Why Pacira Is Looking Quite Expensive

Feb. 4.13 | About: Pacira Pharmaceuticals, (PCRX)

Near the end of 2012, I thought that Pacira was looking a bit overvalued. This was based primarily on the slowdown of Exparel's sales growth (as well as the total prescriptions sold), which began to make Pacira's market capitalization of $676 million look quite ridiculous given that the company's quarterly revenue was $4.6 million at the time.

Pacira (NASDAQ: PCRX) has moved up considerably since then due to four major factors:

-The $110 million private offering of senior convertible notes, which expire in February of 2019 and have a conversion price of about $24.80/share. This surely caused investors to build some faith on the company's prospects due to the sale of these notes.

-A massive reduction in short interest. In the first two weeks of 2013, about half a million shares short were covered, which explains how the stock went from the sub-$18 level to the $20/level so quickly.

-The strength of the stock market in general since the start of the year. This has moved many of the biotech stocks much higher for little to no reason.

-Pacira unveiled preliminary Q4 2012 results in mid January, which stated that the company expects to earn a record $10.5 million in quarterly revenue

While short interest is still quite high (a bit less than 1/5 of the shares are short), I think that the short covering rally since December makes the stock much easier to bet against going forward.

I also want to point out that even if Exparel manages to have exceptional sales growth in the coming quarters, the company actually spends more on the manufacturing of the product than it earns in sales revenue (aka, COGS is way above 100%).

This is why I question the enthusiasm over the preliminary Q4 2012 results, because the company did not really address the issue of profitability of the company itself. Is Pacira going to be the next Dendreon?

I think there's a chance, which is why I had it on the Bio-Wire Weekly watchlist for this coming week. I think that PCRX could be a decent short candidate very soon, if not now. Ideally I'd want to see a confirmation that the current rally in the stock is going to be reversed though.

Disclaimer: I am not an investment advisor, so this article should not be considered as official investment advice. Anyone who wants to trade either of these two stocks should perform due diligence of their own.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in PCRX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.