Pacira BioSciences, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Pacira reported unaudited results for the three months ended March 31, 2019. The company develops, manufactures and commercializes non-opioid pain-management and regenerative-health products, with revenue primarily generated by EXPAREL. The company changed its name from Pacira Pharmaceuticals, Inc. to Pacira BioSciences, Inc. after completing the MyoScience acquisition on April 9, 2019.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $91.3 million | $74.6 million | 22% increase |
| EXPAREL sales | $90.6 million | $74.0 million | 22% increase |
| Gross margin | 70% | 69% | 1 percentage-point increase |
| Operating income (loss) | $1.1 million | $(6.9) million | Improved |
| Net loss | $(2.8) million | $(10.7) million | Loss narrowed |
| Net loss per share | $(0.07) | $(0.26) | Improved |
| Operating cash flow | $3.5 million | $(2.7) million | Improved |
Cost of goods sold increased 19% to $27.3 million, while research and development expense was essentially flat at $14.4 million. Selling, general and administrative expense increased 10% to $48.5 million, driven primarily by higher sales and marketing investment. Gross margin was approximately 70%, and net margin was approximately negative 3%.
At March 31, 2019, cash and cash equivalents were $215.0 million and short-term investments were $197.4 million, for combined cash and short-term investments of $412.4 million. Working capital was $449.7 million. The company reported total assets of $719.2 million and stockholders’ equity of $327.5 million.
The company had $345.0 million principal amount of 2.375% convertible senior notes due 2022, recorded net at $294.4 million. The notes’ estimated fair value was $339.8 million. The company repaid the remaining $0.3 million principal amount of its 2019 convertible notes and a $0.2 million conversion premium in February 2019.
Material changes versus the prior comparable period
- EXPAREL revenue increased 22%, primarily from a 30% increase in unit volume, partly offset by product-size mix.
- Revenue growth reflected broader adoption of EXPAREL, the April 2018 brachial plexus nerve-block label expansion, co-promotion with DePuy Synthes and increased use in enhanced-recovery protocols.
- Gross margin improved as capacity-expansion costs declined after commercial production began at the Swindon, England manufacturing suite.
- Sales and marketing expense increased 26% to $31.6 million as the company expanded its field organization, co-promotion activity and reimbursement-code marketing.
- Research and development expense remained flat: lower clinical-development costs were offset by manufacturing-scale-up, pediatric and Phase 4 program spending.
- Operating cash flow improved to $3.5 million from an operating cash outflow of $2.7 million in Q1 2018.
- Investing cash flow was $78.5 million, primarily reflecting net short-term investment maturities, compared with a $10.3 million use of cash in Q1 2018.
- Cash and cash equivalents increased by $82.5 million during the quarter, ending at $215.0 million.
Guidance, outlook, commentary, risks and unusual items
Management stated that existing cash, short-term investments and cash generated from product sales were expected to fund operating expenses, capital expenditures, potential 2022 note principal payments and debt service through at least May 2, 2020. The filing provides no specific revenue or earnings guidance.
Management expects continued spending on EXPAREL commercialization, additional manufacturing capacity, clinical trials, pediatric studies, regulatory activities, product development, sales and marketing, and potential acquisitions. The company was pursuing regulatory submissions for EXPAREL in Europe and Canada and evaluating its regulatory path in China.
On April 9, 2019, Pacira acquired MyoScience for an initial cash payment of $120.0 million funded from cash on hand. MyoScience markets the Iovera cryoanalgesia system. The transaction also provides for up to $100.0 million of contingent milestone payments, including up to $25.0 million potentially payable in common stock. Purchase accounting was not complete when the filing was issued.
Key risks include reliance on EXPAREL and a limited number of products, concentration among three major wholesalers, manufacturing and supply-chain dependence, regulatory and clinical-development risk, competition, intellectual-property protection, cybersecurity, and integration of MyoScience. Three wholesalers processed 91% of net product sales and represented 39%, 29% and 26% of accounts receivable at March 31, 2019.
The company continued cooperating with a U.S. Department of Justice inquiry into EXPAREL marketing and promotional practices and stated that the outcome and potential impact could not be predicted. Remaining potential milestone obligations to Skyepharma totaled $36.0 million. DepoCyt(e) discontinuation costs were less than $0.1 million in the quarter, with related cash payments expected through the end of the lease term in August 2020.
The company adopted the new lease standard on January 1, 2019, recognizing approximately $27.6 million of right-of-use assets and $36.5 million of lease liabilities at adoption, along with a $0.2 million cumulative-effect reduction to retained earnings. At March 31, 2019, lease liabilities totaled $34.9 million.
Investor verification checklist
- Verify the sustainability of EXPAREL volume growth and the effect of product mix, discounting and sales-related allowances on net revenue.
- Assess whether increased selling, marketing, manufacturing and clinical spending converts into durable operating leverage and positive net income.
- Review the final purchase-price allocation and subsequent financial contribution of MyoScience and Iovera.
- Monitor the potential $100.0 million MyoScience milestone payments and the remaining $36.0 million Skyepharma obligations.
- Evaluate liquidity after the $120.0 million MyoScience cash payment and in light of the $345.0 million convertible notes due in 2022.
- Follow developments in the DOJ inquiry and any related legal, regulatory or compliance costs.
- Monitor customer and accounts-receivable concentration among the three principal wholesalers.
- Confirm progress, costs and regulatory outcomes for pediatric, Phase 4 and international EXPAREL programs.