Pacira Biosciences Inc (PCRX) 2015 Q3 法說會逐字稿

Thank you for joining the Pacira Pharmaceuticals third-quarter 2015 financial results conference call. (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.

At this time, I would like to introduce Jessica Cho of Pacira Pharmaceuticals. Ma'am, you may begin.

Thank you, and good morning, everyone. Joining me on the call today from Pacira are Dave Stack, Chief Executive Officer and Chairman; Jim Scibetta, President and Chief Financial Officer; and Kristen Williams, Chief Administrative Officer, General Counsel and Secretary.

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, outlooks and prospects, and statements containing the word believes, anticipates, plans, expects and similar expressions constitute forward-looking statements from 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. 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 earnings press release for the quarter.

And with that, we will hear first from Dave.

Thanks, Jess, and good morning, everyone. The focus of today's call is our flagship product EXPAREL, the only non-opioid, long-acting local analgesic formulation of bupivacaine approved to provide postsurgical pain control. Studies evaluating EXPAREL have resulted in a reduced need for opioids, earlier ambulation, and decreased hospital resource consumption, length of stay, and readmissions, correlating with increased patient satisfaction across a broad array of surgeries. As a reminder, EXPAREL has safely and effectively improved the lives of over 1.5 million patients in the 3.5 years since launch.

The third quarter of 2015 marked a period of continued growth for EXPAREL, indicative of stabilizing sales against market headwinds within a quarter that is typically a low procedure volume quarter. Let me reiterate here that we fully expect EXPAREL sales to grow as we transition into Q4- historically the strongest quarter of the year in terms of number of procedures.

For this call, I will answer the question of how EXPAREL and Pacira will grow the Brand in 2016 and beyond, with four specific points.

1. Resolve the regulatory actions with the intention to reaffirm the broad indication and 72 hour efficacy for EXPAREL, which will allow us to switch the balance of influence in the hospital back to surgeons, anesthesiologists and other care providers who understand the value that EXPAREL delivers to patients and to overall hospital economics.

2. Build out the Pacira Leadership Team in anticipation of a protracted period of strong growth for EXPAREL as well as DepoFoambased pipeline products.

3. Understand the competitive environment and our belief that there is no commercially useful product in development to compete with EXPAREL.

4. Invest in EXPAREL and DepoFoam to maximize shareholder value and to provide improved patient care options to our healthcare providers.

I will take a few minutes to expand on each point. One, providing clarity to our label would allow all Pacira Commercial resources, including our sales organization, to share the benefits of EXPAREL infiltration as the platform for a multimodal strategy to reduce opioid reliance with their customers across all surgical procedures. We continue to develop clinical data to support this positioning. To be presented today at the American Society of Anesthesiologists, a University of Illinois DUE meant to minimize study bias and assess the economic benefits of a care pathway incorporating EXPAREL versus standard of care for total knee arthroplasty, demonstrating increased mobility, earlier ambulation on the day of surgery, early discharge by up to two days, shorter length of stay and a [$457.27] (corrected by company after the call) per patient benefit-to-cost ratio. This study will also be published in the American Journal of Health System Pharmacists later this year.

In August, a University of Texas pilot study published a in Surgical Endoscopy showed that when EXPAREL was incorporated into an Enhanced Recovery After Surgery, or ERAS multi-modal pain management strategy for colorectal resection, patients experienced significantly less opioid use and lower initial and final PACU pain scores. Another study coming out of the same University of Texas group will be published in the Journal of Medical Economics.

The October supplement of the American Journal of Orthopedics showcased multiple data sets evaluating the changing paradigms in shortstay total joint arthroplasty, or TJA, with periarticular injections of EXPAREL specifically highlighted as an integral component of the TJA multimodal pain management paradigm and alternative to current standard of care, such as regional nerve blocks. The review demonstrated safety and efficacy, reduced opioids, and other clinical and patient-related outcomes of EXPAREL, such as earlier ambulation, length of stay and patient satisfaction, coming from orthopedic thought leaders such as Mike Kelly from Hackensack University Medical Center, Fred Kushner from Northshore LIJ Orthopedic Institute at Southside Hospital, John Barrington from the Texas Center for Joint Replacement, Jill Scuderi from North Shore LIJ Health Systems, and Robert Booth at the Aria 3B Orthopedic Institute.

Separately, let me also address the issue of equivocal data with EXPAREL market-driven studies.

Pacira is changing the way post-surgical pain is treated. This is an important long-term goal, especially in light of the opioid epidemic in the United States today.

Trial and error are part of the process when we are working with health care providers and payers across dozens of high profile procedures, such as Total Knee Arthroplasty or TKA. Let me be specific. At this year's AAHKS taking place in Dallas in a couple of weeks, we are aware of seven data sets relating to EXPAREL Five are positive and two are equivocal or negative. We are grateful for all the surgeons who have taken the time to study EXPAREL, as we will all learn from each data set as we look forward to working with the medical community to improve patient care.

As it relates specifically to TKA and large procedures, we are gaining an increasing understanding that with EXPAREL, volume is very important. And the diluted volume of over 100 cc ensures the volume required for injection into the posterior capsule in the periosteum. In fact, the vast majority of studies reported and ongoing where the volume of EXPAREL was diluted to 100cc or more, clinicians are obtaining good results. When lower volumes are being used, we see variable results. These are important insights and have significant positive impact on how we work with health care providers to provide best practice protocols and algorithms.

Our mission is to work with all interested parties to determine how to best position EXPAREL to improve patient care and outcomes, especially in a dynamic environment where we are anticipating the short-term impact of bundled payments and ACOs in a marketplace moving towards outpatient surgeries including TJAs.

2. We have made valuable additions to our Leadership Team to support the continued growth of our brand. Scott Bronstein, M.D., and Senior Vice President, Strategy and Corporate Development; Jim Jones, M.D., Pharm. D., as the Chief Medical Officer; and, most recently, Jim Scibetta as President. These additions provide a substantial enhancement to our Leadership Team's core capabilities to provide the expertise and experience to create value through the continued clinical and commercial development of our EXPAREL brand and DepoFoam pipeline products.

3. We have learned a great deal since launching EXPAREL in April of 2012. EXPAREL is safe and effective when infiltrated according to best practice, based on the fact that unlike bupivacaine, EXPAREL stays where you put it. We have dozens of data sets which demonstrate the opioid sparing opportunity with EXPAREL as part of a multimodal postsurgical pain protocol. In addition, we continue to work with major academic centers on ERAS initiatives and Continuous Quality Improvement, or CQI, protocol as well as local market initiatives through our EQUIP program. These programs continue to develop viable non-opioid treatment strategies while providing Pacira with a number of opportunities to collaborate across a range of customers to improve patient care. As we learn more regarding the limitations of additional bupivacaine products in development, we are increasingly confident in the blockbuster potential of EXPAREL.

4. Given points one through three, we are planning to invest in the clinical and commercial development of both EXPAREL and the DepoFoam pipeline.

For EXPAREL clinical development, the oral surgery program is in the process of enrolling an estimated 175 patients, with our primary endpoint being area under the curve of NRS pain intensity scores through 48 hours. We expect to see top-line data in this low-risk/straightforward third molar extraction study by the end of Q1 2016. Our primary market research indicates that there are 35 million oral surgery procedures annually in the United States with the need for alternatives to opioid pain control gaining awareness among academic key opinion leaders as well as payers and public policy personnel.

The phase 3 nerve block protocols for upper and lower extremity procedures are gaining clarity based on our discussions with the FDA, and we expect to initiate trials in early 2016 with the goal of completing patient enrollment during 2016.

One of our learnings is that even with the broad indication our customers will benefit from randomized clinical trial data specific to the most prevalent surgical models where EXPAREL is used. We expect an investigator-run RCT and hip arthroplasty to complete enrollment around the end of 2015 with data potentially available in the first half of 2016. We also plan to initiate a Total Knee Arthroplasty Wound Infiltration RCT active comparator trial in 2016 and complete enrollment by the end of 2016. Total EXPAREL volume of 266 mg and 120 [ml] (corrected by company after the call) would provide clear guidance on the value of expanded dilution. This trial is also expected to be important to our potential ex-US partner discussion.

We are also engaging in academic collaborations to develop EXPAREL randomized clinical trial data sets in a number of important procedures, including a three-arm OB/GYN oncology study comparing EXPAREL TAP to EXPAREL infiltration to bupivacaine infiltration, a large abdominal wound study comparing EXPAREL TAP with epidural pain management, and a thoracic surgery study comparing EXPAREL intercostal block with a thoracic epidural.

We also have planned a phase 3 Pediatric Wound Infiltration study which is expected to initiate in the back half of 2016. There is a great deal of interest in a non-opioid alternative to treat this important under-18 patient population, and we look forward to developing clinical data here.

We also have a phase 2 trial in chronic pain that will evaluate EXPAREL for the duration of pain relief following a medial branch block for acute flare of chronic low back pain. If all goes as planned, we will initiate a phase 3 program for chronic pain in 2017.

For the commercial development of EXPAREL, we are targeting a rest-of-world partnership in late 2016. Aratana, our animal health partner, expects a 2016 launch of liposomal bupivacaine suspension for pain control in dogs. And we plan to introduce a 10 ml EXPAREL vial to address the market request for a vial size for small surgical procedures and for oral surgery procedures.

For the DepoFoam portfolio, we expect DepoTransexamic Acid IND to be approved in the first half of 2016, continuing on to phase 2 in the second half of 2016. We also expect Depo Meloxicam to be IND-approved in the back half of 2016. Our strategy team is developing a plan for several market opportunities for DepoFoam-based products to extend our pipeline portfolio.

We see an opportunity in the shifting reimbursement paradigm toward value-based and capitated payment models intended to advance patient care, through Accountable Care Organizations and CMS bundling, where healthcare providers will receive one reimbursement stream for the entire episode of care. These CMS and ACO strategies will force customers to innovate to a more cost-efficient setting with a focus on length of stay and with a strategy to eliminate the expensive discharge to rehabilitation centers or skilled nursing facilities, as well as readmissions-objectives that we believe can be accomplished with EXPAREL. Our health outcomes and value analysis personnel are working with our customers and our EQUIP initiative to develop protocols to better assist with patient selection and provide specific care pathways in support of this transition. As a first step, we expect to develop several preliminary webinars on bundled payments in preparation of CMS' new rule effective in 2016 for total joint replacements to better educate and address customers' primary concerns around developing a specific program in the new reimbursement world, such as how to track results and which tools to use, like EXPAREL.

As we have outlined today, we have much to be excited about, especially now that we've put into place the foundation to prepare ourselves for the next several phases of growth. On the corporate development front, we continue to evaluate a number of opportunities that are important or strategic to our customers and that could prove complementary to our commercial organization and brand.

Additionally, the resolution of the legal action could provide us with the opportunity to share opioid reduction strategies with legislators and local politicians, as well as community activists, toward the common goal of reducing opioid consumption and curtailing the national abuse epidemic. We will additionally work with patient advocacy groups, public health policymakers, and local and national government agencies, all interested in providing patient management without relying on opioids.

With that, let's hear from Kristen Williams, our Chief Administrative Officer and General Counsel, to provide an update on legal action, and then Jim for the story behind the numbers and the future outlook. Kristen?

Thanks, Dave. To recap our legal action with the FDA, we and two doctors initiated a lawsuit on September 8 in the southern district of New York, seeking declaratory judgment from the threat of FDA enforcement action contained in the warning letters specifically, and also against threats implied elsewhere by the current regulatory framework. The next day, we filed a motion for a preliminary injunction to protect our rights during the pendency of the litigation. Our lawsuit and the accompanying motion rely on judicial protection provided to all American citizens in the Administrative Procedures Act, the First Amendment and the Fifth Amendment, to allow us to take certain actions without fear of retribution or prosecution that generally fall in the five categories.

One, affirm that the EXPAREL approval granted by the FDA in 2011 is for use in all adult surgical procedures where local administration is applicable. In other words, the intended uses, as established by the FDA approval, were for the broad range of surgical procedures, and not limited to the two surgical models that were the basis of approval. This is what we refer to as the quote unquote broad indication.

Two, affirm that the duration of efficacy established in our phase 3 hemorrhoidectomy study was 72 hours.

Three, affirm that we can use surgical technique videos and administration guides in our promotional efforts in support of the broad indication.

Four, affirm that we can share with healthcare providers truthful and non-misleading information about EXPAREL, such as data from clinical studies which are not contained in the label but are consistent with the approved broad indication. Importantly, and in contrast to the Amarin lawsuit, our lawsuit does not seek to allow us to share truthful and non-misleading information related to any currently unapproved indications such as nerve block.

And five, affirm that we can share truthful and non-misleading information in comparison to competitive products such as Halyard's elastomeric pumps, because they have been sharing, in their fact-versus-fiction campaign and elsewhere, comparative information, much of which we believe to be untruthful and misleading, without any fear of FDA prosecution,because as a medical device, they get to play by a different set of rules.

There are two activities that I want to comment on which have occurred since September 8. One, the warning letter was removed from the FDA website a few weeks ago. We understand this to be an unprecedented activity. Beyond that, we have no additional information at this time. And second, the FDA had until yesterday, October 26, to respond to the complaint. And instead, we jointly requested and Judge Kaplan approved last Thursday -- a 21-day extension. And that extension request noted that the parties are in settlement discussions.

A further extension of an additional 39 days was recently sent to the judge for approval. The combined 60-day extension from October 26, which lands just before Christmas, is intended to provide the parties time to complete these settlement discussions. I should note here, however, that there are no assurances that the settlement discussions will result in a satisfactory settlement or any settlement at all. And if that is the case, the FDA will have to respond to our complaint and motion by December 24, and we will work our way towards the preliminary injunction decision by Judge Kaplan.

Finally, the content of settlement discussions in the lawsuit are not just confidential in the traditional sense; but more important, they are protected from disclosure by the Federal Rules of Evidence. So Dave and Jim will be diligent to avoid any discussion of the content of those discussions today and subsequently.

Let me now turn the call over to Jim to discuss our Q3 results and other relevant topics. Jim?

Thanks, Kristen. I'll discuss our financial results and outlook and then briefly touch on manufacturing and the organizational changes we recently announced.

As Dave noted, EXPAREL revenues grew in the third quarter in spite of Q3 being seasonally low on procedure volumes. Third-quarter net EXPAREL sales of $59.7 million rose 19% over last year's Q3 and up 5% over the prior quarter.

Based on current pricing going into the quarter, our unit volume growth in terms of boxes sold would've driven our Q3 revenue over $60 million. However, as a consequence of the commercial progress we've made with the US Department of Defense, and that which we hope to make in the future with the veteran affairs department, we signed the Federal Supply Schedule, or FSS, in August of 2015. The FSS discount resulted in approximately $400,000 less revenue than would've occurred at the $315 per vial price we charge otherwise. The DOD is currently 2% to 3% of our business, whereas the VA business to date is debt-to-equity minimis. The FSS price is applied directly to boxes sold into that channel; so while it impacts the average gross price per box sold, it does not impact our gross-to-net calculation.

As of Q3, a total of 3,790 accounts have ordered EXPAREL since launch, a decent add-on of 127 new accounts this third quarter.

There is some focus on sequential quarterly growth as an indicator of whether the product is growing overall, and that doesn't tell the whole story. In a given year, we have moderate Q1 and Q3 sequential growth followed by strong Q4, driven entirely by the growing seasonality dynamic that is pushing elective surgical procedures into Q4, and we still have considerable annual revenue growth. That is what we expect 2015 to look like in a year where we faced every imaginable and unimaginable headwind. Looking ahead, we hope to see more visible sequential quarterly growth in 2016 spurred by regulatory relief and the additional growth drivers Dave detailed, and in 2017 from the oral surgery launch and the nerve block launch.

Before turning to operating expenses, I feel the need to return to my previous rhetoric related to the lack of reliability of third-party tracking services. This quarter, we witnessed a significant market reaction to an incorrect inference from tracking services data that our monthly revenue declined in August 2015 compared to 2014. What was not known is that the tracking services 2014 number was more than 20% overstated, so this conclusion was drawn from a wildly inaccurate assumption. We will continue to not comment on the reported numbers during the quarter, but I want to proactively express my skepticism of these numbers as we move ahead.

We achieved a non-GAAP gross margin of 77% in Q3 compared to 63% in Q3 of last year. This again proves the gross margin potential of the product in our current manufacturing facility in San Diego. Non-GAAP R&D spend was $4.8 million, and this includes enrollment in our oral surgery trial but only preparatory expenses for our nerve block studies in upper and lower extremity procedures. Non-GAAP SG&A was $29.2 million.

Third-quarter non-GAAP net income was $12.9 million, or $0.32 per diluted share. Stock-based compensation was $8.8 million, comprising 11%, 18% and 17% of GAAP COGS, R&D and SG&A expenses respectively.

Q3 adjusted EBITDA was $16.8 million, and we finished the quarter with approximately $164 million of cash.

For Q4, I noted in our last call that we expect a sequential uptick in sales to service in Q4, which we know to be the strongest quarter in terms of procedure volume. Our expectation for the rest of the year remains unchanged given that EXPAREL revenue met our Q3 expectations. We are affirming our 2015 non-GAAP R&D expense guidance of $20 million to $25 million and our non-GAAP SG&A guidance of $115 million to $125 million.

Looking ahead, let me get out front of a few important topics. First, we expect to preannounce our Q4 EXPAREL revenue during the week in January preceding the J.P. Morgan conference. ,given the continued importance of EXPAREL revenue to our business, the time it takes to file our year-end financials and the simplicity of our revenue recognition model.

I will say a few things about reinstating revenue guidance. One is that we are looking for the right opportunity to do so. And two is that the timing of resolution of the legal issues will factor into our analysis of the appropriate timing of providing guidance. And three, we don't want to make any commitment today either way that a new CFO, if identified in Q4, may have a fresh perspective on.

I want to reiterate my temperance of gross margin expectations, especially on the heels of a quarter where we achieved a 77% non-GAAP gross margin. As I discussed in the last call, we expect peak gross margins of 85%, but we don't expect to achieve these until at least a few years out. Our production plan of late and through 2016 calls for a moderation of vials produced, given the need to draw down on the inventory we've accumulated. And because of the largely fixed-cost infrastructure in our San Diego facility, this creates a mathematical certainty that reported margins through 2016 will decline from the current level. It's not the least bit of a concern of ours given the transitory nature of it, but we just wanted to note it to set expectations for modeling purposes.

On the R&D front, Dave spoke of the exciting new commitment to invest in the clinical development of EXPAREL not only to reach the expanded surgical audiences of maxillofacial surgeons and oral surgery and anesthesiologists for nerve block, but also to conduct a randomized controlled trial in total knee arthroplasty. And we are exploring RCTs and other important procedures of interest to support our marketing efforts over the next several years in the approved infiltration indication. We believe this level-one data could drive significant value while creating additional barriers to entry for would-be competitors on our way to building out this very important brand.

We will quantify the spending impact of this more tightly as we move ahead. But for now, I would expect our non-GAAP R&D spend to at least double in 2016 compared to 2015. Our management team and Board are united around the notion that investing in EXPAREL at this point to make it a blockbuster brand is far more important than merely harvesting patent investments and accumulating additional cash.

On the manufacturing front, there are no material updates, but there have been a panoply of milestones achieved by our staff and Patheon in establishing our first EXPAREL manufacturing suite in their England facility with a targeted approval date around the end of 2016. And back in San Diego, our team is working on the design of our commercial spray manufacturing system which remains targeted for approval in 2019.

Turning to organizational changes, as Dave noted last week, my responsibilities were expanded to include the oversight of EXPAREL's commercial efforts under the umbrella of the customer and patient solutions group. Recognizing the importance of optimizing our commercial efforts, I'm excited to work with the talented and dedicated customer-facing team that has launched and built this brand. This team has proven its dedication beyond the call of duty amidst the challenges of 2015 because they still believe in the value of EXPAREL as a breakthrough innovation and as a game-changing non-narcotic platform to provide postsurgical pain control.

I will be taking the strategic plan defined by Dave and our experienced leadership team, including professionals who the investment community is familiar with -- Taunia Markvicka, who heads up commercial strategy; and Dr. Rich Scranton, who heads up our health economic and value analysis activities -- and doing everything I can to optimize the execution of the plan.

My focus on plan execution will free up Dave to focus on all of the other aspects of growth that he outlined and also allow him to spend more time collaborating and sharing his insights directly with key customers in the field, which generates a virtuous cycle of strategic and tactical insights as well.

We have initiated a CFO search. And perhaps I'm biased, but I think this is a distinct opportunity for a new CFO to serve as a strategic advisor to Dave, to partner with our newly built-out management team, to inherit the solid foundation of clean external financial reporting created by our VP of Finance, Lauren Riker and her dedicated team, and to join Pacira at a time of renewing promise and, of course, recent dislocation in our stock price.

In closing, we remain committed to advancing our corporate mission to improve patient care by making EXPAREL an innovative non-opioid option available to as many patients as appropriate. As part of that commitment, we continue to strive toward heightened public awareness of the opioid burden in the acute-care setting and its potential connection to the growing epidemic of prescription drug abuse.

Next month, we are excited to launch our first direct-to-patient educational program in collaboration with the nonprofit health information provider Healthy Women. The first phase of the initiative is anchored by a new survey of over 700 postsurgical patients which found that the overwhelming majority prefer to avoid opioids after surgery if given the choice. And yet, it also found that the overwhelming majority, 73%, also failed to express their preference to physicians.

The program's goal is to provide education and resources to empower patients to take an active role in deciding what treatment they received for postsurgical pain. The campaign will be executed via print, broadcast, online and social media channels, so we hope to put onto the national stage the topic of postsurgical pain and its connection to opioid overuse.

Working collaboratively with healthcare providers and patients alike, we truly believe we are in a position to help drive this important shift away from opioid-centered care as we move towards standardized non-opioid treatment regimens that have the potential to greatly benefit the patient recovery experience, hospital economics and the overall societal opioid burden.

We will now proceed to the Q&A session. Ashley?

(Operator Instructions) Douglas Tsao, Barclays.

Maybe Dave -- I thought it was helpful, your comments in terms of the understanding of the impact of volume of drugs and the success of procedures. And just in terms of the sort of adoption we've seen in orthopedic so far, how broadly understood is that fact right now? As you think about the go-forward growth opportunity, is that really a key point for surgeons who perhaps might not have understood that point and not necessarily received -- or seen the same benefits as others to really start to appreciate the clinical benefit that the product provides?

Good morning, Doug, and thanks for the question. Yes is the short answer. When you -- there's a couple of things that have been common to the investigator-sponsored trials that have been successful versus those that have been equivocal. And volume is the lead indicator because the -- in order to follow the injection technique that's required after the knee is removed but before the prosthesis is inserted to inject the posterior capsule, and then while the adhesive is drying to inject the periosteum and begin the process of the periarticular injection, et cetera, requires a certain amount of volume. And we were routinely hearing that surgeons were running out of volume before they completed the technique, so we moved to 100.

And then in the marketplace -- the marketplace has always been very efficient, moved to 120, and we now have investigators, especially in the Midwest, moving to 160. And the more volume doesn't have a downside, and we continue to see improved reports of efficacy and especially early ambulation at the high volumes. So, for TKAs and for large wounds specifically, Doug, but we are also implying some of that logic in smaller procedures as well.

But I guess what would be helpful is to understand the timeline of that adoption. Is that something that peak surgeons are sort of -- it's just coming to appreciate, given the evolution of the product and maybe some early adopters, and it just wasn't fully elucidated in the community?

Yes. Well, we saw the first couple of data sets with 100 or more about a year ago, Doug. And so it takes a while to push that that gets the stuff into the press and into the public domain. But for most of the new data that we are seeing now, too, it's pretty clear that if you are going to do one thing with EXPAREL -- largely because when it's attached to a multivesicular liposome, it stays where you put it. 100 ccs or more and probably 120, as I said during the script, will be the best-practice education training that we provide going forward.

Okay, great. And then just one follow-up. In terms of the randomized trial that you spoke about in the arthroplasty, have you thought about what that would be a comparison to? Thank you very much.

Sure. The plan is to have a bupivacaine comparator similar to the cocktails that many of the folks in the marketplace are using or trying to use, Doug. So we will mimic one of the best-known cocktails and compare that to EXPAREL.

Okay, great. Thank you very much.

Gary Nachman, Goldman Sachs.

Dave, I know you won't comment on the litigation specifically. But in the event of a good outcome with FDA, would you consider adding to your commercial resources behind EXPAREL to further accelerate it? And have you started to think about the commercial opportunity for oral surgery? I know it's out in 2017, but how you might approach that?

Yes. It is a very similar question, Doug -- or, I'm sorry -- Gary. We right now are in the process of examining the allocation and the alignment of our commercial-touching resources. Not specifically tied to any legal action; it's a process that we go through every year at this time as we start to look for a 2016 budgets. Part of that process is to look at not only dental or oral surgery, but also all of the ambulatory surgery and non-hospital uses of the drug to make sure that we are anticipating our success and making sure that we put the right people in the right places. Yes, we are going through that process right now, Gary.

Okay. And then as a follow-up, in terms of business development opportunities -- I don't think Scott is on the line -- but how does the pipeline look? And what types of deals are you guys considering that could make sense for the Company and could add to the overall portfolio that would be synergistic? Thanks.

Thanks, Gary. There is -- the deals are coming to us in a number of different forms, largely driven by customers who have different techniques and different products that they use during their day-to-day activities. And so most of what we're looking at are driven by either surgeons or anesthesiologists recommending that our educational resources and our field force might be more appropriate for a product than what and the way it's currently being positioned to them and promoted to them.

Scott and his team also have a number of strategic opportunities that we're looking at that would either be complementary to the activities of the current organization or strategically prepare us for a broader relationship with the anesthesiology community around nerve block, et cetera. So, strategic either from a customer's perspective or from the perspective that it would be -- there would be zero cost of sales because our sales forces are already calling on those individuals and/or strategic in that we want to build relationships with customers in the future.

And just add to that, I think it's important that we emphasize Scott's rule is not only BD doing deals. Scott was a big proponent of this TKA study that we're going to do on infiltration and working with Dave and the team to think broadly about are there other studies we should be doing in support of the approved indication. And that I think you are also seeing an additional commitment -- sort of an internal discussion of we have two pipeline products with DepoFoam. Why not more? So Scott will be working with our R&D team to evaluate what commercial opportunities there are with DepoFoam to expand the pipeline. So you've got those two, plus looking at the DB opportunities as well.

Okay, great. Thanks.

Corey Davis, Canaccord Genuity.

First question is, number one, how are you ever going to replace Jim as CFO? Number two, for Kristen, what does it mean to have the warning letter removed? Have you ever seen that before? And number three, I know you can't discuss what you are discussing with the FDA, but can you confirm that you are actually discussing with the FDA a potential settlement?

Corey, I will turn it over to Kristen in one second. I can answer your -- I guess it was your second question. There is no replacing Scibetta, so we're not even going to try. We're going to hire another CFO.

Corey, to answer your legal question, one, as I mentioned in terms of the warning letter coming down, as far as I can see that is unprecedented, but I truly don't have any further information on that at this point. So I don't know what it means, or I can't say anything further about that. And what was your second legal question?

Can you confirm that we are in discussion?

Oh, yes. And you can see by following the docket, extension was filed for 21 days and now we just filed one for another 39 days, so the parties are in discussion at this point.

Okay. Just wanted to be clear on that. And then last one probably for Dave -- so, can you help us understand hospital budgets that are getting finalized or developed in the middle of Q4? And is that determinant of how EXPAREL may or may not improve its position? Or is that always a fluid situation that could improve as we go into 2016?

It's both, Corey. Our national accounts folks and our strategic alliance folks are working with the IDNs and the GPOs and with our big customers to make sure that folks understand the flow of data and the interest of their surgical and anesthesiology groups to make sure that budgets are created. It also is driven in some cases by these ERAS and CQI programs where everybody who comes into a surgical setting, say for OB/GYN oncology or for breast surgery or whatever, is getting EXPAREL. So in those scenarios, it's simple math.

We do expect that with resolution of the warning letter, we will be in a different position when it comes to enhancing the positioning of the product, especially when customers have made decisions based on bad information. And so we do expect the position to both be strategic as we work with them to put the budget together in advance, but then also we expect the situation to improve as we go through 2016.

Great. Thanks very much, guys. And I was kidding about Jim, by the way.

Yes, you know, before the next question -- I know you were kidding. You threw me off a little bit. But I do want to point out, seriously, that I went out to California to oversee our science center activity in the summer of 2013, so we haven't had a full-time CFO in this Company since then regardless of the person. So I do think that, talking with Dave, I'm going to put my full energy into the operating role that I have that I love doing. But I think the Company will seriously benefit from having a full-time CFO interacting with the investment community, which just hasn't been possible for the last couple of years.

Great. Thanks, everyone.

Liana Moussatos, Wedbush Securities.

Congratulations on a great quarter. Thanks for taking my questions. Just the R&D and COGS were low this quarter. I know you reiterated guidance for operating expenses, but could you talk about some of the dynamics going on? You kind of mentioned some things, but could you give us a little detail?

Yes, two very separate issues. R&D is the -- it's the thing that's about to happen that just didn't really kick in yet, meaning that the oral surgery trials are getting going. There's a little bit of that in there. But the nerve block studies are about to crank up. And so if you do the math of guidance, we will have significant more spend in R&D in Q4. If you subtract our guidance from what we spent through the first three quarters. And then also, obviously, one is that expectations that -- we're going to be more of an R&D Company with a great product as you look into 2016. And we are very comfortable with that; we think it's the right thing to do.

On the COGS front, it's a little bit of anomalistic math of Q3. Remember that because we have some inventory, a lot of our reported cost of goods are related to what we manufactured in the previous quarter or the quarter before that. And so there was a time when we were cranking out full capacity, and that's where we got close to the 80% non-GAAP gross margins. And just want to temper expectations as we move forward, and we won't be manufacturing to full production.

Thank you very much.

Shibani Malhotra, Nomura.

Thanks for taking the questions. I've got a couple. The first is, can you talk broadly about the implications of hospital groups acquiring ambulatory surgery centers like Tenet's deal for United Surgical Partner? And what that means in terms of the potential for increased usage of EXPAREL?

And then separately, I think you had mentioned in the past that the warning letter gave hospital formulary decision-makers a reason to restrict EXPAREL. But if this is reversed -- if this warning letter is reversed and removed, have you thought about your strategy of explaining this to formularies? And how do you think formularies or decision-makers are going to react once this happens? Thank you.

Thanks, Shibani. I'll take them in order. First, your specific reference to a healthcare provider buying an ambulatory surgery group -- we expect that we will continue to see more of that, and we do believe that that is positive for both Pacira and EXPAREL. We continue to have significant interest in identifying patient types as well as surgical procedures where a 23-hour stay environment is appropriate. And we've got dedicated resources now working just on those kinds of initiatives with these customer groups.

And so what we think you are seeing is a strong understanding of the impact that the accountable-care organizations are going to have as well as the CMS-bundled payment programs. And the for-profit, aggressive payers -- healthcare providers and payers understanding that our -- looking at innovating with the use of EXPAREL to allow patients to be able to go home in a 23-hour stay environment without the need for a pump or a catheter or any of the other things that currently limit mobility, limit the time to first ambulation.

And I'll remind everybody that it is absolutely -- in one case after another, it's the time to first ambulation that is the gate on the length of stay, including the ability to treat in a 23-hour stay environment.

So, yes, we see those things as very much connected, and we see them as significant opportunities for EXPAREL over the immediate and short term.

As we talk about the warning letter, I will revert back to some old verbiage, Shibani, but one that you and I have talked about previously in that the folks who treat patients -- the folks who actually have patient care responsibility -- very rarely have anything negative to say about EXPAREL. It is budget holders and gatekeepers who are more prone to be limiting the access to EXPAREL.

And so, unlike other times when, say, somebody had a black box or something and that was removed, the caregivers had a negative exposure or a negative experience with the brand. Here, we don't have that. What we have is a group of folks who very much want to use EXPAREL, see the value of the non-opioid treatment regimen, et cetera, we believe that we can be successful in the activities that Kristen outlined, that we can then make it possible for the healthcare providers to go back to the P&T committees where that's the issue or to have restrictions removed and allow them to have more regular or open access to EXPAREL.

So, we routinely work with local healthcare advocates who are looking for us to put the information in their hands to fight back against these restrictions that they find not in the best interest of patient care. We think if we're successful here, as you have outlined, that that will be a lot easier for us. And we can do it with the full breadth of our resources rather than having to do it on an episodic or on a more controlled way. That make sense, Shibani?

Yes, it does. But can I actually pursue on that? Because when we were doing our research, and I think many investors have spoken to some physicians who have used the product, the feedback isn't always consistently good. But what we found is that the good feedback -- or the doctors who really like the products are the ones that have been trained very well and have experience. And is that something you have seen as well? Because sometimes you do get doctors who have used the product but maybe not correctly that actually think it doesn't work. And we struggle with that ourselves.

We struggle with it every day. And what we -- the biggest issue, and bit of a strange issue from our perspective frankly, is that as part of this restricted-access scenario, many healthcare providers and many institutions will not allow our folks in to train. And so we can do it piecemeal through cadaver labs and we can have weekend meetings and we can train at national meetings, et cetera, but that's very different than when we can train in the OR with the surgeon and their surgical team. And then we can follow that to the PACU and then we can follow that to the MedSurg floor so that all of the nurses understand that this patient has gotten a 72-hour non-opioid pain reliever, and you need to think differently about whether you hook them up to a PCA machine at all or how you provide breakthrough therapy with an opioid if required, et cetera.

So that will be another -- that will be a secondary issue behind cleaning up some of these other things in picking off the low-hanging fruit, Shibani. But the hope is that once people start to realize that for all of the reasons that we have been talking about this morning, restricting access to EXPAREL is not in their best interest. And if they're going to use EXPAREL, the only way to get the full benefit of the drug is to allow us to educate and train their surgeons and their anesthesiologists so we can get to that as well.

Great. Thank you.

David Amsellam, Piper Jaffray.

Thanks; just a couple. So, Dave, going back to your comments about the shifting of the balance of influence to back to the surgeons and physicians as opposed to people responsible for hospital budgets, should I take that to mean that the restrictions that we have seen maybe have been more widespread than you originally let on? Or are they more widespread than you originally thought? Maybe help us understand that because I think in the past you said that the restricted environment is really limited to select few PNT committees -- hospital, pharmacy departments, et cetera, et cetera. So I would like some more color there.

And then secondly, in terms of business development, just give us your latest thoughts on how are you thinking about using your cash, how you're thinking about the potential addition of other products. Is that something that you are looking at as a priority, or is it really more just R&D focus and trying to find other uses for the DepoFoam platform at this point? Thanks.

Thanks, David, and fair question. The progression here is -- so we got the warning letter on -- in September of 2014. And all of the early narrative was around how is the field force doing, how are you maintaining in the marketplace relative to customer reactions to the warning letter, et cetera. And in the early days, the field -- and even today, the field force has done extraordinarily well.

What we've had to deal with as we have gone forward is inappropriate utilization of these folks who are dedicated to restricting access and trying to preserve budgets by inappropriately positioning the 72-hour efficacy claim that you would see in the WE declaration on our website as well as the broad label which you would see on the Goldkind declaration on our website. And so that continues where we needed to push back.

This is not a field force issue. This is more an issue of in the environment where budgets are constrained and where budgets are being capped, folks have used the warning letter inappropriately. And then as we did not get the nerve block claim, that was more obvious. And then with the DOJ subpoena, we had some customers that came back and cited that as yet another reason that they were concerned about the broad availability of EXPAREL.

And so it was -- I don't believe we have ever misrepresented everything. The issue with the field force has been strong, and the field force continues to perform at an admirable level, as Jim said, relative to everything that's happened to us in the last 12 months. A separate issue that certain customer groups in the marketplace have continued to use the warning letter completely inappropriately, which is one of the reasons that we took the legal action that we took.

And well -- I'm going to turn it over to Jim in a second, Dave. So I guess to specifically answer your question is has the -- has limited access continued to be a problem or be a growing problem as time went on? The answer is yes. That's -- the -- and the DOJ subpoena have together caused an environment where it's been difficult for our reps to push back against people who are dedicated to restricting access.

And then, David, to pick up on your other question about other products, I guess you would -- the investment community would hope that we calibrate strategy with circumstances. And we're still looking at and we will continue to look at additional products. We would love to have another product that -- a marketed product, for example, that could be sold alongside our same sales force giving access. But we also are calibrating the appetite we have against, frankly, our stock price.

And so I didn't want to suggest that we aren't continuing to look at things, and Scott will continue to with the team here. But we're also realistic that, with our market cap where it is, there is a size of opportunity that is only appropriate, again, also given the context we have, which is we believe we have a real growth engine in EXPAREL on its own plus the pipeline. So we always going to look at opportunities and how to finance them relative to the growth opportunity we have in our stock to just execute on our plan.

Thank you.

Jason Gerberry, Leerink Partners.

First question just on the reported sales growth number for the quarter, can you break out what was unit volume versus, I guess, net price for a net -- gross to net adjustments? And just trying to get a sense of giving your comments about the reliability of some of the data that we have to track EXPAREL, if you can kind of quantify the last two quarters of year-over-year volume growth for EXPAREL.

The unit volume compared to the previous quarter was pretty much in line with the revenue changes well. And I was just trying to point out that we did have a pricing change within the DOJ this quarter that had a minor impact on this quarter. But, frankly, I just wanted to get it out there so that people are aware as we go forward that we have that component of our business.

The volume -- the unit volume relative to the previous year, we've got -- we did have a price increase between then and now, 5%. So the 19% revenue increase is somewhat offset by the price increase in terms of unit volume, but then that's somewhat mitigated by this price change that we have. It was a small part of our business. So there's not a big difference between them when you summarize that together, but we're just trying to help people find the narrative from one quarter to the next.

Okay, yes. Because when I look at IMS, it's showing unit volumes, I guess, flat to slightly down year over year. So if that data is unreliable, effectively, it's more of a mostly driven by volume with a little bit of price on a year-over-year basis. Is that the right way to think about it? I'm ultimately trying to get a sense of how to think about the trend going into fourth quarter.

Yes, we've got -- again, our volume is pretty much in line with the revenue increase. And so there's a significant increase in volume quarter over quarter from year to year. And I would caution you to rely too heavily on the numbers that, as we said, don't always reflect reality out there.

Okay, that's fair enough. And then just lastly from me on the FDA case, as it relates to formulary access, you outlined a number of items you are negotiating with the FDA. Just kind of curious, it would seem to me the breadth of the label, i.e. for all infiltration procedures, seems to be the most critical of those four items in terms of getting the broader formulary access. But just kind of curious if you would generally agree with that assessment or have a different view. Thanks.

We can't comment on that. It would -- it's -- given the state of where everything is in terms of our working with the folks at the FDA, it just would be inappropriate for us to make any comments, Jason. So I would tell you if you have any thought in your mind that EXPAREL sales year on year are flat, I would suggest that you might want to go back and look at the first three quarters of 2014 versus the first three quarters of 2015. And they are not anything close to flat; it's well over 20% growth.

Yes, okay. Thanks.

Thank you. I'm not showing any further questions in queue. I would like to turn the call back over to Dave Stack for any closing remarks.

Thank you, Ashley. Thanks for joining us today. We hope you enjoyed being part of our exciting journey. Coming up in November and early December, we plan on attending Bream Life Sciences Summit in New York City, the Jefferies Autumn Global Healthcare conference in London and the Piper Jaffray Healthcare Conference in New York. We look forward to seeing some of you there. Thanks a lot for being on the call today. Thanks, Ashley.

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