Pacira BioSciences, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Pacira is a single-segment developer, manufacturer and commercializer of non-opioid pain-management and regenerative-health products. Its principal products are EXPAREL, a long-acting local analgesic, and iovera°, a handheld cryoanalgesia system acquired through the April 2019 MyoScience acquisition. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $105.7 million | $91.3 million | +16% |
| Net product sales | $104.7 million | $90.9 million | +15% |
| EXPAREL and bupivacaine sales | $102.5 million | $90.9 million | +13% |
| iovera° sales | $2.3 million | — | New post-acquisition |
| Gross margin | 72% | 70% | +2 percentage points |
| Income from operations | $17.1 million | $1.1 million | Improved |
| Net income (loss) | $8.2 million | $(2.8) million | Improved |
| Diluted EPS | $0.19 | $(0.07) | Improved |
| Net cash provided by operating activities | $6.2 million | $3.5 million | +77% |
Total revenue growth was driven primarily by an 11% increase in EXPAREL unit volume and a 6% increase in gross selling price per unit, partially offset by product-mix changes. Gross margin improved due mainly to manufacturing efficiencies in San Diego, despite downtime at the Swindon, England manufacturing suite.
Operating expenses were $88.6 million versus $90.2 million. Research and development increased 10% to $15.8 million, while selling, general and administrative expense declined 5% to $44.8 million. The company recorded $2.0 million of amortization related to acquired MyoScience intangible assets and a $3.7 million net acquisition-related gain, primarily from a reduction in the fair value of contingent consideration.
Cash and cash equivalents were $54.6 million at March 31, 2020. Short- and long-term investments totaled $299.0 million, producing cash, cash equivalents and investments of approximately $353.6 million. Working capital was $351.3 million. Cash declined by $23.6 million during the quarter, primarily because of net investment purchases, capital expenditures and contingent-consideration payments.
The company had $345.0 million principal amount of 2.375% convertible senior notes due April 2022, recorded at $310.1 million net of discount and issuance costs. The notes had a fair value of approximately $331.2 million at March 31, 2020 and were classified as long-term debt. Management stated that existing liquidity and expected operating cash flows should fund operations, capital expenditures, potential note conversions and debt service through at least May 7, 2021, although additional financing could be required in the future.
Material changes versus the prior comparable period
- Revenue increased 16%, with EXPAREL revenue up 12% and the first full comparable quarter of iovera° sales following the MyoScience acquisition.
- The company moved from a Q1 2019 net loss to Q1 2020 net income, supported by higher revenue, improved gross margin, lower selling and administrative costs, and the acquisition-related gain.
- Interest income declined 26% because of lower interest rates, while interest expense increased 4% to $6.0 million.
- Other expense increased substantially because of a $4.0 million unrealized impairment loss on the company’s TELA Bio equity investment.
- Operating cash flow increased to $6.2 million, but investing activities used $28.6 million compared with $78.5 million of investing cash inflow in Q1 2019.
- Stock-based compensation increased to $8.8 million from $7.4 million.
Guidance, outlook, risks and unusual items
The company did not provide a quantified revenue or earnings outlook in the filing. Management expected Q2 2020 sales of EXPAREL and iovera° to be adversely affected by COVID-19-related restrictions on elective procedures. The company began seeing disruption in the second half of March, and sales-force access to hospitals and surgical centers was substantially reduced. Management expected to offset part of the revenue impact through lower commissions, delayed clinical activities, canceled conferences and reduced travel.
Manufacturing operations remained operational overall, and no material supply-chain disruption had occurred as of the filing. The Fremont facility for iovera° was closed for three weeks in March to implement safety protocols and resumed normal operations in April. A December 2019 media-fill failure at a contract manufacturer was investigated; management concluded that affected inventory remained sellable and expected production on the line to resume in May 2020.
Potential future cash requirements include up to $68.0 million of remaining MyoScience milestone payments, including a $10.0 million payment expected in Q2 2020, and up to $36.0 million of remaining Skyepharma milestone obligations. The company also had future operating lease commitments, including $54.8 million for a lease not yet commenced at March 31, 2020.
Key risks include dependence on EXPAREL and iovera°, concentration of revenue and receivables among three major wholesalers, competition, manufacturing and supply-chain risks, regulatory and clinical-development uncertainty, intellectual-property protection, cybersecurity, and the ongoing COVID-19 pandemic. Clinical trials and enrollment were delayed or suspended because of reduced elective procedures.
The company remained subject to a Department of Justice inquiry concerning EXPAREL marketing and promotional practices. It had reached an agreement in principle for a $3.5 million civil settlement, subject to definitive documentation and other contingencies, with no admission of wrongdoing.
Important facts for investors to verify
- Duration and severity of COVID-19-related reductions in elective procedures and the resulting impact on EXPAREL and iovera° demand.
- Progress toward converting Q1 revenue growth into sustained operating and free cash flow.
- Liquidity requirements for the $345.0 million convertible notes due in 2022 and the company’s intended settlement method.
- Timing and amount of remaining MyoScience and Skyepharma milestone payments.
- Resolution and final cost of the DOJ investigation and proposed settlement.
- Manufacturing capacity expansion, including the Swindon project and the San Diego capacity expansion.
- Progress, delays and regulatory outcomes for EXPAREL label-expansion programs and iovera° clinical initiatives.
- Reliance on three wholesalers, which represented 89% of revenue and approximately 89% of accounts receivable at March 31, 2020.