Overvaluation In Pacira Pharmaceuticals Brings Shorting Opportunity

Pacira Pharmaceuticals (PCRX) is in the 9th month of launch for its compound bupivacaine encapsulated in DepoFoam, the company’s liposomal encapsulating technology that was FDA approved on October 31st 2011. This formulation is known as EXPAREL®, and is useful for patients undergoing surgery.

Since the FDA approval, when the stock was trading around $8/share, the company’s value doubled (and the stock now trades just over $16/share). Although the company has grown sales substantially since it introduced EXPAREL into the market, the product’s momentum is not quite good enough to fundamentally justify a valuation of $524 million.

The Wolters Kluwer’s prescription data for Exparel is presented here:

Exparel was launched in April and the company reported 2Q12 and 3Q12 sales of $2.3 million and $4.6 million, respectively. These numbers are in rough agreement with the Wolters Kluwer’s data, where $1.6 million and $3.9 million have been reported.

Sales growth from April ($151,000) to May ($638,000) was impressive, but sales in the last 5 months have not been impressive at all: July at $1.27MM to November $1.67MM, or an average of $80,000 per month. The rate of growth has slowed considerably. Pacira is turning out to be a “short the launch” story.

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 $43.2MM 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 we came up with earlier.

Another point that has been overlooked by the market is 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 COGS 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 costs 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 (SG&A) expenses.

With a shrinking pool of collaboration revenue to top it off, it’s hard to make a bullish case for this company. PCRX is actually a decent short candidate.