Last night, Innocoll Holdings (INNL) announced that it has received a Refusal to File letter from the U.S. Food and Drug Administration for Xaracoll, the company's product candidate for the treatment of postsurgical pain. Commenting on the news, Janney Capital analyst Ken Trbovich told investors that the decision removes an overhang on Pacira (PCRX) as Xaracoll was "the most significant near-term threat" to its Exparel franchise. He also downgraded Innocoll to Neutral after the announcement.

OVERHANG REMOVAL: Noting that Innocoll's Xaracoll drug was "the most significant near-term threat" to Pacira's Exparel franchise, Janney Capital's Trbovich told investors that the FDA refusal to accept a new drug application for Xaracoll is likely to result in a lengthy process of meeting with the FDA to determine how to address the deficiencies in the NDA. The analyst noted that this may not jump start Exparel's growth, but eliminates a risk that the existing business will slow further before Pacira can secure an expanded nerve block label for the drug. While Trbovich argued that the setback for Innocoll is clearly a positive for Pacira in the short-term, he said it may turn into "a great threat" in the future if another company with greater resources steps in to acquire the former as the lack of capital necessary to fund its operations to the potential timing of an NDA approval for Xaracoll may force Innocoll into a sale. He raised his price target on Pacira's shares to $34 from $31, but reiterated a Neutral rating on the stock.

INNOCOLL 'EXTREMELY RISKY': In a separate note to investors, Trbovich downgraded Innocoll to Neutral from Buy following its Xaracoll's news. It will be at least a month before the company is able to have a meeting with the FDA to discuss the information required to address the deficiencies, the analyst noted, adding that the process "can only be characterized as being of an indeterminate length." Furthermore, Trbovich pointed out that Innocoll's current cash resources are not adequate to fund the company through 2017, making the shares "extremely risky." He lowered his fair value estimate for the shares to $2 from $9. Two other analysts also cut their ratings on Innocoll's shares. JMP Securities analyst Jason Butler downgraded the stock to Market Perform as he believes additional trials cannot be ruled out and sees the launch being delayed by at least 12 months. Additionally, FBR Capital analyst Edward White downgraded Innocoll to Market Perform and lowered his price target for the shares to $2 from $10.

PRICE ACTION: In morning trading, shares of Pacira have gained about 1.5% to $31.75, while Innocoll's stock dropped 65% to 62c per share.