Pacira Pharmaceuticals, Inc. — Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. The company, identified in the request as Pacira Biosciences, Inc., was named Pacira Pharmaceuticals, Inc. in this filing. Pacira develops, manufactures and commercializes DepoFoam-based pharmaceutical products, principally EXPAREL for postsurgical analgesia and DepoCyt(e) for lymphomatous meningitis.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $58.3 million | $36.7 million | Up 59% |
| EXPAREL sales | $56.0 million | $34.4 million | Up 63% |
| DepoCyt(e) sales | $1.1 million | $1.3 million | Down 15% |
| Gross margin | 70% | 50% | Up 20 percentage points |
| Operating income (loss) | $3.3 million | $(9.3) million | Improved $12.6 million |
| Net income (loss) | $1.3 million | $(11.5) million | Improved $12.7 million |
| Basic and diluted EPS | $0.03 | $(0.34) | Improved |
| Net cash from operating activities | $0.5 million | $(4.7) million | Improved $5.2 million |
Cost of goods sold declined 3% to $17.6 million despite higher sales, primarily because increased manufacturing utilization reduced cost per vial. Research and development expense increased 15% to $6.0 million, while selling, general and administrative expense increased 39% to $31.4 million. Stock-based compensation increased to $7.5 million from $4.0 million.
At March 31, 2015, cash and cash equivalents were $40.9 million, short-term investments were $114.0 million, and long-term investments were $19.9 million, for total cash and investments of approximately $174.8 million. Working capital was $83.3 million. Total assets were $335.0 million and the accumulated deficit was $308.9 million.
Convertible senior notes had $120.0 million of principal outstanding and a $104.1 million carrying value net of discount. The notes bear interest at 3.25% and mature in 2019. Their estimated fair value was $429.1 million at March 31, 2015. The notes were classified as a current liability because conversion conditions were met; they were convertible through June 30, 2015. The company stated that it had sufficient liquidity and expected cash generated from product sales to fund operations, capital expenditures, debt service and potential note conversions for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- EXPAREL sales growth was driven by a 54% increase in volume, new and expanding customer accounts, adoption in soft-tissue and orthopedic procedures, and a 5% price increase effective May 2014.
- Gross margin expanded from 50% to 70%, reflecting lower manufacturing costs and the addition of two manufacturing lines at the San Diego Science Center Campus.
- The company moved from a $11.5 million net loss to $1.3 million of net income and generated positive operating cash flow.
- Inventory increased from $29.3 million at December 31, 2014 to $36.3 million at March 31, 2015, contributing to working-capital usage.
- Capital expenditures increased to $9.2 million from $3.8 million, reflecting manufacturing and facility investment.
- Revenue concentration remained high: the three largest customers represented 86% of revenue in Q1 2015, compared with 84% in Q1 2014.
Guidance, Outlook, Risks, Contingencies and Unusual Items
No specific quantitative revenue or earnings guidance is provided. Management expected existing liquidity, investments and product-sales cash flow to fund requirements for at least the next 12 months, but noted that additional financing could be required and that no committed external funding sources were available.
- In March 2015, the FDA issued a Complete Response Letter regarding the supplemental application for EXPAREL in nerve block.
- Following a September 2014 FDA promotional warning letter, Pacira agreed in February 2015 to corrective communications, including a Dear Healthcare Provider letter and corrective journal advertisement.
- In April 2015, after the quarter end, the Department of Justice subpoenaed documents concerning EXPAREL marketing and promotional practices. The company could not estimate the potential financial or operational impact.
- A purported securities class action filed in October 2014 remained at an early stage; potential losses could not be reasonably estimated.
- If all convertible notes were converted, the company estimated it would need to repay $120.0 million of principal and settle an approximately $309.6 million conversion premium in cash, shares or a combination, creating material liquidity and dilution risk. A $1.5 million principal conversion was paid in cash in April 2015, with the premium settled through issuance of 44,287 shares.
- The company remains dependent on EXPAREL, a limited number of customers, a single manufacturing site, regulatory approvals, third-party suppliers and commercial partners.
Important Facts for Investors to Verify
- Whether EXPAREL volume growth and the 70% gross margin are sustainable as manufacturing capacity expands.
- The status and potential consequences of the FDA nerve-block Complete Response Letter and promotional corrective actions.
- The scope, duration and outcome of the Department of Justice inquiry and any related enforcement, litigation or compliance costs.
- The timing and extent of future convertible-note conversions, including required cash repayment and possible share dilution.
- Customer concentration, inventory growth, capital expenditures and the company’s ability to generate consistently positive operating cash flow.
- Progress toward additional EXPAREL indications and development of DepoFoam-based candidates, including associated clinical, regulatory and capital requirements.