- Past and future growth prospects make Pacira a great long-term investment.
- Expanded indications for Exparel should further boost the growth expectations.
- The growth is supply-constrained – an issue that the company will address in the next two to three years.
- Regeneron is an example which shows how much Pacira's share price could grow in the next couple of years.
Pacira Pharmaceuticals (NASDAQ:PCRX) has been one of the most exciting growth stories in the stock market in the past few years. The company has grown revenue in triple digits in the past two years, and 2014 is expected to be another strong year. The share price has benefited immensely, as it rose more than 1,000% since late 2011. However, I believe that the share price has more room to run, and that current and potential Pacira investors have a chance to benefit from the strong growth that is expected in the future. I will use Regeneron (NASDAQ:REGN) as an example to show how much the share price can rise in the next two to three years, since Regeneron's growth and valuation over the past few years are quite similar to Pacira's growth and valuation, but Pacira is in its earlier stages of growth, as opposed to Regeneron, which is in its later stages of growth.
Pacira has a large market to grow into
Pacira has grown its revenue considerably since the launch of Exparel in April 2012. Revenue has grown from $15.7 million in 2011 to $85.6 million in 2013, and Pacira is expected to deliver revenue in excess of $178 million in 2014. These are some strong numbers, but Pacira is yet to address its huge growth opportunity in the future. The company has penetrated just about 1% of its addressable market of 40 million-plus procedures appropriate for Exparel. So, there is a large market for the company to grow into. Exparel is addressing an important need in post-operative pain care, and the drug is indicated for infiltration into the surgical site to produce post-surgical analgesia for up to 72 hours. Exparel addresses a significant unmet medical need for a long-acting non-opiod post-surgical analgesic, which enables simplified post-surgical pain management and reduced opioid consumption, leading to improved patient outcomes and enhanced hospital economics (according to Pacira's SEC filings). So, Exparel is a double positive for both the patient and the hospital, as it reduces the need for opiods and shortens the stay in the hospital, and reduces the costs for both the hospital and the patient. Given the large addressable market, peak sales for Exparel should easily exceed $1 billion in the next five to ten years.
Expanded indication for Exparel could further boost the growth expectations
The large addressable market for Exparel could be broadened further, as the company has submitted an sNDA for Exparel nerve block indication. The sNDA is "based on positive data from a Phase 3 study assessing the safety and efficacy of Exparel in femoral nerve block for total knee arthoplasty, and will also include additional safety data from a Phase 3 study of Exparel used to perform an intercostals nerve block for thoracotomy." The timeline for review is 10 months, and if the FDA accepts the sNDA filing, a PDUFA target date is March 5, 2015. The potential approval will additionally extend the potential for more procedures. Pacira's CEO, Dave Stack indicated on the Q1 conference call that, "With the nerve block indication we can fully execute on the strategy to replace the catheter and a [grid] reservoir with a single administration into the surgical site to produce post-surgical anesthesia eliminating old and cumbersome delivery technologies. The nerve block indication is of significant indication to anesthesiologists the gate keepers of pain management strategies in many institutions." The nerve block indication opens up another large addressable market for Exparel, and should additionally boost the growth potential for Exparel in 2015 and beyond. The nerve block indication opens the road to increased development and adoption in cardiothoracic and many orthopedic surgeries. The "patient-centric" view may form a basis for a chronic pain initiative the company is exploring.
Production constrains the potential growth, but the company is addressing the issue
The problem for Pacira in the future is how to address the growing demand for Exparel, which is a great problem to have, in my opinion. The growth potential is constrained by production rather than by demand, and the company is working hard to address the issue. Pacira announced in late March that it received FDA approval for an additional Exparel manufacturing suite (Suite C) in its Science Center Campus in San Diego. When operating at full capacity, the Suite C will increase Pacira's annual manufacturing capacity by approximately $300 million over the $100 million capacity of Suite A, for a total of approximately $400 million capacity. This capacity will address the needs for the next two years. In April, the company announced that it has entered into a strategic co-production partnership with Patheon to construct two dedicated Exparel manufacturing suites at Patheon's manufacturing facility in Swindon in the U.K. The first Exparel manufacturing suite at Patheon is expected to come online in two to three years, and will provide approximately $300 million of additional capacity for an aggregate $700 million of Exparel production capacity.
After looking at these plans, it becomes obvious that the company expects Exparel demand to reach $700 million in the next three to four years, which means that revenue growth will remain very high in the next four years (probably in triple digits in 2014 and close to triple digits in 2015). This bodes well for Pacira and its investors, as the company has potential for strong profit margins down the road. The company expects to achieve non-GAAP profitability in the second half of 2014, and at the peak of production, gross margins should be almost 80% (and above 80% at the Patheon facility), while the EBITDA margin should be above 40% in 2016. This will enable Pacira to keep its high valuation ratios in the next couple of years, since the strong growth is expected to continue in this period.
Valuation and price target
While it is hard to put a price target on such a fast-growing company, I would try to gauge the growth potential for Pacira's share price, based on the growth estimates for the next couple of years and an example from the past which sheds light on the potential valuation Pacira could have in the next two years. A look at Pacira's TTM P/S ratio chart reveals that Pacira is currently in the middle of its one-year ratio range. Investors have had an opportunity to buy Pacira at a P/S ratio below 20 one month ago, in the midst of a strong sell-off in the biotech sector. Pacira has handled the sell-off quite well, and is now at new all-time highs, as opposed to the biotech sector (NASDAQ:IBB), which needs more repair work. This shows that Pacira is being accumulated and that demand for its shares is quite high.
Although I believe that Pacira can keep its current valuation, and could be trading at a P/S ratio between 20 and 30 in the next two years on expectations for triple-digit revenue growth, I am going to be somewhat conservative, and my price target will be based on a 2015 P/S ratio of 15. This translates into more than 50% upside from the current price, as it translates into a $132 price target. This is substantially higher than the current analyst mean target of $91, and I think that analyst upgrades are inevitable going forward, which should serve as a catalyst for the share price. However, there might be even more upside potential for Pacira shareholders in the next two years, especially if Pacira continues to trade in its current valuation range. The upside in this particularly bullish scenario could be between 100% and 150%, which is not unrealistic given some historical examples.
One particular example that I have in mind when looking at Pacira's growth potential is Regeneron. In late 2011, Regeneron launched its blockbuster drug Eylea, and saw its revenue grow 202% and 51% in 2012 and 2013. Since then, revenue growth slowed down, and is expected to rise 30% and 24% in 2014 and 2015 respectively. During the early stages of growth, in 2012, Regeneron was trading in a P/S ratio range between 15 and 23, and when revenue growth slowed down to 30% to 50%, Regeneron's P/S ratio range was between 13 and 20 (Regeneron's P/S ratio is currently around 15). So, if we take Pacira's growth prospects into consideration, we should expect Pacira to be trading at a considerable growth premium over Regeneron, given that Pacira is expected to grow revenue 108% and 77% in 2014 and 2015 respectively, as opposed to Regeneron's 30% and 24% growth expectations. This is the base for my expectations for share price gains in excess of 100% in the next two years.
As for the downside, it should be limited to 20% to 30% and regarded as strong buying opportunity. This 20% to 30% downside is based on a P/S ratio range in the past twelve months. Since Pacira's TTM P/S ratio will improve significantly every time the company announces its quarterly reports, the P/S ratio will contract significantly even with the same share price (it will be down to 16.7 by the end of 2014, and below the current range). However, the downside is also dependent on the execution of the growth strategy, and would be much higher if the growth slows down significantly in the next two years (which is not expected at the moment, especially if we look at the production expansion plans for the next couple of years).
Risks to the long thesis
I believe that the major risks for Pacira investors are at the macro level and sector-specific. The weakness in the biotech sector has been a major drag on Pacira in March and April, and the current bull market is in its later stages. So, a major macro or sector-specific event could have a profound effect on Pacira's share price. This does not mean that there are no company-specific events that could represent risks for investors, because there could be issues with the manufacturing facility expansion (delays or similar events), but there is no evidence that such an event might occur. On the other hand, the insiders are selling their stakes as the share price rises, but they have been taking profits along the way, and I find that to be normal for fast-growing companies. In fact, they have been selling aggressively in the first half of 2013, when the share price was between $15 and $30, and look where the share price is now. So, I find that insider selling is not a reliable indicator here.
As I said before, Pacira has been one of the most exciting growth stories in the stock market in the past two years, and I believe that the story is far from over. My $132 price target translates into a more than 50% upside from the current price, and in the more optimistic scenario, the upside exceeds 100%. The downside should be limited to 20% to 30%, giving investors an asymmetric reward/risk investment opportunity. If the story develops in a similar way to Regeneron, we could see Pacira trading north of $150 in 2015.