Thank you for joining the Pacira Pharmaceuticals Fourth Quarter and Full Year 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks the Pacira management team will open the lines for a question-and-answer period.

Please be advised that this call is being recorded at the company's request and will be archived on the company's website for two weeks from today's date. [Operator Instructions] I'd now like to turn the conference over to Ms. Jessica Cho, Ma’am you may begin..

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

Before I turn the call over to the management team for their prepared remarks, I would like to remind you that certain remarks made by management during this call about the company's future expectations, plans, outlook, prospects and statements containing the words believes, anticipates, plans, expects, and similar expressions, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Any such forward-looking statements are based on assumptions that the company believes are reasonable and that are subject to a wide range of risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements.

Many of these and other risks and uncertainties are described in the Risk Factors section of Pacira’s most recent Annual Reports on Form 10-K for the fiscal year ended December 31, 2014 and in other filings with the SEC which are available through the investors and media section of the Pacira website at www.pacira.com or on the SEC website at www.sec.gov.

During the course of this call, we will also refer to certain non-GAAP financial measures, including non-GAAP net income or loss, on-GAAP operating expenses, non-GAAP gross margin and non-GAAP EPS.

Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the earnings release for the quarter. And with that we will hear first from Dave..

Thanks Jess. Good morning, everyone, and thank you for joining us today. The primary focus of today's call is EXPAREL which has improved the lives of over 1 million patients in the United States to-date by providing a non-opioid pain management solution in the acute care postsurgical setting.

EXPAREL provides healthcare providers with a non-opioid platform as an option to address the opioid epidemic in the United States. In 2012 there were 259 million opioid prescriptions written and in 2013 46 people died every day from prescription pain killers.

Current study show that roughly one in 15 patients who are prescribed opioid for acute postsurgical pain go on to become long term opioid abusers which translates to over 2 million patients every year, a public healthcare problem we work every day to address.

In Q4 the commercial trends and dynamics that we've seen from quarter-to-quarter continued into the end of the year.

We saw a continued removal of formulary restrictions by earlier doctors and new formulary wins without restrictions, and our largest customers remain those who have had access to EXPAREL for the longest indicating that our existing customers continue to broaden EXPAREL use to new procedures with a reduced opioid strategy for managing postsurgical pain.

Soft tissue where we first launched continues steady growth in conjunction with a proliferation of enhanced recovery after surgery or ERAS protocols and continuous quality improvement or CQI initiatives at major academic teaching centers and hospitals across the United States.

Plastic surgery, general colorectal surgery, OB/GYN oncology, abdominal wall reconstruction, thoracic and geriatric procedures have all been documented through ERAS protocols.

Recall of these protocol driven programs originally stemmed from our earlier algorithms identifying those patients most at risk when opioids are used to control postsurgical pain. High densities protocols are the understood health and economic benefits of an opioid sparing strategy to both patient satisfaction and hospital economics.

Protocol driven management companies which provide specific care pathways for orthopedic procedures implemented similar programs across knees, hips, shoulders, spine, and trauma for both the in-patient and out-patient settings.

We are excited to work with hospitals in these soft tissue and orthopedic care pathways towards a concerted effort to provide real options to opioids as the platform for managing post-surgical pain in a systematic manner which allows us to quantify the benefits of these low or no-opioid strategies.

Orthopedics remains our fastest growing and now largest market segment. According to Premiere’s EXPAREL utilization data since launch through October, orthopedics represented 48% of EXPAREL procedures, soft tissue 44%, cardiothoracic 3% and other 5%.

For the first 10 months of 2014, ortho represented 54% of EXPAREL procedures, soft tissue 39%, cardiothoracic 3% and other 5%. Since our launch in April of 2012, surgeons have gained valuable insights into the value of a reduced opioid postsurgical pain platform.

In Q4 we had several company sponsored studies, as well as physician initiated independent studies with EXPAREL where physicians shared their results in publications and a premier medical meeting. In October Dr.

Brian [ph] presented data demonstrating comparable safety of EXPARL to placebo in peripheral nerve blocks at the annual meeting of the American Society of Anesthesiologist. That same month Dr.

Jay Redon [ph] presented his findings that the American College of Surgeon, Clinical Congress showing that EXPAREL based pain management regiment significantly reduces postsurgical opioid related adverse events in ventral hernia and laparoscopic coronary section when compared to the standard of care. In November Dr.

Mark Schneider shared his results in total knee arthroplast at the annual meeting of The American Association of Hip and Knee Surgeons showing lower pain scores, reduced opioid consumption and improved patient satisfaction, and patients receiving EXPAREL versus a multi-drug cocktail. Recently Dr.

Wang Crumbly and Medovan [ph] whose pilot study was presented at the 29th Annual North American Spine Society which showed patients undergoing Level 1/2 open spine surgeries consumed fewer opioids, up to 50% less, experiencing lower pain scores and they walked more frequently and further when receiving EXPAREL based therapy versus a bupivacaine based regiment.

In another study by Dr. Wang et al, published in Becker Spine Review, an open transluminal lumber interbody fusion or TLIF, was compared to both minimally invasive surgical TLIF, and then a weak minimally invasive TLIF using EXPAREL. Comparing the open procedure to the awake minimally invasive procedure with EXPAREL, Dr.

Wang and his team demonstrated a reduced length of stay from three or four days to one day post procedure with savings of approximately $28,000.

We also had a number of peer review publications in Q4, a cohort study was published in the American Orthopedic Foot and Ankle Society demonstrating in forefoot surgery that an EXPAREL based multi-model therapy produce less opioid, lower pain scores, fewer medication refills and no additional complications compared to a multi-model therapy without EXPAREL.

In February, a pilot study led by Dr. Andrew published in a local and regional anesthesia showed no difference in efficacy and safety when comparing two volumes of EXPAREL be a tapoon filtration for lacroscopic robotic prostatectomy indicating that EXPAREL can be adopted for individual procedure, patient need and surgeon preference.

Most recently, we have also seen a number of articles on shared technique. Dr. David Lehman’s case study of an ultrasound guided pectoral nerve block using EXPAREL, and a women undergoing breast augmentation was published in PRS global open, the American Society of Plastic Surgeons Journal, and an administration technique article by Dr.

Stikhami Masemodu [ph] was published in the Journal of Surgical Orthopedic Advances. Turning to what's ahead, there are great deal of activity across four national congresses in March alone.

The American Association of Neurological Surgeons congress spine summit, our study will be presented demonstrating that EXPAREL versus bupivacaine hydrochloride, and level 1 unilateral microdissectomy showing that the safety of EXPAREL in these lumbar procedures is appropriate especially in an ambulatory surgery center.

At the International Anesthesia Research Society two [ph] reports a patient and a randomized trial will be presented. Once a case report demonstrates benefits of opioid reduction and a patient at high risk for opioid adverse events, she was a hypertensive obese heavy smoker who required modified radical mastectomy with lymph node dissection.

Following surgery the patients reported no pain in the recovery room, did not receive any additional pain medications during our hospital stay and was discharged home at 30 hours postop.

The second case report features a 63 year old with opioid induced incapacitating nausea and vomiting, she reported zero pain after receiving EXPAREL and an axillary block for an open reduction internal fixation of the less distal radius fracture.

Another randomized trial shows that EXPAREL versus bupivacaine in tapmium filtration reduced maximal and minimal pain, nausea and vomiting, and significantly decreased opioid requirements through 72 hours.

As the Society of Gynecological Surgeons, a study result show EXPAREL leading to a reduction in total opioid requirements and IB opioids compared to bupivacaine hydrochloride in 200 patients undergoing laparotomy for gynecologic malignancies.

Next month the American Academy of Orthopedic Surgeons, multiple abstracts will evaluate EXPAREL versus other standard of care strategies in total hip, knee, trigger, figure release surgeries detailing reduced opioids, costs, and length of stay in our traditional care environment as well as rapid recovery protocol.

On February 11, we announced a resolution of matters pertaining to certain promotional aspects of EXPAREL detailed under recent warning letter from the FDAs Office of Prescription Drug or OPDP. EXPAREL is indicative for single administration into the surgical site to produce postsurgical anesthesia.

With this broad indication, we have amended some elements of our promotional language specific to the pivotal trial procedures as outlined in the package [ph]. With the warning letter behind us we are looking forward to concentrating on extending the access to EXPAREL for infiltration and developing additional opportunities beyond infiltration.

On January 22 we hosted an Analyst and Investor Day in New York City where members of the Pacira management team along with physicians and clinical experts provided an overview of EXPAREL indications for nerve block which as of March 5 PDUFA date, as well as development plans for all surgery and chronic pain.

From our market research we believe the nerve block opportunity consists of 26 million addressable procedures bearing in mind the 25% of nerve blocks today are administered via catheter based systems.

As we have conveyed for all surgery we believe there are approximately 27 million addressable procedures, comprise of 10 million third molar extractions and 17 million oral makeable facial procedures.

If we gain approval for oral surgery, we expect primarily oral and Maxell facial surgeons, as well as prosthodontist and endodontics to reduce their reliance on opioids and use EXPAREL as a single dose administration to provide local LNG [ph] during the critical few days after surgery.

We plan on initiating a Phase III study in 2015 and expect to file an SNDA for this indication in early 2016. For chronic pain we are planning a Phase II trial with patients who suffer from chronical back pain caused by the psychotropic dysfunction.

We will initiate this study in 2015 with EXPAREL as a single dose administration to define the duration of efficacy and determine the optimal dose which will better inform the Phase III study design plan for 2016.

Also note that our animal health partner, Eric Turner, recently provided updates on the bupivacaine extended release injectable suspension product, indicating their successful pivotal field effectiveness study in dogs undergoing knee surgery, with anticipated approval for dogs in 2016.

Two DepoFoam based product candidates, DepoMeloxicam and DepoTranexamic Acid were also involved during the Analyst and Investor Day. First, I want to reiterate the key components of our unique customer driven product development strategies.

First, we utilized 505 B2 clinical development and regulatory pathways with our DepoFoam products reducing costs and accelerating development timelines while benefiting from the protection of the proprietary DepoFoam intellectual property and know-how.

Second, we seek replacement of cumbersome catheter reservoir pump systems with a single injection for sustain delivery. Third, we seek to replace systemic dosing with local peripheral injections for local effect putting the drug where you want it.

With the tangible set of future opportunities in hand with EXPAREL and additional pipeline products, we are pleased and excited with the foundation we've built and which will take us out for the next five years.

The value of Pacira lies in our ability to provide solutions to unmet medical needs, as well as leverage within our business model, scalable manufacturing infrastructure with high gross margins which Jim will elaborate on, and the specialty commercial organization of modest size relative to primary care organizations which we believe can be future opportunities with target expansion along with our cost and time efficient 505 B2 clinical programs.

We continue to work with a number of policy and provider constituents to address the opioid epidemic in the United States.

Along with our ERAS and CQI programs we anticipate having the opportunity to share with you our reduced opioid acute pain treatment strategies have had a positive impact on addressing this critical public health issue, in fact there is a featured article in the Miami Herald today, for the major breast cancer meeting in the United States taking place later this week in Miami.

In that article, Dr. Pat Morgan [ph] the Conference Chairman speak specifically about new pain management techniques including EXPAREL. I will now turn the call over to Jim to provide an update of our financials, and provide an overview of our manufacturing.

Jim?.

Thanks, Dave. Good morning, everyone. Q4 marked a solid finish to 2014, a year full of financial, commercial, and operational milestones that signal how far we've come as a company in a relatively short period of time.

To recap the year financially, we crossed the line into profitability for the first time in Q2 on a non-GAAP basis, and also generated cash from operations for the first time in Q2, and we were profitable in generating cash from operations for the full year as well.

Operationally we received FDA approval of our new Suite C manufacturing line in our San Diego Science Center Campus and we entered into a strategic partnership with Patheon for additional manufacturing capacity in Swinton, England, and showing that we can meet future demand for EXPAREL.

And further, we galvanized our product development efforts as we submitted an SNDA for nerve block indication for EXPAREL provided additional color on the potential use of EXPAREL in oral surgery and chronic pain and we unveiled DepoFoam based products in development.

For those looking at the bigger financial Pacira picture, we are pleased to see in our 2014 results tangible evidence of our operating leverage emerging alongside continued EXPAREL revenue growth.

In January we preannounced total revenue of $61.8 million for the fourth quarter, up 84% from the same period last year, and slightly below $200 million for the full year, up 131% from 2013.

This of course was catalyzed by EXPAREL sales of $59 million for the fourth quarter, up 93% from the same period last year and $188.5 million for all of 2014, up almost 150% from 2013.

From launched in Q4, a total of 3,293 distinct customers have ordered EXPAREL with 729 of these customers ordering more than $100,000 of product cumulatively, a 120 ordering more than $0.5 million worth, and 24 ordering more than $1 million of product.

The number of $100,000 customers has grown almost 200% over the 250 customers in this category in Q4 of 2013. This is the only comparative metric we provided in our disclosure in that corresponding period a year ago.

In the fourth quarter gross margins improved to 69% from 61% in Q3, continuing the trend that is in line with our previously provided peak gross margin guidance of 75% to 80% when Suite A and Suite C are operating at peak capacity. Gross margin for all of 2014 was 61%.

Total operating expenses for the quarter were $53.9 million compared to $43.4 million in last year's fourth quarter. Note the stock based compensation makes up a meaningful proportion of operating expenses.

In Q4 nearly $8 million, roughly 14% of our operating expenses were attributable to stock based compensation expense which as a reminder is dictated mostly by accounting charges resulting from our appreciated stock price applied to the more recent option grants.

Total operating expense for 2014 were approximately $203 million, with just under $25 million consisting of stock based compensation, distributed among cost of goods sold, R&D, and SG&A, approximately 15%, 25%, and 60% respectively.

The expense breakdown in additional color can be seen in the MDNA section of our 10-K which we expect to file later today. Our non-GAAP net income grew in the quarter to $14.5 million, or $0.35 per diluted share compared to a non-GAAP net loss of $7.6 million or $0.23 per share in Q4 of 2013.

As a measure of operating cash flow, we generated adjusted EBITDA of $18.2 million in Q4. Our overall cash accumulation in the quarter was offset by $7 million of CapEx. We ended the year with a healthy cash position of $183 million.

Since we launched EXPAREL in April 2012, we have a track record spending almost three full calendar years, we can look at our own internal data and also benchmark this against the performance of other hospital based therapeutics that have become substantial products.

With the benefit of that information and with EXPAREL now a fully established product, we believe we've reached the appropriate crossover point to share our performance expectations in the form of annual revenue and expense guidance.

For 2015 we expect EXPAREL revenues to range from $310 million to $330 million, with approximately 10% of those revenues from the nerve block indication assuming FDA approval on March 5. In light of our product launch maturation, I do want to make a few comments related to factors impacting the revenue ramp curve within this year and future years.

You heard us say it on previous earnings calls that Q1 has been seasonally low on a procedure volume compared to Q4 for a variety of reasons. We see evidence of this pattern looking back at comparable successful hospital based products.

As they move beyond the initial launch trajectory, we see that Q4 unit volumes and sales are consistently higher compared to the subsequent Q1.

For EXPAREL I think this dynamic was largely hidden in the first couple of years of our launch because the Q1 ramp in adoption and growth from a small base more than offset the negative Q1 seasonal pattern for overall procedures.

We actually felt we might see the emergence of this phenomenon in unit volume in our sales in Q1 of last year, but given the continued high organic and product adoption growth, the visibility of the seasonality was deferred again.

In addition to this fact of life, there is another factor related specifically to the current quarter that we been missing not mentioning today, anyone with a TV or internet access has witnessed the abnormally disruptive weather we've experienced in the northeast and other parts of the country, we know anecdotally that has impacted patient access to ORs and has resulted in postponed elective surgery schedules, both from actual storms and even from anticipated ones.

With the benefit of this information, going forward Q1 growth should be measured in comparison to the previous year’s Q1, and so forth for all quarters. We should expect that Q1 have displayed alongside Q4 generally will be in the range of flat plus or minus a few percentage points.

And as I mentioned for this year specifically, we know Q1 has some additional headwinds in the mix. Going forward, just as we've reiterated on every quarterly call since launch, we caution relying on EXPAREL sales estimates released by third-party data tracking services which will continue to misrepresent sales and distort trends.

Turning to guidance expense, we expect the following for 2015.

Excluding stock based compensation, so on a non-GAAP basis, product gross margin of 72% to 75%, R&D expense of $25 million to $30 million, and SG&A expense of $115 million to $125 million; and we expect stock based compensation of approximately $40 million to $45 million distributed among COGS, R&D and SG&A, similarly to 2014 as I noted earlier.

Gross margins reflect the expectation of 24/7 manufacturing in our Suite A and Suite C manufacturing lines to reach estimated maximum capacity on a run rate basis at some point in the second half of 2015.

The R&D expense includes among other things as discussed in our Analyst and Investor Day in January, a Phase III study for EXPAREL in oral surgery, a Phase II study in chronic pain, and the triggering of some fees to Patheon related to the achievement of a major milestone in our new manufacturing expansion as we start to conduct development activity on our newly fabricated misassembled equipment installed in various site.

SG&A includes modest growth in field based personal, and an overall support services personal.

Growth and program supporting the anticipated nerve block launch and significant new investment in patient advocacy and community influence initiatives, and growth in some expenses tied to revenue growth like our cross-linked distributor and our ICS third-party logistics provider relationship. We expect to be generating substantial EBITDA in 2015.

We expect to incur $35 million of CapEx related to manufacturing capacity expansion development along with about $15 million of routine CapEx, so these investments will moderate our cash balance accumulation in 2015 from the starting point of $183 million.

We expect our cash taxes to be minimal in 2015 due to the initial application of an NOL balance of approximately $330 million.

To conclude the 2015 guidance overview, we expect to be affirming or updating this annual guidance in conjunction with our quarterly earnings calls which of course means we won’t be updating these metrics other than on those calls.

Turning to manufacturing and pipeline development, we previously conveyed we expect approximately $1.3 billion of manufacturing capacity in place for EXPAREL by 2019.

Our Science Center Team in San Diego had an extremely productive year, not only getting Suite C approved in executing the planned manufacturing ramp, but lowering the production cycle time and implementing other efficiencies translating to a higher per day output of vials.

As a result we are increasing our EXPAREL manufacturing capacity guidance from $1.3 billion to $1.6 billion by raising the estimated annual production capacity as follows; from $400 million to $500 million for our current Suite A and Suite C operations in San Diego, from $300 million to $350 million for the first Patheon Suite targeted for commercial manufacturing in the second half of 2016, and from $600 million to $700 million for the second scaled up Patheon Suite targeted for no later than 2019.

As you know, we've also been working on a new manufacturing process called DepoFoam Spray which we believe brings several notable advantages, including improved gross margins in the 85% to 90% range due to roughly 2X of production capacity over the current batch process, an orange book listed patent when issued out to 2031 and the development of the DepoFoam Spray IP in the UK which is successful and developed within the parameters of the UK patent box can lower our effective tax rate from the high 30s to the high 20s.

We have previously shared that we have a pilot spray manufacturing line established on our Science Center Campus, the next step is to clarify our regulatory pathway with the FDA which we expect to do in the first half of this year.

Regardless of how these discussions unfold, we feel fortunate to be on a path where we expect to have plenty of commercial manufacturing capacity, not only for our EXPAREL opportunities but also for our pipeline products, DepoMeloxicam and DepoTranexamic Acid.

So in summary, we expect another year of substantial EXPAREL revenue growth in the range of 65% to 75% as reflected in our guidance which should further exhibit the robustness of operating leverage.

In addition, we have a defined development strategy for additional indications for EXPAREL and additional new DepoFoam based pipeline products, we have no generic threats, no foreseeable competitive threats, and the manufacturing infrastructure, both in place and on the development track to support these opportunities.

So we believe the true value of Pacira can be exploited not just in 2015 but also in the very visible year’s right ahead of us. And with that done, we would like to open up the call for our Q&A session..

Thank you. [Operator Instructions] And our first question comes from the line of Gary Nachman of Goldman Sachs. Your line is open, please go ahead..

Hi, good morning. How much nerve block is currently used off label, so is the 10% in your guidance completely incremental with approval of that indication.

And then talk about commercial plans with nerve block if you get it approved, how you expect to roll that out, how many reps will you have on it, and will it be the primary focus for that entire sales force?.

Hey Gary, we know that there is - I mean, there are folks especially KOLs and folks that are - the more opinion leading groups are RUVs [ph], that are experimenting with EXPAREL and nerve block. I don't think Gary honestly that it's anything material to the business as it's currently constituted.

Our belief is that 10% is roughly the number of the value of nerve block given a March 5 PDUFA.

I think we have to be a little bit careful, even here at Pacira we have to be a little bit careful because we have lot of discussions about nerve block and we have a number of people who are using the product on a hit and miss basis in nerve block, but when you get out to the rank and file, when you talk to folks that are not KOLs in the metropolitan areas you find out that there is zero use.

I think we all have to be a little bit careful on how we anticipate the current use and we don't think it's material to the business at all. Assuming success, as we've talked about earlier we expect that we would get a femoral nerve block claim.

We currently have 87 reps and roughly 50 folks in the field that are in our medical affairs department, all of those folks would understand the way our organization is broken out here.

About 87 surgical account specialist really are account managers and own the institutions and are responsible for determining how our resources are deployed in this institutions that they have.

The medical affairs team is more involved with training and making sure that patients receive best care in terms of best practice transfer and things like that. So we will - the focus on the hospitals will be roughly the same since nerve block maps right on top of the infiltration business.

We're looking at it really that it is another opportunity for a call point with the anesthesiology community and to have a different moralistic approach to the way we treat pain by being able to talk about a nerve block and an infiltration in the same patient.

We don't see it really as a - there is no formal, you're going to spend 20% of your time here and 30% of your time there, the reps are going to have the same hospitals, we anticipate having the opportunity to have more productive discussions with the pain treaters in those hospitals as a result for the nerve block label..

Okay, great.

And then just one follow-up here, on the full year EXPAREL sales guidance - and definitely appreciate that you guys are giving that at this point, could you give us a sense of how much of that outside of the nerve block would be orthopedic versus soft tissue, how you expect that to trend? And are you assuming any real price increases in 2015 in that guidance? Thanks..

Yes, but modest as we've talked about in the past, and ideally we would like to see nerve block roll out first and then sort of have the opportunity to gauge that against the potential for our price increase sometime early in the year.

If you're talking about orthopedics, I mean it's difficult to gauge exactly Gary because we've got so many things going on, most of the ERAS and CQI programs that I referenced are in soft tissue.

So while orthopedics is gaining the fastest, we do see some very productive publications and programs coming out of major medical centers as it relates to soft tissue.

I think it would be safe to say that if we get into the 55, 45, very broadly speaking, you're in the right ballpark but there will be about 50-50 if you include everything else other than orthopedics on the other side of the line..

Okay, great. Thanks guys..

Thanks..

Thank you. Our next question comes from the line of David Amsellem of Piper Jaffray. Your line is open, please go ahead..

Thanks, just a couple.

Do you have a read on the extent to which EXPAREL is used in cash paid customers or maybe the percentage of use in cash pay customers? And then secondly on the R&D spend, can you just remind us what the total spend associated with the EXPAREL expansion programs and also during chronic pain? And then also, how should we think about expanding 2015 and then 2016 on the non-EXPAREL programs if you started with the R&D? Thanks..

Well I'll take the first one David and then turn it over to Jim. We really think that the cash pay market today is almost entirely constituted by cosmetic plastic surgery.

We are hearing just very sporadically about people who are willing to pay for EXPAREL if it's outside the confines of what's available through their insurance program, whatever that might be, but almost entirely cosmetic plastic surgery and as best we can tell and I'll tell you why I give you that qualifier, it's about 5% of our business and remains about 5% of our business.

And I give you that number because we can track X percent of our business currently about 5%, directly into the plastic surgery channels.

What we can't track is ambulatory surgery centers etcetera where the patients are indeed plastic surgery but that is not a designated plastic surgery center if you will, and so we come to the conclusion marrying all of that information that is roughly 5% of our business..

Okay.

And Dave just to be clear, I mean you don't believe there is any meaningful usage already in oral and facial surgery?.

We can count the guys on one hand David..

Okay, that's helpful..

Actually you meet half of them..

Yes, that's right, I probably did..

So David, the other part of your question, it was in the context of R&D and we said we'll spend about $25 million to $30 million this year.

In round numbers the trials that we're going to run in Phase III for oral surgery or chronic pain trial, that's Phase II but it's - if you assume that those are in the $5 million, each range, you'll probably be in the ballpark.

You also mentioned the word expansion, I wasn't sure if you meant that in the context of clinical development but I'll just expand it and say that my CapEx discussion was about manufacturing capacity and that we had guided previously that we would spend $40 million to $50 million related to what we're doing with Patheon, those two Suites there, that's encompassed somewhat in our CapEx for 2015..

Just to enable label expansion, but that's helpful. Thanks..

Thank you. Our next question comes from Douglas Tsao of Barclays. Your line is open, please go ahead..

Hi, good morning. Should thanks for that helpful color in terms of those sequential trends that we should sort of be thinking about going to refer this current quarter.

Just maybe if you could provide a little color how we should think about vis-à-vis last year, I mean which is obviously the year that we had the pull over Texas [ph], I don't know what they are calling it this year but there has been pretty extreme weather and storms as well, and yet you were able to grow sort of pretty nicely on a sequential basis and I guess we are talking about a larger base now but maybe highlight some of the trends that might be a little different this year versus next year..

Right, so there is couple of different aspects of it. One, you're absolutely correct that Q1 had weather issues last year, and then we just don't know the extent to what it will mean in Q1 of this year but it's just an obvious factor out there.

A lot of those elective surgeries they could come back within Q1 or they could come back - it typically would come back within a year, so we'll just have to see how that plays out.

And then the other point you sort of made for me if you will which is on a smaller base of absolute sales, the growth Q1 from Q4 can make it look like there is no seasonality going on and the point I was really trying to make is, if you look at comps in our industry there is obviously one that's sort of a poster child $40 million product, that they went from Q4 to Q1 flat earlier in their launch than we did and they have been growing ever since then, so that's not a dynamic specific to today, it's just a dynamic specific to hospital based products and volume in the hospital in Q1..

Okay, great. And then Dave maybe provide a little color vis-à-vis in terms of the existing business, and the two major buckets being sort of ortho and soft tissue, obviously ortho is now majority of the business and really sort of came out of nowhere.

How do you see the penetration into that segment and certainly how should we think about the trends sort of especially into the soft tissue market which I think we would agree is perhaps bigger end market in terms of total number of absolute surgical procedures but how are you sort of penetrating that segment and sort of what are the key initiatives that sort of continue to drive that particular segment because it seems like ortho is kind of taking care of itself.

And then just one follow-up in terms of ortho, what did you see in terms of performance from the cross-linked relationship in 4Q, and was that perhaps impacted in anyway by the warning letter since those are obviously reps who you don't necessarily control and so they might have been little less focused on EXPAREL until resolution of the warning letter.

Thank you..

Thanks, Doug. There is a whole bunch of questions in there, I'll do my best and come back if I don't get them all. So I'll start with ortho, so they really are two very different things.

In ortho the ability to reduce opioids - provide early ambulation for patients because they move to a solid diet, they have a bowel movement and it is really the ability to ambulate on day one that leads for the early discharge that is largely responsible for the economic motivation of physicians to quickly adopt EXPAREL.

We see that same motivation in a number of different orthopedic scenarios and you will see over the next few month’s data on hips, and on ACL repair, and on trigger figure surgeries, and on spine surgeries, and on trauma surgeries etcetera.

So there is no reason to believe Doug that we're going to have any kind of a reduced penetration into that marketplace.

While ortho is a very significant piece of our business it is still a relatively modest percentage of the ortho business, so our expectations that maybe to see this 50-50 phenomenon goal until we get to in oral surgery kind of opportunity. Soft tissue is quite different, ironically the docs did what we asked them to do.

They identified the patients who were likely to be most problematic when opioids were used, so the adoption in that scenario given that algorithm of how we introduce the drug basically was responsible - were more measured approach to the adoption.

Another issue that really a need to understand to really get into soft tissue is that the economic incentive in orthopedics is quite strong, the economic incentive in many of the soft tissue procedures, especially the abdominal soft tissue procedures is relatively modest, I mean you're talking about eight to ten times difference between - say there is an $8,000 profit motivation in a knee, there is probably a $1,500 profit motivation in a hemerectomy [ph] for example.

So the use of a $300 drug like EXPAREL is really a more strategic decision in the soft tissue procedures than it is in an orthopedic procedure which is why the algorithm was used to identify the patients who would benefit most.

What we're seeing now is that there is enough experience in the marketplace at major medical centers around the United States where they’ve determined that they should institutionalize the use of EXPAREL, and in all of the procedures that I outlined, we've got datasets and ERAS and CQI programs where these centers are writing protocols that say everybody that comes into this hospital for abdominal wall reconstruction or for OB/GYN surgery, oncology surgery, it's going to get EXPAREL.

The major difference there for us is that overtime now the fellows and the residence will learn how to perform those procedures only in an environment of EXPAREL and overtime as these different medical schools and these fellowship programs turnover, we should see those people go out into the marketplace and spread this best practice technique as the best way to take care of patients, especially in this ERAS protocol environment.

And we do see some evidence of that Doug where folks in the Department of Defense hospitals where EXPAREL is being used extensively, when they have left those hospitals and gone to their next assignment, they’ve called wanting to see if our nurse teams could come and teach them how to use EXPAREL in whatever procedures they were trained not because that's how they learned how to do the procedures.

So we do see some events but that in fact is true. Crosslinks, I don't think crosslinks reacted to the warning letter any different than Pacira did frankly in terms of reps in the marketplace.

There are a number of things Doug around opioids and around catheter based pain delivery systems where we think that the orthopedic folks and their high level relationship with docs, where they can actually be more effective with some of these non-packaging were driven stories if you will than our reps can and that's how we're using them today..

Okay, great. Thank you very much..

[Operator Instructions] Our next question comes from the line of Steve Burn of Bank of America. Your line is open, please go ahead..

Hi, this is San [ph] for Steve, thanks for taking our questions.

First one is, what percent of surgeries are done in the out-patient setting currently and do you expect that to change with the nerve block? And then have sales been all affected by the CMS real change which was effective in January? And then the next one is the long term expectations between infiltration and nerve block, and then what percent of each do you expect from orthopedic?.

I'll start it out here.

So currently about - well over 80% of EXPAREL is in the hospitals, so in about half of the outside of hospital procedures are actually cosmetic plastic surgery, so if you were going to look at the pure ambulatory surgery, out-patient use of the drug, it looks a lot like plastic surgery to me; so you would think about 5% and I would have the same caution that it's very difficult for us to separate plastic surgery from non-plastic surgery, use outside the hospital just by the way the drugs are purchased, so that's number one.

Number two is - the CMS rule really was only relative to our ambulatory surgery code, 9290, and the FDA - I'm sorry, the CMS interpretation of that is that they are building - they do not want to provide specific J codes for products, and they - in their mind they are bundling the cost of the product against the percentage of times that the product is used in that procedure to allow the use of the product in that procedure against that percentage of caught out cases.

So if you saw, I'll be more specific. If you saw that EXPAREL cost $300 and was being used in 10% of the cases then you would increase the payment for the case or the procedure by $30 to allow EXPAREL to be used 10% of the time.

Now I have to tell you that when I go through that with somebody at ambulatory surgery centered, they think I'm out of my mind but I'm telling you the way CMS thinks and the way they approach the problem.

So that's why you will see the focus here, I'm making sure that you report the use of EXPAREL inside those procedures so that we can continue to make sure that that payment is increased as part of that bundled payment overtime.

So I'll answer the question in two different ways, I think I'm answering the question you asked, but if I'm not, come back at me.

We've seen very little impact of that to-date and the reason for that is, the indemnity payers who were paying for EXPAREL and the out-patient environment under 9290 did that largely because they were moving an in-patient procedure to an out-patient procedure or they were moving a money losing procedure as an in-patient procedure to lose less money out-patient procedure.

And in both of those cases the $300 cost of EXPAREL is relatively unimportant given the reimbursement for the procedure. So in one case it's - I can do something easier and better for patients and the other cases lose less.

The fact - now they would all like to see us have a specific APC code reimbursement but we haven't talked to anybody who stopped using the drug because they don't have a specific payment in an ambulatory procedure.

How might this be impacted by nerve or how would nerve block affect this, I don't see the out-patient being any different than the in-patient frankly.

I mean I - we think what's going to happen is that you're going to see anesthesiologist and surgeons doing nerve blocks and infiltrations on many of the major surgery opportunities because you get a different type of pain, it's a different way to think about multi-model therapy if you will, and so we see for example, and you will see posters at several upcoming meetings where an anesthesiologist will do an abductor block, similar to a nerve block for the anterior of the knee, and the surgeon will do a posterior capsule - periarticular injection and then will do the periostium and regular periarticular injection, and those procedures appear to do even a better job than EXPAREL by infiltration alone and that's the way we think the technology will be used..

Yes, just jumping in on the question on the long term forecast, I mean we're providing guidance only for 2015 and obviously we have a revenue base with the current infiltration and as Dave said, a limited amount of off label use in nerve block.

So that's the basis of those being able to forecast 2015, your question still reminds me to inform though that we're not clear that we'll have any basis to report on nerve block versus infiltration as we go forward, it's a challenge with orthopedic versus soft tissue but we're able to - those are procedures and we can buy them, buy that data from some of our customers and then extrapolate that but given that this is an administration technique within various procedures, it's going to be a challenge for all of us if we go forward to really look back and figure out how much is nerve block versus soft tissue - sorry, versus infiltration..

Okay, that's very helpful. Thank you..

Thank you and I'm showing no further question in queue. I would like to turn the conference back over to Mr. Dave Stack for any closing remarks..

Thanks, Ben, and thanks to everyone for joining us today. We would like to note that next month we will be presenting at the Barclays Global Healthcare Conference in Miami, we hope to see you all there. Thanks a lot..

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day..