Pacira BioSciences, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Pacira develops and commercializes non-opioid pain-management and regenerative-health products. Its principal products are EXPAREL, a long-acting local analgesic, and iovera°, a cryoanalgesia device. The filing reports unaudited results for the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $127.7 million | $117.5 million | $382.3 million | $298.7 million |
| Net product sales | $126.8 million | $116.9 million | $380.4 million | $296.9 million |
| Income from operations | $31.4 million | $17.6 million | $85.7 million | $27.6 million |
| Net income | $17.7 million | $130.1 million | $47.1 million | $131.0 million |
| Diluted EPS | $0.39 | $2.94 | $1.03 | $3.02 |
| Operating cash flow | Not separately provided | Not separately provided | $102.5 million | $30.4 million |
Q3 revenue increased 9%; nine-month revenue increased 28%. EXPAREL and related bupivacaine sales increased 7% in Q3 and 27% year to date, while iovera° sales increased 53% and 76%, respectively. Gross margin was 73% in Q3 and 74% for the nine-month period. Approximate operating margins were 24.6% in Q3 and 22.4% for the first nine months.
Net income comparisons were distorted by the $124.6 million release of a domestic deferred-tax valuation allowance in 2020. In 2021, the company recorded income-tax expense of $6.6 million in Q3 and $15.5 million year to date, compared with tax benefits of $124.0 million and $123.6 million in the prior-year periods.
At September 30, 2021, cash and cash equivalents were $134.0 million and short-term available-for-sale investments were $559.8 million. Including investments, total cash and investments were approximately $693.9 million, and working capital was $596.6 million. Total liabilities were $637.4 million and stockholders’ equity was $718.6 million.
Outstanding convertible debt consisted of $160.0 million principal amount of 2.375% notes due April 2022 and $402.5 million principal amount of 0.750% notes due August 2025. The notes were carried at $155.8 million and $326.1 million, respectively. Management stated that existing liquidity and expected product-sales cash flow should fund operating, capital and debt-related requirements for the next 12 months, subject to the Flexion transaction and other uncertainties.
Material changes versus the prior comparable period
- Operating cash flow increased by $72.1 million to $102.5 million, primarily reflecting higher product sales and gross-margin contribution after the COVID-19 disruption in 2020.
- Operating income more than tripled for the nine-month period, despite higher selling, general and administrative expense and increased interest expense.
- Research and development expense declined 21% in Q3 and 9% year to date, while nine-month selling, general and administrative expense increased 5%, including higher legal and transaction-related costs.
- Gross margin declined one percentage point in Q3 because of higher manufacturing-supply and capacity-expansion costs, but increased one percentage point for the nine-month period.
- Investing cash outflows were $87.7 million, including $36.7 million of capital expenditures and net purchases of available-for-sale investments. Capital spending supported EXPAREL capacity expansion in San Diego and Swindon, England.
- Pacira terminated its China agreement with Nuance because of intellectual-property concerns and recorded $3.0 million of dissolution costs. It entered a Latin American distribution agreement with Eurofarma and recognized $0.1 million of related licensing and milestone revenue.
Guidance, outlook, commentary and risks
- No formal quantitative revenue or earnings guidance is provided in the filing.
- Management expects continued investment in EXPAREL and iovera° commercialization, international expansion, clinical programs, manufacturing capacity and complementary products or technologies. EXPAREL shipments in Europe were expected to begin in Q4 2021, with iovera° sales in Canada expected in Q4 2021 and in targeted European countries in Q1 2022.
- The elective-surgery market experienced Delta-variant surges, staffing shortages and surgical fatigue in August and September 2021. Manufacturing sites remained operational and no material supply-chain impact had been identified, but renewed restrictions or patient reluctance could reduce demand.
- On October 11, 2021, Pacira agreed to acquire Flexion Therapeutics. The tender offer provided $8.50 per Flexion share in cash plus a contingent value right for potential payments of up to $8.00 per share. Initial cash consideration was estimated at approximately $450 million, excluding transaction fees, and Pacira expected to assume approximately $144 million of Flexion debt and termination fees net of cash. Pacira expected to use cash and investments and explore debt financing.
- The proposed Flexion acquisition creates execution, integration, financing, commercialization and regulatory risks, including the risk that ZILRETTA sales or expected cost savings do not materialize or that the transaction is not completed.
- Fortis Advisors asserted a counterclaim relating to MyoScience milestone payments with remaining milestone value of $30.0 million plus attorneys’ fees. Pacira considers the claim without merit and cannot predict the outcome.
- Remaining potential MyoScience milestone payments were up to $48.0 million, and potential SkyePharma-related milestone payments were up to $36.0 million. A $5.0 million MyoScience regulatory milestone was achieved in Q3 and was expected to be paid in November 2021.
- In October 2021, eVenus submitted an ANDA seeking approval for a generic version of EXPAREL and alleged that an Orange Book-listed patent was invalid, unenforceable or not infringed. Pacira had 45 days from receipt of the notice to file a patent-infringement lawsuit.
- ASU 2020-06, effective January 1, 2022, was expected to materially affect the accounting for convertible debt by eliminating certain debt discounts and changing diluted-EPS methodology.
Most important facts for investors to verify
- Whether EXPAREL and iovera° growth continues as elective procedures normalize and whether COVID-19 variants, staffing shortages or procedure cancellations affect demand.
- The completion, financing, integration costs and commercial performance of the Flexion acquisition, including ZILRETTA adoption and contingent value rights.
- The outcome and timing of the eVenus generic EXPAREL patent challenge and the resulting effect on market exclusivity.
- Pacira’s ability to manage the April 2022 $160.0 million convertible-note maturity or conversion obligations and the longer-term 2025 notes.
- The status and eventual cost of MyoScience and SkyePharma milestone obligations, pediatric commitments, clinical programs and manufacturing-capacity expansion.
- The effect of the 2020 deferred-tax valuation-allowance release when assessing year-over-year earnings quality.