Pacira Pharmaceuticals, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three and nine months ended September 30, 2018, filed November 1, 2018. Pacira is a specialty pharmaceutical company focused on DepoFoam extended-release drug delivery technology. Its principal product is EXPAREL, used primarily in postsurgical pain management. Revenue is highly concentrated in EXPAREL and sales are primarily processed through three large wholesalers.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $83.4 million | $67.3 million | $242.2 million | $207.6 million |
| EXPAREL sales | $82.2 million | $66.8 million | $236.7 million | $204.3 million |
| Gross margin | 77% | 73% | 74% | 68% |
| Income (loss) from operations | $4.0 million | $(3.6) million | $3.7 million | $(33.4) million |
| Net loss | $(0.6) million | $(7.6) million | $(8.8) million | $(47.2) million |
| Net loss per share | $(0.02) | $(0.19) | $(0.21) | $(1.19) |
| Operating cash flow | Not separately provided | Not separately provided | $27.7 million | $0.9 million |
- EXPAREL revenue increased 23% in Q3 and 16% for the nine-month period, primarily from higher volumes, the April 2018 label expansion to include interscalene brachial plexus nerve block, and the DePuy Synthes co-promotion arrangement.
- Gross-margin improvement reflected lower manufacturing cost per vial from higher facility utilization and, for the nine-month comparison, the absence of 2017 DepoCyt(e) inventory charges.
- Research and development expense was $14.9 million in Q3, up 27%, but $41.5 million for nine months, down 12%. Selling, general and administrative expense rose 9% in Q3 and 8% for nine months.
- Cash and cash equivalents were $230.9 million and short-term investments were $155.5 million at September 30, 2018, for total cash and short-term investments of $386.4 million. Working capital was $417.5 million.
- Cash increased by $176.8 million during the first nine months, primarily from operating cash flow and net investment maturities. Capital expenditures were $12.3 million, mainly for manufacturing expansion and facility upgrades.
- Total convertible senior-note principal was $345.3 million, consisting primarily of $345.0 million of 2.375% notes due 2022; the notes were carried at $286.9 million net of discount and issuance costs. Interest expense was $16.2 million for the first nine months.
Material changes versus the prior comparable period
- Revenue increased 24% in Q3 and 17% for the first nine months, while EXPAREL sales increased 23% and 16%, respectively.
- The company moved from an operating loss to operating income in both comparison periods and substantially reduced its net loss.
- Operating cash flow improved from $0.9 million to $27.7 million for the first nine months.
- R&D spending shifted from completed Phase 3 clinical work toward manufacturing scale-up, regulatory activities, Phase 4 programs and earlier-stage development.
- DepoCyt(e) production had been discontinued in June 2017. Related discontinuation charges were $1.3 million in Q3 2018 and $1.5 million for the first nine months, compared with $0.3 million and $5.3 million in the corresponding 2017 periods.
- The company adopted ASC 606 using the modified retrospective method, recording a $1.4 million cumulative adjustment to accumulated deficit. Management stated that the adoption did not materially affect the income statement.
Guidance, outlook, risks and unusual items
- Management believed existing cash, investments and cash from product sales would fund operating expenses, capital expenditures, debt service and principal payments on conversions through at least November 1, 2019. The company had no committed external financing sources and stated that additional financing might be required and might not be available on acceptable terms.
- Management expected continued spending on EXPAREL commercialization, expanded manufacturing capacity, clinical and pediatric programs, regulatory activities, legal matters and other product candidates.
- Future potential obligations include up to $36.0 million of additional Skyepharma milestone payments if specified sales or European commercial-sale milestones are achieved, plus a manufacturing commitment to Patheon of approximately $7.9 million annually through May 2028, subject to adjustments.
- The company received a $3.0 million upfront payment from Nuance Biotech for China development and commercialization rights to EXPAREL and could receive up to $60.0 million in future milestones plus tiered royalties.
- A U.S. Department of Justice inquiry concerning EXPAREL marketing and promotional practices remained outstanding. The filing provides no clear estimate of its potential financial impact or timing.
- Key risks include dependence on EXPAREL, reliance on a single manufacturing site and suppliers, wholesaler concentration, regulatory and clinical-development uncertainty, competition, intellectual-property protection, potential debt conversion or reclassification, and the costs of manufacturing expansion.
- The unexercised TELA Bio purchase option expired in September 2018, resulting in a $0.9 million loss. The company also recorded $1.3 million of Q3 DepoCyt(e) discontinuation charges.
Important facts for investors to verify
- Whether EXPAREL volume growth and the brachial plexus indication can sustain revenue growth after accounting for higher discounts, rebates and promotional spending.
- The timing, cost and execution of the Swindon, England manufacturing expansion and the Patheon supply commitment.
- The outcome and potential exposure from the DOJ investigation.
- The amount and timing of any remaining Skyepharma milestone or earn-out payments.
- Whether operating cash flow remains positive after increased commercialization, clinical, legal and capital expenditures.
- The liquidity and potential dilution or cash-settlement implications of the $345.0 million 2022 convertible notes and the remaining 2019 notes.
- The effect of the January 1, 2019 lease-accounting adoption, which management expected to materially increase recognized lease assets and liabilities without a significant income-statement or cash-flow effect.