Pacira Biosciences, Inc. quarterly report, Q3 FY2020

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Pacira BioSciences, Inc. — Q3 2020 Form 10-Q Summary

Business Context and Reporting Period

Pacira develops and commercializes non-opioid pain-management products. Its principal products are EXPAREL, a long-acting local analgesic, and iovera°, a cryoanalgesia system acquired through the April 2019 MyoScience acquisition. The filing covers the unaudited three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.

Financial Performance and Position

  • Third-quarter revenue: $117.5 million, up 12% from $104.7 million. Net product sales were $116.9 million; royalty revenue was $0.6 million.
  • Nine-month revenue: $298.7 million, essentially unchanged from $298.6 million. EXPAREL-related product sales decreased 1% to $290.5 million, while iovera° sales increased 37% to $6.4 million, partly reflecting the timing of the MyoScience acquisition.
  • Profitability: Third-quarter operating income was $17.6 million versus $2.4 million in the prior-year period. Nine-month operating income was $27.6 million versus $8.8 million.
  • Net income: $130.1 million, or $2.94 diluted earnings per share, in the third quarter; nine-month net income was $131.0 million, or $3.02 diluted earnings per share. Results were materially increased by a $124.6 million deferred tax valuation-allowance release.
  • Gross margin: 74% in the third quarter versus 79% in the prior-year period, and 73% for the nine months versus 75%. Lower margins reflected higher product costs, unplanned downtime at the Swindon manufacturing site, and a planned San Diego manufacturing shutdown.
  • Cash flow: Nine-month operating cash flow was $30.4 million versus $44.6 million. Investing cash flow was negative $195.3 million, primarily from net investment purchases and $23.4 million of capital expenditures. Financing cash flow was $211.9 million, primarily from the 2025 convertible notes issuance.
  • Liquidity: Cash, short-term investments and long-term investments totaled approximately $576.2 million at September 30, 2020. Working capital was $572.2 million. Management stated that available liquidity and expected product-sale cash flows should fund operating and capital needs, including debt service and potential note conversions, through at least October 29, 2021.
  • Debt: The company issued $402.5 million of 0.750% convertible senior notes due 2025 and repurchased $185.0 million principal amount of its 2.375% convertible notes due 2022. Remaining principal was $402.5 million on the 2025 notes and $160.0 million on the 2022 notes. Net convertible debt carrying value was $456.5 million.
  • Balance sheet: Total assets were $1.22 billion and stockholders’ equity was $584.7 million at September 30, 2020. Accounts receivable was $46.1 million and inventory was $68.5 million.

Material Changes Versus the Prior Comparable Period

  • Third-quarter EXPAREL revenue increased 12%, driven primarily by a 13% increase in sales volume and a 3% increase in gross selling price per unit. Nine-month EXPAREL revenue declined 1% because of COVID-19-related postponements and suspensions of elective surgeries.
  • COVID-19 reduced elective procedures and limited sales access, although manufacturing sites remained operational and no material supply-chain disruption was reported.
  • Research and development expense decreased 28% in the third quarter and 16% for the nine months, primarily because certain clinical trials were completed or reduced in scope.
  • Sales, general and administrative expense increased 5% in the third quarter but decreased 4% for the nine months. The quarterly increase included costs related to terminating the DePuy Synthes co-promotion agreement.
  • Acquisition-related charges and product-discontinuation costs declined substantially, from $7.6 million to $0.7 million in the third quarter and from $12.3 million to a $1.6 million net gain for the nine months.
  • Interest expense increased because of the 2025 notes, and the company recorded an $8.1 million loss on early extinguishment of the 2022 notes.

Guidance, Outlook, Risks and Unusual Items

  • Outlook: The filing does not provide clear quantitative revenue or earnings guidance. Management expects to continue expanding EXPAREL and iovera°, pursue additional indications, invest in clinical and regulatory programs, and expand manufacturing capacity.
  • Regulatory developments: The European Medicines Agency’s CHMP issued a positive opinion recommending marketing authorization for EXPAREL; final European Commission action was expected in November 2020. An EXPAREL pediatric supplemental application had an FDA action date of March 22, 2021.
  • Tax item: The $124.6 million tax benefit resulted from releasing a valuation allowance after management concluded that deferred tax assets were more likely than not to be realized. This was a significant non-cash and unusual contributor to reported net income.
  • Contingencies: Remaining potential MyoScience milestone payments were up to $58.0 million, and potential Skyepharma milestone payments were up to $36.0 million. The former securityholders’ representative filed a counterclaim seeking $40.0 million plus attorneys’ fees in milestone litigation; the company disputes the claim and cannot predict the outcome.
  • Commercial obligations: Termination of the DePuy Synthes co-promotion agreement could result in costs or payments of up to $12.0 million, recorded over the remaining contract service period.
  • Key risks: Renewed restrictions or delays in elective surgeries, reduced healthcare-provider access, manufacturing or supplier interruptions, reliance on EXPAREL and a limited number of wholesalers, regulatory uncertainty, competition, intellectual-property risks, debt conversion or repayment requirements, and litigation exposure.

Important Facts for Investors to Verify

  • Separate recurring operating performance from the $124.6 million deferred tax valuation-allowance release when evaluating earnings quality.
  • Track elective-surgery volumes, EXPAREL demand, iovera° adoption and the effect of any renewed COVID-19 restrictions.
  • Assess gross-margin recovery and the effect of manufacturing downtime, capacity-expansion spending and product costs.
  • Review the maturity, conversion terms and potential cash or equity settlement obligations of the 2022 and 2025 convertible notes.
  • Monitor the MyoScience milestone litigation and potential payments, including the $40.0 million counterclaim and up to $58.0 million of remaining contingent consideration.
  • Confirm the timing and amount of DePuy Synthes termination-related payments and the status of EXPAREL regulatory expansions.