Pacira Pharmaceuticals, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2017. Pacira is a specialty pharmaceutical company focused on opioid-sparing postsurgical pain management using its DepoFoam extended-release technology. Its principal commercial products are EXPAREL and DepoCyt(e).
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $69.3 million | $65.5 million | 6% |
| EXPAREL sales | $67.7 million | $63.8 million | 6% |
| Gross margin | 65% | 69% | Down 4 percentage points |
| Loss from operations | $(14.1) million | $(2.3) million | Higher loss |
| Net loss | $(19.9) million | $(3.9) million | Higher loss |
| Basic and diluted loss per share | $(0.52) | $(0.10) | Higher loss per share |
| Cash flow from operations | $0.006 million | $(3.1) million | Improved |
Revenue growth was primarily driven by higher EXPAREL volume, reflecting new accounts and increased adoption in soft-tissue and orthopedic procedures. Operating margin was approximately negative 20%, and net margin was approximately negative 29%.
Cost of goods sold increased 21% to $24.6 million. Management attributed the gross-margin decline to scrapped lots, primarily DepoCyt(e), higher manufacturing cost per vial, and lower facility utilization as manufacturing capacity supported pipeline development. Research and development expense increased 75% to $16.6 million, largely due to clinical development programs. Selling, general and administrative expense increased 11% to $42.1 million, driven by expanded commercial personnel and EXPAREL marketing.
At March 31, 2017, cash and cash equivalents were $109.0 million and short-term investments were $274.7 million, for total cash and short-term investments of $383.7 million. Working capital was $402.3 million. Total assets were $600.0 million and accumulated deficit was $366.4 million.
Gross convertible debt principal consisted of $345.0 million of 2.375% notes due 2022 and approximately $0.8 million of 3.25% notes due 2019. The notes were reported at a combined carrying value of $266.8 million, net of discounts and issuance costs. The 2022 notes had an estimated fair value of $357.7 million at quarter-end.
Material changes versus the prior comparable period
- Total revenue increased 6%, while operating expenses increased 23% to $83.3 million.
- Research and development spending increased $7.1 million, primarily for EXPAREL nerve-block and infiltration trials.
- Sales and marketing spending increased $4.8 million to support the expanded commercial organization and educational initiatives.
- Interest expense increased to $2.6 million from $1.9 million, and the company recognized a $3.7 million loss on early extinguishment of debt.
- In March 2017, Pacira issued $345.0 million of 2022 convertible senior notes and used proceeds to repurchase $117.7 million principal amount of 2019 notes. The transaction also resulted in the issuance of approximately 2.5 million common shares.
- Net cash increased $73.0 million during the quarter, principally because of the new convertible debt financing. Investing activities used $143.8 million, including purchases of short-term investments and capital expenditures.
Guidance, outlook, commentary, risks, and unusual items
- No formal revenue or earnings guidance is provided in the filing.
- Management expects to continue investing in EXPAREL commercialization, clinical trials, pipeline development, manufacturing capacity, and regulatory activities.
- Pacira expects to report top-line data from its EXPAREL spinal-fusion Phase 4 trial in the second half of 2017 and planned to submit an sNDA for a nerve-block indication in mid-2017 if supporting trials were successful.
- The company entered a five-year co-promotion agreement with DePuy Synthes for orthopedic use of EXPAREL. DePuy Synthes is entitled to tiered commissions on applicable sales.
- Management stated that existing cash, investments, and expected product-sale cash flows should fund operations, capital expenditures, potential debt conversions, and debt service through May 4, 2018. The filing notes that additional financing may nevertheless be required and is not assured.
- A Department of Justice inquiry concerning EXPAREL marketing and promotional practices remains ongoing. The filing does not provide a clear estimate of potential financial exposure or timing.
- Three customers accounted for 89% of revenue, and three customers accounted for 90% of accounts receivable at March 31, 2017, creating significant customer-concentration risk.
- Potential future Skyepharma milestone payments could total up to $36.0 million if specified sales and European commercialization milestones are achieved.
- Operating lease commitments totaled $37.4 million as of March 31, 2017. The filing also identifies dependence on a limited product portfolio, a single manufacturing site, third-party suppliers and service providers, regulatory approvals, intellectual property protection, and manufacturing expansion.
Most important facts for investors to verify
- Whether EXPAREL volume growth can offset declining gross margins and substantially higher commercial and clinical spending.
- The progress, cost, and regulatory outcome of the nerve-block, spinal-fusion, and other EXPAREL trials.
- The status and potential financial impact of the DOJ inquiry.
- Convertible-note conversion conditions, potential cash repayment requirements, and dilution from the 2022 and remaining 2019 notes.
- Execution and cost of manufacturing expansion in Swindon, England, including reliance on Patheon.
- Customer concentration, sales allowances and rebates, and the sustainability of cash generation.
- Potential Skyepharma milestone obligations and other contractual, litigation, and regulatory contingencies.