but profitability did not improve because Pacira continued to invest heavily in sales, marketing, manufacturing capacity and clinical development.
- Research and development spending rose primarily because of EXPAREL nerve-block trials and related development work.
- Sales and marketing spending increased as Pacira internalized its approximately 60-person sales force from Quintiles and expanded promotional and educational programs.
- Collaborative licensing revenue fell sharply because 2012 included recognition of deferred revenue following the termination of certain licensing agreements.
- DepoCyt(e) sales recovered from 2012 levels after European manufacturing remediation and the lifting of a selective recall recommendation.
- Pacira entered a five-year CrossLink distribution arrangement effective October 1, 2013, covering specified U.S. orthopedic and spine accounts.
Guidance, outlook, commentary, risks and unusual items
- No formal quantitative revenue or earnings guidance is provided in the filing. Management expected continued losses while commercializing EXPAREL, expanding manufacturing and conducting additional clinical and pediatric studies.
- Pacira expected to submit an EXPAREL supplemental NDA for the nerve-block indication in 2014, subject to final femoral nerve-block data. The intercostal nerve-block study did not meet its primary endpoint.
- The company expected FDA approval of the new Suite C manufacturing line in the second quarter of 2014, which it believed would materially increase EXPAREL capacity.
- The FDA required post-approval pediatric studies for EXPAREL, with patient populations to be studied over several years.
- Important concentration risks include dependence on EXPAREL, reliance on three wholesalers that represented 79% of FY2013 revenue, sole-source manufacturing facilities in San Diego, cold-chain distribution, third-party service providers and limited suppliers.
- Market acceptance depends on hospital formulary access, reimbursement, pricing, physician adoption and competition from generic bupivacaine, opioids, NSAIDs and alternative delivery systems.
- Patent protection for EXPAREL has varying expiration dates, with key U.S. patents identified as expiring between 2017 and 2023; regulatory exclusivity was scheduled to expire October 28, 2014.
- The filing identifies potential risks from adverse events, product liability, regulatory enforcement, intellectual-property challenges, manufacturing interruptions, additional capital needs and dilution or cash requirements related to the convertible notes.
- The company reported no material pending litigation, no material off-balance-sheet arrangements and effective internal control over financial reporting, with an unqualified auditor opinion.
Most important facts for investors to verify
- Whether EXPAREL sales growth continues after the initial launch phase and whether increasing volume produces sustainable gross-margin improvement.
- The timing and outcome of the femoral nerve-block trial and any supplemental FDA application or approval.
- FDA approval, production capacity and utilization of Suite C, including the effect of the $3.7 million of non-saleable Suite C batch costs recorded in 2013.
- Whether operating cash flow turns positive before available liquidity is depleted.
- The quarter-by-quarter classification, conversion or refinancing of the $120.0 million convertible notes and the resulting cash or share dilution.
- Customer concentration, wholesaler inventory and ordering patterns, reimbursement conditions and the effectiveness of the CrossLink arrangement.
- Remaining SkyePharma milestones, 3% sales-based payments, Paul Capital royalty obligations and the December 31, 2014 termination of the royalty financing arrangement.
- Patent expiry, generic or competing long-acting bupivacaine products, regulatory exclusivity and any emerging safety or product-liability issues.