Pacira Pharmaceuticals, Inc. — Q3 2011 Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2011; filed October 31, 2011. The filing identifies the registrant as Pacira Pharmaceuticals, Inc. Financial statements are unaudited and presented under U.S. GAAP.
Business context
Pacira was an emerging specialty pharmaceutical company developing, manufacturing and commercializing products using its DepoFoam extended-release drug-delivery technology. Existing commercial products were DepoCyt(e) and DepoDur. EXPAREL, the company’s lead product, received FDA approval on October 28, 2011, after the reporting period, with a planned U.S. launch in the first quarter of 2012.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $4.0 million | $4.5 million | $11.5 million | $12.4 million |
| Gross profit | $0.6 million | $1.0 million | $1.3 million | $2.2 million |
| Gross margin | 15.1% | 21.2% | 11.5% | 17.8% |
| Loss from operations | $(8.7) million | $(6.5) million | $(24.4) million | $(16.7) million |
| Net loss | $(9.5) million | $(7.9) million | $(28.0) million | $(20.1) million |
| Basic and diluted loss per share | $(0.55) | $(13.77) | $(1.89) | $(35.02) |
Q3 operating margin was approximately (220.7)% and nine-month operating margin was approximately (212.7)%. Net margins were approximately (240.4)% and (244.8)%, respectively.
- Supply revenue declined 31% in Q3 and 25% year to date, primarily because of fewer DepoCyt(e) and DepoDur lot sales.
- Royalties were $0.9 million in Q3 and $2.7 million year to date. Collaborative licensing and development revenue increased 77% in Q3 and 51% year to date, primarily from the January 2011 Novo Nordisk agreement.
- Research and development expense declined 24% in Q3 and 18% year to date as EXPAREL pivotal trials and NDA preparation activities were substantially completed.
- Selling, general and administrative expense increased 194% in Q3 and 241% year to date as the company built its commercial organization, incurred public-company costs and recorded higher compensation and stock-based compensation.
- Excess manufacturing-capacity costs were $2.1 million in Q3 and $6.2 million for the first nine months, reflecting largely fixed manufacturing infrastructure costs.
Cash flow and balance sheet: Net cash used in operating activities was $23.4 million for the first nine months, compared with $19.0 million in the prior-year period. Investing cash use was $24.4 million, including $20.7 million invested in short-term commercial paper and corporate bonds and $3.7 million of capital expenditures. Financing provided $38.0 million, principally from the February 2011 IPO.
- September 30, 2011 cash and cash equivalents: $16.4 million.
- Short-term investments: $20.7 million; cash plus short-term investments totaled $37.1 million.
- Working capital: $25.6 million; stockholders’ equity: $13.9 million.
- Accumulated deficit: $165.0 million.
- Total debt and financing obligations: $28.6 million, including $26.3 million of Hercules term-loan principal and $3.1 million of royalty interest obligations.
Material changes versus the prior comparable period
- Revenue decreased 13% in Q3 and 7% for the first nine months.
- Gross margin contracted because lower production volumes were spread over substantially fixed manufacturing costs.
- Operating losses widened to $8.7 million in Q3 and $24.4 million year to date, driven principally by increased commercialization and public-company expenses.
- The February 2011 IPO generated $42.0 million of gross proceeds and approximately $37.1 million of net proceeds.
- At the IPO closing, preferred stock and approximately $51.2 million of related-party notes, including accrued interest, converted into common stock. Related-party debt was eliminated from the balance sheet.
- Weighted-average common shares increased substantially following the IPO and debt conversions, reducing reported loss per share despite a higher dollar net loss.
Guidance, outlook, risks and unusual items
- Management expected no EXPAREL sales until the first quarter of 2012 and planned a commercial sales force of approximately 60 representatives, seven regional managers and a national sales manager through Quintiles.
- Management stated that existing cash, short-term investments and expected product revenue would not be sufficient to fund planned operating expenses, capital expenditures and debt service through the next twelve months without additional financing.
- The filing raises substantial doubt regarding the company’s ability to continue as a going concern because of recurring losses and negative operating cash flow. No assurance was provided that financing would be available on acceptable terms or at all.
- The Hercules facility had a $26.3 million principal balance, floating interest rates, restrictive covenants and principal repayments scheduled after the interest-only period. Subsequent to quarter-end, the interest-only period was extended through February 28, 2012, while the release of investor guarantees would increase the Tranche A interest rate.
- A $2.0 million Novo development milestone was triggered on October 18, 2011 and was payable after the reporting period.
- Key risks included commercialization and market acceptance of EXPAREL, formulary access and reimbursement, manufacturing capacity and cGMP compliance, dependence on commercial partners and third-party service providers, product liability, intellectual-property challenges, foreign-exchange exposure and the need for additional capital.
- The company disclosed that certain DepoCyt(e) and DepoDur adverse-event reports had previously not been submitted to the FDA within the required 15-day period; it enhanced reporting procedures and added pharmacovigilance personnel.
- No material litigation was pending or threatened according to the filing. Management concluded that disclosure controls and procedures were effective as of September 30, 2011.
Most important facts for investors to verify
- Whether EXPAREL’s first-quarter 2012 launch occurred on schedule and generated sufficient revenue and gross margin.
- Cash burn, financing activity and liquidity relative to the company’s stated need for additional funding.
- Compliance with Hercules debt covenants, interest-rate changes, repayment requirements and collateral restrictions.
- Commercial adoption, hospital formulary approvals, reimbursement and competitive developments affecting EXPAREL.
- Manufacturing capacity, product quality, cGMP compliance and the company’s ability to reduce excess-capacity costs.
- Recognition and collection of the $2.0 million Novo milestone and any additional collaboration milestones.
- Progress on FDA-required pediatric studies, post-approval obligations and pharmacovigilance controls.