Business Context and Reporting Period
Pacira Pharmaceuticals, Inc. (now Pacira Biosciences, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2014, including fourth-quarter results. The company operates as a specialty pharmaceutical business focused on DepoFoam extended-release products for hospitals and ambulatory surgery centers. EXPAREL, its lead product, was commercially launched in the United States in April 2012 and generated 95% of 2014 revenue. DepoCyt(e) is manufactured for commercial partners.
Financial Performance and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $197.7 million | $85.6 million | +131% |
| EXPAREL sales | $188.5 million | $76.2 million | +147% |
| Net product sales | $193.5 million | $82.0 million | +136% |
| Gross margin | 61% | 35% | +26 percentage points |
| Loss from operations | $(5.2) million | $(53.3) million | Improved |
| Net loss | $(13.7) million | $(63.9) million | Improved |
| Basic and diluted loss per share | $(0.39) | $(1.93) | Improved |
| Operating cash flow | $25.5 million | $(43.2) million | Improved by $68.7 million |
Fourth-quarter revenue was $61.8 million, compared with $33.6 million in the fourth quarter of 2013. Fourth-quarter net income was $5.8 million, or $0.16 basic and $0.14 diluted earnings per share, compared with a fourth-quarter 2013 net loss of $12.0 million.
Annual cost of revenues was $77.4 million, while research and development expense was $18.7 million and selling, general and administrative expense was $106.7 million. Approximate annual operating and net margins were negative 2.6% and negative 6.9%, respectively. SG&A increased 71%, primarily from sales-force expansion, marketing, educational initiatives, infrastructure, and stock-based compensation.
At December 31, 2014, cash and cash equivalents, restricted cash, and short- and long-term investments totaled $182.6 million, including $37.5 million of cash and cash equivalents, $119.1 million of short-term investments, and $24.4 million of long-term investments. Working capital was $74.2 million. Total assets were $326.1 million and stockholders’ equity was $171.1 million.
Gross consolidated debt was $120.0 million of unsecured 3.25% convertible senior notes due February 2019; the carrying value was $103.1 million after discount. The notes were classified as current because holders met conversion conditions during the fourth quarter. The notes require cash settlement of principal upon conversion, and the conversion premium may be settled in cash, stock, or a combination.
Material Changes Versus the Prior Comparable Period
- EXPAREL revenue growth was driven primarily by a 135% increase in volume, new hospital accounts, increased orthopedic adoption, formulary wins, reduced formulary restrictions, and a 5% price increase in May 2014.
- Gross margin expanded to 61% from 35% as manufacturing facilities were utilized more efficiently and two new manufacturing lines in Suite C became operational.
- Operating losses narrowed substantially despite higher commercial spending. R&D declined 13% to $18.7 million as major nerve-block trials concluded, while SG&A increased 71% to $106.7 million.
- Operating cash flow turned positive, but investing cash outflows increased to $119.3 million, including $84.0 million of net investment purchases, $21.9 million of capital expenditures, and $13.4 million of payments to Skyepharma.
- The company raised $110.5 million of net proceeds through an April 2014 common-stock offering, increasing shares outstanding to 36.2 million at year-end from 33.6 million.
- DepoCyt(e) sales declined 13% to $5.0 million, while collaborative licensing and development revenue increased to $1.3 million, partly reflecting recognition of the $8.0 million Mundipharma upfront payment over the contract term.
- The Paul Capital royalty-financing arrangement terminated on December 31, 2014, eliminating the related royalty interest obligation after year-end.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing provides no formal quantitative revenue, earnings, or margin guidance. Management expected continued investment in EXPAREL commercialization, additional indications, pediatric studies, product candidates, and manufacturing capacity. The company expected the first Patheon manufacturing suite in the United Kingdom to begin commercial production in the second half of 2016, subject to regulatory approval, with the second suite expected in 2018 or 2019.
- An sNDA for EXPAREL nerve-block administration was submitted in May 2014, with an FDA PDUFA action date of March 5, 2015. Management also planned Phase 3 development for oral surgery and Phase 2 development for chronic pain during 2015.
- In September 2014, the FDA issued a warning letter concerning certain promotional aspects of EXPAREL. In February 2015, Pacira agreed to corrective communications consisting of a Dear Healthcare Provider letter and corrective journal advertisement.
- In February 2015, a holder requested conversion of $1.5 million principal amount of the notes. If all notes had been converted at December 31, 2014, the company estimated repayment of $120.0 million principal plus approximately $309 million of conversion premium in cash, or approximately 3.5 million shares, or a combination.
- Future obligations include $185.2 million of contractual payments, comprising notes principal and interest, leases, and purchase commitments. Potential Skyepharma milestone payments of up to $44.0 million were excluded from that table; a 3% sales-based payment on specified EXPAREL collections continues while applicable patent rights remain valid, currently through 2018.
- EXPAREL patents have varying expiration dates, including U.S. protection generally through 2018, while a pending manufacturing-process application could provide protection through 2031 if granted.
- Revenue and credit exposure are highly concentrated: AmerisourceBergen, Cardinal Health, and McKesson accounted for 33%, 29%, and 24% of 2014 revenue, respectively, or 86% in aggregate.
- The company remains loss-making with an accumulated deficit of $310.1 million and may require additional financing if product revenue, manufacturing expansion, conversion activity, or development costs differ materially from expectations.
- A purported shareholder class action filed in October 2014 alleges securities-law violations relating to statements and disclosures during April 2012 through September 2014. The company could not reasonably estimate potential losses at the filing date.
Most Important Facts for Investors to Verify
- Whether EXPAREL growth and adoption continue at a rate sufficient to offset rising commercialization, manufacturing, and compliance costs.
- The FDA’s action on the nerve-block sNDA and the effect of the promotional warning letter and corrective communications on demand.
- The timing, cost, and regulatory approval of Patheon’s manufacturing suites and the company’s ability to maintain sufficient supply from its concentrated manufacturing base.
- The cash and dilution consequences of any further convertible-note conversions, including the potential $120.0 million principal settlement.
- The sustainability of the 61% gross margin as production scales and as royalties, rebates, chargebacks, and wholesaler fees evolve.
- Customer concentration, reimbursement and formulary access, competitive long-acting pain products, and patent protection approaching 2018 expirations.
- The status and potential exposure of the shareholder litigation, pediatric post-approval studies, Skyepharma earn-outs, and other contractual commitments.