Pacira Biosciences Inc (PCRX) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Pacira Pharmaceuticals, Inc. second-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, this conference may be recorded. I would now like to turn the conference over to our host for today's call, Ms. Jessica Cho. You may begin.

Good morning, everyone. The format of this call is as follows. Dave Stack, Chief Executive Officer and Chairman, will discuss the longer-term strategy underway to capitalize on key trends influencing our business. Jim Scibetta, President, will then focus his remarks on the commercial trends seen in Q2 and current initiatives underway. And finally, Charlie Reinhart, Chief Financial Officer, will provide an overview of our Q2 financial results and 2016 outlook before we open up the lines for questions. Also joining us on the call will be Jim Jones, Chief Medical Officer.

Before I turn the call over to the management team for their prepared remarks, I'd 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 within the meaning of the Private Securities Litigation Reform Act of 1995.

Any such forward-looking statements are based on assumptions that the Company believes are reasonable and that are subject to a wide range of risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Many of these and other risks and uncertainties are described in the risk factors section of 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 in the investors and media section of the Pacira website at www.pacira.com or on the SEC website at www.SEC.gov.

During the course of this call, we will also refer to certain non-GAAP financial measures. Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the earnings press release for the quarter. And with that, we will hear first from Dave.

Thanks, Jess and good morning, everyone. With government and advocacy groups, healthcare providers and patients now actively taking up the mantle to curb the opioid epidemic, we believe providing a non-opioid alternative like EXPAREL for postsurgical pain control is more important than ever.

While Jim will elaborate on our recent public relations and advocacy efforts to help influence policy change and bridge the gaps in patients' knowledge of available non-opioid solutions, I will focus on the long-term initiatives that will drive future growth of EXPAREL and our pipeline.

First, at the hospital system level, we are working to complement the work being done with individual hospitals and physicians. We've made significant progress on partnerships with those hospital systems that understand that opioid-sparing approaches are integral to their mandate as healthcare providers to improve patient care and to provide an alternative to opioid-based postsurgical pain management as a step in addressing the opioid epidemic facing our country.

Through these partnerships, we plan to establish centers of excellence for low or no-opioid treatment strategies based on enhanced training, education and clinical research experience to address the needs of our patients and the healthcare providers who care for them.

As an example, a large hospital group is interested in low or no-opioid strategies to enhance patient care, as well as to create a competitive advantage in their geographic areas based on the increasing patient awareness and to avoid the unnecessary use of opioids in postsurgical treatment settings.

We train hospital staff, surgeons and their nurses in the OR, PACU and on the floor on the best-practice use of EXPAREL as the non-opioid platform for a multimodal pain strategy, typically starting with high profile procedures such as total joint, gynecologic oncology, spine, colorectal or C-sections. Generally, this training will be guided by an enhanced recovery protocol for pain management and completion of training on these protocols provides access to EXPAREL.

In addition to training and education, we work with the institution on communicating with patients through various media outlets advising patients on these centers having advanced pain management strategies built around low or no opioids to improve patient awareness and access.

In a moment, Jim will outline our national public relations campaign and you will understand how we are providing an opportunity for patients who are interested in low or no opioid surgery to connect with like-minded centers offering these services.

We continue to support expansion into soft tissue, particularly transverse abdominis plane infiltration procedures, or TAP blocks. With EXPAREL and through procedure-specific enhanced recovery protocols and advanced training, TAP procedures are routinely performed by anesthesiologists under ultrasound guidance either before or after the surgical procedure to provide several days of pain management for procedures below the umbilicus.

As a relatively new procedure, we are working with ultrasound device manufacturers, as well as anesthesia societies and working groups to train physicians on best practice techniques for these TAP procedures. We forecast continued growth in TAP procedures as we train additional medical professionals in the safe and effective procedure to provide low opioid pain control. We have advanced our enhanced recovery protocol strategy at major influence centers and academic institutions in bariatric, gynecologic oncology, thoracotomy, large abdominal surgeries, breast and abdominal wall reconstruction, colorectal and C-section.

As detailed in our corporate presentation, we believe results from soft tissue enhanced recovery protocols with EXPAREL clearly demonstrate the potential to significantly reduce opioid consumption, decrease length of stay and ultimately make a difference in patient satisfaction, as well as the hospital bottom line. For example, at Cleveland Clinic, EXPAREL TAP was compared to an epidural catheter with the EXPAREL arm showing reduced opioid consumption and length of stay while eliminating the need for catheter-based pain management.

In a similar strategy, MD Anderson physicians used EXPAREL to replace thoracic epidural catheters to reduce opioids and decrease length of stay in thoracotomy patients. Our strategy is to communicate these opportunities, to reduce opioids and improve care by sharing these enhanced recovery protocols with healthcare providers and other institutions and throughout these hospital systems to provide guidance for how local physicians can benefit from the work of these major academic centers.

For example, on July 13, we provided an unrestricted educational grant to support a webinar titled Post Surgical Pain Management Techniques for Enhanced Recovery hosted by the Foundation for Women's Cancer, which highlighted the importance of pain management as part of an enhanced recovery strategy at Mayo Clinic with Dr. Sean Dowdy and at M.D. Anderson with Dr. Pedro Ramirez.

The presentation from Dr. Dowdy on EXPAREL in ovarian cancer demonstrated a reduction in the length of stay and the need for patient controlled analgesia or PCA with a 90% reduction in the opioid requirement and over 90% patient satisfaction. With nearly 200 participants in the live webinar presentation alone, you can see how we can rapidly spread these protocols required to achieve the results outlined by Dr. Dowdy.

We also plan to initiate clinical trials in soft tissue in 2017 to maximize the opportunity with TAP blocks, as well as enhance recovery initiatives in GYN oncology, C-section and mastectomy with reconstruction. In orthopedics or hard tissue, we also moved our clinical programs forward to bolster the ortho segment of our business, which has met with some resistance specifically in knees as a result of the residual overhang from the prior FDA warning letter leading to restricted access to EXPAREL or our ability to train on the best practice techniques for hips and knees, two technique-sensitive procedures for the use of EXPAREL.

When our surgeons were blocked from utilizing EXPAREL based on the warning letter, many reverted to the use of multi-drug cocktails, which they used prior to the availability of EXPAREL. Our data suggests that in order for these short-acting cocktails to be effective, patients must be exposed to large doses of opioid to control pain 12 to 14 hours post surgery.

To quantify the efficacy and safety of EXPAREL versus cocktail preparations, we are enrolling in a randomized controlled clinical trial utilizing a strategy of multimodal postsurgical analgesia and randomizing EXPAREL and bupivacaine to measure 72-hour pain control and the need for opioid analgesics. We expect the results from this trial by the end of 2016.

We are also in the final planning for our randomized controlled trial in Level I and Level II spine surgery and expect that if all goes as planned, we will have data from this spine surgery trial in the second half of 2017.

Another important driver of our ortho growth for EXPAREL will be the nerve block indication, which will provide a more straightforward administration technique, require minimal training and appeal to anesthesiologists enhancing and opening up additional ortho procedures such as ACL repair, rotator cuff repair, wrist and hand surgery, foot and ankle surgery and shoulder arthroplasty to EXPAREL-based treatments for postsurgical pain.

Our Phase 3 studies are enrolling in lower extremity femoral nerve block and upper extremity brachial plexus nerve blocks and we expect top-line results early next year. Note that we are rolling out these orthopedic programs alongside the CMS bundled program for joint procedures, CJR or comprehensive care for joint replacement, which began in Q2 2016 with direct impact on hospital payment beginning in Q2 2017.

Based on the data from hospitals who participated in CJR's predecessor, BPCI, or bundled payment for care improvement, including NYU, Hackensack University Medical Center and St. Luke's Medical Center, we have several clinical data sets where incorporating EXPAREL into care pathways significantly improves both patient time to mobilization, discharge to home and hospital economic outcomes based on all of the benefits of reduced opioids, on time to mobilization, diminished opioid adverse events, etc. We look forward to working with our customers to help them best navigate this new evolving environment.

We also remain focused on EXPAREL's geographic reach through business development efforts. Discussions with potential rest-of-world partners for EXPAREL are going well and we can expect to secure regional territory partners this year. We are looking forward to conducting the preclinical work in support of EXPAREL expansion into chronic pain in pediatric indications and supporting our animal health partner, Aratana, launch Nocita later this year, assuming the Animal Drug User Fee Act approval date of August 28, 2016.

Moving on from EXPAREL, we are pleased to announce that for DepoTranexamic Acid, the IND is accepted and we expect to begin Phase 2 by the end of 2016. For DepoMeloxicam, we submitted the FDA briefing package in Q2 and we expect to be in Phase 1 clinical development by the end of 2016 as well. We believe EXPAREL and eventually DepoTranexamic Acid and DepoMeloxicam uniquely positioned us to cement our stronghold in the hospital and ambulatory surgery space allowing us to utilize our specialized expertise and surgeon and anesthesiologist and KOL relationships for possible business development opportunities through product acquisitions or partnerships. As we continue to evaluate the multitude of potential prospects, we are convinced that we will be able to choose the right fit for our product and portfolios.

In conclusion, let me remind you that we are pushing all of these long-term growth drivers forward for EXPAREL, our pipeline and other business development opportunities as we see external tailwinds from CMS bundles in hips and knees and the need to provide alternatives to opioids for postsurgical pain. Patients and our customers increasingly understand that opioids are not the future and that hospitals are looking for solutions to the problem, or as one hospital system's C-suite executive recently put it, to ensure that no one would die from opioid abuse again.

You heard us talk about CMS and CJR, but there are also mounting pressure to allow procedures to move to the outpatient setting, evident most recently in the calls to remove total knee arthroplasties from the CMS inpatient-only list, a transition to outpatient joint surgery where we know an EXPAREL non-opioid platform provides the basis of successful outpatient surgeries based on data from SwiftPath and several other ambulatory care centers.

And lastly and importantly, as demonstrated again this week in the data released by [Heron], we are increasingly confident in our assessment that there are no other clinically or commercially useful long-acting [competitors] currently in development or on the market compared to EXPAREL.

With some of the additional benefits that we expect over the next few years that Jim and Charlie will outline next, starting from our strength in intellectual property to high peak gross margins, we believe we are in an enviable position of being able to build a foundation for durable growth the right way for a blockbuster opportunity. With that, I will turn it over to Jim.

Thanks, Dave and good morning, everyone. For EXPAREL, our Q2 results reflect a solid foundation for reacceleration of growth going forward. Revenue for the quarter reflects year-over-year box growth of 16%. When adjusted for Q1 2015 buy-in we discussed on previous calls, adjusted year-over-year box growth was 12%. Our growth came from both existing accounts and new accounts. We grew in all categories of accounts from our top 20% of accounts, which are large and mature, to our bottom 20% of newer accounts. We added 117 new accounts in the quarter.

The favorable FDA resolution last December put us in a great position to make EXPAREL a major brand. Ironically, seeing the unequivocally broad indication of EXPAREL, some hospital pharmacies also saw EXPAREL as a rising budget bugaboo and so they became even more aggressive in trying to limit growth.

Just as in 2015, we can see that those efforts to limit EXPAREL use played out most significantly in Q1 and to a lesser extent in Q2. In fact, we've seen a rising number of intended formulary restriction efforts pushed back and we are gratified by the continued surgeon advocacy for EXPAREL.

As Dave discussed, we also started to see the post-resolution benefits playing out in increased formulary wins, particularly in anesthesia-driven TAP procedures. We believe for the most part the contribution from these first-half TAP wins will be realized in Q3 and Q4 of 2016 and beyond.

We are excited by the TAP business not only because of the immense opportunity with anesthesiologists, but also because of the size of the overall soft tissue opportunity. Recall there are approximately 28 million soft tissue procedures performed annually in the US, double the number of ortho procedures and based on the available data, we believe our soft tissue marketshare is only a third of the size of our ortho marketshare. So if we were to increase our soft tissue marketshare only to where we are currently in ortho, we would add over $500 million of new revenue annually. This is an exciting growth area for us in 2016 and beyond.

Ortho is more complicated, but still very much a story about opportunity. Dave described that we saw additional headwinds in our hip and knee business from competition in the form of drug cocktails. At the same time, we started to see an uptick in formulary wins in total joints in Q2. We are working hard to preserve and grow this business.

As it pertains to the second half of 2016, much of the customer decisions around EXPAREL use in hips and knees are already in place by now, so we expect to see solid results from these important ortho uses for the rest of the year. And then in 2017, we anticipate two significant catalysts in ortho -- first, the EXPAREL comparative total knee study and second, in Q2 of 2017, as Dave mentioned, hospitals will start to be subject to bundle payment penalties if they don't effectively manage the full episode of care for their total joint Medicare patients.

We often speak of ortho as if it's a single market for EXPAREL, but we should really separate hips and knees from spine, shoulder, foot and ankle and other opportunities. In Q2, we experienced formulary wins in the new large markets of spine and shoulders. The drug cocktails are not present in these markets.

Another potential contributor to growth acceleration is the initiative the organization has been driving with the FDA resolution, the catalyst for new events and programs. Just to highlight a few, we are executing on programs to reduce opioids that incorporate the principles of enhanced recovery and that incorporate the use of TAP as a means to administer EXPAREL. Collectively, these initiatives will reach over 1,000 healthcare providers in 2016.

We recently began a national print ad campaign called Clarity designed to further reach HCPs and hit them over the head with the most essential facts about EXPAREL post-FDA resolution, including the reaffirmed broad indication, long-lasting pain control, reduced reliance on opioids and increased opioid-free patients and the ability to admix with bupivacaine.

We designed and began to roll out a hospital system partnership strategy, which Dave highlighted at the beginning of his remarks. EXPAREL was removed from the Do Not Promote list in the VA system and our commercial teams are now beginning to have discussions with individual VA hospitals.

And on the organizational front, we hired a Chief Commercial Officer, Bob Weiland, increased the salesforce to close to 120, including sales management and bolstered our personnel in other important areas, including national accounts, pharmacy, health economics and training.

We continue our preparation for the EXPAREL launch in oral surgery in late September at the annual meeting of the American Association of Oral Maxillofacial Surgeons, known as AAMOS. In support of the launch, we are doing work to target the subset of 7,000 oral surgeons with the greatest surgical volume where opportunity to treat pain with a non-opioid option best resonates.

In addition, we are working with a number of surgeons on what is essentially a samples program now so they can gain experience using EXPAREL, so we expect to have a critical mass of enthusiastic users at the AAMOS launch meeting. We are also working with surgeons on infiltration of best practices to provide guidance to surgeons on where to place how much of the drug in targeted procedures.

As Dave noted, on Monday, we announced the commencement of a national patient education campaign branded as Choices Matter, which is designed to foster patient/surgeon dialogue prior to a surgical event about the non-opioid options patients have to treat their pain following surgery. The catalyst for the launch of Choices Matter education campaign is a new study that finds the use of opioids to treat pain after surgery represents a nemesis to American society leading to addiction at alarming rates.

We've spoken of research indicating that 1 in 15 opioid-naive patients has become addicted from their exposure to opioids during surgery. While that stat is awful in its own right, in this survey, the addiction rate was even more damaging as 1 in 10 patients reported that they became addicted. And while the vast majority of patients are concerned about opioid side effects and addiction and would prefer a non-opioid pain option, less than a quarter of patients say they discussed non-opioid options with their clinicians prior to surgery. And over 90% of clinicians indicated they frequently feel pressure to prescribe more opioids than their patients actually need.

This initiative is conducted in partnership with the American Society of Enhanced Recovery, or ASER, a non-profit focusing on enhanced recovery of patients in the perioperative environment. Leading the communication on this campaign is former volleyball star, Gabby Reece, whose recent knee replacement occurred without education on non-opioid options, and so this issue became personal to her.

In this campaign, patients are encouraged to go to the website planagainstpain.com to customize their postsurgical pain management plan and to become more demanding in initiating a surgeon-patient discussion. We are currently exploring additional forms of direct-to-consumer education of patient activation and are confident our efforts will further our mission of making a non-opioid option available to as many patients as possible.

Turning to manufacturing operations, we have three quick highlights. Number one, we continue to make progress in our capacity expansion activities with Patheon and remain on target for a mid-2017 approval of the first manufacturing line there. These initiatives will provide additional capacity to meet EXPAREL global demand and provide flexibility on commercial manufacturing for our pipeline products. And of course, they continue to steer us toward achievement of peak gross margins in a few years.

Number two, with plenty of inventory on hand to meet market demand currently, we took some time in Q2 to better automate one of the components of our manufacturing process. This was accomplished by curtailing manufacturing activities for a short period of time, which resulted in some costs being allocated to cost of goods during the quarter rather than to inventory. Charlie will expand upon this shortly.

And three, we are currently actively working on the detailed design of the commercial spray system with the capacity to produce 600 liters of EXPAREL per batch. We anticipate selecting the equipment vendor and starting the construction phase for the equipment by the end of Q4. So we are on target for a late 2019 approval if all goes as planned.

As an important reminder, EXPAREL is bupivacaine encapsulated in DepoFoam, our proprietary multi-vesicular liposome technology. There is and has never been another company that can make multi-vesicular liposomes, and we remain very confident that no company will pose a threat in the form of generic EXPAREL for the foreseeable future and possibly forever.

And further, we expect to have the ability to transition EXPAREL to the spray manufacturing process in 2019 or 2020 to further improve margins and we expect that new proprietary process to be supported by patents through 2031.

So putting this altogether, it's interesting to revisit the trajectory of hospital-based products compared to other branded pharmaceutical products and remember that, generally speaking, hospital products either fail at lunch, or if they are successful, grow steadily and are protected for a long time.

Our explosive 2014 growth trajectory was actually an anomaly for this sector. In our first seventeen quarters since launch, many of which were burdened by the warning letter, EXPAREL has generated cumulative sales of approximately $650 million. Only CUBICIN, now part of Merck, equaled this trajectory and that product kept growing gradually and reached over $1.1 billion in 2015.

And also it's important to remember that our market data indicates a marketshare of roughly 5% to 6% in ortho and 2% in soft tissue. Our overall marketshare is in the 3% range, so we look forward to the impact of the many growth catalysts Dave and I discussed. Our CFO, Charlie Reinhart, will now provide an overview of our financial results and outlook. Charlie.

Thank you, Jim and good morning, everyone. I'm happy to be joining you today on my first Pacira earnings call. I look forward to filling the significant shoes that Jim has left for me now that he is focusing his considerable talents on the role of President here at Pacira.

Today, we reported our second-quarter 2016 financial results. We reported total revenue of $69.6 million, an 18% increase over the $59.1 million reported for the second quarter of 2015. During the second quarter of 2016, EXPAREL continued its double-digit year-over-year growth trend recording EXPAREL net product sales of $65.8 million, a 15% increase over the same period last year.

Total operating expenses were $76.1 million for the quarter comprised of $23.1 million in cost of goods sold, $9.4 million in R&D expense and $43.7 million in SG&A expense. Adjusted for items identified in the tables included in the earnings press release issued this morning, total non-GAAP operating expenses were $61.2 million, including $21.4 million in cost of goods sold, $8.3 million in R&D costs and $31.4 million in SG&A costs.

As Jim mentioned earlier, we implemented certain improvements to our EXPAREL manufacturing process during the quarter, which required us to curtail our manufacturing activities for a short time. Since no finished goods were produced during this downtime, the costs incurred at our San Diego manufacturing plant were recorded as additional cost of goods sold during the quarter. This accounted for $4.9 million of the second quarter's total cost of goods sold.

These additional period costs impacted both GAAP and non-GAAP cost of goods sold resulting in a Q2 2016 GAAP gross margin percentage of approximately 66% and a non-GAAP gross margin percentage of approximately 69%. These figures compare to approximately 68% for GAAP and 71% for the non-GAAP gross margin percentages for the same period in 2015.

As Jim also mentioned, we continue to invest heavily in our manufacturing processes and capacity. While we expect it to take us several more years, we continue to anticipate EXPAREL non-GAAP gross margin percentages to reach a peak of approximately 85%. Q2 2016 non-GAAP research and development expenditures of $8.3 million were significantly higher than non-GAAP R&D costs in the second quarter of 2015 primarily resulting from our clinical investment in the TKA infiltration study, two nerve block studies for EXPAREL and cost to progress our DepoFoam pipeline drug candidates into human clinical studies.

As anticipated in our R&D expense guidance, we expect total R&D costs to continue to rise during the remainder of 2016 as these important clinical trials progress. Our GAAP net loss for the three months ended June 30, 2016 was $8 million resulting in basic and diluted net loss per share of $0.21. The second quarter of 2015 was a breakeven quarter from a GAAP perspective.

From a non-GAAP perspective, net income for the second quarter of 2016 was $7.9 million or $0.19 per diluted share compared to net income of $8.4 million or $0.20 per diluted share for the second quarter of 2015. And finally, we finished Q2 with cash and investments of $162.7 million.

As we look ahead to the rest of 2016, management believes it is an appropriate time to reinstitute EXPAREL revenue guidance. We now project that EXPAREL net product sales for the full year of 2016 will range between $270 million and $280 million. This range factors in the reacceleration of revenue growth we expect sometime in the second half of this year as a consequence of our ongoing commercial activities, including the oral surgery launch in Q3 and external market tailwinds.

We are now issuing non-GAAP gross margin percentage guidance. We forecast full-year non-GAAP gross margins to range between 70% and 73% for 2016. As I mentioned earlier, we continue to expect it to take several more years before we achieve our forecast non-GAAP peak gross margins. We are also affirming the non-GAAP 2016 guidance that we have previously provided for our R&D and SG&A expenses. On a non-GAAP basis, we expect R&D expense of between $60 million and $70 million and SG&A expense of between $125 million and $135 million for 2016. Finally, based on actual 2016 stock grants, we now revise our estimate for full-year stock-based compensation expense to between $30 million and $35 million.

That concludes our opening remarks. We will now open this call to you and your questions.

(Operator Instructions). Douglas Tsao, Barclays.

Maybe Jim or Charlie or Dave, just maybe walk us through a little bit about the second-half pickup that you are expecting to see. From your comments, is this largely going to come from TAP, or how do you expect to see the growth in ortho in the second half of the year and then how much of it is just normal seasonality that we should expect in the fourth quarter? Just trying to understand your visibility in the pickup.

You are right. Part of the pickup is purely the fact that Q4 is a big seasonal quarter for us just based on elective procedures driven by insurance, etc., which we've discussed many times in the past. We do also see an increased awareness of opioids and we are hearing more and more about physicians telling us that their patients are coming in and talking about not wanting opioids for their surgical procedures. And so one of the reasons that we are experiencing increased utility in TAP is because the physicians are increasingly aggressively frankly signing up for the teaching program so that they can learn how to provide these low or no-opioid treatment regimens. And for the first time since we've launched EXPAREL, that is being fostered by patients asking for the drug, as well as clinicians being interested.

So when you roll all that together and you look at more patients coming in, you do gain some confidence and you see that it feels different than it did in the first half of the year, which is what Jim was trying to outline in his remarks.

As a follow-up, you referenced talks and progress in terms of negotiating partnerships with some hospital systems in terms of opioid reduction. Are those with new accounts, or is that simply a function of solidifying and expanding the relationship with already existing customers of Pacira? Thank you.

It's really a mixed bag. I will give you a pro forma for instance. If you were talking to a hospital, or a chain, or a hospital group that had 100 hospitals, typically there would be four or five strong users of EXPAREL at a minimum inside that institution, which in many cases is the nidus for the discussions. The reason that we are so interested in these discussions and in working with these folks in enhanced training and education is that we want to take the best practices of those five or six hospitals and their understanding of how a low opioid treatment strategy benefits patients in the hospital bottom line and extend that to all 100 hospitals.

And so while it is a very significant undertaking in terms of training and education, we are doing things like we've had some of these centers say can we have an opioid meeting where we bring all of these experts with their ERAS protocols and talk to our system groups about how we work with EXPAREL in joints and then how do we work with EXPAREL in GYN surgeries. So there is a formal process then for how EXPAREL would be utilized through the system to improve patient care benefiting greatly from the advances that some of their hospitals have already made.

The only thing I would add to that is most of our business has been generated locally bottoms up, and we continue to have a significant amount of effort of our salesforce working with surgeons and the local folks to work with EXPAREL and do the right thing for patients. This is now giving us the opportunity to work with the C-suite from the top down and do it from a position of we have a collaborative effort with you to be a leader in opioid minimization, which is sort of different than the dynamic we've had in the past. So it's another way for us to continue to either get new accounts or grow significantly within existing accounts.

Great. Thank you very much.

David Amsellem, Piper Jaffray.

So a couple of questions. In terms of the growth trajectory of EXPAREL, I was wondering if you can talk about how you are thinking about providing discounts to certain customers as a way to boost volume growth and expand the footprint and is that something that you are contemplating and I joined late, so I apologize if I missed any color on that.

And then secondly, with the launch in oral surgery and bearing in mind that this is more of a cash paid market, do you feel like you are where you need to be in terms of your sales and marketing resources, and do you feel that the product is going to behave more like a consumer product where you actually may need to put more sales and marketing muscle behind it? Maybe give us some color on how you are thinking about that. Thanks.

I will take one and ask Jim to give first comments on two. Our gross to net remains very high, David, and so we have not done a lot of discounting and I will go back to what Jim said that previously most of our sales were bottom-up. As we have these discussions with folks and we can interact with C-suites on a grander scale, while we haven't done any of this yet, we do expect that we will provide some economic incentives in order to make EXPAREL more widely available to patients.

I say that in the context that our corporate mission is to make a non-opioid alternative available to as many patients as possible and we understand that if you start using this drug as a standard of care in all your joints, all your OBG procedures, all your C-sections, all your mastectomies, etc., which is what the ERAS programs at major medical centers are calling for that there will be an obligation for us to partner with those folks.

It's not just price discounts though, David, I would have to say. I have just as many discussions with CEOs when they talk about things like if the drug is used inappropriately -- the one that's in the back of my mind always is a surgeon in a major center that started using the drug in hair transplant and the CEO was having a heart attack, properly, right -- what would we do about that. Those are the kinds of discussions I have.

And just recently had a couple where there are CEOs of hospitals or hospital networks and they are looking to bid or in self-insurance situations for example, and in those scenarios our willingness to guarantee that we will not have a price increase is just as important as a price discount to those folks so that they can bid against the background of known cost. So it's not always a price discount. There's a number of ways that these partnerships evolve, and what's meaningful to the CEO.

It could be -- we've got another case frankly where they want us to provide educational services for their hospitals and in their mind, that is a form of a discount because that's a service that's being provided, but it doesn't impact the WACC cost of the drug. So there's a number of things that we do with these guys along the lines of a partnership that is actually just as meaningful as a price decrease, but is not exactly the way you asked the question.

The only thing I will just add to that quickly is it could be a strategic lever to grow, as Dave alluded to, but our gross to net has been about 5% and 2% of that is a prompt pay discount so we don't have any expectations that you will see that materially change anytime soon.

So on the oral surgery front, we have talked about the fact that we've expanded our salesforce, as I mentioned in my remarks, up to around 120. The current salesforce and Dave's 40 years of experience feels very strongly that you don't develop a separate salesforce to talk to the oral surgery market. So our salesforce will be working with the hospital community in the morning during surgeries and so forth and then calling in the afternoon on the oral surgery market. It will be much more of a call plan-driven exercise than we have currently with managing the complex environment of a hospital.

So with oral surgery, we have a call center that is proactively working right now to figure out out of those 7,000 oral surgeons who are the biggest users -- who have the most surgical procedures and also talking to them about non-opioid strategies and getting a sense of who would be the most interested in using EXPAREL. And so our salesforce will be handed a very specific call plan that they can use in concert with the rest of their activities.

And of course, the access there is completely different. It's much easier. And they will also be educated on how to talk to those oral surgeons about talking to their patients about EXPAREL and what it can do for them because sometimes it will be passed on, the cost, will be directly to the patient.

Thank you.

Irina Koffler, Mizuho.

Wanted to ask about the R&D guidance. You are guiding to $60 million to $70 million for the year, but you've spent around $17 million in the first half, so I'm just wondering what it is that you are going to invest in that's going to take us to that range. That's my first question.

Thanks for the question. So, obviously, you can't look at the first half as representative of the second half. A significant percent of total R&D is the investment in the three major clinical trials that are ongoing, the TKA study and the two nerve block studies and they are actively enrolling and we expect to spend in the order of $10 million to $15 million for each one of those three studies between now and the end of the year.

Okay. Got it. And then can you comment on business development? Any latest thinking in the current environment as the market seems to be picking back up?

Sure. I've been here a year now. My team has been working pretty diligently. The executive team and my team has been able to review several opportunities in the marketplace. I think we are really excited about what we are looking at today, how we think we have some great opportunities to really intertwine with our business in a way that is synergistic, and certainly the pressure on the public markets and the financing markets has and will continue to create opportunities for us. So we are still very active and we think there are going to be some great opportunities for us over the next several quarters.

Okay. Thank you.

Donald Ellis, JMP Securities.

Most of my questions have been asked and answered, but a couple remaining. Could you tell us in the second quarter what percent of EXPAREL sales were in ortho versus soft tissue and then confirm that you had no price increase in 2016 for EXPAREL? And then lastly, maybe give us a little more color on the data presentations you are planning on bundled payments in the rest of the year. Thanks.

So our mix of business -- I think the last time that we had a chart around that, it was close to 60% ortho and the data source for that as the world converts from ICD-9 to ICD-10 codes is putting us a little bit behind the ball. Remember, we don't have the ability -- we ship boxes to hospitals, but we don't have firsthand data of how the product is used.

We would suspect that, because the soft tissue is growing more rapidly in a large market than ortho right now, that that mix will start to be more 50%/50%-ish as we move forward, but I would suspect that we are still between 50% and 60% ortho today and the soft tissue is in the 40% to 45% range.

So on the price increase, Don, it's a very complex market. Our customers are struggling in many cases because of some of the impacts of the Affordable Care Act, etc. It's a very dynamic environment. We've already got the 10 ml vial coming and the four packs coming and so given again the corporate mission of providing a non-opioid alternative to as many patients as possible, we thought that, guided by our discussions with CEOs around what their needs were, that a price increase this year was just not the right strategic activity and so we are standing behind no price increase in 2016. We've not even considered changing our minds, if that was the nature of the question.

Great. And then the bundled payment presentations planned for the rest of the year?

We've got a bunch of webinars planned. We've got a simulcast planned. We've got -- there is actually several sets of presenters that come from slightly different points of view. I would tell you that it is a bit gratifying for us that, in the last webinar that we had that was run by Labrador Consulting, which is a group out of NYU, there were over 200 participants in that webinar and more than half of them were not physicians.

So I do think that the bundled payment world, especially now after some additional indications or procedures have been added in the last week or so, these were primarily administrators and line item folks from the different hospital groups and so I think we are taking a lead role in educating folks on how to do that. And just reminding you very quickly that the biggest issue with the payment structure that drove CMS to pick these procedures as bundled was the sending of joint patients onto an extended care facility, whether it was a rehab hospital or not.

And so in that light then, mobilization and discharge to home become the critical elements of how you can drive inside a bundled environment, and that is the focus of our activities is how do you reduce AEs and get these patients up on the day of surgery so you can get in a couple of solid PTs and discharge them to home. And we think EXPAREL is really the only way you can do that without opioids.

Thank you very much. That's helpful.

David Steinberg, Jefferies.

A couple questions. First, you just discussed BD a little bit. I'm just curious whether you are looking at products or companies. What are you seeing in terms of pricing? Obviously, there's a big dislocation in valuations earlier this year. Are the sellers more rational in terms of price, or do they still think that last summer's all-time stock price was the starting point and is there a difference in levels of valuation in general between the public and the private entities? I think at last check you had not come up with pricing for the new 10 ml units and is that available at this point? Thanks.

Thanks, David. I will start on the business development front. On the private side, I think we've talked to a lot of companies who have had some struggles in getting financing in the private markets and so that's created greater discussion and potentially greater opportunity.

On the public side, I think there are a lot of companies who may have also not been so interested in speaking to us. When their valuations were a bit richer, they saw the public markets as an easy way to finance. And those discussions have been a lot more productive as well.

In general, I'm pleasantly surprised how many folks are calling us. Most companies see us as a leader, one of the leaders in the hospital space, a leader in the pain space, a leader in the drug delivery space and so our team is still seeing somewhere between 5 and 10 new companies a month, keeping us very busy, and I think managements are a lot more rational about where the market is today than when I started a year ago and where they view their valuations.

Yes, and then on the 10 ml front, no, we haven't actually fully arrived at a price. We've talked in the past about the fact that it won't be half of the 20 ml. It will be something north of that. We are doing some market research now. We are looking at not only the oral surgery market, but down the road to the nerve block opportunity, the potential for 10 mls to be a significant contributor there. But obviously we will have an answer between now and September as we move toward the oral surgery launch.

Thanks. Just quickly on gross margin improvement, you gave some guidance today. The margins have been improving, but clearly slowing in terms of the improvement. Do you still think you can get your batch production peak margins up to the 85% level and then just remind us the spray technology, are you still thinking about it coming online in the 2019 timeframe?

So the improvement of our margins will happen when we are moving some significant amount of our production over to the Patheon facility that we are putting in place today, so there's no technological breakthrough or operational improvements required to do that. It's just a matter of fact of once we have our production substantially over there. And then we had talked about why in this year now that we've moderated our production because we've built inventory why that would affect the gross margins.

In the facility in San Diego, our gross margins there would be probably around 80%. We reached 77% in a quarter last year on a non-GAAP basis when we were manufacturing closer to capacity. So again, the dynamics over there are significant fixed costs. We think we are running pretty efficiently. We can get to roughly 80% gross margins if we are at full capacity, but we are not manufacturing at full capacity today just because we have the inventory in place. And then margins will improve as we get Patheon onboard and put some manufacturing over there.

And just the spray technology, the timing still pretty much as it has been?

It is. I actually mentioned this in my formal remarks, but we are building the commercial system, ordering that equipment this year and we are on schedule for a late 2019, if all goes as planned, approval for that.

Okay. Many thanks.

Tazeen Ahmad, Bank of America.

Maybe, Dave, based on some of your opening remarks, can you just give us a sense based on your discussions with hospitals on what types of surgeries you think that you have the highest potential for penetration into? Historically, we've heard a lot about general surgery, orthopedic, cosmetic, but I think today you mentioned GYN. Is that an area of focus for you in the near term?

Yes. There's a couple of things that are driving our processes as we understand how the hospitals view the opioid epidemic. The answer to your question is, yes, it is evolving. It's evolving in some cases because of work that's been done in these major academic centers and where we see high doses of opioid causing real issues in patient care. And I will just focus for a second, given the nature of your question, on GYN oncology.

So the issue that the clinicians face is that if you are forced to downregulate the immune system with large doses of opioids, then they have a problem in instituting an oncology therapeutic regimen because of the downregulation of the immune system and so that's why the medical community in many ways is focused on can I find a way to keep the immune system intact for these gals so that I can immediately start my oncology therapeutic post surgery.

And if you focus then on Mayo, their initial work was in mastectomy where they found that you could significantly reduce the amount of opioid that was required and reduce both opioid requirement and length of stay. And then the Sean Dowdy discussion that we talked about earlier is a progressive approach. First, they were able to significantly reduce opioids in ovarian cancer, but their focus then became how do we get patients off of the PCA machines and the self-administration of opioids. And in their last publication, they were able to show that they reduced the use of PCA machines from something in the 30% range to 4% so that these patients now are being managed in a way that doesn't require opioids, and he has now reduced his opioid load by over 90%.

The trial that Dr. Ramirez is instituting at MD Anderson, the primary endpoint of that trial is actually opioid-free. And so we are not talking about opioid reductions anymore. We are talking about exploring the opportunity to treat patients with no opioids in certain situations where we believe opioids are most detrimental. So that's the way we are following the market, if you will, and going where the clinicians are telling us opioids are most problematic. And so that is a bit of a change.

In joints, it was really driven by economics. As you get into mastectomy and abdominal wall and breast reconstruction and ovarian cancer, it is really driven by patient care, which is why the ERASs are moving quickly in that direction. Same for colorectal, by the way. If you take out a piece of somebody's bowel, the last thing you want to tell that patient is you use the drug for pain control that causes nausea, vomiting, urinary retention and constipation. That doesn't make a heck of a lot of sense.

And let me just add, Tazeen, that the only surgical procedures where we think we have a marketshare of over 5% are knees, hips and hernia, and if you think about where we will be a couple years down the road, even with knees, we are talking about total knees are like we think 90% of our knee business. So ACL repairs are not a part of it. Spine is the big opportunity right in front of us. Shoulders, we are starting to make some progress on infiltration, but obviously nerve block, that's a big opportunity with both total shoulders and rotator cuffs.

And then on the soft tissue side, in addition to what Dave said, remember that when anesthesiologists do TAP procedures, basically all the ectomies, abdominal, colorectal ectomies, cholecystectomy and colectomy and hysterectomy and so forth can be done by a single anesthesiologist for a bunch of different surgeons who are doing those procedures. So hopefully down the road, we will have more information by surgical model, but at this point, we are developing those markets.

Great. Thanks for the color. Does that mean that you are going to have to address the physicians directly, or are there point people in the hospital that your salesforce would be speaking to? And I guess in line with that question, depending on how your rampup goes in these newer areas of focus, would you need to consider potentially increasing the size of your salesforce?

For the salesforce question -- I will go last first -- we do an annual review of resources and where we are. I think it's pretty clear that our business is changing slightly, Tazeen, for a number of different reasons. When you get into oral surgery and nerve block and [peds] and some of the things that we see coming, we don't have that huge requirement to be in the OR with technical training on exactly where to put EXPAREL.

I think we've said this before, but there is no expectation that an anesthesiologist is going to ask anybody from Pacira how to do a nerve block under ultrasound guidance. That's their bread and butter. So a lot of our obligations are modified and so we can think differently about how we interact with our physicians.

I would add to that that it is one of the reasons that we are working aggressively at the system level because when you have great data in a place like MD Anderson, or Mayo, or Cleveland, it is a common expectation that these protocols in these ERAS programs will spread inside those institutions and in fact, as Jim referenced, the ASER meeting, there was a presentation at ASER on an ERAS protocol involving EXPAREL and when I talked to the person who gave that presentation a couple days later, he had over 50 requests for his ERAS protocol.

So you can start to see how the field force then doesn't have to be hands-on involved in finding a way to these people. The people are actually coming to our KOLs wondering how to institute the protocol and then our salesforce can be involved in making sure that they have best practice training. They can call in our MSLs, or call in our clinical group, etc. in order to make sure that they are using the drug most effectively.

And just one other comment, just generally speaking, anesthesiologists doing TAPs, that's sort of a consolidated set of surgeries, as I mentioned. And if you think about the future, surgeons took business away from anesthesiologists when we went down the infiltration path, which anesthesiologists did not like. When it goes back the other way with either TAPs for soft tissue or nerve block for hard tissue, surgeons will be happy with that. They don't lose any economics. They gain time. They are happy to hand that over. So that's another dynamic in our future that we are excited about.

Okay. Thanks for that color. That was helpful. And then maybe one last question. I'm sorry if I missed this earlier, but for your total knee and spine surgeries, do you have a timeline for when we could see data for that?

So we've guided that we would have the knee data by the end of this year and that the spine trial we expect will go pretty quickly because they generally use morphine and the dynamic -- and Scott and his group are working on exactly what is the injection technique and volume, etc. -- so we expect that trial to go pretty quickly and we guided today, Tazeen, that we would have data by the end of next year. Actually, what I said is in the second half of next year, so it doesn't actually mean the end.

Okay. Thank you.

Unfortunately, we are out of time. I would like to turn the conference back over to Dave Stack for closing remarks.

Thank you. You've heard me outline the future drivers of growth. Jim outlined the commercial landscape for EXPAREL and the blocking and tackling underway and Charlie recapped our financial performance and provided guidance for the rest of the year, but let me remind you that behind the numbers and the strategies are the millions of patients who have benefited from EXPAREL and the millions more who will benefit in the years to come.

Let me close with this patient story, just one of the several notes of gratitude that we personally receive on a regular basis and I might add in all the years that I've done this, I've never gotten a patient note and now I get them regularly. And this is a quote -- "Hi, I had a total hysterectomy and was cut up and down on June 6 at M.D. Anderson performed by Doctor X -- the physician name intentionally omitted -- I am 53, obese, scared of pain, afraid of pain meds and anesthesia because of getting sick and vomiting. I was given EXPAREL. It was the best. I was given Senna stool softener for 30 days, acetaminophen and ibuprofen and I still have some left. I was sent home on a prescription of oxycodone, but took only one of those for the long ride home, three hours, and it made me have an upset stomach. It was the last I took of that. I kept waiting for the pain to kick in at the end of 72 hours, but it didn't. It did great. My bowels moved immediately and normally my kidneys functioned just fine. Blood pressure, pulse and oxygen I believe were all okay while in the hospital. I was up and walking the next morning eight times a day, had all meals, sitting in a chair, plus I went to the beauty shop twice at M.D. Anderson. I love this drug. Thanks for making it. It worked great for me."

This variability to significantly enhance patient post-surgical experience is a true treatment to the impact of fulfilling the Pacira corporate mission of improving patient care. We are reminded everyday that we are doing the right thing for our patients. It's not easy, but it's important gratifying work and we thank you for your support. Up next, we will be at the 2016 Wedbush PacGrow Healthcare Conference August 16 in New York and we look forward to seeing you there. Thanks, everybody.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.