Pacira To Benefit from Surgery Trend Away from Opioids

– Pacira’s (PCRX) post-surgery non-opioid pain medication increasingly in demand

– PCRX sees “high teens” percent sales growth for Exparel medication, new indications

– Competition heats up but PCRX has a big head start; international opportunities

Pacira To Benefit from Surgery Trend Away from Opioids

Opioid abuse in the U.S. is well recognized. According to the National Institute on Drug Abuse, in 2018 46,800 Americans died from an opioid overdose, and 1.7 million Americans suffered from substance use disorders related to prescription opioids. The Centers for Disease Control has put the “economic burden” of prescription opioid misuse at $78.5 billion a year.

Opioids are given for pain management in various settings, such as after serious surgery. Once the anesthesia wears off, the 48-72 hours afterward can be very painful. Postoperative pain management is trending away from opioids, and one healthcare company that could benefit from that is Pacira BioSciences (PCRX).  I think its shares are worth a look. Wednesday, its stock was trading around $42, up from recent coronavirus-induced low of $31 and down from a 12-month high of $50.

Approximately 30 million surgeries are done annually in the U.S., with 14 million procedures high-volume, including orthopedic, general, OB/GYN and plastic surgery. I estimate, based on analyst and the industry reports, that these procedures cost $2.8 billion annually, and the remaining 16 million—including procedures where local anesthetics are currently not used—at $3 billion.

PCRX’s annual sales of $421 million last year are based almost entirely on Exparel, its most important product, a non-opioid nonnarcotic used after painful orthopedic surgeries, like knee replacements and hip fractures, among others. Given the move away from opioids, it’s no surprise sales grew 23% last year and that PCRX maintains they will grow in the high-teens percentage in the future.  That is supported by Pacira’s marketing deal with the giant Johnson & Johnson (JNJ), which is helping propel revenue higher. A look at the quarter on year ago quarter sales since the deal was completed in Jan. 2017 shows impressive growth. (See chart on page 2.)

I like PCRX for a number of reasons, including ongoing clinical studies that the company hopes will allow Exparel’s use to be eventually be extended to other surgical procedures. Demand could broaden. For example, the company is advancing clinical and regulatory activities to expand the Exparel label to include the pediatric, women’s health, and lower extremity nerve block settings, such as foot and ankle surgeries. Results from a study on the latter is expected later in 2020.

Pacira To Benefit from Surgery Trend Away from Opioids
Source: FSInsight, Bloomberg

Typically, Exparel is delivered directly as a foam-based infiltration into the surgical site and costs about $300 per dose, replacing traditional pain pumps, catheters and thoracic epidurals used in hospitals. It is more expensive, but Pacira maintains Exparel is more cost-effective than pain pumps with narcotics, citing studies showing patients using Exparel had significantly less pain, required fewer narcotics, and were discharged sooner than patients who received a nerve block.

Another potential Exparel driver is the cost savings to insurers—who ultimately pay for surgery and medicine—because it’s easier to use than a pain pump, for example, and, more importantly, it means that more surgeries can be done outside the hospital at a lower cost in special ambulatory surgical centers.

Exparel has support from the Centers for Medicare and Medicaid Services (CMS), a large buyer of healthcare services, which  moved some surgeries, like total hip arthroplasty and six spine procedures, from its inpatient-only list and is now covering these procedures in the hospital outpatient setting.  Regulators in Canada, the EU, and China, are evaluating its use.

Now before you run out and buy this stock, there are a number of caveats.  This is a small cap, with all the risk that entails ($1.7 billion market cap), and the short position equals about 11% of shares outstanding.

There are other negatives to consider. First, the coronavirus epidemic has probably cut back elective surgeries that would help Pacira sales in the first quarter and the second. I view this as a short-term issue. While guidance has been for about $485 to $500 million in sales this year and rising margins, don’t be surprised if the first or second quarter misses. The company should report in coming days or weeks.

Of more concern is the competition, as the FDA is looking at several nonopioid new drug applications, particularly Heron Therapeutics’ (HRTX) HTX-011 drug. However, HRTX said in February the FDA has extended its review by up to three months, with a decision goal of June 26. HRTX received a complete response letter from the FDA in April 2019. It’s not entirely clear when, or even if, the FDA will give final approval to Heron. Some investors worry that HTX-011 will be cheaper than Exparel. The ups and downs of the FDA decision process on HTX-011 has affected both companies’ stocks. If HTCX-011 is approved expect Pacira to take a hit.

To broaden its wares, Pacira last year acquired MyoScience and its ioveraº system — an FDA-approved handheld device used to deliver controlled doses of cold temperature to targeted nerves to ease pain — for $120 million. The system is approved for symptoms associated with osteoarthritis of the knee as well as general surgical use. PCRX has said that it expects iovera to approach $200 million in net sales—about half of last year’s total—within five years

For the moment, Pacira lives and dies on Exparel but it has had a big head start and been used in 6 million procedures safely. While drug pricing is important, Exparel’s history of safe usage also counts for doctors, hospitals and insurance companies. Even if HTX-011 is approved, it will have to compete in the marketplace.  PCRX trades at 12 times 2021 EPS estimates of $3.25 but could reach its previous high of $50 as sales rise and even double if Heron continues to have problems.

Where I could be wrong:  If HTX-011 gets FDA final approval and Heron does undercut Exparel, it could hurt PCRX future profits and the stock.

Bottom Line:  Pacira BioSciences has relatively low debt, a big head start and could benefit from the increasing move away from opioids in postoperative settings.

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