Pacira Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012. The filing was dated November 1, 2012. The company, now known as Pacira Biosciences, focuses on DepoFoam-based pharmaceutical products, including EXPAREL and DepoCyt(e). EXPAREL was FDA-approved in October 2011 and commercially launched in April 2012.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $8.5 million, up 115% | $28.6 million, up 150% |
| Net product sales | $4.6 million, up 171% | $10.0 million, up 105% |
| Collaborative licensing and development revenue | $3.5 million, up 158% | $16.6 million, up 331% |
| Royalty revenue | $0.5 million, down 51% | $2.1 million, down 24% |
| Net loss | $15.7 million, versus $9.5 million | $35.9 million, versus $28.0 million |
| Basic and diluted loss per share | $0.49 | $1.21 |
| Net cash used in operating activities | Not provided for the quarter | $49.0 million, versus $23.4 million |
- Gross loss was $0.8 million in the third quarter, implying an approximate gross margin of negative 9%. For the first nine months, gross profit was $6.2 million and gross margin was approximately 22%.
- Operating loss was $15.7 million in the third quarter and $33.5 million for the first nine months, representing operating margins of approximately negative 185% and negative 117%, respectively.
- Cash and cash equivalents were $8.7 million at September 30, 2012, compared with $46.2 million at December 31, 2011. Restricted cash was $1.8 million and short-term investments were $58.2 million, for combined cash, restricted cash and short-term investments of $68.7 million.
- Working capital was $65.3 million and accumulated deficit was $216.2 million at September 30, 2012.
- Inventories increased to $11.9 million from $1.2 million, primarily reflecting preparation for EXPAREL commercialization. Fixed assets, net, increased to $35.3 million from $25.1 million.
- Net cash used in investing activities was $51.9 million, including $13.5 million of fixed-asset purchases, $28.2 million of net short-term investment purchases and a $10.2 million contingent consideration payment.
- Net cash provided by financing activities was $63.4 million, including $62.9 million of net proceeds from an April 2012 equity offering and $27.5 million of new borrowing, partly offset by debt repayment.
Material changes versus the prior comparable periods
- EXPAREL generated $4.6 million of third-quarter sales and $6.8 million of nine-month sales; it had no comparable sales in 2011.
- DepoCyt(e) product sales fell to zero in the third quarter and declined 37% for the first nine months, reflecting European restrictions and a selective recall following manufacturing deficiencies identified by the MHRA. Royalty revenue also declined.
- Collaborative licensing and development revenue increased substantially because the company recognized deferred milestone revenue after termination of agreements with EKR Therapeutics and Novo Nordisk. The filing states that $11.6 million of EKR-related milestone revenue and $4.1 million of Novo-related revenue were recognized during the first nine months.
- Cost of revenues increased 177% in the third quarter and 122% for the first nine months. Drivers included EXPAREL production costs, approximately $1.8 million of EXPAREL facility shutdown costs, and $0.6 million in third-quarter charges related to DepoCyt(e) remediation and replacement inventory.
- Research and development expense declined 19% in the third quarter and 47% for the first nine months, partly because EXPAREL production costs shifted from research and development to cost of revenues after approval.
- Selling, general and administrative expense increased 129% in the third quarter and 154% for the first nine months, primarily due to the EXPAREL sales force, marketing programs, expanded personnel and infrastructure.
- The company replaced its Hercules credit facility with a $27.5 million Oxford Finance loan at a fixed 9.75% interest rate. The loan is interest-only through November 2013, followed by 30 monthly principal and interest payments, plus a 6% end-of-term payment. A $1.1 million loss on debt extinguishment was recorded.
- Common shares outstanding increased materially following the April 2012 offering, with 32.5 million shares outstanding as of October 25, 2012, versus approximately 25.3 million issued and outstanding at December 31, 2011.
Outlook, risks and unusual items
- Management expects continued substantial operating losses as EXPAREL is commercialized and additional products and indications are developed. No quantitative revenue or earnings guidance was provided.
- Management stated that existing cash, short-term investments, restricted cash and product-sale revenue were expected to fund planned operating expenses, capital expenditures and debt service through September 30, 2013. The company also cautioned that cash could be consumed faster than anticipated and that additional financing may be required.
- DepoCyt(e) manufacturing was suspended pending remediation and MHRA reinspection. The company did not expect new European supply until the second quarter of 2013 and recorded $1.3 million of remediation, testing, replacement-product and inventory-reserve charges for the first nine months.
- The company is expanding its EXPAREL manufacturing capacity under a construction management agreement with an approximate contract sum of $7.7 million, subject to scope changes.
- EXPAREL nerve-block development continued, including a Phase 2/3 total-knee-arthroplasty trial and startup activities for a Phase 3 thoracotomy trial.
- Major risks include dependence on EXPAREL market acceptance, manufacturing capacity and compliance, regulatory scrutiny, possible additional DepoCyt(e) remediation costs or delays, customer concentration, future capital needs, debt covenants, clinical and regulatory uncertainties, healthcare-law changes and stock-price volatility.
- The company reported no material litigation, stated that it was in compliance with the Oxford loan covenants, and reported effective disclosure controls as of September 30, 2012.
- On October 5, 2012, Oxford Finance cashlessly exercised warrants into 67,279 common shares.
Facts investors should verify
- Whether EXPAREL sales growth and gross margins improved sufficiently after the initial launch period to offset elevated manufacturing, sales and marketing costs.
- The timing and outcome of the MHRA reinspection, the restart of DepoCyt(e) production and any additional remediation or recall charges.
- The sustainability of reported collaborative revenue, given that significant 2012 amounts arose from recognition of deferred milestones following terminated agreements.
- Cash burn, inventory growth, manufacturing-capacity spending and whether liquidity remained sufficient beyond management’s September 30, 2013 estimate.
- Compliance with the Oxford loan’s covenants and the company’s ability to meet principal repayments beginning in 2013.
- Progress, cost and regulatory outcomes for EXPAREL nerve-block trials and other required post-approval studies.