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 extended-release drug-delivery technology. Its primary commercial product is EXPAREL, used for postsurgical analgesia; other products include DepoCyt(e) and animal-health bupivacaine products. This unaudited filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $68.4 million | $62.2 million | $203.5 million | $179.7 million |
| EXPAREL sales | $64.9 million | $59.7 million | $194.4 million | $172.7 million |
| Gross margin* | 36% | 74% | 57% | 71% |
| Operating income (loss) | $(20.9) million | $5.1 million | $(29.6) million | $10.3 million |
| Net income (loss) | $(22.2) million | $3.1 million | $(34.0) million | $4.4 million |
| Basic EPS | $(0.59) | $0.08 | $(0.91) | $0.12 |
| Cash flow from operations | Not separately provided | Not separately provided | $16.1 million | $11.0 million |
*Gross margin excludes collaborative licensing and milestone revenue.
- Revenue increased 10% year over year in the quarter and 13% year to date. EXPAREL sales increased 9% and 13%, respectively, driven primarily by higher volume.
- Cost of goods sold increased 171% in the quarter and 65% year to date, primarily because of a $21.9 million EXPAREL inventory and related reserve charge, higher manufacturing costs and preparation for the Swindon, England facility.
- Research and development expense increased 66% in the quarter and 84% year to date, reflecting expanded clinical trials and pipeline investment.
- Sales, general and administrative expense increased 3% in the quarter and 16% year to date. The nine-month period included a $7.1 million CrossLink contract termination charge.
- At September 30, 2016, cash and cash equivalents were $24.4 million and short-term investments were $136.7 million, for total cash and short-term investments of $161.1 million. Working capital was $88.6 million.
- Outstanding convertible senior notes had $118.5 million principal and a $107.6 million carrying value. The notes bear 3.25% cash interest, mature in February 2019 and were classified as current because conversion conditions were met.
- Total assets were $381.2 million and accumulated deficit was $342.3 million at September 30, 2016.
Material changes versus the prior comparable period
- Pacira moved from profitability to a net loss, primarily because of the product-quality reserve, increased clinical and commercial spending, and higher manufacturing costs.
- Operating cash flow improved to $16.1 million from $11.0 million, aided by the $20.7 million inventory reserve and lower inventory balances.
- Investing cash use increased to $54.8 million from $26.6 million, including $19.8 million of capital expenditures, $21.2 million of net investment purchases and $13.8 million of contingent consideration payments.
- Cash and cash equivalents declined by $32.5 million during the first nine months, partly offset by increased short-term investments and $6.2 million of financing proceeds.
- EXPAREL was launched in a 10 mL vial configuration for the oral and maxillofacial market. Pacira also continued Phase 3 nerve-block studies and an infiltration trial in total knee arthroplasty.
- Aratana began purchasing the animal-health product marketed as NOCITA, and Pacira recognized $2.0 million of related milestone revenue in 2016.
Guidance, outlook, commentary, risks and unusual items
- Management stated that existing cash, short-term investments and cash from product sales should fund operating expenses, capital expenditures, potential note conversions and debt service for at least the next 12 months. No specific revenue or earnings guidance was provided.
- In October 2016 stability testing identified one early-2016 EXPAREL batch that failed one acceptance criterion by approximately 1%. Pacira attributed the result to a manufacturing-process modification that was subsequently corrected. The company reserved all affected inventory on hand and expects to discuss a potential limited product exchange with the FDA.
- Pacira recorded a $21.9 million third-quarter charge related to the product-quality matter, including a $20.7 million inventory reserve and $1.2 million accrued for replacement boxes and related costs. The company stated that the tested attribute was not considered to affect product safety, but agreed with the FDA that EXPAREL manufactured beginning in October 2016 would carry 12-month expiration dating pending further discussions.
- Pacira terminated its CrossLink distribution arrangement effective September 30, 2016. The $7.1 million termination fee is payable quarterly over two years beginning in the fourth quarter of 2016.
- All $118.5 million of note principal could become payable in cash if holders convert. As of September 30, 2016, the estimated conversion premium was approximately $44.9 million in cash or approximately 1.3 million shares, at Pacira’s option, creating liquidity and dilution risk.
- Potential future Skyepharma milestone payments could total up to $36.0 million, including a $32.0 million payment if annual EXPAREL net sales collected reach $500.0 million and a $4.0 million European commercial-sale milestone.
- The Department of Justice is investigating marketing and promotional practices related to EXPAREL. Pacira is cooperating but cannot predict the timing, outcome or potential financial impact.
- Customer and accounts-receivable concentration is significant: three customers represented 86% of nine-month revenue and 88% of accounts receivable at September 30, 2016. The company also relies substantially on EXPAREL and a single manufacturing site while additional capacity is developed.
Important facts for investors to verify
- Resolution with the FDA of the EXPAREL stability specification, product exchange and expiration-dating issues, including any additional reserves or supply disruption.
- Whether EXPAREL volume growth and pricing can offset higher manufacturing, clinical-development and commercial costs.
- Cash requirements and financing alternatives if the convertible notes are converted or redeemed, including potential dilution.
- The outcome and potential exposure from the DOJ inquiry concerning EXPAREL marketing practices.
- Timing, cost and operational execution of the Swindon manufacturing expansion and other capital projects.
- Future Skyepharma milestone obligations and the effect of the terminated CrossLink agreement on sales coverage and expenses.