Pacira Pharmaceuticals: The Long Case Strengthens

| About: Pacira Pharmaceuticals, (PCRX)
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Summary

Pacira exceeded Q2 EPS and revenue estimates.

The company reinstituted the FY Exparel revenue guidance, which was largely in line with the Street consensus.

Exparel has a lot of growth opportunities ahead.

International partnership to be announced in 2H 2016; the company looking at M&A candidates.

Reiterating my bullish view on Pacira.

Pacira Pharmaceuticals (NASDAQ:PCRX) reported Q2 EPS and revenues ahead of the analyst consensus. Exparel sales are recovering after a few tough quarters. The FDA warning letter resolution is yet to have a significant impact on Exparel's uptake and there are several catalysts that should accelerate revenue growth in the following quarters. The company is also in discussions with international partners and expects to announce regional partnerships in the second half of the year. The strong balance sheet and the prospects for rising free cash flow generation should make the company active on the M&A front as well, which should enhance the growth profile, lead to more leverage and diversify the revenue stream. I am reiterating my bullish view on Pacira.

Q2 highlights

Pacira's Q2 EPS was down 5% Y/Y to $0.19, but ahead of views for just $0.03. Revenues rose 17.7% to $69.6 million, beating the analyst consensus by $2.2 million. Exparel net sales have recovered sequentially as well and Pacira reinstituted the full-year guidance. The company expects Exparel net sales between $270 million and $280 million. For reference, the analyst consensus is $283 million, but the guidance does not include other revenues which were $5.6 million in 1H 2016. So, the guidance is at least in-line with the analyst consensus at mid-point, and perhaps slightly higher if the company can replicate the level of other revenues in 2H 2016.

Pacira also launched a Choices Matter campaign, intended to increase the awareness of non-opioid options among surgeons and patients. The American Society for Enhanced Recovery has joined the campaign, as well as a former star volleyball player, Gabrielle Reece. Management shared some anecdotal evidence on the Q2 call and said patients are asking for Exparel instead of opioids, which was not the case in previous years. Pacira also launched a national print campaign Clarity, which explains Exparel's essentials and its impact on opioid use. The increasing national awareness and a push towards reducing the use of opioids during and after surgery is a secular tailwind for Exparel and should help accelerate growth in the following years, even without other growth drivers, which are plentiful as well and which were extensively covered in my June PRO article.

Overall, I am very pleased with the Q2 results and the reinstitution of the FY Exparel net sales guidance, which implies strong sequential growth in the next two quarters. The FDA FAERS report was not mentioned on the Q2 call and the FY guidance implies no impact from it. I was somewhat worried about its impact in early July but noted in this article the possible consequences and the fact that Exparel was used in over 2 million surgeries to date with a very favorable safety profile.

Several ways for shareholder value creation over the next 12-18 months

I wrote extensively about the growth drivers for Exparel in late June (article linked above) and will repeat just a few of them: the introduction of a 10ml vial and a 4-pack vial carton in September, oral surgery launch (also in September), nerve block launch in late 2017 (if approved by the FDA), CMS bundled program for joint procedures (began in Q2 2016, the impact on hospital payments anticipated in Q2 2017) and sales force expansion.

Exparel has actually just scratched the surface when it comes to market penetration in the United States. Exparel's was most utilized in orthopedic surgeries with 58% of revenues in that segment over the last 12 months (through March 2016). Soft tissue is the second with 27% revenue participation over the last 12 months and it actually represents the larger market for Pacira. Soft tissue market is double the size of ortho and if Pacira achieves the market penetration level similar to ortho, soft tissue net sales should rise from around $65 million a year to over $280 million (assuming no growth for the ortho segment, which is unlikely). In fact, management discussed the TAP procedure opportunity and the growing interest for its use over the last few months. They believe that the soft tissue market share opportunity is 3x the size where ortho market share currently is and that it would add "over $500 million of new revenue annually." The oral surgery launch represents another significant opportunity, with procedure volume of 35 million a year, compared to 42 million combined for soft tissue and ortho. This means that Exparel's peak annual opportunity revenue opportunity is at least $1 billion and more likely closer to a $1.5-2 billion in the U.S. alone.

Source: Pacira investor presentation

There are also two important long-term growth drivers for Exparel:

1. International expansion. The company said on the Q2 call that discussions with potential partners are progressing nicely and that one or more regional partnerships should be announced later this year. I do not expect an international launch before late 2017 or early 2018 but the announcement should be a catalyst for the share price and the company will probably receive a substantial upfront milestone payment or payments.

2. Acquisitions. Here are some management remarks on the Q2 call (emphasis mine):

The executive team and my team have been able to review several opportunities in the marketplace. I think we are really excited about what we are looking at today, how we think we have some great opportunities to really intertwine with our business in a way that is synergistic. And certainly, the pressure on the public markets and the financing markets has and will continue to create opportunities for us. So we are still very active and we think there are going to be some great opportunities for us over the next several quarters."

When asked about the public or private opportunities, Pacira's SVP, Strategy and Corporate Development, Scott N. Braunstein, said that private companies are more reasonable on pricing than public companies. The strong balance sheet and the prospects for increased free cash flow generation in the following quarters makes an acquisition more likely. Acquisitions of complementary products should diversify the company's revenue stream, increase leverage and long-term shareholder value. This opportunity is not reflected at all in the company's current valuation.

I believe Pacira will outperform both the sector and the general market over the next few years.

Conclusion

I am very pleased with the progress Pacira has made over the last few quarters. I think that the risks of owning Pacira have reduced significantly while the fundamentals have improved. There are several catalysts that should push the stock higher in the following years. There are some near-term headwinds the company needs to push through, like the FDA warning letter overhang. Some institutions are still reluctant to allow the use of Exparel, which was once again mentioned on the Q2 call, but the pushback is getting weaker and the awareness campaign should help accelerate adoption and growth in the following quarters.

Disclosure: I am/we are long PCRX.

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.

Additional disclosure: This article reflects the author's personal opinion and should not be regarded as a buy or sell recommendation or investment advice in any way.