FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2023

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in the principal or most advantageous market in an orderly transaction. To increase consistency and comparability in fair value measurements, the Financial Accounting Standards Board (FASB) established a three-level hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of fair value measurements are:

•Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

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

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

The carrying value of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these items. The fair value of the Company’s convertible senior notes are calculated utilizing market quotations from an over-the-counter trading market for these notes (Level 2). The fair value of the Company’s acquisition-related contingent consideration is reported at fair value on a recurring basis (Level 3). The carrying amounts of equity investments and convertible notes receivable without readily determinable fair values have not been adjusted for either an impairment or upward or downward adjustments based on observable transactions.

At June 30, 2023, the carrying values and fair values of the following financial assets and liabilities were as follows (in thousands):


	Carrying Value		Fair Value Measurements Using
			Level 1		Level 2		Level 3
Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis:
Financial Assets:
Equity investments	$	15,877	$	—	$	—	$	15,877
Convertible notes receivable	$	12,062	$	—	$	—	$	12,062
Financial Liabilities:
Acquisition-related contingent consideration	$	21,482	$	—	$	—	$	21,482

Financial Liabilities Measured at Amortized Cost:
Term loan A facility due March 2028	$	145,686	$	—	$	146,452	$	—
0.750% convertible senior notes due 2025 (1)	$	397,360	$	—	$	372,566	$	—
3.375% convertible senior notes due 2024	$	8,641	$	—	$	8,641	$	—

(1) The closing price of the Company’s common stock as reported on the Nasdaq Global Select Market was $40.07 per share at June 30, 2023 compared to a conversion price of $71.78 per share. At June 30, 2023, as the conversion price was above the stock price, the requirements for conversion have not been met. The maximum conversion premium that could have been due on the 2025 Notes is 5.6 million shares of the Company’s common stock, which assumes no increase in the conversion rate for certain corporate events.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Equity and Convertible Note Investments

The Company holds strategic investments in clinical and preclinical stage privately-held biotechnology companies in the form of equity and convertible note investments. The following investments have no readily determinable fair value and are recorded at cost minus impairment, if any, plus or minus observable price changes of identical or similar investments (in thousands):


	Equity Investments		Convertible Notes Receivable		Total
Balance at December 31, 2021	$	14,127	$	4,132	$	18,259
Purchases	11,750		1,250		13,000
Impairment	(10,000)		—		(10,000)
Foreign currency adjustments	—		(67)		(67)
Balance at December 31, 2022	15,877		5,315		21,192
Purchases	—		6,758		6,758

Foreign currency adjustments	—		(11)		(11)
Balance at June 30, 2023	$	15,877	$	12,062	$	27,939

Acquisition-Related Contingent Consideration

The Company has recognized contingent consideration related to the Flexion Acquisition and the MyoScience Acquisition in the amount of $21.5 million and $28.1 million as of June 30, 2023 and December 31, 2022, respectively. For more information, see Note 14, Acquisition-Related (Gains) Charges, Restructuring Charges and Other.

The Company’s contingent consideration obligations are recorded at their estimated fair values and are revalued each reporting period if and until the related contingencies are resolved. The Company has measured the fair value of its contingent consideration using a probability-weighted discounted cash flow approach that is based on unobservable inputs and a Monte Carlo simulation. These inputs include, as applicable, estimated probabilities and the timing of achieving specified commercial and regulatory milestones, estimated forecasts of revenue and costs and the discount rates used to calculate the present value of estimated future payments. Significant changes may increase or decrease the probabilities of achieving the related commercial and regulatory events, shorten or lengthen the time required to achieve such events, or increase or decrease estimated forecasts.

In November 2021, the Company completed the Flexion Acquisition, which provided for contingent consideration related to contingent value rights that were issued to Flexion shareholders and certain equity award holders which could aggregate up to a total of $372.3 million if certain regulatory and commercial milestones are met. The aggregate amount was initially $425.5 million prior to the Company’s September 2022 decision to formally discontinue further development of Flexion’s product candidate, PCRX-301. The Company’s obligation to make milestone payments is limited to those milestones achieved through December 31, 2030, and are to be paid within 60 days of the end of the fiscal quarter of achievement. During the three and six months ended June 30, 2023, the Company recorded gains of $18.3 million and $6.6 million, respectively, due to adjustments to long-term forecasts which reduced the probability of meeting the sales-based contingent consideration milestones by December 31, 2030, the expiration date for achieving the milestones. The gains recognized during the six months ended June 30, 2023 were partially offset by a decrease in the assumed discount rate that is utilized in calculating the liability’s present value, based on a significant improvement in the Company’s incremental borrowing rate resulting from the TLA Credit Agreement entered into in March 2023. During the three and six months ended June 30, 2022, the Company recorded gains of $12.5 million and $13.3 million, respectively, primarily due to adjustments to near-term forecasts for the earnout period of the contingent consideration. These adjustments were recorded as acquisition-related charges (gains) in the condensed consolidated statements of operations. At June 30, 2023, the weighted average discount rate was 10.2% and the probability of payment for the achievement of the remaining regulatory milestone by the expiration date was 12.5%. As of June 30, 2023 and December 31, 2022, a contingent consideration liability related to the Flexion Acquisition was recognized in the amount of $21.5 million and $28.1 million, respectively.

In April 2019, the Company completed the MyoScience Acquisition pursuant to the terms of an Agreement and Plan of Merger, which provided for contingent milestone payments of up to an aggregate of $100.0 million upon the achievement of certain regulatory and commercial milestones. The Company’s obligation to make milestone payments is limited to those milestones achieved through December 31, 2023, and are to be paid within 60 days of the end of the fiscal quarter of achievement. As of June 30, 2023, the maximum potential remaining milestone payments to be paid are $43.0 million. At June 30, 2023, the probability of success for the regulatory milestone that has not yet been met was assessed as zero. As of June 30, 2023 and December 31, 2022, a contingent consideration liability related to the MyoScience Acquisition has been assessed as zero. During the three and six months ended June 30, 2022, the Company recognized contingent consideration gains of $8.8 million and $9.0 million, respectively, due to the reduced probability of meeting the contingent consideration milestones by December 31, 2023, the expiration date for achieving the milestones.

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


Assumption						Flexion Ranges Utilized as of June 30, 2023
Discount rates						9.4% to 11.0%
Probabilities of payment for regulatory milestones						0% to 12.5%
Projected years of payment for regulatory and commercial milestones						2030

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


	Contingent Consideration Fair Value
Balance at December 31, 2021	$	57,598
Fair value adjustments and accretion	(29,476)
Balance at December 31, 2022	28,122
Fair value adjustments and accretion	(6,640)

Balance at June 30, 2023	$	21,482

Available-for-Sale Investments

Short-term investments consist of asset-backed securities collateralized by credit card receivables, investment grade commercial paper and corporate, federal agency and government bonds with maturities greater than three months, but less than one year. Noncurrent investments consist of federal agency bonds and government bonds with maturities greater than one year but less than three years. Net unrealized gains and losses (excluding credit losses, if any) from the Company’s short-term investments are reported in other comprehensive income. At June 30, 2023 and December 31, 2022, all of the Company’s short-term and noncurrent investments are classified as available-for-sale investments and are determined to be Level 2 instruments,

which are measured at fair value using standard industry models with observable inputs. The fair value of the commercial paper is measured based on a standard industry model that uses the three-month U.S. Treasury bill rate as an observable input. The fair value of the asset-backed securities and corporate bonds is principally measured or corroborated by trade data for identical issues in which related trading activity is not sufficiently frequent to be considered a Level 1 input or that of comparable securities. At the time of purchase, all available-for-sale investments had an “A” or better rating by Standard & Poor’s.

The following summarizes the Company’s short-term and noncurrent available-for-sale investments at June 30, 2023 and December 31, 2022 (in thousands):


June 30, 2023 Investments	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Level 2)
Current:
Asset-backed securities	$	5,972	$	—	$	(16)	$	5,956
Commercial paper	49,007		—		(99)		48,908

U.S. federal agency bonds	64,789		—		(314)		64,475
U.S. government bonds	14,697		—		(80)		14,617







Total	$	134,465	$	—	$	(509)	$	133,956


December 31, 2022 Investments	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Level 2)
Current:
Asset-backed securities	$	6,836	$	—	$	(3)	$	6,833
Commercial paper	134,423		23		(386)		134,060

U.S. federal agency bonds	41,971		—		(337)		41,634
U.S. government bonds	2,003		—		(18)		1,985
Subtotal	$	185,233	$	23	$	(744)	$	184,512
Noncurrent:


U.S. federal agency bonds	22,783		2		(66)		22,719
U.S. government bonds	14,499		—		(9)		14,490
Subtotal	37,282		2		(75)		37,209
Total	$	222,515	$	25	$	(819)	$	221,721

At June 30, 2023, there were no investments available for sale that were materially less than their amortized cost.

The Company elects to recognize its interest receivable separate from its available-for-sale investments. At June 30, 2023 and December 31, 2022, the interest receivable from its available-for-sale investments recognized in prepaid expenses and other current assets was $0.9 million and $0.8 million, respectively.

Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term and long-term available-for-sale investments and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. Such amounts may exceed federally-insured limits.

As of June 30, 2023, three wholesalers each accounted for over 10% of the Company’s accounts receivable, at 36%, 21% and 15%. At December 31, 2022, three wholesalers each accounted for over 10% of the Company’s accounts receivable, at 34%, 19% and 18%. For additional information regarding the Company’s wholesalers, see Note 2, Summary of Significant Accounting Policies. EXPAREL and ZILRETTA revenues are primarily derived from major wholesalers and specialty distributors that generally have significant cash resources. The Company performs ongoing credit evaluations of its customers as warranted and generally does not require collateral. Allowances for credit losses on the Company’s accounts receivable are maintained based on historical payment patterns, current and estimated future economic conditions, aging of accounts receivable and its write-off history. As of June 30, 2023 and December 31, 2022, the Company did not deem any allowances for credit losses on its accounts receivable necessary.