Pacira Biosciences Inc (PCRX) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Pacira BioSciences, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Ms. Susan Mesco, Head of Investor Relations. Ma'am, please go ahead.

Thank you, Michelle, and good morning, everyone. Welcome to today's conference call to discuss our second quarter 2019 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; Max Reinhardt, who recently joined us as President; and Charlie Reinhart, Chief Financial Officer.

Dr. Rich Scranton, Chief Medical Officer, is also here and will be available for questions following our formal remarks.

Before we start, let me remind you that today's call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. Please refer to our filings with the SEC, which are available from the SEC or our website, for information concerning the risk factors that could affect the company.

With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone, and thanks for joining. Before we review the progress made over the last quarter, I'd like to begin by welcoming Max Reinhardt as our recently appointed President. Max brings an extensive global and device experience to Pacira, and he shares our passion for bringing non-opioid options to patients. He hit the ground running, making a terrific impact leading our J&J joint steering committee and integrating ioveraº into the Pacira commercial offering. Max will share some updates on both fronts later in the call.

We are particularly excited by the exceptional second quarter we posted. We reported top line revenue growth of 22%, which was largely driven by EXPAREL penetration in existing and expansion into new procedures.

We continue to see strong growth for both the 10 ml and 20 ml vials. Enthusiasm among anesthesiologists continues to grow, as EXPAREL-based regional approach has become a mainstay of Enhanced Recovery After Surgery or ERAS protocol that enable reduction in the length of stay and shifting of many painful procedures to 23 hours environment such as hospital outpatient and ambulatory surgery centers.

Our customer base continues to expand with a 24% year-over-year increase in ordering accounts. And finally, we've made significant progress integrating ioveraº into our commercial offering, and we are confident that it has the potential to cross the $100 million net sales mark within our 5-year plan.

With EXPAREL now firmly positioned for long-term market leadership and the addition of ioveraº to our portfolio, we are well on our way to realizing our vision to become the global leader in innovative non-opioid pain management and regenerative health solutions. To achieve this, we are advancing 3 global pillars to improve patient journey along the neuro pain pathway. First, enabling EXPAREL as the foundation of opioid-sparing protocols across key inpatient and outpatient surgical settings. Second, advancing our clinical pipeline. This includes leveraging our proven DepoFoam platform to efficiently advance new product candidates. And third, pursuing innovative assets that complement our commercial infrastructure and meet the needs of our surgical and anesthesia audiences in the United States and select global markets.

I'll start with our first pillar, expanding the use of EXPAREL. We are very pleased with the strong trends we are seeing and remain on track to deliver full year net EXPAREL sales of $400 million to $410 million. This represents a growth of more than 20% over 2018. In June, we were delighted to have our marketing authorization application for EXPAREL validated by the European Medicines Agency. With this validation, our application is complete and the review process is underway, with an opinion expected in the second half of 2020. This is a major step forward in our geographic expansion effort to provide an opioid alternative to as many patients as possible. We believe select European markets offer significant revenue opportunity as there is great interest in the economic benefits of an opioid-sparing regimen.

For the rest of the world, we anticipate submitting our new drug submission to Health Canada soon and launching a pharmacokinetic study in Hong Kong with our partner Nuance Biotech in China later this year. To remind you, we are advancing go-alone strategy in Europe and Canada rather than pursuing a commercial partnership.

The team is also making great progress advancing 2 Phase III trials intended to broaden the EXPAREL package insert. First, our pediatric study, which is progressing according to plan and actively enrolling patients. This study, known as play, is a top priority to Pacira, given the urgent need for nonopioid alternatives for managing severe postsurgical pain in this vulnerable population. We have seen considerable interests from our academic institutions looking to get involved in the trial, further underscoring the urgent need here. We remain on track to complete this trial later this year.

Second, we are launching a lower extremity nerve block study that will compare EXPAREL with bupivacaine in patients undergoing lower extremity surgeries. We expect the market opportunity for lower extremity nerve block to be at least as meaningful as the brachial plexus nerve block with anesthesia-driven protocols, regional protocol approaches using the nerve block and field blocks continuing to take hold in institutional protocols.

As we look closer, we are seeing 3 key drivers working synergistically to advance EXPAREL within and across a wide range of procedures: one, the ongoing integration of EXPAREL as the foundation of opioid-sparing ERAS protocols; two, the growing level of engagement and enthusiasm from anesthesiologists; and three, increasing penetration on the orthopedic side of the business through our partnership with Johnson & Johnson, which has provided focused effort to -- with procedures such as shoulder, hip fracture and spine surgeries. We are working every day to maximize the value of this partnership.

With respect to ERAS protocols, Pacira is recognized as the go-to partner of choice. ERAS protocols are becoming the accepted standard -- strategy, I'm sorry, to optimize care in many health care systems as a means to standardize protocols by procedure to shift surgeries from inpatient to outpatient environments. These patient-centered opioid-sparing approaches improve patient recovery while reducing complications and costs. They typically involve a multidisciplinary team that is often led by a regional anesthesiologist.

We recently further strengthened our [high scalable] partnership network through a new educational initiative with ERAS USA. This is the U.S. chapter of the International ERAS Society. The ERAS international was founded to improve perioperative care and enhance postsurgical recovery and provides our collaboration with more than a decade of best practice procedure-based guidelines. Our collaboration is dedicated to improving postsurgical patient outcomes and reducing reliance on opioids.

The initiative will utilize U.S.-based hospitals that are accredited by ERAS international as centers of excellence to train health care institutions across the country on the implementation of ERAS programs to reduce opioid utilization. Using multidisciplinary training teams, ERAS USA's centers of excellence will deliver formal on-site training seminars. Curricula will include the most current information about ERAS protocols, including opioid-sparing multimodal pain management strategies and best practices in abdominal wall and other field blocks.

Upon completion, participating hospitals will be designated and listed as qualified centers of excellence for opioid sparing by ERAS international. This will be an important competitive differentiator that hospitals can use given the growing number of patients seeking nonopioid approaches to postsurgical pain management. It is also of great interest to payers and self-insured employers who prefer to send their members and employees to centers with established expertise as opioid minimization centers of excellence. We look forward to launching this program this quarter.

Now let me turn to our second growth driver, expanding interest and engagement we are seeing from the anesthesia community. We continue to see one anesthesiologist's success with brachial plexus nerve block drive expanded use within an institution. Anesthesia is taking a lead in non-opioid postsurgical management through EXPAREL-based regional approaches to utilize peripheral nerve blocks and field blocks as the core of a multimodal approach for a wide range of procedures. The enthusiasm within the anesthesia community is driving strong and steady growth in the size of our active customer base. We are leveraging more than 90 customers -- new customers every month with over 2/3 of these new customers coming from non-opioid hospital accounts.

We see great upside ahead of regional anesthesia approaches becoming more widely accepted and institutional protocols driving a shift to a 23-hour ambulatory setting, which is now a separate, unbundled reimbursement for EXPAREL.

Our Phase III study of EXPAREL as a brachial plexus nerve block is now published in the peer-reviewed journal of pain medicine. In this study, EXPAREL demonstrated highly statistically significant results versus placebo with a 78% reduction in opioids while providing significantly better pain control and 13% of patients opioid-free. In short, this study showed improved pain control with a reduction in opioid use without the need for cumbersome pumps or catheters.

Notably, cesarean sections remain an important growth driver as awareness within the OB anesthesia community around the opioid-sparing benefits of EXPAREL tap block. Earlier this year, we reported top line results from our Phase IV study that demonstrated the superiority of an EXPAREL TAP block to a bupivacaine TAP block in patients undergoing cesarean sections.

EXPAREL achieved statistically significant reductions in opioids and pain scores through 72 hours. Importantly, the study also demonstrated a statistically significant higher percentage of opioid-spared patients in the EXPAREL group, meaning, they took no more than 1 opioid tablet and experienced no opioid-related side effects through 72 hours.

We have been invited to submit this study for a publication to a prestigious peer-review journal, and development of the manuscript is underway.

Our second C-section study, which is known as CHOICE, remains on track for completion this year. To remind you, this next-generation study is designed to be completely opioid-free in the EXPAREL arm. We believe EXPAREL administered as a TAP block will be a key component in transforming the standard of care for undergoing -- for mothers undergoing C-sections.

On the reimbursement front, we continue to see growth drivers take hold. CMS is now reimbursing for EXPAREL use in the ASC under its specific billing code at $1.22 per milligram. Likewise, the American Dental Association has recognized the critical need for non-opioid options by introducing a new reimbursement code for the infiltration of sustained-release therapeutic drug in oral surgery procedures. Both codes took effect on January 1, and our team is working closely with the ambulatory and oral surgery centers as well as commercial payers to overcome upfront administrative hurdles and facilitate reimbursement on a payer-by-payer basis.

Our Aetna ASC pilot program is delivering strong results, and the national expansion is underway with proactive carve-out agreement that we expect will be delivered to ASC in the next few weeks.

Cigna is now covering EXPAREL nationally, and several of the large Blues have also included it in their fee schedule and are now working through the mechanics of adjusting ASC contracts.

From our discussions with other major national commercial payers, we expect EXPAREL coverage to continue to expand for the remainder of this year.

In the dental community, interest in EXPAREL remains high and health care providers and patients recognizing the need for non-opioid options for young adults undergoing wisdom tooth extractions. The leading indicators around reimbursement remain highly favorable, and we are now seeing large self-insured employers calling their third-party administrators and instructing them to add EXPAREL to their listing of covered medications.

The final item to discuss on EXPAREL front is orthopedics, where we are seeing expanded use of EXPAREL in shoulder, spine and hip fracture surgeries. Here, our J&J partnership has further solidified the role of EXPAREL through their substantial commercial presence and world-class educational programs. These have enabled thousands of health care practitioners to learn about the benefits of EXPAREL in reducing or even eliminating opioids for painful orthopedic procedures like total knee replacement and shoulder surgeries. Max, who is now the point on the Pacira side for the J&J steering committee, will share some additional thoughts shortly.

Turning now to the second pillar of growth, advancing our clinical pipeline and leveraging the proven safety, flexibility and customizability of our DepoFoam platform for acute, subacute and chronic pain applications. Here, our strategy is built around a global pain epidemic, which has fueled the current opioid crisis in the United States. Eliminating opioids will not address the significant unmet need for new tools and strategic approaches for managing pain. Consequently, our pipeline is focused on addressing areas of significant unmet need for opioid options for managing pain or opioids are the current standard of care.

For DepoFoam, we are advancing initiatives to take 2 new programs into the clinic. First, the intrathecal or subarachnoid delivery of DepoFoam-based levobupivacaine. Here, we have an opportunity to provide an alternative for the use of intrathecal or subarachnoid opioids, typically delivered by pumps or catheters.

Of note, we have substantial experience here as the DepoFoam technology was used successfully in the intrathecal setting for more than 15 years with our previously marketed product, DepoCyt(e) or cytarabine for lymphomatous meningitis.

The second clinical candidate is depo -- dexmedetomidine. Dexmedetomidine has complementary analgesic and sedative properties with fewer neurocognitive effects versus other sedatives. It also has demonstrated opioid-sparing effects and reduced delirium in the elderly. We believe a long-acting therapeutic dose has the potential to offer patients mental acuity and quality of life while also providing adequate pain control.

As Max will discuss shortly, our clinical team is designing studies that we believe will greatly add to the commercial value of ioveraº. Our clinical development strategy will demonstrate the synergy of EXPAREL and ioveraº used together to successfully manage pain while significantly reducing or eliminating opioids.

We will also investigate additional clinical utility for ioveraº cryoanalgesia as the component of opioid-sparing ERAS protocols to support the development of health messaging.

This brings to our third -- brings me to our third growth pillar, pursuing innovative product technologies that align with our strategy and are complementary to EXPAREL. Here, I would like to highlight our increasing confidence in the technology behind the recently acquired ioveraº system. Ioveraº is highly complementary to EXPAREL as a non-opioid therapy to deliver cryoanalgesia via handheld device to alleviate pain by disrupting pain signals being transmitted to the brain from the site of injury or surgery. We believe ioveraº will benefit greatly from our financial strength, established commercial infrastructure, growing partnership network and deep domain experience in opioid-sparing strategies. The transaction closed in the second quarter and integration is well underway. Max is leading the charge, and I will let him share details. Max?

Thank you, Dave. It's been just 7 weeks since I joined Pacira, and I'm delighted to lead a commercial team who is dedicated to delivering solutions that improve clinical and economic outcomes and reduce our nation's reliance on opioids as the primary solution for surgical pain.

Additionally, as the Pacira lead for the J&J partnership, I'm committed to building on the historic success of this alliance, and I'm confident that together we will continue to bring opioid-sparing solutions to patients in need.

As leaders in the field of pain management, we recognize that the market is evolving, and we are well positioned to advance our product offering to align to those changes.

In this context, we will adapt the focus of our J&J partnership as necessary to reflect the markets transition from inpatient surgery to the ASC site of care, with anesthesiologists having an increasing role in administering pain management solutions. We are confident that we can lead in this market transformation by leveraging both our J&J relationship and our Pacira commercial infrastructure.

Turning now to ioveraº, a technology that takes advantage of the body's natural response to cold to provide safe, effective, immediate, long-lasting pain relief without the need for any narcotics. I share our team's enthusiasm around the addition of this innovative product to the Pacira commercial offering. We believe the combination of ioveraº and EXPAREL will become the preferred procedural solution that will empower patients and their health care providers to take control of the patient's osteoarthritis journey whilst minimizing the need for narcotics.

Ioveraº is a perfect strategic fit with EXPAREL that further solidifies our leadership position in non-opioid pain management while offering health care providers an effective multimodal procedural solution for TKA procedures.

As you know, our initial go-to-market strategy will focus on 2 broad patient categories. Our first priority is ioveraº and EXPAREL for opioid-sparing pain management for the total knee arthroplasty patient, with the ioveraº treatment being administered before surgery and EXPAREL during surgery. As many as 30% of presurgical patients with end-stage knee osteoarthritis use prescription opioids. With ioveraº, our goal is to provide patients with several months of opioid-free pain control to allow them to prepare for surgery with an appropriate rehab regimen.

EXPAREL for surgical pain control and EXPAREL plus ioveraº to control postsurgical pain provide an environment for rapid functional recovery and return to daily activities, including normal sleep.

In this setting, we have an existing reimbursement pathway using a CPT code, and key opinion leaders are already using ioveraº in combination with EXPAREL to achieve near opioid-free results for total knee replacements. In fact, training is underway as a major integrated delivery network for the use of EXPAREL plus ioveraº with a goal of opioid-free surgery.

The second target market would be osteoarthritis patients who have failed conservative treatment such as NSAID or viscosupplementation, who are seeking drug-free, opioid-free, surgery-free pain management for several months.

Here, we are talking to those patients who are seeking an active lifestyle such as golf, tennis, hiking or simply walking with their grandchildren as well as patients who desire to delay surgery for family events such as vacations, weddings. There are 14 million individuals in the U.S. who have symptomatic knee osteoarthritis, and when we look at the market potential for osteoarthritis, we believe this is a $1 billion opportunity where ioveraº can capture a meaningful share. With ioveraº, health care providers can control pain by delivering precise controlled doses of cold temperature to the targeted nerve through a handheld device. The extreme cold is delivered using Smart Tips or closed-end needles so no fluid, chemical or drug is injected into the body during the procedure. Results can be felt immediately, and pain relief can last 3 or more months as the nerve regenerates over time.

Historic ioveraº pricing has not reflected the value this technology delivers. In this context, we are executing a new price, volume, discount matrix that will increase our average selling price above $450 per Smart Tip within 12 months.

We will be investing in key clinical studies to demonstrate the value proposition of ioveraº. Our initial focus will be TKA and ACL repair, with ioveraº in combination with EXPAREL.

Our clinical strategy will focus on enhancing these data with new studies that highlight the complementary effects of ioveraº and EXPAREL.

Our clinical initiatives are focused on enhancing the commercial value and competitive positioning of ioveraº and EXPAREL as the leading multimodal solution for opioid sparing pain management before, during and after surgery. These studies will also be designed to demonstrate health economics and value to facilitate broader market access and reimbursement.

Looking more closely at ACL tear, one of the most common injuries to the knee, which often occurs in athletes who participate in sports such as soccer, football and basketball. Active younger patients and high-level athletes often opt for surgical reconstruction, and severe postsurgical pain can persist for 1 to 2 weeks after the procedure. This is where we see the ioveraº and EXPAREL as an ideal match for providing a powerful non-opioid strategy for managing pain immediately after surgery, and we see potential for enhanced rehabilitation whilst minimizing the need for opioids.

On the manufacturing front, since completing the acquisition, our team has done a tremendous job building out our near-term capacity. And we now anticipate being able to supply at least 100,000 ioveraº Smart Tips by the end of 2020.

From a competitive standpoint, we believe that ioveraº is very well positioned compared with other technologies, where health care professionals will schedule ioveraº treatment sessions with a physician assistant or CRNA trained in its use who can treat several patients per hour.

In summary, ioveraº is a safe and effective treatment that provides immediate pain relief that can last for several months as the nerve regenerates over time.

The treatment is repeatable, using a safe technology that does not risk damage to surrounding tissue. Ioveraº uses a convenient handheld device with a single-use procedure-specific Smart Tip.

Therapy can be delivered precisely using ultrasound guidance or an anatomical landmark, allowing medical practices to incorporate ioveraº as a new revenue generator.

We are actively executing our commercial plans, which include expanding manufacturing capacity, improving margins and developing additional clinical evidence.

As with EXPAREL, we will work with government and commercial payers to provide broad patient access to ioveraº.

With that overview, I'll now turn the call over to Charlie to discuss our financial results. Charlie?

Thank you, Max, and good morning, everyone. Before I walk through the second quarter financial results, I'd like to remind you that we will be discussing non-GAAP financial measures. The press release we issued this morning includes a description of these metrics and why we believe they provide additional insights into the financial aspects of our business. The press release also includes a reconciliation to GAAP for these measures.

We ended the first half of 2019 in a very strong financial position. With approximately $380 million in cash and investments and significant and growing cash flow from operations, we are well positioned to advance our vision to becoming a leading provider of non-opioid pain management and regenerative health solutions.

On the P&L side, we have significant operating leverage, with rapidly growing top line that we're supporting with only modest increases in expenses. This underscores the tremendous opportunity we have to capitalize across our business while continuing to simultaneously ramp revenues and adjusted EBITDA.

I'll now turn to some specific financial highlights for the quarter.

Total revenues increased by 22% to $102.6 million in the second quarter of 2019 versus $84.1 million in 2018. This growth was predominantly driven by net product sales of EXPAREL, which increased by 23% to $98.9 million in the second quarter of 2019 as compared to $80.4 million in 2018.

In April, after closing the MyoScience deal, we began marking ioveraº and reported net product sales of $2 million in the second quarter, which does not include any impact from our new value-based pricing strategy that Max discussed.

Our non-GAAP gross margin for the second quarter of 2019 improved to 77% versus 76% in 2018.

Non-GAAP research and development expenses were $16.6 million in the second quarter of 2019 versus $11.3 million in 2018.

The increase in R&D was primarily driven by the ongoing enrollment in our Phase III pediatric study, our Phase IV opioid-free C-section study as well as startup expenses for the Phase IV spine study and the Phase IV hip fracture study. We have also continued to invest in the scale-up of our manufacturing capacity at our production facility in the U.K.

Non-GAAP SG&A expenses were $43.8 million in the second quarter of 2019 versus $39.2 million in the second quarter of 2018. This increase is attributable to increased sales and promotional activities for EXPAREL, including the establishment of a field-based team of account managers who are driving growth and access in the ambulatory setting as well as dental and plastic markets.

Another key driver of this increase is our co-promotion with J&J, which, as you know, is directly linked to top line growth. All of this resulted in non-GAAP net income in the second quarter of 2019 of $17.5 million or $0.41 per diluted share versus $9.9 million or $0.24 per diluted share in 2018.

Our cash position remains strong as we ended the quarter with approximately $318 million in cash and investments. This figure reflects our investment of approximately $120 million of cash with the closing of the MyoScience acquisition in April.

Looking ahead, given that EXPAREL is on a significant growth trajectory, delivering substantial operating leverage and cash flow, we have tremendous financial flexibility to capitalize on internal and external growth opportunities that align with our commitment to evolving Pacira into a global leader in non-opioid pain management and regenerative health.

The last item to cover is our financial guidance. As Dave discussed, we are very pleased with our financial outlook and so comfortable reiterating our 2019 sales guidance as follows. EXPAREL net product sales guidance of $400 million to $410 million, which we expect to follow a similar cyclical pattern to last year, with the fourth quarter historically being the largest quarter of the year. As for ioveraº, we remain optimistic about its long-term prospects and continue to expect $8 million to $10 million of net product sales in 2019.

Given the strong commercial synergies, we believe ioveraº will become a significant contributor to our business over time. We remain confident that MyoScience acquisition will become accretive beginning in the second half of 2020 and accelerating thereafter.

On the expense side of the P&L, we continue to be on track to achieve Non-GAAP gross margins of 75% to 76%. To remind you, we expect margins to eventually improve to roughly 85%, once our second dedicated suite in Swindon comes online and this location becomes primarily responsible for supplying EXPAREL.

Our non-GAAP R&D is expected to come in at the high end of our previously guided range of $60 million to $70 million as we begin to invest in ioveraº.

We now expect non-GAAP SG&A to be between $180 million and $190 million versus our previously guided range of $165 million to $175 million. This increase is primarily driven by the inclusion of commercial infrastructure cost for ioveraº.

Lastly, our guidance for stock-based compensation expense remains unchanged from our previous guidance of $30 million to $35 million.

With that, I will now turn the call back over to the operator to begin our Q&A session. Operator?

(Operator Instructions) Our first question comes from the line of Randall Stanicky with RBC Capital Markets.

Dave, we've seen pretty robust EXPAREL growth in the first half, and I know you said that can continue to accelerate going forward in the back half. Is that still the case? And maybe can you just comment on how sustainable this level of growth is if we see a competitor able to get to market and enter? And then one for Charlie just on the SG&A increase. Can you just -- is that a new step-up so we should think about an annualized spend next year in the $20 million range? And is that all -- I think you said that's all associated with ioveraº. Can you just confirm that?

Sure. Thanks, Randall. Yes, we don't see anything in the marketplace that convinces us that we shouldn't continue to see growth that is -- as we've seen so far this year. I mean it's driven by anesthesia and by nerve blocks. And we're doing an additional now lower level nerve block trial. Now that will add an additional impetus next year when it's available. We are just beginning to see the rollout of the ambulatory care coverage and reimbursement from all payers, except for Aetna. So Cigna and United and the Blues and a number are just beginning to have active synergies where they are paying for EXPAREL.

We continue to see the ambulatory care space grow rapidly. So as you look out over time and you see C-section and peds data coming, there's no reason to believe that we are anywhere as near the end of a growth cycle. And it looks pretty similar to us to what we've seen over the last several months. Come back to me if you have anything more specific in that. I'll ask Charlie to answer the second part of your question, Randall.

Randall, from the SG&A perspective, the increase in guidance was primarily related to ioveraº, and we would expect the same thing to look -- to happen next year as well. And remember, that's only 9 months, so it actually could be a little bit higher, 12 months, but we'll wait and see how those plans shake out.

Dave, just how are you thinking about the entry -- or potential, I should say, potential entry of a competitor. You've, obviously, had more time for some of your ERAS programs, and I assume you're thinking about these relationships as sticky. So for investors thinking about potential 2020 entry of a competitor, how are you thinking about that?

So we've treated over 5.5 million patients now, Randall. We've had 750 peer-reviewed articles that have been published. I think really increasingly important is we see ERAS protocols grow, where the use of EXPAREL as a platform for non-opioid treatment postsurgical management is institutionalized as part of EMRs. And so when you look at all of that, you say that we have had several years now to become embedded with our customers in the institutional practices.

On top of that, a good deal of the growth is coming from these new market segments around the use of the anesthesiologists triggered by the brachial plexus block, but then pretty quickly moving into TAP blocks, which we highlighted several times in the script and fascia-iliac blocks and pec blocks and all the different ways that an anesthesiologists can provide a regional approach. So there's no reason to think that a competitor is going to be able to challenge EXPAREL on any of those fronts.

And with the addition of peds data and very specific C-section data, we see ASC and the movement of a product to the outpatient center as a growth driver, we see peds as a growth driver, we see the lower extremity nerve block as a growth driver. I don't see any of those being really challenged by any of the competitors that we see in the short-term horizon.

So we're very comfortable with our position. And I mean a competitor that comes in and talks a lot about opioid-sparing approaches could actually be helpful to us. It's a very large market. We still have a relatively modest market share. So Randall, I've known you for a long time. Bring it on. Let's see what you've got.

And our next question comes from the line of David Amsellem with Piper Jaffray.

So couple of quick questions. Can you talk maybe qualitatively or even quantitatively about how the unique separate coding is driving or part of driving the growth of EXPAREL this year? I know you've talked about ambulatory. I know you've talked about nerve block. Those are obviously big drivers. But in terms of the evolving reimbursement landscape, how much of a tailwind has it been to date? And is it going to be a bigger tailwind going forward as you have more and more payers follow suit? So that's number one.

And then, number two, on the ioveraº supply, can you just talk about your longer term plans regarding manufacturing? And ultimately, where do you need to be -- where are you looking to be regarding your longer term supply [years of] the product and the extent to which that's a gating item to a more aggressive promotion?

Thanks, David. On the first one, David, we started the Aetna pilot in December. And so that really is our beta study on what can happen as this rolls out across a broader platform, which I think is the nature of your question. Our same-store sales, if you will, of the Aetna ambulatory surgery centers in New Jersey and Florida has exceeded expectations. I mean it's done extraordinarily well. And we see that as a very significant driver.

I think there's significant insight in your question because what's happened to date is when it's only Aetna that is paying, most of the centers have to have an opioid-sparing approach that Aetna will pay for and then a more normalized approach with the use of opioids where other insurers have not yet caught up with the C code 9290 and are paying for EXPAREL.

As we get more payers paying, you see that you reach the tipping point. And in some cases, we are seeing the tipping point where a Blue, a Cigna and an Aetna are all paying. And then the ambulatory care center says, we are only going to have the opioid-free system, we're not going -- we're no longer going to support an opioid platform and a nonopioid platform. So you're either going to pay for EXPAREL or we're going to stop taking your patients.

And I think you're going to continue to see that movement over the rest of this year, at least, as additional payers come on. And it's all geographic-specific. There are places where the bigger Blues are covering EXPAREL, and then there's places in some of the smaller markets where we have some work to do. But achieving that tipping point, given the nature of your question, is a real big deal for us and will further accelerate the kind of things that we've seen from the Aetna pilot so far.

On the manufacturing side, David, we've put a second manufacturing line in the current facility, which is why Max was able to say in his part of the script that we're comfortable being able to provide 100,000 of the Smart Tips to the marketplace in the next year. The 5-year plan that's in development will provide the opportunity to have many times that number. And we just -- we have outpatient -- we have, I'm sorry, outsourced opportunities to increase that demand. Those leverage will be pulled as we see how this rolls out over the next several quarters. I can't tell you that I know exactly what the capacity is going to be after owning those assets for a few months, but we can get into -- we can get many times the 100,000 units within next year inside the current 5-year plan, if required.

Okay. If I mention again, one additional question. So I think there's been a lot of questions about the nature of the J&J relationship and how that's evolving. So I guess the question here going forward is, are you -- where do you want to go with your relationship with J&J, particularly given that the DePuy Synthes folks are mainly hospital-focused and your growth is coming from outpatient and ambulatory, particularly. So help us understand your thought process going forward regarding that relationship.

So I'll ask Max to comment in a second. He's uniquely qualified to comment on this topic. I think there are -- the marketplace is changing. There's no doubt, David, as you point. And -- but there are huge opportunities that our verticals inside this, the professional education programs that J&J provides, we can't match. I mean that's just not possible. They have sports medicine sales forces. They have spine sales forces. I mean there's a number of things that even though the bulk of our growth is coming from anesthesia and ambulatory, there are places where Johnson & Johnson provides us an opportunity for leadership around new data development that would take us a long time to develop. So I'll ask -- inside the context of that, I'll ask Max to comment. He is now in-charge of the J&J relationship here for obvious reasons.

Yes. What I would say is the partnership has contributed to our growth and improving growth trajectory over the last 2 years. And we work very closely with Johnson & Johnson who are responding to the changes in the marketplace, including the movement of total knee arthroplasty to outpatient and meeting unmet clinical needs in spine, where they have a #2 market share position as well as leveraging the professional, education, infrastructure and channels into sports medicine, which also is conducted in the ASC environment. So we're very happy with how this partnership has performed, and we continue to work closely to focus on our major opportunities for growth.

David, just to be clear, what Max referenced is, the CMS has mandated that total knees be added to the ambulatory surgery center opportunity for 2020. And so we see that as a significant growth driver as well.

And our next question comes from the line of David Steinberg with Jefferies.

A couple of questions. First, on gross margin. I know that the first quarter is usually depressed. We had a very significant uptick in the second quarter, perhaps a little better than expected. So I was wondering how the sequencing gross margin will look like for the rest of the year. Will Q3 be better than Q2 and Q4 be better than Q3?

And then in terms of -- I know your objective with your new facility in the U.K. is to get the gross margins well above 80%. So would that be a 2020 event or more like 2021? And then second question is on new sources of growth for EXPAREL. I know that you indicated you have or will be soon filing your package in the E.U. And so just curious, just, in general, since you may get your first revenues next year, how would you quantify -- there are lots of different territories, but just, in general, how do you quantify the revenue opportunity ex U.S. and pricing as well?

I'm going to turn it over to Charlie to answer your specific questions in a second, David. Let me go backwards here. There are -- we will be selective in the geographies where we launch, especially in the EU. There are countries where we see great benefit to this opioid platform and where ERAS protocols are the standard of care across the majority of the hospital systems, and we think we can have great effect there. There are several territories where you just -- it's very difficult from a cost perspective, and so we're not going to bang our head against the wall. We're going to go where there's something that can be done and address the opportunity.

Canada is an opportunity. Generally, 8% to 10% of what is the U.S. opportunity is available in Canada. And just, generally speaking, Europe is 4 to 5x that, just to give you a sizing. It will take us a while to get there. So if you look at these launches, that will be 2021 timeframe over the 5-year plan, the vast majority of the revenue that will be generated around EXPAREL and ioveraº is in the U.S.

I'll turn it over to Charlie, but just to remind you that the delta of difference from Q1 to Q2 is largely driven by the fact that we have a several-week shutdown in Q1. It's a fixed-cost facility, so we're paying those folks whether we're making it or not, and so that's why you'll always see that shutdown-driven difference between Q1 and Q2. And then Charlie can give you a color on the rest of your questions relative to costs.

David, Q1 comment is absolutely right on. I mean it's historically consistent. Go back and look at last year, it's pretty much the same thing. This first quarter, we also had Patheon coming online. So they were just starting and getting their feet wet as well. So that impacted Q1.

Q2, it's not really a surprise. Frankly, it's pretty much on plan. I mean we said 75% to 76% for the year, and we started out with 71%. So you have to be above 75% for the rest of the quarters in order to get back on track, and we've just confirmed -- or affirmed -- reaffirmed that guidance.

So the second half of the year volumes will be stronger than they are in the first quarter just like they always are, and margins will be better than the first quarter just like they always are. And so we don't see anything unusual really in that.

As far as the longer-term margins, what we really need to do is to continue to transfer volume as total volume growth and transfer that volume into the Patheon space in the U.K. We've said a number of times that the per -- total per-unit costs there are lower. There is also a little bit of a seesaw effect because if you take too much volume out of San Diego and you put it into the U.K., then the fixed costs of San Diego start to make those units go up. So it's not a night and day or a switch you can turn on and off.

The next big jump in improvement in the gross margin comes with our 200-liter unit coming online. That's, as you may recall, we currently use 45-liter batch process, and a 200-liter batch process brings with it some significant additional efficiencies as well. We're hoping that, that is commercially available kind of at the end of 2021. So if we're making product at the end of 2021, we probably won't sell it until 2022. So you'll start to see a change in that kind of a time frame.

And our next question comes from the line of Liana Moussatos with Wedbush Securities.

Congratulations on a strong quarter. The $2 million in sales for ioveraº was -- were that only for osteoarthritis, TKA? What indications were those sales for? And a little clarity on the $450 per Smart Tip. There are different types of Smart Tips, and some are more complicated. Is that just an average? Or are you planning to have different pricing for the different types of tips?

Yes. Thanks, Liana. The $2 million was what bioscience had achieved before the acquisition. And it was almost entirely hospital-driven associated with TKAs.

So it was where the -- they have strong -- they had strong reimbursement in the HOPD section -- session, and that's really where the focus of their activity was and where the vast majority of their revenue was.

On the $450 ASP, what Max said in his prepared remarks were the ASP is lower than that today, and it will ramp up as contracts come due and as we generate new customers over the next 12 months. And so that will be a climb to that point over the next 12 months or so.

You're right. There are several tips. We will limit manufacturing to 2 of the tips, a Smart Tip with the -- called [Triton] with the 3 needle sites that's generally used when the physician is going by anatomical markers and using the broader application of the cryoanalgesia technology. And then a 190 tip that looks almost like a spinal needle. It's like a 3.5-inch spinal needle that is used generally when the physician is using ultrasound guidance and identifies the nerve and then they go in and apply the application specifically to the nerve while we're looking at it on ultrasound.

We will limit manufacturing to those 2 tips, which is what allows us, frankly, to be able to make more tips by making fewer different kinds of tips. And the $450 is really a blend of those 2. But we don't have any intentions of having dramatic differences in the ASP of the different tips. We want the reimbursement work that we do and the value-based pricing that we do to be easy for the customer to understand. And so the $450 represents a blend of the 2, but will be actually what the customer sees.

Okay. And when do you expect that your marketing efforts will start affecting ioveraº sales?

So we brought over a group of people from MyoScience, Liana, and they are working with customers and working with some of the new strategies that will be employed.

We will turn on a greater function of the use of our resources and then the additional resources that are required. I mean I should mention that every year at this time, we go through a review of what resources are required for next year. We're doing that for 2020 right now.

And so Charlie mentioned that the guidance for SG&A is going up. I mean to answer your question very specifically, 1/1/'20 is when we will have a formal soft launch, if you will, relaunch, if you will, with additional resources.

Right now the ioveraº folks that came over with the product are working with some of the physicians on our alliance team to make sure that customers are having a positive experience, et cetera, and then we'll add the Pacira resources once we're sure that we're going to hit the $400 million to $410 million that has been promised for this year.

And our next question comes from the line of Oren Livnat with H.C. Wainwright.

Help us drug folks better understand this device side of ioveraº. Right now there's existing CPT codes, right, which I understand vary across different settings and are probably for significantly lower amounts than the numbers you're talking about for the device hit sales themselves. So how do doctors purchase and get reimbursed and cover their costs to make margin on these purchases of disposable? And is there a big upfront cost for the device itself? And just help us understand the economics for a doctor to use this.

I'll ask Max to comment again here, Oren. I'll just get it started. So you can purchase the handheld, if you'd like, or it can be included in the price of the tips. That's what we meant really by value-based pricing, and the team is still working on different approaches for how different customer groups will want to actually acquire the handheld device and the tips. And not to be too mysterious there, but there are some market segments where they cannot lease or have an embedded cost associated with the variable piece of the equipment, right? So you've got a handheld that is fixed equipment that plugs in and is used over and over again and then you've got a tip that's used once.

And so the $450 that Max was talking about, really, is the price that a physician would use to establish -- whether they were making money in a reimbursed environment or what their charge was going to be in a cash environment. The payment in a HOPD environment, the hospital outpatient environment, is actually between $950 and $1,000. And so the physician that -- the ASP price that Max mentioned actually can do very well.

The opportunity in the physician office and where you're using it for OA and the 14 million patients that Max mentioned, that we see largely as a commercial market or a cash pay market. And in the work that's been done so far, we see a mix of the 2.

And so the reason the physicians have been offered or have been interested is largely around the ability to have a cash pay market for these 14 million OA patients that Max mentioned. And I should mention also 40 -- or 2 million of those patients are under 45. And so there's a real need in this marketplace to provide something for pain control in a patient that's just too young to get a knee replacement given the actuarial tables that suggest that they'll live to be 83, and you can only have this done twice.

So there's a bunch of different reasons why physicians are thinking about how they want to use this cryo technology. and I don't know if Max has anything addition to add, but I'll just turn it over if he does.

Yes. Thank you, Dave. I think a few points to make is that we, as described earlier today in the call, are targeting the TKA candidates and those patients who are in the last stages of their osteoarthritis journey. And in that -- in doing so, we need the orthopedic surgeon to sponsor the use of ioveraº. The most advantageous site of care for our customers is the hospital outpatient department based on the reimbursement.

And -- but what we're observing is that the orthopedic surgeon often delegates the treatment to physician assistant or another health care provider in that practice. And they can organize very efficient ioveraº sessions where they apply these treatments prior to TKA or in the last stages of osteoarthritis, using a member of their team, a PA or a CRNA.

They really love the technology because it's safe, it's easy to use, and it provides immediate pain relief. And what we're finding for physicians who are using the technology is that the advocacy the patients provide for that physician's service is very strong in the community because there are really very few solutions that provide immediate pain relief that is long-lasting in nature.

So should we think this as similar to the HA market, which I assume you have some experience with regards to the use cases in the near term at least?

Yes, PRP, Oren, is the one that we've used. If an orthopedic group is doing PRP, they generally have a PRP day, and they batch patients, and they have a physician extender, as Max outlined, actually doing the procedures. We expect to see very much the same kind of approach with EXPAREL -- or, I'm sorry, with ioveraº.

And our next question comes from the line of Balaji Prasad with Barclays.

Just a couple questions on the manufacturing capacities with both EXPAREL and ioveraº. Firstly, on EXPAREL, have you given an update on the capacity at both your current and upcoming Swindon facilities? And how can I tie that up with the gross margin improvement that you're speaking to? Secondly, on ioveraº, you spoke about 100,000 Smart Tips till 2020. Can you also please help me understand what's the limiting factor? How should we think about the supply year? And going by the guidance on the ASP that you provided, am I right in understanding that this supply is pretty adequate for the next 2 to 3 years?

So I'll go -- I'm going to go quickly. So EXPAREL today, we can make between $800 million and $900 million worth at the current price. I would hope that, that would be wonderful if that was an issue in 2020. It won't be.

We expect, as Charlie outlined, the 200-liter to come on. That gives us 4x what we currently make. So that will make about another $900 million worth. So between now and the end of 2021, if we left all of the 45-liter facilities in place, which we probably won't, we could make between a $1.8 billion and $2 billion worth of EXPAREL. So we're in very good shape.

With ioveraº, the issue -- the rate-limiting issue is that these are put together by hand. So the biggest component of COGS is actually people based. And so it's just hardly keep hiring more and more people. So we are looking at automating part of the process, and we are looking at the opportunity to move the process to some less expensive environment. And both of those things are in process. None of that is done yet, so I can't tell you that we know exactly what we're going to do. We really were focusing on 2020 so that we could get everything working in the marketplace and then we'll have to give you update on where we're going to go from there in future Q calls.

Thank you. And our last question comes from the line of Serge Belanger with Needham.

I wanted to talk a little bit about some of the label expansion activities, specifically the pediatric study and, I think, you announced a new lower extremity trial. Can you just discuss the timelines for these trials and when you expect to be part of the label? And then maybe the market opportunity for each and how much off-label usage are you currently seeing in these indications?

Well, let me go backwards, Serge. So I want to be very clear that we only promote a nerve block for upper extremity. With that said, there are places where the physicians are 100% dedicated to what's in the package insert, and there are places where an anesthesiologist will say to us a nerve is a nerve, and I'm going to use it where I think it's the best -- in the best interest of patient care. So we have a little bit of both. Clearly, having a lower extremity nerve block will work to our advantage. That trial is just kicking off. We've met with the FDA. I mean we're clear on exactly what we're going to do. I think that the best estimate, and I'm looking at Rich Scranton here to give me some help if I get off base, is that we would expect to have data sometime mid next year. And then it will be a former sNDA, so it will have to go to the FDA for review. So you would think in a normal course of events that we would have a lower extremity nerve block in the first quarter of 2021.

For peds, it's a little clear, that trial is enrolling very well. We expect to have data by the end of the year. If we submit an sNDA under accelerated approval, which we would have to ask for, of course, we would have an approval early in the summer of 2020. If we do -- if we did not get accelerated approval, it would add 60 days, and it would be in mid-summer of 2020.

So in either case, it would be something where we would be, hopefully, in the market promoting pediatric use in the fourth quarter of 2020 and then the lower extremity nerve block would follow approximately by a year.

Thank you. And this does conclude today's Q&A portion. And I would like to turn the conference back over to Chairman and CEO, Mr. Dave Stack.

Thanks, Michelle. Thank you for your time and attention this morning. We'll be presenting at the Wedbush conference next week and hope to see some of you there. Have a great day.

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