Pacira Biosciences Inc (PCRX) 2013 Q4 法說會逐字稿

Thank you for joining the Pacira Pharmaceuticals fourth-quarter and full-year 2013 financial results conference call. 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 from Pacira Pharmaceuticals. Please go ahead.

Thank you, and good morning, everyone. Welcome to the Pacira fourth-quarter and full-year 2013 financial results conference call. Joining me on the call today from Pacira are Dave Stack, President, Chief Executive Officer and Chairman; Jim Scibetta, Senior Vice President and Chief Financial Officer; and Taunia Markvicka, Senior Vice President and Chief Commercial Officer.

Before I return the call over to the management team for their prepared remarks, I would like to remind you about certain remarks made by management during this call about the Company's future expectations, plans and prospects, including those regarding EXPAREL; Pacira's plans to expand the indications of EXPAREL, including for nerve block and the relating timing and success of an sNDA; serious plans to evaluate, develop and pursue additional DepoFoam-based product candidates; clinical trials in support of an existing or potential DepoFoam-based product production in suite A and suite C; approval of suite C; anticipated fixed costs and gross margins, and potential conversion of the Company's convertible debt; and other statements containing the words believes, anticipates, plans, expects, and similar expressions constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Any such forward-looking statements are based on assumptions that the Company believes are reasonable or 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 factor section of Pacira's most recent annual report on Form 10-K for the fiscal year ended December 31, 2013, and in other filings with the SEC, which are available through the investors and media section of the Pacira website at www.pacira.com or on the SEC website at www.SEC.gov.

During the course of this call, we will also refer to certain non-GAAP financial measures, including adjusted EPS. Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in the earnings release for the quarter.

And with that, we'll hear first from Dave. Dave?

Thanks, Jessica. Good morning, everyone, and thank you for joining us today. The primary focus of our call today is EXPAREL, our novel, multimodal treatment for postsurgical pain that surgically reduces -- significantly reduces the reliance on narcotics and the potential for narcotic-related adverse events. The first and only long-acting multivesicular liposome local anesthetic for use in the peri- or post-surgical setting, EXPAREL utilizes our proprietary DepoFoam technology to provide local analgesia for up to 72 hours.

Characterized by consistent quarter-over-quarter growth, 2013 demonstrated the successful execution of our twofold commercial launch strategy -- make and sell EXPAREL. As pre-announced early last month, we recorded $30.5 million of EXPAREL sales for the fourth quarter, up more than 50% from the third quarter, and $76.2 million of EXPAREL sales for the full year, up more than 420% from full year 2012.

We also saw 374 new -- total new customers in the fourth quarter, a 27% increase from the previous quarter, which translated to an average of 29 new customers per week. As of the end of the year, 2,106 distinct customers have ordered EXPAREL since launch.

While the breadth of new customers adopting EXPAREL contributed to the base of product sales, the vast majority of the business grew out of customers who have had access to EXPAREL for a longer time, with approximately 250 hospitals each ordering more than $100,000 worth of EXPAREL. We believe that numerous intersecting market dynamics influenced this robust fourth quarter.

Our customers continue to utilize EXPAREL for an evolving broad spectrum of procedures with soft-tissue surgery -- especially hernia repair, cholecystectomy, anal rectal procedures, colon, hysterectomy -- and laparotomy surgery constituting the bulk of EXPAREL markets today. In addition, orthopedic procedures and soft-tissue infiltration into the transversus abdominis plane surgery, which importantly widens the EXPAREL audience to anesthesiologists, represented the fastest-growing segments of the EXPAREL market.

With both new customers and steady growth within existing accounts, we saw the continuing trend of earlier EXPAREL adopters dropping restrictions and new customers gaining formulary approvals without restriction. We also continue to see the adoption of the technology within hospitals based on surgeon-to-surgeon word of mouth, sharing their experience of how EXPAREL helped to improve patient care utilizing a non-narcotic-based multimodal pain strategy.

For example, success in cosmetic surgery, abdominalplasties and breast augmentation, provided the experience and techniques for physicians to expand their use to EXPAREL in reconstructive procedures. Success in reconstructive procedures is beginning to extend into genitourinary reconstructive procedures and surgical oncology.

In the fourth quarter, a procedure-driven quarter, also came with the usual end-of-year macro factors. December saw patients who had satisfied their deductibles within the calendar year schedule elective procedures, especially prominent in 2013, given the uncertainty in 2014 healthcare coverage based on the Affordable Care Act. The seasonal trend of plastic surgery peaking during the holiday month was also apparent, but proportionally less impactful when compared to last year's Q4 due to an increase in EXPAREL procedure volume across a broad range of procedures.

As we proceed into 2014, our eighth quarter since launch, we expect that the high surgical-procedure quarters will be Q2 and Q4, with Q4 being the highest procedure opportunity of the calendar year. To ensure that we continue to educate and train our expanding customer base, we will be increasing the 70 surgical account specialists by 10 or 15 additional FTEs this year, and again in 2015, capping at approximately 100 FTEs.

In response to customers' acute-care demand for specialized clinical expertise and best-practice transfer needed to maximize the benefits of EXPAREL per procedure type, we will also increase the scientific and medical care's team of 40 nurses, PharmDs, and physicians to 50 to 55 over the next two years. This clinical education team also works together with our promotional partner in orthopedics and spine, CrossLink Bioscience, which acts as a general contractor for several hundred orthopedic representatives in strategically selected territories across the country.

In 2014, we see our customers remaining interested in learning best practice with EXPAREL, specifically the dose, volume, timing of infiltration, and technique of use, all of which are critically important, especially in orthopedics and spine surgery. Our emphasis will remain on education for different procedures to ensure patient safety and optimal outcomes.

We have a strong emphasis on using EXPAREL in procedures known to be highly dependent on heavy narcotic burden to achieve pain control. For example, in spine fusions, or laminectomies, we have developed with our customers the techniques that demonstrate meaningful outcomes, and our clinical and education resources transfer this knowledge and experience to others.

During the fourth quarter, further clinical evidence showing EXPAREL utility was provided through both our own Phase 4 studies, as well as several independent non-Pacira-sponsored studies across orthopedics, bariatrics, plastics, colorectal, and urology and anesthesia specialties, just to name a few. In the last few weeks, we published a review of compatible drug products and commonly used implant materials that can be used together with EXPAREL. We anticipate this manuscript will be a great resource to surgeons and anesthesiologists who may want to know the effects of administering EXPAREL contemporaneously with bupivacaine, epinephrine, corticosteroids, antibiotics, NSAIDs, tranexamic acid, and opioids, as well as a number of commonly used surgical implant materials.

Additionally, data was presented by Dr. Andras Sandor from Lawrence Memorial Hospital in Medford, Massachusetts, at the 2013 American Society of Metabolic and Bariatric Surgery meeting in November showing how EXPAREL infiltration into the transverse abdominis plane during bariatric surgery allows for total elimination of PCA in these patients and a 60% reduction in narcotic use at the end of post op day two. To quote the poster, generally these patients experienced a smoother recovery and reported overall increased satisfaction with the hospital care.

We have also been speaking with hospital CEOs who understand the impact of HCAHPS, a CMS program where total hospital reimbursement is governed by patient satisfaction. The interest level in EXPAREL is high with these hospital executive customers since pain is the only clinical area currently addressed in the HCAHPS patient satisfaction questionnaire. For this reason, you can expect to see a continued focus on patient satisfaction as we build the EXPAREL brand.

Looking ahead to the next couple of months, we expect new data and a number of new publications and abstracts to be presented at upcoming national congresses, all of which add to the growing body of work supporting the use of EXPAREL: in March and April, we anticipate presenting data at the American Academy of Orthopedic Surgery, where we have a symposium as well as a podium and poster presentation on the use of EXPAREL in total joint arthroplasty, and specifically in total knee arthroplasty; the American Hernia Society, with a podium presentation assessing inguinal hernia repair patients who receive EXPAREL versus the standard of care; the Association of Perioperative Registered Nurses, where we will present a risk-score model to identify high-risk patients predisposed to opioid-related adverse events in addition to the resulting negative hospital economics such a longer hospital length of stay, higher readmission rates and greater hospitalization costs; the American Society of Regional Anesthesia, where we will have six posters, both Pacira-sponsored initiatives and independent programs on both nerve block and TAP infiltration data sets; the Plastic Surgery and Research Council, where our podium presentation will show the use of EXPAREL as part of an enhanced recovery pathway in patients undergoing breast reconstruction at the Mayo Clinic; the Society of Gynecologic Oncology where our presentation on EXPAREL in TAP infiltration and robotic-assisted hysterectomy procedures looks at pain scores, the use of narcotic, length of stay and post-op nausea; and the International Society for Minimally Invasive Cardiothoracic surgery, a poster entitled Liposomal Bupivacaine and the Management of Early Perioperative Cardiac Surgery -- Impact of a Novel Longer-acting Local Anesthetic Agent. This presentation is the first reported use of EXPAREL in cardiothoracic surgery.

We continue to see a significant number of data sets available from investigator IND-driven trials, being done without Pacira participation, demonstrating the intense interest in the medical community to reduce narcotics and improve patient care. In the seven quarters since launch, our daily interaction with healthcare providers continues to confirm that EXPAREL is a blockbuster platform for postsurgical pain management.

We also see this demonstrated in published case studies, where clinicians are addressing real-world patient care issues. For instance, a recent independent case report published in the Journal of Medical Case Reports evaluated EXPAREL as part of a multimodal regimen and in obese women with chronic pain and multiple co-morbidities who received laparoscopic sleeve gastrectomy surgery. Following surgery, the patient had no adverse events and was discharged on the same opioid regimen she used before surgery to control her pre-existing chronic pain.

Another case study, recently published in Pain Medicine, assessed a patient undergoing an emergency laparoscopic cholecystectomy with hernia mesh repair from a previous surgery. After reporting a pain score of 8 out of 10 in the PACU, fentanyl was administered to control her postsurgical pain but proved inadequate. After receiving a rescue TAP infiltration with EXPAREL, her pain score dropped to 2 out of 10.

In addition, over the next several weeks, we expect to receive data from our pivotal Phase 3 femoral nerve-block study in total knee arthroplasty. Assuming all goes well, we anticipate being on track for an sNDA submission in Q2 for a nerve block indication.

As you all know we are the only manufacturers of multivesicular liposomes, our delivery technology DepoFoam, with no present generic competition in sight. With strong franchise protection in place, we have begun to look at the next stage of growth internally to evaluate further opportunities for EXPAREL in response to customer feedback, increasingly in applications we hadn't previously considered.

For 2014, we intend to further define the specific procedure opportunities to reduce narcotics and improve patient care and patient satisfaction with additional TAP infiltration procedures for abdominal surgeries; a pharmacokinetic initiative to provide information on pharmacokinetics associated with repeat dosing; a second dose trial; additional Phase 4 nerve block trials to provide additional information and support our plan launch into this indication; initiate a chronic toxicology program; and our Phase 4 approval commitment for a pediatric trial in these pediatric populations.

Since our April 2012 commercial launch, we have come a long way in developing EXPAREL brand through clinical trials, commercial initiatives, and strategic partnerships, not only broadening the use of EXPAREL across specialties and procedures, but also providing adequate access and resources to key hospital and ambulatory surgery audiences, all with an eye towards patient satisfaction. With EXPAREL effectively launched, we are turning an eye towards additional DepoFoam-based pipeline assets.

Our first candidate will be a DepoNSAID. We are currently working through the next steps for manufacturing and clinical development. We look forward to providing an update on these activities over the next few quarters.

With that, I'll turn the call over to Jim for a review of the fourth-quarter and full-year financials as well as an update on manufacturing. Jim?

Thanks, Dave, and good morning, everyone. I'll briefly cover three topics, as Dave alluded to: first, the financial results for the recent quarter and year ending December 31; second, an update on our manufacturing capacity; and third, our financial outlook for 2014 and beyond.

Obviously, the outstanding EXPAREL revenue growth in Q4 speaks loudly for itself. In terms of total revenues, we reported $33.6 million in the quarter and $85.6 million for the full year. We continue to caution against relying on the monthly EXPAREL sales estimates released by the data-tracking services, which show distorted trends and lead to incorrect conclusions.

You've heard us reiterate this statement every quarter since launch, but this assessment was particularly pronounced in Q4 and was a primary factor in our decision to preannounce EXPAREL revenue in order to provide the investment community with accurate information. While we don't report monthly sales, and we don't intend to do so going forward, we can confirm that the estimated October EXPAREL sales numbers reported by the tracking services was materially misleading.

Gross margin for the quarter for the Company increased to 43%. To date, all EXPAREL sales have related to product manufacturer and what we refer to as suite A. And for product made and sold out of suite A alone, the gross margin in the quarter was 50%.

The differences related to DepoCyte revenue and costs, as well as expenses incurred in our new manufacturing suite, suite C, which has been put in place and is generating operating expenses including depreciation, although that activity in Q4 was expensed rather than capitalized into inventory. As for our other operating expenses, our $4.8 million of R&D reflects a couple million for the pivotal nerve-block studies, a little more than $1 million for stock-based comp, and the rest for the clinical and product development staff and ancillary activities.

Our $20.2 million SG&A expenses are comprised of $13.9 million of selling costs, a $3.9 million quarter-over-quarter increase reflecting additional scientific affairs staffing, and commissions to our ortho partner, CrossLink. And $6.3 million of G&A, a modest increase from the previous quarter, reflecting Company growth.

Non-GAAP net loss for the quarter was $7.6 million, or $0.23 a share, after deducting $1 million of non-cash debt discount amortization related to our convertible debt and $3.3 million of non-cash stock-based compensation. We haven't done an annual stock-option grant to all employees since 2012, so these additional expenses are, ironically, a consequence of a materially higher stock price employed in the Black-Scholes calculation for vesting options and new employee grants.

Cash used from operations was a little more than $6 million for the quarter, along with $3.4 million of CapEx. We ended the quarter with approximately $74 million of cash and, as of December 31, 2013, we had $33.6 million basic shares of common stock outstanding.

Before addressing the financial outlook for 2014, let me first update you on key issues related to our manufacturing capacity. As a reminder, we filed a prior-approval supplement, or PAS, in December, seeking approval for the additional EXPAREL manufacturing suite, suite C, in our Science Center Campus in San Diego.

The two identical and fully automated manufacturing skids contained in suite C will allow us to increase our capacity from today's $100 million-plus level to over $400 million when approved and operating at full capacity. The PDUFA date for suite C is April 5, and we believe we are very much on schedule to receive approval on or before that date.

With our 24/7 manufacturing and support team fully dedicated to the mission to improve patient care, our suite A production and batch-release performance has been quite robust in recent months. And, in addition, we're now making EXPAREL batches in suite C that are available for commercial marketplace upon approval. So I just want to provide some reassurance that, in spite of our unexpectedly strong sales, we believe that we have successfully bridged our anticipated EXPAREL supply requirements beyond the suite C PDUFA date.

Finally, with regard to our financial outlook for 2014 and beyond, we continue to believe that if we focus on providing value to patients and customers in the marketplace then we'll generate shareholder value. So, first and foremost, we'll endeavor to maximize the value of the EXPAREL brand in 2014 through sales expansion and manufacturing productivity.

In addition, we'll seek to identify and invest in the next generation of value-driving activities, principally: one, the additional opportunities for EXPAREL in nerve block and beyond; two, additional manufacturing capacity beyond the $400 million-plus capacity potential at the Science Center Campus; and, three, pipeline products that leverage both our proprietary capabilities to develop products encapsulated in multivesicular liposomes and what we believe is our distinct knowledge and network advantage in evaluating commercial opportunities in the acute-care space.

Consistent with our previous gross margin guidance, as revenue increases and leverages our mostly fixed cost manufacturing infrastructure of $50 million to $60 million, along with 10% variable cost per unit manufactured, we expect EXPAREL gross margins to ultimately fall in the range of 75% to 80%, once suite A and suite C are both producing at full scale. Specific to 2014, we expect gross margins to continue to trend upward, quarter by quarter. And, while we don't expect to reach that peak in 2014, we do expect EXPAREL gross margins to surpass 60% by the end of 2014.

We're also currently closing in on becoming profitable and cash flow positive. We expect to achieve both of these milestones no later than the second half of 2014. And, with our current cash balance, we believe we have sufficient resources on hand to surpass the cash flow positive milestone.

As of December 31, we have an NOL balance of $286 million, so we don't expect to pay cash taxes this year. Please note that, when our reported non-GAAP net income becomes a positive number, the calculation of non-GAAP earnings per share we utilize in the denominator are fully diluted share count using the treasury method.

As of December 31, 2013, that number is 38.6 million shares, consisting of the 33.6 million basic shares; 2.8 million shares representing the contingent conversion value of our convertible debt in excess of the principal amount; and 2.2 million shares for options and warrants. So, while 2014 is the year we expect to cross over to profitability, which of course is a very significant milestone, our main focus remains on executing on our business activities and milestones as noted above, in which we expect will result in the generation of significant cash flow and EPS in 2015 and beyond.

I'll now turn the call back over to Dave.

Thank you, Jim. Nicole?

(Operator Instructions)

David Amsellem, Piper Jaffray.

Thanks. Just a couple. First on the manufacturing, I just wanted to pose a hypothetical. And if there is any major delay in approval, can you give us a sense of how many months of excess inventory you have on hand where that would enable you to meet demand? And then I have a couple follow-ups. Thanks.

Thanks, David. So as I said earlier we're quite confident that we will get approval on this timeframe. And we've been producing well in suite A.

We've talked about $100 million being roughly the number that we can produce in suite A and frankly that includes periods of scheduled shutdown during the year, which obviously we're not in. So we're continuing to go all out in suite A and we're quite comfortable with where we are from an inventory perspective. Obviously we need to get suite C approved eventually and on this timeframe to continue to meet the growing demand, but we're pretty comfortable with where we are.

David, there's no point in us putting a number in the marketplace and if there's any changes we've got ourself in a [wrecked -- in an inventee] situation. The best way for us to handle this is just to let everybody know that we're very comfortable that we've got enough inventory to get to the PDUFA date and beyond.

Okay. That's helpful and then switching gears to nerve block, can you remind us how you're thinking about the expansion in terms of how do you think about a dollar amounts of the opportunity?

You've talked about peak sales for the EXPAREL franchise potentially near $1 billion. How much of that do you think would be nerve block if any?

And then secondly, on these building-outs just the business and evaluating other opportunities, where does business development and looking at acquisition opportunities that leverages your sales organization, where does that fit into the mix? Thanks.

Three things. I think just to restate, we've -- we're expecting that we're going to have a positive outcome with a nerve block trial, but we believe that this is a significant product by itself with infiltration. We do think that nerve block is important for a couple of reasons.

The anesthesiologists typically use bupivacaine in their daily practices as standard of care and so there is a significant market opportunity all in its own right at least in the numbers as they are currently constituted, David. Nerve block is not as big as infiltration but it is a significant opportunity all on its own.

I phrase it that way because I think the real value of getting nerve block to us is that there are a number of regional anesthesia opportunities where physicians are treating pain and frankly don't have a real conscious understanding of what's and infiltration and what's a nerve block, et cetera. Having a nerve block indication for us will allow us to have discussions with those folks that are much more strategic in nature and we won't have to be worried about the package insert and any issues around having infiltration and not having nerve block.

We can have more strategic discussions about just plain taking care of a patient's pain. So from a strategy perspective it's important to us and adds to the overall cachet of the brand as well as the dollars, if you will.

And then lastly your question on total opportunity, you would expect that we're thinking differently about these things as we launched EXPAREL and we come out the other side of this and we can see profitability. We routinely look at product opportunities.

I would say that as Jim outlined our first order of business is to maximize EXPAREL and as we said during the call there is a number of opportunities to do that, not only through nerve block, but also with the institution of a chronic pain toxicology program, et cetera. So we think EXPAREL itself has a long way to go. We will always have a bias towards DepoFoam-based products just because of the IP profile and our ability to manufacture these products and we think have a very significant proprietary position in the marketplace.

But at the same time we do look at [BD] opportunities. I would say it's safe to say that we haven't seen anything yet that convinces us that the lost opportunity cost against EXPAREL is worthy of us taking on anything additional, but that doesn't mean we're not looking and we wouldn't do that if the right opportunity came along.

All right. Thanks, Dave.

Richard Lau, Wedbush Securities.

So first question is you guys are still adding new customers at a pretty good clip here. And I'd actually thought that it might come down over time just because you guys would have less customers to target. So maybe if you can talk a little bit about what's driving all these new customer adds?

Yes. I think the biggest piece of it, Richard, honestly is still word of mouth and people in major centers who are having real success with the product. And the medical groups that go into a lot of different places, not only smaller hospitals but ambulatory surgery centers and different places where they might practice a day a week or a half a day a week, or the influence model is clearly working in that regard.

I would have to tell you that to be completely candid we're a little bit surprised at that number as well, to be perfectly honest with you. And I think as we look forward, and I'll ask Taunia to comment here in a second if she's got anything that adds to this as well, as we look out and we see nerve block and we see the possibility of other opportunities to move in the ambulatory setting where people have been trained in the hospital environment and we're in an environment where people are trying to move these patients from an inpatient opportunity to an outpatient opportunity, we think we might actually continue to see this over the next year, especially if we're lucky enough to get the nerve block indication.

Yes. I would add also, David, one of the things we're seeing is physicians that are training in centers where EXPAREL has had a history of utilization they're now going into practice in other medical facilities and taking that experience with them and therefore pushing the adoption into these other facilities that have been slower to adopt the product.

And you'll see some of our data coming out in the hysterectomy space really reinforcing what Dave mentioned about taking these procedures from historically being an inpatient procedure into an ambulatory setting. And patients being able to successfully go home and recover after their surgery versus being held in the hospital setting. So you'll see that continue to drive our ambulatory efforts as well.

Okay. Great. That's good to hear. And then one last question is you mentioned doing -- exploring new areas with the chronic tox package and repeat dosing. So I was wondering if you could maybe a little bit go into a little bit more detail about that market opportunity and what surgery types it's currently being used and where you might see that being beneficial?

We really don't know much about it yet, Richard, we're just putting some add reports together. Some of the initial discussions came from folks in some of the combat areas frankly where there was a desire to be able to use a second dose largely around transport and the ability to get somebody from a battlefield to a triage hospital and then from a triage hospital to a more official medical treatment center.

That sort of got us thinking in that direction and now we're getting significant input from the marketplace regarding different areas where they would like to see some support from the Company in terms of repeat dosing. So again, to be completely candid, a chronic tox package in this scenario will take a couple of years.

And so we're starting the chronic tox package now. I can't tell you that we've got a solid formed idea about what we're going to do with that once we get it, but we figure the market is changing so fast that even if we did it probably wouldn't hold up over the next two years. So we're going to get the background support of a chronic tox package and then we'll do a lot more work to specifically identify what the opportunities are inside of that as we get closer to being able to do some of that work.

Got it. Thanks for taking my questions.

Douglas Tsao, Barclays.

Jim and Dave, I was curious in terms of the capacity expansion. Have you already had an FDA inspection as part of the DAS process?

Just for everybody's knowledge base, it's a four-month process for the PDUFA goal. And it does have both an inspection component of it and sort of the Washington review of the actual filing and the information in it.

And we don't think it's particularly constructive to provide details of subcomponents of the overall process in terms of our activity. But I can very much confirm what I said earlier which is we have an April 5 PDUFA date and we think we're very much on schedule with receiving approval by then.

Okay. And then when we think about the adoption right now we've obviously seen in recent months a lot of strength from orthopedics as well as ITAP. When you think about the key drivers for adoption in 2014, are those going to be the key focus areas?

Or do you see right now new indications in the same place where ortho and ITAP were at this time last year? Meaning ones that are relatively small that really growing like a weed?

I think a little bit of a broader answer maybe, Doug. So we continue -- the soft tissues remains today the majority of our business. And TAP infiltrations are embedded inside of soft tissue. So we do see TAP infiltrations as being important for two reasons.

One is it gives us a place where several days of pain control in the abdominal area really separates us and gives us a unique selling opportunity in the marketplace. But it also gives us an opportunity to interact with anesthesia in advance of getting a nerve block indication since most of those procedures are done by anesthesiologists.

So TAP infiltrations in terms of not only EXPAREL being used, but it is a relatively new procedure. So we're working with a lot of the folks in the education space in training physicians and their teams how to do appropriate TAP infiltrations with ultrasound guidance. So it is a fairly broad initiative.

Doug, when you talk about orthopedics, and I know you know a lot about orthopedics and where we are, it is still growing the fastest. And really interesting to us because we've got a reasonable market share in knees and hips but what we see in orthopedics is a formal initiative in spine is now leading to what we believe is growing use there. And then once you get into spine then you start to see trauma surgeons start to use the product.

So while the more advanced orthopedic indications are leading the charge, if you will, inside orthopedics you continue to see a lot of growth. And so I think that those two will remain the major focus for this year, largely because of the stature of those surgical groups inside the hospital. It makes it easier for us to get into hospital if we can train those high-end customers on the appropriate use of the product, things go more smoothly in terms of adoption across a broader spectrum and so we get into soft tissue in a different kind of way. But those two lead the way and they'll be the key components of this year.

Okay. And then you made comments in the prepared remarks about the seasonality or the seasonal strength in the fourth quarter that you typically see with elective procedures. Although you did note that plastics was not a huge driver this year, or as big a driver this year on a percent proportional basis.

Just curious how you're thinking or perspective going into the first quarter. Because typically we see in the third quarter some seasonal softness, although just given where you are in terms of your launch, you were able to grow through that this past year or so. How should we be thinking about some sequential trends going into 1Q? Thank you very much.

Thank you, Doug. I think we're just like everybody else. This is only our second first quarter of being on the market. So we've got a one dot trend line. So we're a little bit dangerous in this regard.

But what you're hearing from others is pretty much what we're seeing as well. There is some disruption in the marketplace from the Affordable Care Act. And we do have people that call looking for free drug because they've got patients who can't find anybody that'll take their insurance. We had not seen a lot of that previously. And so there clearly is some dislocation.

And we've had some weather issues. There's no doubt that when the city of Atlanta closes down that doesn't do us any good. Now how much of it is hurt and how many of those elective procedures are done the next week and stuff? I think generally, Doug, we're doing fine and we're satisfied with where we are. We just don't have a lot to compare ourselves to. And if what I'm hearing in the marketplace about some of the issues people are facing -- we don't seem to have any of those same issues, at least to any degree that we would be worried about.

Okay. Great. Thank you very much.

Corey Davis, National Alliance.

I'll follow on that last comment that you made and asked if you're ready to predict whether or not you think Q1 will be up sequentially over Q4 for EXPAREL sales?

Corey, we've never given any guidance, Corey, and there's no point in starting now. I think the best way for us to handle it is just to say that the brand is doing fine and we continue to grow both the base with new customers as well as use within our existing accounts. And quarter-on-quarter we continue to see all the metrics grow strongly and we're pretty confident on the future of EXPAREL.

Next question is how would you characterize the quality of your sales force right now? Given the need to move into more complex new techniques, even the advance of the formal nerve block indication, is there a need to make new hires or augment the current existing sales force? And what does that mean about directionality of SG&A in 2014 and 2015?

I think we've got I think -- let me answer your question very specifically. Not only our sales force but our commercial organization, you can have whoever else you want. I'll take us.

I think we're as good as anybody in the industry. And I think our folks are in a terrific spot to be able to do what's required to make sure that patients get the best available care.

Just to remind everybody, we've got a little over 40 nurses, pharmacists physicians out there now and their primary responsibility is best practice transfer and specifically technique in some of these very technique-heavy areas. We'll increase that a little bit as we continue to get more customers and our folks are driven into more places.

But I think substantially we can do what we need to do this year with what we've got out there now. In terms of our field organization, Corey, we've got I think a good mix of the leadership that's required from folks that have been around for a while and some of the newer folks that have come in with very specific expertise in some of the device areas and some of the areas where we might've been a little bit soft a year ago and so I think right now we're in really good shape.

Corey, let me just add to that too, that our selling line went from $10 million to $13.9 million Q3 to Q4 and Dave talked about how in 2013 there was a big initiative to increase our scientific affairs staff which mostly has taken place. So in terms of the SG&A going forward, we've talked about 10 to 15 reps a year and very modest growth in that scientific affairs staff, but it's mostly been built out to date.

Okay. And when we first started this there was a huge emphasis on opioid reduction and cost savings, but now that the drug's been out there for as long as it has and the feedback is that the drug just really works really well, where does that opioid reduction fit in the overall schematic of selling points that resonate with new accounts?

It's the whole -- I mean it's the story, Corey, and it remains the story.

It's still really important part of their selling?

It is it. I'll go to T in a minute here, but when you think about all the different ways that physicians are using the drug, they all have their own responses. For a spine surgeon it might be patients are backing up in the PACU for an orthopedic surgeon and it might be time to first ambulation and preventing falls.

For a colorectal surgeon it might be time to first bowel movement and those kinds of -- but when you come back to the root everything is related to finding care pathways that allow us to treat those patients' pain effectively with fewer narcotics. So everything that we do we're focusing now on patient satisfaction largely. It's a reimbursement driver through wage caps and it allows us to sell into the C suite, for example. But everything we do in one form or another is related to our ability to control pain with fewer narcotics.

Yes. I'll just add to that, Dave, that we have been having a number of discussions with quality C suite folks at various institutions and clearly they're recognizing the benefit of effective pain control with less opioids leading to enhanced recovery improvements in patient care, which has obviously economic benefits to them. So that's clearly the story. It starts with our product as a foundation and then being able to deliver on the promise of an enhanced recovery.

Okay. And at the risk of overstaying my welcome on questions, last one would be now that you're on a quarterly run rate that annualizes north of $100 million, how much do your customers think about that and capacity and potential for a disaster scenario, although unlikely, that you run out of product for them?

Or is that mainly just something that we're concerned about and that they don't think about at all? Obviously what I'm getting towards is Q1 softness just holding back a little bit until you actually get that approval on manufacturing?

Yes. It's funny. It is something that you guys worry a lot more about than anybody in the clinical marketplace does, to be completely honest again. The only time that I ever hear it, again I'll let Taunia comment about it as well, is if you're going to go to a formulary approval process or if you're going to educate for a large system where there's a considerable commitment on their time to changing nursing notes and changing the pain protocol and changing the standing orders in the ICU, et cetera, every once in a while you'll have a director of pharmacy say only because they're out of bupivacaine, they're out of so many drugs now, they'll say to us you guys have got plenty so that if I go through this you're not going to tell me you can't make it, right? But it's never in a scenario where anybody is worried about our ability to supply relative to patient care. It's more an investment in resources, et cetera at the time.

Okay. And I lied. One more. Any flexibility to raise price or not there yet?

I think we do, Corey. There will be a day for sure, we're still looking. I'll go back to Richard Lau's question. We still got these between 25 and 30 new customers every week. And we want to make sure that we allow maximum access.

We think that's the key to getting this to be a very big product. And so we're doing primary market research all the time trying to discern what is the point when the marketplace will accept a higher price? But we can still expect this expansion that we keep going through on a monthly basis.

Okay. Great. Thanks. And I know you pre-announced but congrats on a great quarter anyway.

Thanks, Corey.

Patti Bank, Discern Securities.

Just following up on price, how much is that linked to suite C approval? And then also along with that, any update on discounting with EXPAREL? Is there any?

There is virtually no discounting of EXPAREL today. We haven't bought our way into any place, if that's the reference point for the question, Patti.

And I think you see in our gross to net that we're giving -- we've just got the standard returns in those kinds of things, 2% prop pays, et cetera. In terms of pricing and suite C, it doesn't really have anything to do with suite C. In fact it's probably inversely proportional actually. If we were going to raise the price to try to dampen demand we would have done that already.

I think we see suite C more as an opportunity to be more aggressive and support the nerve block indication and all the other initiatives that we've got going on, especially at all the meetings and all the congresses we're going at. When you see the abstracts that are going to come out at the American Academy of Orthopedic Surgery and at ASRA, for example, you'll see some astonishing stuff. And it will be pretty good to get suite C approved before all that good data comes out.

And then just one more question. Any thoughts on -- with Mallinckrodt soon to be in the market now? Good, better, indifferent? If you think that will help expand the market or any change there?

No. None. I'll be true to my mother raising me the right way and say if I don't have anything good to say I'm not going to say anything.

Okay. And then another topic that you might not have anything to say, but on visibility with the prescription data and whether we should see any changes there with them becoming more accurate? Is there any hope for that this year?

I have -- let me go back on my last statement, Patti, just for a second (laughter) just so everybody understands. We don't view a firm as anything but compatible. And we think EXPAREL on a firm that frankly is the way to achieve a multimodal pain strategy and reduce opioids.

So we don't see us being competitive at all. We liked working with the Cadence guys and we just don't know what level of emphasis that's going to get in the new environment, which is why I answered question the way I did. So I just want to make sure people don't think that we think we're in a competitive situation with Mallinckrodt, quite the opposite.

In terms of the tracking agencies, I have no idea, Patti. You're probably right. I shouldn't say anything. But it's astonishing to me that anybody could be that bad at something.

Okay. My question for asking about Mallinckrodt was more just whether you think that could help the situation with a bigger voice or not? I guess we don't know at this point?

I have no information at all, Patti. I would just be guessing.

Okay. Thanks.

I'm showing no further questions in the queue. I'd now like to hand the call back over to Dave Stack for any further remarks.

Thank you, Nicole. Thanks for joining us today, everybody. We look forward to updating you on EXPAREL as we go forward here. We'd also like to note that coming up we'll be presenting at the Barclays Global Healthcare conference in Miami on March 13. Thank you very much for your time.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.