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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2021
 
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from     to
Commission File Number: 001-35060

https://cdn.kscope.io/8f8c1de9401d432045aa3f0af2157b06-pcrx-20210630_g1.jpg

PACIRA BIOSCIENCES, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware51-0619477
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
 Identification No.)

5 Sylvan Way, Suite 300
Parsippany, New Jersey, 07054
(Address and Zip Code of Principal Executive Offices)
(973) 254-3560
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common Stock, par value $0.001 per sharePCRXNasdaq Global Select Market



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No

As of August 1, 2021, 44,454,792 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.


Table of Contents

PACIRA BIOSCIENCES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2021

TABLE OF CONTENTS
  Page #
 
 
 
 
 
 
 
   
 

Pacira BioSciences, Inc. | Q2 2021 Form 10-Q | Page 3

Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
PACIRA BIOSCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)
(Unaudited)
ASSETSJune 30,
2021
December 31,
2020
Current assets:  
     Cash and cash equivalents$105,774 $99,957 
     Short-term investments540,821 421,705 
     Accounts receivable, net68,357 53,046 
     Inventories, net65,264 64,650 
     Prepaid expenses and other current assets12,363 12,265 
          Total current assets792,579 651,623 
Long-term investments 95,459 
Fixed assets, net153,302 136,688 
Right-of-use assets, net71,252 74,492 
Goodwill99,547 99,547 
Intangible assets, net92,588 96,521 
Deferred tax assets98,599 106,164 
Equity investments and other assets17,966 14,019 
          Total assets$1,325,833 $1,274,513 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
     Accounts payable$12,179 $10,431 
     Accrued expenses52,163 70,974 
     Lease liabilities5,644 7,425 
     Convertible senior notes153,681 149,648 
     Contingent consideration5,026 14,736 
     Income taxes payable 114 
          Total current liabilities228,693 253,328 
Convertible senior notes321,708 313,030 
Lease liabilities68,235 71,025 
Contingent consideration12,332 13,610 
Other liabilities7,697 3,832 
          Total liabilities638,665 654,825 
Commitments and contingencies (Note 15)
Stockholders’ equity:  
     Preferred stock, par value $0.001; 5,000,000 shares authorized; none issued and outstanding at
     June 30, 2021 and December 31, 2020
  
     Common stock, par value $0.001; 250,000,000 shares authorized; 44,436,630 shares issued and
     outstanding at June 30, 2021; 43,636,929 shares issued and outstanding at December 31, 2020
44 44 
     Additional paid-in capital911,368 873,201 
     Accumulated deficit(224,425)(253,875)
     Accumulated other comprehensive income181 318 
          Total stockholders’ equity687,168 619,688 
          Total liabilities and stockholders’ equity$1,325,833 $1,274,513 
See accompanying condensed notes to consolidated financial statements.
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PACIRA BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
 2021202020212020
Revenues:    
     Net product sales$134,863 $75,216 $253,601 $179,961 
     Collaborative licensing and milestone revenue125  125  
     Royalty revenue602 289 891 1,228 
          Total revenues135,590 75,505 254,617 181,189 
Operating expenses:    
     Cost of goods sold35,248 22,305 66,597 52,037 
     Research and development12,573 13,620 28,453 29,440 
     Selling, general and administrative50,813 43,342 99,335 88,122 
     Amortization of acquired intangible assets1,967 1,967 3,933 3,933 
     Acquisition-related charges (gains), product
     discontinuation and other
146 1,418 2,019 (2,290)
          Total operating expenses100,747 82,652 200,337 171,242 
Income (loss) from operations34,843 (7,147)54,280 9,947 
Other (expense) income:    
     Interest income224 1,323 639 2,911 
     Interest expense(7,023)(5,456)(13,994)(11,477)
     Other, net(2,396)3,969 (2,554)(136)
          Total other expense, net(9,195)(164)(15,909)(8,702)
Income (loss) before income taxes25,648 (7,311)38,371 1,245 
     Income tax (expense) benefit(6,567)42 (8,921)(356)
Net income (loss)$19,081 $(7,269)$29,450 $889 
Net income (loss) per share:    
     Basic net income (loss) per common share$0.43 $(0.17)$0.67 $0.02 
     Diluted net income (loss) per common share$0.42 $(0.17)$0.64 $0.02 
Weighted average common shares outstanding:  
     Basic44,145 42,221 43,989 42,126 
     Diluted45,592 42,221 45,779 42,861 
 
See accompanying condensed notes to consolidated financial statements.
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PACIRA BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
 2021202020212020
Net income (loss)$19,081 $(7,269)$29,450 $889 
Other comprehensive income (loss):   
Net unrealized gain (loss) on investments, net of tax12 2,536 (138)1,168 
Foreign currency translation adjustments(3) 1  
Total other comprehensive income (loss)9 2,536 (137)1,168 
Comprehensive income (loss)$19,090 $(4,733)$29,313 $2,057 
 
See accompanying condensed notes to consolidated financial statements.
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PACIRA BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2021 AND 2020

(In thousands)
(Unaudited)

 Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
 
 SharesAmountTotal
Balance at March 31, 202143,958 $44 $894,108 $(243,506)$172 $650,818 
Exercise of stock options162 — 5,225 — — 5,225 
Vested restricted stock units286 — — — — — 
Shares issued under employee stock
purchase plan
31 — 1,574 — — 1,574 
Stock-based compensation— — 10,461 — — 10,461 
Other comprehensive income (Note 11)— — — — 9 9 
Net income— — — 19,081 — 19,081 
Balance at June 30, 202144,437 $44 $911,368 $(224,425)$181 $687,168 

 Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
 SharesAmountTotal
Balance at March 31, 202042,117 $42 $766,280 $(391,240)$(1,046)$374,036 
Exercise of stock options220 1 8,201 — — 8,202 
Vested restricted stock units234 — — — — — 
Shares issued under employee stock
purchase plan
37 — 1,421 — — 1,421 
Stock-based compensation— — 9,222 — — 9,222 
Other comprehensive income (Note 11)— — — — 2,536 2,536 
Net loss— — — (7,269)— (7,269)
Balance at June 30, 202042,608 $43 $785,124 $(398,509)$1,490 $388,148 

See accompanying condensed notes to consolidated financial statements.

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PACIRA BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(In thousands)
(Unaudited)

 Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
 
 SharesAmountTotal
Balance at December 31, 202043,637 $44 $873,201 $(253,875)$318 $619,688 
Exercise of stock options479 — 16,022 — — 16,022 
Vested restricted stock units290 — — — — — 
Shares issued under employee stock
purchase plan
31 — 1,574 — — 1,574 
Stock-based compensation— — 20,571 — — 20,571 
Other comprehensive loss (Note 11)— — — — (137)(137)
Net income— — — 29,450 — 29,450 
Balance at June 30, 202144,437 $44 $911,368 $(224,425)$181 $687,168 

Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
SharesAmountTotal
Balance at December 31, 201941,908 $42 $753,978 $(399,398)$322 $354,944 
Exercise of stock options427 1 11,655 — — 11,656 
Vested restricted stock units236 — — — — — 
Shares issued under employee stock
purchase plan
37 — 1,421 — — 1,421 
Stock-based compensation— — 18,070 — — 18,070 
Other comprehensive income (Note 11)— — — — 1,168 1,168 
Net income— — — 889 — 889 
Balance at June 30, 202042,608 $43 $785,124 $(398,509)$1,490 $388,148 

See accompanying condensed notes to consolidated financial statements.
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PACIRA BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
Six Months Ended
June 30,
 20212020
Operating activities:  
Net income$29,450 $889 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:  
     Deferred taxes 7,613  
     Depreciation of fixed assets and amortization of intangible assets9,748 9,810 
     Amortization of debt issuance costs1,310 883 
     Amortization of debt discount11,401 7,254 
     (Gain) loss on disposal and impairment of fixed assets(10)22 
     Stock-based compensation20,571 18,070 
     Changes in contingent consideration(988)(2,312)
     Loss (gain) on investment and other non-operating income, net2,601 (8)
Changes in operating assets and liabilities:  
     Accounts receivable, net(15,312)3,517 
     Inventories, net(615)(8,394)
     Prepaid expenses and other assets(944)(1,701)
     Accounts payable2,156 (3,517)
     Accrued expenses and income taxes payable(18,140)(21,468)
     Other liabilities(964)(3,052)
     Payment of contingent consideration to MyoScience, Inc. securityholders(5,662)(9,409)
          Net cash provided by (used in) operating activities42,215 (9,416)
Investing activities:  
     Purchases of fixed assets(23,624)(15,630)
     Purchases of available for sale investments(318,132)(72,263)
     Sales of available for sale investments294,288 95,450 
     Purchases of equity and debt investments(14,220) 
     Sale of equity investment9,057  
          Net cash (used in) provided by investing activities(52,631)7,557 
Financing activities:  
     Proceeds from exercises of stock options15,997 6,353 
     Proceeds from shares issued under employee stock purchase plan1,574 1,421 
     Payment of contingent consideration to MyoScience, Inc. securityholders(1,338)(5,591)
          Net cash provided by financing activities16,233 2,183 
Net increase in cash and cash equivalents5,817 324 
Cash and cash equivalents, beginning of period99,957 78,228 
Cash and cash equivalents, end of period$105,774 $78,552 
Supplemental cash flow information: 
     Cash paid for interest$3,586 $4,097 
     Cash paid for income taxes, net of refunds$1,447 $80 
Non-cash investing and financing activities:  
     Fixed assets included in accounts payable and accrued liabilities$8,096 $1,903 

See accompanying condensed notes to consolidated financial statements.


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PACIRA BIOSCIENCES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1—DESCRIPTION OF BUSINESS

Pacira BioSciences, Inc. and its subsidiaries (collectively, the “Company” or “Pacira”) is the industry leader in its commitment to non-opioid pain management and regenerative health solutions to improve patients’ journeys along the neural pain pathway. The Company’s long-acting, local analgesic, EXPAREL® (bupivacaine liposome injectable suspension), was commercially launched in the United States in April 2012 and approved by the European Commission in November 2020. EXPAREL utilizes DepoFoam®, a unique and proprietary delivery technology that encapsulates drugs without altering their molecular structure, and releases them over a desired period of time. In April 2019, the Company added iovera°® to its commercial offering with the acquisition of MyoScience, Inc., or MyoScience. The iovera° system is a handheld cryoanalgesia device used to deliver a precise, controlled application of cold temperature to only targeted nerves.

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

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

Novel Coronavirus (COVID-19) Pandemic
During 2020, the Company’s net product sales were negatively impacted by the global pandemic caused by a novel strain of coronavirus (COVID-19), which mandated significant postponement or suspension in the scheduling of elective surgical procedures resulting from public health guidance and government directives. Elective surgical restrictions began to lift on a state-by-state basis in April 2020, allowing net product sales to return to year-over-year growth in June 2020. However, while many restrictions have since eased as COVID-19 vaccines become more widely available and administered to the general public, the Company still does not know how long it will take the elective surgical market to normalize, or if restrictions on elective surgical procedures will recur due to COVID-19 variant strains or otherwise. The Company’s manufacturing sites are operational and have implemented new safety protocols and guidelines as recommended by federal, state and local governments. To date, there have been no material impacts to the Company’s supply chain. The situation remains dynamic and subject to rapid and possibly material changes. Additional negative impacts may also arise from the COVID-19 pandemic that the Company is unable to foresee. The nature and extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation and Principles of Consolidation
 
These interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (SEC), for interim reporting. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in complete annual financial statements have been condensed or omitted. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

The condensed consolidated financial statements at June 30, 2021, and for the three and six month periods ended June 30, 2021 and 2020, are unaudited, but include all adjustments (consisting of only normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial information set forth herein in accordance with GAAP. The condensed consolidated balance sheet at December 31, 2020 is derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The condensed consolidated
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financial statements as presented reflect certain reclassifications from previously issued financial statements to conform to the current year presentation. The accounts of wholly-owned subsidiaries are included in the condensed consolidated financial statements. Intercompany accounts and transactions have been eliminated in consolidation.

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

Concentration of Major Customers
 
    The Company sells EXPAREL through a drop-ship program under which orders are processed through wholesalers (including AmerisourceBergen Health Corporation, Cardinal Health, Inc. and McKesson Drug Company), but shipments of the product are sent directly to individual accounts, such as hospitals, ambulatory surgery centers and individual doctors. The Company also sells EXPAREL directly to ambulatory surgery centers and physicians. The Company sells its bupivacaine liposome injectable suspension for veterinary use to a third-party licensee and sells iovera° directly to end users. The table below includes the percentage of revenues comprised by the Company’s three largest wholesalers in each period presented:

Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
 Largest wholesaler31%32%31%31%
 Second largest wholesaler29%30%29%31%
 Third largest wholesaler26%24%26%25%
     Total86%86%86%87%

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which amended the approaches and methodologies in accounting for income taxes during interim periods and makes changes to certain income tax classifications. The new standard now allows for certain exceptions, including an exception to the use of the incremental approach for intra-period tax allocations, when there is a loss from continuing operations and income or a gain from other items, and to the general methodology for calculating income taxes in an interim period, when a year-to-date loss exceeds the anticipated loss for the year. The new standard also required franchise or similar taxes partially based on income to be reported as income tax and to reflect the effects of enacted changes in tax laws or rates in the annual effective tax rate computation from the date of enactment. Lastly, in any future acquisition, the Company would be required to evaluate when the step-up in the tax basis of goodwill is part of the business combination and when it should be considered a separate transaction. The standard became effective for the Company beginning January 1, 2021 and there were no material impacts to the consolidated financial statements upon adoption.
Recent Accounting Pronouncements Not Adopted as of June 30, 2021
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which limits the number of convertible instruments that require separate accounting to (i) those with embedded conversion features that are not clearly and closely related to the debt, that meet the definition of a derivative, and that do not qualify for the scope exception from derivative accounting and (ii) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The other separation models would be eliminated, including the model for convertible debt that can be settled in cash or shares. As a result these convertible debt instruments will be accounted for as a single liability instrument. In addition, the new guidance requires diluted earnings per share calculations to be prepared using the if-converted method, instead of the treasury stock method. The guidance must be applied in fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company plans to adopt the new guidance using a modified retrospective method of transition, which would be applied to transactions outstanding at the time of adoption. At June 30, 2021, the Company has recognized debt discounts of $72.7 million for its 0.750% convertible senior notes due 2025 and $5.7 million for its 2.375% convertible senior notes due 2022. Upon adoption on January 1, 2022, these debt discounts would be eliminated along with any related future amortization. Further deferred financing costs previously allocated to the conversion features will be re-allocated to the outstanding debt, slightly increasing future annual amortization of deferred financing costs. The Company is currently evaluating the impact from the adoption of ASU 2020-06 on its consolidated financial statements.
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NOTE 3—REVENUE

Revenue from Contracts with Customers

The Company’s sources of revenue include (i) sales of EXPAREL in the United States, or U.S.; (ii) sales of iovera° in the U.S.; (iii) sales of, and royalties on, its bupivacaine liposome injectable suspension for veterinary use in the U.S. and (iv) license fees and milestone payments. To date, there has been no revenue from sales of EXPAREL or iovera° in the European Union, or E.U. The Company does not consider revenue from sources other than sales of EXPAREL to be material to its consolidated revenue, which could change in the future. As such, the following disclosure only relates to revenue associated with net EXPAREL product sales.

Net Product Sales

The Company sells EXPAREL through a drop-ship program under which orders are processed through wholesalers based on orders of the product placed by end-users, namely hospitals, ambulatory surgery centers and healthcare provider offices. EXPAREL is delivered directly to the end-user without the wholesaler ever taking physical possession of the product. Product revenue is recognized when control of the promised goods are transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods. EXPAREL revenue is recorded at the time the product is delivered to the end-user.

Revenues from sales of products are recorded net of returns allowances, prompt payment discounts, wholesaler service fees, 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 and other related information that may become known in the future. The adequacy of these provisions is reviewed on a quarterly basis.

Accounts Receivable

The majority of accounts receivable arise from product sales and represent amounts due from wholesalers, hospitals, ambulatory surgery centers and doctors. Payment terms generally range from zero to 37 days from the date of the transaction, and accordingly, there is no significant financing component.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Accounting Standards Codification, or ASC, 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.
At contract inception, the Company assesses the goods promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a good that is distinct. When identifying individual performance obligations, the Company considers all goods promised in the contract regardless of whether explicitly stated in the customer contract or implied by customary business practices. The Company’s contracts with customers require it to transfer an individual distinct product, which represents a single performance obligation. The Company’s performance obligation with respect to its product sales is satisfied at a point in time, which transfers control upon delivery of EXPAREL to its customers. The Company considers control to have transferred upon delivery because the customer has legal title to the asset, physical possession of the asset has been transferred, the customer has significant risks and rewards of ownership of the asset, and the Company has a present right to payment at that time.

Disaggregated Revenue

The following table represents disaggregated net product sales in the periods presented as follows (in thousands):
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Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Net product sales:
   EXPAREL / bupivacaine liposome injectable suspension$131,050 $73,821 $246,520 $176,296 
   iovera°3,813 1,395 7,081 3,665 
      Total net product sales$134,863 $75,216 $253,601 $179,961 

NOTE 4—INVENTORIES
 
The components of inventories, net are as follows (in thousands):
June 30,December 31,
20212020
Raw materials$34,324 $26,886 
Work-in-process14,400 16,266 
Finished goods16,540 21,498 
     Total$65,264 $64,650 

NOTE 5—FIXED ASSETS

Fixed assets, net, summarized by major category, consist of the following (in thousands):
June 30,December 31,
20212020
Machinery and equipment$77,376 $74,966 
Leasehold improvements54,553 54,434 
Computer equipment and software12,470 12,170 
Office furniture and equipment2,477 2,387 
Construction in progress90,472 71,091 
        Total237,348 215,048 
Less: accumulated depreciation(84,046)(78,360)
        Fixed assets, net$153,302 $136,688 

For the three months ended June 30, 2021 and 2020, depreciation expense was $2.9 million and $3.0 million, respectively. For the three months ended June 30, 2021 and 2020, there was $1.1 million and $0.7 million of capitalized interest on the construction of manufacturing sites, respectively.

For the six months ended June 30, 2021 and 2020, depreciation expense was $5.8 million and $5.9 million, respectively. For the six months ended June 30, 2021 and 2020, there was $2.1 million and $0.8 million of capitalized interest on the construction of manufacturing sites, respectively.

At June 30, 2021 and December 31, 2020, total fixed assets, net includes leasehold improvements and manufacturing process equipment located in Europe in the amount of $68.6 million and $67.5 million, respectively.

As of both June 30, 2021 and December 31, 2020, the Company had asset retirement obligations of $2.0 million, which are included in accrued expenses and other liabilities on its condensed consolidated balance sheet, for costs associated with returning leased spaces to their original condition upon the termination of certain lease agreements.


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NOTE 6—LEASES

The Company leases all of its facilities, including its EXPAREL manufacturing facility in San Diego, California and its iovera° manufacturing facility in Fremont, California. These leases have remaining terms up to 9.2 years, some of which provide renewal options at the then-current market value. The Company also has an embedded lease with Thermo Fisher Scientific Pharma Services for the use of their manufacturing facility in Swindon, England. A portion of the associated monthly base fees have been allocated to the lease component based on a relative fair value basis.
The operating lease costs for the facilities include lease and non-lease components, such as common area maintenance and other common operating expenses, along with executory costs such as insurance and real estate taxes. Total operating lease costs are as follows (in thousands):

Three Months EndedSix Months Ended
June 30,June 30,
2021202020212020
   Fixed lease costs$2,922 $2,422 $5,843 $3,986 
   Variable lease costs424 601 902 1,049 
      Total$3,346 $3,023 $6,745 $5,035 

Supplemental cash flow information related to operating leases is as follows (in thousands):
Six Months Ended
June 30,
20212020
Cash paid for operating lease liabilities, net of lease incentive$7,177 $8,503 
Right-of-use assets recorded in exchange for lease obligations$ $42,101 

The Company has elected to net the amortization of the right-of-use asset and the reduction of the lease liability principal in other liabilities in the condensed consolidated statement of cash flows.
The Company has measured its operating lease liabilities at an estimated discount rate at which it could borrow on a collateralized basis over the remaining term for each operating lease. The weighted average remaining lease term and the weighted average discount rate are summarized as follows:
June 30,
20212020
Weighted average remaining lease term8.71 years9.55 years
Weighted average discount rate6.89 %6.88 %

Maturities of the Company’s operating lease liabilities are as follows (in thousands):
YearAggregate Minimum Payments Due
2021 (remaining six months)$5,350 
202210,423 
202310,697 
202410,980 
202511,271 
2026 and thereafter50,802 
   Total lease payments99,523 
   Less: imputed interest(25,644)
   Total operating lease liabilities$73,879 

The Company has entered into one lease agreement (not included in the table above) for which there are future obligations but the lease has not yet commenced as of June 30, 2021 (in thousands):
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YearAggregate Minimum Payments Due
2021 (remaining six months)$ 
2022439 
2023453 
2024466 
2025480 
2026495 
   Total future lease payments$2,333 

NOTE 7—GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company’s goodwill results from the acquisition of Pacira Pharmaceuticals, Inc. (the Company’s California operating subsidiary) from SkyePharma Holding, Inc. (now a subsidiary of Vectura Group plc) in March 2007 (the “Skyepharma Acquisition”), and the acquisition of MyoScience, Inc. (the “MyoScience Acquisition”) in April 2019.

There was no change in the carrying value of the Company’s goodwill during the three and six months ended June 30, 2021. The balance at both June 30, 2021 and December 31, 2020 was $99.5 million.

The Skyepharma Acquisition occurred in March 2007, prior to the requirements to record contingent consideration at fair value under ASC 805-30. In connection with the Skyepharma Acquisition, the Company agreed to certain milestone payments for DepoBupivacaine products, including EXPAREL. As of June 30, 2021, the remaining milestone payments include: $4.0 million upon the first commercial sale in the United Kingdom, France, Germany, Italy or Spain; and $32.0 million when annual net sales collected reach $500.0 million (measured on a rolling quarterly basis). Any remaining milestone payments will be treated as additional costs of the Skyepharma Acquisition and, therefore, recorded as goodwill if and when each contingency is resolved.

In connection with the MyoScience Acquisition, the Company recorded goodwill totaling $37.5 million. The Company made a tax election that allows the acquired goodwill and intangible assets associated with the MyoScience Acquisition to be tax deductible.

Intangible Assets

Intangible assets, net, consist of the developed technology and customer relationships that were acquired in the MyoScience Acquisition and are summarized as follows (in thousands):
Estimated
Useful Life
June 30,December 31,
20212020
Developed technology14 years$110,000 $110,000 
Customer relationships10 years90 90 
     Total intangible assets110,090 110,090 
Less: accumulated amortization(17,502)(13,569)
     Intangible assets, net$92,588 $96,521 

Amortization expense on intangible assets was consistent for the three and six months periods ended June 30, 2021 and 2020. Amortization expense was $2.0 million and $3.9 million for the three and six month periods, respectively.

Assuming no changes in the gross carrying amount of these intangible assets, amortization expense will be $3.9 million for the remaining six months of 2021, $7.9 million annually through 2032 and $2.2 million in 2033.


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NOTE 8—DEBT

Convertible Senior Notes Due 2025

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

The total debt composition of the 2025 Notes is as follows (in thousands):
June 30,December 31,
20212020
0.750% convertible senior notes due 2025
$402,500 $402,500 
Deferred financing costs(8,058)(8,940)
Discount on debt(72,734)(80,530)
     Total debt, net of debt discount and deferred financing costs$321,708 $313,030 

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

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

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

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

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

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

During the quarter ended June 30, 2021, none of these conditions for conversion were met.

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

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

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As of June 30, 2021, the 2025 Notes had a market price of $1,100 per $1,000 principal amount. In the event of conversion, holders would forgo all future interest payments, any unpaid accrued interest and the possibility of further stock price appreciation. Upon the receipt of conversion requests, the settlement of the 2025 Notes will be paid pursuant to the terms of the 2025 Indenture. In the event that all of the 2025 Notes are converted, the Company would be required to repay the $402.5 million in principal value and any conversion premium in any combination of cash and shares of its common stock (at the Company’s option).

Prior to August 1, 2023, the Company may not redeem the 2025 Notes. On or after August 1, 2023 (but, in the case of a redemption of less than all of the outstanding 2025 Notes, no later than the 40th scheduled trading day immediately before the maturity date), the Company may redeem for cash all or part of the 2025 Notes if the last reported sale price (as defined in the 2025 Indenture) of the Company’s common stock has been at least 130% of the conversion price then in effect for (i) each of at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related notice of redemption and (ii) the trading day immediately before the date the Company sends such notice. The redemption price will equal the sum of (i) 100% of the principal amount of the 2025 Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date. In addition, calling the 2025 Notes for redemption will constitute a “make-whole fundamental change” (as defined in the 2025 Indenture) and will, in certain circumstances, increase the conversion rate applicable to the conversion of such notes if it is converted in connection with the redemption. No sinking fund is provided for the 2025 Notes.

If the Company undergoes a fundamental change, as defined in the 2025 Indenture, subject to certain conditions, holders of the 2025 Notes may require the Company to repurchase for cash all or part of their 2025 Notes at a repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if a “make-whole fundamental change” (as defined in the 2025 Indenture) occurs prior to August 1, 2025, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its notes in connection with the make-whole fundamental change.

The 2025 Notes are the Company’s general unsecured obligations that rank senior in right of payment to all of its indebtedness that is expressly subordinated in right of payment to the 2025 Notes, and equal in right of payment to the Company’s unsecured indebtedness. The 2025 Notes are also effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness, and are structurally subordinated to any debt or other liabilities (including trade payables) of the Company’s subsidiaries.

While the 2025 Notes are currently classified on the Company’s consolidated balance sheet at June 30, 2021 as long-term debt, the future convertibility and resulting balance sheet classification of this liability is monitored at each quarterly reporting date and is analyzed dependent upon market prices of the Company’s common stock during the prescribed measurement periods. In the event that the holders of the 2025 Notes have the election to convert the 2025 Notes at any time during the prescribed measurement period, the 2025 Notes would then be considered a current obligation and classified as such.

Under ASC 470-20, Debt with Conversion and Other Options, an entity must separately account for the liability and equity components of convertible debt instruments (such as the 2025 Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The liability component of the instrument is valued in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. The initial carrying value of the liability component of $314.7 million was calculated using a 5.78% assumed borrowing rate. The equity component of $87.8 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2025 Notes and is recorded in additional paid-in capital on the consolidated balance sheet at the issuance date. The equity component is treated as a discount on the liability component of the 2025 Notes, which is amortized over the five-year term of the 2025 Notes using the effective interest rate method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. A deferred tax liability was recognized in the amount of $20.5 million, with the offsetting amount recorded in additional paid-in capital.

The Company allocated the total transaction costs of approximately $12.5 million related to the issuance of the 2025 Notes to the liability and equity components of the 2025 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the five-year term of the 2025 Notes, and transaction costs attributable to the equity component totaling $2.7 million are netted with the equity component in stockholders’ equity.

The 2025 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company. The 2025 Indenture contains customary events of default with respect to the 2025 Notes, including that upon certain events of default, 100% of the principal and accrued and unpaid interest on the 2025 Notes will automatically become due and payable.
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Convertible Senior Notes Due 2022

In March 2017, the Company completed a private placement of $345.0 million in aggregate principal amount of 2.375% convertible senior notes due 2022, or 2022 Notes, and entered into an indenture, or 2022 Indenture, with respect to the 2022 Notes. The 2022 Notes accrue interest at a fixed rate of 2.375% per year, payable semiannually in arrears on April 1st and October 1st of each year. The 2022 Notes mature on April 1, 2022. As discussed above, in July 2020, the Company used part of the net proceeds from the issuance of the 2025 Notes to repurchase $185.0 million aggregate principal amount of the 2022 Notes in privately-negotiated transactions for an aggregate of $211.1 million in cash (including accrued interest). The partial repurchase of the 2022 Notes resulted in an $8.1 million loss on early extinguishment of debt.

The total debt composition of the 2022 Notes is as follows (in thousands):
June 30,December 31,
20212020
2.375% convertible senior notes due 2022
$160,000 $160,000 
Deferred financing costs(661)(1,089)
Discount on debt(5,658)(9,263)
     Total debt, net of debt discount and deferred financing costs$153,681 $149,648 

Holders may convert their 2022 Notes prior to October 1, 2021 only if certain circumstances are met, including if during the previous calendar quarter, the last reported sales price of the Company’s common stock was greater than or equal to 130% of the conversion price then applicable for at least 20 out of the last 30 consecutive trading days of the quarter. During the quarter ended June 30, 2021, this condition for conversion was not met.

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

Upon conversion, holders will receive the principal amount of their 2022 Notes and any excess conversion value, calculated based on the per share volume-weighted average price for each of the 40 consecutive trading days during the observation period (as more fully described in the 2022 Indenture). For both the principal and excess conversion value, holders may receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s option. The initial conversion rate for the 2022 Notes is 14.9491 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of $66.89 per share of the Company’s common stock. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. The initial conversion price of the 2022 Notes represents a premium of approximately 37.5% to the closing sale price of $48.65 per share of the Company’s common stock on the Nasdaq Global Select Market on March 7, 2017, the date that the Company priced the private offering of the 2022 Notes.

As of June 30, 2021, the 2022 Notes had a market price of $1,099 per $1,000 principal amount. In the event of conversion, holders would forgo all future interest payments, any unpaid accrued interest and the possibility of stock price appreciation. Upon the receipt of conversion requests, the settlement of the 2022 Notes will be paid pursuant to the terms of the 2022 Indenture. In the event that all of the 2022 Notes are settled, the Company would be required to repay the remaining $160.0 million in principal value and any conversion premium in any combination of cash and shares of its common stock (at the Company’s option).

As of April 1, 2020, the Company may redeem for cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s option, all or part of the 2022 Notes if the last reported sale price (as defined in the 2022 Indenture) of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption. This condition was not met during the quarter ended June 30, 2021. The redemption price will equal the sum of (i) 100% of the principal amount of the 2022 Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date. In addition, calling the 2022 Notes for redemption will constitute a “make-whole fundamental change” (as defined in the 2022 Indenture) and will, in certain circumstances, increase the conversion rate applicable to the conversion of such notes if it is converted in connection with the redemption. No sinking fund is provided for the 2022 Notes.
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Interest Expense

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

Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Contractual interest expense$1,713 $2,048 $3,418 $4,097 
Amortization of debt issuance costs659 444 1,310 883 
Amortization of debt discount5,744 3,660 11,401 7,254 
Capitalized interest and other (Note 5)(1,093)(696)(2,135)(757)
        Total$7,023 $5,456 $13,994 $11,477 
Effective interest rate on convertible senior notes6.70 %7.81 %6.70 %7.81 %

ASU 2020-06 will require the Company to eliminate debt discounts along with any related future amortization. Further deferred financing costs previously allocated to the conversion features will be re-allocated to the outstanding debt, slightly increasing future annual amortization of deferred financing costs. This new accounting pronouncement has not been adopted as of June 30, 2021. For additional information regarding ASU 2020-06, see Note 2, Summary of Significant Accounting Policies.

NOTE 9—FINANCIAL INSTRUMENTS
 
Fair Value Measurements
 
Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in the principal or most advantageous market in an orderly transaction. To increase consistency and comparability in fair value measurements, the FASB established a three-level hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of fair value measurements are:
 
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

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

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

The carrying value of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these items. The fair value of the Company’s equity investment with a readily determinable fair value was calculated utilizing market quotations from a major American stock exchange (Level 1). The fair value of the Company’s convertible senior notes are calculated utilizing market quotations from an over-the-counter trading market for these notes (Level 2). The fair value of the Company’s acquisition-related contingent consideration is reported at fair value on a recurring basis (Level 3). The carrying amount of the investments without a readily determinable fair value have not been adjusted for either an impairment or upward or downward adjustments based on observable transactions. Certain assets and liabilities are measured at fair value on a non-recurring basis, including assets and liabilities acquired in a business combination, equity instruments measured at cost and long-lived assets, which would be recognized at fair value if deemed impaired or if reclassified as assets held for sale. The fair value in these instances would be determined using Level 3 inputs.

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At June 30, 2021, the carrying values and fair values of the following financial assets and liabilities were as follows (in thousands):
Carrying ValueFair Value Measurements Using
Level 1Level 2Level 3
Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis: