CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—DESCRIPTION OF BUSINESS
Pacira Pharmaceuticals, Inc. and its subsidiaries (collectively, the “Company” or “Pacira”) is a specialty pharmaceutical company focused on the development, manufacture and commercialization of pharmaceutical products, based on its proprietary DepoFoam
®
extended release drug delivery technology, for use primarily in hospitals and ambulatory surgery centers. Pacira is committed to driving innovation in postsurgical pain management with opioid-sparing strategies.
The Company’s lead product, EXPAREL
®
(bupivacaine liposome injectable suspension), which consists of bupivacaine encapsulated in DepoFoam, was approved by the United States Food and Drug Administration, or FDA, on October 28, 2011 and launched commercially in April 2012. DepoFoam is also the basis for the Company’s other FDA-approved product, DepoCyt(e), which the Company manufactures for its commercial partners. The Company also sells its bupivacaine liposome injectable suspension product to a commercial partner to serve animal health indications.
Pacira is subject to risks common to companies in similar industries and stages of development, including, but not limited to, competition from larger companies, reliance on revenue from few products, reliance on a single manufacturing site, new technological innovations, dependence on key personnel, reliance on third-party service providers and sole source suppliers, protection of proprietary technology and compliance with government regulations.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
These interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, and in accordance with the rules and regulations of the Securities and Exchange Commission 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 consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
The consolidated financial statements at
March 31, 2017
, and for the
three
months ended
March 31, 2017
and
2016
, 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 consolidated balance sheet at
December 31, 2016
is derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
. The accounts of wholly-owned subsidiaries are included in the consolidated financial statements. 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 periods or for the full year.
Concentration of Major Customers
The Company’s customers are national and regional wholesalers of pharmaceutical products as well as commercial, collaborative and licensing partners. The Company sells EXPAREL through a drop-ship program under which orders are processed through wholesalers (including AmerisourceBergen Health Corporation, Cardinal Health, Inc. and McKesson Drug Company), but shipments of the product are sent directly to individual accounts, such as hospitals, ambulatory surgery centers and individual doctors. The table below includes the percentage of revenue comprised by the Company’s
three
largest customers (i.e., wholesalers or commercial partners) in each period presented:
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Largest customer
|
35%
|
|
33%
|
Second largest customer
|
29%
|
|
28%
|
Third largest customer
|
25%
|
|
27%
|
|
89%
|
|
88%
|
Recent Accounting Pronouncements
Recently Adopted
In March 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This update includes multiple provisions intended to simplify various aspects of the accounting for share-based payment transactions including accounting for excess tax benefits and tax deficiencies, classification of excess tax benefits and tax deficiencies in the statement of cash flows and accounting for award forfeitures. The update also removes the requirement to delay recognition of an excess tax benefit until it reduces current taxes payable, instead, it is required to be recognized at the time of settlement, subject to normal valuation allowance considerations. This update became effective for the Company beginning January 1, 2017. The Company elected an accounting policy change to record forfeitures as they occur rather than estimating forfeitures during each period and recorded a charge of
$0.3 million
to retained earnings as of January 1, 2017 related to the reversal of cumulative forfeiture estimates. The adoption of this standard also resulted in the recognition of
$29.3 million
of previously unrecognized excess tax benefits in deferred tax assets, fully offset by a valuation allowance. The changes have been applied prospectively in accordance with the update and prior periods have not been adjusted. All tax-related cash flows resulting from stock-based compensation, including the excess tax benefits related to the settlement of stock-based awards, will be classified as cash flows from operating activities in the Company’s consolidated statements of cash flows. The Company does not believe that any of the provisions in ASU 2016-09 will have a significant impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. The standard requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the previous guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures, one of which is net realizable value). The standard became effective for the Company prospectively beginning January 1, 2017. The adoption of ASU 2015-11 did not have a material impact on the Company’s consolidated financial statements.
Not Adopted as of
March 31, 2017
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which requires that an entity recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to its customers. In order to achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. During the fiscal third quarter of 2015, the FASB approved a one year deferral to the effective date to be adopted by all public companies for all annual periods and interim reporting periods beginning after December 15, 2017. During 2016, the FASB issued additional guidance and clarification relating to identifying performance obligations, licensing, principal versus agent considerations, assessing collectability, presentation of sales taxes, noncash consideration and contract modifications and completed contracts at transition. These updates will replace existing revenue recognition guidance under GAAP when it becomes effective for the Company beginning January 1, 2018, and permits two methods of adoption: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. While the Company is continuing to evaluate the impact of these updates on its consolidated financial statements, it does not expect the implementation of ASU 2014-09 and the subsequently issued related guidance to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (ASC 842)
. This update requires lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the
lease liability, subject to adjustment for items such as initial direct costs. For income statement purposes, the new standard retains a dual model similar to Accounting Standards Codification, or ASC, 840, requiring leases to be classified as either operating or financing. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while financing leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). This update also introduces new disclosure requirements for leasing arrangements. The standard is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the impact of ASU 2016-02 on its consolidated financial statements. Refer to Note 12,
Commitments and Contingencies
, for further discussion on the Company’s leases.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326)
, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. This update also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. This ASU is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact of ASU 2016-13 on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which clarifies existing guidance on how companies present and classify certain cash receipts and cash payments in the statement of cash flows by addressing specific cash flow issues in an effort to reduce diversity in practice, including guidance on debt prepayment or extinguishment costs and contingent consideration payments made after a business combination. This update is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of ASU 2016-15 on its consolidated financial statements.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or not significant to the consolidated financial statements of the Company.
NOTE 3—INVENTORIES
The components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Raw materials
|
$
|
12,966
|
|
|
$
|
11,742
|
|
Work-in-process
|
7,709
|
|
|
11,621
|
|
Finished goods
|
9,636
|
|
|
7,915
|
|
Total
|
$
|
30,311
|
|
|
$
|
31,278
|
|
NOTE 4—FIXED ASSETS
Fixed assets, summarized by major category, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Machinery and laboratory equipment
|
$
|
34,399
|
|
|
$
|
34,309
|
|
Leasehold improvements
|
33,814
|
|
|
33,787
|
|
Computer equipment and software
|
6,509
|
|
|
5,623
|
|
Office furniture and equipment
|
1,606
|
|
|
1,606
|
|
Construction in progress
|
66,855
|
|
|
63,201
|
|
Total
|
143,183
|
|
|
138,526
|
|
Less: accumulated depreciation
|
(40,612
|
)
|
|
(37,510
|
)
|
Fixed assets, net
|
$
|
102,571
|
|
|
$
|
101,016
|
|
For each of the three month periods ended
March 31, 2017
and 2016, depreciation expense was
$3.1 million
. For the three months ended
March 31, 2017
and 2016, capitalized interest on the construction of manufacturing sites was
$0.2 million
and
$0.3 million
, respectively.
At
March 31, 2017
and
December 31, 2016
, total fixed assets, net, includes leasehold improvements and manufacturing process equipment located in England in the amount of
$37.0 million
and
$33.7 million
, respectively.
NOTE 5—GOODWILL
In March 2007, the Company acquired from SkyePharma Holding, Inc., or Skyepharma, its California operating subsidiary, referred to herein as the Acquisition. The Company’s goodwill arose in April 2012 from 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 standard 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 DepoBupivacaine products collected, including EXPAREL, and certain other yet-to-be-developed products, as well as milestone payments for DepoBupivacaine products, including EXPAREL, as follows:
|
|
(i)
|
$10.0 million
upon the first commercial sale in the United States (met April 2012);
|
|
|
(ii)
|
$4.0 million
upon the first commercial sale in a major E.U. country (United Kingdom, France, Germany, Italy and Spain);
|
|
|
(iii)
|
$8.0 million
when annual net sales collected reach
$100.0 million
(met September 2014);
|
|
|
(iv)
|
$8.0 million
when annual net sales collected reach
$250.0 million
(met June 2016); and
|
|
|
(v)
|
$32.0 million
when annual net sales collected reach
$500.0 million
.
|
The first milestone was met in April 2012, resulting in a
$10.0 million
payment to Skyepharma. The Company recorded this payment net of a
$2.0 million
contingent consideration liability recognized at the time of the Acquisition, resulting in
$8.0 million
recorded as goodwill. In September 2014, the Company achieved an
$8.0 million
milestone in connection with achieving
$100.0 million
of annual EXPAREL net sales collected, and in June 2016, the Company achieved another
$8.0 million
milestone for achieving
$250.0 million
of annual EXPAREL net sales collected. For purposes of meeting future potential milestone payments, annual net sales are measured on a rolling quarterly basis. Cumulatively through
March 31, 2017
, the Company has recorded an additional
$24.9 million
as goodwill for earn-out payments that are based on a percentage of net sales of DepoBupivacaine products collected, including EXPAREL. Any remaining earn-out payments will also be treated as additional costs of the Acquisition and, therefore, recorded as goodwill if and when each contingency is resolved.
The change in the carrying value of goodwill is summarized as follows (in thousands):
|
|
|
|
|
|
Carrying Value
|
Balance at December 31, 2016
|
$
|
46,737
|
|
Percentage payments on collections of net sales of DepoBupivacaine products
|
2,092
|
|
Balance at March 31, 2017
|
$
|
48,829
|
|
NOTE 6—DEBT
Convertible Senior Notes Due 2022
On March 13, 2017, the Company completed a private placement of
$345.0 million
in aggregate principal amount of
2.375%
convertible senior notes due 2022, or 2022 Notes, and entered into an indenture agreement, or 2022 Indenture, with respect to the 2022 Notes. The 2022 Notes accrue interest at a fixed rate of
2.375%
per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2017. The 2022 Notes mature on April 1, 2022.
The composition of the Company’s 2022 Notes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
2.375% convertible senior notes due 2022
|
$
|
345,000
|
|
|
$
|
—
|
|
Deferred financing costs
|
(8,661
|
)
|
|
—
|
|
Discount on debt
|
(70,347
|
)
|
|
—
|
|
Total debt, net of debt discount and deferred financing costs
|
$
|
265,992
|
|
|
$
|
—
|
|
The net proceeds from the issuance of the 2022 Notes were approximately
$334.0 million
, after deducting commissions and the estimated offering expenses payable by the Company. A portion of the net proceeds from the 2022 Notes were used by the Company to repurchase the majority of its then-outstanding convertible senior notes due 2019 in privately-negotiated transactions.
Holders may convert the 2022 Notes at any time prior to the close of business on the business day immediately preceding October 1, 2021, only under the following circumstances:
(i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2017 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than
130%
of the conversion price on each applicable trading day;
(ii) during the
five
business-day period immediately after any
five
consecutive trading-day period (the ‘‘measurement period’’) in which the trading price (as defined in the 2022 Indenture) per
$1,000
principal amount of the 2022 Notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
(iii) upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company’s assets; or
(iv) if the Company calls the 2022 Notes for redemption, until the close of business on the business day immediately preceding the redemption date.
On or after October 1, 2021, until the close of business on the second scheduled trading day immediately preceding April 1, 2022, holders may convert their 2022 Notes at any time.
Upon conversion, holders will receive the principal amount of their 2022 Notes and any excess conversion value, calculated based on the per share volume-weighted average price for each of the
40
consecutive trading days during the observation period (as more fully described in the 2022 Indenture). For both the principal and excess conversion value, holders may receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s option. The initial conversion rate for the 2022 Notes is
14.9491
shares of common stock per
$1,000
principal amount, which is equivalent to an initial conversion price of
$66.89
per share of the Company’s common stock. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. The initial conversion price of the 2022 Notes represents a premium of approximately
37.5%
to the closing sale price of
$48.65
per share of the Company’s common stock on the NASDAQ Global Select Market on March 7, 2017, the date that the Company priced the private offering of the 2022 Notes.
As of
March 31, 2017
, the 2022 Notes had a market price of
$1,037
per
$1,000
principal amount. In the event of conversion, holders would forgo all future interest payments, any unpaid accrued interest and the possibility of further stock price appreciation. Upon the receipt of conversion requests, the settlement of the 2022 Notes will be paid pursuant to the terms of the 2022 Indenture. In the event that all of the 2022 Notes are converted, the Company would be required to repay the
$345.0 million
in principal value and any conversion premium in any combination of cash and shares of its common stock (at the Company’s option).
Prior to April 1, 2020, the Company may not redeem the 2022 Notes. On or after April 1, 2020, the Company may redeem for cash all or part of the 2022 Notes if the last reported sale price (as defined in the 2022 Indenture) of the Company’s common stock has been at least
130%
of the conversion price then in effect for at least
20
trading days (whether or not consecutive) during any
30
consecutive trading-day period ending within
five
trading days prior to the date on which the Company provides notice of redemption. The redemption price will equal the sum of (i)
100%
of the principal amount of the 2022 Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date. In addition, calling the 2022 Notes for redemption will constitute a “make whole fundamental change ” (as defined in the 2022 Indenture) and will, in certain circumstances, increase the conversion rate applicable to the conversion of such notes if it is converted in connection with the redemption. No sinking fund is provided for the 2022 Notes.
If the Company undergoes a fundamental change, as defined in the 2022 Indenture, subject to certain conditions, holders of the 2022 Notes may require the Company to repurchase for cash all or part of their 2022 Notes at a repurchase price equal to
100%
of the principal amount of the 2022 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the
fundamental change repurchase date. In addition, if a ‘‘make-whole fundamental change’’ (as defined in the 2022 Indenture) occurs prior to April 1, 2022, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its notes in connection with the make-whole fundamental change.
The 2022 Notes are the Company’s general unsecured obligations that rank senior in right of payment to all of its indebtedness that is expressly subordinated in right of payment to the 2022 Notes, and equal in right of payment to the Company’s unsecured indebtedness. The 2022 Notes are also effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness, and are structurally subordinated to any debt or other liabilities (including trade payables) of the Company’s subsidiaries.
While the 2022 Notes are currently classified on the Company’s consolidated balance sheet at
March 31, 2017
as long-term debt, the future convertibility and resulting balance sheet classification of this liability will be monitored at each quarterly reporting date and will be analyzed dependent upon market prices of the Company’s common stock during the prescribed measurement periods. In the event that the holders of the 2022 Notes have the election to convert the 2022 Notes at any time during the prescribed measurement period, the 2022 Notes would then be considered a current obligation and classified as such.
Under Accounting Standards Codification 470-20,
Debt with Conversion and Other Options
, an entity must separately account for the liability and equity components of convertible debt instruments (such as the 2022 Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The liability component of the instrument is valued in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. The initial carrying value of the liability component of
$274.1 million
was calculated using a
7.45%
assumed borrowing rate. The equity component of
$70.9 million
, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2022 Notes and is recorded in additional paid-in capital on the consolidated balance sheet at the issuance date. That equity component is treated as a discount on the liability component of the 2022 Notes, which is amortized over the five year term of the 2022 Notes using the effective interest rate method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.
The Company allocated the total transaction costs of approximately
$11.0 million
related to the issuance of the 2022 Notes to the liability and equity components of the 2022 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the
five
-year term of the 2022 Notes, and transaction costs attributable to the equity component are netted with the equity component in stockholders’ equity.
The 2022 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company. The 2022 Indenture contains customary events of default with respect to the 2022 Notes, including that upon certain events of default,
100%
of the principal and accrued and unpaid interest on the 2022 Notes will automatically become due and payable.
Convertible Senior Notes Due 2019
On January 23, 2013, the Company completed a private placement of
$120.0 million
in aggregate principal amount of
3.25%
convertible senior notes due 2019, or 2019 Notes, and entered into an indenture agreement, or 2019 Indenture, with respect to the 2019 Notes. The 2019 Notes accrue interest at a fixed rate of
3.25%
per year, payable semiannually in arrears on February 1 and August 1 of each year. The 2019 Notes mature on February 1, 2019.
The composition of the Company’s 2019 Notes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
3.25% convertible senior notes due 2019
|
$
|
819
|
|
|
$
|
118,531
|
|
Deferred financing costs
|
(8
|
)
|
|
(1,276
|
)
|
Discount on debt
|
(52
|
)
|
|
(8,517
|
)
|
Total debt, net of debt discount and deferred financing costs
|
$
|
759
|
|
|
$
|
108,738
|
|
In March 2017, the Company used part of the net proceeds from the issuance of the 2022 Notes discussed above to repurchase
$117.7 million
aggregate principal of the 2019 Notes in privately-negotiated transactions for an aggregate of approximately
$118.2 million
in cash and the issuance of an aggregate of approximately
2.5 million
shares of common stock.
The partial repurchase of the 2019 Notes resulted in a
$3.7 million
loss on early debt extinguishment. At
March 31, 2017
,
$0.8 million
of principal remains outstanding on the 2019 Notes.
On or after August 1, 2018, until the close of business on the second scheduled trading day immediately preceding February 1, 2019, holders may convert their 2019 Notes at any time. Upon conversion, holders will receive cash up to the principal amount of the 2019 Notes and, with respect to any excess conversion value, may receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s option. The initial conversion rate for the 2019 Notes was
40.2945
shares of common stock per
$1,000
principal amount, which is equivalent to an initial conversion price of
$24.82
per share of the Company’s common stock. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.
Holders may convert their 2019 Notes prior to August 1, 2018 only if certain circumstances are met, including if during the previous calendar quarter, the sales price of the Company’s common stock was greater than
130%
of the conversion price then applicable for at least
20
out of the last
30
consecutive trading days of the quarter. During the quarter ended
March 31, 2017
, this condition for conversion was met. As a result, the 2019 Notes are classified as a current obligation and will be convertible until
June 30, 2017
. As of
March 31, 2017
, the 2019 Notes had a market price of
$1,914
per
$1,000
principal amount, compared to an estimated conversion value of
$1,837
per
$1,000
principal amount. In the event that the remaining 2019 Notes are converted, the Company would be required to repay the
$0.8 million
of principal value in cash and settle approximately
$0.7 million
of the conversion premium in cash, common stock or a combination of cash and shares of its common stock at the Company’s option as of
March 31, 2017
.
As of February 1, 2017, the Company may redeem for cash all or part of the 2019 Notes if the last reported sale price (as defined in the Indenture) of the Company’s common stock has been at least
130%
of the conversion price then in effect for at least
20
trading days (whether or not consecutive) during any
30
consecutive trading-day period, ending within
five
trading days prior to the date on which the Company provides notice of redemption. If the 2019 Notes are called for redemption, the holder has the right to submit these notes for conversion at any time prior to the the redemption date, and the Company will, in addition to paying the principal and conversion premium, pay a make-whole premium equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the Notes to be converted had such notes remained outstanding from the applicable conversion date to the maturity date.
Interest Expense
The following table sets forth the total interest expense recognized in the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Contractual interest expense
|
$
|
1,189
|
|
|
$
|
963
|
|
Amortization of debt issuance costs
|
201
|
|
|
153
|
|
Amortization of debt discount
|
1,411
|
|
|
1,022
|
|
Capitalized interest (Note 4)
|
(212
|
)
|
|
(270
|
)
|
Total
|
$
|
2,589
|
|
|
$
|
1,868
|
|
|
|
|
|
Effective interest rate on convertible senior notes
|
7.48
|
%
|
|
7.22
|
%
|
NOTE 7—FINANCIAL INSTRUMENTS
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in the principal or most advantageous market in an orderly transaction. To increase consistency and comparability in fair value measurements, the FASB established a three-level hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of fair value measurements are:
|
|
•
|
Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
|
|
|
•
|
Level 2—Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
|
|
|
•
|
Level 3—Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
|
The carrying value of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these items. The fair value of the Company’s convertible senior notes at
March 31, 2017
are calculated utilizing market quotations from an over-the-counter trading market for these instruments (Level 2). The carrying amount and fair value of the 2019 Notes and 2022 Notes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities Carried at Historical Cost
|
|
Carrying Value
|
|
Fair Value Measurements Using
|
March 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
2.375% convertible senior notes due 2022
(1)
|
|
$
|
265,992
|
|
|
$
|
—
|
|
|
$
|
357,722
|
|
|
$
|
—
|
|
3.25% convertible senior notes due 2019
(2)
|
|
$
|
759
|
|
|
$
|
—
|
|
|
$
|
1,567
|
|
|
$
|
—
|
|
(1) The closing price of the Company’s common stock was
$45.60
per share at
March 31, 2017
compared to a conversion price of
$66.89
per share. Currently, the conversion price is above the stock price. The maximum conversion premium that can be due on the 2022 Notes is approximately
5.2 million
shares, which assumes no increases in the conversion rate for certain corporate events.
(2) The closing price of the Company’s common stock was
$45.60
per share at
March 31, 2017
compared to a conversion price of
$24.82
per share which, if converted, would result in an approximate conversion premium of less than
0.1 million
shares or
$0.7 million
of cash. The maximum conversion premium that can be due on the 2019 Notes is less than
0.1 million
shares, which assumes no increases in the conversion rate for certain corporate events.
Short-term investments consist of asset-backed securities collateralized by credit card receivables, investment grade commercial paper and corporate bonds with maturities less than one year. The net unrealized gains and losses from the Company’s short-term investments are reported in other comprehensive income (loss). At
March 31, 2017
, all of the Company’s short-term 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 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
March 31, 2017
, the Company’s short-term investments were rated A or better by Standard & Poor’s.
The following summarizes the Company’s investments at
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017 Debt Securities
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
(Level 2)
|
Short-term:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
$
|
46,285
|
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
$
|
46,276
|
|
Commercial paper
|
|
45,232
|
|
|
6
|
|
|
(6
|
)
|
|
45,232
|
|
Corporate bonds
|
|
183,294
|
|
|
8
|
|
|
(81
|
)
|
|
183,221
|
|
Total
|
|
$
|
274,811
|
|
|
$
|
14
|
|
|
$
|
(96
|
)
|
|
$
|
274,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 Debt Securities
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
(Level 2)
|
Short-term:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
$
|
9,012
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
9,010
|
|
Commercial paper
|
|
39,530
|
|
|
8
|
|
|
(15
|
)
|
|
39,523
|
|
Corporate bonds
|
|
88,141
|
|
|
11
|
|
|
(32
|
)
|
|
88,120
|
|
Total
|
|
$
|
136,683
|
|
|
$
|
19
|
|
|
$
|
(49
|
)
|
|
$
|
136,653
|
|
Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets and liabilities acquired in a business combination and long-lived assets, which would be recognized at fair value if deemed to be impaired or if reclassified as assets held for sale. The fair value in these instances would be determined using Level 3 inputs. At
March 31, 2017
, the Company had no financial instruments that were measured using Level 3 inputs.
Credit Risk
Financial instruments that 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. Such amounts may exceed federally-insured limits.
As of
March 31, 2017
,
three
customers each accounted for over 10% of the Company’s accounts receivable, at
35%
,
30%
and
25%
, respectively. At
December 31, 2016
,
three
customers each accounted for over 10% of the Company’s accounts receivable, at
36%
,
29%
and
25%
, respectively (for additional information regarding the Company’s customers, see Note 2
, Summary of Significant Accounting Policies
). Revenues are primarily derived from major wholesalers and pharmaceutical companies 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 doubtful accounts receivable are maintained based on historical payment patterns, aging of accounts receivable and the Company’s actual write-off history. As of
March 31, 2017
and
December 31, 2016
,
no
allowances for doubtful accounts were deemed necessary by the Company on its accounts receivable.
NOTE 8—STOCK PLANS
Stock-Based Compensation
The Company recognized stock-based compensation expense in its consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2017
|
|
2016
|
Cost of goods sold
|
|
$
|
1,375
|
|
|
$
|
1,549
|
|
Research and development
|
|
658
|
|
|
893
|
|
Selling, general and administrative
|
|
5,367
|
|
|
6,048
|
|
Total
|
|
$
|
7,400
|
|
|
$
|
8,490
|
|
|
|
|
|
|
Stock-based compensation from:
|
|
|
|
|
Stock options (employee awards)
|
|
$
|
5,917
|
|
|
$
|
6,856
|
|
Stock options (consultant awards)
|
|
53
|
|
|
274
|
|
Restricted stock units (employee awards)
|
|
1,223
|
|
|
1,085
|
|
Employee stock purchase plan
|
|
207
|
|
|
275
|
|
Total
|
|
$
|
7,400
|
|
|
$
|
8,490
|
|
Employee Stock Purchase Plan
The Company’s 2014 Employee Stock Purchase Plan, or ESPP, features two six-month offering periods per year, running from January 1
to June 30 and July 1 to December 31. Under the ESPP, employees may elect to contribute after-tax earnings to purchase shares at
85%
of the closing fair market value of the Company’s common stock on either the offering date or the purchase date, whichever is less. During the
three
months ended
March 31, 2017
,
no
shares were purchased or issued under the ESPP.
Equity Awards
The following tables contain information about the Company’s stock option and restricted stock unit, or RSU, activity for the
three
months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Number of Options
|
|
Weighted Average Exercise Price
|
Outstanding at December 31, 2016
|
|
5,207,743
|
|
|
$
|
42.16
|
|
Granted
|
|
63,650
|
|
|
43.99
|
|
Exercised
|
|
(62,056
|
)
|
|
13.73
|
|
Forfeited
|
|
(122,168
|
)
|
|
55.49
|
|
Expired
|
|
(28,351
|
)
|
|
75.63
|
|
Outstanding at March 31, 2017
|
|
5,058,818
|
|
|
42.02
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Number of Units
|
|
Weighted Average Grant Date Fair Value
|
Unvested at December 31, 2016
|
|
364,403
|
|
|
$
|
52.85
|
|
Granted
|
|
2,063
|
|
|
44.30
|
|
Vested
|
|
(326
|
)
|
|
62.73
|
|
Forfeited
|
|
(18,535
|
)
|
|
57.81
|
|
Unvested at March 31, 2017
|
|
347,605
|
|
|
52.47
|
|
The weighted average fair value of stock options granted for the
three
months ended
March 31, 2017
was
$22.56
per share. The fair values of stock options granted were estimated using the Black-Scholes option valuation model with the following weighted average assumptions:
|
|
|
|
|
|
Three Months Ended
March 31, 2017
|
Expected dividend yield
|
|
None
|
Risk free interest rate
|
|
2.09%
|
Expected volatility
|
|
54.0%
|
Expected term of options
|
|
5.75
|
NOTE 9—STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Income (Loss)
The following table illustrates the changes in the balances of the Company’s accumulated other comprehensive income (loss) for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
Net unrealized gains (losses) from available for sale investments:
|
|
2017
|
|
2016
|
Balance at beginning of period
|
|
$
|
(30
|
)
|
|
$
|
(52
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(52
|
)
|
|
101
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
Balance at end of period
|
|
$
|
(82
|
)
|
|
$
|
49
|
|
NOTE 10—NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to common shares by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing the net income (loss) attributable to common shares by the weighted average number of common shares outstanding plus dilutive potential 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, the vesting of RSUs and the purchase of shares from the ESPP (using the treasury stock method) as well as the conversion of the excess conversion value on the 2019 Notes and 2022 Notes. As discussed in Note 6,
Debt,
the Company has either the obligation or the option to pay cash for the aggregate principal amount due upon the conversion of its convertible senior notes. Since it is the Company’s intent to settle the
principal amount of its convertible senior notes in cash, the potentially dilutive effect of such notes on net income (loss) per share is computed under the treasury stock method.
Potential common shares are excluded from the diluted net loss per share computation to the extent they would be antidilutive. Because the Company reported a net loss for the
three
months ended
March 31, 2017
and
2016
, no potentially dilutive securities have been included in the computation of diluted net loss per share for those periods.
The following table sets forth the computation of basic and diluted net income (loss) per share for the
three
months ended
March 31, 2017
and
2016
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
2017
|
|
2016
|
Numerator:
|
|
|
|
Net loss
|
$
|
(19,866
|
)
|
|
$
|
(3,854
|
)
|
Denominator:
|
|
|
|
Weighted average common shares outstanding
|
37,998
|
|
|
37,020
|
|
Net loss per share:
|
|
|
|
Basic and diluted net loss per common share
|
$
|
(0.52
|
)
|
|
$
|
(0.10
|
)
|
The following outstanding stock options, RSUs, conversion premiums on the Company’s convertible senior notes, warrants and ESPP purchase options are antidilutive in the periods presented (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Weighted average number of stock options
|
5,112
|
|
|
4,324
|
|
Weighted average number of RSUs
|
353
|
|
|
205
|
|
Conversion premium on the 2019 Notes
|
1,624
|
|
|
2,749
|
|
Weighted average number of warrants
|
—
|
|
|
3
|
|
Weighted average ESPP purchase options
|
38
|
|
|
23
|
|
Total
|
7,127
|
|
|
7,304
|
|
NOTE 11—INCOME TAXES
Income (loss) before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Loss before income taxes:
|
|
|
|
Domestic
|
$
|
(19,320
|
)
|
|
$
|
(3,499
|
)
|
Foreign
|
(516
|
)
|
|
(323
|
)
|
Total loss before income taxes
|
$
|
(19,836
|
)
|
|
$
|
(3,822
|
)
|
The Company recorded income tax expense of less than
$0.1 million
in both the three months ended
March 31, 2017
and 2016. The provision for income taxes is recorded based upon the best current estimate of the Company’s annual effective tax rate, or AETR. Generally, the AETR is the result of a mix of profits and losses the Company and its subsidiaries earn in multiple tax jurisdictions with different income tax rates. For both the
three
months ended
March 31, 2017
and 2016, the Company determined that its actual year-to-date rate was the best estimate of its AETR. The tax provisions reflect current state income taxes. Due to net losses in both periods presented, no current federal income tax expense was recorded. Due to the fact that the Company’s deferred tax assets are fully offset by a valuation allowance, the tax provisions do not reflect deferred tax expenses.
During the
three
months ended
March 31, 2017
, the Company established a deferred tax liability of
$26.5 million
with an offset to additional paid-in capital resulting from the conversion feature of the 2022 Notes. The initial difference between the book value of convertible debt issued with a beneficial conversion feature and its tax basis is a temporary difference. The net effect of the deferred tax liability recorded to additional paid-in capital was zero because the Company has a full valuation allowance against its net deferred tax assets.
NOTE 12—COMMITMENTS AND CONTINGENCIES
Leases
The Company’s leases for its research and development, manufacturing and warehouse facilities in San Diego, California expire in August 2020 and its lease for its corporate headquarters in Parsippany, New Jersey expires in March 2028.
As of
March 31, 2017
, aggregate annual minimum payments due under the Company’s lease obligations are as follows (in thousands):
|
|
|
|
|
|
Year
|
|
Aggregate Minimum Payments
|
2017 (remaining nine months)
|
|
$
|
5,925
|
|
2018
|
|
8,063
|
|
2019
|
|
8,272
|
|
2020
|
|
6,389
|
|
2021
|
|
1,207
|
|
2022 through 2028
|
|
7,545
|
|
Total
|
|
$
|
37,401
|
|
Litigation
From time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary course of its business, including those related to patents, product liability and government investigations. Except as described below, the Company is not presently a party to any litigation which it believes to be material, and is not aware of any pending or threatened litigation against the Company which it believes could have a material adverse effect on its business, operating results, financial condition or cash flows.
In April 2015, the Company received a subpoena from the U.S. Department of Justice, U.S. Attorney’s Office for the District of New Jersey, requiring the production of a broad range of documents pertaining to marketing and promotional practices related to EXPAREL. The Company is cooperating with the government’s inquiry. The Company can make no assurances as to the time or resources that will need to be devoted to this inquiry or its final outcome, or the impact, if any, of this inquiry or any proceedings on its business, financial condition, results of operations and cash flows.
NOTE 13—COMMERCIAL PARTNERS AND OTHER AGREEMENTS
DePuy Synthes Sales, Inc.
In January 2017, the Company announced the initiation of a Co-Promotion Agreement, or the Agreement, with DePuy Synthes Sales, Inc., or DePuy Synthes, part of the Johnson & Johnson family of companies, to market and promote the use of EXPAREL for orthopedic procedures in the United States. DePuy Synthes field representatives, specializing in joint reconstruction, spine, sports medicine and trauma, will collaborate with, and supplement, the Company’s field teams by expanding the reach and frequency of EXPAREL education in the hospital surgical suite and ambulatory surgery center settings.
Under the five-year arrangement, DePuy Synthes will be the exclusive third-party distributor during the term of the Agreement to promote and sell EXPAREL for operating room use for orthopedic and spine surgeries (including knee, hip, shoulder, sports and trauma surgeries) in the United States. DePuy Synthes is entitled to a tiered commission ranging from low single-digits to double-digits on sales of EXPAREL under the Agreement, subject to conditions, limitations and adjustments.
The initial term of the Agreement commenced on January 24, 2017 and ends on December 31, 2021, with the option to extend the Agreement an additional 12 month increments upon mutual agreement of the parties, subject to certain conditions.
The Company and DePuy Synthes have mutual termination rights under the Agreement, subject to certain terms, conditions and advance notice requirements, provided that the Company or DePuy Synthes generally may not terminate the Agreement, without cause, within three years of the effective date of the Agreement. The Company also has additional unilateral termination rights under certain circumstances. The Agreement contains customary representations, warranties, covenants and confidentiality provisions, and also contains mutual indemnification obligations. DePuy Synthes is also subject to certain obligations and restrictions, including required compliance with certain laws and regulations and the Company’s policies, in connection with fulfilling their obligations under the Agreement.
CrossLink BioScience, LLC
In October 2013, the Company and CrossLink BioScience, LLC, or CrossLink, commenced a
five
-year arrangement for the promotion and sale of EXPAREL, pursuant to the terms of a Master Distributor Agreement (as amended, the “Agreement”). On June 30, 2016, the Company provided notice to CrossLink electing to terminate the Agreement effective as of September 30, 2016. In connection with the termination of the Agreement, a termination fee based on a percentage of earned performance-based fees is due to CrossLink. This fee of
$7.1 million
is payable to CrossLink quarterly over
two
years beginning in the fourth quarter of 2016, and was recorded in selling, general and administrative expense in the consolidated statements of operations. At
March 31, 2017
,
$3.5 million
is classified in accrued expenses and
$1.2 million
is classified in other liabilities, consistent with the contractual timing of payments.