Pacira Biosciences Inc (PCRX) 2014 Q1 法說會逐字稿

Thank you for joining Pacira Pharmaceuticals first-quarter 2014 financial results conference call. At this time, all participants are in a listen-only mode. Following the formal remarks, the Pacira 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'd like to introduce Jessica Cho of Pacira Pharmaceuticals. Please go ahead.

Thank you, and good morning, everyone. Joining me on the call today from Pacira are Dave Stack, President, Chief Executive Officer and Chairman; and Jim Scibetta, Senior Vice President and 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, including those regarding EXPAREL; Pacira's plans to expand indications of EXPAREL, including for nerve block, and the related timing and success of an SNDA; Pacira's 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 AMTC and our manufacturing relationship with Patheon; anticipated fixed cost in gross margins; 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, 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, 2013, and their 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.

Thanks, Jess. Good morning, everyone, and thank you for joining us today. The primary focus of today's call is EXPAREL, the first and only long-acting multivesicular liposome local anesthetic for use in the peri or postsurgical setting. EXPAREL utilizes our proprietary DepoFoam technology to provide local analgesia for up to 72 hours, acting as the foundation for a multimodal postsurgical pain management strategy that significantly reduces the use of narcotics and narcotic-related adverse events.

Coming off seven successful quarters of EXPAREL sales at the end of 2013, we prioritize not only making and selling EXPAREL in the first quarter, but also putting in place the groundwork needed to meet the marketplace demand that we expect over the next several years. Jim will discuss in his remarks the approved and planned production capacity expansion for EXPAREL, as well as the related capital raise through a public offering.

But let me begin by providing the commercial perspective. As pre-announced in April, we reported $34.4 million of EXPAREL sales in the first quarter, up 13% from the previous quarter. For Q1, we continue to see our base business increase with 346 new accounts ordering, an average of 27 new customers per week. As of March 31, 2014, a total of 2452 distinct customers have ordered since launch, with approximately 330 accounts ordering more than $100,000 worth of EXPAREL. Quarter-over-quarter growth is impressive, given the 53% growth in Q4 2013 over Q3 2013.

Recall that we had discussed during the last earnings call the need to understand the market-driven surgical procedure dynamics for the first quarter of 2014, due to year-end seasonality. Patients who satisfied their annual deductible moved to have elective surgical procedures done in Q4. In 2013, this market driver was exacerbated by the uncertainty around the Affordable Care Act. What we did not foresee in Q1 were hospital closings and delays as a result of a particularly harsh winter, which especially impacted several markets in the Southeast where we are particularly strong.

Overall, we expect to gain market share in each quarter going forward. In Q1 and Q3, we anticipate growth will be primarily from incremental growth. And in Q2 and Q4, the high procedure volume quarters, we forecast a benefit from incremental share as well as procedure volume growth.

The steady growth trajectory of EXPAREL sales in the first quarter was bolstered by several persisting trends. The majority of EXPAREL revenue remains in soft tissue procedures, but with orthopedic surgeries and transversus abdominis plane infiltration procedures remaining the fastest growing market segments, coupled with increasing awareness about the benefits of narcotic-reduced -- reducing treatment strategies where we have surgeons, anesthesiologists, and nurses sharing their experiences with EXPAREL resulting in early adopters removing restrictions and new adopters gaining formulary access without restrictions.

In soft tissue, beyond the early adoption in gastrointestinal and gastro-urinary procedures, use has continued to grow in cosmetic surgery procedures such as abdominoplasty. And success in these difficult procedures has widened to oncology and cosmetic reconstruction, a large and important market opportunity. In orthopedic surgeries, we see the base growing from hips and knees to include hand and wrist, shoulder, foot and ankle, spine, fracture, and more recently, trauma.

In order to properly educate and train this diverse and growing customer base, we plan to increase our 70 surgical account specialists by roughly 15 folks during this year and next, with approximately 100 hospital specialists by the end of 2015. Our clinical and scientific affairs team of 45 nurses, pharm D's and physicians, who provide the hands-on clinical technique, and best practice expertise and institutional training required to experience the maximum benefits of EXPAREL for each procedure type, will rise to approximately 60 by the end of 2015.

We see these resources as unique strategic assets, which are atypical to our industry. A specialized high-end geographically-dispersed team of healthcare professionals that provide local education and training to our healthcare customers is critical to the long-term success of EXPAREL and Pacira. Our customers want to learn not only best practice with EXPAREL -- the specific dose, volume, timing and infiltration technique -- but also how they can expect to improve patient care and hospital economics with a reduced narcotic strategy.

Early this year, we added to our growing body of clinical evidence both sponsored and nonsponsored data through a combination of publications and presentations given to key national congresses. An independent study led by Dr. Sandor from the Hallmark Health Center for Weight Management and Weight Loss Surgery in Medford, Massachusetts supporting TAP infiltration with EXPAREL in 90 patients undergoing laparoscopic bariatric surgery, a population particularly vulnerable to narcotic-related adverse events. In contrast to the control group, the EXPAREL arm eliminated the use of morphine PCA pumps, and saw roughly about 60% reduction in narcotic use that began the post-op day two, and generally, a smoother recovery and reported overall increased satisfaction with the hospital care.

The data on EXPAREL via TAP infiltration was reinforced by data presented at the 39th Annual Meeting of the American Society for Regional Anesthesia and Pain Medicine, or ASRA. In a case report by Dr. Ayad at Clearview Hospital Cleveland clinic, a 52-year-old male patient experiencing severe abdominal pain, nausea, vomiting and abdominal distention, was administered EXPAREL via TAP infiltration as part of a multimodal postsurgical analgesic regimen during an emergency abdominal surgery. The patient reported low pain scores, extreme satisfaction with his postsurgical pain control. And Dr. Ayad noted -- delayed first use of opioid rescue medication and the reduction in overall opioid use with EXPAREL, when compared to similar cases without EXPAREL.

Another case study presented by Dr. Claybon at St. Elizabeth Center in Florence, Kentucky, showed impressive results in a 42-year-old female patient with CMI of 586.8 undergoing ventral hernia repair. The patient had a history of three abdominal surgeries, as well as multiple comorbidities and chronic back pain, for which she was taking oxycodone and methadone daily up to the morning of surgery. Due to the difficulty in locating fascial planes, traditional EXPAREL infiltration was performed under direct visualization by the surgeon. Collaboration between anesthesia and surgery resulted in a good postsurgical outcome for the patient, who emerged out of surgery with low pain scores, and was discharged two hours after arrival in the PACU with no surgical complaints or problems reported.

On the orthopedic front, two studies were presented at the 2014 Annual Meeting of the American Academy of Orthopedic Surgeons, or AAOS -- the first by Dr. John Barrington, and the second by Dr. Roger Emerson, orthopedic surgeons at the Texas Center for Joint Replacement. The first study, a prospective case-controlled analysis of 1000 joint arthroplasties performed with the standard of care management regimens versus 1000 successive total joint arthroplasties using an EXPAREL-based multimodal treatment regimen. The results favored EXPAREL in terms of hospital stay, pain scores, incidents of accidental falls, opioid consumption, hospital costs, and length of stay.

The second study retrospectively analyzed 72 total knee arthroplasty procedures, comparing patients receiving an EXPAREL-based multimodal therapy versus a continuous femoral nerve block, a regional anesthetic technique where the patient receives a perineural catheter to deliver an anesthetic to provide pain control to the knee. The EXPAREL patients showed comparable pain control with significantly lower narcotic requirement.

With a wealth of data demonstrating the utility and efficacy of EXPAREL and infiltration in a broad base of surgical procedures, we also announced clinical evidence in support of a nerve block indication for EXPAREL. We reported that our pivotal Phase III clinical trial in femoral nerve block for total knee arthroplasty met its primary efficacy endpoint, demonstrating statistical significance with a P value of less than 0.0001 for cumulative pain scores over 72 hours. We also presented the trial's secondary endpoints at ASRA, showing that the EXPAREL group compared to the placebo arm experienced a 24% reduction in total narcotic consumption, high patient satisfaction, comparable safety, and a statistically significant higher percentage of pain-free patients.

We expect to submit a Supplemental New Drug Application, or SNDA, for the nerve block indication in the second quarter of this year with a 10-month PDUFA timeline. The value proposition of nerve block indication for EXPAREL, if approved, extends past simply adding the potential for more procedures. With a nerve block indication, we can fully execute on the strategy to replace a catheter and a drug reservoir with a single administration into the surgical sites to produce postsurgical anesthesia, eliminating old and cumbersome delivery technologies.

A nerve block indication is of significant interest to anesthesiologists, the gatekeepers of pain management strategies in many institutions. A nerve block indication allows for discussion on how we can address patient requirements for postsurgical pain control with EXPAREL, whether it be an infiltration or nerve block alone or in combinations, to enhance patient care. Additionally, a nerve block indication for EXPAREL makes way for increased clinical development, and adoption in cardiothoracic and many orthopedic surgeries, which may be performed with both infiltration and nerve block.

This same patient-centric rationale will form the basis of a chronic pain initiative. We are exploring chronic pain with the initiation of chronic toxicology and clinical development programs. In the meantime, with plenty of opportunity via EXPAREL infiltration, we expect to continue to provide the marketplace with customer -- and customers with clinical evidence to support use across an increasing number of surgical models at upcoming national congresses. This schedule clearly demonstrates the broad procedure opportunity available to EXPAREL, as we continue to work with our healthcare and payer customers to provide data on best practice use.

In the next couple of months, we will be at Becker's Hospital Annual Meeting; the International Society for Minimally Invasive Cardiac Surgery, where Dr. Stan Bolki will present his retrospective study on the impact of EXPAREL on postsurgical pain management and robotic coronary valve, and oblation cardiac surgeries -- this is the first representation of the use of EXPAREL in cardiac surgery; at the American Society of Perianesthesia Nurses, the International Anesthesia Research Association, or IARS; the Southeastern Society of Plastic and Reconstructive Surgery, where we have an oral presentation; the American Neurological Association; the American Society of Colon and Rectal Surgeons; the American Society for Metabolic and Bariatric Surgery; the 12th Annual Spine Orthopedic and Pain Management Conference; and, in addition, we'll be presenting at 10 specialty meetings in orthopedics for shoulder, spine, wrist and total joints.

With approximately 1% market share of the estimated 40 million-plus procedures appropriate for EXPAREL for infiltration, we are confident that we have a blockbuster platform for postsurgical pain management. As mentioned, education and training are critical to deliver on the potential of EXPAREL to reduce the reliance on narcotics and related adverse events; and thereby, lower hospital resource consumption and cost, increased ambulation, and enhanced patient care and satisfaction, ultimately changing the way medicine is practiced across hospitals and ambulatory centers.

In this regard, we are planning multiple educational programs, both national and regional, to bring together acute care practitioners, surgeons, anesthesiologists, and nurses, as we expand our understanding of best practice infiltration techniques, and we prepare for the launch of the nerve block indication. In addition, we continue to create value for stakeholders through strategic investments. We are broadening the market opportunity for EXPAREL via nerve block and chronic pain expansion opportunities. And given the consistent proven performance and cost savings of EXPAREL, we implemented a 5% price increase effective today.

As Jim will discuss in detail shortly, we are building out the necessary manufacturing capacities for EXPAREL to meet the anticipated demand for the next few years. And beyond EXPAREL, we are also in the process of developing our DepoFoam-based pipeline, the plan to receive clearance of an Investigational New Drug Application, or IND, for a DepoNSAID product around the end of this year or early 2015. Through the public offering that we completed recently, we have the resources to pursue these value-drivers in parallel.

And with that, I'll turn the floor over to Jim for an overview of our financial and recent manufacturing milestones. Jim?

Thanks, Dave, and good morning, everyone. So let me first provide an update on our EXPAREL manufacturing status, and then address the financial results from Q1. Just to recap, there were two material events related to EXPAREL manufacturing that we recently announced. First, in late March, we received FDA approval of our prior approval supplement for the additional EXPAREL manufacturing suite, Suite C, in our Science Center campus in San Diego.

While we were confident that we would receive this approval, and on a timely basis, this obviously removes the binary event that could have prevented us from keeping up with the rapidly growing demand for the product. I want to publicly thank everyone at the Pacira Science Center campus in San Diego for their tremendous commitment to the greater cause of improving patient care. Evidenced by this timely approval of Suite C and a 24/7 production in Suite A, this brings us to our greater capacity.

When operating at full capacity, the two identical and fully automated skids in Suite C will increase our annual manufacturing capacity by approximately 300 million over the roughly 100 million capacity of Suite A for a total of approximately 400 million capacity. While this provides a respite from inventory concerns for a period of time, we expect that we'll need to put additional manufacturing capacity in place in order to meet EXPAREL demand in excess of 400 million. To address that future demand, on April 7th, we announced entering into a strategic co-production partnership with Patheon, which is the pharmaceutical services business owned by the recently former-named DPx Holdings.

Under the partnership agreements, we'll collaborate with Patheon to construct two dedicated EXPAREL manufacturing suites at Patheon's sterile manufacturing facility in Swindon in the United Kingdom, which is about 60 miles west of London. The first EXPAREL manufacturing suite at Patheon, which is expected to come online in two to three years' time, is designed to mirror our Suite C manufacturing facility. So it will provide approximately 300 million of additional capacity for an aggregate 700 million of overall EXPAREL production capacity. We'll determine the design and production scale of the second manufacturing suite at Patheon at a future date.

In terms of who is responsible for what activities, Patheon will be responsible for the construction of the dedicated manufacturing suites, installation and validation of the manufacturing equipment, and of course, ultimately, the commercial manufacture of EXPAREL. We'll oversee the design and purchase of the dedicated EXPAREL manufacturing equipment to be installed at Patheon, and lead the tech transfer of the manufacturing process. In addition, an important component of the collaboration for us is that we will govern -- with our on-site personnel at Patheon reporting back to our product development team -- the oversight and optimization of our proprietary DepoFoam-based manufacturing process. That's the secret sauce, if you will, that allows us, and only us, to manufacture, at commercial scale, drugs encapsulated in multivesicular liposomes.

Our total capital commitment to acquire the process equipment and pay for the construction of the two Patheon suites is estimated to be $40 million to $50 million. We are accelerating these CapEx outlays for a very good reason, of course, which is the rapid EXPAREL sales growth we've experienced and expected to see ahead. This EXPAREL capacity expansion was the primary impetus for the recent -- recently announced follow-on offering. We expect gross margins from the production of Patheon to be at least 80%.

I'll now turn to our financial results for the quarter. We preannounced our Q1 EXPAREL revenue, which Dave elaborated on. So the only thing I'll add is that Q1 was the eighth quarter of our EXPAREL launch. And at $34.4 million of sales, we remain ahead of where Cubicin sales were at that point in its launch. And that drug, of course, went on to become the standard bearer for hospital-based branded drugs as a $900 million-plus product today.

We continue to caution against relying on the modest -- on the monthly EXPAREL sales estimates released by the data tracking services, which has shown distorted trends and led to incorrect conclusions. We've guided that EXPAREL gross margins for product made in Suite A and Suite C will be 75% to 80% at peak, and greater than 60% in Q4 of 2014. Q1 gross margins for the Company increased to 49%, and surpassed 50% for EXPAREL. We anticipate gross margin improvement quarter-to-quarter simply as a consequence of higher production, as we work our way toward production at capacity in Suite A and Suite C.

As for our other operating expenses, our $5.2 million of R&D expense was fairly consistent with Q4. Our $22.6 million SG&A expenses were comprised of $15.2 million of selling costs and $7.4 million of general administrative expenses, both modest increases from the previous quarter. Non-GAAP net loss for the quarter was $6.5 million or $0.19 per share after deducting $1 million of non-cash debt discount amortization related to our convertible notes, and $4 million of non-cash stock-based compensation. Cash used in operations was $4.7 million for the quarter, along with $3.8 million of CapEx.

We ended the quarter with approximately $65 million of cash, and of course, added approximately $110 million to that amount in our April public offering. We also just completed a deal this week where we'll shortly receive an additional $8 million upfront payment from Mundi Pharma, our European DepoCyte distribution partner, for extending the duration of our partnership, as well as expanding their geographic reach to sell DepoCyte. We now have the resources to not only fund the additional EXPAREL manufacturing capacity buildout at Patheon, as discussed, but to also develop additional indications for EXPAREL, starting with nerve block and potentially chronic pain, and pursue internal product development candidates for our next DepoFoam-based opportunities.

As of March 31, we had [33.0 million] shares of common stock outstanding, but on a pro forma basis, including the 1.84 million shares from the April public offering and 5.1 million of potentially dilutive shares, we have 40.8 million diluted shares outstanding. Recall that we've guided that we expect to be profitable on a non-GAAP reported basis no later than the second half of this year. So from that point forward, the diluted share count that I just referred to -- calculated using the treasury stock method -- will be employed for our non-GAAP EPS calculation.

I'll close with a reminder that we are humbled by our tremendous value-driving opportunity ahead of us, which can be summarized as a combination of four key factors. Number one, a successful launch of a hospital-based product with high peak sales potential expected, as indicated by the sizable addressable market in managing postsurgical pain and chronic pain.

Number two, high gross margins expected when EXPAREL is manufactured at scale. Three, high operating margins expected, due to the high gross margins and the ability to service this large opportunity with a compact specialty sales force. And four, a durable product lifecycle, owing to a compelling combination of formal patent protection, the unique delivery properties of our DepoFoam technology, and the technological and economic barriers to entry that are endemic to EXPAREL manufacturing, clinical development, and the education-heavy selling process.

So, with the positive Phase III nerve block study results and Suite C approval now in the rearview mirror, we believe we simply need to execute on our plans to drive value. I'll now turn the call back to Dave.

Thank you for joining us today. We look forward to updating you on EXPAREL as we go forward. Coming up, we will be presenting on May 13th at the Bank of America Merrill Lynch Healthcare Conference in Las Vegas. We'll also be presenting in June at the Jefferies Global Healthcare Conference in New York City.

With that, I'll turn it over to Q&A. Sam?

(Operator Instructions). David Amsellem, Piper Jaffray.

Just a couple. So, first with the recent capital raise, I know that there's a big component that's going to be dedicated to capacity. But are you potentially going to also use the capital to assess business development opportunities that can leverage the sales organization, and give us a sense of how much of a priority that is?

And then, secondly, I wanted to touch on the DepoNSAID program. Can you tell us if you settled on which NSAID you're going to move forward? And are you looking at this as primarily a post-op pain product or possibly a product for another indication, say, like osteoarthritis of the knee? Thank you.

Thanks, David. Let me go to the BD route first, your first question. We have a strong bias towards developing products in DepoFoam, and so that will always be what we look at first. And -- but with that said, we do have products in the marketplace where we think we can infer either a product benefit or an IP benefit by putting different product opportunities in DepoFoam. So we are looking at products outside of Organization, both for -- as candidates for DepoFoam-based products and as standalone products.

I think the other strong bias we have towards value-add is that as far as we can tell, we are the only pharmaceutical company or spec pharma company that has this team of regionally-dispersed nurses and physicians, et cetera. And so, we also have a strong business development bias towards products that have a high educational component. So the kinds of products that might scare other companies, because they require local anesthesia or they require use in an acute care setting, we actually think that we are the perfect opportunity for those products to be launched effectively. So that's where we are looking with most intensity. But, yes, we are looking at a number of things.

On the second product, we believe that we've locked on a DepoFoam-based NSAID, David, but the issue with the NSAIDs is, we know from all of the history of all the others, is the manufacturing is a critical component of getting one of these products to market. And so, until we are 100% certain that we can manufacture at commercial scale quantities, I think we are probably in the best position to just keep working on these things, and make sure that we know what we are saying before we put anything like that out on the public domain.

The last part of your question -- we do see distinct marketplaces for a locally administered DepoNSAID. Just to remind everybody on the call, the reason that we think that we have a market advantage here is that by administering the NSAID locally, we can use a greatly diminished -- I'm talking about between 5% and 10% of whatever the systemic dose would be. So, we will have a black box for DepoNSAID-driven adverse events. There's no doubt about that. But when we have done our primary market research, the physicians are also pretty sure that if we use a dose that is just a small fraction of what they would use systemically, that we will diminish -- we will have the appropriate diminishing effect on AE.

That leads you to two really distinct market opportunities. One is in an ambulatory care setting, where you could give a patient EXPAREL and an anti-inflammatory NSAID and send them home, hopefully, on a COX-2 or acetaminophen. The other is for local administration in the physician's office where, if a patient did something stupid over the weekend either on the ski slope or in the garden or something like that, you could administer the drug locally, and provide immediate relief while either the topical or the systemic NSAIDs are doing their business.

So, that's really what we see as the first protocol for the development pipeline. And then there's other things behind it, but they're even less developed.

And if I can just -- David, just add onto your first question, I mean, we also -- Dave talked about the biases we have. We also have the strong bias against doing anything that would be very dilutive to our current shareholder base, given that we think that we can just execute on EXPAREL that we look at 2016, 2017 EPS numbers, that you don't have to have a real clever multiple on them to drive value. So when we talk about business development opportunities in our own pipeline, we're talking about supplementing what we have. But we are really, at this point, in the Company, definitely not thinking about transformative transactions that might dilute just what we need to do from an execution standpoint.

Okay. Thank you.

Thanks, David.

Tazeem Ahmad, Bank of America.

Thanks for taking my question. I have a couple. It's been a good clip of picking up new accounts from year-end. And even if you take into account seasonality and weather impacts, I was wondering if you could give some more detail? And of the 346 new accounts that you added in the first quarter, are there a majority that are coming from a specific type of customer? And do you expect that trend to continue going forward?

It's a great question. And as we've reported before, we are a little surprised by the continued growth on a weekly basis, ourselves. What we see largely is that, especially as we grow in orthopedics and in the TAP procedures, and some of the soft tissue procedures, that different physician and different physician groups will have been trained by Pacira in an academic institutional center. And as those physicians and as those groups go out to referral hospitals and associated hospitals, they demand that the drug be put on formulary, because they are using it at the mothership, if you will. So, you know, would just be really specific.

When we win a formulary approval at a, say, a 20-bed hospital or a 20-hospital chain, our folks might only go into three or four of those hospitals and train in the OR and through the nursing staffs, et cetera. What happens then is that those groups might have privileges on a Tuesday morning and a Thursday afternoon at a theater hospital that is in a position where we won't resource that opportunity, but they still want to use EXPAREL because it's the standard of care that's evolved in the major institution.

And so we continue to see the growth in that type of an environment. We are slowly picking up ambulatory care centers as well, especially those ambulatory care centers that are associated with a hospital. But it's pretty much the same story, if you will.

Okay, thanks. And then, secondly, once you get approval of the nerve block indication, do you have a sense of what type of surgeries might be most amenable initially?

We've had nerve block at Boards now, as you would expect. And I would tell you that there's a level of excitement in the anesthesia community around the ability to replace catheters and drug reservoirs with EXPAREL that is stronger than I would've anticipated, especially a couple of years ago. I think they are mostly thinking orthopedic procedures right out of the box -- you know, things like knees and feet and shoulders; a lot of discussion around the very painful procedures, especially knees and shoulders. And then some of the places where they think that they can probably discharge a patient on a more rapid time-frame if they were able to not have the patient tethered to a catheter and a drug reservoir, et cetera, like foot and ankle and wrist, et cetera.

And then that moves -- once you sort of get into the flow of the discussion, if you will, then you start to move to the cardiothoracics, where they would like to do cardiothoracic surgery by infiltrating the port sites and the test tubes, et cetera, but then also do an intercostal block. And so, that becomes something of more interest to them than before we had the nerve block.

And then it starts to get really interesting from there. There are a number of high-end regional programs -- the sort of the avant-garde of anesthesia, if you will, where they look at regional surgery -- regional surgical anesthetic approach for mastectomies and breast reconstruction, et cetera; peri-vertebral blocks -- not a lot of places doing them, but sort of the next evolution of care that's provided. And we do have a number of trials ongoing in that environment as well.

And then, lastly, the nerve block indication, as I stated very simply in the script, allows us to address a chronic pain opportunity, which is almost entirely nerve block -- you know, where you start to do things like the set point injection, where Bupivacaine, again, is the standard of care. And a lot of discussion at our anesthesia ad boards about if we could turn the pain signal off for three days, can we expect even a greater benefit from the use of Bupivacaine mostly today?

A long-winded question to your answer. I apologize for that, but there's a lot there.

No, I appreciate the color. Thanks.

Thanks.

Douglas Tsao, Barclays.

Just curious, in terms of additions we've seen in terms of new accounts. It's actually accelerated from where you were in the first several-month quarters of commercialization. If you could provide some color around the types of accounts that you are adding right now. I mean, are these sort of largely Tier 2 organizations? Or is there still good opportunity to add some larger accounts and larger institutions?

Yes, it's both, Doug. You know, we do still win major top 100 accounts in the top 100 as the drug is being used in reconstruction, for example, which is a major initiative that was made by our efficacy in abdominoplasty. And now, as folks experiment with the use of the drug in different open fracture and trauma institutions, there are hospitals that we would've not had in our top 100 list two years ago that are there now.

So, as we've talked about previously, we've done well with access. And a lot of the Tier 1 use of the product is driven by new customer groups and new surgical procedures, that where EXPAREL is making inpatient procedures into outpatient procedures, and is allowing us to do things like bilateral knees, which were not even possible or were done very rarely in an era of pre-EXPAREL.

And then as I stated, the Tier 2 customers, it's really hard for me to characterize, Doug, because every marketplace is a little bit different. But I would say that in the Tier 1, it's TAPs and reconstructive programs that are really opening a lot of doors. In the Tier 2 centers, it's -- it would be orthopedic leading the way. Tier 1 for trauma and open fractures, et cetera; Tier 2 is where we see a lot of growth still in hips and knees.

And then once folks see that you can take care of a knee, and the patient goes home with little or no morphine on day two, then they start to think about, can I use it in a shoulder? Is there a reason why I'm not using it in spine? All of those kinds of things. So, it's not a very specific answer to your question, but I would tell you, as you and I have talked personally, I mean, we've got a tiger by the tail here. It's a little bit hard to keep track of this on a day-to-day basis.

That's great. And I appreciate the color, Dave. And then, in terms of the composition of the hospitals that have now ordered over $100,000 of product, is there any sort of theme behind some of those big accounts that you're building? Or does it really represent the entire spectrum of centers that you're seeing right now?

It's a great question and there's two answers, Doug. The thing that I'm most interested in is the number one driver of those accounts is the time that they've have access to the technology. So there are several relatively small accounts who were early adopters of EXPAREL who are big users, which continues to say to us that the more time we have in the OR, the more places our customers find to use it effectively to improve patient care. I mean, that's really exciting to us.

There is no doubt that when you've got a 1000-bed hospital, they are going to use more drugs than a 200-bed hospital. And so it is a mix again. But we keep pretty close track of some of the early -- some of the small hospitals that were early adopters. And I'm always happy to see that a couple of those are still in our top 10 purchasers.

Okay, great. Thank you. I'll just hop out of the queue for now.

Thanks, Doug.

Corey Davis, National Alliance.

I wanted to talk about a couple of the P&L line items, starting with gross margins. I saw a nice uptick from Q4 to Q1. It is that trend likely to continue into Q2? Or with Suite C coming online, will you see kind of a setback temporarily in the gross margin line? And then secondarily, I heard you say that a Patheon manufacturing has 80% gross margins. How does that compare to your own current facility at, say, peak capacity? Will Patheon bring you up or bring you down in terms of the overall corporate gross margins?

Yes, thanks, Corey. So think we do expect to see quarter-over-quarter improvement in gross margins. And I talked about the fact that there are two schisms we'd see and they'd come online separately. But one of the skids is now up and running, and we're -- we've been making product before we got approved, and we are actually quite pleased with the productivity we have in that skid, in terms of how many batches per week we are making and so forth.

So, with a little bit of caution because this is new to all of us, I expect to continue to see quarter-over-quarter improvement in gross margin. And as I said earlier, we've guided to have gross margins greater than 60% in Q4. So, I think you'll see sort of a linear move toward that number in the next couple of quarters.

I'm sorry, what was your other question?

Just does Patheon help or hurt overall margins at full capacity?

Yes. I mean, we've said that with Suite A and Suite C at full capacity will be 75% to 80%, and Patheon will be at least 80%. Because it's a new relationship, I don't really want to go out on a limb for it, but we certainly expect that gross margins there will be at least 80% for us. So they will either be -- they will either take the Company's gross margins where they've already been modeled or improve them from there.

Okay. And then the second on the SG&A line, should we -- the same kind of question. Sequentially, should that continue to tick up? And any change in your goal of profitability by the end of the year?

No change in the goal of profitability. We expect to be non-GAAP EPS-positive no later than the second half of the year. And SG&A, I think what we've just tried to communicate is that the G&A portion of it, we're certainly focused on keeping that as limited as possible. And we are not the kind of company that takes our capital and puts it into that type of activity, other than the limited amount of activity to run the business.

And then in the selling side, Dave's talked about that we'll add 10 to 15 reps a year for the next couple of years. And we'll continue to look at the program opportunities on the selling side. Obviously, there's a great return on any dollar you put into the selling process. But we don't expect any big uptake quarter-over-quarter in the short-term here, Corey.

Okay. Thanks very much. That's all I had.

Thanks, Corey.

Patti Bank, DISCERN Securities.

Just two quick questions. Dave, wondering on the formulary process for the nerve block indication. Once you get that, is that pretty immediately accessible for that indication? Or is there a process that you have to go through with another round of P&T committees? Then I have a second question.

For the most part, Patti, the drug is approved on formulary. I mean, there are still some places where it's approved for certain uses and by certain surgeons, et cetera, in there. So, mostly we believe that it will be available for use. There will be some situations where local restrictions will require that we have to have an additional meeting with some type of a access committee in the hospital. It's not always P&T at that level. Sometimes it's safety. There's different groups inside the hospitals.

And are you able to gauge at this point how much off-label use there is beyond infiltration?

Very little. There's some, for sure. And we have to be careful that you don't forecast off it, because you'll hear a lot about some of the different uses of the product. But in terms of a forecast, we don't believe that it's anything material, Patti.

And then just one quick question maybe for Jim. Was there any indication that hospitals were buying ahead of the price increase? Any inventory at the hospitals that needed to be worked down this quarter?

I guess, Patti, what I can say is we don't expect the quarter itself to be impacted by that. And I think the price increase was modest enough that it wouldn't change our month-over-month activity too dramatically.

Yes. I would say, Patti -- and you know we get sales every morning -- I don't see anything here that would survive the quarter. So, it would be distorted on a day-to-day and a week-to-week basis, but I don't think you're going to see anything that's going to bleed into Q3, if that's the nature of your question.

Okay, thanks. That's helpful.

Thank you. And at this time, I'm not showing any further questions. I'd like to turn the call back to Dave Stack for any closing remarks.

Great. No, I think we're all set. Thank you, Sam, for helping us out. And thanks, everybody. We look forward to seeing you all soon.

You're welcome, Sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.