Pacira Biosciences Inc (PCRX) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacira Pharmaceuticals fourth quarter conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn to introduce your host for today's conference, Head of Investor Relations, Susan Mesco. Ms. Mesco, you may begin.

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

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.

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

Thanks, Susan. Good morning, everyone, and thank you for joining us today.

Throughout 2017, you could not open a newspaper or turn on the TV without being confronted by the latest tragedy of the opioid epidemic in the United States. This crisis continues unabated. A recent national survey revealed that 1 in 10 patients inadvertently become addicted to or dependent on opioids after surgery, resulting in more than 3 million postsurgical patients per year becoming persistent opioid users. And the suicidal cause of this epidemic is staggering.

U.S. Centers for Disease Control and Prevention recently reported that the opioid crisis carries an estimated $78.5 billion annual burden to the U.S. economy. The only single-administration long-acting local analgesic for postsurgical pain, EXPAREL, is uniquely positioned to play an important role in addressing this national crisis right at its roots, the surgical suite.

We are pleased with a significant progress Pacira made during 2017, as we continue to advance our mission of providing EXPAREL, our opioid-free alternative to as many patients as possible.

In addition to our own dedicated internal initiatives, we have brought forward several meaningful partnerships that are helping us get the message out about the importance of our opioid-sparing alternative. Our robust partnership with J&J continues to gain traction and help accelerate EXPAREL daily growth to 10% for the fourth quarter of 2017.

Our new collaborations with the Center -- Cancer Treatment Centers of America, the Illinois Surgical Quality Improvement Collaborative, WellStar Health Systems and the University of Tennessee Medical Center are raising awareness around opioid alternatives and minimizing opioid use through a variety of joint initiatives.

These partners share our commitment to reducing the role of the operating room as the gateway for opioid use and abuse. Collectively, these campaigns will drive enhanced awareness for patients, payers and health care providers throughout 2018.

As you know, we are expanding the use of EXPAREL through 3 strategic pillars: First, generating Level 1 clinical data in key surgical procedures; second, driving education and awareness around the need for opioid-sparing solutions; and third, partnering with those who share our commitment to reducing the role of the operating room as the gateway to opioid use and abuse.

This is especially important as we work with payers to develop opioid-sparing opioid-free alternatives. Through these collaboratives, along with our surgeon selector initiative, payers can locate health care provider resources with specific strategies to reduce or eliminate the need for opioids.

Let's begin with clinical. In February, our sNDA seeking expansion of the EXPAREL label to include nerve block was discussed at a meeting of the FDA's Anesthetic and Analgesic Drug Products Advisory Committee. While we were disappointed with the committee's vote, we remain confident that our submission provides all the information requested by FDA reviewers to support label expansion.

Consistent with FDA industry guidance and our discussions with the FDA, our filing is based on 2 highly statistically significant placebo-controlled Phase III studies of EXPAREL: one in femoral nerve block for total knee arthroplasty; and one in brachial plexus block for shoulder surgeries. It includes data from 8 company-sponsored studies with safety and pharmacokinetic data through 120 hours. It also includes data from 2 investigator-initiated bupivacaine comparator studies that provide additional experience in smaller peripheral nerve block settings. Over the coming weeks, we will keep an open dialogue with the FDA to define the best next steps for expanding the EXPAREL indication to include nerve block.

In parallel, our regulatory team is working with the FDA to finalize the plan for EXPAREL in the pediatric setting. As discussed in our last quarterly call, we submitted an extensive package of real-world evidence from the Cleveland Clinic and the Premier database for several surgical procedures in patients under 18 years of age. We have received FDA's feedback on our proposed development plan, and we expect to meet with them around middle of this year to define an acceptable path forward for this vulnerable patient population. There are currently no approved alternatives to opioids for managing severe postsurgical pain for pediatric patients.

As for our Phase IV programs, our C-section study continues to draw great interest. Both patients and health care providers clearly see the benefit of a non-opioid alternative for new mothers and their babies following this common surgical procedure. This study is currently enrolling patients and we expect data later this year.

We are also in the process of finalizing our protocols and educational plans for additional on-label studies in hip fracture, spine, colorectal and breast reconstruction. We expect these studies to begin later this year.

The last topic to cover is our -- for clinical is our early-stage pipeline. We have submitted an investigational new drug application, or IND, for DepoMeloxicam and expect to begin clinical trial this year. DepoMeloxicam is a long-acting NSAID designed to treat moderate-to-severe pain within a non-opioid multimodal regimen.

As for DepoTranexamic Acid, we have made the strategic decision to no longer invest in this clinical program given the current competitive landscape with clinical trials studying oral tranexamic acid for the same or similar clinical uses.

Turning to the second pillar of our strategy, education and awareness. In January, we hosted a panel at a social media event, #BlogHer Health, to educate the women's health audience about non-opioid options like EXPAREL. Nearly 1,000 female health influencers were in attendance. The panel featured 3 EXPAREL surgeons and was moderated by Shannon Hartley, the Chief Marketing Officer of Shatterproof.

The panelists discussed the risks of opioid overprescribing in the surgical setting and the importance of seeking out effective non-opioid options. The event was designed to empower women to discuss non-opioid options like EXPAREL with their surgeons, to prepare for effective postsurgical pain management. Since the event, women have continued to share this message with their followers, creating 282 social posts and 8.4 million social impressions.

We also continue to engage in active discussions with policymakers, given the recommendations of the President's opioid commission to reduce obstructions and enhance access to innovative opioid-sparing options. The commission reports specifically recommends that CMS provide reimbursement for non-opioid postsurgical pain management drugs administered during surgery.

We are currently working with CMS policymakers to achieve an off-cycle change around reimbursement practices to fund EXPAREL within their fixed payment to outpatient and ambulatory surgical centers. Our partner, Johnson & Johnson, has been a tremendous resource for this initiative as well.

In parallel, we are seeking a unique reimbursement culture, through the standard process with CMS. We applied in December. And if we are granted a code, it would take effect January 1, 2019. Around the middle of this year, CMS will publish a draft of their proposed rules to take effect the following year. We are working with CMS to have EXPAREL unbundled within that draft rule.

Securing separate reimbursement for EXPAREL will create a significant opportunity for us. Commercial payers already recognized the economic advantage of reimbursing EXPAREL separately under C9290. They are supporting Enhanced Recovery After Surgery protocols with EXPAREL and shifting many inpatient procedures to the outpatient setting, which is yielding savings of roughly 40% per case.

Let me now move on to our third and final strategic pillar, partnerships. As Scott will highlight later in this call, our partnership with Johnson & Johnson continues to flourish as we transition to meaningful account activation and make inroads across each orthopedic sales vertical. Our collaborations with Trinity Health, Aetna and the American College of Surgeons continue to support active educational initiatives. These partnerships provide a multipronged approach to addressing the opioid epidemic through direct health care provider and patient education.

As I mentioned earlier, we also recently entered into several exciting new collaborations to support education around opioid-sparing solutions. Before I pass the call on to Rich Scranton to discuss these programs, I'd like to quickly comment on the FDA's recently issued draft guidance for the development of a generic version of EXPAREL. This guidance underscores the tremendously high technical and financial hurdles facing any potential generic competitor, namely, the guidance states that a generic product would require equivalent liposomal characteristics including liposome composition, amount of free and encapsulated drug, internal environment of the liposome, liposome particle structure and morphology, liposome size distribution, electrical service potential or charge and in vitro release rates.

The FDA guidance also highlights that EXPAREL's complex multivesicular honeycomb structure, which is very distinct from traditional liposomes. Lastly, the guidance specifies that the bioequivalence study would require test product produced at commercial scale, which would add considerable financial risk. The bottom line is that this guidance leaves us confident in the long-term exclusivity for EXPAREL in the unlikely event of future generic competition.

With that, I'd like to now invite Dr. Richard Scranton, our Chief Scientific Officer, to walk through each of these collaborations in greater detail. Rich?

Thanks, Dave. I'll start with WellStar, the largest health system in Georgia.

In January, we announced a joint commitment with WellStar to minimize opioid use and standardize outcomes across surgical procedures. With our WellStar partners, we are developing a suite of provider and patient-facing opioid education materials as well as quality improvement data attracts the progress of opioid-sparing protocols and the resulting reduction in overall opioid consumption. These data will guide next steps in optimizing patient care.

We are also developing a best practice playbook to transfer protocols from one hospital to an entire hospital system. This will be a valuable, scalable resource that we can use for future system-wide endeavors.

Next, I'd like to highlight an important initiative launched in the fourth quarter with the Illinois Surgical Quality Improvement Collaborative. This quirk is a nationally recognized partnership of 56 Illinois hospitals. We launched this program in December to develop programs and resources to support best practice pain management prescribing for patients undergoing surgery in the state of Illinois. We are focusing on developing intensive, interactive educational tools that hospitals can use to drive adherence to evidence-based best practices for perioperative pain management.

I'd also like to highlight our new relationship with the Cancer Treatment Centers of America. CTCA is a national network of 5 hospitals in Atlanta, Chicago, Philadelphia, Phoenix and Tulsa, specializing in the treatment of adult patients with cancer. This collaboration is centered on the opioid risk reduction initiative, an educational effort that is driving responsible use and increased awareness of opioid alternative. The opioid risk initiative is aimed at improving the experience of cancer patients by expanding their pain management options. It includes a variety of educational programs.

Finally, I'd like to touch upon our collaboration with the University of Tennessee Medical Center, Nashville, which we announced yesterday. This partnership will develop low or no opioid postsurgical pain management pathways for patients undergoing hernia, one of the most common surgical procedures. All in all, we are very gratified with the growing number of key organizations interested in partnering with Pacira to make a meaningful difference in addressing the opioid epidemic as quickly as possible. We continue to have discussions with additional like-minded partners, including health care systems, payers and even employers.

I'll now turn the call over to our Chief Operating Officer, Scott Braunstein, to share an update from our J&J partnership. Scott?

Thanks, Rich, and good morning to all joining today's call. Our collaboration with J&J continues to advance with the teams building under established rapport. In just 1 year, we have created an energy and enthusiasm that is palpable and from which we expect to produce great results.

We're thrilled with the resources J&J is investing in EXPAREL and their shared commitment in providing an opioid alternative to as many patients as possible.

In the coming weeks, our top sales leadership, along with key opinion leaders, will be participating in a series of national sales meetings across 4 of the J&J sales verticals: joint reconstruction, spine, sports and trauma.

In addition, the number of activated accounts continue to grow. To remind you, account activation involved the J&J sales team working with their Pacira colleagues to train customers on proper EXPAREL technique.

Looking ahead, some of our key 2018 priorities include peak programs, professional education, medical society meetings and digital video campaigns. Peak programs are peer-to-peer programs that involves high-caliber KOL sharing their EXPAREL expertise with the specific specialty.

The audience typically averages 30 physicians, including a mix of surgeons, anesthesiologists and residents. J&J has committed to resourcing a sixfold increase in the number of peak programs in 2018. In fact, the number of peak programs already completed were planned so far this year is greater than the number of programs completed all of last year.

Each peak program covers the opioid crisis, multimodal pain management with EXPAREL, case reports and interactive Q&A. On the professional educational front, Tier 2, our J&J colleagues, are exceeding our expectations. J&J's world-class programs include replicas of operating rooms, cadaver labs and classrooms, all of which can simulcast realtime video training courses to doctors and reps. J&J's educational programs will also begin incorporating interactive anatomical model that feature realistic bone and tissue, J&J implants and infiltration simulation.

Our first model is TKA and will be unveiled next month at the Annual Meeting of the American Academy of Orthopaedic Surgeons, or AAOS. Additional model for the development for spine, hip fracture and shoulder procedures will be added this year. These and other educational tools will help expand EXPAREL best practice technique in orthopedic procedures around the country. A significant number of professional educational courses are on track for the first half of 2018.

We are looking forward to EXPAREL's continued integration into J&J's presence at medical society meetings. On the near-term horizon, the teams are preparing for J&J's numerous programs at AAOS. They will include an EXPAREL dedicated booth, a series of cadaver labs and educational symposia, a featured hip fracture video presentation from Dr. Amin and peak programs with Dr. Sethi and (inaudible). All of these sessions will focus on opioid-sparing strategies that feature EXPAREL.

The last initiative I'll cover today is our digital video campaign. This is a new series of educational webinars and video blasts that will include KOLs, such as Dr. Michael Mont, leading author of the PILLAR manuscript, discussing multimodal pain management with EXPAREL to achieve opioid-free surgery.

In summary, our J&J collaboration is driving strong momentum, as we remain dedicated to enhancing the awareness and usage of EXPAREL in the surgical suite. Both field teams are engaged and working collaboratively to drive accelerated growth of EXPAREL.

With that, I'll turn the call over to Charlie to walk through our financial results. Charlie?

Thanks, Scott, and good morning, everyone. I'll start by summarizing our 2017 financial results and then walk through our outlook for 2018. To remind you, I will be discussing non-GAAP financial measures this morning. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release we issued this morning.

We ended 2017 in a very strong financial position. With $371.4 million in cash and investments, we're well positioned to advance our 3-part EXPAREL growth strategy. EXPAREL net product sales were $78.7 million for the fourth quarter and $282.9 million for the year, which was in line with our guided range of $280 million to $285 million.

Our non-GAAP gross margin was 75% for the fourth quarter and 71% for the full year. This full year gross margin was in line with our guided range of approximately 70%. Non-GAAP research and development expenses were $8.8 million for the fourth quarter and $53.9 million for the year. This was at the lower end of our guided range of $50 million to $60 million. The $11.6 million increase in our full year R&D expense for 2017 versus 2016 was largely due to our 2 Phase III studies in nerve block and development cost related to the scale up of our manufacturing capacity in the U.K.

Our non-GAAP selling, general and administrative expenses were $33.4 million for the fourth quarter and $138.7 million for the year. This was below our guided range for 2017 of $145 million to $155 million due to modestly lower spending across a number of functions.

The $14.7 million increase in our full year SG&A expense for 2017 versus 2016 was primarily driven by marketing and educational initiatives to generate product and opioid-sparing awareness in key surgical markets; expenses related to our copromotion activities with J&J; and the launch of a new corporate website as well as a revamped EXPAREL.com, which now includes a surgeon selector tool, video -- technique videos and case reports.

The bottom line was non-GAAP net income of $16 million or $0.38 per diluted share for the fourth quarter and $8.6 million or $0.21 per diluted share for the full year.

Turning to our expectations for 2018. We are guiding to total EXPAREL net product sales of between $300 million and $310 million in 2018. This range aligns with our 2017 year-over-year average daily growth rates recorded during each quarter, ranging from 6% to 10%. While we are very confident in the growth initiatives that are now in place, especially the investment of our partner J&J is making in EXPAREL, the -- projecting the timing of when each of these items will translate into accelerated growth is difficult to predict with certainty.

As we gain additional visibility through the year, we will update our guidance accordingly. I would also remind you of the seasonality of our business with sales directly driven by procedure counts with the first quarter typically the lightest and the fourth quarter the strongest.

With respect to non-GAAP gross margin percent, we would expect 2018 to land in the range of 70% to 72%. To remind you, we'll continue to invest in the expansion of our manufacturing facilities in the U.K. with the first commercial manufacturing on track to begin in the second half of 2018.

As we continue to build additional manufacturing capacity at this location and it becomes fully responsible for supplying EXPAREL, we expect non-GAAP EXPAREL margins to improve to roughly 85%.

For non-GAAP R&D expense, we expect to be comparable to last year and come in between $50 million and $60 million. Key drivers of this year's R&D are investments in a series of Phase IV studies, specifically C-section, hip fracture, spine, colorectal and breast reconstruction as well as the 200 liter scale up of manufacturing capabilities in the U.K.

For non-GAAP SG&A, we are guiding to a range of $150 million to $160 million. The increase from 2017 levels is largely attributable to an extended public affairs campaign focused on driving policy change to improve patient access to non-opioid options as well as our forecasted commission payment for our J&J collaboration.

For those of you who are new to the story, J&J commissions 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 2018 guidance is stock-based compensation. Here, we expect to be in the range of $30 million to $35 million.

That concludes our prepared remarks. I'd now like to turn the call back over to Dave.

Thanks, Charlie. Looking at the remainder of 2018 and beyond, we believe Pacira is well positioned for our continued success. 2017 was a year of important progress and paved the way for several key milestones throughout the remainder of this year, including achieving full year 2018 EXPAREL sales guidance of $300 million to $310 million, defining next steps for the nerve block indication; completing the C-section study and reporting top line results; launching additional Phase IV studies in hip fracture, spine, colorectal and breast reconstruction surgeries; securing separate reimbursement from -- for EXPAREL from both government and commercial payers; and continuing to broaden the national education and awareness campaign about the non-opioid alternatives for postsurgical pain management through our Choices Matter program; and forming new collaborations with health care providers and payers who share our passion for improving patient care through opioid minimization strategies.

With that, I'd like to turn the call over to the operator to begin our Q&A session. Daniel?

(Operator Instructions) And our first question comes from Randall Stanicky with RBC.

Dave, I just have 2 questions. Number one, can you provide some context for the guidance range? It implies growth of 8% for EXPAREL and that's against low double-digit growth that we've seen from both you in December and Symphony in January. So where's the disconnect there in the growth outlook? And then specifically, how are we thinking about the J&J ramp and contribution to that growth as we move throughout this year? So that's number one. And then, the second question is on the J code, it's more of a logistical question. Talk about the time line. The CMS agenda for the main meeting should be released, I think, in the next few weeks. Is that the right way to think about timing? And if we do see a J code for -- a separate J code for EXPAREL in 2019, what does that do for sales, for context? Is that a 5% boost -- growth boost opportunity? 10%? How do we think about the P&L opportunity there?

Thanks, Randall. I'll address the -- well, I'll take it in the order that you put it. First, the guidance we believe is -- well, we hope is conservative. I think, as Charlie outlined, we have not done a good job over the last couple of years of making sure that we met the guidance that we put out there. So we wanted to be conservative -- appropriately conservative to make sure that we're providing a number to the marketplace that we'll be able to revise upward as the year goes on. But I think Charlie's context was also important. We've got a number of moving parts. The CMS initiatives, the commercial payer initiatives, the resolution of the nerve block AdCom. I mean, all of those things make it difficult for us to project exactly the timing of when these increases are going to take place, so we thought a conservative approach, in this case, was the best approach. J&J, as Scott outlined, I mean, is just as good as it could be, Randall. I don't know how we could expect anything more from this partnership. I think I would focus, in addition to all the representatives and all the things that we've talked about with the financial community many times, what's really important is that peak programs and the educational opportunities that Scott outlined and then specifically all of the work that's been done around AAOS, where our partnership is really providing an opportunity at AAOS that would have been well beyond the capabilities of Pacira if we didn't have them as a partner. So we see all of that as upside going forward. The question you asked about CMS, a little bit -- I mean, it's a perfect example of our guidance of why our guidance is appropriately conservative at this point. We are engaged in very constructive discussions with CMS. We still believe that there is a possibility that we will get a off-cycle J code during 2018. And at the same time, we are working through the normal CMS cycle with a backboard than being January 1, 2019. The reason for that approach is and I think you asked for the context of those discussions, really it's difficult to find a surgeon or an anesthesiologist who doesn't have some real strategic interest in non-opioid options. So if we are -- and the only thing that really limits access, either from a P&T perspective or from a general system perspective, is the financial constraints of many of our hospital customers, especially since the signing of the Affordable Care Act. So we believe that if we're -- when we're successful in achieving CMS success, then that we'll remove the vast majority of the obstacles and make -- I mean, it's way more than 5%, Randall. We're not in a position where we're going to provide any guidance, but I would tell you it is a very material opportunity, which we are already seeing now. I mean, there are payers -- commercial payers today who are paying for EXPAREL under C9290 as a medical benefit. What we have to be working with are our ambulatory, our outpatient customers is how to access that code and how to fill out the appropriate paperwork to have access to EXPAREL either on a prior authorization format or as they go through the cycle of negotiating their annual rates, working with them to make sure that they include EXPAREL in their bundle as procedure-specific basis, so that the product is broadly paid for in the ambulatory environment. So it is a major opportunity. Frankly, it is by quite a large margin the largest opportunity, especially given the reach and the frequency we now have with our J&J partnership.

And our next question comes from Douglas Tsao with Barclays.

Dave, maybe going back to the guidance, just curious in terms of there is some high level perspective in terms of how it rolls up and specifically sort of thinking about the breakdown between the growth in orthopedics versus the soft tissue business. I mean, we know soft tissue has been growing more quickly, but obviously, we're starting to see some pickup or impact from J&J. And so it'll just be helpful to sort of understand where you are on the soft tissue side? I mean, I know you had some very good traction in TAP in 2016 and certainly in the first part of 2017.

Yes. Thank you, Doug. We continue to suffer from the same issue that we've discussed a bunch of times with you guys. Our data lags significantly. The data analysis are delayed by a quarter. But frankly, by the time we get on this, more like 4 months -- I'm sorry, yes, it's more like 4 months' delay. So what we're always looking at is a bit of a delayed opportunity versus what we see day-to-day working in the marketplace. To answer your question specifically, Doug, orthopedics remains more than 50% of the business. And since everything is growing, TAP is growing as well, as you say. I think the number of papers that have come out just in the last couple of weeks talking about the use of TAP for a number of surgical procedures, it really highlights the issue that the anesthesia community, which is relatively new to EXPAREL around TAP and with nerve blocks going forward, is starting to gain traction and at least keeping pace with orthopedics now. Specifically, as it relates orthopedics and Scott can jump in here as well, I mean, we saw what we expected from our J&J partnership as it relates to recon. And I think a bit of a surprise to me, but Scott really was much more bullish about spine as we went through 2017. But I think now you start to understand the potential around J&J joining in a strategically aggressive way around sports medicine and around trauma and some of the work that we're doing is specifically to address those opportunities with J&J. So everything is growing. I think that some of the clinical trials that we're doing are very specifically pointed at areas where we see great interest in not only the medical community, but also the payer community. A lot of our current thinking going downstream is in response to the discussions and the relationships we have with the payers and the Cignas of the world as well as the medical systems and all of the folks that we deal with clinically on a daily basis. So I don't know Scott has anything more to add on J&J.

No, Dave, I would say we continue to see the greatest interest in the spine market and that we've been very happy on both sides. We've got a significant number of KOL, and you should imagine that many of those peak programs we talked about, spine will be a key focus. We're starting to see growing interest in the trauma space. We'll have quite a bit of AAOS around hip fracture. We're very excited about that opportunity. And we are seeing wins in the recon space, where specifically the organization and J&J's referencing pillar and that is having a material impact in the way we're looking at the recon market. So we see those 3 areas being very strong. The fourth, sports, certainly we are really excited about the opportunity there as well.

And so Scott, if you don't mind, Doug, I'll take on your question regarding guidance and back to Randall's question as well. Look, I own the fact that we haven't made guidance in the last 2 years. And as you come up to the fourth quarter, that puts enormous pressure on the entire organization around a number. And the appropriate way for this company to react at this time is to put out a number that we have a high confidence in, that we will make and exceed. And hopefully, as the year goes on and all of these different issues that we're raising and discussing here resolve themselves, we'll be able to do exactly that. But this guidance is meant to take that pressure off of the organization because it is not productive for anybody.

Okay, great. And then just one quick follow-up. In terms of the Pacira sales force, what are you -- what is it going to be focusing on from sort of in terms of specific indications in 2018?

So the regional anesthesia world, Doug, is moving very quickly. So we continue to focus on working with cesarean -- well, the hot areas in the marketplace, if you think about it, are women's health. And inside that bundle, you would have C-sections and breast reconstructions and in some places just single mastectomies without reconstruction. I mean, there's a whole series of women's cancer approaches around cervical cancer and ovarian cancer. So think about a therapeutic theme, if you would, around using low-dose opioids or minimizing opioids in women, largely because especially in an oncology situation, you do not want to dampen the immune system of a patient in an oncology setting, for example. The obvious C-section, 100,000 of those done every month in the United States and women don't want the opioids. They don't want the itching that's associated with the opioids. And so we think we have a much better mousetrap, if you will. If you step outside of that, our field force is focused on working with anesthesia around TAPs. The marketplace is moving very quickly. Now we have QL blocks that the anesthesia community wants to do and wants to know more about how to use EXPAREL. There's a whole series of field blocks, which are on label as it relates to the agreement we have with Janet Woodcock at the FDA. And so there's a whole range of opportunities to work with our key opinion leaders at Duke and MD Anderson and Cleveland Clinic and as you saw from the discussion today, the University of Tennessee, where we can use these advanced therapies to not only improve patient care, but extend the duration of these regional blocks by using EXPAREL instead of bupivacaine. So that's really the big periods of focus. And then there's still a lot of resource committed to synergizing J&J. Our folks helping their folks, their folks helping our folks. And so that relationship is still young and we're still learning a lot from each other.

And our next question comes from Tazeen Ahmad with Bank of America.

Maybe a pipeline question. So Dave, you did talk about no longer trying to pursue DepoMeloxicam. In that past you've talked about a bunch of areas that you might be interested in pursuing down the road. One of those, for example, was chronic pain. And so we haven't spoken about it in a while. I just wanted to get maybe a refreshed thoughts on what you think the company should be focusing in on pipeline-wise going forward?

Yes. Thanks, Tazeen. If that's what I said, let me correct myself. We are pursuing DepoMeloxicam. We are not -- we are no longer pursuing tranexamic acid.

Okay, sorry about that.

Okay -- no, no, that's okay. And the reason is there are a number of trials that we're aware of where people are using oral and it appears to be working. And so there's really no reason for us to continue to invest in something where it appears that an oral formulation is going to be the future of that therapy. I remain very interested in chronic pain. So you're in an area where I have a personal interest as well. There's a whole -- there's a number of products that we're working with chronic pain folks to make sure that we get the product profile right. But I'll give you a sense of the kinds of things we're working on. First is and may be interesting to everybody is to look at EXPAREL itself as an opportunity in chronic pain. When -- we have a number of clinicians today who are using EXPAREL in very low doses and CNS applications, so think about sciatica where we are aware of a number of centers where they're using 2 cc of EXPAREL and 1 cc of 0.50% bupivacaine in order to provide a longer duration of relief from the traditional bupivacaine and injection in those -- in that patient population. So we have a natural bridge without having to invest in any manufacturing or regulatory or anything else, right? Because it's -- yes, it is off label and it's not sponsored by the company, but it is something that we're going to look into developing in a fuller way. We also have, by the way, have a number of animal studies that have been done to support the continued investment in that application. To answer your question specifically, our R&D group out in San Diego is looking at pregabalin, clonidine, ketamine, dexmedetomidine. There are a number of products that either are currently being used on a daily basis by the chronic pain guys and they would like to see more guidance from the company in an approved label that would help them with gaining reimbursement, et cetera as well as a longer way to use those products in a way that would improve patient care by extending the duration of pain relief. So that's about as close as I can get. We hope to be able to provide more guidance later this year to deem on which of those we're going forward in a traditional development time line. But for right now, that's about what I could say with some certainty.

Okay. And then, maybe one more on what your thoughts are. Just given FDA's stand recently about trying, number one, to get drugs approve faster, but also on trying to get generic drugs an easier path to approval. So has the way that you're looking at the potential for any kind of generic entrance or competitor for EXPAREL changed at all as a result of language from FDA recently or for any other reason?

No. I actually view the guidance from FDA on generics as a positive for us. It's what we've tried to communicate several times in the past that the generic division will be very specific in the way it would approve a multivesicular liposome generic of EXPAREL and that guidance document provides very specific outputs that make it very clear to a generic that this is a very high hurdle. So I think, if anything, the recent guidance is a positive and as we continue to develop EXPAREL, I mean, we understand that the process that's been developed is highly reproducible when you get it right. But remember, it took us several years to develop a commercial process that we could get EXPAREL out the door. And so it's hard for me to understand how anybody can meet the obligations of that generic division memo in a sterile whole chain environment. This is highly -- the technical bar here is very high, which means the financial bar here is very high. You may see another multivesicular liposome someday, but I don't believe you'll ever see a generic EXPAREL.

And our next question comes from David Amsellem with Piper Jaffray.

This is Micky Ingerman on for David. Just curious as to what extent there's already usage of nerve block off label? And what portion of the procedure mix that is? And also on the topic of the nerve block, based on your experience at the AdCom this last month, has that caused you guys to reevaluate any of your R&D initiatives? And how you think about potential label expansions going forward?

Thanks, Micky. On the first topic, I think, major medical centers with folks like Jeff Gadsden at Duke and Maggie Holtz at WellStar, you do see some increasing use of EXPAREL by nerve block, not because that's something that the company has promoted in any way, but because the product is available in those marketplaces and the clinicians understand that it is the best way to provide improved patient care. In terms of what percentage of our businesses, we continue to believe that it's less -- it's still less single-digit. I can't tell you with anymore precision, but it is, in my view, at least less than 10%. With the AdCom, as we said during the prepared remarks, we're keeping an open mind. We're looking forward to working with the FDA. There were a number of issues that we had with the AdCom and our team is communicating with the FDA on those issues and sending down some updated data that was presented during the AdCom. I think it's just too early. We need another couple of months before I can answer that question with any certainty. And I think you guys would understand, it just wouldn't be appropriate for us to negotiate through you guys or through anybody else with the FDA. So give us another couple of months and we'll come back to you with a lot of clarity with what our -- what the path forward look like.

Got it. And then one quick follow-up on the J&J sales force. Do you guys have any means of quantifying how much incremental benefit they're providing? I guess, put another way, are you able to quantify how new uses of EXPAREL are originating from J&J sales force member rather than, say, like a legacy Pacira sales force number?

We don't have the clarity that you would hope that we would have. I can start out by telling you, we wish it was better. But with that said, we do have, and Scott mentioned this, we have scenarios where the product is being made available in systems because of trauma, specifically hip fracture. We have a list of hospitals where the person who has either improved access or achieved access has been a spine surgeon that we don't have any relationship with at all. So we can track places where the only person that has the relationships that led to a positive outcome with EXPAREL has been non-EXPAREL employee. So that list, we have. We track activations on a monthly and a quarterly basis. And so you can see, as the J&J activates and like I said, in spine and trauma and sports medicine, those are all relationships that we would never had if it wasn't for our J&J partnership. So I think that's the low-hanging fruit, as we go forward. And we see the peak programs and we see all the other things that Scott talked about, we contract hospital usage where we know those programs were held and track the educational initiatives where folks are going to the J&J facilities or participating in our simulcast programs, but many of those programs are fairly nascent, and so they haven't matured enough that we will be reporting any meaningful revenue from those programs yet.

Dave, if I were to add, I think our partner has some sophisticated tools they are used to help them assess their sales force and they are sharing all those tools with us. So we feel confident that we'll have incremental data sources to have a good understanding of where we're having success in the market, but a lot of those details we won't be sharing with you.

And our next question comes from Dana Flanders with Goldman Sachs.

I guess, my first one, if you're in the AdCom, I believe there was discussion that potential for guidance on opioid-sparing claims could be published soon. Is that something you are in discussion with the FDA? And I mean, how you would expect that to potentially impact EXPAREL either positively or negatively?

That was a comment that was made by the FDA, and we are not in discussion with anybody on opioid-sparing claims and I wouldn't hold my breath.

And our next question comes from Chris Schott with JPMorgan.

First one was just on the upcoming Phase IV programs for EXPAREL in hip, spine, et cetera. I guess, 2 questions here. One, is there any read across from the recent FDA panel on how you're thinking about approaching clinical design for any of these studies just based on some of the feedback from that AdCom? And then second, could you help us better understand timing and which of these are the largest opportunities in your view in terms of incremental sales for EXPAREL to extend as Dave reported out? And I have one follow-up from there.

Great. Thanks. Yes, some of the comments from the AdCom actually were fairly bizarre. The comment that a p-value of 0.0001, it doesn't have clinical relevance. It does put in to question exactly what you talked about. I think the biggest opportunity for us, frankly, is that none of the programs that we're running in a Phase IV design require any interaction with the FDA. They are all infiltrations. In some cases, we will do studies where we will compare 2 different EXPAREL designs. So for example, you might think about comparing an EXPAREL TAP with an EXPAREL quadratus lumborum because the marketplace is moving and many of the anesthesiologists who are not in academic centers are asking which are providing more efficacy in these people who are advanced in the academic centers. So the 2 things are completely separate. I think your question is entirely relevant as it relates to EXPAREL nerve block and the stance of the FDA as well as additional products that might go down in the future. But our current Phase IV products are -- trials, I'm sorry, are all infiltrations and are all on label today. As you -- and I'll ask probably both Scott and Richard if they have any thoughts here, but all of these products are huge and all have a strategic theme. So virtually, all of the clinicians who we involve are interested in opioid-sparing strategies, but for different reasons. So for example, as I stated earlier, because you don't want to use females or expose girls who are having cancer surgery to a reduction in their immune system through the use of high-dose opioids, then there's a great interest in opioid minimization and cancer situations and we're working with MD Anderson and Cleveland Clinic on those. There is a great interest in the marketplace in reducing epidurals. So we're doing EXPAREL TAPs in those scenarios. And then from a specifics that we talked about, in reference to Johnson & Johnson in all of the resources that they're providing, spine is really important because the number of procedures that are being done, but also the move of spine from inpatient to outpatient, and we believe EXPAREL actually makes that possible, probably maybe not as many procedures, but strategically very important is hip fracture. It's a huge problem for the medical community, especially for the payers. And putting a protocol in place that treats those patients faster from a surgical perspective and allows us to sidestep the dimension that is so debilitating in that patient population and gets them back into their life situation faster, especially when they're at nursing home, so they don't lose their nursing bed because they've been in the hospital for 2 weeks, et cetera. It's hugely important for the marketplace. So you've got a package of orthopedic opportunities there that are both large, but also strategically very important in terms of addressing medical needs in the marketplace. On the soft tissue side, think about advancing care by studying different regional anesthesia opportunities at the major medical centers and advancing that for the masses, if you will. But really, focusing in on women's health with C-section and breast reconstruction and then on the big bulk of the surgeries. Rich is working with the folks at the University of Tennessee specifically on ERAS programs for hernia. We've got specific programs with Mayo on colorectal, specific programs with MD Anderson on ovarian cancer and thoracotomy, specific programs at Cleveland Clinic on a whole range of products, programs from thoracotomies to replacing epidurals to removing pumps and catheters, so patients can be sent to an outpatient environment. And then a whole bunch of programs with payers that are directly linked to this -- to the Phase IV programs because the payers are -- it's not even a discussion with them, the cost of EXPAREL, it is more around how do I find somebody who is experienced in the art of opioid minimization and what data do we have to support the use of different procedure-based EXPAREL ERAS protocol so that they can actively work with our ambulatory care centers to move patients from in to out as a financial consideration and as well as a patient care consideration. A long answer, Chris, I'm sorry, but that's really important, what you just raised.

Yes, perfect. Very helpful. And then my quick follow-up was just on shifting gears a little bit on business development priorities. Can you just update us in terms of priorities right now, appetite -- I was particular just thinking about adding either a -- another in-market or near the market asset to the portfolio?

Appetite is wide as you could get. I mean, we're looking at a lot of different things. This is all part of Scott's group. Increasingly, folks appreciate not only the fact that we have a marketing and a sales organization that understands the institutional channel, but also the medical science liaisons that we have that are geographically dispersed that can go into places like the ambulatory surgery centers and smaller hospitals and teach on appropriate technique. So we're getting a lot of interest not only in drugs and we've had -- for whatever reason, these things come actually in bunches. And just in the last couple of weeks, we've had a number of very interesting calls with opportunities for us on the pharmaceutical side. And I think for the last several quarters, frankly, we've seen a fairly significant increase in the opportunities that we have on the -- what would be more a traditional device side. And so we're not really driven by the size of the deal or the finances associated with the deal. We think our balance sheet and our relationship with folks who would be potential financial partners is very strong. We're really being driven now by the -- our desire to partner with anesthesiology and surgery and especially ambulatory care. So special interest in moving from in to out, which leads us to regenerative medicine and reconstructive medicine as well as pain relief and getting rid of catheters and pumps and all of that kind of stuff.

And our next question comes from Serge Belanger with Needham.

I got a question about your -- the partnership strategy. Outside of the J&J promotion collaboration, you've been successful in entering a number of partnerships with hospital systems and physician groups. Now that we're coming on about a year on the Trinity Health collaboration, how much do you think that will be a driver in '18 or '19 to drive additional EXPAREL demands?

Thank you for the question. I would be the first -- well, so first of all, the basis of the Trinity deal was a 2-way opportunity for a health care provider and a pharmaceutical company to partner together to advance patient care. And so we always have to remember that, that was the guidance. And in the early days, there were a number of data-driven and educational-driven opportunities for us to work with them, so that we could really understand what their needs were and they could understand how EXPAREL would serve as a solution to their needs. I would tell you and we've made really good progress here over the last couple of quarters, and I think that I have increasing confidence that the Trinity relationship has been strategically important to us because it's brought a number of other health systems interested in opioid-sparing to talk to us because it is now possible for a manufacturer and a provider to have a relationship. Trinity sort of made that okay, if you will. And then specifically to answer your question, we are working, and we have a number now of Pathfinder opportunities that have been worked through with Trinity that we think will be pulled through to the entire organization as we move through 2018. So I think Trinity is another one of those levers that Charlie referenced. The timing is not easy to identify on a monthly basis, but all arrows are pointing in one direction and we're not only really proud of our Trinity collaboration and the ability to help patient care, but we do think it will be important to our investors as well was over '18 and '19.

Okay. And just to follow up on these partnerships. The Aetna collaboration was kind of your first foray into oral health. Can you just give us an update on how that is going? And how you intend to kind of penetrate your oral health opportunity?

Yes. So it's funny. I almost have the same answer in many ways. Similar to Trinity, Aetna made it okay for an insurer and a payer and a pharmaceutical company to work together to improve patient care. Actually, Aetna has on their website a banner that talks about EXPAREL an opioid-sparing as a major strategic opportunity for Aetna. We continue to expand on that opportunity. You will see some press releases in a not-too-distant future that pick up on some of the different things that are going on. And we are working with Aetna to expand that opportunity beyond oral maxillofacial surgery. We've learned enough, I think, from that, that we are looking at different strategic ways internally that we can resource the oral maxillofacial surgery opportunity, frankly, as part of a retail opportunity because we've also not -- this is separate from Aetna, by the way, but we've not addressed plastic surgery, which is another specific opportunity for us in a meaningful way, largely cash, so it wouldn't be a payer opportunity. But as a resource opportunity, we could put a team of people in place that can address the retail marketplace, if you will. So Aetna is -- well, there, the Aetna CMO actually gave testimony in Washington, D.C. a couple of weeks ago at a Senate hearing where he specifically called out their relationship with Pacira and EXPAREL as a significant tool that they're using to address the opioid epidemic. It's really interesting for us because in a realtime way, we get data from them different than the way I had answered Doug's question about the lag and the lack of visibility in the relationships we have with payers. We have almost instant visibility. So it gives us a real opportunity to address the marketplace in a different kind of way. Aetna leads the way, but I would also tell you that there are a number of other Aetna-like relationships that are at various stages of development. So think about the commercial payers paying for EXPAREL not only because their physicians want to work in an ambulatory center, their patients want to go to an ambulatory center, but they save a meaningful percentage of the total cost of care by having a treatment in an outpatient environment. So it is -- it's an opportunity that we're exploring pretty aggressively.

And our last question comes from the line of Gary Nachman with Bank of Montreal.

Dave, I jumped on late, so I'm not sure if you addressed it, but I'm assuming your sales forces has fully transitioned on the soft tissue side at this point. If you don't get nerve block or it's delayed meaningfully, will your sales reps come back to detail or service as well? And then, where are you with the spray process for manufacturing? And what's the timeline to shift over from the batch process to extend IT? Is that still the plan for you guys longer term?

Thanks, Gary. So nerve block is largely an opportunity to work with anesthesia and to improve their understanding of EXPAREL and how it can improve patient care. Frankly, if we don't get a formal nerve block application from the FDA on our PDUFA date of April 6, I don't see the mix of how the field force is working in the marketplace changing at all. We have not abandoned, I want to make sure that I'm clear on this, Gary, we have not abandoned orthopedics. I mean, there are scenarios. Think about the J&J folks and the EXPAREL folks working together collaboratively in a marketplace, in a hospital or in a hospital system, for example. And so they work together wherever the greatest opportunity to improve patient care is. So we have a significant focus on soft tissue, but we still talk to orthopedic surgeons through their peak programs, and if there's an -- well, there is 1 actually. I'm going to be at our peak program tomorrow night in Florida that is driven by anesthesia and reconstruction. It's an anesthesiologist giving the talk, half the audience is orthopedics. And if you ask me why I'm going, I'm going to find out later today, actually. I'm not 100% sure myself, but I know I'm scheduled to be there. And so it is not a complete abandonment of everything that's going on. The spray process is -- so here is where we are. We will get -- so we've got 245 liter skids in San Diego. We have got 245 liters skid in the U.K. As Charlie said during his prepared comments, we expect to get commercial material from the U.K. that will have a -- an improved gross margin in the back half of this year. We have a 200 liter batch skid in the U.K. right now, and there are some technical challenges with how you mix 200 liters of these 2 emulsions in a very short period of time. At the same time, we have a scaled-up spray process and that has a different set of technical challenges. We have plenty of capacity from our current facilities in San Diego and our online facilities coming late this year in Swindon. We will move the -- we will give Swindon as much material as they can make because it is an improved gross margin and then we will queue us that with San Diego until we get 200 liter up. And we have until the end of the year, frankly, to decide whether that will be batch or spray. In a tie, we will lean heavily towards spray for the reasons that you mentioned around IP. But now, with tax -- with the tax law change, we have a whole range of things to talk about. We expect to announce several partnerships over the next several months. And so we have to have a long-term view of how we will source those partnerships. So it is entirely possible, Gary, that we will have 45 liter batch in Europe for Europe and the Asia and a 200 liter, either a batch in Europe and just staff the whole world out of there, because we have margins that are significantly beyond what we can do now with the 45 liter scale or we might elect based on our ability to solve the technical issues to have a spray process and move it back to the United States given the new tax status and service the United States out of our Patheon relationship at one of their facilities here. So we're meeting with Patheon in the middle of next month to start this strategic discussion, but it's not quite as simple as it might appear from the outside.

Okay. Can you just remind us when the pan expire for both the batch and then the spray? How far that could (inaudible)?

So the product and process, that's in play right now, goes to Christmas Eve of 2021 -- December 24, 2021. We filed the application for spray on April 9, 2011. So it goes out until April 9, 2031, but you would expect significant extensions based on the time that the patent application is sitting with the PTO, for example, and I know you guys know more about that than I do. So -- but at least, April 9, 2031.

And that does conclude our question-and-answer session for today's call. I would now like to turn the call back over to Dave Stack for any further remarks.

Thanks for your questions and time this morning. We forward to providing additional updates in the future. Next up for us is the Barclays conference in Miami, look forward to seeing you all soon. Thanks a lot.

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