Pacira Biosciences Inc (PCRX) 2016 Q3 法說會逐字稿

Thank you for joining the Pacira Pharmaceuticals, Inc. third-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.

Good morning, everyone. The format of this call will be as follows. Dave Stack, Chief Executive Officer, Chairman will discuss the key programs currently underway driving the Company's strategy. Jim Scibetta, President, will provide a commercial and manufacturing overview. And, finally, Charlie Reinhart, Chief Financial Officer, will provide a recap of Q3 2016 financial results and any related updates before we open up the line for questions.

Before I turn the call over to the management team, I would like to remind you that certain remarks made by management during this call of 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 Litgation 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 and 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 for the 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 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'll hear first from Dave.

Thanks, Jess. The overriding mission driving Pacira is to be the catalyst for opioid minimization and eventually opioid-free surgery in America and beyond. In my remarks today we discuss that we are making tremendous strides towards this mission.

However, let me start the call by acknowledging that in spite of continued growth, EXPAREL sales have not accelerated as fast as we had expected following the FDA resolution in December 2015. It is taking us longer to reverse the falloff from the warning letter, but changing the way medicine is practiced takes time, even with the tailwind of the opioid epidemic.

We have a three-part strategy to accelerate sales by making EXPAREL available to as many patients as possible. One, to work with patients in addition to hospital systems and physician groups to standardize and broaden the reach of opioid-sparing protocols with EXPAREL through our public relations efforts to enhance recovery protocols and education and training programs.

Second is to build out robust clinical data to support marketplace use of EXPAREL for current and expanded use. And three is to capitalize on commercial partnerships for EXPAREL opportunities both in and outside the United States.

Starting with the first leg of this strategy, we continue to work with patient advocates and health care providers to provide opioid minimization treatment options. Through our public relations program, Choices Matter, we are educating patients on alternatives to opioid-based pain control. And through the Plan against Pain website, patients are provided educational materials on their available non-opioid options and how to proactively discuss a low or no-opioids plan with their health care provider.

These programs have been successfully launched, with over 476 million media impressions driving 27,000 unique visitors to the website in just two months following the August launch of the campaign. We will continue to build on these initiatives, working with government agencies, policy organizations and patient advocacy groups as we communicate directly with patients who cannot tolerate opioid-adverse side effects or who are in addiction recovery.

While we are providing information for patients to demand opioid-sparing post-surgical pain management, we have been working with C suite executives to marry patients with health care providers who have strategic interest in opioid minimization as well as advanced training, education and clinical development expertise for opioid minimized care through procedure-specific enhanced recovery protocols.

We know that training surgeons and anesthesiologists while educating hospital staff is crucial to ensuring that patients as well as health care systems achieve the maximum benefit from EXPAREL as the basis of a multimodal pain strategy. This is why we are working directly with key stakeholders to understand the bigger picture for accountable care decisions and the increasing importance of non-opioid treatment strategies. C suite executives, hospital systems, major physicians, specialty groups such as anesthesia and orthopedics, and leading medical associations which have significant interest in partnering with Pacira to provide improved low-opioid patient care. Through these collaborations, leading systems and centers announced their strategy to provide an opioid minimization surgery working with Pacira on system-wide and local institution enhanced recovery protocols. Our partners determine the procedures of interest, typically total joint surgery, gynecological cancer surgery or colorectal surgery, as well as the individual institutions to be trained. Pacira and the partner work together to develop the enhanced recovery protocol, and Pacira trains the hospital OR, PACU and surgical nursing staff regarding the benefits of replacing opioids post-surgical care with an opioid minimization protocol. Clinicians and nurses have access to EXPAREL based on the completion of training on the enhanced recovery protocol.

We then work with the C suite and hospital administration to communicate to patients the availability of these services through print media outlets, radio and hospital newsletters, as well as physician-patient communications so that like-minded patients in search of non-opioid options can be connected to these centers. You can see the strategy goes hand-in-hand with our patient outreach efforts such as Choices Matter.

One key development in these efforts is Pacira's Pharmaceuticals' educational grant to support the American College of surgery development of Opioids and Surgery: Use, Abuse and Alternatives, with education materials designed to support the rapid dissemination of patient information and education regarding opioids and opioid alternatives and to support the surgeon with evidence-based content including procedure-specific enhanced recovery protocols, managing patient pain expectations, non-opioid options, screening programs, discharge education and transition management.

In addition, we continue our efforts to inform how to best incorporate EXPAREL in a variety of enhanced recovery protocols. These efforts include the support of the American Society for Enhanced Recovery to identify best practices, including the use of EXPAREL to achieve optimal patient outcomes following surgery, and collaborative initiatives for leading medical institutions on incorporating the use of EXPAREL as a means to manage pain with fewer opioids in order to attain the ideal enhanced recovery goals.

We are looking forward to announcing additional collaborations over the next several weeks and months.

The second component of the three-pronged strategy is the development of procedure-specific data to support marketplace use. Remember that institutions which limited access to EXPAREL based on the warning letter also limited our ability to properly educate and train our customers, leading to local use and clinical data sets developed without the benefit of EXPAREL training, which we believe is directly linked to reporting of equivocal results.

While short-acting cocktails can provide 10 to 12 hours of pain relief for orthopedic procedures, opioid pain control is required to cover the period of postsurgical pain for procedures such as hip and knee arthroplasty, exposing patients to the potential for opioid abuse and addiction.

To address the questions in the orthopedic market regarding the benefits of EXPAREL versus generic bupivacaine, we initiated our total-knee arthroplasty, or TKA, trial to demonstrate the best infiltrative use of EXPAREL in a randomized clinical trial with patients randomized to EXPAREL with bupivacaine or bupivacaine alone.

Both arms use the same multimodal strategy, while the EXPAREL patients are treated with one 20-ml vial of EXPAREL, with 100 milligrams of free bupivacaine mixed in the same syringe and expanded to a total volume of 120 ml's. We expect to complete enrollment by the end of the year, with top-line data to follow early next year in time to discuss the trial results at the American Academy of Orthopedic Surgeons in March 2017.

We are also initiating clinical trial sites for a study in patients undergoing one- or two-level open lumbar spine fusion surgery, and we anticipate having trial data in the second half of 2017. This randomized trial comparing EXPAREL with bupivacaine will again provide data on the use of EXPAREL, with additional free bupivacaine in expected volumes of 60 to 90 ml's for this important surgery where over 1.3 million procedures were performed in the United States in 2015.

As part of this clinical data with specific procedure technique, we are planning additional randomized bupivacaine clinical trials in 2017 in soft-tissue surgery with TAP block for C-sections and colorectal surgery and infiltration into the surgical site for gynecologic oncology surgery and breast reconstruction surgery. The recent successful launch of EXPAREL in oral maxillofacial surgery provides the basis of a retail strategy for oral surgery plastic surgery and the move from inpatient to outpatient surgery.

We are enrolling two Phase 3 nerve-block studies, one in lower extremity femoral nerve block and one in upper extremity brachial plexus block. Both remain on track for expected completion in Q1 2017, with a strategy to resubmit the SNDA by the end of Q2 2017. The brachial plexus trial compares EXPAREL to placebo for procedures such as shoulder arthroplasty and rotator cuff repair.

Let me take a moment here to point out that the lower extremity femoral nerve block study is a repeat of the initial study with 266 milligrams of EXPAREL, which successfully met the primary efficacy pain endpoint with a P of 0.0001 and with a highly significant P value for opioid reduction, P of 0.0016. These results have been published in the Journal of Anesthesiology.

Thus, we have the data to show the efficacy in opioid reduction with 266 milligrams of EXPAREL in femoral nerve block. The femoral nerve block trial will investigate pain and opioid reduction with a 133-milligram dose as well as a 266-milligram dose and placebo. In addition to efficacy, safety and opioid reduction, these trials provide data for a number of health economic and functional status endpoints. We believe the nerve block indication will be an additional driver of growth for EXPAREL into ACL repair, rotator cuff repair, wrist and hand procedures, and sports and trauma injuries both in the hospital and in ambulatory care centers.

We have additional recent developments regarding these trials. In the nerve block studies, we receive data from a predetermined interim PK analysis focusing on the timing of maximum drug concentration, or t-max. This analysis will allow us to reduce the patient length of stay in the hospital by a full day in the femoral nerve block trial and by two full days in the brachial plexus nerve block trial, which will improve enrollment since protocol length of stay was artificially long compared to clinical practice.

Further, pertinent to both the nerve block study and the infiltration TKA study I addressed earlier, through monitoring of the available data and re-analysis and refinement of the statistic plans, we will be able to reduce the required number of patients needed to enroll in these studies. Complying with these developments simplify the trials and help with recruitment and trial completion. These developments will also result in considerable cost savings evident in our financial guidance that Charlie will address in a few minutes.

To further extend the EXPAREL platform, we are also initiating our pediatric trials, and in 2017 we expect to expand our work into chronic pain to understand the use of local anesthetic therapy in chronic-pain patients. Beyond EXPAREL, we also continue to advance the DepoFoam pipeline. We have enrolled the first patient in the Phase 2 study for DepoTranexamic Acid, and we expect to provide updates as they develop over the next several quarters.

The third part of our strategy is advancing EXPAREL growth through commercial partnerships. Over the past 12 months there have been growing interests from global and regional partners. We continue to build comprehensive regulatory and manufacturing strategies for increasing the number of global markets. Our goal is to execute a series of partnerships over the coming 12 months, beginning with at least one announcement by the end of this year, and a series of agreements that will continue through 2018.

Our goal would be to launch our first ex-US markets by early 2019 and continue with multiple global launches through 2022. We also have all US rights to EXPAREL in human health based on our termination of our previous orthopedic partner at the end of Q3. With EXPAREL used in over 1,500 ICD-9 codes in 2015 alone, we are investigating the opportunity to partner EXPAREL to leverage expertise with physician audiences of strategic interest for current and future uses of EXPAREL.

Additionally, I'm pleased to announce that we have applied for a patent term extension with the US Patent and Trademark Office for the EXPAREL patent. The Company expects the patent extension to be granted and to extend Orange Book-listed patent coverage in the US through at least July 2020.

In addition, the Company has filed multiple patents in the US and globally for our new multi-multivesicular liposome manufacturing technology, which, if granted, has the potential to provide patent protection for our multi-multivesicular liposome portfolio through 31. While we have no concern about the threat of a generic EXPAREL, as we believe our know-how provides significant barriers to entry, we believe that our legal IP position protection will further enhance the value of EXPAREL to any and all global and regional partners.

In conclusion, 2016 has been characterized by steady blocking and tackling and implementation of key programs and initiatives to drive the future growth in 2017 as part of our three-part strategy to work with patients in addition to hospital systems and physician groups to standardize and broaden the reach of opioid-sparing protocols with EXPAREL through public relations efforts, enhanced recovery protocols, education and training programs. Two, to build out a clinical data set in support of marketplace use of EXPAREL for current and expanded indications. And, three, to capitalize on commercial partnerships for EXPAREL opportunities both in and outside the United States. The result has been that while these programs have not translated into rapid acceleration of sales in 2016 as we had projected, we have made real progress.

With the randomized control trials in TKA and spine to read out next year and the nerve block studies also to be completed next year, and several partnerships to finalize in 2016 and 2017, we are optimistic about the bright future for Pacira.

Without a clinically or commercially useful competitor in development or on the market, we believe Pacira is uniquely positioned to improve patients' lives. Pacira is part of a growing coalition of patients, health care providers, payers and government agencies to address the opioid epidemic.

As published in the New York Times, the hospital OR is the gateway to opioid abuse and eventually heroin addiction. Enhanced recovery protocols with EXPAREL based on multi-modal pain platforms for opioid minimization provides best practice to address the opioid epidemic.

Perhaps Doctor Paul Sethi, an orthopedic surgeon in Greenwich, Connecticut, best described the value proposition for EXPAREL. "The injection costs about $300 extra, which is a bargain if it can save a person from an overdose death or a long struggle with addiction." I believe Pacira's position is as an important partner to the health care providers, patients, hospitals and society at large in the pursuit of opioid minimization and, in many procedures, opioid-free surgery in America.

And with that, I'll turn it over to Jim.

Thanks, Dave, and good morning, everyone. For EXPAREL, in Q3 we experienced year-over-year revenue growth of 9% and box-per-day growth of 10%. [Third] quarter of $64.9 million in absolute terms represents a solid foundation on which to build our future growth from the three pillars Dave just discussed.

We continue to successfully open up new accounts and achieve a significant number of new formulary wins at the hospital and service line level, which will contribute to growth in future quarters.

Just like last quarter, we continued to see strong growth in soft tissue procedures, especially where anesthesiologists are employing TAP procedures. And within ortho, we are also seeing solid expansion into spine and shoulder procedures.

We continue to experience headwinds in our hip and knee business from two sources. One, perceived cost savings from utilizing drug cocktails that consist of a combination of unapproved drugs, often times opioids and a short-acting local anesthetic; and, two, the lack of level 1 data that hospital gatekeepers can use to limit access.

We are addressing both sources aggressively with three synergistic initiatives. Number one, we're pursuing a comprehensive cocktail defense strategy highlighting the benefits of EXPAREL, as evidenced by existing clinical data when the product is properly used, employing three critical factors: appropriate administration technique, appropriate volume expansion, and admixing with free bupivacaine to achieve a denser field block. When all of these three critical factors are employed, EXPAREL can lead to a reduction in opioids and shorten length of stay relative to cocktails. And it's important to juxtapose that data with equivocal or negative results that are generated when and because any of the three critical factors are not understood or followed.

Number two, we'll soon have the level 1 data from the TK randomized control trial that Dave discussed. We believe the information generated from the study will equip the field force, key opinion leaders and physician users with detailed guidance on how appropriate technique for EXPAREL use and conclusive evidence of clinical benefit. We expect this data to demonstrate the benefits of EXPAREL in treating pain and minimizing opioids after post-op day one, when opioids are the only alternative if you want to avoid a catheter and a pump. This trial, which is called PILLAR, uses an administration technique that has been developed by expert surgeons and will serve as an EXPAREL TKA best-practice infiltration guideline.

And three, later this month at the annual hip and knee society meetings, we'll be unveiling both the virtual reality tools and a downloadable Web application to accelerate our efforts in training on the proper surgical techniques in total knee. We partnered with a leading virtual reality software firm to develop an OR-simulating gaming experience where under HTC Vive headsets the surgeon administers EXPAREL in six syringes, each to specified anatomy, during a simulated total-knee placement surgery, with real-time feedback and scoring of the administration technique.

We also developed a free downloadable app with a touch-surgery platform for training on a handheld device. These cutting-edge modules are both modeled off the PILLAR technique. Research has shown that using hands-on educational modalities like this can be extremely effective in reinforcing proper technique and use.

We also continue to make significant strides with key customers. We're proud that today one of our largest customers is the Department of Defense and that we're able to provide play a significant role in providing our soldiers and their families with a non-opioid treatment option. We, of course, also want to serve our war veteran population that so deserves the best opioid avoidance alternatives. And to date, the VA business is only about 10% of the DOD.

To this end, recently a TKA study out of the VA Medical Center in Indianapolis was published in JAMA Surgery, where EXPAREL patients significantly decreased their opioid consumption, had reduced pain scores and generated institutional cost savings. It will be interesting to watch how studies like this, combined with our educational initiatives demonstrating that EXPAREL works when used appropriately, translates into customer growth ahead.

In late September, we officially launched in oral surgery at the annual meeting of the 9,000-surgeon American Association of Oral and Maxillofacial Surgeons. Pacira sponsored presentations for oral surgeons to discuss how EXPAREL has changed their practice and allowed them to treat patients with far fewer opioids. The unintended dangers of prescribing opioids resonated very strongly among this customer group, especially those responsible for treating patients in their early 20s who typically undergo third molar attraction extractions, the initial target of our launch.

We also heard some early enthusiastic response from the OMFS community targeting EXPAREL in three other surgical procedures: full-arch dental implants, which total approximately 200,000 procedures annually in the US; temporomandibular joint disorder procedures, TMJs think of jaw movement function disorders, which total about 30,000 annually; and orthognathic surgeries for corrective jaw surgeries, which total approximately 375,000.

We also recently put the finishing touches on the build-out of our seasoned next-level commercial leadership team as we announce the hiring of Tom Sluby as VP of Sales and Matt Lehman as the VP for our marketing organization. Tom has an extensive track record pharma sales organizations, most recently at InVentiv and Matt spent much of his career at Astra-Zeneca, where he led the successful launch of MOVANTIK and was the commercial leader for Seroquel XR.

Turning to manufacturing inventory, EXPAREL, like all pharmaceutical products, is subject to testing at the time of release, called release testing, and also testing on a few sample batches at various time points over the period of its shelf life, called stability testing. Release and stability testing is a key component of our quality system, which assures consistent manufacturing and demonstrates product quality. In compliance with all federal requirements, our quality department has assured that all of the 1,367 batches released since launch containing approximately 2.8 million vials of EXPAREL have passed all required specifications for testing and have complied with good manufacturing practices.

As we've accumulated test data over the life of the product, it has become evident to us that one of the approximately 20 stability acceptance criteria agreed to with the FDA upon approval, and one that we believe has no bearing on product safety, presents a recurrent risk for testing outside the approved specifications. As a result, we've recently been in discussions with the FDA about both the modification of that specification as well as the potential development of a new analytical test for this attribute. Until that process is completed, we've changed the dating to 12 months for all product manufactured starting from September 2016 to contain any compliance-related impact of product.

Last week we received test results on part of our routine stability monitoring that one of two batches of EXPAREL made in early 2016 has slightly fallen out of specification for the single stability test attribute that is the focus of our current discussions with the FDA. The other stability test batch remains fully within specification.

The value for this out-of-specification attribute is just 1% outside the target range, which is also within the margin of error of testing. And all other test attributes, many of which are the key measurements that we believe are the most indicative of the product's performance and demonstrative of product quality, are within specification and trending according to shelf life.

While we have no concern about the quality of the product at this juncture, the test result was unexpected and suggestive of some deviation from a consistency of manufacturing output. An internal investigation has tied the unexpected result to a modification to the manufacturing process that existed when this product was made and has been identified and corrected as of June 2016. Very little of this product was distributed in the market and a small percentage of what was distributed remains unused.

We filed a field alert report with the FDA yesterday to inform them of this unexpected result and to recommend the confinement of product manufacturing in 2016 prior to June and possibly a product exchange for the small amount of product that's held by customers. This action results in a material charge recorded in the third quarter that Charlie will highlight shortly. Given that we just filed a report with the FDA, we have not yet had any formal communication regarding any potential additional or next steps that need to occur.

As you would expect, we revised our manufacturing plan for the remainder of 2016 and all of 2017, where we will manufacture at higher levels and release product more quickly, and we expect no disruption to our available supply meeting what we forecast to be growing demand for EXPAREL.

I also want to note for our investigators that our PK study and nerve block study studies are supplied with products unrelated to this event.

Our CFO Charlie Reinhart will now provide an overview of our financial results and outlook. Charlie?

Thank you, Jim, and good morning, everyone. Today, we reported third-quarter 2016 financial results. For the quarter ended September 30 2016 we reported total revenues of $68.4 million, a 10% increase over the $62.2 million recorded for the third quarter of 2015. During the third quarter of 2016 EXPAREL net product sales were $64.9 million, a 9% increase over the $59.7 million reported for the same period last year.

For the third quarter of 2016, total GAAP operating expenses were $89.2 million, comprised of $43.2 million in cost of goods sold, $9.8 million in R&D expense and $36.3 million in SG&A expense. Adjusted for items identified in the GAAP to non-GAAP reconciliation tables included in the earnings press release issued this morning, total non-GAAP operating expenses were $60 million, including $19.6 million in cost of goods sold, $9.1 million in R&D costs and $31.4 million in SG&A costs.

As Jim mentioned earlier, our routine stability testing recently identified that a single stability batch of EXPAREL manufactured in early 2016 fell out of specification for one of approximately 20 acceptance criteria measured during its testing. Internal investigation has tied this unexpected result to a modification to the manufacturing process that existed when this product was made and was corrected in June 2016.

During the third quarter we recorded a $21.9 million charge to cost of goods sold to fully reserved for the value of EXPAREL product manufactured during 2016 prior to the process correction. Including this $21.9 million charge, GAAP cost of goods sold for the third quarter of 2016 totaled $43.2 million. Our gross margin percentage was 36%. Excluding the impact of this reserve and stock-based competition expense of $1.6 million, non-GAAP cost of goods sold for the quarter was $19.6 million, yielding a Q3 2016 non-GAAP gross margin of 71%.

Both GAAP and non-GAAP research and development expenses recorded during the third quarter of 2016 were significantly higher than the same figures for Q3 2015, primarily resulting from our clinical investment in the TKA infiltration study and two nerve block studies for EXPAREL, plus costs to progress our DepoFoam pipeline drug candidates in human clinical studies.

Our GAAP net loss for the three months ended September 30, 2016 is $22.2 million, resulting in basic and diluted net loss per share of $0.59. Our GAAP net income for the same period in 2015 was $3.1 million, resulting in basic and diluted net income per share of $0.08.

From a non-GAAP perspective, net income for the third quarter of 2016 was $8 million, or $0.20 per diluted share, compared to net income of $12.9 million, or $0.32 per diluted share, for the third quarter of 2015.

And finally, we finished Q3 with cash and investments of $161.1 million. As I am sure you recall, on the second-quarter 2016 earnings release conference call we issued full-year 2016 EXPAREL revenue guidance of $270 million to $280 million. This forecast was based on our analysis of key factors expected to impact our top line during the remainder of 2016, including implementation of collaborations with hospital systems, physician groups, patient groups and other key stakeholders interested in implementing opioid minimization protocols with EXPAREL. Continued expansion of EXPAREL's utilization in a number of soft-tissue surgeries, including those using TAP blocks.

Growth in our total orthopedic business, net of the impacts of the headwinds mentioned by Jim, including the use of opioid-based drug cocktails and the lack of level 1 clinical data.

And finally, the seasonal nature of our business reflecting the fact that the later part of the year is traditionally stronger than the earlier part of the year.

As you have already heard Dave and Jim mention, all of these growth drivers still exist, and we remain very optimistic about the future of EXPAREL. However, we acknowledge that the revenue growth expected to be fueled by these business drivers is taking longer to impact our top line. As a result, actual revenue growth achieved during the third quarter was lower than we expected.

As we look forward through the end of 2016 we now believe that full-year net product sales of EXPAREL range between $263 million and $268 million. We revised our 2016 EXPAREL net product sales guidance accordingly.

We've reaffirmed our non-GAAP gross margin percentage guidance for the full year of 2016 of between 70% and 73%. We continue to invest heavily in the expansion of our manufacturing facilities in the UK and in the development of our spray technology. As these new manufacturing facilities come online, obtain FDA approval and produce EXPAREL that is sold, we continue to expect non-GAAP gross margins to reach a peak of approximately 85%.

We revised our full-year 2016 non-GAAP R&D expense guidance from between $60 million and $70 million down to between $40 million and $50 million. This $20 million reduction in our guidance range reflects the combined impact of the significant cost reduction in the TKA trial and the two nerve block trials which resulted from the important improvements to these trials described by Dave and the change in the timing of expenses primarily related to the completion of the two nerve block trials in Q1 2017.

Finally, we reaffirm our full-year 2016 guidance for non-GAAP SG&A expense of between $125 million and $135 million and stock-based compensation expense of between $30 million and $35 million.

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

(Operator Instructions) David Amsellem, Piper Jaffray.

Just a couple -- this is sort of a high-level question regarding pricing. Can you talk about in some detail how you are thinking about discounting and providing more financial incentives to your customers to buy more EXPAREL, bearing in mind that the cost pressures in the hospital environment that you've cited have been particularly intense? What are you planning to do there differently, if anything?

Then, secondly, on the launch of the 10-ml., can you talk about the potential for it to take away from 20-ml business? Or, conversely, do you think it will be additive to the business because it gives surgeons the flexibility of using a small vial -- a smaller vial in smaller wound spaces? Maybe help us think about the dynamics of the 10-ml. Thanks.

Sure. Thanks, David. The first question regarding pricing pressures -- insightful because it's very clear that there has been a significant impact of patients coming with Affordable Care Act insurance, for example, that is making life difficult for our customers. I'll give as much detail as I can, David, and please come right back at me.

We don't anticipate that we will have a broad price reduction of any sort. What we do talk about with folks as a way to form the partnerships that I talked about earlier is that when we institute a program with a health system of several -- well, 100 hospitals, say, just to make it easy -- is going to use EXPAREL across a broad platform that we would stand behind the product first and make sure that we met all of the metrics that were guaranteed as part of the discussions with them regarding length of stay and opioids and the savings that they would recognize. But then we also have a price accommodation that makes it useful and easier for them inside current budgets to be able to use EXPAREL in a more broad platform.

So I wouldn't be looking for any kind of a price discount. That is not a strategy that we have any intention of employing. But where folks are using EXPAREL appropriately and across a broad platform of procedures, we do realize that they are under pricing pressures. And even though we continue to believe that the institution will save money as a result of the use of EXPAREL, we want to work with them, especially in situations, David, where they are bidding into self-insurance models or they are addressing large patient populations at the state level relative to the opioid epidemic, et cetera.

So that's really more or less a 20-ml story, which leads me to your second question around 10-ml. We priced the 10-ml vial exactly looking at the scenario that you outlined, David.

A couple things first about 10-ml -- first of all, there's two aspects to EXPAREL. The C-max of the product is roughly 24 hours when you use the 266-milligram vial, and that leads you to the 72-hour duration of action in a bloody field. When you want to increase the oomph, if you will, of the pain control in postsurgical environment while the patient is coming up to the C-max for EXPAREL, then you can just very simply add some pre-bupivacaine. And, as you've heard, virtually all of our procedures require more volume. So it's very easy to just use the pre-bupivacaine as the diluent. And if you want to increase the duration of effect, then you need more lipid particles.

So, the 10-ml vial is geared towards two markets, really. One is the smaller surgery market. The reason it was launched in concert with the oral maxillofacial marketplace is third-molar extractions, but also think about small plastic surgeries, et cetera. We continue to believe that the nerve block trial, especially the upper extremity nerve block trial of brachial plexus trial, will be a 10-ml dose. So what you see, then, is ACL repairs and rotator cuff repairs and carpal tunnel syndromes and all of those kinds of procedures moving to the less expensive ambulatory care 23-hour-stay environment.

And when you inject EXPAREL in this nerve block technique into an avascular environment, you do get an extended duration of action. And so the 10-ml will provide that increased duration because the lipid particles break down at a different rate in a bloody field and in an avascular environment.

So, I don't -- you could use -- I'll address your question very clearly. A physician who wanted to achieve 72 hours of pain control in a surgery such as a TKA would have to use a 20-ml vial in order to achieve that result. If they used a 10-ml vial with some additional bupivacaine, they would only get about half of that duration of efficacy, and that would not be satisfactory, of course.

So you will see the 10-ml vials used in smaller surgeries, and many of which we are not getting today because the physician doesn't want to open a vial of EXPAREL and only use part of it. In some cases -- in workman's comp cases, David, actually they are getting paid by the mil. And so we want to provide as much flexibility for our customers as we can.

But there is very little opportunity for folks to simply use less EXPAREL because what they sacrifice then is the time point from C-max to time above the effective level of local anesthesia, which in the hemorrhoid trial on the package insert is 72 hours, and which in the TKA trial, we believe is going to prove to be very close to that same timeline. If that doesn't make sense, David, please come right back.

No, that makes sense. And if I may follow-up just on pricing, I guess the follow-up here is you are not planning to do any deep discounting. So your belief is that this is still a data-driven customer base. In other words, as you grow the body of data and grow the availability of [LP com] data, you will be able to get more buy-in even without providing deeper financial incentives?

I will tell you, David, that in the deepest of the discussions that are ongoing -- and you probably got from my script that there are several -- this is the obvious optic that you would think would be important in those discussions. But, frankly, it's not. What our customers are looking for is a greater service platform. They're looking for that training they would like to see us contribute to a local --.

So let's just say you are hospital CEO, David. And we could cut the price by some number. Or we could provide some services to you relative to communicating the fact that you are an opioid-free center. We would work with your clinician to highlight their practice in local newspapers and on radio spots. There's a number of services that these folks are interested in relative to training and clinical research and doing more trials of specific interest to them that are a lot more appealing to them than the price of the drug when they understand the economics of reduced length of stay, et cetera.

And so I'm always prepared for that discussion, and I am generally surprised that it doesn't come up as the number one thing that somebody wants to talk about. What they do want to talk about, David, is if I'm with somebody and they want -- and this isn't just me, there's a bunch of people here that can do this. But what they are worried about, frankly, is that they bid with an enhanced recovery protocol with EXPAREL and that we raise the price by 20% the day after they do that. Right?

So what they're interested in is what's the total cost of care for these procedures. Can we put an enhanced recovery protocol in place that squeezes the air bars around these trials so that they become much more predictable. And in that context, can they bid a large teachers' union or state employee association, et cetera? And so that what they asked me for is, frankly, if the drug is used inappropriately will we share that cost with them? And will we guarantee that for the life of this deal that they are about to sign we won't raise the price? Those are the kinds of things they are looking for, not any kind of a material price decrease from us.

David, just to add one -- this is Jim, just to add one thing to that. You go into some of these IDNs or large systems where they say up front that cost is the issue, but, as Dave alluded to, often it is going back to what we were talking about in the script -- is the product being administered properly and therefore delivering the value of opioid reduction, length of stay. And once you get people focused on that, then we're kind of in a partnership with our customer and they are actually, as Dave said, not really focused on the price per se but on the product delivering its value.

Doug Tsao, Barclays.

(technical difficulty)

Why don't we go to Don Ellis?

Donald Ellis, JMP Securities.

The first question is regarding the DOD opportunity. Can you give us -- help us quantify -- I understand a lot of new recruits have their third molars removed when they join the military, and this might be a patient population at higher risk of opioid abuse. Can you kind of quantify what numbers we're looking at and what are the biggest advantages to the DOD?

We've got a really robust clinical program with the DOD, Don. We're doing -- right now, we're doing -- they've only -- this is my understanding -- they've only done one registry in their history, and we are now doing a registry with EXPAREL. It spans a number of different situations.

You are correct that there is a special need to avoid opioids in the military. But it starts -- most of what we saw in the early days, frankly, was hernia. And folks that were in basic training that were doing things that the typical person wouldn't do.

But as time has gone on, they've seen it -- by avoiding opioids, you can avoid these addictive problems specifically to them, and this comes from a camp commander that I was with out in California that basically said when somebody is addicted to these opioid medications, I can't give them a gun, I can't let them drive a truck, I can't do much of anything with them. And in many cases we end up discharging these folks at great cost after they've gone through basic, et cetera.

So it's been a real focus of the DOD. In addition to the registry now, though, DOD is way more than what you would think about if you were just not dealing with what we're dealing with every day. They have a lot of patient lives -- they are doing a very large trial in C-sections, and they are interested in colorectal surgery, and they're interested in a whole lot of these different procedures. And, in fact, the registry covers a number of procedures looking at plastic surgery applications, OB/GYN applications, colorectal applications, as well as TKA, et cetera.

We've done a couple of things, Don, specifically for them. So you'll see a paper come out here sometime in the next few months where we looked at repeat dosing, understanding that most of the DOD -- well, I shouldn't say most -- but many of the DOD procedure applications are extremities. And so when the kids in the Middle East have an IUD issue, et cetera, it's generally a hand or a foot or something like that.

And the question was why can't we re-dose EXPAREL. And you'll notice in the new EXPAREL label it says that you can't use another bupivacaine-containing product within 96 hours except for EXPAREL. So EXPAREL can be predicted on its use against itself. And so we have a paper that's in press regarding the multiple doses of EXPAREL, so that in clinical practice you spend -- you could give a soldier a dose in a M*A*S*H unit, send them to Lansdowne, for example. And then when they were going from Lansdowne to Walter Reed, you could repeat dose with EXPAREL. That was done specifically at the request of the military.

So there's a whole bunch of things going on with the DOD. It's an interesting fishbowl for us in two aspects. One is it's highly unusual in our business to have a patient that has no comorbidities, where you can study just a drug. So I'll tell you if you can study EXPAREL in hernias in Marines, you have a very unusual situation prove that you have the specific aspect of your drug because the patients have no comorbidities, they are all roughly the same age, et cetera. So it's unusual from that perspective that led us to do some meaningful clinical work there.

But as it expands, you start to see that a group of people who can use the technology to its fullest extent because they are less inhibited by the $300 cost of the drug, you see what's possible. And that's what a lot of the things that are being done in the registry now is to look at it across all these different procedures -- what's the impact of EXPAREL on the DOD population? And it's not just soldiers; it's their families as well, which is pretty interesting to us.

And to your point, Don, there is -- I can't quantify it, but it is an interesting phenomenon that kids 18 to 20 who go into the military all --they go into intensive training, and they have kind of a third-molar extraction mill that exists. So that is an opportunity that we definitely want to pursue.

That's great. At what point does this transition from a clinical trial registry to a customer and product sales? Is it a 2017 event or 2018, or when can we expect that?

No, they are very significant customer now, Don. We have signed what is called an FSS, or a Federal supply schedule agreement. And they do have a statutorily mandated discount on the price. So they are not paying $300 a vial, but they are a very significant customer of ours today in terms of sales.

Okay. Terrific. And then any additional -- last question -- any additional details on kind of the timing change for the nerve block trial?

No, only that what we're trying to do is we have a six-month PDUFA. And so what we're trying to do is line ourselves up for a 2018 first-quarter launch. And so we're working with some different sites in Europe. And there were a couple of issues related to the timing of the time that those patients -- or the clinical practice and the time those patients had to spend in the hospital via the protocol. Five days just turned out to be a real challenge. And that was the way the initial protocols were written, and so the trial got off to a bit of a slow start. But I think we're where we want to be now going forward.

Okay. I actually do have one additional question. We've talked to some oral surgeons that are -- to lower the cost to the patient even more from the 10-ml that are diluting with normal saline and getting maybe two patient treatments out of one 10-ml vial. Are you seeing that frequently?

In oral surgery, Don, it's something -- the treatment paradigm goes something like 2.5 mils a tooth. So you'd have to know whether they were doing all four or whether they are just doing two. But I think, again, people in the marketplace are going to experiment. Some of the folks that are the high-end users that have a lot of experience with EXPAREL think that they -- I'll go back to my comment to David Amsellem -- you may have enough articles there in order to get 36 hours of pain control. And if a surgeon determines that that's what they're looking for, with some pre-bupivacaine they probably could get away with that.

Honestly, we haven't seen a lot of that yet. But the guys that are doing it are the guys that have had the most experience. And so I think it's probably not unreasonable and it's one of the reasons we put a 10-ml vial out there. The marketplace is so big, I think we would lean towards more patients rather than trying to maximize the number of mils that are used in each patient, as long as the patients understand that when you cut the dose in half you are not going to get 72 hours of pain control.

Understood. Thank you very much for taking the questions.

Doug Tsao, Barclays.

Just maybe, Dave, I think you acknowledged -- and apologies if I missed this in the opening remarks, a lot of calls this morning -- but sort of the benefit of the FDA settlement sort of playing out a little more slowly. Maybe can you talk a little bit about sort of your break of accounts that are sort of growing very nicely versus some others that you still might be seeing some pressure in terms of the warning letter of restrictions or sort of pushback on the product?

Most of the -- and I tried to address this specifically, Doug, but I appreciate the question. When we got the warning letter -- not allowed to go into the OR because a gatekeeper who wanted for some -- for any reason, generally it was budgetarily driven, to limit access to EXPAREL. And so because in the context of the warning letter it was positioned that EXPAREL only had an indication for bunions and hemorrhoids, there was no context there where we could go into an OR and work with an orthopedic surgeon and teach him how to do a knee or a hip.

And so a number of folks in the marketplace -- many, by the way, ironically trying to produce positive data sets in support of EXPAREL -- did not have the technique that's required for best practice in terms of volume pre-bupivacaine use, dosing the posterior caps, dosing the periosteum, exactly what the timing is of all of those different injections.

And so there were data sets that were developed that were equivocal or negative, and it took some time for those to come out. It didn't happen as an immediate result. Actually we saw -- we started to see those for the first time in August at November of 2014.

And so we're -- as we've reversed the warning letter, we still have folks out there that think that based on local market data that EXPAREL is no different than bupivacaine. And so there's a couple of things that are going on to reverse that. One is that we are working on enhanced recovery protocols where you can show people very specifically how to use the drug and how to lower your cost in joints. And working with systems who will mandate from a C-suite down that we're going to address the use of opioids in joints because it is one of the spots that we've identified more opioids being used than we would like. So there's number one.

Number two is the 331 data, the TKA data, where we will demonstrate, I believe, very specifically that when you use bupivacaine versus using EXPAREL in the way that it's prescribed in the trial, that you will see a very significant difference not only in opioid use but time to first opioid -- total opioid impact on mobilization, moving a patient to first bowel movement, discharge from the hospital, et cetera, et cetera.

So there is an element of the 331 data that says that you are going to have some level 1 data. But at the same time we've got people that are saying, well, let me see that PILLAR trial protocol that Jim talked about. And why -- can I institute that locally? And we've got some very strong advocates who are inside these systems who are using EXPAREL very effectively who push back on some of this negative data that's been used against EXPAREL to say, this is crazy, guys. This drug works dramatically well if you use it right. And so we're starting to see all of that stuff.

I phrase it that way because almost all of what we've seen in terms of the negative stuff is related to orthopedics and to specifically the knee. We're doing very well in TAP. Soft tissue is growing in a number of different places. We've got enhanced recovery protocols in oncology surgery and mastectomy and large abdominal wounds. We're doing a major study at M.D. Anderson in oncology and ovarian cancer. All of the data from all of these experiences is stunningly positive.

And so the 331 data, the TKA data and the spine data and the nerve block data just reverse all of this stuff that we've gone through in the last year. And we're setting up with large systems and orthopedic groups, et cetera, to be able to move this quickly once we get it.

Okay. David, that's really helpful. And maybe just a couple of quick follow-ups on that. One, when we get the knee data, what are the things that you think, based on the feedback you've been getting from accounts, should we be most focused on? You sort of focused on reduced opioid usage, but should we be looking at pain scores or length of stay? Or what do you think is the most important data points that we should be looking for?

And then as a follow-up, just maybe level-set everybody in terms of realistic expectations, in terms of how long it might take for that data set to start to meaningfully -- or detectably perhaps is the better way to put it -- start to affect numbers?

I'll take number two and, then I'm going to introduce -- this is really Scott's -- Scott is the brainchild behind this trial, so I'm going to turn it over to him for the primary endpoints.

But we will talk about it at AOS assuming that everything goes as planned. And I think one thing that you see about the orthopedic community is they respond quickly -- both positively and negatively, but quickly. And so our expectation is that the places that have invested themselves in saying that EXPAREL doesn't work effectively based on their data will obviously take some time. But I think the vast majority of the orthopedic community, especially with the pending bundle programs on April 1, will very much be looking forward to a data set and a protocol that drives them to short lengths of stay and all of the other aspects of improved and earlier mobilization (technical difficulty).

I think you will see an impact of this in the second quarter modest. But in the fourth quarter of next year, which is the big elective quarter for orthopedics, I would expect that you would see a significant difference from this year.

And with that, I'll turn it over to Scott in terms of the way the trial is designed in terms of the importance of the endpoint.

Thanks, Dave. Doug, thanks for the question. When Jim Jones and I sat down with multiple investigators in the knee community, there were one or two things they absolutely wanted to see in this trial. They wanted to see a reduction in pain. They wanted to see a meaningful reduction in opioids.

When we reviewed the literature and the TKA studies in the public domain, you would see a great variation in opioid requirements post-op. Typically, the numbers were between 50 to 100 morphine-equivalent units. That was a critical piece of the equation for what we were looking for. And I told others that when you look at that literature, we were expecting our placebo group to fall somewhere in the 50 to 60 morphine-equivalent units range and for us to have a significant reduction to those numbers.

I think it's really important -- and we talk about it internally all the time -- when you see negative studies or mixed studies with EXPAREL, one of the first things we always look at is that morphine-equivalent unit number. And so if there are studies out there, which there are some where morphine-equivalent units and an EXPAREL arm and a control arm are close to 100, I would argue that's not the one you want when you have your knee surgery.

I think our goal in this study is to show a clear benefit in morphine-equivalent unit. That's a number that we're going to focus on. We're going to focus on it relative to what's out there in the marketplace. That's critical. From the secondary endpoint, you should focus on a lot of outcomes which we think are critically important, discharge readiness as being one of the most important.

Remember, in this study, Doug, we're keeping patients in the hospital for 48 hours. We're doing that specifically to capture all of those data points around pain and opioids. Jim Jones has had in his career done hundreds of pain studies, and he felt it was absolutely critical for quality of data to keep those patients in the hospital. So we do not expect a clear win on length of stay. The average length of stay in the US for TKA is around two days. So by keeping patients in the hospital for two days to collect that data, we are not expecting to win a length of stay, but we are looking at discharge readiness.

And as part of our overall strategy, we will be looking at length of stay in every other trial where we will not require a two-day length of stay in terms of highest-quality data collection.

So we would focus you on discharge readiness as an important endpoint. We are looking at multiple other health outcome measures. An OBAS score, which is really a good measure of patient outcomes. As a critical secondary endpoint, we'll be looking at opioid-free. We'll be looking at opioid use at 72 hours and 30 days as important endpoints that you have not seen in the literature. You will not see in any cocktail study and you will not see in any knee study that we are aware of in the public domain. And remember we're also looking at some very what we think are interesting exploratory endpoints around physical therapy assessments, nursing assessments, patients' ability to do range-of-motion exercises -- all of which we believe will add to the body of evidence differentiating the 331 protocol from everything else that's out there today.

And, Doug, I would only add that these visual reality tools that have been developed are an absolute mimic of the 331 protocol. So we are confident enough in this trial that we want to be able to in a virtual way teach doctors how to achieve the same results that we'll report from this trial.

Okay. Great. Thank you very much.

Ladies and gentlemen, we unfortunately are out of time, and this concludes our Q&A session. I will now turn the call Dave Stack. Sir?

Thank you, Nova. Thank you for joining our call today. We appreciate your support as we continue this important work. Up next, we'll be at the Global Mizuho investor conference on November 16 in New York and the Jefferies 2016 London Healthcare Conference taking place that same week. We look forward to seeing some of you there. Thanks a lot.

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