Pacira Pharmaceuticals, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly results for the three months ended March 31, 2012, filed May 9, 2012. The company develops, manufactures and commercializes DepoFoam-based pharmaceutical products for hospitals and ambulatory surgery centers. EXPAREL was FDA-approved on October 28, 2011 and launched commercially in April 2012. Other marketed products were DepoCyt(e) and DepoDur.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $7.8 million | $3.9 million | +102% |
| Supply and royalty revenue | $1.3 million | $2.7 million | -50% |
| Collaborative licensing and development revenue | $6.5 million | $1.2 million | +436% |
| Cost of revenues | $6.5 million | $3.7 million | +77% |
| Loss from operations | $(11.1) million | $(7.1) million | Loss increased |
| Net loss | $(11.9) million | $(9.8) million | Loss increased |
| Basic and diluted loss per share | $(0.47) | $(0.98) | Improved per share due primarily to higher share count |
| Net cash used in operating activities | $(17.5) million | $(4.0) million | Cash use increased |
Approximate derived margins were 16.8% gross, negative 142.7% operating and negative 152.4% net in Q1 2012; the filing does not present these margins directly. Cash and cash equivalents were $25.2 million and short-term investments were $29.6 million at March 31, 2012. Working capital was $43.1 million and accumulated deficit was $192.1 million. Total debt and financing obligations were $27.7 million, including $25.6 million of Hercules term-loan principal and $2.7 million of royalty obligations.
Capital expenditures were $2.9 million, primarily for EXPAREL manufacturing capacity. Inventories increased to $5.1 million from $1.2 million at December 31, 2011. The company reported no material off-balance-sheet arrangements and stated that disclosure controls were effective.
Material changes versus the prior comparable period
- Revenue increased primarily because the company recognized $5.8 million of deferred milestone revenue related to EKR’s termination of the DepoDur agreement. This was non-recurring or contract-related revenue rather than EXPAREL product sales.
- DepoCyt(e) revenue declined 52% to $1.3 million because of fewer lots sold to commercial partners.
- Cost of revenues increased because the company operated two cGMP facilities, including the EXPAREL production line, resulting in substantial excess-capacity and infrastructure costs.
- Research and development expense declined 66% to $1.3 million as EXPAREL production-line expenses shifted to cost of revenues following FDA approval.
- Selling, general and administrative expense increased 217% to $11.2 million, driven by the EXPAREL sales force, launch-related promotional activities, increased headcount and public-company infrastructure.
- Operating cash use rose substantially because of higher sales and marketing costs, manufacturing costs, lower supply and royalty revenue, and working-capital changes.
- Interest expense declined to $0.5 million from $2.5 million, largely because prior convertible and secured notes had been converted into common stock in February 2011.
Guidance, outlook, risks and unusual items
The filing provides no formal revenue, earnings or margin guidance. Management expected continued substantial operating losses as EXPAREL was commercialized and additional product candidates were developed. Management believed cash, investments, product revenue and approximately $63 million of April 2012 financing proceeds would fund planned operations, capital expenditures and debt service for the next twelve months, while cautioning that cash requirements could exceed expectations.
- EKR’s DepoDur licensing, distribution and marketing agreement terminates July 1, 2012, with the associated supply agreement also terminating. Management expected future DepoDur supply and royalty revenue to decline and did not expect to re-license the product.
- Revenue was highly concentrated: the three largest customers represented 91% of Q1 2012 revenue, and two customers represented 96% of trade accounts receivable.
- EXPAREL commercialization depended on market acceptance, sales-force execution, manufacturing capacity, regulatory developments and additional clinical work, including FDA-required pediatric trials and the planned nerve-block indication.
- The company had incurred losses and negative operating cash flow since inception and had no committed external funding source. Additional financing could dilute shareholders or impose restrictive debt terms.
- Subsequent to quarter-end, the company completed its first EXPAREL commercial sale and paid Skyepharma $10.0 million on April 19, 2012.
- In April 2012, the company raised approximately $63 million net through sales of 6.9 million common shares, including an overallotment.
- On May 2, 2012, the company borrowed $27.5 million from Oxford Finance at a fixed 9.75% rate and used the proceeds to repay the Hercules facility. The new loan is interest-only through November 30, 2013, followed by 30 monthly principal and interest payments, plus a final payment equal to 6% of the facility. It is secured by substantially all assets other than intellectual property and includes customary covenants and default provisions.
Important facts for investors to verify
- Whether EXPAREL sales scale sufficiently after the April 2012 launch to offset elevated manufacturing, sales and marketing expenses.
- The recurring revenue profile excluding the $5.8 million EKR-related milestone recognition.
- The financial and operational effect of the DepoDur agreement termination and declining DepoCyt(e) sales.
- Cash burn, working-capital requirements, manufacturing capacity utilization and inventory levels.
- Compliance with the Oxford Finance loan covenants, repayment schedule, collateral restrictions and final 6% payment obligation.
- Customer concentration, receivable collectability and dependence on commercial and distribution partners.
- Progress and costs of EXPAREL nerve-block and pediatric studies, regulatory requirements, intellectual-property protection and market acceptance.