Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, and in accordance with the rules and regulations of the United States Securities and Exchange Commission, or SEC. We operate and report our financial information in one segment. The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements appearing in Part IV, Item 15, of this Annual Report. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Part I, Item 1A. of this Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements. Certain defined terms have been brought forward from Part I of this Annual Report.
This section of this Annual Report discusses year-to-year comparisons between 2020 and 2019, as well as other discussions of 2020 and 2019 items. We have omitted discussion of the year ended December 31, 2018 (the earliest of the three years covered by our consolidated financial statements presented in this Annual Report) as permitted by SEC regulations. The complete Management’s Discussion and Analysis of Financial Condition and Results of Operations for year-to-year comparisons between 2019 and 2018 and other discussions of 2018 items can be found within Part II, Item 7, to our Annual Report filed with the SEC on February 20, 2020 .
Overview
Pacira is the industry leader in our commitment to non-opioid pain management and regenerative health solutions to improve patients’ journeys along the neural pain pathway. Our long-acting, local analgesic EXPAREL® (bupivacaine liposome injectable suspension) was commercially launched in April 2012. 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. 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 in the U.S., and in the E.U. as a brachial plexus block or femoral nerve block for treatment of post-operative pain in adults, and as a field block for treatment of somatic post-operative pain from small- to medium-sized surgical wounds in adults. Since its initial approval in 2011 for single-dose infiltration, more than eight 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. In April 2019, we acquired iovera° ® , a handheld cryoanalgesia device used to deliver a precise, controlled application of cold temperature only to targeted nerves, which we sell directly to end users. 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 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; invest in sales and marketing resources for EXPAREL and iovera°; expand and enhance our manufacturing capacity for EXPAREL and iovera°; invest in products, businesses and technologies; and support legal matters.
Recent Highlights
• In November 2020, the European Commission, or EC, granted marketing authorization for EXPAREL as a brachial plexus block or femoral nerve block for treatment of post-operative pain in adults, and as a field block for treatment of somatic post-operative pain from small- to medium-sized surgical wounds in adults. The EC decision is applicable to all 27 European Union member states plus the United Kingdom, Iceland, Norway and Liechtenstein. Commercial planning is underway, with an anticipated E.U. launch in the second half of 2021. For more information, see the subsection titled “Global Expansion” in Part 1—Item 1 above.
• In December 2020, we made a $1.2 million (€1.0 million) initial investment in GeneQuine Biotherapeutics GmbH, or GeneQuine, a privately held biopharmaceutical company headquartered in Hamburg, Germany. GeneQuine is advancing a gene therapy platform for the treatment of osteoarthritis and other musculoskeletal disorders. GeneQuine’s product candidates are next-generation gene transfer vehicles. These gene therapy vectors are highly efficient in entering joint cells to confer multi-year gene expression. Safety of this platform has been demonstrated in several species and is currently being evaluated in an ongoing Phase 1 study. In January 2021, we made a $1.2 million (€1.0 million) investment in the form of a convertible note. We will make an additional $4.9 million (€4.0 million) investment upon GeneQuine achieving certain prespecified near-term milestones related to its lead gene therapy product candidate, GQ-303. Up to $3.1 million (€2.5 million) of our total investment will be in the form of a convertible note, which includes the investment made in January 2021.
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Novel Coronavirus (COVID-19) Pandemic
Our 2020 net product sales were negatively impacted by the COVID-19 pandemic, 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 it will take the surgical community to return to normal operations, or if restrictions on elective surgeries will recur. Our 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 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, and we continue to support remote working as appropriate.
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 pandemic conditions persist or exacerbate over an extended period of time, including if states 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, including the timing of effective vaccines becoming widely available and accepted by the public. 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” in this Annual Report.
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
Revenues
Net product sales consist of sales of EXPAREL in the U.S., our bupivacaine liposome injectable suspension to Aratana for veterinary use in the U.S., and sales of iovera° in the U.S. Royalty revenues are from our collaborative licensing agreements.
The following table provides information regarding our revenues during the periods indicated, including percent changes (dollar amounts in thousands):
Year Ended December 31, % Increase / (Decrease)
2020 2019
Net product sales:
EXPAREL $ 413,338 $ 407,877 1 %
Bupivacaine liposome injectable suspension 4,459 3,153 41 %
Total EXPAREL / bupivacaine liposome injectable suspension
net product sales 417,797 411,030 2 %
iovera° 8,817 7,896 12 %
Total net product sales 426,614 418,926 2 %
Royalty revenue 3,033 2,100 44 %
Total revenues $ 429,647 $ 421,026 2 %
EXPAREL revenue grew 1% in 2020 compared to 2019, primarily due to an increase in sales volume of 1% and a 4% increase in gross selling price per unit, partially offset by the sales mix of EXPAREL vial sizes. EXPAREL revenue was impacted by the significant postponement or suspension of elective surgical procedures resulting from public health guidance and government directives due to the COVID-19 pandemic, beginning in mid-March 2020. The demand for EXPAREL has generally continued to increase as a result of ambulatory surgical centers and anesthesiologists broadening the use of long-
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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 increased 12% in 2020 versus 2019. The increase in revenue largely reflects the timing of the MyoScience Acquisition in 2019 offset in part by the impact of the COVID-19 pandemic. 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.
Any renewed government suspension of, or reluctance of patients to have, elective surgeries would impact our future sales of EXPAREL and iovera° during the ongoing COVID-19 pandemic.
Royalty revenue reflects the royalties earned on net product sales of bupivacaine liposome injectable suspension to Aratana for veterinary use, both of which increased over 40% in 2020 versus 2019 as a result of the timing of orders placed by Aratana.
Cost of Goods Sold
Cost of goods sold primarily relates to the costs to produce, package and deliver our products to customers. These expenses include labor, raw materials, manufacturing overhead and occupancy costs, depreciation of facilities, royalty payments, quality control and engineering.
The following table provides information regarding cost of goods sold and gross margin during the periods indicated, including percent changes (dollar amounts in thousands):
Year Ended December 31, % Increase / (Decrease)
2020 2019
Cost of goods sold $ 117,328 $ 106,712 10 %
Gross margin 73 % 75 %
Gross margin decreased two percentage points in 2020 versus 2019. One percentage point was due to unplanned downtime at our custom manufacturing suite in Swindon, England (under our partnership with Thermo Fisher), and one percentage point was due to a planned shutdown at our Science Center Campus in San Diego, California in order to prepare our manufacturing suite for a new EXPAREL capacity expansion project.
Despite shelter-in-place and other restrictive 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 a result of the COVID-19 pandemic as the production of EXPAREL is considered essential. 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. The Fremont facility resumed normal operations in April 2020.
Research and Development Expenses
Research and development expenses primarily consist of costs related to clinical trials and related outside services, product development and other research and development costs, including Phase 4 trials that we are conducting to generate new data for EXPAREL and iovera° and stock-based compensation expense. Clinical and preclinical development expenses include costs for clinical personnel, clinical trials performed by third-parties, toxicology studies, materials and supplies, database management and other third-party fees. Product development and manufacturing capacity expansion expenses include development costs for our products, which include personnel, equipment, materials and contractor costs for process development and product candidates, development costs related to significant scale-ups of our manufacturing capacity and facility costs for our research space. Regulatory and other expenses include regulatory activities related to unapproved products and indications, medical information expenses and related personnel. Stock-based compensation expense relates to the costs of stock option grants, awards of restricted stock units, or RSUs, and our employee stock purchase plan, or ESPP.
The following table provides a breakout of our research and development expenses during the periods indicated, including percent changes (dollar amounts in thousands):
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Year Ended December 31, % Increase / (Decrease)
2020 2019
Clinical and preclinical development $ 23,126 $ 30,265 (24) %
Product development and manufacturing capacity expansion 23,516 29,724 (21) %
Regulatory and other 7,568 7,016 8 %
Stock-based compensation 5,211 5,114 2 %
Total research and development expense $ 59,421 $ 72,119 (18) %
% of total revenue 14 % 17 %
Total research and development expense decreased 18% in 2020 versus 2019. Clinical and preclinical development expense decreased 24% due to the completion of our Phase 3 pediatric (“PLAY”) clinical trial, our Phase 4 C-Section (“CHOICE”) trial and both our nerve block and pediatric pharmacokinetic studies. In addition, we made the strategic decision to conclude enrollment in the spine (“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 inform future studies in this patient population. These decreases were partially offset by startup activities related to our iovera° and EXPAREL (“PREPARE”) trial, our lower extremity nerve block (“STRIDE”) clinical trial, as well as the completion of our clinical trial for pectoral field block in breast augmentation. In addition, these increases included a Phase 1 intrathecal clinical trial to evaluate the safety, pharmacokinetics and sensory selective efficacy of EXPAREL. Certain clinical trials were slower than normal during 2020 as a result of the COVID-19 pandemic.
Product development and manufacturing capacity expansion expense decreased 21% in 2020 versus 2019 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 expenses increased 8% in 2020 versus 2019 due to increases in the publication of clinical manuscripts and abstracts, as well as startup activities related to the iovera° clinical database registry.
Stock-based compensation increased 2% in 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. It also includes professional fees for legal, audit, tax and consulting services. Stock-based compensation expense relates to the costs of stock option grants, RSU awards and our ESPP.
The following table provides information regarding selling, general and administrative expenses during the periods indicated, including percent changes (dollar amounts in thousands):
Year Ended December 31, % Increase / (Decrease)
2020 2019
Sales and marketing $ 118,682 $ 129,663 (8) %
General and administrative 45,714 47,248 (3) %
Stock-based compensation 29,120 23,871 22 %
Total selling, general and administrative expenses $ 193,516 $ 200,782 (4) %
% of total revenue 45 % 48 %
Total selling, general and administrative expenses decreased 4% in 2020 versus 2019.
Sales and marketing expenses decreased 8% in 2020 versus 2019. The decrease was primarily driven by a decline in sales commissions, reduced marketing spend due to the cancellations of in person meetings, medical conferences, travel and increased utilization of lower cost virtual meetings due to the COVID-19 pandemic. These were partially offset by a termination fee to DePuy Synthes of up to $9.0 million, and higher sales and marketing compensation due to an expanded sales force. We
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are continui ng our marketing investment in EXPAREL, which includes 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 recently launched the Pacira Innovation and Training center at Tampa (the “PITT”) in Tampa, Florida. This approximately 10,000 square-foot facility will support a full range of educational events to advance clinician understanding of the latest local, regional and field block approaches for managing pain and reducing or eliminating exposure to opioids. Additionally, we have continued investing in marketing initiatives and customer outreach for iovera°.
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.
General and administrative expenses decreased 3% in 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 resolved in July 2020 and was partially offset by expenditures to support the expansion of the business following the MyoScience Acquisition.
Stock-based compensation increased 22% in 2020 versus 2019, primarily due to an increase in personnel and the number of equity grants awarded.
Amortization of Acquired Intangible Assets
The following table provides a summary of the amortization of acquired intangible assets during the periods indicated, including percent changes (dollar amounts in thousands):
Year Ended December 31, % Increase / (Decrease)
2020 2019
Amortization of acquired intangible assets $ 7,866 $ 5,703 38 %
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. Beginning in the second quarter of 2019, these are being amortized on a straight-line basis. For more information, see Note 9, Goodwill and Intangible Assets , to our consolidated financial statements included herein.
Acquisition-Related Charges, Product Discontinuation and Other
The following table provides a summary of the costs related to the MyoScience Acquisition, our DepoCyt(e) discontinuation and other activities during the periods indicated, including percent changes (dollar amounts in thousands):
Year Ended December 31, % Increase / (Decrease)
2020 2019
Acquisition-related charges $ 5,354 $ 21,571 (75) %
Product discontinuation (188) 159 N/A
Other — 3,500 (100) %
Total acquisition-related charges, product discontinuation and other $ 5,166 $ 25,230 (80) %
In 2020, we recognized charges of $5.4 million related to the MyoScience Acquisition primarily due to changes in the fair value of contingent consideration. In 2019, we recognized charges of $21.6 million, which represents $16.7 million for the changes in fair value of contingent consideration and $4.2 million for advisory costs, including legal, financial, accounting and tax services and $0.7 million for separation costs, asset write-downs and other restructuring activities related to the MyoScience Acquisition. For more information, see Note 18, Acquisition-Related Charges and Product Discontinuance, Net , to our consolidated financial statements included herein.
In 2020, we recorded a gain of $0.2 million related to the final settlement of the lease agreement for the site of the former DepoCyt(e) manufacturing activities. In 2019, we recorded a charge of $0.2 million primarily for the accretion of the related lease liability.
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In 2019, we recorded a charge of $3.5 million related to the U.S. Department of Justice settlement. The settlement was paid in July 2020. For more information, see Note 21, Commitments and Contingencies , to our consolidated financial statements included herein.
Other (Expense) Income
The following table provides information regarding other (expense) income during the periods indicated, including percent changes (dollar amounts in thousands):
Year Ended December 31, % Increase / (Decrease)
2020 2019
Interest income $ 4,629 $ 7,376 (37) %
Interest expense (25,671) (23,628) 9 %
Loss on early extinguishment of debt (8,071) — N/A
Other, net 2,852 (4,976) N/A
Total other expense, net $ (26,261) $ (21,228) 24 %
Total other expense, net increased 24% in 2020 versus 2019, primarily due to an $8.1 million loss on early extinguishment of debt incurred in conjunction with the retirement of $185.0 million aggregate principal of our 2022 Notes in July 2020. In addition, there was a reduction in interest income primarily due to a decline in interest rates and an increase in interest expense due to the issuance of $402.5 million of aggregate principal 2025 Notes in July 2020. Other, net included $1.1 million of United Kingdom research and development tax credits and a $1.6 million unrealized gain on our equity investment in TELA Bio in 2020 versus an unrealized loss on the equity investment of $5.7 million in 2019.
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):
Year Ended December 31, % Increase / (Decrease)
2020 2019
Income tax (benefit) expense $ (125,434) $ 268 N/A
Effective tax rate (100)% + (2) %
We recorded an income tax benefit of $125.4 million for the year ended December 31, 2020 and income tax expense of $0.3 million for the year ended December 31, 2019. A full valuation allowance had been recorded against our net deferred tax balance as of December 31, 2019 as it had been more likely than not that our net deferred tax assets would not be realizable. At each reporting date, we consider new evidence, both positive and negative, that could affect our view of the future realization of deferred tax assets. During the year ended December 31, 2020, in part because in the current year we achieved three years of cumulative pretax income in the U.S. federal and state tax jurisdictions and based on our most recent forecasts, we determined that there is sufficient positive evidence to conclude that it is more likely than not that additional deferred taxes of $126.6 million are realizable and, therefore, we reduced the valuation allowance accordingly. For more information, see Note 16, Income Taxes , to our consolidated financial statements included herein.
The income tax expense for the year ended December 31, 2019 consisted primarily of $1.1 million of state income taxes in jurisdictions where the availability of carryforward losses are either limited or fully utilized as well as $1.0 million of state taxes on the one-time gain from the deemed sale of assets resulting from a tax election pursuant to Internal Revenue Code (IRC) Section 338(g) made by us related to the MyoScience Acquisition. This was partially offset by a $1.8 million reduction in our valuation allowance on our deferred tax assets due to the MyoScience Acquisition. No federal taxes resulted from the tax election given there were sufficient NOL carryforwards.
Liquidity and Capital Resources
Since our inception in 2006, we have devoted most of our cash resources to manufacturing, research and development and selling, general and administrative activities related to the development and commercialization of EXPAREL. In addition, we acquired iovera° as part of the MyoScience Acquisition in April 2019. We are highly dependent on the commercial success of EXPAREL. We have financed our operations primarily with the proceeds from the sale of convertible senior notes, common stock, product sales and collaborative licensing and milestone revenue. As of December 31, 2020, we had an accumulated
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deficit of $253.9 million, cash and cash equivalents, short-term and long-term investments of $617.1 million and working capital of $398.3 million. The net cash proceeds from the July 2020 issuance of $402.5 million aggregate principal of the 2025 Notes was $178.9 million, after deducting fees and offering expenses of $12.5 million and using $211.1 million to retire $185.0 million in aggregate principal (including accrued interest) of our existing 2022 Notes. For more information, see Note 11, Debt , to our 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, 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. The CARES Act, among other things, allows for certain measures to increase liquidity for businesses such as the deferral of employer payroll taxes, a tax credit for retaining employees and other provisions. We benefited from the provision to defer the payment of certain employer payroll taxes in the amount of $2.8 million for the year ended December 31, 2020. One-half of these deferrals are due at each of December 31, 2021 and December 31, 2022.
Summary of Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for the years ended December 31, 2020 and 2019 (in thousands):
Year Ended December 31,
Consolidated Statements of Cash Flows Data: 2020 2019
Net cash provided by (used in):
Operating activities $ 77,032 $ 70,520
Investing activities (277,607) (128,488)
Financing activities 222,304 3,670
Net increase (decrease) in cash and cash equivalents $ 21,729 $ (54,298)
Operating Activities
In 2020, net cash provided by operating activities was $77.0 million compared to $70.5 million in 2019. The increase of $6.5 million was primarily attributable to the increase in income from operations driven by the increase in revenue and reductions in research and development and selling, general and administrative expenses—reflecting reduced spending due to the COVID-19 pandemic and a decline in sales commissions. These increases were partially offset by an increase in overall working capital requirements, and contingent consideration payments made to MyoScience securityholders, $9.4 million of which were classified as operating.
Investing Activities
In 2020, net cash used in investing activities was $277.6 million, which reflected $238.6 million of short-term and long-term investment purchases (net of maturities) and purchases of fixed assets of $37.8 million. Major fixed asset purchases included equipment for a new EXPAREL capacity expansion project at our Science Center Campus in San Diego, California and continuing expenditures for expanding our EXPAREL manufacturing capacity in Swindon, England. In addition, we made a $1.2 million equity investment in GeneQuine.
In 2019, net cash used in investing activities was $128.5 million, which reflected cash used to fund the MyoScience Acquisition of $117.7 million (net of $1.3 million of cash acquired), purchases of fixed assets of $10.2 million and an additional $1.6 million investment in TELA Bio, partially offset by $1.0 million of short-term and long-term investment maturities (net of purchases). Major fixed asset purchases included continuing expenditures for expanding our EXPAREL manufacturing capacity in England and facility upgrades at our Science Center Campus.
Financing Activities
In 2020, net cash provided by financing activities was $222.3 million, which consisted of gross proceeds from the issuance of the 2025 Notes of $402.5 million, the exercise of stock options of $45.2 million and $2.5 million from the issuance of shares through our ESPP. In conjunction with the issuance of the 2025 Notes, we paid $211.1 million of cash (including $1.2 million of accrued interest classified as an operating outflow) to retire $185.0 million of our 2022 Notes in privately-negotiated transactions and $12.5 million in financing costs. We also made contingent consideration payments to MyoScience
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securityholders, of which $5.6 million was classified as financing activities based on their recognition at the time of the MyoScience Acquisition.
In 2019, net cash provided by financing activities was $3.7 million, which consisted of proceeds from the exercise of stock options of $8.5 million and $2.4 million from the issuance of shares through our ESPP. We also made a $6.6 million contingent consideration payment to MyoScience securityholders and a $0.6 million payment to retire our 3.25% convertible senior notes due 2019.
Equity Financings
From our inception through December 31, 2020, we have raised $344.5 million of net proceeds from the sale of common stock and other equity securities via public offerings.
Debt
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 the 2025 Indenture with respect to the 2025 Notes. The 2025 Notes accrue interest at a fixed rate of 0.750% 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. At December 31, 2020, the outstanding principal amount of the 2025 Notes was $402.5 million.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 for certain 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. None of these conditions for conversion were met during the quarter ended December 31, 2020.
While the 2025 Notes are currently classified on our consolidated balance sheet at December 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. In the event that the holders of the 2025 Notes have the right to convert the 2025 Notes at any time during the prescribed measurement period, the 2025 Notes would then be considered a current obligation and classified as such.
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 11, Debt , to our 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 the 2022 Indenture with respect to the 2022 Notes. The 2022 Notes accrue interest at a fixed rate of 2.375% per annum, payable semiannually in arrears on April 1 and October 1 of each year. The 2022 Notes mature on April 1, 2022. 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. At December 31, 2020, the outstanding principal amount of the 2022 Notes was $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. Upon conversion, holders will receive the principal amount of their
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2022 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 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 for certain 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.
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 December 31, 2020.
See Note 11, Debt , to our 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 remaining principal on any conversions of the 2022 Notes and 2025 Notes and to service our indebtedness through at least February 26, 2022. Our future use of operating cash and capital requirements will depend on many forward-looking factors, including, but not limited to, the following:
• the impact of the COVID-19 pandemic, including the amounts and delays of suspended surgical procedures, clinical trials and general economic conditions;
• our ability to successfully continue to expand the commercialization of EXPAREL, including outside of the U.S.;
• the costs of expanding the commercialization of iovera°, including outside of the U.S.;
• 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 in San Diego, California;
• 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, which includes one milestone payment of up to $10.0 million to be paid in the first half of 2021;
• 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 cost and timing of additional strategic investments, including additional investments under existing agreements;
• the cost and timing of an early termination payment to DePuy Synthes, which we currently estimate to be up to $9.0 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;
• the costs of performing additional clinical trials for EXPAREL, including the pediatric trials required by the FDA as a condition of approval;
• the costs of performing additional clinical trials for iovera°;
• the costs for the development and commercialization of other product candidates; and
• the extent to which we acquire or invest in products, businesses and technologies.
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We may require additional debt or equity financing to meet our future operating and capital requirements. We have no committed external sources of funds, and additional equity or debt financing may not be available on acceptable terms, if at all. In particular, capital market disruptions or negative economic conditions, especially in light of the COVID-19 pandemic, may hinder our access to capital.
Contractual Obligations
The table below presents a summary of our contractual obligations as of December 31, 2020 (in thousands):
Payments Due by Period
Contractual Obligations (1)
Total Less Than One Year 1-3 Years 3-5 Years More Than
5 Years
Convertible senior notes - principal (2)
$ 562,500 $ — $ 160,000 $ 402,500 —
Convertible senior notes - interest 20,962 6,986 7,938 6,038 —
Lease obligations (3)
106,699 12,527 21,120 22,251 50,801
Purchase obligations (4)
41,547 25,166 16,381 — —
Achieved milestone payments (1)
10,000 10,000 — — —
Total $ 741,708 $ 54,679 $ 205,439 $ 430,789 50,801
(1) This table does not include potential future 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, including $32.0 million when annual net sales of DepoBupivacaine products collected, including EXPAREL, reach $500.0 million (measured on a rolling quarterly basis) and $4.0 million upon the first commercial sale in the United Kingdom, France, Germany, Italy or Spain. This contingency is described further in Note 9 , Goodwill and Intangible Assets , to our consolidated financial statements included herein. This table also does not include potential future milestone payments to MyoScience shareholders which could be up to an aggregate of $48.0 million if certain regulatory and commercial milestones are met. However, the table above includes one achieved milestone payment totaling $10.0 million scheduled to be paid in the first half of 2021. The table also does not include potential investments of $4.9 million to be made under an investment agreement and convertible loan agreement if certain milestones are met by GeneQuine. Further, this table does not include various agreements that we have entered into for services with third-party vendors, including agreements to conduct clinical trials, and for consulting and other contracted services due to the cancellable nature of the services.
(2) The amounts represent the April 2022 maturity of our 2022 Notes and the August 2025 maturity of our 2025 Notes. See Note 11 , Debt , to our consolidated financial statements included herein for further discussion. Additionally, it excludes any conversion premium on the 2022 Notes and 2025 Notes, which may be settled in cash or stock at our discretion. Neither the 2022 Notes nor the 2025 Notes were convertible as of December 31, 2020.
(3) The amounts consist of operating leases for our corporate headquarters in Parsippany, New Jersey, manufacturing, research and development and warehouse space in San Diego, California and Fremont, California and office space in Tampa, Florida. In addition, the lease component for the use of the Thermo Fisher facility in Swindon, England under the Thermo Fisher Agreements has also been included.
(4) The amounts consist of minimum, non-cancelable contractual commitments for contract manufacturing services and raw materials.
In April 2014, we and Thermo Fisher entered into a Strategic Co-Production Agreement, a Technical Transfer and Service Agreement and a Manufacturing and Supply Agreement to collaborate in the manufacture of EXPAREL. Under the terms of the Technical Transfer and Service Agreement, Thermo Fisher has agreed to undertake certain technical transfer activities and construction services needed to prepare its Swindon, England facility for the manufacture of EXPAREL in two dedicated manufacturing suites. Under these agreements, we are required to make monthly base fee payments to Thermo Fisher. Under the terms of the Manufacturing and Supply Agreement, following FDA approval of the first suite (which occurred in May 2018), we agreed to purchase EXPAREL product from Thermo Fisher. Unless earlier terminated by giving notice of up to three years (other than termination by us in the event of a material breach by Thermo Fisher), this agreement will expire in May 2028.
Critical Accounting Policies and Use of Estimates
We have based our management’s discussion and analysis of our financial condition and results of operations on our financial statements that have been prepared in accordance with GAAP in the U.S. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, contingent consideration, inventory costs, liabilities and accruals, clinical trial expenses, stock-based compensation and the valuation of deferred tax assets. We base our estimates on historical experience, contract terms and on other factors we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
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Our significant accounting policies are more fully discussed in Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements included herein. The following accounting policies, which may include significant judgments and estimates, were used in the preparation of our consolidated financial statements.
Revenue Recognition
Our sources of revenue include (i) sales of EXPAREL in the U.S.; (ii) sales of iovera° in the U.S.; (iii) sales of, and royalties on, sales of our bupivacaine liposome injectable suspension product for veterinary use in the U.S. and (iv) license fees and milestone payments. To date, there has been no revenue from the sales of EXPAREL or iovera° in the E.U. We do not consider revenue from sources other than sales of EXPAREL to be material sources of our consolidated revenue.
Net Product Sales
We sell 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. Product revenue is recognized when control of the promised goods are transferred to the customers, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those goods. EXPAREL revenue is recorded at the time the product is delivered to the end-user.
Collaborative Licensing and Milestone Revenue
Our collaboration agreements generally involve licenses to our products. In determining how and when to recognize the revenue under a collaboration agreement, we must assess whether the license is distinct, which depends upon whether the customer can benefit from the license and whether the license is separate from other performance obligations in the agreement. If the license is distinct, we must further assess whether the customer has a right to access or a right to use the license depending on whether the functionality of the license is expected to substantively change over time. If the license is not expected to substantively change, the revenue is recognized at the point in time when the license is provided. If the license is expected to substantively change, the revenue is recognized over the license period.
Revenue recognition from milestone payments is dependent upon the facts and circumstances surrounding the milestone payments. Milestone payments based on a non-sales metric such as a development-based milestone (e.g. obtaining regulatory approval) represent variable consideration and are included in the transaction price subject to any constraints. If the milestone payments relate to future development, the timing of recognition depends upon historical experience and the significance a third-party has on the outcome. For milestone payments to be received upon the achievement of a sales threshold, the revenue from the milestone payments is recognized at the later of when the actual sales are incurred or the performance obligation to which the sales relate to has been satisfied.
Contingent Consideration
Subsequent to an acquisition, we measure contingent consideration arrangements at fair value for each period with changes in fair value recognized in the consolidated statements of operations as acquisition-related charges. Changes in contingent consideration can result from changes in the assumed achievement and timing of estimated sales, costs of goods sold and regulatory approvals. In the absence of new information, changes in fair value reflect the passage of time towards achievement of the milestones, and are accrued based on an accretion schedule.
Recent Accounting Pronouncements
See Note 3, Recent Accounting Pronouncements , to our consolidated financial statements for further discussion of recent accounting pronouncements.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements as of December 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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.