Pacira Pharmaceuticals, Inc. — Q2 2017 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017. Interim financial statements are unaudited and prepared under U.S. GAAP. The company develops, manufactures and commercializes DepoFoam-based pharmaceutical products, led by EXPAREL for postsurgical pain management.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $70.9 million | $69.6 million | $140.2 million | $135.1 million |
| EXPAREL net sales | $69.8 million | $65.8 million | $137.5 million | $129.5 million |
| Gross margin | 66% | 67% | 65% | 68% |
| Operating loss | $(15.8) million | $(6.4) million | $(29.8) million | $(8.7) million |
| Net loss | $(19.7) million | $(8.0) million | $(39.6) million | $(11.8) million |
| Basic and diluted loss per share | $(0.49) | $(0.21) | $(1.01) | $(0.32) |
| Cash flow from operations | Not separately provided | Not separately provided | $3.7 million | $4.4 million |
Q2 revenue increased 2%, while first-half revenue increased 4%. EXPAREL sales increased 6% in both periods, primarily from approximately 7% higher volume, partly offset by increased volume rebates. DepoCyt(e) and other product sales declined 81% in Q2 and 59% year to date. Collaborative licensing and milestone revenue also declined materially, while royalty revenue increased 11% in Q2 and 9% year to date.
Cost of goods sold was $23.8 million in Q2 and $48.4 million year to date, up 3% and 12%, respectively. Gross margin was pressured by scrapped DepoCyt(e) lots, which reduced margin by approximately four percentage points, higher manufacturing costs per vial and product discontinuation-related inventory charges.
Research and development expense increased 101% in Q2 and 88% year to date, reflecting Phase 3 nerve-block trials, Phase 4 EXPAREL trials and product-development activities. Selling, general and administrative expense decreased 9% in Q2 and was essentially flat year to date. The company recorded a $5.0 million non-recurring DepoCyt(e) discontinuation charge in Q2, including $4.5 million in product-discontinuation expense and approximately $0.5 million in cost of goods sold.
Liquidity, cash flow and debt
- Cash and cash equivalents were $53.8 million at June 30, 2017, compared with $35.9 million at December 31, 2016.
- Short-term investments were $328.6 million, bringing cash and short-term investments to $382.4 million. Working capital was $393.5 million.
- Operating cash flow was $3.7 million for the first six months, compared with $4.4 million in the prior-year period.
- Investing cash outflow was $205.0 million, primarily from net purchases of short-term investments, $8.8 million of fixed-asset purchases and $4.2 million of contingent consideration payments.
- Financing cash inflow was $219.2 million, principally from issuing $345.0 million of 2.375% convertible senior notes due 2022, partly offset by the retirement of approximately $118.2 million of 2019 notes and $11.0 million of issuance costs.
- Net carrying value of the 2022 notes was $269.3 million; approximately $0.3 million of principal remained outstanding on the 2019 notes. The 2022 notes mature in April 2022 and have an initial conversion price of approximately $66.89 per share.
Management stated that existing cash, investments and expected product-sale cash flows should fund operations, capital expenditures, potential note-conversion principal payments and debt service through August 2, 2018. The company noted that additional financing may be required thereafter and that no committed external funding sources exist.
Material changes versus the prior comparable period
- EXPAREL continued to grow, but total revenue growth was limited by declining DepoCyt(e) sales and lower licensing and milestone revenue.
- Operating and net losses widened substantially because of higher clinical-development spending, higher interest expense and the DepoCyt(e) discontinuation charge.
- Gross margin declined because of scrapped lots and higher per-vial manufacturing costs.
- The company issued the 2022 convertible notes and used proceeds to repurchase nearly all of its 2019 convertible notes, increasing long-term debt and interest expense while materially increasing liquidity.
- Shares outstanding increased to 40.3 million from 37.5 million at year-end 2016, primarily due to shares issued upon conversion or exchange of 2019 notes and employee equity activity.
Outlook, commentary and unusual items
- Following July 2017 topline results, management planned to submit an FDA supplemental application for EXPAREL nerve-block use in the second half of 2017, with an anticipated six-month PDUFA review. One Phase 3 study met its primary endpoint; another did not achieve statistical significance in the full analysis because of a protocol deviation at one site, although significance was reported after excluding that site.
- The company is continuing Phase 4 studies in orthopedic, spine, colorectal, cesarean-section and breast-reconstruction procedures. DepoTranexamic Acid was in Phase 2 development, and the company expected to submit an investigational new drug application for preclinical DepoMeloxicam in 2017.
- All future DepoCyt(e) production was discontinued in June 2017 because of persistent technical manufacturing issues. Additional discontinuation costs could be material; lease payments for the former facility continue through August 2020.
- A five-year co-promotion agreement with DePuy Synthes began in January 2017 for orthopedic and spine use of EXPAREL. DePuy Synthes receives tiered commissions ranging from low single digits to double digits on applicable sales.
- The Department of Justice continues an inquiry, initiated by a 2015 subpoena, into EXPAREL marketing and promotional practices. The company cannot predict the timing, outcome or potential impact.
- Key operating risks include dependence on EXPAREL and a limited customer base, manufacturing capacity and technical execution, clinical and regulatory outcomes, competition, intellectual-property protection, government investigations and potential future financing needs.
Investor verification points
- Verify the sustainability of EXPAREL volume growth and the effect of rebates, chargebacks and pricing on net sales and gross margin.
- Track clinical and FDA progress for the planned nerve-block supplemental application, including the implications of the protocol deviation in one Phase 3 study.
- Assess whether the DepoCyt(e) discontinuation creates additional cash costs, inventory write-offs, lease obligations or lost royalty revenue.
- Monitor cash burn, manufacturing-capacity spending and the company’s ability to fund operations beyond the stated August 2018 horizon.
- Evaluate dilution and cash-settlement exposure under the 2022 convertible notes, including potential conversion-related share issuance.
- Follow the DOJ inquiry and any resulting legal, regulatory, financial or operational consequences.