# Pacira BioSciences, Inc. (PCRX) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Pacira BioSciences, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1396814/000139681423000010/pcrx-20221231.htm
Accession: 0001396814-23-000010
Filing date: 2023-02-28
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/PCRX/
All MD&A years: /company/PCRX/mda/
Previous year: /company/PCRX/mda/fy2021/ (FY 2021)
Next year: /company/PCRX/mda/fy2023/ (FY 2023)

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 the other sections of this Annual Report, including 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 2022 and 2021, as well as other discussions of 2022 and 2021 items. We have omitted discussion of the year ended December 31, 2020 (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 2021 and 2020 and other discussions of 2020 items can be found within Part II, Item 7, to our Annual Report for the year ended December 31, 2021, filed with the SEC on February 28, 2022, which is available on the SEC’s website at www.sec.gov and our corporate website at www.pacira.com. The foregoing reference to our corporate website is not intended to, nor shall it be deemed to, incorporate information on our corporate website into this Annual Report by reference, and the inclusion of our website address in this Annual Report is an inactive textual reference only and is not intended to be an active link to our corporate website.

Overview

Pacira is the industry leader in our commitment to non-opioid pain management and providing a non-opioid option to as many patients as possible to redefine the role of opioids as rescue therapy only. We are also developing innovative interventions to address debilitating conditions involving the sympathetic nervous system, such as cardiac electrical storm, chronic pain and spasticity. Our long-acting, local analgesic EXPAREL® (bupivacaine liposome injectable suspension) was commercially launched in April 2012. EXPAREL utilizes our unique pMVL drug delivery technology that encapsulates drugs without altering their molecular structure and releases them over a desired period of time. In the U.S., EXPAREL is the only opioid-free, long-acting local and regional analgesic approved for infiltration, field blocks and interscalene brachial plexus nerve block to produce local or regional postsurgical analgesia. EXPAREL is also approved for infiltration in pediatric patients aged six years and older in the U.S. In Europe, EXPAREL is approved as a brachial plexus block or femoral nerve block for treatment of post-operative pain in adults, and as a field block for treatment of somatic post-operative pain from small- to medium-sized surgical wounds in adults and children aged six years and older. Since its initial approval in 2011, more than 12 million patients have been treated with EXPAREL. We drop-ship EXPAREL directly to end-users based on orders placed to wholesalers or directly to us, and there is no product held by wholesalers. With the acquisition of Flexion Therapeutics, Inc. (the “Flexion Acquisition”) in November 2021, we acquired ZILRETTA® (triamcinolone acetonide extended-release injectable suspension), the first and only extended-release, intra-articular therapy that can provide major relief for OA knee pain for three months and has the potential to become an alternative to hyaluronic acid, or HA, and platelet rich plasma, or PRP, injections or other early intervention treatments. With the acquisition of MyoScience, Inc. (the “MyoScience Acquisition”) in April 2019, we acquired iovera°®, a handheld cryoanalgesia device used to deliver a precise, controlled application of cold temperature to targeted nerves, which we sell directly to end users. EXPAREL, ZILRETTA and the iovera° system are highly complementary products as long-acting, non-opioid therapies that alleviate pain.

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

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Flexion Acquisition

In November 2021, we completed the Flexion Acquisition pursuant to the Flexion Merger Agreement, under which Flexion became our wholly owned subsidiary and added ZILRETTA, a non-opioid corticosteroid that employs a proprietary microsphere technology to provide extended pain relief, to our commercial offering. The addition of ZILRETTA to our innovative non-opioid product portfolio directly aligns with our mission to provide an opioid alternative to as many patients as possible and address medical needs along the neural pain pathway.

The total consideration of $578.8 million included an initial payment of $428.3 million which represented $8.50 in cash per share of Flexion common stock, $20.2 million paid to settle restricted stock units and in-the-money stock options, an $85.1 million cash payment of Flexion debt not assumed by us and $45.2 million in contingent consideration representing the fair value of contingent value rights, or CVRs, that were issued in conjunction with the Flexion Acquisition. The Flexion Merger Agreement provided for one non-tradeable CVR per share of Flexion common stock as well as one CVR per share for certain Flexion equity awards. Each CVR entitles Flexion shareholders to contingent milestone payments of up to an aggregate of $8.00 in cash per share of Flexion common stock if certain milestones are met on or prior to December 31, 2030. At the date of the Flexion Acquisition, we estimated that up to an additional $380.2 million in the aggregate may be payable to holders of the CVRs if each of the applicable milestones are achieved. The fair value of the contingent consideration related to the Flexion Acquisition is revalued each reporting period if and until the related contingencies are resolved. For more information, see Note 5, Flexion Acquisition, to our consolidated financial statements included herein.

Recent Highlights

•In January 2023, we submitted our sNDA to the FDA seeking expansion of the EXPAREL label to include sciatic nerve blocks in the popliteal fossa and femoral nerve blocks in the adductor canal, with an anticipated FDA action date under the Prescription Drug User Fee Act in the second half of 2023. The sNDA is supported by two successful Phase 3 studies in which EXPAREL achieved statistically significant reductions in postsurgical pain control and opioid consumption through 96 hours compared with bupivacaine HCl.

•In January 2023, we opened our second Innovation and Training Center in Houston. This state-of-the-art facility features a 125-seat adaptive lecture hall, broadcast studio and both wet and dry lab space for cadaver and other interactive workshops, as well as advanced ultrasound machines equipped with artificial intelligence training software. This training center is core to developing physician thought leaders and community-based clinicians wanting to stay at the forefront of opioid-sparing pain management.

•In November 2022, both the EMA’s CHMP and the MHRA approved marketing authorization for an expanded indication of EXPAREL to include use in children aged 6 years and older as a field block for the treatment of somatic post-operative pain from small- to medium-sized surgical wounds. The approval was based on the results of our Phase 3 PLAY study of EXPAREL infiltration in pediatric patients undergoing spinal or cardiac surgeries. 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. The EMA’s approval is applicable to all 27 E.U. member states plus Iceland, Norway and Liechtenstein, and the MHRA’s approval is applicable in the U.K. EXPAREL was initially approved by the EC and in the U.K. in November 2020 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.

•In October 2022, the USPTO issued patent number 11,452,691. This patent is a chemical composition patent, with an expiration date of January 22, 2041. This patent is now listed in the FDA’s Orange Book and is the eighth listed patent. The company also received a Notice of Allowance from the USPTO for a U.S. Patent Application that is a product by process patent for EXPAREL. After issuance, Pacira will submit this patent for listing in the Orange Book.

Coronavirus (COVID-19) Pandemic and Global Economic Conditions

Since early 2020, our revenues and supply chain have been impacted by COVID-19 pandemic-related challenges that included the significant postponement or suspension in the scheduling of elective surgical procedures due to public health guidance and government directives. While the degree of impact has diminished during the course of the pandemic due to the introduction of vaccines and therapeutics, as well as the lessening of elective surgery restrictions, certain pandemic-related operational and staffing challenges persist. It remains unclear how long it will take the elective surgery market to normalize or if restrictions on elective procedures will recur due to future COVID-19 variants or otherwise. Direct and indirect effects of the pandemic and global economic conditions have and may continue to negatively impact our business, financial condition and results of operations. Such impacts may include the effect of prolonged periods of inflation and rising interest rates on our

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customers and suppliers and longer lead-times or the inability to secure a sufficient supply of materials. The situation remains dynamic and subject to rapid and possibly material changes. Additional negative impacts may also arise that 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 continue to actively monitor the situation and will 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, 2022 and 2021

Revenues

Net product sales consist of sales of (i) EXPAREL in the U.S., E.U. and U.K.; (ii) ZILRETTA in the U.S.; (iii) iovera° in the U.S., Canada and the E.U.; (iv) sales of, and royalties on, our bupivacaine liposome injectable suspension primarily for veterinary use and (v) license fees and milestone payments.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Increase / (Decrease)"],["","2022","","2021"],["Net product sales:"],["EXPAREL","$","536,899","","","$","506,515","","","6%"],["ZILRETTA (1)","105,517","","","12,683","","","100% +"],["iovera\u00b0","15,258","","","16,162","","","(6)%"],["Bupivacaine liposome injectable suspension","6,476","","","3,606","","","80%"],["Total net product sales","664,150","","","538,966","","","23%"],["Royalty revenue","2,673","","","2,442","","","9%"],["Collaborative licensing and milestone revenue","\u2014","","","125","","","(100)%"],["Total revenues","$","666,823","","","$","541,533","","","23%"]]
[[/GREPCENT_TABLE]]

(1) ZILRETTA net product sales for the year ended December 31, 2021 were attributable to the period beginning November 19, 2021, the date of the Flexion Acquisition.

EXPAREL net product sales increased 6% in 2022 compared to 2021, primarily due to increases of 5.5% in gross vial volume and increases of 3.6% in gross selling price per unit, partially offset by the sales mix of EXPAREL vial sizes and higher gross to net adjustments primarily due to our participation in 340B drug pricing and other strategic partnerships. Although the demand for EXPAREL has continued to increase primarily as a result of ASCs 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, the elective surgery market has faced post-pandemic-related challenges due to regional surges in COVID-19 variant cases, staffing shortages and fatigue from care teams and economic and inflationary pressures on consumer confidence. EXPAREL utilization remains above the overall sharp decline in elective surgical procedures relative to pre-pandemic baseline levels due to increased utilization in outpatient settings and emergent procedures.

As a result of the Flexion Acquisition in November 2021, we acquired ZILRETTA. We recognized net product sales of $105.5 million and $12.7 million for the years ended December 31, 2022 and 2021, respectively. Net product sales during the year ended December 31, 2021 were attributable to the period beginning on November 19, 2021, the closing date of the Flexion Acquisition.

Net product sales of iovera° decreased 6% in 2022 versus 2021 primarily due to a delay in the transition from generation 1 to generation 2 iovera° products and short-term variations in reimbursement policies in certain territories. We have seen the greatest iovera° demand as a pain relief for patients in advance of TKA procedures and in chronic pain management, particularly for people with mild to severe OA of the knee.

Bupivacaine liposome injectable suspension revenue increased 80% in 2022 versus 2021, and its related royalties increased 9%, primarily due to the sales mix of vial sizes of orders placed for veterinary use.

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Any renewed government suspension of or reluctance of patients to have elective procedures would impact our future sales of EXPAREL, ZILRETTA and iovera° during the lingering effects and uncertainty surrounding the ongoing COVID-19 pandemic and the impact of economic conditions including inflation on consumers' healthcare choices.

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 years indicated, including percent changes (dollar amounts in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Increase / (Decrease)"],["","2022","","2021"],["Cost of goods sold","$","199,295","","","$","140,255","","","42%"],["Gross margin","70%","","74%"]]
[[/GREPCENT_TABLE]]

Gross margin decreased four percentage points in 2022 as compared to 2021 due to higher inventory reserves, accelerated depreciation for certain machinery and equipment for which no future economic benefit was identified and the ZILRETTA step-up of fixed assets and inventory to fair value in accordance with purchase accounting, partially offset by unplanned downtime in the prior period.

Research and Development Expenses

Research and development expenses primarily consist of costs related to clinical trials and related outside services, product development and other research and development costs, including trials that we are conducting to generate new data for EXPAREL, ZILRETTA and iovera° 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 years indicated, including percent changes (dollar amounts in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Increase / (Decrease)"],["","2022","","2021"],["Clinical and preclinical development","$","45,615","","","$","24,138","","","89%"],["Product development and manufacturing capacity expansion","24,635","","","19,352","","","27%"],["Regulatory and other","7,953","","","6,590","","","21%"],["Stock-based compensation","6,594","","","5,465","","","21%"],["Total research and development expense","$","84,797","","","$","55,545","","","53%"],["% of total revenue","13%","","10%"]]
[[/GREPCENT_TABLE]]

Total research and development expense increased 53% in 2022 as compared to 2021.

Clinical and preclinical development expense increased 89% in 2022 versus 2021 due to ongoing expenses and completion of two EXPAREL lower extremity nerve block trials in bunionectomy and TKA, ongoing trials for the product candidates acquired as part of the Flexion Acquisition and toxicology studies for product development candidates. The prior year was affected by clinical trial delays related to the COVID-19 pandemic, whereas the current year included an expanded product candidate pipeline internally and as a result of the Flexion Acquisition, including ongoing expenses for PCRX-201, an IA gene therapy candidate for OA.

Product development and manufacturing capacity expansion expense increased 27% in 2022 versus 2021 mainly attributable to the significant scale-up of our EXPAREL manufacturing capacity at our Science Center Campus in San Diego, California.

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Regulatory and other expenses increased 21% in 2022 versus 2021 in support of the E.U. EXPAREL pediatric submission and in the U.S., the sNDA for lower extremity nerve block, which we submitted to the FDA in January 2023 seeking expansion of the EXPAREL label to include femoral nerve block in the adductor canal and sciatic nerve block in the popliteal fossa.

Stock-based compensation increased 21% in 2022 versus 2021 primarily due to an increase in the amount of equity awards outstanding for research and development personnel.

We expect that research and development costs for 2023 will be modestly lower than 2022, with a focus on ZILRETTA, iovera°, PCRX-201 and PCRX-401. We believe ZILRETTA’s extended-release profile may provide effective treatment for OA pain of the shoulder and intend to initiate a Phase 3 trial investigating ZILRETTA in shoulder OA. We also intend to initiate an OA Knee safety study of ZILRETTA in patients with Type 2 diabetes and a Phase 3 trial investigating iovera° in patients with spasticity, as well as plan to submit an IND application for PCRX-401 to initiate a Phase 1 trial for low back pain.

Selling, General and Administrative Expenses

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

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Increase / (Decrease)"],["","2022","","2021"],["Sales and marketing","$","144,996","","","$","111,022","","","31%"],["General and administrative","73,989","","","57,433","","","29%"],["Stock-based compensation","35,531","","","30,890","","","15%"],["Total selling, general and administrative expenses","$","254,516","","","$","199,345","","","28%"],["% of total revenue","38%","","37%"]]
[[/GREPCENT_TABLE]]

Total selling, general and administrative expenses increased 28% in 2022 as compared 2021.

Sales and marketing expense increased 31% in 2022 versus 2021, driven by a sales force expansion supporting both ZILRETTA and iovera° following the completion of the Flexion Acquisition in November 2021 and fully staffing a contracted sales force in Europe for EXPAREL. Increases also included expenses for patient reimbursement support for ZILRETTA. We are continuing our marketing investment in our products, 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. Additionally, we continued our investment in clinician training in the use of EXPAREL and iovera° at our PIT of Tampa. The addition of ZILRETTA to our commercial portfolio provides clinicians with two unique OA treatment options to individualize patient care.

General and administrative expense increased 29% in 2022 versus 2021, driven by administrative support costs as a result of the Flexion Acquisition in November 2021, including transition expenses during integration, legal costs including intellectual property protection and additional support for our expansion into European markets.

Stock-based compensation increased 15% in 2022 versus 2021, primarily due to the number of equity awards outstanding for selling, general and administrative personnel and accelerated stock-based compensation expense.

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Amortization of Acquired Intangible Assets

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Increase / (Decrease)"],["","2022","","2021"],["Amortization of acquired intangible assets","$","57,288","","","$","13,553","","","100% +"]]
[[/GREPCENT_TABLE]]

Amortization of acquired intangible assets increased substantially in 2022 versus 2021 due to 2022 being the first full year after the completion of the Flexion Acquisition. We acquired a developed technology intangible asset for ZILRETTA for OA knee pain, which is being amortized over a useful life of approximately ten years. For more information, see Note 5, Flexion Acquisition, to our consolidated financial statements included herein.

Acquisition-Related Charges (Gains), Impairment and Other

The following table provides a summary of the costs related to the Flexion Acquisition, MyoScience Acquisition, commercial agreements, termination costs and other activities during the years indicated, including percent changes (dollar amounts in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Increase / (Decrease)"],["","2022","","2021"],["Acquisition-related (gains) charges","$","(18,231)","","","$","39,911","","","N/A"],["Impairment of acquired in-process research & development","26,134","","","\u2014","","","N/A"],["Other","3,000","","","3,000","","","\u2014%"],["Total acquisition-related charges (gains), impairment and other","$","10,903","","","$","42,911","","","(75)%"]]
[[/GREPCENT_TABLE]]

In 2022, we recognized acquisition-related gains of $18.2 million. These gains were primarily driven by reductions in acquisition contingent consideration liabilities due to adjustments to forecasts for the applicable period during which the Flexion contingent consideration may be achieved under the Flexion Merger Agreement and due to the reduced probability of meeting the MyoScience contingent consideration milestones by December 31, 2023—the expiration date for achieving those milestones. These gains were partially offset by severance and other employee related costs, legal and other professional fees, third-party services and other one-time charges associated with the Flexion Acquisition. For more information, see Note 12, Financial Instruments and Note 18, Acquisition-related Charges (Gains), Impairment and Other, to our consolidated financial statements included herein.

In 2021, we recognized acquisition-related charges of $39.9 million. These charges were primarily driven by severance and other employee related costs, investment banking, legal and other professional fees, third-party services and other one-time charges associated with the Flexion Acquisition. These charges were partially offset by a gain from changes in fair value associated with the contingent consideration related to the MyoScience Acquisition.

In 2022, we recognized an impairment of $26.1 million for an acquired in-process research and development intangible asset related to ZILRETTA for the treatment of an OA pain of the shoulder based on the amount its previous carrying value exceeded its fair value. See Note 9, Goodwill and Intangible Assets, for more information.

In 2022, we recognized expense of $3.0 million related to the termination of a license agreement. See Note 20, Commitments and Contingencies, to our consolidated financial statements included herein for more information. In 2021, we agreed to a mutual termination of our development and commercialization agreement with Nuance Biotech Co. Ltd. to advance the development and commercialization of EXPAREL in China due to the lack of a viable regulatory pathway that adequately safeguards our intellectual property against the risk of a generic product, that led to dissolution costs of $3.0 million.

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Other Expense, Net

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Increase / (Decrease)"],["","2022","","2021"],["Interest expense","$","(39,976)","","","$","(31,750)","","","26%"],["Interest income","4,542","","","896","","","100% +"],["Other, net","(11,288)","","","(2,666)","","","100% +"],["Total other expense, net","$","(46,722)","","","$","(33,520)","","","39%"]]
[[/GREPCENT_TABLE]]

Total other expense, net increased 39% in 2022 versus 2021.

The 26% increase in interest expense was due to the $375.0 million Term Loan entered into in December 2021. This increase was partially offset by the absence of debt discount amortization associated with our convertible notes in 2022 due to adopting Accounting Standards Update, or ASU, 2020-06 in 2022, and the maturation of our 2.375% convertible senior notes due 2022, or 2022 Notes, on April 1, 2022. For additional information regarding the adoption of ASU 2020-06, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements herein. We made a $50.0 million principal prepayment on our Term Loan in December 2022 in addition to the quarterly required principal payments of $9.4 million and plan to make an additional prepayment in 2023. For more information, See Note 11, Debt, to our consolidated financial statements herein.

Interest income significantly increased in 2022 versus 2021 due to overall investment balances and higher interest rates.

Other, net expense for 2022 included a $10.0 million impairment of an equity investment. Other, net expense for 2021 included a realized loss on the sale of an equity investment in the amount of $2.6 million.

Income Tax (Benefit) Expense

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","% Increase / (Decrease)"],["","2022","","2021"],["Income tax (benefit) expense","$","(2,607)","","","$","14,424","","","N/A"],["Effective tax rate","(20)%","","26%"]]
[[/GREPCENT_TABLE]]

We recorded an income tax benefit of $2.6 million for the year ended December 31, 2022 and income tax expense of $14.4 million for the year ended December 31, 2021. The effective tax rate of (20)% for the year ended December 31, 2022 differed from the U.S. statutory tax rate of 21% due to non-taxable contingent consideration fair value gains, tax deductible interest for a Skyepharma milestone payment and tax credits, partially offset by valuation allowances recorded against capital loss carryforwards and non-deductible executive compensation. The effective tax rate of 26% for the year ended December 31, 2021 differed from the U.S. statutory tax rate of 21% due to non-deductible expenses and valuation allowances recorded against capital loss carryforwards, partially offset by stock-based compensation deductions and tax credits.

Liquidity and Capital Resources

Since our inception in 2006, we have devoted most of our cash resources to manufacturing, research and development and selling, general and administrative activities related to the development and commercialization of EXPAREL. In addition, we acquired ZILRETTA as part of the Flexion Acquisition in November 2021 and iovera° as part of the MyoScience Acquisition in April 2019. We are primarily dependent on the commercial success of EXPAREL and ZILRETTA. We have financed our operations primarily with the proceeds from the sale of convertible senior notes and other debt, common stock, product sales and collaborative licensing and milestone revenue. As of December 31, 2022, we had an accumulated deficit of $148.8 million, cash and cash equivalents and available-for-sale investments of $325.9 million and working capital of $350.6 million.

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

In March 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, allowed for certain measures to increase liquidity for businesses

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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 and remitted $1.4 million in each of December 2021 and 2022. We remitted an additional $0.6 million in December 2022 on behalf of the benefit Flexion received prior to our completion of the Flexion Acquisition.

Summary of Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the years ended December 31, 2022 and 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["Consolidated Statements of Cash Flows Data:","","2022","","2021"],["Net cash provided by (used in):"],["Operating activities","","$","145,274","","","$","125,717"],["Investing activities","","(225,185)","","","(20,790)"],["Financing activities","","(401,528)","","","380,694"],["Net (decrease) increase in cash and cash equivalents","","$","(481,439)","","","$","485,621"]]
[[/GREPCENT_TABLE]]

Operating Activities

In 2022, net cash provided by operating activities was $145.3 million compared to $125.7 million in 2021. The increase of $19.6 million was attributable to increased net product sales from both ZILRETTA—acquired as part of the Flexion Acquisition in November 2021—and EXPAREL, offset by increases in all operating expense lines to support the existing and newly acquired products and product candidates, a slightly lower gross margin and increased interest payments.

Investing Activities

In 2022, net cash used in investing activities was $225.2 million, which reflected $150.1 million of available-for-sale investment purchases (net of maturities), a $32.0 million contingent consideration milestone payment that had been achieved in the fourth quarter of 2021 associated with our 2007 acquisition of Pacira Pharmaceuticals, Inc. from Skyepharma, purchases of fixed assets of $30.1 million for fill lines for our products and equipment for an EXPAREL capacity expansion project at our Science Center Campus in San Diego, California and purchases of equity and debt investments of $13.0 million of investments in external complementary development stage product candidates.

In 2021, net cash used in investing activities was $20.8 million, which was primarily driven by the $420.0 million cash portion of the purchase price consideration, net of cash received, associated with the Flexion Acquisition and $45.9 million of capital expenditures, largely for equipment for our new 200-liter EXPAREL capacity expansion project at our Science Center Campus in San Diego, California. These uses of cash were partially offset by the net sale of available-for-sale investments of $457.2 million to fund the cash portion of the purchase price consideration associated with the Flexion Acquisition.

Financing Activities

In 2022, net cash used by financing activities was $401.5 million, which consisted of a $192.6 million principal repayment of the Flexion 2024 Notes as part of a repurchase offer to the holders of the Flexion 2024 Notes that was triggered by the Flexion Acquisition, $157.0 million to settle the 2022 Notes that matured on April 1, 2022 and $78.1 million of payments of Term Loan principal that included a principal prepayment of $50.0 million, partially offset by $24.4 million of proceeds from the exercise of stock options and $3.0 million from the issuance of common stock through our ESPP.

In 2021, net cash provided by financing activities was $380.7 million, which consisted of net proceeds from the Term Loan of $359.2 million, the exercise of stock options of $23.8 million and $2.8 million from the issuance of shares through our ESPP. We also made contingent consideration payments to MyoScience securityholders, of which $5.2 million was classified as a financing activity based on the recognition at the time of the MyoScience Acquisition.

Equity Financings

From our inception in December 2006 through December 31, 2022, we have raised $344.5 million of net proceeds from the sale of common stock and other equity securities via public offerings.

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Debt

2026 Term Loan B Facility

In December 2021, we entered into the $375.0 million Term Loan which is secured by substantially all of the Company’s and any subsidiary guarantor’s assets and is scheduled to mature on December 7, 2026, subject to certain exceptions set forth in the Credit Agreement. The Company may elect to borrow either alternate base rate borrowings or term benchmark borrowings. Each term loan borrowing which is an alternate base rate borrowing bears interest at a variable rate per annum equal to the Alternate Base Rate (as defined in the Credit Agreement) subject to a 1.75% floor, plus 6.00%. Each term loan borrowing which is a term benchmark borrowing bears interest at a variable rate per annum equal to (i) the Adjusted Term SOFR Rate (as defined in the Credit Agreement) subject to a 0.75% floor plus (ii) 7.00%.

The Credit Agreement requires us to, among other things, maintain (i) a first lien net leverage ratio, determined as of the last day of any fiscal quarter, of no greater than 1.75 to 1.00 and (ii) liquidity, at any time, of at least $150.0 million. The Credit Agreement also contains customary affirmative and negative covenants, financial covenants, representations and warranties, events of default and other provisions. As of December 31, 2022, the Company was in compliance with all financial covenants under the Credit Agreement.

At December 31, 2022, we had $296.9 million in outstanding borrowings under the Term Loan. We made a $50.0 million principal prepayment on our Term Loan in December 2022 in addition to the quarterly required principal payments of $9.4 million and plan to make an additional prepayment in 2023. See Note 11, Debt, to our consolidated financial statements included herein for further discussion of the Term Loan.

2025 Convertible Senior Notes

In July 2020, we completed a private placement of $402.5 million in aggregate principal amount of our 2025 Notes, and entered into an indenture with respect to the 2025 Notes. The 2025 Notes accrue interest at a fixed rate of 0.750% per annum, payable semiannually in arrears on February 1 and August 1 of each year. The 2025 Notes mature on August 1, 2025. At December 31, 2022, the outstanding principal on the 2025 Notes was $402.5 million. See Note 11, Debt, to our consolidated financial statements included herein for further discussion.

2024 Convertible Senior Notes

In November 2021, as part of the Flexion Acquisition, we assumed $201.3 million in aggregate principal amount of the Flexion 2024 Notes. The Flexion 2024 Notes have a maturity date of May 1, 2024, are unsecured, and accrue interest at a rate of 3.375% per annum, payable semi-annually on May 1 and November 1 of each year. In January 2022, we repurchased $192.6 million aggregate principal amount of the Flexion 2024 Notes. At December 31, 2022, the outstanding principal on the Flexion 2024 Notes was $8.6 million. See Note 11, Debt, to our consolidated financial statements included herein for further discussion.

Future Capital Requirements

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

•the cost and timing of the potential Flexion milestone payments in connection with the Flexion Acquisition, which could be up to an aggregate of $372.3 million if certain regulatory and commercial milestones are met. The aggregate amount was previously $425.5 million prior to our September 2022 decision to formally discontinue further development of PCRX-301. See Note 5, Flexion Acquisition, and Note 12, Financial Instruments, to our consolidated financial statements included herein for more information;

•the cost and timing of potential remaining milestone payments to MyoScience security holders, which could be up to an aggregate of $43.0 million if certain regulatory and commercial milestones are met. See Note 12, Financial Instruments, to our consolidated financial statements included herein for more information;

•the impact of the COVID-19 pandemic and global economic conditions, including the volume and delays of suspended elective surgical procedures, clinical trials, longer lead-times, an inability to secure a sufficient supply of materials and the inflationary impact on the cost of materials;

•the timing of and extent to which the holders of our Notes elect to convert their Notes and the timing of principal and interest payments on our Term Loan;

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•the timing and impact of increases to the variable interest rate on our Term Loan borrowings in accordance with the terms of the Credit Agreement;

•the costs and our ability to successfully continue to expand the commercialization of EXPAREL, ZILRETTA and iovera°, including outside of the U.S.;

•the cost and timing of expanding and maintaining our manufacturing facilities, including the current EXPAREL capacity expansion project at our Science Center Campus in San Diego, California and a ZILRETTA capital project at the Thermo Fisher site in Swindon, England;

•the cost and timing of additional strategic investments, including additional investments under existing agreements;

•the costs related to legal and regulatory issues;

•the impact of inflation on our product costs, supply chain, operating expenses and business strategy;

•the costs of performing additional clinical trials for our products, including the additional pediatric trials required by the FDA and EMA as a condition of approval of EXPAREL;

•the costs for the development and commercialization of other product candidates;

•the costs and timing of future payments under our employee benefit plans, including but not limited to our cash long-term incentive plan and non-qualified deferred compensation plan; and

•the extent to which we acquire or invest in products, businesses and technologies.

We may require additional debt or equity financing to meet our future operating and capital requirements. We have no committed external sources of funds, and additional equity or debt financing may not be available on acceptable terms, if at all. In particular, capital market disruptions or negative economic conditions, especially in light of the COVID-19 pandemic, may hinder our access to capital.

Contractual Obligations

We had two convertible senior notes outstanding as of December 31, 2022, for which $8.6 million in aggregate principal amount is due on the 2024 Notes in May 2024 and $402.5 million in aggregate principal amount is due on our 2025 Notes in August 2025. The remaining interest payments on our Notes is $9.4 million, of which an estimated $3.3 million is due in 2023. We also have a Term Loan with $296.9 million in outstanding principal with contractually obligated principal payments of $37.5 million in each of 2023 and 2024, $42.2 million in 2025 and $179.7 million in 2026. The remaining interest payments on the Term Loan are approximately $115.4 million based on the current interest rate.

In the normal course of business, we enter into various lease agreements for manufacturing, research and development and corporate activities, which are typically classified as operating leases under the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases. As of December 31, 2022, we had net minimum commitments of $93.8 million, of which $14.0 million is due in 2023. For more information, refer to Note 8, Leases, to our consolidated financial statements included herein.

In addition, we have approximately $73.3 million of minimum, non-cancelable contractual commitments for contract manufacturing services as of December 31, 2022, of which $18.3 million is due within one year, and the remaining $55.0 million is due in one to three years. We have approximately $5.2 million of minimum, non-cancelable contractual commitments for the purchase of certain raw materials as of December 31, 2022, of which $2.7 million is due within one year, and the remaining $2.5 million is due in one to two years. Subsequent to December 31, 2022, we entered into an additional $2.8 million of minimum, non-cancelable contractual commitments for marketing sponsorships, of which $0.9 million is due within one year, and the remaining $1.9 million is due in one to two years.

As part of the Flexion Acquisition, there are up to $372.3 million in potential payments if all regulatory and commercial milestones are met. The aggregate amount was previously $425.5 million prior to our September 2022 decision to formally discontinue further development of PCRX-301. For more information, see Note 5, Flexion Acquisition, to our consolidated financial statements included herein. As part of the MyoScience Acquisition, upon the achievement of certain regulatory and commercial milestones, there are up to $43.0 million in potential milestone payments available as of December 31, 2022. The MyoScience milestone achievement period ends on December 31, 2023.

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Critical Accounting 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, impairment of intangible assets, 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.

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

Revenues from sales of products are recorded net of returns allowances, prompt payment discounts, service fees, government rebates, volume rebates and chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales. These amounts are treated as variable consideration, estimated and recognized as a reduction of the transaction price at the time of the sale, using the most likely amount method, except for returns, which is based on the expected value method. The Company includes these estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. The calculation of some of these items requires management to make estimates based on sales data, historical return data, contracts, statutory requirements and other related information that may become known in the future. The adequacy of these provisions is reviewed on a quarterly basis. If our assessments, experiences or judgments are not accurate estimates of future results, our results of operations could be affected. The sensitivity of our estimates varies by program. Estimates associated with chargebacks and government programs have the greatest risk of being subject to adjustment because of the time delay between recording the accrual and the final settlement. Historically, adjustments to these estimates to reflect actual results or updated expectations have not been material.

The summary of activity with respect to our sales related allowances and accruals for the years ended December 31, 2022, 2021 and 2020 appears in Note 4, Revenue, to our consolidated financial statements included herein.

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 (gains), impairment and other. 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 impact of the passage of time towards the potential achievement of the milestones.

The following table includes the key assumptions used in the valuation of our contingent consideration milestones:

[[GREPCENT_TABLE]]
[["Assumption","","Flexion Ranges Utilized as of December 31, 2022"],["Discount rates","","14.90% to 15.10%"],["Probability of payment for achievement of regulatory milestones","","0% to 12.50%"],["Projected year of achieving or expiration of regulatory milestones","","2030"]]
[[/GREPCENT_TABLE]]

The maximum remaining potential payments related to contingent consideration from the Flexion Acquisition is $372.3 million as of December 31, 2022. Changes to assumptions may result in a material impact to the calculated amounts. Additionally, the forecasted revenue annual growth rates are key assumptions in the contingent consideration valuations associated with our commercial milestones. The impact of a hypothetical 10 percent increase in the forecasted annual growth rates would have increased the value of our contingent consideration liability associated with the Flexion Acquisition as of December 31, 2022 by $5.8 million. The impact of a hypothetical 100 basis point increase in the discount rate would have reduced the value of our contingent consideration liability associated with the Flexion Acquisition as of December 31, 2022 by $1.4 million.

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Recent Accounting Pronouncements

See Note 3, Recent Accounting Pronouncements, to our consolidated financial statements included herein for further discussion of recent accounting pronouncements.