Pacira Pharmaceuticals, Inc. 10-Q Summary
Reporting period: Three and six months ended June 30, 2012; filed August 9, 2012. The company was an emerging specialty pharmaceutical company commercializing EXPAREL and manufacturing or partnering on DepoCyt(e) and DepoDur products using DepoFoam technology. EXPAREL was commercially launched in April 2012.
Financial Performance and Position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $12.3 million | $3.6 million | $20.1 million | $7.5 million |
| Net product sales | $5.0 million | $1.5 million | $5.4 million | $3.2 million |
| Collaborative licensing and development revenue | $6.6 million | $1.3 million | $13.1 million | $2.5 million |
| Gross profit | $5.7 million | $0.5 million | $7.0 million | $0.7 million |
| Gross margin | 45.9% | 14.3% | 34.6% | 9.6% |
| Loss from operations | $(6.6) million | $(8.5) million | $(17.8) million | $(15.7) million |
| Net loss | $(8.3) million | $(8.8) million | $(20.2) million | $(18.5) million |
| Net loss per share | $(0.27) | $(0.51) | $(0.72) | $(1.36) |
Q2 operating margin was approximately negative 53.7% and net margin was approximately negative 67.2%. Six-month operating margin was approximately negative 88.2% and net margin was approximately negative 100.2%.
- Cash and cash equivalents were $21.4 million at June 30, 2012, compared with $46.2 million at December 31, 2011.
- Restricted cash and short-term investments were $1.8 million and $62.8 million, respectively, producing total cash, restricted cash and short-term investments of approximately $86.1 million.
- Working capital was approximately $84.8 million; accumulated deficit was $200.4 million.
- Net cash used in operating activities was $37.8 million, compared with $14.9 million in the prior-year period.
- Net cash used in investing activities was $50.1 million, including $32.8 million of short-term investment purchases, $10.0 million paid to Skyepharma and $7.3 million of capital expenditures.
- Net cash provided by financing activities was $63.1 million, primarily from the $62.9 million follow-on equity offering and $27.5 million of new debt borrowings, partly offset by $26.3 million of debt repayment.
- Outstanding principal debt was $27.5 million under a new Oxford Finance facility bearing fixed interest of 9.75%. The facility is interest-only through November 2013, followed by 30 monthly principal and interest payments, plus a 6% final payment. The company reported compliance with covenants at June 30, 2012.
Material Changes Versus Prior Comparable Period
- Revenue increased 239% in Q2 and 169% for the six-month period. EXPAREL contributed $2.3 million of product sales in both the quarter and six-month period.
- DepoCyt(e) sales increased $1.2 million in Q2, while six-month DepoCyt(e) sales declined 3%. Royalty revenue declined 14% in Q2 and 10% for the six-month period.
- Collaborative licensing and development revenue increased primarily because the company recognized $5.8 million in Q2 and $11.6 million for the six-month period of deferred milestone revenue related to the termination of the EKR DepoDur agreements.
- Selling, general and administrative expense rose 133% in Q2 and 170% for the six-month period, driven by the EXPAREL sales force, promotional activity, health-outcomes studies and increased corporate infrastructure.
- Research and development expense declined 59% in Q2 and 62% for the six-month period, principally because EXPAREL production-related costs shifted to cost of revenues following FDA approval.
- The company raised $62.9 million net in an April follow-on offering and issued 6.9 million common shares. It also replaced the Hercules credit facility with the $27.5 million Oxford facility, recording a $1.1 million loss on debt extinguishment.
- Inventories increased to $9.3 million from $1.2 million at year-end, and fixed assets increased to $30.0 million from $25.1 million, reflecting preparation for commercial production and manufacturing expansion.
Outlook, Risks and Unusual Items
- Management stated that existing cash, short-term investments and product-sale revenue were expected to fund planned operating expenses, capital expenditures and debt service for the next twelve months. The company also stated that substantial additional operating losses were expected.
- Profitability depends heavily on the commercial success and market acceptance of EXPAREL. The filing provided no formal revenue, earnings or margin guidance.
- EKR’s DepoDur agreements terminated effective June 8, 2012, and the company expected future DepoDur supply and royalty revenue to decline. Novo also gave notice terminating its development and license agreement, effective August 28, 2012, which could reduce future collaborative revenue.
- In July 2012, the MHRA identified critical and major Good Manufacturing Practice deficiencies at the DepoCyt(e) manufacturing line. The company temporarily ceased manufacturing, recorded a $0.6 million remediation charge and committed to a remediation plan targeted for completion by October 31, 2012. Additional costs, production delays or regulatory action remained possible.
- The company is the sole manufacturer of DepoCyt(e), creating concentration and supply-continuity risk. Manufacturing disruption could reduce revenue, breach partner obligations and affect the company’s royalty financing arrangements.
- A construction management agreement authorized renovation and expansion of the San Diego manufacturing facility, with a contract sum not expected to exceed approximately $7.7 million, subject to scope changes.
- EXPAREL sales are subject to estimates for returns, rebates, chargebacks, prompt-payment discounts and wholesaler fees. Actual amounts may differ from estimates.
Investor Verification Checklist
- Verify the pace, repeat usage and profitability of EXPAREL commercialization, including sales growth relative to the expanded sales and marketing cost base.
- Monitor operating cash burn, remaining liquidity and the timing of Oxford debt principal payments and the 6% final payment.
- Track MHRA remediation, the resumption and continuity of DepoCyt(e) manufacturing, and any related regulatory or partner consequences.
- Assess the sustainability of reported collaborative revenue, particularly the non-recurring EKR deferred-revenue recognition and the termination of the Novo agreement.
- Review customer concentration: the three largest customers represented 76% of Q2 revenue and 81% of six-month revenue.
- Evaluate additional Skyepharma earn-out obligations tied to EXPAREL sales, including potential milestone payments of $4 million, $8 million, $8 million and $32 million under specified conditions.
- Confirm whether future capital needs may require equity, debt or licensing transactions, with potential dilution, restrictive covenants or loss of valuable rights.