Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the Quarterly Period Ended September 30, 2012

 

Commission File Number: 001-35060

 


 

PACIRA PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware

 

51-0619477

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
 Identification No.)

 

5 Sylvan Way, Suite 100

Parsippany, New Jersey 07054

(Address of Principal Executive Offices) (Zip Code)

 

(973) 254-3560

(Registrant’s Telephone Number, Including Area Code)

 


 

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. x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files.) x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

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

 

As of October 25, 2012, 32,553,672 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

 

 

 



Table of Contents

 

PACIRA PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

 

 

Page

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets

1

 

Consolidated Statements of Operations

2

 

Consolidated Statements of Comprehensive Loss

3

 

Consolidated Statement of Stockholders’ Equity

4

 

Consolidated Statements of Cash Flows

5

 

Condensed Notes to Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

 

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3.

Defaults upon Senior Securities

29

Item 4.

Mine Safety Disclosures

29

Item 5.

Other Information

29

Item 6.

Exhibits

30

Signatures

 

31

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

PACIRA PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

(Note 2)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

8,709

 

$

46,168

 

Restricted cash

 

1,791

 

1,299

 

Short-term investments

 

58,240

 

29,985

 

Accounts receivable, net of allowances

 

2,459

 

2,113

 

Inventories

 

11,906

 

1,245

 

Prepaid expenses and other current assets

 

2,024

 

1,839

 

Total current assets

 

85,129

 

82,649

 

Fixed assets, net

 

35,319

 

25,103

 

Goodwill

 

8,109

 

 

Intangibles, net

 

3,721

 

5,259

 

Other assets

 

548

 

479

 

Total assets

 

$

132,826

 

$

113,490

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

4,789

 

$

3,440

 

Accrued expenses

 

13,036

 

7,159

 

Current portion of royalty interest obligation

 

837

 

1,219

 

Current portion of deferred revenue

 

1,166

 

13,054

 

Current portion of long-term debt

 

 

7,039

 

Total current liabilities

 

19,828

 

31,911

 

Long-term debt

 

24,930

 

18,537

 

Royalty interest obligation

 

881

 

1,537

 

Deferred revenue

 

4,343

 

8,416

 

Contingent purchase liability

 

 

2,042

 

Other liabilities

 

2,399

 

2,778

 

Total liabilities

 

52,381

 

65,221

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $0.001; 5,000,000 shares authorized, none issued and outstanding

 

 

 

Common stock, par value $0.001 par value; 250,000,000 shares authorized, 32,483,878 shares issued and 32,482,813 shares outstanding at September 30, 2012; 25,340,103 shares issued and 25,339,038 shares outstanding at December 31, 2011

 

32

 

25

 

Additional paid-in capital

 

296,525

 

228,470

 

Accumulated deficit

 

(216,174

)

(180,239

)

Accumulated other comprehensive income

 

64

 

15

 

Treasury stock at cost, 1,065 shares

 

(2

)

(2

)

Total stockholders’ equity

 

80,445

 

48,269

 

Total liabilities and stockholders’ equity

 

$

132,826

 

$

113,490

 

 

See accompanying condensed notes to consolidated financial statements.

 

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PACIRA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

4,550

 

$

1,682

 

$

9,978

 

$

4,868

 

Collaborative licensing and development revenue

 

3,484

 

1,352

 

16,574

 

3,845

 

Royalty revenue

 

452

 

922

 

2,082

 

2,743

 

Total revenues

 

8,486

 

3,956

 

28,634

 

11,456

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

9,287

 

3,357

 

22,467

 

10,138

 

Research and development

 

3,527

 

4,360

 

6,693

 

12,742

 

Selling, general and administrative

 

11,378

 

4,972

 

32,943

 

12,960

 

Total operating expenses

 

24,192

 

12,689

 

62,103

 

35,840

 

Loss from operations

 

(15,706

)

(8,733

)

(33,469

)

(24,384

)

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest income

 

87

 

46

 

218

 

111

 

Interest expense

 

(456

)

(910

)

(1,464

)

(4,068

)

Loss on early extinguishment of debt

 

 

 

(1,062

)

 

Royalty interest obligation

 

378

 

116

 

(47

)

235

 

Other, net

 

(48

)

(27

)

(111

)

61

 

Total other expense, net

 

(39

)

(775

)

(2,466

)

(3,661

)

Net loss

 

$

(15,745

)

$

(9,508

)

$

(35,935

)

$

(28,045

)

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.49

)

$

(0.55

)

$

(1.21

)

$

(1.89

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

32,436,207

 

17,230,826

 

29,585,716

 

14,826,054

 

 

See accompanying condensed notes to consolidated financial statements.

 

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PACIRA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss

 

$

(15,745

)

$

(9,508

)

$

(35,935

)

$

(28,045

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on investments

 

(34

)

(5

)

49

 

(5

)

Total other comprehensive (loss) income

 

(34

)

(5

)

49

 

(5

)

Comprehensive loss

 

$

(15,779

)

$

(9,513

)

$

(35,886

)

$

(28,050

)

 

See accompanying condensed notes to consolidated financial statements.

 

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PACIRA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2012

(Unaudited)

(In thousands)

 

 

 

Common Stock

 

Additional
Paid-In

 

Accumulated

 

Treasury

 

Accumulated
Other
Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Stock

 

Income

 

Total

 

Balances at December 31, 2011

 

25,339

 

$

25

 

$

228,470

 

$

(180,239

)

$

(2

)

$

15

 

$

48,269

 

Exercise of stock options

 

207

 

 

533

 

 

 

 

533

 

Exercise of warrants

 

37

 

 

100

 

 

 

 

100

 

Stock-based compensation

 

 

 

3,220

 

 

 

 

3,220

 

Unrealized gain on short-term investments

 

 

 

 

 

 

49

 

49

 

Follow-on offering, net of issuance costs

 

6,900

 

7

 

62,848

 

 

 

 

62,855

 

Debt discount on issuance of warrants

 

 

 

1,354

 

 

 

 

1,354

 

Net loss

 

 

 

 

(35,935

)

 

 

(35,935

)

Balances at September 30, 2012

 

32,483

 

$

32

 

$

296,525

 

$

(216,174

)

$

(2

)

$

64

 

$

80,445

 

 

See accompanying condensed notes to consolidated financial statements.

 

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PACIRA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

Operating activities:

 

 

 

 

 

Net loss

 

$

(35,935

)

$

(28,045

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,202

 

3,030

 

Amortization of unfavorable lease obligation and deferred financing costs

 

(178

)

(29

)

Amortization of end of term fee and warrants

 

571

 

1,540

 

Loss on disposal of fixed assets

 

 

3

 

Loss on extinguishment of debt

 

1,062

 

 

Stock-based compensation

 

3,220

 

1,965

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

(492

)

(373

)

Accounts receivable, net of allowances

 

(346

)

(305

)

Inventories

 

(10,661

)

(62

)

Prepaid expenses and other assets

 

(161

)

(908

)

Accounts payable and accrued expenses

 

6,849

 

697

 

Royalty interest obligation

 

(1,038

)

(1,435

)

Other liabilities

 

(83

)

722

 

Deferred revenue

 

(15,961

)

(204

)

Net cash used in operating activities

 

(48,951

)

(23,404

)

Investing activities:

 

 

 

 

 

Purchase of fixed assets

 

(13,525

)

(3,684

)

Proceeds from sales of fixed assets

 

1

 

 

Net purchases of short-term investments

 

(28,206

)

(20,671

)

Payment of contingent consideration

 

(10,151

)

 

Net cash used in investing activities

 

(51,881

)

(24,355

)

Financing activities:

 

 

 

 

 

Proceeds from exercise of stock options and warrants

 

633

 

12

 

Proceeds from borrowings on long-term debt

 

27,500

 

 

Proceeds from offering, net

 

62,855

 

38,016

 

Repayment of debt

 

(26,250

)

 

Payment of debt issuance and financing costs

 

(1,365

)

 

Net cash provided by financing activities

 

63,373

 

38,028

 

Net decrease in cash and cash equivalents

 

(37,459

)

(9,731

)

Cash and cash equivalents, beginning of period

 

46,168

 

26,133

 

Cash and cash equivalents, end of period

 

$

8,709

 

$

16,402

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Cash paid for interest, including royalty interest obligation

 

$

3,290

 

$

3,573

 

Initial public offering costs paid in 2010

 

 

907

 

Non cash investing and financing activities:

 

 

 

 

 

Conversion of notes to common stock

 

 

51,222

 

Conversion of preferred stock to common stock

 

 

6

 

Value of warrants issued with debt

 

1,354

 

 

 

See accompanying condensed notes to consolidated financial statements.

 

5



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PACIRA PHARMACEUTICALS, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

Note 1—DESCRIPTION OF BUSINESS

 

Pacira Pharmaceuticals, Inc. and its subsidiaries (collectively, the “Company” or “Pacira”) is an emerging specialty pharmaceutical company focused on the development, commercialization and manufacture of proprietary pharmaceutical products, based on its proprietary DepoFoam extended release drug delivery technology, for use in hospitals and ambulatory surgery centers. The Company’s lead product EXPAREL®, which consists of bupivacaine encapsulated in DepoFoam, was approved by the United States Food and Drug Administration, or FDA, on October 28, 2011. The Company commercially launched EXPAREL in April 2012. DepoFoam is also the basis for the Company’s other FDA-approved commercial product, DepoCyt(e), which the Company manufactures for its commercial partners.

 

Pacira Pharmaceuticals, Inc. is the holding company for the California operating subsidiary of the same name, also referred to as PPI-California, which was acquired from Skyepharma Holding, Inc., or Skyepharma, in March 2007, referred to herein as the Acquisition.

 

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission, or 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 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, 2011, filed with the SEC on March 27, 2012.

 

The consolidated financial statements at September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011, 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 balance sheet as of December 31, 2011, has been derived from the audited financial statements included in the Form 10-K for that year. Certain reclassifications were made to conform to the current presentation. Specifically, for the three and nine months ended September 30, 2011, the Company reclassified less than $0.1 million and $0.5 million, respectively, of stock-based compensation expense from selling, general and administrative expense to research and development expense. This reclassification had no impact on net loss or stockholders’ equity as previously reported. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

 

The results of operations for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. The Company has incurred losses and negative operating cash flow since inception and future losses are anticipated.

 

Liquidity

 

In April 2012, the Company sold 6,900,000 shares of common stock at a price of $9.75 per share in a registered public offering, which includes the underwriter’s exercise of the overallotment option. The Company raised approximately $62.9 million in net proceeds after deducting underwriting discounts and offering expenses.

 

Management believes that the Company’s existing cash and cash equivalents, short-term investments and revenue from product sales will be sufficient to enable the Company to meet its planned operating expenses, capital expenditure requirements and service its indebtedness through September 30, 2013. However, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control. The Company expects to continue to incur substantial additional operating losses as it commercializes EXPAREL and develops and seeks regulatory approval for its product candidates.

 

Revenue Recognition

 

The Company sells EXPAREL mostly to wholesalers based on orders of the product from hospitals and other end user customers such as ambulatory surgery centers and doctors. The Company recognizes revenue when there is persuasive evidence that an arrangement exists, title has passed, collection is reasonably assured and the price is fixed or determinable. Sales to wholesalers

 

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provide for selling prices that are fixed on the date of sale. EXPAREL is delivered directly to the end user with the wholesaler never taking physical possession of the product. The Company records revenue at the time the product is delivered to the end user.

 

At the time the Company recognizes revenue, it also records certain sales reserves and allowances as a reduction of revenue. These reserves and allowances include a prompt payment reserve, return reserves, volume rebates, chargeback reserve and wholesaler service fee. Due to estimates and assumptions inherent in determining some of the sales reserves, the actual amount of volume rebates, chargebacks and returns may be different from estimates, at which time the Company would adjust the reserves accordingly.

 

Prompt pay reserve

 

The prompt payment reserve is based upon discounts offered to wholesalers as an incentive to meet certain payment terms. The Company accounts for these discounts at the time the sale is made and reduces accounts receivable accordingly.

 

Returns reserve

 

The Company allows customers to return product that is damaged or received in error. In addition, the Company allows for product to be returned beginning six months prior to, and twelve months following product expiration. As EXPAREL is a new commercially available product, the Company is estimating its sales return reserve based on return history from other hospital-based products with similar distribution models, which management believes is the best estimate of the anticipated product to be returned. The returns reserve is recorded at the time of sale as a reduction to sales and an increase in returns liability.

 

Volume rebates and chargeback reserve

 

Volume rebates and chargeback reserve are based upon contracted discounts and promotional offers the Company provides to certain end users, including hospitals and ambulatory surgery centers such as members of group purchasing organizations. The volume rebates and chargeback reserve are recorded as a reduction to sales and a customer payable and reduction to receivables, respectively.

 

Wholesaler service fee

 

The Company’s customers include major and regional wholesalers with whom the Company has contracted a fee for service based on a percentage of sales. This fee for service is recorded as a reduction to gross sales and a liability is established at the time the sale is recorded based on the contracted percentage.

 

Allowance for doubtful accounts

 

The Company evaluates accounts receivable to determine if a provision for an allowance for doubtful accounts is appropriate. The Company’s sales to date are primarily to established customers. As of September 30, 2012, the accounts receivable was considered collectible and no allowance for doubtful accounts was recorded.

 

Concentration of Major Customers

 

The Company’s customers are its major and regional wholesalers and commercial, distribution and licensing partners. The Company is dependent on its commercial partners to market and sell DepoCyt(e). The table below includes the percentage of revenue comprised by the three largest customers in each year presented.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Largest customer

 

38

%

48

%

41

%

45

%

Second largest customer

 

22

%

21

%

14

%

20

%

Third largest customer

 

14

%

17

%

10

%

19

%

 

 

74

%

86

%

65

%

84

%

 

No other individual customer accounted for more than 10% of the Company’s revenues for these periods.

 

On January 3, 2012, EKR Therapeutics, Inc., or EKR, delivered a notice to the Company to terminate the licensing, distribution and marketing agreement relating to DepoDur. Pursuant to the terms of the agreement, the termination of the agreement was effective 180 days from the date of the notice, or July 1, 2012. The associated supply agreement also terminated concurrently with the termination of the licensing, distribution and marketing agreement. Both parties agreed to terminate the agreements effective June 8, 2012. As a result of the termination, the Company recognized any unamortized deferred revenue relating to the agreement on a straight-line basis through the termination date in June 2012. During the nine months ended September 30, 2012, the Company recognized $11.6 million of milestone revenue relating to the EKR agreements in collaborative licensing and development revenue on the consolidated statements of operations.

 

On June 29, 2012, the Company received a notice of termination from Novo Nordisk AS, or Novo, of the Development and License Agreement, dated January 14, 2011.  Pursuant to the terms of the agreement, the termination of the agreement was effective

 

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60 days from the date of the notice, or August 28, 2012. Under the agreement, the Company granted exclusive rights to Novo under certain of the Company’s patents and know-how to develop, manufacture and commercialize formulations of a Novo proprietary drug using the Company’s DepoFoam drug delivery technology. The agreement was terminated due to Novo’s decision to discontinue development of the proprietary drug subject to the agreement. As a result of the termination, the Company recognized any unamortized deferred revenue relating to the agreement on a straight-line basis through the termination date in August 2012. During the three and nine months ended September 30, 2012, the Company recognized $3.2 million and $4.1 million, respectively, of revenue relating to the Novo Nordisk agreement in collaborative licensing and development revenue on the consolidated statements of operations.

 

Note 3— FINANCIAL INSTRUMENTS

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or 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 Financial Accounting Standards Board, or 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 are:

 

·            Level 1—Values are unadjusted quoted prices for identical assets and liabilities in active markets.

 

·            Level 2—Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument.

 

·            Level 3—Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement.

 

The carrying value of financial instruments including cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term maturities of these instruments and debts. The fair value of the Company’s long-term debt is calculated using a discounted cash flow analysis factoring in current market borrowing rates for similar types of borrowing arrangements under a similar credit profile. The carrying amount and fair value of the Company’s long-term debt is as follows (in thousands):

 

 

 

Carrying

 

Fair Value Measurements Using

 

Financial Liabilities

 

Value

 

Level 1

 

Level 2

 

Level 3

 

September 30, 2012

 

 

 

 

 

 

 

 

 

Long-term debt- current and long-term *

 

$

27,500

 

$

 

$

27,500

 

$

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Long-term debt- current and long-term

 

$

26,250

 

$

 

$

27,929

 

$

 

 


*The carrying value of the long-term debt at September 30, 2012 approximates its fair value since the interest rate approximates the current market rate for similar instruments.

 

Short-term investments consist of investment grade commercial paper, asset-backed securities collateralized by credit card receivables, and corporate bonds with initial maturities of greater than three months at the date of purchase but less than one year. The net unrealized gains (losses) from the Company’s short-term investments are captured in other comprehensive gain (loss). All of the Company’s short-term investments are classified as available for sale investments and determined to be Level 2 instruments. The fair value of the commercial paper is measured based on a standard industry model that uses the 3-month Treasury bill rate as an observable input. The fair value of the corporate bonds and asset-backed securities is principally measured or corroborated by trade data for identical issues or that of comparable securities in which related trading activity is not sufficiently frequent to be considered a Level 1 input. At September 30, 2012, the Company had $58.2 million invested in short-term investments which were rated A or better by Standard & Poor’s and had maturities ranging from 162 to 356 days from date of purchase.

 

The following summarizes the Company’s short-term investments at September 30, 2012, and December 31, 2011 (in thousands):

 

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Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair Value

 

September 30, 2012

 

Cost

 

Gains

 

Losses

 

(Level 2)

 

Debt securities:

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

33,338

 

$

52

 

$

 

$

33,390

 

Corporate Bonds

 

18,727

 

5

 

(2

)

18,730

 

Asset-backed Securities

 

6,111

 

9

 

 

6,120

 

Total

 

$

58,176

 

$

66

 

$

(2

)

$

58,240

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair Value

 

December 31, 2011

 

Cost

 

Gains

 

Losses

 

(Level 2)

 

Debt securities:

 

 

 

 

 

 

 

 

 

US Treasury Securities

 

$

1,000

 

$

 

$

 

$

1,000

 

Commercial Paper

 

11,476

 

23

 

 

11,499

 

Corporate Bonds

 

17,494

 

2

 

(10

)

17,486

 

Total

 

$

29,970

 

$

25

 

$

(10

)

$

29,985

 

 

Credit Risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed Federal insured limits.

 

As of September 30, 2012, four customers accounted for 35%, 20%, 15%, and 14% of the Company’s accounts receivable. As of December 31, 2011, two customers accounted for 56% and 41% of the Company’s accounts receivable. No other individual customer accounted for more than 10% of the Company’s accounts receivable for these periods.

 

Note 4— INVENTORIES

 

The components of inventories were as follows (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Raw materials

 

$

4,486

 

$

862

 

Work-in-process

 

1,032

 

96

 

Finished goods

 

6,388

 

287

 

Total

 

$

11,906

 

$

1,245

 

 

As of September 30, 2012 and December 31, 2011, the Company had a reserve of inventory of $0.4 million and $0.2 million, respectively. Included in the inventory reserve at September 30, 2012 is $0.3 million of DepoCyte finished inventory related to the amount of excess product that may not be marketable under the remediation plan committed to the Medicines and Healthcare products Regulatory Agency, or MHRA. See Note 11, Commitments and Contingencies, for further discussion.

 

Note 5—FIXED ASSETS

 

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

 

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September 30,

 

December 31,

 

 

 

2012

 

2011

 

Machinery and laboratory equipment

 

$

12,535

 

$

12,188

 

Computer equipment and software

 

1,513

 

1,133

 

Office furniture and equipment

 

431

 

352

 

Leasehold improvements

 

6,217

 

6,056

 

Construction in progress

 

25,669

 

13,656

 

Total

 

46,365

 

33,385

 

Less accumulated depreciation

 

(11,046

)

(8,282

)

Fixed assets, net

 

$

35,319

 

$

25,103

 

 

Depreciation expense was $0.9 million and $0.5 million for the three months ended September 30, 2012 and 2011, respectively. Depreciation expense was $2.7 million and $1.3 million for the nine months ended September 30, 2012 and 2011, respectively. For the three and nine months ended September 30, 2012, the Company capitalized interest of $0.5 million and $1.4 million, respectively, on the construction of its manufacturing sites. Capitalized interest was $0.2 million and $0.5 million for the three and nine months ended September 30, 2011, respectively.

 

Note 6—GOODWILL AND INTANGIBLE ASSETS

 

The Company applies Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other Intangible Assets, to record goodwill and intangible assets.  In accordance with ASC 350, certain intangible assets are to be assessed periodically for impairment using fair value measurement techniques. Goodwill is tested for impairment on an annual basis as of the end of the Company’s fiscal year, or more frequently when impairment indicators arise. The Company evaluates the recoverability of intangible assets periodically and takes into account events and circumstances which indicate that impairment exists.

 

The Company’s goodwill as of September 30, 2012 and December 31, 2011 was $8.1 million and $0.0, respectively. Goodwill arose from the triggering in April 2012 of a contingent milestone payment to Skyepharma in connection with the Acquisition. The Acquisition was accounted for under Statement of Financial Accounting Standards 141, Accounting for Business Combinations, which was the effective GAAP at the Acquisition date. In connection with the Acquisition, the Company agreed to certain earn-out payments based on a percentage of net sales of EXPAREL collected and certain other yet-to-be-developed products, as well as milestone payments for EXPAREL as follows:

 

(a)          $10.0 million upon first commercial sale in the United States;

(b)         $4.0 million upon first commercial sale in a major EU country (United Kingdom, France, Germany, Italy and Spain);

(c)          $8.0 million when annual net sales collected reach $100.0 million;

(d)         $8.0 million when annual net sales collected reach $250.0 million; and

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

 

The Company’s contingent purchase liability as of September 30, 2012 and December 31, 2011 was $0.0 and $2.0 million, respectively. The first contingency was resolved in April 2012, resulting in a $10.0 million payment to Skyepharma. The Company recorded this payment net of the $2.0 million contingent consideration liability recognized at the time of the Acquisition resulting in $8.0 million recorded as goodwill. Additionally, as of September 30, 2012, the Company also recorded $0.2 million as goodwill for the percentage payments on net sales of EXPAREL collected. Any remaining earn-out payments will also be treated as additional cost of the Acquisition and, therefore, recorded as goodwill if and when each contingency is resolved.

 

Intangible assets are summarized as follows (in thousands):

 

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September 30,

 

December 31,

 

 

 

 

 

2012

 

2011

 

Estimated Useful Life

 

Core Technology:

 

 

 

 

 

 

 

Gross amount

 

$

2,900

 

$

2,900

 

9 years

 

Accumulated amortization

 

(1,772

)

(1,530

)

 

 

Net

 

1,128

 

1,370

 

 

 

Developed Technology:

 

 

 

 

 

 

 

Gross amount

 

11,700

 

11,700

 

7 years

 

Accumulated amortization

 

(9,193

)

(7,939

)

 

 

Net

 

2,507

 

3,761

 

 

 

Trademarks and trade names:

 

 

 

 

 

 

 

Gross amount

 

400

 

400

 

7 years

 

Accumulated amortization

 

(314

)

(272

)

 

 

Net

 

86

 

128

 

 

 

Intangible assets, net

 

$

3,721

 

$

5,259

 

 

 

 

Amortization expense for intangibles was $0.5 million and $0.6 million for the three months ended September 30, 2012 and 2011, respectively. Amortization expense for intangibles was $1.5 million and $1.7 million for the nine months ended September 30, 2012 and 2011, respectively.

 

The approximate amortization expense for intangibles, all of which are subject to amortization on a straight-line basis, is as follows (in thousands):

 

 

 

Core

 

Developed

 

Trademarks
and

 

 

 

 

 

Technology

 

Technology

 

Tradenames

 

Total

 

2012 (remaining three months)

 

$

80

 

$

418

 

$

16

 

$

514

 

2013

 

322

 

1,671

 

57

 

2,050

 

2014

 

322

 

418

 

13

 

753

 

2015

 

322

 

 

 

322

 

2016

 

82

 

 

 

82

 

Total

 

$

1,128

 

$

2,507

 

$

86

 

$

3,721

 

 

Note 7—DEBT AND FINANCING OBLIGATIONS

 

The composition of the Company’s debt and financing obligations is as follows (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Debt:

 

 

 

 

 

Current portion of long-term debt

 

$

 

$

7,039

 

Long-term debt

 

27,500

 

19,211

 

Discount on debt

 

(2,570

)

(674

)

Total debt, net of debt discount

 

24,930

 

25,576

 

 

 

 

 

 

 

Financing obligations:

 

 

 

 

 

Current portion of royalty interest obligation

 

837

 

1,219

 

Long-term portion of royalty interest obligation

 

881

 

1,537

 

Total royalty interest obligation

 

1,718

 

2,756

 

 

 

 

 

 

 

Total debt and financing obligations

 

$

26,648

 

$

28,332

 

 

On May 2, 2012, the Company entered into a definitive loan and security agreement, or the Loan Agreement, with Oxford Finance LLC, or the Lender, and borrowed the principal amount of $27.5 million, or the Loan Facility, at a fixed rate of 9.75%, with

 

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the first principal payment due December 1, 2013.  Payments under the Loan Agreement are interest-only in arrears through November 30, 2013, followed by 30 equal monthly payments of principal and interest.  In addition, a payment equal to 6% of the Loan Facility will be due on the final payment date, or such earlier date as specified in the Loan Agreement. The $1.65 million end of term fee was recorded as a debt discount and is being amortized to interest expense over the term of the loan. The proceeds from the Loan Agreement were used by the Company to repay the entire $24.2 million outstanding balance plus accrued interest, $0.6 million end of term fee and $0.3 million early prepayment penalty on its credit facility with Hercules Technology Growth Capital, Inc. and Hercules Technology II, L.P., as lenders, or Hercules Credit Facility. The Company recorded a loss on extinguishment of debt of $1.1 million comprised of the remaining unamortized debt issuance costs, warrants and end of term fee, as well as the early prepayment penalty on the note issued under the Hercules Credit Facility.

 

The Company’s obligations under the Loan Agreement are secured by a first priority security interest in substantially all of its assets, other than its intellectual property. The Company agreed not to pledge or otherwise encumber its intellectual property assets, except for permitted liens or to the extent the intellectual property constitutes royalty collateral, as such terms are defined in the Loan Agreement and except as otherwise provided in the Loan Agreement.

 

If the Company repays all or a portion of the Loan Facility prior to maturity, it will pay the Lender a prepayment fee based on a percentage of the then outstanding principal balance equal to: 3.00% if the prepayment occurs prior to or on the first anniversary of the funding date, 2.00% if the prepayment occurs after the first anniversary of the funding date but prior to or on the second anniversary of the funding date, or 1.00% if the prepayment occurs after the second anniversary of the funding date.

 

The Loan Agreement includes customary affirmative and restrictive covenants for transactions of this type and customary events of default, including the following events of default: payment defaults, breaches of covenants, judgment defaults, cross defaults to certain other contracts, the occurrence of certain events under the Company’s royalty agreements, certain events with respect to governmental approvals if such events could cause a material adverse change, a material impairment in the perfection or priority of the Lender’s security interest or in the value of the collateral, a material adverse change in the business, operations or condition of the Company or any of its subsidiaries and a material impairment of the prospect of repayment of the loans. Upon the occurrence of an event of default, a default increase in the interest rate of an additional 5.00% may be applied to the outstanding loan balance and the Lender may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

 

In connection with the Loan Agreement, the Company issued to the Lender warrants that are exercisable for an aggregate of 162,885 shares of its common stock at a per share exercise price of $10.97.  Each warrant may be exercised on a cashless basis in whole or in part. The value of the warrants was recorded as a debt discount and is being amortized over the term of the loan to interest expense. The fair value of the warrants was determined using Black-Scholes option model (using a discount rate of 1.96%, volatility of 69.69%, a dividend yield of 0%, and a contractual term of 10 years). The relative fair value of the warrants totaled $1.4 million. See Note 12, Subsequent Events, for further information.

 

The Company’s principal payments are due under the Loan Agreement as follows: $0.8 million in 2013, $10.3 million in 2014, $11.3 million in 2015 and $5.1 million in 2016.

 

Note 8—STOCKHOLDERS’ EQUITY

 

Stock-Based Compensation

 

The Company recognized stock-based compensation expense in its consolidated statements of operations as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Cost of revenues

 

$

200

 

$

31

 

$

400

 

$

145

 

Research and development

 

281

 

71

 

745

 

737

 

Selling, general and administrative

 

988

 

340

 

2,075

 

1,083

 

Total

 

$

1,469

 

$

442

 

$

3,220

 

$

1,965

 

 

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Stock Incentive Plans

 

The Company’s 2011 stock incentive plan, or 2011 Plan, previously contained an “evergreen” provision, which allowed for an increase in the number of shares authorized for issuance under the 2011 Plan on the first day of each calendar year from 2012 through 2015. On January 1, 2012, the evergreen provision increased the number of shares of common stock authorized for issuance under the 2011 Plan by 557,880 shares. On June 5, 2012, the 2011 Plan was amended, to, among other things: (i) increase the number of shares of common stock authorized for issuance under the 2011 Plan by 2,100,000, (ii) remove the evergreen provision and (iii) require stockholder approval prior to any repricing of awards granted under the 2011 Plan.

 

The following table contains information about the Company’s plans at September 30, 2012:

 

Plan

 

Awards Reserved
for Issuance

 

Awards Issued

 

Awards Available
for Grant

 

2011 Plan

 

3,130,271

 

2,314,217

 

816,054

 

2007 Plan

 

2,074,266

 

2,074,266

 

 

 

 

5,204,537

 

4,388,483

 

816,054

 

 

The following table summarizes the Company’s stock option activity and related information for the period from December 31, 2011 to September 30, 2012:

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Outstanding at December 31, 2011

 

2,337,017

 

$

3.92

 

Granted

 

2,000,000

 

11.28

 

Exercised

 

(206,584

)

2.58

 

Forfeited

 

(125,124

)

7.30

 

Outstanding at September 30, 2012

 

4,005,309

 

7.55

 

 

Note 9—LOSS PER SHARE

 

Basic net loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of common stock and dilutive common stock outstanding during the period. Potential common shares include the shares of common stock issuable upon the exercise of outstanding stock options and warrants (using the treasury stock method). Potential common shares in the diluted net loss per share computation are excluded to the extent that they would be anti-dilutive. No potentially dilutive securities are included in the computation of any diluted per share amounts as the Company reported a net loss for all periods presented.

 

The following table sets forth the computation of basic and diluted loss per share for the three and nine months ended September 30, 2012 and 2011 (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator for basic and diluted loss per share

 

 

 

 

 

 

 

 

 

Net loss

 

$

(15,745

)

$

(9,508

)

$

(35,935

)

$

(28,045

)

Denominator

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

32,436

 

17,231

 

29,586

 

14,826

 

Effect of dilutive securities

 

 

 

 

 

Weighted average shares of common stock -diluted

 

32,436

 

17,231

 

29,586

 

14,826

 

Net loss per share

 

 

 

 

 

 

 

 

 

Basic net loss per share of common stock

 

$

(0.49

)

$

(0.55

)

$

(1.21

)

$

(1.89

)

Diluted net loss per share of common stock

 

$

(0.49

)

$

(0.55

)

$

(1.21

)

$

(1.89

)

 

The stock options and warrants are excluded from the calculation of diluted loss per share because the net loss for the three and nine months ended September 30, 2012 and 2011 causes such securities to be anti-dilutive. The potential dilutive effect of these

 

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securities is shown in the chart below (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Weighted average shares of common stock outstanding—basic

 

32,436

 

17,231

 

29,586

 

14,826

 

Stock options

 

1,374

 

1,164

 

1,247

 

791

 

Warrants

 

227

 

115

 

158

 

78

 

Weighted average shares of common stock -diluted

 

34,037

 

18,510

 

30,991

 

15,695

 

 

Note 10—RELATED PARTY TRANSACTIONS

 

In June 2011, the Company entered into an agreement with Gary Pace, a member of the Company’s board of directors, to provide consulting services for manufacturing related activities. The fees payable under the agreement may not exceed $60,000 per year. In connection with these services, Dr. Pace received an option to purchase 10,000 shares of common stock at an exercise price of $11.02 per share. In April 2012, the Company entered into an amended and restated consulting agreement with Gary Pace, whereby Dr. Pace will provide consulting services at the rate of $10,000 per month and received an option to purchase 20,000 shares of common stock at an exercise price of $11.02 per share pursuant to the consulting arrangement. In August 2012, the Company further amended and restated the consulting agreement with Gary Pace, whereby Dr. Pace provides consulting services at the rate of $15,000 per month and is eligible for a bonus up to $0.2 million if certain targets are met for an expanded manufacturing line. Dr. Pace also received an option to purchase 70,000 shares of common stock at an exercise price of $16.67 pursuant to the amended and restated consulting arrangement. The amount of fees incurred for each of the three and nine months ended September 30, 2012 was $0.1 million. At September 30, 2012, and December 31, 2011, the amount payable to Dr. Pace was not material.

 

MPM Asset Management, or MPM, an investor in the Company, provides clinical management and subscription services to the Company. The Company incurred expenses of approximately $0.1 million for the three months ended September 30, 2012 and 2011.  The Company incurred expenses of approximately $0.3 million for the nine months ended September 30, 2012 and 2011. Approximately $0.1 million was payable to MPM at September 30, 2012 and December 31, 2011.

 

Note 11—COMMITMENTS AND CONTINGENCIES

 

In July 2012, the Company received an inspection letter from the MHRA noting certain critical and major deficiencies in the DepoCyt(e) manufacturing line, which is located in a separate building from the EXPAREL manufacturing site. As a result of the findings, the European Medicines Agency issued an assessment report which recommended that, until corrective actions are taken allowing new supply to enter the market, alternative medicines be used in European Union member countries where there are suitable alternatives, The assessment report also recommended a selective recall of DepoCyt(e) in European Union member countries where DepoCyt(e) is not considered to be an “essential medicinal product.” In European Union member countries where the product is classified as an “essential medicinal product,” DepoCyte can be used with specific recommendations to monitor patients’ safety. During the three and nine months ended September 30, 2012, the Company recorded a charge of $0.6 million and $1.3 million, respectively, in cost of revenues associated with the implementation of a remediation plan and estimated costs to replace the product. While the corrective actions and upgrades to the facilities are taking place, the Company has stopped manufacturing DepoCyt(e) and will not begin manufacturing product for the European markets until the manufacturing facility is re-inspected by the MHRA. The Company does not expect new product to be available to the European market until the second quarter of 2013. No regulatory action has been taken by the FDA in the United States as a result of these inspection findings. Assuming a successful reinspection and the startup of its manufacturing operations shortly thereafter, the Company does not currently expect an out of stock situation in either the United States or Europe as a result of the interruption in manufacturing of DepoCyt(e). It is possible that additional charges may be required in future periods based on new information and changes in estimates.

 

In May 2012, the Company entered into a construction management agreement with DPR Construction, a General Partnership, or DPR. Under the terms of the agreement, DPR is responsible for the management of the renovation of the Company’s existing manufacturing facility in San Diego, California. The manufacturing facility is being renovated to allow the Company to expand the current manufacturing capacity and meet anticipated future market demand for EXPAREL. Pursuant to the agreement, the contract sum (the cost of the work plus the contractor fee) will not exceed approximately $7.7 million, provided that such amount is subject to change based on agreed-upon changes to the scope of work.

 

Note 12—SUBSEQUENT EVENTS

 

On October 5, 2012, Oxford Finance LLC did a cashless exercise of 162,885 warrants issued in connection with the Loan Facility into 67,279 shares of common stock.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended , which are subject to risks, uncertainties and assumptions that are difficult to predict. All statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, regarding our plans to develop, manufacture and commercialize EXPAREL; our plans to continue to manufacture and provide support services for our commercial partners who have licensed DepoCyt(e); the anticipated success of our remediation plans in response to the inspection report from the Medicines and Healthcare products Regulatory Agency and the timing of recommencing our DepoCyt(e) manufacturing operations; the success of our commercialization of EXPAREL; the rate and degree of market acceptance of EXPAREL; the size and growth of the potential markets for EXPAREL and our ability to serve those markets; our plans to expand the indications of EXPAREL to include nerve block; our manufacturing, commercialization and marketing capabilities, regulatory developments in the United States and foreign countries; our ability to obtain and maintain intellectual property protection; the accuracy of our estimates regarding expenses and capital requirements; and the loss or hiring of key scientific or management personnel. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “could,” “predict,” and “continue,” the negative or plural of these words and other comparable terminology. Forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

 

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed and referenced in Part II-Item 1A. Risk Factors.

 

Unless the context requires otherwise, references to “Pacira,” “we,” the “company,” “us” and “our” in this Quarterly Report on Form 10-Q refers to Pacira Pharmaceuticals, Inc. and its subsidiaries. In addition, references in this Quarterly Report on Form 10-Q to DepoCyt(e) mean DepoCyt when discussed in the context of the United States and Canada and DepoCyte when discussed in the context of Europe.

 

Overview

 

We are an emerging specialty pharmaceutical company focused on the development, commercialization and manufacture of proprietary pharmaceutical products, based on our proprietary DepoFoam drug delivery technology, for use in hospitals and ambulatory surgery centers.

 

On October 28, 2011, the United States Food and Drug Administration, or FDA, approved our New Drug Application, or NDA, for our lead product candidate, EXPAREL, a liposome injection of bupivacaine, an amide-type local anesthetic, indicated for administration into the surgical site to produce postsurgical analgesia. We have developed a sales force entirely dedicated to commercializing EXPAREL comprised of approximately 60 hospital specialists, seven regional directors and a national sales director. We have developed this sales force pursuant to a contract with Quintiles Commercial US, Inc., a division of Quintiles, Inc., or Quintiles, and under the terms of this contract we have the flexibility to hire all or a portion of the sales force dedicated to commercializing EXPAREL as full-time employees of Pacira, upon 60 days’ notice to Quintiles. We commercially launched EXPAREL in April 2012. As a result of our first commercial sale of EXPAREL, we triggered a $10.0 million payment obligation to Skyepharma Holding Inc., or Skyepharma, in connection with the acquisition of our California operating subsidiary, which we refer to as the Acquisition.

 

We also sell our other approved product, DepoCyt(e), to commercial partners. DepoCyt(e) is a sustained release liposomal formulation of the chemotherapeutic agent cytarabine and is indicated for the intrathecal treatment of lymphomatous meningitis. DepoCyt(e) was granted accelerated approval by the FDA in 1999 and full approval in 2007. In July 2012, we received an inspection letter from the MHRA noting certain critical and major deficiencies in the DepoCyt(e) manufacturing line, which is located in a separate building from the EXPAREL manufacturing site. As a result of the findings, the European Medicines Agency issued an assessment report which recommended that, until corrective actions are taken allowing new supply to enter the market, alternative medicines be used in European Union member countries where there are suitable alternatives. The assessment report also recommended a selective recall of DepoCyt(e) in European Union member countries where DepoCyt(e) is not considered to be an “essential medicinal product.” In European Union member countries where DepoCyt(e) is classified as an “essential medicinal product,” DepoCyte can be used with specific recommendations to monitor patients’ safety. While the corrective actions and upgrades to the facilities are taking place, we have stopped manufacturing DepoCyt(e) and will not begin manufacturing product for the

 

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European markets until the manufacturing facility is re-inspected by the MHRA. The Company does not expect new product to be available to the European market until the second quarter of 2013. No regulatory action has been taken by the Food and Drug Administration in the United States as a result of these inspection findings. Assuming a successful reinspection and the startup of its manufacturing operations shortly thereafter, the Company does not currently expect an out of stock situation in either the United States or Europe as a result of the interruption in manufacturing of DepoCyt(e). The selective recall contributed to a reduction in product sales and royalty revenue of Depocyt(e) for the three and nine months ended September 30, 2012, respectively.

 

We also partner with other companies who desire access to our proprietary DepoFoam extended release drug delivery technology to conduct research, feasibility and formulation work with their products. On June 29, 2012, we received a notice of termination from Novo Nordisk AS, or Novo, of a Development and License Agreement, dated January 14, 2011.  Pursuant to the terms of the agreement, the termination of the agreement is effective 60 days from the date of the notice, or August 28, 2012. Under the agreement, we granted exclusive rights to Novo under certain of the Company’s patents and know-how to develop, manufacture and commercialize formulations of a Novo proprietary drug using our DepoFoam drug delivery technology. The agreement was terminated due to Novo’s decision to discontinue development of the proprietary drug subject to in the agreement. As a result, our future collaborative licensing and development revenue may be negatively impacted.

 

We expect to continue to incur significant expenses as we commercialize EXPAREL and advance the development of product candidates, seek FDA approval for our product candidates that successfully complete clinical trials and develop our sales force and marketing capabilities to prepare for their commercial launch. We also expect to incur additional expenses to add operational, financial and management information systems and personnel, including personnel to support our product development efforts and our obligations as a public reporting company. For us to become and remain profitable, we believe that we must succeed in commercializing EXPAREL or other product candidates with significant market potential.

 

Results of Operations

 

Comparison of Three and Nine Months Ended September 30, 2012 and 2011

 

Revenues

 

The following table sets forth a summary of revenues during the periods indicated (in thousands):

 

 

 

Three Months Ended

 

%

 

Nine Months Ended

 

%

 

 

 

September 30,

 

Increase/

 

September 30,

 

Increase/

 

 

 

2012

 

2011

 

Decrease

 

2012

 

2011

 

Decrease

 

Net product sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPAREL

 

$

4,550

 

$

 

N/A

 

$

6,835

 

$

 

N/A

 

DepoCyt(e) 

 

 

1,682

 

(100

)%

3,080

 

4,868

 

(37

)%

DepoDur

 

 

 

N/A

 

63

 

 

N/A

 

Total net product sales

 

4,550

 

1,682

 

171

%

9,978

 

4,868

 

105

%

Collaborative licensing and development revenue

 

3,484

 

1,352

 

158

%

16,574

 

3,845

 

331

%

Royalty revenue

 

452

 

922

 

(51

)%

2,082

 

2,743

 

(24

)%

Total revenues

 

$

8,486

 

$

3,956

 

115

%

$

28,634

 

$

11,456

 

150

%

 

Total revenues increased by $4.5 million, or 115%, to $8.5 million in the three months ended September 30, 2012, as compared to $4.0 million in the three months ended September 30, 2011.  In April 2012, we commercially launched EXPAREL resulting in $4.6 million of net product sales for the three months ended September 30, 2012. We report product sales net of allowances for sales returns, prompt pay discounts, volume rebates and distribution service fees payable to wholesalers. We ship products directly to the end user based on orders placed to wholesalers or directly to us and have no product held by wholesalers.

 

We had no product sales of DepoCyt(e) during the three months ended September 30, 2012 resulting in a $1.7 million decrease in DepoCyt(e) product sales. There was also a corresponding decrease in royalty revenue of $0.5 million due to lower end user sales by our commercial partner, Mundi Pharmaceuticals. These decreases are driven by the reduction in sales of DepoCyt(e) due to a selective recall of Depocyt(e) recommended by the European Medicines Agency for European Union member countries where DepoCyt(e) is not considered to be an “essential medicinal product.” The increase in collaborative licensing and development revenue of $2.1 million was primarily driven by the recognition of deferred milestone revenue in connection with the termination of the licensing agreement with Novo, which was offset by lower collaborative revenues with Novo. We recognized any unamortized deferred revenue related to milestones received from Novo through August 2012.

 

Total revenues increased by $17.2 million, or 150%, to $28.6 million in the nine months ended September 30, 2012, as

 

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compared to $11.5 million in the nine months ended September 30, 2011. Collaborative licensing and development revenue increased $12.7 million in the nine months ended September 30, 2012 primarily due to the recognition of deferred revenue in connection with the termination of the license agreement with EKR for the DepoDur product and deferred revenue associated with the termination of the license agreement with Novo, as discussed above. The increase in net product sales of $5.1 million was driven by $6.8 million of EXPAREL sales since the launch in April 2012, offset by a decrease of Depocyt(e) sales of $1.8 million. Royalty revenue decreased by $0.7 million in the nine months ended September 30, 2012 due to lower end user sales by our commercial partners resulting from the restriction on sales in Europe as discussed above.

 

Cost of Revenues

 

The following table provides information regarding our cost of revenues during the periods indicated (in thousands):

 

 

 

Three Months Ended

 

%

 

Nine Months Ended

 

%

 

 

 

September 30,

 

Increase/

 

September 30,

 

Increase/

 

 

 

2012

 

2011

 

Decrease

 

2012

 

2011

 

Decrease

 

Cost of goods sold

 

$

9,287

 

$

3,059

 

204

%

$

22,072

 

$

9,100

 

143

%

Cost of collaborative licensing and development revenue

 

 

298

 

(100

)%

395

 

1,038

 

(62

)%

Total cost of revenues

 

$

9,287

 

$

3,357

 

177

%

$

22,467

 

$

10,138

 

122

%

 

Cost of revenues increased by $5.9 million, or 177%, to $9.3 million in the three months ended September 30, 2012, as compared to $3.4 million in the three months ended September 30, 2011. Cost of goods sold increased by $6.2 million primarily due to (i) the cost of goods for EXPAREL sales which we commercially launched in April 2012, (ii) approximately $1.8 million of expense for the voluntary but non-routine shutdown period of the EXPAREL manufacturing site for repairs and maintenance and deployment of new manufacturing skids for our Suite C manufacturing expansion project, (iii) a $0.6 million charge for the temporary shutdown of DepoCyt(e) manufacturing site, including inventory reserve, additional testing of current product and the cost of replacement product due to the action taken by the European Medicines Agency. We have a substantial level of infrastructure cost relating to running two cGMP facilities and any extended or non-routine shutdown results in these costs being charged directly to cost of goods sold.

 

Cost of revenues increased by $12.4 million, or 122%, to $22.5 million in the nine months ended September 30, 2012, as compared to $10.1 million in the nine months ended September 30, 2011. The increase was primarily driven by (i) the cost of goods for EXPAREL sales which we launched in April 2012, (ii) $1.3 million charge for corrective actions taken on the DepoCyt(e) manufacturing line based on the remediation plan, inventory replacement and reserve costs, (iii) EXPAREL production costs, which were expensed as incurred until March 2012 when the first commercial batch was produced and (iv) approximately $1.8 million of expense for the extended shutdown of the EXPAREL manufacturing site. Cost of collaborative licensing and development revenue decreased by $0.6 million due to decreased services performed under the Novo agreement for which we received a notice of termination in June 2012.

 

Research and Development Expense

 

The following table provides information regarding our research and development expenses during the periods indicated (in thousands):

 

 

 

Three Months Ended

 

%

 

Nine Months Ended

 

%

 

 

 

September 30,

 

Increase/

 

September 30,

 

Increase/

 

 

 

2012

 

2011

 

Decrease

 

2012

 

2011

 

Decrease

 

Research and development expense

 

$

3,527

 

$

4,360

 

(19

)%

$

6,693

 

$

12,742

 

(47

)%

 

Research and development expenses decreased by $0.9 million, or 19%, to $3.5 million in the three months ended September 30, 2012, as compared to $4.4 million in the three months ended September 30, 2011, due to the shift of EXPAREL production line expenses from research and development expenses to cost of revenues following the approval of EXPAREL by the FDA in October 2011. In the three months ended September 30, 2012, we spent $2.4 million on clinical development primarily for the initiation of our Phase 2/3 pivotal trial of EXPAREL administered as a single-dose injection femoral nerve block for total knee arthroplasty surgery, in which the first patient was dosed in September 2012, and start-up costs for our Phase 3 pivotal trial of EXPAREL for intercostal nerve block for thoracotomy. We also incurred $0.9 million on a potential new manufacturing process for EXPAREL which is in pre-clinical stage.

 

Research and development expenses decreased by $6.0 million, or 47%, to $6.7 million in the nine months ended September 30, 2012, as compared to $12.7 million in the nine months ended September 30, 2011, due to the shift of EXPAREL production line expenses from research and development expenses to cost of revenues as discussed above. In the nine months ended September 30, 2012, we spent $3.8 million on clinical development primarily for the dose ranging EXPAREL nerve block trial and two Phase 2/3

 

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pivotal trials of EXPAREL and $2.2 million on pre-clinical studies for a new manufacturing process for EXPAREL.

 

Selling, General and Administrative Expense

 

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

 

 

 

Three Months Ended

 

%

 

Nine Months Ended

 

%

 

 

 

September 30,

 

Increase/

 

September 30,

 

Increase/

 

 

 

2012

 

2011

 

Decrease

 

2012

 

2011

 

Decrease

 

General and administrative

 

$

4,682

 

$

2,828

 

66

%

$

11,542

 

$

7,361

 

57

%

Sales and marketing

 

6,696

 

2,144

 

212

%

 

21,401

 

 

5,599

 

282

%

Total selling, general and administrative expense

 

$

11,378

 

$

4,972

 

129

%

$

32,943

 

$

12,960

 

154

%

 

Selling, general and administrative expenses increased by $6.4 million, or 129%, to $11.4 million in the three months ended September 30, 2012, as compared to $5.0 million in the three months ended September 30, 2011 due to the following:

 

·            sales and marketing expenses increased by $4.6 million primarily due to a $3.1 million increase in the cost of our sales force entirely dedicated to commercializing EXPAREL, which was comprised of approximately 60 hospital specialists, seven regional directors and a national sales director, a $0.7 million increase in compensation and related expenses due to the expansion of our internal selling and marketing capabilities, and a $0.6 million increase in promotional costs to support the launch of EXPAREL including simulcasts, speaker trainings, educational programs, publications, promotional materials and health outcomes collaboratives; and

 

·            general and administrative expenses increased by $1.9 million mainly due to increases of $0.5 million in salaries and benefits associated with our increased headcount, $0.5 million in consulting costs primarily to support our information technology infrastructure and recruiting efforts, along with a $0.3 million increase in both facilities and legal costs.

 

Selling, general and administrative expenses increased by $19.9 million, or 154%, to $32.9 million in the nine months ended September 30, 2012, as compared to $13.0 million in the nine months ended September 30, 2011, due to the following:

 

·            sales and marketing expenses increased by $15.8 million primarily due to a $9.7 million increase in the cost of our sales force entirely dedicated to commercializing EXPAREL, a $3.2 million increase in promotional costs to support the launch of EXPAREL, a $ 1.9 million increase in compensation and related expenses due to the expansion of our internal selling and marketing capabilities, and a $1.0 million increase related to our Phase IV IMPROVE health outcome studies in targeted surgeries, in which we have been enrolling patients since the second quarter of 2012; and

 

·            general and administrative expenses increased by $4.2 million mainly due to increases of $1.2 million in salaries and benefits associated with higher headcount, $1.5 million in consulting costs to support our information technology infrastructure and recruiting efforts,  $0.6 million increase in facilities related costs and $0.3 million increase in legal costs.

 

Other Income (Expense)

 

The following table provides information regarding our other income (expense) during the periods indicated (in thousands):

 

 

 

Three Months Ended

 

%

 

Nine Months Ended

 

%

 

 

 

September 30,

 

Increase/

 

September 30,

 

Increase/

 

 

 

2012

 

2011

 

Decrease

 

2012

 

2011

 

Decrease

 

Interest income

 

$

87

 

$

46

 

89

%

$

218

 

$

111

 

96

%

Interest expense

 

(456

)

(910

)

(50

)%

(1,464

)

(4,068

)

(64

)%

Loss on early extinguishment of debt

 

 

 

N/A

 

(1,062

)

 

N/A

 

Royalty interest obligation

 

378

 

116

 

226

%

(47

)

235

 

(120

)%

Other, net

 

(48

)

(27

)

78

%

(111

)

61

 

(282

)%

Total other (expense), net

 

$

(39

)

$

(775

)

(95

)%

$

(2,466

)

$

(3,661

)

(33

)%

 

Total other (expense) income, net decreased by $0.7 million, or 95%, to $0.1 million in the three months ended September 30, 2012, as compared to $0.8 million in the three months ended September 30, 2011, primarily due to a $0.3 million decrease in royalty interest obligation expense due to a forecast reduction in end user Depocyt(e) sales relating to the restriction on sales in the European Union, and by a reduction in interest expense of $0.4 million which was driven by an increase in capitalized interest related to our Suite C manufacturing expansion project for EXPAREL.

 

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Total other (expense) income, net decreased by $1.2 million, or 33%, to $2.5 million in the nine months ended September 30, 2012, as compared to $3.7 million in the nine months ended September 30, 2011, primarily due to a $2.6 million decrease in interest expense. The decrease in interest expense is due to the following:

 

·                  $1.1 million decrease of warrant expense recognized during the first quarter of 2011 in connection with the conversion of these warrants upon our initial public offering;

 

·                  $0.9 million increase in capitalized interest related to our Suite C manufacturing expansion project;

 

·                  $0.4 million decrease in interest expense associated with our 2009 and 2010 convertible and secured debt facilities which were converted to common shares in connection with our initial public offering in the first quarter of 2011.

 

The preceding decreases in interest expense were offset by a $1.1 million loss on the extinguishment of our Hercules Credit Facility. There was a $0.3 million increase in royalty interest obligation expense due to a forecast reduction in end user Depocyt(e) sales that took place in the second quarter of 2011.

 

Liquidity and Capital Resources

 

Since our inception in 2007, we have devoted most of our cash resources to manufacturing, research and development and selling, general and administrative activities primarily related to the development of EXPAREL. We have financed our operations primarily with the proceeds from the sale of convertible preferred stock and common stock, secured and unsecured notes and borrowings under debt facilities, product sales, collaborative licensing and development revenue and royalty revenue. We raised approximately $37.1 million in net proceeds through an initial public offering completed on February 8, 2011 and approximately $49.0 million in net proceeds through a follow-on offering completed on November 21, 2011. In April 2012, we sold 6,900,000 shares of common stock at a price of $9.75 per share in a registered public offering, which includes the underwriter’s exercise of the overallotment option. We raised approximately $62.9 million in net proceeds after deducting underwriting discounts and offering expenses.

 

We have generated limited revenue, and we are highly dependent on the commercial success of EXPAREL, which we launched in April 2012. We have incurred losses and generated negative cash flows from operations since inception. As of September 30, 2012, we had an accumulated deficit of $216.2 million, cash and cash equivalents, restricted cash and short-term investments of $68.7 million and working capital of $65.3 million.

 

Summary of Cash Flows

 

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

(48,951

)

$

(23,404

)

Investing activities

 

(51,881

)

(24,355

)

Financing activities

 

63,373

 

38,028

 

Net decrease in cash and cash equivalents

 

$

(37,459

)

$

(9,731

)

 

Operating Activities

 

During the nine months ended September 30, 2012 and 2011, our net cash used in operating activities was $49.0 million and $23.4 million, respectively. The $25.6 million increase in net cash used in operating activities was driven by higher operating expenses of (i) selling, marketing and administrative expenses driven by the launch of EXPAREL in April 2012 including the hiring of our sales force dedicated to EXPAREL, (ii) increased manufacturing costs and an increase in inventory in connection with our commercial launch of EXPAREL, (iii) initiation of our Phase 2/3 EXPAREL nerve block trial in total knee arthroplasty and start-up costs for our Phase 3 nerve block trial in thoracotomy and (iv) a $1.5 million up-front payment received in January 2011 from Novo.

 

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Investing Activities

 

During the nine months ended September 30, 2012 and 2011, our net cash used in investing activities was $51.9 million and $24.4 million, respectively.  The $27.5 million increase in cash used in investing activities was primarily due to a $10.0 million contingent milestone payment made in April 2012 to Skyepharma in connection with the first commercial sale of EXPAREL, a $9.8 million increase in the purchase of fixed assets relating to the construction of our Suite C manufacturing line for EXPAREL, which we re-commenced following approval from the United States Food and Drug Administration in October 2011, and a $7.5 million increase in the purchase of short-term investments from the proceeds of our secondary offering in 2012

 

Financing Activities

 

During the nine months ended September 30, 2012 and 2011, net cash provided by financing activities was $63.4 million and $38.0 million, respectively. In April 2012, we raised $62.9 million in net proceeds through a secondary offering of 6,900,000 shares of common stock. Additionally, in May 2012, we borrowed a principal amount of $27.5 million from Oxford Finance LLC and used the funds to repay the remaining principal on the Hercules Credit Facility of $24.2 million, early prepayment penalty of $0.3 million and the end of term fee of $0.6 million. In 2011, we raised approximately $37.1 million in net proceeds from our initial public offering, after deducting $4.9 million in offering expenses of which $0.9 million was paid prior to December 31, 2010.

 

Debt Facilities

 

On May 2, 2012, we entered into a definitive loan and security agreement, or Loan Agreement, with Oxford Finance LLC, who we refer to as the Lender, and borrowed the principal amount of $27.5 million, at a fixed rate of 9.75%, with the first principal payment due December 1, 2013. Payments under the Loan Agreement are interest-only in arrears through November 30, 2013, followed by 30 equal monthly payments of principal and interest. In addition, a final payment equal to 6% of the Loan Facility will be due on the final payment date, or such earlier date as specified in the Loan Agreement. The proceeds from the Loan Agreement were used by us to repay all of our outstanding obligations with respect to the Hercules Credit Facility.

 

Our obligations under the Loan Agreement are secured by a first priority security interest in substantially all of our assets, other than our intellectual property. We have also agreed not to pledge or otherwise encumber our intellectual property assets, except for permitted liens or to the extent the intellectual property constitutes royalty collateral, as such terms are defined in the Loan Agreement and except as otherwise provided in the Loan Agreement.

 

If we repay all or a portion of the Loan Facility prior to maturity, we will pay the Lender a prepayment fee based on a percentage of the then outstanding principal balance equal to: 3.00% if the prepayment occurs prior to or on the first anniversary of the funding date, 2.00% if the prepayment occurs after the first anniversary of the funding date but prior to or on the second anniversary of the funding date, or 1.00% if the prepayment occurs after the second anniversary of the funding date.

 

The Loan Agreement includes customary affirmative and restrictive covenants for transactions of this type and customary events of default, including the following events of default: payment defaults, breaches of covenants, judgment defaults, cross defaults to certain other contracts, the occurrence of certain events under our royalty agreements, certain events with respect to governmental approvals if such events could cause a material adverse change, a material impairment in the perfection or priority of the Lender’s security interest or in the value of the collateral, a material adverse change in the business, operations or condition of us or any of our subsidiaries and a material impairment of the prospect of repayment of the loans. Upon the occurrence of an event of default, a default increase in the interest rate of an additional 5.00% may be applied to the outstanding loan balance and the Lender may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

 

As of September 30, 2012, we had $27.5 million in outstanding principal debt under the Oxford Loan Facility. As of September 30, 2012, we were in compliance with all covenants under the facility.

 

Future Capital Requirements

 

As of September 30, 2012, we had cash and cash equivalents, restricted cash and short-term investments of $68.7 million. We believe that our existing cash and cash equivalents, restricted cash, short-term investments and revenue from product sales will be sufficient to enable us to meet our planned operating expenses, capital expenditure requirements and service our indebtedness through September 30, 2013. However, changing circumstances may cause us to expend cash significantly faster than we currently anticipate, and we may need to spend more cash than currently expected because of circumstances beyond our control.

 

Our expectations regarding future cash requirements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we make in the future. We have no current understandings, agreements or commitments for any material acquisitions or licenses of any products, businesses or technologies. We may need to raise substantial additional capital in order to engage in any of these types of transactions.

 

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We expect to continue to incur substantial additional operating losses as we commercialize EXPAREL and develop and seek regulatory approval for our product candidates. We will continue to incur significant sales and marketing and manufacturing expenses due to the commercialization of EXPAREL. In addition, we expect to incur additional expenses to add operational, financial and information systems and personnel, including personnel to support our planned product commercialization efforts. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements to us as a public company.

 

Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:

 

·                  the level and timing of our sales of EXPAREL;

·                  the costs of our commercialization activities for EXPAREL;

·                  the cost and timing of expanding our manufacturing facilities and purchasing manufacturing and other capital equipment for EXPAREL and our other product candidates;

·                  the costs of performing additional clinical trials for EXPAREL, including the pediatric trials required by the FDA as a condition of approval and the two Phase 2/3 nerve block trials;

·                  the scope, progress, results and costs of development for additional indications for EXPAREL and for our other product candidates;

·                  the cost, timing and outcome of regulatory review of our other product candidates;

·                  the extent to which we acquire or invest in products, businesses and technologies;

·                  the extent to which we choose to establish collaboration, co-promotion, distribution or other similar agreements for our product candidates; and

·                  the costs of preparing, submitting and prosecuting patent applications and maintaining, enforcing and defending intellectual property claims.

 

To the extent that our capital resources are insufficient to meet our future operating and capital requirements, we will need to finance our cash needs through public or private equity offerings, debt financings, corporate collaboration and licensing arrangements or other financing alternatives. The covenants under the Oxford Loan Facility and the Amended and Restated Royalty Interests Assignment Agreement between us with Royalty Securitization Trust I, an affiliate of Paul Capital Advisors, LLC, and the pledge of our assets as collateral limit our ability to obtain additional debt financing. We have no committed external sources of funds. Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all.

 

If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Additional debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any additional debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, except for operating leases, or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. None of our off-balance sheet arrangements have, or are reasonably likely to have, a current or future material effect on our financial condition or changes in financial condition.

 

Critical Accounting Policies and Estimates

 

We sell EXPAREL to wholesalers based on orders of the product from hospitals and other end user customers such as ambulatory surgery centers and doctors. We recognize revenue when there is persuasive evidence that an arrangement exists, title has passed, collection is reasonably assured and the price is fixed or determinable. Sales to wholesalers provide for selling prices that are fixed on the date of sale. EXPAREL is delivered directly to the end user with the wholesaler never taking physical possession of the product. We record revenue at the time the product is delivered to the end user.

 

At the time we recognize revenue, we also record certain sales reserves and allowances as a reduction of revenue. These reserves and allowances include a prompt payment reserve, return reserves, volume rebates, chargeback reserve and wholesaler service fee. Due to estimates and assumptions inherent in determining some of our sales reserves, the actual amount of volume rebates, chargebacks and returns may be different from our estimates, at which time we would adjust our reserves accordingly.

 

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Prompt pay reserve

 

The prompt payment reserve is based upon discounts offered to wholesalers as an incentive to meet certain payment terms. We account for these discounts at the time the sale is made and reduce accounts receivable accordingly.

 

Returns reserve

 

We allow customers to return product that is damaged or received in error. In addition, we allow for product to be returned beginning six months prior to, and twelve months following product expiration. As EXPAREL is a new commercially available product, we are estimating our sales return reserve based on return history from other hospital based products with similar distribution models, which we believe is the best estimate of the anticipated product to be returned. The returns reserve is recorded at the time of sale and as a reduction to sales and an increase in returns liability.

 

Volume rebates and chargeback reserve

 

Volume rebates and chargeback reserve are based upon contracted discounts and promotional offers we provide to certain end users such as members of group purchasing organizations. The volume rebates and chargeback reserve are recorded as a reduction to sales and a customer payable and reduction to receivables, respectively.

 

Wholesaler service fee

 

Our customers include major and regional wholesalers with whom we have contracted a fee for service based on a percentage of sales.  This fee for service is recorded as a reduction to gross sales and a liability is established at the time the sale is recorded based on the contracted percentage.

 

Allowance for doubtful accounts

 

We evaluate accounts receivable to determine if a provision for an allowance for doubtful accounts is appropriate. Our sales are mostly to established customers. As of September 30, 2012, the accounts receivable was considered collectible and no allowance for doubtful accounts was recorded.

 

For a description of any other critical accounting policies that affect our other significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our most recent Annual Report on Form 10-K for the year ended December 31, 2011. There have been no other significant changes to our critical accounting policies since December 31, 2011.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4. CONTROLS AND PROCEDURES

 

(a)                       Evaluation of Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on their evaluation with the participation of the Company’s management, as of the end of the period covered by this Quarterly Report on Form 10-Q, our President and Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective.

 

(b)                       Changes in Internal Control over Financial Reporting

 

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2012, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

(c)                       Inherent Limitations on Effectiveness of Controls

 

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

 

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PART II—OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any material litigation and we are not aware of any pending or threatened litigation against us that could have a material adverse effect on our business, operating results, financial condition or cash flows.

 

Item 1A. RISK FACTORS

 

In addition to the risks identified below and the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2011, are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. Other than the risk factors set forth below, there have been no material changes in the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

The Medicines and Healthcare products Administration recently issued an inspection report noting certain critical deficiencies in our manufacturing of DepoCyt(e) and remediation of these deficiencies could result in significant costs or delays in the production and sale of DepoCyt(e).

 

In July 2012, the Medicines and Healthcare products Administration, or MHRA, conducted its standard inspection of our DepoCyt(e) manufacturing facility, which is located in a separate building from our EXPAREL manufacturing facility. Following its inspection, the MHRA issued its inspection report in which the MHRA noted certain critical and major failures to comply with the Principles and Guidelines of Good Manufacturing Practices. We temporarily ceased manufacturing DepoCyt(e) in order to implement a remediation plan and address the failures noted in the MHRA inspection report. In connection with the inspection report, the European Medicines Agency issued an assessment report which recommended the use of alternative treatments in countries where DepoCyte is not deemed to be an essential medical product.  The assessment report recommended a selective recall of DepoCyt(e) in European Union member countries where DepoCyt(e) is not considered to be an “essential medicinal product.” The assessment report did not recommend a recall for member countries where DepoCyt(e) is considered to have “essential medicinal product” status. European Union member countries give “essential medicinal product” status to a product if there are no alternative products/therapies in such countries and each country made a determination of whether DepoCyt(e) was an “essential medicinal product” on a country by country basis. The extent of the recall’s impact on our sales of Depocyt(e) is difficult to predict because a number of countries that determined Depocyt(e) was not an “essential medicinal product” also determined that it could still be used in exceptional circumstances or upon special request. The recall contributed to a reduction in product sales of Depocyt(e) for the three and nine month ended September 30, 2012, respectively. We expect our sales of Depocyt(e) in the European Union to continue to decrease until we restart our manufacturing operations.

 

We expect our remediation plan to  be completed and to be inspected by the MHRA again during the fourth quarter of our fiscal year. Our ability to recommence manufacturing of DepoCyt(e) depends on the outcome of this inspection. While we will conduct additional training to address the MHRA inspection findings, we may be required to take steps to address the MHRA inspection findings that are in addition to the remediation plan we have completed. This could result in additional costs or delays in the production and sale of DepoCyt(e), which could have a material adverse effect on our business, financial position and results of operations.

 

EXPAREL and any other products we may market, including DepoCyt(e), will remain subject to substantial regulatory scrutiny.

 

EXPAREL, DepoCyt(e) and any product candidates that we may develop, license or acquire will also be subject to ongoing FDA requirements with respect to the manufacturing, labeling, packaging, storage, distribution, advertising, promotion, record-keeping, post-market testing, and submission of safety and other post-market information on the drug. In addition, the subsequent discovery of previously unknown problems with a product, including undesirable side effects, may result in restrictions on the product, including withdrawal of the product from the market.

 

If EXPAREL, DepoCyt(e) or any other product that we may develop, license or acquire fails to comply with applicable regulatory requirements, such as cGMP regulations, a regulatory agency may:

 

·                  issue warning letters or untitled letters;

 

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·                  require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

·                  impose fines and other civil or criminal penalties;

·                  suspend regulatory approval;

·                  suspend any ongoing clinical trials;

·                  refuse to approve pending applications or supplements to approved applications filed by us;

·                  impose restrictions on operations, including costly new manufacturing requirements; or

·                  seize or detain products or require a product recall.

 

For example, in July 2012, the MHRA issued its inspection report in which the MHRA noted certain critical and major failures to comply with the Principles and Guidelines of Good Manufacturing Practices related to our Depocyt(e) manufacturing facility. We have responded to the MHRA regarding the inspectional observations, however the MHRA may require us to take additional steps to address the MHRA inspection findings, which could result in additional costs or delays in the production and sale of DepoCyt(e), which could have a material adverse effect on our business, financial position and results of operations.

 

The design, development, manufacture, supply, and distribution of EXPAREL and DepoCyt(e) is highly regulated and technically complex.

 

The design, development, manufacture, supply, and distribution of our products EXPAREL and DepoCyt(e) is highly regulated and technically complex. We, along with our third-party providers, must comply with all applicable regulatory requirements of the FDA and foreign authorities. In addition, the facilities used to manufacture, store, and distribute our products are subject to inspection by regulatory authorities at any time to determine compliance with applicable regulations.

 

The manufacturing techniques and facilities used for the manufacture and supply of our products must be operated in conformity with cGMP and other FDA, DEA and MHRA regulations.  In addition, any expansion of our existing manufacturing facilities or the introduction of any new manufacturing facilities would also require conformity with cGMP and other FDA, DEA and MHRA regulations.  In complying with these requirements, we, along with our suppliers, must continually expend time, money and effort in production, record keeping, and quality assurance and control to ensure that our products meet applicable specifications and other requirements for safety, efficacy and quality. In addition, we, along with our suppliers, are subject to unannounced inspections by the FDA, MHRA and other regulatory authorities.

 

Any failure to comply with regulatory and other legal requirements applicable to the manufacture, supply and distribution of our products could lead to remedial action (such as recalls), civil and criminal penalties and delays in manufacture, supply and distribution of our products. For instance, in July 2012, the MHRA issued its inspection report in which the MHRA noted certain critical and major failures to comply with the Principles and Guidelines of Good Manufacturing Practices related to our Depocyt(e) manufacturing facility. We have responded to the MHRA regarding the inspectional observations and expect to complete our proposed remediation plan in the fourth quarter of 2012, however the MHRA may require us to take additional steps to address the MHRA inspection findings, which could result in additional costs or delays in the production and sale of DepoCyt(e), which could have a material adverse effect on our business, financial position and results of operations.

 

If we fail to manufacture EXPAREL in sufficient quantities and at acceptable quality and pricing levels, or to fully comply with cGMP regulations, we may face delays in the commercialization of this product or be unable to meet market demand, and may lose potential revenues.

 

The manufacture of EXPAREL requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls, and the use of specialized processing equipment. We must comply with federal, state and foreign regulations, including FDA’s regulations governing current Good Manufacturing Practices, or cGMP, enforced by the FDA through its facilities inspection program and by similar regulatory authorities in other jurisdictions where we do business. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. The FDA or similar foreign regulatory authorities at any time may implement new standards, or change their interpretation and enforcement of existing standards for manufacture, packaging or testing of our products. Any failure to comply with applicable regulations may result in fines and civil penalties, suspension of production, product seizure or recall, imposition of a consent decree, or withdrawal of product approval, and would limit the availability of our product. Any manufacturing defect or error discovered after products have been produced and distributed also could result in significant consequences, including costly recall procedures, re-stocking costs, damage to our reputation and potential for product liability claims.

 

In addition, we purchase raw materials and components from various suppliers in order to manufacture EXPAREL. If we are unable to source the required raw materials from our suppliers, we may experience delays in manufacturing EXPAREL and may not be able to meet our customers’ demands for EXPAREL.

 

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If we are unable to produce the required commercial quantities of EXPAREL to meet market demand for EXPAREL on a timely basis or at all, or if we fail to comply with applicable laws for the manufacturing of EXPAREL, we will suffer damage to our reputation and commercial prospects and we will lose potential revenues.

 

If we fail to comply with federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.

 

As a pharmaceutical company, even though we do not provide healthcare services or receive payments directly from or bill directly to Medicare, Medicaid or other third-party payers for our products, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We would be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

·                  the federal Anti-Kickback Statute, which constrains our marketing practices, educational programs, pricing policies, and relationships with healthcare providers or other entities, by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under federally funded healthcare programs, such as the Medicare and Medicaid programs;

·                  federal civil and criminal false claims and false statement laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent or making any materially false statement in connection with the delivery or payment for healthcare benefits, items, or services;

·                  the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended, which created  federal criminal and civil statutes that prohibit executing a scheme to defraud any healthcare benefit program;

·                  federal physician self-referral laws, such as the Stark law, which prohibit a physician from making a referral to a provider of certain health services with which the physician or the physician’s family member has a financial interest, and prohibit submission of a claim for reimbursement pursuant to a prohibited referral;

·                  HIPAA, as amended by the Health Information Technology and Clinical Health Act, or HITECH, and its implementing regulations, which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; and

·                  state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

 

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the U.S. federal Anti-Kickback Statute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Recently, several pharmaceutical and other healthcare companies have been prosecuted under the federal false claims laws for allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. To the extent that any product we make is sold in a foreign country, we may be subject to similar foreign laws and regulations.

 

Further, there has been a recent trend in the increase of federal and state laws and regulations regarding consulting arrangements with physicians. Some states, such as California, Massachusetts and Vermont, mandate that we comply with a state code of conduct, adopt a company code of conduct under state criteria, disclose marketing payments made to physicians, and/or report compliance information to the state authorities. Some states, such as Massachusetts, have created an internet database to provide disclosed information on certain transactions with physicians to the public. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply in multiple jurisdictions with different compliance and reporting requirements increases the possibility that a pharmaceutical company may run afoul of one or more of the requirements.

 

If our past or present operations, or those of our distributors are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal or state health care programs, and the curtailment or restructuring of our operations. Similarly, if the healthcare providers, distributors or other entities with whom we do business are found to be out of compliance with applicable laws and regulations, they may be subject to sanctions, which could also have a negative impact on us. The risk of being

 

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found to have violated such laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any penalties, damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

 

We are subject to new legislation, regulatory proposals and healthcare payer initiatives that may increase our costs of compliance and adversely affect our ability to market our products, obtain collaborators and raise capital.

 

In March 2010, the President signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, which we refer to collectively as the Health Care Reform Law. The Health Care Reform Law makes extensive changes to the delivery of health care in the United States. Among the provisions of the Health Care Reform Law of greatest importance to the pharmaceutical industry are the following:

 

·                  an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, beginning in 2011;

·                  an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, retroactive to January 1, 2010, to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively;

·                  a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D, beginning in 2011;

·                  extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, effective March 23, 2010;

·                  expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals beginning in April 2010 and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level beginning in 2014, thereby potentially increasing both the volume of sales and manufacturers’ Medicaid rebate liability;

·                  expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program, effective in January 2010;

·                  new requirements to report certain financial arrangements with physicians and others, including reporting any “transfer of value” made or distributed to prescribers and other healthcare providers and reporting any investment interests held by physicians and their immediate family members during each calendar year beginning in 2012, with reporting starting in 2013, subject to federal implementation and enforcement policies;

·                  a new requirement to annually report drug samples that manufacturers and distributors provide to physicians, effective April 1, 2012, subject to federal implementation and enforcement policies;

·                  a licensure framework for follow-on biologic products;

·                  a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative        clinical effectiveness research, along with funding for such research;

·                  creation of the Independent Payment Advisory Board which, beginning in 2014, will have authority to recommend certain changes to the Medicare program that could result in reduced payments for prescription drugs and those recommendations could have the effect of law even if Congress does not act on the recommendations; and

·                  establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending, beginning by January 1, 2011.

 

These measures could result in decreased net revenues from our pharmaceutical products and decrease potential returns from our development efforts.  Congress has also proposed a number of legislative initiatives, including possible repeal of the Health Care Reform Law. At this time, it remains unclear whether there will be any changes made to the Health Care Reform Law, whether to certain provisions or its entirety. In addition, some details regarding the implementation of the Health Care Reform Law are yet to be determined, and at this time, the full effect that the Health Care Reform Law would have on our business remains unclear.

 

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In addition, other legislative changes have been proposed and adopted since the Health Care Reform Law was enacted. For example, on August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee may consider all elements of discretionary and non-discretionary spending, and its recommendations could result in reduced spending under Medicare and Medicaid for prescription drugs. In the event that the Joint Select Committee is unable to achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, or Congress does not act on the committee’s recommendation, without amendment, by December 23, 2011, an automatic reduction is triggered. These automatic cuts would be made to several government programs and, with respect to Medicare, would include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. The full impact on our business of the new law is uncertain. Nor is it clear whether other legislative changes will be adopted, if any, or how such changes would affect the demand for our products.

 

In addition, there have been a number of other legislative and regulatory proposals aimed at changing the pharmaceutical industry. In particular, California has enacted legislation that requires development of an electronic pedigree to track and trace each prescription drug at the saleable unit level through the distribution system. California’s electronic pedigree requirement is scheduled to take effect in January 2015. Compliance with California and future federal or state electronic pedigree requirements may increase our operational expenses and impose significant administrative burdens. As a result of these and other new proposals, we may determine to change our current manner of operation, provide additional benefits or change our contract arrangements, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

Most recently, the President signed into law the Food and Drug Administration Safety and Innovation Act, or FDASIA.  The new law and related agreements make several significant changes to the Federal Food, Drug, and Cosmetic Act and FDA’s processes for reviewing marketing applications that could have a significant impact on the pharmaceutical industry, including, among other things, the following:

 

·                  Reauthorizes the Prescription Drug User Fee Act, or PDUFA, increases the amount of associated user fees, and, for certain types of applications, increases the agreed-upon time frame for FDA review of the application;

·                  Permanently reauthorizes and makes some revisions to the Best Pharmaceuticals for Children Act and the Pediatric Research Equity Act, which provides for pediatric exclusivity and mandated pediatric assessments for certain types of applications, respectively;

·                  Revises certain standards and requirements for FDA inspections of manufacturing facilities and the importation of drug products from foreign countries;

·                  Creates incentives for the development of certain antibiotic drug products;

·                  Modifies the standards for accelerated approval of certain new medical treatments;

·                  Expands the reporting requirements for potential and actual drug shortages;

·                  Requires FDA to issue a report on, among other things, ensuring the safety of prescription drugs that have the potential for abuse;

·                  Requires FDA to hold a public meeting regarding the potential rescheduling of drug products containing hydrocodone; and

·                  Requires electronic submission of certain marketing applications following the issuance of final FDA regulations

 

The full impact on our business of the new law is uncertain.

 

We have incurred significant losses since our inception and anticipate that we will incur continued losses for the foreseeable future.

 

We are an emerging specialty pharmaceutical company with a limited operating history. We have focused primarily on developing and commercializing EXPAREL. We have incurred losses in each year since our inception in December 2006, including net losses of $43.3 million, $27.1 million and $31.7 million, for the years ended December 31, 2011, 2010, and 2009, respectively. As of September 30, 2012, we had an accumulated deficit of $216.2 million. These losses, among other things, have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital. We incurred increased pre-commercialization expenses during 2010 and 2011 as we prepared for the potential commercial launch of EXPAREL, and we expect to incur significant sales, marketing and manufacturing expenses, as well as continued development expenses related to the commercialization of EXPAREL. As a result, we expect to continue to incur significant losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

 

The market price of our common stock is highly volatile.

 

Our stock price is volatile, and from February 3, 2011, the first day of trading of our common stock, to September 30, 2012,

 

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the trading prices of our stock have ranged from $6.16 to $19.31 per share. Our stock could be subject to wide fluctuations in price in response to various factors, including the following:

 

· the commercial success of EXPAREL;

· results of clinical trials of our product candidates or those of our competitors;

· changes or developments in laws or regulations applicable to our product candidates;

· introduction of competitive products or technologies;

· failure to meet or exceed financial projections we provide to the public;

· actual or anticipated variations in quarterly operating results;

· failure to meet or exceed the estimates and projections of the investment community;

· the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

· general economic and market conditions and overall fluctuations in U.S. equity markets;

· developments concerning our sources of manufacturing supply;

· disputes or other developments relating to patents or other proprietary rights;

· additions or departures of key scientific or management personnel;

· issuances of debt, equity or convertible securities;

· changes in the market valuations of similar companies; and

· the other factors described in this “Risk Factors” section.

 

In addition, the stock market in general, and the market for small pharmaceutical and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.

 

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

 

Our executive officers, directors and 5% stockholders and their affiliates beneficially own approximately 46% of our outstanding voting stock. As a result, these stockholders have significant influence and may be able to determine matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This concentration of ownership could delay or prevent any acquisition of our company on terms that other stockholders may desire.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Unregistered Sales of Equity Securities

 

There were no issuances of unregistered shares of capital stock during the three month period ended September 30, 2012 covered by this report.

 

Use of Proceeds

 

Not applicable.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5. OTHER INFORMATION

 

Not applicable.

 

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Item 6. EXHIBITS

 

The exhibits listed in the Exhibit Index are incorporated herein by reference.

 

EXHIBIT INDEX

 

 10.1

 

Second Amended and Restated Consulting Agreement, dated August 17, 2012, between the Registrant and Gary Pace*

 

 

 

 31.1

 

Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.*

 

 

 

 31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.*

 

 

 

 32.1

 

Certification of Executive Chairman of the Board pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

 

 

 

 32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

 

 

 

 101

 

The following materials from the Quarterly Report on Form 10-Q of Pacira Pharmaceuticals, Inc. for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statement of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Condensed Notes to Consolidated Financial Statements, tagged as blocks of text

 

 

 

 101.INS

 

XBRL Instance Document.**

 

 

 

 101.SCH

 

XBRL Taxonomy Extension Schema Document. *

 

 

 

 101.CAL

 

XBRL Taxonomy Calculation Linkbase Document. *

 

 

 

 101.LAB

 

XBRL Taxonomy Label Linkbase Document. *

 

 

 

 101.PRE

 

XBRL Taxonomy Presentation Linkbase Document.*

 

 

 

 101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.*

 


*           Filed herewith

 

**         Furnished herewith

 

***       Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

PACIRA PHARMACEUTICALS, INC.
(REGISTRANT)

 

 

 

 

Dated: November 1, 2012

/s/ DAVID STACK

 

David Stack
President and Chief Executive Officer
(Principal Executive Officer)

 

 

 

 

Dated: November 1, 2012

/s/ JAMES SCIBETTA

 

James Scibetta
Chief Financial Officer
(Principal Financial Officer)

 

 

Dated: November 1, 2012

/s/ LAUREN RIKER

 

Lauren Riker
Executive Director, Accounting & Reporting
(Principal Accounting Officer)

 

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Exhibit 10.1

 

 

Pacira Pharmaceuticals, Inc.

10450 Science Center Drive

San Diego, CA 92121

Phone: (858) 625-2424

FAX: (858) 625-2439

 

SECOND AMENDED AND RESTATED CONSULTING AGREEMENT

 

RECIPIENT:                                                                        Gary Pace, Ph.D

 

EFFECTIVE DATE:                                  August 17, 2012

 

This Second Amended and Restated Consulting Agreement (the “Agreement”) is entered into this day, August 17, 2012, by and between Pacira Pharmaceuticals, Inc., a California corporation, having its principal place of business at 10450 Science Center Drive, San Diego, California 92121 (the “Company”), and Gary Pace located at the address listed above (the “Consultant”), and is made with respect to the following recitals and agreements:

 

WHEREAS, as of June 2, 2011 (the “Effective Date”) Company and Consultant entered into a Consulting Agreement; (the “Original Agreement” );

 

WHEREAS, as of April 3, 2012, the Original Agreement was amended and restated pursuant to the Amended and Restated Consulting Agreement (the “First Amended Agreement”);

 

WHEREAS, Company and Consultant wish to further amend and restate the First Amended Agreement to read as set forth herein.

 

NOW, THEREFORE, in consideration of the mutual covenants and promises described below, the First Amended Agreement is hereby amended and restated to read, and Company and Consultant agree, as follows:

 

1.                                      Services; Fees.

 

a)  Consultant is hereby retained as an independent contractor to provide the services described in Exhibit A hereto (the “Services”). Consultant shall receive fees for such Services and reimbursement for expenses as set forth in Exhibit A hereto. Such Services shall be performed as requested from time to time by Company’s chief executive officer, or as otherwise set forth on Exhibit A.

 

b)  Consultant shall diligently perform the Services in full compliance with the highest professional standards of practice in the industry and applicable laws.  Anything to the contrary contained in this Agreement notwithstanding, Consultant agrees and acknowledges that during the Term (as defined below) there is neither a minimum amount of Services for which Company is obligated to engage Consultant, nor shall this Agreement be construed as limiting in any way Company’s right to contract for similar services with any other party.  In no event shall this Agreement be construed as obligating Company to pay any amounts for Services performed under this Agreement unless (i) Company actually engages Consultant to perform Services pursuant to this Agreement, and Consultant actually performs such Services, and (ii) each such engagement to perform Services is evidenced by Exhibit A or other written agreement between the parties prior to the commencement of such Services.

 

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c)  In consideration of the Services, Consultant shall receive the fees set forth on Exhibit A (the “Consulting Fees”).  Consultant represents that the compensation: (i) is payment in full for the Services, and (ii) reflects the fair market value of the services described herein, commensurate with the fees charged by Consultant for providing similar services to other entities.

 

2.                                      Term. The initial term of this Agreement commenced on the Effective Date and shall continue until either party terminates this Agreement pursuant to this Section 2 (the “Term”). Consultant’s services shall be rendered as requested by Company and in a manner satisfactory to Company. This Agreement may be terminated by either party upon giving thirty (30) days prior written notice to the other party.  Upon termination of this Agreement, Consultant shall only be entitled and Company only obligated to pay for any Consulting Fee(s) due to Consultant for Services actually rendered and non-cancellable expenses incurred prior to the termination date in accordance with the terms and conditions of this Agreement.  Notwithstanding the foregoing, in the event Company terminates this Agreement as a result of Consultant’s failure to comply with the representations and warranties set forth herein, Company shall be entitled to withhold payment for Services previously rendered. This sentence and Sections 4, 5, 7, 8, 9, 10 and 13 shall survive the termination of this Agreement for any reason.

 

3.                                      Representations and Warranties of Consultant. Consultant represents and warrants that Consultant has the requisite expertise, ability and legal right to render the consulting services, and will perform the Services in an efficient manner and in accordance with the terms of this Agreement. Consultant shall abide by all laws, rules and regulations that apply to the performance of the Services and when on Company premises, will comply with Company’s policies with respect to conduct of visitors.  Consultant represents and warrants that Consultant is not and has not been: (i) excluded from participation in, or otherwise ineligible to participate in a “Federal Health Care Program” (as defined in 42 U.S.C. § 1320a-7b(f)) or in any other government payment program; (ii) listed on the General Services Administration’s List of parties Excluded from Federal Procurement and Nonprocurement Programs; or (iii) debarred under the Generic Drug Enforcement Act of 1992 (the “GDE Act”) (21 U.S.C. § 335(a) and (b)). To the best of Consultant’s knowledge, Consultant represents and warrants that Consultant has not engaged in any activity that could lead Consultant to become excluded or debarred as set forth above. Consultant further represents and warrants that Consultant does not and will not use in any capacity the services of any person excluded or debarred as set forth above. If Consultant is debarred or excluded as set forth above, during the Term, Consultant agrees to immediately notify Company, and this Agreement shall automatically terminate as of the date of such exclusion or debarment, without the requirement of notice from Company.  Consultant further represents and warrants that in providing the Services, Consultant shall be responsible for Consultant’s own compliance with all applicable local, state and federal laws and regulations.

 

4.                                      Confidentiality.

 

(a)                                 Consultant recognizes that in performing services under this Agreement it will have contact with information of substantial value to Company, which is not generally known and which gives Company an advantage over its competitors who do not know or use it, including, but not limited to, Company Inventions (as defined below), improvements to the Company’s technology, techniques, drawings, processes, inventions, developments, sales and customer information, and business and financial information, relating to the business, products, practices or techniques of Company and of any other corporation or entity that may be a party to a particular transaction with the Company (hereinafter referred to as “Confidential Information”). Confidential Information shall also include information belonging to a third party which Company is obligated to keep confidential from others.

 

(b)                                 Consultant agrees, at all times, to (i) regard and preserve as confidential such Confidential Information using the same standard of care as he uses to protect its own confidential information (but in no event less than a reasonable standard of care), (ii) not use the Confidential Information for any purpose other than as necessary to perform the Services, and (iii) to refrain from publishing, distributing, or disclosing any part of such Confidential Information to a third party without prior written consent of Company. Consultant further agrees, at all times, to refrain

 

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from any other acts or omissions that would reduce the value of such Confidential Information to Company.  Consultant will immediately notify Company if he learns that Confidential Information has been disclosed or is about to be disclosed in violation of this Agreement, whether by Consultant’s acts, acts of third parties, law, regulation or court order, and shall cooperate with Company’s efforts to prevent or limit unauthorized disclosure of Confidential Information.

 

(c)                                  Upon termination of this Agreement, Consultant agrees to promptly surrender to Company all documents or items which are the property of Company or which contain or comprise such Confidential Information.

 

(d)                                 Consultant’s duties of confidence to Company and other duties pursuant to this Agreement, shall survive the termination of this Agreement for any reason.

 

5.                                      Inventions and Works of Authorship.

 

(a)                                 Consultant agrees to promptly and fully disclose in writing to Company any invention, discovery, idea, work of authorship, development, improvement, method or product, know-how and data (collectively, “Inventions”), whether or not patentable, which are made, conceived or reduced to practice by Consultant during the term of this Agreement that either: (i) result from any work performed by Consultant for Company; or (ii) relate to the business of the Company (collectively, “Company Inventions”).  Consultant agrees that Company Inventions shall be the sole property of Company and agrees to assign and does hereby assign to Company all right, title, and interest in and to all Company Inventions, including any and all related patents, copyrights, trademarks, trade names, trade secrets and other industrial and intellectual property rights and applications therefor, anywhere in the world.  Consultant hereby waives any moral rights in any Company Inventions to the maximum extent allowed under applicable law.

 

(b)                                 Consultant will maintain adequate and current written records (in the form of notes, sketches, drawings and as may be specified by the Company) to document the making, conception and/or first actual reduction to practice of any Company Invention.  Such written records shall be available to and remain the sole property of the Company at all times.

 

(c)                                  The Consultant agrees that if in the course of performing the Services, the Consultant incorporates into any Company Invention any Invention or other proprietary information owned by the Consultant or in which the Consultant has an interest, (i) the Consultant shall inform Company and receive Company’s consent, in writing, before incorporating such Invention or other proprietary information into any Company Invention; and (ii) the Company is hereby granted and shall have a nonexclusive, royalty-free, perpetual, irrevocable, worldwide right and license, with right to grant sublicenses, to fully use, reproduce, utilize, distribute (through multiple tiers of distribution), commercialize and otherwise exploit such Invention, including a right and license to make, have made, use, sell, offer to sell, develop, have developed, make derivative works, distribute, display, import, lease or otherwise dispose of Company products embodying, incorporating, or otherwise based on the Inventions.  The Consultant shall not incorporate any Invention or other proprietary information owned by any third party into any Company Invention without Company’s prior written permission.

 

(d)                                 All of Company’s patents, copyrights, trade secrets and other intellectual property rights relating to the subject matter of this Agreement that were developed by Company prior to this Agreement or independent thereof shall be owned by Company and Consultant shall have no ownership, license, or other use rights therein except as set forth in this Agreement.

 

(e)                                  Consultant shall cooperate in executing any documents as may be necessary or desirable to further confirm the foregoing assignment or to assist Company in applying for, obtaining and enforcing patents or copyrights or other rights in the United States and in any foreign country with respect to any Company Invention.  The Consultant agrees that if Company is unable because of Consultant’s unavailability, dissolution, mental or physical incapacity, or for any other reason, to secure Consultant’s signature to apply for or to pursue any application for any United States or

 

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foreign patents or mask work or copyright registrations covering the Company Inventions, then the Consultant hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Consultant’s agent and attorney in fact, to act for and in Consultant’s behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyright and mask work registrations thereon with the same legal force and effect as if executed by Consultant.

 

6.                                      Independent Contractor. Consultant’s relationship with Company is and shall be that of an independent contractor, and neither party is authorized to nor shall act as the agent of the other. Consultant agrees that he or she will be solely responsible for the payment of all taxes relating to the compensation paid pursuant to this Agreement.

 

7.                                      Indemnification.  Consultant shall indemnify and hold harmless Company and its affiliates, officers, directors, employees, and agents from and against all liabilities, losses, costs and expenses (including reasonable attorneys’ fees) and damages arising out of or resulting from (i) any willful misconduct or negligent act or omission of Consultant, (ii) any breach of this Agreement by Consultant, or (iii) any violation by Consultant of any local, state, or federal law, rule, or regulation applicable to the performance of Consultant’s obligations under this Agreement.  This Section 7 shall survive any termination or expiration of this Agreement.

 

8.                                      Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, or by Federal Express postage prepaid and addressed to the party to be notified at the address for such party set forth in the introductory paragraph above, or at such other address as such party may designate by ten (10) days advance written notice to the other parties.

 

9.                                      Remedies. Consultant acknowledges that any disclosure or unauthorized use of Confidential Information will constitute a material breach of this Agreement and cause substantial harm to Company for which damages would not be a fully adequate remedy, and, therefore, in the event of any such breach, in addition to other available remedies, Company shall have the right to obtain injunctive relief.

 

10.                               Attorneys’ Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to other relief to which such party may be entitled.

 

11.                               Successors and Assigns. This Agreement shall be binding upon Consultant, and inure to the benefit of, the parties hereto and their respective heirs, successors, assigns, and personal representatives; provided, however, that it shall not be assignable by Consultant.

 

12.                               Amendment and Modification. No amendment, modification or supplement of this Agreement shall be binding unless executed in writing and signed by all of the parties hereto.

 

13.                               Entire Agreement; Governing Law. This Agreement contains the entire understanding of the parties with respect to the matters contained herein. This Agreement shall supersede any and all previous and existing Consulting Agreements between Company and Consultant. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without regard to principles of conflicts of law.

 

IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written.

 

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By:

/s/ Gary Pace

 

Consultant

 

8/17/12

 

Name

 

Title

 

Date

 

 

 

 

 

 

 

 

 

 

 

 

PACIRA PHARMACEUTICALS, INC., a California Corporation

 

 

 

 

 

 

By:

/s/ Dave Stack

 

CEO

 

8/17/12

 

Name

 

Title

 

Date

 

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EXHIBIT A

 

Scope of Services of Consultant:

 

The scope of consulting work contemplated by this Agreement shall be as follows:  Consultant will have the title of Technical Advisor to Company’s Chief Executive Officer and Board of Directors.  Consultant will drive a central process for technical analysis and scientific data based decision making in addition to his role as the project lead for the Spray Process.

 

Consulting Fees:

 

Consultant shall be compensated at the rate of $15,000 per month, to be billed monthly via invoice.  Invoices shall be paid within thirty (30) days of receipt at Pacira.  Invoices must be sent electronically to Accountspayable@pacira.com.

 

In addition to the fee set forth above, Consultant shall be eligible to receive a bonus (the “Bonus”) upon the approval by the United States Food and Drug Administration (the “FDA”) of Company’s Suite C manufacturing facility for EXPAREL (“Suite C”):

 

FDA Approval of Suite C on or before:

 

Bonus Amount:

 

November 30, 2013

 

$

200,000

 

December 31, 2013

 

$

100,000

 

January 31, 2014

 

$

50,000

 

 

The Bonus shall be paid not later than thirty (30) days following the FDA’s approval for Suite C.

 

Equity Compensation:

 

Subject to the approval of the Board of Directors of Pacira Pharmaceuticals, Inc., a Delaware corporation and parent company to Company (“Parent”), Parent shall grant to Consultant an option (the “Option”) to purchase an aggregate of 70,000 shares of Common Stock, $0.001 par value per share, of Parent (the “Option Shares”).  The Option will be subject to the terms and conditions of Parent’s 2011 Amended and Restated Stock Incentive Plan (the “Plan”) and the accompanying Stock Option Agreement which Consultant will be required to execute as a condition to receipt of the Option.  The Option Shares shall

 

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vest in accordance with the Plan and the Stock Option Agreement.

 

Reimbursement of Expenses:

 

·                  Company will reimburse consultant for all pre-approved travel and related expenses.

·                  Consultant is responsible for making all travel arrangements through his/her travel agent, unless otherwise instructed.

·                  Expense reports should be submitted to Company with corresponding receipts within five (5) days of the completed travel.

 

Pacira Pharmaceuticals Contact:

 

Name Dave Stack

Title Chief Executive Officer
Pacira Pharmaceuticals, Inc.

5 Sylvan Way
Parsippany, NJ 07054

Tel: 973-254-3560

 

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Exhibit 31.1

 

CERTIFICATION

 

I, David Stack, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Pacira Pharmaceuticals, Inc. (the “Registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

(a)                                      designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)                                      designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)                                       evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)                                      disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

 

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

 

Date: November 1, 2012

/s/David Stack

 

David Stack

 

President and Chief Executive Officer

 

(Principal Executive Officer)

 

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Exhibit 31.2

 

CERTIFICATION

 

I, James Scibetta, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Pacira Pharmaceuticals, Inc. (the “Registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

(a)                                      designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)                                      designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)                                       evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)                                      disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

 

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

Date: November 1, 2012

/s/ James Scibetta

 

James Scibetta

 

Chief Financial Officer

 

(Principal Financial Officer)

 

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Exhibit 32.1

 

STATEMENT PURSUANT TO 18 U.S.C. §1350

 

Pursuant to 18 U.S.C. §1350, the undersigned certifies that this Quarterly Report on Form 10-Q of Pacira Pharmaceuticals, Inc. for the quarter ended September 30, 2012, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Pacira Pharmaceuticals, Inc.

 

Date: November 1, 2012

/s/ David Stack

 

David Stack

 

President and Chief Executive Officer

 

(Principal Executive Officer)

 

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Exhibit 32.2

 

STATEMENT PURSUANT TO 18 U.S.C. §1350

 

Pursuant to 18 U.S.C. §1350, the undersigned certifies that this Quarterly Report on Form 10-Q of Pacira Pharmaceuticals, Inc. for the quarter ended September 30, 2012, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Pacira Pharmaceuticals, Inc.

 

Date: November 1, 2012

/s/ James Scibetta

 

James Scibetta

 

Chief Financial Officer

 

(Principal Financial Officer)

 

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