Pacira Pharmaceuticals (PCRX) is nine months into the launch of its new treatment, Exparel. Exparel is a formulation of bupivacaine encapsulated in their proprietary “DepoFoam” technology, and induces a delayed release of the substance. Exparel was approved on Oct. 31, 2011, as a prolonged pain treatment option for patients undergoing surgery, and was launched into the market in April 2012.
Since the FDA approval, when the stock was trading around $8/share, the company’s value doubled (the stock now trades just over $16/share). Although the company has grown sales substantially since it introduced Exparel into the market, I don’t think the product’s momentum is good enough to fundamentally justify a valuation of $524 million at this point.
Pacira is now trading around $16.37 and has already accumulated a short interest of over 6.2 million shares at this point, although I think there is potential for more shorts to join the bet against the stock if Exparel continues to grow at such a sluggish rate. Although the month-over-month growth implies that Exparel’s total sales revenue can explode in later years, it is unlikely to keep up the rapid pace. Also, the actual profitability of the manufacturing and selling of the treatment is very poor (as we can see using the company’s financial results from Q3 2012).
The Wolters Kluwer prescription data for Exparel is presented here:
|Date||Actual Exparel Sales|
Exparel was launched in April and the company reported Q2 2012 and Q3 2012 sales of $2.3 million and $4.6 million, respectively. These numbers are in rough agreement with the Wolters Kluwer data, where $1.6 million and $3.9 million, respectively, have been reported. Sales growth from April ($151,000) to May ($638,000) was impressive, but sales in the last five months have not been impressive at all: from July at $1.27 million to November at $1.67 million, or an average of $80,000 per month. The rate of growth has slowed considerably, which means Pacira is looking like a great “short the launch” opportunity.
Even if we assumed a very optimistic outlook for Exparel going forward, the stock doesn’t look like such a great deal. If we assume that Exparel grows at a rate of 10% month over month, the company would only record $5.3 million worth of sales revenue by November 2013 and a total of $43.2 million for the entirety of 2013. Not to mention, if the company adds an average of $160,000 in Exparel sales per month, the company will record 2013 sales of $41.3 million. This outlook for the next 12 months is overly optimistic, and it’s unrealistic to believe that Exparel will maintain anywhere near that level of monthly growth going forward.
Exparel grew an average of 8% from August to November (September was actually a down month, as you can see), so our expectation is that the launch growth rate could continue to decline and Exparel sales in 2013 will find it virtually impossible to breach the $43 million figure we came up with earlier.
Another point that has been overlooked by the market are the terrible gross margins on the production and sale of Exparel. These margins seem to be adversely affected by the manufacturing process, although it’s simply a matter of looking at the actual numbers. In Q3 2012 the company sold $4.6 million worth of Exparel at a cost of $9.3 million, or a cost of goods sold of 202%. There are very few companies that manage to have production costs that exceed their sales revenue, although these numbers explain why Pacira is still operating at steep losses.
Going back to the very optimistic growth scenario, where Exparel sales growth brings Pacira’s revenue for 2013 to over $43 million, I don’t see how the company could justify a valuation of over half a billion dollars. Even if the cost of goods sold remained flat (at $9.3 million per quarter, or $37.2 million) the company would be unable to reach profitability due to sales, general, and administrative expenses.
With a shrinking pool of collaboration revenue to top it off, it’s hard to make a bullish case for this company and much easier to expect a bearish outcome going into 2013.