Pacira Biosciences Inc (PCRX) 2014 Q4 法說會逐字稿

Thank you for joining the Pacira Pharmaceuticals fourth-quarter and full-year 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. (Operator Instructions)

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. (Operator Instructions)

I'd now like to turn the conference over to Ms. Jessica Cho. Ma'am, you may begin.

Thank you, and good morning, everyone. Joining me on the call today from 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, outlook, prospects, and 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 and that 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, 2014, 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 income or loss; non-GAAP operating expenses; non-GAAP gross margin; and non-GAAP EPS. Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the earnings release for the quarter. And with that, we will 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, which has improved the lives of over 1 million patients in the United States to date by providing a non-opioid pain management solution in the acute-care postsurgical setting. EXPAREL provides healthcare providers with a non-opioid platform as an option to address the opioid epidemic in the United States.

In 2012 there were 259 million opioid prescriptions written. And in 2013, 46 people died every day from prescription painkillers. Current studies show that roughly 1 in 15 patients who are prescribed opioids for acute postsurgical pain go on to become long-term opioid abusers, which translates over 2 million patients every year -- a public healthcare problem we work every day to address.

In Q4 the commercial trends and dynamics that we've seen from quarter to quarter continued into the end of the year. We saw continued removal of formulary restrictions by early adopters and new formulary wins without restrictions. And our largest customers remain those who have had access to EXPAREL for the longest, indicating that our existing customers continue to broaden EXPAREL use to new procedures, with a reduced opioid strategy for managing postsurgical pain.

Soft tissue, where we first launched, continues steady market growth in conjunction with a proliferation of enhanced recovery after surgery, or ERAS, protocols and continuous quality improvement, or CQI, initiatives in major academic teaching centers and hospitals across the United States. Plastic surgery, general colorectal surgery, OB/GYN oncology abdominal wall reconstruction, thoracic and bariatric procedures have all been documented through ERAS protocols.

Recall that these protocol-driven programs originally stemmed from our early algorithms identifying those patients most at risk when opioids are used to control postsurgical pain. Tied into these protocols are the understood health and economic benefits of an opioid-sparing strategy to both patient satisfaction and hospital economics.

Protocol-driven management companies, which provide specific care pathways for orthopedic procedures, implemented similar programs across knees, hips, shoulders, spine, and trauma for both the inpatient and outpatient settings. We are excited to work with hospitals in these soft tissue and orthopedic care pathways towards a concerted effort to provide real options to opioids as the platform for managing postsurgical pain in a systematic manner which allows us to quantify the benefits of these low- or no-opioid strategies.

Orthopedics remains our fastest-growing and now largest market segment. According to Premier's EXPAREL utilization data since launch through October, orthopedics represented 48% of EXPAREL procedures; soft tissue, 44%; cardiothoracic, 3%; and other, 5%. For the first 10 months of 2014, ortho represented 54% of EXPAREL procedures; soft tissue, 39%; cardiothoracic, 3%; and other, 5%.

Since our launch in April of 2012, surgeons have gained valuable insights into the value of a reduced-opioid postsurgical pain platform. In Q4 we had several Company-sponsored studies as well as physician-initiated independent studies with EXPAREL, where physicians shared their results in publications and at premier medical meetings.

In October Dr. Brian Ilfeld presented data demonstrating comparable safety of EXPAREL to placebo in peripheral nerve blocks at the annual meeting of the American Society of Anesthesiologists. That same month Dr. Jay Redan presented his findings at the American College of Surgeons Clinical Congress, showing that EXPAREL-based pain management regimen significantly reduces postsurgical opioid-related adverse events in ventral hernia and laparoscopic colon resection when compared to the standard of care.

In November Dr. Mark Snyder shared his results in total knee arthroplasty at the annual meeting of the American Association of Hip and Knee Surgeons, showing lower pain scores, reduced opioid consumption, and improved patient satisfaction in patients receiving EXPAREL versus a multidrug cocktail.

Recently Drs. Wang, Trombly, and Madhavan's pilot study was presented at the 29th annual North American Spine Society, which showed patients undergoing Level I/II open spine surgeries consumed fewer opioids -- up to 50% less, experiencing lower pain scores. And they walked more frequently and further when receiving EXPAREL-based therapy versus a bupivacaine-based regimen.

In another study by Dr. Wang et al, published in Becker's Spine Review, an open transforaminal lumbar interbody fusion, or TLIF, was compared to both a minimally-invasive surgical TLIF and an awake minimally-invasive TLIF using EXPAREL. Comparing the open procedure to the awake minimally-invasive procedure with EXPAREL, Dr. Wang and his team demonstrated a reduced length of stay from three or four days to one day per procedure, with savings of approximately $28,000.

We also had a number of peer review publications in Q4. A cohort study was published in the American Orthopedic Foot and Ankle Society, demonstrating in forefoot surgery that and EXPAREL-based multimodal therapy produced less opioid, lower pain scores, fewer medication refills, and no additional complications compared to a multimodal therapy without EXPAREL.

In February a pilot study, led by Dr. Andrew Sternlicht, published in a local and regional anesthesia showed no difference in efficacy and safety when comparing two volumes of EXPAREL via TAP infiltration for laparoscopic robotic prostatectomy, indicating that EXPAREL can be adopted for individual procedure patient need and surgeon preference.

Most recently we have also seen a number of articles on shared technique. Dr. David Leiman's case study of an ultrasound-guided pectoral nerve block using EXPAREL and a woman undergoing breast augmentation was published in PRS Global Open, in the American Society of Plastic Surgeons Journal; and an administration technique article by Drs. Takami, Mosomutu, and Preck was published in the Journal of Surgical Orthopaedic Advances.

Turning to what's ahead, there are a great deal of activity across four national congresses in March alone. The American Association of Neurological Surgeons Congress Spine Summit -- a study will be presented demonstrating that EXPAREL versus bupivacaine hydrochloride in a Level I unilateral microdiscectomy -- showing that the safety of EXPAREL in these lumbar procedures is appropriate, especially in an ambulatory surgery center.

At the International Anesthesia Research Society, two case reports of patients in a randomized trial will be presented. One case report demonstrates benefits of opioid reduction in a patient at high risk for opioid adverse events. She was a hypertensive, obese, heavy smoker who required a modified radical mastectomy with lymph node dissection. Following surgery, the patient reported no pain in the recovery room, did not receive any additional pain medications during her hospital stay, and was discharged home in 30 hours post-op.

The second case report features a 63-year-old woman with opioid-induced, incapacitating nausea and vomiting. She reported zero pain after receiving EXPAREL in an axillary block for an open reduction internal fixation of the left distal radius fracture. Another randomized trial shows that EXPAREL versus bupivacaine in TAP infiltration reduced maximal and minimal pain, nausea and vomiting, and significantly decreased opioid requirement through 72 hours.

At the Society of Gynecological Surgeons, study results show EXPAREL leading to a reduction in total opioid requirements in IV opioids compared to bupivacaine hydrochloride in 200 patients undergoing laparotomy for gynecologic malignancies. Next month at the American Academy of Orthopaedic Surgeons, multiple abstracts will evaluate EXPAREL versus other standard-of-care strategies in total hip, knee, trigger finger release surgeries, detailing reduced opioids cost and length of stay in a traditional care environment as well as a rapid recovery protocol.

On February 11 we announced the resolution of matters pertaining to certain promotional aspects of EXPAREL detailed in the recent warning letter from the FDA's Office of Prescription Drug, or OPDP. EXPAREL is indicated for single administration into the surgical site to produce postsurgical analgesia. With this broad indication, we have amended some elements of our promotional language specific to the pivotal trial procedures, as outlined in the package insert.

With the warning letter behind us, we are looking forward to concentrating on extending the access to EXPAREL for infiltration and developing additional opportunities beyond infiltration. On January 22 we hosted an analyst and investor day in New York City, where members of the Pacira management team, along with physicians and clinical experts, provided an overview of EXPAREL indications for nerve block -- which has a March 5 PDUFA date -- as well as development plans for oral surgery and chronic pain. From our market research, we believe the nerve block opportunity consists of 26 million addressable procedures, bearing in mind that 25% of nerve blocks today are administered via catheter-based systems.

As we've conveyed for oral surgery, we believe there are approximately 27 million addressable procedures, comprised of 10 million third molar extractions and 17 million oral maxillofacial procedures. If we gain approval for oral surgery, we expect primarily oral and maxillofacial surgeons as well as prosthodontists and endodontists to reduce their reliance on opioids and use EXPAREL as a single-dose administration to provide local analgesia during the critical few days after surgery. We plan on initiating a Phase III study in 2015 and expect to file an sNDA for this indication in early 2016.

For chronic pain we are planning a Phase II trial with patients who suffer from chronic low back pain caused by facet joint dysfunction. We will initiate this study in 2015 with EXPAREL as a single-dose administration to define the duration of efficacy and determine the optimal dose, which will better inform the Phase III study design planned for 2016.

Also note that our animal health partner, Aratana, recently provided updates on the bupivacaine extended-release injectable suspension product indicating their successful pivotal field effectiveness study in dogs undergoing knee surgery, with anticipated approval for dogs in 2016.

Two DepoFoam-based products candidates, DepoMeloxicam and DepoTranexamic Acid, were also unveiled during the analyst and investor day. First, I want to reiterate the key components of our unique, customer-driven product development strategies. First, we utilized 505(b)(2) clinical development and regulatory pathways with our DepoFoam products, reducing costs and accelerating development timelines while benefiting from the protection of the proprietary DepoFoam intellectual property and know-how.

Second, we seek replacement of cumbersome catheter reservoir pump systems for the single injection for sustained delivery. Third, we seek to replace systemic dosing with local peripheral injections for local effect, putting the drug where you want it. With a tangible set of future opportunities in hand with EXPAREL and additional pipeline products, we are pleased and excited with the foundation we've built and which will take us out for the next five years.

The value of Pacira lies in our ability to provide solutions to unmet medical needs as well as leverage within our business model; scalable manufacturing infrastructure with high gross margins, which Jim will collaborate on; and the specialty commercial organization of modest size relative to primary care organizations, which we believe can meet future opportunities with target expansion, along with our cost- and time-efficient 505(b)(2) clinical programs.

We continue to work with a number of policy and provider constituents to address the opioid epidemic in the United States. Along with our ERAS and CQI programs, we anticipate having the opportunity to share with you how reduced opioid acute pain treatment strategies have had a positive impact on addressing this critical public health issue.

In fact, there's a feature article in the Miami Herald today for a major breast cancer meeting -- for the major breast cancer meeting in the United States, taking place later this week in Miami. In that article Dr. Pat Borgen, the conference Chairman, speaks specifically about new pain management techniques, including EXPAREL.

I will now turn the call over to Jim to provide an update of our financials and provide an overview of our manufacturing. Jim?

Thanks, Dave. Good morning, everyone. Q4 marked a solid finish to 2014, a year full of financial, commercial, and operational milestones that signaled how far we've come as a company in a relatively short period of time. To recap the year financially, we crossed the line into profitability for the first time in Q2 on a non-GAAP basis and also generated cash from operations for the first time in Q2. And we were profitable and generated cash from operations for the full year as well.

Operationally, we received FDA approval of our new Suite C manufacturing line in our San Diego Science Center campus. And we entered into a strategic partnership with Patheon for additional manufacturing capacity in Swindon, England, ensuring that we can meet future demand for EXPAREL. And further, we have galvanized our product development efforts as we submitted an sNDA for nerve block indication for EXPAREL, provided additional color on the potential use of EXPAREL in oral surgery and chronic pain, and we unveiled two DepoFoam-based products in development.

For those looking at the bigger financial Pacira picture, we were pleased to see in our 2014 results tangible evidence of our operating leverage emerging alongside continued EXPAREL revenue growth. In January we pre-announced total revenue of $61.8 million for the fourth quarter, up 84% from the same period last year and slightly below $200 million for the full year -- up 131% from 2013. This, of course, was catalyzed by EXPAREL sales of $59 million for the fourth quarter, up 93% from the same period last year, and $188.5 million for all of 2014, up almost 150% from 2013.

From launch through Q4 a total of 3,293 distinct customers have ordered EXPAREL, with 729 of these customers ordering more than $100,000 of product cumulatively; 120 ordering more than $0.5 million worth; and 24 ordering more than $1 million of product. The number of $100,000 customers has grown almost 200% over the 250 customers in this category in Q4 of 2013. This is the only comparative metric we provided in our disclosure in that corresponding period a year ago.

In the fourth quarter gross margins improved to 69% from 61% in Q3, continuing the trend that is in line with our previously-provided peak gross margin guidance of 75% to 80% when Suite A and Suite C are operating at peak capacity. Gross margin for all of 2014 was 61%. Total operating expenses for the quarter were 53 points $9 million $53.9 million compared to $43.4 million in last year's fourth quarter. Note that stock-based compensation makes up a meaningful proportion of operating expenses.

In Q4 nearly $8 million or roughly 14% of our operating expenses were attributable to stock-based compensation expense -- which, as a reminder, is dictated mostly by accounting charges resulting from our appreciated stock price applied to the more recent option grants. Total operating expense for 2014 were approximately $203 million, with just under $25 million consisting of stock-based compensation distributed among cost of goods sold, R&D, and SG&A -- approximately 15%, 25%, and 60%, respectively. The expense breakdown and additional color can be seen in the MD&A section of our 10-K, which we expect to file later today.

Our non-GAAP net income grew in the quarter to $14.5 million or $0.35 per diluted share compared to a non-GAAP net loss of $7.6 million or $0.23 per share in Q4 of 2013. As a measure of operating cash flow, we generated adjusted EBITDA of $18.2 million in Q4. Our overall cash accumulation in the quarter was offset by $7 million of CapEx. We ended the year with a healthy cash position of $183 million.

Since we launched EXPAREL in April of 2012, we now have a track record spanning almost three full calendar years. We can look at our own internal data and also benchmark this against the performance of other hospital-based therapeutics that have become substantial products. With the benefit of that information, and with EXPAREL now a fully established product, we believe we have reached the appropriate crossover point to share our performance expectations in the form of annual revenue and expense guidance.

For 2015 we expect EXPAREL revenues to range from $310 million to $330 million, with approximately 10% of those revenues from the nerve block indication, assuming FDA approval on March 5. In light of our product launch maturation, I do want to make a few comments related to exogenous factors impacting the revenue ramp curve within this year and future years.

You've heard us state on previous earnings calls that Q1 has been seasonally low on a procedure volume compared to Q4 for a variety of reasons. We see evidence of this pattern looking back at comparable successful hospital-based products. As they move beyond the initial launch trajectory, we see that Q4 unit volumes and sales are consistently higher compared to the subsequent Q1. For EXPAREL, I think this dynamic was largely hidden in the first couple years of our launch, because the Q1 ramp and adoption and growth from a small base more than offset the negative Q1 seasonal pattern for overall procedures.

We actually thought we might see the emergence of this phenomenon in unit volume in our sales in Q1 of last year. But given the continued high organic customer and product adoption growth, the visibility of this seasonality was deferred again.

In addition to this fact of life, there is another factor related specifically to the current quarter that we would be remiss in not mentioning today. Anyone with a TV or Internet access has witnessed the abnormally disruptive weather we have experienced in the Northeast and other parts of the country. We know anecdotally that has impacted patient access to ORs and has resulted in postponed elective surgery schedules, both from actual storms and even from anticipated ones.

With the benefit of this information, going-forward Q1 growth should be measured in comparison to the previous year's Q1, and so forth for all quarters. We should expect that Q1, if displayed alongside Q4, generally will be in the range of flat plus or minus a few percentage points.

And as I mentioned, for this year specifically, we know Q1 has some additional headwinds in the mix. Going forward, just as we have reiterated on every quarterly call since launch, we caution relying on EXPAREL sales estimates released by third-party data tracking services, which have continued to misrepresent sales and distort trends.

Turning to guidance expense, we expect the following for 2015: excluding stock-based compensation -- so on a non-GAAP basis -- product gross margin of 72% to 75%, R&D expense of $25 million to $30 million, and SG&A expense of $115 million to $125 million. And we expect stock-based compensation of approximately $40 million to $45 million, distributed among COGS, R&D, and SG&A similarly to 2014, as I noted earlier.

Gross margins reflect the expectation of 24/7 manufacturing in our Suite A and Suite C manufacturing lines to reach estimated maximum capacity on a run rate basis at some point in the second half of 2015. The R&D expense includes, among other things, as discussed in our analyst and investor day in January: a Phase III study for EXPAREL in oral surgery; a Phase II study in chronic pain; and the triggering of some fees to Patheon related to the achievement of a major milestone in our new manufacturing expansion, as we start to conduct development activity on our newly fabricated and assembled equipment installed at their site.

SG&A includes modest growth in field base personnel and in overall support services personnel; growth in programs supporting the anticipated nerve block launch; and significant new investment in patient advocacy and community influence initiatives; and growth in some expenses tied to revenue growth, like our CrossLink distributor and our ICS third-party logistics provider relationship.

We expect to be generating substantial EBITDA in 2015. We expect to incur $35 million of CapEx related to manufacturing capacity expansion development, along with about $15 million of routine CapEx. So these investments will moderate our cash balance accumulation in 2015 from the starting point of $183 million.

We expect our cash taxes to be minimal in 2015 due to the initial application of an NOL balance of approximately $330 million. To conclude the 2015 guidance overview, we expect to be affirming or updating this annual guidance in conjunction with our quarterly earnings calls -- which, of course, means we won't be updating these metrics other than on those calls.

Turning to manufacturing and pipeline development, we've previously conveyed that we expect approximately $1.3 billion of manufacturing capacity in place for EXPAREL by 2019. Our Science Center team in San Diego had an extremely productive year, not only getting Suite C approved and executing the planned manufacturing ramp, but lowering the production cycle time and implementing other efficiencies, translating to a higher per-day output of vials.

As a result we are increasing our EXPAREL manufacturing capacity guidance from $1.3 billion to $1.6 billion by raising the estimated annual production capacity as follows: from $400 million to $500 million for our current Suite A and Suite C operations in San Diego; from $300 million to $350 million for the first Patheon suite targeted for commercial manufacturing in the second half of 2016; and from $600 million to $700 million for the second scaled-up Patheon suite, targeted for no later than 2019.

As you know, we've also been working on a new manufacturing process called DepoFoam Spray, which we believe brings several notable advantages, including improved gross margins -- in the 85% to 90% range, due to roughly 2X of production capacity over the current batch process; an Orange Book listed patent, when issued, out to 2031; and the development of DepoFoam Spray IP in the UK, which, if successful and developed within the parameters of the UK patent box, can lower our effective tax rate from the high 30%s to the high 20%s.

We have previously shared that we had a pilot spray manufacturing line established on our Science Center campus. The next step is to clarify our regulatory pathway with the FDA, which we expect to do in the first half of this year. Regardless of how these discussions unfold, we feel fortunate to be on a path where we expect to have plenty of commercial manufacturing capacity -- not only for our EXPAREL opportunities, but also for our pipeline products DepoMeloxicam and DepoTranexamic Acid.

So in summary, we expect another year of substantial EXPAREL revenue growth, in the range of 65% to 75%, as reflected in our guidance, which should further exhibit the robustness of operating leverage. In addition we have a defined development strategy for additional indications for EXPAREL and additional new DepoFoam-based pipeline products.

We have no generic threats, no foreseeable competitive threats, and the manufacturing infrastructure both in place and on the development track to support these opportunities. So we believe the true value of Pacira can be exploited not just in 2015 but also in the very visible years right ahead of us.

And with that, Ben, we would like to open up the call for our Q&A session.

(Operator Instructions) Gary Nachman, Goldman Sachs.

How much nerve block is currently used off-label? So is the 10% in your guidance completely incremental with approval of that indication?

And then talk about commercial plans with nerve block. If you get it approved, how do you expect to roll that out? How many reps will you have on it? And will it be the primary focus for that entire sales force?

So we know there are folks -- especially KOLs and folks that are the more opinion-leading groups -- have used and are experimenting with EXPAREL and nerve block. I don't think, Gary, honestly, that it's anything material to the business as it's currently constituted.

Our belief is that 10% is roughly the number of the value of nerve block given a March 5 PDUFA. I think we have to be a little bit careful -- even here at Pacira, we have to be a little bit careful, because we have a lot of discussions about nerve block. And we have a number of people who are using the product on a hit-and-miss basis in nerve block.

But when you get out to the rank-and-file, and you talk to folks that are not KOLs in the metropolitan areas, you find out that there is zero use. So I think we all have to be a little bit careful in how we anticipate the current use. And we don't think it's material to the business at all.

Assuming success, as we've talked about earlier, we expect that we would get an ephemeral nerve block claim. We currently have 87 reps and roughly 50 folks in the field that are in our medical affairs department; all of those folks would -- well, so understand the way our organization is broken out, Gar. Of the 87 surgical account specialists, really our account managers own the institutions and are responsible for determining how our resources are supplied or deployed in the institutions that they have.

The medical affairs team is more involved with training and making sure that patients receive best care in terms of best-practice transfer and things like that. So the focus on the hospitals will be roughly the same, since nerve block maps right on top of the infiltration business.

We are looking at it, really, that it is another opportunity for a call point with the anesthesiology community, and to have a different moralistic approach to the way we treat pain by being able to talk about a nerve block and an infiltration in the same patient. We don't see it really as a -- you know, there is no formal you are going to spend 20% of your time here and 30% of your time there. The reps are going to have the same hospitals. We anticipate having the opportunity to have more productive discussions with the pain treaters in those hospitals as a result of the nerve block label.

Okay. Great. And then just one follow-up here. On the full-year EXPAREL sales guidance -- and definitely appreciate that you guys are giving that at this point -- could you give us a sense of how much of that outside of the nerve block would be orthopedic versus soft tissue; how you expect that to trend? And are you assuming any real price increases in 2015 in that guidance? Thanks.

Yes. But modest, as we've talked about in the past. And ideally, we would like to see nerve block roll out first, and then sort of have the opportunity to gauge that against the potential for a price increase sometime early in the year.

If you're talking about orthopedics, it's difficult to gauge exactly, Gary, because we've got so many things going on. Most of the ERAS and CQI programs that I referenced are in soft tissue. So while orthopedics is gaining the fastest, we do see some very productive publications and programs coming out of major medical centers as it relates to soft tissue.

I think it would be safe to say that if we get into the 55%/45%, very broadly speaking, you are in the right ballpark. But they will be about 50%/50% if you include everything else other than orthopedics on the other side of the line.

Okay. Great. Thanks, guys.

David Amsellem, Piper Jaffray.

Thanks. Just a couple. So do you have a good read on the extent to which EXPAREL is used in cash pay customers, or maybe the percentage of use in cash pay customers?

And then, secondly, on the R&D spend, can you just remind us what the total spend associated with the EXPAREL expansion programs in oral surgery and chronic pain will be? And then, also, how should we think about the spend in 2015 and then 2016 on the non-EXPAREL programs that you cited at the R&D day? Thanks.

I'll take the first one, David, and then turn it over to Jim. We really think that the cash pay market today is almost entirely constituted by cosmetic plastic surgery. We are hearing just very sporadically about people who are willing to pay for EXPAREL if it's outside the confines of what's available through their insurance program, whatever that might be. But almost entirely cosmetic plastic surgery.

And as best we can tell -- and I'll tell you why I give you that qualifier -- it's about 5% of our business and remains about 5% of our business. And I give you that number because we can track X percent of our business -- currently about 5% -- directly into the plastic surgery channels. What we can't track is ambulatory surgery centers, etc., where the patients are indeed plastic surgery, but it is not a designated plastic surgery center, if you will. So we come to the conclusion, marrying all of that information, that it is roughly 5% of our business.

Okay. And, David, just to be clear -- you don't believe there's any meaningful usage already in oral or maxillofacial surgery?

We can count the guys on one hand, David.

Okay. That's helpful.

Actually, you met half of them.

Yes, that's right. I probably did.

So, David, the other part of your question -- it was in the context of R&D. And we have said we'll spend about $25 million to $30 million this year.

In round numbers the trials that we are going to run -- you know, a Phase III for oral surgery or a chronic pain trial that's a Phase II, but it's a -- if you assume that those are in the $5 million each range, you would probably be in the ballpark. You also mentioned the word expansion, and I wasn't sure if you meant that in the context of clinical development. But I'll just expand it and say that my CapEx discussion was about manufacturing capacity, and that we had guided previously that we would spend $40 million to $50 million related to what we're doing with Patheon and those two suites there. That's encompassed somewhat in our CapEx for 2015.

I just meant label expansion, but that's helpful. Thanks.

Douglas Tsao, Barclays.

Jim, thanks for the helpful color in terms of the sequential trends that we should sort of be thinking about going into -- or for the current quarter. Maybe if you could provide a little color -- how we should think about it vis-a-vis last year, which is obviously a year that we had the Polar Vortex as well. I don't know what they are calling it this year.

But there's been pretty extreme weather and storms as well, and yet you were able to grow sort of pretty nicely on a sequential basis. And I get we are talking about a larger base now, but maybe highlight some of the trends that might be a little different this year versus next year.

Right. So there's a couple of different aspects of it that -- one, you are absolutely correct that Q1 had weather issues last year. And then we just don't know the extent to what it will mean in Q1 of this year, but it's just an obvious factor out there.

A lot of those elective surgeries -- they could come back within Q1, or they could come back -- and they typically would come back within a year. So we'll just have to see how that plays out.

And then the other point you sort of made for me, if you will, which is it's on a smaller piece of absolute sales. The growth Q1 from Q4 can make it look like there's no seasonality going on. And the point I was really trying to make is if you look at comps in our industry, there's obviously one that's sort of a poster child for the $1 billion product -- that they went from Q4 to Q1 flat earlier in their launch than we did, and they've been growing ever since then. So that's not a dynamic specific to today. It's just a dynamic specific to hospital-based products and volume in the hospital in Q1.

Okay. Great. And then, Dave, maybe provide a little color vis-a-vis -- you know, in terms of the existing business and the two major buckets being sort of ortho and soft tissue. Obviously, ortho is now a majority of the business and really sort of came out of nowhere.

How do you see the penetration into that segment? And certainly, how should we think about the trends -- especially into the soft tissue market, which I think we would agree is perhaps a bigger end market in terms of total number of absolute surgical procedures? Sort of how are you penetrating that segment? And what are the key initiatives to sort of continue drive that particular segment? Because it seems like ortho is kind of taking care of itself.

And then just one follow-up in terms of ortho. What did you see in terms of performance in the CrossLink relationship in 4Q? And was that perhaps impacted in any way by the warning letter, since those are obviously reps who you don't necessarily control, and so they might have been a little bit less focused on EXPAREL until resolution of the warning letter? Thank you.

Thanks, Doug. There's a whole bunch of questions in there. I'll do my best, and come back if I don't get them all. So I'll start with ortho. So there really are two very different things. In ortho the ability to reduce opioids provide early ambulation for patients, because they move to a solid diet; they have a bowel movement. And it really is the ability to ambulate on day one that leads to the early discharge that is largely responsible for the economic motivation of physicians to quickly adopt EXPAREL.

We see that same motivation in a number of different orthopedic scenarios. And you'll see over the next few months data on hips, and on ACL repair, and on trigger finger surgeries, and on spine surgeries, and on trauma surgeries, etc. So there is no reason to believe, Doug, that we're going to have any kind of a reduced penetration into that marketplace. While ortho is a very significant piece of our business, it is still a relatively modest percentage of the ortho business. So our expectations are that you will continue to see this 50%/50% phenomenon go until we get to an oral surgery kind of opportunity.

Soft tissue is quite different. Ironically, the docs did what we asked them to do: they identified the patients who were likely to be most problematic when opioids were used. And so the adoption in that scenario, given that algorithm of how we introduced the drug, basically was responsible for a more measured approach to the adoption.

Another issue that really you need to understand to really get into soft tissue is that the economic incentive in orthopedics is quite strong. The economic incentive in many of the soft tissue procedures -- especially the abdominal soft tissue procedures -- is relatively modest. You're talking about 8 to 10 times difference between -- say there is an $8,000 profit motivation in a knee. There's probably a $1,500 profit motivation in a hemorrhoidectomy, for example. So the use of a $300 drug like EXPAREL is really a more strategic decision in these soft tissue procedures than it is in an orthopedic procedure, which is why the algorithm was used to identify patients who would benefit most, right?

What we are seeing now is that there is enough experience in the marketplace at major medical centers around the United States, where they've determined that they should institutionalize the use of EXPAREL. And in all of the procedures that I outlined, we've got data sets in ERAS and CQI programs where these centers are writing protocols that say: everybody that comes into this hospital for abdominal wall reconstruction, or for OB/GYN surgery, oncology surgery, is going to get EXPAREL.

The major difference there for us is that over time now the fellows and the residents will learn how to perform those procedures only in an environment of EXPAREL. And over time as these different medical schools and these fellowship programs turn over, we should see those people go out into the marketplace and spread this best-practice technique as the best way to take care of patients, especially in this ERAS-protocol environment.

And we do see some evidence of that, Doug, where folks in the Department of Defense hospitals -- where EXPAREL is being used extensively -- when they've left those hospitals and gone to their next assignment, they've called wanting to see if our nurse teams could come and teach them how to use EXPAREL in whatever procedures they were trained on. Because that's how they learned how to do the procedure. So we do see some evidence that that, in fact, is true.

CrossLink's -- I don't think CrossLink has reacted to the warning letter any different than Pacira did, frankly, in terms of reps in the marketplace. You know, there are a number of things, Doug, around opioids and around catheter-based pain delivery systems where we think that the orthopedic folks and their high-level relationship with docs, where they can actually be more effective with some of these non-package-insert-driven stories, if you will, than our reps can -- and that's how we are using them today.

Okay. Great. Thank you very much.

(Operator Instructions) Steve Byrne, Bank of America.

Hi, this is Sara on for Steve. The first one is: what percent of surgeries are done in the outpatient setting currently? And do you expect that to change with the nerve block?

And then, have sales been at all affected by the CMS rule change, which is effective in January? And then the next one is the long-term revenue split expectation between infiltration and nerve block -- and then what percent of each do you expect from orthopedic?

Currently about -- well, over 80% of the use of EXPAREL is in hospitals. And in about half of the outside-of-hospital procedures are actually cosmetic plastic surgery. So if you were going to look at the pure ambulatory surgery outpatient use of the drug, it looks a lot like plastic surgery to me. So you would think about 5%. And I would have the same caution that it's very difficult for us to separate plastic surgery from non-plastic surgery use outside the hospital, just by the way the drugs are purchased. So that's number one.

Number two is the CMS rule really was only relative to our ambulatory surgery code 9290. And the CMS interpretation of that is that they are building the -- they did not want to provide specific J codes for products. And in their mind, they are bundling the cost of the product against the percentage of times that the product is used in that procedure to allow the use of the product in that procedure against that percentage of cases.

So I'll be more specific. If you saw that EXPAREL cost $300 and was being used in 10% of the cases, then you would increase the payment for the case or the procedure by $30 to allow EXPAREL to be used 10% of the time. Now, I have to tell you that when I go through that with somebody that owns an ambulatory surgery center, they think I'm out of my mind; but I'm telling you the way CMS thinks and the way they have approached the problem. So that's why you'll see the focus here on making sure that you report the use of EXPAREL inside those procedures, so that we can continue to make sure that that payment is increased as part of that bundled payment over time.

So I'll answer the question in two different ways. I think I'm answering the question you asked, but if I'm not, come back at me. We have seen very little impact of that to date. And the reason for that is the indemnity payers who were paying for EXPAREL in the outpatient environment under 9290 did that largely because they were moving an inpatient procedure to an outpatient procedure, or they were moving a money-losing procedure as an inpatient procedure to a lose-less-money outpatient procedure.

In both of those cases the $300 cost of EXPAREL is relatively unimportant, given the reimbursement for the procedure. So in one case it's I can do something easier and better for patients; and in the other case, it's lose less. Now, they would all like to see us have a specific APC code reimbursement. But we haven't talked to anybody who stopped using the drug because they don't have a specific payment in an ambulatory procedure.

How might this be impacted by nerve -- or how would nerve block affect this? I don't see the outpatient being any different than the inpatient, frankly. We think what's going to happen is that you are going to see anesthesiologists and surgeons doing nerve blocks and infiltrations on many of the major surgery opportunities because you get a different kind of pain. It's a different way to think about multimodal therapy, if you will.

And so we see, for example -- and you'll see posters at several upcoming meetings -- where an anesthesiologist will do and adductor block, similar to a nerve block, for the anterior of the knee; and the surgeon will do a posterior capsule or periarticular injection and then will do the periosteum and a regular periarticular injection. And those procedures appear to do even a better job than EXPAREL by infiltration alone. And that's the way we think the technology will be used.

Just jumping in on the question on the long-term forecast, we are providing guidance only for 2015. And, obviously, have a revenue base with the current infiltration, and as Dave said, a limited amount of off-label use in nerve block. So that's the basis of us being able to forecast 2015.

Your question sort of reminds me to inform, though, that we're not clear that we will have any basis to report on nerve block versus infiltration as we go forward. It's a challenge with orthopedic versus soft tissue, but we are able to -- those are procedures, and we can buy that data from some of our customers and extrapolate that. But given that this is an administration technique within various procedures, it's going to be a challenge for all of us as we go forward to really look back and figure out how much is nerve block versus soft tissue -- sorry, versus infiltration.

Okay. That's very helpful. Thank you.

Thank you. And I'm showing no further questions in queue. I'd like to turn the conference back over to Mr. Dave Stack for any closing remarks.

Thanks, Ben, and thanks to everyone for joining us today. We'd like to note that next month, we'll be presenting at the Barclays Global Healthcare Conference in Miami. We hope to see you all there. Thanks a lot.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.