Thank you for joining the Pacira Pharmaceuticals Fourth Quarter and Full Year 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, Chief Executive Officer and Chairman; Jim Scibetta, President and Chief Financial Officer; and Scott Braunstein, Senior Vice President of 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 word 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 company's most recent Annual Report on Form 10-K 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 full year.

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

Thanks, Jess, and good morning, everyone. 2015 was an important period for Pacira. We finished the year with another solid quarter of growth, in line with seasonal expectations and we achieved an amicable resolution with the FDA, reaffirming the clarity of the broad label – the broad scope of the indication approved for EXPAREL in 2011.

But more importantly, we spent 2015 building up the infrastructure that we believe will enable us to leverage the multiple opportunities for EXPAREL, our DepoFoam pipeline and our commercial organization to advance the Pacira brand in both the near-term and the intermediate term.

Let's start with our flagship product, EXPAREL, the only non-opioid, long-acting analgesic formulation of bupivacaine currently approved to provide postsurgical pain control.

Our key strategy remains making EXPAREL accessible to as many patients and healthcare providers as possible, developing clinical datasets and enhanced recovery protocols, and providing package configurations at a price which demonstrates the significant value of EXPAREL.

Given the dramatic societal need for reduced opioid strategies in the very large patient audiences, our strategy will provide customer access points across a wide range of procedures and treatment settings, driving real growth for our business for the long-term. The market response to the resolution of the FDA warning letter has been very positive.

The affirmation of the broad label has provided the basis of healthcare providers to challenge decisions which limited access to EXPAREL based on inaccurate information provided in the warning letter.

In addition, we have a number of programs involving infiltration into the transversus abdominis plane or TAP blocks that have been initiated to provide pain control, reduced opioids in important procedures such as C-sections.

Of special interest to many surgeons is the opportunity to mix bupivacaine and EXPAREL in the same syringe, providing for ease-of-use and another opportunity to improve surgical technique in patient care.

In addition to the enhanced label, which the FDA confirm supports the use of EXPAREL across a range of surgical procedures, we are letting our customers know that there will be no price increase implemented this year, as a demonstration of our commitment to partnering with our C-suite and clinical customers who are under pressure to plan and budget in this dynamic environment of bundled payments and accountable care.

We also plan to introduce a smaller 4-pack configuration of EXPAREL in Q3 along with a 10 ml vial to accommodate smaller surgeries, including oral maxillofacial procedures and plastic surgery procedures, many of which are performed in the ambulatory or office setting.

With the FDA confirmation that TAP infiltration procedures are covered in the EXPAREL label, we are pursuing this opportunity for strategic procedures of interest. An article published in the International Anesthesia Research Journal, Dr.

Casanova (5:03) et al, from the University of Texas Southwestern, compared abdominal hysterectomy patients who received infiltration with EXPAREL to patients who received bilateral ultrasound-guided TAP blocks with bupivacaine and found EXPAREL patients received fewer opioids and experienced significantly lower pain scores at rest and with coughing.

Dr.

Hutchins, et al, from the University of Minnesota, published similar findings in the September gynecologic oncology on their hysterectomy patients who received TAP with EXPAREL versus TAP with bupivacaine, with the EXPAREL patients having significantly decreased opioid use, lower pain scores, decreased incidence of nausea and vomiting and a trend towards decreased length of stay.

In a study published in the October supplement of the Journal of the American College of Surgeons, Hackensack University Medical Center's Dr. Burnett, et al, showed how EXPAREL, as part of a multimodal therapy for laparotomy patients, reduced reliance on opioid PCA by 30% through 72 hours with a trend towards shorter hospitalization.

Studies are continuing to demonstrate the value of EXPAREL infiltration as a platform for multimodal reduced opioid strategies across the broad range of orthopedics procedures, leading to faster ambulation, reduced length of stay and improved bottom line for hospitals.

For spine surgery, the desire to reduce the length of stay and transfer lumbar fusions to the outpatient setting, which requires appropriate patient selection and adequate patient management to allow for quicker return to function, has led to EXPAREL based care. Riesenburger et al.

from Tufts University presented a study at the Congress of Neurological Surgeons Annual Meeting, comparing EXPAREL to standard of care postoperative analgesics for single level, minimally invasive transforaminal lumbar interbody fusion spine surgery.

Patients in the EXPAREL arm experienced decreased pain and opioid consumption for the first 24 hours and a decreased length of stay by 1.2 days.

A primary article from (6:37), et al, in the Journal of Orthopedic Advances demonstrated that while both femoral nerve block with bupivacaine and surgical site periarticular infiltration with EXPAREL provided adequate pain control in the total knee arthroplasty that was a significant one half day reduction in the hospital length of stay and more than a $2,000 cost savings in favor of EXPAREL.

We believe that these metrics will be of increasing importance as the market moves towards bundled payments for these orthopedic procedures.

Pain control with a femoral nerve block remains a predominant technique for total knee arthroplasty in the United States, and this paper is of real importance, given the CMS's Bundled Care Program for total joint arthroplasty is being initiated in April.

We believe that low opioid pain control with EXPAREL as part of a multimodal strategy will be a critical component of overall care in the evolving bundle environment.

As an example, NYU recently published their early 2013 results in the Journal of Arthroplasty based on experience in implementing the CMS's Bundled Payment for Care Improvement initiative for total joint replacement.

NYU incorporated EXPAREL into their multimodal regimen for managing pain, and across the 90-day episode of care following patient discharge, the hospital was able to significantly decrease discharge to rehab and skilled nursing facilities, reduced readmissions and lower hospital costs, achievements that have been approved upon and subsequently presented at several medical meetings and will form the basis of future publications.

NYU is just one example of institutions adapting to capitated reimbursement models. Based on the understanding that 50% of the cost of joint episode is driven by post-surgical aftercare, we are working on how to best position EXPAREL as an important component of the bundled payment environment.

As such, early ambulation and discharge to home rather than expensive skilled nursing facilities can make a significant financial impact on the bundle. At the upcoming American Academy of Orthopedic Surgeons meeting in Orlando, there are a number of papers discussing the use of EXPAREL in orthopedic procedures.

Overall, we have learned that there are procedure-specific administration technique and higher injection volumes required for these surgeries in order to reproduce optimal results and minimize variability. One specific highlight comes from the Rubin Institute for Advanced Orthopedics at Sinai Hospital.

Mont, et al, will be presenting a study assessing more than 90,000 patients from the premier database undergoing total knee arthroplasty showing that EXPAREL patients shorten their hospital stay by half a day and had a higher likelihood of being discharged to home, as mentioned above, a significant opportunity for our hospital customers in a bundled environment.

Also at AAOS, we are supporting three symposia, focusing on multimodal pain management in the inpatient and outpatient setting in total joint arthroplasty.

The content will be focused on the importance of technique in periarticular injections, important facts on bundled payments, risk stratification and opioid management as well as patient selection and management for outpatient arthroplasty.

These components, including the use of EXPAREL, are critically important to the evolving best practice of how to treat postsurgical pain today.

Last week, the American Pain Society, with input from the American Society of Anesthesiologists and approval from the American Society of Regional Anesthesia, developed and published a clinical practice guideline to promote evidence-based effective and safe postoperative pain management.

In its recommendation of surgical site local infiltration as an effective component of multimodal analgesia, the guideline specifically points to EXPAREL, underscores the importance of specific local infiltration techniques depending on the procedure type, and calls for the incorporation of non-opioid analgesics around the clock into multimodal analgesic regimens and advises clinicians to improve patient education.

I would like to switch gears to update our launch plans for oral surgery. Recall that as a component of the FDA settlement in December, the FDA confirmed that oral surgery is part of our approved indication, and we are preparing for a late third quarter 2016 launch.

The launch timing is targeted around the annual meeting of the American Association of Oral and Maxillofacial Surgeons in September, and as a result – and as well as our readiness to introduce the previously mentioned 10 ml vial and 4-pack configuration.

This morning, we announced results from our third molar study, which is effectively a Phase IV study, that further supports our launch efforts with a per-protocol analysis, demonstrating statistical significance and an intention-to-treat analysis strongly trending towards significance in spite of the underpowered study size resulting from the elimination of a site due to protocol violations.

The oral surgery trial was performed at three sites in the United States. Two of these sites were strongly positive and one site provided data which conflicted with the other two sites and where data was not collected according to the protocol.

In addition to the data collection issues, there was low or no opioid use in the placebo arm at this site and the pharmacokinetic profiles for EXPAREL was markedly different as compared to the other two sites in the trial resulting in a distortion of the pain profiles reported in the trial arms.

As a result of the number of protocol violations and the nature of these issues, the decision was made to eliminate this site from the analysis resulting in an underpowered study size.

An extensive per-protocol analysis of the study demonstrated statistical significance of the primary endpoint, the area under the curve of the NRS pain intensity scores through 48 hours of P equals 0.0007.

An intention-to-treat analysis indicated a strong trend with a P of 0.06 in favor of the primary endpoint, a trend that would have been statistically significant with proper study power.

From this data and from the additional market activities, we know that when used with appropriate technique EXPAREL provides pain control, reduced opioids in oral surgery as with all of the other procedures study to date.

In concert with our launch, we plan to generate Phase IV studies in other oral and maxillofacial surgeries to provide clinical guidance to the oral maxillofacial community. Phase IV initiatives, such as the Full-Arch Surgical Therapy trial, or FAST trial, utilizes the 20 ml vial of EXPAREL to evaluate its use in All-in-Four dental implants.

We expect completion of this trial prior to the launch meeting. We have also initiated the Phase III nerve block trial to achieve our nerve block indication on the EXPAREL label.

Two nerve block studies will evaluate EXPAREL in upper extremity procedures administered as a brachial plexus block and a lower extremity femoral nerve block and in lower extremity femoral nerve block procedures. We expect top-line data by the end of 2016. And if all goes as planned, we will file an sNDA in Q1 2017 and prepare for launch in Q4 2017.

We have also initiated randomized clinical trial in total knee.

The objective of this study is to standardize technique in this technique sensitive procedure by increasing the total volume to 120 ml, utilizing a bupivacaine bridge and providing a highly descriptive infiltration technique including infiltration into the periosteum and posterior capsule.

As with the nerve block trials, if the trial goes as planned, we expect to have data by the end of 2016. We also plan to initiate a second randomized clinical trial in spine in late 2016 with top line data expected in 2017.

Another important strategy for EXPAREL is to collaborate with major academic centers with the randomized clinical trials addressing medical needs identified by these leading institutions. Two specific examples of our work are at Cleveland Clinic and MD Anderson.

At Cleveland Clinic, findings from an earlier observational study suggest that an EXPAREL TAP provided pain control equal to epidurals, but with a 56% reduction in opioid and a 2.2-day reduction in the length of stay.

We are hoping to confirm these findings by collaborating with the Cleveland Clinic on a prospective randomized clinical trial to compare EXPAREL TAP to epidural pain management and large abdominal surgery. A successful trial will provide the basis of simplified patient care by providing an alternative to epidurals.

At MD Anderson, OB/GYN oncology study will compare EXPAREL to bupivacaine infiltration as part of an enhanced recovery protocol to reduce opioids and investigate the opportunity to provide a roadmap for improving the percentage of patients who are treated for gynecological cancers without the need for opioids.

Our strategy is to publish these enhanced recovery protocols to provide the basis for rapid best practice transfer to healthcare providers across the United States. Our relationship with the United States Department of Defense or DOD has been important for the overall success of EXPAREL.

This year, we also solidified the commercial progress made to date with the DOD by developing and deploying enhanced recovery protocols that integrate EXPAREL for a variety of surgical procedures across the tri-services.

We are initiating a multi-branch DOD postsurgical pain registry, which includes Walter Reed Hospital and the Balboa Naval Medical Center. The registry will use NIH outcomes to examine acute and long-term consequences of postsurgical pain management strategies, including use of regional anesthesia techniques, EXPAREL and other multimodal therapies.

Following patients out to three-months, the registry will focus on open and laparoscopic abdominal surgery, orthopedic joint surgery, neurological spine surgery and plastic surgery, including major breast surgery. We also are continuing to develop programs for chronic pain and pediatric use of EXPAREL, which we will highlight on future calls.

On top of the tremendous opportunity with EXPAREL, we see significant value on our proprietary DepoFoam delivery technology, which provides a 505(b)(2) regulatory pathway for all future DepoFoam-based products, potentially diminishing clinical development cost and time to market.

At present, we expect IND approvals for DepoTranexamic Acid and DepoMeloxicam in the next several months, allowing a Phase I study to be initiated with DepoMeloxicam and a Phase II study to be initiated with DepoTranexamic Acid in the back half of 2016.

We look forward to sharing information on additional DepoFoam products over the next several quarters.

Jim will elaborate further on the leverage provided by our financials and manufacturing capacity and spray process, but before turning it over to him, let me emphasize that we believe that we are in an enviable position of not only having a successful product, which helps patients every day, but also an established foundation to execute an expansive clinical and commercial opportunities outlined today.

The renewed focus resulting from the FDA resolution has given us a chance to take a more proactive look at the way the U.S. addresses the opioid epidemic that is gripping our nation, as publicized by numerous reports from 60 minutes on TV to the New England Journal of Medicine.

Starting this year, we plan on heightening our work with legislators, advocacy groups and government agencies, who are interested in finding real solutions to the source of the opioid epidemic, not just dealing with the aftermath on human life. We have significant leverage across the organization.

In manufacturing, as we move the commercial manufacturing of EXPAREL to the UK to our partnership with Patheon, we have the opportunity to provide improved margins, reduce our royalty burden and provide the advantage of the patent box tax strategy, while freeing up the San Diego facilities to manufacture our DepoFoam pipeline products.

In commercial, as we launch EXPAREL into oral surgery, nerve block, pediatrics, chronic pain and with partners in the rest of world in animal health, we believe we will require modest investments in commercial resources relative to the revenue opportunities to be realized.

In clinical development, based on our deep relationships with key opinion leaders in anesthesia and surgery as well as our collaborations with major academic centers, we have a unique understanding of the needs of these customers, and especially important, as we move to a 23-hour stay environment for surgical patients.

With our resources as a profitable company, we believe we are positioned to aggressively invest in our products and pipeline without the current need for any additional funding or dilution.

We have the commitment, the energy and the resources and we look forward to 2016 and beyond, as we partner with our healthcare customers to improve patient care and help economics. Above all, we remain dedicated to our mission of improving patient cares – improving patient's quality of life.

For the past three years, we have provided non-profits such as Operation Walk, Surgery on Sunday and other missions with EXPAREL to support the need for non-opioid options for underprivileged patients in areas of the world where surgical care is urgently needed.

To-date, we are proud to have treated over 1,000 patients with EXPAREL in support of the missions in Guatemala, Nicaragua, El Salvador, Cuba, Haiti, Honduras, Bolivia and Panama to provide low opioid multimodal pain therapy.

We look forward to continuing our support of these surgeons, anesthesiologists, nurses and other healthcare providers who make these missions possible. And with that, let's go to Jim..

All right. Thank you, Dave. In my comments, I'll review our 2015 financial results and provide an update on operations in the context of our outlook for 2016. To recap, in early January, we preannounced EXPAREL sales of $67.2 million for Q4 and $239.9 million for 2015. Our total sales were $69.3 million for Q4 and $249 million for full-year 2015.

In retrospect, we're quite pleased with year-over-year growth in excess of 25% in a year that was burdened by then now resolved FDA warning letter.

As of Q4, a total of almost 4,000 accounts, 3,917 to be specific, have ordered EXPAREL since launch, an add-on of 127 new accounts this quarter, a modest but growing number, which continue to be ambulatory surgery center customers, substantiating the nascent move of procedures from the inpatient-outpatient settings.

We achieved a non-GAAP gross margin of 74% in Q4 and 73% for the full year. And this was achieved while operating our plan below full potential capacity, further validating the gross margin opportunity for the product. Non-GAAP R&D spend was $11.2 million in Q4.

And this included expenses associated with preparatory work for our two Phase III nerve block studies and the randomized control trial in knee that Dave outlined earlier. Total 2015 non-GAAP R&D expense was $23.5 million, in line with our prior non-GAAP R&D guidance.

Q4 non-GAAP SG&A was $31.5 million, with legal expenses related to the FDA resolution driving most of the fourth quarter spend uptick. We finished with 2015 non-GAAP SG&A expense totaling $116.8 million, on the lower end of our previous annual guidance.

Non-GAAP net income was $8.3 million or $0.20 per diluted share in the fourth quarter and was $39.4 million or $0.95 per diluted share for all of 2015, marking another period of non-GAAP profitability for Pacira.

And for the sake of transparency in connecting the dots from our GAAP to non-GAAP results, stock based compensation expense was $9.7 million in Q4 and $33.4 million for 2015 overall. And for the year, stock based comp expense accounted for 8%, 18% and 16% of GAAP, COGS, R&D and SG&A expenses, respectively.

In 2015, our adjusted EBITDA exceeded $50 million. And so, in spite of a $41 million CapEx spend in 2015, our balance sheet remains strong and we started 2016 with over $170 million of cash in investments on hand. Let me now turn to the 2016 outlook and start with some additional color on what we're expediting in the field.

From the resolution in December with the FDA, we've been urgently training our customer base and professionals on our new clarified and expanded EXPAREL label and to the label clarifications we received from Dr. Woodcock related to TAP blocks.

We've been preparing promotional materials specific to our surgical targets, including surgeon case reports of how they use EXPAREL in a specific surgery, describing the amount of selling and marketing they use and specifying their technique of administering EXPAREL in that surgery.

We now have numerous reports from the field, albeit anecdotal at this point, of how the FDA resolution and new label have impacted the dynamic in the marketplace and opened up new doors for us, and they generally fall into the following three categories.

Number one, orthopedic surgeons, general surgeons doing large abdominal cases, and plastic surgeons doing breast reconstruction cases, add mixing with marcaine (23:29) and expanding their volumes and expressing additional excitement about the consistency and duration of efficacy of EXPAREL.

Two, anesthesiologists delighted to know they're empowered by the FDA to use EXPAREL in TAPs for soft tissue procedures. And three, all of these surgeons and anesthesiologists having greater confidence to navigate, and if required confront, their pharmacy adversaries about the utility of EXPAREL for their patients.

And we see this happening in all types of accounts, in small and mid-size independent not-for-profit hospitals, as well as in hospitals within the major for-profit and not-for-profit chain.

So, how do we think all of these will impact the EXPAREL's sales trajectory for 2016? Taking into account the complex dynamics within hospitals, which impacts the pace of adoption, there's typically a quarter or two lag before the opening of a new door fosters additional box sales at a material level.

We hope that these initial anecdotes we witnessed become pervasive, and if so, we expect growth to accelerate in the second half of the year. Specifically to the near-term, I'll update a comment I made during the December FDA settlement call, Dave made at the JPMorgan Conference, and which the investment community appears to now fully appreciate.

Because of the notable elective procedure seasonality, most markedly the high procedure volumes in Q4 and low procedure volumes following in Q1, coupled with the expectation that the benefits from the FDA resolution will become evident later in 2016, we would expect first quarter EXPAREL sales to be lower or flat compared to Q4 sequentially.

Importantly, as we close in on our fourth full year since the April 2012 launch of EXPERAL, we believe that it's time to move away from a focus on quarter-over-quarter sequential growth and focus instead on year-over-year growth by quarter.

So, please don't misunderstand my previous comment; we absolutely expect to continue to be a growth story in Q1 2016 compared to Q1 2015, and we expect the quarterly growth trajectory in the second half of 2016 to accelerate on a year-over-year basis.

Turning to gross margins, I want to extend the soft margin guidance I've discussed the past few quarters in that we expect our 2016 non-GAAP gross margin to moderate a bit compared to the 77% and 74% non-GAAP gross margins we achieved in Q3 and Q4, respectively.

Recall that with a high fixed cost infrastructure in our current manufacturing facility, up against the fact that we'll be moderating production, given the inventory on hand, our reported gross margins will moderate accordingly.

But we do expect to achieve the 85% gross margin we've guided toward in a few years out, with the full benefit of the anticipated growth revenue and the new manufacturing suites at our manufacturing partner, Patheon.

For SG&A expenses, on a non-GAAP basis, we're guiding to $125 million to $135 million in 2016, which at the midpoint is about a 10% increase from our $117 million actuals in 2015.

The increase is almost entirely attributable to sales and marketing investments in expanding our sales force by 20 from 90 to 110, running aggressive patient advocacy programs that Dave referred to, and for educational programs related to TAPs, the oral surgery launch and bundled payments, all great opportunities for Pacira.

We expect our G&A expense will increase very modestly over 2015 in keeping with our philosophy around financial discipline. For R&D expenses, on a non-GAAP basis, we're guiding to $60 million to $70 million in 2016, reflecting a new period of growth and investment for Pacira.

We're very excited to make the investment in support of oral surgeries, nerve block, the TKA infiltration RCT, and for both of our announced pipeline products, DepoTranexamic Acid and DepoMeloxicam, which we expect to be in human clinical development in 2016.

We expect our 2016 CapEx spend to be in the $35 million to $40 million range, mostly again for manufacturing expansion. And we're tracking along our projected timelines for our three major projects.

One, over at Patheon, we completed setting up the EXPAREL manufacturing skids we successfully installed in Q3 for the first Patheon suite, and we're targeting a Q1 2017 approval. Two, we continue to make progress on the second EXPAREL Patheon suite, the scaled up 200-litre system.

We expect the manufacturing equipment to be delivered to Patheon later this year, which puts us on track for a 2019 approval. And three, with the oversight from our Pacira UK leadership, we anticipate moving forward with fabrication of the spray manufacturing system in 2016.

And with the time to ship, install and tech transfer to a third-party site, we're still targeting 2019 for approval. At our Science Center Campus in San Diego, we've transitioned what we refer to as Suite A into a clinical suite, and we're currently making DepoTranexamic Acid in Suite A using the equipment we used for the 2012 launch of EXPAREL.

The advantage here is that, if we choose to, we could also launch DepoTXA out of this suite. And therefore, our 505(b)(2) development timelines for DepoTXA are not in any way burdened by the scale up of the manufacturing process the way it was for EXPAREL and DepoCyt many years back.

This speaks to one aspect of the leverage of our infrastructure that Dave referred to. We also have significant leverage in our P&L in that we expect top line growth to come without having to make significant investments in SG&A. In terms of the tax outlook on future profitability, we have cumulative net operating losses of around $330 million.

So our requirement to pay cash taxes, other than minimum federal and state taxes, is burdened only by how soon you expect us to realize that level of profitability.

And it's a convenient fact that these NOLs will act as a bridge to our transition to the spray process, which provides tax advantages along with driving business goals of higher margins and patent protection. So in closing, we feel really fortunate to enter 2016 with a strong cash position, while generating significant cash from operations.

The innovation behind EXPAREL has taken over 20 years and over $500 million of investment to get to where we are. So we're proud to have gotten here in a shareholder friendly manner, evidenced by a fully diluted share count limited to 41 million shares. This is a particularly good time, as everybody knows, to not be dependent on the capital markets.

And we're in a strong position to fund the value driving EXPAREL and pipeline development spend I outlined, plus the continued investment in our manufacturing infrastructure for both EXPAREL and our pipeline without currently needing any outside capital. So, with that, we'll now go to Q&A. Michele..

Thank you. Our first question comes from the line of Douglas Tsao with Barclays. Your line is open. Please go ahead..

Hi. Good morning. Thanks for taking the questions.

Just, Jim and Dave, maybe to start off with, you could clarify a little bit about the protocol violations that were seen in the oral surgery data? And then just confirm that, in terms of the ITT, does that include the patients from that site or were those also excluded from the ITT?.

No. Hi, Doug, this is Dave. Thanks for the question. I outlined – so the data is very fresh, Doug. We've only gotten this recently and still working, frankly, on some of the more elaborate data tables. But the specific answer to your question is the ITT does not include that site.

The major problem, Doug, was that there were data points that in the protocol that just weren't collected. So, there really is no way to build that analysis unless you just have an extensive revision of the data sets on a per-protocol basis – I'm sorry, on an ITT basis.

And so, we've elected, given the nature of what we're doing here and the importance of this to the launch, to collect the data the way we did, just eliminate that site and to move forward, working with the steering committee, et cetera..

Okay.

And then, in terms of your sort of the development plans on a go forward basis, I mean, how are you thinking about pursuing this opportunity or do you think that just – what you have in terms of being on label obviously, do you think commercial uptake will be driven more by users' experience in this case, similar to what we saw in orthopedics where it was really just sort of by word of mouth in terms of surgeons who sort of drove the penetration into that market?.

Yeah. A couple of things, Doug. As I referenced in the remarks, we are doing some additional Phase IV work with particular oral maxillofacial procedures of interest and so we expect to be generating that data between now and when we launch.

Also, we were on the phone with the steering committees last night and there is real interest there in developing manuscripts and abstracts from the data on a per-protocol basis with them having a pretty significant understanding of where we are with the data.

And there are folks in the marketplace that have got a very positive experience with EXPAREL and we will use them as you suggest. So, we don't see this as having a negative impact on the launch, Doug.

It's – from us, frankly, it's another learning, that there is a technique and that needs to be followed in order to generate the data and provide a best patient experience here.

And so, we use this as another opportunity to learn and make sure that as we roll this out and as we work with the KOLs in this oral maxillofacial community that we're very specific about how this drug needs to be used in order to achieve best practice..

And not to belabor the point, but was there evidence in some of the sites that were off protocol that they were not using EXPAREL or they were not using – they weren't following proper technique in sort of treatment of patients or was it exclusively a question of data collection?.

No, it's a site, Doug, and it was -.

A site, yeah..

And it is more than data collection. There were some very significant PK differences, which led us to believe that there was a technique variation, and discussions with the site have verified the fact that the product wasn't used according to the protocol.

As the trial went on, Doug, we had some – another aspect of this is that these trials enrolled very quickly. And so, in the early days, in the startup phase, the data looked quite good actually and the PK curves were fine.

Unfortunately, as the trial rolled on, it appears that the standard was not quite as lofty, and we didn't get the same PK results near the end of the trial from a single site..

Okay..

But again remember, the two sites that remain in the study, a significant P value on a per-protocol basis and then on an intent-to-treat basis, trending towards a P value that would be significant, if it didn't result in being under power because of the dynamic of the site that had to be eliminated..

Okay. And then, in terms of spray, this is the first we've sort of had an opportunity to sort of revisit that subject. Obviously, you spoke about the timelines when you'd revisioned (35:28).

What clinical work – I know you reached agreement with the FDA, what progress, if any, has been made in terms of transitioning to that process?.

Sure. So, you're referring to the interaction we had with the FDA last year regarding the development pathway for the spray manufacturing process where they confirmed that provided that we conducted a bioequivalent study only that that would be the basis of us being able to transition from the batch process to the spray process down the road.

That's actually going to happen closer to the 2019 approval timeframe than today. Right now, we're designing the commercial system and we'll do – like we've done with the first Patheon skid that we moved over there, we'll design it and send it overseas and install and so forth.

And then, once it's installed and ready to be used in that site, then we'll do the bioequivalent study that is the basis of moving forward to approval in 2019 is our target..

Okay, great. Thank you very much..

Thanks, Doug..

Thank you. And our next question comes from the line of David Amsellem with Piper Jaffray. Your line is open. Please go ahead..

Thanks. Just a couple of questions.

So, on the anecdotal evidence that you cited regarding surgeon receptivity and the wider promotional paradigm, is that – to be clear, is that already translating into greater volume growth? And if so, why would you be sticking with the idea that the benefits of wider promotion will be loaded into the back half of the year? So, that's the first question.

And then secondly, on the R&D spend that you're guiding to in 2016, can you go through the big sources of the spend beyond the nerve block study? I guess, I'm just struggling with the magnitude of the growth and spend, maybe help me understand what the big drivers are here. Thank you..

Thanks, David. So, let me take number one. So, the institutional environment, which is the vast majority of our current business, is a highly structured environment.

And so, we now – our reps and our medical folks and our customers are in a position where we have a very different data set and a very different way of thinking about EXPAREL in terms of access, but that doesn't happen overnight.

And so where access was denied, our clinicians are going back and meeting with the C-suite and with the P&T committee if that was how the restriction was organized. And there is a time lag for how those changes are reversed.

And so, the tenor of our customer relations in the marketplace is very different than it was pre the resolution of the warning letter and it is entirely positive. But with that said, as Jim outlined, it takes time to get through the different committees and the different structures of the hospital environment.

And then, at the same time, David, where we have new customers as a result of the resolution of the warning letter, we want to make sure that they're appropriately trained and that we can ensure that the patients are going to get a best practice experience.

And so, when you marry those two things together, we expect, as Jim said, to see the expected growth in the back half of the year. All things are positive, but there is a time lag to making the kinds of changes that have to be made. This is very different than just going to a physician and have him write a prescription based on a drug sample.

That isn't the way the hospital environment works unfortunately in this case.

Jim, you want to talk about part two?.

Sure. So, the big dollars associated with the R&D spend, we're running two pivotal nerve block studies and then a TKA RCT that obviously is on label, but we're going to do a robust study. And each of those you can think of as $10 million to $15 million. So, a big chunk of the spend is those pivotal studies.

In addition, we're going to be in the clinic, as I mentioned, with DepoTranexamic Acid and DepoMeloxicam. So, we've got additional clinical work there. So, the clinical program itself basically dwarfs what we spent last year in total.

And then, in addition, we're also excited about the fact that a couple of years back, we said make EXPAREL, sell EXPAREL, now we're doing that, but we're also investing very much in the pipeline. And so, our R&D team in San Diego is in – we leased a new facility right next to our commercial manufacturing facility.

We're sizing – we're adding people into that group so that we can put additional products into the clinic and fully take advantage of the DepoFoam-based technology we have.

And then finally, there's a little bit of an anomaly that's not immaterial and that some of the manufacturing investments we're making over in Patheon, before they become commercial, they hit the R&D line. So, that's all of it..

Yeah. If I may sneak in a follow-up, just going back to my first question, so you mentioned your relatively favorable interactions with the surgeons. Maybe some commentary, some anecdotal commentary, if you will, on your interactions with hospital pharmacies, with P&T committees, now that the shackles have been removed, so to speak..

Very different from the pre-warning letter era, David. And so the P&Ts now are dealing with a different information deck than they were when the perception was that the drug was only approved – that EXPAREL was only approved for bunions and hemorrhoids.

And so, very favorable folks, obviously, as I've stated earlier, wanting to make sure that their sites were appropriately trained and that we do enhance that, and the enhanced recovery protocols come in very handy here, on what this technique is and who the patients are, who are going to benefit most from EXPAREL therapy, et cetera, so we're going through all of those things.

I would say, with pharmacy, the scenario is more driven by the environmental pressures than it is, frankly, by a difference in frank attitude of a pharmacy.

Things like bundles where the ability of academic centers who have participated in the bundled program since the beginning of 2013 and have shown that if you use large doses of opioids or if you use femoral nerve blocks that these patients cannot be ambulated or mobilized in an appropriate time to allow them to be discharged to home.

Those total cost analyses are forcing pharmacy to think differently about how the pharmacy budget impacts on the total cost of care.

And so, as the CMS and as the payers put pressure on the healthcare system, the folks with line item budget responsibility are being forced to think differently about the cost of a product in the overall cost of the 90-day spectrum of care. And so, that is very helpful to us.

And so, we are increasingly communicative and positive with pharmacy, but it's generally based on outside pressures, which are forcing them to analyze the cost of care in a very different way than they did two years ago, for example..

Yeah. Thank you..

Thanks, David..

Thank you. And our next question comes from the line of Shibani Malhotra with Nomura Securities. Your line is open. Please go ahead.

Hi. This is Austin Nelson on for Shibani. We had a couple. I guess, the first one was just moving from the lessons of protocol violation that you saw with the dental study.

The prep work you were doing in 4Q 2015 for nerve block and with those expected to initiate this year, have you considered after this issue adding sites to the nerve block trials to ensure they're properly powered? And are there any other lessons from this you'd take to try to avoid this issue and make sure that this data is positive and can be filed in 2017?.

No. Thank you for the question. And the answer is, obviously, we're always learning and we're always looking at different ways to ensure that we have successful trials, but I would point out that the issues here are very different.

We had an oral surgeon who was not experienced in the use of EXPAREL, who was doing these infiltration procedures in a clinic setting. That is very different than anesthesiologists who are using ultrasound guidance in order to administer EXPAREL in a nerve block procedure in an institution setting.

And many of the anesthesiologists that are in the nerve block trials are the same folks who were participants in the previous nerve block trial, where we had a P-value of 0.0001 for pain and a P-value of 0.0016 for opioid reduction.

So that trial is being redone not because it was a failed trial from a efficacy perspective, but because there were some PK issues around the Cmax and the Tmax that required us to enhance the safety profile to make sure that we had a full understanding of the PK/PD of EXPAREL before we launch into the nerve block space.

So I would never be presumptuous enough to tell you that we're done learning, and we're always looking at the P-values and we're always trying to figure out if there's any way to improve the likelihood of the outcome. But these are appropriately powered for what we believe is going to happen.

And these people are very experienced in the use of EXPAREL and the use of ultrasound guided administration. So we feel as good as we could feel about the nerve block trials. It's still clinical research, of course, but a very different scenario than we faced with the oral surgery trial..

And we didn't do it because of this, obviously, but just the fact that there's 15 to 20 sites in each of the nerve block studies. So, we won't have that diversification challenge that we faced here or lack of..

Okay. Thank you. That's helpful. And then just to follow up on the oral surgery launch in 3Q 2016.

I know the data is fresh, but when – are you still expecting to get this data published ahead of the AAOMS meeting, and do you think this issue might impact the ability to get it published ahead of that meeting in order to have the launch you were originally planning for?.

No. As I said in response to the first question, we were on the phone with the steering committee last night, and they're excited about the opportunity to get abstracts in for this AAOS meeting – I'm sorry AAOMS meeting, sorry about that. And no, we do expect to get the data published.

I mean, remember, this is pain and failure in pain is not – I'm not trying to make an excuse, but it is not unknown and the (47:37) have trials that are difficult.

And no, our steering committee is quite excited actually about having the opportunity to publish the per-protocol analysis and further, by the way, accentuate the fact that technique is important.

And so, the things that we're thinking about is, how can we make some videos and how do we marry those videos with PK curves, for example, to make sure that best practice is transferred to folks who are interested in using an EXPAREL-based regimen around the launch. And those are the kinds of activities we'll take.

But no, our anticipated course of action is to have abstracts and publications in advance of the launch..

Yeah. I think, our – this is a little bit of an atypical situation where we're talking about an approved indication – a launch in an approved indication where some people are using the drug and getting great results with it and the steering committee is a big believer in it.

And so from their perspective, this is data that we didn't have a couple days ago on a per-protocol basis that they can use to talk to their peers and get people excited about the use of the drug, which they know and we know works when it's used properly..

Okay. Thank you..

Thanks..

Thank you. And our next question comes from the line of David Steinberg with Jefferies. Your line is open. Please go ahead..

Yeah. Thanks and good morning. I just wanted to touch on your comment about pricing. If I heard you right, you said you're not going to take a price increase this year. And in the world of hefty price increases, particularly in pain, you've always been pretty restrained. So just curious the thoughts behind why no price increase.

I know you've always said that later on when you have heavy volume, that would be the time to take it, but you have taken some modest price increases recently. And so just curious on your thoughts about this year..

Sure. And we think about this all the time, David. And just for the matter of the record, we've had two roughly 5% price increases since April of 2012 when we launched the drug.

And just as a strategy first, we believe that with the opportunity to address chronic pain (49:45) and nerve block, and all of the other opportunities that we have in front of us, as well as the success of the product so far in infiltration, that we have over 100 million patients on the relative short-term that would benefit from a long-acting non-opioid pain reliever.

So the strategy is to price so that we can drive access to as many of those patients as possible. So that's sort of the big strategy, if you will.

If you get down to the specifics of 2016, when we're talking to folks in the marketplace about bundles and the CMS instituting bundles for [MS-DRGs] 469 and 470 for hips to knees, and people are trying to figure out how they're going to survive in that bundle, we're having very strategic discussions with them about how EXPAREL fits in there, how one of the major components of surviving in the bundle is pain.

And so we thought that the best way for us to proceed, frankly, is to partner with those people so that they can flip over to EXPAREL, if they don't have it, and they can expand the use of EXPAREL, if they are currently using it, without having to worry about us having some exorbitant price increase that would make it more difficult for them to survive inside the bundle.

So we think we're sitting in front of a growth profile that allows us to actually take this action, David. Remember, we're going to launch a 4-ml – a 4-pack and a 10-ml vial this year as well. So there's a lot going on in the marketplace.

And we thought that as a gesture of good faith, given the growth profile we see and the discussions we're having with CEOs and with ambulatory care centers, et cetera, that a price increase for part of 2016 wasn't necessary in order to get us where we need to be..

Okay. And then just a little more color perhaps on your promotional strategy for oral surgery. Have you defined all the target territories, regions, deciles, et cetera? And then, I think you said you're adding 20 reps.

I thought before you'd indicated you're going to keep the reps at the same level and they're going to promote both oral surgery and in the hospitals and the AM. Are these new reps targeting both sets of customers or are they just for oral surgery? And then also, any thoughts about possibly co-promotion..

No. Thanks, David. So, we will – our strategy, again, is that all of our reps will be trained on all of the EXPAREL opportunities, and that when we increase the size of the sales force, there will be only a modest increase in the size of the footprint.

Primarily, what we're trying to do is to size the territories appropriately so that they can accommodate new uses of the product. And when hospitals get very big in terms of being customers of EXPAREL, the rep can handle fewer of those big accounts.

And so, we will always – at least as currently constituted, we will always have all of our reps trained on all of the opportunities. And these 20 reps will go into territories that we'll take two territories and make it into three territories, for example, because the reps just can't keep up with the volume of business.

Now, oral surgery does have something to do with that, of course. And we do have the deciling of the oral maxillofacial surgeons and the reps will be provided the list of these high-volume customers.

And as you state, the thought process is that the – at least one way for a rep to spend their day would be to be in the hospital from early morning and do a number of surgical procedures with their customers in the hospital, and then in the afternoon be in the retail environment where they may talk to plastic surgeons as well as talking the oral maxillofacial surgeons and fill out their day that way.

And if the territories become smaller as a result of these additions, we also facilitate the opportunity for these reps to make more of those kinds of calls because they're spending significantly less windshield time, right? So, this all works as you go forward.

Makes sense?.

Yes. Thanks, Dave..

Okay. Thanks..

Thank you. And our next question comes from the line of Tazeen Ahmad with Bank of America Merrill Lynch. Your line is open. Please go ahead..

Tazeen, I think that was you..

Sorry, guys. I was on mute. Sorry about that..

Okay. Okay. I thought you didn't recognize your name because I had a look up as well. So....

Yeah. Thanks.

So, for oral surgery, if might, I know you've touched upon this topic before, but now as you edge closer to becoming commercial on it, do you have any sense of what kind of coverage dental providers would give for EXPAREL and what your sense is of what out-of-pocket expenses might be?.

It's all over the place, Tazeen. The one thing I can tell you, that the research continues to confirm, is that the vast majority of these surgical practices do not accept insurance.

And so, these are scenarios where the patients pay cash and then the office practice bills, the insurance company on behalf of the insurance – I'm sorry, on behalf of the patient. And so then the insurance payment would go to the patient back to the provider.

And to be quite honest, and if I use our own dental insurance as a proxy here, it isn't great, but it is something and it is the way the artisan practiced forever as far as we can tell. So I don't know if that spurs a follow-up question, Shibani, but that's sort of where we are today – I'm sorry, Tazeen, that's where we are today..

Yeah.

So, I guess based on that knowledge, how do you think the initial ramp would be for oral surgery? Are you expecting it to see something that develops over time or do you think there would be sharp uptake right away?.

I think in some procedures in the oral maxillofacial world, I think the uptake will be consistent, but it'll be linear. I don't think everybody is going to start using it overnight.

I think also just as a frame of reference, remember, at least as the protocol that we just finished with third molar extraction, it's a 10-ml dose, so the pricing is considerably different than if it was a 20-ml dose.

And the primary research picks out very specific areas where folks don't want their late teen, early 20s sons and daughters exposed to opioids as an opioid naïve patient.

And then, there will be situations where, especially as the opioid epidemic becomes more well-known and people start to work with their surgeon on not wanting opioids, we think for the price here that there will be a market.

And at the end of the day, honestly, Tazeen, if there's 35 million patients of interest, and that's the number we're using from the market research, then even if we were talking about a couple of hundred bucks a patient here net-net, the revenue opportunity here is quite significant, even without a market share that has to be enormous as a percentage of the total market.

So, I think you're going to see very much what we've seen in other places. I think the KOLs that have had significant use of the product and who have moved away from using opioids, even writing prescriptions for opioids, will be quite vocal here in their success and folks will dabble in the beginning and they'll use it in certain patient populations.

And as they gain comfort that the drug actually does what it's supposed to do and understand the technique associated with it, we'll see a ramp in a linear kind of way..

And remember, we're talking about the oral surgery focus here of roughly 7,000 oral surgeons, so not just the general dental community. So, these are trained surgeons, they manage the pain of their patients. So, there is – it's not too daunting of a community to access from the rep perspective..

Okay, great. And then just going back to the trials for a second, you guys already have oral surgery on your label and FDA have basically told you, you didn't have to run these trials – this trial.

But in terms of what impact, if at all, just missing (58:19) on ITT will have? Was the purpose really of running these trials to be able to have publication?.

Well, remember, Tazeen, we started these trials before the resolution of the warning letter. So when we started these trials, if we knew that we were going to get the resolution of the warning letter, we probably would have just done Phase IV trials and we would have taken a different approach in terms of the procedures that we addressed. We didn't.

And so we were doing a trial that, if required, would have gone to the FDA and would have gotten oral surgery put on the label as a specific procedure in an environment where we were still under pressure relative to bunions and hemorrhoids. So, that's behind us now.

And so to answer your question specifically, no, I don't think that this community, really, when they hear for KOLs that they use the drug in this procedure, in this technique and the drug works well and the patients have a low or no opioid opportunity, I don't actually think that practicing clinicians in the oral maxillofacial community really care much about intent-to-treat or per-protocol..

Okay. And then I guess quickly, lastly. In the past, you have provided revenue guidance and this year, for various reasons, you're not, at least not now.

But once you get a better sense of how the year is progressing in terms of trends, do you think it's still a possibility that you could provide guidance for 2016 on revenue?.

Yes, Tazeen. We have said the last couple of quarters, I guess, really since the resolution, that we'd like to have a couple of quarters under our belt to get to the point where that we want to have confidence in our ability to provide the guidance in specific numbers.

And obviously, we're providing, over the last couple of quarters and now, some more soft guidance. But, yeah, I think without making a promise, I think it's sort of the middle of the year that we'll take a look at where we are and evaluate that..

Okay. Perfect. Thanks very much..

Okay.

Michele, we all set?.

This does – we are out of time for Q&A today. So, I'd like to turn the conference back over to Mr. Stack for any closing remarks..

Great. Thanks, Michele. Thanks for joining us today. Coming up in March, we plan on attending the Barclays Global Healthcare Conference in Miami. We look forward to seeing you there. Thanks much for all your time and consideration today..

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