Pacira Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. The interim financial statements are unaudited. Pacira is a specialty pharmaceutical company focused primarily on EXPAREL, an extended-release bupivacaine product used in postsurgical pain management.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $84.1 million | $70.9 million | $158.7 million | $140.2 million |
| EXPAREL sales | $80.4 million | $69.8 million | $154.5 million | $137.5 million |
| Gross margin | 75% | 66% | 72% | 65% |
| Income (loss) from operations | $6.5 million | $(15.8) million | $(0.4) million | $(29.8) million |
| Net income (loss) | $2.6 million | $(19.7) million | $(8.1) million | $(39.6) million |
| Net income (loss) per share | $0.06 | $(0.49) | $(0.20) | $(1.01) |
| Cash flow from operations | Not separately provided | Not separately provided | $11.0 million | $3.7 million |
Q2 revenue increased 19%, driven principally by a 15% increase in EXPAREL sales. Six-month revenue increased 13%, while EXPAREL sales increased 12%. Management attributed volume growth to broader adoption of EXPAREL, the newly approved interscalene brachial plexus block indication, and the DePuy Synthes co-promotion arrangement. Product sales were reduced by estimated returns, discounts, wholesaler fees, rebates and chargebacks; these deductions represented 5.4% of gross product sales in the first six months of 2018 versus 5.1% in the prior-year period.
Gross margin improved primarily because of greater manufacturing utilization, lower cost per vial, the absence of significant DepoCyt(e)-related charges recorded in 2017, and the $3.0 million Nuance upfront payment. Excluding the Nuance payment, reported gross margin was 74% for the quarter and 72% for the six-month period.
At June 30, 2018, Pacira had cash and cash equivalents of $116.9 million, short-term investments of $254.5 million, long-term investments of $1.6 million, and working capital of approximately $402.0 million. Total liabilities were $352.2 million and stockholders’ equity was $290.5 million. The company reported an accumulated deficit of $395.9 million.
Total convertible debt carrying value was $283.6 million, consisting principally of $345.0 million principal amount of 2.375% convertible senior notes due 2022 and approximately $0.3 million of remaining 2019 notes. The 2022 notes had a $322.4 million estimated fair value and a $66.89 conversion price; the stock price at June 30, 2018 was $32.05. The 2019 notes mature February 1, 2019 and are convertible at any time.
Material changes versus the prior comparable period
- EXPAREL sales increased 15% in the quarter and 12% for the six months, primarily from higher sales volume, partially offset by product mix and higher chargebacks.
- Operating results improved substantially, with Q2 operating income of $6.5 million compared with a $15.8 million operating loss in Q2 2017. The six-month operating loss narrowed to $0.4 million from $29.8 million.
- Research and development expense declined 35% in Q2 and 25% for the six months, mainly because two Phase 3 nerve-block trials were completed in 2017. Product development spending increased for manufacturing expansion and DepoMLX.
- Selling, general and administrative expense increased 12% in Q2 and 8% for the six months, reflecting higher sales and marketing activity, co-promotion commissions, public affairs initiatives and legal costs related to the Department of Justice inquiry.
- DepoCyt(e) production was discontinued in June 2017 because of persistent manufacturing technical issues. Product-discontinuation expense fell to $0.2 million in Q2 2018 and $0.3 million for the six months, versus $4.5 million in both comparable 2017 periods, excluding related 2017 cost-of-goods-sold charges.
- Operating cash flow increased to $11.0 million from $3.7 million. Investing activities provided $49.3 million, primarily because investment maturities exceeded purchases; capital expenditures were $7.8 million.
- Pacira adopted ASC 606 using the modified retrospective method, increasing accumulated deficit by $1.4 million. The filing states that adoption did not materially affect the statements of operations but accelerated recognition of certain licensing, milestone and royalty revenue.
Guidance, outlook, risks and unusual items
Management stated that existing cash, investments and cash expected from product sales should fund operating expenses, capital expenditures, debt service and potential principal payments on converted 2022 notes through at least August 2, 2019. The company noted that additional financing could be required and that it has no committed external funding sources.
- Pacira expects continued investment in EXPAREL commercialization, Phase 4 studies, pediatric programs, manufacturing capacity, regulatory activities and the DepoMLX pipeline.
- In April 2018, the FDA approved EXPAREL for interscalene brachial plexus nerve block. The company planned additional commercial and educational spending related to the expanded indication.
- In June 2018, Pacira granted Nuance exclusive Chinese development and commercialization rights for EXPAREL and agreed to be the sole supplier. Pacira received a $3.0 million upfront payment in July 2018 and may receive up to $60.0 million in milestones plus tiered royalties.
- Pacira may owe up to an aggregate of $36.0 million in future Skyepharma-related milestone or earn-out payments if specified sales or European commercialization milestones are achieved. It paid $4.7 million during the first six months of 2018.
- The company had lease obligations totaling $49.8 million through 2028 and could be required to invest up to an additional $10.0 million in TELA Bio under specified conditions.
- A 2015 Department of Justice subpoena concerning EXPAREL marketing and promotional practices remained outstanding. Pacira is cooperating but cannot predict the timing, outcome or potential financial impact.
- Key operating risks include dependence on EXPAREL, reliance on a single manufacturing site and third-party suppliers, customer and wholesaler concentration, competition, regulatory and clinical-development risks, intellectual-property protection, and potential product liability or government investigations.
Important facts for investors to verify
- Whether EXPAREL volume growth and the expanded nerve-block indication translate into sustained net sales growth despite higher chargebacks and commercial spending.
- The timing and cost of manufacturing expansion in Swindon, England, and whether increased utilization continues to support gross-margin improvement.
- The company’s ability to generate consistently positive operating cash flow while funding clinical programs, manufacturing investment and legal or regulatory costs.
- Potential cash or equity requirements associated with the $345.0 million 2022 convertible notes, the 2019 notes, and any future conversion events.
- The outcome and potential exposure from the DOJ inquiry and any additional costs related to the discontinued DepoCyt(e) operations.
- Progress of the Nuance China collaboration, including regulatory filings, milestones, royalties and supply obligations.
- Concentration risk: three wholesalers processed 87% of Q2 sales and represented 83% of accounts receivable at June 30, 2018.