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PCRX - Run-Up Valuation

publication date: Apr 25, 2011
 | 
author/source: Jeff Dos Santos
PCRX Valuation

“Pacira Pharmaceuticals Announces FDA Acceptance of EXPAREL™ New Drug Application for Pain Management December 14, 2010”

“Parsippany, NJ - December 14, 2010 - Pacira Pharmaceuticals, Inc., an emerging specialty pharmaceutical company, announced today that the New Drug Application (NDA) for EXPAREL™, a long-acting bupivacaine for postsurgical pain management, has been accepted for filing by the U.S. Food and Drug Administration (FDA). Pacira submitted the EXPAREL NDA in September 2010 for the initial indication of postsurgical analgesia by local administration. The FDA also notified Pacira that its Prescription Drug User Fee Act (PDUFA) target date (the date the FDA expects to complete its review of the EXPAREL NDA) is July 28, 2011.”
< http://www.pacira.com/investors-news.php >

Pacira Pharmaceuticals Inc. (PCRX) is in quite an interesting situation. Before we list out their main advantage and disadvantage leading up to the PDUFA date, let us clear a certain misunderstanding.

< http://myprops.org/content/Video-FDAs-Safety-Focus-Uncovers-More-Manufacturing-Lapses/  >
This video states “PCRX failed 82% of plant inspections since 2000” and that “…among publicly traded companies, there were a couple that stood out. There is a company called “Pacira”, they make painkillers typically used in hospitals and another one called Lannett, they make a thyroid treatment, they failed three-quarters of their inspections over the past decade…

Here is PCRX’s backstory when they were not public:

"We were incorporated in Delaware under the name Blue Acquisition Corp. in December 2006 and changed our name to Pacira, Inc. in June 2007. In October 2010, we changed our name to Pacira Pharmaceuticals, Inc Pacira Pharmaceuticals, Inc. is the holding company for our California operating subsidiary of the same name, which we refer to as PPI-California. On March 24, 2007, or the Acquisition Date, MPM Capital, Sanderling Ventures, OrbiMed Advisors, HBM BioVentures, the Foundation for Research and their co-investors, through Pacira Pharmaceuticals, Inc., acquired PPI-California, from SkyePharma Holding, Inc., which we refer to as the Acquisition. PPI-California was known as SkyePharma, Inc. prior to the Acquisition."

"Our two marketed products, DepoCyt(e) and DepoDur, and our proprietary DepoFoam extended release drug delivery technology were acquired as part of the Acquisition. 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. DepoDur is an extended release injectable formulation of morphine indicated for epidural administration for the treatment of pain following major surgery. DepoDur was approved by the FDA in 2004."
<http://webcache.googleusercontent.com/search?q=cache:1Y8cMCDAWH0J:biz.yahoo.com/e/110331/pcrx10-k.html+pacira+fda+inspection&cd=7&hl=en&ct=clnk&gl=ca&client=firefox-a&source=www.google.ca  >

Here are some aspects in which clears up this misunderstanding:
(1) Deviation in Sales:
No massive deviation in sales for PCRX. Annual standard deviation is $798,861.11 during successor years, which is within 1 standard deviation from the mean. Since supply revenue was increasing over time, then Depocur and Depocyt(e) was never recalled during successor years.
However, there was a massive $3M deviation during predecessor years. This must have meant something happened near 2005-2006. So i found:  
“The product was launched in Germany and Switzerland in September 2005 but a recall from these markets was initiated in January 2006 because of concerns that accidental mishandling of the device had resulted in inaccurate dosing in a small number of cases."

(2) High FDA fail percentage is lead strictly by SkyePharma Holding:
Bunched announcements:
Warning letter:
<http://www.pharmcast.com/WarningLetters/Yr2001/July2001/SkyePharma0701.htm >

(3) 2 Updates from video response:
"The analysis was conducted by Bloomberg, and included data from 10,000 inspections at American pharmaceutical plants between 2000 and September 30, 2010. The analysis initially placed Pacira Pharmaceuticals at first place in the number of flunked safety violations, stating that the company had an 82% rate of failing inspections. However, the analysis is from 2010, and since then the company has changed hands to new management."
<http://www.articlesnatch.com/Article/Abbott-Labs-Leads-In-Fda-Pharmaceutical-Safety-Inspection-Failures/2226133>

"Who led the pack? Pacira Pharmaceuticals (PCRX), which makes painkillers sold in hospitals, was the worst offender among publicly traded drugmakers with an 82 percent failure rate during 11 inspections.* Abbott Labs (ABT) failed 59 percent of 111 inspections; Pfizer (PFE) flunked 57 percent of 202 inspections; Merck (MRK) bombed out on 52 percent of 134 visits and Johnson & Johnson (JNJ) failed 48 percent of 161 inspections. By contrast Mylan (MYL) passed 79 percent of 56 inspections, Bloomberg writes. * [UPDATE: A Pacira spokesman called us Wednesday night to say the Bloomberg tally referred to above included FDA inspections that were made when the plant was owned by another company.]
< http://pharmacyblogbuy.com/tag/pacira-pharmaceuticals/ >
<
http://seekingalpha.com/article/256209-which-drugmaker-fails-most-fda-inspections > <http://www.pharmalot.com/2011/03/which-drugmaker-fails-most-fda-inspections/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+Pharmalot+%28Pharmalot%29 >

(4) No FDA warning letter was ever issued to PCRX.


(5) Best response was in fact within Pacira's 10-K:
"Building 1 is an approximately 80,000 square foot concrete structure located on a five acre site. It was custom built as a pharmaceutical R&D and manufacturing facility in August 1995. Activities in this facility include the manufacture of EXPAREL bulk pharmaceutical product candidate in a dedicated production line and its fill/finish into vials, the manufacture of the DepoDur bulk commercial pharmaceutical product, microbiological and quality control testing, product storage, development of analytical methods, research and development, the coordination of clinical and regulatory functions, and general administrative functions. We have renovated the dedicated EXPAREL production line to expand its capacity and it will be available for the FDA’s pre-approval inspection in 2011. This production line is designed to meet forecasted market demands after initial launch of EXPAREL, if it is approved. We have current plans to further expand our manufacturing capacity to meet future demand."
< http://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=220759&fid=7475224, Page 15>
(Note: Page number listed on their most recent 10-K is 15, but the hyperlink to the left of the window will be “Page 18: Manufacturing”)

With all this being said, we can reassure that no debarment risk penalty is necessary when evaluating PCRX’s price target.

PCRX’s Advantage: Exparel (Product Candidate)
“"EXPAREL has demonstrated efficacy and safety in two multicenter, randomized, double-blind, placebo-controlled, pivotal Phase 3 clinical trials in patients undergoing soft tissue surgery (hemorrhoidectomy) and orthopedic surgery (bunionectomy). At a pre-NDA meeting in February 2010, the FDA acknowledged that the two pivotal Phase 3 clinical trials conducted by us, in patients undergoing hemorrhoidectomy and bunionectomy surgeries, appeared to be appropriately designed to evaluate the safety and efficacy of EXPAREL. Both trials met their primary efficacy endpoints in demonstrating statistically significant analgesia through 72 hours for the hemorrhoidectomy trial and 24 hours for the bunionectomy trial. Both trials also met multiple secondary endpoints, including decreased opioid use and delayed time to first opioid use. These two pivotal Phase 3 clinical trials formed the basis of the evidence for efficacy in the NDA for EXPAREL.

The safety of EXPAREL has been demonstrated in 21 clinical trials consisting of nine Phase 1 trials, seven Phase 2 trials and five Phase 3 trials. EXPAREL was administered to over 1,300 human patients at doses ranging from 10 mg to 750 mg administered by local infiltration into the surgical wound, and by subcutaneous, perineural, epidural and intraarticular administration. In all 21 clinical trials, EXPAREL was well tolerated. The most common treatment emergent adverse events in the EXPAREL and placebo groups were nausea and vomiting and occurred with similar frequency across the EXPAREL and placebo groups. No signal of any of the central nervous system or cardiovascular system adverse events typically observed with high doses of bupivacaine has been observed with EXPAREL. We conducted two thorough QTc studies that demonstrated that EXPAREL did not cause significant QTc prolongation (a measure of cardiac safety mandated by the FDA for all new products) even at the highest dose evaluated. No events of destruction of articular cartilage, or chondrolysis, have been reported in any of the EXPAREL trials. EXPAREL did not require dose adjustment in patients with mild to moderate liver impairment."

While their primary endpoints were met (pain control for up to 72 hours in the hemorrhoidectomy clinical trials, and pain control for up to 24 hours in the bunionectomy trial), their secondary endpoints caught our eye.

For the hemorrhoidectomy trials, “In secondary endpoints, EXPAREL demonstrated efficacy in reducing the use of opioid rescue medication, which was available to both the EXPAREL treatment group and the placebo treatment group. Approximately three times the number of patients in the EXPAREL treatment group avoided opioid rescue medication altogether, and patients in the EXPAREL treatment group showed 45% less opioid usage compared to the placebo treatment group at 72 hours.”
< http://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=220759&fid=7475224, Page 6 >

For the bunionectomy trial, “EXPAREL also achieved statistical significance in secondary endpoints related to pain measurement and the use of opioid rescue medication” which included total avoidance of opioid rescue medication for up to 24 hours, delayed median time before first opioid use under the trial, and more pain free patients up to 48 hours.

As of right now, the data presented serves as a very strong basis for the 505(b)(2) application. 

(Note: Exparel’s primary indications include postsurgical analgesia by infiltration, nerve block, and epidural administration. The PDUFA goal date (on July 28th, 2011) if Exparel is approved and granted commercialization rights worldwide will only be used for infiltration. Exparel for postsurgical analgesia by nerve block is currently under phase 2/3, and Exparel for postsurgical analgesia by epidural administration completed phase 1.)

PCRX’s Disadvantage: Financials
(Note: First, we shall break down PCRX’s income statement and balance sheet for the year (not quarter this time) ended 2010.) 

DepoCur and Depocyt(e) are marketed, with commercialization rights granted to EKR Therapeutics and Flynn Pharmaceuticals, and Sigma-Tau Pharmaceuticals and Mundipharma International (respectively). Combining supply revenue, royalties, and collaborative licensing and development revenue leads total revenue to be $14.562M.

Their cost of revenues was $12.276M, with R&D costs reaching $18.628M and selling G&A cost reaching $6.03M. This implied total operating costs to be $36.934M. Accounting for other factors primarily being the interest expense and royalty interest obligation leaves a net loss of $27.149M
(Note: EPS loss was $47.29, but recall that there were only 574,072 shares at the time.)

Cash is equal to $26.133M (and from viewing the statement of cash flows, this net increase of cash was primarily attributed to the proceeds from convertible notes and secured promissory notes and credit facility), and adding all other current assets leaves total current assets to be $31.055M. Including net fixed assets ($23.95M), net intangibles ($8.912M) and net other assets ($2.645M) leaves total assets to be $66.562M.

Accounts payable currently stands at $6.038M, and accounting for other current liabilities leave total current liabilities to be $16.322M (in which the short run seems to be very good since cash covers this). However, given the related party debt alone ($49.795M) plus all other long term liabilities leaves total liabilities to be $114.945M.

This implies a total equity of -$48.383M (in which would relate to a book value of -$84.28 per share).
<
http://ca.finance.yahoo.com/q/is?s=PCRX&annual >
<
http://ca.finance.yahoo.com/q/bs?s=PCRX&annual >
(Note: Now let’s observe what happened after the IPO)

“In February 2011, we completed the initial public offering of our common stock pursuant to a registration statement on Form S-1, as amended (File No. 333-170245) that was declared effective on February 2, 2011. Under the registration statement, we registered the offering and sale of an aggregate of 6,900,000 shares of our common stock. An aggregate of 6,000,000 shares of common stock registered under the registration statement were sold at a price to the public of $7.00 per share. Barclays Capital Inc. and Piper Jaffray and Co. acted as joint book running managers of the offering and as representatives of the underwriters. The offering commenced on February 3, 2011 and closed on February 8, 2011. The over-allotment option was not exercised by the underwriters. As a result of our IPO, we raised a total of $42.0 million in gross proceeds, and approximately $37.0 million in net proceeds after deducting approximately $5.0 million in underwriting discounts and commissions and estimated offering expenses.”

< http://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=220759&fid=7475224, Page 58 >

Given the $37M that was made during the IPO (Initial Price Offering), their new cash level is at $63.133M, which now leaves total equity to be -$11.383M (in which now relates to a book value of -$0.66 per share). This implies a lot of potential Exparel is carrying (as of Thursday, April 14th, 2011, a potential value of $7.61, where market value (closing price of $6.95) can be seen to be equal to book value plus potential value), but unfortunately there is no financial safety net, and therefore will be seen as a risk investors will face.

Valuation

(Note: There does not exist a concrete postsurgical analgesia market value available to us without severe measurement error. Therefore we shall break down the drug market PCRX can obtain step by step).
The drug market (a value) is recognized as the market share (in which we shall analyze this as an appropriate quantity: The number of people using Exparel in one year’s time) times the market drug (in which we shall analyze this as an appropriate price Exparel is assumed to be charged at.)

Let’s start with the pricing of Exparel. Recall that “EXPAREL was administered to over 1,300 human patients at doses ranging from 10 mg to 750 mg administered by local infiltration into the surgical wound”, let’s assume that the average dosing amount is 380mg.

PCRX states that Exparel will be cost efficient for many hospitals "Our ability to effectively promote and sell EXPAREL and any other product candidates that we may develop, license or acquire in the hospital marketplace will also depend on pricing and cost effectiveness, including our ability to produce a product at a competitive price and achieve acceptance of the product onto hospital formularies, and our ability to obtain sufficient third-party coverage or reimbursement." (Page 30 of the same 10-K), therefore we shall take the lowest price per ml found for Bupivacaine ($0.0575/ml) as the competitive price.

The density of plain (glucose-free) bupivacaine was 0.99950 to 0.99970 g/ml based on a study to determine the density of Bupivacaine and Bupivacaine-Opioid Mixtures for Spinal Anesthesia.
< http://www.anesthesia-analgesia.org/content/96/4/1234.full >

Let’s assume the density of bupivacaine is 0.9996 g/ml. This implies that the density of bupivacaine is 999.6 mg/ml. What we do know is that Exparel is Bupivacaine encapsulated in Depofoam, which would support an even lower cost. However, let’s assume that the cost per Exparel is $0.0575/mg.

(Note: We’re ultimately assuming PCRX’s supply of Depofoam will cost more if more is in demand. “DepoFoam consists of microscopic spherical particles composed of a honeycomb-like structure of numerous internal, aqueous chambers containing an active drug ingredient. Its unique technology enables the release of an encapsulated drug over a desired period of time, from 1 to 30 days”)
< http://www.pacira.com/platform-depofoam-about.php >

Therefore we’ll assume that the price on average will be $21.85 per infiltration. 

(Note: There has been talk that the price can be near $200 which would make sens and ultimately 10-fold the drug market, but since there is no concrete evidence of this, we’ll assume $21.85 will be the price on average.)

There exists an estimated 45 million in US surgical procedures, where 7.2 million of those uses are uses of bupivacaine, leaving 37.8 million opportunities annually. Let’s assume that if Exparel is to be used in the US (if approved), in one year’s time Exparel can be reached to half of those opportunities (18.9 million).

Combining the price ($21.85) per infiltration times the number of opportunistic infiltrations that can be reached (18.9 million) would set the drug market to be $412.97M.

“Substantially all of our existing stockholders are subject to lock-up agreements that restrict the stockholders’ ability to transfer shares of our common stock until August 1, 2011, subject to certain exceptions. The lock-up agreements limit the number of shares of common stock that may be sold prior to August 1, 2011. Subject to certain limitations, 12,218,769 shares will become eligible for sale on August 1, 2011. In addition, shares issued or issuable upon exercise of options and warrants vested as of the expiration of the lock-up period will be eligible for sale at that time. Sales of stock by these stockholders could have a material adverse effect on the market price of our common stock.”
< http://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=220759&fid=7475224, Page 53 >

The sum of shares will be the current sum of shares (17.23M) plus this fixed sale (12,218,769) of shares which equals 29,448,769.

Let’s assume (for Exparel) that the gross margin is 40%.

The gross revenue margin is equal to the gross margin (40%) times the drug market ($412.97M) which equals $165.19M.

Their profit attainable in one year’s time will be equal to the gross revenue margin ($165.19M) minus their cost of goods sold ($49.56M) minus expected R&D costs ($35M) minus expected G&A costs ($30M) minus interest expenses ($3M) minus partial debt payments ($15M) which equals $32.63M

Let’s assume that their price to earnings ratio is 20

The value of the company is equal to the profit attainable in one year’s time ($32.63M) times the price to earnings multiplier (20) which equals $652.6M

The price per share if Exparel is approved would then be the value of the company ($652.6M) divided by the sum of shares (29,448,769) which equals $22.16

Given independence per FDA decision, let’s assume the probability of approving Exparel is 50%. 
Considering:
+5.72% for a seasonality boost
-3.58% given our calculated PDUFA risk
-5% given no strong financial safety net
(Note: We eliminated the debarment risk as shown above in this valuation)
(Note: We’ve decided to nullify the burn situation penalty (-5%) for the strong basis presented in the 505(b)(2) application (+5%))

This therefore sets the scale investors face in terms of reaching the price per share to be 47.14%.
Combining the scale at which investors face (47.14%) times the price per share if Exparel is approved ($22.16) gives us a run up price of $10.45

(Question: In this valuation, there isn’t any mention of PCRX’s low float (5.41M from an outstanding 17.23M) nor low volume (average volume of 89,400 per day), yet it may affect the price per share if active. Can this aspect be incorporated in this valuation?

Answer: Investor interest (demand) and float (supply) are strongly positively correlated. If a bunch of investors decide to purchase the stock at one time then it will definitely affect the equilibrium, but only up to a point depending on how much interest is being carried per investor.

However, investor interest can be assumed as every investor being independent of each other. We cannot measure investor interest primarily because this market is not complete (ex: the bubble-pop theory). Also, low float stocks are often very volatile due to high ownership percentages.

What we can say is that low float can affect the duration at which a certain target can be hit. If a stock has a lower percentage float on average, then the duration at which a certain target can be hit decreases. Prime example for us would be ACUR.)