Pacira Pharmaceuticals, Inc. — Q2 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter and six months ended June 30, 2015. Pacira is a specialty pharmaceutical company focused on DepoFoam-based products, led by EXPAREL, a postsurgical analgesic launched in 2012. The company also sells DepoCyt(e) through commercial partners.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $59.1 million, up 25% | $117.5 million, up 40% |
| EXPAREL sales | $57.0 million, up 27% | $112.9 million, up 42% |
| Net product sales | $58.1 million, up 26% | $115.1 million, up 41% |
| Operating income (loss) | $1.8 million, versus $(2.8) million | $5.2 million, versus $(12.1) million |
| Net income (loss) | $8 thousand, versus $(5.0) million | $1.3 million, versus $(16.5) million |
| Net income (loss) per share | $0.00, versus $(0.14) | $0.03, versus $(0.48) |
| Gross margin on product-related revenue | 68%, versus 57% | 69%, versus 54% |
- Operating cash flow was $9.1 million for the six months, compared with $3.5 million in the prior-year period.
- Cash and cash equivalents were $32.7 million at June 30, 2015. Cash, short-term investments and long-term investments totaled $171.1 million.
- Working capital was $84.2 million; the accumulated deficit was $308.9 million.
- Capital expenditures were $22.5 million for the six months, primarily supporting manufacturing capacity. Construction in progress increased to $40.3 million from $19.9 million at December 31, 2014.
- Convertible senior notes had $118.5 million of principal outstanding and $103.9 million of carrying value. The notes bear 3.25% interest and mature in 2019, but were classified as current because conversion conditions were met.
Material changes versus the prior comparable periods
- EXPAREL growth was driven primarily by higher sales volume, new accounts, increased adoption in soft-tissue and orthopedic procedures, and price increases effective May 2014 and April 2015.
- Gross margin improved because of lower manufacturing cost per vial and increased facility utilization following the addition of a third EXPAREL manufacturing line. Cost of goods sold included $4.2 million of unplanned shutdown and other charges.
- Research and development expense decreased 30% in the quarter and 8% for the six months, primarily due to lower stock-based compensation and completion of a prior EXPAREL nerve-block trial; product-development spending increased.
- Selling, general and administrative expense increased 40% in both periods. Sales and marketing costs rose with headcount and promotional activity, while general and administrative expense reflected higher legal, compliance and personnel costs.
- Stock-based compensation increased to $14.8 million for the six months from $9.5 million, including $10.1 million in selling, general and administrative expense.
- DepoCyt(e) sales declined 3% in the quarter and 10% for the six months, primarily due to the weaker euro. Royalty revenue increased 9% for the six months, while collaborative licensing and development revenue benefited from recognition of a prior Mundipharma upfront payment.
- Inventory increased to $48.8 million from $29.3 million at year-end, contributing to a $19.5 million operating investment in inventory.
Guidance, outlook, risks and unusual items
- The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued investment in EXPAREL commercialization, manufacturing expansion, additional clinical studies and pipeline products, including DepoTranexamic Acid and DepoMeloxicam.
- Following FDA feedback, management planned to pursue a DepoFoam spray manufacturing process. After receiving a Complete Response Letter for the EXPAREL nerve-block supplemental application, the company planned additional Phase 3 studies for upper- and lower-extremity nerve blocks, expected to begin by the end of 2015.
- The FDA closed out a 2014 promotional warning-letter matter in July 2015 after corrective communications. Management cautioned that future regulatory action or restrictions on promotional practices could affect EXPAREL sales.
- The Department of Justice subpoenaed documents concerning EXPAREL marketing and promotional practices. The company is cooperating but could not estimate the timing, outcome or financial impact of the inquiry.
- A purported securities class action alleges misleading statements and omissions concerning the company’s business and performance. The case was at an early stage, and potential losses could not be reasonably estimated.
- If all convertible notes were converted, the company expected to repay approximately $118.5 million of principal and settle an estimated $219.2 million conversion premium in cash, shares or a combination, creating liquidity needs and potential dilution.
- The company stated that existing cash, investments and product-sale proceeds were expected to fund operations, capital expenditures, potential note conversions and debt service for at least the next 12 months, but noted that additional financing may be required and no committed external funding sources existed.
- Revenue and receivables were highly concentrated: the three largest customers represented 87% of revenue and approximately 85% of accounts receivable at June 30, 2015.
Important facts for investors to verify
- Whether EXPAREL growth and improved manufacturing utilization continue after the quarter’s $4.2 million shutdown-related charges.
- The timing and outcome of the DOJ marketing inquiry, related legal proceedings and any resulting fines, restrictions, settlements or remediation costs.
- FDA progress and trial results for the nerve-block indication and the spray manufacturing process.
- The company’s ability to fund manufacturing expansion, clinical programs and potential $118.5 million principal repayment on the convertible notes.
- The sustainability of positive operating cash flow after adjusting for increased inventory, capital expenditures and substantial stock-based compensation.
- Customer concentration, product-return and rebate estimates, and the effect of pricing and sales allowances on reported net revenue.