Pacira BioSciences, Inc.: Form 10-Q for the period ended Sep 30, 2024

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and in accordance with the rules and regulations of the United States Securities and Exchange Commission, or SEC.

This Quarterly Report on Form 10-Q and certain other communications made by us contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, including, without limitation, statements related to: our future outlook, our intellectual property and patent terms, our growth and future operating results and trends, our strategy, plans, objectives, expectations (financial or otherwise) and intentions, future financial results and growth potential, including our plans with respect to the repayment of our indebtedness, anticipated product portfolio, development programs, development of products, strategic alliances, plans with respect to the Non-Opioids Prevent Addiction in the Nation (“NOPAIN”) Act and any other statements that are not historical facts. For this purpose, any statement that is not a statement of historical fact should be considered a forward-looking statement. We often use the words “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “will,” “would” and similar expressions to help identify forward-looking statements. We cannot assure you that our estimates, assumptions and expectations will prove to have been correct. Actual results may differ materially from these indicated by such forward-looking statements as a result of various important factors, including risks relating to, among others: the integration of our new chief executive officer; risks associated with acquisitions, such as the risk that the businesses will not be integrated successfully, that such integration may be more difficult, time-consuming or costly than expected or that the expected benefits of the transaction will not occur; our manufacturing and supply chain, global and United States, or U.S., economic conditions (including inflation and rising interest rates), and our business, including our revenues, financial condition, cash flows and results of operations; the success of our sales and manufacturing efforts in support of the commercialization of EXPAREL® (bupivacaine liposome injectable suspension), ZILRETTA® (triamcinolone acetonide extended-release injectable suspension) and iovera°®; the rate and degree of market acceptance of EXPAREL, ZILRETTA and iovera°; the size and growth of the potential markets for EXPAREL, ZILRETTA and iovera° and our ability to serve those markets; our plans to expand the use of EXPAREL, ZILRETTA and iovera° to additional indications and opportunities, and the timing and success of any related clinical trials for EXPAREL, ZILRETTA and iovera°; the commercial success of EXPAREL, ZILRETTA and iovera°; the related timing and success of United States Food and Drug Administration, or FDA, supplemental New Drug Applications, or sNDAs, and premarket notification 510(k)s; the related timing and success of European Medicines Agency, or EMA, Marketing Authorization Applications, or MAAs; our plans to evaluate, develop and pursue additional product candidates utilizing our proprietary multivesicular liposome, or pMVL, drug delivery technology; the approval of the commercialization of our products in other jurisdictions; clinical trials in support of an existing or potential pMVL-based product; our commercialization and marketing capabilities; our ability to successfully complete capital projects; the outcome of any litigation; the ability to successfully integrate any future acquisitions into our existing business; the recoverability of our deferred tax assets; assumptions associated with contingent consideration payments; assumptions used for estimated future cash flows associated with determining the fair value of the Company and the anticipated funding or benefits of our share repurchase program.

Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements, and as such we anticipate that subsequent events and developments will cause our views to change. Except as required by applicable law, we undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and readers should not rely on the forward-looking statements as representing our views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements. These factors include items mentioned herein and the matters discussed and referenced in Part I-Item 1A. “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”) and in other reports as filed with the SEC.

Unless the context requires otherwise, references to “Pacira,” the “Company,” “our,” “us” and “we” in this Quarterly Report on Form 10-Q refer to Pacira BioSciences, Inc. and its subsidiaries.

Overview

Pacira’s mission is to deliver innovative, non-opioid pain therapies to transform the lives of patients. Our long-acting, local analgesic EXPAREL® (bupivacaine liposome injectable suspension) utilizes our unique pMVL drug delivery technology that encapsulates drugs without altering their molecular structure and releases them over a desired period of time. In the U.S., EXPAREL is a long-acting, non-opioid option proven to manage postsurgical pain. EXPAREL is the only product indicated for local analgesia via infiltration in patients aged six years and older and regional analgesia via interscalene brachial plexus nerve block, sciatic nerve block in the popliteal fossa and adductor canal block in adults. In Europe, EXPAREL is approved as a brachial plexus block or femoral nerve block for treatment of post-operative pain in adults, and as a field block for treatment of somatic post-operative pain from small- to medium-sized surgical wounds in adults and children aged six years and older. Since its initial approval in 2011, more than 15 million patients have been treated with EXPAREL. We drop-ship EXPAREL directly to end-users based on orders placed to wholesalers or directly to us, and there is no product held by wholesalers. With the acquisition of Flexion Therapeutics, Inc., or Flexion, in November 2021 (the “Flexion Acquisition”), we acquired ZILRETTA® (triamcinolone acetonide extended-release injectable suspension), the first and only extended-release, intra-articular, or IA, injectable therapy that can provide major relief for osteoarthritis, or OA, knee pain for three months and has the potential to become an alternative to hyaluronic acid, platelet rich plasma injections or other early intervention treatments. With the acquisition of MyoScience, Inc., or MyoScience, in April 2019 (the “MyoScience Acquisition”), we acquired iovera°®, a handheld cryoanalgesia device used to deliver a precise, controlled application of cold temperature to targeted nerves, which we sell directly to end users. EXPAREL, ZILRETTA and iovera° are highly complementary products as long-acting, non-opioid therapies that alleviate pain. We are also advancing the development of PCRX-201 (enekinragene inzadenovec), a novel, locally administered gene therapy with the potential to treat large prevalent diseases like OA.

We expect to continue to pursue the expanded use of EXPAREL, ZILRETTA and iovera° in additional procedures; progress our earlier-stage product candidate pipeline; advance regulatory activities for EXPAREL, ZILRETTA, iovera°, PCRX-201 and our other product candidates; invest in sales and marketing resources for EXPAREL, ZILRETTA and iovera°; expand and enhance our manufacturing capacity for EXPAREL, ZILRETTA and iovera°; invest in products, businesses and technologies; and support legal matters.

Global Economic Conditions

Direct and indirect effects of global economic conditions have in the past, and may continue to, negatively impact our business, financial condition and results of operations. Such impacts may include the effect of prolonged periods of inflation which could, among other things, result in higher costs for labor, raw materials and services; cause patients to defer or cancel medical procedures, thereby adversely impacting our revenues; and negatively impact our suppliers which could result in longer lead-times or the inability to secure a sufficient supply of materials. The current macroeconomic environment remains dynamic and subject to rapid and possibly material changes. Additional negative impacts may also arise that we are unable to foresee. The nature and extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted.

Recent Highlights & Developments

• In August 2024, the U.S. District Court for the District of New Jersey issued its ruling in our patent infringement suit against eVenus Pharmaceutical Laboratories, Inc., or eVenus, and its parent company for infringement of EXPAREL U.S. Patent No. 11,033,495. The ruling found that this patent is not valid on the grounds of obviousness and anticipation. A notice of appeal was filed in September 2024 and remains pending.

We currently have four other patent infringement lawsuits pending against eVenus and its parent company and remain committed to vigorously defending our EXPAREL intellectual property for the benefit of our shareholders, patients and other stakeholders. With respect to an injunction, based on the information received through the ongoing court proceedings, we do not believe irreparable harm from an “at-risk” launch is imminent at this time.

For more information, see Note 15, Commitments and Contingencies, to our condensed consolidated financial statements included herein.

• In September 2024, we announced the upcoming presentation of new 104-week safety and efficacy data following local administration of our gene therapy candidate—PCRX-201 (enekinragene inzadenovec)—for moderate to severe OA of the knee. The data will be presented at the American College of Rheumatology’s annual ACR Convergence meeting, being held in Washington, D.C. November 14–19, 2024.
• In October 2024, we announced that the Centers for Medicare and Medicaid Services, or CMS, has established a permanent product-specific Healthcare Common Procedure Coding System (HCPCS) J-code for EXPAREL. The new J-code for EXPAREL—J0666—becomes effective January 1, 2025, and will supersede the current C-code (C9290), which has been in place since 2019. In addition to the separate CMS reimbursement EXPAREL will receive in outpatient settings with the implementation of the NOPAIN Act in January 2025, this new J-code will also provide reimbursement when EXPAREL is used in the office setting and for office-based surgeries.

J-codes are reimbursement codes used by commercial insurance plans, Medicare, Medicare Advantage, and other government payers for Medicare Part B drugs like EXPAREL. Claims submission and payment are standardized with a J-code, facilitating and streamlining billing and reimbursement. In addition, some commercial insurers require a J-code for payment.

Additionally, in November 2024, CMS confirmed that both EXPAREL and iovera° qualify as eligible non-opioid pain management products under the NOPAIN Act. Hospital outpatient departments, or HOPDs, and ambulatory surgical centers, or ASCs, that use these products will receive additional Medicare reimbursement beginning January 1, 2025. The reimbursement rate for EXPAREL equates to 106% of the average sales price (ASP +6%) in the HOPD and ASC environments using the new product-specific J-code (J0666) beginning January 1, 2025. The separate reimbursement for iovera° will pay up to an additional $255.85 when providers administer iovera° in ASC and HOPD settings, using a new C-code created for the iovera° system (C9809). This new Medicare payment is provided in addition to the current reimbursement available to HOPDs and ASCs when they perform a procedure with the iovera° system.

• In October 2024, we appointed Shawn Cross as our Chief Financial Officer. Mr. Cross brings more than 25 years of experience as a biotechnology executive, board member and investment banker. Most recently, Mr. Cross served in executive positions of increasing responsibility at Applied Molecular Transport, Inc. where he was ultimately named Chief Executive Officer to lead their merger with Cyclo Therapeutics, Inc., where Mr. Cross currently serves on the Board of Directors. His biopharmaceutical investment banking career includes senior leadership roles at JMP Securities, Inc., Deutsche Bank Securities Inc. and Wells Fargo Securities, LLC.

EXPAREL

In the U.S., EXPAREL is currently indicated for local analgesia via infiltration in patients aged six years and older and regional analgesia via interscalene brachial plexus nerve block, sciatic nerve block in the popliteal fossa, and adductor canal block in adults. Safety and efficacy have not been established in other nerve blocks. In Europe, EXPAREL is approved as a brachial plexus block or femoral nerve block for treatment of post-operative pain in adults, and as a field block for treatment of somatic post-operative pain from small- to medium-sized surgical wounds in adults and children aged six years and older.

EXPAREL Label Expansion

• Expanding utilization in lower extremity nerve block indications. In February 2024, we launched EXPAREL in two key lower extremity nerve blocks—namely an adductor canal block and a sciatic nerve block in the popliteal fossa. We believe these two key nerve blocks will expand EXPAREL utilization within surgeries of the knee, lower leg, and foot and ankle procedures. The launch is supported by two successful head-to-head Phase 3 studies in which EXPAREL demonstrated four days of superiority to bupivacaine.
• Pediatrics. We have launched a Phase 1 pharmacokinetic study of EXPAREL as a single-dose post-surgical infiltration administration in patients under six years of age. If successful, we expect this study, followed by a Phase 3 registration study, will support expansion of the EXPAREL labels in the U.S., European Union, or E.U., and United Kingdom, or U.K. We are also discussing with the FDA, EMA and the Medicines and Healthcare Products Regulatory Agency (MHRA) our regulatory strategy for EXPAREL administered as a nerve block in the pediatric setting. We received notification from the FDA that our pediatric studies requirement had been waived for the indications of brachial plexus interscalene and lower extremity nerve block to produce postsurgical regional analgesia in pediatric patients.

EXPAREL Clinical Benefits

We believe EXPAREL can replace the use of bupivacaine delivered via elastomeric pumps as the foundation of a multimodal regimen for long-acting postsurgical pain management. Based on our clinical data, EXPAREL:

• provides long-lasting local or regional analgesia;
• is a ready-to-use formulation;
• expands easily with saline or lactated Ringer’s solution to reach a desired volume;
• can be administered for local analgesia via infiltration and for regional analgesia via field block, as well as brachial plexus nerve block, sciatic nerve block in the popliteal fossa and adductor canal block; and
• facilitates treatment of a variety of surgical sites.

We believe EXPAREL is a key component of long-acting postsurgical pain management regimens that reduce the need for opioids. Based on the clinical data from our Phase 3 and Phase 4 clinical studies as well as data from retrospective health outcomes studies, EXPAREL significantly reduces opioid usage while improving postsurgical pain management.

ZILRETTA

ZILRETTA is the first and only extended-release, intra-articular therapy for OA knee pain. ZILRETTA employs a proprietary microsphere technology combining triamcinolone acetonide, or TA, a commonly administered, immediate-release corticosteroid, with a poly lactic-co-glycolic acid, or PLGA, matrix to provide extended pain relief. PLGA is a proven extended-release delivery vehicle that is metabolized to carbon dioxide and water as it releases drug in the intra-articular space and is used in other approved drug products and surgical devices. The ZILRETTA microspheres slowly and continuously release triamcinolone acetonide into the knee to provide significant pain relief for 12 weeks, with some people experiencing pain relief through 16 weeks. ZILRETTA was approved by the FDA in October 2017 and launched in the U.S. shortly thereafter.

We believe ZILRETTA’s extended-release profile may also provide effective treatment for OA pain of the shoulder and we recently launched a Phase 3 registration study to evaluate the safety and efficacy of ZILRETTA for the management of OA pain of the shoulder. If the study is successful, we plan to seek approval to expand the ZILRETTA label to include OA pain of the shoulder.

ZILRETTA Clinical Benefits

ZILRETTA combines TA, a commonly administered steroid, with a proprietary, extended-release microsphere technology to administer extended therapeutic concentrations in the joint and persistent analgesic effect.

Based on the strength of its pivotal and other clinical trials, we believe that ZILRETTA represents an important treatment option for the millions of patients in the U.S. in need of safe and effective extended relief from OA knee pain. The pivotal Phase 3 trial showed that ZILRETTA significantly reduced OA knee pain for 12 weeks, with some people experiencing pain relief through 16 weeks. We believe that ZILRETTA has the potential to become the corticosteroid of choice given its safety and efficacy profile, and the fact that it is the first and only extended-release corticosteroid on the market. In September 2021, the American Association of Orthopaedic Surgeons, or AAOS, updated its evidence-based clinical practice guidelines, finding ZILRETTA can improve patient outcomes over traditional immediate-release corticosteroids.

iovera°

The iovera° system is a non-opioid handheld cryoanalgesia device used to deliver precise, controlled doses of cold temperature to targeted nerves. It is FDA 510(k) cleared in the U.S., has a CE mark in the E.U. and is cleared for marketing in Canada for the blocking of pain. We believe the iovera° system is highly complementary to EXPAREL and ZILRETTA as a non-opioid therapy that alleviates pain using a non-pharmacological nerve block to disrupt pain signals being transmitted to the brain from the site of injury or surgery. It is also indicated for the relief of pain and symptoms associated with arthritis of the knee for up to 90 days.

iovera° Clinical Benefits

There is a growing body of clinical data demonstrating success with iovera° treatment for a wide range of chronic pain conditions. Some of our strongest data relates directly to the improvement of OA pain of the knee. In a pivotal trial evaluating iovera° for knee OA pain, the majority of the patients suffering from OA pain of the knee experienced pain relief up to 150 days after being treated with iovera°.

Surgical intervention is typically a last resort for patients suffering from knee OA pain. Treatment with iovera° has also demonstrated effectiveness for managing pain associated with knee replacements. Specifically, findings demonstrated reductions in opioids, including:

• The daily morphine equivalent consumption in the per protocol group analysis was significantly lower at 72 hours (p<0.05), 6 weeks (p<0.05) and 12 weeks (p<0.05).
• Patients who were administered iovera° were far less likely to take opioids six weeks after surgery. The number of patients taking opioids six weeks after total knee arthroplasty, or TKA, in the control group was three times the number of patients taking opioids in the cryoanalgesia group (14 percent vs. 44 percent, p<0.01).
• Patients in the iovera° group demonstrated a statistically significant reduction in pain scores from their baseline pain scores at 72 hours (p<0.05) and at 12 weeks (p<0.05).

We believe these data validate iovera° as a clinically meaningful non-opioid alternative for patients with knee OA as well as those undergoing TKA, and that iovera° offers the opportunity to provide patients with non-opioid pain control well in advance of any necessary surgical intervention through a number of key product attributes:

• iovera° is safe and effective with immediate pain relief that can last for months as the nerve regenerates over time;
• iovera° is repeatable, with no diminishing effectiveness over time and repeat use;
• The iovera° technology does not risk damage to the surrounding tissue;
• iovera° is a convenient handheld device with a single-use procedure-specific Smart Tip; and
• iovera° can be delivered precisely using imaging guidance or an anatomical landmark.

A study published in 2021 that included 267 patients undergoing TKA (169 who underwent cryoneurolysis with iovera° compared to 98 patients who did not receive iovera° treatment) showed that patients who were treated with iovera° had 51% lower daily morphine milligram equivalents during their hospital stay and a 22% lower mean pain score versus those who were not. In addition, the iovera° group had greater function at discharge, a shorter length of hospital stay and received significantly fewer opioids, including discharge prescriptions at week 2 and week 6 after surgery.

In September 2021, the AAOS updated its evidence-based clinical practice guidelines, reporting that denervation therapy—including cryoneurolysis—may reduce knee pain and improve function in patients with symptomatic OA of the knee.

We are currently sponsoring a prospective, real-world registry called the Innovations in Genicular Outcomes Registry, or iGOR, which is a patient focused registry governed in collaboration with a steering committee of scientific experts that evaluates clinical, economic- and health-related patient-reported outcomes in patients who have received any treatment for knee OA pain, including TKA, for a minimum of 18 months. A unique feature of iGOR is that if patients receive additional treatments for OA, data capture resets so outcomes of their treatment journey can be followed over multiple years. Unlike in clinical studies, treatment decisions in iGOR are decided by physicians and patients in a shared decision-making manner rather than being driven by treatment assignment, so that outcomes are truly those from real-world applications. The iGOR registry is tracking outcomes of iovera°, ZILRETTA and EXPAREL, as well as comparator treatments. Early outcomes from iGOR have shown that patients who receive iovera° prior to TKA have less pain, improved function and improved sleep for six months after surgery versus patients who do not receive iovera°.

In addition, a pilot randomized control trial evaluating iovera° for the treatment of lower back pain showed that it had significantly greater improvements in pain and disability, and required fewer injections over a year, compared to patients who were treated with radiofrequency ablation. This data supports the development of a longer Smart Tip that is currently underway which would allow for broader use of iovera° for the treatment of lower back pain.

Beyond treatment for pain, observational data has been presented at multiple congresses showing effectiveness of iovera° for the treatment of upper limb spasticity over 90 days by targeting motor nerves. We currently have a pivotal trial underway to demonstrate the efficacy and safety of iovera° for treating spasticity.

The Osteoarthritis Market

OA is the most common form of arthritis. It is also called degenerative joint disease and occurs most frequently in the hands, hips and knees. With OA, the cartilage within a joint begins to break down and the underlying bone begins to change. These changes usually develop slowly and worsen over time. OA can cause pain, stiffness and swelling. In some cases, it also causes reduced function and disability—some people are no longer able to do daily tasks or work. According to the Centers for Disease Control and Prevention (CDC), OA affects over 32.5 million adults in the U.S.

The lifetime risk of developing symptomatic knee OA is 45 percent according to the Arthritis Foundation. The prevalence of symptomatic knee OA increases with each decade of life, with the annual incidence of knee OA being highest between age 55 and 64 years old. There are 14 million individuals in the U.S. who have symptomatic knee OA, and nearly two million are under the age of 45. Surgical intervention is typically a last resort for patients suffering from OA of the knee.

With ZILRETTA, we now offer clinicians the flexibility to individualize OA knee pain treatment with either ZILRETTA or a drug-free nerve block with iovera° based on patient factors and preference, physician training, site of care and reimbursement considerations.

Clinical Development Programs

PCRX-201

PCRX-201 (enekinragene inzadenovec) is our novel gene therapy in clinical development as a treatment for osteoarthritis of the knee. Its innovative high-capacity adenovirus, or HCAD, design, manufacturing process, and local administration may solve many of the challenges that have made gene therapy inaccessible for common diseases like osteoarthritis. Key features that support the use of PCRX-201 for a prevalent disease:

• The HCAD viral vector is more efficient at delivering genes into cells than other vectors, which means we can achieve the desired effect with smaller doses.
• PCRX-201 is delivered where it matters—it is injected locally into the knee joint capsule and contained there for a favorable clinical and safety profile, whereas if administered systemically, a much higher dose would be needed to reach the knee and achieve the desired effect.
• Smaller doses, local administration, and scalable manufacturing result in an attractive cost of goods profile versus other gene therapies.

After injection, the HCAD vector enters joint cells and turns them into factories to boost cellular IL-1Ra production, which blocks IL-1 pathway activation to reduce inflammation and pain in the knee. PCRX-201 uses an inflammation-responsive promoter to only produce IL-1Ra when needed, mimicking how the body naturally responds to inflammation. In a Phase 1 proof-of-concept study of patients with moderate to severe OA of the knee, PCRX-201 was well tolerated with improvements in knee pain observed across all doses. The study enrolled 72 patients in two three-dose cohorts: a co-administered IA steroid cohort and a cohort that did not receive a steroid. PCRX-201 was well tolerated, with efficacy observed through at least 52 weeks at all doses and cohorts. The highest level of efficacy was achieved in the co-administered steroid group, which showed a greater percentage of patients with at least a 50% improvement in Western Ontario and McMaster Universities Osteoarthritis Index (WOMAC) pain and stiffness scores, as well as a meaningful improvement in (Knee Injury and Osteoarthritis Outcomes Score) KOOS functional assessment. The one-year data were presented at the Osteoarthritis Research Society International (OARSI) 2024 World Congress in April 2024. We now have two-year efficacy and safety data that we have submitted for presentation at the American College of Rheumatology’s annual ACR Convergence meeting in November 2024. While other therapies typically provide relief for three to six months, PCRX-201 has already set a new standard with a year or more of sustained pain relief from a single injection. Given these highly encouraging Phase 1 data, we are preparing to launch a Phase 2 clinical study in knee OA in 2025.

In February 2024, the FDA granted PCRX-201 a Regenerative Medicine Advanced Therapy, or RMAT, designation. Established under the 21st Century Cures Act, RMAT designation is a dedicated program designed to expedite the development and review processes for promising therapies, including genetic therapies, that are intended to treat, modify, reverse or cure a serious or life-threatening disease or condition, and for which preliminary clinical evidence indicates that the drug or therapy has the potential to address an unmet medical need. PCRX-201 is the first gene therapy product candidate to receive RMAT designation for OA.

External Innovation

In parallel to our internal clinical programs, we are pursuing innovative acquisition targets that are complementary to EXPAREL, ZILRETTA and iovera° and are of great interest to the surgical and anesthesia audiences we are already calling on today. We are using a combination of strategic investments, in-licensing and acquisition transactions to buildout a pipeline of innovation to improve patients’ journeys along the neural pain pathway. The strategic investments we have made to support promising early-stage platforms are summarized below:

Product Portfolio and Internal Pipeline

Our current product portfolio and internal product candidate pipeline, along with anticipated milestones over the next 12 to 18 months, are summarized in the table below:

Pacira Training Facilities

We maintain and operate two Pacira Innovation and Training, or PIT, facilities—one in Tampa, Florida and one in Houston, Texas. These sites were constructed with a singular goal in mind: to advance education on best practice techniques to effectively manage acute pain while reducing or eliminating the need for opioids. These facilities provide clinicians with flexible, state-of-the-art environments for interactive, hands-on instruction on the latest and most innovative local, regional and field block approaches for managing pain, improving patient care and enabling patient migration to the 23-hour stay environment. Each of our PIT facilities feature distinct training spaces, including simulation labs equipped with ultrasound scanning stations; lecture halls that feature liquid crystal display video walls to support live, virtual and global presentations; and green-screen broadcast studios to livestream content with single or multiple hosts. The PIT of Houston has both wet and dry lab space for cadaver and other interactive workshops. The PIT of Tampa also houses our principal executive offices and corporate headquarters.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2024 and 2023

Revenues

Net product sales consist of sales of (i) EXPAREL in the U.S., E.U., and U.K.; (ii) ZILRETTA in the U.S.; (iii) iovera° in the U.S., Canada and Europe and (iv) sales of our bupivacaine liposome injectable suspension for veterinary use. Royalty revenues are related to a collaborative licensing agreement from the sale of our bupivacaine liposome injectable suspension for veterinary use.

The following table provides information regarding our revenues during the periods indicated, including percent changes (dollar amounts in thousands):

EXPAREL revenue increased 3% and 2% in the three and nine months ended September 30, 2024 versus 2023, respectively. Components of the increases included a 3% increase in gross vial volume in both the three and nine months ended September 30, 2024 versus 2023, which was offset by a shift in vial mix. EXPAREL revenue was also impacted by a 1% increase in selling price per unit in both periods related to a January 2024 price increase, net of increases in sales related allowances as a result of group purchasing organization contracting.

ZILRETTA revenue decreased 1% in the three months ended September 30, 2024 versus 2023 due to a 6% decrease in kit volume, partially offset by a 5% increase in net selling price per unit. ZILRETTA revenue increased 3% in the nine months ended September 30, 2024 versus 2023 due to a 5% increase in net selling price per unit, partially offset by a 2% decrease in kit volume. The increase in net selling price per unit is related to January and July 2024 price increases and favorable sales related allowances.

Net product sales of iovera° increased 8% and 20% in the three and nine months ended September 30, 2024 versus 2023, respectively, primarily due to respective increases of 9% and 23% in Smart Tip volume, partially offset by increased sales related allowances and accruals.

Bupivacaine liposome injectable suspension revenue increased 91% and by more than 100% in the three and nine months ended September 30, 2024 versus 2023, respectively. Its related royalties increased more than 100% in both the three and nine months ended September 30, 2024 versus 2023 primarily due to the sales mix of vial sizes and the timing of orders placed for veterinary use.

The following tables provide a summary of activity with respect to our sales related allowances and accruals related to EXPAREL and ZILRETTA for the nine months ended September 30, 2024 and 2023 (in thousands):

Total reductions of gross product sales from sales-related allowances and accruals were $108.8 million and $95.5 million, or 17.6% and 16.3% of gross product sales, for the nine months ended September 30, 2024 and 2023, respectively. The overall 1.3% increase in sales-related allowances and accruals as a percentage of gross product sales was primarily related to accruals as a result of higher chargeback-related allowances from expanded contracting efforts.

Cost of Goods Sold

Cost of goods sold primarily relates to the costs to produce, package and deliver our products to customers. These expenses include labor, raw materials, manufacturing overhead and occupancy costs, depreciation of facilities, royalty payments, quality control and engineering.

The following table provides information regarding our cost of goods sold and gross margin during the periods indicated, including percent changes (dollar amounts in thousands):

Gross margin increased one percentage-point in the three months ended September 30, 2024 versus 2023 primarily due to favorable ZILRETTA gross margins as the prior period included costs for a new fill line, partially offset by higher EXPAREL royalty expense. We continue to pay royalties associated with the 200-liter EXPAREL manufacturing process to the Research Development Foundation under protest. For more information, see Note 15, Commitments and Contingencies, to our condensed consolidated financial statements included herein.

Gross margin increased three percentage-points in the nine months ended September 30, 2024 versus 2023 primarily due to lower EXPAREL product cost as a result of higher production volumes and the absence of ZILRETTA step-up of fixed assets to fair value in accordance with purchase accounting that existed in the prior period, partially offset by higher ZILRETTA inventory reserves.

Research and Development Expenses

Research and development expenses primarily consist of costs related to clinical trials and related outside services, product development and other research and development costs, including trials that we are conducting to generate new data for EXPAREL, ZILRETTA and iovera°, clinical trials for PCRX-201 and stock-based compensation expense. Clinical and preclinical development expenses include costs for clinical personnel, clinical trials performed by third-parties, toxicology studies, materials and supplies, database management and other third-party fees. Product development and manufacturing capacity expansion expenses include development costs for our products and PCRX-201, which include personnel, research equipment, materials and contractor costs for process development and product candidates, development costs related to significant scale-ups of our manufacturing capacity and facility costs for our research space. Regulatory and other expenses include regulatory activities related to unapproved products and indications, medical information and scientific communication expenses, expenses related to our iGOR registry study and related personnel. Stock-based compensation expense relates to the costs of stock option grants, awards of restricted stock units, or RSUs, and our employee stock purchase plan, or ESPP.

The following table provides a breakout of our research and development expenses during the periods indicated, including percent changes (dollar amounts in thousands):

Total research and development expense decreased 8% in three months ended September 30, 2024 versus 2023 and increased 2% in the nine months ended September 30, 2024 versus 2023.

Clinical and preclinical development expense increased 21% and 32% in the three and nine months ended September 30, 2024 versus 2023, respectively, due to site start-up of and ongoing enrollment in a ZILRETTA shoulder trial, an EXPAREL pediatric trial and an iovera° spasticity trial. For the three months ended September 30, 2024 versus 2023, these increases were partially offset by the completion of the EXPAREL intrathecal trial cohort 2 enrollment. For the nine months ended September 30, 2024 versus 2023, these increases were partially offset by the winding down of a PCRX-201 Phase 1 trial for knee OA as two-year follow-up visits of subjects were completed in November 2023. This Phase 1 trial remains on track for completion by November 2026, the last year of the follow-up period for the last patient dosed. In addition, toxicology studies for product candidates were completed in 2023.

Product development and manufacturing capacity expansion expense decreased 23% and 17% in the three and nine months ended September 30, 2024 versus 2023, respectively, primarily attributable to the completion of pre-commercial scale-up activities of our EXPAREL manufacturing capacity at our Science Center Campus in San Diego, California, which the FDA approved an sNDA for our 200-liter EXPAREL manufacturing suite in February 2024. This new suite was subsequently placed into service in July 2024. The decrease was partially offset by ongoing product development costs related to PCRX-201 and an iovera° medial branch Smart Tip.

Regulatory and other expense decreased 22% in the three months ended September 30, 2024 versus 2023, due to the reduction of international regulatory activities and headcount vacancies, partially offset by increased enrollment and additional sites related to an observational registry study which track patients’ symptoms and experience with pain management related to OA of the knee. Regulatory and other expense increased 2% in the nine months ended September 30, 2024 versus 2023, due to increased enrollment and additional sites related to an observational registry study, partially offset by the reduction of international regulatory activities and headcount vacancies.

Stock-based compensation decreased 19% and 5% in the three and nine months ended September 30, 2024 versus 2023, respectively, primarily due to fewer equity awards granted to research and development personnel and headcount vacancies.

Selling, General and Administrative Expenses

Sales and marketing expenses primarily consist of compensation and benefits for our sales force and personnel that support our sales, marketing, medical and scientific affairs operations, expenses related to communicating the health outcome benefits of our products, investments in provider-level market access and patient reimbursement support and educational programs for our customers. General and administrative expenses consist of compensation and benefits for legal, finance, regulatory activities related to approved products and indications, compliance, information technology, human resources, business development, executive management and other supporting personnel. It also includes professional fees for legal, audit, tax and consulting services. Stock-based compensation expense relates to the costs of stock option grants, RSU awards and our ESPP.

The following table provides information regarding our selling, general and administrative expenses during the periods indicated, including percent changes (dollar amounts in thousands):

Total selling, general and administrative expense increased 9% and 5% in the three and nine months ended September 30, 2024 versus 2023, respectively.

Sales and marketing expense increased 13% and 4% in the three and nine months ended September 30, 2024 versus 2023. The three and nine months increase was driven by investing in programs to drive awareness and education for our customers and enhance our marketing, market access and reimbursement teams and value creation for the implementation of separate Medicare reimbursement for EXPAREL at average sales price plus 6 percent in HOPD settings and iovera° at up to an additional $255.85 when providers administer iovera° in ASC and HOPD settings beginning in January 2025 as part of the NOPAIN Act. We expect investments in these programs to continue through the end of 2024 as we have launched our national campaign—*Make the NOPAIN Pact—*which targets hospital pharmacists, administrators, clinicians and revenue management teams and is focused on ensuring these audiences are ready for the commencement of the NOPAIN Act. The three and nine months ended September 30, 2024 versus 2023 also benefited from a grant to the American Society of Anesthesiologists Charitable Foundation that occurred in the prior periods. These increases were partially offset by the impact of a February 2024 restructuring program.

General and administrative expense increased 7% and 9% in the three and nine months ended September 30, 2024 versus 2023, respectively. The three month increase in legal expenses was mostly driven by ongoing litigation and an increase in personnel related expenses. The nine month increase was primarily driven by third-party management consulting to assess strategic opportunities and market assessments for our products and compensatory costs associated with the transition to our new Chief Executive Officer effective January 2, 2024, which include compensation related to the current Chief Executive Officer and to the former Chief Executive Officer who remains an advisor to the Company in a consulting capacity.

For more information on our ongoing litigation, see Note 15, Commitments and Contingencies, to our condensed consolidated financial statements included herein.

Stock-based compensation increased 1% and 3% for the three and nine months ended September 30, 2024 versus 2023, respectively, primarily due to greater equity awards granted to personnel.

Amortization of Acquired Intangible Assets

The following table provides a summary of the amortization of acquired intangible assets during the periods indicated, including percent changes (dollar amounts in thousands):

As part of the Flexion Acquisition and the MyoScience Acquisition, we acquired intangible assets consisting of developed technology intangible assets and customer relationships, with estimated useful lives between 9 and 14 years. For more information, see Note 7, Goodwill and Intangible Assets, to our condensed consolidated financial statements included herein.

Goodwill Impairment

The following table provides a summary of goodwill impairments during the periods indicated, including percent changes (dollar amounts in thousands):

During the three months ended September 30, 2024, the FDA approved a generic competitor to EXPAREL and a U.S. District Court ruled that one of our patents was not valid (for more information, see Note 15, Commitments and Contingencies, to our condensed consolidated financial statements included herein). Due to these events and a subsequent decrease in our common stock price, it was determined these qualitative factors indicated it was more likely than not that the fair value of goodwill may be less than its carrying value. Accordingly, we performed a quantitative assessment through a discounted cash flow model (or income approach), which resulted in the carrying value of the Company exceeding its fair value by more than the goodwill balance. As a result, the goodwill balance of $163.2 million was recorded as fully impaired during the three months ended September 30, 2024.

Contingent Consideration (Gains) Charges, Restructuring Charges and Other

The following table provides a summary of the costs related to the contingent consideration, acquisition-related charges and restructuring charges during the periods indicated, including percent changes (dollar amounts in thousands):

Total contingent consideration (gains) charges, restructuring charges and other for the three and nine months ended September 30, 2024 included gains of $1.8 million and charges of $2.9 million, respectively. Total contingent consideration (gains) charges, restructuring charges and other for the three and nine months ended September 30, 2023 included charges of $3.4 million and gains of $1.2 million, respectively.

During the three and nine months ended September 30, 2024, we recognized a contingent consideration gain of $3.2 million and $5.5 million, respectively, primarily due to adjustments reflecting the probability of achieving the remaining Flexion regulatory milestone by the milestone expiration date, partially offset by revisions to the latest discount rates.

During the three months ended September 30, 2023, we recognized contingent consideration charges of $2.8 million primarily due to market volatility which affects the liability’s present value. During the nine months ended September 30, 2023, we recognized gains of $3.8 million primarily due to adjustments to long-term forecasts which reduced the probability of meeting the Flexion sales-based contingent consideration milestones by December 31, 2030, the expiration date for achieving the milestones. The gains recognized during the nine months ended September 30, 2023 were partially offset by a decrease in the assumed discount rate that is utilized in calculating the liability’s present value, based on a significant improvement in our incremental borrowing rate resulting from the TLA Credit Agreement (as defined below) entered into in March 2023.

In February 2024, we initiated a restructuring plan to ensure that we are well positioned for long-term growth. The restructuring plan included, among other things: (i) reshaping the Company’s executive team; (ii) reallocating efforts and resources from our ex-U.S. and certain early-stage development programs to our commercial portfolio in the U.S. market; and (iii) reprioritizing investments to focus on other commercial initiatives. As a result, during the three and nine months ended September 30, 2024, we recognized restructuring charges of $1.2 million and $7.7 million, respectively, related to employee termination benefits, such as the acceleration of share-based compensation, severance, and, to a lesser extent, other employment-related termination costs, as well as contract termination costs.

During the three and nine months ended September 30, 2023, we implemented a restructuring plan in an effort to improve our operational efficiencies and recognized $0.2 million and $1.1 million, respectively, in one-time employee termination benefits through a reduction of headcount.

During the three and nine months ended September 30, 2024, we recognized acquisition-related expenses of $0.3 million and $0.7 million, respectively. During the three and nine months ended September 30, 2023, we recognized acquisition-related expenses of $0.4 million and $1.6 million, respectively. These costs primarily related to vacant and underutilized Flexion leases that were assumed from the Flexion Acquisition

For more information, see Note 9, Financial Instruments and Note 14, Contingent Consideration (Gains) Charges, Restructuring Charges and Other, to our condensed consolidated financial statements included herein.

Other Income (Expense), Net

The following table provides information regarding other income (expense), net during the periods indicated, including percent changes (dollar amounts in thousands):

Total other income, net was $0.7 million and $9.4 million in the three and nine months ended September 30, 2024, respectively. Total other expense, net was $1.1 million and $26.5 million in the three and nine months ended September 30, 2023, respectively.

The substantial increases in interest income in the three and nine months ended September 30, 2024 versus 2023 were due to higher overall investment balances.

The 35% increase in interest expense during the three months ended September 30, 2024 versus 2023 was primarily driven by the issuance of the 2029 Notes (as defined below) in May 2024. The 30% decrease in interest expense during the nine months ended September 30, 2024 versus 2023 was primarily driven by the lower outstanding principal associated with the TLA Term Loan (as defined below) that was entered into on March 31, 2023 which replaced our then-outstanding TLB Term Loan (as defined below) that had a higher principal balance and interest rate, partially offset by issuing the 2029 Notes in May 2024.

In the nine months ended September 30, 2024, we recognized a $7.5 million gain on early extinguishment of debt in conjunction with the repurchase of $200.0 million aggregate principal of our 2025 Notes (as defined below). The partial repurchase of the 2025 Notes was completed with our net proceeds from the issuance of the 2029 Notes (as defined below).

In the nine months ended September 30, 2023, in conjunction with the entry into the TLA Credit Agreement, we incurred a $16.9 million loss on early extinguishment of debt as a result of the retirement of $287.5 million aggregate principal of our TLB Term Loan (as defined below).

For more information, see Note 8, Debt, to our condensed consolidated financial statements included herein.

Income Tax Expense

The following table provides information regarding our income tax expense during the periods indicated, including percent changes (dollar amounts in thousands):

The effective tax rates were (3)% and (30)% for the three and nine months ended September 30, 2024, respectively. The effective tax rates were 35% and 39% for the three and nine months ended September 30, 2023, respectively. 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 effective tax rate for the three months ended September 30, 2024 is primarily impacted by non-deductible goodwill impairment charges. The effective tax rate for the nine months ended September 30, 2024 is primarily impacted by non-deductible goodwill impairment charges and costs related to non-deductible stock-based compensation, mainly related to expired stock options.

The effective tax rates for the three and nine months ended September 30, 2023 include costs related to non-deductible stock-based compensation and non-deductible executive compensation, partially offset by credits and a fair-value adjustment for the contingent consideration.

Liquidity and Capital Resources

Since our inception in 2006, we have devoted most of our cash resources to manufacturing, research and development and selling, general and administrative activities related to the development and commercialization of EXPAREL. In addition, we acquired ZILRETTA as part of the Flexion Acquisition in November 2021 and iovera° as part of the MyoScience Acquisition in April 2019. We are primarily dependent on the commercial success of EXPAREL and ZILRETTA. We have financed our operations primarily with the proceeds from the sale of convertible senior notes and other debt, common stock, product sales and collaborative licensing and milestone revenue. As of September 30, 2024, we had an accumulated deficit of $222.4 million, cash and cash equivalents and available-for-sale investments of $453.8 million and working capital of $383.6 million.

We expect that our cash and cash equivalents and available-for-sale investments on hand will be adequate to cover our short-term liquidity needs, and that we would be able to access other sources of financing should the need arise.

Summary of Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands):

Pacira BioSciences, Inc. | Q3 2024 Form 10-Q | Page 46

Operating Activities

During the nine months ended September 30, 2024, net cash provided by operating activities was $156.3 million, compared to $107.1 million during the nine months ended September 30, 2023. The increase of $49.2 million was primarily attributable to increased revenue with favorable gross margins, lower interest paid and a $13.0 million payment made in the prior year for a termination fee relating to a licensing agreement.

Investing Activities

During the nine months ended September 30, 2024, net cash used in investing activities was $82.9 million, which reflected $74.4 million of outflows from available-for-sale investment purchases (net of sales), as well as $8.5 million of capital expenditures for manufacturing product fill lines and for an EXPAREL capacity expansion project at our Science Center Campus in San Diego, California.

During the nine months ended September 30, 2023, net cash provided by investing activities was $69.2 million, which reflected proceeds from $89.3 million of available-for-sale investment sales (net of purchases), partially offset by purchases of fixed assets of $13.4 million for fill lines for our products and equipment for an EXPAREL capacity expansion project at our Science Center Campus in San Diego, California and purchases of equity and debt investments of $6.8 million.

Financing Activities

During the nine months ended September 30, 2024, net cash provided by financing activities was $19.3 million, which primarily consisted of $287.5 million in proceeds from the issuance of the 2029 Notes. We used the majority of the proceeds from the 2029 Notes to make a partial repurchase of the 2025 Notes in the amount of $191.0 million, enter into a capped call transaction for $26.7 million, repurchase $25.0 million of treasury stock, and pay debt issuance and financing costs of $9.4 million. Additionally, we paid the remaining $8.6 million of 3.375% convertible senior notes due 2024 assumed from the Flexion Acquisition (the “Flexion 2024 Notes”) upon their maturity and made $8.4 million voluntary prepayments associated with the TLA Term Loan. See Note 8, Debt, to our condensed consolidated financial statements included herein for further discussion on the Flexion 2024 Notes, 2025 Notes, 2029 Notes, the capped call transaction and the TLA Term Loan. There was also $1.4 million of proceeds from the issuance of common stock through our ESPP.

During the nine months ended September 30, 2023, net cash used in financing activities was $181.3 million, which consisted of a $296.9 million repayment of TLB Term Loan principal as well as a $5.8 million prepayment penalty in connection with the retirement of the TLB Term Loan facility and $30.6 million repayments of TLA Term Loan principal, partially offset by the net proceeds from the TLA Term Loan of $149.6 million, proceeds from the exercise of stock options of $1.9 million and $1.7 million from the issuance of common stock through our ESPP.

Debt

2028 Term Loan A Facility

On March 31, 2023, we entered into a credit agreement (as amended to date, the “TLA Credit Agreement”) to refinance the indebtedness outstanding under our TLB Credit Agreement (as defined and discussed below). The term loan issued under the TLA Credit Agreement (the “TLA Term Loan”) was issued at a 0.30% discount and provides for a single-advance term loan A facility in the principal amount of $150.0 million, which is secured by substantially all of our and any subsidiary guarantor’s assets and matures on March 31, 2028. We may elect to borrow either (i) alternate base rate borrowings or (ii) term benchmark borrowings or daily simple SOFR (as defined in the TLA Credit Agreement) borrowings. Each term loan borrowing which is an alternate base rate borrowing bears interest at a rate per annum equal to (i) the Alternate Base Rate (as defined in the TLA Credit Agreement), plus (ii) a spread based on our Senior Secured Net Leverage Ratio ranging from 2.00% to 2.75%. Each term loan borrowing which is a term benchmark borrowing or daily simple SOFR borrowing bears interest at a rate per annum equal to (i) the Adjusted Term SOFR Rate or Adjusted Daily Simple SOFR (as each is defined in the TLA Credit Agreement), plus (ii) a spread based on our Senior Secured Net Leverage Ratio ranging from 3.00% to 3.75%. During the nine months ended September 30, 2024, we made voluntary principal prepayments of $8.4 million. During the year ended December 31, 2023, we made a scheduled principal payment of $2.8 million as well as $30.6 million of voluntary principal prepayments. Due to voluntary principal prepayments made, we are not required to make further principal payments until September 2026, although we retain the option to do so. As of September 30, 2024, borrowings under the TLA Term Loan consisted entirely of term benchmark borrowings at a rate of 7.95%.

The TLA Credit Agreement requires us to, among other things, maintain (i) a Senior Secured Net Leverage Ratio (as defined in the Credit Agreement), determined as of the last day of each fiscal quarter, of no greater than 3.00 to 1.00 and (ii) a Fixed Charge Coverage Ratio (as defined in the TLA Credit Agreement), determined as of the last day of each fiscal quarter, of no less than 1.50 to 1.00. The TLA Credit Agreement requires us to maintain an unrestricted cash and cash equivalents balance of at least $500.0 million less any prepayments of the 2025 Notes (as defined below) at any time from 91 days prior to the maturity date through the earlier of (i) the latest maturity date of the 2025 Notes and (ii) the date on which there is no outstanding principal amount of the 2025 Notes, which we expect to accomplish. The TLA Credit Agreement also contains customary affirmative and negative covenants, financial covenants, representations and warranties, events of default and other provisions. As of September 30, 2024, we were in compliance with all financial covenants under the TLA Credit Agreement. See Note 8, Debt, to our condensed consolidated financial statements included herein for further discussion.

2029 Convertible Senior Notes

In May 2024, we completed a private placement of $287.5 million in aggregate principal amount of our 2.125% convertible senior notes due 2029, or 2029 Notes, and entered into an indenture with respect to the 2029 Notes. The 2029 Notes accrue interest at a fixed rate of 2.125% per year, payable semiannually in arrears on May 15th and November 15th of each year. The 2029 Notes mature on May 15, 2029.

At September 30, 2024, all $287.5 million of principal was outstanding on the 2029 Notes. See Note 8, Debt, to our condensed consolidated financial statements included herein for further discussion.

2025 Convertible Senior Notes

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

In May 2024, we used part of the net proceeds from the issuance of the 2029 Notes to repurchase $200.0 million aggregate principal amount of the 2025 Notes in privately negotiated transactions at a discount for $191.4 million in cash (including accrued interest). The partial repurchase of the 2025 Notes resulted in a $7.5 million gain on early extinguishment of debt.

At September 30, 2024, the outstanding principal on the 2025 Notes was $202.5 million. See Note 8, Debt, to our condensed consolidated financial statements included herein for further discussion.

Future Capital Requirements

We believe that our existing cash and cash equivalents, available-for-sale investments and cash received from product sales will be sufficient to enable us to fund our operating expenses, capital expenditure requirements and payment of the interest and principal on our TLA Term Loan, 2025 Notes and 2029 Notes through the next 12 months. Our future use of operating cash and capital requirements will depend on many forward-looking factors, including, but not limited to:

• the cost and timing of the potential milestone payments to former Flexion stockholders, which could be up to an aggregate of $372.3 million if certain regulatory and commercial milestones are met. See Note 9, Financial Instruments, to our condensed consolidated financial statements included herein for more information;
• the impact of global economic conditions—including the impact of inflation—on our product, material and labor costs, supply chain, longer lead-times, an inability to secure a sufficient supply of materials, our operating expenses and our business strategy;
• the timing of and extent to which the holders of our 2025 Notes and 2029 Notes elect to convert their 2025 Notes and 2029 Notes, the timing of principal and interest payments on our TLA Term Loan and the timing and impact of increases to the variable interest rate on our TLA Term Loan borrowings in accordance with the terms of the TLA Credit Agreement;
• the costs and our ability to successfully continue to expand the commercialization of EXPAREL, ZILRETTA and iovera°;
• the cost and timing of expanding and maintaining our manufacturing facilities;
• the cost and timing of additional strategic investments, including additional investments under existing agreements;
• the costs related to legal and regulatory matters, including those to develop and defend our intellectual property;
• the costs of performing additional clinical trials for our products, including the additional pediatric trials required by the FDA and EMA as a condition of the approval of EXPAREL;
• the costs for the development and commercialization of other product candidates;
• the costs and timing of future payments under our employee benefit plans, including but not limited to our cash long-term incentive plan and non-qualified deferred compensation plan;
• the timing and the number of shares of our common stock repurchased through our share repurchase program; and
• the extent to which we acquire or invest in products, businesses and technologies.

We may require additional debt or equity financing to meet our future operating and capital requirements. We have no committed external sources of funds, and additional equity or debt financing may not be available on acceptable terms, if at all. In particular, capital market disruptions or negative economic conditions may hinder our access to capital.

Critical Accounting Estimates

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in a business combination and is subject to impairment testing at least annually or upon the occurrence of a triggering event that could indicate a potential impairment. We have historically tested goodwill for impairment by performing a qualitative assessment in order to determine whether facts and circumstances support a determination that reporting unit fair values are greater than their carrying values. This has historically been performed using readily available market data and company-specific factors.

If we determine that it is more likely than not that the fair value of the Company is less than its carrying value, a quantitative test is required. This is performed by comparing the fair value of the Company with its carrying value. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, impairment is indicated, requiring recognition of a goodwill impairment charge up to the carrying value of goodwill. The fair value of the Company was calculated through an income approach. Under the income approach, we calculate the fair value based on the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate the future cash flows used to assume fair value. Our estimates of future cash flows consider past performance, current and anticipated market conditions and internal projections and operating plans which incorporate estimates for sales growth and future margins. Additional assumptions include forecasted growth rates, estimated discount rates and the probability of success for our product pipeline candidate products. We believe such assumptions also reflect current and anticipated market conditions and are consistent with those that would be used by other marketplace participants for similar valuation purposes. Such assumptions are subject to change due to changing economic and competitive conditions.

For more information, see Note 7, Goodwill and Intangible Assets, to our condensed consolidated financial statements included herein.

For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our 2023 Annual Report. Outside of the aforementioned, there have been no significant changes to our critical accounting policies nor any recently issued accounting pronouncements that are expected to have a material impact on our financial results since December 31, 2023.

Contractual Obligations

In May 2024, we completed a private placement of $287.5 million of our 2029 Notes, and entered into an indenture with respect to the 2029 Notes. The 2029 Notes accrue interest at a fixed rate of 2.125% per year, payable semiannually in arrears on May 15th and November 15th of each year. The 2029 Notes mature on May 15, 2029. At September 30, 2024, all $287.5 million of principal was outstanding on the 2029 Notes.

In May 2024, we used part of the net proceeds from the issuance of the 2029 Notes to repurchase $200.0 million aggregate principal amount of the 2025 Notes in privately negotiated transactions at a discount for $191.4 million in cash (including accrued interest). At September 30, 2024, the outstanding principal on the 2025 Notes was $202.5 million.

In May 2024, the remaining principal of the 3.375% convertible senior notes due 2024 (the “Flexion 2024 Notes”) in the amount of $8.6 million was repaid at maturity.

See Note 8, Debt, to our condensed consolidated financial statements included herein for further discussion.

Outside of the issuance of the 2029 Notes, the partial repurchase of the 2025 Notes and the repayment of the Flexion 2024 Notes, there have been no material changes in our contractual obligations relating to our indebtedness, lease obligations and purchase obligations from those reported in our 2023 Annual Report. For more information on our contractual obligations and commercial commitments, see Part II, Item 7 in our 2023 Annual Report.

The primary objective of our cash equivalents and investment activities is to preserve principal while at the same time maximizing the income that we receive from our investments without significantly increasing risk. We invest in corporate bonds, commercial paper, asset-backed securities and U.S. Treasury and other government agency notes for purposes other than trading which are reported at fair value. These securities are subject to interest rate risk and credit risk. This means that a change in prevailing interest rates may cause the fair value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the interest rate later rises, we expect that the fair value of our investment will decline. A hypothetical 100 basis point increase in interest rates would have reduced the fair value of our available-for-sale securities at September 30, 2024 by approximately $0.9 million.

The fair value of our 2025 Notes is impacted by both the fair value of our common stock and interest rate fluctuations. As of September 30, 2024, the estimated fair value of the 2025 Notes was $956 per $1,000 principal amount. See Note 8, Debt, to our condensed consolidated financial statements included herein for further discussion of our 2025 Notes, which bear interest at a fixed rate. At September 30, 2024, $202.5 million of principal remains outstanding on the 2025 Notes.

The fair value of our 2029 Notes is impacted by both the fair value of our common stock and interest rate fluctuations. As of September 30, 2024, the estimated fair value of the 2029 Notes was $757 per $1,000 principal amount. See Note 8, Debt, to our condensed consolidated financial statements included herein for further discussion of our 2029 Notes, which bear interest at a fixed rate. At September 30, 2024, $287.5 million of principal remains outstanding on the 2029 Notes.

The TLA Term Loan provides for a single-advance term loan in the principal amount of $150.0 million and is scheduled to mature on March 31, 2028. Each term loan borrowing that is a term benchmark borrowing or daily simple SOFR borrowing bears interest at a rate per annum equal to (i) the Adjusted Term SOFR Rate or Adjusted Daily Simple SOFR (as each is defined in the TLA Credit Agreement), plus (ii) a spread based on our Senior Secured Net Leverage Ratio ranging from 3.00% to 3.75%. At September 30, 2024, the outstanding principal on the TLA Term Loan was $108.1 million. As of September 30, 2024, borrowings under the TLA Term Loan consisted entirely of term benchmark borrowings at a rate of 7.95%. A hypothetical 100 basis point increase in interest rates would increase interest expense over the next 12 months by approximately $1.1 million, based on the balance outstanding for these borrowings as of September 30, 2024.

We have agreements with certain vendors and partners that operate in foreign jurisdictions. The more significant transactions are primarily denominated in the U.S. Dollar, subject to an annual adjustment based on changes in currency exchange rates.

Additionally, our accounts receivable are primarily concentrated with four large wholesalers of pharmaceutical products. In the event of non-performance or non-payment, there may be a material adverse impact on our financial condition, results of operations or net cash flow.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. As defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other procedures which are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2024.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including the Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

You should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2023 Annual Report, which could materially affect our business, financial condition, cash flows or future results. There have been no material changes in our risk factors included in our 2023 Annual Report. The risks described in our 2023 Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.