Thank you for joining the Pacira Pharmaceuticals Third Quarter 2016 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..

Dave Stack, Chief Executive Officer and Chairman, will discuss the key programs currently underway driving the company strategy; Jim Scibetta, President, will provide a commercial and manufacturing overview; and finally, Charlie Reinhart, Chief Financial Officer, will provide a recap of Q3 2016 financial results and any related updates before we open up the lines for questions.

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

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

Many of these and other risks and uncertainties are described in the Risk Factors section of 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 financial measures. Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the earnings press release for the quarter.

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

Use, Abuse and Alternatives with education materials designed to support the rapid dissemination of patient information and education regarding opioids and opioid alternatives, and to support the surgeon with evidence-based content, including procedure-specific enhanced recovery protocols, managing patient pain expectations, non-opioid options, screening programs, discharge education and transition management.

In addition, we continue our efforts to inform how to best incorporate EXPAREL in a variety of enhanced recovery protocols.

These efforts include support of the American Society of Enhanced Recovery to identify best practices, including the use of EXPAREL to achieve optimal patient outcomes following surgery, and collaborative initiatives with leading medical institutions on incorporating the use of EXPAREL as a means to manage pain with fewer opioids in order to attain the ideal enhanced recovery goals.

We are looking forward to announcing additional collaborations over the next several weeks and months. The second component of the three-pronged strategy is the development of procedure-specific data to support marketplace use.

Remember that institutions, which limited access to EXPAREL based on the warning letter, also limited our ability to properly educate and train our customers, leading to local use and clinical datasets developed without the benefit of EXPAREL training which, we believe, is directly linked to reporting of equivocal results.

While short-acting cocktails can provide 10 hours to 12 hours of pain relief for orthopedic procedures, opioid pain control is required to cover the period of post-surgical pain for procedures such as hip and knee arthroplasty, exposing patients to the potential for opioid abuse and addiction.

To address the questions in the orthopedic market regarding the benefits of EXPAREL versus generic bupivacaine, we initiated our total knee arthroplasty or TKA trial to demonstrate the best infiltrative use of EXPAREL in a randomized clinical trial with patients randomized to EXPAREL with bupivacaine or bupivacaine alone.

Both arms used the same multimodal strategy, while the EXPAREL patients are treated with 120 mL vial of EXPAREL with 100 milligrams of free bupivacaine mixed in the same syringe and expanded to a total volume of 120 mLs.

We expect to complete enrollment by the end of the year, with top-line data to follow early next year, in time to discuss the trial results at the American Academy of Orthopedic Surgeons in March 2017.

We are also initiating clinical trial sites for a study in patients undergoing one or two level of open lumbar spine fusion surgery, and we anticipate having trial data in the second half of 2017.

This randomized trial comparing EXPAREL with bupivacaine will again provide data on the use of EXPAREL with additional free bupivacaine and expected volumes of 60 mLs to 90 mLs for this important surgery, where over 1.3 million procedures were performed in the United States in 2015.

As part of this clinical data with specific procedure technique, we are planning additional randomized bupivacaine comparative clinical trials in 2017 in soft tissue surgery with TAP blocks for C-Sections and colorectal surgery, and infiltration into the surgical site for gynecologic oncology surgery and breast reconstruction surgery.

The recent successful launch of EXPAREL in Oral/Maxillofacial surgery provides the basis of a retail strategy for oral surgery, plastic surgery, and a move from inpatient to outpatient surgery. We are enrolling two Phase 3 nerve block studies, one in lower extremity femoral nerve block and one in upper extremity brachial plexus block.

Both remain on track for expected completion in Q1 2017, with a strategy to resubmit the sNDA by the end of Q2 2017. The brachial plexus trial compares EXPAREL to placebo for procedures, such as shoulder arthroplasty and rotator cuff repair.

Let me take a moment here to point out that the lower extremity femoral nerve block study is a repeat of the initial study with 266 milligrams of EXPAREL, which successfully met the primary efficacy pain endpoint with a P of 0.0001, and with a highly significant P value for opioid reduction of P 0.0016.

These results have been published in the journal, Anesthesiology. Thus, we have the data to show the efficacy and opioid reduction with 266 milligrams of EXPAREL in femoral nerve block. The femoral nerve block trial will investigate pain opioid reduction and opioid reduction with a 133 milligram dose, as well as a 266 milligram dose in placebo.

In addition to efficacy, safety and opioid reduction, these trials provide data for a number of health economic and functional status endpoints.

We believe the nerve block indication will be an additional driver of growth for EXPAREL into ACL repair, rotator cuff repair, wrist and hand procedures and sports and trauma injuries both in the hospital and in ambulatory care centers. We have additional recent developments regarding these trials.

In the nerve block studies, we received data from a predetermined interim PK analysis focusing on the timing of maximum drug concentration or Tmax.

This analysis will allow us to reduce the patient length of stay in the hospital by a full day in the femoral nerve block trial and by two full days in the brachial plexus nerve block trial, which will improve enrollment since protocol length of stay was artificially long compared to clinical practice.

Further, pertinent to both the nerve block study and the infiltration PK study I addressed earlier, through monitoring of the available data and reanalysis and refinement of the statistical plans, we will be able to reduce the required number of patients needed to enroll in these studies.

Complying these developments simplify the trials and help us recruitment and in trial completion. These developments will also result in considerable cost savings evident in our financial guidance that Charlie will address in a few minutes. To further expand the EXPAREL platform, we are also initiating our pediatric trials.

And, in 2017, we expect to expand our work into chronic pain to understand the use of local anesthetic therapy in chronic pain patients. Beyond EXPAREL, we also continue to advance the DepoFoam pipeline.

We have enrolled the first patient in the Phase 2 study for DepoTranexamic Acid, and we expect to provide updates as they develop over the next several quarters. The third part of our strategy is advancing EXPAREL growth through commercial partnerships. Over the past 12 months, there have been growing interest from global and regional partners.

We continue to build comprehensive regulatory and manufacturing strategy for an increasing number of global markets. Our goal is to execute a series of partnerships over the coming 12 months beginning with, at least, one announcement by the end of this year, and a series of agreements that will continue through 2018.

Our goal would be to launch our first ex-U.S. markets by early 2019 and continue with multiple global launches through 2022. We also have all U.S. rights to EXPAREL and human health based on our termination of our previous orthopedic partner at the end of Q3.

With EXPAREL used in over 1,500 ICD-9 codes in 2015 alone, we are investigating the opportunity to partner EXPAREL to leverage expertise with physician audiences of strategic interest for current and future uses of EXPAREL. Additionally, I'm pleased to announce that we have applied for a Patent Term Extension with the U.S.

Patent and Trademark Office for the EXPAREL patent. The company expects the patent extension to be granted and to extend Orange Book listed patent coverage in the U.S. through, at least, July 2020. In addition, the company has filed multiple patents in the U.S.

and globally for our new multivesicular liposome manufacturing technology which, if granted, has the potential to provide patent protection for our multivesicular liposome portfolio through 2031.

While we have no concern about the threat of a generic EXPAREL as, we believe, our knowhow provides significant barriers to entry, we believe that our legal IT protection will further enhance the value of EXPAREL to any and all global and regional partners.

In conclusion, 2016 has been characterized by steady blocking and tackling and implementation of key programs and initiatives to drive the future growth in 2017, as part of our three-part strategy, to work with patients in addition to the hospital systems and physician groups, to standardize and broaden the reach of opioid-sparing protocols with EXPAREL, through public relations efforts, enhanced recovery protocols, education and training programs.

Two, to build out a clinical data set in support of marketplace use of EXPAREL for current and expanded indications. And three, to capitalize on commercial partnerships for EXPAREL opportunities both in and outside the United States.

The result has been that while these programs have not translated into rapid acceleration of sales in 2016 as we had projected, we have made real progress.

With the randomized control trials in TKA and spine to read out next year and the nerve block study is also to be completed next year and several partnerships to finalize in 2016 and 2017, we are optimistic about the bright future for Pacira.

Without a clinically or commercially useful competitor in development around the market, we believe Pacira is uniquely positioned to improve patients' lives. Pacira is part of a growing coalition of patients, healthcare providers, payers and government agencies to address the opioid epidemic.

It was published in The New York Times, the hospital OR is a gateway to opioid abuse and eventually heroin addiction. Enhanced recovery protocols with EXPAREL-based multimodal pain platform for opioid minimization provides best practice to address the opioid epidemic. Perhaps Dr.

Paul Sethi, an orthopedic surgeon in Greenwich, Connecticut best described the value proposition for EXPAREL. The injection cost about $300 extra which is a bargain if it can save a person from an overdose death or a long struggle with addiction.

I believe Pacira's position is an important partner to the healthcare providers, patient hospitals and society at large in the pursuit of opioid minimization and in many procedures, opioid pre-surgery in America. And, with that, I'll turn it over to Jim..

for large dental implants, which total approximately 200,000 procedures annually in the U.S.; temporomandibular joint disorder procedures; and for TMJs, think of jaw movement and function disorders, which total about 30,000 annually; and orthognathic surgeries or corrected jaw surgeries which total approximately 375,000.

We also recently put the finishing touches on the build-out of our seasoned next-level commercial leadership team as we announced the hiring of Tom Sluby as VP of Sales and Matt Lehmann as the VP for our Marketing organization.

Tom has an extensive track record leading pharma sales organizations, most recently at inVentiv, and Matt has spent much of his career at AstraZeneca, where he led the successful launch of MOVANTIK and was the commercial leader for SEROQUEL XR.

Turning to manufacturing inventory, EXPAREL, like all pharmaceutical products, is subject to testing at the time of release called release testing and also testing on a few sample batches at various time points over the period of its shelf life, called stability testing.

Release and stability testing is a key component of our quality systems, which ensures consistent manufacturing and demonstrates product quality.

In compliance with all federal requirements, our quality department has assured that all of the1,367 batches released since launch containing approximately 2.8 million vials of EXPAREL have passed all required specifications for testing and have complied with good manufacturing practices.

As we've accumulated test data over the life of the product, it's become evident to us that one of the approximately 20 stability acceptance criteria agreed to with the FDA upon approval, and one that we believe has no bearing on product safety, presents a recurrent risk for testing outside the approved specification.

As a result, we've recently been in discussions with the FDA about both a modification of that specification, as well as a potential development of a new analytical test for this attribute.

Until that process is completed, we changed the data into 12 months for all product manufactured starting from September of 2016 to contain any compliance-related impact to products.

Last week, we received test results on part of our routine stability monitoring that one of two test batches of EXPAREL made in early 2016 has slightly fallen out of specification for the single stability test attribute that is the focus of our current discussions with the FDA. The other stability test batch remains fully within specifications.

The value for this out of specification attribute is just 1% outside of target range, which is also within the margin of error of testing.

And all other test attributes, many of which are the key measurements that we believe are the most indicative of the product's performance and demonstrative of product quality are within the specification and trending according to shelf life.

While we have no concern about the quality of the product at this juncture, the test result was unexpected and suggestive of some deviation from a consistency of manufacturing output.

An internal investigation has tied the unexpected result to a modification to the manufacturing process that existed when this product was made, and has been identified and corrected as of June 2016. Very little of this product was distributed into the market, and a small percentage of what was distributed remains unused.

We filed a Field Alert Report with the FDA yesterday to inform them of this unexpected result and recommend the confinement of product manufacturing in 2016 prior to June, and possibly a product exchange for the small amount of product that's held by customers.

This action results in a material charge recorded in the third quarter that Charlie will highlight shortly. Given that we just filed the report with the FDA, we have not yet had any formal communication regarding any potential additional and next steps that need to occur.

As you would expect, we revised our manufacturing plan for the remainder of 2016 and all of 2017, where we will manufacture at higher levels and release product more quickly, and we expect no disruption to our available supply meeting what we forecast to be growing demand for EXPAREL.

I also want to note for our investigators that our TKA study and nerve block studies are supplied with product unrelated to this event. Our CFO, Charlie Reinhart, will now provide an overview of our financial results and outlook.

Charlie?.

Thank you, Jim, and good morning, everyone. Today, we reported third quarter 2016 financial results. For the quarter ended September 30, 2016, we reported total revenues of $68.4 million, a 10% increase over the $62.2 million reported for the third quarter of 2015.

During the third quarter of 2016, EXPAREL net product sales were $64.9 million, a 9% increase over the $59.7 million reported for the same period last year. For the third quarter of 2016, total GAAP operating expenses were $89.2 million, comprised of $43.2 million in cost of goods sold, $9.8 million in R&D expense, and $36.3 million in SG&A expense.

Adjusted for items identified in the GAAP to non-GAAP reconciliation tables included in the earnings press release issued this morning, total non-GAAP operating expenses were $60 million, including $19.6 million in cost of goods sold, $9.1 million in R&D costs, and $31.4 million in SG&A costs.

As Jim mentioned earlier, our routine stability testing recently identified that a single stability batch of EXPAREL manufactured in early 2016 fell out of specification for one of approximately 20 acceptance criteria measured during the testing.

An internal investigation has tied this unexpected result to modification to the manufacturing process that existed when this product was made and was corrected in June 2016.

During the third quarter, we recorded a $21.9 million charge to cost of goods sold to fully reserve for the value of EXPAREL product manufactured during 2016 prior to the process correction. Including this $21.9 million charge, GAAP cost of goods sold for the third quarter of 2016 totaled $43.2 million, and our gross margin percentage was 36%.

Excluding the impact of this reserve and stock-based compensation expense of $1.6 million, non-GAAP cost of goods sold for the quarter was $19.6 million, yielding Q3 2016 non-GAAP gross margin of 71%.

Both GAAP and non-GAAP research and development expenses recorded during the third quarter of 2016 were significantly higher than the same figures for Q3 2015, primarily resulting from our clinical investment in the TKA infiltration study and two nerve block studies for EXPAREL, plus cost to progress our DepoFoam pipeline drug candidates in human clinical studies.

Our GAAP net loss for the three months ended September 30, 2016 is $22.2 million, resulting in basic and diluted net loss per share of $0.59. Our GAAP net income for the same period in 2015 was $3.1 million, resulting in basic and diluted net income per share of $0.08.

From a non-GAAP perspective, net income for the third quarter of 2016 was $8 million or $0.20 per diluted share, compared to net income of $12.9 million or $0.32 per diluted share for the third quarter of 2015. And finally, we finished Q3 with cash and investments of $161.1 million.

As I'm sure you recall, on the second quarter 2016 earnings release conference call, we issued full-year 2016 EXPAREL revenue guidance of $270 million to $280 million.

This forecast was based on our analysis of key factors expected to impact our top line during the remainder of 2016, including implementation of collaborations with hospital systems, physician groups, patient groups and other key stakeholders interested in implementing opioid minimization protocols with EXPAREL, continued expansion of EXPAREL's utilization in a number of soft tissue surgeries, including those using TAP blocks.

Growth in our total orthopedic business, net of the impacts of the headwinds mentioned by Jim, including the use of opioid-based drug cocktails and the lack of Level 1 clinical data. And finally, the seasonal nature of our business, reflecting the fact that the later part of the year is traditionally stronger than the earlier part of the year.

As you have already heard Dave and Jim mention, all of these growth drivers still exist and we remain very optimistic about the future of EXPAREL. However, we acknowledge that the revenue growth expected to be fueled by these business drivers is taking longer to impact our top line.

And as a result, actual revenue growth achieved during the third quarter was lower than we expected. As we look forward through the end of 2016, we now believe that full year net product sales of EXPAREL will range between $263 million and $268 million. We revised our 2016 EXPAREL net product sales guidance accordingly.

We reaffirmed our non-GAAP gross margin percentage guidance for the full year of 2016 of between 70% and 73%. We continue to invest heavily in the expansion of our manufacturing facilities in the UK and in the development of our spray technology.

As these new manufacturing facilities come online, obtain FDA approval, and produce EXPAREL that is sold, we continue to expect non-GAAP gross margins to reach a peak of approximately 85%. We revised our full-year 2016 non-GAAP R&D expense guidance from between $60 million and $70 million, down to between $40 million and $50 million.

This $20 million reduction in our guidance range reflects the combined impact of the significant cost reduction in the TKA trial and the two nerve block trials, which resulted from the important improvements to these trials described by Dave and a change in the timing of expenses primarily related to the completion of the two nerve block trials in Q1 2017.

Finally, we reaffirm our full-year 2016 guidance for non-GAAP SG&A expense of between $125 million and $135 million, and stock-based compensation expense of between $30 million and $35 million. That concludes our opening remarks. We will now open this call to you and your questions..

Thank you. Our first question comes from David Amsellem of Piper Jaffray..

Thanks. Just a couple. So, this is sort of a high level question regarding pricing.

Can you talk about in some detail how you're thinking about discounting and providing more financial incentives to your customers to buy more EXPAREL bearing in mind that the cost pressures in the hospital environment as you've cited kind of had been particularly intense? So, what are you planning to do there differently, if anything? And then, secondly, on the launch of the 10 mL, can you talk about the potential for it to take away from 20 mL business or conversely, do you think it will be additive to the business because it gives surgeons the flexibility of using a smaller vial in smaller wound spaces? So, maybe help us think about the dynamics of 10 mL.

Thanks..

Sure. Thanks, David. So, the first question regarding pricing pressures – insightful because it's very clear that there has been a significant impact of patients coming with Affordable Care Act insurance, for example, that is making life difficult for our customers. And I'll give as much detail as I can, David, and please come right back at me.

So, we don't anticipate that we will have a broad price reduction of any sort.

What we do talk about with folks as a way to form the partnerships that I talked about earlier is that when we institute a program or, say, a health system of several – well, 100 hospitals, say, just to make it easy, is going to use EXPAREL across a broad platform that we would stand behind the product first and make sure that we met all of the metrics that were guaranteed as part of the discussions with them regarding length of stay in opioids and the savings that they would recognize.

But then, we also have a price accommodation that makes it useful and easier for them inside current budgets to be able to use EXPAREL in a more broad platform. So, I wouldn't be looking for any kind of a price discount. I mean that is not a strategy that we have any intention of employing.

But where folks are using EXPAREL appropriately and across a broad platform of procedures, we do realize that they are under pricing pressures.

And even though we continue to believe that the institution will save money as a result of the use of EXPAREL, we want to work with them especially in situations, David, where they are bidding in self-insurance models or they're addressing large patient populations at the state level relative to the opioid epidemic, et cetera.

So, that's really more or less a 20 mL story, which leads me to your second question around 10 mL. We priced the 10 mL vial exactly looking at the scenario that you outlined, David. A couple of things first about 10 mL. First of all, there's two aspects to EXPAREL.

The Cmax of the product is roughly 24 hours when you use the 266 milligram vial, and that leads you to the 72-hour duration of action in a bloody field, right.

When you want to increase the oomph, if you will, of the pain control (35:21) post-surgical environment while the patient is coming up to the Cmax for EXPAREL, then you can just very simply add some free bupivacaine.

And as you've heard, virtually all of our procedures require more volumes, so it's very easy to just use the bupivacaine as the diluent. And if you want to increase the duration of effect, then you need more lipid particles. And so, the 10 mL vial is geared towards two markets, really.

One is the smaller surgery market, if the reason it was launched in concert with the Oral/Maxillofacial marketplace, right, is third molar extractions, but also think about small plastic surgeries, et cetera.

We continue to believe that the nerve block trial especially the upper extremity nerve block trial, a brachial plexus trial will be a 10 mL dose. And so, what you see then is ACL repairs and rotator cuff repairs and carpal tunnel syndromes, and all of those kinds of procedures moving to the less expensive ambulatory care or 23-hour stay environment.

And when you inject EXPAREL in this nerve block technique into an avascular environment, you do get an extended duration of action. And so, the 10 mL will provide that increased duration because the lipid particles break down at a different rate in a bloody field and in an avascular environment. So I'll address your question very clearly.

A physician who wanted to achieve 72 hours of pain control and a surgery such as a TKA would have to use a 20 mL vial in order to achieve that result. If they use the 10 mL vial with some additional bupivacaine, they would only get about half of that duration of efficacy and that would not be satisfactory, of course.

So, you will see the 10 mL vial used in smaller surgeries. And many of which we are not getting today, because the physician doesn't want to open a vial of EXPAREL and only use part of it. In some cases, in Workman's Comp cases, David, actually, they are getting paid by the mil.

And so, we want to provide as much flexibility for our customers as we can.

But there is very little opportunity for folks to simply use less EXPAREL because what they sacrifice then is the time point from Cmax to time above the effective level of local anesthesia which, in the hemorrhoid trial on the package insert is 72 hours and which in the TKA trial is – we believe, is going to prove to be very close to that same timeline.

If that doesn't make sense, David, please come right back..

No, that makes sense. And if I may follow up just on pricing. I guess, the follow-up here is – okay, so you're not planning to do any big discounting.

So, your belief is that this is still a data-driven customer base? In other words, as you grow the body of data, and grow the availability of (38:36) data, you will be able to get more buy-in even without providing deeper financial incentives?.

I would say, David, that in the deepest of the discussions that are ongoing, and you've probably got from my script that there are several, this is the obvious optic that you would think would be important in those discussions, but frankly, it's not. What our customers are looking for is a greater service platform. They're looking for that training.

They would like to see us contribute to a local – so let's just say you're a hospital CEO, David, and we could cut the price by some number or we could provide some services to you relative to communicating the fact that you're an opioid-free center.

We could work with your clinicians to highlight their practice in local newspapers and on radio spots.

There's a number of services that these folks are interested in relative to training and clinical research and doing more trials of specific interest to them that are a lot more appealing to them than the price of the drug when they understand the economics of reduced length of stay, et cetera.

And so, I'm always prepared for that discussion and I'm generally surprised that it doesn't come up as the number one thing that somebody wants to talk about. What they do want to talk about, David, is if I move somebody and they want – and I don't – I'm not – this isn't just me, there's a bunch of people here that can do that.

But what they are worried about, frankly, is that they did with an enhanced recovery protocol with EXPAREL, and that we raised the price by 20% the day after they do that, right. So, what they're interested in is what's the total cost of care for these procedures.

Can we put an enhanced recovery protocol in place that squeezes the air bars around these trials, so that they become much more predictable. And in that context, can they bid a large teachers union or state employee association, et cetera.

And so – that what they ask me for is, frankly, if the drug is used inappropriately, will we share that cost with them, and will we guarantee that for the life of this deal that they're about to sign, we won't raise the price. Those are the kinds of things they're looking for, not any kind of a material price decrease from us..

And David just to add one – this is Jim – just to add one thing to that. You go into some of these IDNs or large systems where they say upfront that cost is the issue.

But as Dave alluded to, often it is going back to what we were talking about in the script, is the product being administered properly and therefore delivering the value of opioid reduction, length of stay and once you get people focused on that, then we're kind of in a partnership with our customer, and they're actually, as Dave said, not really focused on price per se, but on the product delivering its value..

Hello?.

Nova?.

Thank you. Our next question comes from the line of Doug Tsao of Barclays. Your line is open, Doug..

Why don't we go to Don Ellis?.

Yeah..

Thank you. Our next question comes from Donald Ellis of JMP Securities..

Good morning, everyone. Thanks for taking the questions. The first question is regarding the DoD opportunity. Can you help us quantify, I understand a lot of new recruits have their third molars removed when they join the military, and this might be a patient population at higher risk of opioid abuse.

Can you kind of quantify what numbers we're looking at, and what are the biggest advantages to the DoD?.

Well, we've got a really robust clinical program with the DoD, Don. We're doing – right now, we're doing – they've only, to my – this is my understanding, they've only done one registry in their history, and we are now doing a registry with EXPAREL. It spans a number of different situations.

You are correct that there is a special need to avoid opioids in the military, but it starts – most of what we saw in the early days, frankly, was hernia.

And folks that were in basic training that were doing things that a typical person wouldn't do, but as time has gone on, they've seen it by avoiding opioids, you can avoid these addictive problems specifically to them, and this comes from a camp commander that I was with, out in California that basically said, when somebody's addicted to these opioid medications, I can't give him a gun, I can't let him drive a truck, I can't do much of anything with him.

And in many cases, we end up discharging these folks at great cost after they have gone through basic, et cetera. So, it's been a real focus of the DoD.

In addition to the registry now, though, DoD is way more than what you would think about if you were just not dealing with what we're dealing with every day, they have a lot of patient lives, I mean they're doing a very large trial in C-sections, and they're interested in colorectal surgery, and they're interested in a whole lot of these different procedures.

And, in fact, the registry covers a number of procedures looking at plastic surgery applications and OB/GYN applications and colorectal applications, as well as TKA, et cetera. We've done a couple of things, Don, specifically for them. So, you'll see a paper come out here sometime in the next few months where we looked at repeat dosing.

Understanding that most of the DoD – well, I shouldn't say most, but many of the DoD procedure applications are extremities. And so, when the kids in the Middle East have an IUD issue for, et cetera, it's generally a hand or a foot or something like that.

And the question was, why can't we re-dose EXPAREL? And you'll notice in the new EXPAREL label it says that you can't use another bupivacaine-containing product within 96 hours except for EXPAREL. So, EXPAREL can be predictive on its use by against itself. And so, we have a paper that's in press regarding the multiple doses of EXPAREL.

So in clinical practice, you could give up a soldier a dose in a MASH (45:25) unit, send him to Lansdowne for example, and then when they were going from Lansdowne to Walter Reed you could repeat dose with EXPAREL. That was done specifically at the request of the military. So, there's a whole bunch of things going on with the DoD.

It's an interesting fishbowl for us in two aspects. One is, it's highly unusual in our business to have a patient that has no comorbidities, where you can study just a drug.

So, I'll tell you, if you can study EXPAREL in hernias in Marines, you have a very unusual situation to prove that you have the specific aspect of your drug because the patient have no comorbidities, they're all roughly the same age, et cetera, so it's unusual from that perspective that led us to do a meaningful clinical work there.

But as it expands, you start to see that a group of people who can use the technology to its fullest extent because they are less inhibited by the $300 cost of the drug, you see what's possible.

And that's what a lot of the things are being done in the registry now is to look at it across all of these different procedures, what's the impact of EXPAREL on the DoD population, and it's not just soldiers, it's their families as well which is pretty interesting to us so..

And to you point, Don, I can't quantify it, but it is an interesting phenomenon that kids 18 years to 22 years go into the military, they go into intensive training, and they have their kind of a third molar extraction mil that exists, so that is an opportunity that we definitely want to pursue..

That's great.

At what point does this kind of transition from a clinical trial registry to a customer and product sales? When – is it a 2017 event or 2018, or when can we expect that?.

No, they are a very significant customer now, Don. We have signed, what's called an FSS or Federal Supply Schedule agreement, and they do have a statutorily mandated discount on the price. So, they are not paying $300 a vial, but they are a very significant customer of ours today in terms of sales..

Okay, terrific.

And then any additional – last question, any additional details on kind of the timing change for the nerve block trial?.

No. Only that what we're trying to do is – we have a six-month PDUFA. And so, what we're trying to do is line ourselves up for a 2018 first-quarter launch.

And so, we're working with some different sites in Europe, and there were a couple of issues related to the timing of the time that those patients – or the clinical practice and the time those patients had to spend in the hospital via the protocol, five days just turned out to be a real challenge.

And that was the way the initial protocols were written. And so, the trial got off to a bit of a slow start, but I think we're where we want to be now going forward..

Okay. Great. I actually do have one additional question. We've talked to some oral surgeons that are to lower the cost to the patient even more from the 10 mL that are diluting with normal saline and getting maybe two-patient treatments out of one 10 mL vial.

Are you seeing that frequently?.

In oral surgery, Don, it's something – the treatment paradigm goes something like 2.5 mils a tooth. So, you'd have to know whether they were doing all four or whether they're just doing two. But I think again, people in the marketplace are going to experiment.

Some of the folks that are the high-end users that have a lot of experience with EXPAREL, think that they're – I'll go back to my comment to David Amsellem, you may have enough particles there in order to get 36 hours of pain control and if a surgeon determines that that's what they're looking for, what's in free bupivacaine they probably could get away with that.

Honestly, we haven't seen a lot of that yet, but the guys that are doing it are the guys that have had the most experience. And so, I think it's probably not unreasonable and it's one of the reasons we put a 10 mL vial out there.

The marketplace is so big, I think we would lean towards more patients rather than trying to maximize the number of mils that are used in each patient as long as the patients understand that when you cut the dose in half, you're not going to get 72 hours of pain control..

Understood. Thank you very much for taking the questions..

Thank you..

Our next question comes from the line of Doug Tsao of Barclays..

Hi. Good morning. Thanks for taking the questions.

Can you hear me now?.

Yeah. We can hear you, Doug..

Great. So, just maybe, Dave, I think you acknowledged and apologies if I missed this in the opening remarks, a lot of calls this morning.

But sort of the benefit of the FDA settlement sort of playing out a little bit more slowly, maybe can you talk a little bit about sort of your break of accounts that are sort of growing very nicely versus some others that you still might be seeing some pressure in terms of the warning letter restrictions or sort of pushback on the product?.

Most of the – and I tried to address this specifically, Doug, but I appreciate the question. So, when we got the warning letter, not allowed to go into the OR because a gatekeeper who wanted for any reason, generally it was budgetarily driven, to limit access to EXPAREL.

And so, because our – in the context of the warning letter, it was positioned that EXPAREL was only had an indication for bunions and hemorrhoids, there was no context there where we could go into an OR and work with an orthopedic surgeon and teach him how to do a knee or a hip.

And so, a number of folks in the marketplace, many, by the way, ironically trying to produce positive datasets in support of EXPAREL did not have the technique that's required for best practice in terms of volume free bupivacaine use, dosing the posterior caps or dosing the periosteum, exactly what the timing is of all of those different injections.

And so, there were datasets that were developed that were equivocal or negative, and it took some time for those to come out, Doug, it didn't happen as a immediate result. And actually, we started see those for the first time in (52:19) November of 2014.

And so, as we've reversed the warning letter, we still have folks out there that think that based on local market data that EXPAREL is no different than bupivacaine. And so, there's a couple of things that are going on then to reverse that.

One is that we're working on enhanced recovery protocol where you can show people very specifically how to use the drug and how to lower your cost in joints and working with systems, who will mandate from the C-suite down that we're going to address the use of opioids in joints, because it is one of the spots that we have identified more opioids being used than we would like.

So, there's number one.

Number two is the 331 data, the TKA data, where we will demonstrate, I believe, very specifically that when you use bupivacaine versus using EXPAREL in a way that it's prescribed in the trial that you will see a very significant difference, not only in opioid use, but time to first opioid – total opioid impact on mobilization, moving a patient to first bowel movement, discharged from the hospital, et cetera, et cetera.

So, there is an element of the 331 data that says that you're going to have some Level 1 data. But at the same time, we've got people that are saying, well, let me see that PILLAR trial protocol that Jim talked about and can I institute that locally.

And we've got some very strong advocates who are inside these systems who are using EXPAREL very effectively, who pushback on some of this negative data that's been used against EXPAREL, that say, this is crazy guys. This drug works dramatically well if you use it right. And so, we're starting to see all of that stuff.

I phrase it that way because almost all of what we've seen in terms of the negative stuff is related to orthopedics and to specifically to knees. We're doing very well in TAPs. Soft tissue is growing in a number of different places. We've got enhanced recovery protocols in oncology surgery and mastectomy and large abdominal wounds.

We're doing a major study at MD Anderson in oncology and ovarian cancer. All of the data from all of these experience is stunningly positive. And so, the 331 data, the TKA data and the spine data and the nerve block data just reverse all of this stuff that we've gone through in the last year.

And we're setting up with large systems and orthopedic groups, et cetera, to be able to move this quickly once we get it..

Okay. Great. That's really helpful. And maybe just a couple of quick follow-ups on that.

One, when we get the knee data, what are the things that you think based on the feedback you've been getting from accounts should we be more focused on? You sort of focused on reduced opioid usage, but should we be looking at pain scores, or length of stay or sort of what do you think is the most important sort of data points that we should be looking for? And then as a follow-up, just maybe levels that everybody in terms of realistic expectations in terms of how long it might take for that data set to sort of start to meaningfully or detectably, perhaps is a better way to put it, start to affect numbers?.

So, I'll take number two, and then I'm going to introduce – this is really Scott's. Scott's the brainchild behind this trial. So I'm going to turn it over to him for the primary endpoints. But we will talk about it at AOS assuming that everything goes as planned.

And I think one thing that you see about the orthopedic community is they respond quickly both positively and negatively but quickly. And so, our expectation is that the places that have invested themselves in saying that EXPAREL doesn't work effectively based on their data will obviously take some time.

But I think the vast majority of the orthopedic community, especially with the pending bundle programs on April 1 will very much be looking forward to a dataset and a protocol that drive them to shorten length of stay and all of the other aspects of improved and earlier mobilization.

But I think you will see an impact of this in the second quarter modest. But in the fourth quarter of next year which is the big elective quarter for orthopedics, I would expect that you would see a significant difference from this year.

And with that, I'll turn it over to Scott in terms of the way the trial is designed in terms of the importance of the endpoints..

Thanks, Dave. Doug, thanks for the question. When Jim Jones and I sat down with multiple investigators and the knee community, there were one or two things they absolutely wanted to see in this trial. They wanted to see a reduction in pain, they wanted to see a meaningful reduction in opioids.

When we reviewed the literature and the TKA studies in the public domain, you would see a great variation in opioid requirements post-op, typically the numbers were between 50 to 100 morphine equivalent units.

That was a critical piece of the equation of what we were looking for, and I've told others that when you look at that literature, we were expecting our placebo group to fall somewhere in the 50 to 60 morphine equivalent units range, and for us to have a significant reduction to those numbers.

I think it's really important, and we talk about it internally all the time, when you see negative studies or mixed studies with EXPAREL, one of the first things we always look at is that morphine equivalent unit number.

And so, if there are studies out there, which there are some morphine equivalent units in an EXPAREL arm and a control arm or close to 100, I would argue, that's not someone you want when you had your knee surgery. And I think our goal in this study is to show a clear benefit in morphine equivalent unit.

That's a number that we're going to focus on, we're going to focus on it relative to what's out there in the marketplace. That's critical. From the secondary endpoint, you should focus on a lot of outcomes, which we think are critically important. Discharge readiness is being one of the most important.

Remember in this study, Doug, we're keeping patients in the hospital for 48 hours. We're doing that specifically to capture all of those data points around pain and opioid. Jim Jones has, in his career, done hundreds of pain studies, and he felt it was absolutely critical for quality of data to keep those patients in the hospital.

So, we do not expect a clear win on length of stay. The average length of stay in the U.S. for TKA is around two days. So, by keeping patients in the hospital for two days to collect that data, we are not expecting to win on length of stay, but we are looking at discharge readiness.

And as part of our overall strategy, we will be looking at length of stay in every other trial where we will not require a two-day length of stay in terms of highest-quality data collection. So, we would focus you on discharge readiness as an important endpoint.

We are looking at multiple other health outcome measures and OBAS score which is really a good measure of patient outcome as a critical secondary endpoint, we'll be looking at opioid-free.

We'll be looking at opioid use at 72 hours and 30 days as important endpoints that you have not seen in the literature, you will not see in any cocktail study, and you will not see in any new study that we are aware of in the public domain.

And remember, we're also looking at some very, what we think are interesting exploratory endpoints around physical therapy assessment, nursing assessment, patient's ability to do range of motion exercises, all of which we believe will add to the body of evidence differentiating the 331 protocol from everything else that's out there today..

And, Doug, I would only add that what these visual reality tools that have been developed are an absolute mimic of the 331 protocol. So, we are confident enough in this trial that we want to be able to, in a virtual way, teach doctors how to achieve the same results that we'll report from this trial so..

Okay. Great. Thank you very much..

Thanks..

Thank you. Ladies and gentlemen, we unfortunately are out of time. And this concludes our Q&A session. I will now turn the call back to Dave Stack.

Sir?.

Thank you, Nova. Thank you for joining our call today. We appreciate your support as we continue this important work. Up next, we'll be at the Global Mizuho Investor Conference on November 16 in New York, and the Jefferies 2016 London Healthcare Conference taking place that same week. We look forward to seeing some of you there. Thanks a lot..

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