Pacira Biosciences Inc (PCRX) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2016 Pacira Pharmaceuticals, Inc. earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Susan Mesco. Ms. Mesco, you may begin.

Thank you, Saundra. Good morning, everyone. Welcome to today's conference call to discuss our financial results for 2016 and provide guidance for 2017.

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

Joining me on today's call are members of our executive management team, including Dave Stack, Chief Executive Officer and Chairman; Jim Scibetta, President; Charlie Reinhart, our Chief Financial Officer; and Scott Braunstein, Senior Vice President, Strategy and Corporate Development. With that, I will now turn the call over to Dave Stack.

Thanks, Susan. Good morning, everyone and thank you for joining. 2016 was a year of solid execution and 2017 is off to a great start. We delivered 11% year-over-year revenue growth and in January, we announced our collaboration with DePuy Synthes- Johnson & Johnson, which we believe will significantly accelerate EXPAREL growth.

We recently added to our IP estate with a new EXPAREL patent that extends exclusivity to the summer of 2021 and today, we are reporting positive top-line results from our Phase 4 study in total knee arthroplasty or TKA.

This progress is just the beginning. The stage is now set for multiple major milestones for the remainder of this year and beyond. As you know, the opioid epidemic is a crisis of epic proportions. The operating room is the gateway to opioid abuse and places patients at serious risk for addiction and dependence.

As an innovative opioid-sparing option for postsurgical pain, EXPAREL can play a critical role in taking on this national issue. This is why we are so passionate about our mission to make EXPAREL accessible to as many patients as possible. With more than 70 million procedures providing patients access to opioids in the United States each year, the opportunity before us is vast and largely untapped.

Last year, we set forth a detailed EXPAREL growth strategy built on three pillars -- first, expanding awareness around opioid-sparing solutions; second, generating robust clinical data; and third, forming strategic collaborations with partners who share our commitment to providing patients with opioid-sparing alternatives. We are delivering results within each of these areas. Today, I would like to walk through some key highlights.

It is critical that patients and healthcare providers understand the importance of minimizing or even eliminating the use of opioids to reduce the risk of abuse and dependence. Last year, we launched a robust public relations campaign to empower patients to speak to their doctors about opioid-sparing treatment regimens.

Through our Choices Matter campaign, we are educating patients and physicians about their options for postsurgical pain. Since its launch in August of 2016, our Plan Against Pain website has had more than 140,000 page views. This important online resource is providing patients with the necessary tools to talk to their healthcare providers about a personalized pain management plan.

In 2017, we continue to focus on broadening national awareness about the economic impact of opioids and addiction on our nation and healthcare system, as well as a need for non-opioid options. We will expand our digital and social media presence to foster patient communications, as well as online patient advocate communities where patients can share their experiences.

Our educational campaign also includes working directly with healthcare providers to support enhanced recovery protocols to improve patient care. Later this year, we will launch our EXPAREL Finder website to connect patients to opioid-sparing centers of excellence and healthcare providers who have advanced training, expertise and experience with opioid minimizing multimodal pain strategies.

Turning to our second strategic priority, generating robust clinical data. Here, we are advancing two tracks in parallel. First, we are investing in Phase 4 trials in several key orthopedic and soft tissue procedures. These bupivacaine comparator trials are designed to demonstrate the procedure-specific best practice infiltration techniques and opioid minimization strategies to improve patient satisfaction and hospital economics.

On the orthopedic side today, we are reporting positive top-line data from our Phase 4 study of EXPAREL in total knee arthroplasty. This study was designed to demonstrate that EXPAREL affectively delivers prolonged pain relief while minimizing or even eliminating the use of opioids.

The trial was powered for 90% with 139 evaluable patients for this simple oral multimodal protocol. The co-primary endpoints were the area under the curve, or AUC, visual analog scale, VAS, pain intensity from 12 to 48 hours after surgery and the total opioid consumption from 0 to 48 hours after surgery.

The EXPAREL group achieved a statistically significant reduction in AUC VAS scores compared to those who did not receive EXPAREL with a p of 0.0381. In addition, patients who received EXPAREL consumed significantly fewer opioids than patients who did not receive EXPAREL during the 48 hours following surgery with a p of 0.0048.

We are especially encouraged by the clinical meaningfulness of this data given the critical need to reduce reliance on opioids to manage post-operative pain, which is the gateway to abuse and addiction into these dangerous medicines. These data also underscore the importance of proper technique in achieving successful outcomes and will help drive education and training of orthopedic surgeons and nurses on EXPAREL best practice for TKA.

In advance of the American Academy of Orthopedic Surgery or AAOS, and after we receive the full dataset, we plan to report the statistical outcomes of several key secondary endpoints. Because publishing this study in a peer-reviewed journal is critical, we do not intend to release detailed data points or p values for these secondary endpoints prior to publication.

We are also advancing a Phase 4 study of EXPAREL in spinal fusion surgery. The study is now screening patients with data anticipated in the fourth quarter of this year. As we did with TKA, we plan to publish the study's protocol to demonstrate proper infiltration technique.

This year, we are also launching a series of Phase 4 studies in soft tissue procedures. These studies will evaluate EXPAREL as part of a multimodal protocol for C-section, colon cancer and breast reconstruction surgery.

In addition, in collaboration with M.D. Anderson Cancer Center, enrollment is taking place in an ERAS-driven study to evaluate EXPAREL infiltration versus bupivacaine infiltration in ovarian cancer patients with the goal of opioid-free surgery.

The second track of our clinical strategy focuses on label expansion. Our Phase 3 femoral nerve block studies and brachial plexus nerve block study are advancing on schedule. We expect to have the results of both studies around the middle of the year and if all goes as planned, we will file a supplemental new drug application soon thereafter. This would position us for a nerve block launch in early 2018.

Recently, Dr. Vendepitte and colleagues published the results of a randomized study comparing EXPAREL 133 milligrams plus 5 ccs of 0.25% bupivacaine to 15 ccs of 0.25% bupivacaine for an interscalene block in the Journal of Regional Anesthesia and Acute Pain.

In the shoulder arthroplasty study, the EXPAREL group demonstrated lower pain scores and greater patient satisfaction. These and other published data leave us confident in the potential of the nerve block indication to drive EXPAREL growth. Nerve block is a more straightforward administration technique typically done with ultrasound guidance and we believe EXPAREL will be an attractive option for anesthesiologists to deliver post-surgical pain relief in procedures such as ACL repair, rotator cuff repair, wrist and hand surgery, foot and ankle surgery and shoulder arthroplasty.

The third and final leg of our EXPAREL growth strategy focuses on strategic collaborations. These are designed to expand education around non-opioid alternatives and broaden our commercial footprint. We have made tremendous progress.

In January, we announced the agreement with JNJ's DePuy Synthes, one of the largest orthopedic companies in the world. We expect this collaboration to significantly expand the use of EXPAREL across a broad range of surgical procedures. JNJ will take the lead commercial role for orthopedic procedures in the hospital surgical suite and post-anesthesia care unit. JNJ will also use their state-of-the-art educational platforms to train orthopedic surgeons and nurses on EXPAREL best practice techniques emphasizing the episode of care comprehensive approach.

Our Pacira team will focus on the growing soft tissue business and key target surgical specialists and anesthesiologists. We will also continue to take the lead for account management, pharmacy interactions and hospital floor staff education. We recently held our national sales meeting and the JNJ collaboration was welcomed with great enthusiasm from our medical and commercial teams. In addition, the two companies are preparing for their joint presence at AAOS, which Jim will discuss in a few minutes.

From a financial perspective, we built this collaboration as a win-win with both companies benefiting from sales growth. Importantly, after the deal concludes, we retain all rights to EXPAREL and we would expect to benefit from growth generated in our orthopedic business.

We will also continue to discuss partnership opportunities for key markets outside the United States. For Europe, we plan to submit our centralized marketing authorization application or MAA before the end of this year. Our MAA will seek approval for both infiltration and nerve block. In parallel, we are investigating partner opportunities for key markets such as Canada, China, Japan and Central and South America.

Our partnership strategy also focuses on collaborations with healthcare providers and hospital systems to support systemwide opioid minimization strategies and enhance recovery protocols. We are working directly with C-suite executives and specialty group such as anesthesiologists who have a significant interest in multimodal opioid minimization strategies. We expect to formally announce our first collaboration with a large hospital system in the coming weeks.

Beyond EXPAREL, we have two promising early stage assets that are based on our DepoFoam technology. DepoTranexamic acid or DepoTXA is an anti-fibrinolytic being studied to reduce post-surgical bleeding. We expect to launch a Phase 2 study of DepoTXA in a cardiovascular patient population in the second half of this year.

DepoMeloxicam is our nonsteroidal anti-inflammatory agent that we are taking into the clinic for post-surgical analgesia. We plan to advance DepoMeloxicam into the clinic later this year as well.

In summary, we have made great progress and we are excited about the growth that lies ahead. Patients, healthcare providers and hospital systems are desperately seeking solutions to the opioid epidemic. With no commercially available long-acting competitors, EXPAREL is uniquely positioned to play an important role in addressing this national crisis.

We look forward to delivering multiple milestones over the coming year such as broadening the national awareness about the economic impact of opioids and addiction on our nation and healthcare system, launching our EXPAREL Finder website to drive patients to opioid-sparing centers of excellence, reporting key milestones from our Phase 3 studies in nerve block and our Phase 4 studies in orthopedic and soft tissue procedures, rolling out the JNJ partnership with our first joint presence scheduled for later this month at AAOS and partnering with healthcare systems to support broad opioid minimization strategies and enhanced recovery protocols.

These are all important growth drivers for Pacira, but what is more important is that they will make a real difference to patients and healthcare providers who are seeking opioid-sparing solutions.

With that, I will turn the call over to Jim who will cover our commercial progress, including our JNJ partnerships and our plans for AAOS.

Thanks, Dave and good morning to all joining us today. On the commercial side of the business, 2016 was marked by solid progress that allows us to begin 2017 in a position of significant strength. Some of the key investments we made last year include establishing a robust commercial leadership team of seasoned executives, rolling out cutting-edge educational tools that demonstrate proper EXPAREL technique and these include our Touch Surgery app, best practice videos and our virtual reality platform; forming a high caliber team of MSLs to deploy in hospitals to establish best practice protocols and maximize the benefits of non-opioid multimodal therapy; and launching an online portal to help pharmacists and healthcare providers quantify the value of EXPAREL using evidence-based analyses in a wide variety of surgical models.

This is just a brief glimpse into some of our 2016 commercial investments. Our activities focus on education and training around EXPAREL and they hammer home the message about proper technique and opioid minimization. This is driving more consistent results in an increasingly satisfied and loyal customer base.

As for 2017, we are extremely excited about how it has started. As you know, the EXPAREL commercial opportunity is vast and we have only scratched the surface. This is why we are so excited about our newly formed collaboration with JNJ. Through this collaboration, we can accelerate our three-part EXPAREL growth strategy by quickly leveraging the broad reach of JNJ, their established relationships and scale within hospitals and ambulatory surgery centers.

Our joint commercial committee is now in place and includes VP level professionals from sales, marketing, medical affairs and alliance management. This committee is currently defining the positioning of EXPAREL within each of the JNJ orthopedic sales channels, namely joint reconstruction, spine, sports medicine and trauma.

The team has also defined objectives and timelines for our 2017 marketing activities. These include salesforce training, account targeting and prioritization and development of procedural videos for the customer targeted within each orthopedic salesforce. Both sides are eager to complete the upfront activities and shift the collaboration into execution mode.

For JNJ, EXPAREL will allow them to differentiate their product offering with the only long-acting non-opioid solution for prolonged post-surgical pain relief. EXPAREL fits very nicely into JNJ's recently announced holistic approach to aligning their broad capabilities called Care Advantage designed to help providers deliver better care.

As for Pacira, we are eager to pivot our sales focus to the very large untapped soft tissue opportunity. The joint team has been placing a solid effort behind our preparations for AAOS, which is just a few weeks out. We are treating AAOS as the official launch of our collaboration. All educational activities around EXPAREL, as well as pain and opioids, will have a joint presence from both companies.

With the JNJ partnership now underway and today's announcement of positive top-line results from our Phase 4 study of EXPAREL in TKA, we anticipate significant interest from physician thought leaders at AAOS. JNJ's extensive booth area will include the EXPAREL virtual reality experience in TKA procedures. Their booth will also feature a series of talk-of-the-town events throughout the week. Executives from both companies will host these events and physician experts will speak to a variety of topics, including the role of orthopedics in the opioid epidemic, getting ahead of pain to avoid opioids, real-life experience with opioid-free hip fracture surgery and the benefits of a systemwide team approach to multimodal pain management.

The significant amount of progress made within such a short period of time underscores the commitment from both sides to making this collaboration a success and more importantly providing patients and healthcare providers with a non-narcotic solution to manage post-surgical pain.

So in closing, on the commercial front, 2017 is teed up as an exciting year. We've got a commercial organization with the expertise to execute our EXPAREL growth strategy, our JNJ activities will continue to gain momentum through the year and start to expand the use of EXPAREL within orthopedics. Our sales team is eager to make a smooth pivot to the growing soft tissue market and we will continue to establish the EXPAREL value proposition and proper technique in a wide variety of surgical models.

Let me now turn the call over to our CFO, Charlie Reinhart, to walk through our financial results and outlook for 2017. Charlie?

Thanks, Jim, and good morning, everyone. I will start with a brief recap of our 2016 financial results and then walk through our outlook for 2017. To remind you, we will be discussing non-GAAP financial measures this morning. A description of these metrics, along with the reconciliation to GAAP, can be found in the news release we issued this morning.

I'm pleased to report that we ended 2016 in a strong financial position. This gives us a very stable base to support our three-part EXPAREL growth strategy. EXPAREL net product sales were $71.4 million for the fourth quarter and $265.8 million for the year, which was in line with our guided range of $263 million to $268 million. These results reflect the continued success of EXPAREL as an opioid-sparing solution post-surgical pain.

Our non-GAAP gross margin was 68% for the fourth quarter and 70% for the full year. This was within our guided range for 2016 of 70% to 73%. Non-GAAP research and development expense increased to $16.4 million for the fourth quarter and $42.4 million for the year. This was in line with our guided range of $40 million to $45 million. The increases in R&D expense over the prior year were largely the result of our two Phase 3 studies in nerve block and our Phase 4 study in TKA.

Our non-GAAP selling, general and administrative expenses were $29.3 million for the fourth quarter and $124 million for the year. This was just below our guided range for 2016 of $125 million to $135 million. The increase in full-year SG&A over the prior year was primarily due to EXPAREL promotional activities, including our Choices Matter public relations campaign and our TKA virtual reality educational program.

The end result was non-GAAP net income of $3.6 million or $0.09 per diluted share for the fourth quarter and $25.2 million or $0.62 per diluted share for the full year. We ended 2016 with $173 million in cash and investments.

Turning to our expectations for this year, we remain very optimistic about a number of key drivers that we believe will broaden the use of EXPAREL in 2017 and beyond. These include the following. The positive results of our Phase 4 TKA study, we expect data to be published in a peer-reviewed journal later this year. This will be a useful tool to clarify how to use EXPAREL and the benefits of the drug when used correctly.

Our recent announced collaboration with JNJ, as Jim discussed, the teams are advancing a number of upfront activities such as training and account prioritization. As these transitional activities are complete and JNJ's four orthopedic salesforces are trained, we expect the power of this relationship to begin impacting our top line in the second half of this year.

Our Phase 4 spine infiltration study, spine is a significant and largely untapped market for EXPAREL. We expect data from this trial by the end of the year and if positive, we believe we can begin to have a positive impact on sales as early as late 2017.

As Dave mentioned, we plan to announce our first collaboration with a large hospital system in the coming weeks and we would expect others to follow. As these opioid-sparing hospital system collaborations are rolled out, we expect them to broaden the utilization of EXPAREL within existing and new accounts.

Our two Phase 3 nerve block studies, we continue to be optimistic about the results of these trials and their long-term impact on EXPAREL sales. Results for these studies are on track for mid-year and we would file a sNDA soon thereafter. If successful, the timing of an FDA approval would be early 2018. As a result, we do not expect the nerve block indication to impact sales until 2018.

In summary, we have a number of key value drivers that we believe will start to propel long-term EXPAREL sales growth. Taking all of this into consideration, we are guiding to total EXPAREL net product sales of between $290 million and $310 million in 2017. This range reflects the growth trends we saw in our base business in the second half of 2016 with additional growth drivers beginning to take hold in the second half of 2017.

With respect to our non-GAAP gross margin percent, we would expect 2017 to be similar to 2016 and approximate 70%. We continue to invest in the expansion of our manufacturing facilities in the UK. Once these facilities are operational and take over responsibility for supplying EXPAREL, we would expect non-GAAP margins to improve to roughly 85%.

For non-GAAP R&D expense, we expect to be between $50 million and $60 million. Key drivers of this year's R&D are the completion of our two Phase 3 nerve block studies and our Phase 4 spine study. As Dave mentioned, we are also preparing to initiate a series of Phase 4 studies in soft tissue procedures.

For non-GAAP SG&A, we are guiding to a range of $145 million to $155 million. The increase from 2016 levels is largely attributable to the forecasted commission payments for our JNJ collaboration. While commissions earned under this partnership are driven primarily by incremental year-over-year growth of EXPAREL; for modeling purposes, the total annual cost of this relationship can be estimated by applying a high single digit commission rate to your full-year EXPAREL sales forecast.

The last piece of our 2017 guidance is stock-based compensation. Here, we expect to be in the range of $30 million to $35 million.

That concludes our prepared remarks. At this time, I would like to turn the call over to the operator to begin our Q&A session. Operator?

(Operator Instructions). Douglas Tsao, Barclays.

Hi, good morning. Thanks for taking the questions. Just maybe to start with, help us sort of understand a little bit the context of the knee study and how you think that is going to affect results in 2017. I think, Charlie, you might have said in the second half of the year. Should we think about that largely in the fourth quarter, which is generally pretty heavy in elective procedures?

Then just also in terms of the guidance, maybe just help us think through some of the assumptions in terms of the underlying growth rates for 2017 between ortho versus soft tissue. Obviously, in 2016, soft tissue grew I think probably over 20% and so should we expect that momentum to sort of continue?

Thanks, Doug. This is Dave and I will ask Charlie to pick me up on any of the issues. We have been working with the journals on what an approach would be in terms of dissemination of data and the preservation of a peer-reviewed journal opportunity. And part of those discussions has been around a timeline that we think, hopefully at least, will be accelerated. So I would expect that you will see a TKA journal before the fourth quarter. So it should have more of an impact from a timing perspective on a broad dissemination.

We will also work with the JNJ booth with the primary endpoints and so there will be a significant presence at JNJ around the TKA trials. Just to give you an example, they have purchased a couple of the virtual reality machines that I know you have seen and so in our booth, as well as in their booth, we will be demonstrating and people with virtual reality will be able to see for themselves exactly what the technique was that led to these results.

So while the paper won't be out until sometime later this year, I think you will see the opportunity to train and to make the 331 protocol part of the Johnson & Johnson training program. And so I do expect that you will see a benefit of this for the field organization, as well as for our clinicians.

And remember, we had a pretty high-end steering committee and docs who are part of the program and so we had a call with them last night. They know the primary endpoints and so they will be able to talk about this at AAOS at a high level at least.

I don't know if that is -- that is the best answer we've got for right now, Doug. We honestly haven't seen the secondary endpoints yet. We don't have the full dataset yet, so it is hard to comment any further than that.

On the growth drivers, we are training the Johnson & Johnson organization across all of their salesforces as we speak, so that will roll out over time between now and the summertime. That clearly will have a benefit as we just have more critical mass and this allows us to move our salesforce over to soft tissue, so we believe that the primary drivers will be our ability to focus on soft tissue and maintain the growth rate we had last year while at the same time taking on the concept that you can go to a cocktail for total knees and make bupivacaine into EXPAREL.

And I think, with this trial, we have proven without any question that the only way you can make bupivacaine into EXPAREL is if you are willing to use a lot of opioids, which, of course, we think is not in the best interest of healthcare systems or patients or anybody. But, in fact, that is what is going on.

Dave, it is Scott, Doug. If I was to add a little bit to Dave's commentary, I think from the orthopedic perspective overall with our partners, DePuy, I think we view both the knee opportunity and the spine opportunity as a little bit of the low-hanging fruit here. What we are doing in spine now with the 409 trial, with virtual reality, we will mimic that identical 331 protocol and approach. We get great feedback every day in the field about that educational technique around 331.

We are doing the same with 409 and as a reminder for folks, spine infiltration is significantly simpler than a knee infiltration. And so we think there is a lot of applicability from the 331 data how this will be viewed and at least educated and taught to the spine community. And then certainly hip fracture, trauma and sports are right behind that.

Okay, but I guess just explicitly in terms of the guidance, I mean what is the sort of underlying assumption between soft tissue versus ortho in terms of growth rate? And then just maybe one follow-up. In terms of the 331 study, do you expect to have greater impact with surgeons or hospital formularies?

Doug, this is Charlie. From a guidance perspective, we are not going to comment on specific growth rates between sections of the business. Generally, the theme is we have a base business, it is alive and well. It will benefit from some really exciting things this year, but that is going to be a big question of timing.

The 331 data obviously will impact the ortho side of the business, the relationship with DePuy JNJ will impact the orthopedic side of the business. But as we transition, our salesforce will then get the benefit of being able to focus their attention on the soft tissue side of the business as well. So everything is going to be impacted.

The most reasonable short-term opportunity here is we have been asked by many, many orthopedic surgeons who have used EXPAREL in the past and want access to EXPAREL and that access has been blocked by budgetholders. And what we have heard repeatedly is that they do not have a level I dataset that allows them to demonstrate clearly that EXPAREL improves patient care and saves money. We now have that data.

So I think we will put information into the hands of folks who want to use EXPAREL to be able to go in and demonstrate the benefits of appropriate technique, etc.

The other place where we will see a more immediate uptake is in these discussions that we are having with hospital systems, this clearly provides an opportunity for us to put a little kick in the step of those discussions because it is very clear that the orthopedic surgery, the OR is the gateway to the opioid epidemic with a specific focus on the OR gateway. If you are using bupivacaine thinking that you are not increasing the use of opioids, we have just proved without any question that that is an inappropriate strategy.

Okay, great. Thank you very much.

David Amsellem, Piper Jaffray.

Hey, guys. This is Sameer on for David. Just a quick one here. Can you talk about the current volume mix that is in total knee replacement and then how much of the overall mix for EXPAREL is in total hip replacement? Thank you.

When we look at our business overall, and I have to tell you, Sameer, our data is not as good as it was even a year ago when we went from ICD-9 to ICD-10, the datasets are all mixed up now and so I will give you what is a triangulation of a number of data sources, but it is pretty soft, I have to tell you.

So we believe -- now I am not sure if you are asking about hips -- well, I will answer the question both ways. If you are looking at the EXPAREL business, we continue to believe that the mix between orthopedics and soft tissue is about 50/50, maybe slightly more than that in orthopedics.

If we look specifically inside orthopedics, the knee is far and away the greatest percentage of the orthopedic business; hip is behind it. There is some belief in the marketplace that hip doesn't hurt enough in order to require the use of a product like EXPAREL. And to address that, Scott and his team are working with a group of surgeons on a hip fracture study and so when we start talking about the trauma aspect of hip, we think that there is a great opportunity there for us to grow hip and then sort of bleed backwards, if you will, into regular hip because clearly patients report that there is a great need for enhanced pain relief, especially if you are moving hip to an outpatient environment.

If I look at it the other way, and you say what percentage of all knees and hips are using, the knee number is in the neighborhood of 20%, the hip number is in the neighborhood of 5% or 6%. So we have a long way to go still.

Thanks.

Corey Davis, HC Wainwright.

Thanks very much. Just kind of back to the timing of the publication and how you can use the data before it is published. How much of the information can you actually go in and speak to the hospital administrators about it in the absence of a publication?

The same holds true with speaking to orthopedic surgeons. I think, just to be clear, you said that you are going to elaborate more on the primary endpoints at AAOS. Does that mean that you are going to give numbers like percent reduction in opioids and percent reduction in pain?

No. So the way this works, Corey, thanks for the question, is the Company has to make a decision as to whether we are going to go out rapidly with the information and just accept the consequences or whether we think that it is critical that we get a peer-reviewed journal. Given the nature of some of the negative trials that have been put into the marketplace, we believe strongly that we have to have a level I peer-reviewed journal in order to maintain the maximum benefit here.

So what will happen is that we have disclosed the primary endpoints with p values. We will have the secondary dataset and we will have some secondary endpoints that can be discussed by the KOLs and by the members of the steering committee and the PIs on the trial, but without p values. And all of the p values and all of the percentage reductions, etc. that you have asked about are specifically what the Journal requires be kept for the peer-reviewed publication.

And so what we have focused on is the timing of that publication, getting it to the marketplace as rapidly as possible rather than disseminating information, which would put us into a second tier journal.

So does that mean you will be able to talk about whether or not EXPAREL improves discharge readiness without giving specific numbers behind that?

No, what we can talk about, Corey, is that these results were achieved with a very specific technique and that if you are using opioids pre, intra and post-surgery that you are not going to be able to achieve these results. And so it will be a lot around training in order to achieve this 0.0048 opioid-sparing p value and that will give us the opportunity to open doors and get back in front of formulary committees and accelerate some of the C-level discussions that we are having in terms of the need to reduce opioids. And then over the next few months, we will fill in that data with the peer-reviewed journal, but we really can't talk about -- I mean we can't have it both ways. This is already a compromise in putting out what we put out this morning to some of the journals.

The last question is can you elaborate more on what that collaboration with the major hospital system is going to look like? Is this a system that already allows the use of EXPAREL or is the deal that they will now put it on formulary and in return, there is going to be more of an effort to do whatever it is that you are going to collaborate on?

Good question, Corey. So these are significant systems. They're generally -- their hospital mix is quite diverse, so you will have hospitals where they don't have EXPAREL on formulary. We have got hospitals where they are using a fair amount of EXPAREL. They have got procedures where they believe that they are in need of opioid-sparing strategies.

And so to answer your specific question about how does it work, we work together to identify where the opportunities are to reduce opioids where we get the biggest bang for the buck for the resources invested, if you will. And we help them understand how you would address these different procedures from an enhanced recovery and a minimized pain strategy in order to achieve the endpoint of reducing opioids.

We then write an ERAS protocol, an enhanced recovery after surgery protocol, with their line teams. So for example, their orthopedic team would work with our team to develop an ERAS that would be specific to that health system and then our medical affairs team roll that ERAS out to their hospitals and they give us their priority order of those hospitals.

So that is the biggest one that is under consideration right now. Then there is a number of variations on the theme based on the case mix of the different hospitals and where they are in terms of their ability to control opioids, etc. But there are things like we have had hospital systems that have had collaborative discussions with the American College of Surgeons and have drawn some information based on our relationship. We have had calls with the American Society of Enhanced Recovery where they were looking for a specific protocol that didn't exist and we worked with ASER in order to develop a protocol that was specific for the procedure that was being investigated. So there is all kinds of ways that we are helping the health system get their hands around the opioid epidemic.

Corey, this is Jim, just a brief comment. I think we think of it as our customer is starting to agree with us and potentially promulgate publicly that the opioid epidemic is the issue that then leads back to all of the cost issues that are the basis of making decisions for their multimodal pain management. So it is really kind of the potential to shift the culture of our customer base from our customer base.

Okay, thank you.

Gary Nachman, BMO.

Good morning, thanks for taking my question. This is Nicole on for Gary. Just turning back to the 2017 EXPAREL guidance, how much of a benefit are you assuming this year from the JNJ partnership on the ortho side? And what (inaudible) are you expecting from the ortho bundling and what are the types of surgeries where you expect the most increased use and are there any assumptions for pricing? Are there price increases or potential discounts at some point this year? And also one more question to put in, how much of a contribution is expected from the oral surgery?

That is a heck of a mouthful of questions. Let me see if I can remember some of them. From an oral surgery perspective, obviously, you know we launched last year and we will spend some more time this year from a commercial organization focusing on that. We think it is an additive market, meaning that it will contribute to the top line, but it won't be a major driver of the business. That is really the way we have described that.

From the DePuy JNJ side, I think you asked what type of procedures we expect that to result in?

Yes, how much of a benefit are you assuming this year from the JNJ partnership and also what type of surgeries are you expecting the most increased use out of?

So the benefit we think will come as the transition occurs and as their salesforce gets educated and empowered to go out into the marketplace. That will happen within the next couple of quarters and frankly, we haven't specified exactly what we think the financial ramifications of that is.

Nicole, we are not going to give procedure-specific guidance. That is just not in the cards. We do expect a significant benefit of bundling. As I said during my presentation, Johnson & Johnson does have a very concerted effort around episode of care and that is really an end-to-end teaching program and it is basically their bundle, if you will, of how you would use a series of products in order to improve patient care and economics around bundles.

EXPAREL will be a prominent piece of those teaching programs and so really we see a considerable opportunity to educate folks on a multimodal pain strategy, which is based around EXPAREL as forming the basis of addressing the CJR bundles. And so it is only positive and it provides us a critical mass of resource that we could never address by ourselves.

In terms of procedures, EXPAREL has the broad label for post-surgical pain, so we expect over time to benefit from a number of the J&J salesforces. So for example, they have a dedicated salesforce in spine. We will start training on the 409 protocol that Scott talked about for spine now and then in the fourth quarter when we expect to have data in spine, we will have all of the existing relationships, etc. that will allow us to hit the ground running, if you will, rather than our organization having to develop de novo experiences or relationships with the spine marketplace.

It clearly accelerates everything we are doing. It also allows us to have a dedicated presence in sports medicine. I will remind you that, and Charlie is absolutely accurate that we won't have the nerve block indication in 2017 and we don't expect a material benefit from nerve block into the 2017 revenues, but a positive nerve block trial will largely be represented in the marketplace with hand and wrist, foot and ankle, shoulders, primarily sports medicine and ortho-related opportunities and so the Johnson & Johnson relationship is built around having fit-for-purpose relationships that can accelerate all of those additional procedure opportunities.

And if you marry that with the program that Scott talked about where we have a very specific protocol and a virtual reality training tool, we should be able to rapidly disseminate the educational opportunities in order to achieve the results that we are showing in these different procedures.

Great. And can we expect any pricing changes, either increases or potential discounts at some point?

Obviously, you know our history. We are not a spec pharma company that leads by price. We are focused on building the business in a volume perspective and our pricing strategy has been very moderate in the past and at this point, we haven't made any comment about whether there would or wouldn't be any changes in the near term.

If you are tying together the hospital system agreements with price discounts or the demand for price discounts, we are just not seeing that, Nicole. Most of the discussions that we are having with the big systems are around services and helping them address the opioid epidemic; they are not around significant price decreases. So I don't see a material change in the discount programs either.

Okay, great. Thank you so much.

David Steinberg, Jefferies.

Thanks very much. Wondering if you can give us some more granularity on the Johnson & Johnson deal. I know you talked in the past about partnering ex-US and I'm just curious why not do a global transaction with JNJ?

Secondly, could you give us a little color on the genesis of the transaction? Were you talking to JNJ exclusively? Were you talking to other similar companies? If so, what were the key factors in why you went with JNJ? Just I know it has only been a few weeks since you've signed the collaboration, but perhaps a little color from the field on how the teams are working together.

Thanks, David, it is Scott. I've talked about this now with a lot of folks and thanks for asking the question on the call, but we -- when the CrossLink deal ended, we had a lot of interest from several orthopedic players. I think their concept of about looking -- contributing to their customers in a way that includes an opioid-sparing or an enhanced recovery educational piece was important to all of the major players and it has become more important to all of them.

I think DePuy was far and away the most engaged with us, eager to work with us in a way that we felt was most advantageous for our organization and without question had broadest depth and breadth across the orthopedic industry. And again, we think that hip and knee is the beginning. Spine, fracture, trauma, sports can be equally compelling markets and they have just been a great partner to work with.

We were approached by their US organization. We both felt it was critical that we have this deal going into early 2017 around this data, around AAOS and we needed that education for 2017 and we felt that it was most straightforward, simplest to move forward in the US.

It has created an extra level of complexity to our teams' thinking about the global launch, but I think it is important to remember globally that we still have to treat EXPAREL as a drug, we have to ensure global pricing. We have to have a strong global pricing strategy and we need the insight of the pharmaceutical industry to successfully do that. However, we do recognize the value of a strong orthopedic partner and the educational piece in the orthopedic space specifically.

So it's certainly going to play into our thinking as we move forward and it is great to have lots of interest globally. We are incredibly excited about filing end of year in Europe; the clinical team has done a great job. We have gotten great feedback from the regulatory authorities in Europe. We have an equally interesting set of options in other major regions. And so stay tuned; you should hear more as the year progresses.

David, I will answer one of your questions from my perspective, not being involved in this minute to minute like Jim and Scott are. The key factor for me was their dedication to patient care and replacing opioids. It really is very obvious that we are kindred spirits in that regard.

I will tell you what I said to the Board when we were discussing the potential to do this, that if you were the man in the moon and you sat in a room with three JNJ folks and three Pacira folks, after an hour, you would have a great deal of difficulty determining who was who. So there is a cultural bond here that I think is going to make this work and get us through any issues that we have in the marketplace.

I will answer your question about we are only a few weeks in, but I would tell you that is a factual statement, but if we had a chance to do this deal again tonight, we would do it in a minute.

Okay. Just a couple quick follow-ons. You have a bit of a high-class problem now in that you -- I think Charlie said you have $170 million in cash and clearly, you are going to be building cash. Just curious how you think about possibly redeploying that money. It's just burning a hole in your pocket with almost a 0% interest rate. Would a buyback make sense? I know you are growing fast, so probably not, but are you seriously considering some acquisitions or are you just going to let the cash grow on your balance sheet?

There is not much chance -- I was going to say something sarcastic. There is not much chance that we are going to do a buyback. I don't think anybody is investing in Pacira hoping that we do a buyback. We have got, and we have talked about this a couple of times, our customers have provided us with some business development opportunities that we think are quite interesting. We continue to look at those opportunities and right now, we have sort of got a mouthful with the JNJ deal and with all the data that we have got and getting ready for AAOS. But we do continue to look at opportunities that are of interest to these surgery audiences and the anesthesia audiences and I will remind everyone that we don't consider ourselves to be a pain company at all. We consider ourselves to be a company that is dedicated to surgery and to anesthesia, so there are a number of opportunities that are attractive to us and to them and I don't know if Scott has anything to tuck in around that.

I think the only thing I would add, Dave, both Daves, is that the business development team has had some sense that the JNJ deal was moving forward and so we, as an organization, have been incrementally focused on soft tissue opportunities. Once the transition happens within the commercial organization, we think we have a very well-sized organization to manage the hospital space to really optimize opportunities in the soft tissue world and so we will continue to focus on opportunities that make sense for our organization and our current and future focus.

All right. Just last question coming back to JNJ, it sounds like the collaboration is going great. Assuming it continues to go well and they like the product so well they want to own it rather than license it, would they have first right of refusal based on your current terms?

No.

Thank you.

Donald Ellis, JMP Securities.

Thank you and good morning, guys. The first question is for Dave. Is the opioid message really getting to the C-suite executives or do you still need to make a cost-of-care argument for EXPAREL?

And then the next question is regarding the high single digit commission paid to JNJ on EXPAREL sales? Where are you going to book that in your P&L?

Last question is regarding gross margins. I see the guidance for this your, thanks for that, but I thought I heard a comment about a long-term goal for gross margins and I didn't get that number.

Yes, let me talk about the overall message and then I think Charlie can talk about the guidance and if you want more information, Don, Jim can talk to you about what we are doing with Swindon and how that impacts everything relative to the gross margin.

It is a funny thing and I don't know exactly what the tipping point was, but we have been talking to folks for several years now about the opioid epidemic and it is clear now that a reduced opioid strategy is critically important to the major hospital systems.

I think the tipping point actually was when we were able to demonstrate to these folks that the gateway to the opioid epidemic was actually the OR and these patients were actually extending an acute surgical exposure to opioids and still on drug six months after therapy. I think that has really resonated in the C-suite.

Now you would expect that doesn't replace an economic analysis, right, and we still have to do the right kinds of clinical programs to demonstrate that when you reduce opioids, you in fact do improve patient care and actually save money. The bundles are actually helping that because they are shining the bright light of day, if you will, on not only length of stay but discharge status and it shows the difference between a patient that has to be discharged to a skilled nursing facility versus a patient who is discharged to home.

So there are a number of things that are working in our favor, but the argument has really shifted from just a frank economic dollars and sense to opioid-sparing being the primary interest and that really is the basis of the vast majority of my discussions with the C-suite folks.

Don, this is Charlie. I think the number that you missed, the forward-looking target for gross margins continues to be 85%.

Okay. And where will you book the commission to J&J for EXPAREL sales?

That is booked in SG&A.

The one additional question on the bundling, remind us when is it that the hospital systems will actually be penalized financially for going over the capitated rates? Is it April of this year?

Under BPCI, there have been folks that have been in a bundle since 2013. The president delayed the bundles for DRG 469 and 470, hips and knees, from April 1 to June 1, so it still is right around the corner. We still expects -- and actually that gives us some time to actually work with folks as well as with our JNJ partner to get folks ready to address that requirement and -- it is really an opportunity if you do it well because the bundle is actually built on data that when the marketplace was still largely using femoral nerve blocks and because of that, they were sending patients to skilled nursing facilities.

So if we can use a low opioid treatment strategy, reduce the length of stay and send patients home, the bundle actually creates a short-term revenue opportunity around knees and hips and then later in the year around tibial fractures and a couple of other things that have been added to the bundle list. So I hope that answers the question.

Very well. Thank you very much.

Irina Koffler, Mizuho.

Thanks for taking the question. I was just wondering, with J&J, some of the reps are probably mapped to hospitals that are not using EXPAREL or may not have it on formulary. So in those cases, what do those reps do for your franchise? Maybe you could talk about that.

This is Jim. Remember, there are four different salesforces within JNJ and based on our early work with them, they are in virtually every hospital with some level of presence. Somewhere they have got relationships that we can leverage overnight and that is some of the account targeting and somewhere this is an opportunity for them to have another product to bring to their customer that they want to work with in the future. So we are very comfortable that the broad reach of them is frankly -- we have a great salesforce, they've been doing everything they can, but this just gives us tremendous reach beyond where we are today.

Okay. And then on the hospital collaborations, you kind of outlined it before, but in terms of just broad strokes, it sounds like if hospitals are already using the product then longer term they may use more product and maybe this will occur over a year or two time period? Is that a fair assumption or is it more de novo hospitals that are fresh to the product that want to get sort of educated and start using right away?

Yes, on the collaboration front, we don't want to create the impression that these are large hospital systems who have never seen EXPAREL who are going to by themselves drive revenue overnight with something very significant.

It is working with these customers and us being the trusted partner with them, which we think is very important for us to have our product be used properly, deliver value to them, have it be the kind of sticky business that we all think a hospital product should be. And as I said earlier kind of market hospital to hospital and system to system that we have a solution to help them through not just the opioid epidemic, but the bundled payment environment and all the economic pressures that they have.

Okay, thank you.

Ken Trbovich, Janney.

Hi, guys. This is Brennan on for Ken. Sorry to maybe belabor this point, but I was just hoping if you could maybe give some details maybe for modeling on the JNJ impact just to think about it as that second-half impact being heavily weighted or more a slow gradual incremental growth quarter to quarter?

So we really haven't provided that level of color, but I think it is -- what we have said is that the education process, the ability to get the DePuy sales folks out there, is starting now and will take a quarter or two to implement so that we don't, and as it gets implemented, they will be able to have an impact. So it is going to evolve throughout the year, but it is going to be focused we think probably on the second half of the year.

Brennan, this is a major effort. I am sure you appreciate by the nature of your question the enormity of the task of training the JNJ salesforces. So just so everybody gets a sense that we are going to train all of the JNJ salesforces in a specific region and that will roll out through the summer.

So you will have regions, you will have sections, you will have geographies in each section of the United States that will be trained on a rolling basis and so that will allow us a number of opportunities to fix anything that we might not be fully up to speed on. So it is really difficult for us to say that we know what the impact is going to be in any month or any given quarter. We are just going to have to see how this goes forward.

And you also, I'm not trying to make any kind of excuses, but you guys have to understand that we have only had this TKA data for a few days and frankly have only talked about it with J&J for the last couple of days. So to tell you that we understand what the impact of this 331 data is going to have on the Johnson & Johnson opportunity frankly would be rushing the fence in a major way. We just don't know is the answer.

Okay, great. I appreciate that.

I think the best thing about it, Brennan, is it is all positive. We just don't know how positive.

Okay. And then I know there had been some issues with the prescription data coming in from Symphony. I just didn't know if you had any further comments on that, if it has been cleared up and what to expect moving forward as far as the accuracy of that data.

This is Jim Scibetta's domain, but I can't help myself. The data is just unbelievably poorly done. The excuse that we have heard is that we put new SKUs out into the marketplace and that is why they missed half of the business in the month of December. The only thing I can tell you is that that is complete nonsense and I don't know if Charlie or Jim if they want to give any further guidance, but there is no explanation that we can come up with for the way that they have not been able to categorize the EXPAREL sales appropriately and it is getting worse, not better.

The only thing I would say is we are kind of back to where we were a couple years ago where we would really caution the investment community month by month to have any reliance on them until they reestablish that they can figure out what we are doing.

Okay, all right, great. Thank you, guys.

Jason Gerberry, Leerink Partners.

Good morning; thanks for taking my question. First, just I realize the trade-offs in terms of waiting for a level I peer-review publication, but I was curious can you comment at all on what the minimal effect size was for the TKA study for the trial to be considered positive?

Second to that, can you just comment on how many milligrams of bupivacaine did the patients in the cocktail arm get? Thanks.

The protocol is up on clintrials.gov, so it is easy to answer the second part of the question. It was 100 milligrams on both arms. We are not going to talk about minimum effect sizes or any more specific information as it relates to the trial. That will be up to the investigators and the PIs and the steering committee as we go forward. That is not anything that we are going to announce on a conference call.

Okay. If I can just squeeze in a follow-up, the timing of the gross margin benefit with the manufacturing benefit, can you provide a little more color on that? Thanks.

Are you referring to how do we get from 70 to 85? Is that what you are asking?

Yes, more on the timing of that.

So I think it will evolve over the next three or four years, kind of a slow progression.

Okay, great. Thanks.

Boris Peaker, Cowen and Company.

Great, thanks for squeezing me in. I was wondering on the TKA study, how long did it take for the physicians to actually administer EXPAREL given the very detailed procedure that you provided them versus just administration of bupivacaine?

If you are doing it right and you are actually injecting bupivacaine into the posterior capsule in the periosteum, there is no time difference. The product comes to the OR premixed in the syringes. It is not only a very prescribed protocol for where to put it, but once you get into the cadence of how the product should be used, you inject the syringe.

The syringes are very -- it is easy to establish the periarticular injection. Remember they were doing a periarticular injection anyway. What we have had to show is the benefit of the multilevel injection techniques, but, for example, we used to stand around and talk about things while the glue dried after the prosthesis was inserted and now we use that time to inject the periosteum and we have already injected the posterior capsule.

But I would say net if you were using bupivacaine before then there would be no difference and in this trial, if you talk to the docs, the difference between the periarticular injection of 120 mls with bupivacaine and with EXPAREL mixed with bupivacaine, there is no difference in the OR time.

Got you. And for the series of Phase 4 studies that you mentioned you plan to start in soft tissues later in the year, will those be against placebo, active control or a mix? What are your thoughts on those?

Everything is going to be active comparator and in fact, the additional nerve block trials that are being done, that I talked about during the call, are also all active comparators.

So the nerve block trial was done as a placebo at the request of the agency and so then when we were asked to redo the femoral nerve block trial, it was done as a redo rather than as a de novo trial. So all of the trials are competitive and follow basically the same strategy as what was deployed in 331.

The only other comment I would make, this is Scott, is that not only are they all active controlled, but just like 331, they have an active, oral, inexpensive, convenient, multimodal, state of the art and we think that is critical in terms of real-world data.

And just my last question, when it comes to active control, I mean how much bupivacaine will patients be getting generally in the treatment arm versus the control arm in total?

Every study is going to be specific and every study is going to correlate with what historical procedures recommend. So we chose the TKA dose not only consistent with our label, but a review of all prior TKA studies in terms of infiltration. We had lots of input from our steering committee and that will be the case in every study that we run.

There are some specifics -- as an example in the C-section trial, there is incrementally more concern about bupivacaine toxicity, postpartum, so we are using appropriate doses in that study. So every dose that we choose has buy-in from a steering committee standpoint, a safety standpoint, a label standpoint and a best practice standpoint.

So remember, Boris, so I agree with Scott totally, they will all be procedure-specific and they will be driven by people who are experienced in the art and have used EXPAREL in these different procedures. But, remember, the strategy here is that we have got physicians in the marketplace that believe that they can make bupivacaine into EXPAREL. And so the major output of these trials is that the only way you can do that is if you use large doses of opioids and you see some of the papers have been very cleverly constructed to either not give you that information or present it in such a way that it is not possible to discern.

So we want to make it very obvious that bupivacaine has a short duration of action and the only way you can use bupivacaine is if you are willing to use large doses of opioids and we don't think that is an appropriate treatment strategy for patients.

Great. Thank you very much for taking my questions.

That does conclude today's Q&A session. I would now like to return the call to Mr. Dave Stack for any further remarks.

Thank you. Thanks for your questions this morning. In closing, we are very pleased with where we stand. Important progress in 2016 has set the stage for this very exciting year ahead. We are off to a terrific start. The newly formed collaboration with J&J is gaining momentum every day and our Phase 4 study of EXPAREL in TKA has now successfully crossed the finish line with statistically significant results. We have many more key milestones on track for this year; long-term growth prospects for EXPAREL continue to be extremely positive.

We appreciate your time and interest and look forward to providing you with future updates. We are also excited to meet with investors in New York City this Friday and Jim and Scott and Susan will be presenting at the Cowen conference on Monday the 6th. Thanks, again, everybody.

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