Pacira Biosciences Inc (PCRX) 2021 Q4 法說會逐字稿

Good morning, and welcome to the Fourth Quarter 2021 Pacira BioSciences, Inc. Earnings Conference Call. My name is Brandon, and I'll be your operator for today. (Operator Instructions)

I will now turn the call over to Susan Mesco, Head of Investor Relations. And Susan, you may begin.

Thank you, Brandon, and good morning, everyone. Welcome to today's conference call to discuss our fourth quarter and full year 2021 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; and Charlie Reinhart, Chief Financial Officer.

Before we begin, 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. For information concerning risk factors that could affect the company, please refer to the company's filings with the SEC, which are available from the SEC or our website. One last piece of housekeeping, local Internet went down this morning, so the Pacira team is participating via cellular device. We ask for your patience if sound quality is limited at any point.

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

Thank you, Susan. Good morning, everyone, and thank you for joining us. We'd like to devote most of the time today to your questions, so I'll begin today's discussion with a brief prepared remarks that cover recent business highlights.

We remain proud of our team as they continue to perform and deliver both for our patients and our investors. The progress we made throughout 2021 positions us for even greater success in 2022. We have a series of value-driving milestones in the year ahead, and we couldn't be more excited for the future of Pacira.

We ended the year in a strong position with a diversified portfolio of unique, safe, best-in-class products that support healthcare providers' ability to provide low or no opioid therapies to improve patient experiences along the neuro pain pathway. Our achievements in 2021, highlighted by growing EXPAREL sales, the acquisition of Flexion and an exciting pipeline of innovation that have captured -- or that have placed Pacira in the forefront of opioid-sparing pain management.

ZILRETTA provides us with a highly complementary commercial asset for the treatment of osteoarthritis knee pain while also increasing our presence in chronic pain. With more than $100 million in sales in 2021 and a significant potential for an even greater contribution moving forward, ZILRETTA gives us great confidence in its long-term prospects as a high potential, durable product for Pacira.

Importantly, this acquisition diversifies our revenue stream, enhances our top line, and we believe it will provide meaningful synergies as we expect to drive substantial near- and long-term accretion to our cash flows and earnings.

Turning now to progress we made with EXPAREL. I'll start with the recent achievement of a very exciting milestone. Over 10 million patients have been treated with EXPAREL since launch in the United States alone. Our team achieved record EXPAREL sales of $507 million, with adjusted EBITDA margins of 37% in 2021, marking our 8th consecutive year of positive adjusted EBITDA. These are important accomplishments.

As we have been reiterating, EXPAREL-based blocks are enabling the regional anesthesia revolution, which is our #1 growth driver. Regional anesthesiologists are developing new blocks, perfecting old blocks and using imaging to ensure successful patient outcomes. Our state-of-the-art pit training and innovation facility is supporting this market transition with real-time, best practice knowledge transfer and is helping accelerate the surgical migration to outpatient sites of care.

In addition, throughout 2021, we significantly fortified our EXPAREL IP estate with 2 new Orange Book composition patents that are now listed in the FDA Orange Book.

Recently, we received 4 new Notices of Allowance from the U.S. Patent Trademark Office. These are all composition patents that we will submit to -- for Orange Book listing, after which there will be a total of 6 EXPAREL patents listed in the Orange Book with expiration dates of January 22, 2041.

Last year, we were excited to launch EXPAREL in the pediatrics market, where we are making an even bigger impact than anticipated. We are seeing erector spinae, or ESP blocks, becoming the standard of care and displacing costly and cumbersome pumps and catheters.

Interestingly, pediatric spine is triggering a halo effect in adult procedures. Spine surgeons are a tight knit group of like-minded surgeons and the technique for an erector spinae block is the same for children and adults. This provides us with an opportunity to establish EXPAREL ESP regional blocks as the cornerstone of best practice, enhanced recovery pathways for both adult and pediatric spine surgeries.

Looking to our international expansion. For EXPAREL, we are delighted to report that our targeted European launch is now underway. Importantly, as you may recall, EXPAREL enjoys a broad label in Europe, which includes both upper and lower extremity nerve blocks as well as field blocks, such as transverse abdominis plane field blocks or TAP. This is key and will factor into our ability to gain traction in this important market without having to expand our call points and should help simplify market access.

Our Women's Health franchise has seen 30% improvement in EXPAREL procedures over the prior year. EXPAREL TAP blocks for C-section are driving the success, which is not surprising given the incredible value proposition that faster recovery and opioids-sparing pain control means to new mothers.

With 1.3 million C-sections per year in the U.S. and rapidly expanding EXPAREL penetration, we see significant opportunity for continued growth. Further, positive experience and outcomes in C-section procedures are driving demand in gynecologic oncology and breast procedures. As we all know, mothers are the CEOs of the household and a positive birth experience with EXPAREL will drive a lifetime of opioid-sparing decision-making for other procedures.

This past year, COVID has escalated the need for many breast, plastic and oncology surgeons to expedite discharge for their patients. With EXPAREL, they are now able to meet the needs of women who demand an opioid-free experience and don't want to stay overnight in the hospital, while simultaneously optimizing their care experience through better pain management using EXPAREL-based multimodal ERAS protocols.

In addition to the success of our growing EXPAREL and ZILRETTA franchises, we are also making great strides with our iovera° franchise. iovera° is the only cryotherapy option available and a handheld design allowing it to be used in a variety of institutional settings and environments where you cannot use the previously available console-based cryoanalgesia systems.

In 2021, we launched iovera° with a partner in Canada and with Pacira resources in the U.K. and EU. We also used last year as an opportunity to design a more user-friendly next-generation device and develop additional smart tips for new indications. We now have a specific tip ready for human pilot studies for medial branch block as a treatment for chronic low back pain. We are also preparing to evaluate iovera° as a treatment for spasticity, which represents a very significant long-term opportunity.

Looking ahead, we expect to build on last year's success and believe 2022 will be a banner year for Pacira, as we expect to deliver another year of record sales, significant EBITDA growth and multiple clinical and regulatory updates. Enrollment is progressing in our 2 Phase III lower extremity nerve block studies for EXPAREL or the STRIDE studies.

COVID-related delays in the fourth quarter of last year have shifted the expected timing of our sNDA submission to the fourth quarter of 2022. We believe the lower extremity nerve block label is at least as significant as the upper extremity market, with around 3 million procedures a year and an addressable market of approximately $100 million.

For ZILRETTA, the first and only FDA approved treatment for osteoarthritis knee pain, we are focusing on 3 areas of development in 2022, and we'll be meeting with the FDA to obtain alignment. The first is to expand the current label to include a safety superiority claim in diabetes, which we expect will establish ZILRETTA as the first-choice corticosteroid for osteoarthritis and pain of the knee.

Second, we are preparing to launch a Phase III shoulder study, which we plan to begin in year-end. And lastly, we are working to expand the current knee indication to include repeat dosing. In short, we believe ZILRETTA is a perfect fit for the Pacira family of unique products, and we envision longer term, our commercial and clinical capabilities will significantly expand its use.

At the same time, we are addressing several issues with specialty distributors and pharmacies as well as previously stocking of short-dated materials. We are moving these systems and processes to our Pacira operations and expect to have many of these issues behind us by the end of the second quarter.

For iovera°, the launch of our next-generation handheld device is now underway, and we remain on track for an interim review of our PREPARE study, which is evaluating the combination of iovera° and EXPAREL as a procedural solution and TKA procedures in the next few weeks.

As I mentioned earlier, we are particularly excited for the opportunity in spasticity. You may recall that at our analyst event last year, Dr. Paul Winston shared some compelling proof-of-concept videos in his spasticity patients. Importantly, pain associated with spasticity is already on label, and we are working to facilitate greater adoption given the efficacy, safety and ease of use.

We plan to work with the FDA to define a regulatory pathway for adding treatment of spasticity to our iovera° label. Patients currently have limited and often costly therapeutic options. For example, patients are receiving BOTOX, which has dose limitations.

Here, patients receive 3 to 4 treatments a year for $1,800 to $2,400 per treatment. Another example is the use of phenol, a chemical neurolytic. Phenol is painful, requires anesthesia and has adjacent tissue scarring with outcomes that are highly variable. In contrast, iovera° has shown great promise in this indication, with tips costing $450 to $500, iovera° could represent a tremendous value proposition in spasticity.

In addition to EXPAREL, ZILRETTA and iovera°, our portfolio includes promising earlier-stage opportunities. We expect to initiate a Phase II study of our multivesicular liposome technology for subarachnoid analgesia in late 2022.

We are planning pilot studies to evaluate EXPAREL and iovera° spasticity -- separately, I'm sorry, as stellate ganglion blocks for use in cardiac dysrhythmia following heart surgery. In addition, we are defining next steps for clinical programs in our multimodal -- our multivesicular liposomal formulations of dexamethasone for inflammation and low back pain and high-dose bupivacaine for longer-acting pain management of 5 days or more.

Moving ahead with patients always at the forefront of our endeavors, Pacira will continue to innovate in all areas of our business including new indications, line extensions, design improvements and more. We will leverage our state-of-the-art PITT innovation and training center in Tampa as well as a second facility that we are building out in Houston to bring these innovations into the hands of our healthcare provider partners. I'm proud of all we accomplished last year and even more excited for what's to come.

With that, I'll turn the call over to Charlie for some financial highlights. Charlie?

Thank you, Dave, and good morning, everyone. I'll start with a quick update on sales and margin trends.

As previously reported, in the last week of December, we began to see a slowdown in elective procedures as regional surges in Omicron cases prompted government -- governmental restrictions and escalated staffing challenges. These trends continued in the beginning of January until around the middle of the month when we began to see a notable improvement in EXPAREL sales with continued strong trends in February.

On the competitive front, we have not seen any impact from new market entrants on our EXPAREL base business or our ability to generate new business. More than 10 years of physician experience, well-established efficacy and a pristine safety profile continue to be key differentiators between EXPAREL and other extended-release bupivacaine formulations.

For iovera°, the significant growth in 2021 was driven by a 72% increase in new customers with a growing representation from the physician office site of care. We believe the addition of ZILRETTA will accelerate this as it gives us another entree into the physician office and allows us to extend our reach of physician office interactions.

For ZILRETTA, as previously reported, sales were negatively impacted by rebate program modifications and several unanticipated manufacturing batch failures that led to short-dated ZILRETTA inventory, resulting in smaller order sizes and higher product returns.

As Dave mentioned, we are currently addressing these issues and expect to have them resolved by the end of the second quarter, with 2022 sales trends improving throughout the year as we extend inventory dating, simplify the rebate program and complete our transition of the product to the Pacira operating environment.

Turning to gross margins. On a consolidated basis, our full year total non-GAAP gross margin was 75% for 2021. This is comprised of full year non-GAAP margins of 77% for EXPAREL, 33% for iovera° as well as post-acquisition non-GAAP margins of 82% for ZILRETTA.

In 2021, iovera° margins were negatively impacted by overlapping expenses as we transitioned production to our San Diego facility and a new contract manufacturer, along with our investments in our next-generation iovera° handheld device.

Looking ahead, we continue to expect to see improvements of roughly 3% per year for EXPAREL gross margins in each of the next 3 years until we reach gross margins in the mid-80% range. This improvement will be driven by a combination of steadily improving volumes and lower unit costs as our 200-liter suites contribute a greater percentage of EXPAREL units sold.

For iovera° and ZILRETTA, as volumes continue to expand, we expect margins to increase and reach levels in the mid-80% range in approximately the same timeframe as EXPAREL. For iovera°, margins will also benefit as the cost to transition our manufacturing locations to a contract manufacturer at a reduced unit cost as well as the rollout of our Generation 2 device with a reduced COGS by the end of the second quarter.

For ZILRETTA, we are making investments in manufacturing facilities to improve quality metrics and efficiency as volumes grow. While we are currently not providing 2022 revenue or gross margin guidance, given the continued uncertainty around COVID-19 and the pace of the recovery for the elective surgery market, we will continue our practice of transparency of reporting preliminary monthly product sales for EXPAREL and iovera° to share intra-quarter trends with you.

For ZILRETTA, we are currently not reporting preliminary monthly ZILRETTA net product sales as the required adjustments for certain product rebate programs are calculated after the end of the quarter. However, we will include a range for ZILRETTA sales in our quarterly pre-announcements. We will consider adjusting this practice for all 3 products as the year and visibility progresses.

Turning to our expense guidance for 2022. I'll start with our expectations for non-GAAP R&D of $75 million to $85 million. Key drivers over 2021 spend include: Approximately $14 million in incremental clinical and pharmaceutical product development costs associated with ZILRETTA and an early-stage program acquired from Flexion, which is now known as PCRX 201; approximately $6 million in EXPAREL manufacturing capacity expansion costs for our 200-liter batch unit located in our San Diego facility; and the advancement of clinical development activities related to our STRIDE and PREPARE studies.

For non-GAAP SG&A expense, today we are guiding to a range of $220 million to $230 million. Key drivers over 2021 spend include approximately $37 million of incremental SG&A spend for ZILRETTA. This includes doubling the size of our iovera° and ZILRETTA field-based team; a ZILRETTA marketing campaign; an expanded market access function to include ZILRETTA; and G&A costs, which include some transitional activities for certain shared support functions, such as finance, legal, HR and IT.

Approximately $7 million in EU business costs, which includes our commercial footprint as well as legal and regulatory support. Our forecast also includes expanded activities to accelerate growth within our spine, sports medicine, plastics and OMFS businesses as well as increased medical innovation and education programs at the PITT. Finally, our 2022 stock-based compensation is expected to be in the range of $40 million to $45 million.

So in summary, EXPAREL continues to be on a significant growth trajectory that is driving substantial operating leverage and cash flow. With ZILRETTA, we have added a significant and highly complementary revenue stream that makes our earnings outlook even more compelling.

For iovera°, we remain very excited about the near- and long-term outlook for growth. Continued growth in our iovera° customer base and the addition of ZILRETTA to our commercial offering, leave us well positioned to help physicians individualize osteoarthritis care with our unique pipeline of non-opioid options.

On a longer-term horizon, we are investing in exciting new iovera° opportunities that have the potential to be game changers like spasticity and stellate ganglion blocks. The bottom line is that Pacira is financially stronger than we have ever been. And despite turbulent macroenvironment, we continue to deliver impressive financial results and remain bullish in our long-term expectations for robust growth.

We are confident that we are on track for year-over-year top line growth in at least the high teens, gross margin improvement to the mid-80% range, modest year-over-year growth in operating expenses, and adjusted EBITDA margins that exceed 50% by the end of 2024.

That concludes our prepared remarks. I'd like to turn the call over to the operator to begin our Q&A session. Operator?

(Operator Instructions) And from Piper Sandler, we have David Amsellem.

Just a few. So on EXPAREL and the elective surgical environment, I may have missed this. So if you could clarify, in terms of the pace of volumes, where is it relative to pre-pandemic levels? Or to maybe put it differently, with the Omicron wave receding, are you getting back to pre-pandemic levels, when do you think you might be there? And just talk about in any way that's quantifiable, surgical backlog and how EXPAREL stands to benefit as that backlog is cleared? So that's the first set of questions.

And then secondly on ZILRETTA, it sounds like there's, I guess, some speed bumps here. But I wanted to ask you about the -- your commercial efforts, sale and marketing, and talk about what you're doing differently in terms of getting in front of physicians in terms of headcount, your physician targeting. I know you've alluded to this in the past, Dave, but maybe just provide some detail in terms of how you're approaching detailing differently than the predecessor company?

Thanks, David. First, the pace of volumes, I mean, we get the IQVIA report every Friday, and it is up on our website. And what you would see is that we've come up on to the pre-COVID elective surgery line several times only to retreat in several weeks afterwards. And then the week after Christmas was really bad, almost as bad as COVID inputs.

And so we're -- I think while we haven't seen this week yet, of course, it lags by 2 weeks. I should have said that, David. And so we bounced back and forth off of the pre-COVID elective surgery line in that report. I think the interesting thing is that EXPAREL is routinely between 20% and 40% higher than the line, than the return. So we expect that when we do return, we're going to enjoy all of the share that we've taken for -- with all of the programs that we've talked about.

So I would say, based on the performance in February, David, that we're probably very near the elective pre-COVID line again, but then we're 2 weeks in arrears. So I mean, just to give you some context, the last week of the year was horrible, almost unbelievably so. The first 2 weeks in January were a little better, but not great. I'm sorry, the first 2 weeks in January were a little better, but not great. The second half of January got us to plus 4% in January, and we continue to see that kind of momentum into February. So think teens again. Not 100% back, but we're getting there.

On the ZILRETTA. So we've got a team that's been out there with iovera°. And we were fortunate enough to have a number of people come over to Pacira from the ZILRETTA sales force. So we've been able to supplement them with some new hires. Again, people that are willing -- looking to come here based on all the success and some of the things that are exciting around our program. Actually, interestingly, David, many of them have been referenced by their physicians to come and work for Pacira, which we think is a very, very positive sign.

And so without being trite, I would tell you the first difference in terms of ZILRETTA customers, is that we're actually calling on them. And we hear that often that our folks are working, which -- I don't even know how to make that any more clear. And we're working our way through ZILRETTA being useful in the -- or I'm sorry, ZILRETTA being useful in the office primarily.

As Charlie said in his script, we see a lot of chronic pain medicine docs adopting iovera° in their offices. So we see the benefit of having 2 products when we go talk to the chronic pain docs and to the orthopedic surgeons and the spine folks. It is clearly driven by the patient status, the duration of pain control that they're looking for, major driving by reimbursement.

So that does subset select patients that we want to treat in a hospital outpatient department where the reimbursement is very good for iovera° versus the office where the reimbursement is quite good for ZILRETTA. So we can talk about these folks in different sites of care, different reimbursement options they have based on the patient needs.

And we're working again on -- we've found a number of physicians in the marketplace have come to us with data sets on the use of ZILRETTA and Type 2 diabetic patients. And so we've got a number of these folks writing those data sets up for us with the intention of bringing them to the FDA to show them how the product is actually being used in the marketplace in this patient category that obviously has some specific needs that are all our own.

So all in all, I think it's very early days. Remember, we only had our national meeting about 3 weeks ago. So what I'm telling you is a couple of weeks' worth of largely anecdotal data, David. But so far, it's -- everything is going the way we expected it to, more or less.

Okay. That's helpful. And if I just may go back to the question -- the EXPAREL questions. Just on the surgical backlog. Can you just quantify that? And anyway, I think you've done in the past, but if you can provide a little color there, that would be helpful.

Yes. The surgical backlog in orthopedics is -- has been actively worked upon, largely in the ambulatory surgery marketplace. And so we know that the docs are out 2, 3 months. But I think most of these very painful procedures are being driven to the ASC by the CMS and by commercial pillars. And given the long-term relationship of orthopedic patients with their physicians, you see a system that's actually working, right? They go see the doc and they go to an ASC that the doc might or might not have interest in.

And the soft tissue is much more difficult to predict. If you look at ASCs now, David, and you look at EXPAREL, over 75% of our business as reported by IQVIA is ortho. And so the other side of that, of course, is there isn't a lot of ASC capacity for soft tissue. We see some of that being taken up in HOPD, and the HOPD actually has -- in-hospital outpatient, there's a slight bias, like 55% to soft tissue. So you can see that many of these patients are finding their way there.

The issue that we see in the marketplace today is that the insurance companies are trying to save costs by moving these patients to these outside environments. And largely what's happening is the hospitals really struggle to be able to do a soft tissue procedure like a hernia or a hemorrhoidectomy, for what the insurance companies want to pay for a soft tissue procedure because they're basing that off of what they can get it done in the outpatient treatment.

So the backlog in and soft tissue is suffering from 2 things. One is these continued intrusions by COVID, the fact that the primary care guys want to meet with the patient even if it's telemedicine and they need to have lab work done and EKGs done and stuff before they go for these soft tissue procedures. That marketplace is not as structured as the orthopedic marketplace, so it's lagging. And when you put on top of that, the fact that there isn't a lot of capacity in the outpatient departments for these patients to go get their procedures, it's hard to predict that this soft tissue marketplace is going to be satisfied in the next year or so, I think it's going to take longer than that.

And then you get into the issue of some of these patients have been waiting 1.5 years or 2 years, and there are ASA 2 patients that become ASA 3 patients and then do you operate on them at all. So it's soft tissue is a lot more complicated, David, than ortho. Long answer to a simple question, sorry.

From RBC Capital Markets, we have Gregory Renza.

This is [Nina Wong] for Greg. Maybe first one, just a follow-up on what you're seeing around recovery on procedures. I was wondering, could you provide more color on what you're seeing in terms of nursing staffing shortage now, and when do you think we'll see the labor force to return to pre-pandemic levels and how that will impact the recovery on procedures in the clinical environment and EXPAREL?

Yes, thank you for the question. It clearly is the issue. And frankly, in December, it was the issue as well. And in August, it was the issue as well, right? So I mean, you think Omicron was easy to identify. But I think underlying that, the real issue, frankly, was labor shortages.

It's better. I can tell you that the ambulatory surgery centers, in particular, are not all the way back, right? And so it still is difficult to get a nursing team together to work a 12- or a 14-hour shift on a Saturday. And the docs struggle when you get a number of PRNs and you bring them in, and you have 5 people in the OR on a Saturday morning, but they've never worked together before and they don't know each other and the anesthesiologist is introducing themselves to the nursing team, et cetera. It just slows everything down.

And so I wouldn't say that we're back to where we have to be in order to take care of this backlog that David was just referring to. But I think right now, we're at a place where folks are working, the centers are open, and our numbers would suggest that February is going to be a very good month, looks a lot like October did, and November did actually, and we'll see.

But when you run into trouble is when you start talking about a 12- or 14-hour shift on Saturday. And nurses, especially nurses that have got young families really struggle with how they do that when the kids are out of school. And -- this week, for example, is a little bit tough, right? Up in the Northeast, all the kids are off for the whole week. So you can see right away that the ASCs are slowed down.

Great. And then just a second question, if I may, on ZILRETTA. Maybe could you talk a little bit more about your plans to address some of the other headwinds ZILRETTA face on manufacturing, rebating and maybe just pandemic vulnerabilities, and when should we expect to see meaningful growth in revenue in the near term?

I'm not sure I caught the first question. Is it around manufacturing of ZILRETTA?

Yes. Just manufacturing, rebating, and on pandemic.

Okay. Yes, that's pretty much over, frankly. I mean it's -- the issue of making manufacturing with appropriate dating is behind us. The issue in the marketplace is short-dated material that was shipped in beyond the capacity of a physician to use it in the time that the label enabled. And so especially in some places where inventory was placed with a specialty distributor or in a scenario where a doc bought a lot to maximize rebates, et cetera, cleaning some of that up is what's happening.

And so it's -- there's some -- this is always going to happen in an acquisition. So there's nothing here that's alarming or troublesome. It's just running a business. It's just stuff. And I think that you're going to see ZILRETTA do better largely just because of the exposure that we're giving it, right? I mean, the docs that come to the PITT to learn about iovera° and to learn about EXPAREL, it's a little bit surprising to us that I would say, just a general number, at least half, maybe more than half of these guys don't even know what ZILRETTA is.

So I think giving it more exposure, we will come back with a -- it won't be a rebate program, that will be a discount program, which is much easier for the docs to understand and won't incent them to bring in large quantities and -- we want them to order it when they need it and not order a bunch of it in some type of a rebate program.

We -- I think we're doing fine right now. February looks okay. And as we clean the rest of these things up and we give these guys more exposure, then we'll clear any of these hurdles that are in the way. And we think that this will be a good growth opportunity this year. And we're looking at all of these products to grow substantially in this year.

And then as we talk to the FDA about improving the label and we start the shoulder study, and there's a number of things that we think we can do to improve this. And remember, where EXPAREL is already used extensively in the shoulder, we're also looking at iovera° in the shoulder. So we've got a lot of contacts doing clinical research in this part of the body. So we think we're equipped pretty well to handle doing an iovera° or a ZILRETTA shoulder study.

From Jefferies, we have David Steinberg.

I have a question for Charlie. You gave us a pretty clear pathway, both sequencing and sort of peak margins for EXPAREL. But with regard to ZILRETTA and iovera°, I think you mentioned about 3 years to expect mid-80s gross margin, but it was a little unclear in the sequencing and phasing and how you get there. Could you give us a sense of sort of annual increments and improvement in gross margin for those 2 products to get to that peak number?

Well, David, you're on the top of your game because that's exactly right. I was a little less specific and there's a reason for that. And that is -- it's a little more volume dependent. And for iovera° and for ZILRETTA, we literally just got the product.

So you noticed that in Q4, we had 82% margins in ZILRETTA, which was actually better than I had anticipated. I think that was a little higher than normal, because late Q4 manufacturing is humming along to make up for the normal shutdown at the end of the year.

So I think ZILRETTA should have been closer to 80% for the full year, and it will get to 85%. I don't know that there's any prescribed notion other than in the next 3 years, we'll pick up 5 points. I don't think that's anything more specific.

iovera° will change drastically. This year, '21 was an outlier because we doubled up -- as we basically were running a relay race, we had an overlapping section of operations in Northern California, operations in Southern California, operations in Mexico, more QA activity at all 3 locations, there was just some additional expenses, in addition to investing in the Gen2 device. So -- and when you're talking about a $16 million revenue base, it doesn't take much of additional expense to change that margin. That margin will go up very noticeably in '22. And we'll be -- at that point, we'll be on track, I think, over the next 3 years for iovera° to make it too.

So I think -- this is the first time we've given detail other than total gross margin. And so I suspect you were interested to see what some of the other margins were. I think maybe the more important lesson is that EXPAREL is already in the high-70s, and is on a nice path to get to the mid-80s as we were trying to communicate.

Okay, Charlie. And then Dave, a couple of questions for you. First, you mentioned in your prepared remarks that pediatrics were doing well and actually better than you expected. I guess on that point, could you give us a little color around that?

And then sort of some quantification. I think you'd said that pediatric peak sales for EXPAREL could be a range of $100 million. And has your thinking changed based on that comment? And then finally, ZYNRELEF has been on the market for a couple of quarters. Have you seen any losses of P&T committees? And just any color on what you're seeing in the field from that product?

Yes. No, thanks David. For pediatrics, what we forecasted was largely off of the adult population. And so there's a number of places in pediatric medicine where physicians are using EXPAREL almost exclusively: clubfoot, scoliosis and things like that. So immediately it was obvious that our forecast was conservative because there were a number of procedures that weren't included in it at all, to be honest with you.

The big enhancement, though, is we projected that we would have a percentage of the replacement of pumps and catheters. And in fact, what we're seeing is that based on the desire of many of these surgeons who have these patients go home on the same day, they're replacing pumps and catheters totally.

And so I don't think anybody would have believed this if we told us that we were going to replace pumps and catheters totally at a number of big major centers. But in fact, that's what's happening. And we hear docs tell us all the time, "I hope I never put another one of those things in, in my life."

So it's going to be more than $100 million, David, I think, over time. Frankly, we haven't changed the long-term forecast to make it -- to improve that in terms of how it gets there and when it gets there. But it's $100 million given the pace of what we see is clearly on the low side. We were all at Rady's Children's Hospital again last week, and the drug is -- they're finding all kinds of different ways to use EXPAREL.

Again, maybe a bit of a conservative judgment on our part, but the ability to have -- a patient have a surgery, a pediatric patient to have a surgery and to go home from the hospital with mom and dad can't be overestimated in terms of what we're seeing in the marketplace. And so the pace of what's going on in pediatrics is extraordinary. And I mean, even this morning, there were several 10-box and 12-box orders from pediatric hospitals where a year ago, we would have had maybe a box, but likely none. And so it's doing really well.

On ZYNRELEF, yes. That's a short one. I haven't -- I've talked to a couple of people that were, for whatever reason or another, tried it. Nobody has decided that they're going to use it, all the issues that we've raised before. It smells, it's sticky, it's -- it forms a shell over the sutures. You got to use a different suture technique. There have been a couple of issues with infections, especially in the lower extremities.

Honestly, David, we've been out in the community a lot in the last couple of weeks. I haven't -- not one single customer has brought it up to us.

From Barclays, we have Balaji Prasad.

A couple of questions from me, Dave and Charlie. Firstly, as I understand that you're still not providing revenue guidance, but I appreciate the color on some of the other metrics.

But if I look at where consensus is right now, approximately $715 million with EXPAREL at $575 million and ZILRETTA at around $140 million. Would you be able to provide some color around these or throw some ranges around what would move both on the upside and downside? And how do you think 2022 will be with regard to your longer-term goal? That is one.

Secondly, Dave, we discussed the distributor issues around ZILRETTA last month. Could you just drill down on that a bit more, especially around the rebate inventory and manufacturing issues and what you're doing currently? And what would that mean for the cadence of ZILRETTA revenues for the year?

Sure. I don't -- on the first part, on the revenue guidance, I think if we look at history, you see -- you have a pretty good idea, and we've been quite honest about -- candid, I guess, is probably a better word, about how much we expect the product to grow every year, and that is where we are.

I think we have to keep in mind the fact that we do have lower extremity nerve block, and we expect that to be a very big product going forward. But as we said in our prepared remarks, Balaji, the C-section is growing, ortho is growing, peds growing. We're launching in Europe. So I don't -- I think that you can expect the same kind of performance on a percentage basis.

And then you have to think about adding for STRIDE in 2023 and then stellate ganglion blocks probably in that same kind of time frame, 2023. So from our perspective, our longer-term guidance is intact. I mean, I don't see it changing any -- there are some puts and takes. ASCs are growing very rapidly. Hospitals are not growing at all, low single digits.

So as the world goes to HOPD and ASC, I think basically what we built the forecast off of is happening. It's slightly accelerated because of COVID. But then COVID gives us a little bit by moving to the ASC and then it takes it back too by not having staff and not being able to do all the procedures that a facility might be able to handle. So I think long term is intact.

For ZILRETTA, I think $140 million is too high. Just to put it out there, right? I mean they did $102 million, $103 million last year, with $12 million to $13 million of that in the fourth quarter. So those 2 numbers, nothing about those 2 numbers would suggest that you're going to grow by 40% or 50% this year. And so as I've tried to say already, the manufacturing issues in terms of manufacturing product with 2 years of dating is behind us. We have that.

What we have to clean up and why it will be hard to give monthly numbers, well, first of all, the way the current rebate program that we're honoring by the way, while we replace it with our own program, that program doesn't allow you to actually have a final accounting of the numbers until the month is over. So yes -- and the quarter is over, yes. So there would be no way for us to give you a monthly accounting there. We will -- hopefully, we'll be able to provide some ranges, as Charlie said in the context, but there's no way for us to have a firm handle on exactly that.

So in the very short term, there are some things in the marketplace that we just are cleaning up relative to dating and some of the way the product was being handled in the marketplace. But that will all be behind us shortly. So if you were just thinking in general terms, and you were thinking about our products growing by 20-plus percent on an annual basis, I think thinking about ZILRETTA in that same way would put you into the right place.

And the second part of the question, Dave?

Yes, the second part around -- well, I sort of answered part of that as well, right? So what was being done was a pure rebate. You ordered so many boxes, and the rebate grew as the number of units grew. There's a bunch of problems with that from an operating system perspective, right? You let inventory run out to 0 until you can get the big discount or the big rebate at the end of the quarter. This is a fairly expensive drug at $500-plus a unit.

So expecting that our customers, especially in their office-based practices, are going to order anything close to 100 boxes all in 1 order is just not practical, right? We would rather put you in a system where you get a discount based on volume. And you know what that discount is because it's going to be for at least a year. And so the hope is then, well, as you would order it when you need it. And as we've said before, we have people order EXPAREL 3 times a week.

You would want your customers to order enough inventory so that they're going to get through the next 10 days or so and know that they can order at any time they need it at the same price rather than running the risk of running out and then having a ton of product and then running the risk of running out again. And that's what leads to the center ordering inventory that they're borderline whether they're going to use or not, right? And that's where the bleeding comes in, right?

If you order a lot of it to get the total rebate, the biggest rebate you can, but then you don't use it all because of COVID and the fact that patients didn't come into your office, and you end up having inventory that's short dated that's out of date. And obviously, that -- we have an obligation then to work with our customers to take that back, even if we're not the ones that sold it to them, and that's where we are, if that helps you.

Understood. Yes, that was very helpful. If we could just have one final follow-up on EXPAREL. Could you discuss the opportunity around high-dose bupivacaine and where all do you see applications for this?

Yes. I'll give you a little bit more than that, right? So the low dose is really for -- basically what it is, is a spinal, right? And so it will be for a very simple way that we can produce pain control in patients where spinal analgesia is currently being used. And then the corollary to that then is can we produce a lipid particle that can take more bupivacaine than the current 13.3 milligrams in EXPAREL. And the answer to that is yes.

And so we've got a particle that has roughly 40% more bupivacaine on it. And then the way these things are manufactured, we can change the triglyceride component of the product so that these lipid particles that are more potent become available to the sensory nerves on a longer-term basis.

And so we think based on the early data that we're going to have at least 5 days, and it looks like it's going to be longer than that. And so what we'd be addressing then is -- we hear from ankle surgeons and foot and ankle surgeons, the 3 days just isn't enough when you operate on somebody's ankle. There's a number of facial indications and oncology indications where it's an open procedure.

Say you're doing a debridement, and the doc would just like to be able to provide longer term of non-opioid pain control, if there was some way for them to do that. So if you thought about doing a lung resection, for example, you're in there, is there some place I can put this stuff so that the patient would get a week instead of 3 days. That's the question we're trying to answer. We have the product, now we've got to go on and do all the rest of the stuff.

From JPMorgan, we have Christopher Neyor.

Great. So the first one is on the elective procedure shift from HOPD or 2 HOPD and ASC setting, so what key trends is Pacira seeing in this channel? And any Omicron specific impacts that you would note?

Also just trying to get a better picture around EXPAREL procedure volumes across each of those channels and what their growth rates are in those respective markets?

And then maybe for the second question, could you maybe give a bit more color on the 2022 OpEx guidance in the Flexion deal synergies? You've talked about the 30% target for deal synergies and achieving that in 2022. Where do you stand versus those initial expectations with the 2022 guidance? Just trying to get a sense of what's baked in there. And to what extent could there be further upside? And then on the OpEx guidance, maybe just any more color you can provide on the cadence of OpEx through the year.

Thanks, Christopher. I'll take a shot at the first one and hand the phone to Charlie here with this very sophisticated system we've got.

So real specific data. and I'll remind everybody that the IQVIA data by site of care and by procedure is 6 months delayed. So what I'm sharing with you now is August of 2021 data. But if we remember, August was a horrible month. I still think it's all directionally correct and clearly allows me to answer your question with a lot more color, which I think is helpful for everybody.

So if we look at -- let me see. I'm just going to get myself a second piece of data here, so I don't confuse the heck out of everybody here. So let me tell you, overall, if you look at all procedures, hospitals are about 50-50, both orthopedic, what we call hard -- bony surgeries and soft tissue surgeries, and they're growing at a mid-single digit.

If you look at HOPDs, they are a slight bias towards soft tissue, which is what we would expect, given the answer what we tried to talk about on the call, it's about 55-45, and it's growing by 13%. And in the ambulatory surgery center, it's 75 ortho, 25 soft tissue, and it's grown by 18%. So you can see a clear bias.

And what you see inside those numbers, Christopher, is that the insurance companies are effectively moving their large, painful, profitable procedures, right? So if you can save 35% on the cost of care, there's a huge difference between doing a $1,500 hernia and doing a $15,000 knee. And if you can do a $40,000 spine, now you're really talking, right? And so that's what's going on in the marketplace.

And that's why you see these soft tissues gravitating more towards HOPD and into the hospital. So if you have any follow-up questions, please come back. I'm going to hand the phone to Charlie to answer your question on OpEx.

Great. That's super helpful.

So I think one of the questions you had on OpEx was overall timing. Is that what you were looking for? And synergies.

Timing for the year.

Okay. So from a timing perspective, I don't have my quarterly progression in front of me with this phone hiccup this morning, we're all rushed into one little conference room.

I can get back to you. I don't think there's anything unusual. I would just look at past trends and expect them to follow probably a similar path. And if that's not right, I can get back to you.

Just one-piece question I think -- go ahead. I'm sorry. I was just going to say. I was just going to add -- I mean you said 3%. 3% was really what we were talking about in terms of gross margin enhancement on an annual basis. The way we think about OpEx is that net-net, we think in something in the mid-single-digit range. So the whole idea of the story here is gross margins heading towards 85% revenue, high teens. OpEx, 1/3 of that, if you're thinking about it in the broadest terms, right, rather. So I don't want you to think that, that 3% was not related to OpEx overall. It was related just to gross margin improvements.

Great. And then on the OpEx front, how much is the deal synergies are really captured upfront? Is there any additional synergies you should be expecting further or later dated in 2022?

So I have to tell you, I'm really pleased with our organization and our quickness with which we've implemented changes and started to bring things in. So the 2022 guidance includes significant synergies. There might be $2 million, $3 million, $4 million better than we do next year. There are -- as I mentioned in my script, there are some transitional activities on the G&A side. Mostly that we have overlapping things for the next 6 months or so as we fully transition.

But after that, I have to tell you, I think we've done a great job with synergies. If you go back and -- I tried to lay out in my script, a path for you guys to follow from top line, margin and synergies perspective. And what we said when we acquired the company was, that we expected it to be highly accretive and that we only needed to capture 30% of our target to break even on this, and we've well exceeded that at this point.

So I don't think it's going to be significantly different going forward, and I'm pleased with where we are.

That's great context. Maybe one last one for me, maybe more on the M&A and the business development side. So I realize that you guys have just completed the Flexion deal, but I think you guys talked about staying active. And we've seen a pretty meaningful pullback in valuations for both the early stage and commercial-stage companies.

Maybe any opportunities you're seeing for acquisitions, either on chronic or acute pain space? And then maybe what's the profile of the asset, of the type of asset that you guys would be looking to acquire?

Yes. Thanks, Christopher. So they really fall into 2 buckets. There's things like spine biopharma where they're looking into degenerative disc disease, with a 7-amino acid peptide that we think can turn off the degenerative process. Those kinds of assets are meaningful. We've made an investment in that company and there's a target profile. And hopefully, on attainment of that type of profile, there would be further activity of the nature of which you're talking about, right?

There's a number of places where we're working with folks on different products for neuropathic pain, for recalcitrant pain. We have a whole bunch of different pain opportunities. Some are very broad, like diabetic neuropathy or peripheral neuropathy. And some of them are highly specific, like specific spine types of pain.

And so Rod and his team are active across a broad spectrum of opportunities. I would agree with your comment on pricing as it relates to commercial resources or commercial assets. I haven't seen anybody in the private side say that their asset isn't going to change the way we practice medicine in the world and they're worth a lot more than anybody that's been around the block for 10 minutes thinks they're worth. So the private market, in my view, needs a lot of thoughtful reflection on what their assets are actually worth in this economy.

Most of the stuff that we're working at is in that environment and folks are still very proud of their assets. And so we'll have to see where that goes. But the majority of deals that we don't do are because of just a crazy valuation and people that are pre-manned comparing themselves to a product that's on the market in terms of the market cap of the company. I mean it’s just crazy stuff, Christopher. It's unworldly in some instances.

And from Truist Securities, we have Greg Fraser.

On the pediatric market, could you be doing more in terms of sales calls or marketing spend to drive use, or would you say the pediatric effort is pretty well resourced for now? And then on iovera°, when do you expect to have visibility on the regulatory pathway for a spasticity indication?

Yes. Thanks, Greg. So in peds, I mean if you put additional resource out there, you're always going to get some additional revenue. The question is whether it's profitable revenue or whether you're just churning revenue?

I mean, I think we have to be careful here. And so we launched with a team of nurses, all hospital critical care nurses, pediatric ICU nurses, et cetera, and we were very careful to let the leaders in pediatric pain control talk to their constituents, their fellows and their residents and stuff about how they're going to use this and how they're going to replace pumps and catheters and things like that.

So the sales force is -- has been turned on. And I guess, since August now or early September maybe, the bigger sales force has been working with the community hospitals and the smaller centers. But I think the number of educators that we've got and the number of KOLs, key opinion leaders that we've got in each of the specific disease categories, suggest that the right way to do this is to take our time and to do it very well so that we don't put any little guys in harm's way.

So I think we're happy with the pace. I think as docs continue to use EXPAREL in different ways for different procedures and invent new blocks for how we can do things in kids that might be a little bit different than adults, I think if we went any faster, Greg, we would run the risk of cutting our legs off long term. I think the best thing for us to do is keep doing what we're doing and training people and making sure that a hospital is fully prepared to use EXPAREL and iovera°, all our products basically. But the question here is largely around peds.

And so I don't know, Roy, if you've got anything to add to that, let me come back, let me answer this, the second part of the question here, which I can't remember. What was the second?

Spasticity regulatory.

Yes, spasticity regulatory. Well, you know what? I'm going to give the phone to Roy Winston, who is our Chief Medical Officer, who is here with us, and he can answer both those questions.

Good, and thanks for the question. So I think starting with the regulatory pathway for spasticity, we are in the middle of discussions with the FDA right now on exactly what that is. Just keep in mind, iovera° has a very, very broad label at this point. And it's really only a small addition because it's the same process that's treating -- could be treating the same nerves even just for a different purpose.

So we feel that the 510(k) pathway is fairly well defined for this. We feel it will take one relatively small study, and we're in the planning stages of that now. We have a lot of engaged KOLs who are guiding us on what that really looks like for us. I always hate to throw out a timeline, but I do think you're going to see a lot of very fast progress in spasticity.

And we have a lot of interest already in the community since the Investor Day of several months ago. We find it to be one of the most frequently asked questions we have. And it's surprising, too, to see how many people, whether it's elderly friends and relatives with strokes that have spasticity as a byproduct of that, or families with kids with cerebral palsy, who now are going to have a treatment modality that is really groundbreaking.

So we're on it, and we're engaged. And I would expect by the next earnings call to have a lot of very specific granularity on that.

And any comments on peds other than what I said?

Yes. So peds continues to grow at a rapid rate. We have a several collaborative studies now, starting one with the Cleveland Clinic looking at major spine surgeries and for kids with scoliosis. As you know, they're one of the leaders in doing that. And another one with Shriners Children's Hospital, which could go throughout all their campuses.

And then we are -- we have a meeting which was postponed by the FDA because I guess they're overwhelmed with everything going on, but we have a meeting towards the end of March to define the regulatory pathway for the expansion of the pediatric label down to, we hope, somewhere around 6 months old, and to include nerve block in all those kids.

I think in pediatrics, the combination of lower extremity nerve blocks and the rest of these tissue plane blocks, like TAP and particularly erector spinae really are the pathways that people are using now. And if you look at the literature, there is -- almost a week doesn't go by where someone doesn't publish a case report about using EXPAREL for some new indication in pediatrics, which is very exciting to us.

And the major pediatric centers, Texas Children's, the largest children's hospital in the world, has now come online as a user in the multiple treatment modalities. And I think we're going to see it because where the leaders in the community go, everybody follows.

And Greg, I would just close that Roy raised an important topic for, I think, everybody on the call to at least have a frame of reference on. We've had several of our FDA meetings delayed for all the different things that they're going through and the same kind of staff shortages that we've referenced in other places.

So it's very difficult to figure out what a timeline is when it's very difficult to know exactly when you're going to be able to meet with the FDA. So just something else to keep in the back of your mind as we go forward.

And we'll now turn it back to Dave Stack, Chairman and CEO, for closing comments.

Thank you, Brandon. I'd like to thank all of you for participating and listening to today's conference call. We look forward to keeping you updated on our progress. Next up for us is the Barclays Conference next month. Thank you all, and stay well. Goodbye.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.