Pacira Biosciences, Inc. quarterly report, Q1 FY2016

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Pacira Pharmaceuticals, Inc. — Q1 2016 Form 10-Q Summary

Business context and reporting period

Pacira is a specialty pharmaceutical company developing, manufacturing and commercializing products based on its DepoFoam extended-release technology. Its principal commercial products are EXPAREL, used for postsurgical analgesia, and DepoCyt(e), supplied to commercial partners. This unaudited report covers the three months ended March 31, 2016, with comparison to the three months ended March 31, 2015.

Financial performance and position

  • Revenue: Total revenue was $65.5 million, up 12% from $58.3 million. Net product sales increased 13% to $64.5 million, led by EXPAREL sales of $63.8 million, up 14%. DepoCyt(e) sales declined 34% to $0.8 million; royalty revenue declined 30% to $0.6 million.
  • Profitability: Gross margin was approximately 69%, compared with 70% in the prior-year quarter. The company reported an operating loss of $2.3 million versus operating income of $3.3 million, and a net loss of $3.9 million, or $0.10 per diluted share, versus net income of $1.3 million, or $0.03 per share.
  • Margins: Operating margin was approximately negative 3.4%, compared with positive 5.7% in Q1 2015. Net margin was approximately negative 5.9%, compared with positive 2.2%.
  • Expenses: Cost of goods sold rose 15% to $20.3 million. Research and development increased 59% to $9.5 million, while selling, general and administrative expense increased 21% to $38.0 million. Stock-based compensation was $8.5 million, compared with $7.5 million.
  • Cash flow: Operating cash flow was negative $3.1 million versus negative $0.9 million. Investing cash flow was negative $21.9 million, including $7.1 million of capital expenditures, net investment purchases and a $1.9 million contingent consideration payment. Financing cash flow was positive $3.0 million from stock-option exercises. Cash and cash equivalents declined to $35.0 million from $57.0 million.
  • Liquidity: Cash, short-term investments and long-term investments totaled approximately $163.5 million at March 31, 2016. Working capital was $102.5 million. Management stated that available liquidity and expected product-sale cash flows should fund operating expenses, capital expenditures, potential note conversions and debt service for at least the next 12 months.
  • Debt: The company had $118.5 million principal amount of 3.25% convertible senior notes due February 2019, carried at $105.2 million net of discounts and issuance costs. The notes were classified as current because conversion conditions were met during the quarter and were convertible through June 30, 2016.
  • Balance sheet: Total assets were $391.2 million and stockholders’ equity was $226.2 million. Inventories increased to $63.7 million from $61.6 million, and net fixed assets increased to $95.8 million from $90.3 million.

Material changes versus the prior comparable period

  • EXPAREL revenue growth reflected a 9% increase in sales volume and a 5% price increase effective April 2015, partly offset by lower government pricing.
  • Gross margin declined modestly because of higher costs associated with preparing the new Swindon, England manufacturing site for commercial production.
  • Research and development spending increased primarily because of EXPAREL clinical trials, increased clinical staffing and investment in DepoTXA and DepoMLX pipeline candidates.
  • Sales and marketing spending increased due to expanded field and national-account personnel, promotional programs and a patient-awareness campaign.
  • General and administrative expense increased substantially, including higher legal costs related to the Department of Justice inquiry into EXPAREL marketing and promotional practices.
  • Other expense declined to $1.6 million from $2.0 million, reflecting lower interest expense, expiration of the DepoCyt(e) royalty obligation, higher interest income and favorable foreign-exchange movements.

Guidance, outlook, risks and unusual items

  • Management anticipated a late-third-quarter 2016 launch for oral-surgery use of EXPAREL and expected completion of enrollment in a 300-patient total-knee-arthroplasty trial in the second half of 2016.
  • Planned development activities included Phase 3 nerve-block studies, a chronic-lower-back-pain Phase 2 study, FDA-required pediatric trials and continued development of DepoMLX and DepoTXA. The filing does not provide quantitative full-year revenue or earnings guidance.
  • The company remains highly dependent on EXPAREL, with three customers accounting for 88% of revenue in the quarter. Three customers also represented 30%, 30% and 28% of accounts receivable.
  • If all convertible notes were converted at March 31, 2016, the company estimated repayment of $118.5 million principal in cash plus approximately $134.5 million of conversion premium in cash, shares or a combination, creating significant liquidity needs and/or dilution.
  • Potential future milestone payments to Skyepharma could total up to $44.0 million if specified EXPAREL sales milestones are achieved. Operating lease commitments totaled $45.2 million.
  • The company is cooperating with a DOJ subpoena concerning EXPAREL marketing and promotional practices and stated that the timing, cost and outcome remain uncertain.
  • Key operating risks include competition, reliance on a limited product portfolio and major customers, dependence on a single manufacturing site, regulatory and clinical-development risks, supply-chain concentration, intellectual-property protection and potential additional financing needs.

Important facts for investors to verify

  • Whether EXPAREL volume growth and pricing can offset declining DepoCyt(e) and royalty revenue.
  • The timing, cost and operational impact of the Swindon manufacturing expansion and other capital projects.
  • The status and potential financial consequences of the DOJ inquiry.
  • Whether the convertible notes remain current and whether holders convert, including the resulting cash requirement or dilution.
  • Progress, clinical results and regulatory timing for oral surgery, nerve blocks, total-knee arthroplasty, pediatric studies, DepoMLX and DepoTXA.
  • The sustainability of liquidity given operating cash use, clinical and commercial spending, contingent consideration and potential milestone payments.