Pacira BioSciences, Inc. — Q3 2019 Form 10-Q Summary
Business context and reporting period
Pacira is a non-opioid pain-management company whose principal commercial product is EXPAREL. On April 9, 2019, Pacira acquired MyoScience, adding the FDA-approved iovera° cryoanalgesia system and changing its corporate name to Pacira BioSciences, Inc. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the same periods in 2018.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $104.7 million | $83.4 million | $298.6 million | $242.2 million |
| Net product sales | $104.4 million | $82.7 million | $297.1 million | $237.7 million |
| EXPAREL product sales | $101.7 million | $82.7 million | $292.4 million | $237.7 million |
| iovera° product sales | $2.6 million | — | $4.7 million | — |
| Gross margin | 79% | 77% | 75% | 74% |
| Income from operations | $2.4 million | $4.0 million | $8.8 million | $3.7 million |
| Net loss | $6.1 million | $0.6 million | $6.1 million | $8.8 million |
| Net loss per share | $0.15 | $0.02 | $0.15 | $0.21 |
| Net cash from operations | Not separately provided | Not separately provided | $44.6 million | $27.7 million |
Q3 operating margin was approximately 2.3%, compared with approximately 4.9% in Q3 2018. Nine-month operating margin was approximately 2.9%, compared with approximately 1.5% in the prior-year period. Results include acquisition-related charges, acquired-intangible amortization and other unusual items.
Balance sheet, debt and liquidity
- At September 30, 2019, cash and cash equivalents were $85.1 million, short-term investments were $180.5 million and long-term investments were $70.6 million, for total cash and investments of approximately $336.2 million.
- Working capital was $283.0 million and total assets were $807.5 million.
- The company had $345.0 million principal amount of 2.375% convertible senior notes due April 2022, recorded at $302.1 million net of discount and financing costs. The notes had an estimated fair value of $340.5 million.
- Operating lease liabilities totaled $43.9 million, including $5.0 million classified as current.
- Contingent consideration related to MyoScience was $35.8 million at September 30, 2019. Remaining potential MyoScience payments were up to $80.0 million at that date, within the contractual maximum of $100.0 million.
- Management stated that existing cash, investments and expected operating cash flows should fund operating expenses, capital expenditures, debt service and potential note conversions through at least November 7, 2020. The company has no committed external funding source.
Material changes versus the prior comparable period
- Total revenue increased 25% in Q3 and 23% for the first nine months. EXPAREL revenue increased 23% in both periods, primarily from higher unit demand. Net product sales benefited from the addition of iovera° after the MyoScience acquisition.
- Gross margin improved to 79% in Q3 and 75% for the nine months, reflecting completion of EXPAREL manufacturing capacity expansion in Swindon and other manufacturing efficiencies. iovera° carried a lower gross margin than EXPAREL.
- Research and development expense increased 36% in Q3 and 26% year to date, primarily due to pediatric, C-section, spine and hip-fracture clinical programs.
- Selling, general and administrative expense increased 13% in Q3 and 11% year to date, driven largely by expanded sales and marketing efforts for EXPAREL and initial iovera° commercialization.
- Acquisition-related charges and product-discontinuation costs increased to $7.6 million in Q3 and $12.3 million year to date, versus $1.3 million and $1.5 million, respectively, in the prior-year periods. The 2019 charges principally reflected remeasurement of MyoScience contingent consideration.
- Other expense increased because of a $5.4 million impairment of the company’s investment in TELA Bio and higher amortization of the convertible-note discount.
- Operating cash flow increased to $44.6 million from $27.7 million. Investing cash flow changed to a $97.7 million use, principally due to the $118.7 million cash purchase of MyoScience, compared with $143.7 million of investing cash provided in the prior-year period.
Outlook, commentary, risks and unusual items
- Management expects continued investment in EXPAREL and iovera° commercialization, clinical trials, regulatory submissions, manufacturing capacity and product development. The filing does not provide formal revenue or earnings guidance.
- EXPAREL expansion initiatives include Phase 4 studies, pediatric development, a lower-extremity nerve-block study and regulatory submissions in Europe, Canada and China. Management expects to report topline PLAY pediatric-study results before the end of 2019.
- In October 2019, a validation lot of EXPAREL manufactured at the company’s U.K. contract manufacturing line failed stability testing. Production was temporarily halted while the company investigated. Inventory associated with the line was approximately $10.5 million, and some or all could become unsellable; the filing states that no loss amount could yet be determined.
- In Q3, a MyoScience regulatory milestone was achieved, requiring a $7.0 million payment in Q4 2019. The company also expected a previously accrued $5.0 million milestone payment in 2020.
- After quarter-end, new regulatory information led the company to expect an additional $10.0 million MyoScience milestone and approximately $9.0 million of acquisition-related charges in Q4 2019.
- Remaining material contingencies include up to $80.0 million of MyoScience contingent consideration, up to $36.0 million of potential Skyepharma milestones, the $345.0 million convertible-note principal due in 2022, and ongoing operating-lease commitments.
- The company is cooperating with a Department of Justice inquiry concerning EXPAREL marketing and promotional practices and cannot predict its outcome or potential impact.
- Revenue and receivables are highly concentrated: three wholesalers represented 89% of nine-month revenue and 93% of accounts receivable at September 30, 2019. The company also remains substantially dependent on EXPAREL and a limited number of manufacturing sites.
- Management identified risks related to integrating MyoScience, realizing expected synergies, regulatory approvals, clinical-trial outcomes, competition, intellectual-property protection, manufacturing reliability, cybersecurity and dependence on key personnel and suppliers.
Most important facts for investors to verify
- Whether EXPAREL demand and unit growth continue to support revenue growth despite increased discounting and customer concentration.
- The root cause, regulatory resolution and potential inventory write-down related to the failed U.K. stability lot.
- The commercial performance, gross margins and integration costs of iovera°.
- The timing and amount of MyoScience contingent milestone payments, including the additional $10.0 million milestone identified after quarter-end.
- The company’s ability to generate sufficient cash for operations, capital investment, contingent payments and the 2022 convertible notes.
- The outcome and potential financial exposure from the Department of Justice inquiry.
- Progress and costs of EXPAREL and iovera° clinical, regulatory and international expansion programs.