Pacira Pharmaceuticals, Inc. Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2013, filed October 31, 2013. Pacira is a specialty pharmaceutical company developing, manufacturing, and commercializing products based on its DepoFoam drug-delivery technology. Its lead product, EXPAREL, launched in April 2012; DepoCyt(e) is sold to commercial partners.
Effective October 1, 2013, CrossLink BioScience became the exclusive third-party distributor promoting and selling EXPAREL for U.S. orthopedic and spine surgeries, subject to stated exceptions.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $23.3 million | $8.5 million | $52.0 million | $28.6 million |
| Net product sales | $22.4 million | $4.6 million | $49.5 million | $10.0 million |
| EXPAREL sales | $20.0 million | $4.6 million | $45.7 million | $6.8 million |
| Loss from operations | $(12.8) million | $(15.7) million | $(43.5) million | $(33.5) million |
| Net loss | $(14.8) million | $(15.7) million | $(52.0) million | $(35.9) million |
| Net loss per share | $(0.44) | $(0.49) | $(1.57) | $(1.21) |
| Operating cash flow | Not separately provided | Not separately provided | $(36.9) million | $(49.0) million |
Calculated gross margin was approximately 36.4% in Q3 2013 versus negative 9.4% in Q3 2012, and approximately 30.0% for the first nine months of 2013 versus 21.5% in the prior-year period. Calculated operating margin was approximately negative 55.1% in Q3 2013 and negative 83.6% for the first nine months of 2013. The company remained unprofitable.
- Q3 revenue increased 174%; nine-month revenue increased 82%.
- Q3 EXPAREL revenue increased 340%; nine-month EXPAREL revenue increased 568%.
- Research and development expense increased 69% in Q3 and 150% for the nine-month period, primarily due to nerve-block trials, personnel, stock-based compensation, and product-development work.
- Selling, general, and administrative expense increased 35% in Q3 and 29% year to date, driven by sales, marketing, promotional programs, and expanded personnel.
- Interest expense increased to $1.9 million in Q3 and $5.3 million year to date, primarily because of the convertible notes and debt-discount amortization.
Liquidity, Debt, and Cash Flow
- At September 30, 2013, cash and cash equivalents were $3.4 million, restricted cash was $2.0 million, and short-term investments were $78.5 million, totaling approximately $83.8 million.
- Accounts receivable were $9.8 million and inventories were $15.6 million. Total current assets were $111.7 million.
- Working capital was a deficit of approximately $5.3 million, principally because the convertible senior notes were classified as current.
- The company issued $120.0 million of 3.25% convertible senior notes due 2019 in January 2013 and received net proceeds of $115.3 million. It used approximately $30.1 million to repay the Oxford Credit Facility and related costs.
- Convertible notes, net of discount, totaled $97.9 million at September 30, 2013; total debt and financing obligations were $99.3 million.
- The notes became convertible during the quarter ended September 30, 2013 and remained classified as a current obligation through December 31, 2013. The initial conversion price was approximately $24.82 per share.
- Nine-month investing cash outflow was $58.2 million, including $9.4 million of fixed-asset purchases and substantial purchases of short-term investments. Financing cash inflow was $88.4 million.
Material Changes Versus the Prior Comparable Period
- EXPAREL commercialization accelerated materially: 1,732 accounts had ordered EXPAREL by the end of Q3 2013 versus 556 a year earlier, with 297 new accounts added during Q3.
- DepoCyt(e) sales were $2.4 million in Q3 2013 versus none in Q3 2012, when the product was affected by a selective recall recommended by the European Medicines Agency.
- Collaborative licensing and development revenue declined 93% in Q3 and 96% year to date, primarily because 2012 included recognition of deferred milestone revenue related to terminated Novo Nordisk and EKR agreements.
- The company replaced its prior Oxford debt facility with convertible notes, increasing reported debt and interest expense but extending contractual maturity to 2019.
- The company expanded manufacturing capacity, including construction of Suite C, and increased fixed assets to $45.9 million from $39.1 million at December 31, 2012.
- The company reported positive findings from the first part of its femoral nerve-block study but disclosed that its intercostal nerve-block study did not achieve its primary endpoint.
Outlook, Risks, and Unusual Items
- Management stated that existing cash, short-term investments, restricted cash, and product-sale revenue should fund planned operating expenses, capital expenditures, and debt service for at least the next 12 months.
- Management also expects substantial additional operating losses while commercializing EXPAREL, expanding manufacturing, developing additional indications, and seeking regulatory approvals. No quantitative revenue or earnings guidance was provided.
- The company anticipated submitting an sNDA for the EXPAREL nerve-block indication in early 2014, subject to results from the ongoing femoral nerve-block study and safety data from the intercostal study.
- FDA approval of the expanded Suite C manufacturing facility was anticipated in 2014.
- If noteholders converted the notes during the permitted period, the company stated that it might not have sufficient cash to pay principal plus any conversion premium and might need to refinance; no refinancing was committed.
- Revenue concentration was significant: the three largest customers represented 77% of Q3 revenue and 77% of nine-month revenue. Three customers represented 34%, 26%, and 19% of accounts receivable at quarter-end.
- The company had incurred losses and negative operating cash flow since inception and stated that additional financing may be required. Additional financing could dilute shareholders or impose restrictive terms.
- Unusual items included a $3.4 million loss on early extinguishment of debt, $8.2 million of stock-based compensation year to date, and a $0.4 million income-tax benefit from selling state net operating losses.
- The filing disclosed no material litigation, no defaults upon senior securities, and no material off-balance-sheet arrangements other than operating leases.
Investor Verification Items
- Verify the sustainability of EXPAREL growth, account additions, formulary wins, and customer concentration.
- Assess whether gross-margin improvement can continue as manufacturing capacity expands and Suite C receives regulatory approval.
- Review the femoral and intercostal nerve-block trial results and the timing and prospects of the planned sNDA.
- Monitor the convertible notes’ classification, conversion activity, cash-settlement exposure, and potential refinancing requirement.
- Reconcile cash burn, capital expenditures, inventory growth, and the company’s stated claim that liquidity covers at least 12 months.
- Evaluate the effect of continuing losses, additional financing needs, stock-based compensation, and potential equity dilution.