What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-07 · 473 added, 304 removed, 740 unchanged (51% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

ASSETS March 31,

ASSETS June 30,

2020 December 31,

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none issued and outstanding at

March 31, 2020 and December 31, 2019

June 30, 2020 and December 31, 2019

Common stock, par value $ 0.001 ;

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42,608,257 shares issued and

outstanding at March 31, 2020;

outstanding at June 30, 2020;

41,908,148 shares issued and outstanding at December 31, 2019

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Accumulated deficit ( 398,509 ) ( 399,398 )

Accumulated other comprehensive income (loss) ( 1,046 ) 322

Accumulated other comprehensive income 1,490 322

Total stockholders’ equity 388,148 354,944

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net product sales $ 75,216 $ 101,824 $ 179,961 $ 192,730

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Amortization of acquired intangible assets 1,967 1,770 3,933 1,770

Acquisition-related (gains) charges and product discontinuation, net ( 3,708 ) 1,242

Acquisition-related charges (gains) and product

discontinuation, net 1,418 3,405 ( 2,290 ) 4,647

Total operating expenses 82,652 97,329 171,242 187,563

Income from operations 17,094 1,079

Income (loss) from operations ( 7,147 ) 5,275 9,947 6,354

Other (expense) income:

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Income (loss) before income taxes ( 7,311 ) 1,127 1,245 ( 1,390 )

Income tax expense ( 398 ) ( 253 )

Income tax benefit (expense) 42 1,603 ( 356 ) 1,349

Net income (loss) $ ( 7,269 ) $ 2,730 $ 889 $ ( 41 )

Net income (loss) per share:

Basic and diluted net income (loss) per common share $ 0.19 $ ( 0.07 )

Basic net income (loss) per common share $ ( 0.17 ) $ 0.07 $ 0.02 $ ( 0.00 )

Diluted net income (loss) per common share $ ( 0.17 ) $ 0.06 $ 0.02 $ ( 0.00 )

Weighted average common shares outstanding:

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net income (loss) $ ( 7,269 ) $ 2,730 $ 889 $ ( 41 )

Other comprehensive income (loss):

Net unrealized gain (loss) on investments ( 1,368 ) 462

Total other comprehensive income (loss) ( 1,368 ) 462

Other comprehensive income:

Net unrealized gain on investments 2,536 318 1,168 780

Total other comprehensive income 2,536 318 1,168 780

Comprehensive income (loss) $ ( 4,733 ) $ 3,048 $ 2,057 $ 739

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019

(In thousands)

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Shares Amount Total

Balance at March 31, 2020 42,117 $ 42 $ 766,280 $ ( 391,240 ) $ ( 1,046 ) $ 374,036

Exercise of stock options 220 1 8,201 — — 8,202

Vested restricted stock units 234 — — — — —

Shares issued under employee stock

purchase plan 37 — 1,421 — — 1,421

Stock-based compensation — — 9,222 — — 9,222

Net unrealized gain on investments — — — — 2,536 2,536

Net loss — — — ( 7,269 ) — ( 7,269 )

Balance at June 30, 2020 42,608 $ 43 $ 785,124 $ ( 398,509 ) $ 1,490 $ 388,148

Common Stock Additional

Capital Accumulated

Deficit Accumulated

Comprehensive

Income (Loss)

Shares Amount Total

Balance at March 31, 2019 41,289 $ 41 $ 718,449 $ ( 391,153 ) $ 182 $ 327,519

Exercise of stock options 97 — 2,029 — — 2,029

Vested restricted stock units 184 1 — — — 1

Shares issued under employee stock

purchase plan 36 — 1,270 — — 1,270

Stock-based compensation — — 7,783 — — 7,783

Net unrealized gain on investments — — — — 318 318

Net income — — — 2,730 — 2,730

Balance at June 30, 2019 41,606 $ 42 $ 729,531 $ ( 388,423 ) $ 500 $ 341,650

See accompanying condensed notes to consolidated financial statements.

PACIRA BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(In thousands)

Common Stock Additional

Capital Accumulated

Deficit Accumulated

Comprehensive

Income (Loss)

Shares Amount Total

Balance at December 31, 2019 41,908 $ 42 $ 753,978 $ ( 399,398 ) $ 322 $ 354,944

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Vested restricted stock units 236 — — — — —

Shares issued under employee stock

purchase plan 37 — — 1,421 — — 1,421

Stock-based compensation — — 18,070 — — 18,070

Net unrealized loss on investments — — — — ( 1,368 ) ( 1,368 )

Net unrealized gain on investments — — — — 1,168 1,168

Net income — — — 889 — 889

Balance at March 31, 2020 42,117 $ 42 $ 766,280 $ ( 391,239 ) $ ( 1,046 ) $ 374,037

Balance at June 30, 2020 42,608 $ 43 $ 785,124 $ ( 398,509 ) $ 1,490 $ 388,148

Common Stock Additional

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Vested restricted stock units 188 1 — — — 1

Shares issued under employee stock

purchase plan 36 — 1,270 — — 1,270

Stock-based compensation — — 15,217 — — 15,217

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Net loss — — — ( 41 ) — ( 41 )

Balance at March 31, 2019 41,289 $ 41 $ 718,449 $ ( 391,153 ) $ 182 $ 327,519

Balance at June 30, 2019 41,606 $ 42 $ 729,531 $ ( 388,423 ) $ 500 $ 341,650

See accompanying condensed notes to consolidated financial statements.

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(In thousands)

Three Months Ended

Six Months Ended

Operating activities:

Net income (loss) $ 889 $ ( 41 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

Depreciation of fixed assets and amortization of intangible assets 9,810 8,881

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Changes in contingent consideration ( 2,312 ) —

Loss on investment 3,971 —

Changes in operating assets and liabilities:

Gain on investment ( 8 ) —

Changes in operating assets and liabilities (net of MyoScience, Inc.

acquisition):

Accounts receivable, net 3,517 ( 2,141 )

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securityholders ( 9,409 ) —

Net cash provided by operating activities 6,208 3,499

Net cash (used in) provided by operating activities ( 9,416 ) 26,262

Investing activities:

Acquisition of MyoScience, Inc.

(net of cash acquired) — ( 118,683 )

Purchases of fixed assets ( 15,630 ) ( 4,070 )

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Sales of investments 95,450 163,017

Net cash (used in) provided by investing activities ( 28,566 ) 78,481

Equity Investment — ( 1,622 )

Net cash provided by (used in) investing activities 7,557 ( 103,318 )

Financing activities:

Proceeds from exercises of stock options 6,353 3,568

Proceeds from shares issued under employee stock purchase plan 1,421 1,270

Repayment of 2019 convertible senior notes — ( 338 )

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Payment of contingent consideration to MyoScience, Inc securityholders ( 5,591 ) —

Net cash (used in) provided by financing activities ( 1,281 ) 530

Net (decrease) increase in cash and cash equivalents ( 23,639 ) 82,510

Net cash provided by financing activities 2,183 4,267

Net increase (decrease) in cash and cash equivalents 324 ( 72,789 )

Cash and cash equivalents, beginning of period 78,228 132,526

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Cash paid for interest $ 4,097 $ 4,102

Cash paid for income taxes, net of refunds $ 80 $ 490

Non-cash investing and financing activities:

Net increase in contingent consideration liabilities $ — $ 28,470

Net decrease in accrued fixed assets $ ( 1,115 ) $ ( 682 )

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EXPAREL utilizes DepoFoam ® , a unique and proprietary delivery technology that encapsulates drugs without altering their molecular structure, and releases them over a desired period of time.

In April 2019, the Company added iovera° ® to its commercial offering with its acquisition of MyoScience, Inc., or MyoScience.

In April 2019, the Company added iovera° ® to its commercial offering with the acquisition of MyoScience, Inc., or MyoScience.

The iovera° system is a handheld cryoanalgesia device used to deliver a precise, controlled application of cold temperature to only targeted nerves.

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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 period financial results.

Accordingly, the Company views its business as one reportable segment to evaluate performance, allocate resources, set operational targets and forecast its future financial results.

Novel Coronavirus (COVID-19) Pandemic

During the second quarter of 2020, the Company’s net product sales were negatively impacted by the global pandemic caused by a novel strain of coronavirus (COVID-19), which mandated significant postponement or suspension in the scheduling of elective surgical procedures resulting from public health guidance and government directives.

Elective surgery restrictions began to lift on a state-by-state basis in April 2020;

however, the Company does not know how long other states will mandate stay at home orders, how long it will take the surgical community to return to normal operations or if states will return to placing restrictions on elective surgical procedures.

The Company’s manufacturing sites are operational and have implemented new safety protocols and guidelines as recommended by federal, state and local governments.

To date, there have been no material impacts to the Company’s supply chain.

The situation remains dynamic and subject to rapid and possibly material changes.

Additional negative impacts may also arise from the COVID-19 pandemic 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.

NOTE 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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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, 2019 .

The condensed consolidated financial statements at March 31, 2020, and for the three-month periods ended March 31, 2020 and 2019, are unaudited, but include all adjustments (consisting of only normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial information set forth herein in accordance with GAAP.

The condensed consolidated financial statements at June 30, 2020, and for the three and six-month periods ended June 30, 2020 and 2019, are unaudited, but include all adjustments (consisting of only normal recurring adjustments) 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, 2019 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, 2019.

The condensed consolidated financial statements as presented reflect certain reclassifications from previously issued financial statements to conform to the current year presentation.

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.

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The Company also sells EXPAREL directly to ambulatory surgery centers and physicians.

The Company sells its bupivacaine

liposome injectable suspension for veterinary use to a third-party licensee and sells iovera° directly to end users.

The Company sells its bupivacaine liposome injectable suspension for veterinary use to a third-party licensee and sells iovera° directly to end users.

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

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Largest wholesaler 32 % 32 % 31 % 34 %

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(i) changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The standard became effective for the Company beginning January 1, 2020 and the Company has applied these new disclosure requirements in its condensed consolidated financial statements as of and for the three months ended March 31, 2020.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other Internal-Use Software (Subtopic 350-40):

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This standard became effective for the Company beginning January 1, 2020.

The amendments are to be applied prospectively to all implementation costs incurred after the date of adoption.

The Company did not incur any implementation costs in a hosting arrangement during the three months ended March 31, 2020.

Recent Accounting Pronouncements Not Adopted as of March 31, 2020

The amendments are to be applied prospectively to all implementation costs incurred

after the date of adoption.

The Company did not incur any implementation costs in a hosting arrangement during the three and six months ended June 30, 2020.

Recent Accounting Pronouncements Not Adopted as of June 30, 2020

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes , which amends the approaches and methodologies in accounting for income taxes during interim periods and makes changes to certain income tax classifications.

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The standard also requires franchise or similar taxes partially based on income to be reported as income tax and to reflect the effects of enacted changes in tax laws or rates in the annual effective tax rate computation from the date of enactment.

Lastly, in any future acquisition, the Company would be required to evaluate when the

step-up in the tax basis of goodwill is part of the business combination and when it should be considered a separate transaction.

Lastly, in any future acquisition, the Company would be required to evaluate when the step-up in the tax basis of goodwill is part of the business combination and when it should be considered a separate transaction.

The standard will be effective for the Company beginning January 1, 2021, with early adoption of the amendments permitted.

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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 which include hospitals, ambulatory surgery centers and doctors.

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.

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net product sales:

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The total consideration was $ 147.5 million, which included a net cash payment of $ 119.0 million and the fair value of contingent consideration in the amount of $ 28.5 million.

The contingent consideration consisted of contingent milestone payments up to an aggregate of $ 100.0 million upon the achievement of certain regulatory and commercial milestones, of which $ 68.0 million are available as of March 31, 2020.

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.

During the three months ended March 31, 2020, the Company made a $ 5.0 million cash payment for the achievement of a regulatory milestone.

The Company will pay an additional $ 10.0 million for the achievement of a regulatory milestone in the second quarter of 2020.

Up to $ 5.0 million of this milestone payment may be payable in shares of the Company’s common stock, at the election of former MyoScience shareholders.

See Note 10, Financial Instruments , for information on the measurement and amounts recognized on the Company’s condensed consolidated balance sheet for contingent consideration.

During the six months ended June 30, 2020, the Company made $ 15.0 million of cash payments for the achievement of two regulatory milestones.

See Note 10, Financial Instruments , for information on the measurement and amounts recognized on the Company’s condensed consolidated balance sheets for contingent consideration.

Unaudited Pro Forma Summary of Operations

The following table shows the unaudited pro forma summary of operations for the three months ended March 31, 2019 as if the MyoScience Acquisition had occurred on January 1, 2019.

The following table shows the unaudited pro forma summary of operations for the three and six months ended June 30, 2019 as if the MyoScience Acquisition had occurred on January 1, 2019.

This pro forma information does not purport to represent what the Company’s actual results would have been and is not indicative of what such results would be expected for any future period (in thousands, except per share amounts):

Three Months Ended

March 31, 2019

Three Months Ended June 30, 2019 Six Months Ended

June 30, 2019

Total revenues $ 102,913 $ 196,366

Net loss $ ( 8,102 )

Pro forma basic and diluted net loss per share $ ( 0.20 )

Net income (loss) $ 4,234 $ ( 4,742 )

Pro forma basic and diluted net income (loss) loss per share $ 0.10 $ ( 0.11 )

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 MyoScience.

The summary pro forma financial information primarily reflects the following pro forma adjustments:

• Removal of the acquisition-related transaction fees and costs from the three months ended March 31, 2019;

• Removal of the acquisition-related transaction fees and costs, including certain stock-based compensation and other compensation expenses related to the acquisition;

• Removal of the income tax benefit resulting from the Company decreasing its existing valuation allowance;

• Removal of MyoScience's loss on extinguishment of debt and warrant expense;

• Removal of MyoScience’s interest expense;

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

March 31, December 31,

June 30, December 31,

Raw materials $ 23,894 $ 20,019

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In December 2019, the Company’s contract manufacturer experienced a media fill failure, which is part of the routine aseptic manufacturing requalification program, and an investigation was completed in April 2020.

Based on the results of the investigation, the Company does not believe that any additional inventory reserves are required related to the media fill failure, and that all inventory in question has been determined to be sellable.

The Company will resume production on this manufacturing line in May 2020.

Based on the results of the investigation, the Company determined that no inventory reserves are required related to the media fill failure, and that all inventory in question has been determined to be sellable.

The Company resumed production on this manufacturing line in May 2020.

NOTE 6— FIXED ASSETS

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

March 31, December 31,

June 30, December 31,

Machinery and equipment $ 74,436 $ 70,078

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Fixed assets, net $ 113,297 $ 104,681

For the three months ended March 31, 2020 and 2019, depreciation expense was $ 2.9 million and $ 3.6 million, respectively.

For the three months ended March 31, 2020 and 2019, there was less than $ 0.1 million and no capitalized interest on the construction of manufacturing sites, respectively.

At March 31, 2020 and December 31, 2019, total fixed assets, net, includes leasehold improvements and manufacturing process equipment located in Europe in the amount of $ 64.0 million and $ 64.8 million, respectively.

For the three months ended June 30, 2020 and 2019, depreciation expense was $ 3.0 million and $ 3.5 million, respectively.

For the three months ended June 30, 2020 and 2019, there was $ 0.7 million and no capitalized interest on the construction of manufacturing sites, respectively.

For the six months ended June 30, 2020 and 2019, depreciation expense was $ 5.9 million and $ 7.1 million, respectively.

For the six months ended June 30, 2020 and 2019, there was $ 0.8 million and no capitalized interest on the construction of manufacturing sites, respectively.

At June 30, 2020 and December 31, 2019, total fixed assets, net, includes leasehold improvements and manufacturing process equipment located in Europe in the amount of $ 65.4 million and $ 64.8 million, respectively.

During the six months ended June 30, 2020, the Company established an asset retirement obligation of $ 0.2 million related to a new building lease which contains manufacturing, research and development and office space at its Science Center Campus in San Diego, California.

NOTE 7— LEASES

The Company leases all of its facilities, including its EXPAREL manufacturing facility in San Diego, California and its iovera° manufacturing facility in Fremont, California.

These leases have remaining terms between five months and 10.4 years, some of which provide renewal options at the then-current market value.

These leases have remaining terms up to 10.2 years, some of which provide renewal options at the then-current market value.

The Company also has a lease with Thermo Fisher Scientific Pharma Services, or Thermo Fisher (formerly Patheon UK Limited), for the use of their manufacturing facility in Swindon, England, which is embedded in agreements the Company has with Thermo Fisher.

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Total operating lease costs are as follows (in thousands):

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

Operating Lease Costs 2020 2019 2020 2019

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

Three Months Ended

Six Months Ended

Cash paid for operating lease liabilities $ 8,503 $ 3,121

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The weighted average remaining lease term and the weighted average discount rate are summarized as follows:

March 31, 2020

June 30, 2020

Weighted average remaining lease term 9.55 years

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Year Aggregate Minimum Payments Due

2020 (remaining nine months) $ 6,116

2020 (remaining six months) $ 7,497

2025 through 2030 62,072

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Total operating lease liabilities $ 81,508

The Company has entered into one lease agreement (not included in the table above) for which there are future obligations but the lease has not yet commenced as of March 31, 2020 (in thousands):

Year Aggregate Minimum Payments Due

2020 (remaining nine months) $ 7,124

2025 through 2030 29,242

Total future lease payments $ 54,838

NOTE 8— GOODWILL AND INTANGIBLE ASSETS

There was no change in the carrying value of the Company’s goodwill during the three months ended March 31, 2020.

The balance at both December 31, 2019 and March 31, 2020 was $ 99.5 million.

There was no change in the carrying value of the Company’s goodwill during the three and six months ended June 30, 2020.

The balance at both December 31, 2019 and June 30, 2020 was $ 99.5 million.

Skyepharma Acquisition

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The Skyepharma Acquisition was accounted for under Statement of Financial Accounting Standards 141, Accounting for Business Combinations , which was the effective GAAP standard at the Skyepharma Acquisition date.

As of June 30, 2020 the Company has recorded $ 62.0 million of goodwill related to the Skyepharma Acquisition.

In connection with the Skyepharma Acquisition, the Company agreed to percentage and milestone payments for DepoBupivacaine products, including EXPAREL.

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(v) $ 32.0 million when annual net sales collected reach $ 500.0 million.

As of March 31, 2020 the Company has recorded $ 62.0 million of goodwill related to the Skyepharma Acquisition The two unmet milestone payments totaling $ 36.0 million are the only remaining obligations to Skyepharma.

The two unmet milestone payments totaling $ 36.0 million are the only remaining obligations to Skyepharma.

Any remaining milestone payments will be treated as additional costs of the Skyepharma Acquisition and, therefore, recorded as goodwill if and when each contingency is resolved.

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Intangible assets, net, consist of the developed technology and customer relationships that were acquired in the MyoScience Acquisition and are summarized as follows (in thousands):

March 31, 2020 Gross Carrying Value Accumulated

June 30, 2020 Gross Carrying Value Accumulated

Amortization Intangible

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Total intangible assets $ 110,090 $ ( 5,703 ) $ 104,387

Amortization expense on intangible assets for the three months ended March 31, 2020 was $ 2.0 million.

There was no amortization expense on intangible assets for the three months ended March 31, 2019.

Assuming no changes in the gross carrying amount of these intangible assets, amortization expense on intangible assets will be $ 5.9 million for the remaining nine months of 2020 and the future amortization expense on intangible assets will be $ 7.9 million annually through 2032 and $ 2.2 million in 2033.

Amortization expense on intangible assets for the three and six months ended June 30, 2020 was $ 2.0 million and $ 3.9 million, respectively.

There was $ 1.8 million of amortization expense on intangible assets for both the three and six months ended June 30, 2019.

Assuming no changes in the gross carrying amount of these intangible assets, amortization expense on intangible assets will be $ 3.9 million for the remaining six months of 2020 and the future amortization expense on intangible assets will be $ 7.9 million annually through 2032 and $ 2.2 million in 2033.

Convertible Senior Notes Due 2025

On July 10, 2020, the Company completed a private placement of $ 402.5 million in aggregate principal amount of 0.75 % 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 0.75 % per year, payable semiannually in arrears on February 1 st and August 1 st of each year, beginning on February 1, 2021.

The 2025 Notes mature on August 1, 2025.

The Company used part of the net proceeds from the issuance of the 2025 Notes to repurchase $ 185.0 million aggregate principal of the 2022 Notes in privately-negotiated transactions for an aggregate of approximately $ 211.1 million in cash (including accrued interest).

For more information on the 2025 Notes, see Note 17, Subsequent Events .

Convertible Senior Notes Due 2022

On March 13, 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, and entered into an indenture, or 2022 Indenture, with respect to the 2022 Notes.

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

March 31, December 31,

June 30, December 31,

2.375 % convertible senior notes due 2022

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Total debt, net of debt discount and deferred financing costs $ 314,182 $ 306,045

Holders may convert their 2022 Notes prior to October 1, 2021 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 March 31, 2020, this condition for conversion was not met.

Holders may convert their 2022 Notes prior to October 1, 2021 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 or equal to 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 June 30, 2020, this condition for conversion was not met.

On or after October 1, 2021, until the close of business on the second scheduled trading day immediately preceding April 1, 2022, holders may convert their 2022 Notes at any time.

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The initial conversion price of the 2022 Notes represents a premium of approximately 37.5 % to the closing sale price of $ 48.65 per share of the Company’s common stock on the Nasdaq Global Select Market on March 7, 2017, the date that the Company priced the private offering of the 2022 Notes.

As of March 31, 2020, the 2022 Notes had a market price of $ 960 per $ 1,000 principal amount.

As of June 30, 2020, the 2022 Notes had a market price of $ 1,096 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 stock price appreciation.

Upon the receipt of conversion requests, the settlement of the 2022 Notes will be paid pursuant to the terms of the 2022 Indenture.

In the event that all of the 2022 Notes are settled, the Company would be required to repay the $ 345.0 million in principal value and any conversion premium in any combination of cash and shares of its common stock (at the Company’s option).

In the event that all of the 2022 Notes are settled, the Company would be required to repay the $ 345.0 million in principal value ($ 160.0 million following the July 2020 repurchase of $ 185.0 million aggregate principal of 2022 Notes discussed above and in Note 17, Subsequent Events ) and any conversion premium in any combination of cash and shares of its common stock (at the Company’s option).

As of April 1, 2020, the Company may redeem for 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, all or part of the 2022 Notes if the last reported sale price (as defined in the 2022 Indenture) of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption.

This condition was not met during the quarter ended June 30, 2020.

The redemption price will equal the sum of (i) 100 % of the principal amount of the 2022 Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date.

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No sinking fund is provided for the 2022 Notes.

While the 2022 Notes are currently classified on the Company’s consolidated balance sheet at March 31, 2020 as long-term debt, the future convertibility and resulting balance sheet classification of this liability will be monitored at each quarterly reporting date and will be analyzed dependent upon market prices of the Company’s common stock during the prescribed measurement periods.

While the 2022 Notes are currently classified on the Company’s consolidated balance sheet at June 30, 2020 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 2022 Notes have the right to convert the 2022 Notes at any time during the prescribed measurement period, the 2022 Notes would then be considered a current obligation and classified as such.

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Contractual interest expense $ 2,048 $ 2,049 $ 4,097 $ 4,098

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The fair value of the Company’s acquisition-related contingent consideration is reported at fair value on a recurring basis (Level 3).

The carrying values and fair values of the Company’s financial assets and liabilities at March 31, 2020 are as follows (in thousands):

The carrying values and fair values of the Company’s financial assets and liabilities at June 30, 2020 are as follows (in thousands):

Carrying Value Fair Value Measurements Using

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$ 314,182 (2)

$ — $ 378,206 $ —

Acquisition-related contingent consideration (3)

$ 20,830 $ — $ — $ 20,830

(1) The closing price of the Company’s common stock as reported on the Nasdaq Global Select Market was $ 33.53 per share on March 31, 2020 compared to a conversion price of $ 66.89 per share.

Therefore, at March 31, 2020, the conversion price was above the stock price.

The maximum conversion premium that can be due on the 2022 Notes is approximately 5.2 million shares of the Company’s common stock, which assumes no increases in the conversion rate for certain corporate events.

(1) The closing price of the Company’s common stock as reported on the Nasdaq Global Select Market was $ 52.47 per share on June 30, 2020 compared to a conversion price of $ 66.89 per share.

Therefore, at June 30, 2020, the conversion price was above the stock price.

The maximum conversion premium that could have been due on the 2022 Notes at June 30, 2020 was approximately 5.2 million shares of the Company’s common stock, which subsequently became 2.4 million shares after the July 2020 redemption of $ 185 million of aggregate principal 2022 Notes (see Note 17, Subsequent Events , for more information).

These figures assume no increases in the conversion rate for certain corporate events.

(2) Reported at historical cost.

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Financial Liabilities Measured at Fair Value on a Recurring Basis

The Company has recognized contingent consideration related to the MyoScience Acquisition in the amount of $ 29.3 million as of March 31, 2020.

The Company has recognized contingent consideration related to the MyoScience Acquisition in the amount of $ 20.8 million as of June 30, 2020.

Refer to Note 4, MyoScience Acquisition and Note 15, Acquisition-Related (Gains) Charges and Product Discontinuation, Net , for more information.

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, as a result of downward revisions in its forecasted revenues (principally due to the impact of the COVID-19 pandemic), for the three months ended March 31, 2020, recognized $ 3.9 million of credits related to contingent consideration, which have been included in acquisition-related (gains) charges in the condensed consolidated statements of operations.

The Company has, as a result of revisions to its forecasted revenues (principally due to the impact of the COVID-19 pandemic), for the three and six month periods ended June 30, 2020, recognized $ 1.6 million of charges and $ 2.3 million of gains related to contingent consideration, respectively, which have been included in acquisition-related charges (gains) in the condensed consolidated statements of operations.

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 discount rates used to calculate the present value of estimated future payments.

These inputs include, as applicable, estimated probabilities and the timing of achieving specified commercial and regulatory milestones, estimated forecasts of revenue and costs and 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.

At March 31, 2020, the weighted average discount rate was 9.7 % and the weighted average probability of success for regulatory milestones was 44.6 %.

At June 30, 2020, the weighted average discount rate was 5.96 % and the weighted average probability of success for regulatory milestones was 22.4 %.

There were no changes in the fair value of contingent consideration in the three and six months ended June 30, 2019.

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

Assumption Ranges Utilized as of March 31, 2020

Assumption Ranges Utilized as of June 30, 2020

Discount rates 5.94 % to 6.03 %

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Projected years of payment for regulatory and commercial milestones 2020 to 2023

The maximum remaining potential payments related to the contingent consideration from the MyoScience Acquisition are $ 68.0 million, including a $ 10.0 million payment to be made in the second quarter of 2020.

The maximum remaining potential payments related to the contingent consideration from the MyoScience Acquisition are $ 58.0 million.

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

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Payments made ( 15,000 )

Balance at March 31, 2020 $ 29,268

Balance at June 30, 2020 $ 20,830

Short-term investments consist of asset-backed securities collateralized by credit card receivables, investment grade commercial paper and corporate bonds with maturities greater than three months, but less than one year.

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Net unrealized gains and losses (excluding credit losses, if any) from the Company’s short-term and long-term investments are reported in other comprehensive income (loss).

At March 31, 2020, all of the Company’s short-term and long-term 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.

At June 30, 2020, all of the Company’s short-term and long-term 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.

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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 March 31, 2020, all short-term and long-term investments had an “A” or better rating by Standard & Poor’s.

The following summarizes the Company’s investments at March 31, 2020 and December 31, 2019 (in thousands):

March 31, 2020 Investments Cost Gross

At the time of purchase, all short-term and long-term investments had an “A” or better rating by Standard & Poor’s.

The following summarizes the Company’s investments at June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020 Investments Cost Gross

Losses Fair Value

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Subtotal 246,806 1,434 — 248,240

Asset-backed securities 6,175 23 — 6,198

Corporate bonds 8,205 56 — 8,261

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Total $ 278,198 $ 346 $ ( 24 ) $ 278,520

At March 31, 2020, the fair values of some of the investments held for sale were less than their amortized costs.

These investments had been in unrealized loss positions for less than 12 months.

The Company considered whether it intends to sell or is more likely than not to be required to sell those investments prior to the recovery of their amortized cost bases.

In addition, the Company considered the present value of future cash flows of those investments and projects that these cash flows will be greater than the amortized costs.

For the three months ended March 31, 2020, the Company concluded that the decline in fair value was not a result of credit losses and no credit impairments have been recognized in the condensed consolidated statements of operations.

At June 30, 2020, there were no investments held for sale that were less than their amortized cost.

The Company elects to recognize its interest receivable separate from its available for sale investments.

At March 31, 2020 and December 31, 2019, the interest receivable recognized in prepaid expenses and other current assets was $ 1.6 million and $ 1.0 million, respectively.

At June 30, 2020 and December 31, 2019, the interest receivable recognized in prepaid expenses and other current assets was $ 1.7 million and $ 1.4 million, respectively.

Equity Investment

At March 31, 2020 and December 31, 2019, the Company held an equity investment in TELA Bio, Inc., or TELA Bio, in its condensed consolidated balance sheets in the amount of $ 6.1 million and $ 10.0 million, respectively.

During the three months ended March 31, 2020, the Company recorded its investment in TELA Bio at fair value, based on a quoted market price, which resulted in an impairment loss in the amount of $ 4.0 million.

There was no impairment loss in the three months ended March 31, 2019.

The fair values at both March 31, 2020 and December 31, 2019 were based on Level 1 inputs.

At both June 30, 2020 and December 31, 2019, the Company held an equity investment in TELA Bio, Inc., or TELA Bio, in its condensed consolidated balance sheets in the amount of $ 10.0 million.

The Company records its investment in TELA Bio at fair value based on a quoted market price, which resulted in an unrealized gain in the amount of $ 4.0 million during the three months ended June 30, 2020 and an unrealized gain of less than $ 0.1 million in the six months ended June 30, 2020.

The fair values at both June 30, 2020 and December 31, 2019 were based on Level 1 inputs.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, long-term investments and accounts receivable.

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Such amounts may exceed federally-insured limits.

As of March 31, 2020, three wholesalers each accounted for over 10% of the Company’s accounts receivable, at 32 %, 29 % and 28 %, respectively.

At December 31, 2019, three wholesalers each accounted for over 10% of the Company’s accounts receivable, at 37 %, 29 % and 26 %, respectively.

As of June 30, 2020, three wholesalers each accounted for over 10% of the Company’s accounts receivable, at 33 %, 30 % and 26 %.

At December 31, 2019, three wholesalers each accounted for over 10% of the Company’s accounts receivable, at 37 %, 29 % and 26 %.

For additional information regarding the Company’s wholesalers, see Note 2 , Summary of Significant Accounting Policies .

EXPAREL revenues are primarily derived from major wholesalers and pharmaceutical companies which generally have significant cash resources.

EXPAREL revenues are primarily derived from major wholesalers and pharmaceutical companies 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 Company’s accounts receivable are maintained based on historical payment patterns, current and estimated future economic conditions, aging of accounts receivable and actual write-off history.

As of March 31, 2020 and December 31, 2019, no allowances for credit losses were deemed necessary by the Company on its accounts receivable.

As of June 30, 2020 and December 31, 2019, the Company did no t deem any allowances for credit losses on its accounts receivable necessary.

NOTE 11— STOCK PLANS

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Cost of goods sold $ 1,284 $ 1,156 $ 2,503 $ 2,247

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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 three months ended March 31, 2020:

The following tables contain information about the Company’s stock option and restricted stock unit, or RSU, activity for the six months ended June 30, 2020:

Stock Options Number of Options Weighted Average Exercise Price (Per Share)

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Expired ( 31,982 ) 61.24

Outstanding at March 31, 2020 6,582,154 43.62

Outstanding at June 30, 2020 7,442,539 44.34

Restricted Stock Units Number of Units Weighted Average Grant Date Fair Value (Per Share)

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Forfeited ( 32,059 ) 42.72

Unvested at March 31, 2020 615,075 41.86

The weighted average fair value of stock options granted during the three months ended March 31, 2020 was $ 20.97 per share.

Unvested at June 30, 2020 927,573 45.16

The weighted average fair value of stock options granted during the six months ended June 30, 2020 was $ 22.05 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 Three Months Ended March 31, 2020

Black-Scholes Weighted Average Assumption Six Months Ended June 30, 2020

Expected dividend yield None

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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 three months ended March 31, 2020, no shares were purchased and issued through the ESPP.

During the six months ended June 30, 2020, 36,668 shares were purchased and issued through the ESPP.

NOTE 12— STOCKHOLDERS’ EQUITY

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

Three Months Ended

Six Months Ended

Net unrealized gains (losses) from available for sale investments:

Balance at beginning of period $ 322 $ ( 280 )

Other comprehensive income (loss) before reclassifications ( 1,368 ) 462

Other comprehensive income before reclassifications 1,168 780

Amounts reclassified from accumulated other comprehensive income (loss) — —

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Potential common shares are excluded from the diluted net income (loss) per share computation to the extent they would be antidilutive.

Because the Company reported a net loss for the three months ended March 31, 2019, 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 loss per share for the three months ended March 31, 2020 and 2019 (in thousands, except per share amounts):

Because the Company reported a net loss for the three months ended June 30, 2020 and the six months ended June 30, 2019, no potentially dilutive securities have been included in the computation of diluted net loss per share for those periods.

The following table sets forth the computation of basic and diluted net loss per share for the three and six months ended June 30, 2020 and 2019 (in thousands, except per share amounts):

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net income (loss) $ ( 7,269 ) $ 2,730 $ 889 $ ( 41 )

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Dilutive effect of RSUs — 148 168 —

Dilutive effect of ESPP purchase options — 3 — —

Weighted average common shares outstanding—diluted 42,221 42,345 42,861 41,312

Net income (loss) per share:

Basic and diluted net income (loss) per common share $ 0.19 $ ( 0.07 )

Basic net income (loss) per common share $ ( 0.17 ) $ 0.07 $ 0.02 $ ( 0.00 )

Diluted net income (loss) per common share $ ( 0.17 ) $ 0.06 $ 0.02 $ ( 0.00 )

The following outstanding stock options, RSUs and ESPP purchase options are antidilutive in the periods presented (in thousands):

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Weighted average number of stock options 6,804 4,426 5,327 5,932

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Income (loss) before income taxes:

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Total income (loss) before income taxes $ ( 7,311 ) $ 1,127 $ 1,245 $ ( 1,390 )

For the three months ended March 31, 2020 and 2019, the Company recorded income tax expense of $ 0.4 million and $ 0.3 million, respectively.

The tax provisions for 2020 and 2019 reflect current state income taxes.

For the three months ended June 30, 2020 and 2019, the Company recorded an income tax benefit of less than $0.1 million and $ 1.6 million, respectively.

For the six months ended June 30, 2020 and 2019, the Company recorded income tax expense of $ 0.4 million and an income tax benefit of $ 1.3 million, respectively.

The tax provisions recorded for 2020 and 2019 reflect current state income taxes.

The income tax benefit for the three and six months ended June 30, 2019 is primarily related to the MyoScience Acquisition and a $ 1.8 million reduction in the Company’s valuation allowance on its deferred tax assets due to the acquisition.

Due to net operating losses, or NOLs, carried forward, and the repeal of the corporate minimum tax, no current federal income tax expense was recorded for 2020 or 2019.

The utilization of the Company’s NOLs has not resulted in any deferred federal tax expense because there was a full valuation allowance recorded with respect to the NOLs.

However, if the Company’s results of operations continue to improve, the Company may be required to reverse some or all of the valuation allowance on its deferred tax assets in the second half of 2020.

NOTE 15— ACQUISITION–RELATED (GAINS) CHARGES AND PRODUCT DISCONTINUATION, NET

MyoScience Acquisition

The Company recognized acquisition-related gains related to the MyoScience Acquisition in the amount of $ 3.7 million and acquisition-related charges of $ 1.2 million in the three months ended March 31, 2020 and 2019, respectively.

The acquisition-related gains primarily reflect the decrease in the fair value of contingent consideration in the amount of $ 3.9 million for the three months ended March 31, 2020.

See Note 10, Financial Instruments , for information regarding the method and key assumptions used in the fair value measurements of contingent consideration.

In the three months ended March 31, 2020 and 2019, the remaining acquisition-related charges of $ 0.2 million and $ 1.2 million represented legal, accounting, and other related costs.

See Note 4, MyoScience Acquisition , for more information.

The Company recognized acquisition-related charges related to the MyoScience Acquisition in the amount of $ 1.6 million and acquisition-related gains of $ 2.2 million in the three and six months ended June 30, 2020, respectively.

The majority of these charges and gains represented changes in the fair value of contingent consideration.

In these three and six month periods, there were also charges of less than $0.1 million and $0.1 million, respectively, for legal, accounting and other related costs.

The Company recognized acquisition-related charges of $ 3.4 million and $ 4.6 million in the three and six months ended June 30, 2019, respectively, related to separation costs, asset write-downs and other restructuring charges.

There were no changes in the value of contingent consideration in the three and six months ended June 30, 2019.

See Note 10, Financial Instruments , for information regarding the methods and key assumptions used in the fair value measurements of contingent consideration.

DepoCyt(e) Discontinuation

The Company recorded costs related to its DepoCyt(e) discontinuation activities of less than $ 0.1 million in each of the three month periods ended March 31, 2020 and 2019.

The Company recorded gains related to its DepoCyt(e) discontinuation activities of $ 0.2 million and $ 0.1 million in the three and six month periods ended June 30, 2020, respectively.

The Company recorded costs for its DepoCyt(e) discontinuation activities of $ 0.1 million in both the three and six month periods ended June 30, 2019.

The Company ceased all production of DepoCyt(e) as of June 30, 2017.

Cash payments for the DepoCyt(e) manufacturing facility are expected to continue through the end of its lease term in August 2020.

Cash payments for the DepoCyt(e) manufacturing facility are expected to be finalized in the third quarter of 2020.

Summary of Acquisition-Related Restructuring Activities and DepoCyt(e) Discontinuation Costs

The Company’s acquisition-related restructuring and DepoCyt(e) discontinuation costs as of March 31, 2020 are summarized below (in thousands):

The Company’s acquisition-related restructuring and DepoCyt(e) discontinuation costs as of June 30, 2020 are summarized below (in thousands):

Severance and Related Costs Asset Retirement Obligations, Other Restructuring and Discontinuation Costs Total

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Cash payments made ( 81 ) ( 449 ) ( 530 )

Balance at March 31, 2020 $ 81 $ 432 $ 513

Balance at June 30, 2020 $ — $ 130 $ 130

NOTE 16— COMMITMENTS AND CONTINGENCIES

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 which 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.

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.

Department of Justice Inquiry Settlement

In April 2015, the Company received a subpoena from the U.S.

Department of Justice, U.S.

Attorney’s Office for the District of New Jersey, requiring the production of a broad range of documents pertaining to marketing and promotional practices related to EXPAREL.

The Company is cooperating with the government’s inquiry.

The Company can make no assurances as to the time or resources that will need to be devoted to this inquiry.

In December 2019, the Company reached an agreement in principle with the Department of Justice and more than one state Attorney General’s office (the “Plaintiffs”) on a proposal for a global civil settlement in the amount of $ 3.5 million, subject to accrual of interest on the settlement amount from the date of the agreement in principle, negotiation of a definitive settlement agreement and other contingencies.

As part of the settlement, the Company will admit no wrongdoing and will explicitly deny the Plaintiffs’ allegations.

The Company has been given assurances that, if the parties can agree to negotiation of the settlement, this will conclude the investigation that originated from the U.S.

Attorney’s Office for the District of New Jersey pertaining to marketing and promotional practices related to EXPAREL.

In July 2020, the Company formally entered into settlement agreements that resolved all outstanding investigations and claims by the United States Department of Justice, the United States Department of Health and Human Services, various States Attorneys’ General and a private plaintiff.

This agreement concludes a five-year investigation related to the sale and marketing of EXPAREL.

Under the various settlement agreements, the Company paid a global settlement of $ 3.5 million, which was previously recorded in acquisition-related charges, product discontinuation and other in the consolidated financial statements for the year ended December 31, 2019.

The Company expressly denies all allegations and contentions and has admitted no wrongdoing in connection with the settlement agreements.

The Company has been given assurances that this concludes the investigation that originated from the U.S.

Department of Justice subpoena in April 2015.

This settlement was recorded in acquisition-related charges, product discontinuation and other in the consolidated financial statements for the year ended December 31, 2019.

NOTE 17— SUBSEQUENT EVENTS

Novel Coronavirus (COVID-19) Pandemic

The Company began experiencing the impact of the global pandemic caused by a novel strain of coronavirus (COVID-19) on its business in mid-March 2020, and has continued to experience sales disruptions into the second quarter of 2020.

The principal impact of the COVID-19 pandemic on the Company’s business is that many hospitals, surgical centers and clinicians have suspended elective procedures per the recommendation of the Centers for Disease Control and Prevention (CDC), resulting in a decline in revenue for both EXPAREL and iovera°.

The Company expects to continue to be impacted as long as elective surgical procedures are restricted by government action, or by patient or clinician behavior.

Also, in response to the COVID-19 pandemic, many hospitals, ambulatory surgical centers and clinicians have restricted sales force access to their sites.

While some states are starting to ease or lift elective surgery restrictions, the Company does not know how long other states will mandate stay at home orders or how long it will take the surgical community to return to normal operations.

The Company’s manufacturing sites are operational and have implemented new safety protocols and guidelines as recommended by federal, state and local governments.

To date, there have been no material impacts to the Company’s supply chain.

The situation remains dynamic and subject to rapid and possibly material changes.

Additional negative impacts may also arise from the COVID-19 pandemic 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.

Convertible Senior Notes Due 2025

On July 10, 2020, the Company completed a private placement of $ 402.5 million in aggregate principal amount of its 2025 Notes and entered into the 2025 Indenture with respect to the 2025 Notes.

The 2025 Notes accrue interest at a fixed rate of 0.75 % per year, payable semiannually in arrears on February 1 st and August 1 st of each year, beginning on February 1, 2021.

The 2025 Notes mature on August 1, 2025.

The net proceeds from the issuance of the 2025 Notes were approximately $ 389.9 million, after deducting commissions and the estimated offering expenses payable by the Company.

A portion of the net proceeds from the 2025 Notes were used by the Company to repurchase $ 185.0 million of its then-outstanding 2022 Notes in privately-negotiated transactions for a total of $ 211.1 million of cash (including accrued interest).

For more information, see Note 9, Debt .

Holders may convert the 2025 Notes at any time prior to the close of business on the business day immediately preceding February 3, 2025, only under the following circumstances:

(i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day;

(ii) during the five business day period immediately after any five consecutive trading day period (the ‘‘measurement period’’) in which the trading price (as defined in the 2025 Indenture) per $1,000 principal amount of notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

(iii) upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company’s assets;

(iv) if the Company calls the 2025 Notes for redemption, until the close of business on the business day immediately preceding the redemption date.

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.

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 40 th scheduled trading day immediately before the 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.

If the Company undergoes a fundamental change, as defined in the 2025 Indenture, subject to certain conditions, holders of the 2025 Notes may require the Company to repurchase for cash all or part of their 2025 Notes at a repurchase price equal to 100 % of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

In addition, if a ‘‘make-whole fundamental change’’ (as defined in the 2025 Indenture) occurs prior to August 1, 2025, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its notes in connection with the make-whole fundamental change.

The 2025 Notes are the Company’s general unsecured obligations that rank senior in right of payment to all of its indebtedness that is expressly subordinated in right of payment to the 2025 Notes, and equal in right of payment to the Company’s unsecured indebtedness.

The 2025 Notes are also effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness, and are structurally subordinated to any debt or other liabilities (including trade payables) of the Company’s subsidiaries.

The 2025 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company.

The 2025 Indenture contains customary events of default with respect to the 2025 Notes, including that upon certain events of default, 100 % of the principal and accrued and unpaid interest on the 2025 Notes will automatically become due and payable.

Termination of Agreement with DePuy Synthes Sales, Inc.

In July 2020, the Company announced the termination of the Co-Promotion Agreement, dated January 24, 2017 between the Company and DePuy Synthes Sales Inc.

to jointly market and promote the use of EXPAREL for orthopedic procedures in the United States.

The Company currently estimates termination-related costs or payments to be up to $ 12.0 million, which will be recorded in selling, general and administrative expenses.

MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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economic conditions;

the impact of the COVID-19 pandemic on our business, including our revenues, financial condition and results of operations;

the cost and timing of an early termination payment to DePuy Synthes Sales, Inc., or DePuy Synthes;

the success of our sales and manufacturing efforts in support of the commercialization of EXPAREL ® (bupivacaine liposome injectable suspension);

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the size and growth of the potential markets for EXPAREL and our ability to serve those markets;

our plans to expand the use of EXPAREL to additional indications and opportunities, and the timing and success of any related clinical trials;

our plans to expand the use of EXPAREL to additional indications and opportunities, and the timing and success of any related clinical trials for EXPAREL;

our ability to realize the anticipated benefits and synergies from the acquisition of MyoScience, Inc., or MyoScience;

the ability to successfully integrate iovera° ® and MyoScience into the Company’s existing business;

the commercial success of iovera°;

the success of our sales and manufacturing efforts in support of the commercialization of iovera° ® ;

the rate and degree of market acceptance of iovera°;

the size and growth of the potential markets for iovera° and our ability to serve those markets;

our plans to expand the use of iovera° to additional indications and opportunities, and the timing and success of any related clinical trials for iovera°;

the related timing and success of United States Food and Drug Administration, or FDA, supplemental New Drug Applications, or sNDAs;

the outcome of the U.S.

Department of Justice, or DOJ, inquiry;

the Company’s plans to evaluate, develop and pursue additional DepoFoam ® -based product candidates;

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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, 2019 and in other reports as filed with the SEC.

“Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2019 and in other reports as filed with the SEC, including this Quarterly Report on Form 10-Q.

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

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EXPAREL is currently indicated for single-dose infiltration in adults to produce postsurgical local analgesia and as an interscalene brachial plexus nerve block to produce postsurgical regional analgesia.

Since its initial approval in 2011 for single-dose infiltration, more than six million patients have been treated with EXPAREL.

Since its initial approval in 2011 for single-dose infiltration, more than seven million patients have been treated with EXPAREL.

We drop-ship EXPAREL directly to the end-user based on orders placed to wholesalers or directly to us, and there is no product held by wholesalers.

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The iovera° system is highly complementary to EXPAREL as a non-opioid therapy that alleviates pain by disrupting pain signals being transmitted to the brain from the site of injury or surgery.

We expect to continue to incur significant expenses as we pursue the expanded use of EXPAREL and iovera° in additional procedures;

We expect to continue to pursue the expanded use of EXPAREL and iovera° in additional procedures;

progress our earlier-stage product candidate pipeline;

advance regulatory activities for EXPAREL,

iovera° and other product candidates;

advance regulatory activities for EXPAREL, iovera° and other product candidates;

invest in sales and marketing resources for EXPAREL and iovera°;

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Novel Coronavirus (COVID-19) Pandemic

The full long-term impacts of the global emergence of the novel strain of coronavirus (COVID-19) on our business are currently unknown, although we are beginning to see some expected near-term impacts due to the COVID-19 pandemic, as described in more detail below.

We have taken precautionary and preemptive actions to address the COVID-19 pandemic, such as implementing additional safety protocols and guidelines at our manufacturing sites and requiring our non-essential personnel to work from home, including our field sales force and clinical education teams which continue to support our customers remotely.

Given that many hospitals, surgical centers and clinics have suspended elective procedures per the recommendation of the Centers for Disease Control and Prevention, or CDC, since mid-March 2020 and continuing into the second quarter of 2020, we expect that EXPAREL and iovera° revenues and our corresponding results of operations will be adversely impacted in the near-term.

While some states are starting to ease or lift elective surgery restrictions, we do not know how long other states will mandate stay at home orders or how long it will take the surgical community to return to normal operations.

Future results could be impacted by governmental actions, patient or clinical decisions, or poor economic conditions.

Because of the rapid and evolving nature of the outbreak of COVID-19, it is not clear what the potential effects may be to our business going forward, including the impacts on our revenues, results of operations or financial condition, particularly if these impacts persist or exacerbate over an extended period of time.

During the second quarter of 2020, our net product sales were negatively impacted by the global pandemic caused by a novel strain of coronavirus (COVID-19), which mandated significant postponement or suspension in the scheduling of elective surgical procedures resulting from public health guidance and government directives.

Elective surgery restrictions began to lift on a state-by-state basis in April 2020;

however, we do not know how long other states will mandate stay at home orders or how long it will take the surgical community to return to normal operations.

Our manufacturing sites are operational and have implemented new safety protocols and guidelines as recommended by federal, state and local governments.

Our Fremont, California facility, where we manufacture iovera°, was closed for three weeks in March 2020 to implement safety protocols and guidelines, and resumed normal operations in April 2020.

To date, there have been no material impacts to our supply chain.

With the reopening of many states, the ability of our sales representatives to renew their in-person engagement efforts, in conjunction with remote efforts, has occurred across all sites of care, with more focus on physician offices and ambulatory surgical centers.

Our offices have re-opened on a voluntary basis with strict safety and hygiene guidelines implemented;

however we continue to encourage remote working wherever possible.

The situation remains dynamic and is subject to rapid and possibly material changes.

It is not clear what the potential effects may be to our business going forward, including the impact on our revenues, results of operations or financial condition, particularly if these conditions persist or exacerbate over an extended period of time, including if and when states will return to placing restrictions on elective surgical procedures.

Additional negative impacts may also arise from the COVID-19 pandemic 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.

We have also taken advantage of some of the provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act, mainly by deferring the payment of certain employer payroll taxes.

For more information, see “Liquidity and Capital Resources” below.

We will continue to actively monitor the situation and implement measures recommended by federal, state or local authorities, or that we determine are in the best interests of our patients, employees, partners, suppliers, shareholders and stakeholders.

For a description of risks facing the Company that relate to the COVID-19 pandemic or any other future pandemic, epidemic or outbreak of contagious disease, see Item 1A.

“Risk Factors” below.

Our in-person interactions with surgeons, anesthesiologists and other healthcare professionals have been substantially reduced, and we have offered virtual support as needed.

We recently began making limited calls to hospitals and ambulatory surgical centers in select areas where elective surgery bans have been eased or lifted.

These precautionary measures will likely continue during the COVID-19 pandemic.

In addition, some of our interactive discussion forums and education programs have been delayed or cancelled.

Our EXPAREL and iovera° manufacturing activities remain fully operational (with additional safety protocols in place) as they are deemed essential operations by state and local governments, and we have not experienced disruptions to our supply chain to date.

We expect our second quarter sales of EXPAREL and iovera° to be impacted until governmental action and patient or clinical decisions enable the resumption of elective medical procedures.

Furthermore, we expect to offset some of the anticipated impact to revenues through reductions in expenditures, including, but not limited to, those resulting from a decline in commissions related to our co-promotion agreement with DePuy Synthes Sales, Inc., or DePuy Synthes, the delay of certain clinical trial activities, the cancellations of in-person industry conferences and the suspension of non-essential employee travel.

Finally, we anticipate that some of the virtual training activities that have been adopted by our clinical education teams out of necessity could become more commonplace in the future and drive savings on a regular basis in the long-term.

We may take further actions that alter our, our customers’ and our vendors’ normal business operations.

Recent Highlights

• In January 2020, we announced positive results from our Phase 4 opioid-free CHOICE study of EXPAREL in patients undergoing C-section.

The study achieved its primary endpoint with a statistically significant reduction in total postsurgical opioid consumption while maintaining pain scores through 72 hours (p≤0.001).

EXPAREL demonstrated statistical significance for the key secondary endpoint of a reduction in the incidence and severity of itching for 72 hours after surgery (p≤0.05).

Full study results will be submitted for publication in the peer-reviewed medical literature later this year.

• In January 2020, we announced a collaboration with Envision Physician Services to train anesthesiology clinicians on ultrasound-guided regional anesthesia techniques utilizing long-acting local anesthetics like EXPAREL via a series of interactive workshops held across the United States.

The program supports ongoing efforts by both organizations to advance the delivery of high-quality, patient-centered care.

• In May 2020, we announced the appointment of Donald C.

Manning, M.D., Ph.D., as Chief Medical Officer.

Manning, who brings more than 20 years of experience in biopharmaceutical executive leadership, was most recently, Chief Medical Officer at Adynxx, Inc., a development company focused on advancing disease-modifying products for the treatment of pain management and inflammation.

In his new position, Dr.

Manning will report directly to David Stack, our chief executive officer and chairman.

• In August 2020, we announced that the FDA has accepted the submission of our sNDA seeking expansion of the EXPAREL label to include single-dose infiltration to provide postsurgical analgesia in children aged six and over.

The expected action date by the FDA under the Prescription Drug User Fee Act, or PDUFA, is March 22, 2021.

• In July 2020, we completed a private placement of $402.5 million in aggregate principal amount of 0.75% convertible senior notes due 2025, or 2025 Notes.

We used part of the net proceeds from the issuance of the 2025 Notes to repurchase $185.0 million aggregate principal of our 2.375% convertible senior notes due 2022, or 2022 Notes, in privately-negotiated transactions for an aggregate of approximately $211.1 million in cash (including accrued interest).

For more information, see Note 17, Subsequent Events , to our condensed consolidated financial statements included herein and “Liquidity and Capital Resources” below.

• In July 2020, we announced the termination of the Co-Promotion Agreement, dated January 24, 2017 between us and DePuy Synthes to jointly market and promote the use of EXPAREL for orthopedic procedures in the United States.

We currently estimate termination-related costs or payments to be up to $12.0 million, which will be recorded in selling, general and administrative expenses.

For more information, see Note 17, Subsequent Events , to our condensed consolidated financial statements included herein.

Safety and efficacy have not been established in other nerve blocks.

Due to the COVID-19 pandemic, our clinical trial activities, including those described below, are currently delayed or experiencing suspended enrollment as a result of the suspension of elective surgical procedures.

Due to the COVID-19 pandemic, our clinical trial activities, including those described below, have experienced delays due to the postponement or suspension of elective surgical procedures.

Phase 4 Trials

We are expanding the clinical evidence for EXPAREL through Phase 4 clinical trials across several surgical specialties.

In January 2019, we reported positive topline results from a Phase 4 study of EXPAREL in patients undergoing Cesarean section, or C-section.

The study compared an EXPAREL transversus abdominis plane, or TAP, block to a bupivacaine TAP block and achieved its primary endpoint with a statistically significant reduction in total postsurgical opioid consumption through 72 hours (p<0.05) while maintaining pain intensity scores through 72 hours.

The study also achieved statistical significance (p<0.05) for relevant additional endpoints, including:

(i) reduced total opioid consumption at one and two weeks following C-section and (ii) an increased percentage of opioid-spared patients, a composite endpoint, which was defined as patients who took no more than one oxycodone 10mg tablet (or equivalent) and graded their bother or stress from the following opioid-related adverse events as “not at all”:

vomiting, itching, sweating, freezing or dizziness.

These data were presented at the Annual Meeting of the Society for Obstetric Anesthesia and Perinatology in May 2019.

The full study results have been submitted for publication in the peer-reviewed medical literature.

We have completed two successful studies of EXPAREL in patients undergoing Cesarean section, or C-section.

The first study compared an EXPAREL transversus abdominis plane, or TAP, block to a bupivacaine TAP block.

This was a multicenter, randomized, double-blind study across 13 clinical sites in the United States, in patients undergoing elective C-section and receiving spinal anesthesia and a multimodal analgesic regimen.

Patients were randomized (1:1) to receive EXPAREL 266 mg plus bupivacaine HCl 50 mg or bupivacaine HCl 50 mg alone administered via TAP field block after delivery.

Effectiveness was evaluated in a pre-specified modified intent-to-treat (mITT) population which met the study criteria regarding proper administration of TAP and multimodal regimen (N=136).

Key findings include:

• Significant reduction in total opioid consumption with EXPAREL plus bupivacaine HCl versus bupivacaine HCl

• 52% reduction through 72 hours, the primary endpoint of the study (least squares mean [LSM] standard error [SE], 15.5 [6.67] vs 32.0 [6.25] mg, respectively;

• 49% reduction at one week (LSM [SE], 23.3 [9.75] vs 45.8 [9.13] mg, respectively;

• 41% reduction of opioid consumption at two weeks, although results did not reach statistical significance (LSM [SE], 28.2 [11.20] vs 47.8 [10.49] mg, respectively;

• Significantly higher percentage of opioid-spared patients with EXPAREL versus bupivacaine HCl, defined as patients who took no more than one oxycodone 10 mg tablet (or equivalent) with no opioid-related side effects through 72 hours

• The percentage of opioid-spared patients was 2.2 times higher in the EXPAREL group vs bupivacaine HCl group (54% vs 25%, respectively;

These data were published in the peer reviewed journal, Anesthesia and Analgesia , in August 2020.

In January 2020, we reported positive topline results from a second C-section study (known as “CHOICE”).

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The Phase 4, multicenter, randomized, active-controlled study across 18 clinical sites in the United States, enrolled 167 patients undergoing elective C-section.

Patients were randomized (1:1:1) to receive either 150 mcg morphine spinal anesthesia plus a standard of care postoperative pain regimen, 50 mcg morphine spinal anesthesia plus EXPAREL TAP field block or opioid-free spinal anesthesia plus EXPAREL TAP block.

Patients were randomized (1:1:1) to receive either 150 mcg morphine spinal anesthesia plus a standard of care postoperative pain regimen, 50 mcg morphine spinal anesthesia plus EXPAREL TAP field block or morphine-free spinal anesthesia plus EXPAREL TAP block.

Patients in the EXPAREL arms received a protocol-defined postoperative pain management regimen comprised of ketorolac, acetaminophen and ibuprofen.

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Full study results will be submitted for publication in the peer-reviewed medical literature later this year.

We are also advancing a Phase 4 study in spine surgeries (known as “FUSION”).

This is a multicenter, prospective, active-controlled, real world, study of EXPAREL in multimodal regimens compared with the standard of care for postsurgical pain management in patients undergoing lumbar posterior spine surgeries.

In surgical settings where we are seeing positive outcomes for EXPAREL as part of an enhanced recovery after surgery, or ERAS, protocol (such as colorectal and breast reconstruction procedures), we are investing in training around the protocol and collecting real-world data on the standard-of-care without EXPAREL compared to an EXPAREL-based ERAS protocol.

We recently discontinued enrollment in our Phase 4 study in spine surgeries (known as “FUSION”).

This multicenter, prospective, active-controlled, real world, study compared EXPAREL in multimodal regimens to the standard of care for postsurgical pain management in patients undergoing lumbar posterior spine surgeries.

While the use of EXPAREL continues to significantly expand in spinal procedures, medical practice is rapidly evolving with regional approaches becoming more widespread and procedures shifting to the 23-hour stay environment.

Given this changing treatment landscape, we closed enrollment early as the protocol was becoming less feasible and less reflective of current practice.

The data from approximately 65 FUSION study subjects will be analyzed with the intent to create either a future study or registry for this patient population.

In surgical settings where we are seeing positive outcomes for EXPAREL as part of an enhanced recovery after surgery, or ERAS, protocol (such as colorectal, breast reconstruction and hip fracture procedures), we are investing in training around the protocol and collecting real-world data on the standard-of-care without EXPAREL compared to an EXPAREL-based ERAS protocol.

Our Phase 4 strategy also supports clinician education on procedure-specific best-practice care for improved patient outcomes and customer satisfaction within our approved indications.

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In December 2019, we reported positive topline results from our Phase 3 registration study (known as “PLAY”) of EXPAREL administered as a single-dose infiltration in pediatric patients undergoing spinal or cardiac surgeries.

findings were consistent with the pharmacokinetic and safety profiles for adult patients with no safety concerns identified at a dose of 4 mg/kg.

We believe the results from this study will provide the foundation for an sNDA submission in the first half of 2020 to the FDA seeking expansion of the EXPAREL label to include children aged six and over.

We are also working with the FDA to finalize a regulatory pathway to expand the EXPAREL label to include EXPAREL administered as a nerve block in the pediatric setting.

Overall findings were consistent with the pharmacokinetic and safety profiles for adult patients with no safety concerns identified at a dose of 4 mg/kg.

Based on the positive data from the PLAY study, we submitted an sNDA to the FDA seeking expansion of the EXPAREL label to include single-dose infiltration to provide postsurgical analgesia in children aged six and over.

The sNDA has been filed with the FDA with a PDUFA action date of March 22, 2021.

The PLAY study enrolled 98 patients to evaluate the pharmacokinetics and safety of EXPAREL for two patient groups:

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The full study results will be submitted for publication in the peer-reviewed medical literature.

We are also working with the FDA to finalize a regulatory pathway to expand the EXPAREL label to include EXPAREL administered as a nerve block in the pediatric setting.

Nerve Block in Lower Extremity Surgery

We have initiated a Phase 3 study for nerve block in lower extremity surgeries (known as “STRIDE”) that is comparing an EXPAREL nerve block in lower extremity surgeries to a bupivacaine nerve block in lower extremity surgeries in patients undergoing foot and ankle surgeries.

We plan to enroll patients once COVID-19 surgical restrictions have eased.

We believe positive results from this study would support an sNDA submission seeking label expansion to include nerve blocks in lower extremity surgeries.

We are initiating a Phase 3 study for nerve block in lower extremity surgeries (known as “STRIDE”) that is comparing EXPAREL nerve blocks in lower extremity surgeries to bupivacaine nerve blocks in lower extremity surgeries in patients undergoing foot and ankle surgeries.

We have been working closely with the FDA on the design of this study to maximize the chances of supporting an sNDA submission seeking label expansion to include nerve blocks in lower extremity surgeries should the study hit its primary endpoints.

We believe the addition of this indication is significant as anesthesia-driven regional approaches using nerve and field blocks continue to expand as institutional protocols.

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In Europe, we have secured a positive opinion for our Pediatric Investigation Plan (PIP) and in June 2019 our Marketing Authorization Application, or MAA, was validated by the European Medicines Agency, or EMA.

The MAA is currently in late-stage review as we work towards E.U.

In Canada, which is a concentrated market driven by four provinces, Health Canada has validated our New Drug Submission.

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Ltd., a China-based specialty pharmaceutical company, for the development and commercialization of EXPAREL.

We have received feedback from the National Medical Products Administration, or NMPA, in China and we are planning to meet with the NMPA to finalize our regulatory path forward.

We have completed a pharmacokinetic study requested by the National Medical Products Administration, or NMPA, in China, and we are planning to meet with the NMPA to finalize our regulatory path forward.

The iovera° System

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Initially, we will focus on two broad patient care opportunities.

The iovera° system is 510(k) cleared in the U.S.

for the blocking of pain, pain relief and symptoms associated with osteoarthritis of the knee as well as general surgical use.

Our first priority is iovera° and EXPAREL for opioid-sparing pain management for the total knee arthroplasty, or TKA, patient, with iovera° being administered before surgery and EXPAREL administered during surgery (our “PREPARE” clinical trial).

We plan to enroll patients once COVID-19 surgical restrictions have eased.

The iovera° system is 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, pain relief and symptoms associated with osteoarthritis of the knee as well as general surgical use.

Our commercial strategy for iovera° focuses on two broad market segments.

First, iovera° and EXPAREL for opioid-sparing pain management for the total knee arthroplasty, or TKA, patient, with iovera° being administered before surgery and

EXPAREL administered during surgery.

Later this year, we expect to begin enrollment in our PREPARE study that will evaluate iovera° and EXPAREL for TKA.

As many as 30 percent of presurgical patients with end-stage knee osteoarthritis use prescription opioids.

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Surgical intervention is typically a last resort for patients suffering from osteoarthritis of the knee.

In one study, the

majority of the patients suffering from osteoarthritis of the knee experienced pain relief beyond 150 days after being treated with iovera°.

In one study, the majority of the patients suffering from osteoarthritis of the knee experienced pain relief beyond 150 days after being treated with iovera°.

Preliminary findings demonstrated reductions in opioids, including:

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We will be investing in key clinical studies to demonstrate the synergy of iovera° and EXPAREL to manage pain while reducing or eliminating opioids.

Our initial focus will be iovera° and EXPAREL as a multimodal solution for TKA.

Product Pipeline

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Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

Comparison of the Three and Six Months Ended June 30, 2020 and 2019

Net product sales consist of sales of EXPAREL in the U.S., our bupivacaine liposome injectable suspension to Aratana Therapeutics, Inc., or Aratana, for veterinary use in the U.S.

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Three Months Ended

March 31, % Increase / (Decrease)

June 30, % Increase / (Decrease) Six Months Ended

June 30, % Increase / (Decrease)

2020 2019 2020 2019

Net product sales:

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Bupivacaine liposome injectable suspension 775 921 (16)% 1,981 1,213 63%

Total EXPAREL / bupivacaine liposome injectable suspension net product sales 102,475 90,906 13%

iovera° 2,270 — N/A

Total EXPAREL / bupivacaine liposome

injectable suspension net product sales 73,821 99,789 (26)% 176,296 190,695 (8)%

iovera° 1,395 2,035 (31)% 3,665 2,035 80%

Total net product sales 75,216 101,824 (26)% 179,961 192,730 (7)%

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Total revenues $ 75,505 $ 102,604 (26)% $ 181,189 $ 193,917 (7)%

The 12% increase in net product sales of EXPAREL in the three months ended March 31, 2020 versus 2019 was primarily due to an 11% increase in unit volume and a 6% increase in gross selling price per unit.

These increases were partially offset by changes in the sales mix of EXPAREL vial sizes.

The demand for EXPAREL has generally continued to increase as a result of a number of key growth initiatives, such as the expansion of the use of EXPAREL to include brachial plexus nerve block, the success of our co-promotion agreement with DePuy Synthes, and the continued implementation of EXPAREL-based opioid-sparing ERAS protocols across a wide range of soft tissue and orthopedic surgical procedures.

Net product sales of EXPAREL were impacted during the second half of March 2020 as a result of the suspension of elective surgical procedures related to the COVID-19 pandemic.

There was also an increase in sales of our bupivacaine liposome injectable suspension to Aratana for veterinary use in the three months ended March 31, 2020.

As part of the MyoScience Acquisition, we acquired the iovera° system and began recognizing net product sales in April 2019.

Net product sales were $2.3 million for the three months ended March 31, 2020.

The 26% and 8% decreases in net product sales of EXPAREL in the three and six months ended June 30, 2020 versus 2019, respectively, was primarily due to the significant postponement or suspension in the scheduling of elective surgical procedures resulting from public health guidance and government directives due to the COVID-19 pandemic, beginning in mid-March 2020.

For the three and six months ended June 30, 2020, there were decreases of 29% and 12%, respectively, in gross unit volume combined with changes in the sales mix of EXPAREL vial sizes.

These decreases were partially offset by an increase in gross selling price per unit.

The demand for EXPAREL has generally continued to increase as a result of ambulatory surgical centers and anesthesiologists broadening the use of long-acting EXPAREL regional approaches as a foundation of multimodal opioid-minimization strategies that enable shifting inpatient procedures to 23-hour sites of care.

As part of the acquisition of MyoScience (the “MyoScience Acquisition”), we acquired the iovera° system and began recognizing net product sales in April 2019.

Net product sales decreased 31% in the three months and increased 80% in the six months ended June 30, 2020 versus 2019, respectively, due to the impact of the COVID-19 pandemic and the timing of the acquisition in 2019.

Thus far, we have seen the greatest iovera° demand as pain relief for patients in advance of TKA procedures and in chronic pain management, particularly for people with mild to severe osteoarthritis of the knee.

We began to experience an impact to iovera° sales from the COVID-19 pandemic in the second half of March 2020.

We expect that the suspension of elective surgeries will impact our future sales of EXPAREL and iovera° until governmental action and patient or clinical decisions enable the resumption of elective medical procedures.

Any continued or renewed governmental suspension of elective surgeries would impact our future sales of EXPAREL and iovera°, as would patient or clinical decisions during the ongoing COVID-19 pandemic.

Royalty revenue reflects the royalties earned on sales to Aratana.

Royalty revenue increased by more than 100% in the three months ended March 31, 2020 versus 2019 as a result of the timing of orders placed by Aratana.

The following tables provide a summary of activity with respect to our sales related allowances and accruals related to EXPAREL for the three months ended March 31, 2020 and 2019 (in thousands):

March 31, 2020 Returns Allowances Prompt Payment Discounts Wholesaler Service Fees Volume

Royalty revenue decreased 63% in the three months and increased 3% in the six months ended June 30, 2020 versus 2019, respectively, as a result of the timing of orders placed by Aratana.

The following tables provide a summary of activity with respect to our sales related allowances and accruals related to EXPAREL for the six months ended June 30, 2020 and 2019 (in thousands):

June 30, 2020 Returns Allowances Prompt Payment Discounts Wholesaler Service Fees Volume

Chargebacks Total

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Payments / Adjustments (142) (3,704) (3,398) (4,868) (12,112)

Balance at March 31, 2020 $ 609 $ 761 $ 984 $ 1,508 $ 3,862

March 31, 2019 Returns Allowances Prompt Payment Discounts Wholesaler Service Fees Volume

Balance at June 30, 2020 $ 732 $ 867 $ 847 $ 1,588 $ 4,034

June 30, 2019 Returns Allowances Prompt Payment Discounts Wholesaler Service Fees Volume

Chargebacks Total

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Payments / Adjustments (191) (3,877) (3,177) (4,274) (11,519)

Balance at March 31, 2019 $ 376 $ 823 $ 844 $ 1,284 $ 3,327

Total reductions to gross product sales from sales-related allowances and accruals were $6.4 million and $5.4 million, or 5.8% and 5.6% of gross product sales, for the three months ended March 31, 2020 and 2019, respectively.

Balance at June 30, 2019 $ 516 $ 807 $ 979 $ 1,381 $ 3,683

Total reductions to gross product sales from sales-related allowances and accruals were $11.3 million and $11.9 million, or 5.9% and 5.8% of gross product sales, for the six months ended June 30, 2020 and 2019, respectively.

The overall increase in sales-related allowances and accruals as a percentage of gross product sales was directly related to an increase in discounting driven by higher sales volume from customers with discount contracts.

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Three Months Ended

March 31, % Increase / (Decrease)

June 30, % Increase / (Decrease) Six Months Ended

June 30, % Increase / (Decrease)

2020 2019 2020 2019

Cost of goods sold $ 22,305 $ 25,201 (11)% $ 52,037 $ 52,505 (1)%

Gross margin 70 % 75 % 71 % 73 %

Gross margin improved two percentage points in the three months ended March 31, 2020 versus 2019.

A four percentage point improvement is due to manufacturing efficiencies at our Science Center Campus in San Diego, California, which were partially offset by a two percentage point decrease as a result of unplanned downtime at our custom manufacturing suite in Swindon, England (under our partnership with Thermo Fisher Scientific Pharma Services, or Thermo Fisher).

Despite shelter-in-place orders to combat the COVID-19 pandemic in California and England, there were no interruptions to our EXPAREL operations at either the Science Center Campus or Swindon manufacturing sites as the production of EXPAREL is considered essential.

Gross margin decreased five percentage points in the three months ended June 30, 2020 versus 2019.

Of the decrease, two percentage points related to inventory write-offs, two percent percentage points were the result of unplanned downtime at our custom manufacturing suite in Swindon, England (under our partnership with Thermo Fisher Scientific Pharma Services, or Thermo Fisher) and one percentage point was due to lower gross margin on iovera°.

Gross margin decreased two percentage points in the six months ended June 30, 2020 versus 2019.

There was a two percentage point decrease due to inventory write-offs and a two percentage point decrease as a result of unplanned downtime at our custom manufacturing suite in Swindon, England (under our partnership with Thermo Fisher), which were partially offset by a two percentage point increase due to lower cost of product sold for EXPAREL produced at the Swindon site.

Our Fremont, California facility, where we manufacture iovera°, was closed for three weeks in March 2020 to implement safety protocols and guidelines related to the COVID-19 pandemic.

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Three Months Ended

March 31, % Increase / (Decrease)

June 30, % Increase / (Decrease) Six Months Ended

June 30, % Increase / (Decrease)

2020 2019 2020 2019

Clinical and preclinical development $ 4,363 $ 7,669 (43)% $ 10,648 $ 13,193 (19)%

Product development and manufacturing capacity expansion 6,605 6,403 3%

Product development and

manufacturing capacity expansion 6,084 6,812 (11)% 12,688 13,213 (4)%

Regulatory and other 1,816 2,089 (13)% 3,560 3,329 7%

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% of total revenues 18 % 17 % 16 % 17 %

Total research and development expense increased 10% in the three months ended March 31, 2020 versus 2019.

The 10% increase in clinical and preclinical development expense in the three months ended March 31, 2020 versus 2019 is due to the enrollment and completion of our PEC Block (Breast Augmentation) clinical trial, ongoing enrollment in our Phase 4 Spine (“FUSION”) clinical trial as well as startup activities related to both our Lower Extremity Nerve Block (“STRIDE”) study and a Phase 1 intrathecal clinical trial to evaluate the safety and pharmacokinetics of EXPAREL administered via a single intrathecal injection.

These increases were partially offset by the completion of our Phase 3 Pediatric (“PLAY”) clinical trial, our Phase 4 Opioid-Free C-Section (“CHOICE”) clinical trial and our Phase 4 C-Section clinical trial.

Due to the COVID-19 pandemic, clinical trial activities are currently delayed or experiencing suspended enrollment as a result of the suspension of elective surgical procedures.

As a result, we anticipate a reduction in expenditures related to most of our clinical trial activities in the near-term.

Product development and manufacturing capacity expansion expense increased 3% in the three months ended March 31, 2020 versus 2019.

These amounts primarily consist of costs related to the significant scale-up of our manufacturing capacity at the Thermo Fisher site in Swindon, England.

Regulatory and other expense increased 71% in the three months ended March 31, 2020 versus 2019 due to activities related to our European Marketing Authorization Application, or MAA, for EXPAREL and the dissemination and publication of EXPAREL and iovera° data in response to medical information queries.

Stock-based compensation decreased by 3% in the three months ended March 31, 2020 versus 2019 due to fewer equity awards outstanding to research and development personnel.

Total research and development expense decreased 24% and 9% in the three and six months ended June 30, 2020 versus 2019, respectively.

The 43% and 19% decreases in clinical and preclinical development expense in the three and six months ended June 30, 2020 versus 2019, respectively, is due to the completion of our Phase 3 pediatric (“PLAY”) clinical trial, our two Phase 4 C-Section trials and our pediatric pharmacokinetic study.

In addition, due to the COVID-19 pandemic, enrollment in our spine (“FUSION”) trial was suspended.

Subsequently, we made the strategic decision to conclude enrollment in the FUSION study early due to protocol feasibility given the rapid evolution of medical practice for spinal procedures.

The data from approximately 65 FUSION study subjects will be analyzed with the intent to create either a future study or registry for this patient population.

These decreases were partially offset by our pectoral field block clinical trial in breast augmentation, as well as startup activities related to both our lower extremity nerve block (“STRIDE”) clinical trial and a Phase 1 intrathecal clinical trial to evaluate the safety and pharmacokinetics of EXPAREL administered via a single intrathecal injection.

Product development and manufacturing capacity expansion expense decreased 11% and 4% in the three and six months ended June 30, 2020 versus 2019, respectively.

These decreases are mainly due to our progress in constructing the significant scale-up of our manufacturing capacity at the Thermo Fisher site in Swindon, England as the project advances from the development phase to the registration phase.

Regulatory and other expense decreased 13% in the three months ended June 30, 2020 versus 2019 due to activities related to our European Marketing Authorization Application, or MAA, for EXPAREL in 2019.

For the six months ended June 30, 2020 versus 2019, these expenditures increased 7% due to increased publications of EXPAREL and iovera° abstracts.

Stock-based compensation increased by 8% and 3% in the three and six months ended June 30, 2020 versus 2019, primarily due to an increase in the number of equity awards granted.

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, commission payments to our marketing partners for the promotion and sale of EXPAREL and iovera°, expenses related to communicating the health outcome benefits of EXPAREL 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.

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.

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Three Months Ended

March 31, % Increase / (Decrease)

June 30, % Increase / (Decrease) Six Months Ended

June 30, % Increase / (Decrease)

2020 2019 2020 2019

Sales and marketing $ 25,356 $ 32,312 (22)% $ 53,268 $ 63,869 (17)%

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% of total revenues 57 % 48 % 49 % 50 %

Total selling, general and administrative expenses decreased 5% in the three months ended March 31, 2020 versus 2019.

Sales and marketing expenses decreased 12% in the three months ended March 31, 2020 versus 2019.

Total selling, general and administrative expenses decreased 12% and 9% in the three and six months ended June 30, 2020 versus 2019, respectively.

Sales a nd marketing expenses decreased 22% and 17% in the three and six months ended June 30, 2020 versus 2019, respectively.

The decrease was primarily driven by a decline in commissions related to our co-promotion agreement with DePuy Synthes as a result of the suspension of elective surgeries due to the COVID-19 pandemic.

The decrease was partially offset by additional selling and promotional activities to support the growth of EXPAREL, including expanding our team in the field in order to support our growth plan, initiatives related to our co-promotion agreement with DePuy Synthes and additional marketing spend related to ambulatory and dental reimbursement codes.

We are continuing our marketing investment in EXPAREL—including educational initiatives and programs related to the impact of opioids and postsurgical pain management and our national advocacy campaign designed to educate patients about non-opioid treatment options.

Marketing spend decreased due to the cancellations of in person meetings, medical conferences, travel and higher utilization of lower cost virtual meetings due to the COVID-19 pandemic.

These were partially offset by higher Sales and Marketing compensation due to increased headcount.

We are continui ng our marketing investment in EXPAREL—including educational initiatives and programs related to the impact of opioids and postsurgical pain management and our national advocacy campaign designed to educate patients about non-opioid treatment options.

We are also nearing completion of the build-out of a 20,000 square foot innovation and training center in Tampa, Florida, which will allow for interactive customer training—hands-on and/or virtually—related to both infiltration technique and best practice regional approaches to improve patient care.

Additionally, we have continued investing in marketing initiatives and customer outreach for iovera°.

In the near-term, we expect reductions in sales and marketing expenditures, including, but not limited to, those resulting from a decline in commissions related to our co-promotion agreement with DePuy Synthes, the cancellations of in-person industry conferences and the suspension of non-essential employee travel.

General and administrative expenses decreased 2% in the three months ended March 31, 2020 versus 2019.

The decrease was primarily due to an insurance recovery of $2.1 million for legal expenditures related to our Department of Justice inquiry, which was partially offset by expenditures to support the expansion of the business following the MyoScience Acquisition.

Stock-based compensation increased 26% in the three months ended March 31, 2020 versus 2019, primarily due to an increase in personnel and the number of equity grants awarded.

In the near-term, we expect that sales and marketing expenditures will continue to be impacted by the COVID-19 pandemic and its resultant effects on elective surgeries, sales commissions, cancellations of in-person industry conferences and the suspension of non-essential employee travel.

These potential reductions in expenditures could be partially offset by a termination fee related to our Co-Promotion Agreement with DePuy Synthes.

For more information, see Note 17, Subsequent Events , to our condensed consolidated financial statements included herein.

General and administrative expenses were flat for the three months ended June 30, 2020 versus 2019 and decreased 1% in the six months ended June 30, 2020 versus 2019.

The decrease was primarily due to lower legal expenditures related to our U.S.

Department of Justice subpoena received in April 2015, which was partially offset by expenditures to support the expansion of the business following the MyoScience Acquisition.

Stock-based compensation increased 23% and 24% in the three and six months ended June 30, 2020 versus 2019, respectively, primarily due to an increase in personnel and the number of equity grants awarded.

Amortization of Acquired Intangible Assets

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Three Months Ended

March 31, % Increase / (Decrease)

Amortization of acquired intangible assets $ 1,967 $ — N/A

June 30, % Increase / (Decrease) Six Months Ended

June 30, % Increase / (Decrease)

2020 2019 2020 2019

Amortization of acquired intangible assets $ 1,967 $ 1,770 11% $ 3,933 $ 1,770 100% +

As part of the MyoScience Acquisition we acquired intangible assets consisting of developed technology and customer relationships, with estimated useful lives of 14 and 10 years, respectively.

Amortization began in the second quarter of 2019 on a straight-line basis.

Amortization began in the second quarter of 2019 on

a straight-line basis.

For more information, see Note 8, Goodwill and Intangible Assets , to our condensed consolidated financial statements included herein.

Acquisition-Related (Gains) Charges and Product Discontinuation

Acquisition-Related Charges (Gains) and Product Discontinuation, Net

The following table provides a summary of the costs related to the MyoScience Acquisition and our DepoCyt(e) discontinuation activities during the periods indicated, including percent changes (dollar amounts in thousands):

Three Months Ended

March 31, % Increase / (Decrease)

Acquisition-related (gains) charges $ (3,739) $ 1,213 N/A

Product discontinuation 31 29 7%

Total acquisition-related (gains) charges and product discontinuation, net $ (3,708) $ 1,242 N/A

As part of the MyoScience Acquisition, we recognized a gain of $3.7 million and charges of $1.2 million in the three months ended March 2020 and 2019, respectively.

Of the total for the three months ended March 31, 2020, a $3.9 million decrease in the fair value of contingent consideration was recorded as a result of the impact of the COVID-19 pandemic and the reduced likelihood that certain commercial milestones will be achieved within the eligible timeframe.

This decrease was partially offset by $0.2 million in legal, accounting and tax services.

The $1.2 million for the three months ended March 31, 2019 represented advisory costs, including legal, financial, accounting and tax services.

In both of the three month periods ended March 31, 2020 and 2019, we recorded charges of less than $0.1 million related to the discontinuation of our DepoCyt(e) manufacturing activities for contract and exit costs.

June 30, % Increase / (Decrease) Six Months Ended

June 30, % Increase / (Decrease)

2020 2019 2020 2019

Acquisition-related charges (gains) $ 1,577 $ 3,357 (53)% $ (2,162) $ 4,570 N/A

Product discontinuation charges (gains) (159) 48 N/A (128) 77 N/A

Total acquisition-related charges (gains) and

product discontinuation, net $ 1,418 $ 3,405 (58)% $ (2,290) $ 4,647 N/A

As part of the MyoScience Acquisition, we recognized acquisition-related charges in the amount of $1.6 million and acquisition-related gains of $2.2 million in the three and six months ended June 30, 2020, respectively.

The majority of these charges and gains represented changes in the fair value of contingent consideration.

In these three and six month periods, there were also charges of less than $0.1 million and $0.1 million, respectively, for legal, accounting and other related costs.

We recognized acquisition-related charges of $3.4 million and $4.6 million in the three and six months ended June 30, 2019, respectively, related to separation costs, asset write-downs and other restructuring charges.

There were no changes in the value of contingent consideration in the three and six months ended June 30, 2019.

See Note 10, Financial Instruments , to our condensed consolidated financial statements included herein, for information regarding the methods and key assumptions used in the fair value measurements of contingent consideration.

In the three and six months ended June 30, 2020, we recorded gains of $0.2 million and $0.1 million, respectively, related to asset retirement obligations and exiting the former DepoCyt(e) production facility.

We recorded charges of less than $0.1 million in both of the three and six month periods ended June 30, 2019 for contract and exit costs related to the discontinuation of DepoCyt(e).

Other Income (Expense)

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Three Months Ended

March 31, % Increase / (Decrease)

June 30, % Increase / (Decrease) Six Months Ended

June 30, % Increase / (Decrease)

2020 2019 2020 2019

Interest income $ 1,323 $ 1,817 (27)% $ 2,911 $ 3,973 (27)%

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Total other expense, net $ (164) $ (4,148) (96)% $ (8,702) $ (7,744) 12%

Total other expense, net increased by more than 100% in the three months ended March 31, 2020 versus 2019, primarily due to a $4.0 million unrealized loss on our equity investment in TELA Bio, Inc., or TELA Bio, due to its significant decrease in market value as of March 31, 2020.

There was also more amortization of the discount on our 2.375% convertible senior notes due 2022, or 2022 Notes, and a decrease in interest income due to a decline in interest rates.

Income Tax Expense

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

Total other expense, net decreased by 96% in the three months ended June 30, 2020 versus 2019, primarily due to a $4.0 million unrealized gain on our equity investment in TELA Bio, Inc., or TELA Bio, due to the fluctuations in market value as of June 30, 2020.

There was also a reduction in interest income due to a decline in interest rates that was partially offset by a reduction in interest expense due to increased capitalized interest related to a new EXPAREL capacity expansion project at our Science Center Campus.

Total other expense, net increased by 12% in the six months ended June 30, 2020 versus 2019, primarily due to a $1.1 million reduction in interest income due to a decline in interest rates.

Income Tax (Benefit) Expense

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

Three Months Ended

March 31, % Increase / (Decrease)

Income tax expense $ 398 $ 253 N/A

June 30, % Increase / (Decrease) Six Months Ended

June 30, % Increase / (Decrease)

2020 2019 2020 2019

Income tax (benefit) expense $ (42) $ (1,603) (97) $ 356 $ (1,349) N/A

Effective tax rate (1) % (142) % 29 % 97 %

For the three months ended March 31, 2020 and 2019, we recorded income tax expense of $0.4 million and $0.3 million, respectively.

The income tax expense for the three months ended March 31, 2020 and 2019 reflects current state income taxes.

For the three months ended June 30, 2020 and 2019, we recorded an income tax benefit of less than $0.1 million and $1.6 million, respectively.

For the six months ended June 30, 2020 and 2019, we recorded income tax expense of $0.4 million and an income tax benefit of $1.3 million, respectively.

The tax provisions recorded for 2020 and 2019 reflect current state income taxes.

The income tax benefit for the three and six months ended June 30, 2019 is primarily related to the MyoScience Acquisition and a $1.8 million reduction in our valuation allowance on our deferred tax assets due to the acquisition.

Due to net operating losses, or NOLs, carried forward, and the repeal of the corporate minimum tax, no current federal income tax expense was recorded for 2020 or 2019.

The utilization of our NOLs has not resulted in any deferred federal tax expense because there was a full valuation allowance recorded with respect to the NOLs.

However, if our results of operations continue to improve, we may be required to reverse some or all of the valuation allowance on our deferred tax assets in the second half of 2020.

Liquidity and Capital Resources

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We have financed our operations primarily with cash generated from product sales, the proceeds from the sale of equity and debt securities, borrowings under prior debt facilities and collaborative licensing and milestone revenue.

As of March 31, 2020, we had an accumulated deficit of $391.2 million, cash and cash equivalents, short-term and long-term investments of $353.6 million and working capital of $351.3 million.

As discussed above, we anticipate that the COVID-19 pandemic will result in a reduction of certain commercial and clinical expenditures which would offset some of the revenue impact caused by the COVID-19 pandemic.

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

As of June 30, 2020, we had an accumulated deficit of $398.5 million, cash and cash equivalents, short-term and long-term investments of $335.1 million and working capital of $385.2 million.

The net cash proceeds from the July 2020 issuance of $402.5 million aggregate principal of the 2025 Notes was $178.8 million, after deducting fees and estimated offering expenses of $12.6 million and using $211.1 million to retire $185.0 million of our existing 2022 Notes.

For more information, see Note 17, Subsequent Events , to our condensed consolidated financial statements included herein.

As discussed above, we anticipate that the COVID-19 pandemic will continue to result in a reduction of certain commercial and clinical expenditures which would offset some of the revenue declines caused by the COVID-19 pandemic.

We currently expect that our cash, short-term and long-term investments on hand will be adequate to cover any potential short-term liquidity needs (especially considering the issuance of the 2025 Notes in July 2020), and that we would be able to access other sources of financing should the need arise.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law in response to the COVID-19 pandemic.

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We are continuing to evaluate the overall impact of the CARES Act on our business.

We currently expect to benefit from the provision to defer the

payment of certain employer payroll taxes of approximately $4.0 million for calendar year 2020, with half of these payments due at each of December 31, 2021 and December 31, 2022, respectively.

We currently expect to benefit from the provision to defer the payment of certain employer payroll taxes of approximately $3.8 million for calendar year 2020, of which $1.2 million has been deferred as of June 30, 2020.

Half of these deferrals are due at each of December 31, 2021 and December 31, 2022, respectively.

Summary of Cash Flows

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

Three Months Ended

Six Months Ended

Condensed Consolidated Statement of Cash Flows Data:

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Financing activities 2,183 4,267

Net (decrease) increase in cash and cash equivalents $ (23,639) $ 82,510

Net increase (decrease) in cash and cash equivalents $ 324 $ (72,789)

Operating Activities

During the three months ended March 31, 2020, net cash provided by operating activities was $6.2 million compared to $3.5 million during the three months ended March 31, 2019.

The increase of $2.7 million was primarily attributable to a 12% increase in net product sales of EXPAREL.

This increase was partially offset by increased expenditures related to our ongoing clinical trials, our European MAA for EXPAREL, growing a team of account managers focused on the outpatient market for EXPAREL as well as marketing initiatives and customer outreach for iovera°.

During the six months ended June 30, 2020, net cash used in operating activities was $9.4 million, compared to $26.3 million provided by operating activities during the six months ended June 30, 2019.

The decrease of $35.7 million was primarily attributable to an 8% decrease in net product sales of EXPAREL caused by the COVID-19 pandemic and contingent consideration payments made to MyoScience securityholders—$9.4 million of which was classified as an operating outflow with the remaining $5.6 million classified as a financing outflow.

This decrease also included additional expenditures related to growing a team of account managers focused on the outpatient market for EXPAREL as well as marketing initiatives and customer outreach for iovera°.

Investing Activities

During the three months ended March 31, 2020, net cash used in investing activities was $28.6 million, which reflected $21.8 million of short-term and long-term investment purchases (net of maturities) and purchases of fixed assets of $6.7 million.

Major fixed asset purchases included equipment for a new EXPAREL capacity expansion project at our Science Center Campus.

During the three months ended March 31, 2019, net cash provided by investing activities was $78.5 million, which reflected $80.5 million of short-term investment maturities (net of purchases), partially offset by purchases of fixed assets of $2.0 million.

During the six months ended June 30, 2020, net cash provided by investing activities was $7.6 million, which reflected $23.2 million of short-term and long-term investment maturities (net of purchases) and purchases of fixed assets of $15.6 million.

Major fixed asset purchases included equipment for a new EXPAREL capacity expansion project at our Science Center Campus and continuing expenditures for expanding our EXPAREL manufacturing capacity in Swindon, England in partnership with Thermo Fisher.

During the six months ended June 30, 2019, net cash used in investing activities was $103.3 million, which reflected cash used to fund the MyoScience Acquisition of $118.7 million (net of $1.3 million of cash acquired), purchases of fixed assets of $4.1 million, and an additional $1.6 million investment in TELA Bio Inc., partially offset by $21.1 million of short-term investment maturities (net of purchases).

Major fixed asset purchases included continuing expenditures for expanding our EXPAREL manufacturing capacity in Swindon, England in partnership with Thermo Fisher, and facility upgrades at our Science Center Campus.

Financing Activities

During the three months ended March 31, 2020, net cash used in financing activities was $1.3 million, which consisted of $4.7 million of contingent consideration payments made to MyoScience securityholders, partially offset by proceeds from the exercise of stock options of $3.5 million.

During the three months ended March 31, 2019, net cash provided by financing activities was $0.5 million, which consisted of proceeds from the exercise of stock options of $1.1 million, partially offset by $0.6 million of payments made to retire our 3.25% convertible senior notes due 2019.

During the six months ended June 30, 2020, net cash provided by financing activities was $2.2 million, which consisted of proceeds from the exercise of stock options of $6.4 million and $1.4 million from the issuance of shares through our ESPP, partially offset by $5.6 million of contingent consideration payments made to MyoScience securityholders.

During the six months ended June 30, 2019, net cash provided by financing activities was $4.3 million, which consisted of proceeds from the exercise of stock options of $3.6 million and $1.3 million from the issuance of shares through our ESPP, partially offset by $0.6 million of payments made to retire our 3.25% convertible senior notes due 2019.

2025 Convertible Senior Notes

On July 10, 2020, we completed a private placement of $402.5 million in aggregate principal amount of our 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 0.75% per annum, payable in arrears on February 1 and August 1 of each year, beginning on February 1, 2021.

The 2025 Notes mature on August 1, 2025.

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.

For both the principal and excess conversion value, holders may receive cash, shares of our common stock or a combination of cash and shares of our common stock, at our 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 approximately $71.78 per share of our common stock.

The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.

Prior to the close of business on the business day immediately preceding February 3, 2025, holders may convert the 2025 Notes under certain circumstances, including if during any given calendar quarter, our stock price closes at or above 130% of the conversion price then applicable during a period of at least 20 out of the last 30 consecutive trading days of the previous quarter.

On or after August 1, 2023, we may redeem for cash, shares of our common stock or a combination of cash and shares of our common stock, at our option, all or part of the 2025 Notes if the last reported sale price (as defined in the 2025 Indenture) of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not

consecutive) during any 30 consecutive trading-day period ending within five trading days prior to the date on which we provide notice of redemption.

See Note 17, Subsequent Events , to our condensed consolidated financial statements included herein for further discussion of the 2025 Notes.

2022 Convertible Senior Notes

On March 13, 2017, we completed a private placement of $345.0 million in aggregate principal amount of our 2022 Notes, and entered into an indenture, or 2022 Indenture, with respect to the 2022 Notes.

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The 2022 Notes mature on April 1, 2022.

At March 31, 2020, the outstanding principal on the 2022 Notes was $345.0 million.

At June 30, 2020, the outstanding principal on the 2022 Notes was $345.0 million.

In July 2020, we used part of the net proceeds from the issuance of the 2025 Notes discussed above to repurchase $185.0 million aggregate principal of the 2022 Notes in privately-negotiated transactions for an aggregate of approximately $211.1 million in cash, including accrued interest, reducing the current outstanding principal on the 2022 Notes to $160.0 million.

On or after October 1, 2021, until the close of business on the second scheduled trading day immediately preceding April 1, 2022, holders may convert their 2022 Notes at any time.

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For both the principal and excess conversion value, holders may receive cash, shares of our common stock or a combination of cash and shares of our common stock, at our option.

The initial conversion rate

for the 2022 Notes is 14.9491 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $66.89 per share of our common stock.

The initial conversion rate for the 2022 Notes is 14.9491 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $66.89 per share of our common stock.

The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.

Prior to the close of business on the business day immediately preceding October 1, 2021, holders may convert the 2022 Notes under certain circumstances, including if during any given calendar quarter, our stock price closes at or above 130% of the conversion price then applicable during a period of at least 20 out of the last 30 consecutive trading days of the previous quarter.

While the 2022 Notes are currently classified on our consolidated balance sheet at March 31, 2020 as long-term debt, the future convertibility and resulting balance sheet classification of this liability will be monitored at each quarterly reporting date and will be analyzed dependent upon market prices of our common stock during the prescribed measurement periods.

While the 2022 Notes are currently classified on our consolidated balance sheet at June 30, 2020 as long-term debt, the future convertibility and resulting balance sheet classification of this liability will be monitored at each quarterly reporting date and will be analyzed dependent upon market prices of our common stock during the prescribed measurement periods.

As of April 1, 2020, we may redeem for cash, shares of our common stock or a combination of cash and shares of our common stock, at our option, all or part of the 2022 Notes if the last reported sale price (as defined in the 2022 Indenture) of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending within five trading days prior to the date on which we provide notice of redemption.

This condition was not met during the quarter ended June 30, 2020.

See Note 9, Debt , to our condensed consolidated financial statements included herein for further discussion of the 2022 Notes.

Future Capital Requirements

We believe that our existing cash and cash equivalents, short-term and long-term investments and cash received from product sales will be sufficient to enable us to fund our operating expenses, capital expenditure requirements, payment of the principal on any conversions of our 2022 Notes and to service our indebtedness through at least May 7, 2021.

We believe that our existing cash and cash equivalents, short-term and long-term investments and cash received from product sales will be sufficient to enable us to fund our operating expenses, capital expenditure requirements, payment of the principal on any conversions of our 2022 Notes and 2025 Notes and to service our indebtedness through at least August 6, 2021.

Our future use of operating cash and capital requirements will depend on many forward-looking factors, including, but not limited to, the following:

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• the cost and timing of expanding our manufacturing facilities for EXPAREL and other product candidates, including the construction of an additional manufacturing suite at Thermo Fisher’s facility in Swindon, England and an EXPAREL capacity expansion project at our Science Center Campus;

• the cost and timing of potential milestone payments to MyoScience security holders, which could be up to an aggregate of $68.0 million if certain regulatory and commercial milestones are met, which includes a milestone payment of $10.0 million to be paid in the second quarter of 2020;

• the cost and timing of potential remaining milestone payments to MyoScience security holders, which could be up to an aggregate of $58.0 million if certain regulatory and commercial milestones are met;

• the cost and timing of potential milestone payments to Skyepharma, which could be up to an aggregate of $36.0 million if certain milestones pertaining to net sales of DepoBupivacaine products, including EXPAREL, are met, or upon the first commercial sale in the United Kingdom, France, Germany, Italy or Spain;

• the timing of and extent to which the holders of our 2022 Notes elect to convert their notes;

• the cost and timing of an early termination payment to DePuy Synthes, which we currently estimate to be up to $12.0 million;

• the timing of and extent to which the holders of our 2022 Notes and 2025 Notes elect to convert their notes;

• costs related to legal and regulatory issues;

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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.

In particular, capital market disruptions or negative economic conditions, especially in light of the COVID-19 pandemic, may hinder our access to capital.

Off-Balance Sheet Arrangements

Other than one lease agreement that has not yet commenced for which there are future obligations, we do not have any material off-balance sheet arrangements as of March 31, 2020, nor do we have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

We do not have any material off-balance sheet arrangements as of June 30, 2020, nor do we have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Critical Accounting Policies and Use of Estimates

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Contractual Obligations

There have been no material changes in our contractual obligations relating to our indebtedness, lease obligations and purchase obligations from those reported in our Annual Report on Form 10-K for the year ended December 31, 2019.

Other than the issuance of $402.5 million of aggregate principal of our 2025 Notes and concurrent repurchase of $185.0 million aggregate principal of our 2022 Notes in July 2020 discussed above, there have been no material changes in our contractual obligations relating to our indebtedness, lease obligations and purchase obligations from those reported in our Annual Report on Form 10-K for the year ended December 31, 2019.

For more information on our contractual obligations and commercial commitments, see Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2019.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements