Pacira Biosciences, Inc. annual report, FY2019

Pacira BioSciences, Inc. — FY2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone quarterly filing; fourth-quarter data are provided in the unaudited quarterly table. Pacira develops and commercializes non-opioid pain-management and regenerative-health products, principally EXPAREL and, following the April 9, 2019 acquisition of MyoScience, the iovera° cryoanalgesia system.

Business Context and Reporting Period

• EXPAREL is an FDA-approved long-acting local analgesic indicated for adult postsurgical infiltration and interscalene brachial plexus nerve block.
• iovera° is an FDA-cleared handheld cryoanalgesia device. It contributed revenue from April 10 through December 31, 2019.
• Pacira operates as one reportable segment and had 606 employees at December 31, 2019.
• Revenue was concentrated in the United States and with three wholesalers, which represented 89% of 2019 revenue.

Financial Performance and Position

Metric	FY2019	FY2018	Change
Total revenue	$421.0 million	$337.3 million	+25%
Net product sales	$418.9 million	$332.4 million	+26%
EXPAREL sales	$407.9 million	$331.1 million	+23%
iovera° sales	$7.9 million	None	Acquired in 2019
Gross margin	75%	74%	+1 percentage point
Operating income	$10.5 million	$15.9 million	−34%
Net loss	$11.0 million	$0.5 million	Worsened
Basic and diluted loss per share	$0.27	$0.01	Worsened
Net cash from operating activities	$70.5 million	$48.9 million	+44%

• Research and development expense increased 30% to $72.1 million, primarily due to pediatric, C-section and spine clinical programs, regulatory activities and manufacturing-capacity expansion.
• Selling, general and administrative expense increased 13% to $200.8 million, including expanded sales, marketing and promotional activity for EXPAREL and iovera°.
• Acquisition-related, discontinuation and other charges totaled $25.2 million, including $21.6 million related to MyoScience and $3.5 million accrued for a proposed Department of Justice settlement.
• Other expense, net increased to $21.2 million, including a $5.7 million impairment loss on the TELA Bio investment, partly offset by $7.4 million of interest income.

Liquidity, Cash Flow and Debt

• Cash, cash equivalents and short- and long-term investments totaled $356.7 million at year-end, compared with $409.3 million in 2018.
• Cash and cash equivalents were $78.2 million; working capital was $300.9 million.
• Operating cash flow was $70.5 million. Investing cash flow was negative $128.5 million, primarily because of the $117.7 million net cash cost of the MyoScience acquisition, $10.2 million of capital expenditures and a $1.6 million TELA Bio investment.
• Net cash decreased by $54.3 million during 2019.
• Gross debt consisted of $345.0 million of unsecured 2.375% convertible senior notes due April 1, 2022. The notes had a net carrying value of $306.0 million and a fair value of approximately $360.1 million at year-end.
• Management stated that available liquidity and cash from product sales were expected to fund operations, capital expenditures, debt service and potential principal payments through at least February 20, 2021. The filing also states that additional financing may be required and that no committed external funding source exists.

Material Changes Versus FY2018

• Revenue accelerated, driven by a 23% increase in EXPAREL sales, higher unit volume and the addition of iovera° sales.
• Gross margin improved by one percentage point following the start of commercial EXPAREL production at Thermo Fisher’s Swindon, England facility, although iovera° had a lower gross margin.
• Despite higher revenue and operating income, net results declined to a loss because of higher interest expense, acquisition-related charges and the TELA Bio impairment.
• The MyoScience acquisition added $147.5 million of recognized consideration, $37.5 million of goodwill and $110.1 million of identifiable intangible assets.
• Contingent consideration related to MyoScience was $38.1 million at year-end, with maximum remaining potential payments of $73.0 million.
• The company adopted the new lease standard, recording $38.1 million of right-of-use assets and $45.9 million of lease liabilities at year-end.
• Commercial production began at the first Thermo Fisher manufacturing suite in February 2019; a second suite was under development to further increase EXPAREL capacity.

Guidance, Outlook, Risks and Unusual Items

• Management expects continued investment in EXPAREL and iovera° commercialization, clinical development, regulatory submissions, manufacturing capacity and potential acquisitions. The filing does not provide formal numerical revenue or earnings guidance.
• Planned regulatory activities included an EXPAREL supplemental NDA for pediatric infiltration in the first half of 2020, continued lower-extremity nerve-block development, and regulatory expansion efforts in Europe, Canada and China.
• The company reported positive topline pediatric Phase 3 PLAY results and later announced positive Phase 4 CHOICE C-section results. These outcomes support planned label-expansion and commercialization efforts but do not assure regulatory approval or market adoption.
• In December 2019, a contract manufacturer experienced a media-fill failure and production on the affected line was temporarily halted. Up to $4.4 million of inventory could become unsellable depending on the investigation; none of the potentially affected lots had been distributed.
• A separate EXPAREL validation lot failed stability testing, resulting in a $1.3 million reserve at year-end.
• The company reached an agreement in principle for a $3.5 million global civil settlement with the DOJ and state attorneys general concerning the 2015 marketing and promotional-practices inquiry. The proposed settlement remained subject to a definitive agreement and other contingencies; Pacira would admit no wrongdoing.
• Key risks include dependence on EXPAREL, competition from generic bupivacaine, opioids and alternative devices, reimbursement and formulary decisions, manufacturing concentration and supply continuity, regulatory and clinical-trial uncertainty, intellectual-property challenges, product liability, cybersecurity and the need to refinance or repay the 2022 convertible notes.
• Potential obligations include $15.0 million of achieved MyoScience milestones payable in the first half of 2020, up to $58.0 million of additional MyoScience milestones, and up to $36.0 million of remaining Skyepharma milestones.

Most Important Facts for Investors to Verify

• Whether EXPAREL growth and the iovera° launch can offset the company’s high selling, research and development costs and return Pacira to sustained profitability.
• The outcome of the contract-manufacturing investigations, production restart timing and any additional inventory write-downs or supply constraints.
• Finalization and payment terms of the proposed $3.5 million DOJ settlement.
• The timing, probability and funding of MyoScience and Skyepharma contingent milestone payments.
• Progress and regulatory outcomes for pediatric, lower-extremity and international EXPAREL indications.
• Manufacturing capacity, quality performance and regulatory approval of the second Thermo Fisher suite.
• Liquidity available for the $345.0 million convertible notes due in April 2022, including potential cash requirements upon conversion or a fundamental change.
• Customer and credit concentration: three wholesalers accounted for 89% of 2019 revenue and approximately 92% of year-end accounts receivable.
• The filing’s audited financial statements and internal-control report received unqualified opinions from KPMG; however, the acquired CryoTech business was excluded from the 2019 internal-control assessment, representing 1% of total assets and 2% of total revenue.