Pacira BioSciences Inc Annual Report 2014

Plain-text annual report

Use these links to rapidly review the documentTABLE OF CONTENTSIndex to Consolidated Financial StatementsTable of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K(Mark One) xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 For the Fiscal Year Ended: December 31, 2014 Or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 For the transition period from to Commission File Number: 001-35060 PACIRA PHARMACEUTICALS, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 51-0619477(State or Other Jurisdiction ofIncorporation or Organization) (I.R.S. Employer Identification No.) 5 Sylvan Way, Suite 300Parsippany, New Jersey 07054(Address and Zip Code of Principal Executive Offices) (973) 254-3560(Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchangeon which registeredCommon Stock, $0.001 par value The NASDAQGlobal Select MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No xIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes x No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data Filerequired 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 shorterperiod that the registrant was required to submit and post such files). Yes x No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o (Do not check if a smallerreporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No xThe aggregate market value of 16,276,524 shares of voting stock held by non-affiliates of the registrant, based upon the closing sale price of thecommon stock as reported on the NASDAQ on June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, of$91.86 per share was $1,495,161,494. Shares of common stock held by each director and executive officer (and their respective affiliates) and by each personwho owns 10 percent or more of the outstanding common stock or who is otherwise believed by the registrant to be in a control position have been excluded.This determination of affiliate status is not necessarily a conclusive determination for other purposes.As of February 20, 2015, 36,236,036 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.DOCUMENTS INCORPORATED BY REFERENCEPart III of this Annual Report on Form 10-K incorporates certain information by reference from the registrant’s proxy statement for the 2015 annualmeeting of stockholders to be filed no later than 120 days after the end of the registrant’s fiscal year ended December 31, 2014.iTable of ContentsTable of Contents Page No.PART I 2Item 1.Business2Item 1A.Risk Factors21Item 1B.Unresolved Staff Comments46Item 2.Properties47Item 3.Legal Proceedings47Item 4.Mine Safety Disclosures47PART II 48Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities48Item 6.Selected Financial Data49Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations51Item 7A.Quantitative and Qualitative Disclosures about Market Risk64Item 8.Financial Statements and Supplementary Data64Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure64Item 9A.Controls and Procedures64Item 9B.Other Information67PART III 67Item 10.Directors, Executive Officers and Corporate Governance67Item 11.Executive Compensation67Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters67Item 13.Certain Relationships and Related Transactions, and Director Independence67Item 14.Principal Accounting Fees and Services67PART IV 67Item 15.Exhibits, Financial Statement Schedules67Forward-Looking StatementsThis Annual Report on Form 10-K and certain other communications made by us contains forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including statements about our growth and future operating results, discovery anddevelopment of products, strategic alliances and intellectual property. For this purpose, any statement that is not a statement of historical fact should beconsidered a forward-looking statement. We often use the words “believe,” “anticipate,” “plan,” “expect,” “intend,” “may” and similar expressions to helpidentify forward-looking statements. We cannot assure you that our estimates, assumptions and expectations will prove to have been correct. These forward-looking statements include, among others, statements about: the success of our sales and manufacturing efforts in support of the commercialization ofEXPAREL; the rate and degree of market acceptance of EXPAREL; the size and growth of the potential markets for EXPAREL and our ability to serve thosemarkets; the Company’s plans to expand the indications of EXPAREL, including nerve block, oral surgery and chronic pain; the related timing and successof United States Food and Drug Administration supplemental New Drug Applications; the Company’s plans to evaluate and pursue additional DepoFoam-based product candidates; clinical studies in support of an existing or potential DepoFoam-based product; the Company’s plans to continue to manufactureand provide support services for its commercial partners who have licensed DepoCyt(e) and our commercialization and marketing capabilities. Importantfactors could cause our actual results to differ materially from those indicated or implied by forward-looking statements, including those discussed below inPart I-Item 1A. Risk Factors. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise, and readers should not rely on the forward-looking statements as representing the Company’s views as of any datesubsequent to the date of the filing of this Annual Report on Form 10-K.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 andreferenced in Part I-Item 1A. Risk Factors.1Table of ContentsPART IItem 1. BusinessReferencesPacira Pharmaceuticals, Inc. is the holding company for our California operating subsidiary, or Pacira California. In March 2007, we acquired PaciraCalifornia from SkyePharma Holdings, Inc., or Skyepharma (referred to in this Annual Report on Form 10-K as the “Acquisition”). Unless the context requiresotherwise, references to “Pacira,” “we,” the “company,” “us” and “our” in this Annual Report on Form 10-K refers to Pacira Pharmaceuticals, Inc. and itssubsidiaries. In addition, references in this Annual Report on Form 10-K to DepoCyt(e) mean DepoCyt when discussed in the context of the United States andCanada and DepoCyte when discussed in the context of Europe.Corporate InformationWe were incorporated in Delaware under the name Blue Acquisition Corp. in December 2006 and changed our name to Pacira, Inc. in June 2007. InOctober 2010, we changed our name to Pacira Pharmaceuticals, Inc. Our principal executive offices are located at 5 Sylvan Way, Suite 300, Parsippany, NewJersey 07054, and our telephone number is (973) 254-3560.Pacira®, EXPAREL®, DepoFoam®, DepoCyt® (U.S. registration), DepoCyte® (E.U. registration), the Pacira logo and other trademarks or service marks ofPacira appearing in this Annual Report on Form 10-K are the property of Pacira. This Annual Report on Form 10-K contains additional trade names,trademarks and service marks of other companies.OverviewWe are a specialty pharmaceutical company focused on the development, commercialization and manufacture of proprietary pharmaceutical products,based on our proprietary DepoFoam® drug delivery technology, primarily for use in hospitals and ambulatory surgery centers. We operate in one reportablesegment. On October 28, 2011, the United States Food and Drug Administration, or FDA, approved our New Drug Application, or NDA, for our lead productcandidate, EXPAREL®, a liposome injection of bupivacaine, an amide-type local anesthetic indicated for infiltration into the surgical site to producepostsurgical analgesia. We believe EXPAREL addresses a significant unmet medical need for a long-acting non-opioid postsurgical analgesic, resulting insimplified postsurgical pain management and reduced opioid consumption, leading to improved patient outcomes and enhanced hospital economics. Wehave developed an internal sales force entirely dedicated to commercializing EXPAREL, which we commercially launched in the United States inApril 2012. Our net sales for EXPAREL in 2014 were $188.5 million, and our net sales for EXPAREL in the quarter ended December 31, 2014, which was theeleventh quarter of our launch, were $59.0 million. We believe EXPAREL will ultimately become a major hospital pharmaceutical brand.In addition to EXPAREL, DepoFoam is also the basis for our other FDA-approved commercial product, DepoCyt(e), which we manufacture for ourcommercial partners, as well as our other product candidates. For the years ended December 31, 2014, 2013 and 2012 sales of EXPAREL accounted for 95%,89% and 37% of total revenues and DepoCyt(e) 4%, 10% and 15%, respectively.2Table of ContentsOur current product portfolio and product candidate pipeline, along with expected timelines, is summarized in the table below*:* The information in this chart represents expected clinical development and commercialization timelines for the United States. We make no assurances regarding such timelines orour ability to obtain acceptable clinical results or necessary regulatory approvals.** Timing within 2016 not specified. Source: Aratana Therapeutics, Inc.Our StrategyOur goal is to be a leading specialty pharmaceutical company focused on the development, commercialization and manufacture of proprietarypharmaceutical products primarily for use in hospitals and ambulatory surgery centers. We plan to achieve this by:•fully commercializing EXPAREL in the United States for postsurgical analgesia by infiltration;•continuing to build and expand a streamlined commercial organization concentrating on major hospitals and ambulatory surgery centers inthe United States and targeting surgeons, anesthesiologists, pharmacists and nurses;•demonstrating the economic benefits of EXPAREL, working directly with managed care payers, quality improvement organizations, KeyOpinion Leaders, or KOLs, in the field of postsurgical pain management and leading influential hospitals in conducting Phase 4 retrospectiveand prospective trials and drug utilization evaluations;•servicing the commercial audiences that are rapidly adopting EXPAREL in local infiltration procedures, including not only the soft tissuesurgical audiences that were the focus of the launch, but more recently expanding our education to audiences including orthopedic, spine andanesthesia customers (infiltration into the transverse abdominis plane, or TAP) who require similar education and training to ensureconsistent, proper and safe use of the product;•obtaining FDA approval for additional indications for EXPAREL including nerve block;•leveraging the development success of EXPAREL in the animal health market through our commercial partner Aratana Therapeutics, Inc. forBupivacaine Liposome Injectable Suspension to serve the companion animal market;3Table of Contents•manufacturing all our DepoFoam-based products, including EXPAREL, in facilities compliant with current Good Manufacturing Practices, orcGMP, and expanding such manufacturing capacity to meet demand;•continuing to expand our marketed product portfolio through development of additional DepoFoam-based hospital products utilizing aSection 505(b)(2) strategy, which permits us to rely upon the FDA’s previous findings of safety and effectiveness for an approved product. ASection 505(b)(2) strategy may not succeed if there are successful challenges to the FDA’s interpretation of Section 505(b)(2) under theFederal Food, Drug and Cosmetic Act; and•continuing research and development partnerships to provide DepoFoam-based products to enhance the duration of action and patientcompliance for partner products.EXPAREL—Our Lead ProductBased on our clinical data, EXPAREL provides continuous and extended postsurgical analgesia and reduces the consumption of opioid medications.We believe EXPAREL will simplify postsurgical pain management, minimize breakthrough episodes of pain and has the potential to result in improvedpatient outcomes and enhanced hospital economics.Our EXPAREL strategy has several principal elements:1)Replace the use of bupivacaine via elastomeric pumps as the foundation of a multimodal regimen for long-acting postsurgical painmanagement. Based on our clinical data, EXPAREL: •extends postsurgical analgesia•utilizes existing postsurgical infiltration administration techniques;•dilutes easily with saline to reach desired volume;•is a ready-to-use formulation; and•facilitates treatment of both small and large surgical sites.2)Become the foundation of a long-acting postsurgical pain management regimen in order to reduce and delay opioid usage. Based on theclinical data from our Phase 3 hemorrhoidectomy trial as well as our retrospective health outcomes studies data, EXPAREL significantlydelays and reduces opioid usage while improving postsurgical pain management.In our Phase 3 hemorrhoidectomy trial, EXPAREL:•delayed first opioid usage to approximately 14 hours post-surgery, compared to approximately one hour for placebo;•significantly increased the percentage of patients requiring no opioid rescue medication through 72 hours post-surgery to 28%, compared to10% for placebo;•resulted in 45% less opioid usage through 72 hours post-surgery compared to placebo; and•increased the percentage of patients who are pain free at 24 hours post-surgery compared to placebo.3)Improve patient satisfaction and outcomes. We believe EXPAREL:•provides effective pain control without the need for expensive and difficult-to-use delivery technologies that extend the duration of action forbupivacaine, such as elastomeric bags, or opioids administered through patient-controlled analgesia, or PCA, when used as part of amultimodal postsurgical pain regimen;•reduces the need for patients to be constrained by elastomeric bags and PCA systems, which are clumsy, difficult to use and may introducecatheter-related issues, including infection; and4Table of Contents•promotes maintenance of early postsurgical pain management, which may reduce the time spent in the intensive care unit.4)Develop and seek approval of additional indications for EXPAREL, including for nerve block administration. We believe the nerve blockindication for EXPAREL:•presents a low-cost opportunity for clinical development; and•enables us to fully leverage our manufacturing and sales infrastructure.EXPAREL Health Economic BenefitsIn addition to being efficacious and safe, we believe that EXPAREL provides health economic benefits that play an important role in formularydecision-making and that these health economic benefits are an often overlooked factor in planning for the commercial success of a pharmaceutical product.Several members of our management team have extensive experience applying health economic outcomes research to support the successful launch ofcommercial products. Our strategy is to work directly with our hospital C-suite customers, group purchasing organizations, integrated health networks,quality improvement organizations, KOLs in the field of postsurgical pain management and leading influence hospitals and to provide them withretrospective and prospective studies to demonstrate the economic benefits of EXPAREL.Our national, regional and local analyses assessing retrospective health outcomes, conducted in conjunction with hospital customer groups utilizingtheir own hospital databases, revealed that the use of opioids for postsurgical pain control is a significant driver of hospital resource consumption, includinghigher hospitalization costs, longer length of stay and higher readmission rates.Phase 4 Clinical StudiesWe completed our IMPROVE program, a series of open-label prospective Phase 4 clinical studies evaluating the differences in postsurgical opioid useand health economic outcomes in patients undergoing open colectomy, ileostomy reversal and lap colectomy. Findings consistently showed reductions inmedian length of hospital stay, mean hospitalization costs and mean opioid consumption.Additionally, we conducted a Phase 4 study (the “TRANSCEND” trial) in patients undergoing gynecologic or colorectal surgery. Prior to surgery,patients received either EXPAREL or sham (normal saline) TAP as part of a multimodal pain management regimen. The study goal was to demonstrate theutility of EXPAREL by achieving either co-primary endpoint of Day 3 Overall Benefit of Analgesia Score (OBAS) or total opioid rescue. A pre-plannedinterim analysis was performed on the first 39 patients recruited, which revealed a signal in one of the co-primary endpoints (OBAS), but poor compliancewith the algorithm for total opioid rescue in the protocol and no signal for that co-primary endpoint. As a result, the decision was made not to continue thetrial, but rather to analyze all of the patients recruited up to that point (n=67). In this analysis, the total opioid rescue continued to show no signal (with only35 percent of patients protocol compliant), while the OBAS demonstrated an advantage for EXPAREL (P<0.05) compared to the sham-treated group.EXPAREL Regulatory PlanThe NDA for EXPAREL was approved on October 28, 2011, using a 505(b)(2) application. The initial FDA approval of EXPAREL is for single-doseinfiltration into the surgical site to produce postsurgical analgesia.EXPAREL consists of bupivacaine encapsulated in DepoFoam, both of which are used in FDA-approved products:•Bupivacaine, a well-characterized generic anesthetic/analgesic, has an established safety profile and over 20 years of use in the United States.•DepoFoam, modified to meet the requirements of each product, is used to extend the release of the active drug substances in the productsDepoCyt(e) and the no-longer marketed DepoDur.The FDA, as a condition of EXPAREL approval, has required us to study EXPAREL in pediatric patients. We have agreed to a trial timeline where, overseveral years, we will study pediatric patient populations in descending order by age, starting with 12 to 18 year olds and ending with children under twoyears of age.5Table of ContentsAdditional IndicationsNerve BlockWe are pursuing several additional indications for EXPAREL and submitted a United States Food and Drug Administration supplemental New DrugApplication, or sNDA, for nerve block administration in May 2014 and we expect Prescription Drug User Fee Act, or PDUFA action on March 5, 2015. Webelieve that this additional indication for EXPAREL presents a low-cost opportunity for clinical development and will allow us to fully leverage ourmanufacturing and commercial infrastructure.Nerve block is a general term used to refer to the injection of local anesthetic onto or near nerves for control of pain. Nerve blocks can be singleinjections but have limited duration of action. When extended pain management is required, a catheter is used to deliver bupivacaine continuously using anexternal pump. According to Thomson Data, over eight million nerve block procedures were conducted in the United States in 2008 with over four million ofthese procedures utilizing bupivacaine. EXPAREL is designed to provide extended pain management with a single injection utilizing a narrow gauge needle.In 2012, we initiated two pivotal nerve block trials comparing the effect of EXPAREL versus placebo through a femoral nerve block study for total kneearthroplasty and an intercostal block study for posterolateral thoracotomy procedures. In May 2013, we reported positive findings from the first part of ourfemoral nerve block study for total knee arthroplasty. In August 2013, we reported that the intercostal nerve block study for posterolateral thoracotomy didnot achieve its primary endpoint. The FDA has previously indicated to us at its end of Phase 2 meeting that a single pivotal trial meeting its primary endpointwould be sufficient to gain approval for the nerve block indication, assuming demonstration of adequate safety. In May 2014, we submitted data from thefemoral nerve block Phase 3 study to demonstrate efficacy and safety, as well as safety data from the intercostal nerve block Phase 3 study, for an sNDA, witha PDUFA action date set for March 5, 2015. We believe that this new indication will present an alternative long-term method of pain control with a singleinjection, replacing the costly and cumbersome standard of care requiring a perineural catheter, drug reservoir and pump needed to continuously deliverbupivacaine.In addition to the nerve block indication, we are also pursuing oral surgery and chronic pain indications for EXPAREL.Oral SurgeryWe expect an indication for oral surgery will significantly improve patient recovery by decreasing the reliance on opioids for postsurgical painmanagement. Standard of care depends heavily on opioids for treating postsurgical pain due to the limited duration of short acting local anesthetics used tocontrol intraoperative and extended pain relief. From our preliminary market research, we expect oral and maxillofacial surgeons as well as prosthodontistsand endodontists to be the primary customers to benefit from the ability to provide analgesia with a single dose administration during the critical few daysfollowing surgery. Similar to the plastic surgery market for EXPAREL infiltration, we expect no pharmacy or pharmacy and therapeutics committeegatekeeper to EXPAREL adoption.We plan on initiating a Phase 3 study in 2015 and, if successful, expect to file an sNDA for this procedure in 2016. Chronic PainAlthough most chronic pain is managed with the off-label use of existing medications by a specialized group of physicians in high-volume clinics, onlytwo approved treatment options for chronic pain currently exist: morphine and prialt. A large population of Americans suffers from chronic pain, a complexcondition with multiple sources, including, but not limited, to inflammation, demyelination, viral injury, progressive loss of nerve fiber function, spinal cordinjury, inadequate control of acute pain and nerve root damage, such as facet joint dysfunction.Approximately 80 percent of Americans have suffered from lower back pain in their lifetime. A leading source of chronic back pain is facet jointdysfunction for which local anesthetics are often administered as a monotherapy and for which surgery is not a viable option except in complex cases. Weintend to initiate a Phase 2 trial in 2015 with patients suffering from chronic lower back pain caused by facet joint dysfunction with EXPAREL as a singledose administration to define the duration of efficacy and determine the optimal dose, which will better inform the Phase 3 study design planned for 2016.6Table of ContentsSales and MarketingWe have built our marketing and sales organization to commercialize EXPAREL and our product candidates in the United States. We intend to out-license commercialization rights for other territories. Our goal is to retain significant control over the development process and commercial execution for ourproduct candidates, while participating in a meaningful way in the economics of all products that we bring to the market.Our commercial team, consisting of both sales representatives and scientific and medical affairs professionals, executes on a full range of activities forEXPAREL, including:•providing publications and abstracts showing the EXPAREL clinical program efficacy and safety, health outcomes program and reviewarticles on pain management;•working in tandem with hospital staff, such as registered nurses, surgeons, heads of quality, pharmacists and C-level executives, to provideaccess and resources for drug utilization or medication use evaluations and Health Outcomes Studies, which provide retrospective andprospective analyses for our hospital customers using their own hospital data to demonstrate the true cost of opioid-based postsurgical paincontrol;•working with KOLs and advisory boards to address topics of best practice techniques as well as guidelines and protocols for the use ofEXPAREL, meeting the educational and training needs of our physician, surgeon, anesthesiologist, pharmacist and registered nursecustomers; and•undertaking education initiatives such as center of excellence programs, preceptorship programs, pain protocols and predictive models forenhanced patient care, interactive discussion forums, web-based training and virtual launch programs.Initially at launch, we outsourced our dedicated commercial sales force through our relationship with Quintiles Commercial US, Inc., or Quintiles. OnJanuary 28, 2013, this sales force transitioned from Quintiles employees to Pacira employees. They are supported by our current marketing team as well asteams of healthcare professionals, including medical affairs, scientific affairs and nursing teams, who support our formulary approval and customer educationinitiatives. Additionally, effective October 1, 2013, we entered into an agreement with CrossLink BioScience, LLC, or CrossLink, to act as a local agent andlead partner in collaboration with additional distributors to promote and sell EXPAREL in select territories in the United States for postsurgical painmanagement following orthopedic procedures.In order to increase the speed with which we address market segments, or to increase our access to market segments that we are currently not addressing,we may expand our sales resources in the future directly or by developing additional relationships with third parties that agree to sell our product.The primary target audience for EXPAREL is healthcare practitioners who influence pain management decisions, including surgeons, anesthesiologists,pharmacists and nurses.DepoFoam—Our Proprietary Drug Delivery TechnologyOur current product development activities utilize our proprietary DepoFoam drug delivery technology. DepoFoam consists of microscopic sphericalparticles composed of a honeycomb-like structure of numerous internal aqueous chambers containing an active drug ingredient. Each chamber is separatedfrom adjacent chambers by lipid membranes. Following injection, the DepoFoam particles release drug over an extended period of time by erosion and/orreorganization of the particles’ lipid membranes. Release rates are determined by the choice and relative amounts of lipids in the formulation.We believe the DepoFoam formulation provides several technical, regulatory and commercial advantages over competitive technologies, including:•Convenience. Our DepoFoam products are ready to use and do not require reconstitution or mixing with another solution, and can be usedwith patient-friendly narrow gauge needles and pen systems;•Multiple regulatory precedents. Our current and past DepoFoam products, including DepoCyt(e) and DepoDur, have been approved in theUnited States and Europe, making regulatory authorities familiar with our DepoFoam technology;7Table of Contents•Extensive safety history. Our DepoFoam products have over fifteen years of safety data as DepoCyt(e) has been sold in the United States since1999;•Proven manufacturing capabilities. We make the DepoFoam-based products, EXPAREL and DepoCyt(e), in our cGMP facilities;•Flexible time release. Encapsulated drug releases over a desired period of time, from 1 to 30 days;•Favorable pharmacokinetics. Decrease in adverse events associated with high peak blood levels, thereby improving the utility of theproduct;•Shortened development timeline. Does not alter the native molecule, potentially enabling the filing of a 505(b)(2) application; and•Aseptic manufacturing and filling. Enables use with proteins, peptides, nucleic acids, vaccines and small molecules.Other ProductsDepoCyt(e)DepoCyt(e) is a sustained-release liposomal formulation of the chemotherapeutic agent cytarabine utilizing our DepoFoam technology. DepoCyt(e) isindicated for the intrathecal treatment of lymphomatous meningitis, a life-threatening complication of lymphoma, a cancer of the immune system.Lymphomatous meningitis can be controlled with conventional cytarabine, but because of the drug’s short half-life, a spinal injection is required twice perweek, whereas DepoCyt(e) is dosed once every two weeks in an outpatient setting. DepoCyt(e) was granted accelerated approval by the FDA in 1999 and fullapproval in 2007. We recognized revenue from DepoCyt(e) of $7.9 million from our commercial partners in 2014.Product CandidatesIn January 2015, we announced two product candidates to our Depo-Foam based pipeline: DepoMeloxicam, or DepoMLX, and DepoTranexamic Acid,or DepoTXA.DepoMeloxicamOur preclinical product candidate, DepoMLX, is a long-acting non-steroidal anti-inflammatory drug, or NSAID, designed to treat moderate to severeacute postsurgical pain as part of a non-opioid multimodal regimen. A product designed for single dose local administration such as DepoMLX couldprovide a longer duration of pain relief at a significantly lower concentration of systemic NSAIDs, which are known to cause dose dependent gastrointestinalside effects. Meloxicam, which is currently available as an oral formulation, is one of the most potent NSAIDs on the market today. We expect our customeraudience for this drug to be similar to the target for EXPAREL infiltration.DepoMLX is currently in pre-clinical phase, and we currently expect to commence a Phase 3 study in 2017.DepoTranexamic AcidTranexamic Acid, or TXA, is currently used off-label as a systemic injection or as a topical application, and is used to treat or prevent excessive bloodloss during surgery by promoting hemostasis. The current formulation of tranexamic acid, however, has a short-lived effect consisting of only a few hours,while the risk of bleeding continues for two to three days after surgery. We believe DepoTXA, a long acting local antifibrinolytic agent combining immediateand extended release TXA, could address the unmet, increasing need for rapid ambulation and discharge in the ambulatory surgery environment for jointsurgery (primarily orthopedic surgery, including spine and trauma procedures and cardiothoracic surgery). Designed for single dose local administration intothe surgical site, DepoTXA could provide enhanced hemostabilization and improved safety and tolerability for patients over the systemic use of TXA byreducing bleeding, the need for blood transfusions, swelling, soft-tissue hematomas and the need for post-operative drains, thereby increasing not only vigorin patients, but also by decreasing overall costs to the hospital system.DepoTXA is currently in the preclinical phase, and we currently expect to commence a Phase 3 study in 2017.8Table of ContentsCommercial Partners and AgreementsSkyePharma Holdings, Inc.In connection with the stock purchase agreement related to the Acquisition, we agreed to certain earn-out payments based on a percentage of net sales ofEXPAREL collected and certain other yet-to-be-developed products as well as milestone payments for EXPAREL as follows:(i)$10.0 million upon first commercial sale in the United States;(ii)$4.0 million upon first commercial sale in a major EU country (United Kingdom, France, Germany, Italy and Spain);(iii)$8.0 million when annual net sales collected reach $100.0 million;(iv)$8.0 million when annual net sales collected reach $250.0 million; 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. In September 2014, we made an $8.0 million milestonepayment to Skyepharma in connection with achieving $100.0 million of EXPAREL net sales collected. For purposes of meeting future milestone payments,with certain exceptions, annual net sales are measured on a quarterly rolling basis.Additionally, we agreed to pay to Skyepharma a certain percentage of net sales of EXPAREL collected in the United States, Japan, the United Kingdom,France, Germany, Italy and Spain. Such obligations to make percentage payments will continue for the term in which such sales related to EXPAREL arecovered by a valid claim in certain patent rights related to EXPAREL and other biologics products. The expiration date of the last valid claim will occur in2018. Cumulatively through December 31, 2014, Skyepharma has earned $7.8 million of percentage payments on net sales of EXPAREL collected. We havethe right to cease paying the percentage payments in the event that Skyepharma breaches certain covenants not to compete contained in the stock purchaseagreement. In the event that we cease to sell EXPAREL and begin marketing a similar replacement product for EXPAREL, we would no longer be obligatedto make percentage payments, but we may be required to make certain milestone payments upon reaching certain sales milestones.For additional information related to the Skyepharma agreement, please refer to Note 6, Goodwill and Intangible Assets, in the Consolidated FinancialStatements.Research Development FoundationPursuant to an agreement with one of our stockholders, the Research Development Foundation, or RDF, we are required to pay RDF a low single-digitroyalty on the collection of revenues from our DepoFoam-based products for as long as certain patents assigned to us under the agreement remain valid. RDFhas the right to terminate the agreement for an uncured material breach by us, in connection with our bankruptcy or insolvency or if we directly or indirectlyoppose or dispute the validity of the assigned patent rights.Sigma-Tau Pharmaceuticals, Inc.In December 2002, we entered into a supply and distribution agreement with Enzon Pharmaceuticals Inc., or Enzon, regarding the sale of DepoCyt.Pursuant to the agreement, Enzon was appointed the exclusive distributor of DepoCyt in the United States and Canada for a ten-year term. In January 2010,Sigma-Tau Pharmaceuticals, Inc., or Sigma-Tau, acquired the rights to sell DepoCyt from Enzon for the United States and Canada. Under the supply anddistribution agreement, we supply unlabeled DepoCyt vials to Sigma-Tau. Under these agreements, we receive a fixed payment for manufacturing the vials ofDepoCyt and an additional royalty payment, if Sigma-Tau’s quarterly net sales exceed a certain amount, which brings total payments in the thirty percentrange on sales by Sigma-Tau in the United States and Canada.We and Sigma-Tau have the right to terminate the agreement for an uncured material breach by the other party or in the event that a genericpharmaceutical product that is therapeutically equivalent to DepoCyt is commercialized. We may terminate the agreement if certain minimum sales targetsare not met by Sigma-Tau. Sigma-Tau may terminate the agreement if, as a result of a settlement or a final court or regulatory action, the manufacture, use orsale of DepoCyt in the United States is prohibited.9Table of ContentsMundipharma International Holdings LimitedIn June 2003, we entered into an agreement granting Mundipharma International Holdings Limited, or Mundipharma, exclusive marketing anddistribution rights to DepoCyte in the European Union and certain other European countries. In April 2014, we amended the agreements to extend the term ofthe agreements by an additional 15 years to June 2033 and we expanded Mundipharma’s exclusive territory to include all countries other than the UnitedStates, Canada and Japan. In connection with the amendments, in May 2014, we received a non-refundable upfront payment of $8.0 million. Under theagreement, as amended, and a separate supply agreement, we receive a fixed payment for manufacturing the vials of DepoCyte, as well as a royalty inaddition to the fixed sum per vial supplied to Mundipharma, if Mundipharma’s quarterly net sales exceed a certain amount, and a mid single-digit royalty onall annual sales exceeding a certain amount. We are also entitled to receive up to €10.0 million in milestone payments from Mundipharma upon theachievement by Mundipharma of certain milestone events, of which we have already received €2.5 million and do not expect to receive the remaining€7.5 million. We and Mundipharma have the right to terminate the agreement for an uncured material breach by the other party, in connection with the otherparty’s bankruptcy or insolvency or the repossession of all or any material part of the other party’s business or assets. Mundipharma has the right to terminatethe agreement if its marketing authorization is cancelled or withdrawn for a certain period, or if it is prevented from selling DepoCyte in any three countriesin the territory covered in the agreement by a final non-appealable judgment in respect of infringement by DepoCyte of any third party intellectual propertyrights.Paul Capital Advisors LLCOn March 23, 2007, we entered into an amended and restated royalty interests assignment agreement with Paul Capital Advisors LLC, or Paul Capital,pursuant to which we assigned to Paul Capital the right to receive a portion of our royalty payments from DepoCyt(e) and DepoDur. The original agreementwas entered into prior to the Acquisition by Skyepharma in order to monetize certain royalty payments from DepoCyt(e) and DepoDur. In connection withthe Acquisition, the original agreement with Paul Capital was amended and restated and the responsibility to pay the royalty interest in product sales ofDepoCyt(e) and DepoDur was transferred to us and we were required to make payments to Paul Capital upon the occurrence of certain events. For additionalinformation, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Royalty Interests Assignment Agreement.” Our related financing arrangement with Paul Capital Advisors terminated on December 31, 2014.Aratana Therapeutics, Inc.On December 5, 2012 we entered into an Exclusive License, Development and Commercialization Agreement and related Supply Agreement withAratana Therapeutics, Inc., or Aratana. Under the agreements, we granted Aratana an exclusive royalty-bearing license, including the limited right to grantsublicenses, for the development and commercialization of our bupivacaine liposome injectable suspension product for animal health indications. Under theagreement, Aratana will develop and seek approval for the use of the product in veterinary surgery to manage postsurgical pain, focusing initially ondeveloping it for cats, dogs and other companion animals. Aratana announced in December 2014 that they have initiated a pivotal field effectiveness studyin dogs undergoing knee surgery.In connection with our entry into the agreement, we received a one-time payment of $1.0 million and are eligible to receive up to an additionalaggregate $42.5 million upon the achievement of development and commercial milestones, of which we received $0.5 million in 2013. If the product isapproved by the FDA for sale in the United States, Aratana will pay us a tiered double digit royalty on net sales made in the United States. If the product isapproved by foreign regulatory agencies for sale outside of the United States, Aratana will pay us a tiered double digit royalty on such net sales. Royalty rateswill be reduced by a certain percentage upon the entry of a generic competitor for animal health indications into a jurisdiction or if Aratana must payroyalties to third parties under certain circumstances.Either party has the right to terminate the license agreement in connection with (i) an insolvency event involving the other party that is not dischargedin a specified period of time; (ii) a material breach of the agreement by the other party that remains uncured for a specified cure period or (iii) the failure toachieve a minimum annual revenue as set forth in the agreement, all on specified notice. We may terminate the agreement in connection with (i) Aratana’sfailure to pay any amounts due under the agreement; (ii) Aratana’s failure to achieve regulatory approval in a particular jurisdiction with respect to suchjurisdiction or (iii) Aratana’s failure to achieve its first commercial sale within a certain amount of time on a country by country basis after receivingregulatory approval, all on specified notice. Aratana may terminate the license agreement (i) upon the entry of a generic competitor for animal healthindications on a country by country basis or (ii) at any time on a country by country basis except with respect to the United States and any country in theEuropean Union, all on specified notice. The parties may also terminate the license agreement by mutual consent. The license agreement will terminateautomatically if we terminate the10Table of Contentssupply agreement. In the event that the license agreement is terminated, all rights to the product (on a jurisdiction by jurisdiction basis) will be terminatedand returned to us.Unless terminated earlier pursuant to its terms, the license agreement is effective until December 5, 2027, after which Aratana has the option to extendthe agreement for an additional five (5) year term, subject to certain requirements.CrossLink BioScience, LLCEffective October 1, 2013, we and CrossLink commenced a five-year arrangement for the promotion and sale of EXPAREL, pursuant to the terms of aMaster Distributor Agreement (as amended, the “Agreement”). We entered into the Agreement on March 11, 2013, which provided for an initial small-scalepilot period commencing on April 1, 2013 and ending on September 30, 2013 (the “Pilot Period”), during which CrossLink was appointed as the exclusivedistributor of EXPAREL for certain specified accounts. The Agreement permitted either party to terminate the Agreement within 15 days prior to theexpiration of the Pilot Period, and unless such termination was effected, the Agreement would automatically renew for a term of five years, commencing onOctober 1, 2013 and ending on September 30, 2018 (the “Term”). Neither party provided notice of termination, and upon the commencement of the Term,certain performance metrics and payment terms became effective and CrossLink’s distribution territory expanded.Under the Agreement, we appointed CrossLink as the exclusive third-party distributor during the Term to promote and sell EXPAREL to orthopedicsurgeons in the United States, with the exception of certain geographical areas and accounts (the “Territory”). The prices and purchasing terms related to salesof EXPAREL are determined by us, and all orders are subject to acceptance or rejection by us. CrossLink is entitled to receive commissions on its sales ofEXPAREL in the Territory, subject to certain conditions and adjustments. CrossLink may receive additional performance-based payments if it achievescertain sales goals, and we may terminate the Agreement if CrossLink fails to meet certain minimum performance metrics.CrossLink and any sub-distributors engaged by CrossLink pursuant to the terms of the Agreement are subject to certain obligations and restrictions,including required compliance with certain laws and regulations, confidentiality obligations and our policies. The Agreement contains customaryrepresentations and warranties and mutual indemnification obligations. In addition, CrossLink and its sub-distributors are prohibited from promoting, sellingor distributing any competitive products during the Term.Pacira and CrossLink have mutual termination rights under the Agreement, and we have additional unilateral termination rights under certaincircumstances. The Agreement also permits us to terminate the Agreement without cause effective September 30, 2016, subject to certain terms andconditions set forth in the Agreement.Effective March 1, 2015, the Agreement was amended to, among other things, amend certain payment terms and specify certain sub-distributors thatmay promote and sell EXPAREL under the Agreement.Significant CustomersWe had three customers each comprising 10% or more of our total revenue for the year ended December 31, 2014: AmerisourceBergen HealthCorporation, Cardinal Health, Inc. and McKesson Drug Company, which accounted for 33%, 29% and 24% of our revenues. These customers are wholesalersthat process orders for EXPAREL under a drop-ship program.ManufacturingInternal FacilitiesWe manufacture EXPAREL and DepoCyt(e) in two manufacturing facilities that we refer to as the Science Center Campus in San Diego, California.These facilities are designated as Building 1 and Building 6 and are located within two miles of each other on two separate and distinct sites. Our facilitiesare inspected regularly and approved for pharmaceutical manufacturing by the FDA, the European Medicines Agency, or EMA, the Medicines and HealthcareProducts Regulatory Agency, or MHRA and the Environmental Protection Agency, or EPA.We purchase raw materials and components from third party suppliers in order to manufacture EXPAREL. In most instances, alternative sources ofsupply are available, although switching to an alternative source would, in some instances, take time and could lead to delays in manufacturing our drugcandidates. We also purchase raw materials and equipment from third party suppliers for the manufacture of DepoCyt(e). While we have not experiencedshortages of our raw materials in the past,11Table of Contentssuch suppliers may not sell these raw materials to us at the times that we need them or on commercially reasonable terms and we do not have any control overthe process or timing of the acquisition of these raw materials from our suppliers.All manufacturing of products, initial product release and stability testing are conducted by us in accordance with cGMP.Building 1 is an approximately 84,000 square foot concrete structure located on a five acre site. It was custom built as a pharmaceutical R&D andmanufacturing facility in August 1995. Activities in this facility include the manufacture of EXPAREL bulk pharmaceutical product candidate in a dedicatedproduction line and its fill/finish into vials, microbiological and quality control testing, product storage, development of analytical methods, research anddevelopment, the coordination of clinical and regulatory functions and general administrative functions. Prior to 2014, the bulk manufacturing of allEXPAREL product sold to the marketplace had occurred in a manufacturing line housed in what we refer to as Suite A. In March 2014, the FDA approved ournewly installed manufacturing line, referred to as Suite C. Combined with Suite A, Suite C has significantly increased our manufacturing capacity and abilityto meet the growing demand for EXPAREL. We are expanding our manufacturing capacity either directly or through agreements with third parties as demandfor EXPAREL increases.Building 6 is located in a 17-acre pharmaceutical industrial park. It is a two story concrete masonry structure built in 1977 that we and our predecessorshave leased since August 1993. We occupy approximately 22,000 square feet of the first floor. Building 6 houses the current manufacturing process forDepoCyt(e), the fill/finish of DepoCyt(e) into vials, a pilot plant suite for new product development and early stage clinical product production, amicrobiology laboratory and miscellaneous support and maintenance areas.In addition, we lease approximately 21,000 square feet of warehouse space located within five miles of our manufacturing facilities. The warehouse isprimarily used for the storage of materials used in the production of our products.Distribution of our DepoFoam products, including EXPAREL, requires cold-chain distribution, whereby a product must be maintained betweenspecified temperatures. We have validated processes for continuous monitoring of temperature from manufacturing through delivery to the end-user. We andour partners utilize similar cold-chain processes for DepoCyt(e).Co-Production FacilitiesOn April 4, 2014, we and Patheon U.K. Limited, or Patheon, entered into a Strategic Co-Production Agreement, Technical Transfer and ServiceAgreement and Manufacturing Supply Agreement (the “Patheon Agreements”) to collaborate in the manufacture and packaging of EXPAREL. Patheon hasagreed to undertake certain technical transfer activities and construction services needed to prepare Patheon’s Swindon, United Kingdom facility for themanufacture and packaging of EXPAREL in two dedicated manufacturing suites. We will provide Patheon with the equipment necessary to manufactureEXPAREL and will pay fees to Patheon based on Patheon’s achievement of certain technical transfer and construction milestones. We will also reimbursePatheon certain nominal expenses and additional services. We also currently expect, subject to receipt of regulatory approvals, the first commercialmanufacturing suite at Patheon’s facility to commence commercial production in the second half of 2016.The Technical Transfer and Service Agreement expires upon receipt of FDA approval of the manufacturing suites. We may terminate the TechnicalTransfer and Service Agreement if Patheon does not meet certain construction and manufacturing milestones, or at any time for convenience upon 30 days’notice. Either party may terminate the Technical Transfer and Service Agreement in the event of a breach by or bankruptcy of the other party. If the TechnicalTransfer and Service Agreement is terminated before the completion of the first manufacturing suite, the Manufacturing and Supply Agreement and StrategicCo-Production Agreement will concurrently and automatically terminate. Upon termination of this agreement (other than termination by us in the event thatPatheon does not meet the construction and manufacturing milestones or for a breach by Patheon), we will pay for the make good costs occasioned by theremoval of our manufacturing equipment and for Patheon’s termination costs up to a maximum amount of $2.0 million.The initial term of the Manufacturing Supply Agreement is 10 years from the date of FDA approval of the initial manufacturing suite. We will pay feesto Patheon for their operation of the manufacturing suites and the amount of EXPAREL produced by Patheon. We will also reimburse Patheon for purchasesmade on our behalf, certain nominal expenses and additional services. We may terminate this agreement upon one month’s notice if a regulatory authoritycauses the withdrawal of EXPAREL from the United States or any other market that represents 80% of our overall sales, or at any time for convenience byproviding between 18 and 36 months’ notice (depending on the number of years after the FDA approval date). Either party may terminate the ManufacturingSupply Agreement in the event of the breach or bankruptcy of the other party. Upon termination of this agreement (other than termination by us for a breachby Patheon), we will pay for the make good costs12Table of Contentsoccasioned by the removal of our manufacturing equipment and for Patheon’s termination costs up to a maximum amount of $2.0 million.Intellectual Property and ExclusivityWe seek to protect our product candidates and our technology through a combination of patents, trade secrets, proprietary know-how, regulatoryexclusivity and contractual restrictions on disclosure.Patents and Patent ApplicationsWe seek to protect the proprietary position of our product candidates by, among other methods, filing U.S. and foreign patent applications related to ourproprietary technology, inventions and improvements that are important to the development of our business. As of December 31, 2014, there are over 14families of patents and patent applications relating to various aspects of the DepoFoam delivery technology. Patents have been issued in numerous countries,with an emphasis on the North American, European and Japanese markets. These patents generally have a term of 20 years from the date of thenonprovisional filing unless referring to an earlier filed application. Some of our U.S. patents have a term from 17 years from the grant date. Our issuedpatents expire at various dates in the future, as discussed below, with the last currently issued patent expiring in 2018.In regards to patents providing protection for EXPAREL, issued patents in the United States relating to methods for modifying the rate of drug release ofthe product candidate and the composition of the product candidate expire in January 2017 and September 2018, respectively. A patent relating tocompositions including EXPAREL, but not EXPAREL specifically, expired in November 2013. A patent relating to the composition of the product issued inSeptember 2014 and will expire in September 2018. A pending U.S. application relating to the process for making the product candidate, if granted, wouldexpire in November 2018. In Europe, granted patent(s) related to the composition of the product candidate expire in September 2018 and certain Europeanpatent(s) expired in November 2014. Pending applications in Europe relating to methods of modifying the rate of drug release of the product candidate andthe process for making the product candidate, if granted, would expire in January 2018 and November 2018, respectively. In April 2010, a provisional patentwas filed relating to a new process to manufacture EXPAREL and other DepoFoam-based products. The process offers many advantages to the currentprocess, including larger scale production and lower manufacturing costs. In April 2011, we filed a non-provisional patent application which, if granted,could prevent others from using this process until 2031. Furthermore, a non-exclusively licensed patent of ours relating to EXPAREL was allowed in Europewith an expiration date in October 2021 and was extended in the United States until October 2023.We have also taken steps to protect our two pipeline candidates, DepoMLX and DepoTXA. Pending patent applications for compositions and methodsof treatment of DepoMLX, if granted, would expire in October 2031. In addition, a provisional patent application for DepoTXA has been filed and, if granted,would expire in January 2036.Trade Secrets and Proprietary InformationTrade secrets play an important role in protecting DepoFoam-based products and provide protection beyond patents and regulatory exclusivity. Thescale-up and commercial manufacture of DepoFoam products involves processes, custom equipment and in-process and release analytical techniques that webelieve are unique to us. The expertise and knowledge required to understand the critical aspects of DepoFoam manufacturing steps requires knowledge ofboth traditional and non-traditional emulsion processing and traditional pharmaceutical production, overlaid with all of the challenges presented by asepticmanufacturing. We seek to protect our proprietary information, including our trade secrets and proprietary know-how, by requiring our employees,consultants and other advisors to execute proprietary information and confidentiality agreements upon the commencement of their employment orengagement. These agreements generally provide that all confidential information developed or made known during the course of the relationship with us bekept confidential and not be disclosed to third parties except in specific circumstances. In the case of our employees, the agreements also typically providethat all inventions resulting from work performed for us, utilizing our property or relating to our business and conceived or completed during employmentshall be our exclusive property to the extent permitted by law. Where appropriate, agreements we obtain with our consultants also typically contain similarassignment of invention obligations. Further, we require confidentiality agreements from third parties that receive our confidential data or materials.CompetitionThe pharmaceutical and biotechnology industries are intensely competitive and subject to rapid and significant technological change. Our competitorsinclude organizations such as major multinational pharmaceutical companies,13Table of Contentsestablished biotechnology companies, specialty pharmaceutical companies and generic drug companies. Many of our competitors have greater financial andother resources than we have, such as more commercial resources, larger research and development staffs and more extensive marketing and manufacturingorganizations. As a result, these companies may obtain marketing approval more rapidly than we are able and may be more effective in developing, sellingand marketing their products. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangementswith large, established companies.Our competitors may succeed in developing, acquiring or licensing on an exclusive basis technologies and drug products that are more effective or lesscostly than EXPAREL or any other products that we are currently selling through partners or developing or that we may develop, which could render ourproducts obsolete and noncompetitive. We expect any products that we develop and commercialize to compete on the basis of, among other things, efficacy,safety, convenience of administration and delivery, price and the availability of reimbursement from government and other third-party payers. We also expectto face competition in our efforts to identify appropriate collaborators or partners to help commercialize our product candidates in our target commercialmarkets.EXPAREL competes with well-established products with similar indications. Competing products available for postsurgical pain management includeopioids such as morphine, fentanyl, meperidine and hydromorphone, each of which is available generically from several manufacturers, and several of whichare available as proprietary products using novel delivery systems. Ketorolac, an NSAID, is also available generically in the United States from severalmanufacturers, and Caldolor (ibuprofen for injection), an NSAID, has been approved by the FDA for pain management and fever in adults. EXPAREL alsocompetes with currently-marketed non-opioid products such as bupivacaine, marcaine, ropivacaine and other anesthetics/analgesics such as morphine, all ofwhich are also used in the treatment of postsurgical pain and are available as either oral tablets, injectable dosage forms or administered using novel deliverysystems. Additional products may be developed for the treatment of acute pain, including new injectable NSAIDs, novel opioids, new formulations ofcurrently available opioids and NSAIDs, long-acting local anesthetics and new chemical entities as well as alternative delivery forms of various opioids andNSAIDs. Currently EXPAREL also competes with elastomeric pump/catheter devices intended to provide bupivacaine over several days. I-FLOWCorporation (acquired by Kimberly-Clark Corporation in 2009 and spun off into Halyard Health, Inc. in 2014) has marketed these medical devices in theUnited States since 2004.Government RegulationFederal Food, Drug and Cosmetic ActPrescription drug products are subject to extensive pre- and post-market regulation by the FDA, including regulations that govern the testing,manufacturing, distribution, safety, efficacy, approval, labeling, storage, record keeping, reporting, advertising and promotion of such products under theFederal Food, Drug and Cosmetic Act, or FDCA, and its implementing regulations, and by comparable agencies and laws in foreign countries. Failure tocomply with applicable FDA or other regulatory requirements may result in, among other things, refusal to approve pending applications, withdrawal of anapproval, warning letters, clinical holds, civil or criminal penalties, recall or seizure of products, injunction, debarment, partial or total suspension ofproduction or withdrawal of the product from the market. Any agency or judicial enforcement action could have a material adverse effect on us.New Drug ApplicationsGenerally, the FDA must approve any new drug before marketing of the drug occurs in the United States. This process generally involves:•completion of preclinical laboratory and animal testing and formulation studies in compliance with the FDA’s Good Laboratory Practiceregulations;•submission to the FDA of an investigational new drug, or IND, application for human clinical testing, which must become effective beforehuman clinical trials may begin in the United States;•approval by an independent institutional review board, or IRB, at each clinical trial site before each trial may be initiated;•performance of adequate and well-controlled human clinical trials in accordance with the FDA’s good clinical practices, or GCP, to establishthe safety and efficacy of the proposed drug product for each intended use;14Table of Contents•submission of an NDA to the FDA;•satisfactory completion of an FDA pre-approval inspection of the product’s manufacturing facility or facilities to assess compliance with theFDA’s cGMP and to ensure that the facilities, methods and controls are adequate to preserve the drug’s identity, quality and purity;•satisfactory completion of an FDA advisory committee review, if applicable; and•review and approval by the FDA of the NDA.The preclinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that the FDAwill grant approvals for any of our product candidates on a timely basis, if at all. Preclinical tests include laboratory evaluation of product chemistry,formulation and stability, as well as studies to evaluate toxicity in animals. The results of preclinical tests, together with manufacturing information,analytical data and a proposed clinical trial protocol and other information, are submitted as part of an IND application to the FDA. The IND automaticallybecomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the trial on a clinical hold because of, among otherthings, concerns about the conduct of the clinical trial or about exposure of human research subjects to unreasonable health risks. In such a case, the INDsponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND may not result in FDAauthorization to commence a clinical trial. In addition, the FDA requires Pacira to amend an existing IND for each successive clinical trial conducted duringproduct development. Further, an IRB covering each medical center proposing to conduct the clinical trial must review and approve the plan for any clinicaltrial and informed consent information for subjects before the clinical trial commences at that center, and it must monitor the clinical trial until completed.The FDA, the IRB or the sponsor may suspend a clinical trial at any time, or from time to time, on various grounds, including a finding that the subjects orpatients are being exposed to an unacceptable health risk.Clinical trials involve the administration of the product candidate to healthy volunteers or patients having the disease being studied under thesupervision of qualified investigators in accordance with GCP requirements, which include the requirement that all research subjects provide their informedconsent for their participation in any clinical trial. For purposes of an NDA submission and approval, typically, the conduct of human clinical trials occurs inthe following three pre-market sequential phases, which may overlap or be combined:•Phase 1: sponsors initially conduct clinical trials in a limited population to test the product candidate for safety, dose tolerance, absorption,metabolism, distribution and excretion in healthy humans. In the cases of some products for severe or life-threatening diseases, especiallywhen the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing often is conducted onlyon patients having the specific disease.•Phase 2: sponsors conduct clinical trials generally in a limited patient population to identify possible adverse effects and safety risks, topreliminarily evaluate the efficacy of the product for specific targeted indications and to determine dose tolerance, optimal dosage and dosingschedule. Sponsors may conduct multiple Phase 2 clinical trials to obtain information prior to beginning larger and more extensive Phase 3clinical trials.•Phase 3: these include expanded controlled and uncontrolled trials, including pivotal clinical trials. When Phase 2 evaluations suggest theeffectiveness of a dose range of the product and acceptability of such product’s safety profile, sponsors undertake Phase 3 clinical trials inlarger patient populations to obtain additional information needed to evaluate the overall benefit and risk balance of the drug and to providean adequate basis to develop labeling.In addition, sponsors may elect to conduct, or be required by the FDA to conduct, post-approval clinical trials to further assess the drug’s safety oreffectiveness after NDA approval. Such post approval trials are typically referred to as Phase 4 clinical trials.U.S. Review and Approval ProcessSponsors submit the results of product development, preclinical studies and clinical trials to the FDA as part of an NDA. NDAs must also containextensive information relating to the product’s pharmacology, chemistry, manufacture, controls and proposed labeling, among other things. In addition,505(b)(2) applications must contain a patent certification for each patent listed in FDA’s “Orange Book” that covers the drug referenced in the applicationand upon which the third-party studies were15Table of Contentsconducted. For some drugs, the FDA may require risk evaluation and mitigation strategies, or REMS, which could include medication guides, physiciancommunication plans or restrictions on distribution and use, such as limitations on who may prescribe the drug or where it may be dispensed or administered.Upon receipt, the FDA has 60 days to determine whether the NDA is sufficiently complete to initiate a substantive review. If the FDA identifies deficienciesthat would preclude substantive review, the FDA will refuse to accept the NDA and will inform the sponsor of the deficiencies that must be corrected prior toresubmission. If the FDA accepts the submission for substantive review, the FDA typically reviews the NDA in accordance with established timeframes. Underthe PDUFA, the FDA agrees to specific goals for NDA review time through a two-tiered classification system, Priority Review and Standard Review. A PriorityReview designation is given to drugs that offer major advances in treatment, or provide a treatment where no adequate therapy exists. For a Priority Reviewapplication, the FDA aims to complete the initial review within six months. Standard Review applies to all applications that are not eligible for PriorityReview. The FDA aims to complete Standard Review NDAs within ten months. Review processes often extend significantly beyond anticipated completiondates due to FDA requests for additional information or clarification, difficulties scheduling an advisory committee meeting, negotiations regarding REMS orFDA workload issues. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to the application’sapproval. The recommendations of an advisory committee do not bind the FDA, but the FDA generally follows such recommendations.Under the PDUFA, NDA applicants must pay significant NDA user fees upon submission. In addition, manufacturers of approved prescription drugproducts must pay annual establishment and product user fees.Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured. The FDA will not approve an applicationunless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and are adequate to ensure consistentproduction of the product within required specifications. Additionally, the FDA will typically inspect one or more clinical sites to ensure compliance withGCP before approving an NDA.After the FDA evaluates the NDA and the manufacturing facilities, it may issue an approval letter or a Complete Response Letter, or CRL, to indicatethat the review cycle for an application is complete and that the application is not ready for approval. CRLs generally outline the deficiencies in thesubmission and may require substantial additional testing or information in order for the FDA to reconsider the application. Even if such additionalinformation is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not alwaysconclusive and the FDA may interpret data differently than we do. The FDA could also require a REMS plan to mitigate risks, which could includemedication guides, physician communication plans or elements to assure safe use, such as restricted distribution methods, patient registries and other riskminimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling, a commitment to conduct one or more post-market studies or clinical trials and the correction of identified manufacturing deficiencies, including the development of adequate controls andspecifications. If and when the deficiencies have been addressed to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letterauthorizes commercial marketing of the drug with specific prescribing information for specific indications.Section 505(b)(2) New Drug ApplicationsAs an alternate path to FDA approval, particularly for modifications to drug products previously approved by the FDA, an applicant may submit anNDA under Section 505(b)(2) of the FDCA. Section 505(b)(2) was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984,also known as the Hatch-Waxman Act, and permits the submission of an NDA where at least some of the information required for approval comes fromclinical trials not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The FDA interprets Section 505(b)(2) ofthe FDCA to permit the applicant to rely upon the FDA’s previous findings of safety and effectiveness for an approved product. The FDA may also requirecompanies to perform additional clinical trials or measurements to support any change from the previously approved product. The FDA may then approve thenew product candidate for all or some of the label indications for which the referenced product has been approved, as well as for any new indication soughtby the Section 505(b)(2) applicant.Applications under Section 505(b)(2) are subject to any non-patent exclusivity period applicable to the referenced product, which may delay approvalof the 505(b)(2) application even if FDA has completed its substantive review and determined the drug should be approved. In addition, 505(b)(2)applications must include patent certifications to any patents listed in the FDA’s Orange Book as covering the referenced product. If the 505(b)(2) applicantseeks to obtain approval before the expiration of an applicable listed patent, the 505(b)(2) applicant must provide notice to the patent owner and NDA holderof the referenced product. If the patent owner or NDA holder brings a patent infringement lawsuit within 45 days of such notice, the 505(b)(2) applicationcannot be approved for 30 months or until the 505(b)(2) applicant prevails, whichever is sooner. If the 505(b)(2) applicant loses the patent infringement suit,FDA may not approve the 505(b)(2) application until the patent expires, plus any period of pediatric exclusivity.16Table of ContentsIn the NDA submissions for our product candidates, we intend to follow the development and approval pathway permitted under the FDCA that webelieve will maximize the commercial opportunities for these product candidates.Post-Approval RequirementsAfter approval, the NDA sponsor must comply with comprehensive requirements governing, among other things, drug listing, recordkeeping,manufacturing, marketing activities, product sampling and distribution, annual reporting and adverse event reporting.If new safety issues are identified following approval, the FDA can require the NDA sponsor to revise the approved labeling to reflect the new safetyinformation; conduct post-market studies or clinical trials to assess the new safety information and implement a REMS program to mitigate newly-identifiedrisks. The FDA may also require post-approval testing, including Phase 4 studies, and surveillance programs to monitor the effect of approved products whichhave been commercialized, and the FDA has the authority to prevent or limit further marketing of a product based on the results of these post-marketingprograms. Drugs may be marketed only for approved indications and in accordance with the provisions of the FDA-approved label. Further, if we modify adrug, including any changes in indications, labeling or manufacturing processes or facilities, the FDA may require us to submit and obtain FDA approval of anew or supplemental NDA, which may require us to develop additional data or conduct additional preclinical studies and clinical trials. In September 2014,we received a warning letter from the FDA regarding off-label uses, as more fully discussed below.In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register theirestablishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliancewith cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDAregulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon us and anythird-party manufacturers that we may decide to use.If after approval the FDA determines that the product does not meet applicable regulatory requirements or poses unacceptable safety risks, the FDA maytake other regulatory actions, including initiating suspension or withdrawal of the NDA approval. Later discovery of previously unknown problems with aproduct, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements,may result in, among other things: •restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;•fines, warning letters or holds on post-approval clinical trials;•refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product licenseapprovals;•product seizure or detention, or refusal to permit the import or export of products; or•injunctions or the imposition of civil or criminal penalties.The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. These regulations includestandards and restrictions for direct-to-consumer advertising, industry-sponsored scientific and educational activities, promotional activities involving theinternet and off-label promotion. While physicians may prescribe for off-label uses, manufacturers may only promote for the approved indications and inaccordance with the provisions of the approved label. The FDA has very broad enforcement authority under the FDCA, and failure to abide by theseregulations can result in penalties, including the issuance of a warning letter directing entities to correct deviations from FDA standards, a requirement thatfuture advertising and promotional materials be pre-cleared by the FDA, and state and federal civil and criminal investigations and prosecutions.In September 2014, we received a warning letter from the FDA’s Office of Prescription Drug Promotion, or OPDP, pertaining to certain promotionalaspects of EXPAREL, and in February 2015, agreement was reached with the OPDP on the content and mechanisms for distribution of corrective action,which will consist of a Dear Healthcare Provider Letter and a corrective journal advertisement. We are actively working to ensure that our sales force andother promotional channels communicate these points to customers thoroughly and accurately: EXPAREL is broadly indicated for administration into the17Table of Contentssurgical site to produce postsurgical analgesia. FDA approval of EXPAREL was based on pivotal trials conducted in excisional hemorrhoidectomy andbunionectomy surgical models, and thus, the basis for assessment of safety and efficacy was limited to those two procedures. Regarding duration of efficacy,in both pivotal trials, EXPAREL demonstrated a significant reduction in pain intensity scores compared to placebo for up to 24 hours. In thehemorrhoidectomy trial, which had a primary endpoint of cumulative pain scores over the first 72 hours, there was minimal to no difference in pain intensityscores between EXPAREL and placebo from 24 to 72 hours; however, there was a cumulative decrease in opioid consumption through 72 hours. The clinicalbenefit of that reduction was not demonstrated.In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates thedistribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states.Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability indistribution, including a drug pedigree which tracks the distribution of prescription drugs.International RegulationIn addition to regulations in the United States, we are subject to a variety of foreign regulations governing clinical trials and the commercial sales anddistribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities offoreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country,and the time may be longer or shorter than that required for FDA approval.For example, in Europe, there are several tracks for marketing approval, for product approval and post-approval regulatory processes, depending on thetype of product for which approval is sought. Under the centralized procedure, a company submits a single application to the European Medicines Agency, orEMA. The marketing application is similar to the NDA in the U.S. and is evaluated by the Committee for Medicinal Products for Human Use, or CHMP, theexpert scientific committee of the EMA. If the CHMP determines that the marketing application fulfills the requirements for quality, safety and efficacy, itwill submit a favorable opinion to the European Commission, or EC. The CHMP opinion is not binding, but is typically adopted by the EC. A marketingapplication approved by the EC is valid in all member states. The centralized procedure is required for all biological products, orphan medicinal productsand new treatments for neurodegenerative disorders, and it is available for certain other products, including those which constitute a significant therapeutic,scientific or technical innovation.In addition to the centralized procedure, Europe also has (i) a nationalized procedure, which requires a separate application to and approvaldetermination by each country; (ii) a decentralized procedure whereby applicants submit identical applications to several countries and receive simultaneousapproval and (iii) a mutual recognition procedure, where applicants submit an application to one country for review and the other countries may accept orreject the initial decision. Regardless of the approval process employed, various parties share responsibilities for the monitoring, detection and evaluation ofadverse events post-approval, including national authorities, the EMA, the EC and the marketing authorization holder.As with FDA approval, we may not be able to secure regulatory approvals in Europe in a timely manner, if at all. Additionally, as in the United States,post-approval regulatory requirements, such as those regarding product manufacture, marketing or distribution would apply to any product that is approvedin Europe, and failure to comply with such obligations could have a material adverse effect on our ability to successfully commercialize any product.In addition to regulations in Europe and the United States, we will be subject to a variety of foreign regulations governing clinical trials andcommercial distribution of any future products.Third Party Payer Coverage and ReimbursementThe commercial success of our products and product candidates will depend, in part, upon the availability of coverage and reimbursement from third-party payers at the federal, state and private levels. Government payer programs, including Medicare and Medicaid, private health care insurance companiesand managed care plans may deny coverage or reimbursement for a product or therapy in whole or in part if they determine that the product or therapy is notmedically appropriate or necessary. Also, third-party payers have attempted to control costs by limiting coverage and the amount of reimbursement forparticular procedures or drug treatments. The United States Congress and state legislatures from time to time propose and adopt initiatives aimed at costcontainment that could impact our ability to sell our products at a price level high enough to realize an appropriate return on our investment, which wouldmaterially impact our results of operations.18Table of ContentsIn March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and EducationAffordability Reconciliation Act, which we refer to collectively as the Affordable Care Act, a sweeping law intended to broaden access to health insurance,reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare andhealth insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The Affordable Care Act revisedthe definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates owed to states bypharmaceutical manufacturers for covered outpatient drugs. The Affordable Care Act also established a new Medicare Part D coverage gap discount program,in which drug manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand name drugs to eligible beneficiariesduring their coverage gap period as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D. Further, the new law imposed asignificant annual, nondeductible fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affectingcompliance have also been enacted, which may require us to modify our business practices with healthcare practitioners. There have been proposed inCongress a number of legislative initiatives regarding healthcare, including possible repeal of the Affordable Care Act. At this time, it remains unclearwhether there will be any changes made to the Affordable Care Act. The full impact that the Affordable Care and other new laws will have on our business isuncertain. However, such laws appear likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may alsoincrease our regulatory burdens and operating costs. Moreover, in the coming years, additional changes could be made to governmental healthcare programsthat could significantly impact the success of our products.The marketability of our products may suffer if the government and third-party payers fail to provide adequate coverage and reimbursement. Inaddition, emphasis on managed care in the United States has increased, and we expect will continue to increase, the pressure on pharmaceutical pricing. Somethird-party payers require pre-approval of coverage for new or innovative devices or drug therapies before they will reimburse healthcare providers that usesuch therapies, or place limits on the amount of reimbursement. Coverage policies and third-party payer reimbursement rates may change at any time. Even iffavorable coverage and reimbursement status is attained for our products, less favorable coverage policies and reimbursement rates may be implemented inthe future.In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted priceceilings on specific products and therapies. There can be no assurance that our products will be considered medically reasonable and necessary for a specificindication, that our products will be considered cost-effective by third-party payers or that an adequate level or reimbursement will be available so that thethird-party payers’ reimbursement policies will not adversely affect our ability to sell our products profitably.Marketing/Data ExclusivityThe FDA may grant three or five years of marketing exclusivity in the United States for the approval of new or supplemental NDAs, includingSection 505(b)(2) NDAs, for, among other things, new indications, dosages or dosage forms of an existing drug, if new clinical investigations that wereconducted or sponsored by the applicant are essential to the approval of the application. Additionally, six months of marketing exclusivity in the UnitedStates is available under Section 505A of the FDCA if, in response to a written request from the FDA, a sponsor submits and the agency accepts requestedinformation relating to the use of the approved drug in the pediatric population. This six month pediatric exclusivity period is not a standalone exclusivityperiod, but rather is added to any existing patent or non-patent exclusivity period for which the drug product is eligible. Based on our clinical trial programfor EXPAREL, the FDA granted three years of marketing exclusivity to EXPAREL, which expired on October 28, 2014.Manufacturing RequirementsWe must comply with the FDA’s cGMP requirements and comparable regulations in other countries. The cGMP provisions include requirementsrelating to organization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production andprocess controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports and returned or salvaged products. Themanufacturing facilities for our products must meet cGMP requirements to the satisfaction of the FDA and other authorities pursuant to a pre-approvalinspection before we can use them to manufacture our products. We and any third-party manufacturers we engage or with which we partner are also subject toperiodic inspections of facilities by the FDA and other authorities, including procedures and operations used in the testing and manufacture of our productsto assess our compliance with applicable regulations. Failure to comply with these and other statutory and regulatory requirements subjects a manufacturer topossible legal or regulatory action, including warning letters, the seizure or recall of products, injunctions, consent decrees placing significant restrictions onor suspending manufacturing operations and civil and criminal penalties. Adverse experiences with the product must be reported and could result in theimposition of market restrictions through labeling changes or in product19Table of Contentsremoval. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy ofthe product occur following approval.Regulations Pertaining to Sales and MarketingWe are subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws. Anti-kickback laws generally prohibit a prescription drug manufacturer from soliciting, offering, receiving, or paying any remuneration to generate business,including the purchase or prescription of a particular drug. Although the specific provisions of these laws vary, their scope is generally broad and there maybe no regulations, guidance or court decisions that clarify how the laws apply to particular industry practices. There is therefore a possibility that ourpractices might be challenged under the anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, orcausing to be presented for payment to third party payers (including Medicare and Medicaid) claims for reimbursed drugs or services that are false orfraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Our activities relating to the sale andmarketing of our products may be subject to scrutiny under these laws. Violations of fraud and abuse laws may be punishable by criminal or civil sanctions,including fines and civil monetary penalties and exclusion from federal health care programs (including Medicare and Medicaid). In the U.S., federal andstate authorities are paying increased attention to enforcement of these laws within the pharmaceutical industry and private individuals have been active inalleging violations of the laws and bringing suits on behalf of the government under the federal civil False Claims Act. If we were subject to allegationsconcerning, or were convicted of violating, these laws, our business could be harmed.Laws and regulations have been enacted by the federal government and various states to regulate the sales and marketing practices of pharmaceuticalmanufacturers. The laws and regulations generally limit financial interactions between manufacturers and health care providers or require disclosure to thegovernment and public of such interactions. The laws include the federal Physician Payment Sunshine Act, or “sunshine” provisions, enacted in 2010 as partof the Affordable Care Act. The sunshine provisions apply to pharmaceutical manufacturers with products reimbursed under certain government programsand require those manufacturers to disclose annually to the federal government (for re-disclosure to the public) certain payments made to physicians andcertain other healthcare practitioners or to teaching hospitals. State laws may also require disclosure of pharmaceutical pricing information and marketingexpenditures. Many of these laws and regulations contain ambiguous requirements. Given the lack of clarity in laws and their implementation, our reportingactions could be subject to the penalty provisions of the pertinent federal and state laws and regulations. Outside the U.S., other countries have implementedrequirements for disclosure of financial interactions with healthcare providers and additional countries may consider or implement such laws.Healthcare Privacy and Security LawsWe may be subject to, or our marketing activities may be limited by the Health Insurance Portability and Accountability Act, or HIPAA and itsimplementing regulations, which established uniform standards for certain “covered entities” (healthcare providers, health plans and healthcareclearinghouses) governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of protected health information.The American Recovery and Reinvestment Act of 2009, commonly referred to as the economic stimulus package, included sweeping expansion of HIPAA’sprivacy and security standards called the Health Information Technology for Economic and Clinical Health Act, or HITECH, which became effective onFebruary 17, 2010. Among other things, the new law makes HIPAA’s privacy and security standards directly applicable to “business associates”—independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf ofa covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly otherpersons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws andseek attorney’s fees and costs associated with pursuing federal civil actions.Environmental MattersOur research and development processes and our manufacturing processes involve the controlled use of hazardous materials and chemicals and producewaste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardousmaterials and waste products. We do not expect the cost of complying with these laws and regulations to be material. While we believe we are in compliancewith applicable environmental regulations, the failure to fully comply with any such regulations could result in the imposition of penalties, fines and/orsanctions which could have a material adverse effect on our business.20Table of ContentsEmployeesAs of December 31, 2014, we had 447 employees, of which two were part-time. All of our employees are located in the United States. None of ouremployees are represented by a labor union, and we consider our current employee relations to be good.Available InformationWe file reports and other information with the SEC as required by the Exchange Act. We make available free of charge through our website(http://www.pacira.com) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filedor furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act. We make these reports available through our website as soon as reasonably practicableafter we electronically file such reports with, or furnish such reports to, the SEC. In addition, we regularly use our website to post information regarding ourbusiness, product development programs and governance, and we encourage investors to use our website, particularly the information in the section entitled“Investors & Media,” as a source of information about us. The foregoing references to our website are not intended to, nor shall they be deemed to,incorporate information on our website into this Annual Report on Form 10-K by reference.Item 1A. Risk FactorsIn addition to the other information in this Annual Report on Form 10-K, any of the factors set forth below could significantly and negatively affect ourbusiness, financial condition, results of operations or prospects. The trading price of our common stock may decline due to these risks. This section containsforward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 1.Risks Related to the Development and Commercialization of Our Product CandidatesOur success depends on our ability to successfully commercialize EXPAREL.We have invested a significant portion of our efforts and financial resources in the development and commercialization of our lead product, EXPAREL,which was approved by the FDA on October 28, 2011 and commercially launched in April 2012. During 2014, sales of EXPAREL constituted a significantportion of our total revenue, and our success depends on our ability to continue to effectively commercialize EXPAREL. Our ability to effectively generaterevenues from EXPAREL will depend on our ability to, among other things:•create market demand for EXPAREL through our marketing and sales activities and other arrangements established for the promotion ofEXPAREL;•train, deploy and support a qualified sales force;•secure formulary approvals for EXPAREL at a substantial number of targeted hospitals;•manufacture EXPAREL in sufficient quantities in compliance with requirements of the FDA and similar foreign regulatory agencies and atacceptable quality and pricing levels in order to meet commercial demand;•implement and maintain agreements with wholesalers, distributors and group purchasing organizations on commercially reasonable terms;•receive adequate levels of coverage and reimbursement for EXPAREL from commercial health plans and governmental health programs;•maintain compliance with regulatory requirements;•obtain regulatory approvals for additional indications for the use of EXPAREL;•ensure that our entire supply chain efficiently and consistently delivers EXPAREL to our customers; and•maintain and defend our patent protection and regulatory exclusivity for EXPAREL.Any disruption in our ability to generate revenues from the sale of EXPAREL will have a material and adverse impact on our results of operations.21Table of ContentsOur efforts to successfully commercialize EXPAREL are subject to many internal and external challenges and if we cannot overcome these challenges in atimely manner, our future revenues and profits could be materially and adversely impacted.EXPAREL has been a commercialized drug for less than three years. As a result, we continue to expend significant time and resources to train our salesforce to be credible and persuasive in convincing physicians and hospitals to use EXPAREL. In addition, we also must train our sales force to ensure that aconsistent and appropriate message about EXPAREL is delivered to our potential customers. If we are unable to effectively train our sales force and equipthem with effective materials, including medical and sales literature to help them inform and educate potential customers about the benefits and risks ofEXPAREL and its proper administration, our efforts to successfully commercialize EXPAREL could be put in jeopardy, which could have a material adverseeffect on our future revenues and profits.In addition to our extensive internal efforts, the successful commercialization of EXPAREL will require many third parties, over whom we have nocontrol, to choose to utilize EXPAREL. These third parties include physicians and hospital pharmacy and therapeutics committees, which we refer to as P&Tcommittees. Generally, before we can attempt to sell EXPAREL in a hospital, EXPAREL must be approved for addition to that hospital’s list of approveddrugs, or formulary list, by the hospital’s P&T committee. A hospital’s P&T committee typically governs all matters pertaining to the use of medicationswithin the institution, including the review of medication formulary data and recommendations for the appropriate use of drugs within the institution to themedical staff. The frequency of P&T committee meetings at hospitals varies considerably, and P&T committees often require additional information to aid intheir decision-making process. Therefore, we may experience substantial delays in obtaining formulary approvals. Additionally, hospital pharmacists may beconcerned that the cost of acquiring EXPAREL for use in their institutions will adversely impact their overall pharmacy budgets, which could causepharmacists to resist efforts to add EXPAREL to the formulary, or to implement restrictions on the usage of EXPAREL in order to control costs. We cannotguarantee that we will be successful in obtaining the approvals we need from enough P&T committees quickly enough to optimize hospital sales ofEXPAREL.Even if we obtain hospital formulary approval for EXPAREL, physicians must still prescribe EXPAREL for its commercialization to be successful.Because EXPAREL is a relatively new drug with a limited track record of sales in the United States, any inability to timely supply EXPAREL to ourcustomers, or any unexpected side effects that develop from use of the drug, particularly early in product launch, may lead physicians to not acceptEXPAREL as a viable treatment alternative.If EXPAREL does not achieve broad market acceptance, the revenues that we generate from its sales will be limited. The degree of market acceptance ofEXPAREL also depends on a number of other factors, including:•changes in the standard of care for the targeted indications for EXPAREL, which could reduce the marketing impact of any claims that we canmake; •the relative efficacy, convenience and ease of administration of EXPAREL; •the prevalence and severity of adverse events associated with EXPAREL; •cost of treatment versus economic and clinical benefit, both in absolute terms and in relation to alternative treatments; •the availability of adequate coverage or reimbursement by third parties, such as insurance companies and other healthcare payers, and bygovernment healthcare programs, including Medicare and Medicaid;•the extent and strength of our marketing and distribution of EXPAREL;•the safety, efficacy and other potential advantages over, and availability of, alternative treatments, including, in the case of EXPAREL, anumber of products already used to treat pain in the hospital setting; and•distribution and use restrictions imposed by the FDA or to which we agree as part of a mandatory risk evaluation and mitigation strategy orvoluntary risk management plan.Our ability to effectively promote and sell EXPAREL and any product candidates that we may develop, license or acquire in the hospital marketplacewill also depend on pricing and cost effectiveness, including our ability to produce a product at a competitive price and therefore achieve acceptance of theproduct onto hospital formularies, and our ability to obtain sufficient third-party coverage or reimbursement. Since many hospitals are members of grouppurchasing organizations, which leverage the purchasing power of a group of entities to obtain discounts based on the collective buying power of the group,our ability to attract customers in the hospital marketplace will also depend on our ability to effectively promote our product candidates to group purchasingorganizations. We will also need to demonstrate acceptable evidence of safety and efficacy, as well as relative22Table of Contentsconvenience and ease of administration. Market acceptance could be further limited depending on the prevalence and severity of any expected orunexpected adverse side effects associated with our product candidates.In addition, the labeling approved by the FDA does not contain claims that EXPAREL is safer or more effective than competitive products and does notpermit us to promote EXPAREL as being superior to competing products. Further, the availability of inexpensive generic forms of postsurgical painmanagement products may also limit acceptance of EXPAREL among physicians, patients and third-party payers. If EXPAREL does not achieve an adequatelevel of acceptance among physicians, patients and third-party payers, we may not generate meaningful revenues from EXPAREL and we may not becomeprofitable.We face significant competition from other pharmaceutical and biotechnology companies. Our operating results will suffer if we fail to competeeffectively.The pharmaceutical and biotechnology industries are intensely competitive and subject to rapid and significant technological change. Our majorcompetitors include organizations such as major multinational pharmaceutical companies, established biotechnology companies and specialtypharmaceutical and generic drug companies. Many of our competitors have greater financial and other resources than we have, such as larger research anddevelopment staff, more extensive marketing, distribution, sales and manufacturing organizations and experience, more extensive clinical trial andregulatory experience, expertise in prosecution of intellectual property rights and access to development resources like personnel and technology. As a result,these companies may obtain regulatory approval more rapidly than we are able to and may be more effective in selling and marketing their products. Smalleror early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.Our competitors may succeed in developing, acquiring or licensing on an exclusive basis technologies and drug products that are more effective or lesscostly than EXPAREL or any product candidate that we are currently developing or that we may develop, which could render our products obsolete andnoncompetitive or significantly harm the commercial opportunity for EXPAREL or our product candidates.As a result of these factors, our competitors may obtain patent protection or other intellectual property rights that may limit our ability to develop otherindications for, or commercialize, EXPAREL. Our competitors may also develop drugs that are safer, more effective, useful or less costly than ours and may bemore successful than us in manufacturing and marketing their products.EXPAREL competes with well-established products with similar indications. Competing products available for postsurgical pain management includeopioids such as morphine, fentanyl, meperidine and hydromorphone, each of which is available generically from several manufacturers, and several of whichare available as proprietary products using novel delivery systems. Ketorolac, an NSAID is also available generically in the United States from severalmanufacturers, and Caldolor (ibuprofen for injection), an NSAID, has been approved by the FDA for pain management and fever in adults. In addition,EXPAREL competes with non-opioid products such as bupivacaine, marcaine, ropivacaine and other anesthetics/analgesics, all of which are also used in thetreatment of postsurgical pain and are available as either oral tablets, injectable dosage forms or administered using novel delivery systems. Additionalproducts may be developed for the treatment of acute pain, including new injectable NSAIDs, novel opioids, new formulations of currently available opioidsand NSAIDs, long-acting local anesthetics and new chemical entities as well as alternative delivery forms of various opioids and NSAIDs.EXPAREL also competes with elastomeric bag/catheter devices intended to provide bupivacaine over several days. I-FLOW Corporation (acquired byKimberly-Clark Corporation in 2009 and spun off into Halyard Health, Inc. in 2014) has marketed these medical devices in the United States since 2004.Regulatory approval for any approved product is limited by the FDA to those specific indications and conditions for which clinical safety and efficacyhave been demonstrated, and allegations of our failure to comply with such approved indications could limit our sales efforts and have a material adverseeffect on our business.The FDA strictly regulates marketing, labeling, advertising and promotion of prescription drugs. These regulations include standards and restrictions fordirect-to-consumer advertising, industry-sponsored scientific and educational activities, promotional activities involving the internet and off-labelpromotion. Any regulatory approval that the FDA grants is limited to those specific diseases and indications for which a product is deemed to be safe andeffective by the FDA. For example, the FDA-approved label for EXPAREL does not include an indication in obstetrical paracervical block anesthesia. Inaddition to the FDA approval required for new formulations, any new indication for an approved product also requires FDA approval. If we are not able toobtain FDA approval for any desired future indications for our products and product candidates, our ability to effectively market and sell our products may bereduced and our business may be adversely affected.While physicians in the United States may choose, and are generally permitted to prescribe drugs for uses that are not described in the product’slabeling and for uses that differ from those tested in clinical studies and approved by the regulatory authorities, our ability to promote the products isnarrowly limited to those indications that are specifically approved by the FDA. These “off-label” uses are common across medical specialties and mayconstitute an appropriate treatment for some patients in varied circumstances. Regulatory authorities in the United States generally do not regulate thebehavior of23Table of Contentsphysicians in their choice of treatments. Regulatory authorities do, however, restrict communications by pharmaceutical companies on the subject of off-label use. Although recent court decisions suggest that certain off-label promotional activities may be protected under the First Amendment, the scope of anysuch protection is unclear. If our promotional activities fail to comply with the FDA’s regulations or guidelines, we may be subject to warnings from, orenforcement action by, these authorities. In addition, our failure to follow FDA rules and guidelines relating to promotion and advertising may cause the FDAto issue warning letters or untitled letters, bring an enforcement action against us, suspend or withdraw an approved product from the market, require a recallor institute fines or civil fines, or could result in disgorgement of money, operating restrictions, injunctions or criminal prosecution, any of which could harmour reputation and our business.In September 2014, we received a warning letter from the OPDP pertaining to certain promotional aspects of EXPAREL, and in February 2015,agreement was reached with the OPDP on the content and mechanisms for distribution of corrective action, which will consist of a Dear Healthcare ProviderLetter and a corrective journal advertisement. We are actively working to ensure that our sales force and other promotional channels communicate thesepoints to customers thoroughly and accurately: EXPAREL is broadly indicated for administration into the surgical site to produce postsurgical analgesia.We are unable to predict whether such clarifications in promotional activities will have an effect on EXPAREL sales. We can make no assurances thatwe will not receive FDA warning letters in the future or be subject to other regulatory action. As noted above, any regulatory violation or allegations of aviolation may have a material adverse effect on our reputation and business.If we are unable to establish and maintain effective marketing and sales capabilities or enter into agreements with third parties to market and sellEXPAREL, we may be unable to generate product revenues.We are continuing to build our commercial infrastructure for the marketing, sale and distribution of pharmaceutical products. In order to continuecommercializing EXPAREL effectively, we must continue to build our marketing, sales and distribution capabilities. We entered into an agreement withQuintiles for the outsourcing of our specialty sales force, which we then hired as direct employees in January 2013. The establishment, development andtraining of our sales force and related compliance plans to market EXPAREL is expensive and time consuming. In the event we are not successful indeveloping our marketing and sales infrastructure, we may not be able to successfully commercialize EXPAREL, which would limit our ability to generateproduct revenues.In addition to our internal marketing and sales efforts, we have entered into agreements with third party distributors to promote and sell EXPAREL incertain territories. For example, following a pilot program, effective October 1, 2013, we appointed CrossLink as our exclusive third-party distributor topromote and sell EXPAREL to orthopedic surgeons in the United States, with the exception of certain geographical areas and accounts, for a five year term.We may seek additional distribution arrangements in the future, including arrangements with third party distributors to commercialize and sell EXPAREL incertain foreign countries. The use of distributors involves certain risks, including risks that such distributors will:•not effectively distribute or support our products;•not provide us with accurate or timely information regarding their inventories, the number of accounts using our products or complaints aboutour products;•fail to comply with their obligations to us;•fail to comply with laws and regulations to which they are subject, whether in the U.S. or in foreign jurisdictions;•reduce or discontinue their efforts to sell or promote our products; or•cease operations.Any such failure may result in decreased sales, which would have an adverse effect on our business.We rely on third parties to perform many essential services for EXPAREL and any other products that we commercialize, including services related tocustomer service support, warehousing and inventory program services, distribution services, contract administration and chargeback processing services,accounts receivable management and cash application services, and financial management and information technology services. If these third parties failto perform as expected or to comply with legal and regulatory requirements, our ability to commercialize EXPAREL will be significantly impacted and wemay be subject to regulatory sanctions.We have entered into agreements with third-party service providers to perform a variety of functions related to the sale and distribution of EXPAREL,key aspects of which are out of our direct control. These service providers provide key services24Table of Contentsrelated to customer service support, warehousing and inventory program services, distribution services, contract administration and chargeback processingservices, accounts receivable management and cash application services, financial management and information technology services. In addition, most of ourinventory is stored at a single warehouse maintained by one such service provider. We substantially rely on these providers as well as other third-partyproviders that perform services for us, including entrusting our inventories of products to their care and handling. If these third-party service providers fail tocomply with applicable laws and regulations, fail to meet expected deadlines or otherwise do not carry out their contractual duties to us, or encounterphysical or natural damage at their facilities, our ability to deliver product to meet commercial demand would be significantly impaired. In addition, we mayengage third parties to perform various other services for us relating to adverse event reporting, safety database management, fulfillment of requests formedical information regarding our product candidates and related services. If the quality or accuracy of the data maintained by these service providers isinsufficient, we could be subject to regulatory sanctions.Distribution of our DepoFoam-based products, including EXPAREL, requires cold-chain distribution provided by third parties, whereby the productmust be maintained between specified temperatures. We and our partners have utilized similar cold-chain processes for DepoCyt(e) and, when it wasproduced, DepoDur. If a problem occurs in our cold-chain distribution processes, whether through our failure to maintain our products or product candidatesbetween specified temperatures or because of a failure of one of our distributors or partners to maintain the temperature of the products or product candidates,the product or product candidate could be adulterated and rendered unusable. We have obtained limited inventory and cargo insurance coverage for ourproducts. However, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. This couldhave a material adverse effect on our business, financial condition, results of operations and reputation.We will need to increase the size of our organization and effectively manage our sales force, and we may experience difficulties in managing growth.As of December 31, 2014, we had 447 employees. We may need to expand our personnel resources in order to manage our operations and sales ofEXPAREL. Our management, personnel, systems and facilities currently in place may not be adequate to support this future growth. In addition, we may notbe able to recruit and retain qualified personnel in the future, particularly marketing positions, due to competition for personnel among pharmaceuticalbusinesses, and the failure to do so could have a significant negative impact on our future product revenues and business results. Our need to effectivelymanage our operations, growth and various projects requires that we:•continue the hiring and training of an effective commercial organization for the commercialization of EXPAREL, and establish appropriatesystems, policies and infrastructure to support that organization;•continue to establish and maintain effective relationships with distributors and commercial partners for the promotion and sale of our products;•ensure that our distributors, partners, suppliers, consultants and other service providers successfully carry out their contractual obligations,provide high quality results and meet expected deadlines;•manage our development efforts and clinical trials effectively;•expand our manufacturing capabilities and effectively manage our co-production arrangement with Patheon;•continue to carry out our own contractual obligations to our licensors and other third parties; and•continue to improve our operational, financial and management controls, reporting systems and procedures.We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our development and commercializationgoals. Additionally, these tasks may impose a strain on our administrative and operational infrastructure. If we are unable to effectively manage our growth,our product sales and resulting revenues will be negatively impacted.We may not be able to manage our business effectively if we are unable to attract and retain key personnel.We may not be able to attract or retain qualified management and commercial, scientific and clinical personnel due to the intense competition forqualified personnel among biotechnology, pharmaceutical and other businesses, as well as universities, non-profit research organizations and governmententities, particularly in the San Diego, California and northern New Jersey areas. If we are not able to attract and retain necessary personnel to accomplish ourbusiness objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raiseadditional capital and our ability to implement our business strategy.25Table of ContentsOur industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development andmanufacturing expertise for our DepoFoam delivery technology and the commercialization expertise of certain members of our senior management. Inparticular, we are highly dependent on the skills and leadership of our management team, including David Stack, our President, Chief Executive Officer andChairman. If we lose one or more of these key employees, our ability to successfully implement our business strategy could be seriously harmed. Replacingkey employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth ofskills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool isintense, and we may be unable to hire, train, retain or motivate additional key personnel.Under our consulting agreement with Gary Patou, M.D., our Chief Medical Officer, he is not required to devote all of his business time to our company.We cannot assure you that Dr. Patou’s business time commitment to us will be sufficient to perform the duties of our Chief Medical Officer.We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for DepoCyt(e), EXPARELor product candidates that we may develop and may have to limit their commercialization.The use of DepoCyt(e), EXPAREL and any product candidates that we may develop, license or acquire in clinical trials and the sale of any products forwhich we obtain regulatory approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers,health care providers or others using, administering or selling our products. If we cannot successfully defend ourselves against these claims, we will incursubstantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:•loss of revenue from decreased demand for our products and/or product candidates;•impairment of our business reputation or financial stability;•costs of related litigation;•substantial monetary awards to patients or other claimants;•diversion of management attention;•loss of revenues;•withdrawal of clinical trial participants and potential termination of clinical trial sites or entire clinical programs; and•the inability to commercialize our product candidates.We have obtained limited product liability insurance coverage for our products and our clinical trials with a $10.0 million annual aggregate coveragelimit. However, our insurance coverage may not reimburse us, or may not be sufficient to reimburse us, for any expenses or losses we may suffer. Moreover,insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage on acceptable terms, at areasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale ofadditional commercial products upon FDA approval for our product candidates in development, but we may be unable to obtain commercially reasonableproduct liability insurance for any products approved for marketing, or at all. On occasion, large judgments have been awarded in class action lawsuits basedon drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and,if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.If we fail to manufacture EXPAREL in sufficient quantities and at acceptable quality and pricing levels, or to fully comply with cGMP regulations, wemay 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,process controls and the use of specialized processing equipment. We must comply with federal, state and foreign regulations, including the FDA’sregulations governing cGMP, enforced by the FDA through its facilities inspection program and by similar regulatory authorities in other jurisdictions wherewe do business. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. TheFDA or similar foreign regulatory authorities at any time may implement new standards, or change their26Table of Contentsinterpretation and enforcement of existing standards for manufacture, packaging or testing of our products. Any failure by us or our manufacturing partner tocomply with applicable regulations may result in fines and civil penalties, suspension of production, product seizure or recall, operating restrictions,imposition of a consent decree, modification or withdrawal of product approval or criminal prosecution and would limit the availability of our product. Anymanufacturing defect or error discovered after products have been produced and distributed also could result in significant consequences, including costlyrecall procedures, re-stocking costs, damage to our reputation and potential for product liability claims.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 wefail to comply with applicable laws for the manufacturing of EXPAREL, we will suffer damage to our reputation and commercial prospects and we will losepotential revenues.We will need to expand our manufacturing operations or outsource such operations to third parties.To successfully meet future customer demand for EXPAREL, we will need to expand our existing commercial manufacturing facilities or establishlarge-scale commercial manufacturing capabilities. In addition, as our drug development pipeline increases and matures, we will have a greater need forclinical trial and commercial manufacturing capacity. As a result, we must continue to improve our manufacturing processes to allow us to reduce our drugcosts. We may not be able to manufacture our drugs at a cost or in quantities necessary to be commercially successful.The build-up or other expansion of our internal manufacturing capabilities for EXPAREL production in San Diego, California exposes us to significantup-front fixed costs. If market demand for EXPAREL does not align with our expanded manufacturing capacity, we may be unable to offset these costs and toachieve economies of scale, and our operating results may be adversely affected as a result of high operating expenses. Alternatively, if we experiencedemand for EXPAREL in excess of our estimates, our facilities may be insufficient to support higher production volumes, which could harm our customerrelationships and overall reputation. Our ability to meet such excess demand could also depend on our ability to raise additional capital and effectively scaleour manufacturing operations.In addition, the procurement time for the equipment that we use to manufacture EXPAREL requires long lead times. Therefore, we may experiencedelays, additional or unexpected costs and other adverse events in connection with our capacity expansion projects, including those associated withpotential delays in the procurement of manufacturing equipment required to manufacture EXPAREL, including with respect to the procurement of equipmentfor the construction of manufacturing suites in connection with our manufacturing arrangement with Patheon.In addition to expanding our internal manufacturing facilities, we may enter into arrangements with third parties to manufacture, supply, test and/orstore EXPAREL or our other products, such as our manufacturing arrangement with Patheon. Entering into such arrangements requires testing andcompliance inspections, FDA approvals and development of the processes and facilities necessary for the production of our products. Such arrangements alsoinvolve additional risks, many of which would be outside of our control. Such risks include disruptions or delays in production, manufactured products thatdo not meet our required specifications, the failure of such third party manufacturers to comply with cGMP regulations or other regulatory requirements,protection of our intellectual property and manufacturing process, loss of control of our complex manufacturing process, inabilities to fulfill our commercialneeds and financial risks in connection with our investment in setting up a third party manufacturing process, such as substantial capital outlays required byus to assist in setting up our manufacturing process at Patheon’s facilities.If we are unable to achieve and maintain satisfactory production yields and quality, whether through our internal manufacturing capabilities orarrangements with contract manufacturers, our relationships with potential customers and overall reputation may be harmed and our revenues could decrease.We are currently the sole manufacturer of EXPAREL and DepoCyt(e). Our inability to continue manufacturing adequate supplies of these products couldresult in a disruption in the supply to our customers and partners, which could have a material adverse impact on our business and results of operations.We are currently the sole manufacturer of EXPAREL and DepoCyt(e), and we expect to be the sole manufacturer until, if and when manufacturingoperations commence at Patheon’s facility, which we currently expect, subject to receipt of regulatory approvals, to commence in two to three years’ time. Wedevelop and manufacture EXPAREL and DepoCyt(e) at our facilities in San Diego, California, which are the only FDA approved sites for manufacturingEXPAREL and DepoCyt(e) in the world. We may experience temporary or prolonged suspensions in production of our products due to issues in ourmanufacturing process that must be remediated or in response to inspections conducted by the FDA or similar foreign regulatory authorities, which couldhave a material adverse effect on our business, financial position and results of operations.For example, in 2012 we temporarily ceased the manufacturing of DepoCyt(e) for sales in the European Union to implement a remediation plan toaddress certain issues noted in an inspection report issued by the MHRA, in July 2012 regarding our DepoCyt(e) manufacturing facility, which is located in aseparate building from our EXPAREL manufacturing facility. The assessment report also recommended a selective recall of DepoCyt(e) in European Unionmember states where27Table of ContentsDepoCyt(e) is not considered to be an “essential medicinal product,” which contributed to a reduction in product sales of DepoCyt(e) during fiscal year 2012.Although we received notice from the MHRA in January 2013 that our remediation efforts were successful and that we could resume production ofDepoCyt(e) for sale in Europe, we may be required in the future to cease manufacturing operations at our facilities in response to inspection reports or otherregulatory actions, and such temporary cessations could result in additional costs or delays in the production and sale of our products.Our San Diego facilities are also subject to the risks of a natural or man-made disaster, including earthquakes and fires, or other business disruption. Inaddition, we have obtained limited property and business interruption insurance coverage for our facilities in San Diego. However, our insurance coveragemay not reimburse us, or may not be sufficient to reimburse us, for any expenses or losses we may suffer. There can be no assurance that we would be able tomeet our requirements for EXPAREL and DepoCyt(e) if there were a catastrophic event or failure of our current manufacturing system. If we are required tochange or add a new manufacturer or supplier, the process would likely require prior FDA and/or equivalent foreign regulatory authority approval, and wouldbe very time consuming. An inability to continue manufacturing adequate supplies of EXPAREL and DepoCyt(e) at our facilities in San Diego, Californiacould result in a disruption in the supply of EXPAREL and DepoCyt(e), respectively, to our customers and partners and a breach of our contractualobligations to such counterparties.Our co-production and other agreements with Patheon may involve unanticipated expenses and delays, including the need for the Patheon facilities toreceive regulatory approvals required for manufacturing to commence at the Patheon suites.We and Patheon have entered into a Co-Production Agreement, Technical Transfer and Service Agreement and Manufacturing Supply Agreement.Under these agreements, Patheon will undertake certain technical transfer activities and construction services to prepare Patheon’s Swindon, United Kingdomfacility for the manufacture and packaging of EXPAREL in two dedicated manufacturing suites. We have agreed with Patheon, among other things, toprovide them with the equipment necessary to manufacture EXPAREL in these suites. We have anticipated and budgeted for capital expenditures associatedwith the two Patheon suites, including the equipment purchase and construction of the suites as well as payments to be made to Patheon.The Patheon facilities must be approved by the FDA prior to any production and manufacturing of EXPAREL. We currently expect, subject to receipt ofregulatory approvals, that the first commercial manufacturing suite at Patheon’s facility will commence commercial production in 2016 or 2017. If theconstruction of the Patheon suites is delayed, if Patheon experiences unanticipated cost overruns, or if the Patheon suites do not receive regulatory approvalsin the timeframe anticipated (if at all), this could have a material adverse effect on our business, financial position and results of operations.Further, if and when the Patheon facilities are constructed and have received the required FDA approvals, the production under these agreementsinvolve additional risks, many of which would be outside of our control, such as disruptions or delays in production, manufactured products that do not meetour required specifications, the failure of Patheon to comply with cGMP regulations or other regulatory requirements, protection of our intellectual propertyand manufacturing process, loss of control of our complex manufacturing process and inabilities to fulfill our commercial needs. We rely on third parties for the timely supply of specified raw materials and equipment for the manufacture of DepoCyt(e) and EXPAREL. Although weactively manage these third-party relationships to provide continuity and quality, some events which are beyond our control could result in the complete orpartial failure of these goods and services. Any such failure could have a material adverse effect on our financial condition and operations.We purchase certain raw materials and equipment from various suppliers in order to manufacture our products. The acquisition of certain of thesematerials may require considerable lead times, and our ability to source such materials is also dependent on logistics providers. If we are unable to source therequired raw materials and equipment from our suppliers on a timely basis and in accordance with our specifications, we may experience delays inmanufacturing and may not be able to meet our customers’ or partners’ demands for our products. In addition, we and our third-party suppliers must complywith federal, state and foreign regulations, including cGMP regulations, and any failure to comply with applicable regulations, or failure of governmentagencies to provide necessary authorizations, may harm our ability to manufacture and commercialize our products on a timely and competitive basis, whichcould result in decreased product sales and lower revenues.Our future growth depends on our ability to identify, develop, acquire or in-license products and if we do not successfully identify, develop, acquire or in-license related product candidates or integrate them into our operations, we may have limited growth opportunities.An important part of our business strategy is to continue to develop a pipeline of product candidates by developing, acquiring or in-licensing products,businesses or technologies that we believe are a strategic fit with our focus on the hospital marketplace. However, these business activities may entailnumerous operational and financial risks, including:28Table of Contents•significant capital expenditures;•difficulty or inability to secure financing to fund development activities for such development, acquisition or in-licensed products ortechnologies;•incurrence of substantial debt or dilutive issuances of securities to pay for development, acquisition or in-licensing of new products;•disruption of our business and diversion of our management’s time and attention;•higher than expected development, acquisition or in-license and integration costs;•exposure to unknown liabilities;•difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;•inability to retain key employees of any acquired businesses;•difficulty entering markets in which we have limited or no direct experience;•difficulty in managing multiple product development programs; and•inability to successfully develop new products or clinical failure.We have limited resources to identify and execute the development, acquisition or in-licensing of products, businesses and technologies and integratethem into our current infrastructure. We may compete with larger pharmaceutical companies and other competitors, including public and private researchorganizations, academic institutions and government agencies, in our efforts to establish new collaborations and in-licensing opportunities. Thesecompetitors likely will have access to greater financial resources, research and development staffs and facilities than us and may have greater expertise inidentifying and evaluating new opportunities. We may not be successful in locating and acquiring or in-licensing additional desirable product candidates onacceptable terms or at all. Moreover, we may devote resources to potential development, acquisitions or in-licensing opportunities that are never completed,or we may fail to realize the anticipated benefits of such efforts.Our business involves the use of hazardous materials and we must comply with environmental laws and regulations, which can be expensive and restricthow we do business.Our manufacturing activities involve the controlled storage, use and disposal of hazardous materials, including the components of our products,product candidates and other hazardous compounds. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage,handling, release and disposal of, and exposure to, these hazardous materials. Violation of these laws and regulations could lead to substantial fines andpenalties. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by these lawsand regulations, we cannot eliminate the risk of accidental contamination or injury from these materials or unintended failure to comply with these laws andregulations. In the event of an accident or failure to comply with these laws and regulations, state or federal authorities may curtail our use of these materialsand interrupt our business operations. In addition, we could become subject to potentially material liabilities relating to the investigation and cleanup of anycontamination, whether currently unknown or caused by future releases.Our business and operations would suffer in the event of system failures.Despite the implementation of security measures, our internal computer systems are vulnerable to damage from computer viruses, human error,unauthorized access, natural disasters, intentional acts of vandalism, terrorism, war and telecommunication and electrical failures. Any system failure,accident or security breach that causes interruptions in our operations could result in a material disruption of our product development programs. Forexample, the loss of clinical trial data from completed clinical trials for EXPAREL could result in delays in our regulatory approval efforts and significantlyincrease our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss or damage to our data or applications,or inappropriate disclosure of confidential or proprietary information, we may incur liability, reputation damage and harm to our business operations.Any collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to develop andcommercialize our product candidates.29Table of ContentsOur business model is to commercialize our product candidates in the United States and generally to seek collaboration arrangements withpharmaceutical or biotechnology companies for the development or commercialization of our product candidates in the rest of the world. Accordingly, wemay enter into collaboration arrangements in the future on a selective basis. Any future collaboration arrangements that we enter into may not be successful.The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significantdiscretion in determining the efforts and resources that they will apply to these collaboration arrangements.Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in thedevelopment process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. Thesedisagreements can be difficult to resolve if neither of the parties has final decision making authority.Collaborations with pharmaceutical companies and other third parties often are terminated or allowed to expire by the other party. Any suchtermination or expiration would adversely affect us financially and could harm our business reputation.Clinical trials may fail to demonstrate the safety and efficacy of our drug products, which could prevent or significantly delay obtaining regulatoryapproval.Prior to receiving approval to commercialize any of our drug products, we must demonstrate with substantial evidence from well-controlled clinicaltrials, and to the satisfaction of the FDA, other regulatory authorities in the United States, and other countries, that each of the products is both safe andeffective. For each drug product, we will need to demonstrate its efficacy and monitor its safety throughout the process. If such development is unsuccessful,our business and reputation would be harmed and our stock price would be adversely affected.All of our drug products are prone to the risks of failure inherent in drug development. Clinical trials of new drug products sufficient to obtainregulatory marketing approval are expensive and take years to complete. We may not be able to successfully complete clinical testing within the time framewe have planned, or at all. We may experience numerous unforeseen events during, or as a result of, the clinical trial process which could delay or prevent usfrom receiving regulatory approval or commercializing our drug products. In addition, the results of pre-clinical studies and early-stage clinical trials of ourdrug products do not necessarily predict the results of later-stage clinical trials. Later-stage clinical trials may fail to demonstrate that a drug product is safeand effective despite having progressed through initial clinical testing. Even if we believe the data collected from clinical trials of our drug products ispromising, such data may not be sufficient to support approval by the FDA or any other U.S. or foreign regulatory approval authority. Pre-clinical and clinicaldata can be interpreted in different ways.Accordingly, FDA officials could interpret such data in different ways than we or our partners do which could delay, limit or prevent regulatoryapproval. The FDA, other regulatory authorities, our institutional review boards, our contract research organizations or we ourselves may suspend orterminate our clinical trials for our drug products. Any failure or significant delay in completing clinical trials for our drug products, or in receivingregulatory approval for the sale of any drugs resulting from our drug products, may severely harm our business and reputation. Even if we receive FDA andother regulatory approvals, our drug products may later exhibit adverse effects that may limit or prevent their widespread use, may cause the FDA to revoke,suspend or limit their approval, or may force us to withdraw products derived from those drug products from the market.Our dependence on contract research organizations could result in delays in and additional costs for our drug development efforts.We may rely on contract research organizations, or CROs, to perform preclinical testing and clinical trials for drug candidates that we choose todevelop without a collaborator. If the CROs that we hire to perform our preclinical testing and clinical trials or our collaborators or licensees do not meetdeadlines, do not follow proper procedures or a conflict arises between us and our CROs, our preclinical testing and clinical trials may take longer thanexpected, may be delayed or may be terminated. If we were forced to find a replacement CRO to perform any of our preclinical testing or clinical trials, wemay not be able to find a suitable replacement on favorable terms, if at all. Even if we were able to find another CRO to perform a preclinical test or clinicaltrial, any material delay in a test or clinical trial may result in significant additional expenditures that could adversely affect our operating results. Eventssuch as these may also delay regulatory approval for our drug candidates or our ability to commercialize our products.We depend on clinical investigators and clinical sites to enroll patients in our clinical trials and sometimes other third parties to manage the trials and toperform related data collection and analysis, and, as a result, we may face costs and delays outside of our control.30Table of ContentsWe rely on clinical investigators and clinical sites to enroll patients and sometimes third parties to manage our trials and to perform related datacollection and analysis. However, we may be unable to control the amount and timing of resources that the clinical sites which conduct the clinical testingmay devote to our clinical trials. Our clinical trials may be delayed or terminated due to the inability of our clinical investigators to enroll enough patients. Patient enrollment dependson many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites and the eligibilitycriteria for the study. If our clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials or fail to enroll them onour planned schedule, we may face increased costs, delays or termination of the trials, which could delay or prevent us from obtaining regulatory approvalsfor our product candidates. Our agreements with clinical investigators and clinical sites for clinical testing and for trial management services place substantial responsibilities onthese parties, which could result in delays in, or termination of, our clinical trials if these parties fail to perform as expected. For example, if any of our clinicaltrial sites fail to comply with FDA-approved GCPs, we may be unable to use the data gathered at those sites. If these clinical investigators, clinical sites orother third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical datathey obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed orterminated, and we may be unable to obtain regulatory approval for, or successfully commercialize, our product candidates.We are subject to periodic litigation, which could result in losses or unexpected expense of time and resources.From time to time, we are called upon to defend ourselves against lawsuits relating to our business. Due to the inherent uncertainties of litigation, wecannot accurately predict the ultimate outcome of any such proceedings. We are currently involved in two legal proceedings. See Item 3 Legal Proceedingsin Part I of this Form 10-K for a detailed description of a pending purported stockholder class action lawsuit filed against us and a products liability lawsuit.An unfavorable outcome in either of these proceedings could have an adverse impact on our business, financial condition and results of operations. Inaddition, any significant litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantiallegal fees. In addition, if our stock price is volatile, we may become involved in additional securities class action lawsuits in the future. Any litigation couldresult in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.Regulatory RisksWe may not receive regulatory approval for any of our product candidates, or the approval may be delayed for various reasons, including successfulchallenges to the FDA’s interpretation of Section 505(b)(2), which would have a material adverse effect on our business and financial condition.We may experience delays in our efforts to obtain regulatory approval from the FDA for any of our product candidates, and there can be no assurancethat such approval will not be delayed, or that the FDA will ultimately approve these product candidates. Although the FDA’s longstanding position hasbeen that the Agency may rely upon prior findings of safety or effectiveness to support approval of a 505(b)(2) application, this policy has been controversialand subject to challenge in the past. If the FDA’s policy is successfully challenged administratively or in court, we may be required to seek approval of ourproducts via full NDAs that contain a complete data package demonstrating the safety and effectiveness of our product candidates, which would be time-consuming, expensive and would have a material adverse effect on our business and financial condition.The FDA, as a condition of the EXPAREL approval on October 28, 2011, has required us to study EXPAREL in pediatric patients. We have agreed to atrial timeline where, over several years, we will study pediatric patient populations in descending order starting with 12-18 year olds and ending withchildren under two years of age. These trials will be expensive and time consuming and we are required to meet the timelines for submission of protocols anddata and for completion as agreed with the FDA, and we may be delayed in meeting such timelines. We are required to conduct these trials even if we believethat the costs and potential benefits of conducting the trials are not warranted from a scientific or financial perspective. The failure to conduct these pediatrictrials or to meet applicable deadlines could result in the imposition of sanctions, including, among other things, issuance of warnings letters or imposition ofseizures or injunctions.The FDA may determine that EXPAREL or any of our product candidates have undesirable side effects.If concerns are raised regarding the safety of a new product candidate as a result of undesirable side effects identified during clinical testing, the FDAmay decline to approve the drug at the end of the NDA review period or issue a letter requesting additional data or information prior to making a finaldecision regarding whether or not to approve the drug. The number of such requests for additional data or information issued by the FDA in recent years hasincreased, and resulted in substantial delays in the approval of several new drugs. Undesirable side effects caused by EXPAREL or any product candidate31Table of Contentscould also result in the inclusion of unfavorable information in our product labeling, imposition of distribution or use restrictions, a requirement to conductpost-market studies or to implement a risk evaluation and mitigation strategy, denial, suspension or withdrawal of regulatory approval by the FDA or otherregulatory authorities for any or all targeted indications, and in turn prevent us from commercializing and generating revenues from the sale of EXPAREL orany product candidate.For example, the side effects observed in the EXPAREL clinical trials completed to date include nausea and vomiting. In addition, the class of drugsthat EXPAREL belongs to has been associated with nervous system and cardiovascular toxicities at high doses. We cannot be certain that these side effectsand others will not be observed in the future, or that the FDA will not require additional trials or impose more severe labeling restrictions due to these sideeffects or other concerns. The active component of EXPAREL is bupivacaine and bupivacaine infusions have been associated with the destruction ofarticular cartilage, or chondrolysis. Chondrolysis has not been observed in clinical trials of EXPAREL, but we cannot be certain that this side effect will notbe observed in the future.Following approval of EXPAREL or any of our product candidates, if we or others later identify previously unknown undesirable side effects caused bysuch products, if known side effects are more frequent or severe than in the past, or if we or others detect unexpected safety signals for such products or anyproducts perceived to be similar to such products:•regulatory authorities may require the addition of unfavorable labeling statements, specific warnings or contraindications (including boxedwarnings);•regulatory authorities may suspend or withdraw their approval of the product, or require it to be removed from the market;•regulatory authorities may impose restrictions on the distribution or use of the product;•we may be required to change the way the product is administered, conduct additional clinical trials, reformulate the product, change thelabeling of the product or change or obtain re-approvals of manufacturing facilities;•sales of the product may be significantly decreased from projected sales;•we may be subject to government investigations, product liability claims and litigation; and•our reputation may suffer.Any of these events could prevent us from achieving or maintaining market acceptance of EXPAREL or any of our product candidates and couldsubstantially increase our commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from its sale.Regulatory approval for any approved product is limited by the FDA to those specific indications and conditions for which clinical safety and efficacyhave been demonstrated.Any regulatory approval is limited to those specific diseases and indications for which a product is deemed to be safe and effective by the FDA. Forexample, the FDA-approved label for EXPAREL does not include an indication in obstetrical paracervical block anesthesia. In addition to the FDA approvalrequired for new formulations, any new indication for an approved product also requires FDA approval. If we are not able to obtain FDA approval for anydesired future indications for our products and product candidates, our ability to effectively market and sell our products may be reduced and our businessmay be adversely affected.While physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those tested inclinical studies and approved by the regulatory authorities, our ability to promote the products is limited to those indications that are specifically approvedby the FDA. These “off-label” uses are common across medical specialties and may constitute an appropriate treatment for some patients in variedcircumstances. Regulatory authorities in the United States generally do not regulate the behavior of physicians in their choice of treatments. Regulatoryauthorities do, however, restrict communications by pharmaceutical companies on the subject of off-label use. Although recent court decisions suggest thatcertain off-label promotional activities may be protected under the First Amendment, the scope of any such protection is unclear. If our promotional activitiesfail to comply with the FDA’s regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, ourfailure to follow FDA rules and guidelines relating to promotion and advertising may cause the FDA to issue warning letters or untitled letters, suspend orwithdraw an approved product from the market, require a recall or institute fines or civil fines or could result in disgorgement of money, operatingrestrictions, injunctions or criminal prosecution, any of which could harm our business.32Table of ContentsIf we fail to comply with federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, we could facesubstantial 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 federalgovernment 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 withhealthcare providers or other entities by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly orindirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under federally funded healthcareprograms, 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, individualsor entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payers thatare false or fraudulent or making any materially false statement in connection with the delivery or payment for healthcare benefits, items orservices;•HIPAA, which creates 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 healthservices with which the physician or the physician’s family member has a financial interest, and prohibit submission of a claim forreimbursement pursuant to a prohibited referral;•HITECH, and its implementing regulations, which imposes certain requirements relating to the privacy, security and transmission ofindividually identifiable health information;•the Physician Payment Sunshine Act, or “sunshine” provisions, which impose disclosure requirements on pharmaceutical manufacturers ofpayments made to physicians and certain other healthcare providers and institutions; 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 servicesreimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy and security of health information incertain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating complianceefforts.Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the U.S. federal Anti-KickbackStatute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Moreover, recent health care reformlegislation has strengthened these laws. For example, the Affordable Care Act, among other things, amends the intent requirement of the federal anti-kickbackand criminal health care fraud statutes; a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition,the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Federal false claims laws prohibit any person from knowinglypresenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement toget a false claim paid. Recently, several pharmaceutical and other healthcare companies have been prosecuted under the federal false claims laws forallegedly 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, certainmarketing 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. TheAffordable Care Act imposes new requirements to report certain financial arrangements with physicians and others, including reporting any “transfer ofvalue” made or distributed to prescribers and other healthcare providers and reporting any ownership or investment interests held by physicians and theirimmediate family members during33Table of Contentseach calendar year, subject to federal implementation and enforcement policies. The period between August 1, 2013 and December 31, 2013 was the firstreporting period, and manufacturers were required to report aggregate payment data by March 31, 2014, and will be required to report detailed payment dataand submit legal attestation to the accuracy of the data during Phase 2 of the program. Thereafter, drug manufacturers must submit reports by the 90th day ofeach subsequent calendar year. In addition, certain states mandate that we comply with a state code of conduct, adopt a company code of conduct under statecriteria, 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 complianceenvironment and the need to build and maintain robust and expandable systems to comply in multiple jurisdictions with different compliance and reportingrequirements increase the possibility that a pharmaceutical company may violate one or more of the requirements. Any failure to comply with these reportingrequirements could result in significant fines and penalties.The risks of complying with these laws cannot be entirely eliminated. The risk of violation of such laws is also increased because many of them havenot been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us forviolation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attentionfrom the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws mayprove costly. 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 othergovernmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion fromparticipation in U.S. federal or state health care programs and the curtailment or restructuring of our operations any of which could materially adversely affectour ability to operate our business and our financial results. Similarly, if healthcare providers, distributors or other entities with whom we do business arefound 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 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 EXPAREL and DepoCyt(e) is highly regulated and technically complex. We, alongwith our third-party providers, must comply with all applicable regulatory requirements of the FDA and foreign authorities. In addition, the facilities used tomanufacture, store and distribute our products are subject to inspection by regulatory authorities at any time to determine compliance with applicableregulations.The manufacturing techniques and facilities used for the manufacture and supply of our products must be operated in conformity with cGMP and otherFDA and MHRA regulations, including potentially prior regulatory approval. In addition, any expansion of our existing manufacturing facilities or theintroduction of any new manufacturing facilities, including the manufacturing suites to be constructed at Patheon’s facility, also require conformity withcGMP and other FDA and MHRA regulations. In complying with these requirements, we, along with our co-production partners and suppliers, mustcontinually expend time, money and effort in production, record keeping and quality assurance and control to ensure that our products meet applicablespecifications and other requirements for safety, efficacy and quality. In addition, we, along with our co-production partners and suppliers, are subject tounannounced 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 toremedial 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 GoodManufacturing Practices related to our DepoCyt(e) manufacturing facility. We responded to the MHRA regarding these inspectional observations, completedimplementation of our proposed remediation plan and were reinspected by the MHRA in December 2012. In January 2013, we received notice from theMHRA that our remediation efforts were successful and that we could recommence manufacturing DepoCyt(e) for Europe.If we fail to comply with the extensive regulatory requirements to which we and our products, EXPAREL and DepoCyt(e), are subject, such products couldbe subject to restrictions or withdrawal from the market and we could be subject to penalties.The testing, manufacturing, quality control, labeling, safety, effectiveness, advertising, promotion, storage, sales, distribution, import, export andmarketing, among other things, of our products EXPAREL and DepoCyt(e) are subject to extensive regulation by governmental authorities in the UnitedStates and elsewhere throughout the world. Quality control and manufacturing procedures regarding EXPAREL and DepoCyt(e) must conform to cGMP.Regulatory authorities, including the FDA and the MHRA, periodically inspect manufacturing facilities to assess compliance with cGMP. Our failure, or thefailure of any contract manufacturers with whom we may work in the future, to comply with the laws administered by the FDA, the MHRA or othergovernmental authorities could result in, among other things, any of the following:34Table of Contents•product recall or seizure;•suspension or withdrawal of an approved product from the market;•interruption of production;•operating restrictions;•warning letters;•injunctions;•refusal to permit import or export of an approved product;•refusal to approve pending applications or supplements to approved applications that we submit;•denial of permission to file an application or supplement in a jurisdiction;•consent decrees;•suspension or termination of ongoing clinical trials;•fines and other monetary penalties;•criminal prosecutions; and•unanticipated expenditures.If the government or third-party payers fail to provide coverage and adequate coverage and payment rates for EXPAREL, DepoCyt(e) or any futureproducts, or if hospitals choose to use therapies that are less expensive, our revenue and prospects for profitability will be limited.In both domestic and foreign markets, sales of our existing products and any future products will depend in part upon the availability of coverage andreimbursement from third-party payers. Such third-party payers include government health programs such as Medicare and Medicaid, managed careproviders, private health insurers and other organizations. Coverage decisions may depend upon clinical and economic standards that disfavor new drugproducts when more established or lower cost therapeutic alternatives are already available or subsequently become available. Assuming coverage isapproved, the resulting reimbursement payment rates might not be adequate. In particular, many U.S. hospitals receive a fixed reimbursement amount perprocedure for certain surgeries and other treatment therapies they perform. Because this amount may not be based on the actual expenses the hospital incurs,hospitals may choose to use therapies which are less expensive when compared to our product candidates. Although hospitals currently receive separatereimbursement for EXPAREL used in the hospital outpatient setting, EXPAREL, DepoCyt(e) or any product candidates that we may develop, in-license oracquire, if approved, will face competition from other therapies and drugs for these limited hospital financial resources. We may need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of any future products to the satisfaction of hospitals, other target customers and their third-party payers. Such studies might require us to commit a significant amount of management time, financial and other resources. Our future products might notultimately be considered cost-effective. Adequate third-party coverage and reimbursement might not be available to enable us to maintain price levelssufficient to realize an appropriate return on investment in product development.Third-party payers, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controllinghealthcare costs. For example, third-party payers may limit the indications for which our products will be reimbursed to a smaller set of indications than webelieve is appropriate or limit the circumstances under which our products will be reimbursed to a smaller set of circumstances than we believe is appropriate.In addition, in the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party payers. Therefore, coverageand reimbursement for drug products can differ significantly from payer to payer.Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in internationalmarkets, as federal, state and foreign governments continue to propose and pass new legislation designed to reduce or contain the cost of healthcare. Third-party coverage and reimbursement for our products or product candidates for which we receive regulatory approval may not be available or adequate in eitherthe United States or35Table of Contentsinternational markets, which could have a negative effect on our business, results of operations, financial condition and prospects.We are subject to new legislation, regulatory proposals and healthcare payer initiatives that may increase our costs of compliance and adversely affect ourability to market our products, obtain collaborators and raise capital.In March 2010, the President of the United States signed the Patient Protection and Affordable Care Act, as amended by the Health Care and EducationReconciliation Act, which we refer to collectively as the Affordable Care Act. The Affordable Care Act makes extensive changes to the delivery of health carein the United States. Among the provisions of the Affordable Care Act 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, apportionedamong these entities according to their market share in certain government healthcare programs;•an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, to 23.1% and 13.0% of theaverage 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 50.0% point-of-sale discounts off negotiatedprices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatientdrugs to be covered under Medicare Part D;•extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed careorganizations;•expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additionalindividuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133.0% of the Federal PovertyLevel, 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;•a new requirement to annually report drug samples that manufacturers and distributors provide to physicians, subject to federal implementationand enforcement policies;•a licensure framework for follow-on biologic products;•payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers toimprove the coordination, quality and efficiency of certain healthcare services through bundled payment models;•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 has authority to recommend certain changes to the Medicare program that couldresult in reduced payments for prescription drugs and those recommendations could have the effect of law even if Congress does not act on therecommendations; and•establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services to test innovative payment and servicedelivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.Some details regarding the implementation of the Affordable Care Act are yet to be determined, and, at this time, the full effect that the Affordable CareAct would have on our business remains unclear. These measures could result in decreased net revenues from our pharmaceutical products and decreasepotential returns from our development efforts.In addition, other legislative changes have been proposed and adopted since enactment of the Affordable Care Act. For example, on August 2, 2011, thePresident of the United States signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on DeficitReduction to recommend proposals in spending reductions to Congress. As a result of the failure of the Joint Select Committee to propose, and of Congress toenact, deficit reduction measures of at least $1.2 trillion for the years 2013 through 2021, the Budget Control Act provides for automatic cuts to be36Table of Contentsmade to most federal government programs, which, with respect to Medicare, would include aggregate reductions to Medicare payments to providers of 2%per fiscal year, which went into effect on April 1, 2013. In addition, the American Taxpayer Relief Act of 2012, among other things, further reduced Medicareinpatient payment amounts to hospitals and increased the statute of limitations for recovering overpayments from three years to five years. The full impact onour business of these new laws is uncertain. Nor is it clear whether other legislative changes will be adopted or how such changes would affect the demand forour 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 levelthrough the distribution system. California’s electronic pedigree requirement is scheduled to take effect on a staggered basis from January 1, 2015 throughJuly 1, 2017. Compliance with California and future federal or state electronic pedigree requirements may increase our operational expenses and imposesignificant administrative burdens. As a result of these and other new proposals, we may determine to change our current manner of operation, provideadditional benefits or change our contract arrangements, any of which could have a material adverse effect on our business, financial condition and results ofoperations.In addition, the Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted in 2012 makes several significant changes to the FDCA,and the FDA’s processes for reviewing marketing applications that could have a significant impact on the pharmaceutical industry, including, among otherthings, the following:•reauthorizes the PDUFA, increases the amount of associated user fees and, for certain types of applications, increases the expected time frame forFDA review of the application;•permanently reauthorizes and makes some revisions to the Best Pharmaceuticals for Children Act and the Pediatric Research Equity Act, whichprovides 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 foreigncountries;•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 the FDA to issue a report on, among other things, ensuring safe use of prescription drugs that have the potential for abuse;•requires the FDA to hold a public meeting regarding the potential rescheduling of drug products containing hydrocodone, which was held inJanuary 2013; and•requires electronic submission of certain marketing applications following the issuance of final FDA regulations.The full impact of FDASIA on our business is uncertain.Public concern regarding the safety of drug products such as EXPAREL could result in the inclusion of unfavorable information in our labeling, orrequire us to undertake other activities that may entail additional costs.In light of widely publicized events concerning the safety risk of certain drug products, the FDA, members of Congress, the Government AccountabilityOffice, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the withdrawal ofdrug products, revisions to drug labeling that further limit use of the drug products and the establishment of risk management programs that may, forexample, restrict distribution of drug products after approval. The Food and Drug Administration Amendments Act of 2007, or FDAAA, grants significantexpanded authority to the FDA, much of which is aimed at improving the safety of drug products before and after approval. In particular, the FDAAAauthorizes the FDA to, among other things, require post-approval studies and clinical trials, mandate changes to drug labeling to reflect new safetyinformation and require risk evaluation and mitigation strategies for certain drugs, including certain currently approved drugs. The FDAAA also significantlyexpands the federal government’s clinical trial registry and results databank, which we expect will result in significantly increased government oversight ofclinical trials. Under the FDAAA, companies that violate these and other provisions of the new law are subject to substantial civil monetary penalties, amongother regulatory, civil and criminal penalties. The increased attention to drug safety issues may result in a more cautious approach by the FDA in its review ofdata from our clinical trials. Data from clinical trials may receive greater scrutiny, particularly with respect to safety, which may make the FDA or otherregulatory authorities more likely to require additional37Table of Contentspreclinical studies or clinical trials. If the FDA requires us to provide additional clinical or preclinical data for EXPAREL, the indications for which thisproduct candidate was approved may be limited or there may be specific warnings or limitations on dosing, and our efforts to commercialize EXPAREL maybe otherwise adversely impacted.Risks Related to Intellectual PropertyThe patents and the patent applications that we have covering our products are limited to specific injectable formulations, processes and uses of drugsencapsulated in our DepoFoam drug delivery technology and our market opportunity for our product candidates may be limited by the lack of patentprotection for the active ingredient itself and other formulations and delivery technology and systems that may be developed by competitors.The active ingredients in EXPAREL and DepoCyt(e) are bupivacaine and cytarabine, respectively. Patent protection for the bupivacaine and cytarabinemolecules themselves has expired and generic immediate-release products are available. As a result, competitors who obtain the requisite regulatory approvalcan offer products with the same active ingredients as EXPAREL and DepoCyt(e) so long as the competitors do not infringe any process, use or formulationpatents that we have developed for these drugs encapsulated in our DepoFoam drug delivery technology.For example, we are aware of at least one long-acting injectable bupivacaine product in development which utilizes an alternative delivery system toEXPAREL. Such a product is similar to EXPAREL in that it also extends the duration of effect of bupivacaine, but achieves this clinical outcome using acompletely different drug delivery system as compared to our DepoFoam drug delivery technology.The number of patents and patent applications covering products in the same field as EXPAREL indicates that competitors have sought to develop andmay seek to market competing formulations that may not be covered by our patents and patent applications. The commercial opportunity for EXPARELcould be significantly harmed if competitors are able to develop and commercialize alternative formulations of bupivacaine that are long acting but outsidethe scope of our patents.Because EXPAREL has been approved by the FDA, one or more third parties may challenge the patents covering this product, which could result in theinvalidation or unenforceability of some or all of the relevant patent claims. For example, if a third party files an Abbreviated New Drug Application, orANDA, for a generic drug product containing bupivacaine and relies in whole or in part on studies conducted by or for us, the third party will be required tocertify to the FDA that either: (i) there is no patent information listed in the FDA’s Orange Book with respect to our NDA for EXPAREL; (ii) the patents listedin the Orange Book have expired; (iii) the listed patents have not expired, but will expire on a particular date and approval is sought after patent expiration;or (iv) the listed patents are invalid or will not be infringed by the manufacture, use or sale of the third-party’s generic drug product. A certification that thenew product will not infringe the Orange Book-listed patents for EXPAREL, or that such patents are invalid, is called a paragraph IV certification. If the thirdparty submits a paragraph IV certification to the FDA, a notice of the paragraph IV certification must also be sent to us once the third-party’s ANDA isaccepted for filing by the FDA. We may then initiate a lawsuit to defend the patents identified in the notice. The filing of a patent infringement lawsuit within45 days of receipt of the notice automatically prevents the FDA from approving the third-party’s ANDA until the earliest of 30 months or the date on whichthe patent expires, the lawsuit is settled or the court reaches a decision in the infringement lawsuit in favor of the third party. If we do not file a patentinfringement lawsuit within the required 45-day period, the third-party’s ANDA will not be subject to the 30-month stay. Litigation or other proceedings toenforce or defend intellectual property rights are often very complex in nature, may be very expensive and time-consuming, may divert our management’sattention from our core business and may result in unfavorable results that could adversely impact our ability to prevent third parties from competing withour products.Because it is difficult and costly to protect our proprietary rights, we may not be able to ensure their protection and all patents will eventually expire.Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection for EXPAREL, DepoCyt(e),DepoFoam and for any product candidates that we may develop, license or acquire and the methods we use to manufacture them, as well as successfullydefending these patents and trade secrets against third-party challenges. We will only be able to protect our technologies from unauthorized use by thirdparties to the extent that valid and enforceable patents or trade secrets cover them.The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions forwhich important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical or biotechnologypatents has emerged to date in the United States. Patent positions and policies outside the United States are even more uncertain. Changes in either the patentlaws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannotpredict the breadth of claims that may be allowed or enforced in our patents or in third-party patents.The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequatelyprotect our rights or permit us to gain or keep our competitive advantage. For example:38Table of Contents•we may not have been the first to make the inventions covered by each of our pending patent applications and issued patents;•we may not have been the first to file patent applications for these inventions;•others may independently develop similar or alternative technologies or duplicate any of our product candidates or technologies;•it is possible that none of the pending patent applications will result in issued patents;•the issued patents covering our product candidates may not provide a basis for commercially viable active products, may not provide us withany competitive advantages, may not have sufficient scope or strength to protect the technologies they were intended to protect or may bechallenged by third parties;•others may design around our patent claims to produce competitive products that fall outside the scope of our patents;•we may not develop or in-license additional proprietary technologies that are patentable;•patents of others may have an adverse effect on our business; or•competitors may infringe our patents and we may not have adequate resources to enforce our patents.Patent applications in the United States are maintained in confidence for at least 18 months after their earliest effective filing date. Consequently, wecannot be certain we were the first to invent or the first to file patent applications on EXPAREL, our DepoFoam drug delivery technology or any productcandidates that we may develop, license or acquire. In the event that a third party has also filed a U.S. patent application relating to our product candidates ora similar invention, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority ofinvention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in amaterial adverse effect on our U.S. patent position. Furthermore, we may not have identified all United States and foreign patents or published applicationsthat affect our business either by blocking our ability to commercialize our drugs or by covering similar technologies that affect our drug market.In addition, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries patentprotection may not be available at all to protect our product candidates. Even if patents are issued, we cannot guarantee that the claims of those patents willbe valid and enforceable or provide us with any significant protection against competitive products, or otherwise be commercially valuable to us.Furthermore, while we generally apply for patents in those countries where we intend to make, have made, use or sell patented products, we may notaccurately predict all of the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country,we may be precluded from doing so at a later date. We also cannot assure you that the patents issuing as a result of our foreign patent applications will havethe same scope of coverage as our United States patents.Some of our older patents have already expired. In the case of DepoCyt(e), key patents providing protection in Europe have expired. In the case ofEXPAREL, our European and U.S. patent applications have been granted and provide protection through November 2018 and September 2018, respectively.In the United States, we have a patent application that is pending, and, if granted, would provide protection for EXPAREL in the United States throughNovember 2018. An existing formulation patent for EXPAREL expired in November 2013. An existing formulation patent for EXPAREL expired in the U.S.in 2013 and its equivalents in Canada, Germany, France, Spain, Italy and the United Kingdom expired in 2014. Once our patents covering EXPAREL haveexpired, we will be more reliant on trade secrets to protect against generic competition.We also rely on trade secrets to protect our technology, particularly where we do not believe patent protection is appropriate or obtainable. However,trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets through confidentiality and non-disclosure agreements, ourlicensors, employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information tocompetitors. Policing unauthorized use of our trade secrets or enforcing a claim that a third party illegally obtained and is using our trade secrets is expensiveand time consuming, and the outcome is unpredictable. In addition, trade secret laws in other countries may not be as protective as they are in the UnitedStates. Thus, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently developequivalent knowledge, methods and know-how.In order to protect the goodwill associated with our company and product names, we rely on trademark protection for our marks. We have registered the“Pacira”, “EXPAREL”, “DepoCyt” and “DepoCyte” marks with the United States Patent and39Table of ContentsTrademark Office. A third party may assert a claim that one of our marks is confusingly similar to its mark, and such claims or the failure to timely register amark or objections by the FDA could force us to select a new name for one of our product candidates, which could cause us to incur additional expense ordelay the commercialization of such product.If we fail to obtain or maintain patent protection or trade secret protection for EXPAREL, DepoCyt(e), DepoFoam or any product candidate that we maydevelop, license or acquire, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affectour ability to generate revenues and achieve profitability.If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in any litigationwould harm our business.Our ability to develop, manufacture, market and sell EXPAREL, our DepoFoam drug delivery technology or any product candidates that we maydevelop, license or acquire depends upon our ability to avoid infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents andpending patent applications, which are owned by third parties, exist in the general fields of pain management and cancer treatment and cover the use ofnumerous compounds and formulations in our targeted markets. Because of the uncertainty inherent in any patent or other litigation involving proprietaryrights, we and our licensors may not be successful in defending intellectual property claims by third parties, which could have a material adverse effect on ourresults of operations. Regardless of the outcome of any litigation, defending the litigation may be expensive, time-consuming and distracting tomanagement. In addition, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which maylater result in issued patents that EXPAREL or DepoCyt(e) may infringe. There could also be existing patents of which we are not aware that EXPAREL orDepoCyt(e) may inadvertently infringe.There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceuticalindustries in general. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:•infringement and other intellectual property claims which, with or without merit, can be expensive and time consuming to litigate and candivert management’s attention from our core business;•substantial damages for past infringement which we may have to pay if a court decides that our product infringes on a competitor’s patent;•a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which it would not be required todo;•if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and•redesigning our processes so they do not infringe, which may not be possible or could require substantial funds and time.We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.As is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at other biotechnology orpharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject toclaims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers.Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantialcosts and be a distraction to management.Risks Related to Our Financial Condition and Capital RequirementsWe have incurred significant losses since our inception and may incur additional losses in the future.We are a 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 $13.7 million, $63.9 million and $52.3 million, for theyears ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, we had an accumulated deficit of $310.1 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 significant pre-commercialization expenses as we prepared for the commercial launch of EXPAREL, and we incur significant sales, marketing and manufacturing expenses,as well as continued development expenses related to the commercialization of EXPAREL. As a40Table of Contentsresult, we have not been profitable. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable topredict the extent of any future losses or when we will become profitable, if at all.We may never become profitable.Our ability to become profitable depends upon our ability to generate revenue from EXPAREL. Our ability to generate revenue depends on a number offactors, including, but not limited to, our ability to:•manufacture commercial quantities of EXPAREL at acceptable cost levels; and•continue to develop a commercial organization and the supporting infrastructure required to successfully market and sell EXPAREL.We anticipate incurring significant additional costs associated with the commercialization of EXPAREL. We also do not know when we will achieveprofitability, if ever. If we are unable to generate revenues, we will not become profitable and may be unable to continue operations without continuedfunding.Our short operating history makes it difficult to evaluate our business and prospects.We were incorporated in December 2006 and have been conducting operations with respect to EXPAREL since March 2007. Our operations to dateinclude organizing and staffing our company, conducting product development activities, including clinical trials and manufacturing development activitiesfor EXPAREL and manufacturing and related activities for DepoCyt(e). Further, we worked to establish our commercial infrastructure for EXPAREL, whichwe launched in the second quarter of 2012. Consequently, any predictions about our future performance may not be as accurate as they could be if we had ahistory of successfully developing and commercializing pharmaceutical products.We may need additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our productdevelopment programs or commercialization efforts.Developing and commercializing products for use in the hospital setting, conducting clinical trials, establishing outsourced manufacturing relationshipsand successfully manufacturing and marketing drugs that we may develop is expensive. We may need to raise additional capital to:•continue to fund our operations;•continue our efforts to hire additional personnel and build a commercial infrastructure to commercialize EXPAREL;•qualify, outsource or build additional commercial-scale manufacturing of our products under cGMP; and•in-license and develop additional product candidates.We may not have sufficient financial resources to continue our operations or meet all of our objectives, which could require us to postpone, scale back oreliminate some, or all, of these objectives. Our future funding requirements will depend on many factors, including, but not limited to:•the costs of maintaining a commercial organization to sell, market and distribute EXPAREL;•the success of the commercialization of EXPAREL;•the cost and timing of manufacturing sufficient supplies of EXPAREL to meet customer demand, including the cost of expanding ourmanufacturing facilities to produce EXPAREL;•the rate of progress and costs of our efforts to prepare for the submission of an NDA for any product candidates that we may in-license or acquirein the future, and the potential that we may need to conduct additional clinical trials to support applications for regulatory approval;•the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with our productcandidates, including any such costs we may be required to expend if our licensors are unwilling or unable to do so;•the effect of competing technological and market developments;41Table of Contents•the terms and timing of any collaborative, licensing, co-promotion or other arrangements that we may establish; and•the potential that we may be required to file a lawsuit to defend our patent rights or regulatory exclusivities from challenges by companiesseeking to market generic versions of extended-release liposome injection of bupivacaine.Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products andtechnologies.Until we can generate a sufficient amount of product revenue, if ever, we expect to finance or supplement future cash needs through public or privateequity offerings, debt financings, product supply revenue and royalties, corporate collaboration and licensing arrangements, as well as through interestincome earned on cash and investment balances. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequatefunds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs or our commercializationefforts.Our quarterly operating results may fluctuate significantly.We expect our operating results to be subject to quarterly fluctuations. Our operating results will be affected by numerous factors, including:•the level of underlying hospital demand for EXPAREL and end-user buying patterns;•maintaining our existing manufacturing facilities and expanding our manufacturing capacity and constructing facilities for the manufacture ofEXPAREL with our co-production partner, Patheon, including installing specialized processing equipment for the manufacturing of EXPAREL;•our execution of other collaborative, licensing, distribution, manufacturing or similar arrangements and the timing of payments we may make orreceive under these arrangements;•variations in the level of expenses related to our future development programs;•any product liability or intellectual property infringement lawsuit in which we may become involved; and•regulatory developments affecting EXPAREL or the product candidates of our competitors;If our quarterly or annual operating results fall below the expectations of investors or securities analysts, the price of our common stock could declinesubstantially. Furthermore, any quarterly or annual fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our futureperformance.Raising additional funds by issuing securities may cause dilution to existing stockholders and raising funds through lending and licensing arrangementsmay restrict our operations or require us to relinquish proprietary rights.To the extent that we raise additional capital by issuing equity securities, our existing stockholders’ ownership will be diluted. If we raise additionalfunds through licensing arrangements, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies, orgrant licenses on terms that are not favorable to us. Any debt financing we enter into may involve covenants that restrict our operations. These restrictivecovenants may include limitations on additional borrowing and specific restrictions on the use of our assets as well as prohibitions on our ability to createliens, pay dividends, redeem our stock or make investments.Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to devote substantial time to compliance initiatives, and if weare unable to receive an unqualified attestation report on our internal controls from our independent registered public accounting firm, our stock pricecould be adversely affected.Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our management on the effectivenessof our internal control over financial reporting. The internal control report must contain (i) a statement of management’s responsibility for establishing andmaintaining adequate internal control over financial reporting, (ii) a statement identifying the framework used by management to conduct the requiredevaluation of the effectiveness of our internal control over financial reporting and (iii) management’s assessment of the effectiveness of our internal controlover financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting iseffective.To achieve compliance with Section 404, we are engaged in a process to document and evaluate our internal control over financial reporting, which isboth costly and challenging. In this regard, we have dedicated internal resources, hired additional42Table of Contentsemployees for our finance function, and engaged outside consultants and adopted a detailed work plan to (i) assess and document the adequacy of internalcontrol over financial reporting, (ii) continue steps to improve control processes where appropriate, (iii) validate through testing that controls are functioningas documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. In addition, in connectionwith the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation ofany requested improvements and receiving a favorable attestation. If we cannot favorably assess the effectiveness of our internal control over financialreporting, or if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, investorscould lose confidence in our financial information and our stock price could decline.The use of our net operating loss carryforwards and research tax credits will be limited.We have significant federal and state net operating loss carryforwards and federal and state research and development tax credit carryforwards. Our netoperating loss carryforwards and research and development tax credits may expire and not be used. Our net operating loss carryforwards will begin expiringin 2026 for federal purposes and 2015 for state purposes if we have not used them prior to that time, and our federal tax credits will begin expiring in 2028unless previously used. Our state tax credits carry forward indefinitely. Additionally, our ability to use any net operating loss and credit carryforwards tooffset taxable income or tax, respectively, in the future will be limited under Internal Revenue Code Sections 382 and 383 because we experiencedcumulative changes in ownership of more than 50% within a three-year period. Such ownership changes were triggered by the cumulative ownership changesarising as a result of the initial acquisition of the Company’s stock in 2007 and the completion of our initial public offering and our other financingtransactions. Because of the ownership changes, we will be limited regarding the amount of net operating loss carryforwards and research tax credits that wecan utilize annually in the future to offset taxable income or tax, respectively. Such an annual limitation will significantly reduce the utilization of the netoperating loss carryforwards and research tax credits before they expire. In addition, California and certain states have suspended use of net operating losscarryforwards for certain taxable years, and other states are considering similar measures. As a result, we may incur higher state income tax expense in thefuture. Depending on our future tax position, continued suspension of our ability to use net operating loss carryforwards in states in which we are subject toincome tax could have an adverse impact on our results of operations and financial condition.Our results of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturns.Our results of operations could be materially negatively affected by general economic conditions, both in the United States and elsewhere around theworld. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a decliningresidential real estate market in the United States have contributed to increased volatility and diminished expectations for the economy and the marketsgoing forward. These factors, combined with volatile oil prices, low business and consumer confidence and increased unemployment have precipitated aneconomic recession and fears of a possible depression. Domestic and international equity markets continue to experience heightened volatility and turmoil.These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn, our results of operationscould be adversely affected by those factors in many ways, including making it more difficult for us to raise funds if necessary, and our stock price mayfurther decline.Risks Related Our Indebtedness and our Common StockOur common stock price may be subject to significant fluctuations and volatility.Our stock price is volatile, and from February 3, 2011, the first day of trading of our common stock, to February 20, 2015, the trading prices of our stockhave ranged from $6.16 to $119.08 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;43Table of Contents•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 extremeprice and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market andindustry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. Fluctuations in our stock pricecould, among other things, adversely impact the trading price of the Notes and our shares issuable upon conversion of the Notes.Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantialindebtedness.Our ability to make payments of the principal of, to pay interest on or to refinance our indebtedness, including the notes issued in our private offeringcompleted on January 23, 2013, or Notes, as described below, or to make cash payments in connection with any conversion of the Notes depends on ourfuture performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow fromoperations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate such cash flow, we maybe required to adopt one or more alternatives, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that may beonerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may notbe able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.On January 23, 2013, the Company completed a private offering of $120.0 million in aggregate principal amount of 3.25% convertible senior notes due2019 and entered into an indenture with Wells Fargo Bank, National Association, a national banking association, as trustee, governing the Notes. The Notesaccrue interest at a rate of 3.25% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2013. The Noteswill mature on February 1, 2019.As of December 31, 2014, our total consolidated gross indebtedness was $120.0 million, all of which was unsecured indebtedness, and our subsidiarieshad no indebtedness (in each case, excluding trade payables, intercompany liabilities and income tax-related liabilities).Despite our current indebtedness levels, we may still incur substantially more indebtedness or take other actions which would intensify the risks discussedabove.Despite our current consolidated indebtedness levels, we and our subsidiaries may be able to incur substantial additional indebtedness in the future,subject to any restrictions contained in our then-existing debt instruments, some of which may be secured indebtedness. We are not restricted under the termsof the indenture governing the Notes from incurring additional indebtedness, securing existing or future indebtedness, recapitalizing our indebtedness ortaking a number of other actions that could have the effect of diminishing our ability to make payments on the Notes or any future indebtedness.We may not have the ability to raise the funds necessary to settle conversions of the Notes in cash to the extent required or to repurchase the Notes upon afundamental change, and our future indebtedness may contain limitations on our ability to pay cash upon conversion of the Notes or limitations on ourability to repurchase the Notes.Holders of the Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a repurchase price equalto 100% of their principal amount, plus accrued and unpaid interest, if any. In addition, upon conversion of the Notes, we will be required to make cashpayments for each $1,000 in principal amount of Notes converted of at least the lesser of $1,000 and the sum of the daily conversion values. However, wemay not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notesbeing44Table of Contentsconverted. Any credit facility or other agreement that we may enter into may limit our ability to make cash payments at the time of a fundamental change orupon conversion of the Notes. Further, our ability to repurchase the Notes or to pay cash upon conversions of the Notes may be limited by law, by regulatoryauthority or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture or topay any cash payable on future conversions of the Notes as required by the indenture would constitute a default under the indenture. A default under theindenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the relatedindebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchasethe Notes or make cash payments upon conversions thereof. In February 2015, we received notice of an election for conversion from one of the holders of theNotes. The principal amount of the conversion request was $1.5 million which must be paid in cash pursuant to the terms of the Indenture. We elected tosettle the conversion premium in shares of our common stock, calculated using a 40 trading-day observation period ending April 8, 2015. There is noassurance that we will not receive more conversion requests.The conditional conversion feature of the Notes, if triggered and elected, may adversely affect our financial condition and operating results.Under certain circumstances, holders of the Notes are entitled to convert the Notes to common stock at any time during specified periods at their option.If one or more holders elect to convert their Notes, we would be required to settle any converted principal through the payment of cash, which couldadversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we have reclassified all of the outstanding principal of the Notesas a current rather than long-term liability, which has resulted in a material reduction of our net working capital.Conversion of the Notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their Notes, or mayotherwise depress the price of our common stock.The conversion of the Notes into shares of our common stock, to the extent that we choose not to deliver all cash for the conversion value in excess ofthe principal amount, will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable uponconversion of the Notes could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage shortselling by market participants due to this dilution or may facilitate trading strategies involving the Notes and our common stock.Future sales in the public market or issuances of our common stock could lower the market price for our common stock and adversely impact the tradingprice of the Notes.In the future, we may sell additional shares of our common stock to raise capital. Except under limited circumstances, we are not restricted from issuingadditional common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. Theissuance of additional shares of our common stock or convertible securities, including upon exercise of our outstanding options or otherwise, will dilute theownership interest of our common stockholders. In addition, our greater than 5% stockholders may sell a substantial number of their shares in the publicmarket, which could also affect the market price for our common stock. We cannot predict the size of future sales or issuances of our common stock or theeffect, if any, that they may have on the market price for our common stock. The liquidity and trading volume of our common stock is limited. For the threemonths ended December 31, 2014, the average per day trading volume of our common stock was 539,866 shares. The issuance and/or sale of substantialamounts of common stock, or the perception that such issuances and/or sales may occur, could adversely affect the market price of our common stock and thetrading price of the Notes and impair our ability to raise capital through the sale of additional equity or debts securities.The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financialresults.In May 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible DebtInstruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as AccountingStandards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20. Under ASC 470-20, an entity must separately account for theliability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in amanner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required tobe included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of theequity component would be treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we are required to record agreater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Notes to theirface amount over the term of the Notes. We will report larger net losses in our financial results because ASC 470-20 will require interest to include both thecurrent period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results,the trading price of our common stock and the trading price of the Notes.45Table of ContentsIn addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currentlyaccounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in thecalculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stockmethod, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settlesuch excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit theuse of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, thenour net losses per share would be increased.Holders of the Notes will not be entitled to any rights with respect to our common stock, but will be subject to all changes made with respect to them to theextent our conversion obligation includes shares of our common stock.Holders of Notes will not be entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receiveany dividends or other distributions on our common stock) prior to the last trading day of the observation period, but, to the extent our conversion obligationincludes shares of our common stock, holders of Notes will be subject to all changes affecting our common stock. For example, if an amendment is proposedto our certificate of incorporation or bylaws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote onthe amendment occurs prior to the last trading day of the relevant observation period, then to the extent our conversion obligation includes shares of ourcommon stock, such holder will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes affecting ourcommon stock as a result of such amendment.Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if anacquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.Provisions in our restated certificate of incorporation and our bylaws, as well as provisions of the Delaware General Corporation Law, or DGCL, couldmake it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, includingtransactions in which stockholders might otherwise receive a premium for their shares. These provisions include:•authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued withoutstockholder approval;•prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;•eliminating the ability of stockholders to call a special meeting of stockholders; and•establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted uponat stockholder meetings.These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult forstockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, we are subject toSection 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with aninterested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions areapproved by our Board of Directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by orbeneficial to our stockholders.We do not intend to pay dividends on our common stock for the foreseeable future.We have never declared or paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the furtherdevelopment and expansion of our business and do not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividendswill be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, capital requirements, restrictionscontained in future financing instruments and such other factors as our Board of Directors deems relevant.Item 1B. Unresolved Staff CommentsNone.46Table of ContentsItem 2. PropertiesOur research and development and manufacturing facilities are located in San Diego, California, where we occupy two facilities totaling approximately106,000 square feet under leases expiring in August 2020. In November 2014, we signed a lease for an additional 45,465 square feet at our San Diegolocation expiring in October 2020. We use these facilities for research and development, manufacturing and general and administrative purposes. We alsooccupy a warehouse in San Diego primarily used for the storage of inventory under a lease expiring in August 2020. In addition, we maintain our executiveoffices and our commercial and business development facility in Parsippany, New Jersey, where we occupy approximately 27,000 square feet under a leaseexpiring in July 2017.We believe that our manufacturing facilities will be sufficient for our needs with Suites A and C and the yet to be completed Patheon facility asdiscussed in Item 1-Business above. We also may add new facilities or expand existing facilities as we add employees, expand our geographic markets and ifdemand for EXPAREL increases and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansionof our operations.Item 3. Legal ProceedingsFrom time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. Except asdescribed below, we are not presently a party to any litigation that we believe to be material and we are not aware of any pending or threatened litigationagainst us that we believe could have a material adverse effect on our business, operating results, financial condition or cash flows.On October 3, 2014, a purported class action lawsuit was filed in the U.S. District Court for the District of New Jersey against the Company and three ofour current officers, Nicholas R. Lovallo v. Pacira Pharmaceuticals, Inc., et al., Case No. 2:14-cv-06172-WHW-CLW. The lawsuit asserts claims underSections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and is premised on allegedly false and/or misleading statements, and non-disclosure of material facts, regarding the Company’s business, operations, prospects and performance during the proposed class period of April 9, 2012 toSeptember 24, 2014. We intend to vigorously defend all claims asserted, including by filing a motion to dismiss.Item 4. Mine Safety DisclosuresNot applicable.47Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock has been listed under the symbol “PCRX” on The NASDAQ Global Select Market since January 2, 2013. Prior to that, our commonstock was listed on The NASDAQ Global Market from our initial public offering on February 3, 2011 until January 1, 2013. The following table sets forth, forthe periods indicated, the high and low intraday sales prices of our common stock as reported by the NASDAQ:Year Ended 2014 High LowFourth Quarter $112.00 $84.93Third Quarter 109.94 81.51Second Quarter 93.13 60.30First Quarter 83.41 54.23Year Ended 2013 High LowFourth Quarter $58.22 $45.68Third Quarter 49.45 28.79Second Quarter 32.36 24.70First Quarter 30.94 17.15On February 20, 2015, the closing price of our common stock as reported on The NASDAQ Global Select Market was $117.33 per share and we hadapproximately 14 holders of record of our common stock.Performance GraphThe following graph shows the value of an investment of $100 on February 3, 2011, the date of our initial public offering, or IPO, in each of Paciracommon stock (PCRX), the NASDAQ Composite index (^IXIC) and the NASDAQ Biotechnology index (^NBI). The indices are included for comparativepurposes only and do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of our commonstock. All results assume the reinvestment of dividends, if any, and are calculated as of December 31 of each year. The historical stock price performance ofour common stock shown in the performance graph is not necessarily indicative of future stock price performance.48Table of ContentsComparison of Cumulative Total Returns Since Our IPO Cumulative Total Return February 3, December 31, December 31, December 31, December 31, 2011 2011 2012 2013 2014Pacira Pharmaceuticals, Inc. (PCRX)$100.00 $123.22 $248.86 $818.95 $1,262.96NASDAQ Composite (^IXIC)100.00 94.60 109.65 151.66 171.98NASDAQ Biotechnology (^NBI)100.00 111.01 146.42 242.49 325.17Dividend PolicyWe have never declared or paid any cash dividends on our capital stock. We currently intend to retain earnings, if any, to finance the growth anddevelopment of our business, and as such we do not expect to pay any cash dividends on our common stock in the foreseeable future. The payment of futuredividends, if any, will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements,restrictions contained in future financing instruments, provisions of applicable law and other factors the board deems relevant.Item 6. Selected Financial DataThe following table provides selected consolidated financial data. We have prepared this information using our audited consolidated financialstatements for the years ended December 31, 2014, 2013, 2012, 2011 and 2010. The following consolidated financial data should be read in conjunctionwith our consolidated financial statements and related notes and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” included in this report.49Table of Contents Year Ended December 31, 2014 2013 2012 2011 2010Statement of Operations Data(In thousands, except per share data)Revenues: Net product sales$193,526 $81,956 $18,191 $6,895 $7,640 Collaborative licensing and development revenue1,287 972 18,390 5,074 3,217 Royalty revenue2,855 2,623 2,503 3,720 3,705 Total revenues197,668 85,551 39,084 15,689 14,562Operating expenses: Cost of revenues77,440 54,772 32,139 16,739 12,276 Research and development18,731 21,560 9,937 14,873 18,628 Selling, general and administrative106,662 62,508 46,306 20,159 6,367 Impairment of long-lived assets— — — 3,019 — Total operating expenses202,833 138,840 88,382 54,790 37,271Loss from operations(5,165) (53,289) (49,298) (39,101) (22,709)Other (expense) income: Interest income382 259 275 255 146 Interest expense(8,278) (7,253) (1,807) (4,780) (3,959) Loss on early extinguishment of debt— (3,398) (1,062) — (184) Royalty interest obligation(323) (623) (278) 227 (930) Other, net(159) (47) (111) 71 487 Total other expense, net(8,378) (11,062) (2,983) (4,227) (4,440)Loss before income taxes(13,543) (64,351) (52,281) (43,328) (27,149) Income tax (expense) benefit(173) 442 — — —Net loss$(13,716) $(63,909) $(52,281) $(43,328) $(27,149) Net loss per share: Basic and diluted net loss per common share$(0.39) $(1.93) $(1.72) $(2.64) $(47.29)Weighted average common shares outstanding: Basic and diluted35,299 33,182 30,332 16,437 574 December 31, 2014 2013 2012 2011 2010Balance Sheet Data(In thousands)Cash and cash equivalents, restricted cash,short-term and long-term investments$182,598 $73,785 $42,573 $77,452 $27,447Working capital (deficit)74,247 (15,192) 46,766 50,738 14,733 Total assets326,072 169,820 112,054 113,490 66,562Long-term liabilities14,917 6,628 32,043 33,310 98,623Accumulated deficit(310,145) (296,429) (232,520) (180,239) (136,911) Total stockholders’ equity (deficit)171,145 41,249 65,855 48,269 (48,383)50Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and thenotes to those financial statements appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements thatinvolve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Part I, Item 1A of this Annual Reporton Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.OverviewWe are a specialty pharmaceutical company focused on the development, commercialization and manufacture of proprietary pharmaceutical products,based on our proprietary DepoFoam extended release drug delivery technology, for use primarily in hospitals and ambulatory surgery centers. As ofDecember 31, 2014, our commercial stage products are EXPAREL and DepoCyt(e):•EXPAREL is a liposome injection of bupivacaine, an amide-type local anesthetic indicated for administration into the surgical site to producepostsurgical analgesia, and was approved by the FDA on October 28, 2011. We commercially launched EXPAREL in April 2012. We drop-shipEXPAREL directly to the end user based on orders placed to wholesalers or directly to us, and we have no product held by wholesalers.•DepoCyt(e) is a sustained release liposomal formulation of the chemotherapeutic agent cytarabine and is indicated for the intrathecal treatmentof lymphomatous meningitis. DepoCyt(e) was granted accelerated approval by the FDA in 1999 and full approval in 2007. We sell DepoCyt(e)to our commercial partners located in the United States and Europe.Since inception, we have incurred significant operating losses. We expect to continue to incur significant expenses as we commercialize EXPAREL;pursue the use of EXPAREL in additional indications, such as for nerve block, oral surgery, chronic pain and pediatrics; advance the development of productcandidates, such as DepoMeloxicam and DepoTranexamic Acid; seek FDA approval for our product candidates that successfully complete clinical trials;develop our sales force and marketing capabilities to prepare for their commercial launch and expand and enhance our manufacturing capacity forEXPAREL.2014 Highlights and Developments•Total revenues increased $112.1 million, or 131%, in the year ended December 31, 2014, as compared to 2013, primarily driven by EXPARELproduct sales of $188.5 million, net of allowances for sales returns, prompt payment discounts, volume rebates and distribution service feespayable to wholesalers.•In September 2014, we made an $8.0 million milestone payment to Skyepharma in connection with achieving $100.0 million of EXPAREL netsales collected.•In May 2014, we announced the submission of an sNDA for a nerve block indication based on data from a Phase 3 study demonstrating theefficacy and safety of EXPAREL in femoral nerve block for total knee arthroplasty, as well as data from a Phase 3 study in intercostal nerve blockfor thoracotomy. The FDA has accepted our sNDA for review and has set a Prescription Drug User Fee Act, or PDUFA, action date of March 5,2015.•In April 2014, we and Patheon entered into a Strategic Co-Production Agreement, Technical Transfer and Service Agreement and ManufacturingSupply Agreement to collaborate in the manufacture and packaging of EXPAREL. Patheon has agreed to undertake certain technical transferactivities and construction services needed to prepare its Swindon, United Kingdom facility for the manufacture and packaging of EXPAREL intwo dedicated manufacturing suites. We expect the first suite to begin commercial production in the second half of 2016 and the second suite tobecome operational in the 2018 or 2019 timeframe. We expect that the expansion of our manufacturing capacity with Patheon, coupled with ourmanufacturing facility at our Science Center Campus, will enable us to meet the future demand for EXPAREL.•In April 2014, we completed a follow-on underwritten public offering, selling 1,840,000 shares of common stock, which included theunderwriters’ exercise of the over-allotment option, at an offering price of $64.00 per share. We received net proceeds after underwriting fees andrelated expenses of $110.5 million.•In April 2014, we and Mundipharma amended our agreements to, among other things, (i) extend the term of such agreements by an additional 15years to June 2033 and (ii) expand the territory where Mundipharma can market51Table of Contentsand distribute DepoCyte to all countries other than the United States of America, Canada and Japan. In connection with the agreements, wereceived a non-refundable upfront payment of $8.0 million from Mundipharma. The revenue has been deferred and will be recognized over thecontractual term.•In March 2014, the FDA approved an additional bulk manufacturing suite, or Suite C, for EXPAREL at our Science Center Campus in San Diego,California, which has more than doubled our manufacturing capacity.EXPARELWe are pursuing several additional indications for EXPAREL. In May 2014, we submitted an sNDA for nerve block administration and expect PDUFAaction on March 5, 2015. We believe that this additional indication for EXPAREL presents a method of pain control that has the potential to reduce the needfor opioids and replace the costly and cumbersome perineural catheter, drug reservoir and pump with a single injection to continuously deliver bupivacaine,and will allow us to fully leverage our manufacturing and commercial infrastructure. In addition to the nerve block indication, we are also pursuing anexpansion into oral surgery and chronic pain indications for EXPAREL. We plan on initiating a Phase 3 study in 2015 and expect to file an sNDA for oralsurgery procedures in 2016. For chronic pain, we intend to initiate a Phase 2 trial in 2015 with patients suffering from chronic lower back pain caused byfacet joint dysfunction with EXPAREL as a single dose administration to define the duration of efficacy and determine the optimal dose, which will betterinform the Phase 3 study design planned for 2016. We also plan on commencing pediatric trials, which have been required by the FDA.Our development pipeline projects include line extensions and the generation of additional clinical data for EXPAREL.We are also focused on the lifecycle management of EXPAREL, including seeking to enhance our intellectual property rights. Our current patents forEXPAREL expire in the U.S. in November 2018. We currently have a pending non-provisional patent application that claims a continuous spraymanufacturing process for DepoFoam-based products, including a process for making EXPAREL. We believe the spray process offers many advantages to thecurrent process, including larger scale production and lower manufacturing costs. If this patent application is granted, it could prevent others from using thisprocess until 2031. We can make no assurances that such a patent will be granted.We have focused significant resources on building our commercial team for the launch and commercial sale of EXPAREL. In 2013, we contracted withCrossLink to promote and sell EXPAREL to orthopedic surgeons. We continue to run prospective outcome studies designed for commercial purposes, whichdo not have any regulatory endpoints. We expect to continue to implement a variety of programs to educate customers about EXPAREL. Our commercialteam, consisting of both sales representatives and scientific and medical affairs professionals, executes on a full range of activities for EXPAREL, includingproviding publications and abstracts showing the EXPAREL clinical program efficacy and safety, health outcomes programs and review articles on painmanagement. We also provide access and resources for drug utilization or medication use evaluations and Health Outcomes Studies, which provideretrospective and prospective analyses for our hospital customers using their own hospital data to demonstrate the true cost of opioid-based postsurgical paincontrol.In September 2014, we received a warning letter from the FDA’s Office of Prescription Drug Promotion, or OPDP, pertaining to certain promotionalaspects of EXPAREL, and in February 2015, agreement was reached with the OPDP on the content and mechanisms for distribution of corrective action,which will consist of a Dear Healthcare Provider Letter and a corrective journal advertisement. We are actively working to ensure that our sales force andother promotional channels communicate these points to customers thoroughly and accurately: EXPAREL is broadly indicated for administration into thesurgical site to produce postsurgical analgesia. FDA approval of EXPAREL was based on pivotal trials conducted in excisional hemorrhoidectomy andbunionectomy surgical models, and thus, the basis for assessment of safety and efficacy was limited to those two procedures. Regarding duration of efficacy,in both pivotal trials, EXPAREL demonstrated a significant reduction in pain intensity scores compared to placebo for up to 24 hours. In thehemorrhoidectomy trial, which had a primary endpoint of cumulative pain scores over the first 72 hours, there was minimal to no difference in pain intensityscores between EXPAREL and placebo from 24 to 72 hours; however, there was a cumulative decrease in opioid consumption through 72 hours. The clinicalbenefit of that reduction was not demonstrated.Product PipelineDepoFoam is used to extend the release of the active drug substances. With this technology, we are currently developing two new DepoFoam-basedproduct candidates, DepoMeloxicam, or DepoMLX, a DepoFoam-based NSAID, and DepoTranexamic Acid, or DepoTXA, a DepoFoam-basedantifibrinolytic. Completion of clinical trials may take several years or more, and the length of time generally varies according to the type, complexity,novelty and intended use of a product candidate.52Table of ContentsDepoMLX, is a long-acting non-steroidal anti-inflammatory drug, or NSAID, designed to treat moderate to severe acute postsurgical pain as part of anon-opioid multimodal regimen. A product designed for single dose local administration such as DepoMLX could provide a longer duration of pain relief ata significantly lower concentration of systemic NSAIDs, which are known to cause dose dependent gastrointestinal side effects. Meloxicam, which iscurrently available as an oral formulation, is one of the most potent NSAIDs on the market today. We expect our customer audience for this drug to be similarto the target audience for EXPAREL infiltration. DepoMLX is currently in pre-clinical phase, and we expect to commence a Phase 3 study in 2017.Tranexamic Acid, or TXA, is currently used off-label as a systemic injection or as a topical application, and is used to treat or prevent excessive bloodloss during surgery by promoting hemostasis. The current formulation of tranexamic acid, however, has a short-lived effect consisting of only a few hours,while the risk of bleeding continues for two to three days after surgery. We believe DepoTXA, a long acting local antifibrinolytic agent combining immediateand extended release TXA, could address the unmet, increasing need for rapid ambulation and discharge in the ambulatory surgery environment for jointsurgery (primarily orthopedic surgery, including spine and trauma procedures and cardiothoracic surgery). Designed for single dose local administration intothe surgical site, DepoTXA could provide enhanced hemostabilization and improved safety and tolerability for patients over the systemic use of TXA byreducing bleeding, the need for blood transfusions, swelling, soft-tissue hematomas and the need for postoperative drains, thereby increasing not only vigorin patients, but also by decreasing overall costs to the hospital system. DepoTXA is currently in the preclinical phase, and we expect to commence a Phase 3study in 2017.Results of OperationsComparison of Years Ended December 31, 2014, 2013 and 2012RevenuesThe following table provides information regarding our revenues during the periods indicated, including percent changes (dollar amounts inthousands): Year Ended December 31, 2014 versus2013 2013 versus2012 2014 2013 2012 % Increase / (Decrease)Net product sales: EXPAREL$188,528 $76,218 $14,591 147 % 422 %DepoCyt(e)4,998 5,738 3,537 (13)% 62 %DepoDur— — 63 N/A (100)%Total net product sales193,526 81,956 18,191 136 % 351 %Collaborative licensing and development revenue1,287 972 18,390 32 % (95)%Royalty revenue2,855 2,623 2,503 9 % 5 %Total revenues$197,668 $85,551 $39,084 131 % 119 %EXPAREL revenue grew 147% in 2014, of which 135% was attributable to an increase in sales volume. The strong demand for EXPAREL hascontinued as a result of new accounts and growth within existing accounts, which has been driven by continued adoption in soft tissue procedures as well asrapid adoption in orthopedic procedures. In addition, as a result of both major hospital system formulary wins and the reduction of formulary restrictions,physician access has improved. The remaining increase in EXPAREL revenue was due to a 5% price increase in May 2014 coupled with changes in sales-related allowances and accruals, including volume rebates and chargebacks and returns allowances. DepoCyt(e) product sales decreased 13% in 2014primarily due to a lower number of DepoCyt(e) lots sold to our commercial partners.In 2014, the increase in collaborative licensing and development revenue of 32% was primarily driven by the receipt of an $8.0 million upfrontpayment in May 2014 from Mundipharma, which is being recognized on a straight-line basis over the contractual term.EXPAREL revenue grew 422% in 2013 resulting from both a full year of EXPAREL sales and continued penetration into the soft tissue and orthopedicmarkets. In addition, we experienced improved physician access due to the completion of drug utilization evaluations, which reduced restrictions on accessto EXPAREL. The entire growth in this period was attributable to increases in sales volume. DepoCyt(e) product sales increased 62% in 2013 driven by thelifting of a selective recall recommended by the European Medicines Agency in countries where DepoCyt(e) was not considered to be an “essential medicinalproduct,” resulting in decreased sales in 2012.53Table of ContentsIn 2013, the decrease in collaborative licensing and development revenue of 95% was primarily driven by the recognition of $17.4 million in deferredrevenue in connection with the termination of certain licensing agreements in 2012.Royalty revenue reflects royalties earned on collections of end user sales of DepoCyt(e) by our commercial partners.Cost of RevenuesThe following table provides information regarding cost of revenues during the periods indicated, including our gross margin percentage (dollaramounts in thousands): Year Ended December 31, 2014 versus2013 2013 versus2012 2014 2013 2012 % Increase / (Decrease)Cost of goods sold$77,440 $54,772 $31,744 41% 73 %Cost of collaborative licensing and development— — 395 N/A (100)%Total cost of revenues$77,440 $54,772 $32,139 41% 70 %Gross margin *61% 35% (53)% * The gross margin calculation excludes collaborative licensing and development revenue and expenses.The increase in cost of goods sold in 2014 was due to the increase in net product sales discussed above. The improvement in gross margin to 61% in2014 was driven by increased utilization of our facilities to manufacture EXPAREL. During 2014, we added two new manufacturing lines in Suite C to offsetthe high fixed cost infrastructure at our EXPAREL manufacturing facility.In 2013, cost of goods sold increased as net product sales increased. The improvement in gross margin to 35% in 2013 was driven by increasedutilization of our facility to manufacture EXPAREL 24/7 to meet demand; a decrease in consulting costs and the resumption of DepoCyt(e) production after aselective recall was lifted. The improvement was partially offset by the impact of producing Suite C batches in preparation for FDA approval submission,which could not be sold for commercial use and resulted in $3.7 million of expense in 2013. There was no cost of collaborative licensing and developmentrevenue in 2013 due to the termination of services performed under a licensing agreement with Novo Nordisk AS in 2012.Research and Development ExpensesResearch and development expenses consist primarily of costs related to clinical studies and related outside service, stock-based compensationexpenses and other research and development costs. Clinical study expenses include costs for clinical personnel, clinical studies performed by third-partycontract research organizations, materials and supplies, database management and other third party fees. Other research and development expenses includepersonnel and other costs for both new process development and new product candidates, toxicology studies, medical information services and overheadallocations. Stock-based compensation expenses largely relate to the costs of option grants to employees and non-employees.The following table provides a breakout of our research and development expenses during the periods indicated, including percent changes (dollaramounts in thousands): Year Ended December 31, 2014 versus2013 2013 versus2012 2014 2013 2012 % Increase / (Decrease)Clinical development$5,518 $11,202 $5,019 (51)% 123%Stock-based compensation6,490 4,345 1,155 49 % 276%Other6,723 6,013 3,763 12 % 60%Total research and development expense$18,731 $21,560 $9,937 (13)% 117%% of total revenue9% 25% 25% Research and development expenses decreased 13% in 2014 primarily due to decreases in clinical development expenses related to the conclusion ofour Phase 2/3 pivotal trial of EXPAREL administered as a femoral nerve block for total knee arthroplasty and our Phase 3 pivotal trial of EXPAREL as anintercostal nerve block for thoracotomy. This decrease was partially offset by an increase in stock-based compensation expense, primarily due to therequirement to revalue non-employee options periodically until they vest. Over this timeframe the fair value of our stock options increased significantly,largely as a result of a corresponding increase in our stock price. The increase in other research and development expense reflects increased headcount for ourmedical information support function.54Table of ContentsResearch and development expenses increased 117% in 2013 primarily due to increases in clinical development expenses relating to our Phase 2/3pivotal trial of EXPAREL administered as a femoral nerve block for total knee arthroplasty and our Phase 3 pivotal trial of EXPAREL as an intercostal nerveblock for thoracotomy. Stock-based compensation expense significantly increased in this timeframe as a result of revaluing non-employee options asdiscussed above. Other research and development expense increased due to the development of the EXPAREL DepoFoam Spray manufacturing process andincreased toxicity studies.From the acquisition date through December 31, 2014, we have incurred research and development expenses of $163.9 million, which have beenprimarily for EXPAREL.Selling, General and Administrative ExpensesThe following table provides information regarding selling, general and administrative expenses during the periods indicated, including percentchanges (dollar amounts in thousands): Year Ended December 31, 2014 versus2013 2013 versus2012 2014 2013 2012 % Increase / (Decrease)Sales and marketing$65,010 $39,298 $29,292 65% 34%General and administrative26,902 17,568 13,956 53% 26%Stock-based compensation14,750 5,642 3,058 161% 84%Total selling, general and administrative expenses$106,662 $62,508 $46,306 71% 35%% of total revenue54% 73% 118% Selling, general and administrative expenses increased 71% in 2014.Sales and marketing expenses increased by 65% in 2014 primarily due to a $16.0 million increase in spending for EXPAREL, which includededucational initiatives and programs to create product awareness in the orthopedic market, commission based payments to CrossLink, other selling initiativesand promotional activities to support the growth of EXPAREL. We also had an $8.7 million increase in salaries and benefits driven by an increase in thenumber of our field-based medical and scientific affairs personnel to better support and educate our customers.General and administrative expenses increased 53% in 2014 largely due to increases in salaries and benefits of $3.6 million associated with ourincreased headcount, as well as increased infrastructure costs and outside services in areas such as regulatory affairs and pharmacovigilance, tax services andinformation technology to support the commercial and manufacturing growth of EXPAREL.Stock-based compensation increased 161% in 2014 largely due to increases in headcount and significantly higher grant date fair values of our optionsas a result of a corresponding increase in our stock price.Selling, general and administrative expenses increased by 35% in 2013.Sales and marketing expenses increased by 34% in 2013 due to an $8.0 million increase in spending for EXPAREL, which included educationalinitiatives and programs to create product awareness in the orthopedic market, commission based payments to CrossLink, our Phase 4 trial for infiltration intothe transverse abdominis plane, along with other selling initiatives and promotional activities to support the growth of EXPAREL and a $2.0 million increasein salaries and benefits driven by an increase in the number of our field-based medical and scientific affairs personnel.General and administrative expenses increased by 26% in 2013 primarily due to increases in salaries and benefits associated with our increasedheadcount, as well as infrastructure costs and outside services in areas such as information technology, human resources and finance to support thecommercial and manufacturing growth of EXPAREL.Stock-based compensation increased 84% in 2013 largely due to increases in headcount and significantly higher grant date fair values of our options asa result of a corresponding increase in our stock price.55Table of ContentsOther Income (Expense)The following table provides information regarding other income (expense) during the periods indicated, including percent changes (dollar amounts inthousands): Year Ended December 31, 2014 versus2013 2013 versus2012 2014 2013 2012 % Increase / (Decrease)Interest income$382 $259 $275 47 % (6)%Interest expense(8,278) (7,253) (1,807) 14 % 301 %Loss on early extinguishment of debt— (3,398) (1,062) (100)% 220 %Royalty interest obligation(323) (623) (278) (48)% 124 %Other, net(159) (47) (111) 238 % (58)%Total other expense, net$(8,378) $(11,062) $(2,983) (24)% 271 %% of total revenue(4)% (13)% (8)% Total other expense, net decreased by 24% in 2014 primarily due to the loss on the extinguishment of the Oxford Credit Facility in January 2013,partially offset by the increase in interest expense. The increase in interest expense was due to an $0.8 million decrease in capitalized interest on Suite Cwhich was placed into service in 2014 and a $0.2 million increase in interest expense arising from a full year’s amortization of the discount on ourconvertible notes.Total other expense, net increased 271% in 2013 primarily due to an increase in interest expense. The increase in interest expense is due to a$3.5 million increase in amortization of the debt discount on the Notes; a $1.0 million increase on higher debt balances and a $0.9 million decrease incapitalized interest due to a lower effective interest rate.In 2013, we incurred a $3.4 million loss on the extinguishment of the Oxford Credit Facility, and in 2012, we incurred a $1.1 million loss onextinguishment of the Hercules Credit Facility.Income Tax Expense (Benefit)The following table provides information regarding our income tax (expense) benefit during the periods indicated, including percent changes (inthousands): Year Ended December 31, 2014 versus2013 2013 versus2012 2014 2013 2012 % Increase / (Decrease)Income tax expense (benefit)$173 $(442) $— N/A N/AEffective tax rate(1)% 1% —% To date there has been no provision for federal income taxes since we have incurred net operating losses since inception. In 2014, the income taxexpense consisted of minimum and apportionment based state taxes. In 2013, the income tax benefit reflected the sale of our unused net operating lossesthrough the State of New Jersey’s Economic Development Authority Technology Business Tax Certificate Transfer Program.Liquidity and Capital ResourcesSince our inception in 2006, we have devoted most of our cash resources to manufacturing, research and development and selling, general andadministrative activities related to the development and commercialization of EXPAREL. We have incurred losses since inception and are highly dependenton the commercial success of EXPAREL, which we launched in April 2012. We have financed our operations primarily with the proceeds from the sale ofconvertible senior notes, convertible preferred stock, common stock, secured and unsecured notes, borrowings under debt facilities, product sales andcollaborative licensing and development revenue. In April 2014, we sold 1,840,000 shares of common stock in a follow-on underwritten public offering forproceeds of $110.5 million, net of underwriters’ fees and related expenses. As of December 31, 2014, we had an accumulated deficit of $310.1 million, cashand cash equivalents, restricted cash, short-term investments and long-term investments of $182.6 million and working capital of $74.2 million.Our $120.0 million in aggregate principal amount of 3.25% convertible senior notes due 2019, or Notes, are classified as a current liability as discussedin Note 8, Debt, to our consolidated financial statements included herein. The holders of the Notes have the ability to elect to convert the Notes at any timeduring the quarter ended March 31, 2015. In the event of56Table of Contentsconversion, holders would forgo all future interest payments and the possibility of further stock price appreciation. In the event that all of the Notes areconverted, we would be required to repay the $120.0 million in principal value and approximately $309 million of cash or issue approximately 3.5 millionshares of our common stock (or a combination of cash and shares of our common stock) to settle the conversion premium as of December 31, 2014, causingdilution to our current shareholders and/or significant expenditures of our cash and liquid securities.In February 2015, we received notice of an election for conversion from one of the holders of the Notes. The principal amount of the conversion requestwas $1.5 million which must be paid in cash pursuant to the terms of the Indenture. We elected to settle the conversion premium in shares of our commonstock, calculated using a 40 trading-day observation period ending April 8, 2015.Summary of Cash FlowsThe following table summarizes our cash flows from operating, investing and financing activities for the years ended December 31, 2014, 2013 and2012 (in thousands): Year Ended December 31,Consolidated Statement of Cash Flows Data:2014 2013 2012Net cash provided by (used in): Operating activities$25,469 $(43,216) $(70,130)Investing activities(119,339) (43,560) (29,522)Financing activities118,875 89,165 63,610Net increase (decrease) in cash and cash equivalents$25,005 $2,389 $(36,042)Operating ActivitiesIn 2014, net cash provided by operating activities increased by $68.7 million. This increase was primarily driven by higher EXPAREL product salesand improved gross margins, which were partially offset by expenditures for additional field-based personnel and related educational, selling andpromotional initiatives, as well as additional administrative support. We also received an $8.0 million upfront payment from Mundipharma in connectionwith the extension of the term of existing supply and distribution agreements and the expansion of the territory where Mundipharma can market anddistribute DepoCyte.In 2013, net cash used in operating activities decreased by $26.9 million, primarily driven by higher EXPAREL product sales and improved grossmargins. This improvement was partially offset by increased operating expenses incurred for commercial manufacturing and the Phase 2/3 EXPAREL nerveblock trials, increases in the number of our field-based personnel and various promotional and educational programs to support EXPAREL.Investing ActivitiesIn 2014, net cash used in investing activities was $119.3 million. This was due to a net investment of $84.0 million in short and long-term investments,mainly purchased using the net proceeds from our April 2014 follow-on underwritten public offering. We spent $21.9 million in purchases of fixed assets,which included major investments for an EXPAREL manufacturing fill line and our capacity expansion project with Patheon. We also paid $13.4 million incontingent consideration payments to Skyepharma, which included an $8.0 million milestone payment in September 2014 and $5.4 million in percentagepayments on collections of net sales of EXPAREL.In 2013, net cash used in investing activities was $43.6 million. This was due to a net investment of $28.7 million in short-term investments, $12.8million in investments in fixed assets related to the expansion of our Suite C manufacturing facilities in San Diego, California and $2.0 million in percentagepayments on collections of net sales of EXPAREL.In 2012, net cash used in investing activities was $29.5 million. This was primarily due to an $18.3 million investment in fixed assets and $10.3million in contingent consideration payments to Skyepharma, which included an $8.0 million milestone payment in April 2012 and $2.3 million inpercentage payments on collections of net sales of EXPAREL. We also increased short-term investments by $0.9 million.Financing ActivitiesIn 2014, our net cash provided by financing activities was $118.9 million which was largely attributable to our April 2014 follow-on underwrittenpublic offering with net proceeds of $110.5 million after deducting underwriters’ fees and expenses. We also received $7.2 million and $1.2 million ofproceeds from the exercise of stock options/warrants and our employee stock purchase plan, respectively.57Table of ContentsIn 2013, our net cash provided by financing activities of $89.2 million was primarily attributable to our private offering of the Notes, which, afterdeducting financing costs, provided net proceeds of $115.3 million. We used $30.0 million of the net proceeds from the offering of the Notes to repay in fullthe $27.5 million outstanding balance on the Oxford Credit Facility, as well as a $1.7 million end of term fee and an $0.8 million early prepayment penalty.We also received $3.9 million from the exercise of stock options and warrants.In 2012, our net cash provided by financing activities of $63.6 million was primarily due to raising $62.9 million in net proceeds through a follow-onpublic offering. Additionally, we borrowed net proceeds of $27.0 million from Oxford Finance, LLC and used the funds to repay the principal on the HerculesCredit Facility of $26.3 million, an early prepayment penalty of $0.3 million and the end of term fee of $0.6 million. We also received $0.9 million from theexercise of stock options and warrants.Equity FinancingsFrom inception through December 31, 2014, we have raised approximately $346 million of net proceeds from the sale of common stock and otherequity securities.Common StockIn April 2014, we sold 1,840,000 shares at a price of $64.00 per share in a registered public offering of common stock. We raised $110.5 million in netproceeds after deducting underwriting discounts and offering expenses.In April 2012, we sold 6,900,000 shares at a price of $9.75 per share in a registered public offering of common stock. We raised $62.9 million in netproceeds after deducting underwriting discounts and offering expenses.Debt FacilitiesJanuary 2013 Convertible NotesOn January 23, 2013, we completed our private offering of the Notes. The net proceeds from the Notes offering were $115.3 million, after deducting theinitial purchasers’ discounts and commissions as well as offering expenses. The Notes accrue interest at a rate of 3.25% per year, payable semiannually inarrears on February 1 and August 1 of each year, and mature on February 1, 2019. As of December 31, 2014, the outstanding principal on the Notes was$120.0 million.On or after August 1, 2018, until the close of business on the second scheduled trading day immediately preceding February 1, 2019, holders mayconvert their Notes at any time. Upon conversion, holders will receive cash up to the principal amount of the Notes and, with respect to any excessconversion value, cash, shares of our common stock or a combination of cash and shares of our common stock, at our option. The conversion rate for theNotes is initially 40.2945 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $24.82per share of our common stock. The conversion rate will be subject to adjustment for some events, but will not be adjusted for any accrued and unpaidinterest. Additionally, during any calendar quarter, the holders have the right to convert if our stock price closes at or above 130% of the conversion pricethen applicable (the “Consecutive Sales Price”) during a period of at least 20 out of the last 30 consecutive trading days of any given quarter. During thethree months ended December 31, 2014, the requirements with respect to the Consecutive Sales Price were met and, as a result, the Notes are classified as acurrent obligation and are convertible until March 31, 2015. The future convertibility and resulting balance sheet classification of the Notes will bemonitored on a quarterly basis. Prior to February 1, 2018, in the event such requirements are not met in a given quarter, the Notes would be reclassified as along-term liability. See Note 8, Debt, and Note 19, Subsequent Events, to our consolidated financial statements included herein for further discussion of theNotes and a conversion election received in February 2015.Royalty Interests Assignment AgreementOn March 23, 2007, we entered into the Amended and Restated Royalty Interests Assignment Agreement with Paul Capital, pursuant to which weassigned to Paul Capital the right to receive up to approximately 20% of our royalty payments from DepoCyt(e) and the no-longer marketed DepoDur. Theagreement expired on December 31, 2014.Future Capital RequirementsWe believe that our existing cash and cash equivalents, restricted cash, short and long-term investments and cash received from product sales will besufficient to enable us to fund our operating expenses, capital expenditure requirements, payment of the principal on any conversions of the Notes and toservice our indebtedness for at least the next 12 months. The holders of the Notes have the ability to elect to convert them at any time during the quarterended March 31, 2015. In the event of conversion, holders would forgo all future interest payments and the possibility of further stock price appreciation. Ifall the Notes were converted, we would be required to repay the $120.0 million in principal value and approximately $309 million of cash or issue58Table of Contentsapproximately 3.5 million shares of our common stock (or a combination of cash and shares of our common stock) to settle the conversion premium as ofDecember 31, 2014, causing significant expenditures of our cash and liquid securities and/or dilution to our current shareholders.Our future use of operating cash and capital requirements will depend on many forward-looking factors, including, but not limited to, the following:•our ability to successfully continue our commercialization of EXPAREL;•the cost and timing of expanding our manufacturing facilities for EXPAREL and our other product candidates, including costs associatedwith certain technical transfer activities and the construction of manufacturing suites at Patheon’s Swindon, United Kingdom facility;•the extent to which the holders of our Notes elect to convert the Notes;•the cost and timing of potential milestone payments to Skyepharma;•the costs of performing additional clinical trials for EXPAREL, including the pediatric trials required by the FDA as a condition of approval,and costs of developing our other product candidates; and•the extent to which we acquire or invest in products, businesses and technologies.We may require additional debt or equity financing to meet our future operating and capital requirements. We have no committed external sources offunds, and additional equity or debt financing may not be available on acceptable terms, if at all.Contractual ObligationsThe table below presents a summary of our contractual obligations as of December 31, 2014 (in thousands): Payments Due by PeriodContractual Obligations (1)Total Less Than OneYear 1-3 Years 3-5 Years More Than5 YearsSenior convertible notes - principal (2) (3)$120,000 $1,466 $— $118,534 $—Senior convertible notes - interest15,925 3,900 7,800 4,225 —Lease obligations (4)48,177 6,133 14,722 15,536 11,786Purchase obligations (5)1,142 273 571 298 —Total$185,244 $11,772 $23,093 $138,593 $11,786(1) This table does not include potential future milestone payments to Skyepharma which could be up to an aggregate of $44.0 million if certain milestones pertaining to net sales ofEXPAREL are met. This contingency is described further in Note 6, Goodwill and Intangible Assets, of our consolidated financial statements included herein for additional details.(2) The amounts displayed in the table above represent management’s best estimate of timing with respect to the future convertibility of these instruments. See Note 8, Debt, of ourconsolidated financial statements included herein for further discussion. Additionally, it excludes any conversion premium on the Notes, which may be settled in cash or stock at theCompany’s discretion. If the Notes were converted at December 31, 2014, it would result in an approximate premium of 3.5 million shares or $309 million of cash or a combinationthereof.(3) In February 2015, we received notice of an election for conversion from one of the holders of the Notes in the amount of $1.5 million of principal, which is reflected in theabove table as due in less than one year. The conversion premium will be settled in shares of our common stock. See Note 19, Subsequent Events, of our consolidated financialstatements included herein for further discussion.(4) The amounts consist of operating leases for our corporate headquarters in Parsippany, New Jersey and manufacturing, research and warehouse space in San Diego, California.(5) The amounts consist of minimum non-cancelable contractual commitments for the purchase of certain raw materials.In April 2014, we and Patheon entered into a Strategic Co-Production Agreement and Technical Transfer and Service Agreement to collaborate in themanufacture and packaging of EXPAREL. Under the terms of the Technical Transfer and Service Agreement, Patheon has agreed to undertake certaintechnical transfer activities and construction services needed to prepare its Swindon, United Kingdom facility for the manufacture and packaging ofEXPAREL in two dedicated manufacturing suites. Upon an early termination of this agreement (other than termination by us in the event that Patheon doesnot meet the construction and manufacturing milestones or for a breach by Patheon), we will pay for the make good costs occasioned by the removal of ourmanufacturing equipment and for Patheon’s termination costs up to a maximum amount of $2.0 million.59Table of ContentsCritical Accounting Policies and Use of EstimatesWe have based our management’s discussion and analysis of our financial condition and results of operations on our financial statements that havebeen prepared in accordance with generally accepted accounting principles, or GAAP, in the United States. The preparation of these financial statementsrequire us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of thefinancial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates andjudgments, including those related to revenue recognition, clinical trial expenses and stock-based compensation. We base our estimates on historicalexperience, contract terms and on other factors we believe to be appropriate under the circumstances. Actual results may differ from these estimates underdifferent assumptions or conditions.Our significant accounting policies are more fully discussed in Note 2, Summary of Significant Accounting Policies, to our audited consolidatedfinancial statements included in this filing. The following accounting policies, which may include significant judgments and estimates, were used in thepreparation of our consolidated financial statements.Revenue RecognitionOur principal sources of revenue include (i) sales of EXPAREL in the United States, (ii) sales of DepoCyt(e) in the United States and European Union,(iii) royalties based on sales by commercial partners of DepoCyt(e), and (iv) license fees, milestone payments and reimbursement for development work fromthird parties. We recognize revenue when there is persuasive evidence that an arrangement exists, title has passed, collection is reasonably assured and theprice is fixed or determinable.Net Product SalesWe sell EXPAREL through a drop-ship program under which orders are processed through wholesalers based on orders of the product placed by endusers which include hospitals, ambulatory surgery centers and doctors. EXPAREL is delivered directly to the end user without the wholesaler ever takingphysical possession of the product. We record revenue at the time the product is delivered to the end user. We also recognize revenue from productsmanufactured and supplied to commercial partners, such as DepoCyt(e) upon shipment. Prior to the shipment of manufactured products, we conduct initialproduct release and stability testing in accordance with cGMP.Revenues from sales of products are recorded net of returns allowances, prompt payment discounts, wholesaler service fees and volume rebates andchargebacks. The calculation of some of these items requires management to make estimates based on sales data, contracts, inventory data and other relatedinformation which may become known in the future. We review the adequacy of our provisions on a quarterly basis.Returns AllowancesWe allow customers to return product that is damaged or received in error. In addition, we allow EXPAREL to be returned beginning six months priorto, and twelve months following, product expiration. As EXPAREL is a newly commercially available product, we estimate our sales returns reserve based onreturn history from other hospital-based products with similar distribution models and our historical experience, which we believe is the best estimate of theanticipated product to be returned. The returns reserve is recorded at the time of sale as a reduction to gross product sales and an increase in accrued expenses.Our commercial partners can return Depocyt(e) within contractually specified timeframes if the product does not meet the applicable inspection tests.We estimate our returns reserves based on our experience with historical return rates. Historically, our product returns have not been material.Prompt Payment DiscountsThe prompt payment reserve is based upon discounts offered to wholesalers as an incentive to meet certain payment terms. We accrue discounts towholesalers based on contractual terms of agreements and historical experience. We account for these discounts at the time of sale as a reduction to grossproduct sales and a reduction to accounts receivable.Wholesaler Service FeesOur customers include major and regional wholesalers with whom we have contracted a fee for service based on a percentage of gross product sales. Thisfee for service is recorded as a reduction to gross product sales and an increase to accrued expenses at the time of sale, and is recorded based on the contractedpercentage.60Table of ContentsVolume Rebates and ChargebacksVolume rebates and chargeback reserves are based upon contracted discounts and promotional offers we provide to certain end users such as membersof group purchasing organizations. Volume rebates are recorded at the time of sale as a reduction to gross product sales and an increase in accrued expenses.Chargeback reserves are recorded at the time of sale as a reduction to gross product sales and a reduction to accounts receivable.The following table provides a summary of activity with respect to our sales related allowances and accruals for the years ended December 31, 2014,2013 and 2012 (in thousands): Returns Allowances Prompt PaymentDiscounts Wholesaler ServiceFees Volume Rebates andChargebacks TotalBalance at January 1, 2012$— $— $— $— $— Provision155 294 206 200 855 Payments/credits(21) (214) (138) (89) (462)Balance at December 31, 2012134 80 68 111 393 Provision802 1,559 1,078 590 4,029 Payments/credits(39) (1,326) (880) (299) (2,544)Balance at December 31, 2013897 313 266 402 1,878 Provision829 3,833 2,780 881 8,323 Payments/credits(167) (3,571) (2,458) (962) (7,158)Balance at December 31, 2014$1,559 $575 $588 $321 $3,043Total reductions of gross product sales from sales-related allowances and accruals were $8.3 million, $4.0 million and $0.9 million, or 4.1%, 4.7% and4.5% of gross product sales, for the years ended December 31, 2014, 2013 and 2012, respectively. The overall increase in sales-related allowances andaccruals was directly related to the increase in product sales since the commercial launch of EXPAREL in April 2012. The decrease in the percentage of sales-related allowances and accruals from 2013 to 2014 related primarily to a reduction in our estimate of product returns based on historical returns experienceand a reduction in volume rebates and chargebacks due to a reduced percentage of sales purchased through group purchasing organizations. As a percentageof gross product sales, the prompt payment discounts and wholesaler service fees remained consistent from 2013 to 2014.The percentage of sales-related allowances and accruals increased only slightly from 2012 to 2013. The percentage increase was almost entirely due toincreases in the prompt payment discounts and wholesaler service fees, as our customer base shifted more towards purchasing through wholesalers rather thandirectly from us. This increase was partially offset by a small decrease in volume rebates and chargebacks. The percentage of returns and allowances remainedconsistent from 2012 to 2013.Royalty RevenueWe recognize revenue from royalties based on our commercial partners’ net sales of products. Royalties are recognized as earned in accordance withcontract terms when they can be reasonably estimated and collection is reasonably assured. Our commercial partners are obligated to report their net productsales and the resulting royalty due to us within 60 days from the end of each quarter. Based on historical product sales, royalty receipts and other relevantinformation, we accrue royalty revenue each quarter and subsequently true-up our royalty revenue when we receive royalty reports from our commercialpartners.Collaborative Licensing and Development RevenueWe recognize revenue from reimbursements received in connection with feasibility studies and development work for third parties who desire to utilizeour DepoFoam extended release drug delivery technology for their products when our contractual services are performed, provided collection is reasonablyassured. Our principal costs under these agreements include costs for our personnel conducting research and development, our allocated overhead as well asresearch and development performed by outside contractors or consultants.We recognize revenues from non-refundable up-front license fees received under collaboration agreements ratably over the performance period asdetermined under the collaboration agreement (estimated development period in the case of development agreements, and contract period or longest patentlife in the case of supply and distribution agreements). If the61Table of Contentsestimated performance period is subsequently modified, we will modify the period over which the up-front license fee is recognized accordingly on aprospective basis. Upon notification of the termination of a collaboration agreement, any remaining non-refundable license fees received by us, which hadbeen deferred, are recognized over the remaining contractual term. If the termination is immediate and no additional services are to be performed, the deferredrevenue is generally recognized in full. All such recognized revenues are included in collaborative licensing and development revenue in our consolidatedstatements of operations.We recognize revenue from milestone payments received under collaboration agreements when earned, provided that the milestone event issubstantive, its achievability was not reasonably assured at the inception of the agreement, we have no further performance obligations relating to the eventand collection is reasonably assured. If these criteria are not met, we recognize milestone payments ratably over the remaining period of our performanceobligations under the applicable collaboration agreement.Cost of RevenuesOur cost of revenues consist of the costs associated with our products sold and include the following:•manufacturing overhead and fixed costs associated with running two cGMP manufacturing facilities, including allocated rent, utilities,insurance, depreciation and salaries and related costs of personnel, including stock-based compensation;•costs of active pharmaceutical ingredients;•royalties due to third parties on our revenues;•packaging, testing and freight;•amortization of our intangible assets; and•costs associated with excess manufacturing capacity.Research and Development ExpensesWe expense all research and development costs as incurred. We rely on third parties to conduct our preclinical and clinical studies and to provideservices, including data management, statistical analysis and electronic compilation for our clinical trials. We track and record information regarding third-party research and development expenses for each study or trial that we conduct and recognize these expenses based on the estimated progress towardscompletion at the end of each reporting period. Factors we consider in preparing these estimates include the number of subjects enrolled in studies,milestones achieved, direct pass-through costs, clinical site fees and other criteria related to the efforts of our vendors. Historically, any adjustments we havemade to these assumptions have not been material. Depending on the timing of payments to vendors and estimated services provided, we may record prepaidor accrued expenses related to these costs.Convertible Debt TransactionsWe separately account for the liability and equity components of convertible debt instruments by allocating the proceeds from the issuance betweenthe liability component and the embedded conversion option, or equity component. This is done in accordance with accounting for convertible debtinstruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by firstmeasuring the fair value of the liability component, using the interest rate of a similar liability that does not have a conversion feature, as of the issuance date.The difference between the initial proceeds from the convertible debt issuance and the fair value of the liability component is recorded as the carryingamount of the equity component. We recognize the amortization of the resulting discount as part of interest expense in our consolidated statement ofoperations.Upon settlement of the convertible senior notes, the liability component is measured at fair value. We allocate a portion of the fair value of the totalsettlement consideration transferred to the extinguishment of the liability component equal to the fair value of that component immediately prior to thesettlement. Any difference between the consideration attributed to the liability component and the net carrying amount of the liability component, includingany unamortized debt issuance costs, is recognized as a gain or loss in the consolidated statement of operations. Any remaining consideration is allocated tothe reacquisition of the equity component and is recognized as a reduction of additional paid-in capital.62Table of ContentsStock-Based CompensationWe account for stock-based compensation by measuring and recognizing compensation expense for all stock-based awards based on their estimatedgrant date fair values. We use the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, whichis generally the vesting period for stock options and the offering period for our employee stock purchase plan, or ESPP. Because the valuation of stockoptions is inherently subjective, we estimate the fair value of our stock-based awards using the Black-Scholes option valuation model, or Black-Scholesmodel. The Black-Scholes model requires the input of subjective assumptions, including the expected stock price volatility, the calculation of expected term,and the fair value of the underlying common stock on the date of grant, among other inputs:•Expected Volatility—The expected volatility rate used to value stock option grants is based on volatilities of a peer group of similarcompanies whose share prices are publicly available. Since our initial public offering, we have utilized our available historic volatility datacombined with the publicly traded peer group historic volatility to determine our expected volatility over the expected option term. The peergroup was developed based on companies in the pharmaceutical and biotechnology industry in a similar stage of development. The expectedvolatility rate used to value employee stock purchase plan options is based solely on our historic volatility data.•Expected Term—In 2014, we used an expected term based on a weighted average combination of our historical data from stock optionexercises and the simplified method. In prior years, we utilized the “simplified” method for “plain vanilla” options to estimate the expectedterm of stock option grants. Under that approach, the weighted average expected life was presumed to be the average of the vesting term andthe contractual term of the option.•Risk-Free Interest Rate—The risk-free interest rate assumption is based on zero coupon United States Department of the Treasury instrumentsfor periods commensurate with the expected term of our stock option grants.•Expected Dividend Yield—We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in theforeseeable future.The following table summarizes our assumptions used in the Black-Scholes model for stock options: Year Ended December 31, 2014 2013 2012Expected dividend yieldNone None NoneRisk free interest rate0.02 - 2.16% 0.33 - 2.83% 0.84 - 1.70%Expected volatility57.2% 68.7% 74.0%Expected term of options5.86 years 6.22 years 6.76 yearsThe fair value of the ESPP share options granted in September 2014 were estimated using the Black-Scholes model assuming: no expected dividends, arisk free interest rate of 0.37%, an expected volatility of 28.2% and an expected term of four months.Income Tax Expense (Benefit)Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s assessment of estimatedfuture taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense. As of December 31, 2014, wehave significant federal and state income tax net operating loss and credit carry forwards, the use of which may be limited by historic and future ownershipchanges within the meaning of Section 382 of the Internal Revenue Code. Based on the positive and negative evidence available, we believe that it is morelikely than not that the benefit from deferred tax assets will not be realized. In recognition of this risk, we have provided a full valuation allowance againstour deferred tax assets net of deferred tax liabilities that will generate taxable income during the reversal period.Recent Accounting PronouncementsSee Note 3, Recent Accounting Pronouncements, to the Notes to Consolidated Financial Statements in Item 15 below for further discussion of recentaccounting pronouncements.63Table of ContentsOff-Balance Sheet ArrangementsWe had no material off-balance sheet arrangements as of December 31, 2014.Item 7A. Quantitative and Qualitative Disclosures about Market RiskThe primary objective of our cash investment activities is to preserve principal while at the same time maximizing the income that we receive from ourinvestments without significantly increasing risk. Some of the securities that we invest in may be subject to market risk. This means that a change inprevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interestrate at the then-prevailing rate and the interest rate later rises, we expect that the fair value of our investment will decline. A hypothetical 100 basis pointincrease in interest rates would have reduced the fair value of our available-for-sale securities at December 31, 2014 by $0.4 million. To minimize this risk,we maintain our portfolio of cash equivalents and marketable securities in a variety of securities, which may include commercial paper, government and non-government debt securities, asset-backed securities and/or money market funds that invest in such securities. Most of our transactions are conducted in United States dollars. We do have certain agreements with commercial partners located outside the UnitedStates, which have transactions conducted in Euros. As of December 31, 2014, we had approximately $0.3 million in receivables from customersdenominated in Euros. A hypothetical 10% decrease in the value of the United States dollar relative to the Euro would have decreased our revenue by $0.1million for the quarter ended December 31, 2014. Our Notes carry a fixed interest rate and, thus, we are not subject to interest rate risk with respect to the Notes.Item 8. Financial Statements and Supplementary DataOur consolidated financial statements required by this item, together with the report of our independent registered public accounting firm, appear onpages F-1 through F-30 of this Annual Report on Form 10-K.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed toensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management,including our President, Chief Executive Officer and Chairman and Senior Vice President and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.Based on their evaluation as of December 31, 2014, our President, Chief Executive Officer and Chairman and Senior Vice President and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective as of December 31, 2014.Management’s Report on Internal Control over Financial ReportingOur internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with GAAP. Our management is responsible for establishing and maintainingadequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with theparticipation of our management, including our President, Chief Executive Officer and Chairman and Senior Vice President and Chief Financial Officer,management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014, based on the criteriaestablished in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Based upon the results of the evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.The effectiveness of our internal control over financial reporting as of December 31, 2014 was audited by CohnReznick LLP, our independentregistered public accounting firm, as stated in their report appearing below, which expressed an unqualified opinion on the effectiveness of our internalcontrol over financial reporting as of December 31, 2014.64Table of ContentsChanges in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2014, that materiallyaffected, or are reasonably likely to materially affect, our internal control over financial reporting.65Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and StockholdersPacira Pharmaceuticals, Inc.We have audited Pacira Pharmaceuticals, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteriaestablished in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Pacira Pharmaceuticals, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on Pacira Pharmaceuticals, Inc.’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United Statesof America.A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the UnitedStates of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors ofthe company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.In our opinion, Pacira Pharmaceuticals, Inc. has maintained, in all material respects, effective internal control over financial reporting as of December31, 2014 based on the COSO criteria.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financialstatements of Pacira Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2014 and 2013, and for each of the three years in the period ended December31, 2014 and our report dated February 24, 2015, expressed an unqualified opinion thereon./s/ CohnReznick LLPRoseland, New JerseyFebruary 24, 201566Table of ContentsItem 9B. Other InformationAs disclosed previously in this report, effective October 1, 2013, we and CrossLink commenced a five-year arrangement for the promotion and sale ofEXPAREL, pursuant to the terms of a Master Distributor Agreement. On February 20, 2015, and to be effective on March 1, 2015, we entered into a ThirdAmendment to the Master Distributor Agreement (the “Third Amendment”) with CrossLink to, among other things, amend certain payment terms of theagreement and specify certain sub-distributors that may promote and sell EXPAREL under the agreement. The foregoing description of the Third Amendmentdoes not purport to be complete and is qualified in its entirety by the terms of the Third Amendment, which we intend to file as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ending March 31, 2015.PART IIIItem 10. Directors, Executive Officers and Corporate GovernanceInformation required by this item will be included in the proxy statement for our 2015 annual stockholders’ meeting and is incorporated by referenceinto this report.Item 11. Executive CompensationInformation required by this item will be included in the proxy statement for our 2015 annual stockholders’ meeting and is incorporated by referenceinto this report.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders MattersInformation required by this item will be included in the proxy statement for our 2015 annual stockholders’ meeting and is incorporated by referenceinto this report.Item 13. Certain Relationships and Related Transactions, and Director IndependenceInformation required by this item will be included in the proxy statement for our 2015 annual stockholders’ meeting and is incorporated by referenceinto this report.Item 14. Principal Accounting Fees and ServicesInformation required by this item will be included in the proxy statement for our 2015 annual stockholders’ meeting and is incorporated by referenceinto this report.PART IVItem 15. Exhibits, Financial Statement Schedules(a)Documents filed as part of Form 10-K.(1)Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Loss Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements(2)SchedulesAll financial statement schedules have been omitted because they are not required, are not applicable or the information is included in the FinancialStatements or Notes thereto.(3)ExhibitsThe Exhibits listed in the Exhibit Index are filed as a part of this Form 10-K.67Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. PACIRA PHARMACEUTICALS, INC./s/ DAVID STACKDate:February 24, 2015By: David Stack President, Chief Executive Officer and ChairmanPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.Signature Title Date/s/ DAVID STACK Director, President, Chief Executive Officer and Chairman(Principal Executive Officer) February 24, 2015David Stack /s/ JAMES SCIBETTA Senior Vice President and Chief Financial Officer(Principal Financial Officer) February 24, 2015James Scibetta /s/ LAUREN RIKER Executive Director, Finance(Principal Accounting Officer) February 24, 2015Lauren Riker /s/ LAURA BREGE Director February 24, 2015Laura Brege /s/ YVONNE GREENSTREET Director February 24, 2015Yvonne Greenstreet /s/ MARK KRONENFELD Director February 24, 2015Mark Kronenfeld /s/ JOHN LONGENECKER Director February 24, 2015John Longenecker /s/ GARY PACE Director February 24, 2015Gary Pace /s/ ANDREAS WICKI Director February 24, 2015Andreas Wicki /s/ DENNIS WINGER Director February 24, 2015Dennis Winger /s/ PAUL HASTINGS Lead Director February 24, 2015Paul Hastings 68Table of ContentsPACIRA PHARMACEUTICALS, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2014 and 2013F-3Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012F-4Consolidated Statements of Comprehensive Loss for the years ended December 31, 2014, 2013 and 2012F-5Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012F-6Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012F-7Notes to Consolidated Financial StatementsF-8F-1Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and StockholdersPacira Pharmaceuticals, Inc.We have audited the accompanying consolidated balance sheets of Pacira Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2014 and 2013,and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period endedDecember 31, 2014. Pacira Pharmaceuticals, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PaciraPharmaceuticals, Inc. and Subsidiaries as of December 31, 2014 and 2013, and their results of operations and cash flows for each of the three years in theperiod ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pacira Pharmaceuticals,Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control- IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 24, 2015,expressed an unqualified opinion thereon./s/ CohnReznick LLPRoseland, New JerseyFebruary 24, 2015F-2Table of ContentsPACIRA PHARMACEUTICALS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts) December 31, 2014 2013ASSETS Current assets: Cash and cash equivalents$37,520 $12,515Restricted cash1,509 1,633Short-term investments119,138 59,637Accounts receivable, net22,366 14,590Inventories29,263 15,557Prepaid expenses and other current assets4,461 2,819Total current assets214,257 106,751Long-term investments24,431 —Fixed assets, net60,632 48,182Goodwill23,761 10,328Intangibles, net403 1,157Other assets2,588 3,402Total assets$326,072 $169,820LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$6,758 $3,069Accrued expenses28,450 17,885Convertible senior notes103,100 98,961Current portion of royalty interest obligation276 1,020Current portion of deferred revenue1,426 1,008Total current liabilities140,010 121,943Royalty interest obligation— 226Deferred revenue9,508 3,212Other liabilities5,409 3,190Total liabilities154,927 128,571Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock, par value $0.001; 5,000,000 shares authorized, none issued and outstanding at December 31,2014 and 2013— —Common stock, par value $0.001 and 250,000,000 shares authorized; 36,150,620 shares issued and outstandingat December 31, 2014; 33,636,442 shares issued and outstanding at December 31, 201336 34Additional paid-in capital481,334 337,639Accumulated deficit(310,145) (296,429)Accumulated other comprehensive income (loss)(80) 5Total stockholders’ equity171,145 41,249Total liabilities and stockholders’ equity$326,072 $169,820See accompanying notes to consolidated financial statements.F-3Table of ContentsPACIRA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts) Year Ended December 31, 2014 2013 2012Revenues: Net product sales$193,526 $81,956 $18,191Collaborative licensing and development revenue1,287 972 18,390Royalty revenue2,855 2,623 2,503Total revenues197,668 85,551 39,084Operating expenses: Cost of revenues77,440 54,772 32,139Research and development18,731 21,560 9,937Selling, general and administrative106,662 62,508 46,306Total operating expenses202,833 138,840 88,382Loss from operations(5,165) (53,289) (49,298)Other (expense) income: Interest income382 259 275Interest expense(8,278) (7,253) (1,807)Loss on early extinguishment of debt— (3,398) (1,062)Royalty interest obligation(323) (623) (278)Other, net(159) (47) (111)Total other expense, net(8,378) (11,062) (2,983)Loss before income taxes(13,543) (64,351) (52,281)Income tax (expense) benefit(173) 442 —Net loss$(13,716) $(63,909) $(52,281) Net loss per share: Basic and diluted net loss per common share$(0.39) $(1.93) $(1.72)Weighted average common shares outstanding: Basic and diluted35,299 33,182 30,332See accompanying notes to consolidated financial statements.F-4Table of ContentsPACIRA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(In thousands) Year Ended December 31, 2014 2013 2012Net loss$(13,716) $(63,909) $(52,281)Other comprehensive income (loss): Net unrealized gain (loss) on investments(85) (22) 12 Total other comprehensive income (loss)(85) (22) 12Comprehensive loss$(13,801) $(63,931) $(52,269)See accompanying notes to consolidated financial statements.F-5Table of ContentsPACIRA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYYears Ended December 31, 2014, 2013 and 2012(In thousands) Common Stock AdditionalPaid-InCapital AccumulatedDeficit TreasuryStock AccumulatedOtherComprehensiveIncome (Loss) Total Shares Amount Balances at December 31, 201125,339 $25 $228,470 $(180,239) $(2) $15 $48,269 Exercise of stock options279 1 769 — — — 770 Exercise of warrants105 — 100 — — — 100 Stock-based compensation— — 4,776 — — — 4,776 Net unrealized gain oninvestments— — — — — 12 12 Follow-on public offering, net6,900 7 62,848 — — — 62,855 Debt discount on issuance ofwarrants— — 1,354 — — — 1,354 Net loss— — — (52,281) — — (52,281)Balances at December 31, 201232,623 33 298,317 (232,520) (2) 27 65,855 Exercise of stock options741 1 3,855 — — — 3,856 Cashless exercise of warrants271 — — — — — — Stock-based compensation— — 11,513 — — — 11,513 Net unrealized loss oninvestments— — — — — (22) (22) Equity component of convertiblesenior notes, net of issuance costs— — 23,956 — — — 23,956 Issuance of common stock fromtreasury1 — (2) — 2 — — Net loss— — — (63,909) — — (63,909)Balances at December 31, 201333,636 34 337,639 (296,429) — 5 41,249 Follow-on public offering, net1,840 2 110,450 — — — 110,452 Exercise of stock options624 — 7,239 — — — 7,239 Shares issued under employeestock purchase plan16 — 1,184 — — — 1,184 Cashless exercise of warrants35 — — — — — — Stock-based compensation— — 24,822 — — — 24,822 Net unrealized loss oninvestments— — — — — (85) (85) Net loss— — — (13,716) — — (13,716)Balances at December 31, 201436,151 $36 $481,334 $(310,145) $— $(80) $171,145See accompanying notes to consolidated financial statements.F-6Table of ContentsPACIRA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2014 2013 2012Operating activities: Net loss$(13,716) $(63,909) $(52,281)Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation of fixed assets and amortization of intangibles10,035 5,747 5,648Amortization of unfavorable lease obligation and debt issuance costs487 459 (239)Amortization of debt discount4,139 3,959 831Loss on disposal of fixed assets158 32 1Loss on early extinguishment of debt— 3,398 1,062Stock-based compensation24,822 11,513 4,776Changes in operating assets and liabilities: Restricted cash124 (110) (224)Accounts receivable, net(7,776) (10,238) (2,239)Inventories(13,706) (3,480) (10,832)Prepaid expenses and other assets(1,447) (972) (59)Accounts payable and accrued expenses14,254 10,244 1,386Royalty interest obligation(970) (434) (1,076)Other liabilities2,352 1,047 (106)Deferred revenue6,713 (472) (16,778)Net cash provided by (used in) operating activities25,469 (43,216) (70,130)Investing activities: Purchases of fixed assets(21,889) (12,794) (18,257)Proceeds from sales of fixed assets— — 1Purchases of short-term investments(139,840) (114,299) (54,047)Sales of short-term investments80,286 85,564 53,120Purchases of long-term investments(24,463) — —Payment of contingent consideration(13,433) (2,031) (10,339)Net cash used in investing activities(119,339) (43,560) (29,522)Financing activities: Proceeds from follow-on public offering, net110,452 — 62,855Proceeds from exercise of stock options and warrants7,239 3,856 870Proceeds from shares issued under employee stock purchase plan1,184 — —Proceeds from borrowings on long-term debt— — 27,500Proceeds from convertible senior notes— 120,000 —Repayment of debt— (27,500) (26,250)Payment of debt issuance and financing costs— (7,191) (1,365)Net cash provided by financing activities118,875 89,165 63,610Net increase (decrease) in cash and cash equivalents25,005 2,389 (36,042)Cash and cash equivalents, beginning of year12,515 10,126 46,168Cash and cash equivalents, end of year$37,520 $12,515 $10,126Supplemental cash flow information: Cash paid for interest, including royalty interest obligation$5,193 $3,500 $4,229Cash paid for income taxes$34 $— $—Non-cash investing and financing activities: Equity component of convertible senior notes$— $24,936 $—Value of warrants issued with debt$— $— $1,354See accompanying notes to consolidated financial statements.F-7Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1—DESCRIPTION OF BUSINESSPacira Pharmaceuticals, Inc. and its subsidiaries (collectively, the “Company” or “Pacira”) is a specialty pharmaceutical company focused on thedevelopment, commercialization and manufacture of proprietary pharmaceutical products, based on its proprietary DepoFoam® extended release drugdelivery technology, primarily for use in hospitals and ambulatory surgery centers. The Company’s lead product, EXPAREL®, which consists of bupivacaineencapsulated in DepoFoam, was approved by the United States Food and Drug Administration, or FDA, on October 28, 2011 and launched commercially inApril 2012. DepoFoam is also the basis for the Company’s other FDA-approved product, DepoCyt(e), which the Company manufactures for its commercialpartners.Pacira is subject to risks common to companies in similar industries and stages of development, including, but not limited to, competition from largercompanies, reliance on revenue from few customers and products, reliance on a single manufacturing site, new technological innovations, dependence on keypersonnel, reliance on third-party service providers and sole source suppliers, protection of proprietary technology and compliance with governmentregulations.NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation and Principles of ConsolidationThe 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, or SEC. The accounts of wholly owned subsidiariesare included in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. Certainreclassifications were made to conform to the current presentation.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts ofassets and liabilities, including disclosure of contingent assets and contingent liabilities, at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Estimates are used for, among other things, revenue recognition, impairment of long-lived assets, stock-based compensation and valuation of deferred tax assets. The Company’s critical accounting policies are those that are both most important to theCompany’s consolidated financial condition and results of operations and require the most difficult, subjective or complex judgments on the part ofmanagement in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of theuncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results could differ fromthese estimates.LiquidityManagement believes that the Company’s existing cash and cash equivalents, restricted cash, short-term and long-term investments and cash flowsgenerated from product sales will be sufficient to enable the Company to meet its planned operating expenses, capital expenditure requirements, payment ofthe principal on any conversions of the Company’s convertible senior notes and to service its indebtedness at least through December 31, 2015. However,changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend morecash than currently expected because of circumstances beyond its control. The Company expects to continue to incur substantial additional expenditures asit continues to commercialize EXPAREL, develops and seeks regulatory approval for its product candidates, and expands its manufacturing facilities forEXPAREL and its other product candidates including costs associated with certain technical transfer activities and construction of two dedicatedmanufacturing suites in the United Kingdom.On January 23, 2013, the Company completed a private placement of $120.0 million in aggregate principal amount of 3.25% convertible senior notes,or Notes, due 2019. As further discussed in Note 8, Debt, the Company must settle the principal of the Notes in cash upon conversion, and it may settle anyconversion premium in either cash, stock or a combination of cash and shares of common stock at the Company’s discretion. Based on certain conditions thatwere met during the three months ended December 31, 2014, the holders can convert their Notes at any time during the quarter ended March 31, 2015 and,therefore, the Notes are classified in the consolidated balance sheet at December 31, 2014 as a current obligation. In the event of conversion, holders wouldforgo all future interest payments, any unpaid interest and the possibility of further stock price appreciation. In the event that all of the Notes are converted,the Company would be required to repay the $120.0 million in principal value and approximately $309 million of cash or issue approximately 3.5 millionshares of its common stock (or aF-8Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)combination of cash and shares of its common stock) to settle the conversion premium as of December 31, 2014, causing dilution to the Company’s currentshareholders.Revenue RecognitionThe Company’s principal sources of revenue include (i) sales of EXPAREL in the United States, or U.S., (ii) sales of DepoCyt(e) in the U.S. and theEuropean Union, or E.U., (iii) royalties based on sales by commercial partners of DepoCyt(e) and (iv) license fees, milestone payments and reimbursement fordevelopment work from third parties. 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.Net Product SalesThe Company sells EXPAREL through a drop-ship program under which orders are processed through wholesalers based on orders of the productplaced by end users which include hospitals, ambulatory surgery centers and doctors. EXPAREL is delivered directly to the end user without the wholesalerever taking physical possession of the product. The Company records revenue at the time the product is delivered to the end user. The Company alsorecognizes revenue from products manufactured and supplied to commercial partners, such as DepoCyt(e) upon shipment. Prior to the shipment ofmanufactured products, the Company conducts initial product release and stability testing in accordance with current Good Manufacturing Practices.Revenues from sales of products are recorded net of returns allowances, prompt payment discounts, wholesaler service fees and volume rebates andchargebacks. The calculation of some of these items requires management to make estimates based on sales data, contracts, inventory data and other relatedinformation which may become known in the future. The Company reviews the adequacy of its provisions on a quarterly basis.Returns AllowancesThe Company allows customers to return product that is damaged or received in error. In addition, the Company allows EXPAREL to be returnedbeginning six months prior to, and twelve months following product expiration. As EXPAREL is a newly commercially available product, the Companyestimates its sales return reserve based on return history from other hospital-based products with similar distribution models and its historical experience,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 togross product sales and an increase in accrued expenses.The Company’s commercial partners can return Depocyt(e) within contractually specified timeframes if the product does not meet the applicableinspection tests. The Company estimates its returns reserve based on its experience with historical return rates. Historically, the Company’s product returnshave not been material.Prompt Payment DiscountsThe prompt payment reserve is based upon discounts offered to wholesalers as an incentive to meet certain paymentterms. The Company accrues discounts to wholesalers based on contractual terms of agreements and historical experience. The Company accounts for thesediscounts at the time of sale as a reduction to gross product sales and a reduction to accounts receivable.Wholesaler Service FeesThe Company’s customers include major and regional wholesalers with whom the Company has contracted a fee for service based on a percentage ofgross product sales. This fee for service is recorded as a reduction to gross product sales and an increase to accrued expenses at the time the sale, and isrecorded based on the contracted percentage.Volume Rebates and ChargebacksVolume rebates and chargeback reserves are based upon contracted discounts and promotional offers the Company provides to certain end users such asmembers of group purchasing organizations. Volume rebates are recorded at the time of sale as a reduction to gross product sales and an increase in accruedexpenses. Chargeback reserves are recorded at the time of sale as a reduction to gross product sales and a reduction to accounts receivable.F-9Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Royalty RevenueThe Company recognizes revenue from royalties based on sales of its commercial partners’ net sales of products. Royalties are recognized as earned inaccordance with contract terms when they can be reasonably estimated based and collection is reasonably assured. The Company’s commercial partners areobligated to report their net product sales and the resulting royalty due to the Company within 60 days from the end of each quarter. Based on historicalproduct sales, royalty receipts and other relevant information, the Company accrues royalty revenue each quarter and subsequently trues-up its royaltyrevenue when it receives royalty reports from its commercial partners.Collaborative Licensing and Development RevenueThe Company recognizes revenue from reimbursements received in connection with feasibility studies and development work for third parties whodesire to utilize its DepoFoam extended release drug delivery technology for their products when the Company’s contractual services are performed,provided collection is reasonably assured. The Company’s principal costs under these agreements include costs for its personnel conducting research anddevelopment, its allocated overhead as well as research and development performed by outside contractors or consultants.The Company recognizes revenues from non-refundable up-front license fees received under collaboration agreements ratably over the performanceperiod as determined under the collaboration agreement (estimated development period in the case of development agreements, and contract period orlongest patent life in the case of supply and distribution agreements). If the estimated performance period is subsequently modified, the Company willmodify the period over which the up-front license fee is recognized accordingly on a prospective basis. Upon notification of a termination of a collaborationagreement, any remaining non-refundable license fees received by the Company, which had been deferred, are recognized over the remaining contractualterm. If the termination is immediate and no additional services are to be performed, the deferred revenue is generally recognized in full. All such recognizedrevenues are included in collaborative licensing and development revenue in the Company’s consolidated statements of operations.The Company recognizes revenue from milestone payments received under collaboration agreements when earned, provided that the milestone event issubstantive, its achievability was not reasonably assured at the inception of the agreement, the Company has no further performance obligations relating tothe event and collection is reasonably assured. If these criteria are not met, the Company recognizes milestone payments ratably over the remaining period ofthe Company’s performance obligations under the applicable agreements.Concentration of Major CustomersThe 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 HealthCorporation, 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 three largest customers (i.e.,wholesalers or commercial partners) in each year presented: Year Ended December 31, 2014 2013 2012Largest customer33% 33% 30%Second largest customer29% 28% 14%Third largest customer24% 18% 11% 86% 79% 55%Revenues from customers outside the U.S. accounted for 2%, 5% and 23% of the Company’s revenue for the years ended December 31, 2014, 2013 and2012, respectively.Research and Development ExpensesResearch and development expenses consist of costs associated with products being developed internally, and include related personnel expenses,laboratory supplies, active pharmaceutical ingredients, manufacturing supplies, facilities costs, preclinical and clinical trial costs and other outside servicefees. The Company expenses research and development costs asF-10Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)incurred. A significant portion of the development activities are outsourced to third parties, including contract research organizations. In such cases, theCompany may be required to estimate related service fees to be accrued.Cash and Cash EquivalentsAll highly-liquid investments with maturities of 90 days or less when purchased are considered cash equivalents.Restricted CashAs further discussed in Note 8, Debt, the Company had entered into a financing agreement with Paul Capital for the sale of a royalty interest in itsDepoCyt(e) and DepoDur® product revenue and royalties. The royalty interest agreement pertained only to DepoCyt(e) and the Company’s previously-marketed product, DepoDur, and does not include revenue related to EXPAREL or any other product candidates. As part of this financing agreement, theCompany and Paul Capital maintained a lockbox, where all DepoCyt(e) and DepoDur product revenue and royalties were received. The Company had nominimum payment obligations under this agreement. Commencing on April 1 of every year, the first $2.5 million received in the lockbox was restricted andwas used to make quarterly payments due to Paul Capital, if any, under the agreement during the subsequent 12 month period. On March 31 of thesubsequent year, the balance of cash in the lockbox, if any, is remitted to the Company. The Paul Capital agreement terminated on December 31, 2014.Short-Term and Long-Term InvestmentsShort-term investments consist of asset-backed securities collateralized by credit card receivables, investment grade commercial paper and corporatebonds with initial maturities of greater than three months at the date of purchase, but less than one year. Long-term investments consist of corporate bondswith initial maturities greater than one year at the date of purchase. The Company determines the appropriate classification of its investments at the time ofpurchase and reevaluates such determination at each balance sheet date. The Company’s investment policy sets minimum credit quality criteria andmaximum maturity limits on its investments to provide for preservation of capital, liquidity and a reasonable rate of return. Available-for-sale securities arerecorded at fair value, based on current market valuations. Unrealized holding gains and losses on available-for-sale securities are excluded from net loss andare reported as a separate component of other comprehensive loss until realized. Realized gains and losses are included in non-operating other income(expense) on the consolidated statements of operations and are derived using the specific identification method for determining the cost of the securities sold.InventoriesInventories consist of finished goods held for sale and distribution, raw materials and work in process. Inventories are stated at the lower of cost, whichincludes amounts related to material, labor and overhead; or market (net realizable) value and is determined using the first-in, first-out (“FIFO”) method. TheCompany periodically reviews its inventory to identify obsolete, slow-moving, or otherwise unsalable inventories, and establishes allowances for situationsin which the cost of the inventory is not expected to be recovered.Fixed AssetsFixed assets are recorded at cost, net of accumulated depreciation and amortization. The Company reviews its property, plant and equipment assets forimpairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.Depreciation of fixed assets is provided over their estimated useful lives on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the related remaining lease terms. Useful lives by asset category are as follows:Asset Category Useful LivesComputer equipment and software 1 to 3 yearsOffice furniture and equipment 5 yearsManufacturing and laboratory equipment 5 to 10 yearsF-11Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Goodwill and Intangible AssetsIntangible assets are recorded at cost, net of accumulated amortization. Amortization of intangible assets is provided over their estimated useful liveson a straight-line basis. The Company evaluates the recoverability of intangible assets periodically and takes into account events and circumstances whichmay indicate that impairment exists. Goodwill represents the excess of purchase price over fair value acquired in a business combination and is notamortized, but subject to impairment at least annually or when a triggering event occurs that could indicate a potential impairment.Impairment of Long-Lived AssetsManagement reviews long-lived assets, including fixed assets, for impairment whenever events or changes in circumstances indicate the carryingamount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset tofuture undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized ismeasured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.Convertible Debt TransactionsThe Company separately accounts for the liability and equity components of convertible debt instruments by allocating the proceeds from the issuancebetween the liability component and the embedded conversion option, or equity component. This is done in accordance with accounting for convertible debtinstruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by firstmeasuring the fair value of the liability component, using the interest rate of a similar liability that does not have a conversion feature, as of the issuance date.The difference between the initial proceeds from the convertible debt issuance and the fair value of the liability component is recorded as the carryingamount of the equity component. The Company recognizes the amortization of the resulting discount as part of interest expense in its consolidated statementof operations.Upon settlement of the convertible senior notes, the liability component is measured at fair value. The Company allocates a portion of the fair value ofthe total settlement consideration transferred to the extinguishment of the liability component equal to the fair value of that component immediately prior tothe settlement. Any difference between the consideration attributed to the liability component and the net carrying amount of the liability component,including any unamortized debt issuance costs, is recognized as a gain or loss in the consolidated statement of operations. Any remaining consideration isallocated to the reacquisition of the equity component and is recognized as a reduction of additional paid-in capital.Foreign CurrenciesThe Company receives payment from certain commercial partners relating to royalties on DepoCyte® in Euros. Realized gains and losses from foreigncurrency transactions are reflected in the consolidated statements of operations and were not significant in any period. All foreign currency receivables andpayables are measured at the applicable exchange rate at the end of the reporting period.Income TaxesThe Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimatedfuture tax consequences attributable to basis differences between the financial statement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to theamount expected to be realized. As of December 31, 2014 and 2013, all deferred tax assets were fully offset by a valuation allowance.In February 2013, the Company received $0.4 million from the sale of unused net operating losses through the State of New Jersey’s EconomicDevelopment Authority Technology Business Tax Certificate Transfer Program. As a result, the Company recorded an income tax benefit by reversing thevaluation allowance for the related net deferred tax assets. The Company continues to maintain a full valuation allowance on its remaining net deferred taxassets because there is significant doubt regarding the Company’s ability to utilize such net deferred tax assets.The Company accrues interest and penalties, if any, on underpayment of income taxes related to unrecognized tax benefits as a component of incometax expense in its consolidated statements of operations.F-12Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Per Share DataBasic net income (loss) per share is computed by dividing net income (loss) available (attributable) to common stockholders by the weighted averagenumber of shares of common stock outstanding during the period.Diluted net income (loss) per share is calculated by dividing net income (loss) available (attributable) to common stockholders as adjusted for the effectof dilutive securities, if any, by the weighted average number of common stock and dilutive common stock outstanding during the period. Potential commonshares include the shares of common stock issuable upon the exercise of outstanding stock options, warrants and the purchase of shares from the employeestock purchase plan (using the treasury stock method) as well as the conversion of the excess conversion value on the Notes. Potential common shares in thediluted net loss per share computation are excluded to the extent that they would be anti-dilutive. No potentially dilutive securities are included in thecomputation of any diluted per share amounts as the Company reported a net loss for all periods presented.Stock-Based CompensationThe Company’s stock-based compensation program includes grants of stock options to employees, consultants, and non-employee directors in additionto the opportunity for employees to participate in an employee stock purchase plan. The expense associated with these programs is recognized in theCompany’s consolidated statements of operations based on their fair values as they are earned under the applicable vesting terms or the length of an offeringperiod.The valuation of stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable stockoptions. Accordingly, the Company uses an option pricing model to derive an estimated fair value. In calculating the estimated fair value of stock optionsgranted, the Company uses the Black-Scholes option valuation model, or Black-Scholes model, which requires the consideration of the following variablesfor purposes of estimating fair value:•Expected term of the option•Expected volatility•Expected dividends•Risk-free interest rateSince its initial public offering, the Company utilizes its available historic volatility data combined with a publicly traded peer group’s historicvolatility to determine expected volatility over the expected option term. In 2014, the Company used an expected term based on a weighted averagecombination of its historical data from stock option exercises and the simplified method. In prior years the Company utilized the “simplified” method for“plain vanilla” options to estimate the expected term of stock option grants. Under that approach, the weighted average expected life was presumed to be theaverage of the vesting term and the contractual term of the option. The risk-free interest rate is based on the implied yield on United States Department of theTreasury zero coupon bonds for periods commensurate with the expected term of the options. The dividend yield on the Company’s common stock isestimated to be zero as the Company has not paid any dividends since inception, nor does it have any intention to do so in the foreseeable future. TheCompany estimates the level of award forfeitures expected to occur based on its historical data and records compensation cost only for those awards that areultimately expected to vest.Segment ReportingThe Company operates in one reportable segment and, accordingly, no segment disclosures have been presented.NOTE 3—RECENT ACCOUNTING PRONOUNCEMENTSIn May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2014-09, Revenue from Contracts withCustomers, 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 toits 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 theperformance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contractand (5) recognize revenue when (or as) the entity satisfies a performance obligation. This update will replace existing revenue recognition guidance underGAAP when it becomes effective for the Company beginning January 1, 2017, with early adoptionF-13Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)not permitted. The updated standard will permit the use of either the retrospective or cumulative effect transition method. The Company is currentlyevaluating the impact of this update on its consolidated financial statements.In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements—Going Concern, which requires thatmanagement of an entity should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’sability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update will becomeeffective beginning January 1, 2017, with early adoption permitted. The provisions of this standard are not expected to significantly impact the Company.Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable ornot significant to the consolidated financial statements of the Company.NOTE 4—INVENTORIESThe components of inventories are as follows (in thousands): December 31, 2014 2013Raw materials$9,263 $5,290Work-in-process8,617 6,321Finished goods11,383 3,946 Total$29,263 $15,557NOTE 5—FIXED ASSETSFixed assets, net summarized by major category, consist of the following (in thousands): December 31, 2014 2013Machinery and laboratory equipment$29,697 $19,570Computer equipment and software3,754 2,476Office furniture and equipment1,001 441Leasehold improvements26,350 24,852Construction in progress19,944 13,419 Total80,746 60,758Less: accumulated depreciation(20,114) (12,576)Fixed assets, net$60,632 $48,182Depreciation expense for the years ended December 31, 2014, 2013 and 2012 was $9.3 million, $3.7 million and $3.6 million, respectively. During theyears ended December 31, 2014, 2013 and 2012, the Company capitalized interest of $0.4 million, $1.1 million and $2.0 million, respectively. The balanceof construction in progress at December 31, 2014 relates largely to the construction of a new manufacturing facility in the United Kingdom and a new fill linefor EXPAREL at the Company’s Science Center Campus in San Diego, California.NOTE 6—GOODWILL AND INTANGIBLE ASSETSIn March 2007, the Company acquired from SkyePharma Holding, Inc., or Skyepharma, its California operating subsidiary, or Pacira California, referredto herein as the Acquisition. The Company’s goodwill arose in April 2012 from a contingent milestone payment to Skyepharma in connection with theAcquisition. The Acquisition was accounted for under Statement of Financial Accounting Standards 141, Accounting for Business Combinations, which wasthe effective GAAP at the Acquisition date. In connection with the Acquisition, the Company agreed to certain earn-out payments based on a percentage ofnet sales of EXPAREL collected and certain other yet-to-be-developed products as well as milestone payments for EXPAREL as follows:F-14Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 6—GOODWILL AND INTANGIBLE ASSETS (Continued)(i)$10.0 million upon the first commercial sale in the United States;(ii)$4.0 million upon the first commercial sale in a major EU country (United Kingdom, France, Germany, Italy and Spain);(iii)$8.0 million when annual net sales collected reach $100.0 million;(iv)$8.0 million when annual net sales collected reach $250.0 million; 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 $2.0million contingent consideration liability recognized at the time of the Acquisition, resulting in $8.0 million recorded as goodwill. In September 2014, theCompany made an $8.0 million milestone payment to Skyepharma in connection with achieving $100.0 million of EXPAREL net sales collected. Forpurposes of meeting future milestone payments, with certain exceptions, annual net sales are measured on a rolling quarterly basis. Cumulatively throughDecember 31, 2014, the Company has recorded an additional $7.8 million as goodwill for earn-out payments which are based on a percentage of net sales ofEXPAREL collected. Any remaining earn-out payments will also be treated as additional costs of the Acquisition and, therefore, recorded as goodwill if andwhen each contingency is resolved.The change in the carrying value of goodwill is summarized as follows (in thousands): Carrying ValueBalance at December 31, 2012 $8,297Percentage payments on collections of net sales of EXPAREL 2,031Balance at December 31, 2013 10,328Milestone payment triggered by collections of net sales of EXPAREL 8,000Percentage payments on collections of net sales of EXPAREL 5,433Balance at December 31, 2014 $23,761Intangible assets, net, consist of core technology, developed technology and trademarks and trade names acquired in the Acquisition and aresummarized as follows (in thousands):December 31, 2014GrossCarrying Value AccumulatedAmortization IntangibleAssets, Net EstimatedUseful LifeAmortizable intangible assets: Core technology$2,900 $(2,497) $403 9 YearsDeveloped technology11,700 (11,700) — 7 YearsTrademarks and trade names400 (400) — 7 YearsTotal intangible assets$15,000 $(14,597) $403 December 31, 2013GrossCarrying Value AccumulatedAmortization IntangibleAssets, Net EstimatedUseful LifeAmortizable intangible assets: Core technology$2,900 $(2,175) $725 9 yearsDeveloped technology11,700 (11,282) 418 7 yearsTrademarks and trade names400 (386) 14 7 yearsTotal intangible assets$15,000 $(13,843) $1,157 Annual amortization expense for intangibles for the years ended December 31, 2014, 2013 and 2012 was $0.8 million, $2.1 million and $2.1 million,respectively.Future amortization expense relates only to core technology and is as follows (in thousands):2015 $3222016 81Total $403F-15Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 7—ACCRUED EXPENSESAccrued expenses consist of the following (in thousands): December 31, 2014 2013Compensation and benefits$8,909 $5,488Accrued operating expenses12,094 8,001Accrued royalties3,213 1,526Accrued interest1,625 1,625Product returns, rebates and other fees2,470 1,245Income taxes payable139 —Total$28,450 $17,885NOTE 8—DEBTThe composition of the Company’s debt and financing obligations is as follows (in thousands): December 31, 2014 2013Debt: Convertible senior notes$120,000 $120,000Discount on debt(16,900) (21,039)Total debt, net of discount103,100 98,961Royalty interest obligation276 1,246Total debt and financing obligations$103,376 $100,207Senior Convertible NotesOn January 23, 2013, the Company completed a private placement of $120.0 million in aggregate principal amount of 3.25% Notes, and entered into anindenture agreement, or Indenture, with respect to the Notes. The Notes accrue interest at a fixed rate of 3.25% per year, payable semiannually in arrears onFebruary 1 and August 1 of each year, beginning on August 1, 2013. The Notes mature on February 1, 2019.The net proceeds from the offering were $115.3 million after deducting the initial purchasers’ discounts, commissions and the offering expensespayable by the Company. The net proceeds from the Notes were used by the Company to repay the entire balance of the Company’s then existing creditfacility. In connection with the extinguishment of the credit facility, the Company prepaid the remaining principal amount of $27.5 million, a $1.7 millionend of term fee, an $0.8 million early prepayment penalty and $0.2 million of accrued interest. The Company recorded a loss on extinguishment of debt of$3.4 million, comprised of the early prepayment penalty, the remaining unamortized debt issuance costs and end of term fee.Holders may convert their Notes prior to the close of business on the business day immediately preceding August 1, 2018, only under the followingcircumstances:(i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2013, if the last reported sale price of the Company’s commonstock for at least 20 trading days during the period including the last 30 consecutive trading days of the quarter (ending on the last trading day of theimmediately preceding calendar quarter) is greater than 130% of the conversion price then applicable (the “Consecutive Sales Price”), on each applicabletrading day;(ii) during the five business-day period after any five consecutive trading-day period (the ‘‘measurement period’’) in which the trading price (as definedin the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reportedsale price of the Company’s common stock and the conversion rate on each such trading day;F-16Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 8—DEBT (Continued)(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 Notes for redemption until the close of business on the business day immediately preceding the redemption date.On or after August 1, 2018, until the close of business on the second scheduled trading day immediately preceding February 1, 2019, holders mayconvert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, holders will receive cash up to the principal amount of the Notesand, with respect to any excess conversion value, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’scommon stock, at the Company’s option. The initial conversion rate for the Notes was 40.2945 shares of common stock per $1,000 principal amount, whichis equivalent to an initial conversion price of approximately $24.82 per share of the Company’s common stock. The conversion rate will be subject toadjustment for some events, but will not be adjusted for any accrued and unpaid interest. The initial conversion price of the Notes represented a premium ofapproximately 32.5% to the closing sale price of $18.73 per share of the Company’s common stock on The NASDAQ Global Select Market on January 16,2013, the date that the Company priced the private offering of the Notes.During the quarter ended December 31, 2014, the requirements with respect to the Consecutive Sales Price were met. As a result, the Notes are classifiedas a current obligation and will be convertible until March 31, 2015. As of December 31, 2014, the Notes had a market price of $3,579 per $1,000 principalamount, compared to an estimated conversion value of $3,572. In the event of conversion, holders would forgo all future interest payments, any unpaidaccrued interest and the possibility of further stock price appreciation. Upon the receipt of conversion requests, the settlement of the Notes will be paidpursuant to the terms of the Indenture, which state that the principal must be settled in cash. In the event that all of the Notes are converted, the Companywould be required to repay the $120.0 million in principal value and approximately $309 million of cash or issue approximately 3.5 million shares of itscommon stock (or a combination of cash and shares of its common stock) to settle the conversion premium as of December 31, 2014, causing dilution to theCompany’s shareholders and/or significant expenditures of the Company’s cash and liquid securities. See Note 19, Subsequent Events, for further discussionof a conversion request received in February 2015. While the Notes are classified in the Company’s consolidated balance sheets at December 31, 2014 and 2013 as a current obligation, the futureconvertibility and resulting balance sheet classification of this liability will be monitored at each quarterly reporting date and will be analyzed dependentupon market prices of the Company’s common stock during the prescribed measurement periods. In the event that the holders of the Notes continue to havethe election to convert the Notes at any time during the prescribed measurement period, the Notes will continue to be considered a current obligation andclassified as such. Prior to February 1, 2018, in the event that none of the conversion conditions are satisfied, the Notes would be reclassified as a long-termliability.Prior to February 1, 2017, the Company may not redeem the Notes. On or after February 1, 2017, the Company may redeem for cash all or part of theNotes 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 effectfor 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 onwhich the Company provides notice of redemption. The redemption price will equal the sum of (i) 100% of the principal amount of the Notes beingredeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date, plus (iii) a “make-wholepremium” payment in cash equal to the sum of the present values of the remaining scheduled payments of interest that would have been made on the Notes tobe redeemed had such Notes remained outstanding from the redemption date to the maturity date (excluding interest accrued to, but excluding, theredemption date that is otherwise paid pursuant to the preceding clause (ii)). The present values of the remaining interest payments will be computed using adiscount rate equal to 2.0%. The Company must make the make-whole premium payments on all Notes called for redemption prior to the maturity date,including Notes converted after the date the Company provides the notice of redemption. No sinking fund is provided for the Notes, which means that theCompany is not required to redeem or retire the Notes periodically.If the Company undergoes a fundamental change as defined in the Indenture, subject to certain conditions, holders of the Notes may require theCompany to repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plusaccrued and unpaid interest to, but excluding, the fundamental change repurchase date.F-17Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 8—DEBT (Continued)The Notes are senior unsecured obligations of the Company and will rank senior in right of payment to the Company’s future indebtedness, if any, thatis expressly subordinated in right of payment to the Notes and equal in right of payment to the Company’s existing and future unsecured indebtedness that isnot so subordinated. The Notes are effectively junior in right of payment to any secured indebtedness of the Company to the extent of the value of the assetssecuring such indebtedness and are structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by theCompany’s subsidiaries.The Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the incurrence of other indebtedness orthe issuance or repurchase of securities by the Company. The Indenture contains customary events of default with respect to the Notes, including that uponcertain events of default, 100% of the principal of and accrued and unpaid interest on the Notes will automatically become due and payable.Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, an entity must separately account for the liability andequity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner thatreflects the issuer’s economic interest cost. The equity component is recorded in additional paid-in capital in the consolidated balance sheet at the issuancedate and the equity component is treated as a discount on the liability component of the Notes. The initial carrying value of the liability component of $95.1million was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying value of the equitycomponent, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes. Theequity 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 $4.7 million related to the issuance of the Notes to the liability and equity components of theNotes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the six-year term of theNotes, and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity.The following table sets forth the total interest expense recognized related to the Notes issued in January 2013 (in thousands): Year Ended December 31, 2014 2013Contractual interest expense$3,900 $3,662Amortization of debt issuance costs620 584Amortization of debt discount4,139 3,897 $8,659 $8,143 Effective interest rate7.22% 7.22%Oxford Loan FacilityOn 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 the first principal payment due December 1, 2013.The term loan under the Oxford Loan Facility was repaid and terminated in January 2013, and the Company recorded a loss on extinguishment of debt of$3.4 million comprised of the early prepayment penalty and the remaining unamortized debt issuance costs.In connection with the Loan Agreement, the Company issued to the Lender warrants that were exercisable for an aggregate of 162,885 shares of itscommon stock at a per share exercise price of $10.97. The value of the warrants, $1.4 million, was recorded as a debt discount and amortized over the term ofthe loan to interest expense. The warrants were exercised in 2012.F-18Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 8—DEBT (Continued)Sale of Royalty InterestsIn 2000, Pacira California and SkyePharma PLC entered into a Royalty Interests Assignment Agreement, or PLC Royalty Agreement, with an affiliate ofPaul Capital Advisors, LLC, or Paul Capital, to raise $30.0 million. Under the PLC Royalty Agreement, Paul Capital had the right to receive a royalty interestin four of SkyePharma PLC’s product sales including product sales of, and other payments related to DepoCyt(e) and the no-longer marketed DepoDur.Payments began for product sales realized on or after January 1, 2003 and continued through December 31, 2014.In connection with the Acquisition, the PLC Royalty Agreement was amended (“Amended and Restated Royalty Interests Assignment Agreement”). Aspart of this amendment the responsibility to pay the royalty interest in product sales of DepoCyt(e) and DepoDur were transferred to the Company, and thepayment to Paul Capital in a “Purchase Option Event” of the Company, as described below, was defined. The net present value of royalties expected to berepaid to Paul Capital (the “royalty interest obligation”) was valued at $13.0 million.The Company recorded the royalty interest obligation as a liability in the consolidated balance sheets in accordance with ASC 470-10-25, Sales ofFuture Revenues. The Company imputed interest expense associated with this liability using the effective interest rate method. The effective interest ratevaried during the term of the agreement depending on a number of factors including the actual sales of DepoCyt(e) and DepoDur and a significant estimation,performed quarterly, of certain future cash flows of the Company related to these products during the remaining term of the Royalty Interests AssignmentAgreement which terminated on December 31, 2014. Any adjustment to the estimates was reflected in the Company’s consolidated statements of operationsas interest income (expense). In addition, such cash flows were subject to foreign exchange movements related to sales of DepoCyt(e) and DepoDurdenominated in currencies other than U.S. dollars.The Company had no minimum payment obligations under the PLC Royalty Agreement. However, the repayment of the Paul Capital liability wassupported through a jointly controlled lockbox, where all DepoCyt(e) and DepoDur product revenue and royalties were received as discussed in Note 2,Summary of Significant Accounting Policies.NOTE 9—FINANCIAL INSTRUMENTSFair Value MeasurementsFair 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 anorderly transaction. To increase consistency and comparability in fair value measurements, the FASB established a three-level hierarchy which requires anentity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are:•Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair valuehierarchy 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 toLevel 3 inputs.The carrying value of financial instruments including cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximatetheir respective fair values due to the short-term nature of these items. The fair value of the Company’s Notes at December 31, 2014 is calculated utilizingmarket quotations from an over-the-counter trading market for such notes (Level 2). The carrying amount and fair value of the Notes are as follows (inthousands): CarryingValue Fair Value Measurements UsingFinancial Liabilities Carried at Historical Cost Level 1 Level 2 Level 3December 31, 2014 Convertible senior notes * $103,100 $— $429,438 $—* The fair value of the Notes was based on the Company’s closing stock price of $88.66 per share at December 31, 2014 compared to a conversion price of $24.82 per share which,if converted, would result in an approximate conversion premium of 3.5 million shares or $309F-19Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 9—FINANCIAL INSTRUMENTS (Continued)million of cash. The maximum conversion premium that can be due on the Notes is 4.8 million shares, which assumes no increases in the conversion rate for certain corporateevents.Short-term investments consist of asset-backed securities collateralized by credit card receivables, investment grade commercial paper and corporatebonds with initial maturities of greater than three months at the date of purchase, but less than one year. Long-term investments consist of corporate bondswith initial maturities greater than one year at the date of purchase. The net unrealized gains from the Company’s short-term and long-term investments arereported in other comprehensive income (loss). At December 31, 2014, all of the Company’s short-term and long-term investments are classified as availablefor 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 relatedtrading activity is not sufficiently frequent to be considered a Level 1 input or that of comparable securities. At December 31, 2014, the Company had $119.1million invested in short-term investments which were rated A or better by Standard & Poor’s and had maturities ranging from 175 to 365 days from date ofpurchase. At December 31, 2014, the Company had $24.4 million invested in long-term investments which were also rated A or better by Standard & Poor’sand had maturities ranging from 20 to 37 months from the date of purchase.The following summarizes the Company’s short-term and long-term investments at December 31, 2014 and 2013 (in thousands):December 31, 2014 Cost GrossUnrealizedGains GrossUnrealizedLosses Fair Value(Level 2)Debt securities: Short-term: Asset-backed securities $15,009 $— $(9) $15,000 Commercial paper 1,747 3 — 1,750 Corporate bonds 102,430 — (42) 102,388 Subtotal 119,186 3 (51) 119,138 Long-term: Corporate bonds 24,463 10 (42) 24,431 Total $143,649 $13 $(93) $143,569December 31, 2013 Cost GrossUnrealizedGains GrossUnrealizedLosses Fair Value(Level 2)Debt securities: Asset-backed securities $10,838 $1 $(1) $10,838 Commercial paper 17,986 11 — 17,997 Corporate bonds 30,808 1 (7) 30,802 Total $59,632 $13 $(8) $59,637Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets and liabilities acquired in a business combination andlong-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 instanceswould be determined using Level 3 inputs. At December 31, 2014, the Company had no financial instruments that were measured using Level 3 inputs.Credit RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-terminvestments, long-term investments and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financialinstitutions. At times, such amounts may exceed federally-insured limits. The Company performs ongoing credit evaluations of its customers as warrantedand generally does not require collateral.F-20Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 9—FINANCIAL INSTRUMENTS (Continued)As of December 31, 2014, three customers accounted for over 10% of the Company’s accounts receivable; 33%, 29% and 27%, respectively. AtDecember 31, 2013, three customers accounted for over 10% of the Company’s accounts receivable; 31%, 31% and 20%, respectively. Revenues areprimarily derived from major wholesalers and pharmaceutical companies that generally have significant cash resources. Allowances for doubtful accountsreceivable are maintained based on historical payment patterns, aging of accounts receivable and actual write-off history. As of December 31, 2014 and 2013,no allowances for doubtful accounts were deemed necessary by the Company on its accounts receivable.NOTE 10—STOCKHOLDERS’ EQUITYCommon StockThe Company is authorized to issue up to 250,000,000 shares of common stock, of which 36,150,620 and 33,636,442 were outstanding atDecember 31, 2014 and 2013, respectively.In April 2014, the Company completed a follow-on underwritten public offering of 1,840,000 shares of common stock, including the shares issuedto cover the underwriters’ overallotment option, at $64.00 per share. The Company received proceeds of $110.5 million as a result of the offering, net ofunderwriters’ fees and related expenses.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 included theunderwriters’ exercise of the overallotment option. The Company raised $62.9 million in net proceeds after deducting discounts and offering expenses.Preferred StockThe Company is authorized to issue up to 5,000,000 shares of preferred stock. No preferred stock was outstanding at December 31, 2014 or 2013.WarrantsAt December 31, 2014 and 2013, the Company had 7,216 and 58,354 warrants outstanding at a weighted average exercise price of $13.44 and $11.73,respectively. The warrants currently outstanding expire in February 2016.Accumulated Other Comprehensive IncomeThe following table illustrates the changes in the balances of the Company’s accumulated other comprehensive income (in thousands): Net Unrealized Gains(Losses) From AvailableFor Sale InvestmentsBalance at December 31, 2012$27Other comprehensive loss before reclassifications(23)Amounts reclassified from accumulated other comprehensive income1Balance at December 31, 20135Other comprehensive loss before reclassifications(85)Amounts reclassified from accumulated other comprehensive income—Balance at December 31, 2014$(80)NOTE 11—STOCK PLANSStock Incentive PlansThe Company’s 2011 stock incentive plan, or 2011 Plan, was adopted by its board of directors and approved by its stockholders in December 2010. The2011 Plan allows the granting of incentive stock options, non-statutory stock options, restricted stock awards and other stock-based awards. The 2011 Planwas amended in June 2014, primarily to increase the number of shares of common stock available for grants by 2.75 million shares. Any shares forfeited orcanceled from the Company’s 2007 Stock Incentive Plan are transferred to the 2011 Plan. In April 2014, the Company’s Board of DirectorsF-21Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 11—STOCK PLANS (Continued)adopted the 2014 Inducement Plan which authorized 175,000 shares of common stock to be granted as equity awards to new employees.All of the Company’s stock option grants have an exercise price equal to the closing price of the fair market value of the Company’s common stock onthe date of grant, generally have a 10-year contractual term and vest in increments (generally over four years from the date of grant although the Companymay occasionally grant options with different vesting terms). The Company uses authorized and unissued shares to satisfy its obligations under these plans.2014 Employee Stock Purchase PlanIn April 2014, the Company’s Board of Directors adopted the 2014 Employee Stock Purchase Plan, or ESPP, which was subsequently approved by theCompany’s stockholders. The purpose of the ESPP is to provide a vehicle for eligible employees to purchase shares of the Company’s common stock at adiscounted price and to help retain and motivate current employees as well as attract new talent. Under the ESPP, up to 500,000 shares of common stock maybe sold under the plan which expires in June 2024. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423of the Internal Revenue Code. The maximum fair market value of stock which can be purchased by a participant in a calendar year is $25,000. The initialoffering period of the ESPP began on September 1, 2014 and ended on December 31, 2014. Beginning in 2015, six-month offering periods will begin onJanuary 1st and July 1st of each year. During an offering period, eligible employees will have the opportunity to elect to purchase shares of the Company’scommon stock on the purchase dates of June 30 and December 31. The per share purchase price will be equal to the lesser of 85% of the fair market value ofthe Company’s common stock on either the offering date or the purchase date. During the year ended December 31, 2014, 15,722 shares were purchasedunder the plan.The following table contains information about the Company’s plans at December 31, 2014:Stock Incentive Plans Awards Reserved forIssuance Awards Issued Awards Available forGrant2007 Stock incentive plan 2,022,837 2,022,837 —2011 Plan 5,931,700 4,400,525 1,531,1752014 Inducement plan 175,000 77,000 98,000 8,129,537 6,500,362 1,629,175 Employee Stock Purchase Plan Shares Reserved forPurchase Shares Purchased Shares Available forPurchase2014 Employee stock purchase plan 500,000 15,722 484,278Stock-Based CompensationCompensation expense for stock options granted to employees and directors is based on the estimated grant date fair value of options recognized overthe requisite service period on a straight-line expense attribution method. Compensation expense for options granted to non-employees is based on the fairvalue of options, which are revalued each reporting period until vested and are recognized as expense over the requisite service period. Compensationexpense for ESPP options is based on the grant date fair value of the ESPP shares and the grant date number of shares that can be purchased, which isrecognized as expense over the length of an offering period.F-22Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 11—STOCK PLANS (Continued)The Company recognized stock-based compensation expense (net of forfeitures) in its consolidated statements of operations for the years endedDecember 31, 2014, 2013 and 2012 as follows (in thousands): Year Ended December 31, 2014 2013 2012Cost of revenues $3,582 $1,526 $563Research and development 6,490 4,345 1,155Selling, general and administrative 14,750 5,642 3,058Total $24,822 $11,513 $4,776 Stock-based compensation from: Stock options $24,477 $11,513 $4,776 Employee stock purchase plan 345 — — Total $24,822 $11,513 $4,776In November 2014, the Company’s Board of Directors approved amendments to stock options held by a departing Vice President. The amendmentsaccelerated the vesting of nine months’ worth of options and as a result the Company recognized an additional $0.6 million in stock-based compensationexpense for the year ended December 31, 2014. In September 2013, the Company’s Board of Directors approved amendments to stock options held by twodeparting directors. The amendments (i) accelerated the vesting of the unvested portion of certain options, and (ii) extended the period during which eachdeparting director could exercise all vested options to September 30, 2015. As a result of these amendments, the Company recognized an additional $0.2million in stock-based compensation for the year ended December 31, 2013.The following table summarizes the Company’s stock option activity and related information for the period from January 1, 2012 to December 31,2014 (in thousands except share and per share amounts): Number ofShares WeightedAverageExercise Price Weighted AverageRemainingContractualTerm (Years) AggregateIntrinsic Value(in Thousands)Outstanding at January 1, 20122,337,017 $3.92 8.80 $11,829Granted2,120,250 11.55 Exercised(279,476) 2.75 $3,005Forfeited(174,610) 7.94 Expired(15) 7.07 Outstanding at December 31, 20124,003,166 7.86 8.66 $38,485Granted918,915 30.42 Exercised(742,211) 5.19 $21,679Forfeited(338,145) 10.93 Expired(1,687) 7.24 Outstanding at December 31, 20133,840,038 13.50 8.01 $168,905Granted1,638,575 79.68 Exercised(624,229) 11.60 $45,289Forfeited(175,967) 44.32 Expired(561) 21.70 Outstanding at December 31, 20144,677,856 $35.78 7.86 $248,276Exercisable at December 31, 20142,085,829 $11.61 6.75 $160,707Vested and expected to vest at December 31, 20144,486,980 $34.59 7.81 $243,438F-23Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 11—STOCK PLANS (Continued)As of December 31, 2014, $73.1 million of total unrecognized compensation cost related to non-vested stock options is expected to be recognized overa weighted average period of 3.1 years. The Company’s stock options have a maximum expiration date of ten years from the date of grant.The weighted average fair value of stock options granted for the years ended December 31, 2014, 2013 and 2012 was $42.62, $19.22 and $8.52 pershare, respectively. The fair values of stock options granted were estimated using the Black-Scholes model with the following weighted average assumptions: Year Ended December 31, 2014 2013 2012Expected dividend yieldNone None NoneRisk free interest rate0.02 - 2.16% 0.33 - 2.83% 0.84 - 1.70%Expected volatility57.2% 68.7% 74.0%Expected term of options5.86 years 6.22 years 6.76 yearsThe $23.27 fair value of the ESPP share options granted in September 2014 was estimated using the Black-Scholes model assuming: no expecteddividends, a risk free interest rate of 0.37%, an expected volatility of 28.2% and an expected term of four months.NOTE 12—NET INCOME (LOSS) PER SHAREBasic net income (loss) per share is calculated by dividing the net income (loss) attributable to common shares by the weighted average number ofcommon shares outstanding during the period. Diluted net income (loss) per share is calculated by dividing the net income (loss) attributable to commonshares by the weighted average number of shares outstanding plus dilutive potential common stock outstanding during the period. Potential common sharesinclude the shares of common stock issuable upon the exercise of outstanding stock options, warrants and the purchase of shares from the employee stockpurchase plan (using the treasury stock method) as well as the conversion of the excess conversion value on the Notes. As discussed in Note 8, Debt, theCompany must settle the principal of the Notes in cash upon conversion, and it may settle any conversion premium in either cash or stock at the Company’sdiscretion. For purposes of calculating the dilutive impact, it is presumed that the conversion premium will be settled in common stock.Potential common shares are excluded from the diluted net income (loss) per share computation to the extent that they would be antidilutive. Becausethe Company reported a net loss for all periods presented, no potentially dilutive securities have been included in the computation of diluted net loss pershare.The following table sets forth the computation of basic and diluted loss per share for the years ended December 31, 2014, 2013 and 2012 (in thousandsexcept per share amounts): Year Ended December 31, 2014 2013 2012Numerator: Net loss$(13,716) $(63,909) $(52,281)Denominator: Weighted average shares of common stock outstanding35,299 33,182 30,332Net loss per share: Basic and diluted net loss per share of common stock$(0.39) $(1.93) $(1.72)For the years ended December 31, 2014, 2013 and 2012, the number of potential common shares which were excluded from the diluted net loss pershare calculation using the treasury stock method was 5.4 million, 3.4 million and 1.4 million, respectively.F-24Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 12—NET INCOME (LOSS) PER SHARE (Continued)The following outstanding stock options, conversion premium on the Notes, warrants and employee stock purchase plan units which could dilute basicearnings per share in the future are as follows (in thousands): Year Ended December 31, 2014 2013 2012Weighted average number of stock options outstanding3,534 3,980 3,304Conversion premium on the Notes2,483 1,194 —Weighted average number of warrants outstanding21 204 585Weighted average purchase options under ESPP1 — — Total6,039 5,378 3,889NOTE 13—INCOME TAXESA reconciliation of income taxes at the U.S. federal statutory rate to the provision for income taxes is as follows: Year Ended December 31, 2014 2013 2012Benefit at U.S. Federal statutory rate35.00 % 35.00 % 35.00 %State taxes(32.75)% 4.79 % 6.73 %Increase in valuation allowance(17.71)% (42.91)% (39.62)%Tax credits5.49 % 1.69 % — %Interest expense10.68 % 0.30 % (0.22)%Other(1.99)% 1.82 % (1.89)%Provision for income taxes(1.28)% 0.69 % — %There has been no provision for federal income taxes since the Company has incurred net operating losses since inception. The income tax provisionof $0.2 million at December 31, 2014 is a result of minimum and apportionment based state taxes.In 2013, the Company sold a portion of its unused New Jersey State net operating losses through a program sponsored by the New Jersey EconomicDevelopment Authority. Cash proceeds of $0.4 million were received by the Company resulting in a state tax benefit recognized during the year endedDecember 31, 2013.F-25Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 13—INCOME TAXES (Continued)Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands): December 31, 2014 2013Deferred tax assets: Federal and state net operating loss carry-forwards$111,086 $114,819Federal and state research credits6,043 5,149Depreciation and amortization3,494 3,248Accruals and reserves3,861 1,696Deferred revenue4,065 1,707Stock based compensation8,487 2,622Other588 752Total deferred tax assets137,624 129,993Deferred tax liabilities: Discount on convertible senior notes(6,283) (8,507) 131,341 121,486Less: valuation allowance(131,341) (121,486)Net deferred tax assets$— $—As of December 31, 2014, the available federal net operating loss carryforward and the federal research and development tax credit carryforwardstotaled $331.0 million and $4.4 million , respectively. Approximately $41.3 million of the federal net operating loss carryforward related to excess taxbenefits arising from the exercise of stock options for which future tax benefits will be credited to equity when realized through a reduction in taxes payable.The Company also had state net operating loss carryforwards and state research and development tax credit carryforwards of approximately $196.3 millionand $2.5 million, respectively which are subject to change on an annual basis due to variations in the Company’s annual state apportionment factors. TheCompany had non-U.S. tax net operating losses of approximately $0.3 million at December 31, 2014.The net operating loss carryforwards will begin expiring in 2026 for federal purposes and 2015 for state purposes if the Company has not used themprior to that time, and the federal tax credits will begin expiring in 2028 unless previously used. The state tax credits carry forward indefinitely.Since the Company had cumulative changes in ownership of more than 50% within a three-year period, under Internal Revenue Code sections 382 and383, the Company’s ability to use any net operating loss and credit carryforwards to offset taxable income or tax will be limited. Such ownership changeswere triggered by the initial acquisition of the Company’s stock in 2007 as well as cumulative ownership changes arising as a result of the completion of theinitial public offering and other financing transactions. As a result of these ownership changes, the Company estimates that approximately $197.2 million offederal net operating losses are subject to annual limitations. At December 31, 2014, approximately $72.3 million of these federal net operating losses wereavailable. The Company estimates that an additional $26.3 million will become available annually in 2015 and 2016, $14.8 million in 2017, $10.3 millionannually from 2018 through 2022, and the remaining $6.0 million thereafter through 2025. In addition, California and certain states have suspended use ofnet operating loss carryforwards for certain taxable years, and other states are considering similar measures. As a result, the Company may incur higher stateincome tax expense in the future.The valuation allowance for deferred tax assets increased by approximately $9.9 million, $17.5 million and $20.7 million during the years endedDecember 31, 2014, 2013 and 2012, respectively. There is significant doubt regarding the Company’s ability to utilize its net deferred tax assets and,therefore, the Company has recorded a full valuation allowance.The 2007 Acquisition was treated as a stock acquisition for tax purposes and, therefore, the acquired intangibles for book purposes are not deductiblefor income tax purposes. The Company also recorded goodwill relating to contingent payments due under the Acquisition during the years endedDecember 31, 2014 and 2013, which are not deductible for income tax purposes. See Note 6, Goodwill and Intangible Assets, for further discussion.F-26Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 13—INCOME TAXES (Continued)In connection with the adoption of stock-based compensation guidance in 2006, the Company elected to follow the with-and-without approach todetermine the sequence in which deductions and net operating loss carryforwards are utilized. Accordingly, no tax benefit related to stock options wasrecognized in the current year.The Company evaluates its uncertain tax positions in a two-step process. The Company first determines whether it is more-likely-than-not that a taxposition will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine theamount of benefit to be recognized in the financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50%likelihood of being realized upon ultimate settlement.The Company did not have a liability related to unrecognized tax benefits as of December 31, 2014 and 2013 due to operating losses but has reducedits deferred tax assets by $0.4 million at December 31, 2014 and 2013. Further, because the Company has recorded a full valuation allowance on its netdeferred tax assets, the effect of implementing ASC 740 has been a reduction of the tax valuation allowance by the amount above.The Company recognizes interest and penalties related to unrecognized tax benefits as tax expense. No interest or penalties were accrued for 2014,2013 or 2012. The Company is currently open for audit by the United States Internal Revenue Service, or IRS, and state tax jurisdictions for 2008 through2014. However, the IRS or state may still examine and adjust a net operating loss arising from a closed year to the extent it is utilized in an open tax year. TheAmerican Tax Relief Act of 2012, enacted on January 2, 2013, retroactively reinstated the research and development tax credit for 2012. The Companyreported credits of approximately $0.2 million for federal income tax purposes in the first quarter of 2013 related to 2012.NOTE 14—OTHER EMPLOYEE BENEFITSThe Company sponsors a 401(k) savings plan. Under the plan, employees may make contributions which are eligible for a discretionary percentagematch as defined in the plan and determined by the Board of Directors. The Company recognized $1.0 million, $0.6 million and $0.3 million of relatedcompensation expense for the years ended December 31, 2014, 2013 and 2012, respectively.NOTE 15—COMMERCIAL PARTNERS AND OTHER AGREEMENTSCommercial PartnersPatheon UK LimitedIn April 2014, the Company and Patheon UK Limited, or Patheon, entered into a Strategic Co-Production Agreement and Technical Transfer andService Agreement to collaborate in the manufacture and packaging of EXPAREL. Under the terms of the Technical Transfer and Service Agreement, Patheonhas agreed to undertake certain technical transfer activities and construction services needed to prepare its Swindon, United Kingdom facility for themanufacture and packaging of EXPAREL in two dedicated manufacturing suites. This agreement will remain in full effect unless and until it expires or isterminated. Upon termination of this agreement (other than termination by the Company in the event that Patheon does not meet the construction andmanufacturing milestones or for a breach by Patheon), the Company will pay for the make good costs occasioned by the removal of its manufacturingequipment and for Patheon’s termination costs up to a maximum amount of $2.0 million.The Company also entered into a Manufacturing and Supply Agreement with Patheon. Under the terms of the Manufacturing and Supply Agreement,following the FDA approval date of the suites, the Company has agreed to purchase EXPAREL product from Patheon. Unless earlier terminated, thisagreement will expire on the 10th anniversary of the FDA approval date for the initial manufacturing suite.Future expenditures associated with the aforementioned agreements are primarily driven by the potential commercial requirements and demand for theCompany’s products which cannot be fully determined at this time.Aratana Therapeutics, Inc.On December 5, 2012, the Company entered into a worldwide license, development and commercialization agreement with Aratana Therapeutics, Inc.,or Aratana. Under the agreement, the Company granted Aratana an exclusive royalty-bearing license, including the limited right to grant sublicenses, for thedevelopment and commercialization of the Company’sF-27Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 15—COMMERCIAL PARTNERS AND OTHER AGREEMENTS (Continued)bupivacaine liposome injectable suspension product for animal health indications. Under the agreement, Aratana will develop and seek approval for the useof the product in veterinary surgery to manage postsurgical pain, focusing initially on developing the product for cats, dogs and other companion animals. Inconnection with its entry into the license agreement, the Company received a one-time payment of $1.0 million and is eligible to receive up to an additionalaggregate $42.5 million upon the achievement of development and commercial milestones. Once the product has been approved by the FDA for sale in theUnited States, Aratana will be required to pay the Company a tiered double digit royalty on net sales made in the United States. If the product is approved byforeign regulatory agencies for sale outside of the United States, Aratana will be required to pay the Company a tiered double digit royalty on such net sales.Royalty rates will be reduced by a certain percentage upon the entry of a generic competitor for animal health indications into a jurisdiction or if Aratanamust pay royalties to third parties under certain circumstances. In December 2013, the Company received a $0.5 million milestone payment under theagreement.Mundipharma International Corporation LimitedIn June 2003, the Company entered into an agreement granting Mundipharma International Corporation Limited, or Mundipharma, exclusivemarketing and distribution rights to DepoCyte in the E.U. and certain other European countries. Under the agreement, as amended, and a separate supplyagreement, the Company receives a fixed payment for supplying vials of DepoCyte and a double-digit royalty, net of supply price, on sales in the applicableterritories. In April 2014, the Company and Mundipharma amended their agreements to, among other things, (i) extend the term of such agreements by anadditional 15 years to June 2033, and (ii) expand the territories where Mundipharma can market and distribute DepoCyte to all countries other than theUnited States of America, Canada and Japan. In connection with the agreements, the Company received a non-refundable upfront payment of $8.0 million inMay 2014 which was deferred and is being recognized over the contractual term.Sigma-Tau Pharmaceuticals, Inc.In December 2002, the Company entered into a supply and distribution agreement with Enzon Pharmaceuticals Inc., subsequently acquired by Sigma-Tau Pharmaceuticals, Inc., or Sigma-Tau, regarding the sale of DepoCyt®. Pursuant to the agreement, Sigma-Tau was appointed the exclusive distributor ofDepoCyt in the United States and Canada. Under the supply and distribution agreement, the Company supplies unlabeled DepoCyt vials to Sigma-Tau forfinished packaging by Sigma-Tau. Under these agreements, the Company receives a fixed payment for supplying the vials of DepoCyt and a double-digitroyalty on sales, net of supply price, in the United States and Canada.CrossLink BioScience, LLCEffective October 1, 2013, the Company and CrossLink BioScience, LLC, or CrossLink, commenced a five-year arrangement for the promotion andsale of EXPAREL pursuant to the terms of a Master Distributor Agreement. Under the agreement, the Company appointed CrossLink as a third-partydistributor during the term to promote and sell EXPAREL to orthopedic surgeons in the United States, with the exception of certain geographical areas andaccounts. The prices and purchasing terms related to sales of EXPAREL are determined by the Company, and all orders are subject to acceptance or rejectionby the Company. CrossLink is entitled to receive commissions on its sales of EXPAREL in the applicable territories, subject to certain conditions andadjustments. CrossLink may receive additional performance-based payments if it achieves certain sales goals. The Company may terminate the agreement ifCrossLink fails to meet certain minimum performance metrics or if the Company pays a termination fee. Effective March 1, 2015, the agreement was amendedto, among other things, amend certain payment terms and specify certain sub-distributors that may promote and sell EXPAREL under the agreement.Research Development FoundationPursuant to an agreement with Research Development Foundation, or RDF, the Company is required to pay RDF a low single-digit royalty on thecollection of revenues from its DepoFoam-based products, for as long as certain patents assigned to the Company under the agreement remain valid. RDF hasthe right to terminate the agreement for an uncured material breach by the Company, in connection with its bankruptcy or insolvency or if it directly orindirectly opposes or disputes the validity of the assigned patent rights.Amylin Pharmaceuticals, Inc.In March 2008, the Company entered into a development and licensing agreement with Amylin Pharmaceuticals, Inc., or Amylin. Under thedevelopment and licensing agreement, the Company provided Amylin with access to its proprietary DepoFoam drug delivery technology to conductresearch, feasibility and formulation work, and for the manufacturing of pre-F-28Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 15—COMMERCIAL PARTNERS AND OTHER AGREEMENTS (Continued)clinical and clinical material for various Amylin products. The Company is entitled to payments from Amylin for its work on the formulation anddevelopment of compounds with the DepoFoam technology, its achievement of certain clinical development milestones, its achievement of certainworldwide sales and a tiered royalty based upon sales. The development and licensing agreement with Amylin remains in effect until January 2017, however,neither party is currently performing any activities under the agreement.Terminated AgreementsEKR Therapeutics, Inc.On January 3, 2012, EKR Therapeutics, Inc., delivered a notice to the Company to terminate the licensing, distribution and marketing agreementrelating to DepoDur. The associated supply agreement also terminated concurrently with the termination of the licensing, distribution and marketingagreement, effective June 8, 2012. As a result of the termination, the Company recognized any unamortized deferred revenue relating to the agreement on astraight-line basis through the termination date in June 2012.Flynn Pharmaceuticals LimitedOn October 29, 2012, the Company terminated the marketing agreement with Flynn Pharmaceuticals Limited, which had granted exclusive distributionrights to DepoDur in the E.U., certain other European countries, South Africa and the Middle East. The supply agreement terminated concurrently with themarketing agreement. The termination was effective immediately. As a result of the termination, the Company recognized any unamortized deferred revenuerelating to the agreement upon termination.Novo Nordisk ASOn June 29, 2012, the Company received a notice of termination from Novo Nordisk AS, or Novo, of the Development and License Agreement, datedJanuary 14, 2011, which had granted non-exclusive rights to Novo under certain of its patents and know-how to develop, manufacture and commercializeformulations of a Novo proprietary drug using the Company’s DepoFoam drug delivery technology. The Company received a one-time upfront payment of$1.5 million in January 2011 and a milestone payment of $2.0 million in November 2011, both of which had been deferred and were being recognized on astraight-line basis over the estimated contract period to collaborative licensing and development revenue in the consolidated statements of operations.Pursuant to the terms of the agreement, the termination of the agreement was effective on August 28, 2012. The agreement was terminated due to Novo’sdecision to discontinue development of the proprietary drug subject to the agreement. As a result of the termination, the Company recognized anyunamortized deferred revenue relating to the agreement on a straight-line basis through the termination date in August 2012.NOTE 16—RELATED PARTY TRANSACTIONSThe Company’s Chief Medical Officer, Dr. Gary Patou, is a partner of MPM Asset Management LLC, or MPM, an investor in the Company. DavidStack, the Company’s President, Chief Executive Officer and Chairman is also a managing director at MPM. The Company contracted with MPM and Dr.Patou for the services of Dr. Patou, or Consultant. MPM earned monthly consulting fees between $16,000 and $26,000 in exchange for 50% to 80% of theConsultant’s business time. The Company incurred expenses of $0.5 million, $0.3 million and $0.4 million for the years ended December 31, 2014, 2013 and2012, respectively. At December 31, 2014 and 2013, the amount payable to MPM was $0.2 million and $0.1 million, respectively.In December 2012, the Company entered into a worldwide license, development and commercialization agreement with Aratana as discussed inNote 15, Commercial Partners and Other Agreements. MPM and its affiliates are holders of capital stock of Aratana.In April 2012, the Company entered into a consulting agreement with Dr. Gary Pace, a director of the Company, whereby Dr. Pace would provideconsulting services. Pursuant to the consulting agreement and subsequent amendments, the consulting services are paid at the rate of $5,000 to $15,000 permonth based on the number of days worked. The Company recorded expenses under the consulting arrangement for the years ended December 31, 2014,2013 and 2012 of $0.1 million, $0.1 million, and $0.2 million, respectively. In connection with the consulting arrangement, Dr. Pace received an option topurchase 20,000 shares of common stock at an exercise price of $11.02 per share and received an option to purchase 70,000 shares ofF-29Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 16—RELATED PARTY TRANSACTIONS (Continued)common stock at an exercise price of $16.67 per share. The amounts payable at December 31, 2014 and 2013 to Dr. Pace for the consulting services were lessthan $0.1 million.NOTE 17—COMMITMENTS AND CONTINGENCIESLeasesThe Company leases research and development, manufacturing and warehouse facilities in San Diego, California and its corporate headquarters inParsippany, New Jersey. The three leases in San Diego run through August 2020. In March 2014, the Company amended the lease for its corporateheadquarters which increased the size of the leased premises and extended the lease term through March 2028. In November 2014, the Company entered intolease contracts for additional research and development space at the Company’s Science Center Campus in San Diego. The leases will commence in August2015 and expire in October 2020.In connection with the Acquisition, the Company determined that its lease rates associated with the Science Center Campus were in excess of marketrates resulting in a $3.3 million unfavorable lease accrual as of the Acquisition date. The unfavorable lease accrual, which is recorded in other long-termliabilities in the Company’s consolidated balance sheets, is amortized over the remaining terms of the leases. The annual amortization of the unfavorablelease accrual for each of the years ended December 31, 2014, 2013 and 2012 was $0.1 million, $0.1 million and $0.4 million, respectively.As of December 31, 2014, the aggregate annual minimum payments due under the Company’s lease obligations are as follows (in thousands):Year 2015 $6,1332016 7,2632017 7,4592018 7,6602019 7,8762020 through 2028 11,786Total $48,177Total rent expense, net of amortization of unfavorable lease obligation and tenant improvements, under all operating leases for years endedDecember 31, 2014, 2013 and 2012 was $4.9 million, $4.9 million and $4.8 million, respectively. Deferred rent at December 31, 2014 and 2013 was $4.5million and $2.3 million, respectively.LitigationFrom time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary course of its business. Except asdescribed 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 threatenedlitigation against the Company which it believes could have a material adverse effect on its business, operating results, financial condition or cash flows.On October 3, 2014, a purported class action lawsuit was filed in the United States District Court for the District of New Jersey against the Company andthree of its current officers, Nicholas R. Lovallo v. Pacira Pharmaceuticals, Inc., et al., Case No. 2:14-cv-06172-WHW-CLW. The lawsuit asserts claims underSections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and is premised on allegedly false and/or misleading statements, and non-disclosure of material facts, regarding the Company’s business, operations, prospects and performance during the proposed class period of April 9, 2012 toSeptember 24, 2014. The Company intends to vigorously defend all claims asserted, including by filing a motion to dismiss. Given the early stage of thelitigation, at this time the Company is unable to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable orremote. It is not currently possible to assess whether or not the outcome of these proceedings will have a material adverse effect on the Company.Other Commitments and ContingenciesThe FDA, as a condition of the approval of EXPAREL has required the Company to study EXPAREL in pediatric patients. The Company has agreed toa trial timeline where, over several years, it will study pediatric patient populations inF-30Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 17—COMMITMENTS AND CONTINGENCIES (Continued)descending order starting with 12-18 year olds and ending with children under two years of age. The cost to complete the trial may be significant.In addition to the initial $19.6 million purchase price for the Acquisition, the Company entered into an earn-out agreement with Skyepharma whichwas based on the Company reaching certain revenue milestones following the Acquisition. Pursuant to this agreement, the Company is required to paySkyepharma milestone payments up to an aggregate of $62.0 million, of which $18.0 million has been paid. Additionally, the Company agreed to pay toSkyepharma a 3% percentage payment on collections of EXPAREL sales in the United States, Japan, the United Kingdom, France, Germany, Italy and Spain.Such obligations to make percentage payments will continue for the term in which such sales related to EXPAREL are covered by a valid claim incertain patent rights related to EXPAREL and other biologics products. The expiration date of the last valid claim will occur in 2018. The Company has theright to cease paying the 3% percentage payments in the event that Skyepharma breaches certain covenants not to compete contained in the stock purchaseagreement. In the event that the Company ceases to sell EXPAREL and begin marketing a similar replacement product for EXPAREL, it would no longer beobligated to make percentage payments, but it may be required to make certain milestone payments upon reaching certain sales milestones.Refer to Note 6, Goodwill and Intangible Assets, for further discussion.NOTE 18—SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)The following table presents selected quarterly financial data for the years ended December 31, 2014 and 2013 (in thousands, except per share data): Three Months Ended March 31,2014 June 30,2014 September 30,2014 December 31,2014Total revenues$36,662 $47,165 $52,048 $61,793Cost of revenues18,127 19,954 20,391 18,968Total operating expenses45,920 50,007 53,033 53,873Net income (loss)(11,477) (5,037) (3,004) 5,802Basic net income (loss) per common share$(0.34) $(0.14) $(0.08) $0.16Diluted net income (loss) per common share$(0.34) $(0.14) $(0.08) $0.14 Three Months Ended March 31,2013 June 30,2013 September 30,2013 December 31,2013Total revenues$11,587 $17,141 $23,259 $33,564Cost of revenues11,391 10,214 14,791 18,376Total operating expenses30,232 29,151 36,073 43,384Net loss(23,138) (14,031) (14,784) (11,956)Basic net loss per common share$(0.71) $(0.42) $(0.44) $(0.36)Diluted net loss per common share$(0.71) $(0.42) $(0.44) $(0.36)For periods where the Company reported a net loss, no potentially dilutive securities have been included in the computation of diluted net loss pershare.NOTE 19—SUBSEQUENT EVENTSIn February 2015, the Company received notice of an election for conversion from one of the holders of the Notes. The principal amount of theconversion request was $1.5 million which must be paid in cash pursuant to the terms of the Indenture. The Company elected to settle the conversionpremium in shares of its common stock, calculated using a 40 trading-day observation period ending April 8, 2015.F-31Table of ContentsEXHIBIT INDEXExhibitNumber Description3.1 Amended and Restated Certificate of Incorporation of the Registrant.(1)3.3 Amended and Restated Bylaws of the Registrant.(1)4.1 Specimen Certificate evidencing shares of common stock.(2)4.2 Indenture (including form of Notes), dated January 23, 2013, between the Registrant and Wells Fargo Bank, National Association, astrustee.(3)10.1 Second Amended and Restated 2007 Stock Option/Stock Issuance Plan.(2)***10.2 Form of Stock Option Agreement under the Second Amended and Restated 2007 Stock Option/Stock Issuance Plan.(2)***10.3 Investors’ Rights Agreement, dated March 23, 2007, among the Registrant and the parties named therein.(2)10.4 Assignment Agreement, dated February 9, 1994, amended April 15, 2004, between the Registrant and Research Development Foundation.(2)10.5 Stock Purchase Agreement, dated January 8, 2007, between SkyePharma, Inc. and the Registrant.(2)10.6 Amended and Restated Royalty Interests Assignment Agreement, dated March 23, 2007, as amended, between SkyePharma, Inc. andRoyalty Securitization Trust I.(2)10.7 Amended and Restated Security Agreement (SKPI), dated March 23, 2007, between SkyePharma, Inc. and Royalty Securitization Trust I.(2)10.8 Supply Agreement, dated June 30, 2003, between SkyePharma, Inc. and Mundipharma Medical Company.(2)10.9 Distribution Agreement, dated June 30, 2003, between SkyePharma, Inc. and Mundipharma International Holdings Limited.(2)10.10 Distribution Agreement, dated July 27, 2005, between SkyePharma, Inc. and Mundipharma International Holdings Limited.(2)10.11 Co-development, Collaboration and License Agreement, dated January 2, 2003, among Enzon Pharmaceuticals, Inc., Jagotec, AG,SkyePharma, Inc. and SkyePharma PLC.(2)10.12 DepoCyt Supply and Distribution Agreement, dated December 31, 2002, between SkyePharma, Inc. and Enzon Pharmaceuticals, Inc.(2)10.13 Industrial Real Estate Triple Net Lease, dated August 17, 1993, between Pacira Pharmaceuticals, Inc. and HCP TPSP, LLC.(2)10.14 Fifth Amendment, dated March 13, 2013, to the Industrial Real Estate Triple Net Lease, dated August 17, 1993, among the Registrant,Pacira Pharmaceuticals, Inc. and HCP TPSP, LLC (and successor-in-interest to Equitable Life Assurance Society of the United States).(4)10.15 Industrial Real Estate Lease, dated December 8, 1994, amended July 2, 2009, between Pacira Pharmaceuticals, Inc. and LASDK LimitedPartnership.(2)10.16 Third Amendment, dated March 13, 2013, to the Industrial Real Estate Lease, dated December 8, 1994, among the Registrant, PaciraPharmaceuticals, Inc. and LASDK Limited Partnership (and successor-in-interest to Lankford & Associates, Inc.).(4)10.17 Services Agreement, dated October 28, 2010, between the Registrant, MPM Asset Management LLC and Gary Patou.(2)***10.18 Amendment to Services Agreement, dated October 28, 2010, between the Registrant, MPM Asset Management LLC and Gary Patou.(6)***10.19 Services Agreement, dated September 15, 2010, between Pacira Pharmaceuticals, Inc. and Stack Pharmaceuticals, Inc.(2)10.20 Employment Agreement between the Registrant and David Stack.(2)***10.21 Amendment No. 1 to Executive Employment Agreement, dated March 13, 2013, between the Registrant and David Stack.(4)***10.22 Employment Agreement between the Registrant and James Scibetta.(2)***10.23 Amendment No. 1 to Executive Employment Agreement, dated March 13, 2013, between the Registrant and James Scibetta.(4)***10.24 Warrant to purchase preferred stock of the Registrant, dated November 24, 2010.(2)10.25 Form of Warrant to purchase Series A convertible preferred stock of the Registrant, dated July 2, 2009.(2)10.26 Form of Warrant to purchase common stock of the Registrant, dated January 22, 2009.(2)10.27 Form of Warrant to purchase common stock of the Registrant, dated December 29, 2010.(2)10.28 Form of Indemnification Agreement between the Registrant and its directors and officers.(2)***Table of Contents10.29 Commercial Outsourcing Services Agreement entered into as of August 25, 2011 by the Registrant and Integrated CommercializationSolutions, Inc.(5)10.30† First Amendment to Commercial Outsourcing Services Agreement, dated August 1, 2013, between the Registrant and IntegratedCommercialization Solutions, Inc.(8)10.31 Amended and Restated Consulting Agreement, dated April 3, 2012, between the Registrant and Gary Pace.(7)***10.32 Executive Employment Agreement, dated November 1, 2010, between the Registrant and Taunia Markvicka.(7)***10.33 Amendment No. 1 to Executive Employment Agreement, dated March 13, 2013, between the Registrant and Taunia Markvicka.(4)***10.34 Employment Agreement, dated April 19, 2012, between the Registrant and Lauren Riker.(7)***10.35 Amendment No. 1 to Employment Agreement, dated March 13, 2013, between the Registrant and Lauren Riker.(4)***10.36 Amended and Restated 2011 Stock Incentive Plan.(9)***10.37 Construction Management Agreement between the Registrant and DPR, dated May 17, 2012.(10)10.38 Warrant to Purchase Stock No 1, 2, 3 and 4, issued by the Registrant to Oxford Finance LLC, dated May 2, 2012(10)10.39 Second Amended and Restated Consulting Agreement, dated August 17, 2012, between the Registrant and Gary Pace.(11)***10.40 Third Amendment to Consulting Agreement, dated September 11, 2013, between the Registrant and Gary Pace.(8)***10.41 Amendment #2 to Services Agreement, between the Registrant and MPM Asset Management LLC, and Gary Patou, dated November 29,2012.(12)***10.42 Amendment #3 to Services Agreement, dated September 11, 2013, among the Registrant, MPM Asset Management LLC, and Gary Patou.(8)***10.43† License, Development and Commercialization Agreement, dated December 5, 2012 between the Registrant and Aratana Therapeutics, Inc.(13)10.44† Supply Agreement, dated December 5, 2012 between the Registrant and Aratana Therapeutics, Inc.(13)10.45† Master Distributor Agreement, dated March 11, 2013, between the Registrant and CrossLink BioScience, LLC.(14)10.46† First Amendment to Master Distributor Agreement, dated April 1, 2013, between the Registrant and Crosslink BioScience, LLC.(14)10.47† Second Amendment to Master Distributor Agreement, dated September 5, 2013, between the Registrant and Crosslink BioScience, LLC.(14)10.48 2014 Inducement Plan.(15)***10.49 2014 Employee Stock Purchase Plan.(9)***10.50 Form of Nonstatutory Stock Option Agreement under the Amended and Restated 2011 Stock Incentive Plan.(9)*** 10.51† Strategic Co-Production Agreement dated April 4, 2014, by and between Pacira Pharmaceuticals, Inc. and Patheon UK Limited.(16) 10.52† Manufacturing and Supply Agreement dated April 4, 2014, by and between Pacira Pharmaceuticals, Inc. and Patheon UK Limited.(16) 10.53† Technical Transfer and Service Agreement dated April 4, 2014, by and between Pacira Pharmaceuticals, Inc. and Patheon UK Limited.(16) 10.54† Second Amendment to Commercial Outsourcing Services Agreement, dated August 25, 2014, between Pacira Pharmaceuticals, Inc. andIntegrated Commercialization Solutions, Inc.(17)21.1 Subsidiaries of Registrant.*23.1 Consent of CohnReznick LLP.*31.1 Certification of President, Chief Executive Officer and Chairman pursuant to Exchange Act Rule 13a-14(a).*31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a).*32.1 Certification of President, Chief Executive Officer and Chairman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of 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 Actof 2002.** Table of Contents101.INS XBRL Instance Document.*101.SCH XBRL Taxonomy 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.*_______________________________________________________________________________(1)Incorporated by reference to the registrant’s Current Report on Form 8-K, filed on February 11, 2011.(2)Incorporated by reference to the exhibits to the registrant’s Registration Statement on Form S-1 (SEC File 333-170245).(3)Incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K, filed on January 23, 2013.(4)Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on March 18, 2013.(5)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on October 31, 2011.(6)Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on December 9, 2011.(7)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on May 9, 2012.(8)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on October 31, 2013.(9)Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on June 4, 2014.(10)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on August 9, 2012.(11)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on November 1, 2012(12)Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on December 4, 2012.(13)Incorporated by reference to the exhibits to the registrant’s Annual Report on Form 10-K, filed on March 7, 2013.(14)Incorporated by reference to the exhibits to the registrant’s Annual Report on Form 10-K, filed on February 25, 2014.(15)Incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q, filed on May 1, 2014.(16)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on July 31, 2014.(17)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on October 30, 2014.*Filed herewith.**Furnished herewith.***Denotes management contract or compensatory plan or arrangement.†Confidential treatment has been granted as to certain portions, which portions were omitted and filed separately with the Securities and ExchangeCommission pursuant to a Confidential Treatment Request.EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Pacira Pharmaceuticals, Inc., a California corporationPacira Pharmaceuticals International, Inc., a Delaware corporation Pacira Ltd., company organized under the laws of the United KingdomExhibit 23.1Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in Registration Statement Nos. 333-175101, 333-181986 and 333-196542 on Form S-8 and RegistrationStatement No. 333-195099 on Form S-3 of our report dated February 24, 2015, on our audits of the consolidated financial statements of PaciraPharmaceuticals, Inc. and Subsidiaries as of December 31, 2014 and 2013, and for each of the three years in the period ended December 31, 2014 and ourreport on our audit of the internal control over financial reporting of Pacira Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2014, dated February24, 2015, included in this Annual Report on Form 10-K of Pacira Pharmaceuticals, Inc. for the year ended December 31, 2014./s/ CohnReznick LLPRoseland, New JerseyFebruary 24, 2015 Exhibit 31.1CERTIFICATIONI, David Stack, certify that:1. I have reviewed this annual report on Form 10-K 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 thestatements 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 thefinancial 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 inExchange 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 theRegistrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes 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 effectivenessof 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 fiscalquarter (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; and5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe 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 reasonablylikely 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 overfinancial reporting.Date:February 24, 2015/s/ DAVID STACKDavid Stack President, Chief Executive Officer and Chairman (Principal Executive Officer)Exhibit 31.2CERTIFICATIONI, James Scibetta, certify that:1. I have reviewed this annual report on Form 10-K 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 thestatements 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 thefinancial 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 inExchange 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 theRegistrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes 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 effectivenessof 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 fiscalquarter (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; and5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe 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 reasonablylikely 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 overfinancial reporting.Date:February 24, 2015/s/ JAMES SCIBETTAJames ScibettaSenior Vice President and Chief Financial Officer(Principal Financial Officer)Exhibit 32.1STATEMENT PURSUANT TO 18 U.S.C. §1350Pursuant to 18 U.S.C. §1350, the undersigned certifies that this Annual Report on Form 10-K of Pacira Pharmaceuticals, Inc. for the year endedDecember 31, 2014, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information containedin this report fairly presents, in all material respects, the financial condition and results of operations of Pacira Pharmaceuticals, Inc.Date:February 24, 2015/s/ DAVID STACKDavid Stack President, Chief Executive Officer and Chairman(Principal Executive Officer)Exhibit 32.2STATEMENT PURSUANT TO 18 U.S.C. §1350Pursuant to 18 U.S.C. §1350, the undersigned certifies that this Annual Report on Form 10-K of Pacira Pharmaceuticals, Inc. for the year endedDecember 31, 2014, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information containedin this report fairly presents, in all material respects, the financial condition and results of operations of Pacira Pharmaceuticals, Inc.Date:February 24, 2015/s/ JAMES SCIBETTAJames ScibettaSenior Vice President and Chief Financial Officer(Principal Financial Officer)

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