Pacira Biosciences, Inc. annual report, FY2021

Pacira BioSciences, Inc. — 2021 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2021. The filing is an annual Form 10-K, not a standalone fourth-quarter report. Pacira operates as one segment focused on non-opioid pain management and regenerative health products, principally EXPAREL, iovera° and, following the November 19, 2021 Flexion acquisition, ZILRETTA.

Business Context and Strategic Developments

• EXPAREL is Pacira’s primary commercial product for postsurgical analgesia and accounted for 94% of 2021 revenue.
• Pacira acquired Flexion Therapeutics for approximately $578.8 million, adding ZILRETTA and clinical-stage candidates PCRX-201 and PCRX-301. The acquisition included approximately $533.6 million of cash consideration and $45.2 million of estimated contingent consideration.
• ZILRETTA contributed $12.7 million of revenue during the post-acquisition period from November 19 through December 31, 2021; full-year legacy Flexion sales were $102.7 million but were not owned by Pacira for most of the year.
• The company continued international expansion, launching EXPAREL in the U.K. and selected European Union markets and iovera° in Canada during the fourth quarter.

Key Financial Metrics

Metric	2021	2020	Change
Total revenue	$541.5 million	$429.6 million	Up 26%
Net product sales	$539.0 million	$426.6 million	Up 26%
EXPAREL sales	$506.5 million	$413.3 million	Up 23%
ZILRETTA sales recognized by Pacira	$12.7 million	—	Acquired November 2021
iovera° sales	$16.2 million	$8.8 million	Up 83%
Gross profit	$401.3 million	$312.3 million	Up 29%
Gross margin	74%	73%	Up 1 percentage point
Income from operations	$89.9 million	$46.4 million	Up 94%
Operating margin	16.6%	10.8%	Improved
Net income	$42.0 million	$145.5 million	Down 71%
Diluted earnings per share	$0.92	$3.33	Down 72%
Net cash from operating activities	$125.7 million	$77.0 million	Up 63%

Net income declined despite stronger operating income primarily because 2020 included a $126.6 million income tax benefit from releasing a deferred-tax valuation allowance. In 2021, Pacira recorded $14.4 million of income tax expense and $33.5 million of net other expense, including $31.8 million of interest expense.

Liquidity, Debt and Capital Resources

• At December 31, 2021, cash and cash equivalents were $585.6 million, short-term investments were $70.8 million and total cash plus short-term investments were $656.4 million.
• Working capital was $344.9 million and accumulated deficit was $211.9 million.
• Gross debt was approximately $1.1 billion, consisting principally of the $375.0 million secured Term Loan, $402.5 million of 2025 convertible notes, $160.0 million of 2022 convertible notes and $201.3 million of Flexion 2024 convertible notes.
• The Term Loan matures in December 2026, bears variable interest, and had a 7.75% rate at December 31, 2021. It requires minimum liquidity of $150.0 million and includes a first-lien net leverage covenant of no more than 1.75 to 1.00. Pacira was in compliance at year-end.
• The $160.0 million principal amount of 2022 Notes was due April 1, 2022. Pacira stated it intended to repay the principal with cash on hand.
• In January 2022, Pacira repurchased $192.6 million of the Flexion 2024 Notes, reducing reported gross indebtedness to approximately $946.1 million as of February 28, 2022.

Cash Flow and Investment

• Operating cash flow increased to $125.7 million from $77.0 million, supported by higher revenue and partially offset by Flexion-related costs and contingent consideration payments.
• Investing cash outflow was $20.8 million. Major uses included $420.0 million for the Flexion acquisition and $45.9 million of capital expenditures, partly funded by $457.2 million of net investment sales.
• Financing cash inflow was $380.7 million, principally from $359.2 million of net Term Loan proceeds.
• Capital expenditures focused largely on the 200-liter EXPAREL capacity expansion project in San Diego.

Material Changes Versus 2020

• Revenue increased 26%, driven by EXPAREL growth, higher iovera° sales and the initial contribution from ZILRETTA.
• EXPAREL gross vial volume increased 21% and gross selling price per unit increased 4%, partly offset by vial-size mix.
• Research and development expense decreased 7% to $55.5 million as major manufacturing scale-up work progressed, although management expects R&D expense to increase in 2022 because of ZILRETTA and Flexion pipeline programs.
• Selling, general and administrative expense increased 3% to $199.3 million. Sales and marketing expense declined 6% after the DePuy Synthes co-promotion ended in January 2021, while general and administrative expense increased 26% due to legal, administrative and Flexion integration costs.
• Acquisition-related, product-discontinuation and other charges increased to $42.9 million from $5.2 million, primarily due to the Flexion acquisition, including severance, transaction fees and other one-time costs.
• Interest expense increased 24% to $31.8 million because of higher debt following the Term Loan and the assumed Flexion notes.
• Revenue concentration remained high: Cardinal Health, McKesson and AmerisourceBergen represented 31%, 28% and 26% of total revenue, respectively, or 85% combined.

Guidance, Outlook and Management Commentary

• Management expects continued expansion of EXPAREL, ZILRETTA and iovera° use, additional international commercialization, greater manufacturing capacity and continued investment in clinical development.
• Planned 2022 activities include a Phase 3 ZILRETTA shoulder osteoarthritis study, comparative safety work in patients with Type 2 diabetes, evaluation of repeat dosing, additional EXPAREL nerve-block studies and iovera° development for lower-back pain, spine procedures and spasticity.
• Management believes available cash, investments and product-sale cash flows will fund operating expenses, capital expenditures, debt service and expected note obligations for at least the next 12 months.
• Management expects interest expense to increase in 2022 because of the Term Loan. Adoption of ASU 2020-06 on January 1, 2022 is expected to reduce 2022 interest expense by approximately $18.0 million and change the accounting for convertible debt.

Risks, Contingencies and Unusual Items

• COVID-19 variants, staffing shortages and renewed restrictions on elective surgeries could reduce demand for all three commercial products and disrupt clinical, manufacturing or sales activities.
• EXPAREL remains highly concentrated in one product and depends on reimbursement, hospital and ambulatory surgery center adoption, manufacturing execution and protection from generic or alternative long-acting bupivacaine products.
• eVenus submitted Paragraph IV challenges for generic EXPAREL products. Pacira filed patent infringement lawsuits, triggering 30-month stays of FDA approval; the outcomes remain uncertain.
• Pacira filed a declaratory judgment action against the Research Development Foundation regarding whether royalty obligations for EXPAREL ended in December 2021. Royalties continue to be paid under protest.
• A Delaware lawsuit involving former MyoScience securityholders concerns up to $30.0 million of disputed milestone payments plus attorneys’ fees; the outcome is uncertain.
• Flexion CVRs could require up to approximately $380.2 million of additional payments, while remaining MyoScience milestone obligations could reach $43.0 million. The filing also discusses potential aggregate Flexion-related milestone payments of up to $425.5 million, depending on the specific contractual obligations considered.
• The company has approximately $50.3 million of minimum contract-manufacturing commitments, $9.2 million of raw-material commitments and $104.2 million of operating lease commitments as of year-end.
• Manufacturing is concentrated among Pacira facilities, Thermo Fisher’s Swindon site and Providien’s Tijuana site, creating supply, regulatory, quality and business-continuity risks.
• KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The assessment excluded certain Flexion internal controls, which represented 13% of total assets excluding goodwill and intangible assets and 2% of revenue.

Most Important Facts for Investors to Verify

• Whether EXPAREL growth and outpatient procedure trends offset concentration, reimbursement and potential generic competition risks.
• The status, timing and potential financial impact of the eVenus patent litigation and the RDF royalty dispute.
• Post-acquisition ZILRETTA growth, integration savings and achievement of milestones that could trigger CVR payments.
• Pacira’s ability to repay or refinance near-term convertible debt while maintaining the Term Loan liquidity and leverage covenants.
• The effect of COVID-19-related elective-surgery disruptions, staffing shortages and supply-chain inflation on 2022 revenue and margins.
• Whether planned clinical and regulatory programs for ZILRETTA, EXPAREL, iovera°, PCRX-201 and PCRX-301 advance on schedule and within available capital.