Pacira BioSciences, Inc. - Quarter Report: 2013 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

For the Quarterly Period Ended March 31, 2013

 

OR

 

 

For the transition period from          to          

 

Commission File Number: 001-35060

 

 

PACIRA PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware		51-0619477
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer  Identification No.)

 

5 Sylvan Way, Suite 100

Parsippany, New Jersey 07054

(Address of Principal Executive Offices) (Zip Code)

 

(973) 254-3560

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

 

As of April 29, 2013, 33,047,004 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

 

 

Table of Contents

 

PACIRA PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Loss	5
	Consolidated Statement of Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Condensed Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
Signatures

 

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

PACIRA PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

(In thousands, except share and per share amounts)

 

		March 31,			December 31,
		2013			2012
					(Note 2)
ASSETS
Current assets:
Cash and cash equivalents		$	26,272		$	10,126
Restricted cash		—			1,523
Short-term investments		83,974			30,924
Accounts receivable, net		5,243			4,352
Inventories		10,760			12,077
Prepaid expenses and other current assets		2,740			1,920
Total current assets		128,989			60,922
Fixed assets, net		41,130			39,116
Goodwill		8,582			8,297
Intangibles, net		2,695			3,208
Other assets		3,845			511
Total assets		$	185,241		$	112,054
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,001		$	2,569
Accrued expenses		9,872			9,792
Current portion of royalty interest obligation		853			823
Current portion of deferred revenue		972			972
Total current liabilities		12,698			14,156
Long-term debt, net of discount		95,857			25,191
Royalty interest obligation		723			857
Deferred revenue		3,477			3,720
Other liabilities		2,694			2,275
Total liabilities		115,449			46,199
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.001; 5,000,000 shares authorized, none issued and outstanding at March 31, 2013 and December 31, 2012		—			—
Common stock, par value $0.001 and 250,000,000 shares authorized; 32,960,170 issued and 32,959,105 shares outstanding at March 31, 2013; 32,624,049 shares issued and 32,622,984 shares outstanding at December 31, 2012		33			33
Additional paid-in capital		325,375			298,317
Accumulated deficit		(255,658		)	(232,520		)
Accumulated other comprehensive income		44			27
Treasury stock at cost, 1,065 shares		(2		)	(2		)
Total stockholders’ equity		69,792			65,855
Total liabilities and stockholders’ equity		$	185,241		$	112,054

 

See accompanying condensed notes to consolidated financial statements.

 

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PACIRA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

(In thousands, except share and per share amounts)

 

		Three Months Ended
		March 31,
		2013			2012
Revenues:
Net product sales		$	10,835		$	446
Collaborative licensing and development revenue		243			6,490
Royalty revenue		509			868
Total revenues		11,587			7,804
Operating expenses:
Cost of revenues		11,391			6,495
Research and development		5,905			1,294
Selling, general and administrative		12,936			11,152
Total operating expenses		30,232			18,941
Loss from operations		(18,645		)	(11,137		)
Other (expense) income:
Interest income		73			63
Interest expense		(1,519		)	(514		)
Loss on early extinguishment of debt		(3,398		)	—
Royalty interest obligation		(86		)	(282		)
Other, net		(5		)	(24		)
Total other expense, net		(4,935		)	(757		)
Loss before income taxes		(23,580		)	(11,894		)
Income tax benefit		442			—
Net loss		$	(23,138	)	$	(11,894	)
Net loss per share:
Basic and diluted net loss per common share		$	(0.71	)	$	(0.47	)
Weighted average common shares outstanding:
Basic and diluted		32,709,298			25,367,306

 

See accompanying condensed notes to consolidated financial statements.

 

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PACIRA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(Unaudited)

(In thousands)

 

		Three Months Ended
		March 31,
		2013			2012
Net loss		$	(23,138	)	$	(11,894	)
Other comprehensive income:
Net unrealized gain on investments		17			2
Total other comprehensive income		17			2
Comprehensive loss		$	(23,121	)	$	(11,892	)

 

See accompanying condensed notes to consolidated financial statements.

 

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PACIRA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2013

(Unaudited)

(In thousands)

 

		Common Stock					Additional Paid-In			Accumulated			Treasury			Accumulated Other Comprehensive
		Shares		Amount			Capital			Deficit			Stock			Income			Total
Balances at December 31, 2012		32,623		$	33		$	298,317		$	(232,520	)	$	(2	)	$	27		$	65,855
Exercise of stock options		193		—			877			—			—			—			877
Exercise of warrants		143		—			—			—			—			—			—
Stock-based compensation		—		—			2,225			—			—			—			2,225
Unrealized gain on short-term investments		—		—			—			—			—			17			17
Equity component of convertible senior notes, net		—		—			23,956			—			—			—			23,956
Net loss		—		—			—			(23,138		)	—			—			(23,138		)
Balances at March 31, 2013		32,959		$	33		$	325,375		$	(255,658	)	$	(2	)	$	44		$	69,792

 

See accompanying condensed notes to consolidated financial statements.

 

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PACIRA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

(In thousands)

 

		Three Months Ended
		March 31,
		2013			2012
Operating activities:
Net loss		$	(23,138	)	$	(11,894	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,431			1,380
Amortization of unfavorable lease obligation and debt issuance costs		94			(56		)
Amortization of debt discount		855			103
Loss on early extinguishment of debt		3,398			—
Stock-based compensation		2,225			712
Changes in operating assets and liabilities:
Restricted cash		1,523			1,299
Accounts receivable, net		(891		)	1,253
Inventories		1,317			(3,833		)
Prepaid expenses and other assets		(868		)	366
Accounts payable and accrued expenses		162			(613		)
Royalty interest obligation		(104		)	(93		)
Other liabilities		450			(3		)
Deferred revenue		(243		)	(6,166		)
Net cash used in operating activities		(13,789		)	(17,545		)
Investing activities:
Purchase of fixed assets		(2,932		)	(2,901		)
Purchases of short-term investments		(71,785		)	—
Sale of short-term investments		18,750			371
Payment of contingent consideration		(284		)	—
Net cash used in investing activities		(56,251		)	(2,530		)
Financing activities:
Proceeds from exercise of stock options and warrants		877			153
Proceeds from convertible senior notes		120,000			—
Repayment of debt		(27,500		)	(685		)
Payment of debt issuance and financing costs		(7,191		)	(348		)
Net cash provided by (used in) financing activities		86,186			(880		)
Net increase (decrease) in cash and cash equivalents		16,146			(20,955		)
Cash and cash equivalents, beginning of period		10,126			46,168
Cash and cash equivalents, end of period		$	26,272		$	25,213
Supplemental cash flow information
Cash paid for interest, including royalty interest obligation		$	584		$	1,168
Non cash investing and financing activities:
Value of equity premium on convertible senior notes		$	24,936		$	—

 

See accompanying condensed notes to consolidated financial statements.

 

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PACIRA PHARMACEUTICALS, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

Note 1—DESCRIPTION OF BUSINESS

 

Pacira Pharmaceuticals, Inc. and its subsidiaries (collectively, the “Company” or “Pacira”) is an emerging specialty pharmaceutical company focused on the development, commercialization and manufacture of proprietary pharmaceutical products, based on its proprietary DepoFoam extended release drug delivery technology, for use in hospitals and ambulatory surgery centers. The Company’s lead product EXPAREL®, which consists of bupivacaine encapsulated in DepoFoam, was approved by the United States Food and Drug Administration, or FDA, on October 28, 2011. The Company commercially launched EXPAREL in April 2012. DepoFoam is also the basis for the Company’s other FDA-approved commercial product, DepoCyt(e), which the Company manufactures for its commercial partners.

 

Pacira Pharmaceuticals, Inc. is the holding company for the California operating subsidiary of the same name, also referred to as PPI-California, which was acquired from Skyepharma Holding, Inc., or Skyepharma, in March 2007, referred to herein as the Acquisition.

 

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission, or SEC, for interim reporting. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in complete annual financial statements have been condensed or omitted. Therefore, these interim financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

The consolidated financial statements at March 31, 2013, and for the three months ended March 31, 2013 and 2012 are unaudited, but include all adjustments (consisting of only normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial information set forth herein in accordance with GAAP. The balance sheet as of December 31, 2012 has been derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

 

The results of operations for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. The Company has incurred losses and negative operating cash flow since inception and future losses are anticipated.

 

Liquidity

 

Management believes that the Company’s existing cash and cash equivalents, short-term investments and revenue from product sales will be sufficient to enable the Company to meet its planned operating expenses, capital expenditure requirements and service its indebtedness through at least the next 12 months. However, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control. The Company expects to continue to incur substantial additional operating losses as it commercializes EXPAREL and develops and seeks regulatory approval for its other product candidates.

 

Concentration of Major Customers

 

The Company sells EXPAREL to wholesalers based on orders of the product from hospitals and other end user customers such as ambulatory surgery centers and doctors. The Company sells DepoCyt(e) to its commercial partners. The table below includes the percentage of revenue comprised by the three largest customers in each year presented.

 

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		Three Months Ended
		March 31,
		2013		2012
Largest customer		34%		75%
Second largest customer		27%		10%
Third largest customer		16%		6%
		77%		91%

 

No other individual customer accounted for more than 10% of the Company’s revenues for these periods.

 

Income Tax Benefit

 

In February 2013, the Company received $0.4 million from the sale of unused net operating losses through the State of New Jersey’s Economic Development Authority Technology Business Tax Certificate Transfer Program. As a result, the Company recorded an income tax benefit and released the valuation allowance for the related net deferred tax assets. The Company continues to maintain a full valuation allowance on its remaining net deferred tax assets because there is significant doubt regarding the Company’s ability to utilize such net deferred tax assets.

 

Note 3—FINANCIAL INSTRUMENTS

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction. To increase consistency and comparability in fair value measurements, the Financial Accounting Standards Board, or FASB, established a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are:

 

·    Level 1—Values are unadjusted quoted prices for identical assets and liabilities in active markets.

 

·    Level 2—Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active or other inputs that are observable or can be corroborated by market data for the term of the instrument.

 

·    Level 3—Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement.

 

The carrying value of financial instruments including cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term maturities of these instruments and debts. The fair value of the Company’s convertible senior notes, further described in Note 7 Debt and Financing Obligations, is calculated utilizing market quotations from an over-the-counter trading market for such notes (Level 2). The carrying amount and fair value of the Company’s long-term debt is as follows (in thousands):

 

					Fair Value Measurements Using
Financial Liabilities		Carrying Value			Level 1			Level 2			Level 3
March 31, 2013
Long-term debt		$	95,857		$	—		$	164,250		$	—

 

Short-term investments consist of investment grade commercial paper, asset-backed securities collateralized by credit card receivables and corporate bonds with initial maturities of greater than three months at the date of purchase but less than one year. The net unrealized gains (losses) from the Company’s short-term investments are captured in other comprehensive income (loss). All of the Company’s short-term investments are classified as available for sale investments and determined to be Level 2 instruments. The fair value of the commercial paper is measured based on a standard industry model that uses the 3-month Treasury bill rate as an observable input. The fair value of the corporate bonds and asset-backed securities is principally measured or corroborated by trade data for identical issues or that of comparable securities in which related trading activity is not sufficiently frequent to be considered a Level 1 input. At March 31, 2013, the Company’s short-term investments were rated A or better by Standard & Poor’s and had maturities ranging from 154 to 363 days from the date of purchase.

 

The following summarizes the Company’s short-term investments at March 31, 2013, and December 31, 2012 (in thousands):

 

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					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair Value
March 31, 2013		Cost			Gains			Losses			(Level 2)
Debt securities:
Commercial paper		$	48,167		$	64		$	—		$	48,231
Corporate bonds		31,744			1			(22		)	31,723
Asset-backed securities		4,019			1			—			4,020
Total		$	83,930		$	66		$	(22	)	$	83,974

 

					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair Value
December 31, 2012		Cost			Gains			Losses			(Level 2)
Debt securities:
Commercial paper		$	15,974		$	23		$	—		$	15,997
Corporate bonds		8,874			1			(1		)	8,874
Asset-backed securities		6,049			4			—			6,053
Total		$	30,897		$	28		$	(1	)	$	30,924

 

Credit Risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed federally insured limits.

 

As of March 31, 2013, three customers accounted for 35%, 24%, and 17% of the Company’s accounts receivable. As of December 31, 2012, four customers accounted for 31%, 27%, 16% and 15% of the Company’s accounts receivable. No other individual customer accounted for more than 10% of the Company’s accounts receivable for these periods.

 

Note 4—INVENTORIES

 

The components of inventories are as follows (in thousands):

 

		March 31,			December 31,
		2013			2012
Raw materials		$	2,737		$	4,081
Work-in-process		4,237			5,979
Finished goods		3,786			2,017
Total		$	10,760		$	12,077

 

Note 5—FIXED ASSETS

 

Fixed assets, summarized by major category, consist of the following (in thousands):

 

		March 31,			December 31,
		2013			2012
Machinery and laboratory equipment		$	11,858		$	12,414
Computer equipment and software		1,508			1,579
Office furniture and equipment		392			437
Leasehold improvements		6,203			6,217
Construction in progress		32,653			30,072
Total		52,614			50,719
Less accumulated depreciation		(11,484		)	(11,603		)
Fixed assets, net		$	41,130		$	39,116

 

For each of the three months ended March 31, 2013 and 2012, depreciation expense was $0.9 million. For each of the three months ended March 31, 2013 and 2012, the Company capitalized interest of $0.4 million on the construction of its manufacturing sites.

 

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Note 6—GOODWILL AND INTANGIBLE ASSETS

 

The Company’s goodwill arose from the triggering in April 2012 of a contingent milestone payment to Skyepharma in connection with the Acquisition. The Acquisition was accounted for under Statement of Financial Accounting Standards 141, Accounting for Business Combinations, which was the effective GAAP at the Acquisition date. In connection with the Acquisition, the Company agreed to certain earn-out payments based on a percentage of net sales of EXPAREL collected and certain other yet-to-be-developed products, as well as milestone payments for EXPAREL as follows:

 

(i)	$10.0 million upon first commercial sale in the United States;
(ii)	$4.0 million upon first commercial sale in a major EU country (United Kingdom, France, Germany, Italy and Spain);
(iii)	$8.0 million when annual net sales collected reach $100.0 million;
(iv)	$8.0 million when annual net sales collected reach $250.0 million; and
(v)	$32.0 million when annual net sales collected reach $500.0 million.

 

 

The first contingency was resolved in April 2012, resulting in a $10.0 million payment to Skyepharma. The Company recorded this payment net of the $2.0 million contingent consideration liability recognized at the time of the Acquisition resulting in $8.0 million recorded as goodwill. Cumulatively through March 31, 2013, the Company recorded an additional $0.6 million as goodwill for the percentage payments on net sales of EXPAREL collected. Any remaining earn-out payments will also be treated as additional cost of the Acquisition and, therefore, recorded as goodwill if and when each contingency is resolved.

 

Intangible assets are summarized as follows (in thousands):

 

		March 31,			December 31,
		2013			2012			Estimated Useful Life
Core Technology:
Gross amount		$	2,900		$	2,900		9 years
Accumulated amortization		(1,933		)	(1,853		)
Net		967			1,047
Developed Technology:
Gross amount		11,700			11,700			7 years
Accumulated amortization		(10,029		)	(9,610		)
Net		1,671			2,090
Trademarks and trade names:
Gross amount		400			400			7 years
Accumulated amortization		(343		)	(329		)
Net		57			71
Intangible assets, net		$	2,695		$	3,208

 

Amortization expense for intangibles was $0.5 million for each of the three months ended March 31, 2013 and 2012. The approximate amortization expense for intangibles, all of which are subject to amortization on a straight-line basis, is as follows (in thousands):

 

		Core Technology			Developed Technology			Trademarks and Tradenames			Total
2013 (remaining nine months)		$	242		$	1,252		$	43		$	1,537
2014		322			419			14			755
2015		322			—			—			322
2016		81			—			—			81
Total		$	967		$	1,671		$	57		$	2,695

 

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Note 7—DEBT AND FINANCING OBLIGATIONS

 

The composition of the Company’s debt and financing obligations is as follows (in thousands):

 

		March 31,			December 31,
		2013			2012
Debt:
Long-term debt		$	120,000		$	27,500
Discount on debt		(24,143		)	(2,309		)
Total debt, net of debt discount		95,857			25,191
Financing obligations:
Current portion of royalty interest obligation		853			823
Long-term portion of royalty interest obligation		723			857
Total royalty interest obligation		1,576			1,680
Total debt and financing obligations		$	97,433		$	26,871

 

On January 23, 2013, the Company completed a private placement of $120.0 million in aggregate principal amount of 3.25% convertible senior notes due 2019, or Notes, and entered into an indenture, or Indenture, with Wells Fargo Bank, National Association, a national banking association, as trustee governing the Notes.  The aggregate principal amount of Notes sold reflects the exercise in full by the initial purchasers of their option to purchase up to an additional $10.0 million in aggregate principal amount of the Notes. The Notes accrue interest at a rate of 3.25% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2013.  The Notes mature on February 1, 2019.

 

The net proceeds from the offering, including net proceeds from the exercise in full by the initial purchasers of their option to purchase an additional $10.0 million in aggregate principal amount of the Notes, were $115.3 million, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses payable by the Company. The net proceeds from the Notes were used by the Company to repay the entire balance of the Oxford Credit Facility with Oxford Finance LLC. In connection with such termination, the Company prepaid the remaining principal amount of $27.5 million, $1.7 million end of term fee, $0.8 million early prepayment penalty and $0.2 million of accrued interest. The Company recorded a loss on extinguishment of debt of $3.4 million comprised of the early prepayment penalty and the remaining unamortized debt issuance costs and the end of term fee.

 

Holders may convert their Notes prior to the close of business on the business day immediately preceding August 1, 2018, only under the following circumstances:

 

(i)    during any calendar quarter commencing after the calendar quarter ending on June 30, 2013 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day;

 

(ii)   during the five business-day period after any five consecutive trading-day period (the ‘‘measurement period’’) in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

 

(iii)  upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company’s assets; or

 

(iv)  if the Company calls the Notes for redemption, until the close of business on the business day immediately preceding the redemption date.

 

On or after August 1, 2018 until the close of business on the second scheduled trading day immediately preceding February 1, 2019, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, holders will receive cash up to the principal amount of the Notes and, with respect to any excess conversion value, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s option. The conversion rate for the Notes is initially 40.2945 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $24.82 per share of the Company’s common stock. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. The initial conversion price of the Notes represented a premium of approximately 32.50% to the closing sale price of $18.73 per share of the Company’s common stock on The NASDAQ Global Select Market on January 16, 2013, the date that the Company priced the private offering of the Notes.

 

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Prior to February 1, 2017, the Company may not redeem the Notes. On or after February 1, 2017, the Company may redeem for cash all or part of the Notes if the last reported sale price (as defined in the Indenture) of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption. The redemption price will equal the sum of (i) 100% of the principal amount of the Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date, plus (iii) a “make-whole premium” payment in cash equal to the sum of the present values of the remaining scheduled payments of interest that would have been made on the Notes to be redeemed had such Notes remained outstanding from the redemption date to the maturity date (excluding interest accrued to, but excluding, the redemption date that is otherwise paid pursuant to the preceding clause (ii)). The present values of the remaining interest payments will be computed using a discount rate equal to 2.0%.  The Company must make the make-whole premium payments on all Notes called for redemption prior to the maturity date, including Notes converted after the date the Company provides the notice of redemption. No sinking fund is provided for the Notes, which means that the Company is not required to redeem or retire the Notes periodically.

 

If the Company undergoes a fundamental change, as defined in the Indenture, subject to certain conditions, holders of the Notes may require the Company to repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

 

The Notes are senior unsecured obligations of the Company and will rank senior in right of payment to the Company’s future indebtedness, if any, that is expressly subordinated in right of payment to the Notes and equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated. The Notes are effectively junior in right of payment to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness and are structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by the Company’s subsidiaries.

 

The Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the incurrence of other indebtedness or the issuance or repurchase of securities by the Company. The Indenture contains customary events of default with respect to the Notes, including that upon certain events of default, 100% of the principal of and accrued and unpaid interest on the Notes will automatically become due and payable.

 

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on the consolidated balance sheet at the issuance date and the value of the equity component would be treated as debt discount for purposes of accounting for the debt component of the Notes. The carrying value of the liability component of $95.1 million was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying value of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes as a whole. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.

 

The Company allocated the total transaction costs of $4.7 million related to the issuance of the Notes to the liability and equity components of the Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the six-year term of the Notes, and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity.

 

The following table sets forth total interest expense recognized related to the Notes (in thousands):

 

		March 31,			March 31,
		2013			2012
Contractual interest expense		$	748		$	—
Amortization of debt issuance costs		119			—
Amortization of debt discount		793			—
		$	1,660		$	—

 

The effective interest rate on the Notes was 7.2% for the three months ended March 31, 2013.

 

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Note 8—STOCKHOLDERS’ EQUITY

 

Stock-Based Compensation

 

The Company recognized stock-based compensation expense in its consolidated statements of operations as follows (in thousands):

 

		Three Months Ended
		March 31,
		2013			2012
Cost of revenues		$	235		$	89
Research and development		956			177
Selling, general and administrative		1,034			446
Total		$	2,225		$	712

 

Stock Incentive Plans

 

The following table contains information about the Company’s stock plans at March 31, 2013:

 

Plan		Awards Reserved for Issuance		Awards Issued		Awards Available for Grant
2011 Stock Incentive Plan		3,158,778		2,777,920		380,858
2007 Stock Incentive Plan		2,045,759		2,045,759		—
		5,204,537		4,823,679		380,858

 

The following table summarizes the Company’s stock option activity and related information for the period from December 31, 2012 to March 31, 2013:

 

		Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2012		4,003,166		$	7.86
Granted		466,200		23.47
Exercised		(192,883	)	4.55
Forfeited		(101,006	)	9.66
Expired		(747	)	2.80
Outstanding at March 31, 2013		4,174,730		9.72

 

Note 9—LOSS PER SHARE

 

Basic net loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of shares of common stock and dilutive common stock outstanding during the period. Potential common shares include the shares of common stock issuable upon the exercise of outstanding stock options and warrants (using the treasury stock method). Potential common shares in the diluted net loss per share computation are excluded to the extent that they would be anti-dilutive. No potentially dilutive securities are included in the computation of any diluted per share amounts as the Company reported a net loss for all periods presented.

 

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The following table sets forth the computation of basic and diluted loss per share for the three months ended March 31, 2013 and 2012 (in thousands, except per share amounts):

 

		Three Months Ended
		March 31,
		2013			2012
Numerator for basic and diluted loss per share
Net loss		$	(23,138	)	$	(11,894	)
Denominator
Weighted average shares of common stock outstanding		32,709			25,367
Effect of dilutive securities		—			—
Weighted average shares of common stock -diluted		32,709			25,367
Net loss per share
Basic net loss per share of common stock		$	(0.71	)	$	(0.47	)
Diluted net loss per share of common stock		$	(0.71	)	$	(0.47	)

 

In January 2013, the Company issued $120.0 million aggregate principal amount of 3.25% convertible senior notes due February 1, 2019. The Company must settle the principal in cash upon conversion and it may settle any conversion premium in either cash or stock at the Company’s discretion. For purposes of calculating the diluted impact, it is presumed that the conversion premium will be settled in common stock and the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. The stock options, warrants and conversion premium on the Notes are excluded from the calculation of diluted loss per share because the net loss for the three months ended March 31, 2013 and 2012 causes such securities to be anti-dilutive. The potential dilutive effect of these securities is shown in the chart below (in thousands):

 

		Three Months Ended
		March 31,
		2013		2012
Stock options		1,829		1,163
Warrants		133		116
Conversion premium on convertible senior notes		—		—
Total		1,962		1,279

 

Note 10—RELATED PARTY TRANSACTIONS

 

Since June 2011, Gary Pace, a member of the Company’s board of directors, has provided consulting services for manufacturing-related activities. Under the agreement, Dr. Pace is eligible to receive a bonus up to $0.2 million, contingent upon the FDA approval of the Company’s Suite C manufacturing facility for EXPAREL. The expenses incurred under the consulting arrangement in each of the three months ended March 31, 2013 and 2012 were less than $0.1 million. At March 31, 2013 and December 31, 2012, the amount payable to Dr. Pace was less than $0.1 million.

 

The Company’s Chief Medical Officer, Gary Patou, is also a partner of MPM Asset Management, or MPM, a stockholder in the Company. The Company contracted with MPM for Dr. Patou’s services. The Company incurred expenses relating to Dr. Patou’s services of approximately $0.1 million in each of the three months ended March 31, 2013 and 2012. At March 31, 2013 and December 31, 2012, the amount payable to MPM was approximately $0.1 million.

 

Note 11—COMMITMENTS AND CONTINGENCIES

 

Leases

 

The Company leases research and development and manufacturing facilities in San Diego, California, in two buildings referred to as the Science Center campus. On March 13, 2013, the Company entered into amendments with HCP TPSP, LLC and LASDK Limited Partnership, or Landlord, to extend the lease term on the Science Center campus. Pursuant to the amended lease agreements, the leases of both buildings were extended through August 31, 2020 with an option to extend the lease term for an additional five years.

 

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The amendments provide that the Landlord will pay a one-time tenant improvement allowance in the amount of $1.6 million for costs relating to the initial design and construction of the Company’s improvements that are permanently affixed to the premises. It also provides that the Company can increase the tenant improvement allowance by an amount not to exceed $1.4 million for base building work. Monthly basic rent is not adjusted on account of any portion of the base building allowance paid to the Company. The amendments further provide that, if exercised prior to October 1, 2013, the Company can increase the tenant improvement allowance by an amount not to exceed $3.2 million. In the event the Company exercises its right to use all or any of this additional allowance, the monthly basic rent for the premises shall be increased retroactively to January 1, 2013, in order to repay the additional allowance to the Landlord. If the Company fails to utilize the tenant improvement allowance by June 30, 2015, any unused amounts will revert back to the Landlord, and the Company will have no further rights with respect thereto.

 

The Company also has a lease for its corporate headquarters in Parsippany, New Jersey, which expires in June 2017. As of March 31, 2013, annual aggregate minimum payments due under the Company’s lease obligations are as follows (in thousands):

 

Year
2013 (remaining nine months)		$	3,325
2014		4,589
2015		4,782
2016		4,927
2017		4,858
Thereafter		13,131
Total		$	35,612

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended , which are subject to risks, uncertainties and assumptions that are difficult to predict. All statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, regarding our plans and expectations regarding EXPAREL; the success of our commercialization of EXPAREL; the rate and degree of market acceptance of EXPAREL; the size and growth of the potential markets for EXPAREL and our ability to serve those markets; our plans to expand the indications of EXPAREL to include nerve block; our manufacturing, commercialization and marketing capabilities, regulatory developments in the United States and foreign countries; our ability to obtain and maintain intellectual property protection; the accuracy of our estimates regarding expenses and capital requirements; and the loss or hiring of key scientific or management personnel. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “could,” “predict,” “continue,” the negative or plural of these words and other comparable terminology. Forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

 

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed and referenced herein in Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2012, and in our other reports filed with the SEC.

 

Unless the context requires otherwise, references to “Pacira,” “we,” the “company,” “us” and “our” in this Quarterly Report on Form 10-Q refer to Pacira Pharmaceuticals, Inc. and its subsidiaries. In addition, references in this Quarterly Report on Form 10-Q to DepoCyt(e) mean DepoCyt when discussed in the context of the United States and Canada and DepoCyte when discussed in the context of Europe.

 

Overview

 

We are an emerging specialty pharmaceutical company focused on the development, commercialization and manufacture of proprietary pharmaceutical products, based on our proprietary DepoFoam drug delivery technology, for use in hospitals and ambulatory surgery centers. On October 28, 2011, the United States Food and Drug Administration, or FDA, approved our New Drug Application, or NDA, for our lead product candidate, EXPAREL, a liposome injection of bupivacaine, an amide-type local anesthetic, indicated for administration into the surgical site to produce postsurgical analgesia. We have developed a sales force entirely dedicated to commercializing EXPAREL, which we commercially launched in April 2012.

 

We sell our other approved product, DepoCyt(e), to commercial partners. DepoCyt(e) is a sustained release liposomal formulation of the chemotherapeutic agent cytarabine and is indicated for the intrathecal treatment of lymphomatous meningitis. DepoCyt(e) was granted accelerated approval by the FDA in 1999 and full approval in 2007. We also partner with other companies who desire access to our proprietary DepoFoam extended release drug delivery technology to conduct research, feasibility and formulation work with their products.

 

On January 23, 2013, we completed a private placement of $120.0 million in aggregate principal amount of 3.25% convertible senior notes due 2019, or Notes.  The aggregate principal amount of Notes sold reflects the exercise in full by the initial purchasers of their option to purchase up to an additional $10.0 million in aggregate principal amount of the Notes. The Notes accrue interest at a rate of 3.25% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2013.  The Notes mature on February 1, 2019. The net proceeds from the offering, including net proceeds from the exercise in full by the initial purchasers of their option to purchase an additional $10.0 million in aggregate principal amount of the Notes, were $115.3 million, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses. The net proceeds from the Notes were used to repay the entire balance of a credit facility with Oxford Finance LLC. In connection with such termination, we prepaid the remaining principal amount of $27.5 million, $1.7 million end of term fee, $0.8 million early prepayment penalty and $0.2 million of accrued interest.

 

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We expect to continue to incur significant expenses as we commercialize EXPAREL, advance the development of other product candidates and pursue the use of EXPAREL in additional indications such as nerve block, seek FDA approval for our product candidates that successfully complete clinical trials and develop our sales force and marketing capabilities to prepare for their commercial launch. We also expect to incur additional expenses to add operational, financial and management information systems and personnel, including personnel to support our product development efforts and our obligations as a public reporting company. In order to become and remain profitable, we believe that we must succeed in commercializing EXPAREL or other product candidates with significant market potential.

 

Results of Operations

 

Comparison of Three Months Ended March 31, 2013 and 2012

 

Revenues

 

The following table provides information regarding our revenues during the periods indicated (in thousands):

 

		Three Months Ended						%
		March 31,						Increase/
		2013			2012			Decrease
Net product sales:
EXPAREL		$	10,441		$	—		N/A
DepoCyt(e)		394			425			(7)%
DepoDur		—			21			(100)%
Total net product sales		10,835			446			2,329%
Collaborative licensing and development revenue		243			6,490			(96)%
Royalty revenue		509			868			(41)%
Total revenues		$	11,587		$	7,804		48%

 

Total revenues increased by $3.8 million, or 48%, to $11.6 million in the three months ended March 31, 2013, as compared to $7.8 million in the three months ended March 31, 2012.  The increase was driven by EXPAREL net product sales which for the three months ended March 31, 2013 were $10.4 million. We launched EXPAREL in April 2012 and ship products directly to the end user based on orders placed to wholesalers or directly to us and have no product held by wholesalers. We report product sales net of allowances for sales returns, prompt pay discounts, volume rebates and distribution service fees payable to wholesalers.

 

The increase in EXPAREL sales was partially offset by a reduction in collaborative licensing and development revenue of $6.2 million which was primarily driven by the recognition of deferred milestone revenue during the first and second quarters of 2012, in connection with the termination of the licensing agreement with EKR Therapeutics, Inc.

 

Cost of Revenues

 

The following table provides information regarding our cost of revenues during the periods indicated (in thousands):

 

		Three Months Ended March 31,						% Increase/
		2013			2012			Decrease
Cost of goods sold		$	11,391		$	6,254		82%
Cost of collaborative licensing and development revenue		—			241			(100)%
Total cost of revenues		$	11,391		$	6,495		75%

 

Total cost of revenues increased by $4.9 million, or 75%, to $11.4 million in the three months ended March 31, 2013, as compared to $6.5 million for the three months ended March 31, 2012. Cost of goods sold increased by $5.1 million primarily due to cost of product sold for EXPAREL for a full quarter in 2013 since the product was launched in April 2012. There was no cost of collaborative licensing and development revenue for the three months ended March 31, 2013 due to the termination of services performed under the Novo Nordisk licensing agreement, which ended in June 2012.

 

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Research and Development Expense

 

The following table provides information regarding our research and development expenses during the periods indicated (in thousands):

 

		Three Months Ended						%
		March 31,						Increase/
		2013			2012			Decrease
Research and development expense		$	5,905		$	1,294		356%

 

Research and development expenses increased by $4.6 million, or 356%, to $5.9 million in the three months ended March 31, 2013, as compared to $1.3 million in the three months ended March 31, 2012. This increase is primarily attributable to a $3.2 million increase in clinical development relating to our Phase 2/3 pivotal trial of EXPAREL administered as a femoral nerve block for total knee arthroplasty surgery and our Phase 3 pivotal trial of EXPAREL as an intercostal nerve block for thoracotomy. We also had a $0.8 million increase in research and development expenses related to a potential new manufacturing process for EXPAREL, and we incurred $0.6 million for a toxicity study in animals initiated in January 2013.

 

Selling, General and Administrative Expense

 

The following table provides information regarding our selling, general and administrative expenses during the periods indicated (in thousands):

 

		Three Months Ended						%
		March 31,						Increase/
		2013			2012			Decrease
General and administrative		$	4,675		$	3,644		28%
Sales and marketing		8,261			7,508			10%
Total selling, general and administrative expense		$	12,936		$	11,152		16%

 

Selling, general and administrative expenses increased by $1.7 million, or 16%, to $12.9 million in the three months ended March 31, 2013, as compared to $11.2 million in the three months ended March 31, 2012 due to the following:

 

·      general and administrative expenses increased by $1.0 million primarily due to increases in salaries and benefits associated with our increased headcount of fifteen; and

 

·      sales and marketing expenses increased by $0.8 million primarily due to increased project-related costs for EXPAREL, including initiatives to create product awareness.

 

Other Income (Expense)

 

The following table provides information regarding our other income (expense) during the periods indicated (in thousands):

 

		Three Months Ended March 31,						% Increase/
		2013			2012			Decrease
Interest income		$	73		$	63		16%
Interest expense		(1,519		)	(514		)	196%
Loss on early extinguishment of debt		(3,398		)	—			N/A
Royalty interest obligation		(86		)	(282		)	(70)%
Other, net		(5		)	(24		)	(79)%
Total other expense, net		$	(4,935	)	$	(757	)	552%

 

Total other expense, net increased by $4.1 million, or 552%, to $4.9 million in the three months ended March 31, 2013, as compared to $0.8 million in the three months ended March 31, 2012, primarily due to a $3.4 million loss on extinguishment of debt from the termination of our Oxford Credit Facility and a $1.0 million increase in interest expense primarily due to amortization of the debt discount related to the equity component of the Notes and amortization of debt issuance costs for the Notes.

 

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