Thank you for joining the Pacira Pharmaceuticals Second Quarter 2015 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. At this time, I would like to introduce Jessica Cho of Pacira Pharmaceuticals. 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; Jim Scibetta, Senior Vice President, Chief Financial Officer and Head of Technical Operations; and Scott Braunstein, Senior Vice President, Strategy and Corporate Development 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, and prospects and statements containing the words believes, anticipates, plans, expects, and similar expressions, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

Many of these and other risks and uncertainties are described in the Risk Factors section of Pacira's most recent Annual Report 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 & Media section of the Pacira website at www.pacira.com or on the SEC website at www.sec.gov.

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

And with that, we'll hear first from Dave..

an average length of stay of 0.59 days, zero readmissions, and zero rehabilitation discharges to skilled nursing facilities. In fact, 100% of the patients in this trial were discharged to home, which is materially important for patients and payers.

As a point of reference, the total cost of care in 2013 for patients receiving major lower extremity joint replacement 90 days post-discharge was $24,770 in the United States, with the average cost for a skilled nursing facility being $4,660; dollars which could potentially be mitigated and/or eliminated by using EXPAREL.

To this point, CMS has noted a wide range of clinical and economic outcomes for similar surgeries, including total joint replacement.

Earlier this month, CMS proposed a new rule requiring acute care hospitals across 75 geographic areas, regardless of pre-existing government contracts, to receive retrospective bundled payments for hip and knee replacements, starting with the patient's admission to the hospital out to 90 days after discharge.

In this new reimbursement world, hospitals will be forced to calculate and acknowledge all costs of care for patients, including resources used, length of stay, and hospital readmissions, diminishing the former influence of gatekeeper and line-item budget considerations.

This program represents a significant opportunity for EXPAREL to share the value proposition of opioid reduction, leading to faster ambulation and discharge from the hospital, which in turn directly translates into reduced costs, improved patient satisfaction, and overall savings – the very health economic benefits that we in the marketplace have demonstrated with EXPAREL and shared on numerous occasions through a multitude of studies.

We continue to work with our customers to develop enhanced recovery protocols addressing the need for cost-effective care pathways or enhanced recovery protocols.

To run through a couple of recent study examples, we are aware of several abstracts submitted to major orthopedic meetings demonstrating that the use of EXPAREL, compared to the standard of care, decreased length of stay and facilitated discharged disposition to home with lower readmission rates.

These abstracts from major medical centers will provide EXPAREL-based treatment protocols designed to lower hospital costs, length of stay, readmission for pain control, while reducing the need for post-discharge rehabilitation.

From Case Western, a pilot study in complex hernia model utilizing an enhanced recovery after surgery, or ERAS, protocol incorporating an EXPAREL path infiltration as a platform for a multimodal pain strategy, results showed a significantly faster return to GI functions such as tolerance of solid food and passage of stool, by 1.4 days, leading to a reduction in the length of stay also by 1.4 days, 5.8 versus 4.4 days, with a p-value of 0.0001.

A Department of Defense Navy study integrating local infiltration with EXPAREL for open laparotomies as part of Continuous Quality Improvement, or CQI, led to a reduced use of continuous thoracic epidurals for pain control from 35% of patients to 10% of patients without impacting median pain scores, while reducing opioid consumption by 32% and the length of stay by one day.

With government programs acknowledging the opioid abuse epidemic and accelerating the need for cost-effective reforms with improved patient outcomes, we continue to work on these ERAS and CQI protocols for both soft tissue and orthopedic procedures, institutionalizing EXPAREL as part of best-practice regimens at hospitals and major academic centers, but understand the advantage of a low-opioid strategy in order to adapt to the movement towards fixed reimbursement systems such as bundled payments.

To properly track the results of EXPAREL used at these facilities, our health outcome value analysis team has developed the EXPAREL quality improvement program, or EQIP, a toolkit designed to guide and measure the beneficial outcomes according to an institution's particular goals and objectives by using EXPAREL.

In terms of EXPAREL opportunities, we are also progressing as planned for our expanded indications. We are on track for our phase 3 study of third molar extraction for an oral surgery indication, which means that if enrollment, data collection, and regulatory submission go as planned, we could get approval and launch in the first half of 2017.

The self-pay appeal, combined with the oral maxillofacial surgeons' specific interest in reduced or no-opioid pain options make this opportunity a logical near-term market for Pacira, especially with the sizable market of approximately 27 million addressable procedures, consisting of roughly 10 million third molar extractions and 17 million oral maxillofacial procedures annually in the US.

Oral surgery is also an important societal issue, with dentists being the number-one prescriber of opioids to patients under 20. In fact, the State of Pennsylvania has recently instituted its third set of opioid-prescribing guidelines for dentists to address the prescribing of opioids for acute or chronic head and orofacial pain.

Secretary Gary Tennis of Pennsylvania's Department of Drug and Alcohol Programs stated, quote, "In the last 15 years, Pennsylvania and the rest of the nation has seen a dramatic increase in prescribing of opioids. And we believe that this is [audio break] (10:06) an opioid crisis we are facing today.

This new set of guidelines will strengthen our efforts to significantly reduce the need for opioid prescription medications and open the door to alternative pain management for our citizens.

The dental prescribing guidelines address the use of opioids for the treatment of acute dental pain and are intended to help healthcare providers improve patient outcomes when providing dental treatment, including avoiding potential adverse outcomes associated with the use of opioids to treat pain." We continue to make progress following the end-of-review meeting with the FDA regarding the supplemental new drug application for the nerve block indication for EXPAREL.

Based on the FDA's guidance that the expected use of EXPAREL will be for a broad spectrum of nerve blocks and not limited to a narrow indication of a single nerve block, we announced our plans in May to conduct additional phase 3 studies for upper extremity and lower extremity nerve blocks that, together, would cover the majority of nerve blocks performed today in the United States.

We are working with the FDA on the nerve block studies. And assuming we'd begin enrolling patients in these trials by the end of this year and the studies go as planned, we could launch this indication the second half of 2017.

The FDA has also requested that we provide data on specific procedures in an adult population to inform the phase 4 pediatric commitment for EXPAREL. This adult study is complete, and we intend to move forward with a study program to achieve approval for the use of EXPAREL in patients under 18, patients with a significant need for options to opioids.

In addition, we have a chronic pain program which will be informed by the development and timeline of the nerve block program. We are planning to perform a Phase 2 work for chronic pain during 2016.

Our animal health partner, Aratana Therapeutics, announced several weeks ago the positive results for its pivotal field effectiveness study of the Company's bupivacaine liposomal injection suspension licensed from Pacira for managing postsurgical pain in dogs. Aratana anticipates beginning commercialization of the product in dogs in 2016.

We also have two pipeline product candidates, DepoMeloxicam and DepoTranexamic Acid, which we plan to develop using our DepoFoam proprietary intellectual property through 505(b) (2) clinical development and regulatory pathways, potentially diminishing the cost of clinical development and the time to market.

Finally, on the commercial front, since we are no longer constrained by our manufacturing capacity, we have begun discussions with potential global partners to commercialize EXPAREL in geographies outside the United States.

Earlier this month we announced that Scott Braunstein joined the leadership team to oversee strategy and corporate development at Pacira, bringing over 20 years of knowledge and experience.

Scott will be primarily responsible for building out the Pacira product portfolio by evaluating, integrating, and optimizing all internal and external opportunities as part of a bigger strategic picture. Before turning the call over to Jim, I would like to discuss the competitive environment, starting with our proprietary DepoFoam technology.

Pacira is the only Company with commercial-scale manufacturing capability for multivesicular liposomes. With our spray manufacturing process we have a patent application which, if granted, will provide Orange Book-listed protection through at least April 2031.

We also note that DepoFoam is safe, patient-friendly, and a useful delivery technology platform.

Remember that we have another DepoFoam-based product, DepoCyte, which has been used in the United States since 2009 by intrathecal administration for patients with lymphamatous meningitis, a specific demonstration of the safety and utility of this delivery technology.

As we look at the competitive landscape, we believe EXPAREL has an extended period of market utility. Examining the possible long-acting bupivacaine competitors in development, we do not see any technology that provides all of the utility well-known with both DepoFoam and EXPAREL.

First, a product with a delivery technology, which contains alcohol and is administered by installation rather than infiltration. The traditional method of administration for EXPAREL and bupivacaine is by infiltration, where the product is placed in direct contact with the sensory nerves.

A delivery technology which does not allow direct contact with the sensory nerves will also limit the product's clinical utility, as it will likely not be appropriate for market opportunities being pursued with EXPAREL such as nerve block, TAP infiltration procedures, et cetera.

Second, a product with a delivery technology which is pro-inflammatory, requiring a second drug in order to address this technology deficiency, could force several issues.

First, clinical development through a fixed combination rule, a complex and time-consuming requirement with an onerous development pathway and requirement for a large clinical trial population in the absence of a reference-listed product.

Second, a pro-inflammatory technology which will not be appropriate for nerve block and TAP infiltration, and lastly, a technology which will limit or eliminate the opportunity for a standalone bupivacaine product. Without any other competitors or alternatives in sight, we remain 100% committed to providing EXPAREL to as many patients as possible.

Patients like Janet B.

in Oklahoma City, who suffered from chronic knee pain resulting from a surgery done years ago and who had to subsequently rely on pain pills and who finally, quote-unquote, "got her life back" after successfully undergoing knee surgery with EXPAREL and, shortly thereafter, sought surgery with EXPAREL for her other knee." There is also Jacob M., a 21-year-old former opioid addict from Lowell, Massachusetts, who delayed his shoulder surgery until he could no longer stand the pain because he feared having to rely on opioids to control this pain and is now the local poster boy for EXPAREL.

It's these personal patient experiences that reinforce for us every day the unmet need for a non-opioid alternative in the marketplace and the positive impact provided by EXPAREL for acute postsurgical pain control.

Patients not only deserve non-opioid options; they deserve to know that there are non-opioid options, especially when millions of Americans are introduced to opioids in the postsurgical acute care setting every year.

In Q2 alone, for EXPAREL we had over 20 key opinion leader interviews, four letters to the editor, and 24 media placements -- including a recent Cure TV interview with Pat Borgen, M.D., Chair of Department of Surgery at Maimonides Medical Center and head of the Brooklyn breast cancer center at Maimonides Cancer Center, discussing the importance of EXPAREL in preventing the opioid abuse cycle and in treating the specific pain experienced by cancer patients undergoing breast surgery in the immediate postsurgical setting.

So we continue on our important work with media and key advocacy groups as well as policymakers and community leaders to increase awareness on how products like EXPAREL offer the unique opportunity to curb the opioid epidemic right where it starts. And with that, let's hear from Jim..

in terms of operating expenses, we achieved a non-GAAP or adjusted gross margin of 71% in Q2 compared to 59% in Q2 of 2014 and down 1 percentage point from the previous quarter.

That 71% adjusted gross margin in Q2 was negatively impacted by approximately $4 million of unplanned shutdown and other charges, without which we would have achieved an adjusted gross margin of approximately 78%.

Adjusted R&D spend was $3.1 million and adjusted SG&A was $29.6 million, and that was impacted by new hires and legal expenses toward the resolution of regulatory matters. Adjusted net income in Q2 was $8.4 million or $0.20 per diluted share.

Second-quarter stock-based compensation was $7.3 million, constituting 8%, 15%, and 15% of GAAP, COGS, R&D, and SG&A expenses, respectively. Q2 adjusted EBITDA was $11.9 million, and we finished the quarter with approximately $171 million of cash and investments.

Looking ahead on the EXPAREL revenue front, we see favorable catalysts for growth, and we remain optimistic about the intermediate and long-term growth prospects for the brand.

For the remainder of 2015, based on what we are experiencing with accounts in the marketplace, we believe Q2 will reveal itself to be the quarter with the slowing (20:32) of the EXPAREL growth trajectory – bouncing off the bottom, if you will.

We chose the suspend guidance in late April, in the immediate aftermath of the announcement of the DOJ investigation. And we have seen a select number of accounts tie the DOJ investigation to the issues raised in the FDA warning letter and used that inference, along with other issues, to create restrictions on access to the product.

And so resolution of regulatory matters remains a very high priority for us. Our commercial organization has rallied around the product and around the customers and patients we serve, and we are engaging with new and existing customers account by account on the value that EXPAREL delivers.

Against that renewed but cautious optimism, recall that Q3 is a lower-volume quarter for elective procedures compared to Q2 as surgeons take time away from their professional activities in the summer months. So we do not expect a sequential uptick in EXPAREL sales to materially surface until the seasonally strong Q4.

Looking forward on operating expenses, obviously the EXPAREL gross margin in future years and what is achievable at peak is a key value driver of future earnings per share and therefore currently a key value driver for the Company.

Our guidance since launch has been peak gross margins of 75% to 80% in our science center facility in San Diego and at least 80% for a product that is to be manufactured at our partner, Patheon.

With the benefit of experience running three manufacturing lines 24/7 and the great job our team in San Diego has done to reduce cycle time and implement other efficiencies, we are now increasing our guidance for peak gross margins to 85%.

But I also need to note that we don't expect to reach these peak levels until a few years after this sales trajectory can benefit from the nerve block launch.

Our near-term consequence of this efficiency improvement is an inventory build that, coupled with additional capacity expected to come online in late 2016, will require us to moderate our production activities next year, which could push our margins below the current levels.

At the same time as we're rapidly pushing our pipeline products into human clinical studies, we have the opportunity to repurpose our Suite A manufacturing line to make clinical material, which would move Suite-A-related expenses from COGS to R&D.

We will have better visibility on this later this year and would expect to provide an update on the impact of these factors for 2016 at that time.

These factors aside, since reported gross margins for the remainder of the year are driven mostly by inventory already in place, we expect better than 70% adjusted gross margin performance throughout the remainder of 2015.

As for the outlook for other operating expenses, some capacity expansion expenses and clinical expenses unrelated to our pivotal programs in oral surgery and nerve block have been pushed out into 2016. So we are revising our 2015 adjusted R&D expense guidance from the range of $25 million to $30 million previously to $20 million to $25 million.

We are affirming 2015 adjusted SG&A expense guidance of $115 million to $125 million. In May we announced positive feedback from the FDA regarding our new spray manufacturing process.

The FDA deemed acceptable our proposed approach to demonstrate comparability and provide adequate data in support of the spray process and for establishing the bioequivalency of EXPAREL.

If spray is used to produce EXPAREL, we could see further significant upside in the form of improved gross margins, the formal IP protection that Dave discussed, and potential tax savings from domiciling and developing our IP technology in the United Kingdom.

Dave made some comments about competition; and we continue to think, frankly, that we're extremely lucky to have the DepoFoam technology as the vehicle for EXPAREL, which, of course, is the only approved bupivacaine product with an extended duration of effect, and for our pipeline opportunities as well.

We found that the closer one gets to the technology and the innovative manufacturing process we have in San Diego, the better one is able to appreciate just how unique EXPAREL is and how challenging it will be for any aspiring competitor to deliver bupivacaine so safely and effectively.

In summary, we have a renewed sense of energy regarding the EXPAREL growth prospects – although, again, to be clear, we don't expect this to be visible in our numbers until Q4.

We are excited to convey improved gross margin prospects, and we continue to be grateful for our DepoFoam technology in the context of the value EXPAREL delivers to our customers, our lack of concern of any potential competition, and our currently-defined and future pipeline opportunities.

EXPAREL is a non-narcotic therapy which improves patient care, unburdens hospitals from excess spending, and has no equivalent competitor.

Juxtapose that with the fact that two people in this great country will die from opioid overdose during this 60-minute call, and you understand why Pacira is a Company that believes it has a critically important mission, an important responsibility to society, and a long, successful runway ahead of us. Vince, we are now ready for Q&A.

And as Jess and Dave both alluded to, Scott Braunstein is with Dave and me here..

Our first question comes from Liana Moussatos of Wedbush Securities. Your line is open..

Thank you for taking my questions and congratulations on all your progress.

Since Pacira is profitable, any consideration of a share buyback program with $170 million cash?.

we just – I mean, not yet, at least. We just don't think people are investing in PCRX looking for a share buyback.

I mean we think that our primary responsibility here, with our shareholders' investment, is to create value by developing our pipeline and continuing to look for new ways to use the DepoFoam technology to create real value, rather than just using the cash for something other than that.

So Jim is obviously the one that will have a heavy hand in those decisions, but that's right off – my gut instinct is to make that comment..

Yes, we will take a look at that in the out years as we continue to accumulate cash, but Scott coming on board is to look at moving our internal pipeline and expanding our internal pipeline; looking at external assets; and also, frankly, looking at EXPAREL itself and making sure that we have a strategic view, that we can fully aggrandize that asset and make it a huge brand.

So we don't want to be shy with our cash, for the opportunities that we have in front of us..

Thank you very much..

Thank you. Our next question comes from Dave Amsellem of Piper Jaffray. Your line is open..

Thanks. I have a couple of questions.

First, maybe, can you give us some qualitative commentary on what kind of pushback you are getting from hospital pharmacy departments, if any, or pushback and resistance from surgeons, if any, in the wake of your modified communications as part of your resolution of the warning letter? Maybe just provide us with some commentary on how that may or may not have impacted volumes in the second quarter, and how that could be impacting volumes in the current quarter.

And then, secondly, this may be a question – this is probably a question for Scott. Just give us some thoughts on how you're thinking about BD.

Are you looking at trying to find new ways to optimize the DepoFoam technology with other products? Do you see a healthy list of external opportunities for acquisitions? Maybe give us a sense of what's on your to-do list, what are your top priorities as you get started? Thanks..

So I'll go first, David, and then, as you suggest, I will ask Scott to make some comments. So, relative to the DOJ and the warning letter, etcetera, I think the first thing we have to acknowledge, and tried to outline this in the script, is that our customers, especially budget holders, are actually in a tough spot.

And it's no secret that they are having a tough time. And so, if you are worried about getting through 2015 from a budgetary perspective, then the obvious thing to do is to look at your budgets and see where you might be able to make those budgets stretch. And that's really what we are seeing from pharmacy.

I think mostly what we saw from the impact of the warning letter and the DOJ, is at the hospital level, was somebody who already had a predisposition to try to limit the access to EXPAREL, have a couple of additional regulatory tools, if you will, to try to institute that thought process.

I would say that, as we've continued to move along and as the marketplace continues to evolve, we have started to see those things modify. And in fact, we've seen some places where restricted access was applied and where it hasn't worked to the satisfaction of care providers.

And so we've seen people start to come back to EXPAREL, because they just couldn't achieve the same patient outcomes without it. On the surgeon side, on the anesthesiologist side, when the product is used appropriately, David, we have very little pushback, actually almost no pushback, from customers who treat patients.

In fact, if there was no cost pressures, I think it would be pretty safe to say that virtually everybody would like to use EXPAREL virtually everywhere. But that's just not the real world. But we very rarely get pushback from people who treat patients. So I'll ask Scott to....

Just to jump in, Dave, the only thing I'll add to that is, the picture that we are seeing is, as I referenced in my comments, it's a select group of customers who have jumped on that factor related to DOJ and so forth. There are a number of other customers who we continue to grow with and are unaware of, or ignoring, these regulatory factors.

So it's a real dichotomy. It's a smaller number of customers that have focused on it, but some of them are large customers. And as you might imagine, the people who take a shorter-term view of cutting costs are the ones that have the most incentive, in this quarter or next quarter, to have cost-cutting activities.

So with that as background, Scott, do you want to address the other questions?.

Sure. Thanks, David. My first question, I'm excited about answering it. I'm trying to take a very long-term view at Pacira as a company, and how our products will fit in over 2016, 2017, 2018, and 2019, as a starting point, and beyond.

It's very logical that, from an external business development standpoint, I think about – and we as a company think about, markets where our customers are today. And our sales force is so strong today in the hospital, within the surgical community, in the anesthesia community in 2017 and beyond, and other potential hospital customers.

So that's a logical place to continue the activity on the business development side. But I'm also spending a lot of time with the internal pipeline, the team in San Diego, which is terrific. We have some of the smartest people in the world on drug delivery technology in San Diego. We have some of the smartest people making the product in San Diego.

So we have world-class manufacturing and we want to utilize that technology to its ultimate ability. I'm very deep in the TXA program today. Meloxicam is right on board. And since I've been with the Company, I'm more enthusiastic about our pipeline products than I've ever been.

And certainly I'm spending a lot of time and will be spending more time with the teams, thinking about where else we can apply this technology in a way that's logical and synergistic to our business. So I think I'll stop there..

That's helpful. Thank you..

Thanks, David..

Thanks David..

Thank you. Our next question comes from Gary Nachman of Goldman Sachs. Your line is open..

Hi. Good morning, guys. First, on oral surgery, we were supposed to get data by late 2015.

Why the slight push-out to early 2016? Have you started this study already? How big will the trial be? And then would you build your own dental sales force? How do you plan on commercializing that?.

We don't know, Gary, honestly. We don't know that there will be a push-out to 2016. So it's in that timeframe, late 2015/early 2016. So we are talking about a few weeks in terms of how the Gantt chart lays out. There are multiple programs in the dental surgery initiative, and those have been started.

And we continue to make progress on going through all of the required regulatory hurdles in order to make sure that happens. So yes, all of those things are in play. When it comes to a separate dental sales force, we don't view that as a requirement under any scenario that has been envisioned so far.

The dental surgery market looks to us like a very big plastic surgery opportunity. And so we envision a scenario where we would probably add some more reps, but they will not be specific to the dental surgery program.

And you can see a scenario where folks work in a hospital as part of the – as the morning activity; and the early afternoon activity, working with surgeons, etcetera, like we always have. And then you make some dental surgery calls and some plastic surgery calls at the off hours in the hospital.

So we would rather see more people, smaller territories, but a full range of EXPAREL opportunities handled in the same bag..

Okay. And then on the sales force, have there been any changes recently to your current sales force in how they are promoting EXPAREL, or have all the changes been implemented? And Dave, you mentioned partnership discussions outside the US. That's really the first we heard of that.

How soon can that materialize?.

Let me answer first the sales force. Gary, the scenario that has been outlined since the warning letter remains in place. So there are no changes there. And the field force is doing extraordinarily well, as Jim outlined in his presentation, relative to their dedication to this opioid-sparing and opioid epidemic solution, if you will.

It's really too early for me to tell, Gary. We've initiated discussions with a number of potential partners. But it would be way too early for me to be able to tell you that I think I know when we might be able to close on those.

And different territories require different regulatory strategies, so it even gets a little more difficult to tell you exactly when we might generate some revenue from any of these partnerships..

Okay. Thanks, guys. And welcome, Scott..

Thanks..

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

Hi. Good morning.

Dave, maybe to start, in terms of the business and the trends that you are seeing, just curious if you are seeing any different growth rates between orthopedics which is, I think, a little over half the business versus the sort of soft tissue indications? And then also maybe comment on the relative performance of the reps or of the CrossLink partnership and how that has been going.

And have you ultimately thought about your sales strategy into the orthopedics market right now?.

Yeah. So the first question, Doug, ortho versus soft tissue, really hard to tell day-to-day, week-to-week, what the business mix is.

But there's nothing optically obvious that there is any kind of a dramatic shift there, other than the fact that it is interesting to me that the majority of the ERAS and CQI programs that we are seeing are soft tissue programs. We attribute that to the fact that people in the soft tissue environment have had a longer time course with EXPAREL.

It was where the product was adopted first. But no, we don't see any significant shift. What Jim and I referred to in the script really is more customer-based than when the customers have access to the product.

You don't really see them think about it in that kind of a way, other than the fact that where they have the biggest issues with opioids, or where the most opioids are used, seem to be the directed way that EXPAREL would be employed, even in a restricted access environment, frankly. The CrossLink question is an interesting one.

They've had the same – we've had to train our CrossLink partnership exactly the same way that we train our reps. And so as a result of the warning letter, we've worked with CrossLink exactly the same way that our folks have worked.

So we have been able to talk to customers about why are you using customer or catheter-based therapies; making sure folks are fully aware of the opioid epidemics and the different use profiles of different physician groups and different procedure groups from an opioid-prescribing perspective.

And the CrossLink's relationship has also been really important to us in terms of KOL development and our presence at national meetings like AAOS and AAHKS and things like that. So I don't know if I'm answering your question, Doug. But even in the warning letter environment, this relationship has proved to be very useful to Pacira..

one in terms of the modified communications after the warning letter. Have you seen any sort of elongation, if you will, of the sales cycle, not necessarily with institutions, but with particular surgeons? And then a follow-up, obviously, in your comments you have really emphasized the opioid-sparing benefits of the product.

When we talked to – or in my experience in talking to physicians, it seems to be much more an emphasis on time to ambulation, length of stay, as well as just improved pain benefits.

And I'm just curious; in your larger sample size, in terms of interacting with clinicians, is opioid reduction really the key point for the advocates of the product?.

Yes. Well, so opioid reduction, Doug, is the reason that the patient benefits that you outlined are possible. So I'll just give you a real quick, so let's take a total knee.

If you do a femoral nerve block, and you use a morphine PCA machine and those patients receive a significant amount of morphine, both of those modalities lead to a patient who is highly unlikely to ambulate on day one.

If you replace those modalities with EXPAREL and a PRN use of an opioid, meaning that you would get much less opioid in most circumstances, then that patient doesn't have nausea and vomiting caused by the opioids; they don't have the urinary retention and the dizziness, etc., that comes from using the opioids.

They are not having the motor blockade and the need for a leg brace that comes from the femoral nerve block. And so we see that virtually all EXPAREL low-opioid-based total knee patients ambulate on the day of surgery.

And it is the very simple fact that they feel better, meaning they don't have all of the opioid-related adverse events, that when the nurse suggests, or the protocol for a Swift Path delivery program requires, that they ambulate on day one, that is much more likely to happen with an EXPAREL patient then within the traditional treatment modalities.

So it is both, right. You can't just say that patients are going to feel better, walk faster, and all those things. We have to tie that to opioid reduction, because that is what makes it all happen..

Okay, great.

And then just in terms of the impact in terms of the "sales cycle" given the modified communications?.

You know, Doug, it's pretty interesting. I would tell you – I would say more than half of the docs that I talk to don't even know that we got a warning letter or a DOJ investigation. So typically, at the doctor level, it is not an issue.

It is an issue where we might have large purchasers, either GPOs or IDNs, who for budget reasons and, again, for profit motivation are trying to limit access to EXPAREL. But that is almost never a physician issue..

Dave, I guess maybe my question wasn't clear, because I wasn't really focused on that awareness.

But what I meant is that in terms of the sales rep not being able to necessarily talk about specific procedures that were outside the OCI – since you have to refer, then, to the medical CX science liaisons now, does that necessarily mean that the time from when you first engage with the surgeons that they actually start to use it has sort of lengthened to some degree?.

Yes. Impossible for me to tell you, Doug, because it wouldn't be material, in my view. It is not perfect from our perspective. We like to have the old label back and the old way of doing business back. But I can't tell you that I could tie any direct box sales from the last weeks or quarter to that specific issue.

It's really hard to tease that out specifically..

Okay, great. Thank you very much..

Thanks, Doug..

Thank you. Your next question comes from David Steinberg of Jefferies. Your line is open..

Thanks, good morning. A couple of questions. First, Dave, you talked about the number of times the difficult environment in hospitals and the cost-cutting.

I'm just curious, trying to better understand why in 2016 would this improve? Looked at another way, perhaps, why should the value proposition of EXPAREL be different right at the moment versus next year? I know Jim has alluded to we're moving off the bottom. If you could give us a little more commentary on that? Thanks..

Sure. Thanks, David. So I don't think the environment is going to improve materially, frankly. But what we see is a difference between a visceral reaction to the, my 2015 budget is not appropriate to get me through December 31, to an innovative way to look at how you can actually address these issues strategically rather than budgetarily.

And what you are seeing is, these ERAS protocols and these outpatient protocols allowing folks to innovate and to improve or enhance the way that they're providing their pain care, so that you don't have to keep a patient in the hospital because they are tethered to a morphine PCA machine.

Or you don't have to provide epidural administration plus-plus, which means that the patient has to be institutionalized. As we see the marketplace move to shorter LOSes and eventually to outpatient care, morphine and many of the other treatment mortalities are the reason that we are where we are. They are not the solution.

And so a low-opioid treatment strategy that allows these patients to ambulate sooner, and eventually to be discharged sooner, provides the innovative platform, especially in an environment where we can provide very specific algorithmic guidelines from major medical centers on how exactly to achieve an economic outcome – and, by the way, usually driven by the fact that we can provide non-opioid pain control..

that's the stuff that easily could be saved. And we have customers who have been using EXPAREL as part of a perioperative care system, where they are reducing costs tremendously through that whole 90-day period. And again, our customers are going to be sort of forced to get it more efficient along those lines..

Fair enough. And then just moving to the oral surgery program, which looks like a major opportunity, you are doing the phase 3 trial for the third molar extraction.

What would the ideal label look like, based on this study, for you?.

It's an infiltration, David, and it will be pain control. The endpoints will be very much (47:07). So it will be – well, the first thing, I think, is a specific treatment algorithm for infiltration in a third molar extraction procedure. So we want to make sure, again, that we provide specific information to the marketplace.

It likely will be a 10ml dose. And the ideal label will be for a single administration in an oral surgery procedure to provide postsurgical analgesia..

Okay. And finally, it seems like there's an acquisition in this area every five or six business days.

Just curious about the Company's point of view – how receptive would you be to some sort of friendly approach to being acquired in the current environment?.

David, I think our shareholders have the great benefit that there's nobody here who is a founder and/or – you know, so we're going to do what's in the best interests of shareholders. I don't know what that is, Vince.

If you can make sure that we are not being interrupted with whatever that ring tone is? So David, obviously, from a fiduciary perspective, we would take any kind of reasonable discussion to the board of directors.

And we will always act in the best interest of our shareholders, in terms of what we can achieve and what a potential partner could achieve. And who knows? But that is not our strategy, I guess.

We are building a long-term business, which is why we have got Scott here and why we anticipate hiring other folks into the leadership team in relatively short order here. If it happens, it happens. But that isn't our plan..

And obviously we – you know, referring back to our comments in the call today, we are bullish about our future. And there has been some dislocation in our stock price. So that's a contextual thing that makes this a suboptimal time for that. And we've got our eyes open about those type of issues..

Okay. Thanks..

Thanks, David..

Thank you. Our next question comes from Jonathan Aschoff of Brean Capital. Your line is open..

Thank you.

I was wondering, guys, have you found that surgeries performed when some sort of significant inflammation is present tend to make it more difficult for a local anesthesia like EXPAREL to work well?.

I'm sorry, Jonathan. I didn't – I'm sorry, I didn't quite understand.

Can you go through that again?.

Yeah. So, when there is a decent amount of inflammation at the site -.

Oh, I'm sorry. Okay..

...so that's what I was asking. Whenever that is kind of high, have you -.

That appears, Jonathan – and this is not my area of expertise, and we could – you could ask some other folks in the organization that have got decade careers in drug delivery. My understanding is that that is technology dependent, that there are some delivery technologies that do not react well in the presence of inflammation.

And it's related to pH issues and the ability of that delivery technology to act as anticipated. We don't believe that that's the case with EXPAREL..

Okay. And I guess there's no other way to maybe get at how the second quarter may have looked without any sort of removals or restrictions on EXPAREL.

You've pretty much said what you are going to say about that already?.

Yeah. You know, we've got so many customers, and every one of them really is an N of 1. So we analyze these different scenarios regularly. And if I thought that there was something that made sense that we could communicate with you guys, we certainly would. But it's all over the place, Jonathan.

And you know, we have to remember, we have a number of scenarios Jim outlined. We had 165 new customers. We still have places like the DoD where the product is growing well.

And so we are not only looking at losses, we are looking at gains; we're looking at new information, we are looking at, when places put out an ERAS protocol, what does that happen, the impact of the Miami breast surgery meeting, and all of that.

So it's a very dynamic – situation, and it's really hard for us to tell you that there's any one thing that we could put our finger on that's either really positive or really negative, frankly..

Okay. Thank you..

Thank you. Our next question comes from Corey Davis of Canaccord Genuity. Your line is open..

Thanks.

The first question is, at what point in time do you think you will be in a better position to predict the trajectory of EXPAREL, based on everything you have spoken about, such that you could reinstitute guidance? Do you know it already and just don't want to put guidance out there? Or is it something that you still don't even really know exactly what it's going to look like?.

Yeah, Corey, I think our – I guess to sort of step back and maybe state the obvious management's confidence or certainty translating into future numbers is what the investment community wants. Through 2014 we didn't have that in the form of specific revenue guidance. And it still was a working relationship, if you will.

Suspending guidance obviously created a tremendous amount of uncertainty, which we thought was ethical and prudent because we had it ourselves. And so you translate it back to today, and we are not putting specific numbers out there. But if you take my comments, we think we bounced off the bottom. We think Q3 should have some growth in it.

We want to manage expectations that – you know, in Q2 we were essentially up 5% in unit volume in a seasonally strong quarter. So that's not a lot, and it was almost a little bit better than flat, if you think about it that way. We are not exactly sure what that the amount of procedures were in Q2 relative to Q1.

But as we look to Q3, we expect to have some growth. But because it's a softer quarter, the numbers will be up a little bit. And then in Q4, as we said, we expect to see the growth trajectory starting. So I think that's – conceptually, it's soft. It's not specific numbers.

But it is saying that's management's confidence that that's what we think will happen at this point..

Okay. And then second question, Jim, could I ask you to clarify what you are saying about gross margin? Because it wasn't clear to me. If it was 71% in this quarter, and I think I heard you say without some one-time effects, it would be 78% without those.

And then you said that margins would go greater than 70% for the remainder of 2015, and then down again possibly in 2016.

So would that mean that in 2016, they could dip into the 60% range? Or are you starting from that 78% that you mentioned first?.

Yeah, you have it all. You know, we have proven the 75% to 80% number at least to ourselves, and we would have been in that range this quarter without the one-time impacts. But then – and then, as we noted, we expect at least 70% for the rest of the year.

But then as we get into moderated production with a mostly fixed-cost infrastructure next year, they could be down from at least where we are now. I don't really want to put a specific number on it, because that could be somewhat offset by taking Suite A – remember, we've got three manufacturing lines, two that are part of Suite C and one in Suite A.

And we are looking to transition Suite A into a clinical line, which would positively impact gross margins as an absolute event by taking some of the costs and putting it there. So everything you said is accurate. I just don't want to put a specific number into 2016 until we get a little bit closer to it and know what our plan is..

Okay. And then last question, I don't know....

And then, of course, the fourth thing that we had said was we do know that we can achieve peak gross margins in the 85% in the out years....

Right..

Once we get into transitions..

Then the last question – I don't know if it would be for Scott or Dave, and I think you kind of answered this.

But in the products that you are looking for, are you looking for more pipeline projects to bring in-house, or unmarketed products, or both?.

You know, I think right now we would prefer a marketed product, if something was available that made some sense, as Scott outlined. But I don't think there's any color on anything, Corey. We are looking at a whole bunch of stuff across a wide spectrum..

Great. Thanks.

Yeah, I would just add, Corey that I am really spending my time equally looking externally and internally. But certainly, thinking about the strategic need for the organization, as I mentioned earlier, 2016 and beyond..

All right, okay. Thanks, guys..

Thanks Corey..

Thank you. Our next question comes from Tazeen Ahmad of Bank of America. Your line is open..

Good morning, guys. Thanks for taking my question. Maybe something on your pipeline, earlier this year you had mentioned the possibility of developing a DepoFoam of Meloxicam as part of your pipeline.

Can you give us an update on where you might be in development with that compound? And ideally, would you see this particular product being used alone, or would you want to use it in combination with EXPAREL?.

We haven't talked about methotrexate as a DepoFoam product in a couple of years, Tazeen..

I'm sorry. I thought it was DepoMeloxicam..

I'm sorry, Meloxicam – I thought you said methotrexate. My error. So no – we DepoMeloxicam is very much on our radar screen and in development. There's a couple places where the product appears to have utility based on the primary market research.

The reason that the product was put into DepoFoam was to provide that anti-inflammatory effect, especially as we see the marketplace move to an outpatient environment, so that we can provide EXPAREL and an anti-inflammatory as the patient in a 23-hour stay was being discharged, so that we wouldn't have to worry about any of the issues of compliance or any of those kinds of things.

That's the broad strategy. What we found out when we did the primary market research is that the – especially the orthopedic surgeons and the sports guys were also interested in a more rapid onset of activity from an NSAID.

So they are thinking about the retail use of the product where, you know, if you did something dumb over the weekend like trying to ride a snowboard or something, you went in on Monday and you would get a peripheral injection of a DepoMeloxicam product that would allow you to achieve relief from an NSAID much more quickly than if you were relying on a topical or a PO product.

And then the real winner in all of those things is our expectation is that the dose that will be provided will be significantly less than if you were going to get the same response from a systemic dose.

And so while we know we will have the black box associated with NSAIDs from an AE perspective, our expectation is that those will be greatly modified by the use of a materially lower dose in a peripheral injection..

currently our development plan for Meloxicam is as a single-agent therapy. And that's where we believe the product will follow that clinical timeline, as a single-agent product..

And there are – we would never want to obligate our customers to use both products in every procedure, because there are some procedures like spine where they typically don't want an NSAID. So we think giving our customers that choice would be really great..

Okay, thanks for that color. And then maybe one on EXPAREL – in the past you have been able to give us breakouts of use by different types of procedures.

Is that something that we should still expect to get going forward?.

Oh, yeah. Yeah. So we – as a matter of fact, we are enhancing that database, Tazeen. We were using only a database from a GPO organization. And now we've got some additional data that we think can enhance that and make it more accurate. So we will continue to report that data.

It will be part of our corporate presentation, and it's actually on our website. So it will be updated as the corporate presentation is updated..

Okay, great. Thanks..

Thank you. At this time I would like to turn the call back to Mr. Stack for any closing remarks..

Thank you, Vince. Thanks for tuning in, everyone. Coming up, we will be at the Wedbush PacGrowth Healthcare Conference (sic) [Wedbush PacGrow Healthcare Conference] (1:00:31) on August 11 in New York City and at the Canaccord Genuity 35th Annual Growth Conference in Boston on August 12.

Thanks a lot for hanging in there for a full hour and we appreciate your interest in Pacira. Thanks..

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Everyone have a great day..