Pacira Pharmaceuticals, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015, with unaudited quarterly data for the quarter ended December 31, 2015. Pacira is a specialty pharmaceutical company focused on DepoFoam extended-release drug delivery products for hospitals and ambulatory surgery centers. EXPAREL, its primary product, accounted for 96% of total revenue in 2015. The company operates in one reportable segment.
Financial performance and key metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $249.0 million | $197.7 million | +26% |
| EXPAREL sales | $239.9 million | $188.5 million | +27% |
| DepoCyt(e) sales | $4.6 million | $5.0 million | -7% |
| Gross margin | 71% | 61% | +10 percentage points |
| Operating income (loss) | $9.5 million | $(5.2) million | Improved |
| Net income (loss) | $1.9 million | $(13.7) million | Improved |
| Diluted EPS | $0.04 | $(0.39) | Improved |
| Operating cash flow | $29.0 million | $26.6 million | +9% |
FY2015 operating margin was approximately 3.8% and net margin was approximately 0.7%. Research and development expense increased 53% to $28.7 million, while selling, general and administrative expense increased 30% to $139.0 million. Legal and regulatory costs related to the FDA matter, DOJ inquiry and related activities contributed to higher general and administrative expense. Cost of goods sold declined 7% to $71.8 million despite 21% higher sales volume, reflecting better manufacturing utilization and the absence of 2014 start-up costs; this benefit included $3.0 million of unplanned shutdown costs.
For the fourth quarter of 2015, revenue was $69.3 million, cost of goods sold was $19.4 million, total operating expenses were $70.1 million, and net loss was $2.5 million, or $(0.07) per basic and diluted share. The filing does not provide fourth-quarter operating cash flow.
Liquidity, debt and balance-sheet metrics
- Cash and cash equivalents were $57.0 million; short-term and long-term investments totaled $115.4 million, for combined cash and investments of $172.4 million.
- Working capital was $100.9 million, compared with $74.2 million at December 31, 2014.
- Total assets were $389.6 million and stockholders’ equity was $218.4 million.
- Gross convertible senior notes outstanding were $118.5 million, with a net carrying value of $105.9 million. The notes bear interest at 3.25% and mature February 1, 2019.
- The notes became convertible through March 31, 2016 because the stock-price conversion condition was met. If all notes were converted at December 31, 2015, the company estimated repayment of $118.5 million principal plus approximately $248 million of cash, approximately 3.2 million shares, or a combination at the company’s option.
- Management stated that existing liquidity and expected product-sale cash flows were sufficient to fund planned operations, capital expenditures, potential note conversions and debt service through at least December 31, 2016, but identified no committed external funding sources.
Material changes versus the prior comparable period
- Revenue growth was driven by continued EXPAREL adoption, new accounts, formulary wins and reduced formulary restrictions. Growth was partly offset by lower government pricing after participation in the Federal Supply Schedule.
- Manufacturing efficiency materially improved gross margin from 61% to 71%, while inventory increased from $29.3 million to $61.6 million to support demand.
- The company moved from a $13.7 million net loss to $1.9 million net income and generated positive operating cash flow for the second consecutive year.
- Research and development spending increased primarily for the EXPAREL spray manufacturing process, oral surgery and nerve-block programs, DepoMeloxicam, DepoTranexamic Acid and related toxicology work.
- Capital expenditures increased to $41.3 million, including investments in the San Diego research and manufacturing infrastructure and the Patheon manufacturing project in England.
- The company paid $7.1 million of contingent consideration to Skyepharma in 2015; cumulative percentage payments on EXPAREL collections were $14.9 million through year-end.
Guidance, outlook, commentary and risks
- Management expected an oral-surgery launch in late third quarter 2016, subject to continued development and commercialization activities.
- Following a March 2015 Complete Response Letter, the company planned to resubmit the EXPAREL nerve-block supplement in the first quarter of 2017 with a targeted six-month PDUFA review. Two pivotal nerve-block studies were initiated in early 2016.
- The company planned pediatric studies required by the FDA, a 2016 chronic-pain Phase 2 study, and further development of DepoMeloxicam and DepoTranexamic Acid.
- Patheon’s first dedicated EXPAREL manufacturing suite in Swindon, England was expected to begin commercial production in 2017, subject to regulatory approvals. The company remained dependent on its San Diego facilities for current EXPAREL production.
- In December 2015, the FDA withdrew its 2014 warning letter and resolved Pacira’s lawsuit. The revised labeling confirmed broad administration of EXPAREL into the surgical site for postsurgical analgesia and addressed TAP-block, oral-surgery and admixture guidance.
- The Department of Justice was investigating marketing and promotional practices related to EXPAREL following an April 2015 subpoena. The company was cooperating but could not estimate the timing, outcome or potential financial impact.
- Key risks include heavy dependence on EXPAREL, concentration of revenue and receivables among three wholesalers, competition from generic and alternative pain therapies, reimbursement and formulary pressure, regulatory and promotional compliance, clinical and manufacturing execution, patent expiration beginning in 2017-2018, potential note-conversion liquidity needs and possible future capital requirements.
- The filing reports unqualified audit opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2015.
Most important facts for an investor to verify
- Whether EXPAREL demand and pricing support sustained revenue growth after the 2015 27% increase in sales.
- Whether the 71% gross margin is sustainable after accounting for shutdown costs, manufacturing expansion and third-party production.
- The status, scope and potential financial exposure of the DOJ inquiry.
- The timing and regulatory outcomes of the nerve-block, pediatric, chronic-pain and oral-surgery programs.
- The company’s ability to fund approximately $118.5 million of note principal and any conversion premium without significant dilution or liquidity pressure.
- The effect of upcoming EXPAREL patent expirations and potential generic or competing long-acting bupivacaine products.
- The collectability and concentration risk associated with the three wholesalers representing approximately 90% of 2015 revenue.