Pacira Pharmaceuticals, Inc. — 2018 Form 10-K Summary
Business context and reporting period
Pacira is a specialty pharmaceutical company focused on non-opioid pain management and regenerative health solutions. Its principal product is EXPAREL, a long-acting bupivacaine formulation using the DepoFoam delivery platform. The filing covers the fiscal year ended December 31, 2018, with comparative data for 2017 and 2016. EXPAREL accounted for approximately 98% of total revenue in 2018.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $337.3 million | $286.6 million | 18% |
| EXPAREL net sales | $331.1 million | $282.9 million | 17% |
| Gross margin | 74% | 69% | +5 percentage points |
| Income (loss) from operations | $15.9 million | $(24.9) million | Improved |
| Net income (loss) | $(0.5) million | $(42.6) million | Improved |
| Net loss per share | $(0.01) | $(1.07) | Improved |
| Operating cash flow | $48.9 million | $17.8 million | Improved |
| Cash, cash equivalents and investments | $409.3 million | $371.4 million | Increased |
| Working capital | $417.3 million | $334.9 million | Increased |
Cost of goods sold was $86.8 million, research and development expense was $55.7 million, and selling, general and administrative expense was $177.3 million. Operating expenses included a $1.6 million non-recurring charge related to the discontinued DepoCyt(e) business. Interest expense was $21.9 million, including $12.8 million of non-cash convertible-debt discount amortization.
Fourth-quarter 2018 revenue was $95.1 million, with net income of $8.3 million and diluted earnings of $0.20 per share. Quarterly revenue increased from $79.1 million in the fourth quarter of 2017.
Liquidity, debt and cash flow
- Cash and cash equivalents were $132.5 million at year-end; short-term investments were $250.9 million and long-term investments were $25.9 million.
- Net cash provided by operating activities was $48.9 million. Investing activities provided $20.6 million, primarily reflecting net investment maturities, offset by $14.5 million of capital expenditures and $6.8 million of Skyepharma-related contingent consideration payments. Financing activities provided $9.0 million.
- Gross consolidated debt was approximately $345.3 million at December 31, 2018, consisting primarily of $345.0 million of 2.375% convertible senior notes due April 2022 and $0.3 million of 3.25% convertible notes due February 2019. The 2019 notes were repaid at maturity on February 1, 2019.
- Management stated that existing liquidity and expected product-sale cash flows were sufficient to fund operations, capital expenditures and debt service through at least February 28, 2020. This assessment is subject to demand, manufacturing expansion, clinical, legal and regulatory costs.
Material changes versus the prior comparable period
- EXPAREL sales increased 17%, driven primarily by a 23% increase in unit volume, the April 2018 FDA approval of the interscalene brachial plexus nerve-block indication, the DePuy Synthes co-promotion arrangement and broader adoption of enhanced-recovery protocols.
- Gross margin increased from 69% to 74%, primarily because higher production utilization reduced manufacturing cost per vial and because 2017 included costs associated with DepoCyt(e) production.
- Operating results improved from a $24.9 million operating loss in 2017 to $15.9 million of operating income in 2018. Net loss narrowed substantially to $0.5 million.
- Research and development expense declined 3% as major Phase 3 nerve-block trials were completed, partially offset by increased manufacturing scale-up, pipeline and international regulatory spending.
- SG&A increased 10%, reflecting higher sales and marketing investment, public-affairs activity, DePuy Synthes commissions, outpatient initiatives and legal and regulatory costs.
- The company recognized a $3.0 million upfront licensing payment from Nuance Biotech for China rights to EXPAREL. Nuance may also owe up to $60.0 million in future milestones and tiered royalties.
- DepoCyt(e) production was discontinued in 2017 because of persistent manufacturing issues. Pacira recorded an additional $1.6 million of discontinuation costs in 2018 and expects lease-related cash payments through August 2020.
Guidance, outlook, risks and unusual items
Management did not provide a specific numerical 2019 revenue or earnings forecast in the supplied filing text. The stated outlook emphasizes continued EXPAREL expansion, international regulatory filings, pediatric development, additional clinical studies and increased manufacturing capacity.
- Commercial production began in February 2019 at the first dedicated Thermo Fisher facility in Swindon, England, which is expected to double capacity. A second suite is expected to provide another doubling in approximately two years.
- In February 2019, the FDA approved an extension of EXPAREL shelf life from 12 months to 24 months for product manufactured on or after the approval date.
- A Phase 4 C-section study announced in January 2019 met its primary endpoint for reducing opioid consumption through 72 hours; full results were to be submitted for publication.
- The company plans to pursue marketing applications in Europe, Canada and China. Timing and approval remain uncertain.
- A DOJ inquiry, initiated by a 2015 subpoena concerning EXPAREL marketing and promotional practices, remained outstanding. The company is cooperating but cannot estimate the outcome, potential liability or related costs.
- Remaining potential Skyepharma milestone obligations total $36.0 million, including $32.0 million upon reaching specified annual sales and $4.0 million upon first commercial sale in a major European country.
- EXPAREL revenue is highly concentrated: three wholesalers represented 90% of net product sales in 2018. The company also relies on two FDA-approved manufacturing sites, third-party suppliers, cold-chain distribution and Thermo Fisher production.
- Key risks include regulatory action, reimbursement pressure, generic and alternative long-acting analgesic competition, manufacturing or supply disruption, clinical-trial and pediatric-study costs, product liability, intellectual-property challenges and the possibility that the company may require additional financing.
- Effective January 1, 2019, lease accounting was expected to add approximately $35 million to $38 million of lease liabilities and $26 million to $29 million of right-of-use assets to the balance sheet, without a material expected effect on earnings or cash flow.
Important facts for investors to verify
- Whether EXPAREL volume growth and the 2018 margin improvement continue after the Swindon facility ramp-up and associated fixed-cost investments.
- The timing and outcome of European, Canadian, Chinese and pediatric regulatory programs.
- The status and potential financial exposure from the DOJ inquiry and any related legal proceedings.
- Cash generation relative to the $345.0 million 2022 convertible-note principal, potential conversion or repurchase obligations and remaining Skyepharma milestones.
- Customer concentration, reimbursement trends and the effect of competitors or alternative long-acting bupivacaine products.
- The resolution of DepoCyt(e) discontinuation obligations and any additional costs arising from the terminated Mundipharma agreements.