Pacira Pharmaceuticals, Inc. (PCRX) is a vertically integrated (IP to manufacturing) pharmaceutical company. Its main line of business is the sale of a drug called EXPAREL, which was approved by the FDA in October 2011 and launched in the U.S. in April 2012. EXPAREL is a pain control drug (using slow release bupivacaine) injected directly into the wound/cut site during a surgical procedure, prior to closing the incision. It is also being studied for use as a nerve block agent for additional procedures. Bupivacaine is a well-known drug that has been used for decades during surgery. Its safety profile is well understood. The key advantage of EXPAREL over generic bupivacaine is that it incorporates a proprietary time-release "wrapper" called DepoFoam that lets the pain relief delivered by bupivacaine last for up to three days post-surgery. This enables reduced usage of dangerous opiates and other treatments, such as pain balls. In the end, we believe that based on clinical studies, EXPAREL is cheaper, safer and more effective than current pain management practices. We believe that EXPAREL has significant IP protection and has limited potential competitors.
Uptake among large hospital formularies has been brisk, and EXPAREL has been at least initially purchased at over 75% of the top 100 hospitals in the U.S. and most of the top 500 hospitals.Yet penetration of the potential $40 million procedure market is still minimal. Most current sales are for soft tissue procedures, but orthopedic studies also look promising. EXPAREL did about $14.5 million in sales in 2012, which grew to about $76 million in 2013 based on information recently released by the company. The fourth quarter annualized run rate of the drug is over $120 million.This means that the company is going to have to expand capacity from its current $100 million volume plant. It has built capacity for up to $400 million in sales, and is awaiting what we believe will be near term approval from the FDA on the plant. We believe EXPAREL represents a worldwide market opportunity of potentially billions of dollars and that it is just at the start of its overall volume penetration.Additionally, the company has longer term plans to use its DepoFoam "wrapper" technology on other drugs, including methotrexate (for rheumatoid arthritis). If this massive opportunity set is properly exploited, we believe that Pacira could become a billion dollar revenue company within a few years, and earnings per share could ultimately exceed $10 on EXPAREL alone. At a current price of $65, shares trade at only 6.5x this level, and it's possible that they could trade at 15-20x if growth hits our expectations. Continue Reading »