Pacira BioSciences Inc Annual Report 2016

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, 2016 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 the Registrant’s voting stock held by non-affiliates of the registrant, based upon the closing sale price of the commonstock as reported on the NASDAQ on June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, of $33.73 pershare was $949 million. Shares of common stock held by each director and executive officer (and their respective affiliates) and by each person who owns10 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. Thisdetermination of affiliate status is not necessarily a conclusive determination for other purposes.As of February 22, 2017, 37,525,108 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 2017 annualmeeting of stockholders to be filed no later than 120 days after the end of the registrant’s fiscal year ended December 31, 2016.iTable of ContentsTable of Contents Page No.PART I 2Item 1.Business2Item 1A.Risk Factors21Item 1B.Unresolved Staff Comments45Item 2.Properties45Item 3.Legal Proceedings45Item 4.Mine Safety Disclosures46PART II 46Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities46Item 6.Selected Financial Data47Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations49Item 7A.Quantitative and Qualitative Disclosures about Market Risk62Item 8.Financial Statements and Supplementary Data62Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure62Item 9A.Controls and Procedures62Item 9B.Other Information65PART III 65Item 10.Directors, Executive Officers and Corporate Governance65Item 11.Executive Compensation65Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters65Item 13.Certain Relationships and Related Transactions, and Director Independence65Item 14.Principal Accounting Fees and Services65PART IV 65Item 15.Exhibits, Financial Statement Schedules65Item 16.Form 10-K Summary65Forward-Looking StatementsThis Annual Report on Form 10-K and certain other communications made by us contain 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® (bupivacaine liposome injectable suspension) and our other products; the rate and degree of market acceptance of EXPAREL; the size andgrowth of the potential markets for EXPAREL and our ability to serve those markets; the Company’s plans to expand the use of EXPAREL to additionalindications and opportunities, and the timing and success of any related clinical trials; the related timing and success of United States Food and DrugAdministration supplemental New Drug Applications; the outcome of the U.S. Department of Justice inquiry; the Company’s plans to evaluate, develop andpursue additional DepoFoam®-based product candidates; clinical trials in support of an existing or potential DepoFoam-based product; the Company’s plansto continue to manufacture and provide support services for its commercial partners who have licensed DepoCyt(e); our commercialization and marketingcapabilities and the Company’s and Patheon UK Limited’s ability to successfully and timely construct EXPAREL manufacturing suites. Important factorscould cause our actual results to differ materially from those indicated or implied by forward-looking statements, including those discussed below in Part I-Item 1A. Risk Factors. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information,future events or otherwise, and readers should not rely on the forward-looking statements as representing our views as of any date subsequent to the date ofthe 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 the Company’s actual results,levels of activity, performance or achievements to differ materially from those expressed or implied by these statements. These factors include the mattersdiscussed and referenced in Part I-Item 1A. Risk Factors.1Table of ContentsPART IItem 1. BusinessReferencesPacira Pharmaceuticals, Inc., a Delaware corporation, is the holding company for our California operating subsidiary of the same name, or PaciraCalifornia. In March 2007, we acquired Pacira California from SkyePharma Holdings, Inc., or Skyepharma (referred to in this Annual Report on Form 10-K asthe “Acquisition”). Unless the context requires otherwise, references to “Pacira,” “we,” the “Company,” “us” and “our” in this Annual Report on Form 10-Krefers to Pacira Pharmaceuticals, Inc., a Delaware corporation, and its subsidiaries.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 in Parsippany, New Jersey.Pacira®, EXPAREL®, DepoFoam®, DepoCyt® (United States (US) registration), DepoCyte® (European Union (EU) registration), DepoTXA®, the Paciralogo and other trademarks or service marks of Pacira appearing in this Annual Report on Form 10-K are the property of Pacira. In addition, references in thisAnnual Report on Form 10-K to DepoCyt(e) mean DepoCyt when discussed in the context of the United States and Canada and DepoCyte when discussed inthe context of the EU.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, manufacture and commercialization of pharmaceutical products, based on ourproprietary DepoFoam extended release drug delivery technology, for use primarily in hospitals and ambulatory surgery centers. We operate in onereportable segment. On October 28, 2011, the US Food and Drug Administration, or FDA, approved our New Drug Application, or NDA, for EXPAREL(bupivacaine liposome injectable suspension). EXPAREL consists of bupivacaine, an amide-type local anesthetic, encapsulated in DepoFoam and isindicated for single-dose infiltration into the surgical site to produce postsurgical analgesia. We believe EXPAREL addresses a significant medical need for along-acting non-opioid postsurgical analgesic, resulting in simplified postsurgical pain management and reduced opioid consumption, and has the potentialto result in improved patient outcomes and enhanced hospital economics. We have developed an internal sales force entirely dedicated to commercializingEXPAREL, which we commercially launched in the United States in April 2012. Our net sales for EXPAREL in 2016 were $265.8 million. We believeEXPAREL is playing a significant role in opioid minimization strategies.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 product candidates. For the years ended December 31, 2016, 2015 and 2014, sales of EXPAREL accounted for 96%, 96%and 95% of our total revenues, respectively.2Table of ContentsOur current product portfolio and product candidate pipeline, along with expected milestones, are summarized in the table below:Proprietary Pipeline: Product / Product CandidatesStatusNext Expected Milestone EXPAREL: Surgical infiltrationApproved (US)Series of Phase 4 data readouts Total knee arthroplasty (TKA)Phase 4Publication of Phase 4 trial SpinePhase 4Report data from Phase 4 trial in second-half 2017 C-SectionPhase 4Initiate Phase 4 trial in 2017 ColorectalPhase 4Initiate Phase 4 trial in 2017 Breast reconstructionPhase 4Initiate Phase 4 trial in 2017 Gynecologic oncology 1Phase 4Report top-line data in 2018 Nerve block (NB)Phase 3Report top-line data from Phase 3 trials in mid-2017 EU Surgical infiltration/NBPhase 3 (EU)File EU Marketing Authorization Application in Q4 2017 PediatricsPhase 3Finalize clinical strategy DepoTranexamic AcidPhase 2Report data from Phase 2 trial in TKA DepoMeloxicamPreclinicalSubmit Investigational New Drug (IND) application Partnered Pipeline: Product / Product Candidates DepoCyt(e) (cytarabine liposome injection): Lymphomatous meningitisApprovedLeadiant Biosciences Ltd.2 (US) and MundiPharma (EU) NOCITA® (bupivacaine liposome injectable suspension): Surgical infiltration in dogsApprovedAratana Therapeutics1 - Trial being conducted at MD Anderson Cancer Center under a Pacira Grant2 - Formerly Sigma-Tau Rare Disease Ltd.NOCITA® is a registered trademark of Aratana Therapeutics, Inc.Our StrategyOur goal is to be a leading specialty pharmaceutical company focused on the development, manufacture and commercialization of proprietarypharmaceutical products primarily for use in hospitals and ambulatory surgery centers. We plan to achieve this by:•commercializing EXPAREL in the United States for postsurgical analgesia by infiltration;•maintaining a streamlined commercial organization concentrating on major hospitals and ambulatory surgery centers in the US and targetingsurgeons, anesthesiologists, pharmacists and nurses;•utilizing strategic commercial partnerships to broaden the use of EXPAREL;•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;•educating strategic commercial audiences for local infiltration procedures, including soft tissue, orthopedic, anesthesia (such as infiltrationinto the transversus abdominis plane, or TAP block) and oral and maxillofacial surgeries, to ensure appropriate use of the product;•obtaining FDA approval for additional indications for EXPAREL, including nerve block;•manufacturing our DepoFoam-based products, including EXPAREL, in facilities compliant with the FDA’s current Good ManufacturingPractices, or cGMP, and expanding such manufacturing capacity to meet demand;3Table of Contents•continuing to expand our marketed product portfolio through development of additional DepoFoam-based hospital products utilizing aSection 505(b)(2) strategy, which permits the reliance upon previous findings of safety and effectiveness for an approved product; and•continuing research and development partnerships to provide DepoFoam-based products to enhance the duration of action and patientcompliance for partner products.EXPARELThe US is in the midst of an opioid epidemic, with the Centers for Disease Control and Prevention (CDC) estimating that 91 people die every day froman opioid overdose. Unfortunately, research also shows that surgery has become an inadvertent gateway to opioid abuse and can put patients at serious riskfor addiction and dependence. A 2016 survey found that one-in-ten patients prescribed an opioid following surgery report becoming addicted to ordependent on the drug. With an estimated 70 million procedures in the US providing access to opioids annually, these findings suggest that as many as 7million patients could develop an opioid addiction or dependency this year.Based on our clinical data, EXPAREL provides continuous and extended postsurgical analgesia and reduces the consumption of opioid medications.We believe EXPAREL simplifies postsurgical pain management, minimizes breakthrough episodes of pain and has the potential to result in improved patientcare and outcomes, as well as enhanced hospital economics.We are advancing a three-part growth strategy to expand the use of EXPAREL to fulfill our mission to provide an opioid alternative to as manyappropriate patients as possible:•First, we are advancing the understanding among our customers and patients that the operating room, in the absence of EXPAREL as part of a non-narcotic multimodal pain management, has served as a gateway to the opioid epidemic. In 2016, we initiated a robust public relations campaign thatfocuses on opioid-sparing solutions. We are educating patients about the availability of an opioid alternative and empowering them to talk to theirhealthcare providers about their pain treatment options. We are also working directly with healthcare providers to define opioid-sparing strategies toimprove patient care, patient satisfaction and economic benefits.•Second, we are investing in clinical trials in a number of key surgical procedures to expand the EXPAREL label to include nerve block, and todemonstrate procedure-specific pain reduction, opioid reduction and best-practice surgical infiltration techniques within the currently approvedindication. In pursuit of a new indication in nerve block, we have initiated two pivotal Phase 3 trials comparing the effect of EXPAREL versusplacebo through a femoral nerve block trial for total knee arthroplasty, or TKA, and a brachial plexus block trial for total shoulder arthroplasty, orrotator cuff repair procedures. We have reported positive topline results from our completed Phase 4 multicenter, randomized, double-blind,controlled, parallel group trial in TKA, we have initiated a spine study, we expect to initiate studies in 2017 in C-section, colorectal surgery andbreast reconstruction and we have funded an ongoing study at MD Anderson Cancer Center in gynecologic oncology. We believe positive data fromour Phase 4 studies will lead to improved patient outcomes and customer satisfaction.•Third, we are forming strategic collaborations to expand education on the importance of non-opioid multimodal alternatives for post-surgical painmanagement and to broaden our commercial reach. These include agreements with industry partners, as well as healthcare providers and hospitalsystems to support their implementation of opioid-sparing enhanced recovery protocols. In January 2017, we announced a co-promotion agreementwith DePuy Synthes Sales Inc., part of the Johnson & Johnson family of companies, to support the promotion, education and training of EXPARELin orthopedics.EXPAREL Clinical BenefitsEXPAREL can 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: •provides long-lasting postsurgical analgesia;•is a ready-to-use formulation;•expands easily with saline or lactated Ringer’s to reach a desired volume;4Table of Contents•leverages existing postsurgical infiltration administration techniques; and•facilitates treatment of both small and large surgical sites.EXPAREL can 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 significantly delays and reducesopioid usage while improving postsurgical pain management.In our Phase 3 hemorrhoidectomy trial, EXPAREL:•delayed the median time to rescue analgesic use (opioids) to 15 hours for patients treated with EXPAREL and one hour for patients treatedwith 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.EXPAREL can 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 barriers to earlier ambulation and mayintroduce catheter-related issues, including infection; and•promotes maintenance of early postsurgical pain management, which may reduce the time spent in the intensive care unit.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 the senior leadership of our hospital customers, group purchasing organizations, integrated healthnetworks, quality improvement organizations, KOLs in the field of postsurgical pain management and leading influencer hospitals 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 the potential for opioid-related adverse events.EXPAREL Label ExpansionNerve BlockWe are pursuing additional indications to expand the label for EXPAREL. Our most advanced development program is evaluating EXPAREL for nerveblock. Nerve block is a general term used to refer to the injection of local anesthetic onto or near nerves for pain control. Traditionally, nerve blocks aresingle injections of short-acting anesthetics and as a result, have a limited duration of action. When extended pain management is required, a catheter is usedto deliver bupivacaine continuously using an external pump. EXPAREL is designed to provide extended pain management using a single injection.5Table of ContentsIn the first quarter of 2016, we initiated two pivotal Phase 3 nerve block trials comparing the effect of EXPAREL versus placebo through a femoralnerve block trial for TKA and a brachial plexus block trial for total shoulder arthroplasty or rotator cuff repair procedures. We believe that this new indicationwill present an alternative long-term method of pain control with a single injection, replacing the costly and cumbersome standard of care requiring aperineural catheter, drug reservoir and pump needed to continuously deliver bupivacaine.If our trials are successful, we intend to file a supplemental New Drug Application, or sNDA, for nerve block in the middle of 2017 for a six-monthPrescription Drug User Fee Act, or PDUFA, review. We believe that this additional indication for EXPAREL will allow us to fully leverage our manufacturingand commercial infrastructure.PediatricsThe FDA, as a condition of EXPAREL approval, has required us to study EXPAREL in pediatric patients. We were granted a deferral for the requiredpediatric trials in all age groups for EXPAREL in the setting of wound infiltration and plan to conduct these pediatric trials as a post-marketing requirement,which was stated in the NDA approval letter for EXPAREL. We recently secured feedback from the FDA on the pediatric trial design in all age groups and weare in the process of finalizing our clinical strategy.EXPAREL Phase 4 Clinical TrialsWe are investing in a series of blinded, randomized, bupivacaine-comparator Phase 4 trials in key surgical procedures. These trials are designed toassess the differences in postsurgical pain and opioid use between patients receiving EXPAREL as the foundation of a multimodal analgesic regimen versus abupivacaine-based multimodal analgesic regimen. Our Phase 4 trials are also designed to support clinician education on procedure-specific best-practicecare.For each of our Phase 4 trials we are taking the following approach:•publishing procedure-specific technique and best-practice protocol to demonstrate (i) volume expansion to ensure proper coverage of thesurgical field, (ii) admixing with bupivacaine to ensure pain relief that spans both the acute and later postsurgical periods and (iii) properinfiltration technique;•creating KOL educational videos of proper technique;•using virtual reality simulation to provide an immersive, hands-on training experience to reinforce recommended EXPAREL technique; and•publishing trial results.Third Molar Procedures and Introduction of 133mg Dose in a 10mL VialWe have completed a Phase 4 randomized, controlled trial in third molar (wisdom teeth) procedures, with a per-protocol analysis demonstratingstatistical significance and an intention-to-treat analysis strongly trending towards significance.In September 2016, we launched EXPAREL to the oral and maxillofacial market by introducing a 133mg dose contained in a 10mL vial for use inpatients undergoing third molar (wisdom teeth) extractions. We believe the 133mg dose will also find adoption among plastic surgeons. We introduced the133mg dose in a 10-pack and a 4-pack so that oral surgeons and doctors at smaller surgical centers will have easier access to provide EXPAREL to theirpatients.In 2017, we expect to introduce the 133mg dose into the hospital and ambulatory surgery marketplaces. To date, EXPAREL has only been available inthe hospital and ambulatory surgery marketplaces in a 266mg dose contained in a 20mL vial. The 266mg dose, containing twice as much pain relieving drugas the 133mg dose, provides greater pain relief over a longer duration of time. However, we believe the 133mg dose in a 10mL vial could gain adoption insmaller surgical wounds such as foot and ankle surgeries, where 10mL covers the area of the surgery and where the larger 266mg dose in a 20mL vial is toomuch volume for the wound site.Total Knee ArthroplastyWe recently announced positive top-line results from a Phase 4 multicenter, randomized, double-blind, controlled, parallel group trial in patientsundergoing a primary unilateral TKA. The trial compared EXPAREL-based local analgesia infiltration to6Table of Contentsstandard bupivacaine-based local analgesia infiltration, each as part of a standard multi-modal analgesic protocol. Patients were randomized to receive localinfiltration analgesia with EXPAREL admixed with bupivacaine and expanded in volume to local infiltration analgesia with bupivacaine expanded involume. The trial met its co-primary endpoints for postsurgical pain (p=0.0381) and opioid reduction (p=0.0048). We plan to report the statistical results forcertain key secondary endpoints from this study in the first quarter of 2017. The full results will be submitted for publication in a peer-reviewed medicaljournal.Spinal FusionWe are advancing a Phase 4 multicenter, randomized, double-blind, controlled trial of EXPAREL for postsurgical pain management in patientsundergoing open lumbar spinal fusion surgery. Patients will be randomized to receive local infiltration analgesia with EXPAREL admixed with bupivacaineand expanded in volume or local infiltration analgesia with bupivacaine expanded in volume. The primary objective of this trial is to compare postsurgicalpain control and the secondary objectives will compare additional efficacy, safety and health economic outcomes. We expect to report top-line data from thistrial in the second half of 2017.Soft Tissue TrialsIn 2017, we plan to initiate a series of Phase 4 trials in soft tissue procedures with EXPAREL as part of an Enhanced Recover After Surgery, or ERAS,protocol. These will include a C-Section trial with a two-point TAP, a colorectal trial evaluating a four-point TAP and a unilateral breast reconstruction trial.These trials will evaluate opioid use and postsurgical pain control, as well as a number of additional efficacy, safety and health economic outcomes.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 $7.2 million from our commercial partners in 2016.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, do not require reconstitution or mixing with another solution, and can be used withpatient-friendly narrow gauge needles and pen systems;•Multiple regulatory precedents. Our current and past DepoFoam products have been approved in the United States and Europe, makingregulatory authorities familiar with our DepoFoam technology;•Extensive safety history. Our DepoFoam products have over 15 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;7Table of Contents•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.In January 2015, we announced two product candidates to our DepoFoam based pipeline: DepoTranexamic Acid, or DepoTXA, and DepoMeloxicam, orDepoMLX.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 preventing the breakdown of a clot. The current formulation of tranexamic acid, however, has a short-lived effect consisting of only afew hours, while the risk of bleeding continues for two to three days after surgery. We believe DepoTXA, a long-acting local antifibrinolytic agent combiningimmediate and extended release TXA, could address the unmet, increasing need for rapid ambulation and discharge in the ambulatory surgery environmentfor joint surgery (primarily orthopedic surgery, including spine and trauma procedures and cardiothoracic surgery). Designed for single-dose localadministration into the surgical site, DepoTXA could provide enhanced hemostabilization and improved safety and tolerability for patients over the systemicuse of TXA by reducing bleeding, the need for blood transfusions, swelling, soft tissue hematomas and the need for post-operative drains, thereby increasingvigor in patients while decreasing overall costs to the hospital system.DepoTXA is currently in Phase 2 clinical development.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 a commonly used NSAID on the market today. We expect our customeraudience for this drug to be similar to the target for EXPAREL infiltration.We expect to submit an Investigational New Drug, or IND, application and subsequently initiate a Phase 1 clinical trial of DepoMLX in 2017.Research and DevelopmentIn the years ended December 31, 2016, 2015 and 2014, we spent $45.7 million, $28.7 million and $18.7 million, respectively, on research anddevelopment activities. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Research and Development Expenses.”Sales and MarketingWe have built our marketing and sales organization to commercialize EXPAREL and our product candidates in the US. We intend to out-licensecommercialization rights for other territories. Our goal is to retain significant control over the development process and commercial execution for our productcandidates, while participating in a meaningful way in the economics of all products that we bring to the market. The primary target audience for EXPARELis healthcare practitioners who influence pain management decisions including surgeons, anesthesiologists, pharmacists and nurses.Our field 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;8Table of Contents•working in tandem with hospital staff, such as registered nurses, surgeons, heads of quality, pharmacists and executives, to provide access andresources for drug utilization or medication use evaluations and health outcomes studies, which provide retrospective and prospectiveanalyses for our hospital customers using their own hospital data to demonstrate the true cost of opioid-based postsurgical pain control;•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;•undertaking education initiatives such as center of excellence programs; preceptorship programs; pain protocols and predictive models forenhanced patient care; interactive discussion forums; patient education platforms leveraging public relations, advocacy partnerships andpublic affairs efforts where appropriate; web-based training and virtual launch programs; and•collaborating with surgeons towards improving the knowledge and management of pain in surgical patients with a focus on opioid risk andnon-opioid alternatives and engaging our field-based medical teams in system-wide partnerships to address the national opioid epidemic,with a goal of studying alternative postsurgical pain management options that focus on optimization and opioid alternative strategies.DePuy Synthes Sales Inc.In January 2017, we entered into a co-promotion agreement with DePuy Synthes Sales Inc., or DePuy Synthes, to market and promote the use ofEXPAREL for orthopedic procedures in the US market. Through this collaboration, we believe we can accelerate the EXPAREL growth strategy by quicklyleveraging the broad reach of DePuy Synthes and their established relationships and scale within hospitals and ambulatory surgery centers.DePuy Synthes field representatives, specializing in joint reconstruction, spine, sports medicine and trauma, will collaborate with, and supplement, ourfield teams by expanding the reach and frequency of EXPAREL education in the hospital surgical suite and ambulatory surgery center settings. DePuySynthes will also include EXPAREL in their Orthopedic Episode of Care Approach for health systems and surgeons. In addition to supporting DePuySynthes, we will focus on soft tissue surgeons in key specialties and anesthesiologists, and continue to act as the overall EXPAREL account manager.We will also work with DePuy Synthes to develop ERAS protocols to improve procedure-specific patient care and to then rapidly communicateopportunities to utilize EXPAREL-based multimodal pain strategies to minimize opioids and improve patient satisfaction and hospital economics.DePuy Synthes is entitled to commissions on sales of EXPAREL under the agreement, subject to conditions, limitations and adjustments. The initialterm of the agreement commences on January 24, 2017 and ends on December 31, 2021, with the option to extend the agreement in 12 month incrementsupon mutual agreement of the parties, subject to certain conditions.We and DePuy Synthes have mutual termination rights under the agreement, subject to certain terms, conditions, and advance notice requirements;provided that we or DePuy Synthes generally may not terminate the agreement, without cause, within three years of the effective date of the agreement. Wealso have additional unilateral termination rights under certain circumstances. The agreement contains customary representations, warranties, covenants andconfidentiality provisions, and also contains mutual indemnification obligations. DePuy Synthes is also subject to certain obligations and restrictions,including required compliance with certain laws and regulations and our policies, in connection with fulfilling their obligations under the agreement.Other 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 ofDepoBupivacaine products collected, including EXPAREL, and certain other yet-to-be-developed products as well as milestone payments forDepoBupivacaine products, including EXPAREL as follows:(i)$10.0 million upon first commercial sale in the United States (met April 2012);(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 (met September 2014);(iv)$8.0 million when annual net sales collected reach $250.0 million (met June 2016); and9Table of Contents(v)$32.0 million when annual net sales collected reach $500.0 million.For purposes of meeting future potential milestone payments, with certain exceptions, annual net sales are measured on a rolling quarterly basis.Additionally, we agreed to pay to Skyepharma a certain percentage of net sales of DepoBupivacaine products, including EXPAREL, collected in theUnited States, Japan, the United Kingdom, France, Germany, Italy and Spain. Such obligations to make percentage payments will continue for the term inwhich such sales related to EXPAREL are covered by a valid claim in certain patent rights related to EXPAREL and other biologics products. Cumulativelythrough December 31, 2016, Skyepharma has earned $22.8 million of percentage payments on net sales of EXPAREL and other DepoBupivacaine productscollected. We have the right to cease paying the percentage payments in the event that Skyepharma breaches certain covenants not to compete contained inthe stock purchase agreement or the last valid patent claim expires.See Note 6, Goodwill and Intangible Assets, to our consolidated financial statements included herein for further information related to the Skyepharmaagreement.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.Leadiant Biosciences Limited (Formerly Sigma-Tau Rare Disease Limited)In December 2002, we entered into a supply and distribution agreement with Enzon Pharmaceuticals Inc., or Enzon, regarding the promotion anddistribution of DepoCyt. Pursuant to the agreement, Enzon was appointed the exclusive distributor of DepoCyt in the United States and Canada for a ten-yearterm, with successive two year renewal periods. In January 2010, Sigma-Tau Rare Disease, Ltd., or Sigma-Tau, acquired the rights to sell DepoCyt from Enzonfor the United States and Canada. In December 2016, Sigma-Tau changed their name to Leadiant Biosciences, Ltd., or Leadiant. We and Leadiant arecurrently operating under the terms of the agreement. Under the supply and distribution agreement, we supply unlabeled DepoCyt vials to Leadiant. Underthese agreements, we receive a fixed payment for the sale of DepoCyt vials, as well as a royalty on their sales in the thirty percent range.We and Leadiant have the right to terminate the agreement for an uncured material breach by the other party or in the event that a generic pharmaceuticalproduct that is therapeutically equivalent to DepoCyt is commercialized. We may terminate the agreement if certain minimum sales targets are not met byLeadiant. Leadiant may terminate the agreement if, as a result of a settlement or a final court or regulatory action, the manufacture, use or sale of DepoCyt inthe United States is prohibited.Mundipharma 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 the sale of DepoCyte vials, as well as a royalty in the thirty percentrange. If annual sales exceed a certain amount, we receive an additional mid single-digit royalty. We are also entitled to receive up to €10.0 million inmilestone payments from Mundipharma upon the achievement by Mundipharma of certain milestone events, of which we have already received €2.5 millionand 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 bythe other party, in connection with the other party’s bankruptcy or insolvency or the repossession of all or any material part of the other party’s business orassets. Mundipharma has the right to terminate the agreement if its marketing authorization is cancelled or withdrawn for a certain period, or if it is preventedfrom selling DepoCyte in any three countries in the territory covered in the agreement by a final non-appealable judgment in respect of infringement byDepoCyte of any third-party intellectual property rights.10Table of ContentsAratana Therapeutics, Inc.In December 2012, we entered into an Exclusive License, Development and Commercialization Agreement and related Supply Agreement with AratanaTherapeutics, 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. In August2016, the FDA’s Center for Veterinary Medicine approved NOCITA® (bupivacaine liposome injectable suspension) as a local post-operative analgesia forcranial cruciate ligament surgery in dogs. Aratana began purchasing bupivacaine liposome injectable suspension product in the third quarter of 2016.In connection with its entry into the license agreement, we received a one-time payment of $1.0 million. In December 2013, we received a $0.5 millionmilestone payment under the agreement. In June 2016, we recorded $1.0 million in milestone revenue for Aratana’s filing of an FDA Administrative NewAnimal Drug Application, or ANADA, and in August 2016 recorded $1.0 million related to the FDA’s approval of the ANADA. We are eligible to receive upto an additional aggregate $40.0 million upon the achievement of commercial milestones. Aratana is required to pay us a tiered double-digit royalty on netsales made in the United States. If the product is approved by foreign regulatory agencies for sale outside of the United States, Aratana will be required to payus 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 animalhealth indications into a jurisdiction or if Aratana must pay royalties 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 the supply agreement. In the event that the license agreement is terminated, all rights to the product (on a jurisdiction byjurisdiction basis) will be terminated and 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.NOCITA® is a registered trademark of Aratana Therapeutics, Inc.CrossLink BioScience, LLCIn October 2013, we formed a five-year arrangement with CrossLink BioScience, LLC, or CrossLink, for the promotion and sale of EXPAREL, pursuantto the terms of a Master Distributor Agreement. On June 30, 2016, we provided notice to CrossLink electing to terminate the agreement (as amended)effective as of September 30, 2016. In connection with the termination, a fee based on a percentage of earned performance-based fees is due toCrossLink. This fee of $7.1 million is payable to CrossLink quarterly over two years, and is recorded in selling, general and administrative expense in theconsolidated statements of operations.Significant CustomersWe had three customers each comprising 10% or more of our total revenue for the year ended December 31, 2016: Cardinal Health, Inc., McKessonDrug Company and AmerisourceBergen Health Corporation, which accounted for 32%, 28% and 26% of our revenues, respectively. These customers arewholesalers that process orders for EXPAREL under a drop-ship program. EXPAREL is delivered directly to end-users without the wholesalers ever takingphysical possession of the product.11Table of ContentsManufacturing and Research FacilitiesInternal FacilitiesWe manufacture EXPAREL and DepoCyt(e) in two manufacturing facilities in San Diego, California. These facilities are designated as Building 1 andBuilding 6 and are located within two miles of each other on two separate and distinct sites. We also have a research and development facility, Building 2,which sits adjacent to Building 1, and a warehouse, Building 7, located within five miles of our manufacturing facilities. We refer to these four buildings asthe Science Center Campus, and together these four buildings consist of approximately 172,000 square feet. Our manufacturing facilities are inspectedregularly and approved for pharmaceutical manufacturing by the FDA, the European Medicines Agency, or EMA, the Medicines and Healthcare ProductsRegulatory Agency, or MHRA, and the Environmental Protection Agency.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, such suppliers may not sell these raw materials to us at the times that we need them or on commercially reasonableterms and we do not have direct control over the availability 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 research anddevelopment and manufacturing facility in 1995. Activities in this facility include the manufacture of EXPAREL bulk product on dedicated production linesand its fill/finish into vials, microbiological and quality control testing, product storage, development of analytical methods and manufacturing ofdevelopment products. Prior to 2014, the bulk manufacturing of all EXPAREL product sold to the marketplace had occurred in a manufacturing line housedin what we refer to as Suite A. In 2014, the FDA approved our recently installed manufacturing lines, referred to as Suite C. Suite C significantly increased ourmanufacturing capacity and ability to meet the growing demand for EXPAREL. In 2017, we expect Suite A to be used for both commercial production ofEXPAREL and for the production of clinical material for development products. We are expanding our EXPAREL manufacturing capacity directly andthrough agreements with a third-party, Patheon U.K. Limited, or Patheon, as demand for EXPAREL increases, as explained below.Building 2 is a recently renovated approximately 45,000 square foot steel and concrete structure located adjacent to Building 1, originally built as apharmaceutical research and development lab and office building in 2003. We moved most of our Science Center related general and administrativefunctions to this building in 2015, as roughly half of the building is office space. The other half of the building is being used for research and developmentactivities as it includes both laboratories and the building infrastructure necessary to support the formulation, analytical testing, clinical and processdevelopment activities for additional commercial product indications and new pipeline products.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.Building 7 is an approximately 21,000 square foot concrete panel structure built in 1988 which serves as the main cGMP warehouse for all of our SanDiego operations. It was recently renovated in early 2014 to support the expansion of EXPAREL. The warehouse is primarily used for the storage of materialsused in the production of our products. It contains ambient as well as cold temperature cGMP warehouse storage for materials used in our manufacturingoperations. It also features a quality control clean room for sampling incoming materials. 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 FacilitiesIn April 2014, we and Patheon entered into a Strategic Co-Production Agreement, Technical Transfer and Service Agreement and Manufacturing andSupply Agreement (the “Patheon Agreements”) to collaborate in the manufacture of12Table of ContentsEXPAREL. Patheon has agreed to undertake certain technical transfer activities and construction services needed to prepare Patheon’s Swindon, Englandfacility for the manufacture 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 for 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 late 2018.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 daysnotice. 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.The initial term of the Manufacturing and Supply Agreement is 10 years from the date of FDA approval of the initial manufacturing suite. We will payfees to Patheon for their operation of the manufacturing suites and the amount of EXPAREL produced by Patheon. We will also reimburse Patheon forpurchases made on our behalf, certain nominal expenses and additional services. We may terminate this agreement upon one month’s notice if a regulatoryauthority causes the withdrawal of EXPAREL from the United States or any other market that represents 80% of our overall sales, or at any time forconvenience by providing between 18 and 36 months notice (depending on the number of years after the FDA approval date). Either party may terminate theManufacturing and Supply Agreement in the event of the breach or bankruptcy of the other party.Upon termination of the Technical Transfer and Service Agreement (other than termination by us for a breach by Patheon), we will pay for the makegood costs occasioned by the removal of our manufacturing equipment, for Patheon’s termination costs up to a maximum amount of $2.4 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 US and foreign patent applications related to ourproprietary technology, inventions and improvements that are important to the development of our business. As of December 31, 2016, 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 the non-provisional filing unless referring to an earlier filed application. Some of our expired US 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. Certain pending patent applicationsmay qualify for patent term adjustment that, if granted, would provide patent protection for EXPAREL beyond 2018. We received an issue notification fromthe United States Patent and Trademark Office, or USPTO, stating that a patent relating to product-by-process and process claims in connection with theproduction of multivesicular liposomes will issue on March 7, 2017. This patent will be listed on the Orange Book for EXPAREL, and includes patent termadjustment that equates to an expiration date of December 24, 2021.Issued patents for EXPAREL in the United States relating to methods for modifying the rate of drug release of the product candidate and thecomposition of the product candidate expired in January 2017 and will expire in September 2018, respectively. Pursuant to 35 U.S.C. § 156, an applicationfor patent term extension was filed with the USPTO in October 2016 in connection with the regulatory approval of Aratana Therapeutics, Inc.’s NOCITA®. AUS patent relating to compositions including EXPAREL, but not EXPAREL specifically, expired in November 2013. A patent relating to the composition ofthe product issued in September 2014 and will expire in September 2018. A patent relating to the method of treatment using EXPAREL issued in December2015 and will expire in September 2018. Two pending US applications relating to the process for making the product candidate, if granted, would expire inNovember 2018 or later. 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. In Europe, a patent relating to methods of modifying the rate of drug release of the product candidate expires in January2018. A pending application in Europe relating to the process for making the product candidate, if granted, would expire in November 2018. In April 2010, aprovisional patent was filed relating to a new process to manufacture EXPAREL and other DepoFoam-13Table of Contentsbased products. The process offers many advantages to the current process, including larger scale production and lower manufacturing costs. In April 2011,we filed an international patent application providing the basis for several non-provisional patent applications, for example in the US, Europe, China andJapan which, if granted, could potentially prevent others from using this process until 2031. In 2016, one such application was granted as a patent in Japan.Also, in 2015, a patent in the People’s Republic of China directed to an apparatus for use in this process was granted. Furthermore, a non-exclusively licensedpatent of ours relating to EXPAREL was allowed in Europe with an expiration date in October 2021 and was extended in the United States until October2023.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, established biotechnology companies, specialty pharmaceutical companiesand generic drug companies. Many of our competitors have greater financial and other resources than we have, such as more commercial resources, largerresearch and development staffs and more extensive marketing and manufacturing organizations. As a result, these companies may obtain marketing approvalmore rapidly than we are able and may be more effective in developing, selling and marketing their products. Smaller or early stage companies may alsoprove 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 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.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, all of which are alsoused in the treatment of postsurgical pain and are available as either oral tablets, injectable dosage forms or administered using novel delivery systems.Additional products may be developed for the treatment of acute pain, including new injectable NSAIDs, novel opioids, new formulations of currentlyavailable opioids and NSAIDs, long-acting local anesthetics and new chemical entities as well as alternative delivery forms of various opioids and NSAIDs.Currently EXPAREL also competes with elastomeric pump/catheter devices intended to provide bupivacaine over several days. I-FLOW Corporation(acquired by Kimberly-Clark Corporation in 2009 and spun off into Halyard Health, Inc. in 2014) has marketed these medical devices in the United Statessince 2004.14Table of ContentsGovernment RegulationIn the United States, prescription drug products are subject to extensive pre- and post-market regulation by the FDA, including regulations that governthe research, development, testing, manufacturing, distribution, safety, efficacy, approval, labeling, storage, record keeping, reporting, advertising andpromotion of such products under the Federal Food, Drug and Cosmetic Act, or FDCA, and its implementing regulations. Outside the United States,prescription drug products are regulated by comparable agencies, laws and regulations. Failure to comply with applicable regulatory requirements in theUnited States or elsewhere may result in, among other things, refusal to approve pending applications, withdrawal of an approval, warning letters, clinicalholds, civil or criminal penalties, recall or seizure of products, injunction, debarment, partial or total suspension of production or withdrawal of the productfrom the market. Any agency or judicial enforcement action could have a material adverse effect on the Company.United States Regulatory EnvironmentGenerally, the FDA must approve any new drug, including a new use of a previously approved drug, before marketing of the drug occurs in the UnitedStates. This process generally involves:•completion of preclinical laboratory and animal testing and formulation studies in compliance with the FDA’s Good Laboratory Practiceregulations (21 CFR 58);•submission to the FDA of an IND application for human clinical testing, which must become effective before human clinical trials may beginfor unapproved use 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;•completion of process validation, quality product release and stability;•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 withcGMP requirements 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 places the trial on a clinical hold because of, among other things, concerns about theconduct of the clinical trial or about exposure of human research subjects to unreasonable health risks. In such a case, the IND sponsor and the FDA mustresolve any outstanding concerns before the clinical trial can begin. Thus, submission of an IND does not by itself automatically result in FDA authorizationto commence a clinical trial. In addition, the FDA requires us to amend an existing IND for each successive clinical trial conducted during productdevelopment. Further, an IRB covering each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial along withinformed consent information for subjects before the clinical trial commences at that center. The IRB also must monitor the clinical trial until it is completed.The FDA, the IRB or the sponsor may suspend a clinical trial at any time, on various grounds, including a finding that the subjects or patients are beingexposed to an unacceptable health risk. We may also suspend or terminate a clinical trial based on evolving business objectives and/or competitive climate.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 the15Table of Contentsrequirement that all research subjects provide their informed consent for their participation in any clinical trial. Sponsors of clinical trials generally mustregister at the NIH-maintained website www.clinicaltrials.gov and report key findings and parameters. For purposes of an NDA submission and approval,typically, the conduct of human clinical trials occurs in the following three pre-market sequential phases, which may overlap or be combined:•Phase 1: Sponsors initially conduct clinical trials in a limited population, either patients or healthy volunteers, to test the product candidatefor safety, dose tolerance, absorption, metabolism, distribution, excretion and clinical pharmacology, and, if possible, to gain early evidenceof effectiveness. In the cases of some products for severe or life-threatening diseases, especially when the product may be too inherently toxicto ethically administer to healthy volunteers, the initial human testing often is conducted only on 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.Some clinical trials may be overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safetymonitoring board or committee. This group provides authorization for whether or not a trial may move forward at designated check points based on access tocertain data from the trial. The process of completing clinical testing and obtaining FDA approval for a new drug is likely to take a number of years andrequires the expenditure of substantial resources. If an application is submitted, there can be no assurance that the FDA will review and approve the NDA. Inaddition, sponsors may elect to conduct, or be required by the FDA to conduct, post-approval clinical trials to further assess the drug’s safety or effectivenessafter NDA approval. Such post approval trials are typically referred to as Phase 4 clinical trials.US Review and Approval ProcessAssuming successful completion of all required testing in accordance with all applicable regulatory requirements, sponsors submit the results of productdevelopment, preclinical studies and clinical trials to the FDA as part of an NDA requesting approval to market the product for one or more indications. NDAsmust also contain extensive information relating to the product’s pharmacology, chemistry, manufacture, controls and proposed labeling, among otherthings. In addition, 505(b)(2) applications must contain a patent certification for each patent listed in FDA’s “Orange Book” that covers the drug referencedin the application and upon which the third-party studies were conducted. For some drugs, the FDA may require risk evaluation and mitigation strategies, orREMS, which could include medication guides, physician communication plans or restrictions on distribution and use, such as limitations on who mayprescribe the drug or where it may be dispensed or administered. Upon receipt of an NDA, the FDA has 60 days to determine whether it is sufficientlycomplete to initiate a substantive review. If the FDA identifies deficiencies that would preclude substantive review, the FDA will refuse to accept the NDA(“refuse to file”) and will inform the sponsor of the deficiencies that must be corrected prior to resubmission. The resubmitted application is also subject toreview before the FDA accepts it for filing. If the FDA accepts the submission for substantive review, the FDA typically reviews the NDA in accordance withestablished timeframes. Under the Prescription Drug User Fee Act, or PDUFA, the FDA establishes goals for NDA review time through a two-tieredclassification system: Priority Review and Standard Review. A Priority Review designation is given to drugs that address and unmet medical need by offeringmajor advances in treatment or providing a treatment where no adequate therapy currently exists. Standard Review applies to all applications that are noteligible for Priority Review. The FDA aims to complete Standard Reviews of NDAs within ten months of submission and Priority Reviews within 6 months.Review processes may sometimes extend beyond these target completion dates due to FDA requests for additional information or clarification, difficultiesscheduling an advisory committee meeting, negotiations regarding REMS or FDA workload issues, but in general under PDUFA the FDA is supposed tocomplete its reviews within the target timeframes despite these factors. The FDA may refer the application to an advisory committee for review, evaluationand recommendation as to the application’s approval. The recommendations of an advisory committee do not bind the FDA, but the FDA generally followssuch recommendations.Under 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.16Table of ContentsBefore 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 approve an NDA contingent on, among other things, changes to proposed labeling, a commitment to conduct one ormore 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 frompreclinical and/or clinical trials not conducted by or for the applicant. The FDA interprets Section 505(b)(2) of the FDCA to permit the applicant to rely uponthe FDA’s previous findings of safety and effectiveness for an approved product. The FDA may also require companies to perform additional clinical trials ormeasurements to support any change from the previously approved product. The FDA may then approve the new product candidate for all or some of thelabel indications for which the referenced product has been approved, as well as for any new indication sought by 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.In 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 trials, 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.17Table of ContentsIn 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 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.In December 2015 we announced that we achieved an amicable resolution with the United States in our lawsuit filed in September 2015 against theFDA and other governmental defendants. The resolution confirms that EXPAREL is, and has been since 2011, broadly indicated for administration into thesurgical site to provide postsurgical analgesia.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 EMA. The marketingapplication is similar to the NDA in the US and is evaluated by the Committee for Medicinal Products for Human Use, or CHMP, the expert scientificcommittee of the EMA. If the CHMP determines that the marketing application fulfills the requirements for quality, safety and efficacy, it will submit afavorable opinion to the European Commission, or EC. The CHMP opinion is not binding, but is typically adopted by the EC. A marketing applicationapproved by the EC is valid in all member states. The centralized procedure is required for all biological18Table of Contentsproducts, orphan medicinal products and new treatments for neurodegenerative disorders, and it is available for certain other products, including those whichconstitute 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.In 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 by19Table of Contentsthird-party payers or that an adequate level or reimbursement will be available so that the third-party payers’ reimbursement policies will not adversely affectour 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 or product complaints must be reported andcould result in the imposition of market restrictions through labeling changes or in product removal. Product approvals may be withdrawn if compliance withregulatory requirements is not maintained or if problems concerning safety or efficacy of the 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 US, federal and stateauthorities 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 be20Table of Contentssubject to the penalty provisions of the pertinent federal and state laws and regulations. Outside the US, other countries have implemented requirements fordisclosure of financial interactions with healthcare providers and additional countries may consider or implement such laws.In April 2015, we received a subpoena from the US Department of Justice, US Attorney’s Office for the District of New Jersey, requiring the productionof a broad range of documents pertaining to marketing and promotional practices related to EXPAREL. We are cooperating with the government’sinquiry. We can make no assurances as to the time or resources that will need to be devoted to this inquiry or its final outcome, or the impact, if any, of thisinquiry or any proceedings on our business, financial condition, results of operations and cash flows.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.EmployeesAs of December 31, 2016, we had 503 employees. All of our employees are located in the United States except for six located in England. 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 1.21Table of ContentsRisks 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 2016, sales of EXPAREL constituted the vastmajority of our total revenue, and we expect it will do so for the foreseeable future. Our success depends on our ability to continue to effectivelycommercialize EXPAREL. Our ability to effectively generate revenues 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.Our 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 five 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 or to encourage use of a lower costdose than a surgeon would otherwise choose in order to control costs. We cannot guarantee that we will be successful in obtaining the approvals we needfrom enough P&T committees quickly enough to optimize hospital sales of EXPAREL.22Table of ContentsEven 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 relative convenience and ease of administration.Market acceptance could be further limited depending on the prevalence and severity of any expected or unexpected adverse side effects associated with ourproduct 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.23Table of ContentsAs 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 trials and approved by the regulatory authorities, our ability to promote the products is narrowlylimited to those indications that are specifically approved by the FDA. These “off-label” uses are common across medical specialties and may constitute anappropriate treatment for some patients in varied circumstances. Regulatory authorities in the United States generally do not regulate the behavior ofphysicians 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 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 consisted of a Dear Healthcare Provider Letter and a corrective journal advertisement. Although the warning letter was subsequently withdrawn weexpect that it had a negative impact on our customers’ perception of us. We can make no assurances that we will not receive FDA warning letters in the futureor be subject to other regulatory action. As noted above, any regulatory violation or allegations of a violation may have a material adverse effect on ourreputation 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 our24Table of Contentsmarketing and sales infrastructure, we may not be able to successfully commercialize EXPAREL, which would limit our ability to generate product 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, in January 2017, we entered into a co-promotion agreement with DePuy Synthes to market and promote the use of EXPARELfor orthopedic procedures in the US market. The initial term of the agreement commences on January 24, 2017 and ends on December 31, 2021, with theoption to extend the agreement in 12 month increments upon mutual agreement of the parties, subject to certain conditions. We may seek additionaldistribution arrangements in the future, including arrangements with third-party distributors to commercialize and sell EXPAREL in certain 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 US 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 services related to customer service support, warehousing andinventory program services, distribution services, contract administration and chargeback processing services, accounts receivable management and cashapplication services, financial management and information technology services. In addition, our inventory is stored at two warehouses maintained by twoservice providers. We substantially rely on these providers as well as other third-party providers that perform services for us, including entrusting ourinventories of products to their care and handling. If these third-party service providers fail to comply with applicable laws and regulations, fail to meetexpected deadlines or otherwise do not carry out their contractual duties to us, or encounter physical or natural damage at their facilities, our ability todeliver product to meet commercial demand would be significantly impaired. In addition, we may engage third parties to perform various other services for usrelating to adverse event reporting, safety database management, fulfillment of requests for medical information regarding our product candidates and relatedservices. If the quality or accuracy of the data maintained by these service providers is insufficient, 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, 2016, we had 503 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 be25Table of Contentsadequate to support this future growth. In addition, we may not be able to recruit and retain qualified personnel in the future, particularly marketingpositions, due to competition for personnel among pharmaceutical businesses, and the failure to do so could have a significant negative impact on our futureproduct revenues and business results. Our need to effectively manage 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.Our 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 Chief Executive Officer and Chairman,James Scibetta, our President and Charles A. Reinhart, III, our Chief Financial Officer. If we lose one or more of these key employees, our ability tosuccessfully implement our business strategy could be seriously harmed. Replacing key employees may be difficult and may take an extended period of timebecause of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of andcommercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate additionalkey personnel.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. We have been a party of these suits in the past and may be again in the future. Ifwe cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claimsmay 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;26Table of Contents•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, including ourindemnification obligations to other parties. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able tomaintain insurance coverage on acceptable terms, at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend toexpand our insurance coverage to include the sale of additional commercial products upon FDA approval for our product candidates in development, but wemay be unable to obtain commercially reasonable product liability insurance for any products approved for marketing, or at all. On occasion, large judgmentshave been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims broughtagainst 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 their interpretation and enforcement of existing standardsfor manufacture, packaging or testing of our products. Any failure by us or our manufacturing partner to comply with applicable regulations may result infines and civil penalties, suspension of production, product seizure or recall, operating restrictions, imposition of a consent decree, modification orwithdrawal of product approval or criminal prosecution and would limit the availability of our product. Any manufacturing defect or error discovered afterproducts have been produced and distributed also could result in significant consequences, including costly recall procedures, re-stocking costs, damage toour 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 ourproduction costs. 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 the equipment for the construction ofmanufacturing suites at Patheon.27Table of ContentsIn addition to expanding our internal manufacturing facilities, we may enter into arrangements with third parties to supply, manufacture, package, testand/or store 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 timely 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 one to two 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 where DepoCyt(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 resumeproduction of DepoCyt(e) for sale in Europe, we may be required in the future to cease manufacturing operations at our facilities in response to inspectionreports or other regulatory 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 and Supply Agreement.Under these agreements, Patheon will undertake certain technical transfer activities and construction services to prepare Patheon’s Swindon, England facilityfor the manufacture of EXPAREL in two dedicated manufacturing suites. We have agreed with Patheon, among other things, to provide them with the processequipment necessary to manufacture EXPAREL in these suites. We have anticipated and budgeted for capital expenditures associated with the two Patheonsuites, 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 late 2018. If theconstruction of the Patheon suites is delayed, if Patheon experiences unanticipated cost overruns, or if the Patheon suites do not receive or maintainregulatory approvals in the timeframe anticipated (if at all), this could have a material adverse effect on our business, financial position and results ofoperations.28Table of ContentsFurther, 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, including our current product candidates DepoMLXand DepoTXA. However, these business activities may entail numerous operational and financial risks, including:•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 may 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. We may also not be successful in developing or commercializing our current product candidates29Table of ContentsDepoMLX and DepoTXA. Such efforts may require the dedication of significant financial and personnel resources, and any diversion of resources may alsodisrupt our management from expanding on EXPAREL sales. Moreover, we may devote resources to potential development, acquisitions or in-licensingopportunities 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.Our 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 we30Table of Contentsbelieve the data collected from clinical trials of our drug products is promising, such data may not be sufficient to support approval by the FDA or any otherUS or foreign regulatory approval authority. Pre-clinical and clinical data 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.We 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 trial. If our clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials or fail to enroll them on ourplanned schedule, we may face increased costs, delays or termination of the trials, which could delay or prevent us from obtaining regulatory approvals forour 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. See Item 3 Legal Proceedings in Part I of this Form 10-K. An unfavorable outcomein either of these or other proceedings could have an adverse impact on our business, financial condition and results of operations. In addition, anysignificant litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantial legal fees. Inaddition, if our stock price is volatile, we may become involved in additional securities class action lawsuits in the future. Any litigation could result insubstantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.31Table of ContentsRegulatory RisksWe are involved in an ongoing inquiry by the United States Department of Justice, the results of which could result in significant liability and have amaterial adverse effect on our sales, financial condition, results of operations and cash flows.In April 2015, we received a subpoena from the US Department of Justice, US Attorney’s Office for the District of New Jersey, requiring the productionof a broad range of documents pertaining to marketing and promotional practices related to EXPAREL. We are cooperating with the government’s inquiry.We cannot estimate what impact this inquiry and any results from this inquiry or any proceedings could have on our business, financial condition, results ofoperations or cash flows. Cooperation with this inquiry may divert the attention of management and require the devotion of a substantial amount of time andresources. The existence of the inquiry could also adversely impact our sales activity or our customers’ perception of us or EXPAREL. Any of these impactscould have a material adverse effect on our business, financial condition, results of operations and cash flows.If, as a result of this inquiry, proceedings are initiated and we are found to have violated one or more applicable laws, we may be subject to significantliability, including without limitation, civil fines, criminal fines and penalties, civil damages and exclusion from federal funded healthcare programs such asMedicare and Medicaid, as well as potential liability under the federal False Claims Act and state false claims acts, and/or be required to enter into acorporate integrity or other settlement with the government, any of which could materially affect our reputation, business, financial condition, results ofoperations and cash flows. Conduct giving rise to such liability could also form the basis for private civil litigation by third-party payors or other personsallegedly harmed by such conduct. In addition, if some of our existing business practices are challenged as unlawful, we may have to change those practices,including changes and impacts on the practices of our sales force, which could also have a material adverse effect on our business, financial condition, resultsof operations and cash flows.Our business could be materially adversely affected if the FDA determines that we are promoting or have in the past promoted the “Off-label” use of drugs.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. According to these regulations, companies may not promote drugs for “Off-label” uses—that is, uses that are not described in the product’slabeling and that differ from those that were approved by the FDA. For example, the FDA-approved label for EXPAREL does not include an indication inobstetrical paracervical block anesthesia. In addition to the FDA approval required for new formulations, any new indication for an approved product alsorequires FDA approval. If we are not able to obtain FDA approval for any desired future indications for our products and product candidates, our ability toeffectively market and sell our products may be reduced 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 trials and approved by the regulatory authorities, under the FDA’s regulations our ability topromote the products is narrowly limited to those indications that are approved by the FDA. “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 of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications by pharmaceutical companies on thesubject 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 such protection is unclear. Moreover, while we promote our products consistent with what we believe to be the approved indication for ourdrugs, the FDA may disagree. If the FDA determines that our promotional activities fail to comply with the FDA’s regulations or guidelines, we may besubject to warnings from, or enforcement action by, these authorities. In addition, our failure to follow FDA rules and guidelines relating to promotion andadvertising may cause the FDA to issue warning letters or untitled letters, bring an enforcement action against us, suspend or withdraw an approved productfrom the market, require a recall or institute fines or civil fines, or could result in disgorgement of money, operating restrictions, injunctions or criminalprosecution, any of which could harm our reputation and our business.In September 2014, we received a warning letter from the OPDP pertaining to certain promotional aspects of EXPAREL. We took actions toimmediately address the FDA’s concerns and minimize further disruption to our business. Ultimately, however, in September 2015, we, along with twoindependent physicians, filed a lawsuit in federal court against the FDA and other governmental defendants seeking to exercise our lawful rights tocommunicate truthful and non-misleading information about EXPAREL. The complaint outlined our belief that the FDA’s warning letter received inSeptember 2014 and regulations restricting our truthful and non-misleading speech about EXPAREL violate the Administrative Procedure Act and the Firstand32Table of ContentsFifth Amendments of the US Constitution. The lawsuit sought a declaration and injunctive relief to permit us to promote EXPAREL consistent with itsapproved indication and pivotal trials that supported FDA approval. On December 15, 2015, we announced that the FDA had formally withdrawn theSeptember 2014 Warning Letter via a “Rescission Letter,” and that the FDA and Pacira had reached an amicable resolution of the lawsuit. As part of theresolution of this matter, the FDA confirmed that EXPAREL was broadly approved for “administration into the surgical site to product postsurgicalanalgesia” in a variety of surgeries not limited to those studied in its pivotal trials. The FDA also approved a labeling supplement for EXPAREL that furtherclarified that EXPAREL was not limited to any specific surgery type or site, that the proper dosage and administration of EXPAREL is based on variouspatient and procedure-specific factors, that there was a significant treatment effect for EXPAREL compared to placebo over the first 72 hours in the pivotalhemorrhoidectomy trial and that EXPAREL may be admixed with bupivacaine, provided certain medication ratios are observed. We and the FDA haveagreed that, in future interactions, the parties will deal with each other in an open, forthright and fair manner.We are unable to predict whether any future regulatory actions will have an effect on EXPAREL sales, and even if such actions are ultimately resolvedfavorably, our sales may suffer due to reputational or other concerns. We can make no assurances that we will not receive FDA warning letters in the future orbe subject to other regulatory action. As noted above, any regulatory violation or allegations of a violation may have a material adverse effect on ourreputation and business.We 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 candidatecould 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:33Table of Contents•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 trials and approved by the regulatory authorities, our ability to promote the products is limited to those indications that are specifically approved bythe FDA. These “off-label” uses are common across medical specialties and may constitute an appropriate treatment for some patients in varied circumstances.Regulatory authorities in the United States generally do not regulate the behavior of physicians 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-labelpromotional activities may be protected under the First Amendment, the scope of any such protection is unclear. If our promotional activities fail to complywith the FDA’s regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, our failure to followFDA rules and guidelines relating to promotion and advertising may cause the FDA to issue warning letters or untitled letters, suspend or withdraw anapproved product from the market, require a recall or institute fines or civil fines or could result in disgorgement of money, operating restrictions, injunctionsor criminal prosecution, any of which could harm our business.If we do not comply with federal, state and foreign laws and regulations relating to the health care business, we could face substantial penalties.We and our customers are subject to extensive regulation by the federal government, and the governments of the states and foreign countries in whichwe may conduct our business. In the United States, the laws that directly or indirectly affect our ability to operate our business include the following:•the Federal Anti-Kickback Law, which prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration,directly or indirectly, in cash or in kind, to induce either the referral of an individual or furnishing or arranging for a good or service for whichpayment may be made under federal health care programs such as Medicare and Medicaid;•other Medicare laws and regulations that prescribe the requirements for coverage and payment for services performed by our customers,including the amount of such payment;•the Federal False Claims Act, which imposes civil and criminal liability on individuals and entities who submit, or cause to be submitted, falseor fraudulent claims for payment to the government;34Table of Contents•the Federal False Statements Act, which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making anymaterially false statement in connection with delivery of or payment for health care benefits, items or services; and•various state laws that impose similar requirements and liability with respect to state healthcare reimbursement and other programs.If our operations are found to be in violation of any of the laws and regulations described above or any other law or governmental regulation to whichwe or our customers are or will be subject, we may be subject to civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaidprograms and the curtailment or restructuring of our operations. Similarly, if our customers are found to be non-compliant with applicable laws, they may besubject to sanctions, which could also have a negative impact on us. Any penalties, damages, fines, curtailment or restructuring of our operations wouldadversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defendagainst it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage ourreputation.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. We, along with our third-partyproviders, must comply with all applicable regulatory requirements of the FDA and foreign authorities. In addition, the facilities used to manufacture, storeand distribute our products are subject to inspection by regulatory authorities at any time to determine compliance with applicable regulations.The manufacturing techniques and facilities used for the manufacture and supply of our products must be operated in conformity with cGMP and 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.The design, development, manufacture, supply and distribution of EXPAREL and DepoCyt(e) is highly complex. As part of our routine stabilitymonitoring that occurred in October 2016, it came to our attention that one of two test batches of EXPAREL made in early 2016 had fallen slightly out ofspecification for one of the 21 acceptance criteria measured during testing. This test result was unexpected and suggestive of some deviation from aconsistency of manufacturing output. As a result, we have been in discussions with the FDA about both a modification of that specification as well as thepotential development of a new analytical test for this attribute. Until that process is completed, we have agreed with the FDA that all EXPARELmanufactured beginning in October 2016 will include 12 month expiration dating. In connection with this issue, in 2016, we recorded a $20.7 million chargeto cost of goods sold. If we are unable to manufacture EXPAREL in compliance with our specifications, we may be subject to product exchanges or othercorrective measures.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 thefailure35Table of Contentsof any contract manufacturers with whom we may work in the future, to comply with the laws administered by the FDA, the MHRA or other governmentalauthorities could result in, among other things, any of the following:•product recall or seizure;•suspension or withdrawal of an approved product from the market;•interruption of production;•reputational concerns of our customers or the medical community;•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 US 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.36Table of ContentsFurther, 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 or international markets, which could have a negative effect on our business, results of operations, financial condition and prospects.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 additional preclinical studies or clinical trials. If the FDA requires us to provide additional clinical or preclinicaldata for EXPAREL, the indications for which this product candidate was approved may be limited or there may be specific warnings or limitations on dosing,and our efforts to commercialize EXPAREL may be 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 third-party 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-37Table of Contentsparty’s ANDA until the earliest of 30 months or the date on which the patent expires, the lawsuit is settled or the court reaches a decision in the infringementlawsuit in favor of the third-party. If we do not file a patent infringement lawsuit within the required 45-day period, the third-party’s ANDA will not besubject to the 30-month stay. Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in nature, may be veryexpensive and time-consuming, may divert our management’s attention from our core business and may result in unfavorable results that could adverselyimpact our ability to prevent third parties from competing with our 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:•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 US patent application relating to our product candidates ora similar invention, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention in the United States.The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a material adverse effect on our USpatent position. Furthermore, we may not have identified all United States and foreign patents or published applications that affect our business either byblocking 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 protection38Table of Contentsagainst competitive products, or otherwise be commercially valuable to us. Furthermore, while we generally apply for patents in those countries where weintend to make, have made, use or sell patented products, we may not accurately predict all of the countries where patent protection will ultimately bedesirable. 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 thatthe patents issuing as a result of our foreign patent applications will have the 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 US patent applications have been granted and provide protection through November 2018 and September 2018, respectively.An existing formulation patent for EXPAREL expired in November 2013. An existing formulation patent for EXPAREL expired in the US in 2013 and itsequivalents in Canada, Germany, France, Spain, Italy and the United Kingdom expired in 2014. Once our patents covering EXPAREL have expired, we willbe 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”, “DepoCyte” and “DepoTXA” marks with the USPTO. A third-party may assert a claim that one of our marks isconfusingly similar to its mark, and such claims or the failure to timely register a mark or objections by the FDA could force us to select a new name for one ofour product candidates, which could cause us to incur additional expense or delay 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 US 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; and39Table of Contents•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 RequirementsCumulatively, we 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.Up until 2015, we had incurred losses in each year since our inception in December 2006. We had a net loss of $37.9 million for the year ended December 31,2016, net income of $1.9 million for the year ended December 31, 2015 and a net loss of $13.7 million for the year ended December 31, 2014. As ofDecember 31, 2016, we had an accumulated deficit of $346.2 million. These losses, among other things, have had, and will continue to have, an adverseeffect on our stockholders’ equity and working capital. We incurred significant pre-commercialization expenses as we prepared for the commercial launch ofEXPAREL, and we incur significant sales, marketing and manufacturing expenses, as well as continued development expenses related to thecommercialization of EXPAREL. As a result, we had not been profitable prior to 2015 and were not profitable in 2016. Because of the numerous risks anduncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses.We may not return to profitability.Our ability to return to profitability depends upon our ability to generate revenue from EXPAREL. Our ability to generate revenue depends on a numberof factors, 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 and are unsure as to whether we will be able toreturn to profitability. If we are unable to generate additional revenues, we will not be able to do so and may be unable to continue operations withoutcontinued funding.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;•in-license and develop additional product candidates; and40Table of Contents•refinance our current convertible senior notes, due February 2019.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;•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, collaboration and licensing arrangements, as well as through interest income earnedon cash and investment balances. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are notavailable, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs or our commercialization efforts.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, lawsuits and investigations 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, in41Table of Contentsturn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful andshould not be relied upon as an indication of our future performance.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.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 2025 for federal purposes and 2017 for state purposes if we have not used them prior to that time. Additionally, our ability to use certain net operating lossand credit carryforwards to offset taxable income or tax, respectively, in the future will be limited under Internal Revenue Code Sections 382 and 383because we experienced cumulative changes in ownership of more than 50% within a three-year period. Such ownership changes were triggered by thecumulative ownership changes arising as a result of the initial acquisition of the Company’s stock in 2007 and the completion of our initial public offeringand our other financing transactions. Because of the ownership changes, we will be limited regarding the amount of net operating loss carryforwards andresearch tax credits that we can utilize annually in the future to offset taxable income or tax, respectively. Such an annual limitation will significantly reducethe utilization of the net operating loss carryforwards and research tax credits before they expire. In addition, California and certain states have suspended useof net operating loss carryforwards for certain taxable years, and other states are considering similar measures. As a result, we may incur higher state incometax expense in the future. Depending on our future tax position, continued suspension of our ability to use net operating loss carryforwards in states in whichwe are subject to income tax could have an adverse impact on our results of operations and financial condition.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 28, 2017, the trading prices of our stockhave ranged from $6.16 to $121.95 per share.Our stock could be subject to wide fluctuations in price in response to various factors, including the following:•the commercial success of EXPAREL;•results of clinical trials of our product candidates or those of our competitors;•changes or developments in laws or regulations applicable to our product candidates;•introduction of competitive products or technologies;•failure to meet or exceed financial projections we provide to the public;•actual or anticipated variations in quarterly operating results;•failure to meet or exceed the estimates and projections of the investment community;•the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;•regulatory concerns or government actions•general economic and market conditions and overall fluctuations in US equity markets;•developments concerning our sources of manufacturing supply;•disputes or other developments relating to patents or other proprietary rights;42Table of Contents•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 our shares.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, 2016, our total consolidated gross indebtedness was $118.5 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 Notesbeing converted. Any credit facility or other agreement that we may enter into may limit our ability to make cash payments at the time of a fundamentalchange or upon 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, byregulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by theindenture or to pay any cash payable on future conversions of the Notes as required by the indenture would constitute a default under the indenture. A defaultunder the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of therelated indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness andrepurchase the Notes or make cash payments upon conversions thereof. In43Table of ContentsFebruary 2015, we received notice of an election for conversion from one of the holders of the Notes. The principal amount of the conversion request was$1.5 million was paid in cash pursuant to the terms of the Indenture. We elected to settle the conversion premium with shares of our common stock. There isno assurance that we will not receive more conversion requests. We have completed other immaterial 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.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.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, 2016, the average per day trading volume of our common stock was 857,234 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 andimpair 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.In 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.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.44Table of ContentsProvisions 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.Item 2. PropertiesWe occupy four facilities totaling approximately 172,000 square feet at our Science Center Campus in San Diego, California. We use these facilities forresearch and development, manufacturing, general and administrative purposes and the storage of inventory and raw materials. All of our properties in SanDiego are under leases which expire in August 2020. In addition, we maintain our executive offices and our commercial and business development facility inParsippany, New Jersey, where we occupy approximately 42,000 square feet under a lease expiring in March 2028.We believe that our research and development and manufacturing facilities at our Science Center Campus and yet-to-be completed Patheon facility (asdiscussed in Item 1-Business above) will be sufficient for our commercial and pipeline development needs. We also may add new facilities or expand existingfacilities as we add employees, expand our geographic markets and if demand for EXPAREL increases and we believe that suitable additional or substitutespace will be available as needed to accommodate any such expansion of 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.In April 2015, we received a subpoena from the US Department of Justice, US Attorney’s Office for the District of New Jersey, requiring the productionof a broad range of documents pertaining to marketing and promotional practices related to EXPAREL. We are cooperating with the government’sinquiry. We can make no assurances as to the time or resources that will need to be devoted to this inquiry or its final outcome, or the impact, if any, of thisinquiry or any proceedings on our business, financial condition, results of operations and cash flows.45Table of ContentsItem 4. Mine Safety DisclosuresNot applicable.PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is listed under the ticker symbol “PCRX” on The NASDAQ Global Select Market. The following table sets forth, for the periodsindicated, the high and low intraday sales prices of our common stock as reported by the NASDAQ:Year Ended 2016 High LowFourth Quarter $38.20 $29.95Third Quarter 46.22 32.16Second Quarter 65.64 31.08First Quarter 76.75 44.15Year Ended 2015 High LowFourth Quarter $80.25 $35.78Third Quarter 72.98 39.29Second Quarter 93.22 65.00First Quarter 121.95 82.00On February 22, 2017, the closing price of our common stock as reported on The NASDAQ Global Select Market was $43.15 per share and we hadapproximately 13 holders of record of our common stock.Performance GraphThe following graph shows the value of an investment of $100 on December 31, 2011, in each of Pacira common stock (PCRX), the NASDAQComposite index (^IXIC) and the NASDAQ Biotechnology index (^NBI). The indices are included for comparative purposes only and do not necessarilyreflect management’s opinion that such indices are an appropriate measure of the relative performance of our common stock. All results assume thereinvestment of dividends, if any, and are calculated as of December 31 of each year. The historical stock price performance of our common stock shown inthe performance graph is not necessarily indicative of future stock price performance.46Table of ContentsComparison of Cumulative Total Returns Cumulative Total Return Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, 2011 2012 2013 2014 2015 2016Pacira Pharmaceuticals, Inc. (PCRX)$100.00 $201.97 $664.62 $1,024.97 $887.75 $373.41NASDAQ Composite (^IXIC)100.00 115.91 160.32 181.44 192.21 206.63NASDAQ Biotechnology (^NBI)100.00 131.91 218.45 295.37 326.39 255.62Dividend 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 any other factors the board deems relevant.Item 6. Selected Financial DataThe following tables provide selected consolidated financial data. We have prepared this information using our audited consolidated financialstatements as of and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012. The following consolidated financial data should be read inconjunction with our consolidated financial statements and related notes and Item 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included in this report.47Table of Contents Year Ended December 31, 2016 2015 2014 2013 2012Statement of Operations Data(In thousands, except per share data)Revenues: Net product sales$270,073 $244,487 $193,526 $81,956 $18,191 Collaborative licensing and milestone revenue3,426 1,426 1,287 972 18,390 Royalty revenue2,872 3,084 2,855 2,623 2,503 Total revenues276,371 248,997 197,668 85,551 39,084Operating expenses: Cost of goods sold110,1041 71,837 77,440 54,772 32,139 Research and development45,678 28,662 18,731 21,560 9,937 Selling, general and administrative152,6132 139,043 106,662 62,508 46,306 Total operating expenses308,395 239,542 202,833 138,840 88,382Income (loss) from operations(32,024) 9,455 (5,165) (53,289) (49,298)Other (expense) income: Interest income1,323 678 382 259 275 Interest expense(7,061) (7,725) (8,278) (7,253) (1,807) Loss on early extinguishment of debt— (52) — (3,398) (1,062) Royalty interest obligation— (71) (323) (623) (278) Other, net(82) (165) (159) (47) (111) Total other expense, net(5,820) (7,335) (8,378) (11,062) (2,983)Income (loss) before income taxes(37,844) 2,120 (13,543) (64,351) (52,281) Income tax (expense) benefit(105) (264) (173) 442 —Net income (loss)$(37,949) $1,856 $(13,716) $(63,909) $(52,281) Net income (loss) per share: Basic net income (loss) per common share$(1.02) $0.05 $(0.39) $(1.93) $(1.72) Diluted net income (loss) per common share$(1.02) $0.04 $(0.39) $(1.93) $(1.72)Weighted average common shares outstanding: Basic37,236 36,540 35,299 33,182 30,332 Diluted37,236 41,301 35,299 33,182 30,3321 - Includes a $20.7 million charge for inventory and related reserves for the cost of EXPAREL batches impacted by a routine stability test that did not meet required specifications.For further discussion of this charge, see Note 4, Inventories, to our consolidated financial statements included herein.2 - Includes a $7.1 million contract termination charge due to CrossLink Bioscience, LLC. For further discussion of this charge, see Note 15, Commercial Partners and OtherAgreements, to our consolidated financial statements included herein. December 31, 2016 2015 2014 2013 2012Balance Sheet Data(In thousands)Cash and cash equivalents, restricted cash,short-term and long-term investments$172,597 $172,427 $182,598 $73,785 $42,573Working capital (deficit) 3198,251 102,794 71,715 (18,345) 46,766 Total assets 3391,466 387,735 323,540 166,668 111,722Long-term liabilities 3127,652 19,555 14,917 6,628 32,376Accumulated deficit(346,238) (308,289) (310,145) (296,429) (232,520) Total stockholders’ equity218,976 218,392 171,145 41,249 65,8553 - Includes a reclassification in prior periods of deferred financing costs per Accounting Standards Update 2015-03 Interest—Imputation of Interest (Subtopic 835-30): Simplifying thePresentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carryingamount of the related debt liability instead of being presented as an asset. This retrospective application is described further in Note 3, Recent Accounting Pronouncements, to ourconsolidated financial statements included herein.48Table 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, manufacture and commercialization of pharmaceutical products, based on ourproprietary DepoFoam extended release drug delivery technology, for use primarily in hospitals and ambulatory surgery centers. As of December 31, 2016,our product portfolio includes two commercial stage products—EXPAREL® and DepoCyt(e), and two earlier-stage compounds—DepoTranexamic Acid, orDepoTXA and DepoMeloxicam, or DepoMLX.•EXPAREL is a liposome injection of bupivacaine, an amide-type local anesthetic indicated for single-dose administration into the surgical siteto produce postsurgical analgesia. EXPAREL was approved by the United States Food and Drug Administration, or FDA, on October 28, 2011and commercially launched in April 2012. We drop-ship EXPAREL directly to end users based on orders placed to wholesalers or directly to us.We do not have any 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 our inception, we have incurred significant operating losses. We expect to continue to incur significant expenses as we further commercializeEXPAREL; pursue expanded uses of EXPAREL in additional indications and opportunities; advance the development of DepoFoam-based productcandidates, such as DepoMLX and DepoTXA; seek FDA approval for our product candidates that successfully complete clinical trials; develop our salesforce and marketing capabilities to prepare for their commercial launch; expand and enhance our manufacturing capacity for EXPAREL and supportregulatory and legal matters.Recent Highlights and Developments•Total revenues increased $27.4 million, or 11%, in the year ended December 31, 2016, as compared to 2015, primarily driven by EXPARELproduct sales of $265.8 million, net of allowances for sales returns, prompt payment discounts, volume rebates, chargebacks and distributionservice fees payable to wholesalers.•In March 2017, we announced positive top-line results from a Phase 4 multicenter, randomized, double-blind, controlled, parallel group trial inpatients undergoing a primary unilateral TKA. The trial compared EXPAREL-based local analgesia infiltration to standard bupivacaine-basedlocal analgesia infiltration, each as part of a standard multi-modal analgesic protocol. Patients were randomized to receive local infiltrationanalgesia with EXPAREL admixed with bupivacaine and expanded in volume to local infiltration analgesia with bupivacaine expanded involume. The trial met its co-primary endpoints for postsurgical pain control (p=0.0381) and opioid reduction (p=0.0048). We plan to report thestatistical results for certain key secondary endpoints from this study in the first quarter of 2017. The full results will be submitted for publicationin a peer-reviewed medical journal.•In February 2017, we received an issue notification from the United States Patent and Trademark Office stating that a patent relating to product-by-process and process claims in connection with the production of multivesicular liposomes will issue on March 7, 2017. This patent will belisted on the Orange Book for EXPAREL, and includes a patent term adjustment that equates to an expiration date of December 24, 2021. Forfurther discussion, see “Intellectual Property and Exclusivity” in Item 1. “Business” included in this report.•In January 2017, we announced the initiation of an agreement with DePuy Synthes Sales, Inc., or DePuy Synthes, to market and promote the use ofEXPAREL for orthopedic procedures in the United States market. DePuy Synthes field representatives, specializing in joint reconstruction, spine,sports medicine and trauma, will collaborate with, and supplement our field teams by expanding the reach and frequency of EXPAREL educationin the hospital surgical suite and ambulatory surgery center settings. We believe our collaboration with DePuy Synthes will49Table of Contentsaccelerate and enhance our education and training efforts with orthopedic customers as we aim to broaden and strengthen the adoption and use ofEXPAREL. In addition to supporting DePuy Synthes, we will focus on soft tissue surgeons in key specialties and anesthesiologists, and continueto act as the overall EXPAREL account manager.•In 2016, we recorded a $20.7 million charge to cost of goods sold related to a stability out-of-specification test batch of EXPAREL. In October2016, as part of our routine stability monitoring, it came to our attention that one of two test batches of EXPAREL made in early 2016 had fallenslightly (1%) out of specification for one of the 21 acceptance criteria. All other test attributes, many of which we believe are the most indicativeof the product’s performance and quality, are within specification and trending according to shelf life expectations. The other stability test batchremains fully within specifications. This test result was unexpected and an internal investigation has tied the result to a modification to themanufacturing process when this product was made, which has subsequently been corrected. We have reserved all impacted inventory on handand exchanged a limited number of boxes that were sold from the impacted inventory.Separately, as we have accumulated test data over the life of the product, it has become evident to us that one of the 21 stability acceptancecriteria agreed to with the FDA upon product approval, and one that we believe has no bearing on product safety, presents a recurrent risk fortesting outside the approved specification. As a result, we have recently been in discussions with the FDA about both a modification of thatspecification as well as the potential development of a new analytical test for this attribute. Until that process is completed, we have agreed withthe FDA that all EXPAREL manufactured beginning in October 2016 will include 12-month expiration dating.•In September 2016, we launched EXPAREL to the oral and maxillofacial market by introducing a 133mg dose contained in a 10mL vial for use inpatients undergoing third molar (wisdom teeth) extractions. We believe the 133mg dose will also find adoption among plastic surgeons. Weintroduced these 10mL vials in a 10-pack and a 4-pack so that oral surgeons and doctors at smaller surgical centers will have easier access toprovide EXPAREL to their patients.•In June 2016, we enrolled the first patients in both of our EXPAREL Phase 3 trials for upper and lower extremity nerve blocks, specifically afemoral nerve block for patients undergoing TKA, and a brachial plexus nerve block for patients undergoing either total shoulder arthroplasty orrotator cuff repair procedures. We expect to report top-line data from these trials in mid-2017.EXPARELWe are investing in a series of blinded, randomized, bupivacaine-comparator Phase 4 trials in key surgical procedures. These trials are designed toassess the differences in postsurgical pain and opioid use between patients receiving EXPAREL as the foundation of a multimodal analgesic regimen versus abupivacaine-based multimodal analgesic regimen. Our Phase 4 trials are also designed to support clinician education on procedure-specific best-practicecare.As noted above, we recently announced top-line data from a Phase 4 trial in TKA. We are also advancing a Phase 4 trial of EXPAREL for postsurgicalpain management in patients undergoing spinal fusion surgery, and we expect to report top-line data in the second half of 2017.In 2017, we plan to initiate a series of Phase 4 trials in soft tissue procedures. These will include a C-Section trial with a two-point transverse abdominisplane infiltration, or TAP, with EXPAREL added to the standard of care, a colorectal trial evaluating a four-point TAP with EXPAREL as part of an EnhancedRecovery After Surgery, or ERAS, protocol and a breast reconstruction trial. These trials will evaluate opioid use and postsurgical pain control, as well as anumber of additional efficacy, safety and health economic outcomes.In the first quarter of 2016, we initiated two pivotal Phase 3 nerve block trials comparing the effect of EXPAREL versus placebo through a femoralnerve block trial for TKA and a brachial plexus block trial for total shoulder arthroplasty or rotator cuff repair procedures. We believe that this new indicationwill present an alternative long-term method of pain control with a single injection, replacing the costly and cumbersome standard of care requiring aperineural catheter, drug reservoir and pump needed to continuously deliver bupivacaine.If our trials are successful, we intend to file a supplemental New Drug Application, or sNDA, for nerve block in the middle of 2017 for a six-monthPrescription Drug User Fee Act, or PDUFA, review. We believe that this additional indication for EXPAREL will allow us to fully leverage our manufacturingand commercial infrastructure.50Table of ContentsProduct PipelineDepoFoam is used to extend the release of active drug substances. With this technology, we are currently developing two new DepoFoam-based productcandidates—DepoMLX, a non-steroidal anti-inflammatory drug, or NSAID, and DepoTXA, an antifibrinolytic. Completion of clinical trials may take severalyears or more. The length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. We are also evaluatingother potential DepoFoam products as pipeline candidates.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 preventing the breakdown of a clot. However, the current formulation of TXA 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 combiningimmediate and extended release TXA, could address the unmet, increasing need for rapid ambulation and discharge in the ambulatory surgery environmentfor joint surgery (primarily orthopedic surgery, including spine and trauma procedures and cardiothoracic surgery). Designed for single-dose localadministration into the surgical site, DepoTXA could provide enhanced hemostabilization and improved safety and tolerability for patients over the systemicuse of TXA by reducing bleeding, the need for blood transfusions, swelling, soft tissue hematomas and the need for post-operative drains, thereby increasingvigor in patients while decreasing overall costs to the hospital system.DepoTXA is currently in Phase 2 clinical development.DepoMeloxicamOur preclinical product candidate, DepoMLX, is a long-acting NSAID, designed to treat moderate to severe acute postsurgical pain as part of a non-opioid multimodal regimen. A product designed for single-dose local administration such as DepoMLX could provide a longer duration of pain relief at asignificantly lower concentration of systemic NSAIDs, which are known to cause dose-dependent gastrointestinal side effects. Meloxicam, which is currentlyavailable as an oral formulation, is a commonly used NSAID on the market today. We expect our customer audience for this drug to be similar to the target forEXPAREL infiltration.We expect to submit an Investigational New Drug application and subsequently initiate a Phase 1 clinical trial of DepoMLX in 2017.Results of OperationsComparison of Years Ended December 31, 2016, 2015 and 2014RevenuesOur net product sales primarily include sales of EXPAREL in the United States and DepoCyt(e) in the United States and Europe. We also earn royaltiesbased on sales by commercial partners of DepoCyt(e) and license fees and milestone payments from third parties.The following table provides information regarding our revenues during the periods indicated, including percent changes (dollar amounts inthousands): Year Ended December 31, 2016 versus2015 2015 versus2014 2016 2015 2014 % Increase / (Decrease)Net product sales: EXPAREL$265,802 $239,851 $188,528 11 % 27 %DepoCyt(e) and other product sales4,271 4,636 4,998 (8)% (7)%Total net product sales270,073 244,487 193,526 10 % 26 %Collaborative licensing and milestone revenue3,426 1,426 1,287 140 % 11 %Royalty revenue2,872 3,084 2,855 (7)% 8 %Total revenues$276,371 $248,997 $197,668 11 % 26 %51Table of ContentsEXPAREL revenue grew 11% and 27% in the years ended December 31, 2016 and 2015, respectively, primarily due to increases in sales volume of10% and 21% in each respective period. The demand for EXPAREL has continued as a result of new accounts and growth within existing accounts, whichhas been driven by continued adoption of EXPAREL use in soft tissue and orthopedic procedures. The remaining increase in EXPAREL revenue was due to5% price increases in April 2015 and May 2014, partially offset by lower pricing on government sales from our participation in the Federal Supply Schedulebeginning in the third quarter of 2015.DepoCyt(e) and other product sales decreased 8% in 2016 primarily due to fewer DepoCyt(e) lots sold to our domestic commercial partners comparedto 2015, partially offset by net sales of bupivacaine liposome injectable suspension to serve animal health indications. DepoCyt(e) product sales decreased7% in 2015 primarily due to the decrease in the value of the Euro reflected in European sales and a decrease in domestic DepoCyt(e) sales volume.The increase in collaborative licensing and milestone revenue of 140% in 2016 compared to 2015 was a result of $2.0 million in milestones earnedunder our agreement with Aratana Therapeutics, Inc., or Aratana, for the development and commercialization of bupivacaine liposome injectable suspensionfor animal health indications. The increase in collaborative licensing and milestone revenue of 11% in 2015 versus 2014 was primarily driven by a fullversus a partial year of amortized revenue on an $8.0 million upfront payment received in May 2014 from Mundipharma International Corporation Limited,or Mundipharma. The payment, which is being recognized on a straight-line basis over the contractual term expiring in June 2033, was consideration forextending the term of the existing supply and distribution agreements and expanding the territory where Mundipharma can market and distribute DepoCyte.Royalty revenue primarily reflects royalties earned on collections of end user sales of DepoCyt(e) by our commercial partners.Cost of Goods SoldCost of goods sold primarily relates to the costs to produce, package and deliver our products to customers. These expenses include labor, raw materials,manufacturing overhead and occupancy costs, depreciation of facilities, royalty payments, quality control and engineering.The following table provides information regarding cost of goods sold during the periods indicated, including our gross margin percentage (dollaramounts in thousands): Year Ended December 31, 2016 versus2015 2015 versus2014 2016 2015 2014 % Increase / (Decrease)Cost of goods sold$110,104 $71,837 $77,440 53% (7)%Gross margin60% 71% 61% The 11 percentage point decrease in our gross margins in 2016 versus 2015 primarily reflects $20.7 million for inventory and related reserves for thecost of EXPAREL batches impacted by a routine stability test that did not meet required specifications and for replacement product and other relatedcosts. We also had a higher EXPAREL manufacturing cost per vial due to lower planned production, partially offset by a shift to utilizing a portion of ourmanufacturing lines in support of new pipeline product development opportunities at our Science Center Campus in San Diego, California starting mid-year2015. In addition, gross margins decreased due to higher costs of $3.0 million related to expansion of our manufacturing capacity in Swindon, England, inpartnership with Patheon U.K. Limited, or Patheon and increases of $2.9 million for unplanned manufacturing shutdown charges in 2016 versus 2015.Despite an increase in annual sales volume during 2015 of 21%, the 7% decrease in cost of goods sold versus 2014 was due to a lower manufacturingcost per vial, driven by increased utilization of our EXPAREL manufacturing facility located in San Diego, California, along with the absence ofmanufacturing line start-up costs which were incurred during 2014. In 2015, the full-year benefit of additional capacity from the 2014 introduction of twonew manufacturing lines dedicated to EXPAREL and higher production contributed to the increased utilization of our facilities and lower manufacturingcosts per vial, which is reflected in the improvement of our gross margin to 71% in 2015 versus 61% in 2014. The improvements in lower manufacturingcosts per vial and gross margin percentage were sustained in spite of unplanned shutdown costs of $3.0 million during 2015.Research and Development ExpensesResearch and development expenses consist primarily of costs attributable to clinical trials and related outside services, stock-based compensationexpenses and other research and development costs, including Phase 4 trials that are required as a52Table of Contentscondition of FDA approval or are conducted to generate new data such as dosing and administration techniques. Clinical trial expenses include costs forclinical personnel, services performed by third-party contract research organizations, materials and supplies, database management and other third-party fees.Product development and other expenses include development costs for our pipeline products and medical information expenses, which include personnel,equipment, materials and contractor costs for both new process development and new product candidates, toxicology studies and facility costs for ourresearch space. Stock-based compensation expense relates to the costs of stock option grants to employees and non-employees, awards of restricted stockunits, or RSUs, and our employee stock purchase plan, or ESPP.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, 2016 versus2015 2015 versus2014 2016 2015 2014 % Increase / (Decrease)Clinical development$23,566 $12,609 $5,518 87 % 129 %Product development and other18,815 10,919 6,723 72 % 62 %Stock-based compensation3,297 5,134 6,490 (36)% (21)%Total research and development expense$45,678 $28,662 $18,731 59 % 53 %% of total revenue17% 12% 9% Total research and development expenses increased 59% in 2016 versus 2015 largely due to an $11.0 million increase in clinical developmentexpenses driven by the enrollment of the Phase 4 infiltration trial in TKA and two Phase 3 nerve block trials, including a femoral nerve block in subjectsundergoing TKA and a brachial plexus block in patients undergoing total shoulder arthroplasty, or rotator cuff repair procedures. We also incurred start-upexpenses in our spine trial and costs for planning pediatric trials. Increased costs also include a larger clinical workforce, which is managing our increasinginvestment in research and development initiatives. The increase in clinical development expense was partially offset by a decrease in research grants.Product development and other expenses increased $7.9 million which reflects our investments in the development of a new EXPAREL DepoFoam spraymanufacturing process, DepoMLX and DepoTXA, the latter of which is now in Phase 2 clinical development, along with increased depreciation on our newresearch and development facility placed into service in August 2015. Expenses for investigational runs and development of a new analytical test for thestability testing attribute are also included in costs for product development and other. Stock-based compensation decreased 36%, which was largelyattributable to the requirement to revalue non-employee grants.Total research and development expenses increased 53% in 2015 versus 2014 driven by a $7.1 million increase in clinical development, including theinitiation of and enrollment in our Phase 4 trial in third molar procedures, start-up expenses for our Phase 4 infiltration trial in TKA, two Phase 3 trials innerve block procedures which began in 2015, and Phase 4 trials in tonsillectomy and C-section. Product development and other increased $4.2 million,reflecting our investments in the development of a new EXPAREL DepoFoam spray manufacturing process, DepoTXA, DepoMLX and additional pre-clinicalexpenses driven by DepoFoam toxicology trials. Stock-based compensation decreased 21%, which was largely attributable to the requirement to revalue non-employee grants.Selling, General and Administrative ExpensesSales and marketing expenses primarily consist of compensation and benefits for our sales force and personnel that support our sales, marketing,medical and scientific affairs operations, commission payments to our marketing partners for the promotion and sale of EXPAREL, expenses related tocommunicating health outcome benefits of EXPAREL patients and educational programs for our customers. General and administrative expenses consist ofcompensation and benefits for legal, finance, regulatory, compliance, information technology, human resources, executive management and other supportingpersonnel. It also includes professional fees for legal, audit, tax and consulting services. Stock-based compensation expense relates to the costs of stockoption grants, RSU awards and our ESPP.The following table provides information regarding selling, general and administrative expenses during the periods indicated, including percentchanges (dollar amounts in thousands):53Table of Contents Year Ended December 31, 2016 versus2015 2015 versus2014 2016 2015 2014 % Increase / (Decrease)Sales and marketing$89,218 $77,733 $65,010 15 % 20%General and administrative41,882 39,088 26,902 7 % 45%Stock-based compensation21,513 22,222 14,750 (3)% 51%Total selling, general and administrative expenses$152,613 $139,043 $106,662 10 % 30%% of total revenue55% 56% 54% Total selling, general and administrative expenses increased 10% in 2016 versus 2015.Sales and marketing expenses increased by 15% in 2016 versus 2015 primarily due to a $7.1 million contract termination charge due to CrossLinkBioScience, LLC, or CrossLink, which was recognized in June 2016, and is payable quarterly over two years beginning in the fourth quarter of 2016. Inaddition, we increased the number of our field-based hospital sales specialists and commercial personnel to better support and educate our customers,resulting in a $2.1 million increase in salaries, benefits and other personnel-related costs. We also had a $3.9 million increase in spending for EXPAREL,which included educational initiatives and programs to create product awareness among key orthopedic and soft tissue surgical markets, along with otherselling initiatives and promotional activities to support the growth of EXPAREL. Included in the increased spending for EXPAREL was our “ChoicesMatter” campaign, a national patient education campaign launched in August 2016, focused on educating the patient population about postsurgical non-opioid options for pain relief. We also unveiled a virtual reality educational program to focus on the proper EXPAREL infiltration technique for TKAprocedures. In the third quarter of 2016, we launched EXPAREL to the oral and maxillofacial market by introducing a 10mL vial for use in patientsundergoing third molar (wisdom teeth) extractions. Commission-based payments to CrossLink decreased as a result of the mid-year contract termination.General and administrative expenses increased 7% in 2016 versus 2015 largely due to increases of $1.6 million in business development and $1.5million in regulatory activities. Business development costs increased commensurate with added personnel to support our strategic initiatives, including ourrecently executed co-promotion agreement with DePuy Synthes. Regulatory spend rose in order to begin preparation for our EXPAREL nerve block sNDAfiling and to support activities for other product pipeline candidates. Expenditures also increased for the expansion of our New Jersey headquarters and in ourfinance and human resource functions. Legal costs decreased by $2.6 million, reflecting a decrease of $4.1 million in legal expenses related to the amicableresolution in December 2015 of a lawsuit with the FDA, which stemmed from a warning letter issued by the FDA’s Office of Prescription Drug Promotion, orOPDP, and legal costs related to an April 2015 subpoena from the US Department of Justice, US Attorney’s Office for the District of New Jersey, or DOJ. Thesedecreases were partially offset by a $1.1 million increase in intellectual property matters and pipeline protection and $0.4 million in other legal matters.Stock-based compensation decreased 3% in 2016 versus 2015, mostly as a result of lower grant-date fair values of equity awards.Total selling, general and administrative expenses increased by 30% in 2015 versus 2014.Sales and marketing expenses increased by 20% in 2015 versus 2014 primarily due to an increase in the number of our field-based medical andscientific affairs personnel to better support and educate our customers, resulting in a $10.0 million increase in salaries, benefits and other personnel-relatedcosts. We also had a $2.7 million increase in spending for EXPAREL, which included educational initiatives and programs to create product awarenesswithin key orthopedic and soft tissue surgical markets, commission-based payments to CrossLink, the initiation of a patient awareness campaign related topostsurgical analgesic options for pain relief and other selling initiatives and promotional activities to support the growth of EXPAREL.General and administrative expenses increased 45% in 2015 versus 2014 largely due to increases in legal costs of $7.8 million associated with thesubpoena from the DOJ and our FDA activities. Due to the growth of the business mainly in our business development and human resources groups, salariesand benefits increased by $2.5 million. Additionally, there were increases in infrastructure costs and outside services in areas such as compliance andinformation technology to support the commercial and manufacturing growth of EXPAREL.Stock-based compensation increased 51% in 2015 versus 2014 as a result of increases in personnel as well as our 2015 grant of RSUs.54Table 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, 2016 versus2015 2015 versus2014 2016 2015 2014 % Increase / (Decrease)Interest income$1,323 $678 $382 95 % 77 %Interest expense(7,061) (7,725) (8,278) (9)% (7)%Loss on early extinguishment of debt— (52) — (100)% N/ARoyalty interest obligation— (71) (323) (100)% (78)%Other, net(82) (165) (159) (50)% 4 %Total other expense, net$(5,820) $(7,335) $(8,378) (21)% (12)%% of total revenue(2)% (3)% (4)% Total other expense, net decreased by 21% in 2016 versus 2015 largely due to a decrease in interest expense arising from a $0.6 million increase incapitalized interest, primarily on construction of our new manufacturing suites and an increase in interest income as a result of higher average investmentreturns. We had no expenses for our DepoCyt(e) royalty obligation and loss on early extinguishment of debt in 2016.Total other expense, net decreased by 12% in 2015 versus 2014 primarily due to decreases in both interest expense and our royalty interest obligationand an increase in interest income. The decrease in interest expense was primarily due to a $0.5 million increase in capitalized interest on the construction ofour new manufacturing suites. The increase in interest income was due to higher investment balances and longer duration investments, and the decrease inour royalty interest obligation was due to our royalty interest assignment agreement with Paul Capital Advisors, LLC that ended on December 31, 2014.Income Tax ExpenseThe following table provides information regarding our income tax expense during the periods indicated, including percent changes (in thousands): Year Ended December 31, 2016 versus2015 2015 versus2014 2016 2015 2014 % Increase / (Decrease)Income tax expense$105 $264 $173 (60)% 53%Effective tax rate0 % 12% (1)% We recorded tax provisions of $0.1 million, $0.3 million and $0.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. Sinceour deferred tax assets are fully offset by a valuation allowance, our total income tax expense includes only current tax expense. The 2016 and 2014 taxprovisions consist principally of minimum state taxes. The 2015 tax provision reflects federal alternative minimum tax as well as state taxes.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 are highly dependent on the commercial success of EXPAREL,which we launched in April 2012. We have financed our operations primarily with the proceeds from the sale of convertible senior notes, convertiblepreferred stock, common stock, secured and unsecured notes, borrowings under debt facilities, product sales and collaborative licensing and milestonerevenue. As of December 31, 2016, we had an accumulated deficit of $346.2 million, cash and cash equivalents and short-term investments of $172.6 millionand working capital of $198.3 million.Summary of Cash FlowsThe following table summarizes our cash flows from operating, investing and financing activities for the years ended December 31, 2016, 2015 and2014 (in thousands):55Table of Contents Year Ended December 31,Consolidated Statement of Cash Flows Data:2016 2015 2014Net cash provided by (used in): Operating activities$33,453 $28,021 $26,564Investing activities(61,754) (19,256) (120,434)Financing activities7,261 10,699 118,875Net increase (decrease) in cash and cash equivalents$(21,040) $19,464 $25,005Operating ActivitiesIn 2016, net cash provided by operating activities was $33.5 million, which largely resulted from an 11% increase in EXPAREL net product sales and$2.0 million in milestones earned under our agreement with Aratana. Our operating loss of $37.9 million was more than offset by non-cash expenses of $49.1million, including $31.2 million of stock-based compensation, $17.5 million of depreciation and amortization expense and $22.3 million of funds providedby net changes in our operating assets and liabilities. These net changes included a $30.4 million decrease in inventory due to a $20.5 million charge forinventory that did not meet routine stability test specifications and a $9.9 million decrease in our inventory investment, partially offset by increases of $4.1million in accounts receivable and prepayments for clinical trials of $3.2 million.In 2015, net cash provided by operating activities was $28.0 million, which largely resulted from increased revenues and improved gross margins versus2014. Positive cash flow from operations reflected net income of $1.9 million plus $49.5 million in add backs of non-cash expenses comprised of $33.4million of stock-based compensation and $16.1 million of depreciation and amortization, partially offset by a $23.3 million net investment in operatingassets and liabilities, including a substantial investment in inventory. Both net income and cash flow were negatively impacted by legal expenses related tothe warning letter issued by the OPDP in September 2014, the related FDA lawsuit which was amicably resolved in December 2015 and the DOJ inquiry.In 2014, net cash provided by operating activities was $26.6 million. Our net loss of $13.7 million was more than offset by $39.6 million in non-cashexpenses comprised of $24.8 million of stock-based compensation and $14.7 million of depreciation and amortization. Cash flow benefited from higherEXPAREL product sales and significantly improved gross margins, which were partially offset by expenditures for additional field-based personnel andrelated educational, selling and promotional initiatives, as well as additional administrative support. We also received an $8.0 million upfront payment fromMundipharma in connection with the extension of the term of existing supply and distribution agreements and the expansion of the territory whereMundipharma can market and distribute DepoCyte.Investing ActivitiesIn 2016, net cash used in investing activities was $61.8 million, which reflected purchases of fixed assets of $24.7 million. Major capital projectsincluded the continued expansion of our manufacturing capacity in Swindon, England in partnership with Patheon. We also purchased $21.2 million ofshort-term investments (net of maturities) and made $15.9 million of contingent consideration payments to Skyepharma related to the March 2007acquisition, including an $8.0 million milestone payment in connection with achieving $250.0 million of EXPAREL net sales collected on an annual basisand $7.9 million in percentage payments on collections of net sales of EXPAREL.In 2015, net cash used in investing activities was $19.3 million, which reflected purchases of fixed assets of $40.3 million. Major capital projectsincluded investing in a new research and development facility at our Science Center Campus and continuing expenditures for expanding our manufacturingcapacity in Swindon, England in partnership with Patheon. We also made contingent consideration payments to Skyepharma of $7.1 million related to theMarch 2007 acquisition. These expenditures were offset by $28.2 million of short-term investment maturities, net of purchases.In 2014, net cash used in investing activities was $120.4 million. This was due to a net investment of $84.0 million in short-term and long-terminvestments, mainly purchased using the net proceeds from our April 2014 follow-on underwritten public offering. We spent $23.0 million for purchases offixed assets, which included major investments for an EXPAREL manufacturing fill line and our capacity expansion project with Patheon. We also paid$13.4 million in contingent consideration payments to Skyepharma, which included an $8.0 million milestone payment and $5.4 million in percentagepayments on collections of net sales of EXPAREL in connection with the March 2007 acquisition.56Table of ContentsFinancing ActivitiesIn 2016, net cash provided by financing activities was $7.3 million, which reflected proceeds from the exercise of stock options of $5.8 million andproceeds from the issuance of shares under our ESPP of $1.5 million.In 2015, net cash provided by financing activities was $10.7 million, which reflected proceeds from the exercise of stock options of $10.1 million andproceeds from the issuance of shares under our ESPP of $2.1 million. The increase was offset by the cash settlement of $1.5 million in principal on aconversion of our convertible senior notes.In 2014, net cash provided by financing activities was $118.9 million which was largely attributable to our April 2014 follow-on underwritten publicoffering with net proceeds of $110.5 million after deducting underwriters’ fees and expenses. We also received $7.2 million and $1.2 million of proceedsfrom the exercise of stock options/warrants and our ESPP, respectively.Equity FinancingsFrom inception through December 31, 2016, we have raised approximately $345 million of net proceeds from the sale of common stock and otherequity securities via public offerings. In April 2014, we sold 1,840,000 shares of common stock at a price of $64.00 per share in a follow-on underwrittenpublic offering for proceeds of $110.5 million, net of underwriters’ fees and related expenses.DebtJanuary 2013 Convertible Senior NotesOn January 23, 2013, we completed a private offering of $120.0 million in aggregate principal, 3.25% convertible senior notes due 2019, or Notes, asdiscussed in Note 8, Debt, to our consolidated financial statements included herein. The net proceeds from the Notes offering were $115.3 million, afterdeducting the initial purchasers’ discounts and commissions as well as offering expenses.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, 2016, the requirements with respect to the Consecutive Sales Price were not met and, as a result, the Notes are classified asa long-term obligation and are not convertible during the quarter ended March 31, 2017. The future convertibility and resulting balance sheet classificationof this liability is monitored at each quarterly reporting date and is analyzed dependent upon market prices of our common stock during the prescribedmeasurement periods. Prior to February 1, 2018, in the event such requirements are not met in a given quarter, the Notes would be reclassified as a long-termliability. In the event that all of the Notes are converted, we would be required to repay the $118.5 million in outstanding principal and approximately $35.7million of cash or issue approximately 1.1 million shares of our common stock (or a combination of cash and shares of our common stock at our option) tosettle the conversion premium as of December 31, 2016, causing dilution to our current shareholders and/or significant expenditures of our cash and liquidsecurities.As of February 1, 2017, we may redeem for cash all or part of the Notes if the last reported sale price (as defined in the indenture governing the Notes) ofour common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30consecutive trading-day period, ending within five trading days prior to the date on which we provide notice of redemption. If we decide to call the Notes, wecurrently intend, subject to market conditions and the trading price of our common stock, to provide holders of the Notes with the maximum 60 dayredemption notice provided for in the Indenture.In February 2015, we received notice of an election for conversion from a holder of the Notes. The principal amount of the conversion request was $1.5million which was paid in cash in April 2015 pursuant to the terms of an indenture agreement with respect to the Notes. We elected to settle the conversionpremium by issuing 44,287 shares of our common stock, calculated based on a daily volume-weighted average price over a 40 trading-day observationperiod which ended on April 8, 2015. We have completed other immaterial conversion requests.See Note 8, Debt, to our consolidated financial statements included herein for further discussion of the Notes.57Table of ContentsFuture Capital RequirementsWe believe that our existing cash and cash equivalents, short-term investments and cash received from product sales will be sufficient to enable us tofund our operating expenses, capital expenditure requirements, payment of the principal on any conversions of the Notes and to service our indebtednessthrough March 1, 2018. 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 to expand the commercialization of EXPAREL;•the cost and timing of expanding our manufacturing facilities for EXPAREL and our other product candidates, including costs associated withcertain technical transfer activities and the construction of manufacturing suites at Patheon’s Swindon, England facility;•the timing of and extent to which the holders of our Notes elect to convert the Notes, or we elect to redeem all or part of the Notes on or afterFebruary 1, 2017 in accordance with the terms of the indenture agreement;•the cost and timing of potential milestone payments to Skyepharma, which could be up to an aggregate of $36.0 million if certain milestonespertaining to net sales of DepoBupivacaine products, including EXPAREL, are met;•costs related to legal and regulatory issues;•the costs of performing additional clinical trials for EXPAREL, including the pediatric trials required by the FDA as a condition of approval, andcosts of development for 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, 2016 (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)$118,531 $— $118,531 $— $—Senior convertible notes - interest8,026 3,852 4,174 — —Lease obligations (3)39,356 7,880 16,335 7,596 7,545Purchase obligations (4)588 290 298 — —Total$166,501 $12,022 $139,338 $7,596 $7,545(1) This table does not include potential future milestone payments to Skyepharma which could be up to an aggregate of $36.0 million if certain milestones pertaining to net sales ofDepoBupivacaine products, including EXPAREL are met, including $32.0 million when annual net sales of DepoBupivacaine products, including EXPAREL collected reach $500.0million (measured on a rolling quarterly basis) and $4.0 million upon the first commercial sale in a major European Union country. This contingency is described further in Note 6,Goodwill and Intangible Assets, of our consolidated financial statements included herein. In addition, this table does not include various agreements that we have entered into forservices with third-party vendors, including agreements to conduct clinical trials, and for consulting and other contracted services due to the cancelable nature of the services.(2) The amounts displayed in the table above represent the February 2019 maturity of these instruments. See Note 8, Debt, of our consolidated financial statements included herein forfurther discussion. Additionally, it excludes any conversion premium on the Notes, which may be settled in cash or stock at the Company’s discretion. If the Notes were converted atDecember 31, 2016, it would result in an approximate premium of 1.1 million shares, $35.7 million of cash or a combination thereof, at the Company’s option.(3) The amounts consist of operating leases for our corporate headquarters in Parsippany, New Jersey and manufacturing, research and development and warehouse space in SanDiego, California.(4) The amounts consist of minimum non-cancelable contractual commitments for the purchase of certain raw materials.In June 2016, we provided notice to CrossLink electing to terminate our Master Distributor Agreement (as amended) effective as of September 30, 2016.In connection with the termination of the Agreement, a termination fee based on a percentage of earned performance-based fees is due to CrossLink. This feeof $7.1 million is payable to CrossLink quarterly over two years and was recorded in selling, general and administrative expense in the consolidatedstatements of operations. At December 31, 2016, $5.3 million is classified in accrued expenses and $1.8 million is classified in other liabilities.58Table of ContentsIn April 2014, we and Patheon entered into a Strategic Co-Production Agreement, a Technical Transfer and Service Agreement and a Manufacturing andSupply Agreement to collaborate in the manufacture of EXPAREL. Under the terms of the Technical Transfer and Service Agreement, Patheon has agreed toundertake certain technical transfer activities and construction services needed to prepare its Swindon, England facility for the manufacture of EXPAREL intwo dedicated manufacturing suites. Under these agreements, we will make monthly base fee payments for services rendered. The agreements will remain infull effect unless and until they expire or are terminated. Upon termination of the Technical Transfer and Services Agreement (other than termination by us inthe event that Patheon does not meet the construction and manufacturing milestones or for a breach by Patheon), we will pay for the make good costsoccasioned by the removal of our manufacturing equipment and for Patheon’s termination costs up to a maximum amount of $2.4 million. Under the terms of the Manufacturing and Supply Agreement, following the FDA approval date of the suites, we have agreed to purchase EXPARELproduct from Patheon. Unless earlier terminated by giving notice of up to three years (other than termination by us in the event of a material breach byPatheon), this agreement will expire on the 10th anniversary of the FDA approval date for the initial manufacturing suite.Critical 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, inventory costs, liabilities and accruals, clinical trial expenses, stock-based compensation and thevaluation of deferred tax assets. We base our estimates on historical experience, contract terms and on other factors we believe to be appropriate under thecircumstances. Actual results may differ from these estimates under different 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) to our commercial partners within theUnited States and Europe, (iii) royalties based on sales by commercial partners of DepoCyt(e) and (iv) license fees and milestone payments. We recognizerevenue 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 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 the FDA’s current Good Manufacturing Practices, or 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 that 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. We estimate our sales returns reserve based on our historical return rates, which we believe is the bestestimate of the anticipated product to be returned. The returns reserve is recorded at the time of sale as a reduction to gross product sales and an increase inaccrued 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 DepoCyt(e) returns have not been material.59Table of ContentsPrompt 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.Volume 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, 2016,2015 and 2014 (in thousands): Returns Allowances Prompt PaymentDiscounts Wholesaler ServiceFees Volume Rebates andChargebacks TotalBalance at December 31, 2013$897 $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, 20141,559 575 588 321 3,043 Provision339 4,905 3,482 2,020 10,746 Payments/credits(165) (4,855) (3,325) (1,544) (9,889)Balance at December 31, 20151,733 625 745 797 3,900 Provision694 5,448 4,118 2,611 12,871 Payments/credits(1,081) (5,478) (4,128) (2,284) (12,971)Balance at December 31, 2016$1,346 $595 $735 $1,124 $3,800Total reductions of gross product sales from sales-related allowances and accruals were $12.9 million, $10.7 million and $8.3 million, or 4.6%, 4.2%and 4.1% of gross product sales, for the years ended December 31, 2016, 2015 and 2014, 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 increase in the percentage of sales-related allowances and accruals for the year ended December 31, 2016 was primarily related to an increase in volume related rebates and an increase inwholesaler fees as a result of higher service rates. The percentage of sales-related allowances remained fairly consistent from 2014 to 2015. During that timeframe the percentage of volume-related rebates increased slightly, which was offset by a slight decrease in the returns allowance percentage.Royalty RevenueWe recognize revenue from royalties based on our commercial partners’ net sales of DepoCyt(e) and sales of bupivacaine liposome injectablesuspension product to serve animal health indications. Royalties are recognized as earned in accordance with contract terms when they can be reasonablyestimated and collection is reasonably assured. Based on historical product sales, royalty receipts and other relevant information, we accrue royalty revenueeach quarter.Collaborative Licensing and Milestone RevenueWe 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 the estimated performance period is subsequently modified, we will modify the period over whichthe up-front license fee is recognized accordingly on a prospective basis. Upon notification of the termination of a collaboration agreement, any remainingnon-refundable license fees received by us, which had been deferred, are recognized over the remaining contractual term. If the termination is immediate andno additional services are to be performed, the deferred revenue is generally60Table of Contentsrecognized in full. All such recognized revenues are included in collaborative licensing and milestone revenue in our consolidated statements 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.Research and Development ExpensesResearch and development expenses consist of costs associated with products and processes being developed, and include related personnel expenses,laboratory supplies, active pharmaceutical ingredients, manufacturing supplies, facilities costs, preclinical and clinical trial costs and other outside servicefees. We expense research and development costs as incurred. We rely on third parties to conduct our preclinical and clinical trials and to provide services,including data management, statistical analysis and electronic compilation for our clinical trials. We track and record information regarding third-partyresearch and development expenses for each study or trial that we conduct and recognize these expenses based on the estimated progress towards completionat the end of each reporting period. Factors we consider in preparing these estimates include the number of subjects enrolled in trials, milestones achieved,direct pass-through costs, clinical site fees and other criteria related to the efforts of our vendors. Historically, any adjustments we have made to theseassumptions have not been material. Depending on the timing of payments to vendors and estimated services provided, we may record prepaid or accruedexpenses 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.Stock-Based CompensationWe account for stock-based compensation by measuring and recognizing compensation expense for employee stock-based awards based on theirestimated grant date fair values. We use the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite serviceperiod, which is generally the vesting period for stock options, RSUs and the offering period for our ESPP. Because the valuation of stock options isinherently subjective, we estimate the fair value of our stock-based awards using the Black-Scholes option valuation model, or Black-Scholes model. TheBlack-Scholes model requires the input of subjective assumptions, including the expected stock price volatility, expected term, risk-free interest rate andexpected dividend yield.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 realization of our deferred tax assets. As of December 31, 2016,we have 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. There is significant doubt regarding our ability to utilize our net deferred tax assetsand, therefore, we have recorded a full valuation allowance reducing our net deferred tax assets to zero at both December 31, 2016 and 2015.61Table of ContentsRecent Accounting PronouncementsSee Note 3, Recent Accounting Pronouncements, to the Notes to Consolidated Financial Statements in Item 15 below for further discussion of recentaccounting pronouncements.Off-Balance Sheet ArrangementsWe do not have any material off-balance sheet arrangements as of December 31, 2016, except for operating leases, nor do we have any relationshipswith unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. None of our operatingleases have, or are reasonably likely to have, a current or future material effect on our financial condition or changes in financial condition.Item 7A. Quantitative and Qualitative Disclosures about Market RiskThe primary objective of our cash equivalent and investment activities is to preserve principal while at the same time maximizing the income that wereceive from our investments without significantly increasing risk. We invest in corporate bonds, commercial paper and asset-backed securities, which arereported at fair value. These securities are subject to interest rate risk. This means that a change in prevailing interest rates may cause the principal amount ofthe investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the interest rate laterrises, we expect that the fair value of our investment will decline. A hypothetical 100 basis point increase in interest rates would have reduced the fair valueof our available-for-sale securities at December 31, 2016 by $0.5 million.In January 2013, we issued $120.0 million in aggregate principal amount of 3.25% convertible senior notes, which mature in February 2019. Both weand the holders may convert the Notes prior to maturity under certain circumstances. Upon conversion, holders will receive cash up to the principal amountof the Notes and, with respect to any excess conversion value, cash, shares of our common stock or a combination of cash and shares, at our option. The fairvalue of the Notes is impacted by both the fair value of our common stock and interest rate fluctuations. As of December 31, 2016, the estimated fair value ofthe Notes was $1,406 per $1,000 principal amount. See Note 8, Debt, to the Notes to Consolidated Financial Statements in Item 15 below for additionalinformation on the Notes.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, 2016, we had approximately $0.6 million in receivables from customers denominatedin Euros. A hypothetical 10% decrease in the value of the Euro relative to the United States dollar would have decreased our revenue by $0.4 million for theyear ended December 31, 2016. Additionally, our accounts receivable are concentrated with three large regional wholesalers of pharmaceutical products. In the event of non-performance or non-payment, there may be a material adverse impact on our financial condition, results of operations or net cash flow.Item 8. Financial Statements and Supplementary DataOur consolidated financial statements required by this item, together with the reports of our independent registered public accounting firms, appear onpages F-1 through F-33 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, which are designedto ensure 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 Chief Executive Officer and Chairman and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.Based on their evaluation as of December 31, 2016, our Chief Executive Officer and Chairman and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of December 31, 2016.62Table of ContentsManagement’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 Chief Executive Officer and Chairman and Chief Financial Officer, management conducted an evaluation ofthe effectiveness of our internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control—IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon the results of the evaluation, ourmanagement concluded that our internal control over financial reporting was effective as of December 31, 2016.The effectiveness of our internal control over financial reporting as of December 31, 2016 was audited by KPMG LLP, our independent registeredpublic accounting firm, as stated in their report appearing below, which expressed an unqualified opinion on the effectiveness of our internal control overfinancial reporting as of December 31, 2016.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2016, that materiallyaffected, or are reasonably likely to materially affect, our internal control over financial reporting.63Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and StockholdersPacira Pharmaceuticals, Inc.:We have audited Pacira Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). PaciraPharmaceuticals, 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 the 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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered 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 generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial 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. maintained, in all material respects, effective internal control over financial reporting as of December 31,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheet of Pacira Pharmaceuticals, Inc. and subsidiaries as of December 31, 2016, and the related consolidated statements of operations, comprehensive income(loss), stockholders’ equity, and cash flows for the year ended December 31, 2016, and our report dated March 1, 2017 expressed an unqualified opinion onthose consolidated financial statements./s/ KPMG LLPShort Hills, NJMarch 1, 201764Table of ContentsItem 9B. Other InformationNone.PART IIIItem 10. Directors, Executive Officers and Corporate GovernanceInformation required by this item will be included in the proxy statement for our 2017 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 2017 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 2017 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 2017 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 2017 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 KPMG LLP, Independent Registered Public Accounting Firm Report of CohnReznick LLP, Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income (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 theconsolidated financial statements or related notes thereto.(3)ExhibitsThe Exhibits listed in the Exhibit Index are filed with, or incorporated by reference in this Form 10-K.Item 16. Form 10-K SummaryNone.65Table 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:March 1, 2017By: David StackChief 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, Chief Executive Officer and Chairman(Principal Executive Officer) March 1, 2017David Stack /s/ CHARLES A. REINHART, III Chief Financial Officer(Principal Financial Officer) March 1, 2017Charles A. Reinhart, III /s/ LAUREN RIKER Vice President, Finance(Principal Accounting Officer) March 1, 2017Lauren Riker /s/ LAURA BREGE Director March 1, 2017Laura Brege /s/ YVONNE GREENSTREET Director March 1, 2017Yvonne Greenstreet /s/ MARK KRONENFELD Director March 1, 2017Mark Kronenfeld /s/ JOHN LONGENECKER Director March 1, 2017John Longenecker /s/ GARY PACE Director March 1, 2017Gary Pace /s/ ANDREAS WICKI Director March 1, 2017Andreas Wicki /s/ DENNIS WINGER Director March 1, 2017Dennis Winger /s/ PAUL HASTINGS Lead Director March 1, 2017Paul Hastings 66Table of ContentsPACIRA PHARMACEUTICALS, INC.ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2016INDEX TO CONSOLIDATED FINANCIAL STATEMENTSReport of KPMG LLP, Independent Registered Public Accounting FirmF-2Report of CohnReznick LLP, Independent Registered Public Accounting FirmF-3Consolidated Balance Sheets as of December 31, 2016 and 2015F-4Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014F- 5Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and 2014F- 6Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014F- 7Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014F- 8Notes to Consolidated Financial StatementsF- 9F-1Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and StockholdersPacira Pharmaceuticals, Inc.:We have audited the accompanying consolidated balance sheet of Pacira Pharmaceuticals, Inc. and subsidiaries as of December 31, 2016, and therelated consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year ended December 31, 2016.These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements 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 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 auditprovides 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, 2016, and the results of their operations and their cash flows for the year ended December 31, 2016,in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pacira Pharmaceuticals,Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2017 expressed an unqualifiedopinion on the effectiveness of the Company’s internal control over financial reporting./s/ KPMG LLPShort Hills, NJMarch 1, 2017F-2Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and StockholdersPacira Pharmaceuticals, Inc.:We have audited the accompanying consolidated balance sheet of Pacira Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2015, and therelated consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the two years in the period endedDecember 31, 2015. 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, 2015, and their results of operations and cash flows for each of the two years in the period endedDecember 31, 2015, in conformity with accounting principles generally accepted in the United States of America./s/ CohnReznick LLPRoseland, New JerseyFebruary 25, 2016F-3Table of ContentsPACIRA PHARMACEUTICALS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts) December 31, 2016 2015ASSETS Current assets: Cash and cash equivalents$35,944 $56,984Short-term investments136,653 101,981Accounts receivable, net29,937 25,855Inventories, net31,278 61,645Prepaid expenses and other current assets9,277 6,117Total current assets243,089 252,582Long-term investments— 13,462Fixed assets, net101,016 90,324Goodwill46,737 30,880Intangibles, net— 81Other assets624 406Total assets$391,466 $387,735 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$7,511 $8,739Accrued expenses36,666 35,375Convertible senior notes— 104,040Current portion of deferred revenue595 1,426Income taxes payable66 208Total current liabilities44,838 149,788Convertible senior notes108,738 —Deferred revenue7,487 8,082Other liabilities11,427 11,473Total liabilities172,490 169,343Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock, par value $0.001; 5,000,000 shares authorized, none issued and outstanding at December 31,2016 and 2015— —Common stock, par value $0.001 and 250,000,000 shares authorized; 37,480,952 shares issued and outstandingat December 31, 2016; 36,848,319 shares issued and outstanding at December 31, 201537 37Additional paid-in capital565,207 526,696Accumulated deficit(346,238) (308,289)Accumulated other comprehensive loss(30) (52)Total stockholders’ equity218,976 218,392Total liabilities and stockholders’ equity$391,466 $387,735See accompanying notes to consolidated financial statements.F-4Table of ContentsPACIRA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts) Year Ended December 31, 2016 2015 2014Revenues: Net product sales$270,073 $244,487 $193,526Collaborative licensing and milestone revenue3,426 1,426 1,287Royalty revenue2,872 3,084 2,855Total revenues276,371 248,997 197,668Operating expenses: Cost of goods sold110,104 71,837 77,440Research and development45,678 28,662 18,731Selling, general and administrative152,613 139,043 106,662Total operating expenses308,395 239,542 202,833Income (loss) from operations(32,024) 9,455 (5,165)Other (expense) income: Interest income1,323 678 382Interest expense(7,061) (7,725) (8,278)Loss on early extinguishment of debt— (52) —Royalty interest obligation— (71) (323)Other, net(82) (165) (159)Total other expense, net(5,820) (7,335) (8,378)Income (loss) before income taxes(37,844) 2,120 (13,543)Income tax expense(105) (264) (173)Net income (loss)$(37,949) $1,856 $(13,716) Net income (loss) per share: Basic net income (loss) per common share$(1.02) $0.05 $(0.39)Diluted net income (loss) per common share$(1.02) $0.04 $(0.39)Weighted average common shares outstanding: Basic37,236 36,540 35,299Diluted37,236 41,301 35,299See accompanying notes to consolidated financial statements.F- 5Table of ContentsPACIRA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In thousands) Year Ended December 31, 2016 2015 2014Net income (loss)$(37,949) $1,856 $(13,716)Other comprehensive income (loss): Net unrealized gain (loss) on investments22 28 (85) Total other comprehensive income (loss)22 28 (85)Comprehensive income (loss)$(37,927) $1,884 $(13,801)See accompanying notes to consolidated financial statements.F- 6Table of ContentsPACIRA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014(In thousands) Common Stock AdditionalPaid-InCapital AccumulatedDeficit AccumulatedOtherComprehensiveIncome (Loss) Total Shares Amount Balance 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 on investments— — — — (85) (85) Net loss— — — (13,716) — (13,716)Balance at December 31, 201436,151 36 481,334 (310,145) (80) 171,145 Exercise of stock options618 1 10,072 — — 10,073 Shares issued under employeestock purchase plan35 — 2,093 — — 2,093 Stock-based compensation— — 33,368 — — 33,368 Issuance of common stock uponconversion of convertible senior notes44 — 3,929 — — 3,929 Retirement of equity componentof convertible senior notes— — (4,100) — — (4,100) Net unrealized gain on investments— — — — 28 28 Net income— — — 1,856 — 1,856Balance at December 31, 201536,848 37 526,696 (308,289) (52) 218,392 Exercise of stock options518 — 5,770 — — 5,770 Vested restricted stock units62 — — — — — Shares issued under employeestock purchase plan53 — 1,495 — — 1,495 Stock-based compensation— — 31,248 — — 31,248 Retirement of equity componentof convertible senior notes— — (2) — — (2) Net unrealized gain on investments— — — — 22 22 Net loss— — — (37,949) — (37,949)Balance at December 31, 201637,481 $37 $565,207 $(346,238) $(30) $218,976See accompanying notes to consolidated financial statements.F- 7Table of ContentsPACIRA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2016 2015 2014Operating activities: Net income (loss)$(37,949) $1,856 $(13,716)Adjustments to reconcile net income (loss) to net cash provided byoperating activities: Depreciation of fixed assets and amortization of intangibles12,919 11,475 10,035Amortization of unfavorable lease obligation and debt issuance costs479 481 487Amortization of debt discount4,088 4,102 4,139Loss on disposal of fixed assets389 6 158Loss on early extinguishment of debt— 52 —Stock-based compensation31,248 33,368 24,822Changes in operating assets and liabilities: Restricted cash— 1,509 124Accounts receivable, net(4,082) (3,489) (7,776)Inventories, net30,367 (32,382) (13,706)Prepaid expenses and other assets(3,377) (2,007) (1,621)Accounts payable, accrued expenses and income taxes payable710 8,966 15,349Royalty interest obligation— (276) (970)Other liabilities87 5,786 2,526Deferred revenue(1,426) (1,426) 6,713Net cash provided by operating activities33,453 28,021 26,564Investing activities: Purchases of fixed assets(24,709) (40,295) (22,984)Purchases of investments(192,815) (189,082) (164,303)Sales of investments171,627 217,240 80,286Payment of contingent consideration(15,857) (7,119) (13,433)Net cash used in investing activities(61,754) (19,256) (120,434)Financing activities: Proceeds from follow-on public offering, net— — 110,452Proceeds from exercise of stock options and warrants5,770 10,073 7,239Proceeds from shares issued under employee stock purchase plan1,495 2,093 1,184Conversion of principal and equity component of convertible senior notes(4) (1,467) —Net cash provided by financing activities7,261 10,699 118,875Net increase (decrease) in cash and cash equivalents(21,040) 19,464 25,005Cash and cash equivalents, beginning of year56,984 37,520 12,515Cash and cash equivalents, end of year$35,944 $56,984 $37,520Supplemental cash flow information: Cash paid for interest, including royalty interest obligation$3,852 $4,224 $5,193Cash paid for income taxes, net of refunds$247 $195 $34Non-cash investing and financing activities: Issuance of stock from conversion of convertible senior notes$— $3,929 $—Net increase (decrease) in accrued fixed assets$(789) $1,393 $(1,095)See accompanying notes to consolidated financial statements.F- 8Table 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, manufacture and commercialization of pharmaceutical products, based on its proprietary DepoFoam® extended release drug deliverytechnology, for use primarily in hospitals and ambulatory surgery centers. The Company’s lead product, EXPAREL® (bupivacaine liposome injectablesuspension), which consists of bupivacaine encapsulated in DepoFoam, was approved by the United States Food and Drug Administration, or FDA, onOctober 28, 2011 and launched commercially in April 2012. DepoFoam is also the basis for the Company’s other FDA-approved product, DepoCyt(e), whichthe Company manufactures for its commercial partners. The Company also sells its bupivacaine liposome injectable suspension product to a commercialpartner to serve animal health indications.Pacira is subject to risks common to companies in similar industries and stages of development, including, but not limited to, competition from largercompanies, reliance on revenue from few products, reliance on a single manufacturing site, new technological innovations, dependence on key personnel,reliance on third-party service providers and sole source suppliers, protection of proprietary technology and compliance with government regulations.NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING 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, inventory costs, impairments of goodwilland long-lived assets, liabilities and accruals, stock-based compensation and the valuation of deferred tax assets. The Company’s critical accounting policiesare those that are both most important to the Company’s consolidated financial condition and results of operations and require the most difficult, subjectiveor complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that areinherently uncertain. Because of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financialstatements, actual results could differ from these estimates.LiquidityManagement believes that the Company’s existing cash and cash equivalents, short-term investments and cash flows generated from product sales willbe sufficient to enable the Company to meet its planned operating expenses, capital expenditure requirements, payment of the principal on any conversionsof the Company’s convertible senior notes and to service its indebtedness at least through March 1, 2018. However, changing circumstances may cause theCompany to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because ofcircumstances beyond its control. See Note 8, Debt, for further discussion of the Company’s convertible senior notes and conversion elections. The Companyexpects to continue to incur substantial additional expenditures as it continues to commercialize EXPAREL, develops and seeks regulatory approval for itsproduct candidates, and expands its manufacturing facilities for EXPAREL and its other product candidates, including costs associated with certain technicaltransfer activities and construction of two dedicated manufacturing suites in England.Revenue RecognitionThe Company’s principal sources of revenue include (i) sales of EXPAREL in the United States, or US, (ii) sales of DepoCyt(e) to our commercialpartners within the US and the European Union, or EU, (iii) royalties based on sales by commercial partners of DepoCyt(e) and (iv) license fees and milestonepayments. The Company recognizes revenue when there is persuasive evidence that an arrangement exists, title has passed, collection is reasonably assuredand the price is fixed or determinable.F- 9Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)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 DepoCyt(e) and other product sales upon shipment. Prior to the shipment of manufactured products, the Company conducts initialproduct 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, contract terms, inventory data and otherrelated information 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 12 months following product expiration. The Company estimates its sales return reserve based on its historical returnrates, 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 areduction to gross 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 DepoCyt(e)returns have 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 of 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.The following table provides a summary of activity with respect to the Company’s accrued rebates and chargebacks, returns, wholesaler service fees andprompt pay discounts for the years ended December 31, 2016, 2015 and 2014 (in thousands):F- 10Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ReturnsAllowances Prompt PaymentDiscounts Wholesaler ServiceFees Volume Rebatesand Chargebacks TotalBalance at December 31, 2013$897 $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, 20141,559 575 588 321 3,043 Provision339 4,905 3,482 2,020 10,746 Payments/credits(165) (4,855) (3,325) (1,544) (9,889)Balance at December 31, 20151,733 625 745 797 3,900 Provision694 5,448 4,118 2,611 12,871 Payments/credits(1,081) (5,478) (4,128) (2,284) (12,971)Balance at December 31, 2016$1,346 $595 $735 $1,124 $3,800Royalty RevenueThe Company recognizes revenue from royalties based on sales of its commercial partners’ net sales of DepoCyt(e) and sales of bupivacaine liposomeinjectable suspension product to serve animal health indications.Royalties are recognized as earned in accordance with contract terms when they can be reasonably estimated and collection is reasonably assured.Based on historical product sales, royalty receipts and other relevant information, the Company accrues royalty revenue each quarter.Collaborative Licensing and Milestone RevenueThe Company recognizes revenues from non-refundable up-front license fees received under collaboration agreements ratably over the performanceperiod as determined under the agreement (estimated development period in the case of development agreements, and contract period or longest patent life inthe case of supply and distribution agreements). If the estimated performance period is subsequently modified, the Company will modify the period overwhich the up-front license fee is recognized accordingly on a prospective basis. Upon notification of a termination of a collaboration agreement, anyremaining non-refundable license fees received by the Company, which had been deferred, are recognized over the remaining contractual term. If thetermination is immediate and no additional services are to be performed, the deferred revenue is generally recognized in full. All such recognized revenuesare included in collaborative licensing and milestone 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.(i.e.,wholesalers or commercial partners) in each year presented:F- 11Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Year Ended December 31, 2016 2015 2014Largest customer32% 33% 33%Second largest customer28% 29% 29%Third largest customer26% 28% 24% 86% 90% 86%Revenues from customers outside the US accounted for 1%, 2% and 2% of the Company’s revenue for the years ended December 31, 2016, 2015 and2014, respectively.Research and Development ExpensesResearch and development expenses consist of costs associated with products and processes being developed, 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 as incurred. A significant portion of the development activities are outsourced to third parties,including contract research organizations. In such cases, the Company 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.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 accumulated other comprehensive loss until realized. Realized gains and losses are included in interest income in theconsolidated 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:F- 12Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Asset Category Useful LivesComputer equipment and software 1 to 3 yearsOffice furniture and equipment 5 yearsManufacturing and laboratory equipment 5 to 10 yearsAsset Retirement ObligationsThe Company has contractual obligations stemming from certain of its lease agreements to return leased space to its original condition upontermination of the lease agreement. The Company records an asset retirement obligation, or ARO, along with a corresponding capital asset in an amountequal to the estimated fair value of the ARO. In subsequent periods, the Company records interest expense to accrete the ARO to full value. Each ARO capitalasset is depreciated over the depreciable term of the associated asset.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. Goodwill represents the excess of purchase price over fair value acquired in a business combination and is not amortized, but subjectto 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 consolidatedstatements of 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 statements 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 accounts receivable and royalties on DepoCyte® in Euros. Gains andlosses from foreign currency transactions are reflected in the consolidated statements of operations and were not significant in any period. All foreigncurrency receivables and payables 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 usingF- 13Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuationallowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of December 31, 2016 and 2015, alldeferred tax assets were fully offset by a valuation allowance because there is significant doubt regarding the Company’s ability to utilize such net deferredtax 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.Per Share DataBasic net income (loss) per common share is computed by dividing net income (loss) available (attributable) to common stockholders by the weightedaverage number of shares of common stock outstanding during the period.Diluted net income (loss) per common share is calculated by dividing net income (loss) available (attributable) to common stockholders as adjusted forthe effect of dilutive securities, if any, by the weighted average number of common stock and dilutive common stock outstanding during the period. Potentialcommon shares include the shares of common stock issuable upon the exercise of outstanding stock options and warrants, the vesting of restricted stockunits, or RSUs, and the purchase of shares from the employee stock purchase plan (using the treasury stock method), as well as the conversion of the excessconversion value on the Company’s convertible senior notes. Potential common shares in the diluted net loss per share computation are excluded to theextent that they would be anti-dilutive. For periods where the Company reported a net loss, no potentially dilutive securities were included in thecomputation of diluted net loss per share.Stock-Based CompensationThe Company’s stock-based compensation program includes grants of stock options and restricted stock units to employees, consultants, and non-employee directors in addition to the opportunity for employees to participate in an employee stock purchase plan. The expense associated with theseprograms is recognized in the Company’s consolidated statements of operations based on their fair values as they are earned under the applicable vestingterms or the length of an offering period.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. The Company used an expected term based on its historical data from stock optionexercises. In prior years the Company utilized the “simplified” method for “plain vanilla” options to estimate the expected term of stock option grants. Underthat approach, the weighted average expected life was presumed to be the average of the vesting term and the contractual term of the option. The risk-freeinterest rate is based on the implied yield on United States Department of the Treasury zero coupon bonds for periods commensurate with the expected termof the options. The dividend yield on the Company’s common stock is estimated to be zero as the Company has not paid any dividends since inception, nordoes it have any intention to do so in the foreseeable future. The Company estimates the level of award forfeitures expected to occur based on its historicaldata and records compensation cost only for those awards that are ultimately expected to vest.Segment ReportingThe Company operates in one reportable segment and, accordingly, no segment disclosures have been presented.F- 14Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 3—RECENT ACCOUNTING PRONOUNCEMENTSRecently AdoptedIn April 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2015-03, Interest—Imputation ofInterest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability bepresented on the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debtdisclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents achange in accounting principle. The update is effective for fiscal years beginning after December 15, 2015. The Company adopted this standard on January 1,2016. The Company applied the new guidance retrospectively to all prior periods presented in the financial statements to conform to the 2016 presentation.As a result, $1.9 million of debt issuance costs related to the Company’s convertible senior notes at December 31, 2015 were reclassified from other assets to areduction in the carrying value of the Company’s convertible senior notes.Not Adopted as of December 31, 2016In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires that an entity recognize the amount of revenue towhich it expects to be entitled for the transfer of promised goods or services to its customers. In order to achieve this core principle, an entity should apply thefollowing steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4)allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performanceobligation. During the fiscal third quarter of 2015, the FASB approved a one year deferral to the effective date to be adopted by all public companies for allannual periods and interim reporting periods beginning after December 15, 2017. During 2016, the FASB issued additional guidance and clarificationrelating to identifying performance obligations, licensing, principal versus agent considerations, assessing collectability, presentation of sales taxes, noncashconsideration and contract modifications and completed contracts at transition. These updates will replace existing revenue recognition guidance underGAAP when it becomes effective for the Company beginning January 1, 2018, and permits two methods of adoption: the full retrospective method, whichrequires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption tobe recognized as an adjustment to opening retained earnings in the period of adoption. While the Company is continuing to evaluate the impact of theseupdates on its consolidated financial statements, it does not expect the implementation of ASU 2014-09 and the subsequently issued related guidance tohave a material impact on its consolidated financial statements.In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The standard requires entities tomeasure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measureinventory at the lower of cost or market (market in this context is defined as one of three different measures, one of which is net realizable value). Thestandard is effective for the Company prospectively beginning January 1, 2017. The adoption of ASU 2015-11 is not expected to have a material impact onthe Company’s consolidated financial statements.In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). This update requires lessees to recognize lease assets and lease liabilities on thebalance sheet for those leases classified as operating leases under previous authoritative guidance. The lease liability will be equal to the present value oflease payments and the right-of-use asset will be based on the lease liability, subject to adjustment for items such as initial direct costs. For income statementpurposes, the new standard retains a dual model similar to Accounting Standards Codification, or ASC, 840, requiring leases to be classified as eitheroperating or financing. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases underASC 840) while financing leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). Thisupdate also introduces new disclosure requirements for leasing arrangements. The standard is effective for annual reporting periods beginning after December15, 2018 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the impact of ASU 2016-02 on itsconsolidated financial statements. Refer to Note 17, Commitments and Contingencies, for further discussion on the Company’s leases.In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting. This update includes multiple provisions intended to simplify various aspects ofF- 15Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)the accounting for share-based payment transactions including accounting for excess tax benefits and tax deficiencies, classification of excess tax benefits inthe statement of cash flows and accounting for award forfeitures. The update also removes the present requirement to delay recognition of an excess taxbenefit until it reduces current taxes payable, instead, it is required to be recognized at the time of settlement, subject to normal valuation allowanceconsiderations. This update became effective for the Company beginning January 1, 2017. The Company will elect an accounting policy change to recordforfeitures as they occur rather than estimating forfeitures during each period and will record a charge of approximately $0.3 million to retained earnings as ofJanuary 1, 2017 related to the reversal of cumulative forfeiture estimates. The adoption of this standard also will result in the recognition of $29.3 million ofpreviously unrecognized excess tax benefits in deferred tax assets, fully offset by a valuation allowance. All tax-related cash flows resulting from stock-basedcompensation, including the excess tax benefits related to the settlement of stock-based awards, will be classified as cash flows from operating activities onthe Company’s consolidated statements of cash flows. Based on a preliminary assessment, the Company does not believe that any of the provisions in ASU2016-09 will have a significant impact on its consolidated financial statements.In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected creditlosses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Entities willnow use forward-looking information to better form their credit loss estimates. This update also requires enhanced disclosures to help financial statementusers better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of anentity’s portfolio. This ASU is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company isevaluating the impact of ASU 2016-13 on its consolidated financial statements.In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,which clarifies existing guidance on how companies present and classify certain cash receipts and cash payments in the statement of cash flows by addressingspecific cash flow issues in an effort to reduce diversity in practice, including guidance on debt prepayment or extinguishment costs and contingentconsideration payments made after a business combination. This update is effective for annual reporting periods beginning after December 15, 2017, withearly adoption permitted. The Company is currently evaluating the impact of ASU 2016-15 on its consolidated financial statements.Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or notsignificant to the consolidated financial statements of the Company.NOTE 4—INVENTORIESThe components of inventories are as follows (in thousands): December 31, 2016 2015Raw materials$11,742 $16,712Work-in-process11,621 12,152Finished goods7,915 32,781 Total$31,278 $61,645The Company is required to perform ongoing stability testing on select lots of EXPAREL at various time intervals. In October 2016, as part of itsongoing stability testing, the Company identified that a single batch of EXPAREL, which was manufactured in early 2016, did not meet the requiredspecification. An internal investigation has tied this unexpected result to a modification to the manufacturing process that existed when this product wasmade, which has subsequently been corrected. The Company reserved all impacted inventory on hand and exchanged a limited number of boxes that weresold from the impacted inventory. As a result, the Company recorded in 2016 a $20.7 million charge to cost of goods sold related to this matter, of which$20.5 million was recorded as an inventory reserve and $0.2 million for replacement boxes and other related administrative costs.F- 16Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 5—FIXED ASSETSFixed assets, net summarized by major category, consist of the following (in thousands): December 31, 2016 2015Machinery and laboratory equipment$34,309 $29,864Leasehold improvements33,787 30,834Computer equipment and software5,623 4,007Office furniture and equipment1,606 1,439Construction in progress63,201 49,097 Total138,526 115,241Less: accumulated depreciation(37,510) (24,917)Fixed assets, net$101,016 $90,324Depreciation expense for the years ended December 31, 2016, 2015 and 2014 was $12.8 million, $11.2 million and $9.3 million, respectively. Duringthe years ended December 31, 2016, 2015 and 2014, the Company capitalized interest of $1.5 million, $0.8 million and $0.4 million, respectively. As ofDecember 31, 2016 and 2015, total fixed assets, net, includes leasehold improvements and manufacturing process equipment located in England in theamount of $33.7 million and $25.9 million, respectively.For the years ended December 31, 2016 and 2015, the Company has recorded an ARO of $0.5 million and $0.6 million, respectively, included in otherliabilities on its consolidated balance sheet, for costs associated with returning leased space to its original condition upon the termination of certain leaseagreements.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 DepoBupivacaine products collected, as well as milestone payments for DepoBupivacaine products, as follows:(i)$10.0 million upon the first commercial sale in the United States (met April 2012);(ii)$4.0 million upon the first commercial sale in a major EU country (United Kingdom, France, Germany, Italy and Spain);(iii)$8.0 million when annual net sales collected reach $100.0 million (met September 2014);(iv)$8.0 million when annual net sales collected reach $250.0 million (met June 2016); and(v)$32.0 million when annual net sales collected reach $500.0 million.The first milestone was met in April 2012 resulting in a $10.0 million payment to Skyepharma. The Company recorded this payment net of a $2.0million 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 annual EXPAREL net sales collected. InJune 2016, the Company recorded an $8.0 million milestone payment for achieving $250.0 million of annual EXPAREL net sales collected. For purposes ofmeeting future potential milestone payments, with certain exceptions, annual net sales are measured on a rolling quarterly basis. Cumulatively throughDecember 31, 2016, the Company has recorded an additional $22.8 million as goodwill for earn-out payments which are based on a percentage of net sales ofDepoBupivacaine products, including EXPAREL, collected. Any remaining earn-out payments will also be treated as additional costs of the Acquisition and,therefore, recorded as goodwill if and when each contingency is resolved.The Acquisition was treated as a stock acquisition for tax purposes and, therefore, the acquired intangibles for book purposes are not deductible forincome tax purposes. The Company also recorded goodwill related to contingent payments due under the Acquisition during the years ended December 31,2016, and 2015, which are not deductible for income tax purposes.The change in the carrying value of goodwill is summarized as follows (in thousands):F- 17Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 6—GOODWILL AND INTANGIBLE ASSETS (Continued) Carrying ValueBalance at December 31, 2014 $23,761Percentage payments on collections of net sales of DepoBupivacaine products 7,119Balance at December 31, 2015 30,880Milestone payment triggered by collections of net sales of DepoBupivacaine products 8,000Percentage payments on collections of net sales of DepoBupivacaine products 7,857Balance at December 31, 2016 $46,737Intangible 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, 2016 December 31, 2015 Amortizable Intangible Assets:GrossCarryingValue AccumulatedAmortization IntangibleAssets, Net GrossCarryingValue AccumulatedAmortization IntangibleAssets, Net EstimatedUseful LifeCore technology$2,900 $(2,900) $— $2,900 $(2,819) $81 9 YearsDeveloped technology11,700 (11,700) — 11,700 (11,700) — 7 YearsTrademarks and trade names400 (400) — 400 (400) — 7 Years Total intangible assets$15,000 $(15,000) $— $15,000 $(14,919) $81 Annual amortization expense for intangibles for the years ended December 31, 2016, 2015 and 2014 was $0.1 million, $0.3 million and $0.8 million,respectively.NOTE 7—ACCRUED EXPENSESAccrued expenses consist of the following (in thousands): December 31, 2016 2015Compensation and benefits$11,228 $11,944Accrued operating expenses16,538 14,601Accrued royalties3,822 3,731Accrued interest1,605 1,605Product returns, rebates and other fees3,473 3,494Total$36,666 $35,375NOTE 8—DEBTThe composition of the Company’s debt and financing obligations is as follows (in thousands): December 31, 2016 20153.25% convertible senior notes$118,531 $118,533Deferred financing costs(1,276) (1,888)Discount on debt(8,517) (12,605)Total debt, net of debt discount$108,738 $104,040Convertible Senior NotesOn January 23, 2013, the Company completed a private placement of $120.0 million in aggregate principal amount of 3.25% convertible senior notesdue 2019, or the Notes, and entered into an indenture agreement, or the Indenture, with respectF- 18Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 8—DEBT (Continued)to the Notes. The Notes accrue interest at a fixed rate of 3.25% per year, payable semiannually in arrears on February 1 and August 1 of each year. The Notesmature on February 1, 2019.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, if the last reported sales price of the Company’s common stock for at least 20 trading days during the period includingthe last 30 consecutive trading days of the quarter (ending on the last trading day of the immediately preceding calendar quarter) is greater than 130% of theconversion price then applicable (the “Consecutive Sales Price”), on each applicable trading 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;(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, 2016, the requirements with respect to the Consecutive Sales Price were not met. As a result, the Notes areclassified as a long-term obligation and are not convertible during the quarter ended March 31, 2017. As of December 31, 2016, the Notes had a market priceof $1,406 per $1,000 principal amount, compared to an estimated conversion value of $1,301 per $1,000 principal amount. In the event of conversion,holders would forgo all future interest payments, any unpaid accrued interest and the possibility of further stock price appreciation. Upon the receipt ofconversion requests, the settlement of the Notes will be paid pursuant to the terms of the Indenture, which state that the principal must be settled in cash. Inthe event that all of the Notes are converted, the Company would be required to repay the $118.5 million in principal value and approximately $35.7million of cash or issue approximately 1.1 million shares of its common stock (or a combination of cash and shares of its common stock at the Company’soption) to settle the conversion premium as of December 31, 2016, causing dilution to the Company’s shareholders and/or significant expenditures of theCompany’s cash and liquid securities.In 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 was paid in cash pursuant to the terms of the Indenture in April 2015. The Company elected to settle theconversion premium by issuing 44,287 shares of its common stock, calculated based on a daily volume-weighted adjusted price over a 40 trading-dayobservation period which ended on April 8, 2015. The Company realized a $0.1 million loss on the early extinguishment of the converted Notes. TheCompany has completed other immaterial conversion requests. The future convertibility and resulting balance sheet classification of this liability is monitored at each quarterly reporting date and is analyzeddependent upon market prices of the Company’s common stock during the prescribed measurement periods. The Notes are classified on the Company’sconsolidated balance sheet at December 31, 2016 as a long-term obligationF- 19Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 8—DEBT (Continued)and at December 31, 2015 as a current obligation. In the event that the holders of the Notes have the election to convert, the Notes would then be considereda current obligation and classified as such.As of February 1, 2017, the Company may redeem for cash all or part of the Notes if the last reported sale price (as defined in the Indenture) of theCompany’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption. The redemptionprice will equal the sum of (i) 100% of the principal amount of the Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest,if any, to, but excluding, the redemption date, plus (iii) a “make-whole premium” payment in cash equal to the sum of the present values of the remainingscheduled payments of interest that would have been made on the Notes to be redeemed had such Notes remained outstanding from the redemption date tothe maturity date (excluding interest accrued to, but excluding, the redemption date that is otherwise paid pursuant to the preceding clause (ii)). The presentvalues of the remaining interest payments will be computed using a discount rate equal to 2.0%. The Company must make the make-whole premiumpayments on all Notes called for redemption prior to the maturity date, including Notes converted after the date the Company provides the notice ofredemption. No sinking fund is provided for the Notes, which means that the Company 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.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 on 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 by the Company (in thousands):F- 20Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 8—DEBT (Continued) Year Ended December 31, 2016 2015 2014Contractual interest expense$3,852 $3,856 $3,900Amortization of debt issuance costs612 615 620Amortization of debt discount4,088 4,102 4,139Capitalized interest (Note 5)(1,491) (848) (381) Total$7,061 $7,725 $8,278 Effective interest rate on the Notes7.22% 7.21% 7.22%Sale of Royalty InterestsIn 2000, prior to the Acquisition, Pacira California and SkyePharma PLC entered into a Royalty Interests Assignment Agreement, or PLC RoyaltyAgreement, with an affiliate of Paul Capital Advisors, LLC, or Paul Capital, to raise $30.0 million. Under the PLC Royalty Agreement, Paul Capital had theright to receive a royalty interest in four of SkyePharma PLC’s product sales including product sales of, and other payments related to DepoCyt(e) and the no-longer marketed DepoDur, which are recorded as a royalty interest obligation in the Company’s consolidated statements of operations. Payments began forproduct sales realized on or after January 1, 2003 and continued through December 31, 2014. The related financing arrangement with Paul Capital terminatedon December 31, 2014, and the final payment to Paul Capital occurred in March 2015.NOTE 9—FINANCIAL INSTRUMENTSFair Value MeasurementsFair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in the principal or most advantageous market inan orderly 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 of fair valuemeasurements 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, accounts receivable and accounts payable approximate theirrespective fair values due to the short-term nature of these items. The fair value of the Company’s Notes at December 31, 2016 are calculated utilizing marketquotations from an over-the-counter trading market for these notes (Level 2). The carrying amount and fair value of the Notes are as follows (in thousands): CarryingValue Fair Value Measurements UsingFinancial Liabilities Carried at Historical Cost Level 1 Level 2 Level 3December 31, 2016 Convertible senior notes * $108,738 $— $166,672 $—* The fair value of the Notes was based on the Company’s closing stock price of $32.30 per share at December 31, 2016 compared to a conversion price of $24.82 per share which, ifconverted, would result in an approximate conversion premium of 1.1 million shares or $35.7 million of cash. The maximum conversion premium that can be due on the Notes is 4.8million shares, which assumes no increases in the conversion rate for certain corporate events.Short-term investments consist of asset-backed securities collateralized by credit card receivables, investment grade commercial paper and corporatebonds with maturities greater than three months, but less than one year. Long-term investmentsF- 21Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 9—FINANCIAL INSTRUMENTS (Continued)consist of corporate bonds with maturities greater than one year. The net unrealized gains from the Company’s short-term and long-term investments arereported in other comprehensive income (loss). At December 31, 2016, all of the Company’s short-term investments are classified as available for saleinvestments and are determined to be Level 2 instruments, which are measured at fair value using standard industry models with observable inputs. The fairvalue 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 fairvalue of the asset-backed securities and corporate bonds is principally measured or corroborated by trade data for identical issues in which related tradingactivity is not sufficiently frequent to be considered a Level 1 input or that of comparable securities. At December 31, 2016, all short-term and long-terminvestments were rated A or better by Standard & Poor’s.The following summarizes the Company’s investments at December 31, 2016 and 2015 (in thousands):December 31, 2016 Cost GrossUnrealizedGains GrossUnrealizedLosses Fair Value(Level 2)Debt securities: Short-term: Asset-backed securities $9,012 $— $(2) $9,010 Commercial paper 39,530 8 (15) 39,523 Corporate bonds 88,141 11 (32) 88,120 Total $136,683 $19 $(49) $136,653December 31, 2015 Cost GrossUnrealizedGains GrossUnrealizedLosses Fair Value(Level 2)Debt securities: Short-term: Asset-backed securities $27,484 $— $(15) $27,469 Commercial paper 35,191 31 — 35,222 Corporate bonds 39,319 2 (31) 39,290 Subtotal 101,994 33 (46) 101,981 Long-term: Corporate bonds 13,501 — (39) 13,462 Total $115,495 $33 $(85) $115,443Certain 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, 2016, 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.As of December 31, 2016, three customers accounted for over 10% of the Company’s accounts receivable; 36%, 29% and 25%, respectively. AtDecember 31, 2015, three customers accounted for over 10% of the Company’s accounts receivable; 34%, 28% and 27%, respectively. Revenues areprimarily derived from major wholesalers and pharmaceutical companies which 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, 2016 and 2015,no allowances for doubtful accounts were deemed necessary by the Company on its accounts receivable.F- 22Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 10—STOCKHOLDERS’ EQUITYCommon StockThe Company is authorized to issue up to 250,000,000 shares of common stock, of which 37,480,952 and 36,848,319 were outstanding atDecember 31, 2016 and 2015, respectively.In April 2014, the Company completed a follow-on underwritten public offering of 1,840,000 shares of common stock, including the shares issued tocover 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.Preferred StockThe Company is authorized to issue up to 5,000,000 shares of preferred stock. No preferred stock was outstanding at December 31, 2016 or 2015.WarrantsThe Company had no warrants outstanding at December 31, 2016. At December 31, 2015, the Company had 7,216 warrants outstanding at a weightedaverage exercise price of $13.44.Accumulated Other Comprehensive Income (Loss)The following table illustrates the changes in the balances of the Company’s accumulated other comprehensive loss (in thousands): Net Unrealized Gains(Losses) From AvailableFor Sale InvestmentsBalance at December 31, 2014$(80)Other comprehensive income before reclassifications28Amounts reclassified from accumulated other comprehensive income (loss)—Balance at December 31, 2015(52)Other comprehensive income before reclassifications22Amounts reclassified from accumulated other comprehensive income (loss)—Balance at December 31, 2016$(30)NOTE 11—STOCK PLANSStock Incentive PlansThe Company’s amended and restated 2011 stock incentive plan, or 2011 Plan, was adopted by its Board of Directors and approved by its stockholdersin June 2014. The 2011 Plan allows the granting of incentive stock options, non-statutory stock options, restricted stock awards and other stock-basedawards. Since the adoption of the 2011 Plan, any remaining shares available for issuance under a 2007 stock incentive plan, or 2007 Plan, are reallocated tothe 2011 Plan. In April 2014, the Company’s Board of Directors adopted the 2014 Inducement Plan which authorized 175,000 shares of common stock to begranted as equity awards to new employees.In June 2016, the Company’s board of directors adopted an amendment to the 2011 Plan. Under the amendment, an additional 4,000,000 shares ofcommon stock were authorized for issuance as equity awards under the plan. The amendment to the 2011 Plan was subsequently ratified by the Company’sstockholders and became effective in June 2016.All of the Company’s stock option grants have an exercise price equal to the closing price of the Company’s common stock on the 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 Company may occasionallygrant options with different vesting terms). Since 2015, the Company has granted RSUs to employees and its Board of Directors. The Company usesauthorized and unissued shares to satisfy its obligations under these plans.F- 23Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 11—STOCK PLANS (Continued)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 in June 2014. The purpose of the ESPP is to provide a vehicle for eligible employees to purchase shares of the Company’s commonstock at a discounted price and to help retain and motivate current employees as well as attract new talent. Under the ESPP, up to 500,000 shares of commonstock may be sold under the ESPP which expires in June 2024. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning ofSection 423 of 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.Six-month offering periods begin on January 1 and July 1 of each year. During an offering period, eligible employees have the opportunity to elect topurchase shares of the Company’s common stock on the purchase dates of June 30 and December 31. The per share purchase price will be equal to the lesserof 85% of the fair market value of the Company’s common stock on either the offering date or the purchase date.The following table contains information about the Company’s plans at December 31, 2016:Stock Incentive Plans Awards Reserved forIssuance Awards Issued Awards Available forGrant2007 Plan 2,022,837 2,022,837 —2011 Plan 9,931,700 6,503,336 3,428,3642014 Inducement plan 175,000 66,626 108,374 12,129,537 8,592,799 3,536,738 Employee Stock Purchase Plan Shares Reserved forPurchase Shares Purchased Shares Available forPurchase2014 ESPP 500,000 103,620 396,380Stock-Based CompensationCompensation expense for stock options and RSUs granted to employees and directors is based on the estimated grant date fair value of optionsrecognized over the requisite service period on a straight-line expense attribution method. Compensation expense for options and RSUs granted to non-employees is based on the fair value of options, which are revalued each reporting period until vested and are recognized as expense over the requisiteservice period. Compensation expense for ESPP options is based on the grant date fair value of the ESPP shares and the grant date number of shares that canbe purchased, which is recognized as expense over the length of an offering period.The Company recognized stock-based compensation expense (net of forfeitures) in its consolidated statements of operations for the years endedDecember 31, 2016, 2015 and 2014 as follows (in thousands): Year Ended December 31, 2016 2015 2014Cost of goods sold $6,438 $6,012 $3,582Research and development 3,297 5,134 6,490Selling, general and administrative 21,513 22,222 14,750Total $31,248 $33,368 $24,822 Stock-based compensation from: Stock options (employee awards) $24,505 $27,262 $19,182 Stock options (consultant awards) 841 2,367 5,295 RSUs 5,117 2,887 — ESPP 785 852 345 Total $31,248 $33,368 $24,822F- 24Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 11—STOCK PLANS (Continued)In 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.The following table summarizes the Company’s stock option activity and related information for the period from January 1, 2014 to December 31,2016: Number ofOptions WeightedAverageExercise Price (PerShare) Weighted AverageRemainingContractualTerm (Years) AggregateIntrinsic Value(in Thousands)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 $248,276Granted906,706 75.35 Exercised(618,434) 16.29 $39,401Forfeited(294,880) 64.29 Expired(25,526) 81.94 Outstanding at December 31, 20154,645,722 44.03 7.31 $162,340Granted1,656,598 38.20 Exercised(518,226) 11.13 $21,750Forfeited(401,048) 70.27 Expired(175,303) 80.91 Outstanding at December 31, 20165,207,743 $42.16 7.39 $37,581Exercisable at December 31, 20162,798,083 $35.30 5.93 $37,403Vested and expected to vest at December 31, 20164,858,131 $41.92 7.25 $37,567As of December 31, 2016, $57.1 million of total unrecognized compensation cost related to non-vested stock options is expected to be recognized overa weighted average period of 2.8 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, 2016, 2015 and 2014 was $19.13, $37.82 and $42.62 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, 2016 2015 2014Expected dividend yieldNone None NoneRisk free interest rate1.03% - 2.48% 1.40% - 2.28% 0.02% - 2.16%Expected volatility53.5% 52.9% 57.2%Expected term of options5.77 years 5.76 years 5.86 yearsF- 25Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 11—STOCK PLANS (Continued)The following table summarizes the Company’s RSU activity and related information for the period from January 1, 2015 to December 31, 2016: Numberof Units WeightedAverage GrantDate Fair Value (PerShare) AggregateIntrinsic Value(in Thousands)Unvested at December 31, 2014— $— $—Granted232,046 78.65 Vested— — Forfeited(15,848) 79.43 Unvested at December 31, 2015216,198 78.59 $16,602Granted256,631 40.21 Vested(61,487) 78.33 Forfeited(46,939) 68.84 Unvested at December 31, 2016364,403 $52.85 $11,824Expected to vest at December 31, 2016308,797 $53.05 $9,974As of December 31, 2016, $16.0 million of total unrecognized compensation cost related to non-vested RSUs is expected to be recognized over aweighted average period of 3.0 years. The Company’s RSUs have a maximum vest date of four years from the date of grant. The fair values of RSUs awardedare equal to the closing price of the fair market value of the Company’s common stock on the date of grant.The fair values of the ESPP share options granted are estimated using the Black-Scholes model with the following weighted average assumptions: Year Ended December 31, 2016 2015 2014ESPP option fair value$10.57 - $25.28 $21.93 - $25.24 $23.27Expected dividend yieldNone None NoneRisk free interest rate0.37% - 0.49% 0.11% - 0.13% 0.37%Expected volatility63.4% 50.7% 28.2%Expected term of ESPP share options6 months 6 months 4 monthsNOTE 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 common share is calculated by dividing the net income (loss) attributable tocommon shares by the weighted average number of common shares outstanding plus dilutive potential common stock outstanding during the period.Potential common shares include the shares of common stock issuable upon the exercise of outstanding stock options and warrants, the vesting of RSUs andthe purchase of shares from the employee stock purchase plan (using the treasury stock method) as well as the conversion of the excess conversion value onthe Notes. As discussed in Note 8, Debt, the Company must settle the principal of the Notes in cash upon conversion, and it may settle any conversionpremium in either cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’soption. For purposes of calculating the dilutive impact of the conversion premium on the Notes, it is presumed that the conversion premium will be settled incommon 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 the years ended December 31, 2016 and 2014, no potentially dilutive securities have been included in the computationof diluted net loss per share for those periods.The following table sets forth the computation of basic and diluted net income (loss) per share for the years ended December 31, 2016, 2015 and 2014(in thousands, except per share amounts):F- 26Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 12—NET INCOME (LOSS) PER SHARE (Continued) Year Ended December 31, 2016 2015 2014Numerator: Net income (loss)$(37,949) $1,856 $(13,716)Denominator: Weighted average common shares outstanding—basic37,236 36,540 35,299Computation of diluted securities: Dilutive effect of stock options— 1,638 —Dilutive effect of RSUs— 3 —Dilutive effect of conversion premium on the Notes— 3,113 —Dilutive effect of warrants— 6 —Dilutive effect of ESPP— 1 —Weighted average common shares outstanding—diluted37,236 41,301 35,299Net income (loss) per share: Basic net income (loss) per common share$(1.02) $0.05 $(0.39)Diluted net income (loss) per common share$(1.02) $0.04 $(0.39)The following outstanding stock options, RSUs, conversion premium on the Notes, warrants and ESPP purchase options are antidilutive in the periodspresented (in thousands): Year Ended December 31, 2016 2015 2014Weighted average number of stock options4,482 1,891 3,534Weighted average number of RSUs290 99 —Conversion premium on the Notes2,022 — 2,483Weighted average number of warrants1 — 21Weighted average ESPP purchase options21 8 1 Total6,816 1,998 6,039NOTE 13—INCOME TAXESIncome (loss) before income taxes and the related tax expense is as follows (in thousands): Year Ended December 31, 2016 2015 2014Income (loss) before income taxes: Domestic$(36,339) $3,760 $(13,271) Foreign(1,505) (1,640) (272) Total income (loss) before income taxes$(37,844) $2,120 $(13,543) Current taxes: Federal$11 $92 $— State94 172 173 Total income tax expense$105 $264 $173The tax provision of $0.1 million and $0.2 million for the years ended December 31, 2016 and 2014, respectively, is principally the result of minimumstate taxes. The tax provision of $0.3 million for the year ended December 31, 2015 is the result of the federal alternative minimum tax and state taxes.F- 27Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 13—INCOME TAXES (Continued)A reconciliation of income taxes at the US federal statutory rate to the provision for income taxes is as follows: Year Ended December 31, 2016 2015 2014U.S. federal statutory rate35.00 % 35.00 % 35.00 %State taxes2.20 % 0.71 % (32.62)%Foreign taxes(0.81)% 12.03 % (0.13)%Change in valuation allowance(43.96)% 10.32 % (17.71)%Stock-based compensation(0.54)% 7.26 % (0.44)%Tax credits8.77 % (30.63)% 5.49 %Interest expense5.75 % (37.57)% 10.68 %Effect of state blended rate changes(4.65)% — % — %Other(2.04)% 15.33 % (1.55)%Effective tax rate(0.28)% 12.45 % (1.28)%The Company’s effective tax rates of (0.28)% and (1.28)% for the years ended December 31, 2016 and 2014, respectively, differed from the expected USstatutory tax rate of 35.0%. This difference was primarily driven by pretax losses for which the Company concluded that a majority of its tax benefits are notmore-likely-than-not to be realized, resulting in the recording of a full valuation allowance. The Company’s effective tax rate of 12.45% for the year endedDecember 31, 2015 was favorably impacted by the utilization of domestic net operating loss carryforwards for which there was a full valuation allowance.Deferred taxes reflect the tax effects of the differences between the amounts recorded as assets and liabilities for financial reporting purposes and thecomparable amounts recorded for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2016and 2015 are as follows (in thousands): December 31, 2016 2015Deferred tax assets: Net operating loss carry-forwards$96,163 $101,011Federal and state credits13,724 7,232Depreciation and amortization2,604 1,310Accruals and reserves14,004 5,558Deferred revenue3,023 3,530Stock based compensation21,890 17,201Other531 953Total deferred tax assets151,939 136,795Deferred tax liabilities: Discount on convertible senior notes(3,186) (4,679) 148,753 132,116Less: valuation allowance(148,753) (132,116)Net deferred tax assets$— $—As of December 31, 2016, the available federal net operating loss carryforwards, or NOLs, and the federal tax credit carryforwards totaled $341.4million and $10.5 million, respectively. The Company also had state NOLs and state tax credit carryforwards of $222.8 million and $5.0 million,respectively, which are subject to change on an annual basis due to variations in the Company’s annual state apportionment factors. The Company had non-US tax NOLs of $3.4 million at December 31, 2016. The federal and state NOLs will begin expiring in 2025 and 2017, respectively, if the Company has notused them prior to that time. The Company applies the with-and-without approach to determine the sequence in which stock-based compensationF- 28Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 13—INCOME TAXES (Continued)deductions and NOLs are utilized. Accordingly, no excess tax benefit related to stock option exercises was recognized in the current year. $78.2 million ofthe federal NOLs are related to excess tax benefits arising from the exercise of stock options.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 certain 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 $192.4 million offederal net operating losses are subject to annual limitations. At December 31, 2016, $120.1 million of these federal net operating losses were available. TheCompany estimates that an additional $14.8 million will become available in 2017, $10.3 million annually from 2018 through 2022, and the remaining $6.0million through 2025. In addition, California and certain states have previously suspended or limited the use of net operating loss carryforwards for certaintaxable years, and certain states are considering similar future measures. As a result, the Company may incur higher state income tax expense in the future.In accordance with ASC Topic 740, the Company establishes a valuation allowance for deferred tax assets that, in its judgment, are not more-likely-than-not realizable. These judgments are based on projections of future income, including tax-planning strategies, by individual tax jurisdictions. In eachreporting period, the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to its valuation allowance isappropriate. As a result of this assessment, the Company had a net change in its valuation allowance totaling $16.6 million, $0.8 million and $9.9 millionduring the years ended December 31, 2016, 2015 and 2014, respectively. There is significant doubt regarding the Company’s ability to utilize its net deferredtax assets and, therefore, the Company has recorded a full valuation allowance reducing its net deferred tax assets to zero at both December 31, 2016 and2015.The Company did not have a liability related to unrecognized tax benefits, or UTBs, as of December 31, 2016 and 2015. The Company believes itsUTBs for uncertain tax positions are adequate, consistent with the principles of ASC Topic 740. The Company regularly assesses the likelihood of additionaltax assessments by jurisdiction and, if necessary, adjusts its UTBs based on new information or developments. The Company recognizes interest andpenalties related to UTBs as an income tax expense. No interest or penalties were recognized in income tax expense for the years ended December 31, 2016,2015 or 2014, respectively.The Company is currently subject to audit by the United States Internal Revenue Service, or IRS, for the years 2014 through 2016, and state taxjurisdictions for the years 2010 through 2016. However, the IRS or states may still examine and adjust a net operating loss arising from a closed year to theextent it is utilized in a year that remains subject to audit. The Company’s previously filed income tax returns are not presently under audit by the IRS orstate tax authorities.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 $1.5 million, $1.7 million and $1.0 million of relatedcompensation expense for the years ended December 31, 2016, 2015 and 2014, 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, a Technical Transfer and ServiceAgreement and a Manufacturing and Supply Agreement to collaborate in the manufacture of EXPAREL. Under the terms of the Technical Transfer andService Agreement, Patheon has agreed to undertake certain technical transfer activities and construction services needed to prepare its Swindon, Englandfacility for the manufacture of EXPAREL in two dedicated manufacturing suites. Under these agreements, the Company will make monthly base fee paymentsfor services rendered. The agreements will remain in full effect unless and until they expire or are terminated. Upon termination of the Technical Transfer andServices Agreement (other than termination by the Company in the event that Patheon does not meet the construction and manufacturing milestones or for abreach by Patheon), the Company will pay for the make good costsF- 29Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 15—COMMERCIAL PARTNERS AND OTHER AGREEMENTS (Continued)occasioned by the removal of its manufacturing equipment and for Patheon’s termination costs up to a maximum amount of $2.4 million. Under the terms of the Manufacturing and Supply Agreement, following the FDA approval date of the suites, the Company has agreed to purchaseEXPAREL product from Patheon. Unless earlier terminated by giving notice of up to three years (other than termination by the Company in the event of amaterial breach by Patheon), this agreement will expire on the 10th anniversary of the FDA approval date for the initial manufacturing suite.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’s bupivacaine liposome injectable suspension product for animal health indications. Under theagreement, Aratana developed and obtained FDA approval for the use of the product in veterinary surgery to manage postsurgical pain. In connection with itsentry into the license agreement, the Company received a one-time payment of $1.0 million. In December 2013, the Company received a $0.5 millionmilestone payment under the agreement. In June 2016, the Company recorded $1.0 million in milestone revenue for Aratana’s filing of an FDAAdministrative New Animal Drug Application, or ANADA, and in August 2016 recorded $1.0 million related to the FDA’s approval of the ANADA. TheCompany is eligible to receive up to an additional aggregate $40.0 million upon the achievement of commercial milestones. Aratana is required to pay theCompany a tiered double digit royalty on net sales made in the United States. If the product is approved by foreign regulatory agencies for sale outside of theUnited 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 certainpercentage upon the entry of a generic competitor for animal health indications into a jurisdiction or if Aratana must pay royalties to third parties undercertain circumstances. Unless terminated earlier pursuant to its terms, the license agreement is effective until December 2027, after which Aratana has theoption to extend the agreement for an additional five-year term, subject to certain requirements.Aratana began purchasing bupivacaine liposome injectable suspension product in the third quarter of 2016, which they will market under the tradename NOCITA® to serve animal health indications.NOCITA® is a registered trademark of Aratana Therapeutics, Inc.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 EU 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.Leadiant Biosciences, Ltd.In December 2002, the Company entered into a supply and distribution agreement with Enzon Pharmaceuticals Inc., subsequently acquired by Sigma-Tau Rare Disease, Ltd., subsequently known as Leadiant Biosciences, Ltd., or Leadiant, regarding the promotion and distribution of DepoCyt®. Pursuant tothe agreement, Leadiant was appointed the exclusive distributor of DepoCyt in the United States and Canada for a ten-year term, with successive two yearrenewal periods. Under the supply and distribution agreement, the Company supplies unlabeled DepoCyt vials to Leadiant. Under these agreements, theCompany receives a fixed payment for supplying the vials of DepoCyt and a double-digit royalty on sales, net of supply price, in the United States andCanada. The Company and Leadiant are currently operating under the terms of the agreement.CrossLink BioScience, LLCIn October 2013, the Company and CrossLink BioScience, LLC, or CrossLink, commenced a five-year arrangement for the promotion and sale ofEXPAREL, pursuant to the terms of a Master Distributor Agreement (as amended). On June 30, 2016, the Company provided notice to CrossLink electing toterminate the agreement effective as of September 30, 2016. In connection with the termination of the agreement, a termination fee based on a percentage ofearned performance-based fees isF- 30Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 15—COMMERCIAL PARTNERS AND OTHER AGREEMENTS (Continued)due to CrossLink. This fee of $7.1 million is payable to CrossLink quarterly over two years, beginning in the fourth quarter of 2016, and was recorded inselling, general and administrative expense in the consolidated statements of operations. At December 31, 2016, $5.3 million is classified in accruedexpenses and $1.8 million is classified in other liabilities.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-clinical and clinical material for various Amylin products. The Company wasentitled to payments from Amylin for its work on the formulation and development of compounds with the DepoFoam technology, its achievement of certainclinical development milestones, its achievement of certain worldwide sales and a tiered royalty based upon sales. The development and licensing agreementwith Amylin was in effect until January 2017.NOTE 16—RELATED PARTY TRANSACTIONSThe Company’s former Chief Medical Officer, Dr. Gary Patou, is a partner of MPM Asset Management LLC, or MPM, an investor in the Company. TheCompany incurred related consulting expenses of $0.1 million, $0.3 million and $0.5 million for the years ended December 31, 2016, 2015 and 2014,respectively. At December 31, 2016 there was nothing payable to MPM and at December 31 2015, the amount payable to MPM was $0.1 million. TheCompany’s agreement with MPM expired on December 31, 2015. The Company contracted with Dr. Patou directly for his services for the first six months of2016.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. David Stack, the Company’s ChiefExecutive Officer and Chairman is a managing director at MPM.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. The Company recorded expenses under the consulting arrangement of less than $0.1 million for each of the years ended December 31,2016, 2015 and 2014. In connection with the consulting arrangement, Dr. Pace received an option to purchase 20,000 shares of common stock at an exerciseprice of $11.02 per share and an option to purchase 70,000 shares of common stock at an exercise price of $16.67 per share. At December 31, 2016, there wasnothing payable to Dr. Pace for consulting services and at December 31, 2015, less than $0.1 million was payable to Dr. Pace for consulting services.NOTE 17—COMMITMENTS AND CONTINGENCIESLeases The Company’s leases for its research and development, manufacturing and warehouse facilities in San Diego, California expire in August 2020 and itslease for its corporate headquarters in Parsippany, New Jersey expires in March 2028.As of December 31, 2016, aggregate annual minimum payments due under the Company’s lease obligations are as follows (in thousands):Year Aggregate MinimumPayments2017 $7,8802018 8,0632019 8,2722020 6,3892021 1,2072022 through 2028 7,545Total $39,356Total rent expense, net of amortization of unfavorable lease obligations and tenant improvements, under all operating leases for the years endedDecember 31, 2016, 2015 and 2014 was $6.0 million, $5.7 million and $4.9 million, respectively. Deferred rent at December 31, 2016 and 2015 was $8.6million and $9.2 million, respectively. The Company’s research andF- 31Table of ContentsPACIRA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)NOTE 17—COMMITMENTS AND CONTINGENCIES (Continued)development facility in San Diego, California included a lease incentive allowance of $5.6 million for the payment of leasehold improvements, which theCompany utilized completely in 2015 and 2016. The leasehold improvements were capitalized into fixed assets, net on the consolidated balance sheets andare depreciated over the lease term.LitigationFrom time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary course of its business, includingthose related to patents, product liability and government investigations. Except as described below, the Company is not presently a party to any litigationwhich it believes to be material, and is not aware of any pending or threatened litigation against the Company which it believes could have a materialadverse effect on its business, operating results, financial condition or cash flows.In April 2015, the Company received a subpoena from the US Department of Justice, US Attorney’s Office for the District of New Jersey, requiring theproduction of a broad range of documents pertaining to marketing and promotional practices related to EXPAREL. The Company is cooperating with thegovernment’s inquiry. The Company can make no assurances as to the time or resources that will need to be devoted to this inquiry or the impact, if any, ofthis inquiry or any proceedings on its business, financial condition, results of operations and cash flows.Purchase ObligationsThe Company has $0.6 million of minimum, non-cancelable contractual commitments for the purchase of certain raw materials as of December 31,2016.Other Commitments and ContingenciesThe FDA, as a condition of EXPAREL approval, has required the Company to study EXPAREL in pediatric patients. The Company was granted adeferral for the required pediatric trials in all age groups for EXPAREL in the setting of wound infiltration and plans to conduct these pediatric trials as apost-marketing requirement, which was stated in the New Drug Application approval letter for EXPAREL. The Company recently secured feedback from theFDA on the pediatric trial design in all age groups and is in the process of finalizing its clinical strategy.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 $36.0 million are for milestones not yet met. Additionally, the Companyagreed to pay to Skyepharma a low single-digit percentage payment on collections of EXPAREL sales in the United States, Japan, 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 Company has the right to cease paying the low single-digit percentage paymentsin the event that Skyepharma breaches certain covenants not to compete contained in the stock purchase agreement or the last valid patent claim expires.Refer to Note 6, Goodwill and Intangible Assets, for further discussion.Pursuant 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.NOTE 18—SUBSEQUENT EVENTSIn January 2017, the Company announced the initiation of a Co-Promotion Agreement, or the Agreement, with DePuy Synthes Sales, Inc., or DePuySynthes, to market and promote the use of EXPAREL for orthopedic procedures in the United States. DePuy Synthes field representatives, specializing injoint reconstruction, spine, sports medicine and trauma, will collaborate with, and supplement, the Company’s field teams by expanding the reach andfrequency of EXPAREL education in the hospital surgical suite and ambulatory surgery center settings.F- 32Table of ContentsUnder the five-year arrangement, DePuy Synthes will be the exclusive third-party distributor during the term of the Agreement to promote and sellEXPAREL for operating room use for orthopedic and spine surgeries (including knee, hip, shoulder, sports and trauma surgeries) in the United States. DePuySynthes is entitled to a tiered commission ranging from low single-digits to double-digits on sales of EXPAREL under the Agreement, subject to conditions,limitations and adjustments. The initial term of the Agreement commenced on January 24, 2017 and ends on December 31, 2021, with the option to extendthe Agreement in additional 12 month increments upon mutual agreement of the parties, subject to certain conditions.The Company and DePuy Synthes have mutual termination rights under the Agreement, subject to certain terms, conditions and advance noticerequirements; provided that the Company or DePuy Synthes generally may not terminate the Agreement, without cause, within three years of the effectivedate of the Agreement. The Company also has additional unilateral termination rights under certain circumstances. The Agreement contains customaryrepresentations, warranties, covenants and confidentiality provisions, and also contains mutual indemnification obligations. DePuy Synthes is also subject tocertain obligations and restrictions, including required compliance with certain laws and regulations and the Company’s policies, in connection withfulfilling their obligations under the Agreement.NOTE 19—SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)The following tables present selected quarterly financial data for the years ended December 31, 2016 and 2015 (in thousands, except per share data): Three Months Ended March 31,2016 June 30,2016 September 30,2016 December 31,2016Total revenues$65,474 $69,640 $68,355 $72,902Cost of goods sold20,278 23,053 43,152 23,621Total operating expenses67,728 76,084 89,220 75,363Net income (loss)(3,854) (7,958) (22,164) (3,973)Basic and diluted net loss per common share$(0.10) $(0.21) $(0.59) $(0.11) Three Months Ended March 31,2015 June 30,2015 September 30,2015 December 31,2015Total revenues$58,316 $59,148 $62,213 $69,320Cost of goods sold17,580 18,929 15,901 19,427Total operating expenses54,975 57,330 57,104 70,133Net income (loss)1,260 8 3,086 (2,498)Basic and diluted net income (loss) per common share$0.03 $0.00 $0.08 $(0.07)For periods where the Company reported a net loss, no potentially dilutive securities were included in the computation of diluted net loss per share.F- 33Table of ContentsEXHIBIT INDEXExhibitNumber Description3.1 Amended and Restated Certificate of Incorporation of the Registrant.(1)3.2 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 Supply Agreement, dated June 30, 2003, between SkyePharma, Inc. and Mundipharma Medical Company.(2)10.7 Distribution Agreement, dated June 30, 2003, between SkyePharma, Inc. and Mundipharma International Holdings Limited.(2)10.8 Distribution Agreement, dated July 27, 2005, between SkyePharma, Inc. and Mundipharma International Holdings Limited.(2)10.9 DepoCyt Supply and Distribution Agreement, dated December 31, 2002, between SkyePharma, Inc. and Enzon Pharmaceuticals, Inc.(2)10.10 Industrial Real Estate Triple Net Lease, dated August 17, 1993, between the Registrant and HCP TPSP, LLC.(2)10.11 Fifth Amendment, dated March 13, 2013, to the Industrial Real Estate Triple Net Lease, dated August 17, 1993, between the Registrantand HCP TPSP, LLC (and successor-in-interest to Equitable Life Assurance Society of the United States).(4)10.12 Industrial Real Estate Lease, dated December 8, 1994, amended July 2, 2009, between the Registrant and LASDK Limited Partnership.(2)10.13 Third Amendment, dated March 13, 2013, to the Industrial Real Estate Lease, dated December 8, 1994, between the Registrant andLASDK Limited Partnership.(4)10.14 Employment Agreement between the Registrant and David Stack.(2)***10.15 Amendment No. 1 to Executive Employment Agreement, dated March 13, 2013, between the Registrant and David Stack.(4)***10.16 Amendment No. 2 to Executive Employment Agreement, dated June 30, 2015, between the Registrant and David Stack.(14)***10.17 Employment Agreement between the Registrant and James Scibetta.(2)***10.18 Amendment No. 1 to Executive Employment Agreement, dated March 13, 2013, between the Registrant and James Scibetta.(4)***10.19 Amendment No. 2 to Executive Employment Agreement, dated June 30, 2015, between the Registrant and James Scibetta.(14)***10.20 Employment Agreement, dated November 29, 2012, between the Registrant and Kristen Williams.(13)***10.21 Amendment No. 1 to Employment Agreement, dated March 13, 2013, between the Registrant and Kristen Williams.(13)***10.22 Amendment No. 2 to Employment Agreement, dated June 30, 2015, between the Registrant and Kristen Williams.(14)***10.23 Executive Employment Agreement, dated May 2, 2016, between the Registrant and Charles A. Reinhart, III.(17)***10.24 Executive Employment Agreement, dated June 11, 2015, between the Registrant and Scott Braunstein.(16)***10.25 Executive Employment Agreement, dated August 24, 2015, between the Registrant and James Jones.(16)***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)***10.29† Commercial Outsourcing Services Agreement entered into as of August 25, 2011 by the Registrant and Integrated CommercializationSolutions, Inc.(5)Table of Contents10.30† First Amendment to Commercial Outsourcing Services Agreement, dated August 1, 2013, between the Registrant and IntegratedCommercialization Solutions, Inc.(7)10.31† Second Amendment to Commercial Outsourcing Services Agreement, dated August 25, 2014, between the Registrant and IntegratedCommercialization Solutions, Inc.(12)10.32† Third Amendment to Commercial Outsourcing Services Agreement, dated April 29, 2015, between the Registrant and IntegratedCommercialization Solutions, Inc.(14)10.33 Amended and Restated 2011 Stock Incentive Plan.(8)***10.34 Form of Nonstatutory Stock Option Agreement under the Amended and Restated 2011 Stock IncentivePlan.(8)***10.35 Form of Restricted Stock Unit Award Agreement (Employees) under the Amended and Restated 2011 Stock Incentive Plan.(14)***10.36 Form of Restricted Stock Unit Award Agreement (Non-Employee Directors) under the Amended and Restated 2011 Stock Incentive Plan.(14)***10.37 License, Development and Commercialization Agreement, dated December 5, 2012 between the Registrant and Aratana Therapeutics, Inc.(9)10.38 Supply Agreement, dated December 5, 2012 between the Registrant and Aratana Therapeutics, Inc.(9)10.39 2014 Inducement Plan.(10)***10.40 2014 Employee Stock Purchase Plan.(8)***10.41† Strategic Co-Production Agreement dated April 4, 2014, by and between the Registrant and Patheon UK Limited.(11)10.42† Manufacturing and Supply Agreement dated April 4, 2014, by and between the Registrant and Patheon UK Limited.(11)10.43† Technical Transfer and Service Agreement dated April 4, 2014, by and between the Registrant and Patheon UK Limited.(11)10.44 Amended and Restated Consulting Agreement, dated April 3, 2012, between the Registrant and Gary Pace.(6)***10.45 Second Amended and Restated Consulting Agreement, dated August 17, 2012, between the Registrant and Gary Pace.(15)***10.46 Third Amendment to Consulting Agreement, dated September 11, 2013, between the Registrant and Gary Pace.(7)***10.47 Fourth Amendment to Consulting Agreement, dated November 25, 2015, between Pacira Pharmaceuticals, Inc. and Gary Pace.(18)***21.1 Subsidiaries of Registrant.*23.1 Consent of KPMG LLP.*23.2 Consent of CohnReznick LLP.*31.1 Certification of 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 Chief Executive Officer and Chairman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-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.** 101.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 Quarterly Report on Form 10-Q, filed on May 9, 2012.Table of Contents(7)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on October 31, 2013.(8)Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on June 4, 2014.(9)Incorporated by reference to the exhibits to the registrant’s Annual Report on Form 10-K, filed on March 7, 2013.(10)Incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q, filed on May 1, 2014.(11)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on July 31, 2014.(12)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on October 30, 2014.(13)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on April 30, 2015.(14)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on July 30, 2015.(15)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on November 1, 2012.(16)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on May 2, 2016.(17)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on August 4, 2016.(18)Incorporated by reference to Exhibit 10.57 to the registrant’s Annual Report on Form 10-K, filed on February 25, 2016.*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., a 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 the registration statements (Nos. 333-175101, 333-181986, 333-196542 and 333-212098) on Form S-8and the registration statement (No. 333-195099) on Form S-3 of Pacira Pharmaceuticals, Inc. of our reports dated March 1, 2017, with respect to theconsolidated balance sheet of Pacira Pharmaceuticals, Inc. as of December 31, 2016, and the related consolidated statements of operations, comprehensiveincome (loss), stockholders’ equity and cash flows for the year ended December 31, 2016, and the effectiveness of internal control over financial reporting asof December 31, 2016, which reports appear in the December 31, 2016 annual report on Form 10-K of Pacira Pharmaceuticals, Inc./s/ KPMG LLPShort Hills, NJMarch 1, 2017 Exhibit 23.2Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in Registration Statement Nos. 333-175101, 333-181986, 333-196542, and 333-212098 on Form S-8 andRegistration Statement No. 333-195099 on Form S-3 of our report dated February 25, 2016, on our audits of the consolidated financial statements of PaciraPharmaceuticals, Inc. and Subsidiaries as of December 31, 2015, and for each of the two years in the period ended December 31, 2015, included in thisAnnual Report on Form 10-K of Pacira Pharmaceuticals, Inc. for the year ended December 31, 2016./s/ CohnReznick LLPRoseland, NJMarch 1, 2017 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 theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recentfiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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:March 1, 2017/s/ DAVID STACK David StackChief Executive Officer and Chairman(Principal Executive Officer)Exhibit 31.2CERTIFICATIONI, Charles A. Reinhart, III, 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 theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recentfiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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:March 1, 2017/s/ CHARLES A. REINHART, III Charles A. Reinhart, IIIChief 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, 2016, 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:March 1, 2017/s/ DAVID STACK David StackChief 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, 2016, 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:March 1, 2017/s/ CHARLES A. REINHART, III Charles A. Reinhart, IIIChief Financial Officer(Principal Financial Officer)

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