Pacira Biosciences Inc (PCRX) 2016 Q1 法說會逐字稿

Thank you for joining Pacira Pharmaceuticals' first-quarter 2016 financial results conference call. (Operator Instructions) Please be advised that this call is being recorded at the Company's request and will be archived on the Company's website for two weeks from today's date. At this time, I would like to introduce Jessica Cho of Pacira Pharmaceuticals. Ma'am, you may begin.

Thank you, and good morning, everyone. Joining me on the call today from Pacira are Dave Stack, Chief Executive Officer and Chairman; Jim Scibbeta, Chief Financial Officer and President; and Scott Braunstein, Senior Vice President, Strategy and Corporate Development.

Before I turn the call over to the management team for their prepared remarks, I would like to remind you that certain remarks made by management during this call about the Company's future expectations, plans, outlook and prospects, and statements containing the words believes, anticipates, plans, expects and similar expressions constitute forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are based on assumptions that the Company believes are reasonable and that are subject to a wide range of risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Many of these and other risks and uncertainties are described in the risk factors section of the Company's most recent annual report on Form 10-K for the fiscal year ended December 31, 2015 and in other filings with the SEC which are available through the investors and media section of the Pacira website at www.pacira.com or on the SEC website at www.SEC.gov.

During the course of this call, we will also refer to certain non-GAAP financial measures. Definitions of these non-GAAP financial measures, and reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, are included in the earnings press release for the quarter.

And with that, we will hear first from Dave.

Thanks Jess. Without any FDA warning letter overhang or the requisite need to raise additional funds to support our operations, the first quarter of 2016 for Pacira marked the start of aggressive investment in the future growth of our business and our flagship product EXPAREL, the only non-opioid long-acting analgesic formulation of bupivacaine, and our DepoFoam-based pipeline products.

Integral to our strategy of broadening EXPAREL access to as many patients and health care providers as appropriate, we shared our plans to provide the medical community with guidance on procedure-specific techniques and administration in surgeries of interest, all as we seek to capitalize on multiple upcoming tailwinds.

Specifically, bundled payment health care reform, the growing social and political movements to curb the opioid abuse epidemic, and the increasing focus on enhanced recovery initiatives to provide guidance for major academic centers on the best practice across a broad range of surgical procedures.

In the first quarter we invested in training our field organization on all aspects of the updated package insert as a result of the rescission of the warning letter in December of 2015. This is a great time for Pacira, as our customer-based teams again have the opportunity to work with healthcare providers on positive patient-based discussions after the clarity around the label for EXPAREL, including transversus abdominis plane blocks and infiltration during oral surgery.

In Q1, we hosted productive discussions and follow-up meetings from the American Academy of Orthopedic Surgeons, meeting with major orthopedic care providers at the American Society of Regional Anesthesia meeting around TAP blocks with EXPAREL and at the American Society of Enhanced Recovery, where multiple presentations were given on the use of EXPAREL for non-opioid pain control in enhanced recovery protocols across multiple procedures.

We believe bundled payment through the CMS mandatory comprehensive care for joint replacement model, and the impact of reduced length of stay and discharged to home will compel hospitals to modify their pain management protocols with EXPAREL as the basis of a multimodal pain strategy in order to improve patient outcomes and significantly reduce hospital downstream costs -specifically, the high cost of patient discharge to skilled nursing facility or rehab facility- which make up approximately 50% of the total episode of care in hip and knee replacement surgery for CMS patients.

We know that EXPAREL as part of a bundled payment protocol can lead to significantly improved patient and economic outcomes from the positive results gathered from early adopters of BPCI, the predecessor of the current CMS bundled program.

For example, Hackensack University Medical Center was able to increase patients discharged to home versus skilled nursing facility from approximately 20% to over 60% since initiating the bundled program three years ago, providing a material improvement in hospital economics. St. Luke's Medical Center in Phoenix, Arizona, was able to cut their total episodic cost of care by nearly $4,500 since initiating their bundled program with EXPAREL as part of a multimodal pain protocol.

Clearly, using a local opioid-sparing approach in pain management with EXPAREL can substantially reduce hospital resource consumption and promote faster patient mobilization, decrease risk of fall, shorten hospital stay, and increase patient satisfaction and discharge to home, which ultimately makes a significant difference in hospitals' reimbursement and bottom lines.

Our strategy is to work with hospitals and surgeons who have successfully implemented these bundled programs to provide critical information and experience to hospitals and physicians who are initiating their bundle.

In this evolving healthcare environment, our continued work with major academic centers to institutionalize EXPAREL into their enhanced recovery protocols for a broad range of procedures is particularly relevant. Enhanced recovery protocols provide a roadmap for the best practice throughout the surgical environment, including total IV anesthesia, fluid management, nutrition and pain management without the heavy reliance on opioids, thereby improving postoperative outcomes such as patient satisfaction and length of stay.

We have shared with you various examples of success at leading institutions such as Mayo Clinic, Houston Methodist, Cleveland Clinic, MD Anderson and Memorial Sloan-Kettering, particularly for soft tissue procedures like breast reconstruction, GYN oncology surgery, abdominal, thoracic, bariatric and bladder surgery.

A recent example of this opportunity is the data presented by Sean Dowdy from Mayo Clinic in GYN oncology surgery at the Society of Gynecologic Oncology Meeting in San Diego. The enhanced recovery study in 193 GYN oncology patients demonstrated that EXPAREL was similarly effective in reducing pain with reduced ileus and nausea and reduced the need for patient-controlled opioid analgesia and rescue IV opioid use, demonstrating that patients have pain control with fewer narcotics.

Last week at the ERAS World Congress in Lisbon, a Memorial Sloan-Kettering Cancer Center study recognized EXPAREL as one of several important elements for its breast reconstructive surgery enhanced recovery protocol that can lead to significantly reduced opioid use and one-day reductions in the hospital length of stay.

Similar positive outcomes have been replicated and standardized through enhanced recovery protocols, particularly in light of the rescission letter and the affirmation that EXPAREL TAP blocks are on-label. Penn State Hershey Medical Center presented their colorectal surgery enhanced recovery protocol at the American Society of Colon and Rectal Surgeons, demonstrating that a TAP block with EXPAREL versus a TAP block with bupivacaine or ropivacaine resulted in significantly lower pain scores in the first 48 postoperative hours and significantly reduced opioid consumption in the EXPAREL arm.

In another recently published study, investigators from Cleveland Clinic demonstrated that TAP administration with EXPAREL was comparable regarding pain scores and reduced opioid consumption and length of stay when compared to an epidural catheter-based regimen among patients undergoing large abdominal procedures.

In this study, 8% of patients in the epidural catheter cohort experienced the clinically meaningful adverse event of hemodynamic instability. Based on these findings, we are supporting a randomized controlled trial comparing TAP with EXPAREL versus pain control with an epidural catheter in large abdominal surgery, supporting our strategy to develop EXPAREL to allow improved time to discharge by eliminating the need for catheters and pumps.

In collaboration with MD Anderson, we are also initiating and enhanced recovery protocol comparing EXPAREL with bupivacaine in GYN oncology surgery. We expect to initiate other studies in collaboration with leading medical institutions assessing the added benefits of including EXPAREL and enhanced recovery protocols through academic collaboration in bladder surgery and bariatric surgery.

As part of our strategy to standardized administration and technique sensitive procedures, we are initiating randomized controlled trials to establish current best practice and minimize any variability in outcomes. We are enrolling a total knee arthroplasty randomized controlled trial with several critical elements. Increasing the total volume to be infiltrated to 120 milliliters, utilizing a bupivacaine bridge, mixing EXPAREL and bupivacaine in the same syringe, and providing a highly descriptive infiltration technique, including infiltration into the posterior capsule and periosteum. We expect top-line results by the end of this year. We are also planning a trial in spine surgery another technique-specific procedure in the second half of 2016, with top-line results expected in 2017.

Staying with infiltration, we are targeting our oral surgery launch around the annual meeting of the American Association of Oral and Maxillofacial Surgeons in September. We have submitted the data from the oral surgery trial as an abstract for this meeting, and a steering committee for the trial is preparing a manuscript of the trial results. In support of the use of EXPAREL and oral surgery procedures, we expect to have a 10 milliliter vial as well as a four pack vial configuration in the market by the end of Q3.

We have also initiated two placebo-controlled phase 3 nerve block trials: one is upper-extremity brachial plexus nerve block; and the other in lower-extremity femoral nerve block. The femoral nerve block trial is informed by our previous study which was published in the March Journal of Anesthesiology. We anticipate top-line data by the end of 2016 and to file an sNDA in Q1 of 2017 to add a nerve block indication to the EXPAREL package insert.

We continue to develop EXPAREL programs for chronic and pediatrics. We had a productive meeting with the FDA in Q1 agreeing to a path forward for the pediatric opportunity. We are submitting a protocol for 12- to 17-year-old patients and we look forward to initiating clinical trials in this patient population.

Most of all, we are particularly excited by the momentum building from the public outcry against the abuse of opioid prescription drugs. Manifest through last week's Chris Christie-sanctioned prescription monitoring program partnership with New York State, the recent national prescription drug abuse and heroin summit in Atlanta, and President Obama's subsequent proposals, and the CDC's recent guidelines for prescribing opioids, specifically on how opioid therapy for acute pain such as low-risk surgeries leads to long-term opioid use and abuse.

We have ramped up our efforts to work together with the government agencies, advocacy groups and the media tackling the source of the opioid epidemic in the acute setting, where it can start, rather than just mitigating the consequences on human life after the fact. And we are encouraged to see our customers who have first-hand experience with the impact of an opioid-sparing approach to postsurgical pain management standing with us to spread the word.

For example, on a previous call you may remember us mentioning Jacob, a 21-year-old former opioid addict from Massachusetts who delayed his shoulder surgery until he could no longer stand the pain because he feared for re-exposure to opioids. Jacob's orthopedic surgeon utilized EXPAREL as part of a multimodal pain management regimen, and Jacob recovered without needing any of the opioids he was so fearful of receiving.

That surgeon, Dr. Scott Sigman from Lowell General Hospital, is a recognized advocate for opioid reduction in the hospital setting and recently published an opinion article on the subject in the New York Times. Importantly, Dr. Sigman has now been appointed by Massachusetts Governor Charlie Baker to provide first-hand insight and recommendations on how hospitals can treat postsurgical pain with a reduced reliance on opioids as part of a newly developed statewide commission.

With the anti-opioid movement gaining speed and traction, multiple key tailwinds in the health care reimbursement landscape, no clinically useful competitor to EXPAREL in the near or immediate term, and immense leverage on the manufacturing, commercial, clinical and financial side of the business, we are confident and optimistic that EXPAREL is on track to become a blockbuster brand.

As we started this discussion, we have solid strategies in soft tissue procedures around TAP and enhanced recovery protocols and in orthopedics around CMS bundles for total joints, randomized trials in knee and planned trial in spine, as well as nerve block phase 3 trials, which are primarily orthopedic indications.

You can understand that the rescission of the warning letter and the revised package insert have energized our Company and our customers. Moreover, we look forward to the pipeline opportunities based on our proprietary DepoFoam delivery technology, which provides a 505(b)2 regulatory pathway for future DepoFoam-based products and can diminish clinical development costs and time to market. We currently expect IND approvals for DepoTranexamic acid and DepoMeloxicam, with a phase 1 study to be initiated with DepoMeloxicam and a phase 2 study initiated with DepoTranexamic acid in the back half of 2016.

We look forward to sharing additional information on these DepoFoam products as well as additional DepoFoam product candidates over the next several quarters.

And lastly, as you have seen from our press releases this month, we have also fortified our leadership team with key hires: Bob Weiland, our new Chief Commercial Officer, and Charlie Reinhart, our new Chief Financial Officer. Bob and Charlie will help us to properly resource, lead and realize the execution of the opportunities for EXPAREL and our pipeline that we've highlighted with this call today.

And with that, I will turn it over to Jim for his overview of financials and manufacturing updates.

Thanks, Dave. Let me start by summarizing the overall results in the first quarter, which I would characterize as establishing a solid foundation of FDA resolution for future growth acceleration in making EXPAREL a much larger brand than it is today.

We announced EXPAREL revenues of $63.8 million, a 14% increase, compared to reported $56 million in Q1 of last year.

Looking at quarter-over-quarter sales and unit volume growth, with Q1 2015 adjusted for the buy-in that resulted from a price increase that was announced in March 2015, as effective April 1, 2015, we saw an increase -- an 18% increase in sales and a 13% increase in unit volume.

We believe this adjustment of Q1 2015 provides the best path to an apples-to-apples comparison when evaluating year-over-year trends. And you may recall we were proactive and have been consistent with this narrative since reporting Q1 2015 numbers.

To make the connection to my commentary in our 2015 call a year ago, quote, we estimate there was a modest buy-in impact on Q1 sales of about $2 million resulting from the price increase, unquote.

Note that our revenue per unit of sales was also impacted by the meaningful price reduction in our Department of Defense business this quarter compared to Q1 of 2015, resulting from the Federal supply schedule agreement that we previously disclosed we signed last September. The DOD volume we did this quarter would've resulted in $0.5 million more revenue at that old pre-FFS agreement price.

As of Q4 -- as of the end of Q1, sorry, a total of 4,041 accounts have ordered EXPAREL since launch, an add-on of 124 new accounts this quarter.

Consistent with our comments in prior quarters, our business continues to have a seasonal component to it which supports our focus on year-over-year revenue analysis, as opposed to quarterly sequential revenue analysis, particularly Q4 to Q1. A large portion of our business is for elective procedures. And because of healthcare insurance dynamics around deductibles and co-pays, we can expect there to be frenetic activity in Q4, that steals significant volume from Q1.

In Q1, non-GAAP gross margins were 71%, compared to 72% in Q1 of last year and 73% for all of last year. This is in line with the soft guidance I provided in February indicating that we wouldn't be reaching peak gross margins in 2016 since we are purposely moderating our production output in our science center manufacturing facility to account for the inventory build we achieved last year.

Total non-GAAP operating expenses were $59.2 million. I just commented on margins, which of course come from our COGS. And there was nothing unexpected on the R&D and SG&A front either.

Non-GAAP net income was $5.7 million, or $0.14 per diluted share. Stock-based compensation was $8.5 million, constituting 8%, 9% and 16% of COGS R&D and SG&A, respectively, on a GAAP basis. Adjusted EBITDA for the quarter was $9.5 million, and we finished Q1 with cash and investments of approximately $163 million.

On the manufacturing front, just a quick update that last quarter, I noted we were tracking along our projected timelines for our three major EXPAREL expansions -- capacity expansion projects. The first Patheon suite to make EXPAREL is a replica of our current suite C facility in San Diego; the second Patheon suite for EXPAREL, which is an expanded 200-liter system; and the EXPAREL spray system at a to-be-determined site.

The targeted approval of the first suite has shifted from Q1 2017 to the middle of 2017, with no discernible consequences for our business as we fine-tune the skids in preparation for the drive towards registration batches in the approval process. Both the 200-liter suite of Patheon and the EXPAREL spray system remain on a targeted 2019 approval timeline.

Looking ahead, we are affirming the 2016 expense guidance we provided for our R&D and SG&A expenses. So on a non-GAAP basis, excluding stock-based compensation, we expect R&D expense of $60 million to $70 million and SG&A expense of $125 million to $135 million.

As noted in December and February, we would like to see a few quarters under our belt post FDA resolution before evaluating the reinstatement of EXPAREL revenue guidance and related gross margin guidance. Our new CFO, Charlie Reinhart, starts in that role tomorrow, so he will have the opportunity to lead this discussion amongst our executive team as we move ahead.

More generally speaking, though, on the outlook, we are investing to make EXPAREL a blockbuster brand, so let's first level-set by looking at where we are today. We just completed our 16th quarter, our fourth full year since the launch of EXPAREL. With a little under $600 million of cumulative sales in that timeframe, we don't know of another hospital product launch that has attained this level of commercial success. Assuming one vial is equal to one patient, EXPAREL sales to date translate into the treatment of over 2 million patients. And all of this was achieved in an environment when the broad scope of our approval was questioned in the marketplace by some from the beginning, and this dynamic was exacerbated by regulatory action in late 2014.

As you know, that has recently been rectified. So in our future, just starting really Q1, we promote EXPAREL and infiltration to the broad indication. And as Dave noted in his remarks, there's a different dynamic with our surgeon and anesthesiologist customers in 2016, most notably a shift from bad guy to good guy receptivity given the FDA resolution. And also a growing understanding and acknowledgment that EXPAREL is extremely effective when, but only if, administered appropriately. This is especially important in our ortho business, which is our largest segment to date. And within the enormous soft tissue opportunity, the FDA settlement clarified that TAP procedures are included in the current infiltration indication. And this year, the TAP workshops at the national meetings like ASRA and ASER that Dave referenced have all been oversubscribed.

We look for further momentum from the three big exogenous factors we have emphasized that we believe work in our favor: the Medicare bundled payment initiatives; the proliferation of enhanced recovery protocols; and the societal exasperation and now remedial action pertaining to the overprescription of opioids.

And, further, we have in our future the expansion in oral surgery targeted for the end of Q3 and a targeted expansion into the significant nerve block opportunity in the second half of 2017. All told, the factors that contribute to long-term growth are abundant and significant.

But regardless of the comprehensiveness of the value proposition of EXPAREL, it's 2016 in America so we continue to operate in a price-sensitive environment for pharmaceuticals. And it would be unrealistic to expect all of our customers to immediately respond to all of the factors that we think favor EXPAREL for their benefit as paying customers and for patients.

For example, it's a year before the economic consequences of the new bundled payment initiatives will be felt by our customers. So we forge ahead with the education about the topic today, knowing the benefits aren't all immediate.

Also as we have noted, we are working through the process of hiring up to 20 new reps and training all of our sales force on the new label. And the business that comes from these promotional efforts takes time to translate materially into sales. And, similarly, for MDs recently educated on and excited about TAP, it will take them some time to revise internal protocols before they drive a considerable uptake in product usage.

Putting all these dynamics together, we think we have just scratched the surface of the potential sales of EXPAREL overall. And just focusing on 2016, we continue to look towards the second half for an acceleration of the rate of sales growth.

Finally, since this is my last call in this role, I just wanted to communicate explicitly what an honor it's been to serve you, the investment community, as the Pacira CFO since our 2011 IPO. I certainly don't need to be melodramatic like Bruce in saying that I don't want to fade away. And, in fact, I will be presenting at a few conferences in the next few months as Dave, Charlie, Scott Braunstein and I divide and conquer on IR front.

But as we all know, the role and responsibilities of the CFO are certainly unique. So this is indeed a transition for me and for you. I've been truly blessed working with the Pacira legal team, led by Kristen Williams, and the finance team we have built, led by Lauren Riker, as they and their teams do all the great work to facilitate our management team putting timely and transparent information into the public domain.

Looking ahead, I'm very excited to be able to fully focus on the organizational leadership responsibilities I have to help grow the business and drive shareholder value to a whole new level. And I feel we got lucky to bring in Charlie, who I'm certain will be a great partner with Dave and the investment community starting tomorrow, when he assumes the CFO position.

And what that, Liz, we would like to open the call for our Q&A session.

(Operator Instructions) David Amsellem, Piper Jaffray.

Just a couple. First, can you give us some qualitative commentary on what you are seeing in terms of receptivity from hospital pharmacists, PNC committees, particularly in March and April as elective procedures pick up? I know you are guiding to second-half acceleration. But is it reasonable to potentially see that in the second quarter, which typically is better seasonally versus 1Q? Thanks.

Thank you for the question, David. It's all -- there is no single answer to that question. We have places where TAPs and ERAS programs have been institutionalized and are very strongly held. We've got places where, even post warning letter, it's been difficult to schedule meetings. And so some of the bigger for-profit places have been more difficult for us to move against the warning letter rescission.

And so I can't tell you that there is a single answer to that, David. I would say that we see great momentum in the marketplace around ERAS programs and especially around TAP, as both Jim and I outlined. And we have a lot of interest in bundles. Whether that's going to pull through in boxes or not in Q2 is really difficult to say.

Okay. And then secondly, can you talk about the size of the sales force? I guess your -- after the hire -- the 20 new reps, are you contemplating further additional headcount expansion, particularly after the launch in oral surgery, and more of a focus in outpatient centers? And then also can you give us any color, quantitatively if possible, on the mix of usage between outpatient versus inpatient use of EXPAREL? Thanks.

Sure. The size of the sales force net out in the neighborhood of 120, David. And we think for the oral surgery opportunity and for the ambulatory center business as it exists, that's the right number. And so at the end of every year, we do an exercise where we look at total resources and how those resources are going to be allocated. So I think you would expect us to do that again at the end of 2016 for 2017 looking at nerve block, where you would expect that there would be some resource enhancement around our belief that we are going to get a nerve block indication.

In terms of in and out, David, ambulatory versus inpatient, it hasn't changed much. Roughly 90% of our vials are sold in the inpatient environment. And if you look at the outpatient environment, it is roughly 10% with -- our best estimate is roughly 5% is plastics and 5% of that is other. So, to date, you haven't seen a large move in the outpatient environment to the freestanding, primarily physician-owned ambulatory care centers, which is the way the data is presented.

If you look at the data, David, and it's outpatient procedures that are attached to a hospital, where a hospital as administrator is making a decision to move that patient to a 23-hour-stay environment, we are getting a significant percentage of that business. But it is bought through -- the drug is purchased through a central pharmacy, so we have no way of carving that business out. So my 10% number was related to pure outpatient ambulatory centers that are many times physician-owned.

Okay. All right. Thanks.

Douglas Tsao, Barclays.

Just maybe if you could help us understand -- Dave in particular, you are talking a lot about the opportunities with these ERAS procedures. What are the basics or the surgeries that are taking place where you see the biggest opportunity from these ERAS protocols?

Good morning, Doug. It started with colorectal and was largely the European phenomena at the time with a physician named Henrik Kehlet, who is really the godfather of ERAS.

And most of them, Doug, have been soft tissue directed. I don't say that because there isn't a need in orthopedics, but people -- the orthopedic protocols have really been more aggressively adopted than soft tissue has. The soft tissue surgical procedures have been all over the place. So it started with colorectal. Now at the meeting, you saw a lot about reconstruction, both breast and abdominal. There's a number of presentations that were made on bariatric surgery and on abdominal surgery.

So it is mostly soft tissue stuff, but it's -- I don't think it's because there isn't a need in orthopedics. I think it's because protocols and orthopedics have been widely adopted already.

Okay, and --

Doug, it's Scott. I'm going to jump in as well. I agree with Dave. I think what you see in orthopedics is really the equivalent of an ERAS protocol, but it's just not called an ERAS protocol. The soft tissue guys have adopted that. As a reminder, the trial that we are doing with MD Anderson, that GYN oncology trial, that is also a well-established ERAS So you tend to see ERAS protocols where the hospitalization days are longer, high opioid use. The ovarian cancer group at MD Anderson, for example, had close to a 10-day hospitalization before their ERAS protocol had cut it to five days. Now, we are working with them to reduce the opioid burden in those patients.

So I think where you see those longer procedures, you see them starting rippled procedures, other long hospitalizations. As Dave mentioned, it's really our opportunity.

Okay. Great. Thank you. And then just in terms of TAPs, I know about a year into the launch, that was a very strong area for you. After the warning letter, did that really reset back? Or is it just simply -- did it flatline and you are now starting to see growth again?

I think there's been interest in TAP as a procedure in the medical community all along. Because what happened is we launched -- we started to get significant traction. Then there were a number of questions at the societal level and at the journal level about whether TAP wasn't included in our package insert or not. And so, I think we saw TAP level off.

And now with the rescission letter and specifically the letter from Janet Woodcock stating that it is a field block and therefore in the current label has helped us a lot. And as we said during -- as Jim said, actually, during the prepared remarks, you see great enthusiasm now for the use of EXPAREL and TAP. And at all of the national meetings, you can't get in any of the TAP programs.

Yes, and just to add, Doug, when we first got into this, not a lot of anesthesiologists were doing TAP when we started our launch, and, more independent of us, have adopted the procedure. And the anesthesiology community is thoughtful -- respectfully thoughtful about the use of the drug. And so I think that the fact that we have been on the market for a lot longer, in addition to the fact that it's clearly on-label but just the fact that it's been out there longer, it's just created a different dynamic today with the anesthesiologists.

And lastly, Doug, I would mention that the use in TAP, at least the way we've instructed during our workshops, is dependent on the availability of handheld ultrasound machines. And that continues to change as well. And without the appropriate technology, this is not a procedure that we would be recommending in our workshops. And so as you see the use of those machines grow, you see the opportunity for TAP to grow with it.

Okay, great. Thank you very much.

Irina Koffler, Mizuho.

I was wondering if you could provide an overview of other procedure types where the 10-milliliter vial can be used in that incremental market size.

And then my second question is what are you doing to assure protocol adherence in the nerve block trials, and how frequently are your sites being monitored? Thanks.

I will start with the 10-milliliter, and then -- well, I guess we can chip in on the monitoring of stuff. The 10-milliliter is clearly being launched in concert with the dental launch, Irina. We've had a number of requests from the plastic surgery community for small biopsy-type procedures and small procedures where there just isn't any room to reject the 120 milliliters -- or, I'm sorry, 20 milliliters of EXPAREL.

In addition to that, we believe that there will be -- in the nerve block trials, we are studying a 10-milliliter dose and a 20-milliliter dose. And so it is highly likely that in some of the smaller nerve surgeries, specifically around wrist and ankle, that you would expect to have a smaller 133-milligram dose, which is the 10-milliliter vial.

For the nerve block trial, let me frame this first. This is an anesthesiology-driven trial. And all of those folks have ultrasound machines. And at the investigator meeting, we brought in ultrasound machines and had experts in the space retrain everybody again on how to use ultrasound for a nerve block procedure. And you would expect that during this protocol, we will monitor those sites aggressively.

I don't know what else to tell you other than the fact that we have trained the heck out of them. And when we bring them up, we train them again. And I think that you will have broad exposure to folks that use EXPAREL and then folks that are experts in ultrasound. So I think we've done everything we can do.

Thank you.

Scott is out there all the time, Irina. Let me ask him if he's got any other comments.

The one thing I would say, the clinical team is working really hard for not only the nerve block studies but the pillar study. They are visiting sites aggressively before the first patient is enrolled. They are monitoring the first patient enrolled in the trial. They are following up on a very regular time schedule. And we are making sure that from data collection, we have a very up-to-date system to review sites and to continuously monitor all those sites for quality. We feel highly confident that from a quality standpoint, we will be generating the data that is necessary for all three of the trials.

And pillar is the TKA trial, Irina.

Tazeen Ahmad, Bank of America.

I apologize. I'm on multiple calls this morning, so if you addressed this in your prepared remarks, I'm sorry about that. I just wanted to get a sense, maybe David -- in terms of your key surgeries historically -- the general surgery, the plastic surgery, and cosmetic surgery -- can you give us a sense of how much of the current use is coming from new users now versus people that are repeat users?

It is hard to look at the data by users. We look at it by institutions and by purchasers, Tazeen. I think we will see an uptick of use in the retail environment. You mentioned plastics in the question. We have had multiple discussions around not only the 10-milliliter but the four-pack. There are smaller plastic surgery practices where buying 10-, 20-milliliter vials is a material financial commitment. And being able to buy four vials either of the 10-milliliter size or the 20-milliliter size, we think will enhance the use there.

It is really seasonal and it's so dynamic, it's changing all over the place. I don't -- it's hard to find clinicians that have used EXPAREL and stopped using unless there's some financial pressure on them in order to not use the product. And I don't know -- past that, I don't have any data that I can share with you that tells you that I know that a certain prescriber or certain prescriber group is using more or less. I think everything is still growing. Some are growing faster than others around TAP in some of the enhanced recovery protocols, for example.

Okay. Thanks for that color. And then maybe can you talk a little bit about the dynamics of getting back on to PNT lifts with hospitals? Let's say that EXPAREL is not on a particular hospital's formulary. How restrictive is that, then, for a doctor if he or she wants to use EXPAREL as a one-off basis on a particular type of surgery?

Again, I'm going to sound like a broken record here -- it's all over the place. We've got places where the drug is not -- where the product is not formally on formulary, but it's okay to use it. We've got places where it can be used, but against an enhanced recovery protocol. So one of the ways for us to use these enhanced recovery protocols is to work with the local institution to make sure that EXPAREL is used in the procedures where they see the major benefit. We've got places where we are working with entire systems to put EXPAREL on formulary in -- against the ERAS protocols and the procedure protocols for whole medical systems that -- these are new discussions as of the last several weeks. And then we've got places that, frankly, just won't allow access to EXPAREL and they just don't order it.

So if the doc doesn't have access to it, we see people move those patients to an outpatient facility. We've had several examples of where physicians have not only taken their patients across the street to a hospital that does have EXPAREL. We've got cases where patients are demanding EXPAREL. And if the patient doesn't -- if the physician doesn't have access, they are either going to another physician or another hospital. So, again, it's a very dynamic environment.

And the docs, in some cases, feel like they are exposed here because as the public demand for opioids bearing technologies continues to grow and some of these hospital systems continue to limit access to EXPAREL, you can feel that many of the doctors who are treating these patients are exasperated by the inability to have access to the product.

Okay. Thanks. And then I guess the last question I have is just in terms of your timelines of moving patients off of the infiltration formulation onto spray. I think your last update was that you think spray would be online in the 2019 time frame. Is that still the case?

Yes, that's -- from a big planning perspective, that is still the timeline we are on. Just let me accentuate that is absolutely no difference between these two formulations. It's a difference of whether it is made in a batch or whether it's made by what we call the spray process. But the EXPAREL and the vial and the way the customers sees EXPAREL and uses EXPAREL will be identical to what it is today. The main drivers are the manufacturing COGS and the royalty and the tech strategy and all the stuff Jim has talked about a whole bunch of times.

Okay. Great. Thanks for taking my questions.

Donald Ellis, JMP Securities.

I would like to go back to David's questions. I think one of the first questions regarding -- I think what he was asking -- regarding the seasonality between the first and the fourth quarter exclusive of the CMS bundling seasonality there. But the seasonality we've seen between the fourth quarter and the first quarter seem to be much more significant this year for who knows what reasons, whether deductibles reset, co-pays, patients change plans. Did you see seasonality in the first quarter more significant? And can I -- when in the year do you think that is going to reverse and we will see more procedures?

The next question is could you give us a few more details on the nerve block phase 3 trials with respect to timing, the numbers of patients and when you expect to be filing an sNDA? Thanks.

Thanks. First on procedures, it's been pretty consistent over the last few years, Don, that there is disproportionality between Q4 and Q1. The stronger Q4 is, the weaker Q1 is, because a lot of those procedures as you state related to insurance issues are pulled forward and therefore not available.

The pattern has been that you see some rebound in Q2, and I think that's what David Amsellem was asking about. And then Q3 grows very modestly over Q2 for many of the same reasons of vacations and procedures being done. And then Q4 is always our strongest quarter by quite a lot for the opposite reason that Q1 is relatively weak.

I would say, Don, that what we are working on with TAPs and ERAS programs and stuff is that the seasonality is almost entirely related to elective procedures. When somebody finds out they've got colon cancer, they are not trying to plan their vacation and stuff. And so there is a basis of emergent procedures. And as we grow TAP and as we grow the ERAS procedures, for example, you will see those normalize. And then as we do the other trials, you're going to see them mostly done in orthopedics.

So I think this is going to be a situation that we live in -- live with, but it always is Q1, Q2, Q3 and then a whopping Q4. And we've seen that now for the last several years. So I wouldn't say there was anything peculiar about Q1 this year. I'm looking at Jim, so if he wants to --

No, I agree. It really coincides with our launch. This really was something that we started to see significantly in 2013, but it hasn't -- I think it is permanent. There is a dynamic where everybody knows now that the ORs are going to be really full in Q4. We won't let our sales force be distracted in Q4. And then a lot of the surgeons will be taking vacations in Q1. It came out of the dynamics of payments, but I think it's embedded into our economy now.

So -- the nerve block trials, Don -- so there's 300 patients in each of the two trials, brachial plexus and femoral nerve block. That is up on Clintrials.gov, so if you want to take a look at it for more color, you'll see it up there.

The focus for the FDA trials is on upper and lower extremities. The upper is a brachial plexus block, and the procedures of interest in that scenario are a rotator cuff procedure and a shoulder arthroplasty. And then it's a redo of the femoral. And as I mentioned in my script, you can get a sense of what we saw in the original trial, it was published in anesthesiology a couple weeks ago now.

And what the FDA asked us to do was to follow all of those patients out to Cmax and Tmax. And so there have been a couple of other adjustments looking at 133 as well as 266; so, a 10-milliliter vial and a 20-milliliter vial. But other than that, it's pretty much a redo of the trial that we've already done. And we already have data on that will give us a lower-extremity data set and an upper-extremity data set, looking for a broad label for a nerve block indication.

We expect to have this trial complete enrollment by the end of the year. Assuming that we are successful with that, we would file an sNDA in Q1. And then according to the PDUFA rules, this would be a resubmission based on the fact that we have already submitted a set of data on femoral nerve block, and that would trigger a six-month regulatory pathway. If all of that works out that way, Don, we would launch into Q4 of 2017.

Great. Thank you very much.

David Steinberg, Jefferies.

First question -- I was wondering if you could give us an update on the chronic pain opportunity. I know in the past you have indicated this is a pretty large opportunity for you.

And then secondly, looks like the last couple of quarters, your base infiltration indication has grown about 14% year over year. I was wondering what can get the sales trajectory higher on this indication? Or should we view this as the new baseline? Thanks.

I don't know that number, David, of 14% for base infiltration. Well, I think -- go ahead.

I think maybe he's just referring to the -- roughly what the volume increase was.

Oh, I see, I see. Yes. I'm sorry, David; I missed that one.

No problem.

I think we are working on it from the perspective of all the things we talked about today. Take out the opioid epidemic that I think is the standalone vertical. We think that institutionalized -- so when most of the soft tissue infiltrations are the majority are relatively low margin procedures for a hospital. And so that is why we've been working with them on how you make that decision to use a $300 product in an environment where there is not a huge motivation from a profit perspective like you would see with spine surgery or orthopedic surgery for example.

As people gain experience with EXPAREL and start to see the benefits, then than moving them to an enhanced recovery protocol where everybody that comes in to the institution in these different procedure sets is treated with an ERAS protocol that has exactly the same elements to it. And that always includes EXPAREL when we have been involved. So there's multiple ways there that we can increase the infiltration business, exactly the same thing in TAP.

TAP -- the strategy is a little bit different because it opens up a whole new customer base for us. The primary basis of infiltration without TAP is the surgeon or somebody on the surgical team. As you move into TAPs, the primary audience becomes anesthesiologists. And so if we can institutionalize the use of EXPAREL, not only do we get the benefit of revenue, but as those fellows and residents rotate, you will see people that have only treated patients with EXPAREL against these various difficult pain profile procedures. And then opening this -- the opportunity up for TAPs and anesthesiologist is not only important for what technically is an infiltration procedure, but allows us the opportunity to start to work with anesthesiologists and have a relationship with anesthesiologists in advance of the nerve block indication next year.

Dave, maybe you want to talk a little bit about spine or --

Dave Steinberg, it's Scott. I think one important area on the infiltration side that Dave did mention is spine, certainly. We've had very good share historically in knees and hips. Our spine business has been a smaller component of the business. But when you look at spine from a procedural standpoint, it certainly ranks in terms of just open lumbar procedures, open spinal procedures. The numbers rank very similarly to that of total knee. Narcotics used are quite meaningful in that procedure. You do not use epidural catheters typically for spine procedures because the surgeons don't want to risk infection. So we have a great opportunity in the spine world to really infiltrate that marketplace, and that is the major reason behind our spine study that we'll start at year-end.

So that's another big orthopedic indication that we are thinking very long and hard about and see as a great opportunity for growth.

And just one thing I want to add, too. We talk a lot about what we are doing as a Company in educating surgeons and the anesthesiologists. But I do think it will be interesting to keep an eye on society's reaction to the opioid epidemic because I think we feel like we've been talking about it for a couple of years, trying to educate the world that it is something that is impacted by people that are opioid-naive coming into the surgical suite and getting the introduction to opioids there.

But with all the legislation recently -- and we've had some surgeons tell us that they are raising their eyebrows about what their legal liability is. If their post-discharge Percocet use goes beyond a certain amount of days and something happens. So at some point, it's just sort of a question of is this a gradual thing that impacts our business, or is there a tipping point. And we are just going to have to keep an eye on it. But you certainly see some things recently that would suggest that it's not just us screaming from the rooftops; it's society is looking at this and saying what are we going to do about it.

So then, David, for chronic, the -- we've been consistent I think in saying that we would do some phase 2 work around looking at the cess joint injections and gaining a better understanding of bupivacaine and exactly what the flow dynamics are when you put bupivacaine into a small body space like a facet joint. Partly guided by we have reports that patients have several weeks of relief from a product that has a -six or a seven-hour half-life. And so we need to understand those dynamics. We will then move on to the understanding of what happens when you put EXPAREL in those same body compartments.

But I think the key thing is that you wouldn't want to start those trials until we file that sNDA for nerve block because indeed this would be an epidural administration and another way to provide a nerve block. And so we want the chronic pain study to be fully informed by the nerve block trials that we are doing now before we start something in the epidural space.

Okay. And then, finally, I may have missed it. Did you disclose what the planned pricing was for the 10-milliliter bottle? And then finally, any thoughts on the competitive landscape? I know where you stand on generics, but do you see any competitive products reaching the market in the next three to five years? And how should we think about it?

We have not done anything with 10-milliliter pricing yet, David. As a matter of fact, the work is being done right now. So we don't have really anything to disclose on the pricing of the 10-milliliter vial.

Relative to the competition, I would say that we don't believe that there is a product that can be used in a scenario where it is injected close to nerves and into muscle based on myelotoxicity and neurotoxicity. And so if that's the case -- and you wouldn't use them in a nerve block scenario, you wouldn't use them in a TAP scenario, and so you would have a very limited opportunity. So you know that I am fairly skeptical about the opportunity to even get the drugs on the market. But if they do, we think that the opportunity to displace EXPAREL is going to be modest given where EXPAREL is going to be at the time.

Okay. Many thanks.

Jonathan Aschoff, Brean Capital.

Hey guys, I was wondering, regarding potential new adopters of EXPAREL, could you help me understand the extent to which you are needing to appeal to the C-level hospital staff to hopefully get EXPAREL on that formulary versus how that might've gone in the first year or two of launch?

That's basically all I'm doing, Jonathan. So, an insightful question. And it's a bit of a combination of everything. I don't think we would be having the discussions with these folks if we didn't have the rescission of the warning letter and the new PI. But there are folks at major medical systems who would echo what Jim Scibetta just said relative to the opioid epidemic.

And so we now have opioid-free ERs. We have opioid-free ambulatory care centers. We are never going to have an opioid-free hospital; don't get me wrong. But I think we can have a significant impact on how opioid-naive patients see opioids for the first time in an acute-care surgical environment. Don't even understand that they are taking an opioid until they've taken it and they can't get off it. And so there's a number of initiatives that we can undertake. But, yes, I am having -- almost all of my time is spent on C-suite discussions on how Pacira and organizations can work together to address the opioid issue in the United States.

And it's the target of our national accounts group. It's not -- sometimes the national accounts group might be just a contracting arm, but ours is very much focused on C suite strategy. And it's not only the chief, but often it will be a service line director, head of quality. Somebody who cares about the overall quality of what they are providing -- service they are providing, but, equally as important, the overall cost of everything that happens, and that leads to discussions around ERAS protocol and so forth.

In the simplest terms, Jonathan, you know the whole value versus cost, the value of reducing opioid is incrementally more than it was -- incrementally better for us than it was two years ago is probably the simplest way to say it.

Okay. And how would you maybe describe those C-level conversations and their ability to counter an initial pharmacist discussion? Someone who might be looking after their own P&L kind of at the -- not the benefit of the rest of the hospital?

I think there's -- well, when the guy who is running the place is this is what we are going to do via an ERAS protocol or something like that, you don't see anybody that doesn't get in line. I think where folks have been concerned about the -- EXPAREL just growing too rapidly and busting their budgets somehow, we are working with the C suite on controlling the procedures where you roll EXPAREL out to the things that Scott was talking about -- to the places where patients stay for a very long time because of heavy doses of opioid, because you either don't have access to other forms of pain control or whatever. So that is one piece of it.

I think the pharmacy thing, Jonathan, is also being moderated by the whole bundled program. CMS is really forcing folks to look at the long-term impact of short-term therapies. So the bundle now is the 90 day episode of care. And so you -- or at least I see, we see a lot more awareness in the C suite of the long-term implications of appropriate pain control, whether that goes on to chronic pain or goes on to a skilled nursing facility or goes on to whatever.

And so I think that the view of the world where you can run a line item budget as a gatekeeper for hospital is still here today in 2016. But I think it is under great scrutiny because it just doesn't make any sense if you're not looking at the impact of those short-term decisions on long-term outcomes.

Great. Thank you very much.

I am showing no further questions in the queue at this time. I would like to turn the call back to Dave Stack for closing remarks.

Thanks, Liz. Thanks for joining us today. Coming up in a few weeks, we plan on attending the Bank of America Merrill Lynch 2016 Healthcare Conference in Las Vegas. We look forward to seeing you there. Thanks a lot. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone have a great day.