FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2022

Fair Value Measurements

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

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

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

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

The carrying value of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these items. The fair value of the Company’s 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 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, whereas an equity investment was fully impaired during the year ended December 31, 2022.

At December 31, 2022, the carrying values and fair values of the Company’s 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 Asset:
Equity investments	$	15,877	$	—	$	—	$	15,877
Convertible notes receivable	$	5,315	$	—	$	—	$	5,315
Financial Liabilities:
Acquisition-related contingent consideration	$	28,122	$	—	$	—	$	28,122

Financial Liabilities Measured at Amortized Cost:
Term loan B facility due December 2026	$	284,704	$	—	$	292,422	$	—
0.750% convertible senior notes due 2025 (1)	$	396,126	$	—	$	365,269	$	—
3.375% convertible senior notes due 2024 (2)	$	8,641	$	—	$	8,641	$	—

(1) The closing price of the Company’s common stock as reported on the Nasdaq Global Select Market was $38.61 per share at December 31, 2022 compared to a conversion price of $71.78 per share. At December 31, 2022, 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 at December 31, 2022 is approximately 5.6 million shares of the Company’s common stock, which assumes no increase in the conversion rate for certain events.

(2) Relates to the Flexion 2024 Notes. For more information, See Note 11, Debt.

Certain assets and liabilities are measured at fair value on a non-recurring basis, including assets and liabilities acquired in a business combination and long-lived assets, which would be recognized at fair value if deemed impaired or if reclassified as assets held for sale. The fair value in these instances would be determined using Level 3 inputs.

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, 2020	$	12,802	$	—	$	12,802
Purchases	12,967		4,220		17,187
Divestiture of investment	(11,642)		—		(11,642)
Foreign currency adjustments	—		(88)		(88)
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

During the year ended December 31, 2022, an impairment of an equity investment of $10.0 million was recorded in other, net in the consolidated statements of operations.

During the year ended December 31, 2021, the Company sold an equity investment for net cash proceeds of $9.1 million and recognized a realized loss of $2.6 million, which was recorded in other, net in the consolidated statements of operations. The fair value of the divested equity investment was based on a Level 1 input.

In February 2023, the Company invested $4.0 million in a convertible note receivable.

Acquisition-Related Contingent Consideration

The Company has recognized contingent consideration related to the Flexion Acquisition and the MyoScience Acquisition in the amount of $28.1 million and $57.6 million as of December 31, 2022 and 2021, respectively. Refer to Note 5, Flexion Acquisition and Note 18, Acquisition-related Charges (Gains), Impairment and Other, for more information.

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 CVRs 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 previously $425.5 million prior to the Company’s September 2022 decision to formally discontinue further development of 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. As part of the purchase price consideration related to the Flexion Acquisition, the Company recorded contingent consideration of $45.2 million, which represented the Company’s potential achievement of meeting the regulatory and commercial milestones. From the date of the Flexion Acquisition through December 31, 2021, the Company recorded an additional $1.2 million liability. For the year ended December 31, 2022, the Company recorded a gain of $18.3 million primarily due to adjustments to near-term forecasts for the earnout period of the Flexion contingent consideration, which were recorded as acquisition-related gains in the consolidated statements of operations. At December 31, 2022, the weighted average discount rate was 15.0%. The probability of payment for the achievement of the remaining regulatory milestone by the expiration date was reduced to 12.5% at December 31, 2022 from 15% at December 31, 2021. The reduction in the probability of payment is due to the likelihood of achievement prior to the expiration date being reduced to 50% from 100% due to revised timing in conducting clinical trial studies, whereas the probability of success in regulatory approval has improved to 25% from 15%. As of December 31, 2022 and 2021, the contingent consideration liability related to the Flexion Acquisition was recognized in the amount of $28.1 million and $46.4 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 December 31, 2022, the maximum potential remaining milestone payments to be paid are $43.0 million. For the year ended December 31, 2022, the Company recognized a contingent consideration gain of $11.2 million due to the reduced probability of meeting the MyoScience contingent consideration milestones by December 31, 2023, the expiration date for achieving the remaining milestones.

For the years ended December 31, 2021 and 2020, the Company recognized an acquisition-related gain of $2.2 million and an acquisition-related charge of $5.2 million, respectively, as a result of revisions to the probabilities of regulatory milestones being met and future projections, which have been included in acquisition-related charges (gains) in the consolidated statements of operations. At December 31, 2022, the probability of success for the regulatory milestone that has not yet been met was reduced to zero. As of December 31, 2022 and 2021, the fair value associated with the contingent consideration liability related to the MyoScience Acquisition has been assessed as zero and $11.2 million, respectively.

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

Assumption

Flexion Ranges Utilized as of
December 31, 2022

Discount rates

14.9% to 15.1%

Probability of payment for achievement of regulatory milestones

0% to 12.5%

Projected year of achieving or expiration of regulatory 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, 2020	$	28,346
Contingent consideration related to the Flexion Acquisition	45,241
Fair value adjustments and accretion	(989)
Payments made or offset against amounts due	(15,000)
Balance at December 31, 2021	57,598
Fair value adjustments and accretion	(29,476)
Balance at December 31, 2022	$	28,122

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 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 and noncurrent investments are reported in other comprehensive (loss) income. At 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 short-term and noncurrent investments had an “A” or better rating by Standard & Poor’s.

The following summarizes the Company’s investments at December 31, 2022 and 2021 (in thousands):


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


December 31, 2021 Investments:	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (Level 2)
Current:
Asset-backed securities	$	3,182	$	—	$	—	$	3,182
Commercial paper	57,533		80		(2)		57,611
Corporate bonds	9,936		102		—		10,038







Total	$	70,651	$	182	$	(2)	$	70,831

At December 31, 2022, 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 December 31, 2022 and 2021, the interest receivable recognized in prepaid expenses and other current assets was $0.8 million and $0.1 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 noncurrent 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 December 31, 2022, three wholesalers each accounted for over 10% of the Company’s accounts receivable at 34%, 19% and 18%. As of December 31, 2021, four wholesalers each accounted for over 10% of the Company’s accounts receivable at 30%, 20%, 17% and 11%. 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 December 31, 2022 and 2021, the Company did not deem any allowances for credit losses on its accounts receivable necessary.