Pacira Biosciences Inc (PCRX) 2014 Q3 法說會逐字稿

Thank you for joining the Pacira Pharmaceuticals third 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 session. 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, Pacira Pharmaceuticals.

Thank you, and good morning everyone. Joining me on the call today were Pacira are Dave Stack, President and 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 plans to expand indications for EXPAREL, our ability to adequately resolve the issues raised in the FDA warping letters, Pacira's plans to evaluate, develop, and pursue additional DepoFoam based product candidates, production in Suite A and Suite C, the manufacturing relationship with Patheon, anticipated costs, gross margins, operating leverage, and other statements containing the words please, anticipates, plans, expects, and similar expressions constitute forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995. Any such forward-looking statements are based on assumptions that the Company believes are reasonable that are subject to a wide range of risks and uncertainties.

Actual results may differ materially from those expressed or implemented by such forward-looking statements. Many of these and other risks and uncertainties are described in the Risk Factors section of the Pacira's most recent Annual Report on Form 10-K for the fiscal year-ended December 31th, 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 non-GAAP net income or loss, non-GAAP EPS. Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures are included in the earnings release for the quarter. With that we will hear first from Dave.

Thanks Jess. Good morning everyone, and thank you for joining us today. Our main product EXPAREL which has now seen continued numerous success for nearly 2.5 years, is the primary focus of today's call. As of September 30th, 2014 a total of 3,062 distinct customers have ordered EXPAREL since launch, with 593 customers ordering more than $100,000 worth of product, 80 customers ordering more than $500,000 worth of product, and 13 ordering more than $1 million worth of EXPAREL. Market share gains in the low procedure third quarter were in line with the quarterly seasonal expectations that we provided to the Street for 2014.

We reported $50.2 million of EXPAREL net revenue in the third quarter, up 12% from the previous quarter. For Q3 we also saw the base of our business continue to grow with 247 new accounts, an average of 19 new accounts per week. While we are pleased with the consistent number of new accounts quarter after quarter since launch, internal and external discussions have made it clear that more than two years into the launch this metric has outrun its use, and we will no longer provide it beginning with the fourth quarter. Recall that with our current approved indication for infiltration into the surgical site to produce postsurgical analgesia, we need an 8% market share to reach $1 billion of EXPAREL sales. With orders from approximately 65% of the Top 1000 hospitals in the US, which perform two-thirds of all surgical procedures, a key commercial focus is now to expand growth within the exiting customer base to provide reduced opioid pain management opportunities. The third quarter demonstrated that our larger customers continue to be those accounts that have had access to EXPAREL the longest. Further accentuated by the growing and increasingly broad utilization of EXPAREL across different new procedures. Adding to that evidence we continue to see the removal of formulary restrictions by early adopters, and new formulary access without restriction. In addition, similar market dynamics driving overall surgical procedures were in play in Q3, with our initial launch into soft tissue procedures we established improved patient care through the ability to provide postsurgical pain management with reduced opioids. The ability to provide specific algorithms for patients most likely to be problematic when opioids are used for postsurgical pain management has led to a number enhanced recovery protocols, and continuous quality improvement initiatives at major academic teaching centers. We look forward to continuing to work with these centers to provide care pathways which can be shared with other hospitals, as we provide a viable option to address the opioid epidemic in the United States.

Orthopedic procedures remain the fastest growing market segment for EXPAREL. Continuing the expansion for knees, hips, hands, wrists, shoulders, foot and ankle, to spine, fractures, trauma and sports medicine. There are several protocol driven management companies which provide specific care pathways for orthopedic procedures. Orthopedic enhanced recovery protocols for both inpatient and outpatient procedures have implemented EXPAREL, for example the Marshall steel cap care pathway for inpatient procedures, and the Swift pass outpatient arthroplasty protocol, both are using EXPAREL to achieve a reduced opioid strategy. In fact according to the latest available premiere data since launch soft tissue represents 46% of EXPAREL procedures, orthopedics represent 46% of procedures, cardiothoracic represents 3% of procedures, with approximately 5% other.

If we look specifically at the most recent data for the first six months of 2014, soft tissue represents 39% of procedures, orthopedic represents 54% of procedures, with 3% cardiothoracic, and 4% other. On September 25th we announced receipt of a letter from the FDA's Office of Prescription Drug Promotion, or OPDP. Referencing certain promotional materials, the letter states that Pacira has promoted EXPAREL for uses outside of the package in certain indications, and that there is a lack of evidence to support pain control beyond 24 hours. Pacira responded on October 6th in accordance with the OPDP request. We are in active with the FDA, and look forward to resolving their concerns. While not raised in the OPDP letter, we also included an overview of the safety profile of EXPAREL in our response. From a clinical perspective, Dr. Eugene Viscusi published in The Journal of Pain Research last year, a complete review of all of our wound infiltration safety data which showed excellent safety. Two weeks ago Dr. Brian Ilfeld presented at The American Society of Anesthesia Meeting, our nerve block safety data which showed results similar to placebo.

Finally, from the post-marketing perspective our sales numbers indicate that we have shipped over 800,000 vials of EXPAREL since launch, and our reported adverse event rate continues to be well below 1%, with most of those adverse events reflecting either normal events in the course of surgery, or issues that could likely be addressed by further training and proper administration technique. Our clinical development team continues to work with EXPAREL as a platform opportunity. Based on our PDUFA date of March 5, 2015 for the nerve block sNDA, we are planning Phase 4 studies and additional nerve block procedures for upper extremity and lower extremity nerve blocks. We believe a nerve block approval will also provide the opportunity to initiate our planned chronic pain program. Bupivacaine is used routinely in chronic pain patients in the chronic pain patient population, and this patient population of approximately 100 million people in the United States, and we have many requests from the chronic pain physicians to study EXPAREL in this treatment setting. If all goes well, we would anticipate the US launch for chronic pain management in early 2018.

In addition, again based on many requests from physicians and dentists from the marketplace, we expect to initiate a Phase III clinical program in oral surgery, to address the roughly 25 million oral surgery procedures performed annually in the United States. Oral surgery is a well accepted pain model for FDA approval in acute pain. If all goes as planned we anticipate this being added to our label, with a potential launch opportunity in oral surgery in the first half of 2017. Our animal health partner, Aratana, has also recently provided updates from a pilot field study in the use of liposomal bupivacaine following knee surgery in dogs, demonstrating 72 hours of effect. This data has provided the basis of continued clinical program in companion animals. To accommodate the expanding clinical use of EXPAREL in the marketplace, we also expect to provide additional packaging options to support the needs of our customers. In late 2015 we expect to launch a 10 ml vial, followed by a 5 ml vial, to support either the dental oral surgery indication, a pediatric indication, and/or the veterinary launch.

Importantly, we have dedicated resources to our DepoFoam pipeline initiatives, and we look forward to having the opportunity to discuss these programs with you early in 2015. We also continue to see the existing body of clinical work grow in support of EXPAREL. Physicians continue to initiate and share their own independent studies in soft tissue and orthopedic surgeries. This week Dr. Jay Redan, a medical director at Florida Hospital Celebration Health, presented his analysis at the American College of Surgeons, or ACS. The findings reiterate the positive impact of an EXPAREL-based pain management therapy reducing opioid related postsurgical complications in abdominal surgical procedures. Patients treated with EXPAREL after surgery experienced statistically significant decreases in urinary retention, respiratory depression and the risk of falls, compared to the group receiving the previous standard of care.

Next week there will be a randomized prospective patient and health economic outcome trials presented at the American Association of Hip and Knee Surgeons, or AAHKS, comparing EXPAREL to opioid based standard of care across pain reduction, opioid consumption, opioid related adverse events, and fall events in total knee arthroplasty. Additionally at American Society of Health Systems Pharmacists, or ASHP, EXPAREL will be compared to morphine PCA and femoral nerve block for total knee arthroplasty, in terms of PACU time, length of hospital stay. opioid use, and hospital costs. In Q3 a paper by Dr. Ben Domb, of the American Hip Institute in Chicago, on the effect of liposomal Bupivacaine injection during total hip arthroplasty, a controlled cohort study was published in the BMC Musculoskeletal Disorder Journal, and in October, the American Journal of Orthopedics published a supplement from the American Academy of Orthopedic Surgery Meeting earlier this year, titled Advancing Orthopedic Postsurgical Pain Management in Multimodal Care Pathways, Improving Clinical and Economic Outcomes, authored by Drs. Lombardi, Herbst, Springer, and Hutchinson.

In addition we have a number of publications on individual centers evaluating with EXPAREL, ranging from bariatrics, reconstructive surgery, cardiothoracic procedures, GYN procedures, and total joints, both in the inpatient and outpatient environments over the next two quarters. We also anticipate a number of publications around the safety of EXPAREL, pharmacokinetic evaluations in various practice scenarios, Best Practice consensus recommendations and enhanced recovery outcomes. Our health outcomes and value assessment team continues to partner with patient safety organizations, as well as physician and patient advocacy groups, and opioids bearing treatment strategies to address the opioid epidemic in the United States. For example, a presentation comparing outcomes of pain management strategies in bariatric surgery patients will be presented at Obesity Week next month.

As you see there is a great deal of interest in the medical community to determine the Best Practice opportunity to reduce opioids and improve patient care. As you will hear from Jim in the next couple of minutes, the scale up of our manufacturing facilities continues to go well. Based on current forecasts we believe we will be in a position to provide EXPAREL to markets outside of the United States in 2018, 2019 timeframes. Given this expectation we anticipate initiating discussions with potential ex-US partners in late 2015 or early 2016, to work with a number of possible partners, who have inquired regarding the availability of EXPAREL outside of the US. I will now turn the call over to Jim to review our Q3 financials and manufacturing update. Jim.

Thanks Dave, and good morning everyone. We saw strong evidence in the Q3 results of the Pacira operating leverage, which we believe will be more and more pronounced, as EXPAREL revenue continues to grow, not only with increased market share and infiltration, and with the anticipated nerve block launch in March 2015, but also farther down the road with the potential oral surgery pediatric and chronic pain opportunities. With EXPAREL revenue of $50.2 million in Q3, as emphasized a slow quarter in terms of surgical procedures, we're obviously at an annual sales run-rate of over $200 million. This has been achieved in our tenth quarter post launch, remaining ahead of the timeline reached by the largest comparable branded hospital products, which ultimately have achieved revenue well over $500 million. Let me point out here, as we have noted on every quarterly call since launch, that we continue to caution against relying on the EXPAREL sales estimates released by the third-party data tracking services, which have consistently shown distorted trends and misleading trends, and this is particularly acute this quarter.

As expected we continue to see gross margin improvement up to 61% in Q3. Recall that we have guided EXPAREL gross margins for product made in Suite A and Suite C to be 75% to 80% at peak, and greater than 60% in Q4 of this year, which we have already surpassed. We expect to see further improvement over the Q3 results in Q4 and going forward, as we work our way up toward full production capacity.

Turning to measures of profitability, our GAAP net loss narrowed to $3 million, or $0.08 per share. You will recall that we expected to achieve profitability on a non-GAAP basis no later than the second half of 2014, and we achieved that milestone last quarter with a $1.5 million profit. In Q3 our non-GAAP net income rose to $5.7 million, which translated to $0.16 per basic share, and $0.14 per diluted share. The primary driver of the difference between our GAAP and non-GAAP income is the noncash stock-based compensation expense, which reached a very sizable $7.7 million in Q3, about 15% of our total operating expenses. I just want to remind and emphasize that this is a direct consequence of the value we have created for shareholders, resulting from our stock price appreciation since the $7-dollar IPO in 2011.

Given the importance of understanding our financial performance and trends independent of stock-based compensation, I want to highlight that we added a disclosure in the NDA section of our 10-Q, the stock-based comp within operating expense categories. So note that with a quarter-over-quarter EXPAREL revenue increase of approximately $5 million, our adjusted net income increased by approximately $4 million. This high correlation in Q3 between the incremental EXPAREL revenue and incremental non-GAAP profitability provides a glimpse of the operating leverage inherent in our business model. We expect to become increasingly apparent as revenue continues to grow in the quarters and years ahead. In terms of cash, we generated $9 million of cash from operations in the third quarter. Our CapEx in Q3 was $4.9 million, and as previously disclosed, we expect that figure to grow over the next several quarters as we purchase equipment, and build out the additional manufacturing capacity with Patheon in the UK.

Of notice that we made an $8 million milestone payment to SkyePharma in the quarter, reflecting the achievement of the $100 million annual sales milestone related to our 2007 purchase agreement with SkyePharma. For reference this payment doesn't hit our P&L, and is reflected in the payment of contingent consideration line in our cash flow statement. Owing to the generation of cash from operations, and in spite of the milestone payment and manufacturing CapEx, we ended the quarter with approximately $176 million of cash and investments, only slightly down from the $180 million coming into the quarter.

We recently hosted a visit to our science center campus facility for research analysts, emphasizing a few key messages on the EXPAREL product supply front. Number one, that we are continuing to manufacture 24/7 365 days a year, to build inventory in anticipation of continued rapid EXPAREL growth, and are making significant progress in this endeavor. And number two, we were very much on track for the first suite, Suite A2 for additional capacity at our co-production partner Patheon facility, to be up and running in the second half of 2016. We have previously disclosed that our expected maximum annual production stated in terms of revenue at the current price is approximately $400 million in Suite A and Suite C combined, and then an additional $300 million expected in Suite A2 at Patheon, for a combined total of around $700 million.

We're also in the design phase of the second manufacturing skid at Patheon. which we refer to as Suite B2, and we plan on being operational in 2018 or 2019 timeframe. Because we expect this facility to be at a scale that is twice the capacity of what we have in Suite C, this suite alone could provide an additional $600 million of annual capacity. We expect to have at least $1.3 billion of total capacity in place no later than 2019. Keep in mind that we initially made the capacity estimates for Suite A and Suite C, and by extension applied to the Patheon Suite A2 and B2, before we had any meaningful experience running either suite 24/7. Based on our Suite A and Suite C production performance to-date, we believe those estimates may prove to be conservative.

We also achieved a meaningful milestone in Q3 related to the new spray manufacturing process, which we are now referring to as DepoFoam spray. On our science center campus we have successfully established a DepoFoam spray pilot manufacturing facility, which is not only replicating the liposomal bupivacaine product performance results, that we had previously achieved on the lab bench equipment, but equally important has been achieved with the proprietary aseptic spray nozzle that is a central component of the DepoFoam spray intellectual property. We expect to meet with the FDA in the first half of 2015 to receive feedback on our proposed regulatory pathway, to supplement our NDA to include an additional method of manufacturing EXPAREL, via the DepoFoam spray process. With have noted that EXPAREL made in DepoFoam spray could enjoy improved gross margins estimated in the 85% to 90% range, and we effect to have an Orange Book listed patent to 2031.

In addition because of our emerging manufacturing presence in the UK alongside our co=production partner, as we work through the technical development of the Suite A2 and B2 manufacturing lines, we intend to also focus our development of the DepoFoam spray IP. In concert with this development activity we expect to qualify for the UK patent box, and if we are ultimately successful with the DepoFoam spray development, we expect our effective tax rate could decline from the high-30's to the high-20's. We intend to put more specific timelines on EXPAREL DepoFoam spray development subsequent to our meeting and feedback from the FDA.

In our Analyst Meeting at the science center campus, we also highlighted three additional topics that were interrelated. Number one, we delved deeper into how DepoFoam-based products like EXPAREL are made, employing a very clever, sometimes enigmatic proprietary process at the intersection of complex physics and chemistry, required for example specialized equipment containing pre-specified mixer head geometries, heights, speed, and total mixing time, that are all critical to the particle size formulation, and the need for experienced based know-how to assess the impact of infinitesimal changes in critical process parameters on the final product attributes.

We believe it's important for investors to understand why we have such conviction, that we can see no generic threat. Second, we emphasized that the various [sucipients] used in our process, our bio compatible natural lipids, that form the outer membranes and internal chamber membranes of the multi vesicular particles, and that the bupivacaine in each vial of EXPAREL is contained within millions of those particles, each containing trillions of internal chambers, ultimately resulting in the desired release profile regardless of where the drug is injected. This is clearly a unique formulation, but also begins to foster an understanding of the positive safety profile of EXPAREL that Dave discussed.

And finally we highlighted that we have an experienced and cohesive teams of R&D professionals, who are actively working on our DepoFoam-based pipeline products, which as Dave mentioned we expect to say more about early next year. So in summary, a strong quarter financially providing concrete evidence of the operating leverage inherent in our business model, and encouraging steps in our strategic plan around EXPAREL manufacturing, DepoFoam spray development, and R&D pipeline development, to support and drive future value creation. Dave.

Thanks, Jim. Actually can we open up for question-and-answer?

Thank you. (Operator Instructions). Our first question comes from Douglas Tsao of Barclays, your line is open.

Hi. Good morning. Just when you think about sort of the trajectory that we have seen in recent months or recent quarters, sort of have been a little bit more modest growth followed by boluses of activity, some of it seems to be seasonal. What is your sort of take and what we saw this last quarter, say in comparison to the inevitably tough comp that we saw in 2Q, where we saw really strong sequential growth on a quarter-to-quarter basis?

Yes. We were pretty much what we has forecasted Doug. If you go back and look at Q1, we had growth of 13%, in Q3 we had growth of 12%. That's pretty much the way we think the years are going to roll out, based on everything we talked about earlier. We see Q1 and Q3 being soft quarters for different reasons by the way, and Q2 and Q4 being the big procedure driven quarters, and that's really what is the driver, is really the number of procedures being done, not any kind of a different use of EXPAREL. I would make one additional comment there, Doug, is as we do more orthopedic procedures, which by their very nature are elective, then we become more and more seasonal, right? So what we have is the baseline of emergent things as they are related to tumor removal, and things like that, and then patients actually have a choice of when they would have a knee or a hip done, and they will favor the second quarter and the fourth quarter.

And then you mentioned ongoing discussions with the FDA, in terms of the warning letter. I guess the first question that comes to mind is at what point do you think that you could come, there could be a resolution with that, and not necessarily a closeout letter, because I know those can take years and years and years to come, if they ever do come. But at what point do you think you will sort of come to some interim agreement, if you will, with the Agency in terms of the market, your marketing materials?

I appreciate the question, Doug, and I think you'll appreciate the fact that we are having ongoing discussions with the FDA, and it's just not appropriate for me to comment at this time.

Okay. And then have you seen any impact in terms of accounts, how they've been being looking at the indication of use for the product since the warning letter came out?

That's a much more difficult question to answer. So here's what we see, and I will give you two directional answers to the question, and I appreciate you asking the question by the way. I mean, it is the obvious question. One is, that we have a strong and a significant number of advocates across a wide range of procedures and healthcare providers who have used the product, and have enjoyed the benefits or their patients have enjoyed the benefits of a reduced opioid strategy.

With that being said, there have been a number of negative reports almost entirely from pharmacy, that have caused some market disruptions as a result of the warning letter, and I will give you a couple of examples. We've had reports that EXPAREL has a black box, we have a report that EXPAREL has been taken off of the market, EXPAREL must have significant safety issues which have prompted the FDA warning letter after more than two years on the market. Of course all of those things are not accurate, and we're certainly going to have to handle these pharmacy-driven misrepresentations until we come to some resolution with the FDA, and it certainly is not a positive, Doug. I mean I guess I should probably start off by saying that.

Okay. Great. Thank you very much.

Yes, thank you.

Thank you Gary Nachman of Goldman Sachs. Your line is now open.

Hi. Good morning. Dave just to follow up on that last point have you actually been having any conversations proactively with the hospitals, to explain your position to them, and make them more comfortable about the whole situation? And then in 3Q, could you run through where else you're seeing most of the increased use for EXPAREL outside of orthopedics?

Sure. So there's daily discussions with customers, individual physicians and pharmacists, and even patient advocacy groups and physician advocacy groups. There are a number of quality initiatives, and enhanced recovery pathways, Gary, that we we're rolling out at some major institutions. So those discussions those activities continue. Remember that the FDA warning letter was quite specific in the topics that it raised and so as you might imagine we're being very careful in how we work with the FDA in addressing the issues that they raised in the warning letter, but we continue to have daily interactions with all of our customers. So that's number one.

Number two, I don't know if I see anything specifically in Q3, Gary, that would be a lot different. I mean what we see is that everything is growing, and ortho is growing faster, and I would also say though, that these CQI initiatives that continue with quality improvement initiatives and the care pathways that are being rolled out, are primarily in soft tissue indications. Primarily in tumor removal and in the OB/GYN area, so we expect that as time goes on, and it's largely by the way because those folks have had access to the technology for a longer period of time, so their ability to develop protocol driven care is actually stronger than the ortho guys who are more recent advocates for EXPAREL. So what we have seen in Q3 is a little bit less ortho, because of the elective nature of those procedures, but on a percentage basis still growing faster than soft tissue, and generally a dampening of the procedures relative to what we think we will see in Q4. I don't know if that is, if that's not a specific answer to your question, ask again.

No that's very helpful. And then just last one for Jim. It was noticeable that the R&D expense is pretty low in the third quarter. Just how should we think about that run rate as you head into next year, as you try and move forward with chronic pain, and then potentially also some of those other Depo products in the pipeline?

Yes. I think we've had a lot of discussion internally, and we feel very fortunate that we can move forward multiple products in a pipeline without having a great impact on the P&L in the process. So the R&D there's no doubt the R&D number is low this quarter, because we're coming offer of pivotal studies in the past, and then nothing like that is active now. So you can expect a higher run rate as we go forward, but at the same time when we look out, without getting ahead of ourselves the type of things that we're looking at, like EXPAREL development, are actually not that expensive for us to develop so we can have a bit of a win/win there.

Okay. Thanks.

Thanks, Gary.

Thank you. Our next question comes from Liana Moussatos of Wedbush Securities. Your line is open.

Thank you for taking my question. In Q3 was there any inventory destocking? Can you comment on inventory from Q2 to Q3?

We're still making more than we're selling now, with we see approved so we're building inventory. I don't know if that is the answer.

I was going to say is that your question, Liana?

I don't mean at Pacira, I mean more at--?

Okay, sorry. No I mean I think we've sort of consistently said that based on the order patterns that we will see, it doesn't appear that there's any material stocking in any of our customers, meaning that they order so frequently, that it appears that they're using the product. So I don't think that is anything that affects the quarter-over-quarter results.

Yes. I will give you a slightly different frame of reference on that, Liana. It's interesting to us that we will see the same hospital order one box three times in a day, and your normal response to that would be we could improve slightly our margins if we could get them to order all three and throw them in one box, but in fact what's happening in the marketplace is, they don't want those three boxes to go into a central pharmacy somewhere. They want them to go directly into a Pyxis machine, or some point of entry system inside of the hospital, so that goes back to Jim's point that we think we have several days of inventory in the field, and we don't see that changing much.

Thank you.

Thank you. Our next question comes from David Steinberg of Jefferies. Your line is open.

Yes. Thanks very much and good morning. I was interested in your comments about pursuing an ex-US deal going forward. I haven't heard you discuss that too much in the past. So a couple of questions. First, what are some of the territories that you think are most attractive ex-US, and in which territories do you think you may get more favorable pricing? Secondly, are you looking to do some sort of global transaction, or more sort of a country by country situation, and thirdly, what types of companies, I know it's early, would you be look to talk with more, more device companies, more pharmaceutical companies, and finally again it's early, but what sort of structure do you think you might pursue sort of a royalty based deal, or a gross profit split? Thanks very much.

Yes. Thanks for the question, David. Let me just make a broad comment first. That the opportunity has been created by over performance in the manufacturing group, as Jim outlined. So we've moved the schedule for this forward so your comment that we haven't talked about it really is appropriate. I think we've had a number of folks who have asked about the drug some every month for the last couple of years frankly, and a lot of that is driven by folks who come to the US, and work with some of our leading-edge KOLs, and see them using EXPAREL, and then want to know from us, when they might be able to use that in their home territory.

Specifically, David, we have two quite different global opportunities. There are territories, Latin and South America, Canada, some of the countries like Australia, et cetera, and to some extent China, where the approval in the US provides a shortened regulatory opportunity in those territories. And those would be the most obvious for us to look at first. Other territories where the regulators have had a different idea about how the clinical trials would have to be done, and where you might have to go through a more rigorous pricing discussion are going to take a longer time, and I'm talking specifically now about the EU and Japan. So we view these as two very different opportunities.

We have been in discussion with some of the KOLs in the European Union about how we might be able to create an opportunity for them to have access to EXPAREL, and so those discussions are ongoing. For the rest of your questions about, what kind of deal we're looking for, and all of that, it's just way too early for me to be able to give you any -- significant comments. We haven't even really started the process yet, David. We're just getting to the point where we can open the opportunity to start to talk about this stuff.

Okay. Thanks. And just one more question sort of a 20,000-foot view. So given your robust reasonable soon you're being to be building a serious cash position, and I don't know how much you talked about it at the Board level, but any thoughts on what you might do with that? I would assume you're not going to be paying a dividend, share repurchases, a potentially looking at acquisitions, obviously it would be hard to find something that's grow as fast as EXPAREL, but what sort of acquisitions might you looking for, or any other possible uses of cash going forward?

I will ask Jim to pick me up if I stumble here at all relative to Board discussion, but the first thing David, is we have got a number of pipeline opportunities that are DepoFoam-based, that we're fleshing out now, and really more around we're pretty solid with the market opportunity, but we want to understand the clinical development requirements, and how we're going to manufacture, et cetera, and that was the reference to hopefully some early discussions in 2015. So that's the first thing that we're focused on. We are looking at some additional products for in licensing. Jim would remind me if I don't say it, we're not going to do a $1.4 billion acquisition, or anything like that, but if we found something that had a low cost of sales because it was interesting to the same customer base that we're currently dealing with, we've also talked to the Board about that opportunity as well. After that we'll just have to see, I guess I would look to Jim to make some comments here, but we've got the bonds that are out there, and how you resolve those relative to your use of cash and share buybacks, and all of the rest of that stuff, will require a much for sophisticated strategy than I can talk about on this call.

Yes. I mean the only thing I would add to that is, we're aware that we're in an industry where people that have had great success, haven't always been the greatest stewards of capital for their shareholders. In front of us what is visible is a lot of opportunity with our internal pipeline, and then potential in licensing like Dave said, but if we are in that fortuitous situation of having a lot of cash, and it's not clear what to do with excess cash, we're not going to viscerally impose upon ourselves the need to by something just because we have the cash, and then you do get into a discussion of down the road of do you eventually find ways to return cash to shareholders. But again between now and then, we have a lot of development opportunities in front of us that we intend to pursue.

Great. Thanks very much.

Thanks, David.

Thank you. Our next question comes from David Amsellem of Piper Jaffray. Your line is open.

Thanks. Just a couple. So just back to the warning letter. Maybe I will ask the question a little bit differently, in terms of the sales rep interactions with the surgeons, are you noticing anything in terms of surgeon, physician perceptions of EXPAREL changing in the wake of this letter? So that's my first question. And then secondly switching gears to pricing, I'm sure it's not lost on you on what Mallinckrodt did on their price reset on Ofirmev, and there was a near-term impact on volume. So I guess with that in mind, is it safe to say that you're going to take a conservative approach on price as it relates to EXPAREL, and focus just on continuing to drive volume growth? How are you thinking about that? Thank you.

Yes. Thanks for the questions, David. The first question related to surgeons, and if I can broaden that, I would say all healthcare providers other than pharmacy, and anybody else who might be in the purchasing camp, we don't see anything where their perceptions of EXPAREL have changed, except where they have been provided misinformation by some other party that is inaccurate. And so no, I don't have any experience or any notion that any surgeons have had any misperceptions. I mean the drug is the drug, right? And the surgeons know that it works, and so that is what it is as far as we're concerned. Your intuition on the conservative approach is probably the best way for me to say it actually. We continue to believe that pain is something that is ubiquitous, and especially an opioid bearing strategy is of great value to the healthcare system, and we will take modest price increases as the costs of our business increase, but we think that it's much more appropriate for us to make the product available to as many patients as possible, and have access to as many places as possible, especially given, David, the fact that we've got nerve block and chronic pain and oral surgery and pediatrics, and everything else coming down the pike here. So we are going to take very much a conservative approach, so I would agree with what you said. I won't make any negative comments.

And just a quick follow-up if I may, David. Just so these expansion opportunity that you alluded to, I might have missed this earlier. Is there any significant headcount expansion that's really just expansion at the margins if necessary?

Yes. Very much at the margins if necessary, and if we decide to double up on some of the clinical development, we might and three or four heads in clinical research, clinical development, but this is not anything that would be material in any way, David. I mean you might increase our clinical group from a whopping seven or eight to nine or ten, but from a sales force perspective no, we're covering the institutions where the action is, if you will.

Thanks.

Thanks.

Thank you. Our next question comes from Steve Byrne of Bank of America. Your line is open.

Hi, it's Tazeen here for Steve this morning. A couple of questions. Can you drill in a little bit more into your orthopedic business? I know you've had significant growth in the segment for quite some time, and I guess the question I'm really asking is, how much of your targeted orthopedic market have you penetrated, and which procedures in particular do you think you have a lot of room to grow in?

I don't think that we're anywhere near any kind of a top in any of them, Tazeen. What we talk about is the percentage of the EXPAREL business that's related to orthopedic procedures, but if you turn that the other way, and you look at the percentage of orthopedic procedures where EXPAREL is used, it's tiny still. So the normal progression maybe this is a more appropriate way to answer your question. Physicians or institutions almost always start with knees and hips, especially knees, and the opportunity there really is around the opportunity to have patients ambulate more quickly, which obviously does great things in knee and hip procedures, and discharged more quickly, so there is a constellation of reasons why you would want to use a low opioid treatment strategy in a patient who is getting a hip or a knee.

Then once the success of the EXPAREL therapy is demonstrated, then you see other people in the institution start to pick up on it, and that's when you move to wrists and shoulders, and then the spine guys generally will get involved, and then the trauma guys get involved, and those kind of things. And so I would tell you that knees and hips are the bulk of the orthopedic business, but we have got a whole bunch of additional opportunities that literally are primarily word of mouth in the surgeon suite in the hospital, where it's the orthopedic surgeon, talking to the spine guy, talking to the trauma guy, talking to the sports medicine guy, and I would tell you from my perspective, other than maybe knees themselves all of those opportunities are nascent.

Okay. And then with regards to your opportunity in chronic pain, it's obviously a very large market in the US alone, and as you think about the types of trials that you plan on running ahead of when you think you would could launch in 2018, where in the treatment regimen are you trying to place EXPAREL?

So we're actually having a series of ad boards right now, we have had a couple, and we're having a couple more. With we're look at where bupivacaine is used, we would very much want to look at a specific procedure that isn't confounded by the concomitant use of a corticosteroid if we can find one, and so right now, I think if I had to handicap where we would go, we would look at something look a facet joint, and that would be the primary area that you would look to do at to do a Phase III program to demonstrate efficacy and safety.

And obviously these discussions are still in flux, but would you need to do a large patient study for something like that?

Honestly I haven't looked at any kind of a power calculation for a P value or anything yet. I don't think we're there yet, but we will kick hose things off sometime next year.

Okay.

Relative to what in I mean relative to I cardiac trial, we're not talking about thousands. We're talking about hundreds in any case, but I don't have a number I can share with you.

Okay. And I guess the last question about your plans to partner the ex-US rights, would there be any situation in which you would choose to keep ex-US?

Probably not. I mean I guess I'm never saying never, but a number of us who work here have had a significant amount of international experience, and I think our efforts are best rewarded here in the United States, and we would very much like to partner with somebody who actually lives in these other markets, and can address those the way we address this here.

Okay. Thanks.

Thanks.

Thank you. Our next question comes from Oren Livnat of JMP Securities. Your line is now open.

Thanks far taking the questions. I have a few. Obviously March is bringing us this PDUFA for nerve block, I don't expect, I think your contraindicated now, but I'm just curious when you are staring at anesthesiologists in the face every day, right? And I'm just wondering sort of what kind of ground work can be laid ahead of that? Sort of what besides that data you published, what sort of awareness do you sense is out there now, and can be built before you launch, and how would that maybe be reflected in that launch uptake curve, assuming you are approved? And I guess the bigger picture question with growth. You've obviously shown data, and you can show lots of data about opioids bearing and better AE profiles, I am just curious, is this about the hospitals recognizing the value position across the board, and say anybody we use this in will have maybe a better outcome, a shorter length of stay, less opioids, et cetera, or is it really about this targeted stratification of, let's get these algorithms right of which patients this is best for, and let's get 70% of that market, rather than 2% of the whole market? Thanks.

Thanks, Mark. First, with anesthesia, really you're right. I mean we do interact with anesthesia because we're in the pain wormed every day, and really the only ongoing activity that we have with the anesthesia community because we have an SNDA under review with the FDA, is when there's a specific request for information around some educational component of the trial work that was done, or it's every once in a while we will have somebody ask about a physician who they heard is using the product somewhere else, is there some way that we can introduce them to that person, or something like that, but there is no rep driven interactions for sure. On the higher level side, where we have anesthesia ad boards of course as we start to work with the different anesthesia groups around the country to understand what the opportunity is, and how they see the value of opioid reduction, and things like that, but no formal program that would be rolled out in advance of the FDA approval of the product.

The second question is a little, I don't lean the first question wasn't interesting, but we have known each for a long time, but is a little bit more interesting. So there is no one answer which you might understand, but let me give you how we think about it anyway, and then come back and ask me another question. So if you're talking about, let's say a cholecystectomy, where we are taking somebody's gall bladder out. Typically the economic incentive of the hospital would be, and I will just pick a number, but let's say for the purpose of this discussion that it's $1000, and in that environment the use of a $300 product actually is material, and in that environment we provide the algorithms of who is most likely to have problems with opioids, and stay too long, and cost too much, and that's where we recommend that the hospital, or the purchasing group might want to take a look at their own data, and investigate a low opioid treatment, or a low morphine treatment strategy. That would be quite different than a procedure where you have a significant profit margin for the hospital, and especially in a scenario where there's a volume of procedures that overwhelms either the PACU bed size, or the number of beds that are dedicated to that certain surgical group, and in scenarios where throughput becomes very important. So I will give you a specific again. If you thought that you were going to make $6000 on a procedure say, the use of a $300 drug that has the promise of reducing length of stay by a day, has a completely different discussion than you had with our cholecystectomy guy. So it's both.

And I guess in terms of your uptake using this approach, are you finding that you're able in these lower profit margin procedures, are your algorithms resonating are these care and quality pathways you talked so much about gaining traction, or is this ultimately and the reason we are seeing so much more maybe ortho uptake, is it just a numbers game, and we're just looking at the math, and they're saying, the low hanging fruit is the rain making stuff, and let's just use it there?

Well, there's a little bit of that, but it is interesting to me that most of the care pathways and enhanced recovery protocols are actually in soft tissue. And it's for the reasons that we outlined, right? And so it's a lot easier for the institution then to define exactly who is going to get EXPAREL, and to have those pathways established, so it's not a physician or a group of physicians at a time. It's an institutional decision that's made, or in some cases a group of stations that have defined the best way to take care of patients in a certain procedure category.

Thanks. I don't want to hog the time, so I will end there.

I appreciate the question. Thanks Oren.

Thank you. Our next questions comes from Jonathan Aschoff of Brean Capital. Your line is open.

Thank you. A simple one. What's the difference between the $50.2 million in the headline, and the $50.9 million on the P&L for the EXPAREL revenues?

I'm not sure what you're referring to, Jonathan.

The press release has $50.2 million in the headlines, and $50.9 million down in the P&L?

If you are accurate then that's inaccurate. The revenue is $50.2 million for the quarter.

Okay. Thanks a lot.

The EXPAREL revenue. I don't see that.

Thanks Jonathan.

Thank you. Our next questions comes from Patti Bank of DISCERN Securities. Your line is open.

Good morning. I just wanted to follow up on the nerve block, and just Dave, if you can explain a little bit kind of the training that needs to be done ahead of nerve block versus infiltration, and whether it's one dose for all nerve blocks, or different doses for different nerves?

So the study was done in femoral nerve blocks, Patti and the sNDA that was submitted is 266 in a femoral nerve block, and so that will be the reference indication or the reference procedure, if you will, and the intention here is that once the FDA approves the femoral nerve block, that we will do additional work in an upper extremity nerve block and a lower extremity nerve block, so what we have right now is a femoral nerve block data set. Now with that being said, I'm sure there are a number of KOLs and academic institutions, who are doing their own clinical programs with EXPAREL in nerve block, and hopefully we will have the benefit of that information has we gain FDA approval, but right now all we're looking at is a femoral nerve block, and that will likely be what the indication is.

Okay. Then I just had a quick question on a J code. If am I correct that we are supposed to hear some time in November on that, and just kind of what your thoughts are about possibly getting that for 2015?

Yes. On the first point that is our understanding, and on the second point, we don't know. But I honestly Patti I just don't know. I should just stop there. We really don't know whether we're going to get J code or not. I guess I could give you a little bit of intuition that we are already working on an updated application, that we would put in immediately if we don't get it.

And then just last question maybe for Jim is point of clarification. On DepoFoam spray, I thought you said that you would be having a meeting with the FDA in the first half of 2015. Am I correct in that you would go in and suggest some kind of bridging study, or that's the outcome you would want there, and that we're not looking at any additional big studies to get a DepoFoam spray approved?

That's right. We're trying to as always have a regulatory patent that is one that allows us to get to the market the quickest.

Okay. Thanks.

Just going back to the question that Jonathan asked, I think I thought he was referring to the headline in the press release and he wasn't. Obviously he was referring to the income statement itself, and it says net product sales of $50.9 million. That includes some DepoCyt revenue in there. So it's the $50.2 million of EXPAREL, and $700,000 of DepoCyt revenue.

Thank you. It looks like we have a follow-up from Oren Livnat of JMP Securities. Your line is open.

Thanks. That was fast. First I want ti thank you guys for hosting us out there in San Diego, that was a really cool trip. Don't get mad at me if I took something incorrect away from it, so I am going to ask you maybe a nit picky question, but on that suite C, which was sort of educational for me to see that was this two side-by-side parallel suites there. Did I misunderstand that second half is not yet running, or validated or FDA approved? I'm not trying to take a pot shot here, just help me understand, when you talk about $400 million in capacity now, is that actually up and running, or are there still a few steps you have to take before you're fully functional?

You're right. The first skid was approved and we have been using the opportunity to do some development related activities, development is the not right word. Efficiency related activities that put us in a position to be able to maximize productivity as we go forward, and we're just now in the process of using the second skid from a pre-commercial perspective, but the approval process is quite perfunctory there and with Suite A and then one of the skids in Suite C, as I intimated earlier, were well ahead of production that we would have considered to be getting out of those skids.

Okay. So just so I understand, the second skid relatively a box-checking exercise to get that going, and regardless it's not like you take half of that $300 million, and take chop that off because you're already running significantly more efficiently with the 100, and half of Suite C as it stands today?

Both of those are accurate. Yes.

Awesome. Thanks so much.

Thanks, Oren.

Thank you, it looks like we have a follow-up from Douglas of Barclays. Your line is open.

Hey. Just a quick clarification. Busy morning, but I wasn't clear. Dave, you indicated in terms of the nerve block indication that you're expecting to get, do you think it will be limited to femoral nerve blocks, rather than sort of a more general nerve blockade?

I really don't know, Doug, but I think what I was trying to point out was that it was the data that was submitted to the FDA is in femoral nerve block, and so there is a range of possibilities as to how these different products have been approved. We're taking some of our guidance from the ropivacaine package insert, where they talk about large nerves, but we really don't know until we get into discussions with the FDA, and that hasn't happened yet, Doug.

Okay. Great. Thank you.

Thanks.

Thank you. That is all of the time that we have for questions today. I would like to turn the call back over to Dave Stack for any further remarks.

Great. Thanks Ashley. We would like to note that next month we will be attending a Barclays Select Series 2014 Small Cap Symposia on November 12th, and the Brean Life Sciences Summit on November 24th, both of which will take place in New York City. We will also be presenting at the Jefferies Global Healthcare Conference in London on November 20th. Thanks for joining us today, and we hope to see all of you there. Thanks Ashley. Thanks everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, you may all disconnect. Everyone have a great day.