Pacira BioSciences, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Pacira is a single-segment biopharmaceutical company focused on non-opioid pain-management products and related pipeline programs. Its principal commercial products are EXPAREL, ZILRETTA, and iovera. The filing covers the unaudited three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
The November 2021 Flexion acquisition added ZILRETTA and related development programs. ZILRETTA contributed $27.4 million of revenue in the second quarter and $51.1 million in the first six months of 2022.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Total revenue | $169.4 million | $135.6 million | +25% |
| Net product sales | $168.6 million | $134.9 million | +25% |
| Operating income | $31.2 million | $34.8 million | -10% |
| Net income | $19.9 million | $19.1 million | +4% |
| Diluted EPS | $0.40 | $0.42 | Down from prior period |
| Gross margin | 70% | 74% | Down 4 percentage points |
| Operating margin | 18.4% | 25.7% | Down 7.3 points |
| Net margin | 11.7% | 14.1% | Down 2.4 points |
| Metric | Six months ended June 30, 2022 | Six months ended June 30, 2021 | Change |
|---|---|---|---|
| Total revenue | $327.4 million | $254.6 million | +29% |
| Operating income | $48.6 million | $54.3 million | -10% |
| Net income | $26.7 million | $29.5 million | -9% |
| Diluted EPS | $0.55 | $0.64 | Down from prior period |
| Operating cash flow | $60.6 million | $42.2 million | +$18.4 million |
Q2 revenue growth was driven primarily by ZILRETTA and higher EXPAREL sales. EXPAREL revenue increased 5% to $137.0 million, reflecting higher vial volume and pricing. iovera revenue declined 16% to $3.2 million. For the six-month period, EXPAREL revenue rose 9%, while iovera declined 12%.
Cost of goods sold increased 43% in Q2 and 30% year to date. Management attributed the quarterly gross-margin decline primarily to higher EXPAREL inventory reserves related to raw-material supply-chain delays and purchase-accounting effects from ZILRETTA inventory and fixed-asset step-ups.
Research and development expense increased 109% in Q2 to $26.3 million and 68% year to date to $47.9 million, primarily due to EXPAREL lower-extremity nerve-block trials, Flexion-acquired programs, and manufacturing-capacity expansion. Selling, general and administrative expense increased 28% in Q2 and 30% year to date due to expanded commercial operations, ZILRETTA integration, European activities, and higher support costs.
Amortization of acquired intangible assets increased to $14.3 million in Q2 and $28.6 million year to date, versus $2.0 million and $3.9 million, respectively, in the prior-year periods, primarily because of the Flexion acquisition.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $122.1 million at June 30, 2022, down from $585.6 million at December 31, 2021.
- Short-term available-for-sale investments were $194.3 million, resulting in cash and short-term investments of approximately $316.4 million.
- Working capital was approximately $393.0 million.
- Operating activities generated $60.6 million of cash in the first six months.
- Investing activities used $188.9 million, including $124.7 million of net short-term investment purchases, a $32.0 million contingent-consideration payment, $19.4 million of capital expenditures, and $12.8 million of strategic investments.
- Financing activities used $335.2 million, primarily for repayment of the 2022 convertible notes, repurchase of Flexion 2024 notes, and scheduled Term Loan amortization.
- Debt carrying value was $755.7 million at June 30, 2022, consisting principally of the $352.1 million carrying value of the Term Loan, $394.9 million of 2025 convertible notes, and $8.6 million of Flexion 2024 notes.
- The Term Loan had $365.6 million of principal outstanding, bore interest at 7.81% at quarter-end, and matures in December 2026. It requires quarterly principal payments and a substantial maturity payment.
- The Term Loan requires liquidity of at least $150.0 million and a first-lien net leverage ratio no greater than 1.75 to 1.00. The company reported compliance with all financial covenants at June 30, 2022.
Material changes versus the prior comparable period
- Revenue increased materially because of the inclusion of ZILRETTA and continued EXPAREL growth, while iovera sales declined.
- Operating profit and margins decreased despite revenue growth because of higher cost of goods sold, research and development, commercial spending, and acquired-intangible amortization.
- Net income was modestly higher in Q2 but lower for the first six months, reflecting higher operating costs and interest expense.
- Interest expense increased 26% in Q2 and 36% year to date, primarily because of the Term Loan, although convertible-debt discount amortization was reduced following adoption of ASU 2020-06.
- The company repaid the remaining $160.0 million principal of its 2022 convertible notes at maturity on April 1, 2022, using $156.9 million of cash and issuing 101,521 shares for the conversion premium.
- Contingent consideration liabilities declined from $57.6 million at year-end 2021 to $35.2 million at June 30, 2022. The company recorded $18.1 million of net acquisition-related gains in Q2, primarily from reductions in the estimated fair value of Flexion and MyoScience contingent consideration.
- Sales-related allowances and accruals increased to $34.4 million, or 9.6% of gross product sales, in the first six months of 2022 versus $15.6 million, or 5.8%, in the prior-year period, primarily due to ZILRETTA-related allowances.
Guidance, outlook, commentary, and risks
The filing does not provide a clear quantified revenue or earnings guidance figure. Management expects to continue expanding EXPAREL, ZILRETTA, and iovera; invest in sales and marketing; expand manufacturing capacity; advance clinical and regulatory programs; and pursue strategic investments, licensing, and acquisitions.
- Management stated that existing cash, investments, and operating cash flow should fund operating expenses, capital expenditures, debt service, and potential note conversions for at least the next 12 months, but noted that additional financing may be required for future needs.
- Elective-surgery volumes remain exposed to COVID-19 variants, staffing shortages, procedure backlogs, and possible renewed restrictions.
- Inflation, supply-chain delays, longer lead times, and raw-material availability have affected costs and gross margin.
- Revenue is concentrated among a small number of wholesalers. The three largest wholesalers represented 77% of Q2 revenue and 76% of year-to-date revenue; three wholesalers also represented 68% of accounts receivable at June 30, 2022.
- EXPAREL faces patent and generic-competition risks. Pacira is defending patent litigation involving eVenus ANDAs for generic EXPAREL.
- Pacira is involved in litigation with former MyoScience securityholders concerning up to $30.0 million of disputed milestones, plus attorneys’ fees. The outcome is not predictable.
- Pacira is also litigating the duration of royalty obligations to the Research Development Foundation and is paying royalties under protest during the case.
- Potential future contingent consideration includes up to $380.2 million under Flexion CVRs and up to $43.0 million related to MyoScience milestones, subject to achievement of specified milestones.
- A triggering event led to an impairment assessment of the ZILRETTA asset group; management concluded the asset group was recoverable and not impaired as of June 30, 2022.
- A 100-basis-point increase in interest rates would have increased Term Loan interest expense by approximately $0.9 million for Q2 and $1.9 million for the first six months.
Important facts for investors to verify
- Whether ZILRETTA growth and EXPAREL volume gains can offset iovera weakness and sustain consolidated revenue growth.
- The durability of the 70% quarterly gross margin amid supply-chain costs, inventory reserves, and purchase-accounting effects.
- The timing and cost of EXPAREL manufacturing expansions and ongoing clinical trials.
- Compliance with the Term Loan’s $150.0 million liquidity covenant and leverage covenant as cash balances and variable interest costs change.
- Future cash requirements for the 2025 convertible notes, Term Loan amortization, contingent consideration, capital projects, and potential litigation outcomes.
- The outcome and timing of eVenus patent litigation and its effect on the duration of EXPAREL market exclusivity.
- Whether the reported $18.1 million Q2 acquisition-related gain is nonrecurring and how normalized profitability compares after excluding such items.
- The impact of COVID-19, elective-surgery volumes, reimbursement changes, wholesaler concentration, and product-return and rebate estimates.