Pacira Pharmaceuticals, Inc. — Fiscal 2017 Form 10-K Summary
Reporting period: Year ended December 31, 2017, with unaudited fourth-quarter data. Pacira is a specialty pharmaceutical company focused on opioid-sparing postsurgical pain management. Its principal product is EXPAREL, a long-acting bupivacaine formulation marketed in the U.S. The filing was dated February 28, 2018.
Financial Performance and Position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $286.6 million | $276.4 million | +4% |
| EXPAREL sales | $282.9 million | $265.8 million | +6% |
| Net product sales | $284.3 million | $270.1 million | +5% |
| Gross margin | 69% | 60% | +9 percentage points |
| Operating loss | $24.9 million | $32.0 million | Improved |
| Net loss | $42.6 million | $37.9 million | Worsened |
| Basic loss per share | $1.07 | $1.02 | Worsened |
| Cash flow from operations | $17.8 million | $33.5 million | Down $15.7 million |
- EXPAREL volume increased approximately 7%; revenue growth was partly offset by higher sales-related allowances, which totaled $15.6 million in 2017 versus $12.9 million in 2016.
- Research and development expense rose 25% to $57.3 million, primarily due to Phase 3 nerve-block trials and other clinical programs.
- Selling, general and administrative expense increased 6% to $161.5 million, reflecting expanded commercial, educational, regulatory and co-promotion activities.
- Cash, cash equivalents and short- and long-term investments totaled $371.4 million at year-end. Working capital was $334.9 million and total assets were $628.4 million.
- Net cash used in investing activities was $223.8 million, including $181.0 million of net investment purchases, $19.3 million of capital expenditures, $15.0 million invested in TELA Bio and $8.5 million of payments to Skyepharma.
Debt and Liquidity
- In March 2017, Pacira issued $345.0 million of 2.375% convertible senior notes due April 2022, generating $334.0 million of net proceeds.
- The proceeds were used in part to repurchase substantially all of the 3.25% convertible notes due 2019. Only approximately $0.3 million of principal remained outstanding at December 31, 2017.
- Total consolidated gross indebtedness was $345.3 million, all unsecured. Reported net carrying value of convertible debt was $276.5 million.
- Interest expense increased to $18.0 million from $7.1 million, primarily because of the 2022 notes and non-cash amortization of debt discounts.
- Management stated that existing liquidity, investments and expected product-sale cash flows should fund planned operations, capital expenditures and debt service through at least February 28, 2019; additional financing may nevertheless be required.
Material Changes Versus 2016
- EXPAREL remained the dominant product, representing approximately 99% of total revenue in 2017, compared with 96% in 2016.
- DepoCyt(e) production was discontinued in June 2017 because of persistent manufacturing issues. DepoCyt(e) and other product sales declined 66% to $1.4 million, and the company recorded a $5.4 million discontinuation charge.
- Royalty revenue declined 34% to $1.9 million following the DepoCyt(e) discontinuation. Collaborative licensing and milestone revenue fell 89% to $0.4 million because 2016 included $2.0 million of Aratana milestones.
- Gross margin recovered from 60% to 69%, principally because 2016 included a $20.7 million inventory and reserve charge related to an EXPAREL stability batch and approximately $5.9 million of related manufacturing shutdown costs.
- Operating loss narrowed, but net loss increased because interest expense and a $3.7 million early debt-extinguishment loss more than offset the operating improvement.
- Pacira entered into a five-year U.S. co-promotion agreement with DePuy Synthes for orthopedic and spine procedures and invested $15.0 million in TELA Bio, with potential additional investment obligations of up to $10.0 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued significant spending on EXPAREL commercialization, Phase 4 and pediatric studies, pipeline development, regulatory activities and manufacturing expansion.
- The FDA was reviewing an sNDA to expand EXPAREL use to nerve blocks. After year-end, an FDA advisory committee voted 6-4 against approval; the FDA action date was April 6, 2018. The advisory vote was not binding, but created meaningful regulatory risk.
- Pacira planned to initiate a Phase 1 trial of DepoMeloxicam in 2018 after opening an IND in December 2017.
- Pacira expected, subject to regulatory approval, to begin commercial EXPAREL production at Patheon’s U.K. facility in the second half of 2018. Delays or quality failures could constrain supply and increase costs.
- The company remains dependent on EXPAREL and a single San Diego manufacturing system during the transition to Patheon. Three wholesalers represented 91% of 2017 revenue, creating customer-concentration risk.
- The Department of Justice continues an inquiry, initiated by a 2015 subpoena, concerning EXPAREL marketing and promotional practices. The filing does not provide a clear estimate of potential liability or timing.
- Remaining contingent payments to Skyepharma could total up to $36.0 million, including a $32.0 million milestone if annual collected sales reach $500.0 million and a $4.0 million European commercial-sale milestone.
- EXPAREL patent protection varies by jurisdiction, with certain U.S. and European formulation and use patents expiring in 2018, although process and other patents extend later.
- The company reported an accumulated deficit of $389.1 million and stated that it may not return to profitability if EXPAREL revenue growth or market acceptance is insufficient.
- The filing reports effective disclosure controls and internal control over financial reporting, with unqualified auditor opinions.
Most Important Facts for Investors to Verify
- Whether EXPAREL sales growth and volume adoption can offset high commercial, clinical and manufacturing costs.
- The FDA’s final decision and any labeling or post-marketing requirements related to the nerve-block sNDA.
- Progress, cost and regulatory approval of the Patheon manufacturing suites and the company’s ability to diversify production capacity.
- The resolution, potential penalties and business impact of the Department of Justice inquiry.
- EXPAREL patent durability, potential generic or alternative long-acting bupivacaine competition and reimbursement trends.
- Liquidity relative to the $345.0 million 2022 note maturity, possible cash settlement of conversions, contingent Skyepharma payments and ongoing operating losses.
- The financial impact of DepoCyt(e) discontinuation, including remaining lease costs and any additional exit obligations.