Pacira Biosciences, Inc. quarterly report, Q2 FY2021

Pacira BioSciences, Inc. Q2 2021 Form 10-Q Summary

Business Context and Reporting Period

Pacira develops, manufactures, and commercializes non-opioid pain-management and regenerative-health products. Its principal products are EXPAREL, a long-acting local analgesic, and iovera^o, a cryoanalgesia system. The company operates as one reportable segment.

The filing covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods. The interim financial statements are unaudited and prepared under U.S. GAAP.

Financial Performance and Key Metrics

Metric	Q2 2021	Q2 2020	Six Months 2021	Six Months 2020
Total revenue	$135.6 million	$75.5 million	$254.6 million	$181.2 million
Net product sales	$134.9 million	$75.2 million	$253.6 million	$180.0 million
Operating income	$34.8 million	$(7.1) million	$54.3 million	$9.9 million
Net income	$19.1 million	$(7.3) million	$29.5 million	$0.9 million
Diluted EPS	$0.42	$(0.17)	$0.64	$0.02
Operating cash flow	Not separately provided	Not separately provided	$42.2 million	$(9.4) million

EXPAREL-related sales increased 78% in Q2 and 40% for the six-month period, primarily from higher vial volume and approximately 3% increases in gross selling price per unit. Iovera sales increased by more than 100% in Q2 and 93% year to date, reflecting an expanded sales force and the comparison with COVID-19-affected 2020 results.

Gross margin was 74% in Q2 2021 versus 70% in Q2 2020, and 74% for the first six months versus 71% in the prior-year period. Based on reported figures, operating margin was approximately 25.7% in Q2 and 21.3% year to date; net margin was approximately 14.1% and 11.6%, respectively.

Research and development expense declined 8% in Q2 and 3% year to date. Selling, general and administrative expense increased 17% in Q2 and 13% year to date, driven by sales-force expansion, pediatric launch activity, legal expenditures, and stock-based compensation. Other expense increased due to higher interest expense and a $2.6 million year-to-date realized loss on the sale of the TELA Bio investment.

Balance Sheet, Cash Flow, Debt, and Liquidity

• Cash and cash equivalents were $105.8 million at June 30, 2021, compared with $100.0 million at December 31, 2020.
• Short-term investments were $540.8 million; total cash, short-term investments, and long-term investments were $646.6 million.
• Working capital was $563.9 million and total assets were $1.33 billion.
• Outstanding convertible-note principal consisted of $160.0 million due in 2022 and $402.5 million due in 2025. Carrying values, net of discounts and issuance costs, were $153.7 million and $321.7 million, respectively.
• Six-month investing cash outflow was $52.6 million, including $23.6 million of fixed-asset purchases and net investment purchases. Financing cash inflow was $16.2 million, primarily from stock-option exercises and employee stock purchases.
• Capital expenditures supported EXPAREL manufacturing-capacity expansion in San Diego and Swindon, England. The company stated that available cash, investments, and expected product-sale cash flows should fund operating expenses, capital expenditures, and debt obligations for at least the next 12 months.

Material Changes Versus the Prior Comparable Period

• Revenue increased 80% in Q2 and 41% for the first six months, benefiting from recovery in elective procedures after pandemic-related disruptions in 2020.
• The company moved from a Q2 2020 operating loss and net loss to operating and net profitability in Q2 2021.
• Operating cash flow improved from a $9.4 million use to $42.2 million provided for the six-month period.
• Gross margin improved because of lower unit costs, manufacturing efficiencies, reduced unplanned downtime, inventory-reserve reductions, and pricing, partly offset by capacity-expansion costs.
• In June 2021, Pacira entered a Latin American EXPAREL distribution agreement with Eurofarma and recognized $0.1 million of related licensing and milestone revenue.
• Pacira and Nuance mutually terminated the China EXPAREL agreement because the company concluded that no viable regulatory pathway adequately protected its intellectual property; $3.0 million of dissolution costs were recognized in the first six months.
• Stockholders approved an increase of 1.5 million shares authorized for equity awards under the 2011 Stock Incentive Plan.

Guidance, Outlook, Commentary, Risks, and Unusual Items

The filing does not provide a clear quantitative revenue, earnings, or margin forecast. Management expects to continue expanding EXPAREL and iovera commercialization, pursue additional indications, increase manufacturing capacity, launch EXPAREL and iovera in targeted European countries in the fourth quarter of 2021, and initiate follow-up lower-extremity nerve-block studies before year-end.

EXPAREL received FDA label expansion for single-dose infiltration in patients aged six and older. Management is pursuing additional pediatric indications and regulatory activities. Pacira also expects to begin selling commercial EXPAREL manufactured in a new 200-liter Swindon suite later in 2021.

• COVID-19 remains a material uncertainty because renewed restrictions, variant strains, or patient reluctance could reduce elective procedures and product demand. No material supply-chain impact had occurred through the filing date.
• Revenue and receivables are concentrated among a limited number of wholesalers. The three largest wholesalers represented 86% of revenue and 89% of accounts receivable at June 30, 2021.
• A Delaware lawsuit involving former MyoScience securityholders includes a counterclaim for $30.0 million of remaining milestones plus attorneys’ fees. The company believes the counterclaim lacks merit but cannot predict the outcome.
• Remaining potential MyoScience milestone payments were up to $48.0 million through 2023. Potential SkyePharma-related milestone payments were up to $36.0 million.
• The company had a future $2.9 million GeneQuine investment obligation expected in the quarter ending September 30, 2021, subject to specified milestones.
• The 2022 notes mature April 1, 2022. Holders could elect to convert beginning October 1, 2021, subject to the indenture terms. The company stated that existing liquidity should cover principal and interest obligations through the next 12 months.
• ASU 2020-06 was not yet adopted. Adoption on January 1, 2022 was expected to eliminate convertible-debt discounts and related future amortization, with a corresponding reallocation of certain financing costs.
• The company reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective as of June 30, 2021.

Important Facts for Investors to Verify

• Whether the strong EXPAREL and iovera growth rates persist after the favorable comparison with pandemic-affected 2020 results.
• The timing and cost of San Diego and Swindon manufacturing expansions and whether capacity comes online as planned.
• The cash or equity requirements associated with the April 2022 convertible notes and any potential note conversions.
• The outcome and potential cash exposure from the MyoScience milestone litigation and remaining contingent consideration.
• The effect of COVID-19 variants and elective-surgery volumes on demand and operating performance.
• The commercial contribution and regulatory progress of the Eurofarma Latin American agreement and planned European launch.
• The accounting and diluted-share effects of adopting ASU 2020-06 in 2022.