Pacira Biosciences Inc (PCRX) 2013 Q1 法說會逐字稿

Thank you for joining us for Pacira Pharmaceuticals' first-quarter 2013 financial results conference call. At this time, all participants are in a listen-only mode. Following the formal remarks, Pacira's management team will open the lines for a question-and-answer period. Please be advised that this call is being recorded at the Company's request and will be archived on the Company's website for two weeks from today's date. At this time, I would like to introduce Jessica Cho of Pacira Pharmaceuticals. Please go ahead.

Thank you and good morning, everyone. Welcome to Pacira's first-quarter 2013 financial results conference call. Joining me on the call today from Pacira are Dave Stack, President and Chief Executive Officer, and Jim Scibetta, Chief Financial Officer. Before I turn the call over to the management team for their prepared remarks, I would like to remind you that certain remarks made by management during this call about the Company's future expectations, plans, and prospects constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements about the Company's future expectations, plans, and prospects include statements regarding the Company's plans and expectations regarding EXPAREL; the success of our sales and manufacturing efforts in support of the commercialization of EXPAREL; the rate and degree of market acceptance of EXPAREL; the size and growth of the potential markets for EXPAREL and the Company's ability to serve those markets; Pacira's plans to expand the indications of EXPAREL to include nerve block; Pacira's plans to continue to manufacture and provide support services for commercial partners who have licensed DepoCyt(e); the Company's commercialization and marketing capabilities; and other statements containing the words "beliefs," "anticipates," "plans," "expects," and similar expressions. Any such forward-looking statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Many of these and other risks and uncertainties are described in the "Risk Factors" section of Pacira's most recent annual report on Form 10-K for the fiscal year ended December 31, 2012 and in other filings with the SEC, which are available through the investor section of the Pacira website at www.Pacira.com or on the SEC website at www.SEC.gov.

Thanks, Jessica. Good morning, everyone, and thank you for joining us today. Today we will primarily be talking about EXPAREL, our novel treatment for postsurgical pain management, which we launched commercially in the United States in April of 2012, the first and only multivesicular liposome local anesthetic for use in a peri- and or post-surgical setting. EXPAREL uses our proprietary DepoFoam technology to improve local analgesia for up to 72 hours with a reduced need for opioids.

With the first full year of EXPAREL sales now complete, we continue to build momentum through both new accounts and expanded use within existing accounts. During this quarter, we reported net sales of $10.4 million for EXPAREL, up 33% from the $7.8 million in the previous quarter.

As of the end of the first quarter, 1065 distinct customers have ordered EXPAREL, an increase of over 30% from the fourth quarter. Of this total, 308 customers ordered six times or more, up 61% from the preceding quarter, while 175 customers ordered 10 times or more, up 59% from the fourth quarter of 2012.

We also maintained an average of 22 new customers per week as of the first quarter, and now have access and orders from over 90% of the top 100 target hospital accounts in United States and 64% of the top 500 targeted hospital accounts.

As you can see from the continued growth of new customers and expanded use from existing customers, we are very pleased with how the launch of EXPAREL has gone and the rapid adoption by a number of surgical specialties and anesthesia physicians.

When you do what we do, hearing every day from physicians and nurses how EXPAREL has improved the quality of patient care and patient satisfaction, we are energized to work with our customers on expanding the access to this important product and to educate health care providers on appropriate patient selection and infiltration techniques.

Our first January for the launch year was helpful in shedding light on ongoing market dynamics and seasonality. Plastic surgery, a significant driver of our December EXPAREL growth, was slower in January. In addition, as has been reported by other companies working in the acute-care hospital space, we saw pronounced growth in December as patients rushed to have surgery before increasing year-end insurance deductibles. This market acceleration did not carry into the first quarter, as many of these patients canceled elective procedures based on these increasing deductibles in the new year and their inability to pay. Coupled with this seasonal impact of winter weather and reports of a lack of hospital beds for elective procedures based on the flu epidemic, the net effect was a relatively soft January when compared to our very active December. It is key to point out, though, that we continued our upward sales trend and acceleration in February and March, ending the quarter on a strong note as expected.

As many of you will know, this analysis does not conform to the monthly reports from the national tracking services, furthering our belief that, at least at this point in the launch, data from tracking services are not reliable as forecasting tools.

In the quarter, soft tissue continued to be the majority of EXPAREL's sales, demonstrating the success of our launch strategy in abdominal surgery and plastic surgery procedures. Looking ahead, we are especially excited about the strong interest being shown in orthopedics and also by the Department of Defense for a wide range of EXPAREL indications. We see several key initiatives fueling the strong demand for EXPAREL in the second quarter. First, major hospital system and chain wins in the quarter, rather than by individual hospitals, as was the case at the time of commercial launch of EXPAREL. Second, the rapid adoption and significant market potential in the orthopedic space, along with the exciting results from several major orthopedic influence centers on the use of EXPAREL. Third, the rapid rise in Department of Defense formulary access and adoption, with full approval at major military institutions in the U.S. Navy, Army, and the VA system. And last, the timely removal of formulary restrictions and hospitals, which approved EXPAREL early in the launch and have completed the necessary drug utilization evaluations and experienced positive results with EXPAREL, leading to removal of restrictions and improved physician access.

In response to the positive reaction from the marketplace in orthopedics, we are currently exploring a regionally targeted pilot program utilizing the variable cost resource to service our orthopedic customers. We intend to provide more information on this pilot program as the next several quarters unfold.

In terms of EXPAREL manufacturing, we remain on track with our progress in expanding our manufacturing facility and overall capacity. As reported last quarter, we project to receive FDA approval for our newly installed manufacturing facility, Suite C, sometime in early 2014. Combined with our current facility, we expect this facility to significantly increase our manufacturing capacity and ability to meet the growing demand for EXPAREL.

To divert from EXPAREL for a moment, we saw a little DepoCyt(e) revenue in Q1 as we completed the remediation of our manufacturing facility and restarted commercial manufacturing DepoCyt(e). You can expect to see a full recovery of DepoCyt(e) revenue in Q2.

Supporting the demand for EXPAREL is our focus on generating new data, which shows both the clinical and economic benefits of EXPAREL, especially as the challenges and issues presented by an opioid-based pain management platform continue to be quantified. And last month, we announced the publication of two retrospective studies identifying the cost of opioid-related adverse events from an analysis of national and regional hospital systems, respectively. Both showed not only that most hospitalized patients use opioids after undergoing common surgical procedures, but also that these patients incurred significantly higher hospital costs, extended length of stay, and readmission rates associated with opioid-related adverse events. We expect to publish a third and complementary analysis from an integrated delivery network database in the next few months. In a market environment where we've heard daily about the negative consequences of opioid-based pain control and where the regulatory bodies--such as the Joint Commission on Hospital Accreditation as well as CMS through the HCAHPS, or Hospital Consumer Assessment of Health Care Providers and Systems, Initiative--where pain is the important clinical consideration, we see regulatory influencers providing the impetus for clinicians and Suite C executives to continue to explore low-opioid treatment strategies.

We also expect three prospective studies demonstrating the benefits of EXPAREL over current opioid-based platforms for standard of care to be published over the next couple of months as part of our phase 4 IMPROVE trials. And similar to the publication of the open colectomy trial from Steve Cohen from the Southern Regional Medical Center, these three studies, which include two ileostomy reversal studies and a laparoscopic colectomy study, will show that EXPAREL-based multimodal therapy reduced opioid consumption, reduced length of stay, and lowered hospital costs.

In addition, we expect several publications reporting the clinical use of EXPAREL in the second quarter. A time to onset article will show that EXPAREL performs similarly to traditional bupivacaine hydrochloride exhibiting local anesthetic effect within two minutes following administration.

An article on program -- on safety, which aggregates safety data from tender wound infiltration studies, will report no unexpected safety signals related to EXPAREL use and in fact, a safety profile similar to regular bupivacaine hydrochloride.

And a third article will examine program-wide wound healing in 10 clinical trials which demonstrated that EXPAREL had no impact on wound healing across a number of different surgical models.

We also continue to investigate additional surgical models for EXPAREL as part of our reduced opioid strategy. Last month, we presented results from EXCLAIM, a phase 4 prospective study to assess the use of EXPAREL for post-surgical analgesia in patients undergoing 4 common plastic surgery procedures-- abdominoplasty, breast augmentation, breast reduction, and a combination of abdominoplasty and breast procedure. Patients reported low pain scores as well as high satisfaction with pain control and minimal opioid use, which we presented during the hot topics session of this year's aesthetics meeting at the American Society for Aesthetic Plastic Surgery. This presentation was selected as "Best of Hot Topics" and, as a result, was presented a second time.

In addition, data was presented from a surgical practice in Houston, describing their success utilizing EXPAREL versus pain balls in patients undergoing abdominoplasty, which we anticipate will be published in a leading plastic surgery journal in the coming months.

As we expressed in our last earnings call, we continue to explore additional uses for EXPAREL, such as infiltration into the transversus abdominis plane, or TAP.

Last week, we announced data from two studies. The first study, a retrospective review of patients undergoing hand-assisted nephrectomy in colorectal procedures, found that EXPAREL administered via TAP infiltration was well tolerated and provided up to 72 hours of full surgical pain control. This study was discussed at the 38th annual spring meeting of the American Society of Regional Anesthesia and Pain Medicine in Boston.

The second study was a prospective analysis examining TAP infiltration in patients undergoing open abdominal hernia repair. Patients reported low pain scores and high satisfaction with EXPAREL. This research was presented at the International Anesthesia Research Society.

Over the next couple of months, we anticipate a publication of a phase 4 study examining TAP infiltration with EXPAREL in robotic prostatectomy patients, 100% of whom were either satisfied or extremely satisfied with their pain control through the study.

We are initiating our prospective TAP infiltration phase 4 program to study the use of EXPAREL for lower-abdominal surgeries, laparoscopic hysterectomy, lap colectomy, lap ventral hernia repair, etcetera.

Studies are also currently underway as part of our phase 3 nerve-block program comparing the effect of EXPAREL on motor and sensory function versus placebo - a femoral nerve-block study for total knee arthroplasty and an intercostal block study in posterolateral thoracotomy procedures. We expect to complete these trials in late 2013, early 2014, and will use these data to submit an SNDA for a new indication in the package insert for EXPAREL. We believe that this new indication will present an alternative long-term method of pain control with a single injection, replacing the costly and cumbersome standard of care requiring a perineural catheter, drug reservoir, and pump needed to continuously deliver bupivacaine.

Overall, we are very happy with the progress we've made so far with EXPAREL and look forward to continuing to advance the program and our strategic initiatives. With a successful year of sales and important insights behind us, we have concluded our launch year with a better understanding of seasonality and sales performance, and the developing potential of EXPAREL in new areas. Through our continued growth and robust data collection, and by responding to increasing marketplace demand, we continue to believe that EXPAREL represents a blockbuster platform for post-surgical pain management.

With that, I will turn the call over to Jim to review our first-quarter financials for the year. Jim.

Thanks, Dave, and good morning, everyone. For the quarter ended March 31, our total revenues were $11.6 million, and most important, as Dave discussed, EXPAREL revenue in what was the fourth quarter of the launch was $10.4 million. I will note that the EXPAREL revenue for the first four quarters of launch was $25 million. Those results, along with the growth rates we are experiencing and the still de minimis market share we have achieved overall, would suggest EXPAREL may be on a path to becoming a major pharmaceutical brand.

I feel the responsibility to reiterate, once again, that we continue to caution relying on the monthly numbers reported by the sales data tracking services. It is not our intent to report monthly revenue numbers either historically or going forward; but to make the point, I do want to convey that within a three-month period ended March 31, both services reported a capture rate in a given month that was in excess of 100%. And further, even though the [symphony] numbers may have arrived to a random walk to match our full-quarter number, they arrived there through a very misleading month-over-month trend. So we will continue to make every effort to provide perspective on actual sales and sales trends on these quarterly calls.

With respect to our other product, DepoCyt(e), which you will recall is marketed by separate partners in Europe and the US, Q1 revenue was minimal as we finalized the remediation efforts in our DepoCyt(e) manufacturing line that we committed to the EU inspectors. As Dave noted, we expect DepoCyt(e) revenue, both from lots sold to partners as well as royalty revenue from patient usage, to pick up significantly in Q2 as we resupply the market.

Operating expenses were pretty much in line with our year-end commentary regarding what to expect for 2013. Q1 cost of goods sold, which pertained to both EXPAREL and DepoCyt(e), was $11.4 million. We spent $5.9 million in R&D in the quarter, most of which was for the EXPAREL pivotal nerve block studies and, to a lesser extent, the development of our new spray manufacturing process.

SG&A expenses were $12.9 million in total in the quarter, with about two-thirds of that for selling and marketing costs.

CapEx for the quarter was $2.9 million. Most of the Q1 CAPEX related to Suite C, and there will be additional Suite C CAPEX in Q2 as we complete that project, which, as Dave mentioned, remains on schedule.

Net loss for the quarter was $23.1 million, which amounts to $0.71 per share based on 32.7 million weighted average shares outstanding. Note that a significant component of our loss per share, I estimate from $0.20 to $0.25 per share, was attributable to the combination of four unanticipated or nonrecurring events. One, a nonrecurring expense related to the early extinguishment of debt incurred as a result of the January convertible debt financing. Two, a non-cash interest expense associated with the accounting for that new debt. Three, stock-based comp expense specifically attributable to our stock price increase in the quarter. And four, the absence of DepoCyt(e) revenue during the remediation period, as discussed previously. I should also point out that none of those factors have anything to do with the revenue or operating expense lines pertaining to EXPAREL, which, of course, is the primary value driver for the Company at this point.

As of March 31, 2013, the Company had 33 million shares of common stock outstanding. We ended the quarter with approximately $110 million of cash, which we believe is more than sufficient to get us to cash flow positive. And as noted in previous calls, we expect to be cash flow positive at some point in 2014.

As we've completed our first full year of the EXPAREL launch, it's an appropriate time to reflect on where we are to try to see where we might be going forward. In the first year we have either exceeded or are tracking very nicely with the other hospital-based products that proceeded to become major brands with greater than $500 million of annual sales. And distinct from those brands, we achieved our first year of launch results in a more challenging macro environment amidst economic uncertainty and in a hospital environment well prepared to challenge the value proposition of new innovative therapies. We believe our progress to date really speaks to the uniquely compelling value proposition of EXPAREL in the marketplace and the tailwinds of the micro environment we are operating in, where medical professionals, hospital leadership, patients, and patient advocates, and government regulatory bodies are all very eager to find pain treatment alternatives to opioids.

Because of our solid conventional IP rights and our proprietary capabilities in manufacturing multivesicular liposomes, that has enabled Pacira to become the only success story in the pharmaceutical industry's long -- decade-long quest to satisfy market demand for an extended-release bupivacaine product. We believe we have a unique franchise protection position that allows us to build this major brand without any foreseeable generic threat or competition.

We own 100% of the global rights of the EXPAREL brand and enjoy a very minimal royalty burden of only 5.5% that is, by contract, reduced to a maximum of 2.5% in 2018. And our combination of the scalable fixed-cost manufacturing infrastructure we used to manufactured EXPAREL along with the need for only a manageable size specialty sales force to resource the significant commercial opportunity, should position us to drive considerable profitability for Pacira as we grow the EXPAREL brand.

So with that, I'll now turn the call back to Dave.

Katharine, I think we are ready to open the call to questions.

(Operator Instructions) Richard Lau, Wedbush Securities.

I was wondering if you could maybe comment a little bit, even anecdotally, about the average order sizes? If they have been creeping up or if -- do hospitals typically place larger orders or just more frequent at this point?

Yes, what we are seeing, Richard, is -- well, there's two things going on here. One is that when you continue to have between 80 and 100 new customers every month, typically a customer starts out with a one-box order. And so it's really hard to move the needle when you have that quantity of new customers every month and we are still this early in the launch. But I think probably more compelling, frankly, is hospitals really are just-in-time inventory artists. And so we do see more small-box ordering -- one, two, four boxes -- and it appears, at least based on the size of the box and the lack of refrigeration and the fact that they really don't want to have a lot of inventory on hand, that the strategic preference would be in more small orders.

I would also tell you, though, that with that said, Richard, we do see many more eight, 10, and even 20-box orders now; things that we wouldn't have seen at all six months ago. So we do see places where there are sizable orders. But if I was going to tell you that the average order size has gone up significantly based on everything we just talked about, that would not be the case.

Okay, got it. And then, have hospitals had time at this point to do a product review, and is there any anecdotal feedback you can give there?

No. What we are seeing is, especially early adopters who have used a lot of the product and where there has been an active review under a [DUE] for whatever reason they might be doing it, we've been very successful in those scenarios. And frankly, what has happened as a result of most of those DUEs and the feedback from the physicians and the nurses is that the DUEs -- rather than being a negative, which is always the way they start out that they are going to be the basis of some type of control mechanism -- it worked out just the opposite way. And the DUEs that have been completed have largely led to a removal of restrictions and increased physician access.

Got it. And then you guys have recently released some good data in TAP infiltration. So I just wanted to drill down a little bit more into it. Are physicians performing the TAP technique in a similar fashion as with regular bupivacaine? Or is there adjustment to volume and dilution and things like that that they need to do? Just trying to get a sense on how quickly docs might jump on board.

Yes. Well, there is no -- like with everything else that we've done so far, Richard, there is no one way that everybody does it. One of the reasons that we are kicking off our phase 4 prospective trial in these lower abdominal surgeries is to provide some guidance to the marketplace as to the use of EXPAREL. A couple of dictums that we are following here is that in everything we see, more volume is always better. So what we are going to recommends is a 40-milliliter injection, 20 milliliters on each side. We think that is the right way to use it. You see in the marketplace anywhere from 15 on each side to 30 on each side. So I don't think what we are doing is going to be anything unusual, but we would like to be able to report some results with a specific regimen that docs can follow. These will all be done under ultrasound guidance, which is the common practice in the marketplace. I think the only thing that would change as a result of our work is that currently, in the majority of cases at least, Richard, well -- we have places where as the procedure is starting, they will do a TAP infiltration, and then extend the duration as long as they can.

There's other situations, probably more common, where the physicians perform what is called a rescue TAP. And so because of the short duration of action of bupivacaine, they do the TAP when the patient awakens from whatever general anesthesia or regional anesthesia that they are doing. And so they awaken in pain, and then they do the TAP to provide their 12 to 14 hours of relief.

Because our early data demonstrates several days of relief with EXPAREL, we are going to do these procedures before the patient is ever going into the OR. So the patient in the EXPAREL program will receive their post-surgical pain control before there is ever an incision. And we think that will be a fairly significant advance in how TAPs are used.

But this product has been very carefully engineered so that whatever you are doing with bupivacaine today, you can do with EXPAREL tomorrow. So there is no change in the technique. It's more looking at volume and timing.

All right. And how much would hospitals, on average, save by not having to do the rescue TAP?

It's more of the same stories. So it's more -- well, there's two sides again. I guess, one is reduce the opioids, leading to reduced adverse events, leading to earlier discharges. So one -- that's the hospital savings side, if you will. We are hearing more and more as the result of HCAHPs and patient satisfaction being a driver of hospital reimbursement through the CMS systems, etcetera; that hospitals are increasingly interested, frankly, in patient satisfaction just as much as they are in saving money. But it's the same story, Richard. It doesn't change a lot from the infiltration.

Actually, the way to think about TAPs in my view is, generally folks who are doing an infiltration will not do in infiltration and will do a TAP. So there's really two sides to the TAP strategy. One is that when folks start doing TAPs aggressively, they are generally doing those in the -- replacing an infiltration. So there is a defensive portion to our strategy. But we also think that by providing several days of pain control with the same basic procedure and the same use of diagnostic equipment and the same time, etcetera, that when people start doing TAPs we will be the only obvious choice. And so that is the offense part of the strategy, if you will.

Got it. Thanks, guys. And congrats on a good quarter.

Thanks, Richard.

Thanks.

David Amsellem, Piper Jaffray.

Just a couple. So starting on the topic of formulary access, hospital formulary access. For hospitals that are not buying in, can you give us some color on what kind of pushback you are getting or what the gating factors are to getting the holdouts to buying in on EXPAREL?

Sure. I would say -- you know, there are, and it runs the gamut again, David -- there are places where they won't even look at a new product launch until year one. And so, we do have places that are just starting to call us now about the use of EXPAREL.

We've got other places where the soft tissue launch, whether it was colorectal surgeons or plastic surgeons, just didn't provide enough impetus for a hospital to go through the formulary approval process and make the product available. One of the things that we see as the audiences expand to other surgery groups and to anesthesia, is that there is -- if you -- I'll give you an example. If you are a center of excellence for orthopedics or if you are a center of excellence for spine, etcetera, once those surgical audiences start using the drug, you have a lot more critical mass inside the hospital in terms of making a formulary approval happen.

I don't want to give you only the good side. There are places where we are just never going to be on formulary because they just don't use any new products. And so, if you go back and if it was a year ago and we said we were going to have over 90% access in the top 100 and over 60% access in the top 500, I would tell you that I would be thrilled and we have way more access now then we need to get this year's numbers and next year's numbers. So the focus of the commercial organization and the field organization, frankly, is on working with places who understand a low-opioid story and have seen the benefit of reducing opioids, and patient satisfaction, improving hospital costs going down, and working with those people rather than fighting windmills.

I think we've got way more than we need, David, to be successful. But I would tell you just on the first of May, we had two major hospital groups in the United States who approved the drug in late March, early April. And we used that five or six weeks to educate these centers and have to commit more than one corporate FTEs in going through those organizations and educating all the nurses and the health care practitioners, etcetera. And they both came online May 1.

So -- and we've got other major centers now who are queued up. I don't want to give you the impression we don't have continued new formulary wins. We do, but the focus of the organization now is on making sure that we are making this product available to as many patients as we can. And that is a lot easier in an expansion strategy where you are already available than it is in fighting windmills, like I said.

Okay, that is helpful.

Second question is, as it relates to seasonality, and I may have missed the commentary earlier in the call. But as we get further into 2013, should we expect to see some seasonality in the summer months? And maybe just lay out for us how we should think about the potential for lumpiness during a given calendar year. Bearing in mind, of course, that we are early in the lifecycle. But how should we think about that?

We have one dot in each of these monthly trend lines. So take this with the way we think about it, but things are going well. We expect that things will continue to go well. We have less of an increase in July and August, but the product is still increasing on a month-on-month basis. And then as we get into the fall, similarly to what we saw last year, we don't think that we'll have the dramatic issue in September that we had last year; because we have so many places where EXPAREL is now the standard of care in it is written into the protocols and the nursing notes in the way they do practice.

And then all signs indicate, David, that the patients who did not get elective procedures in January because, frankly, in some cases, they were just stunned by the increase in the co-pays that were being levied against them, are now -- are getting those procedures, it's just on a different timeline. And then everything that we have heard and seen, whether it's related to a flexible spending account that needs to be allocated in that year or any of the uncertainties about our insurance system and where that is headed on an annual basis, everything points to the fourth quarter being very strong again. And that is what we are getting ready for.

Okay, and then one last one if I may. This is as it relates to Suite C. Can you give us some color as to whether or not both Suite A and Suite C are going to be running concurrently at some point next year? How long there may be some overlap? And then maybe an overall sense of what your expectations are for that new suite to come online. Or in other words, what is the timing for that in 2014? Thanks.

Yes, I will get the last piece out of the way first. It should be early in 2014. And you guys know well, but when you're dealing with regulators and regulatory approvals and stuff, it's always best to give yourself a little bit of wiggle in there. But we think it will happen early in the first quarter.

Suite A and Suite C will be available to be run together, David. But you also would understand that we can make a significant amount of material in Suite C before it is approved. And then when it is approved, that material would all be available for sale. So that is our intention. And so, by strategy then, we will make the primary source of commercial material, once we see it is approved, will be Suite C.

Occasionally, we will make a batch in Suite A, just to keep that suite running and working properly. But we favor the cost of goods advantages and the fact that we don't have a semi-automated system, that we've got a fully automated system, etcetera. So we will make as much as we can in C; keep A available until we have clear visibility on the spray process, and then make our decisions with A really more around spray and the new process than around C.

Great. Thank you.

Thanks, David.

Douglas Tsao.

Just trying to understand a little bit around some of the sequential trends that you saw from December to January and at the beginning of the year. In terms of -- on the order of magnitude between the plastic surgeons stepping away in the early part of January, and to the extent that they came back; as well as you referred to, some of the procedures, soft tissue procedures, seeing a slowdown related more to the macro issue that we've seen in hospital volumes.

Yes, anything specific or just general comments, Doug?

Just general comments in terms of the order of magnitude. Was it one versus the other? Was it a combination of both?

It was -- I wouldn't say -- we probably wouldn't be talking about it at all if there was any one. It is a combination of all, really. The most obvious, frankly, was -- in the early days of the month was plastics, and it really -- largely because it was so strong in December. And again, we don't have a lot of trend information here, but what we saw was that these were folks who were getting these procedures during the break, that in many cases they were gifts that were associated with the holiday period, and the patients were making their schedules and getting them done. Especially strong in that week between Christmas and New Year's. And then, as a result of the fact that most of those offices were working every minute that they could during that period, they took a couple weeks off in early January. And so you really saw a very distinct difference on New Year's Day. And we went from -- holy cow, this is unbelievable, to what happened?

So that would be my first comment.

We also saw, and you've seen others comment on this, that there were pockets in the country where we were getting reports from docs that their elective cases were being taken off the schedule because there were no beds because of the flu epidemic. I wouldn't say that that was strong enough to have any material impact on the month, but when you add it into a number of other things, there were pockets where we saw softness in January. And then we are nowhere near strong enough in the orthopedic marketplace yet to say that we had a material impact on Q1 from orthopedic procedures being delayed, but we did have a number of calls from anesthesia folks and from orthopedic surgeons who were talking about patients who were thinking that they had a $500 co-pay, and they would get a note from the hospital saying that their co-pay had been increased to $2000. And patients who were planning on having a knee or a hip done are still planning to have the knee or the hip done, but didn't have another $1500 to go to the hospital next week to have that procedure done. And we absolutely saw some of that, too.

So when you roll that up, January becomes on the soft side. And then, as we said during the call script, February was right where you wanted it to be and March was strong enough that we actually made up for the soft January.

Okay. And then in terms of the orthopedic opportunity, obviously, it's a small base. It seems that perhaps it is coming together still a little more quickly than you anticipated. And certainly, we have gotten independent feedback from both orthopedic surgeons as well as spine surgeons in terms of how much they like the product. Just curious if that has changed. And perhaps you have referenced that in terms of the variable infrastructure that you are perhaps thinking of bringing on -- change your thoughts in terms of your marketing strategy and an acceleration in terms of trying to build awareness in that community more quickly than you perhaps anticipated, away from the focus on the original core market of soft tissue procedures.

Yes. We are going to -- a little bit different than what you outlined. So again, the answer to the question, there is nothing going on in orthopedics that leaves us with anything but bullish thoughts on not only the way the physicians see the product being used, but the response from patients and nurses is just extraordinary. So everything there is going well. We have a dedicated team here in medical affairs that just works on orthopedics. And so, they are largely responsible for getting us where we are.

The strategy, Doug, is -- do we distract our soft tissue folks from continuing to grow the product in abdominal soft tissue and plastic surgery, etcetera, where we think that there is roughly 20 million surgical opportunities, in order to address what we believe is a more rapidly adopting and, frankly, rapidly growing orthopedic opportunity? And so what we are doing is we are increasing the size of our -- which by the way, the orthopedics, the numbers are probably in the 4 million to 5 million range. So it's a more aggressive audience, but it is a smaller net opportunity if you had a market share of 50% in both. So what we are doing is we continue to dedicate internal resources to both opportunities. We are focusing our field force largely on soft tissue. And we are working with some folks who are in the OR every day working with orthopedic customers to determine if an appropriate strategy with those customers is to use their variable cost resource to address our needs than the needs of our customers. Does that make sense?

Yes. And two follow-ups would be that, because it seems within the orthopedic community a lot of it -- this awareness has been viral, if you will.

Right.

And so, to the extent that you're trying to facilitate that. And then the follow-up question would also be, in terms of your clinical support focus or helping facilitating adoption amongst the orthopedic community, are they -- do they have a backlog? And is there a bottleneck in terms of more docs wanting to try out the product and having to wait a little bit right now? And how should we -- how are you thinking about that?

Yes, so you are right in that we have focused on the key opinion leaders and on the influence centers, which is what you would expect us to do. And so we are starting to see care pathways and the first initiation of people putting their protocols up on websites and providing their protocols for how they are using EXPAREL for different orthopedic specialties, etcetera. So that is all happening.

There is a combination here of orthopedic guys who want to use the drug immediately where there is access, because we been successful in the same institution for soft tissue surgeries. And we've got all the folks we need to support that activity.

There also are a number of places where orthopedics is the primary driver of formulary approval, and we are working our way through those processes. And I think you'll see that largely taking place between now and the summer, Doug.

So it's a little bit of both. And the formulary process there does stage these guys in such a way they can't just start using the drugs tomorrow unless it's been available in an institution for some other purpose.

Okay, great. Thank you.

Thank you.

Corey Davis, Jefferies.

Thanks. Dave, I want to go back to the quarterly progression and a couple of comments you made at different points during the call. And so if you were to plot January, February, March, and April -- in your prepared remarks, you used the term "acceleration." And then later, I think you just said there is steady growth month over month. So the question is, is that line linear, and just acceleration was the wrong choice of words? And if so, at some point do you expect that line to truly accelerate the rate at which sales are increasing on a monthly basis?

So obviously, trends overall, we are not commenting on April sales specifically. Well, I think if you are talking about some type of an inflection point, Corey, where the product just takes off from the linear trend line in a --.

Yes, that's probably a better way to put it.

We have not seen that yet. So the growth is as we would have expected quarter on quarter. What I was trying to point out is that the numbers on a month-by-month basis are very different than you would have expected if all you saw was the quarterly number. And so there is an increase, a slight increase in the linearization of the month-by-month growth so far. And the reason that we expect that to change -- and I do absolutely believe that there is an inflection point out in the near-term future -- is the acceptance of this product by the orthopedic surgeons and by the -- and in these TAP procedures where, to date, we see aggressive growth, but as a percentage of the total procedures being done in those two marketplaces, we are still tiny.

And so we are doing a bunch of orthopedic work now and we are starting a TAP study. And you saw some of the data last week from TAPs. So those will be the two accelerators when we get to an inflection point -- one in orthopedics, or what we are terming hard tissue surgeries; and one in transversus abdominis procedures, in what we consider to be a soft tissue surgery.

Okay. And to my second question, you described an awful lot of studies that you are doing -- and I didn't follow every single one of them, but could you be clear about which of the studies you're conducting will ultimately lead to a label change, versus just studies to increase awareness and application? I know about that --.

Yes, let me group those studies in four quick buckets, Corey. I hope I can remember to do it in four. One is the hospital studies where the big hospital groups prove for themselves that there is a $4000 to $6000 cost and a three-day length of stay difference in a patient that has and opioid-related adverse event. That is the first leg, if you will.

The second leg was all of the IMPROVE studies and demonstrating that if you lower the amount of opioid that was being used by between 50% and 80%, that you saw at least a one-day reduction in length of stay, and you saved several thousand dollars again. And remember, in this prospective payment environment, what we were trying to do there is offset the $285 cost of the drug. And we've done that times 10x in virtually all of the approved trials.

Then we did -- I'll add to that, a series of trials. EXCLAIM does basically the same thing that IMPROVE does, but does it in cosmetic plastic surgery. And then the TAP program, where we are replacing bupivacaine with EXPAREL and extending the duration of action from something like 12 hours to three to four days. We believe that every one of those is in the current package insert where we have an indication for single-dose administration into the surgical site to produce post-surgical analgesia. So that is that whole class, if you will.

The only trials that we are doing for inclusion into the package insert are the nerve-block trials. And that is the femoral nerve-block trial in total knee arthroplasty, and the intercostal-block trial as part of a posterolateral thoracotomy procedure.

And just to pick up on that, similarly, the R&D line is driven, as I talked about, by the nerve-block studies that Dave talked about, which is the only label change. Focus studies, everything else is in the selling line of SG&A because it is supporting the already-approved indication.

All right. And so that actually leads to my last question, which is how are you feeling about expenses, both SG&A and R&D, at the current rate this quarter? Is this something that will be flattish going forward, or do you envision the need for any kind of increase in SG&A if revenue starts to accelerate? That is (inaudible) prior to profitability.

Yes, I think, overall, the picture for 2013 is fairly stable expense lines by OpEx category. I think that we will be doing some work in the latter half of the year running manufacturing 24/7, which has an increase of costs a little bit there. And then as we've talked about, we will increase -- we will continue to increase the field force moderately. And I don't know if Dave wants to elaborate on this, but continuing to add scientific affairs and, particularly, clinical nurses. But nothing that dramatically will change that line.

No, the only comment I would make, Corey, is as we've talked about several times, when we get into these orthopedic procedures, especially in the knee and hand the spine, the surgical technique is really important. And so we will continue to add a couple of nurses on a quarterly basis, so that we can make sure that we can meet the needs of these customers when it comes to the adoption of the product and making sure that they get started correctly in terms of injection technique.

So, slight increases in SG&A on a quarterly basis for the rest of the year?

Yes that's fair.

That's fair.

And then the R&D line is the opposite where it is front loaded with the nerve-block studies, and in the back half of the year we will reduce to more of a steady state.

So that will drop back down throughout the course of the year?

Right.

Okay. I got it. Thanks.

Patti Bank, DISCERN Securities.

I jumped on a little bit late, so I apologize if you answered this. But Dave, can you talk about some of the other factors in the first quarter that may have helped a little bit in some of the outlooks for the full year in terms of the compounding issue? I heard from some doctors that helped EXPAREL. And also, we saw some of the recent manufacturing recalls from some of the competitors.

I'm not sure what you are -- can you just make sure I answer the right question, Patty? Compounding issues?

Yes, some of the other drugs that need to be compounded that I guess some of the doctors were using in the OR, and they had said that once that all hit with the FDA --

I see what you mean, yes --

-- That helped drugs with EXPAREL, which were easy to open the bottle and use.

Yes, I think it is interesting, by the way, and those of you who have been with us in this orthopedic environment have seen this firsthand, one of the first things you see when you get into the OR is generally a white board telling you all the products that they can't get and what they are recommending you use as an alternative.

I don't think, honestly, that that has had a huge impact on us. What we hear from hospital pharmacists is -- I go through all this effort to make sure that we get this drug used appropriately and we are going through all these programs on injection technique, etcetera, don't you dare run out. That, we hear all the time.

The only place that I can tell you that I see a material advantage to EXPAREL is with elastomeric pumps. And that is in two places, really. One is, they can't get the bupivacaine; and when you marry that with the thought process that they use a lot of bupivacaine in one of those pumps relative to how much they would use with EXPAREL, the pharmacist just doesn't want to use all of their short supply of bupivacaine to fill up an elastomeric bag. That is one piece.

The other piece that has really has started to just push people to EXPAREL, if they were at all hesitant, is there have been a number of recalls. And not only the market leader, which we've talked about on this call before, but now some of the generic manufacturers of these elastomeric pumps have had Class I recalls for safety issues. The PRN buttons are getting stuck -- really, material issues. And there's one major center, actually it is a nine-hospital chain, that just in the last month said -- we are done. No more elastomeric pumps. They are going to the process right now of teaching everybody how to replace an elastomeric pump with EXPAREL. And so we are just starting to see the real material impact of all of those things that you're asking about.

But in terms of the compounding from a hospital pharmacy in Boston, for example, that led to a number of those issues, I can't tell you that I've seen anything really significant come our way as a result of that.

Okay, and then just one second question to follow up on your comments on TAP. Is there any way to give us a better idea what that market opportunity is? As you say, I know it is increasing, but I don't think it's standard of care in most hospitals. But can you quantify that in terms of number of procedures or rate of growth?

We are doing some work at an anesthesia meeting this week, actually, Patti. And so I hope I'll know a little bit more in the next couple of weeks. But the short answer, if you want a real number, is no. And part of the issue is that hospitals, as you say, either do it or they don't, generally. The real interesting component of this is when they do it, it spreads like wildfire. And you will actually hear nurses say -- well, how come this patient didn't get a TAP? And it happens very quickly, like in six months; they will replace half of their infiltrations. And so there's two things there. One is it's not universally accepted because hand-held ultrasound isn't available everywhere. And two, when it does happen, it happens quickly. And those two dynamics make it virtually impossible for us to say that I know this month or next month was the total TAP market is likely to be.

I am -- I'll give you a number, but it's what we get from you guys, frankly. So I've gotten from several folks in the financial community that their number is 3 million procedures. Every time I ask for that background, I don't get anything, so it's really a soft number for all the reasons that we've just talked about.

It's not insignificant, but it's not 20 million.

It appears that it's a very effective procedure with EXPAREL, so we are really happy with how we are positioned in its future growth, not only in the short term but in the real long term here.

Yes, there are some real [KOLs], too, in the space. And so we can always think about going forward about having somebody who really knows what they are talking about on the call, as well.

All right, thank you.

Thanks, Patti.

Jonathan Aschoff, Brean Murray.

Dave, regarding the orthopedic space, where is it being used most aggressively within that space? And then, just by contrast, how it is being used on soft tissue.

Yes, that's a great question, Jonathan. I would say that its initial takeoff was in knees. And largely because physicians were able to control pain, but they had to do it either with a femoral nerve block which caused quad weakness. And then falls are a never event, meaning that if somebody falls in the hospital, the hospital gets no payment for that hospital stay. As a result of that, they were using leg braces, which ironically, cost more than EXPAREL does. They were delaying ambulation protocols, etcetera. So there were a lot of issues with the use of femoral nerve blocks. And so that was the obvious place for docs to look.

As they become more comfortable with the product, they also start looking, then, at places where they are currently doing either an epidural or a spinal. And then once we have success in those areas, then they start to think about a strategy -- well, why am I using any perineural catheters with a drug reservoir and a pump, where I am effectively pumping bupivacaine in and going through all of that entails? So the progression generally is knees and then hips, and then you start to know when people are moving into different areas. We get a lot of requests now for a 10 milliliter vial of a wrist. We can tell you exactly where the spine guys are doing procedures. And we are being very careful there. Everybody is referred, then, to a very small team of very high-end KOL spine surgeons. We want to be absolutely sure that they are doing that right.

So I would say that the normal progression is, look where you are doing a femoral nerve block on a knee. When you have success there, then you start to talk to other surgeons who might not be using femoral nerve blocks and talk about -- do we need to do epidurals, we might just be able to do a spinal and an EXPAREL infiltration. And then once you are successful there, you start to think about shoulders, wrists, ankles. And somewhere in there, the spine guys get interested and start doing laminectomies and discectomies and things like that.

Great, thanks, David.

Thanks.

Thank you. I would now like to turn the call over to Dave Stack for closing remarks.

Thanks, everybody, for joining us today. We'd like to note that, coming up, we will be presenting at the Bank of America conference in Las Vegas next week and at the Jefferies conference in New York City on June 3. We look forward to updating you all on all of our progress here over the next several quarters. Thanks a lot for joining.

Thank you for joining in today's conference. This concludes the presentation. You can now disconnect and have a very good day.