Thank you for joining the Pacira Pharmaceuticals First Quarter 2016 Financial Results Conference Call. At this time, all participants are in 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, Chief Financial Officer and President; 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 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 the company's most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2015 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 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..

Thanks, Jess.

Without any FDA warning letter overhang or the requisite need to raise additional funds to support our operations, the first quarter of 2016 for Pacira marked the start of aggressive investment in the future growth of our business and our flagship product, EXPAREL, the only non-opioid long-acting analgesic formulation of bupivacaine and our DepoFoam-based pipeline products.

Integral to our strategy of broadening EXPAREL access to as many patients and healthcare providers as appropriate, we shared our plans to provide the medical community with guidance on procedure-specific technique and administration and surgeries of interest, all as we seek to capitalize on multiple upcoming tailwinds, specifically, bundled payment, healthcare reform, the growing social and political movements to curb the opioid abuse epidemic and the increasing focus on enhanced recovery initiatives to provide guidance for major academic centers on the best practice across a broad range of surgical procedures.

In the first quarter, we invested in training our field organization on all aspects of the updated Package Insert as a result of the rescission of the warning letter in December of 2015.

This is a great time for Pacira, as our customer based teams, again, have the opportunity to work with healthcare providers on positive patient-based discussions, after the clarity around the label for EXPAREL, including transversus abdominis plane blocks and infiltration during oral surgery.

In Q1, we hosted productive discussion and follow-up meetings from the American Academy of Orthopedic Surgeons meeting with major orthopedic care providers at the American Society of Regional Anesthesia meeting around TAP blocks with EXPAREL, and at the American Society of (sic) [for] (03:28) Enhanced Recovery where multiple presentations were given on the use of EXPAREL for non-opioid pain control and enhanced recovery protocols across multiple procedures.

We believe bundled payment through the CMS' mandatory Comprehensive Care for Joint Replacement model and the impact of reduced length of stay and discharge to home will compel hospitals to modify their pain management protocols with EXPAREL as the basis of a multimodal pain strategy, in order to improve patient outcomes and significantly reduce hospital downstream costs, specifically, the high cost of patient discharged to skilled nursing facilities or rehab facilities which make up approximately 50% of the total episode of care in hip and knee replacement surgery for CMS patients.

We know that EXPAREL as part of the bundled payment protocol can lead to significantly improved patient and economic outcomes from the positive results gathered from early adopters of BPCI, the predecessor of the current CMS bundled program.

For example, Hackensack University Medical Center was able to increase patients discharged to home versus skilled nursing facility from approximately 20% to over 60% since initiating the bundled program three years ago, providing material improvement in hospital economics. St.

Luke's Medical Center in Phoenix, Arizona was able to cut their total episodic cost of care by nearly $4,500 since initiating their bundled program with EXPAREL as part of the multimodal pain protocol.

Clearly, using a local opioid-sparing approach in pain management with EXPAREL can substantially reduce hospital resource consumption and promote faster patient mobilization, decrease risk of fall, shorten hospital stay and increase patient satisfaction and discharge to home, which ultimately makes a significant difference in hospitals' reimbursement and bottom lines.

Our strategy is to work with hospitals and surgeons who have successfully implemented these bundled programs, to provide critical information and experience to hospitals and physicians who are initiating their bundles.

In this evolving healthcare environment, our continued work with major academic centers to institutionalize EXPAREL into their enhanced recovery protocols for a broad range of procedures is particularly relevant.

Enhanced recovery protocols provide a roadmap for the best practice throughout the surgical environment, including total IV anesthesia, fluid management, nutrition and pain management without the heavy reliance on opioids, thereby improving post-operative outcomes such as patient satisfaction and length of stay.

We have shared with you various examples of success at leading institutions such as Mayo Clinic, Houston Methodist, Cleveland Clinic, MD Anderson and Memorial Sloan Kettering, particularly for soft tissue procedures like breast reconstruction, GYN oncology surgery, abdominal, thoracic, bariatric and bladder surgery.

A recent example of this opportunity is the data presented by Sean Dowdy from Mayo Clinic in GYN oncology surgery at the Society of Gynecologic Oncology meeting in San Diego.

The enhanced recovery study in 193 GYN oncology patients demonstrated that EXPAREL was similarly effective in reducing pain with reduced ileus and nausea and reduced the need for patient-controlled opioid analgesia and rescue IV opioid use, demonstrating that patients have pain control with fewer narcotics.

Last week, at the ERAS World Congress in Lisbon, a Memorial Sloan Kettering Cancer Center study recognized EXPAREL as one of several important elements for its breast reconstructive surgery enhanced recovery protocol that can lead to significantly reduced opioid use and one-day reduction in the hospital length of stay.

Similar positive outcomes have been replicated and standardized through enhanced recovery protocols, particularly in light of the rescission letter and the affirmation that EXPAREL TAP blocks are on label.

Penn State Hershey Medical Center presented their colorectal surgery enhanced recovery protocol at the American Society of Colon and Rectal Surgeons demonstrating that a TAP block with EXPAREL versus the TAP block with oral bupivacaine resulted in significantly lower pain scores in the first 48 post-operative hours and significantly reduced opioid consumption in the EXPAREL arm.

In another recently published study, investigator from Cleveland Clinic demonstrated that TAP administration with EXPAREL was comparable regarding pain scores and reduced opioid consumption and length of stay when compared to an epidural catheter-based regimen among patients undergoing large abdominal procedures.

In this study, 8% of patients in the epidural catheter cohort experienced a clinically meaningful adverse event of hemodynamic instability.

Based on these findings, we are supporting a randomized controlled trial comparing TAP with EXPAREL versus pain control with an epidural catheter in large abdominal surgeries, supporting our strategy to develop EXPAREL to allow improved time to discharge, by eliminating the need for catheters and pumps.

In collaboration with MD Anderson, we are also initiating an enhanced recovery protocol comparing EXPAREL with bupivacaine in GYN oncology surgery.

We expect to initiate other studies in collaboration with leading medical institutions, assessing the added benefits of including EXPAREL in enhanced recovery protocols through academic collaboration in bladder surgery and bariatric surgery.

In spite of our strategy to standardize administration and technique-sensitive procedures, we are initiating randomized controlled trials to establish current best practice and minimize any variability in outcomes.

We are enrolling the total knee arthroplasty randomized controlled trial with several critical elements; increasing the total volume to be infiltrated to 120 mls, utilizing a bupivacaine bridge mixing EXPAREL and bupivacaine in the same syringe; and providing a highly descriptive infiltration technique including infiltration into the posterior capsule and periosteum.

We expect top-line results by the end of this year. We are also planning a trial in spine surgery, another technique-specific procedure in the second half of 2016 with top-line results expected in 2017.

Staying with infiltration, we are targeting our oral surgery launch around the annual meeting of the American Association of Oral and Maxillofacial Surgeons in September. We have submitted the data from the oral surgery trial as an abstract for this meeting and the Steering Committee for the trial is preparing a manuscript of the trial results.

In support of the use of EXPAREL in oral surgery procedures, we expect to have a 10 ml vial as well as a 4-pack vial configuration in the markets by the end of Q3. We've also initiated two placebo controlled Phase 3 nerve block trials, one in upper extremity brachial plexus nerve block and the other in lower extremity femoral nerve block.

The femoral nerve block trial is informed by our previous study, which was published in the March journal Anesthesiology. We anticipate top-line data by the end of 2016 and to file an sNDA in Q1 of 2017 to add a nerve block indication to the EXPAREL Package Insert. We continue to develop EXPAREL programs for chronic and pediatrics.

We had a productive meeting with the FDA in Q1 agreeing to a path forward for the pediatric opportunity. We're submitting a protocol for 12-year-old to 17-year-old patients and we look forward to initiating clinical trials in this patient population.

Most of all, we are particularly excited by the momentum building from the public outcry against the abusive opioid prescription drugs.

Manifest through last week's Chris Christie sanctioned Prescription Monitoring Program partnership with New York State, the recent National Prescription Drug Abuse and Heroin Summit in Atlanta, and President Obama's subsequent proposals and the CDC's recent guidelines for prescribing opioids, specifically on how opioid therapy for acute pain such as low-risk surgeries, these two long-term opioid used and abused.

We have ramped up our efforts to work together with the government agencies, advocacy groups, and the media, tackling the source of the opioid epidemic in the acute setting where it can start (11:20) rather than just mitigating the consequences on human life after the fact.

And we are encouraged to see our customers who have first-hand experience with the impact of an opioid-sparing approach to post-surgical pain management, standing with us to spread the word.

For example, on a previous call, you may remember us mentioning Jacob (11:37), a 21-year-old former opioid addict from Massachusetts, who delayed his shoulder surgery until he could no longer stand the pain, because he feared for re-exposure to opioids.

Jacob's (11:48) orthopedic surgeon utilized EXPAREL as part of the multimodal pain management regimen and Jacob (11:53) recovered without needing any of the opioids he was so fearful of receiving. That surgeon, Dr.

Scott Sigman, from Lowell General Hospital is a recognized advocate for opioid reduction in the hospital setting and recently published an opinion article on the subject in the New York Times. Importantly, Dr.

Sigman has now been appointed by Massachusetts Governor Charlie Baker to provide first-hand insight and recommendations on how hospitals can treat post-surgical pain with the reduced reliance on opioids as part of a newly developed state-wide commission.

With the anti-opioid movement gaining speed and traction, multiple key tailwinds in the healthcare reimbursement landscape, no clinical usable competitor to EXPAREL in the near or immediate term and immense leverage on the manufacturing, commercial, clinical and financial side of the business, we are confident and optimistic that EXPAREL is on track to become a blockbuster brand.

As we started this discussion, we have solid strategies in soft tissue procedures around TAP and enhanced recovery protocols and in orthopedics around CMS bundles for total joints, randomized trials in knee and planned trial in spine, as well as nerve block Phase 3 trials which are primarily orthopedic indications.

You can understand that the rescission of the warning letter and the revised Package Insert have energized our company and our customers.

Moreover, we look forward to the pipeline opportunities based on our proprietary DepoFoam delivery technology, which provides a 505(b)(2) regulatory pathway for future DepoFoam-based products and can diminish clinical development cost and time to market.

We currently expect IND approvals for DepoTranexamic Acid and DepoMeloxicam, with a Phase 1 study to be initiated with DepoMeloxicam and a Phase 2 study initiated with DepoTranexamic Acid in the back half of 2016.

We look forward to sharing additional information on these DepoFoam products, as well as additional DepoFoam product candidates over the next several quarters.

And lastly, as you have seen from our press releases this month, we have also fortified our leadership team with key hires; Bob Weiland, our new Chief Commercial Officer and Charlie Reinhart, our new Chief Financial Officer.

Bob and Charlie will help us to properly resource, lead and realize the execution of the opportunities for EXPAREL and our pipeline that we've highlighted with this call today. And with that, I'll turn it over to Jim for his overview of financials and manufacturing update..

Thanks, Dave. Let me start by summarizing the overall results in the first quarter, which I would characterize as establishing a solid foundation post-FDA (14:22) resolution for future growth acceleration in making EXPAREL a much larger brand than it is today.

We announced EXPAREL revenues of $63.8 million, a 14% increase compared to a reported $56 million in Q1 of last year.

Looking at quarter-over-quarter sales and unit volume growth, with Q1 2015 adjusted for the buy-in that resulted from a price increase that was announced in March 2015 as effective April 1, 2015, we saw an 18% increase in sales and a 13% increase in unit volume.

We believe this adjustment of Q1 2015 provides the best path to an apples-to-apples comparison when evaluating year-over-year trends, and you may recall, we were proactive and have been consistent with this narrative since reporting Q1 2015 numbers.

To make the connection to my commentary in our 2015 call a year ago, "we estimate there was a modest buy-in impact on Q1 sales of about $2 million resulting from the price increase." Note that our revenue per unit of sales was also impacted by the meaningful price reduction in our Department of Defense business this quarter compared to Q1 of 2015, resulting from the Federal supply schedule agreement that we previously disclosed we signed last September.

The DOD volume we did this quarter would have resulted in an $500,000 more revenue at that old pre-FSS agreement price. As of the end of Q1, a total of 4,041 accounts have ordered EXPAREL since launch, an add-on of 124 new accounts this quarter.

Consistent with our comments in prior quarters, our business continues to have a seasonal component to it, which supports our focus on year-over-year revenue analysis as opposed to quarterly sequential revenue analysis, particularly Q4 to Q1.

A large portion of our business is for elective procedures and because of healthcare insurance dynamics around deductibles and copays, we can expect there to be frenetic activity in Q4 that spills significant volume from Q1. In Q1, non-GAAP gross margins were 71% compared to 72% in Q1 of last year, and 73% for all of last year.

This is in line with the soft guidance I provided in February indicating that we wouldn't be reaching peak gross margins in 2016 since we are purposely moderating our production output in our Science Center manufacturing facility to account for the inventory build we achieved last year. Total non-GAAP operating expenses were $59.2 million.

I just commented on margins, which, of course, come from our COGS, and there was nothing unexpected on the R&D and SG&A front either. Non-GAAP net income was $5.7 million or $0.14 per diluted share. Stock-based compensation was $8.5 million, constituting 8%, 9% and 16% of COGS, R&D and SG&A, respectively, on a GAAP basis.

Adjusted EBITDA for the quarter was $9.5 million, and we finished Q1 with cash and investments of approximately $163 million. On the manufacturing front, just a quick update, the last quarter I noted we were tracking along our projected timelines for our three major EXPAREL capacity expansion projects.

The first Patheon suite to make EXPAREL is a replica of our current Suite C facility in San Diego. The second Patheon suite for EXPAREL, which is an expanded 200-liter system, and the EXPAREL spray system at a to-be-determined site.

The targeted approval of the first suite has shifted from Q1 2017 to the middle of 2017 with no discernible consequences for our business, as we fine-tune the skid in preparation for the drive towards registration batches and the approval process.

Both the 200-liter suite of Patheon and the EXPAREL spray system remain on a targeted 2019 approval timeline. Looking ahead, we're affirming the 2016 expense guidance we provided for our R&D and SG&A expenses.

So on a non-GAAP basis, excluding stock-based compensation, we expect R&D expense of $60 million to $70 million and SG&A expense of $125 million to $135 million.

As noted in December and February, we'd like to see a few quarters under our belt post-FDA resolution, before evaluating the reinstatement of EXPAREL revenue guidance and related gross margin guidance.

Our new CFO, Charlie Reinhart starts in that role tomorrow, so he'll have the opportunity to lead this discussion amongst our executive team as we move ahead. More generally speaking though on the outlook, we're investing to make EXPAREL a blockbuster brand. So let's first level set by looking at where we are today.

We just completed our 16th quarter, our fourth full year since the launch of EXPAREL. With a little under $600 million of cumulative sales in that timeframe, we don't know of another hospital product launch that has attained this level of commercial success.

Assuming one vial is equal to one patient, EXPAREL sales to-date translated into the treatment of over 2 million patients. And all of this was achieved in an environment when the broad scope of our approval was questioned in the marketplace by some from the beginning and its dynamic was exacerbated by regulatory action in late 2014.

As you know, that has recently been rectified.

So in our future, just starting really in Q1, we promote EXPAREL and infiltration to the broad indication, and as Dave noted in his remarks, there's a different dynamic with our surgeon and anesthesiologist customers in 2016, most notably a shift from bad guy to good guy receptivity given the FDA resolution and also a growing understanding and acknowledgement that EXPAREL is extremely effective when, but only if, administered appropriately.

This is especially important in our ortho business, which is our largest segment to-date.

And within the enormous soft tissue opportunity, the FDA settlement clarified that TAP procedures are included in the current infiltration indication and this year, the TAP workshops at the national meetings like ASRA and ASER that Dave referenced, have all been oversubscribed.

We look for further momentum from the three big exogenous factors we've emphasized, that we believe work in our favor; the Medicare bundled payment initiatives, the proliferation of enhanced recovery protocols and the societal exasperation and our remedial action pertaining to the overprescription of opioids.

And further, we have in our future the expansion in oral surgery targeted for the end of Q3 and a targeted expansion into the significant nerve block opportunity in the second half of 2017. All told, the factors should contribute to long-term growth are abundant and significant.

But regardless of the comprehensiveness of the value proposition of EXPAREL, it's 2016 in America, so we continue to operate in a price-sensitive environment for pharmaceuticals.

And it would be unrealistic to expect all of our customers to immediately respond to all of the factors that we think favor EXPAREL for their benefit as paying customers and for patients. For example, it's a year before the economic consequences of the new bundled payment initiatives will be felt by our customers.

So we forge ahead with the education about the topic today, knowing the benefits aren't all immediate. Also as we've noted, we're working through the process of hiring up the 20 new reps and turning all of our sales force on the label. And the business that comes from these promotional efforts takes time to translate materially into sales.

And similarly, for MDs recently educated on and excited about TAP, it will take them some time to revise internal protocols before they drive a considerable uptake and product usage.

Putting all these dynamics together, we think we've just scratched the surface of the potential sales of EXPAREL overall, and just focusing on 2016, we continue to look towards the second half for an acceleration of the rate of sales growth.

Finally, since this is my last call in this role, I just wanted to communicate explicitly what an honor it's been to serve you, the investment community, as the Pacira's CFO since our 2011 IPO.

I certainly don't need to be melodramatic like Bruce and sing that I don't want to fade away, and in fact, I'll be presenting at a few conferences in the next few months as Dave, Charlie, Scott Braunstein, and I divide and confer on the IR front. But as we all know, the role and responsibilities of the CFO are certainly unique.

So this is indeed a transition for me and for you. I've been truly blessed working with the Pacira legal team led Kristen Williams and the finance team we built led by Lauren Riker, as they and their teams do all the great work to facilitate our management team, putting timely and transparent information into the public domain.

Looking ahead, I'm very excited to be able to fully focus on the organizational leadership responsibilities I have, to help grow the business and drive shareholder value to a whole new level.

And I feel we got lucky to bring in Charlie who I'm certain will be a great partner with Dave and the investment community starting tomorrow when he assumes the CFO position. And with that, Liz, we'd like to open the call for our Q&A session..

Our first quarter question comes from the line of David Amsellem with Piper Jaffray..

Thanks. Just a couple. So first, can you give us some maybe qualitative commentary on what you're seeing in terms of receptivity from hospital pharmacists, P&T committees, particularly in March and April as elective procedures pick up.

I know you're guiding to the second half acceleration, but is it reasonable to potentially see that in the second quarter which typically is better seasonally versus 1Q? Thanks..

Thank you for the question, David. I mean there's no single answer to that question. We have places where the TAPs and ERAS programs have been institutionalized and are very strongly held. We've got places where even post-warning letter, it's been difficult to schedule meetings.

And so, some of the bigger for-profit places have been more difficult for us to move against the warning letter rescission. And so, I can't tell you that there's a single answer to that, David.

I would say that we see great momentum in the marketplace around ERAS programs, and especially around TAP, as both Jim and I outlined, and we have a lot of interest in bundles. Whether that's going to pull through in boxes or not in Q2 is really difficult to say..

Okay.

And then secondly, can you talk about the size of the sales force after the hire of the 20 new reps, I mean are you contemplating (25:10) further additional head count expansion, particularly after the launch in oral surgery and more of a focus in outpatient centers? And then also, can you give us any color quantitatively, if possible, on the mix of usage between outpatient versus in-patient use of EXPAREL? Thanks..

Sure. So the size of the sales force are net out in the neighborhood of 120, David. And we think for the oral surgery opportunity and for the ambulatory center business, as it exists, that's the right number. And so, at the end of every year, we do an exercise where we look at total resources and how those resources are going to be allocated.

So I think you would expect us to do that again at the end of 2016, for 2017, looking at nerve block where you would expect that there would be some resource enhancement around our belief that we're going to get a nerve block indication. In terms of in and out, David, ambulatory versus in-patient, it hasn't changed much.

Roughly 90% of our vials are sold in the in-patient environment. And if you look at the outpatient environment, it's roughly 10% with a – our best estimate is roughly 5% is plastics and 5% of that is other.

So to-date, you haven't seen a large move in the outpatient environment to the freestanding primarily physician-owned ambulatory care centers, which is the way the data is presented.

If you look at the data, David, and it's outpatient procedures that are attached to a hospital where a hospital's administrator is making a decision to move that patient to a 23-hour stay environment, we're getting a significant percentage of that business, but it's bought through the – the drug is purchased through a central pharmacy.

So we have no way of carving that business out. So my 10% number was related to pure outpatient ambulatory centers that are many times physician-owned..

Okay. All right. Thanks..

Thanks..

Our next question comes from the line of Douglas Tsao with Barclays..

Hi. Good morning. Thanks for taking the question.

Just – maybe if you could help us understand, Dave, in particular, you're talking a lot about the opportunities with these ERAS procedures or – what are the basics or the surgeries that are taking place where you see the biggest opportunity from these sort of ERAS protocols?.

Good morning, Doug. It started with colorectal and it was largely European phenomenon at the time with the physician named Henrik Kehlet, who is really the godfather of ERAS. And most of them, Doug, have been soft issue directed.

I don't say that because there isn't a need in orthopedics, but people, the orthopedic protocols have really been more aggressively adopted than soft tissue has. The soft tissue surgical procedures have been all over the place. So it started with colorectal. Now, at the meeting, you saw a lot about reconstruction, both breast and abdominal.

There's a number of presentations that were made on bariatric surgery and on abdominal surgeries. So it is mostly soft tissue stuff, but it's – I don't think it's because there isn't a need in orthopedics, I think it's because protocols and orthopedics have been widely adopted already..

Okay..

Doug, it's Scott. I'm going to jump in as well. Yeah, I agree with Dave. I think what you see in orthopedics is really the equivalent of an ERAS protocol, but it's just not called an ERAS protocol, but soft tissue guys have adopted that.

As a reminder, the trial that we're doing with MD Anderson, that GYN oncology trial, that's awfully well-established ERAS protocol. So you tend to see ERAS protocols where the hospitalization days are longer, high opioid use, the ovarian cancer group at MD Anderson, for example, had close to a 10-day hospitalization before their ERAS protocol.

It cut it to five days. Now, we're working with them to reduce the opioid burden in those patients. So I think where you see those longer procedures, you see them starting Whipple (29:49) procedures, other long hospitalizations and as Dave mentioned, it's really our opportunity..

Okay. Great. Thank you. And then, just in terms of TAPs, I know about a year into the launch, that was a very strong area for you.

After the warning letter, did that really reset back or is it just simply – did it flat line and you're now starting to see growth again?.

I think there's been interest in TAP as a procedure in the medical community all along, Doug. What happened is when we launched (30:24), we started to get significant traction, then there were a number of questions at the societal level and at the journal level about whether TAP was then included in our Package Insert or not.

And so, I think we saw TAP to level off, and now, with the rescission letter and specifically the letter from Janet Woodcock stating that it is a field block, and therefore, in the current label has helped us a lot and as we said during – as Jim said actually during the prepared remarks, you see great enthusiasm now for the use of EXPAREL and TAP and at all of the national meetings, you can't get in any of the TAP programs..

Yeah. And just to add, I mean, Doug, when we first got into this, I mean not a lot of anesthesiologists were doing TAP, when we started our launch and more independent of us have adopted the procedure.

And the anesthesiology community is respectfully thoughtful about the use of the drug, and so, I think that the fact that we've been on the market for a lot longer, in addition to the fact that it's clearly unlabeled, but just the fact that it's been out there longer, it's just created a different dynamic today with the anesthesiologists..

And lastly, Doug, I would mention that the use in TAP, at least the way we've instructed during our workshops is dependent on the availability of handheld ultrasound machines and that continues to change as well. And without the appropriate technology, this is not a procedure that we would be recommending on our workshops.

And so, as you see the use of those machines grow, you see the opportunity for TAP to grow with it..

Okay. Great. Thank you very much..

Thanks, Doug..

Our next question comes from the line of Irina Koffler with Mizuho..

Hi. Thanks for taking the questions. I was wondering if you could provide an overview of other procedure types where the 10 ml vial can be used in that incremental market size? And then, my second question is, what are you doing to assure protocol adherence in the nerve block trials? And how frequently are your sites being monitored? Thanks..

Yeah. I'll start with the 10 ml, and then, well, I guess we can shift in on the monitoring and stuff. So the 10 ml is clearly being launched in concert with the dental launch, Irina.

We've had a number of requests from the plastic surgery community for small bioptic type procedures and small procedures where there just isn't any room to inject 20 mls of EXPAREL.

In addition to that, we believe that there will be in the nerve block trials, we are studying a 10 ml dose and a 20 ml dose, and so, it is highly likely that in some of the smaller nerve surgeries, specifically around wrist and ankle, that you would expect to have a smaller 133 milligram dose which is the 10 ml vial.

For the nerve block trial, let me frame this first.

This is an anesthesiology driven trial and all of those folks have ultrasound machines and at the investigator meeting, we brought in ultrasound machines and had experts in the space, re-train everybody again on how to use ultrasound for a nerve block procedure, and you would expect that during this protocol, we will monitor those sites aggressively.

I don't know what else to tell you other than the fact that we've trained a heck out of them and when we bring them up, we trained them again, and I think that you will have broad exposure to folks that use EXPAREL, and then, folks that are experts in ultrasound. So I think we've done everything we could do..

Thank you..

Well, Scott's out there all the time, Irina. Let me ask him if he's got any other comments..

The one thing I would say is the clinical team is working really hard for not only the nerve block studies, but the pillar study. They are visiting sites aggressively before the first patient is enrolled. They are monitoring the first patient enrolled in the trial.

They're following up on a very regular time schedule, and we are making sure that from data collection, we have a very up to date system to review site and to continuously monitor all those sites for quality. We feel highly confident that, from a quality standpoint, we will be generating the data that's necessary for all three of the trials..

Pillar is the TKA trial, Irina..

Our next question comes from the line of Tazeen Ahmad with Bank of America..

Hi. Good morning, guys..

Good morning..

Thanks for taking my questions and I apologize, I'm on multiple calls this morning, so if you addressed this in your prepared remarks, I'm sorry about that.

I just wanted to get a sense maybe, David, in terms of your key surgeries historically, the general surgery, the plastic surgery, and cosmetic surgery, can you give us a sense of how much of the current use is coming from new users now versus people that are repeat users?.

It's hard to look at the data by users. We look at it by institutions and by purchasers, Tazeen..

Sure..

I think we will see an uptick of use in the retail environment. You mentioned plastics is in the question. We have had multiple discussions around not only the 10 ml, but the 4-pack.

There are smaller plastic surgery practices where, buying 10 ml, 20 ml vials is a material financial commitment and being able to buy four vials either of the 10 ml size or the 20 ml size, we think, will enhance the use there. It's really seasonal, and it's so dynamic, it's changing all over the place.

I don't – it's hard to find clinicians that have used EXPAREL and stopped using unless there's some financial pressure on them in order to not use the product. And I don't know past that. I don't have any data that I can share with you that tells you that I know that a certain prescriber or a certain prescriber group is using more or less.

I think everything is still growing. Some are growing faster than others around TAP and some of the enhanced recovery protocols, for example..

Okay. Thanks for that color. And then, maybe, can you talk a little bit about sort of the dynamics of getting back on to P&T list with hospitals.

So let's say that EXPAREL is not on a particular hospital's formulary, how restrictive is that than for a doctor if he or she wants to use EXPAREL as sort of a one-off basis on a particular type of surgery?.

Again, I'm going to sound like a broken record here, it's all over the place. We've got places where the drug is not – where the product is not formally on formulary, but it's okay to use it. We've got places where it can be used, but against an enhanced recovery protocol.

So one of the ways for us to use these enhanced recovery protocols is to work with the local institution to make sure that EXPAREL is used in the procedures where they see the major benefit.

We've got places where we're working with entire systems to put EXPAREL on formulary and against the ERAS protocols and the procedure protocols for whole medical systems that these are new discussions as of the last several weeks. And then, we've got places that frankly just won't allow access to EXPAREL and they just don't order it.

So if the doc doesn't have access to it, we see people move those patients to an outpatient facility. We've had several examples of where physicians have not only taken their patients across the street to a hospital that does have EXPAREL.

We've got cases where patients are demanding EXPAREL and if the physician doesn't have access, (38:41) going to another physician or another hospital. So again, it's a very dynamic environment.

And the docs, in some cases, feel like they're exposed here, because as the public demand for opioid-sparing technologies continues to grow and some of these hospital systems continue to limit access to EXPAREL, you can feel that many of the doctors who are treating these patients are exasperated by the inability to have access to the product..

Okay. Thanks. Then I guess the last question I have is just in terms of your timelines of moving patients off of the infiltration formulation onto spray.

I think your last update was that you think spray would be online in the 2019 timeframe, is that still the case?.

Yeah, I mean from a big planning perspective, that's still the timeline we're on. Just let me accentuate that there is absolutely no difference between these two formulations. It's a difference of whether it's made in a batch or whether it's made by what we call the spray process.

But the EXPAREL and the vial and the way the customers sees EXPAREL and uses EXPAREL will be identical to what it is today, the main drivers are the manufacturing COGS, and the royalty, and the tax strategy, and all the stuff, Jim's talked about a whole bunch of times..

Okay. Great. Thanks for taking my question..

Thanks, Tazeen..

Our next question comes from the line of Donald Ellis with JMP Securities..

Thank you and good morning. I'd like to go back to David's question.

And I think one of the first questions, regarding – I think what he was asking regarding the seasonality between the first quarter and the fourth quarter exclusive of the CMS bundling seasonality there, but the seasonality we've seen between the fourth quarter and the first quarter seem to be much more significant this year for who knows what the reasons were, deductibles reset, copays, (40:42) plans.

Did you see seasonality in the first quarter more significant and kind of when in the year do you think that's going to reverse and we'll see more procedures? And the next question is could you give us a few more details on the nerve block Phase 3 trials with respect to timing, numbers of patients and when you expect to be filing an sNDA? Thanks..

Yeah. Thanks. So first on procedures, it's been pretty consistent over the last few years, Don, that there is a proportionality between Q4 and Q1. The stronger Q4 is, the weaker Q1 is, because a lot of those procedures, as you state, related to insurance issues are pulled forward and therefore not available.

The pattern has been that you see some rebound in Q2, and I think that's what David Amsellem was asking about. And then Q3 grows very modestly over Q2 for many of the same reasons of vacations and procedures being done. And then Q4 is always our strongest quarter by quite a lot for the opposite reason that Q1 is relatively weak.

I would say, Don, that what we're working on with TAPs and ERAS programs and stuff is that the seasonality is almost entirely related to elective procedures, right? When somebody finds out they've got colon cancer, they're not trying to plan their vacation and stuff, and so, there is a basis of emerging (42:16) procedures and as we grow TAP and as we grow the ERAS procedures, for example, you'll see those normalize.

And then, as we do the other trials, you're going to see it mostly done in orthopedics. So I think this is going to be a situation that we live with, but it always is Q1, Q2, Q3, and then a whopping Q4 and we've seen that now for the last several years. So I wouldn't say there was anything peculiar about Q1 this year.

I'm looking at Jim, so if you'd like to say..

No, I agree. It really coincided with our launch. This really was something that we started to see significantly in 2013, but it hasn't – I think it is permanent. I mean there's a dynamic where everybody knows now that the ORs are going to be really full in Q4. We won't let our sales force be distracted in Q4.

And then a lot of the surgeons will be taking vacations in Q1. It sort of came out of the dynamics of payments, but I think it's sort of embedded into our economy now..

So phase – or the nerve block trials, Don?.

Yeah..

So there's 300 patients in each of the two trials, brachial plexus and femoral nerve block, that is up on clinicaltrials.gov (43:31). So if you want to take a look at it for more color, you'll see it up there. The focus for the FDA trials is on upper and lower extremities.

So the upper is a brachial plexus block, and the procedures of interest in that scenario are a rotator cuff procedure and a shoulder arthroplasty. And then, it's a redo of the femoral. And as I mentioned in my script, you can get a sense of what we saw in the original trial that was published in Anesthesiology a couple of weeks ago now.

And what the FDA asked us to do was to follow all of those patients out to Cmax and Tmax. And so, there have been a couple other adjustments looking at 133 mg as well as 266 mg or a 10 ml vial and a 20 ml vial.

But other than that, it's pretty much a redo of the trial that we've already done, and we already have data on that'll give us a lower extremity data set and an upper extremity data set looking for a broad label for a nerve block indication. We expect to have this trial complete enrollment by the end of the year.

Assuming that we're successful with that, we would file an sNDA in Q1. And then, according to the PDUFA rules, this would be a resubmission based on the fact that we've already submitted a set of data on femoral nerve block and that would trigger a six-month regulatory pathway.

If all of that works out that way, Don, we would launch in the Q4 of 2017..

Great. Thank you very much..

Thanks..

Our next question comes from the line of David Steinberg with Jefferies..

Thanks. Good morning. First question, I'm wondering if you could give us an update on the chronic pain opportunity. I know in the past you've indicated this is a pretty large opportunity for you. And then, secondly, looks like the last couple of quarters, your base infiltration indication has grown about 14% year-over-year.

I was wondering what could get the sales trajectory higher on this indication or should we view this as the new baseline? Thanks..

I don't know that number, David, of 14% for base infiltration..

Well, I mean I think....

Go ahead..

I think maybe he's just referring to the – roughly what the volume increase was..

Oh, I see. I see. Yeah. I'm sorry, David, I missed that one totally..

No problem..

I think we're working on it from the perspective of all the things we talked about today, take out the opioid epidemic that I think is the standalone vertical. We think that institutionalize, so on most of these soft tissue infiltrations, the majority are relatively low-margin procedures for a hospital.

And so, that's why we've been working with them on how you make that decision to use a $300 product in an environment where there is not a huge motivation from a profit perspective like you would see with spine surgery or orthopedic surgery, for example.

As people gain experience with EXPAREL and start to see the benefits, then moving them to an enhanced recovery protocol where everybody that comes into the institution in these different procedure sets is treated with an ERAS protocol that has exactly the same elements to it and that always includes EXPAREL when we've been involved.

So there is multiple ways there that we can increase the infiltration business. Exactly, the same thing in TAP. TAP, the strategy is a little bit different, because it opens up a whole new customer base for us. The primary basis of infiltration without TAP is a surgeon or somebody on the surgical team.

As you move into TAPs, the primary audience becomes anesthesiologists then. So if we can institutionalize the use of EXPAREL, not only do we get the benefit of revenue, but as those fellows and residents rotate, you will see people that have only treated patients with EXPAREL against these various difficult pain profile procedures.

And then, opening the opportunity up for TAPs in anesthesiologists is not only important for what technically is an infiltration procedure, but allows us the opportunity to start to work with anesthesiologists and have a relationship with anesthesiologists and advance with the nerve block indication next year..

Dave, maybe you want to talk a little bit about spine or you want me to take that?.

Go ahead..

Dave Steinberg, it's Scott. I think one important area on the infiltration side that Dave did mention is spine. Certainly, we've had very good share historically in knees and hips. Our spine business has been a smaller component of the business.

But when you look at spine from a procedural standpoint, it certainly ranks in terms of just open lumbar procedures, open spinal procedures. The numbers rank very similarly to that of total knee. Narcotics use are quite meaningful in that procedure.

You do not use epidural catheters, typically, for spine procedures, because surgeons don't want to risk infection. So we have a great opportunity in the spine world to really infiltrate that marketplace and that's the major reason behind our spine studies that will start at year-end.

So that's another big orthopedic indication that we're thinking very long and hard about and see as a great opportunity for growth..

And just one thing I want to add too. I mean we talk a lot about what we're doing as a company in educating the surgeons and the anesthesiologists.

But I do think it'll be interesting to keep an eye on the society's reaction to the opioid epidemic, because I think we feel like we've been sort of talking about it for a couple of years, trying to educate the world that it is something that is impacted by people that are opioid-naïve coming into the surgical suite and getting their introduction to opioids there.

But with all the legislation recently, and we've had some surgeons sort of tell us that they're raising their eyebrows about what their legal liability is if their post-discharge Percocet use goes beyond a certain amount of days and something happens.

So at some point, it's just sort of a question of, is this the gradual thing that impacts our business or is there a tipping point. And we're just going to have to keep an eye on it.

But you certainly see some things recently that would suggest that it's not just us screaming from the rooftops, it's the society is sort of looking at this and saying, what are we going to do about it..

So then, David, for chronic, we've been consistent, I think, in saying that we would do some Phase 2 work around looking at facet joint injections and gaining a better understanding of bupivacaine and exactly what the flow dynamics are when you put bupivacaine into a small body space like a facet joint, partly guided by we have reports that patients have several weeks of relief from a product that has a six-hour or a seven-hour half-life.

And so, we need to understand those dynamics. We will then move on to the understanding of what happens when you put EXPAREL in those same body compartments.

But I think the key thing is that you wouldn't want to start those trials until we file at sNDA for nerve block, because indeed, this would be an epidural administration and another way to provide a nerve block.

And so, we want the chronic pain study to be fully informed by the nerve block trials that we're doing now before we start something in the epidural space..

Okay.

And then, finally, I may have missed it, did you disclose what the planned pricing was for the 10 ml vial? And then finally, any thoughts on the competitive landscape? I know where you stand on generics, but do you see any competitive products reaching the market in the next three years to five years and how should we think about it?.

So we have not done anything with 10 ml pricing yet, David. As a matter of fact, the work is being done right now. So we don't have really anything to disclose on the pricing of the 10 ml vial.

Relative to the competition, I would say that we don't believe that there is a product that can be used in a scenario where it is injected close to nerves and into muscles based on myotoxicity and neurotoxicity. And so, if that's the case, then you wouldn't use them in a nerve block scenario, you wouldn't use them in a TAP scenario.

And so, you would have a very limited opportunity. So you know that I'm fairly skeptical about the opportunity to even get the drugs on the market, but if they do, we think that the opportunity to displace EXPAREL is going to be modest given where EXPAREL is going to be at the time..

Okay. Many thanks..

Thanks, David..

Our next question comes from the line of Jonathan Aschoff with Brean Capital..

Thank you. Hey, guys.

I was wondering regarding potential new doctors in EXPAREL, could you help me understand the extent to which you are needing to appeal to the C level hospital staff to hopefully get EXPAREL on that formulary versus how they might have been in the first year or two of launch?.

That's basically all I'm doing, Jonathan. So an insightful question, and it's a bit of a combination of everything. I don't think we'd be having the discussions with these folks if we didn't have the rescission of the warning letter and the new PI.

But there are folks at major medical systems who would echo what Jim Scibetta just said relative to the opioid epidemic. And so, we now have opioid-free ERs, we have opioid-free ambulatory care centers. We're never going to have an opioid-free hospital, don't get me wrong.

But I think we can have a significant impact on how opioid-naïve patients see opioids for the first time in an acute care surgical environment, don't even understand that they're taking an opioid until they've taken it and they can't get off it. And so, there's a number of initiatives that we can undertake.

But yes, I am having almost all of my time spent on C-suite discussions on how Pacira and organizations can work together to address the opioid issue in the United States..

And it's a target of our National Accounts Group. It's not – sometimes, the National Accounts Group might be just a contracting arm, but ours is very much focused on C-suite strategy.

And it's not only the chief, but often, it'd be a service line director, head of quality, somebody who cares about the overall quality of what they're providing – service they're providing, but equally as important, the overall cost of everything that happens and that leads to discussions around ERAS protocols and so forth..

In the simplest term, Jonathan, the whole value versus cost, the value of reducing opioid is incrementally more than it was – incrementally better for us than it was two years ago. It's probably the simplest way to say it..

Okay.

And how would you maybe describe the C-level conversations and their ability to counter an initial pharmacist discussion, someone who might be looking after their own P&L kind of mark the benefit of the rest of the hospital?.

I think there's about – when the guy who's running the place says this is what we're going to do be an ERAS protocol or something like that, you don't see anybody that doesn't get in line.

I think where folks have been concerned about that EXPAREL just growing too rapidly and busting their budget somehow, we're working with the C-suite on controlling the procedures where you roll EXPAREL out to the things that Scott was talking about, to the places where patients stay for a very long time because of heavy doses of opioid, because you either don't have access to other forms of pain control or whatever.

So that's one piece of that. I think the pharmacy thing, Jonathan, is also being moderated by the whole bundled program. CMS is really forcing folks to look at the long-term impact of short-term therapies. So the bundle now is 90-day at the sort of care.

And so, you see or at least I see, we see a lot more awareness in the C-suite of the long-term implications of appropriate pain control, whether that – as goes on to chronic pain or goes on to a skilled nursing facility or goes on to whatever.

And so, I think that the view of the world where you can run a line item budget as a gatekeeper for a hospital is still here today in 2016, but I think it's under great scrutiny, because it just doesn't make any sense if you're not looking at the impact of those short-term decisions on long-term outcomes..

Great. Thank you very much..

I'm showing no further questions in queue at this time. I'd like to turn the call back to Dave Stack for closing remarks..

Thanks, Liz. Thanks for joining us today. Coming up in a few weeks, we plan on attending the Bank of America Merrill Lynch 2016 Healthcare Conference in Las Vegas. We look forward to seeing you there. Thanks a lot. Have a great day..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day..