Form 10-Q Pacira BioSciences, Inc. For: Sep 30

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Pacira BioSciences, Inc. and its subsidiaries (collectively, the “Company” or “Pacira”) is the industry leader in its commitment to non-opioid pain management and providing a non-opioid option to as many patients as possible to redefine the role of opioids as rescue therapy only. The Company is also developing innovative interventions to address debilitating conditions involving the sympathetic nervous system, such as cardiac electrical storm, chronic pain and spasticity. The Company’s long-acting, local analgesic, EXPAREL® (bupivacaine liposome injectable suspension), was commercially launched in the United States, or U.S., in April 2012 and approved in select European countries and the United Kingdom, or U.K. in November 2021. EXPAREL utilizes the Company’s proprietary multivesicular liposome drug delivery technology that encapsulates drugs without altering their molecular structure, and releases them over a desired period of time. In November 2021, the Company acquired Flexion Therapeutics, Inc., or Flexion, and added ZILRETTA® (triamcinolone acetonide extended-release injectable suspension) to its product portfolio. ZILRETTA is the first and only extended-release, intra-articular (meaning in the joint) injection indicated for the management of osteoarthritis, or OA, knee pain. For more information, see Note 4, Flexion Acquisition. In April 2019, the Company added iovera°® to its commercial offering with the acquisition of MyoScience, Inc., or MyoScience (the “MyoScience Acquisition”). The iovera° system is a handheld cryoanalgesia device used to deliver a precise, controlled application of cold temperature to targeted nerves.

Pacira is subject to risks common to companies in similar industries and stages, including, but not limited to, competition from larger companies, reliance on revenue from three products, reliance on a limited number of wholesalers, reliance on a limited number of manufacturing sites, new technological innovations, dependence on key personnel, reliance on third-party service providers and sole source suppliers, protection of proprietary technology, compliance with government regulations and risks related to cybersecurity.

The Company is managed and operated as a single business focused on the development, manufacture, marketing, distribution and sale of non-opioid pain management and regenerative health solutions. The Company is managed by a single management team, and consistent with its organizational structure, the Chief Executive Officer and Chairman manages and allocates resources at a consolidated level. Accordingly, the Company views its business as one reportable segment to evaluate performance, allocate resources, set operational targets and forecast its future financial results.

Coronavirus (COVID-19) Pandemic and Global Economic Conditions

Since early 2020, the Company’s revenues have been impacted by COVID-19 pandemic-related challenges that included the significant postponement or suspension in the scheduling of elective surgical procedures due to public health guidance and government directives. While the degree of impact has diminished during the course of the pandemic due to the introduction of vaccines and therapeutics, as well as the lessening of elective surgery restrictions, certain pandemic-related operational and staffing challenges persist. It remains unclear how long it will take the elective surgery market to normalize or if restrictions on elective procedures will recur due to future COVID-19 variants or otherwise. Direct effects of the pandemic and global economic conditions may negatively impact the Company’s business, financial condition and results of operations. Such impacts may include the effect of prolonged periods of inflation on the Company’s customers and suppliers and longer lead-times or the inability to secure a sufficient supply of materials. The situation remains dynamic and subject to rapid and possibly material changes. Additional negative impacts may also arise that the Company is unable to foresee. The nature and extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted.

Basis of Presentation and Principles of Consolidation

These interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (SEC), for interim reporting. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in complete annual financial statements have been condensed or omitted. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The condensed consolidated financial statements at September 30, 2022, and for the three and nine-month periods ended September 30, 2022 and 2021, are unaudited, but include all adjustments (consisting of only normal recurring adjustments)

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which, in the opinion of management, are necessary to present fairly the financial information set forth herein in accordance with GAAP. The condensed consolidated balance sheet at December 31, 2021 is derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The condensed consolidated financial statements as presented reflect certain reclassifications from previously issued financial statements to conform to the current year presentation. The accounts of wholly-owned subsidiaries are included in the condensed consolidated financial statements. Intercompany accounts and transactions have been eliminated in consolidation.

The results of operations for these interim periods are not necessarily indicative of results that may be expected for any other interim periods or for the full year.

Concentration of Major Customers

    The Company sells EXPAREL through a drop-ship program under which orders are processed through wholesalers (including AmerisourceBergen Health Corporation, Cardinal Health, Inc. and McKesson Drug Company), but shipments of the product are sent directly to individual accounts, such as hospitals, ambulatory surgery centers and individual doctors. The Company also sells EXPAREL directly to ambulatory surgery centers and physicians. The Company sells ZILRETTA primarily to specialty distributors and a specialty pharmacy, who then subsequently resell ZILRETTA to physicians, clinics and certain medical centers or hospitals. The Company also contracts directly with healthcare providers and intermediaries such as Group Purchasing Organizations, or GPOs. The Company sells iovera° directly to end users and its bupivacaine liposome injectable suspension for veterinary use to a third-party licensee in the U.S.

The table below includes the percentage of revenues comprised by the Company’s three largest wholesalers in each period presented:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Largest wholesaler			31%						31%						31%						31%
Second largest wholesaler			22%						28%						23%						28%
Third largest wholesaler			22%						26%						22%						26%
Total			75%						85%						76%						85%

The percentage of revenues from the Company’s three largest wholesalers have shifted in the current year with the addition of ZILRETTA sales, which began in November 2021 following the completion of the Flexion Acquisition (as defined below).

Recently Adopted Accounting Pronouncements

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Revenue from Contracts with Customers

The Company’s net product sales consist of (i) EXPAREL in the U.S., the European Union, or E.U., and the U.K.; (ii) ZILRETTA in the U.S.; (iii) iovera° in the U.S., Canada and the E.U. and (iv) sales of, and royalties on, its bupivacaine liposome injectable suspension for veterinary use. Royalty revenues are from the Company’s collaborative licensing agreements. The Company does not consider revenue from sources other than sales of EXPAREL and ZILRETTA to be material sources of its consolidated revenue. As such, the following disclosure only relates to revenue associated with net EXPAREL and ZILRETTA product sales.

Net Product Sales

The Company sells EXPAREL through a drop-ship program under which orders are processed through wholesalers based on orders of the product placed by end-users, namely hospitals, ambulatory surgery centers and healthcare provider offices. EXPAREL is delivered directly to the end-user without the wholesaler ever taking physical possession of the product. The Company primarily sells ZILRETTA to specialty distributors and a specialty pharmacy, who then subsequently resell ZILRETTA to physicians, clinics and certain medical centers or hospitals. The Company also contracts directly with healthcare providers and intermediaries such as GPOs. Product revenue is recognized when control of the promised goods are transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods. EXPAREL and ZILRETTA revenues are recorded at the time the products are transferred to the customer.

Revenues from sales of products are recorded net of returns allowances, prompt payment discounts, service fees, government rebates, volume rebates and chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales. These amounts are treated as variable consideration, estimated and recognized as a reduction of the transaction price at the time of the sale, using the most likely amount method, except for returns, which is based on the expected value method. The Company includes these estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. The calculation of some of these items requires management to make estimates based on sales data, historical return data, contracts, statutory requirements and other related information that may become known in the future.

Accounts Receivable

The majority of accounts receivable arise from product sales and represent amounts due from wholesalers, hospitals, ambulatory surgery centers, specialty distributors, specialty pharmacy and doctors. Payment terms generally range from zero to 97 days from the date of the transaction, and accordingly, there is no significant financing component.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Accounting Standards Codification, or ASC, 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

At contract inception, the Company assesses the goods promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a good that is distinct. When identifying individual performance obligations, the Company considers all goods promised in the contract regardless of whether explicitly stated in the customer contract or implied by customary business practices. The Company’s contracts with customers require it to transfer an individual distinct product, which represents a single performance obligation. The Company’s performance obligation with respect to its product sales is satisfied at a point in time, which transfers control upon delivery of EXPAREL and ZILRETTA to its customers. The Company considers control to have transferred upon delivery because the customer has legal title to the asset, physical possession of the asset has been transferred, the customer has significant risks and rewards of ownership of the asset, and the Company has a present right to payment at that time.

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Disaggregated Revenue

The following table represents disaggregated net product sales in the periods presented as follows (in thousands):

						Three Months Ended September 30,												Nine Months Ended September 30,
						2022						2021						2022						2021
Net product sales:
EXPAREL						$	132,642					$	121,926					$	398,854					$	366,663
ZILRETTA						26,494						—						77,546						—
iovera°						4,467						4,182						10,694						11,264
Bupivacaine liposome injectable suspension						2,957						683						5,469						2,465
Total net product sales						$	166,560					$	126,791					$	492,563					$	380,392

On November 19, 2021, the Company acquired Flexion (the “Flexion Acquisition”), a biopharmaceutical company focused on the discovery, development, and commercialization of novel, local therapies for the treatment of patients with musculoskeletal conditions, beginning with osteoarthritis, the most common form of arthritis. Upon consummation of the Flexion Acquisition, Flexion became a wholly-owned subsidiary of the Company and was renamed Pacira Therapeutics, Inc.

The total consideration for the Flexion Acquisition was approximately $578.8 million consisting of: (i) $448.5 million of cash paid to former Flexion stockholders and to settle restricted stock units and in-the-money stock options; (ii) an $85.1 million cash payment to repay Flexion debt that was not assumed by the Company and (iii) $45.2 million of estimated contingent consideration related to contingent value rights, or CVRs, that were issued to Flexion shareholders and certain equity award holders in conjunction with the Flexion Acquisition. The consideration is subject to adjustments based on the achievement of certain potential milestone payments. Up to an additional $380.2 million in the aggregate may be payable to holders of the CVRs if each of the applicable milestones are achieved. No contingent consideration milestones were achieved in the nine months ended September 30, 2022. See Note 10, Financial Instruments, for information regarding the methodology and key assumptions used in the fair value measurements of contingent consideration and for more information regarding the changes in fair value.

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The Company is finalizing its valuation of certain tax accounts, and anticipates finalizing the purchase price allocation as the information necessary to complete the analyses is obtained, but no later than one year after the acquisition date. The following table sets forth the preliminary allocation of the Flexion Acquisition purchase price to the estimated fair value of the net assets acquired at the acquisition date (in thousands):

						Amounts Recognized at the Acquisition Date (as previously reported) (a)						Measurement Period Adjustments (b)						Amounts Recognized at the Acquisition Date (as adjusted)
ASSETS ACQUIRED
Cash and cash equivalents						$	113,562					$	—					$	113,562
Short-term available-for-sale investments						11,153						—						11,153
Accounts receivable						32,838						—						32,838
Inventories						29,667						—						29,667
Prepaid expenses and other assets						4,852						—						4,852
Fixed assets						23,307						—						23,307
Deferred tax assets						58,015						(10,970)						47,045
Right-of-use assets						6,585						—						6,585
Identifiable intangible assets						480,000						—						480,000
In-process research and development (IPR&D)						61,000						—						61,000
Total assets						$	820,979					$	(10,970)					$	810,009
LIABILITIES ASSUMED
Accounts payable						$	9,794					$	—					$	9,794
Accrued expenses						22,746						1,216						23,962
Deferred revenue						10,000						—						10,000
Lease liabilities						6,585						—						6,585
Other liabilities						1,187						—						1,187
Long-term debt						201,450						—						201,450
Total liabilities						251,762						1,216						252,978
Total identifiable net assets acquired						569,217						(12,186)						557,031
Goodwill						9,628						12,186						21,814
Total consideration transferred						$	578,845					$	—					$	578,845

(a) As previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

(b) Represents the finalization of a tax study and pre-acquisition expenses that were paid by the Company in 2022, partially offset by the release of estimated reserves.

Unaudited Pro Forma Summary of Operations

The following table shows the unaudited pro forma summary of operations for the three and nine-month periods ended September 30, 2021, as if the Flexion Acquisition had occurred on January 1, 2020. This pro forma information does not purport to represent what the Company’s actual results would have been if the Flexion Acquisition had occurred as of January 1, 2020, and is not indicative of what such results would be expected for any future period (in thousands, except per share amounts):

			Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
Total revenues			$	149,048					$	456,429
Net loss			$	(10,763)					$	(31,250)
Pro forma basic and diluted net loss per share			$	(0.24)					$	(0.71)

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The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of the Company and Flexion. The summary pro forma financial information primarily reflects the following pro forma adjustments:

•Recognition of the income tax benefit resulting from decreasing Flexion’s existing valuation allowance on deferred tax assets for the three and nine months ended September 30, 2021;

•Removal of Flexion’s interest expense and associated deferred financing cost amortization related to the $85.1 million of debt not assumed;

•Adjustments to the Company’s interest income for the cash used to acquire Flexion;

•Additional cost of goods sold related to a step-up value in inventory;

•Additional amortization expense from the acquired developed technology intangible assets;

•Additional depreciation of Flexion’s fixed assets; and

•Additional lease expense on Flexion’s right-of-use, or ROU, assets.

In addition, all of the above adjustments were adjusted for the applicable tax impact.

The components of inventories, net are as follows (in thousands):

			September 30,						December 31,
			2022						2021
Raw materials			$	35,602					$	36,337
Work-in-process			35,026						35,182
Finished goods			26,171						27,031
Total			$	96,799					$	98,550

Fixed assets, net, summarized by major category, consist of the following (in thousands):

			September 30,						December 31,
			2022						2021
Machinery and equipment			$	118,233					$	117,264
Leasehold improvements			61,302						59,740
Computer equipment and software			14,449						13,197
Office furniture and equipment			2,420						2,883
Construction in progress			98,770						80,557
Total			295,174						273,641
Less: accumulated depreciation			(101,528)						(85,240)
Fixed assets, net			$	193,646					$	188,401

For the three months ended September 30, 2022 and 2021, depreciation expense was $5.8 million and $3.8 million, respectively. For the three months ended September 30, 2022 and 2021, there was $1.1 million and $0.9 million of capitalized interest on the construction of manufacturing sites, respectively.

For the nine months ended September 30, 2022 and 2021, depreciation expense was $18.0 million and $9.6 million, respectively. For the nine months ended September 30, 2022 and 2021, there was $2.9 million and $3.0 million of capitalized interest on the construction of manufacturing sites, respectively.

At September 30, 2022 and December 31, 2021, total fixed assets, net includes leasehold improvements and manufacturing process equipment located in Europe in the amount of $57.4 million and $65.4 million, respectively.

As of September 30, 2022 and December 31, 2021, the Company had asset retirement obligations of $3.1 million and $2.4 million, respectively, included in accrued expenses and other liabilities on its condensed consolidated balance sheet, for costs associated with returning leased spaces to their original condition upon the termination of certain lease agreements.

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The Company leases all of its facilities, including its EXPAREL and iovera° manufacturing facility in San Diego, California. These leases have remaining terms up to 7.9 years, some of which provide renewal options at the then-current market value. The Company also has two embedded leases with Thermo Fisher Scientific Pharma Services for the use of their manufacturing facility in Swindon, England for the production of EXPAREL and ZILRETTA. A portion of the associated monthly base fees has been allocated to the lease components based on a relative fair value basis. During the three months ended September 30, 2022, the Company entered into a partial sublease for the former Flexion research and development laboratory in Woburn, Massachusetts which resulted in a $0.4 million ROU asset reclassified to a fixed asset.

The operating lease costs for the facilities include lease and non-lease components, such as common area maintenance and other common operating expenses, along with executory costs such as insurance and real estate taxes. Total operating lease expense, net is as follows (in thousands):

						Three Months Ended												Nine Months Ended
						September 30,												September 30,
						2022						2021						2022						2021
Fixed lease costs						$	3,440					$	2,919					$	10,509					$	8,762
Variable lease costs						540						416						1,520						1,318
Sublease income						(169)						—						(169)						—
Lease expense, net of sublease income						$	3,811					$	3,335					$	11,860					$	10,080

Supplemental cash flow information related to operating leases is as follows (in thousands):

						Nine Months Ended
						September 30,
						2022						2021
Cash paid for operating lease liabilities, net of lease incentive						$	9,922					$	9,868
ROU assets recorded in exchange for lease obligations						$	—					$	212

The Company has elected to net the amortization of the ROU asset and the reduction of the lease liability principal in other liabilities in the condensed consolidated statement of cash flows.

The Company has measured its operating lease liabilities at an estimated discount rate at which it could borrow on a collateralized basis over the remaining term for each operating lease. The weighted average remaining lease term and the weighted average discount rate are summarized as follows:

						September 30,
						2022						2021
Weighted average remaining lease term						7.11 years						8.46 years
Weighted average discount rate						6.95		%				6.88		%

Maturities of the Company’s operating lease liabilities are as follows (in thousands):

Year						Aggregate Minimum Payments Due
2022 (remaining three months)						$	3,261
2023						13,304
2024						13,435
2025						12,575
2026						12,310
Thereafter						39,423
Total future lease payments						94,308
Less: imputed interest						(20,543)
Total operating lease liabilities						$	73,765

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As of September 30, 2022, the Company has entered into one lease agreement not included above as the Company has not yet taken possession of the property. When the lease commences, the future lease obligations will be as follows (in thousands):

Year						Aggregate Minimum Payments Due
2022 (remaining three months)						$	81
2023						492
2024						493
2025						503
2026						505
Thereafter						443
Total future lease payments						$	2,517

Goodwill

The Company’s goodwill results from the acquisition of Pacira Pharmaceuticals, Inc. (the Company’s California operating subsidiary) from SkyePharma Holding, Inc., or Skyepharma, (now a subsidiary of Vectura Group plc) in March 2007 (the “Skyepharma Acquisition”), MyoScience, Inc., or MyoScience, (the “MyoScience Acquisition”) in April 2019 and the Flexion Acquisition in November 2021. The balances at September 30, 2022 and December 31, 2021 were $157.4 million and $145.2 million, respectively. The increase was due to measurement period adjustments associated with the Flexion Acquisition. See Note 4, Flexion Acquisition, for more information.

The Skyepharma Acquisition occurred in March 2007, prior to the requirements to record contingent consideration at fair value under ASC 805-30. In connection with the Skyepharma Acquisition, the Company agreed to certain milestone payments for DepoBupivacaine products, including EXPAREL. The final Skyepharma milestone payment of $32.0 million when annual net sales collected reached $500.0 million was achieved in the fourth quarter of 2021 and paid during the first quarter of 2022.

Intangible Assets

Intangible assets, net, consist of the in-process research and development, or IPR&D, and developed technology from the Flexion Acquisition and developed technology and customer relationships from the MyoScience Acquisition and are summarized as follows (dollar amounts in thousands):

September 30, 2022						Gross Carrying Value						Accumulated Amortization						Intangible Assets, Net						Weighted-Average Useful Lives
Developed technologies						$	590,000					$	(70,057)					$	519,943					10 years, 5 months
Customer relationships						90						(31)						59						10 years
Total finite-lived intangible assets, net						590,090						(70,088)						520,002
Acquired IPR&D						61,000						—						61,000
Total intangible assets, net						$	651,090					$	(70,088)					$	581,002
December 31, 2021						Gross Carrying Value						Accumulated Amortization						Intangible Assets, Net						Weighted-Average Useful Lives
Developed technologies						$	590,000					$	(27,097)					$	562,903					10 years, 5 months
Customer relationships						90						(25)						65						10 years
Total finite-lived intangible assets, net						590,090						(27,122)						562,968
Acquired IPR&D						61,000						—						61,000
Total intangible assets, net						$	651,090					$	(27,122)					$	623,968

Amortization expense on intangible assets for the three and nine months ended September 30, 2022 was $14.3 million and $43.0 million, respectively. Amortization expense on intangible assets for the three and nine months ended September 30, 2021 was $2.0 million and $5.9 million, respectively. The increase in amortization expense in the current year is a result of the amortization of ZILRETTA for osteoarthritis knee pain acquired as part of the Flexion Acquisition in November 2021.

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Assuming no changes in the gross carrying amount of these intangible assets, the future estimated amortization expense on the finite-lived intangible assets will be $14.3 million for the remaining three months of 2022, $57.3 million from 2023 to 2030, $37.4 million in 2031, $7.9 million in 2032 and $2.2 million in 2033.

The Company reviews its long-lived assets for impairment whenever an event or change in circumstances arise that indicate the carrying amount of an asset group is at risk of not being recoverable. During the three months ended June 30, 2022, a triggering event was identified for the ZILRETTA asset group due to a reduction in the near-term projected cash flows from the ZILRETTA product. The Company completed an impairment assessment through a recoverability test at June 30, 2022 by comparing the net carrying value of ZILRETTA asset group against the undiscounted net cash flows expected to be generated from ZILRETTA. It was determined that the ZILRETTA asset group was recoverable and not impaired.

The carrying value of the Company’s outstanding debt is summarized as follows (in thousands):

			September 30,						December 31,
			2022						2021
Term loan B facility maturing December 2026			$	343,719					$	359,497
0.750% Convertible senior notes due August 2025			395,510						330,627
3.375% Convertible senior notes due May 2024			8,641						201,249
2.375% Convertible senior notes due April 2022 (1)			—						157,857
Total			$	747,870					$	1,049,230

(1) The 2022 Notes (as defined below) matured on April 1, 2022.

Term Loan B Facility

In December 2021, the Company entered into a term loan credit agreement (the “Credit Agreement”) with JP Morgan Chase Bank, N.A., as administrative agent and the initial lender. The term loan issued under the Credit Agreement (the “Term Loan”) was issued at a 3% discount and allows for a single-advance term loan B facility in the principal amount of $375.0 million, which is secured by substantially all of the Company’s and each subsidiary guarantor’s assets. Subject to certain conditions, the Company may, at any time, on one or more occasion, add one or more new classes of term facilities and/or increase the principal amount of the loans of any existing class by requesting one or more incremental term facilities. The net proceeds of the Term Loan were approximately $363.8 million after deducting an original issue discount of $11.2 million.

The total debt composition of the Term Loan is as follows (in thousands):

			September 30,						December 31,
			2022						2021
Term Loan maturing December 2026			$	356,250					$	375,000
Deferred financing costs			(3,578)						(4,443)
Discount on debt			(8,953)						(11,060)
Total debt, net of debt discount and deferred financing costs			$	343,719					$	359,497

The Term Loan matures on December 7, 2026 and requires quarterly repayments of principal in the amount of $9.4 million commencing June 30, 2022, increasing to $14.1 million commencing December 31, 2025, with a remaining balloon payment of approximately $188.0 million due at maturity. During 2022, the Company is required to make three quarterly payments totaling $28.1 million. The Company is also required to make mandatory prepayments of principal from (i) the Company’s excess cash flow (as defined in the Credit Agreement) existing in any fiscal year and if the Senior Secured Leverage Ratio (as defined in the Credit Agreement) for such fiscal year exceeds certain predetermined limits (ii) net proceeds (as defined in the Credit Agreement) of non-ordinary course assets sales and casualty events and (iii) debt issuance proceeds (other than permitted debt under the Credit Agreement). Prepayment penalties for the Term Loan are 2% in the first loan year plus an interest make-whole payment, 2% in the second loan year, 1% in the third loan year and nothing thereafter. Prepayment penalties generally do not apply to mandatory prepayment obligations under the Credit Agreement, such as prepayments due in connection with excess cash flow. During the nine months ended September 30, 2022, the Company made scheduled principal payments of $18.8 million in the aggregate.

The Term Loan requires the Company to, among other things, maintain (i) a first lien net leverage ratio, determined as of the last day of any fiscal quarter, of no greater than 1.75 to 1.00 and (ii) liquidity, at any time, of at least $150.0 million. The Term Loan also contains customary affirmative and negative covenants, financial covenants, representations and warranties,

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events of default and other provisions. As of September 30, 2022, the Company was in compliance with all financial covenants under the Credit Agreement.

The Company may elect to borrow either term benchmark borrowings or alternate base rate borrowings. Term benchmark borrowings bear interest at a variable rate per annum equal to the Adjusted Term SOFR Rate (as defined in the Credit Agreement) (subject to a 75 basis points floor) plus an applicable margin of 700 basis points. Alternate base rate borrowings bear interest at a variable rate per annum determined using a base rate (subject to a 175 basis points floor) equal to the greatest of (i) the Prime Rate (as defined in the Credit Agreement) in effect on such day, (ii) the NYFRB Rate (as defined in the Credit Agreement) plus 50 basis points or (iii) the Adjusted Term SOFR Rate (as defined in the Credit Agreement) plus 100 basis points, subject to certain exceptions, plus an applicable margin of 600 basis points. As of September 30, 2022, borrowings under the Term Loan consisted entirely of term benchmark borrowings at a rate of 9.21%.

Convertible Senior Notes Due 2025

In July 2020, the Company completed a private placement of $402.5 million in aggregate principal amount of its 0.750% convertible senior notes due 2025, or 2025 Notes, and entered into an indenture, or 2025 Indenture, with respect to the 2025 Notes. The 2025 Notes accrue interest at a fixed rate of 0.750% per year, payable semiannually in arrears on February 1st and August 1st of each year. The 2025 Notes mature on August 1, 2025.

The total debt composition of the 2025 Notes is as follows (in thousands):

			September 30,						December 31,
			2022						2021
0.750% convertible senior notes due August 2025			$	402,500					$	402,500
Deferred financing costs			(6,990)						(7,155)
Discount on debt			—						(64,718)
Total debt, net of debt discount and deferred financing costs			$	395,510					$	330,627

The net proceeds from the issuance of the 2025 Notes were approximately $390.0 million, after deducting commissions and the offering expenses paid by the Company. A portion of the net proceeds from the 2025 Notes was used by the Company to repurchase $185.0 million in aggregate principal amount of its then-outstanding 2.375% convertible senior notes due 2022 in privately-negotiated transactions for a total of $211.1 million of cash (including accrued interest).

Holders may convert the 2025 Notes at any time prior to February 3, 2025, only if certain circumstances are met, including if during the previous calendar quarter, the last reported sales price of the Company’s common stock was greater than 130% of the conversion price then applicable for at least 20 out of the last 30 consecutive trading days of the quarter. During the quarter ended September 30, 2022, this condition for conversion was not met.

On or after February 3, 2025, until the close of business on the second scheduled trading day immediately preceding August 1, 2025, holders may convert their 2025 Notes at any time.

Upon conversion, holders will receive the principal amount of their 2025 Notes and any excess conversion value, calculated based on the per share volume-weighted average price for each of the 40 consecutive trading days during the observation period (as more fully described in the 2025 Indenture). For both the principal and excess conversion value, holders may receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s option. The initial conversion rate for the 2025 Notes is 13.9324 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of $71.78 per share of the Company’s common stock. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. The initial conversion price of the 2025 Notes represents a premium of approximately 32.5% to the closing sale price of $54.17 per share of the Company’s common stock on the Nasdaq Global Select Market on July 7, 2020, the date that the Company priced the private offering of the 2025 Notes.

As of September 30, 2022, the 2025 Notes had a market price of $993 per $1,000 principal amount. In the event of conversion, holders would forgo all future interest payments, any unpaid accrued interest and the possibility of further stock price appreciation. Upon the receipt of conversion requests, the settlement of the 2025 Notes will be paid pursuant to the terms of the 2025 Indenture. In the event that all of the 2025 Notes are converted, the Company would be required to repay the $402.5 million in principal value and any conversion premium in any combination of cash and shares of its common stock (at the Company’s option).

Prior to August 1, 2023, the Company may not redeem the 2025 Notes. On or after August 1, 2023 (but, in the case of a redemption of less than all of the outstanding 2025 Notes, no later than the 40th scheduled trading day immediately before the

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maturity date), the Company may redeem for cash all or part of the 2025 Notes if the last reported sale price (as defined in the 2025 Indenture) of the Company’s common stock has been at least 130% of the conversion price then in effect for (i) each of at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related notice of redemption and (ii) the trading day immediately before the date the Company sends such notice. The redemption price will equal the sum of (i) 100% of the principal amount of the 2025 Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date. In addition, calling the 2025 Notes for redemption will constitute a “make-whole fundamental change” (as defined in the 2025 Indenture) and will, in certain circumstances, increase the conversion rate applicable to the conversion of such notes if it is converted in connection with the redemption. No sinking fund is provided for the 2025 Notes.

While the 2025 Notes are currently classified on the Company’s condensed consolidated balance sheet at September 30, 2022 as long-term debt, the future convertibility and resulting balance sheet classification of this liability is monitored at each quarterly reporting date and is analyzed dependent upon market prices of the Company’s common stock during the prescribed measurement periods. In the event that the holders of the 2025 Notes have the election to convert the 2025 Notes at any time during the prescribed measurement period, the 2025 Notes would then be considered a current obligation and classified as such.

Convertible Senior Notes Due 2024 Assumed from the Flexion Acquisition

Prior to the Flexion Acquisition, on May 2, 2017, Flexion issued an aggregate of $201.3 million principal amount of 3.375% convertible senior notes due 2024 (the “Flexion 2024 Notes”), pursuant to the indenture, dated as of May 2, 2017 (the “Original Flexion Indenture”), between Flexion and Wells Fargo Bank, N.A., as trustee (the “Flexion Trustee”), as supplemented by the First Supplemental Indenture, dated as of November 19, 2021, between Flexion and the Flexion Trustee (the “First Supplemental Flexion Indenture” and, together with the Original Flexion Indenture, the “Flexion Indenture”). The Flexion 2024 Notes have a maturity date of May 1, 2024, are unsecured, and accrue interest at a rate of 3.375% per annum, payable semi-annually on May 1 and November 1 of each year. Upon the Flexion Acquisition, the principal was assumed and recorded at fair value by the Company.

Upon conversion of the Flexion 2024 Notes, at the election of each holder thereof, each Flexion 2024 Note was convertible into cash, shares of Flexion’s common stock, or a combination thereof, at Flexion’s election, at a conversion rate of approximately 37.3413 shares of Flexion common stock per $1,000 principal amount of the Flexion 2024 Notes, which corresponded to an initial conversion price of approximately $26.78 per share of Flexion’s common stock. As a result of the Flexion Acquisition, and in connection with the Notice (as defined below), holders of the Flexion 2024 Notes became entitled to certain Flexion Acquisition-related conversion and repurchase rights, as discussed below. In addition, as a result of the Flexion Acquisition and as discussed in more detail below, any future conversion rights are subject to the occurrence of any future events giving rise to such conversion rights under the Flexion Indenture.

On December 6, 2021, as a result of the Flexion Acquisition and in accordance with the Flexion Indenture, Flexion provided a Fundamental Change Company Notice and Offer to Purchase (the “Notice”) to the holders of the Flexion 2024 Notes and offered to repurchase for cash all of the outstanding Flexion 2024 Notes, at a repurchase price in cash equal to 100% of the principal amount of the Flexion 2024 Notes being repurchased, plus accrued and unpaid interest thereon to, but excluding, January 7, 2022, subject to the terms and conditions set forth therein. The offer to purchase expired at 5:00 p.m., New York City time, on January 6, 2022, as scheduled.

Any holder that did not exercise its repurchase right in accordance with the terms of the Notice retained the conversion rights associated with such holder’s Flexion 2024 Notes under the Flexion Indenture. For conversion of Flexion 2024 Notes in connection with the Fundamental Change and the Make-Whole Fundamental Change (each as defined in the Flexion Indenture) resulting from the Flexion Acquisition, each $1,000 principal amount of the Flexion 2024 Notes was convertible into (i) $317.40 in cash and (ii) 37.3413 CVRs, based on the conversion rate of 37.3413, prior to 5:00 p.m., New York City time, on January 7, 2022. Alternatively, holders could retain their Flexion 2024 Notes and such Flexion 2024 Notes would remain outstanding subject to their existing terms, including with respect to a holder’s right to receive interest payments on the Flexion 2024 Notes and exercise any future conversion rights that may arise under the Flexion Indenture.

On January 7, 2022, following the expiration of the offer to purchase, the Company accepted the $192.6 million aggregate principal amount of Flexion 2024 Notes that were validly tendered (and not validly withdrawn). No Flexion 2024 Notes were converted in connection with the Notice. At September 30, 2022, the remaining principal outstanding is $8.6 million.

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Convertible Senior Notes Due 2022

In March 2017, the Company completed a private placement of $345.0 million in aggregate principal amount of 2.375% convertible senior notes due 2022, or 2022 Notes. The 2022 Notes accrued interest at a fixed rate of 2.375% per year, payable semiannually in arrears on April 1st and October 1st of each year. In July 2020, the Company used part of the net proceeds from the issuance of the 2025 Notes to repurchase $185.0 million aggregate principal amount of the 2022 Notes in privately-negotiated transactions for an aggregate of $211.1 million in cash (including accrued interest).

The total debt composition of the 2022 Notes is as follows (in thousands):

			September 30,						December 31,
			2022						2021
2.375% convertible senior notes due April 2022			$	—					$	160,000
Deferred financing costs			—						(223)
Discount on debt			—						(1,920)
Total debt, net of debt discount and deferred financing costs			$	—					$	157,857

On April 1, 2022, the 2022 Notes matured and the Company settled the remaining outstanding principal balance of $160.0 million and a conversion premium of $4.8 million through a cash payment of $156.9 million and the issuance of 101,521 shares of the Company’s common stock, which increased additional paid-in capital by $3.0 million.

Interest Expense

The following table sets forth the total interest expense recognized in the periods presented (dollar amounts in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Contractual interest expense			$	9,343					$	1,704					$	26,724					$	5,122
Amortization of debt issuance costs			903						666						2,956						1,976
Amortization of debt discount			695						5,844						2,107						17,245
Capitalized interest and other (Note 6)			(1,085)						(881)						(2,852)						(3,016)
Total			$	9,856					$	7,333					$	28,935					$	21,327
Effective interest rate on total debt			5.42		%				6.70		%				5.66		%				6.70		%

Upon the adoption of ASU 2020-06 effective January 1, 2022, the Company eliminated the convertible debt discounts associated with the 2022 Notes and the 2025 Notes that were originally recorded as offsets to the embedded conversion features recognized in equity. Effective January 1, 2022, the Company will not record interest expense on the previously recorded discounts on convertible debt. The deferred financing costs previously allocated to the conversion features have since been re-allocated to the outstanding debt, slightly increasing the future annual amortization of deferred financing costs. For additional information regarding the adoption of ASU 2020-06, see Note 2, Summary of Significant Accounting Policies.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in the principal or most advantageous market in an orderly transaction. To increase consistency and comparability in fair value measurements, the FASB established a three-level hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of fair value measurements are:

•Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

•Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

•Level 3: Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

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The carrying value of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these items. The fair value of the Company’s convertible senior notes are calculated utilizing market quotations from an over-the-counter trading market for these notes (Level 2). The fair value of the Company’s acquisition-related contingent consideration is reported at fair value on a recurring basis (Level 3). The carrying amounts of convertible notes receivable without readily determinable fair values have not been adjusted for either an impairment or upward or downward adjustments based on observable transactions, whereas an equity investment was fully impaired during the three months ended September 30, 2022.

At September 30, 2022, the carrying values and fair values of the following financial assets and liabilities were as follows (in thousands):

						Carrying Value						Fair Value Measurements Using
												Level 1						Level 2						Level 3
Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis:
Financial Assets:
Equity investments						$	15,877					$	—					$	—					$	15,877
Convertible notes receivable						$	5,224					$	—					$	—					$	5,224
Financial Liabilities:
Acquisition-related contingent consideration						$	34,204					$	—					$	—					$	34,204
Financial Liabilities Measured at Amortized Cost:
Term loan facility due December 2026						$	343,719					$	—					$	343,781					$	—
0.750% convertible senior notes due 2025 (1)						$	395,510					$	—					$	399,481					$	—
3.375% convertible senior notes due 2024 (2)						$	8,641					$	—					$	8,649					$	—

(1) The closing price of the Company’s common stock as reported on the Nasdaq Global Select Market was $53.19 per share at September 30, 2022 compared to a conversion price of $71.78 per share. Therefore, at September 30, 2022, the conversion price was above the stock price. The maximum conversion premium that could have been due on the 2025 Notes is 5.6 million shares of the Company’s common stock, which assumes no increase in the conversion rate for certain corporate events.

(2) Relates to the Flexion 2024 Notes. For more information, See Note 9, Debt.

Equity and Convertible Note Investments

The Company holds strategic investments in clinical and preclinical stage privately-held biotechnology companies in the form of equity and convertible note investments. The following investments have no readily determinable fair value and are recorded at cost minus impairment, if any, plus or minus observable price changes of identical or similar investments (in thousands):

						Equity Investments						Convertible Notes Receivable						Total
Balance at December 31, 2020						$	12,802					$	—					$	12,802
Purchases						12,967						4,220						17,187
Divestiture of investment						(11,642)						—						(11,642)
Foreign currency adjustments						—						(88)						(88)
Balance at December 31, 2021						$	14,127					$	4,132					$	18,259
Purchases						11,750						1,250						13,000
Impairment						(10,000)						—						(10,000)
Foreign currency adjustments						—						(158)						(158)
Balance at September 30, 2022						$	15,877					$	5,224					$	21,101

During the three and nine months ended September 30, 2022, an impairment of an equity investment of $10.0 million was recorded within other, net in the condensed consolidated statements of operations.

During the nine months ended September 30, 2021, the Company sold an equity investment for net cash proceeds of $9.1 million and recognized a realized loss of $2.6 million, which was recorded in other, net in the condensed consolidated statements of operations. The fair value of the divested equity investment was based on a Level 1 input.

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Acquisition-Related Contingent Consideration

The Company has recognized contingent consideration related to the Flexion Acquisition and the MyoScience Acquisition in the amount of $34.2 million and $57.6 million as of September 30, 2022 and December 31, 2021, respectively. The Company’s contingent consideration obligations are recorded at their estimated fair values and are revalued each reporting period if and until the related contingencies are resolved. The Company has measured the fair value of its contingent consideration using a probability-weighted discounted cash flow approach that is based on unobservable inputs and a Monte Carlo simulation. These inputs include, as applicable, estimated probabilities and the timing of achieving specified commercial and regulatory milestones, estimated forecasts of revenue and costs and the discount rates used to calculate the present value of estimated future payments. Significant changes may increase or decrease the probabilities of achieving the related commercial and regulatory events, shorten or lengthen the time required to achieve such events, or increase or decrease estimated forecasts.

In November 2021, the Company completed the Flexion Acquisition, which provided for contingent consideration related to CVRs that were issued to Flexion shareholders and certain equity award holders which could aggregate up to a total of $425.5 million if certain regulatory and commercial milestones are met. The Company’s obligation to make milestone payments is limited to those milestones achieved through December 31, 2030, and are to be paid within 60 days of the end of the fiscal quarter of achievement. As part of the purchase price consideration related to the Flexion Acquisition, the Company recorded contingent consideration of $45.2 million, which represented the Company’s potential achievement of meeting the regulatory and commercial milestones. For the period from the date of the Flexion Acquisition through December 31, 2021, the Company recorded an additional $1.2 million liability. During the three and nine months ended September 30, 2022, the Company recorded gains of $0.5 million and $13.8 million, respectively, primarily due to adjustments to near-term forecasts for the earnout period of the contingent consideration. These adjustments were recorded as acquisition-related gains in the condensed consolidated statements of operations. At September 30, 2022, the weighted average discount rate was 14.4% and the probability of success for the remaining regulatory milestone was 20.0%. As of September 30, 2022 and December 31, 2021, a contingent consideration liability related to the Flexion Acquisition was recognized in the amount of $32.6 million and $46.4 million, respectively.

In April 2019, the Company completed the MyoScience Acquisition pursuant to the terms of an Agreement and Plan of Merger, which provided for contingent milestone payments of up to an aggregate of $100.0 million upon the achievement of certain regulatory and commercial milestones. The Company’s obligation to make milestone payments is limited to those milestones achieved through December 31, 2023, and are to be paid within 60 days of the end of the fiscal quarter of achievement. As of September 30, 2022, the maximum potential remaining milestone payments to be paid are $43.0 million. The Company recognized contingent consideration gains of $0.5 million and $9.6 million during the three and nine months ended September 30, 2022, respectively, due to the reduced probability of meeting the contingent consideration milestones by December 31, 2023, the expiration date for achieving the milestones. The Company recognized contingent consideration gains of $1.2 million and $2.1 million during the three and nine months ended September 30, 2021, respectively. At September 30, 2022, the weighted average discount rate was 12.8% and the probability of success for the regulatory milestone that has not yet been met was reduced to zero. As of September 30, 2022 and December 31, 2021, a contingent consideration liability related to the MyoScience Acquisition has been recognized in the amounts of $1.6 million and $11.2 million, respectively.

The following table includes the key assumptions used in the valuation of the Company’s contingent consideration:

Assumption

Flexion Ranges Utilized as of September 30, 2022

MyoScience Ranges Utilized as of September 30, 2022

Discount rates

13.98% to 14.77%

12.25% to 13.28%

Probabilities of payment for regulatory milestones

0% to 20%

0%

Projected years of payment for regulatory and commercial milestones

2027 to 2030

2023

The change in the Company’s contingent consideration recorded at fair value using Level 3 measurements is as follows (in thousands):

						Contingent Consideration Fair Value
Balance at December 31, 2021						$	57,598
Fair value adjustments and accretion						(23,394)
Balance at September 30, 2022						$	34,204

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Available-for-Sale Investments

Short-term investments consist of asset-backed securities collateralized by credit card receivables, investment grade commercial paper and corporate, federal agency and government bonds with maturities greater than three months, but less than one year. Noncurrent investments consist of federal agency bonds with maturities greater than one year but less than three years. Net unrealized gains and losses (excluding credit losses, if any) from the Company’s short-term investments are reported in other comprehensive income (loss). At September 30, 2022 and December 31, 2021, all of the Company’s short-term and noncurrent investments are classified as available-for-sale investments and are determined to be Level 2 instruments, which are measured at fair value using standard industry models with observable inputs. The fair value of the commercial paper is measured based on a standard industry model that uses the three-month U.S. Treasury bill rate as an observable input. The fair value of the asset-backed securities and corporate bonds is principally measured or corroborated by trade data for identical issues in which related trading activity is not sufficiently frequent to be considered a Level 1 input or that of comparable securities. At the time of purchase, all short-term investments had an “A” or better rating by Standard & Poor’s. 

The following summarizes the Company’s short-term and noncurrent available-for-sale investments at September 30, 2022 and December 31, 2021 (in thousands):

September 30, 2022 Investments						Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value (Level 2)
Current:
Asset-backed securities						$	22,298					$	—					$	(127)					$	22,171
Commercial paper						169,736						—						(903)						168,833
Corporate bonds						2,000						—						—						2,000
U.S. federal agency bonds						24,474						—						(160)						24,314
U.S. government bonds						2,006						—						(23)						1,983
Subtotal						220,514						—						(1,213)						219,301
Noncurrent:
U.S. federal agency bonds						17,496						—						(102)						17,394
Total						$	238,010					$	—					$	(1,315)					$	236,695

December 31, 2021 Investments						Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value (Level 2)
Current:
Asset-backed securities						$	3,182					$	—					$	—					$	3,182
Commercial paper						57,533						80						(2)						57,611
Corporate bonds						9,936						102						—						10,038
Total						$	70,651					$	182					$	(2)					$	70,831

At September 30, 2022, there were no investments available for sale that were materially less than their amortized cost.

The Company elects to recognize its interest receivable separate from its available-for-sale investments. At September 30, 2022 and December 31, 2021, the interest receivable recognized in prepaid expenses and other current assets was $0.4 million and $0.1 million, respectively.

Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term available-for-sale investments and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. Such amounts may exceed federally-insured limits.

 As of September 30, 2022, three wholesalers each accounted for over 10% of the Company’s accounts receivable, at 33%, 18% and 18%. At December 31, 2021, four wholesalers each accounted for over 10% of the Company’s accounts receivable, at 30%, 20%, 17% and 11%. For additional information regarding the Company’s wholesalers, see Note 2, Summary of Significant Accounting Policies. EXPAREL and ZILRETTA revenues are primarily derived from major wholesalers and specialty distributors that generally have significant cash resources. The Company performs ongoing credit evaluations of its customers as warranted and generally does not require collateral. Allowances for credit losses on the

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Accumulated Other Comprehensive (Loss) Income

The following tables illustrate the changes in the balances of the Company’s accumulated other comprehensive (loss) income for the periods presented (in thousands):

						Net Unrealized (Loss) Gain From Available For Sale Investments						Unrealized Foreign Currency Translation						Accumulated Other Comprehensive (Loss) Income
Balance at December 31, 2021						$	139					$	28					$	167
Net unrealized loss on investments, net of tax (1)						(1,056)						—						(1,056)
Foreign currency translation adjustments						—						219						219
Balance at September 30, 2022						$	(917)					$	247					$	(670)

						Net Unrealized (Loss) Gain From Available For Sale Investments						Unrealized Foreign Currency Translation						Accumulated Other Comprehensive (Loss) Income
Balance at December 31, 2020						$	319					$	(1)					$	318
Net unrealized loss on investments, net of tax (1)						(168)						—						(168)
Foreign currency translation adjustments						—						3						3
Balance at September 30, 2021						$	151					$	2					$	153

Stock-Based Compensation

The Company recognized stock-based compensation expense in the periods presented as follows (in thousands):

						Three Months Ended September 30,												Nine Months Ended September 30,
						2022						2021						2022						2021
Cost of goods sold						$	1,599					$	1,512					$	4,429					$	4,429
Research and development						1,783						1,156						4,761						3,591
Selling, general and administrative						9,300						8,116						26,225						23,336
Total						$	12,682					$	10,784					$	35,415					$	31,356
Stock-based compensation from:
Stock options						$	6,711					$	6,458					$	20,038					$	19,507
Restricted stock units						5,758						4,126						14,588						11,164
Employee stock purchase plan						213						200						789						685
Total						$	12,682					$	10,784					$	35,415					$	31,356

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Equity Awards

The following tables contain information about the Company’s stock option and restricted stock unit, or RSU, activity for the nine months ended September 30, 2022:

Stock Options						Number of Options						Weighted Average Exercise Price (Per Share)
Outstanding at December 31, 2021						6,050,540						$	49.32
Granted						1,034,230						60.16
Exercised						(667,940)						35.18
Forfeited						(88,766)						54.38
Expired						(24,447)						78.76
Outstanding at September 30, 2022						6,303,617						52.41

Restricted Stock Units						Number of Units						Weighted Average Grant Date Fair Value (Per Share)
Unvested at December 31, 2021						955,277						$	52.85
Granted						598,699						60.43
Vested						(323,821)						50.17
Forfeited						(68,000)						55.04
Unvested at September 30, 2022						1,162,155						57.38

The weighted average fair value of stock options granted during the nine months ended September 30, 2022 was $25.66 per share. The fair values of stock options granted were estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

Black-Scholes Weighted Average Assumption						Nine Months Ended September 30, 2022
Expected dividend yield						None
Risk-free interest rate						2.84%
Expected volatility						45.14%
Expected term of options						4.92 years

Employee Stock Purchase Plan

In June 2022, the Company’s stockholders approved the Amended and Restated 2014 Employee Stock Purchase Plan, or ESPP. The ESPP was amended to increase the number of shares of common stock that may be sold under the ESPP by an additional 500,000 shares.

The ESPP features two six-month offering periods per year, running from January 1 to June 30 and July 1 to December 31. Under the ESPP, employees may elect to contribute after-tax earnings to purchase shares at 85% of the closing fair market value of the Company’s common stock on either the offering date or the purchase date, whichever is less. During the nine months ended September 30, 2022, 36,729 shares were purchased and issued through the ESPP.

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Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to common shares by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing the net income (loss) attributable to common shares by the weighted average number of common shares outstanding plus dilutive potential common shares outstanding during the period.

ASU 2020-06 was adopted on January 1, 2022 and requires the Company to use the if-converted method to calculate the number of potentially dilutive shares for convertible debt. Under the if-converted method, adjustments are made to the diluted net income (loss) per common share calculation as if the Company had converted the convertible debt on the first day of each period presented. Adjustments to the numerator are made to add back the interest expense associated with the convertible debt on a post-tax basis. Adjustments to the denominator reflect the number of shares assumed to be convertible at the beginning of the period. For additional information regarding ASU 2020-06, see Note 2, Summary of Significant Accounting Policies. Prior to January 1, 2022, the Company used the treasury stock method to calculate dilutive shares on its convertible debt.

Potential common shares include the shares of common stock issuable upon the exercise of outstanding stock options, the vesting of RSUs and the purchase of shares from the ESPP (using the treasury stock method), if applicable.

Potential common shares are excluded from the diluted net income (loss) per share computation to the extent they would be antidilutive. As the Company reported a net loss for the three months ended September 30, 2022, no potentially dilutive securities have been included in the computation of diluted net loss per share for that period.

The following table sets forth the computation of basic and diluted net income (loss) per common share for the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share amounts):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Numerator:
Net (loss) income—basic			$	(693)					$	17,660					$	26,011					$	47,110
ASU 2020-06 convertible notes if-converted method adjustment			—						—						3,112						—
Adjusted net (loss) income—diluted			(693)						17,660						29,123						47,110
Denominator:
Weighted average common shares outstanding—basic			45,831						44,476						45,400						44,151
Computation of diluted securities:
ASU 2020-06 convertible notes if-converted method adjustment			—						—						5,608						—
Dilutive effect of stock options			—						827						937						1,132
Dilutive effect of RSUs			—						160						272						337
Dilutive effect of conversion premium on the 2022 Notes			—						—						—						51
Dilutive effect of ESPP purchase options			—						—						3						3
Weighted average common shares outstanding—diluted			45,831						45,463						52,220						45,674
Net (loss) income per share:
Basic net (loss) income per common share			$	(0.02)					$	0.40					$	0.57					$	1.07
Diluted net (loss) income per common share			$	(0.02)					$	0.39					$	0.56					$	1.03

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Income before income taxes and income tax expense are as follows (dollar amounts in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Income before income taxes:
Domestic			$	9,230					$	25,167					$	39,610					$	66,962
Foreign			(7,161)						(936)						(8,240)						(4,360)
Total income before income taxes			$	2,069					$	24,231					$	31,370					$	62,602
Income tax expense			$	2,762					$	6,571					$	5,359					$	15,492
Effective tax rate			133		%				27		%				17		%				25		%

The Company’s income tax expense represents the estimated annual effective tax rate applied to the year-to-date domestic operating results adjusted for certain discrete tax items.

The Company’s effective tax rates for the three months ended September 30, 2022 and September 30, 2021 include non-deductible executive compensation and valuation allowances recorded against non-U.S. results and deductible capital losses. The three months ended September 30, 2022 also includes benefits for a first quarter Skyepharma milestone payment and a fair value adjustment for Flexion contingent consideration.

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Acquisition-related charges (gains) and other for the three and nine months ended September 30, 2022 and 2021 summarized below (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Severance-related expenses			$	194					$	445					$	4,259					$	445
Acquisition-related fees			905						951						4,918						958
Other acquisition expenses			433						—						985						—
Total acquisition-related charges			1,532						1,396						10,162						1,403
Flexion contingent consideration			(520)						—						(13,837)						—
MyoScience contingent consideration			(523)						(1,159)						(9,557)						(2,147)
Nuance Biotech Co. Ltd. agreement dissolution costs			—						—						—						3,000
Total acquisition-related charges (gains) and other			$	489					$	237					$	(13,232)					$	2,256

Flexion Acquisition

The Company recognized acquisition-related costs of $1.5 million and $10.2 million during the three and nine months ended September 30, 2022, respectively, primarily for severance, legal fees, third-party services and other one-time charges related to the Flexion Acquisition. The Company recognized acquisition-related costs of $1.0 million during the three and nine months ended September 30, 2021 primarily related to legal fees. See Note 4, Flexion Acquisition, for more information.

On November 19, 2021, as part of the purchase price consideration related to the Flexion Acquisition, the Company recorded contingent consideration of $45.2 million, which represents the Company’s potential achievement of meeting regulatory and sales-based milestones. During the three and nine months ended September 30, 2022, the Company recorded $0.5 million and $13.8 million gains, respectively, due to a decrease to the fair value of its contingent consideration. See Note 10, Financial Instruments, for information regarding the method, key assumptions used in the fair value measurements of contingent consideration and more information regarding the changes in fair value.

MyoScience Acquisition

The Company recognized $0.5 million and $9.6 million contingent consideration gains during the three and nine months ended September 30, 2022, respectively. The Company recognized $1.2 million and $2.1 million contingent consideration gains during the three and nine months ended September 30, 2021, respectively. See Note 10, Financial Instruments, for information regarding the method, key assumptions used in the fair value measurements of contingent consideration and more information regarding the changes in fair value.

The Company recognized acquisition-related costs of $0.4 million during the three and nine months ended September 30, 2021 primarily related to one-time termination benefits fees.

Nuance Biotech Co. Ltd.

In June 2018, the Company entered an agreement with Nuance Biotech Co. Ltd., or Nuance, a China-based specialty pharmaceutical company, to advance the development and commercialization of EXPAREL in China. Under the terms of the agreement, the Company had granted Nuance the exclusive rights to develop and commercialize EXPAREL. In April 2021, the Company and Nuance agreed to a mutual termination of the agreement due to the lack of a viable regulatory pathway that adequately safeguards the Company’s intellectual property against the risk of a generic product, which resulted in dissolution costs of $3.0 million for the nine months ended September 30, 2021.

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From time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary course of its business, including those related to patents, product liability and government investigations. Except as described below, the Company is not presently a party to any legal proceedings that it believes to be material, and is not aware of any pending or threatened litigation against the Company which it believes could have a material adverse effect on its business, operating results, financial condition or cash flows.

MyoScience Milestone Litigation

In August 2020, the Company and its subsidiary, Pacira CryoTech, Inc. (“Pacira CryoTech”), filed a lawsuit in the Court of Chancery of the State of Delaware against Fortis Advisors LLC (“Fortis”), solely in its capacity as representative for the former securityholders of MyoScience, and certain other defendants, seeking declaratory judgment with respect to certain terms of the merger agreement for the MyoScience Acquisition (the “Merger Agreement”), specifically related to the achievement of certain milestone payments under the Merger Agreement. In addition, the Company and Pacira CryoTech sought general, special and compensatory damages against the other defendants related to breach of fiduciary duties in connection with the purported achievement of milestone payments under the Merger Agreement, and breach of the Merger Agreement and certain other agreements with the defendants. In October 2020, Fortis filed an answer and counterclaim against the Company and Pacira CryoTech seeking to recover certain milestone payments under the Merger Agreement. The total remaining value of these milestones is $30.0 million, plus attorneys’ fees. The Company believes that the counterclaim from Fortis is without merit and intends to vigorously defend against all claims. The Company is unable to predict the outcome of this action at this time.

eVenus Pharmaceutical Laboratories Litigations

In October 2021, the Company received a Notice Letter advising that eVenus Pharmaceutical Laboratories, Inc., or eVenus, of Princeton, New Jersey, submitted to the FDA an Abbreviated New Drug Application (ANDA) with a Paragraph IV certification seeking authorization for the manufacturing and marketing of a generic version of EXPAREL (266 mg/20 mL) in the U.S. prior to the expiration of U.S. Patent No. 11,033,495 (the ’495 patent).

In November 2021, the Company filed a patent infringement suit against eVenus and its parent company in the U.S. District Court for the District of New Jersey (21-cv-19829) asserting infringement of the ’495 patent. This triggered an automatic 30-month stay of final approval of the eVenus ANDA. On January 6, 2022, eVenus filed an Answer with counterclaims to the Complaint, alleging the ’495 patent is invalid and/or not infringed through the manufacture, sale, or offer for sale of the product described in product described in eVenus’s ANDA submission.

In December 2021, the Company received a second Notice Letter advising that eVenus submitted to the FDA an amendment to its ANDA with a Paragraph IV Certification seeking authorization for the manufacturing and marketing of a generic version of EXPAREL (133 mg/10 mL) in the U.S. prior to the expiration of the ’495 patent. In the Notice Letter, eVenus also advised that it submitted a Paragraph IV Certification to the FDA seeking authorization for the manufacturing and marketing of a generic version of EXPAREL (266 mg/20 mL and 133 mg/10 mL) in the U.S. prior to the expiration of U.S. Patent No. 11,179,336 (the ’336 patent). eVenus further alleges in the Notice Letter that both the ’495 patent and the ’366 patent are invalid and/or not infringed.

In February 2022, the Company filed a second patent infringement suit against eVenus and its parent company in the U.S. District Court for the District of New Jersey (22-cv-00718) asserting that the 133 mg/10 mL ANDA product will infringe the ’495 and ’336 patents and that the 266 mg/20 mL ANDA product will infringe the ’336 patent. This filing triggered a second automatic 30-month stay of final approval for the 133 mg/10 mL ANDA product.

These litigations are in their early stages, and the Company is unable to predict the outcome of this action at this time.

Research Development Foundation

Pursuant to an agreement with the Research Development Foundation, or RDF, the Company was required to pay RDF a low single-digit royalty on the collection of revenues from certain products, for as long as certain patents assigned to the Company under the agreement remain valid. RDF has the right to terminate the agreement for an uncured material breach by the Company, in connection with its bankruptcy or insolvency or if it directly or indirectly opposes or disputes the validity of the assigned patent rights. The Company’s U.S. Patent No. 11,033,495 was issued on June 15, 2021. Thereafter, RDF asserted that the issuance of that patent extends the Company’s royalty obligations under the agreement until 2041. The Company believes that the royalty period under the agreement was set to end on December 24, 2021 with the expiration of its U.S. Patent No. 9,585,838. Because of the disagreement over the interpretation of the agreement, in December 2021, the Company filed a declaratory judgment lawsuit in the U.S. District Court for the District of Nevada (21-cv-02241). The lawsuit seeks a

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declaration from the court that the Company owes no royalties to RDF with respect to its EXPAREL product after December 24, 2021. During the pendency of the lawsuit, the Company will continue to pay royalties to RDF under protest, however, the Company is unable to predict the outcome of this action at this time.

Other Commitments and Contingencies

Pediatric Trial Commitments

The FDA, as a condition of EXPAREL approval, has required the Company to study EXPAREL in pediatric patients, as well as the administration of EXPAREL as a nerve block in the pediatric setting. The Company was granted a deferral for the required pediatric trials until after the indications were approved in adults. Similarly, in Europe, the Company agreed with the European Medicines Agency, or EMA, on a Pediatric Investigation Plan as a prerequisite for submitting a Marketing Authorization Application (MAA) in the E.U. Despite the U.K.’s withdrawal from the E.U., the agreed pediatric plan is applicable in the U.K.

In December 2019, the Company announced positive results for its extended pharmacokinetic and safety study (“PLAY”) for local analgesia in children aged six to 17 undergoing cardiovascular or spine surgeries. Those positive results were the basis for the submission of a supplemental New Drug Application, or sNDA, in the U.S. and Type II variations in the E.U. and U.K. to expand the EXPAREL label to include use in patients six years of age and older for single-dose infiltration to produce postsurgical local analgesia. In March 2021, the Company announced that the FDA approved the submission of the sNDA in the U.S. The EMA and the Medicines and Healthcare Products Regulatory Agency, or MHRA, are still reviewing the Type II variations.

The Company is working with the FDA, MAA and MHRA to finalize the regulatory pathway for its remaining pediatric commitments.

Hong Kong Pharma Tainuo Ltd.

Prior to the Flexion Acquisition, in March 2020, Flexion entered into an exclusive license agreement with Hong Kong Tainuo Pharma Ltd., or HK Tainuo, and Jiangsu Tainuo Pharmaceutical Co. Ltd., or Jiangsu Tainuo, a subsidiary of China Shijiazhuang Pharmaceutical Co, Ltd., for the development and commercialization of ZILRETTA in Greater China (consisting of mainland China, Hong Kong, Macau and Taiwan). Under the terms of the agreement, HK Tainuo paid Flexion an upfront payment of $10.0 million during the year ended December 31, 2020 which was recorded in other liabilities as of December 31, 2021. The Company was also eligible to receive up to $32.5 million in aggregate development, regulatory and commercial sales milestone payments under the exclusive license agreement. HK Tainuo was responsible for the clinical development, product registration and commercialization of ZILRETTA in Greater China. The Company was solely responsible for the manufacture and supply of ZILRETTA to HK Tainuo for all clinical and commercial activities. The terms related to product manufacturing and supply, including pricing and minimum purchase requirements agreed to in the license agreement, were to be covered by a separate supply agreement, which had not yet been finalized as of June 30, 2022. Unless terminated earlier in accordance with its terms, the license agreement was scheduled to continue in effect in perpetuity or as long as HK Tainuo or Jiangsu Tainuo continued to sell ZILRETTA in Greater China.

In July 2022, the Company submitted a letter to HK Tainuo associated with this license agreement seeking a mutual decision to end the licensing agreement. As of September 30, 2022, $10.0 million was recognized as part of acquisition accounting within other liabilities in the condensed consolidated balance sheet related to this matter.

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ATTACHMENTS / EXHIBITS

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