Pacira Pharmaceuticals, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Pacira is a specialty pharmaceutical company developing, manufacturing and commercializing products using its DepoFoam extended-release technology. Its primary commercial product is EXPAREL, launched in April 2012 for postsurgical analgesia; it also sells DepoCyt(e) through commercial partners. This unaudited filing covers the three and nine months ended September 30, 2015, with comparisons to the corresponding 2014 periods.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $62.2 million | $52.0 million | $179.7 million | $135.9 million |
| EXPAREL sales | $59.7 million | $50.2 million | $172.7 million | $129.5 million |
| Gross margin | 74% | 61% | 71% | 57% |
| Operating income (loss) | $5.1 million | $(1.0) million | $10.3 million | $(13.1) million |
| Net income (loss) | $3.1 million | $(3.0) million | $4.4 million | $(19.5) million |
| Operating cash flow | Not separately provided | Not separately provided | $12.0 million | $11.8 million |
- EXPAREL revenue increased 19% in Q3 and 33% year to date, primarily from volume growth of 15% and 27%, respectively. Pricing increases partly offset lower government pricing under the Federal Supply Schedule.
- DepoCyt(e) sales rose 103% in Q3 and 15% year to date, primarily from higher vial volumes, partly offset by foreign-exchange effects.
- Operating expenses were $57.1 million in Q3 and $169.4 million year to date. Selling, general and administrative expense increased 25% and 34%, respectively, reflecting higher sales-force costs, stock-based compensation, legal expenses and corporate support costs.
- Research and development expense increased 33% in Q3 and 4% year to date, driven by clinical trials, product development and manufacturing-process initiatives.
- Cash provided by operations was $12.0 million year to date. Investing cash use was $27.5 million, including $32.1 million of fixed-asset purchases and $5.1 million of contingent consideration payments. Financing provided $8.5 million, primarily from stock-option exercises and employee stock-plan proceeds.
- Cash and cash equivalents were $30.5 million at September 30, 2015, compared with $37.5 million at December 31, 2014. Short- and long-term investments totaled $133.8 million, producing cash, cash equivalents and investments of approximately $164.4 million. Reported working capital was $87.7 million.
- Inventory increased to $56.1 million from $29.3 million, and net fixed assets increased to $86.3 million from $60.6 million, reflecting manufacturing capacity expansion and construction in progress.
- Convertible senior notes had $118.5 million of principal and a $104.9 million carrying value. Because the stock-price conversion condition was met, the notes were classified as current and were convertible through December 31, 2015. The notes mature February 1, 2019 and bear fixed interest at 3.25%.
Material changes versus the prior comparable period
- Revenue growth and improved manufacturing utilization drove a 13-percentage-point Q3 gross-margin improvement and a 14-percentage-point year-to-date improvement.
- The company reported its fourth consecutive quarter of net income and moved from a year-to-date loss in 2014 to positive earnings in 2015.
- Cost of goods sold declined 22% in Q3 and 10% year to date despite higher sales; management cited lower manufacturing cost per vial and greater facility utilization. Unplanned shutdown costs were $0.7 million in Q3 and $2.3 million year to date.
- General and administrative expense increased substantially, including legal costs associated with the DOJ inquiry and FDA-related activities.
- Stock-based compensation increased to $23.6 million year to date from $17.2 million, and represented a significant noncash operating expense.
- The company paid $1.5 million of convertible-note principal in April 2015 and issued 44,287 shares to settle the related conversion premium.
Outlook, commentary, risks and unusual items
- Management expects existing cash, investments and product-sales cash flow to fund operating expenses, capital expenditures, potential note conversions and debt service for at least the next 12 months, but stated that additional financing may be required in the future and that no committed external funding sources exist.
- Capital requirements include EXPAREL manufacturing expansion, additional clinical trials, product-candidate development, legal and regulatory matters, potential Skyepharma milestone payments and possible conversion of the notes.
- The company plans additional Phase 3 studies for upper- and lower-extremity nerve blocks after receiving an FDA Complete Response Letter on the nerve-block supplemental application. An oral-surgery trial was enrolling, with completion anticipated in the first quarter of 2016.
- Pacira is pursuing a DepoFoam spray manufacturing process after receiving FDA feedback that its proposed comparability approach appeared acceptable.
- The Department of Justice is investigating marketing and promotional practices related to EXPAREL. Pacira is cooperating and cannot estimate the timing, outcome or potential financial impact.
- Pacira filed suit against the FDA in September 2015 concerning restrictions on communications about EXPAREL; its motion for a preliminary injunction was pending at quarter-end.
- A purported securities class action alleges misleading statements and nondisclosure relating to the company’s business and performance. The company is defending the case, but could not estimate potential losses.
- Three customers represented 89% of Q3 revenue and three customers represented 90% of year-to-date revenue. Three customers each accounted for more than 10% of accounts receivable.
- Key operating risks include dependence on EXPAREL and a limited customer base, reliance on a single manufacturing site, regulatory and promotional restrictions, manufacturing execution, competition, clinical and product-development risk, intellectual-property protection and potential liabilities from government inquiries or litigation.
Most important facts for investors to verify
- Whether EXPAREL volume growth and adoption continue at the reported pace, particularly after pricing changes and government-contract pricing effects.
- Whether gross-margin gains are sustainable after manufacturing expansion, shutdown costs and future capacity investments.
- The outcome and potential financial, regulatory and commercial effects of the DOJ inquiry and FDA promotional dispute.
- The timing and terms of any conversion of the $118.5 million principal amount of convertible notes, including potential cash requirements and dilution.
- Whether operating cash flow can fund planned manufacturing, clinical, legal and regulatory expenditures without additional financing.
- The status and results of nerve-block, oral-surgery and other EXPAREL clinical programs, as well as the proposed spray manufacturing process.
- Potential exposure from the securities class action, CrossLink termination provisions, Skyepharma contingent payments and the company’s $49.0 million of remaining aggregate lease obligations.