Susan Mesco - Pacira Pharmaceuticals, Inc. David M. Stack - Pacira Pharmaceuticals, Inc. Richard E. Scranton - Pacira Pharmaceuticals, Inc. Charles A. Reinhart III - Pacira Pharmaceuticals, Inc..

Ashley Ryu - RBC Capital Markets LLC Douglas D. Tsao - Barclays Capital, Inc. David A. Amsellem - Piper Jaffray & Co. David Michael Steinberg - Jefferies LLC Corey George Davis - Seaport Global Securities LLC Serge Belanger - Needham & Co. LLC Ami Fadia - Leerink Partners LLC.

Good day, ladies and gentlemen, and welcome to the Q2 2018 Pacira Pharmaceuticals Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will have a question-and-answer session, and instructions will be given at that time.

And as a reminder, today's conference is being recorded for replay purposes. I would now like to introduce your host for today's conference, Susan Mesco, Head of Investor Relations. Please go ahead..

Thank you, Halley, and good morning, everyone. Welcome to today's conference call to discuss our second quarter financial 2018 results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; Dr. Richard Scranton, our Chief Medical Officer; and Charlie Reinhart, our Chief Financial Officer.

Before we start, let me remind you that today's call will include forward-looking statements based on our current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties.

Please refer to our filings with the SEC that are available from the SEC or our website for information concerning the risk factors that could affect our business. With that, I will now turn the call over to Dave Stack..

joint reconstruction, spine, trauma and sports medicine. For joint reconstruction, EXPAREL will be part of JNJ's direct-to-patient digital effort, OA MY WAY.

This personalized program offers individuals with osteoarthritis, who're considering total knee replacement, an online community to support them on their journey that spans considering surgery to scheduling surgery and finally their postsurgical recovery.

Patients are empowered with important resources such as insights from other patients, doctor discussion guides, one-on-one patient interactions and education around opioid-free options like EXPAREL. Spine continues to be a compelling growth opportunity and a priority with our partnership.

We are seeing recent efforts pay off with a significant increase in the use of EXPAREL in spine procedures and excitement building around the upcoming launch of an observational study in spine. Awareness is also growing around the transition of inpatient spine surgeries to the ambulatory setting. In June, Dr.

Michael Wang, a renowned neurosurgeon at the University of Miami Health System, presented at the Becker's Ambulatory Surgery Conference about the benefits of outpatient spine surgery. During the standing-room-only symposia, Dr.

Wang highlighted how UHealth is using an ERAS protocol which includes EXPAREL-based multimodal pain management and the VIPER PRIME System to reduce procedure costs, shortened recovery, improved patient satisfaction, and shift spine surgery to the outpatient setting.

This information forms the basis of our discussions with commercial payers on how even extremely painful procedures like spine surgery can be transitioned to the outpatient setting by using EXPAREL to standardize effective non-opioid pain management strategies.

As for sports medicine and trauma, the teams are highly engaged around the roll out of EXPAREL as a brachial plexus nerve block for shoulder procedures and growing interest in EXPAREL as a fascia iliaca compartment block for hip fractures.

In June, our moving towards opioid-free surgery digital video campaign featured leading orthopedic surgeons discussing the highly statistically significant results from our Phase 3 study in total shoulder arthroplasty or rotator cuff repair.

We are working on a similar campaign for hip fractures that we'll launch later this year along with our Phase 4 study.

Given that we've only scratched the surface in penetrating many of these key orthopedic procedures like spine, shoulder, and hip fracture, we are very bullish about the near and long-term opportunity that JNJ is helping us secure and retain.

The last piece I'll quickly cover on JNJ is the recent extension of our relationship to include the soft tissue space. We are now in the launch phase of our pilot program that will involve a subset of Ethicon bariatric thoracic representatives who will be supporting EXPAREL through their KOL network and professional education programs.

We look forward to updating you on future calls as this exciting program evolves. Other highlights from our growing partnership network include a new initiative with MEDNAX to address the ongoing use of opioids during and after a cesarean surgery.

MEDNAX is a leader in providing health solutions through their network of more than 4,000 physicians nationwide. Together, we are implementing Enhanced Recovery after Cesarean Surgery programs to improve maternal and infant health, enhance patient experience and provider satisfaction while reducing the total cost of care. In parallel to our U.S.

progress, we recently announced an agreement with Nuance, a China-based specialty pharmaceutical company, committed to developing and commercializing EXPAREL in China. Nuance is a strong locally-based partner with a highly talented leadership team and deep expertise advancing innovative products in China.

We have every confidence that Nuance will help make EXPAREL a success in this market. Finally, we remain very excited about the prospects of our investment in TELA Bio and their OviTex platform, which we believe is highly differentiated and positioned to emerge as a leading bioscaffold solution to replace traditional surgical mesh.

TELA's portfolio and therapeutic focus are highly complementary to our commercial audience in soft tissue procedures, such as colorectal surgery, ventral hernia repair, and breast reconstruction. We look forward to transitioning this relationship to a more collaborative one. And with that overview, I would like to turn the call over to Dr.

Rich Scranton to provide some additional color on our clinical and regulatory activities.

Rich?.

Thanks, Dave. Good morning to all joining today's call. Over the past several months, our clinical and regulatory teams have made great deal of progress around several exciting new priorities.

It's worth noting that the excellent safety profile of EXPAREL, now with over 4.3 million patients treated, provides the basis for wide adoption in areas such as spine, peripheral nerve blocks and field blocks. We're also very excited about the future role of EXPAREL for pediatric procedures. I'll start here.

We're advancing our development plan to incorporate pediatric patients aged 6 and older into our EXPAREL label. There are limited options for managing severe postsurgical pain for this vulnerable population. And they're in urgent need of opioid-free alternatives.

This is particularly true for children aged 6 to 12 who don't have any local anesthetic options approved for use by the FDA. To that end, we have completed our interim pharmacokinetics and the safety study in children aged 12 to 17 undergoing corrective spine surgery with no safety issues reported.

Our preliminary evaluation of the PK profile supports our dosing recommendations and we now believe we have the necessary information to proceed with a definitive study. We have submitted our proposed protocol to the FDA for an extended PK and safety study in children aged 6 to 17 undergoing cardiovascular or spine surgeries.

These painful procedures are ideal for EXPAREL to provide analgesia via a long-lasting field block to manage pain and reduce the need for opioids. We expect to launch this study later this year.

Our submission will also include an extensive package of real-world evidence from The Cleveland Clinic and the Premier Database for several surgical procedures in patients less than the age of 18 years of age. We are also working to solidify a regulatory path for a pediatric nerve block indication.

Because the pediatric population does not require similar surgeries as adults, such as a total shoulder procedure or an interscalene brachial plexus block would be used, we are preparing to have a discussion with the FDA on other more relevant peripheral nerve blocks, such as blocks for ACL repair.

Next, let's move to our Phase 4 cesarean section study. We continue to see great interest in this program from both patients and healthcare providers. There are approximately 100,000 C-Sections performed each month in the U.S.

And there's a significant need for a non-opioid pain regimen to help eliminate the negative side effects and to allow new mothers the ability to recover faster and spend more time with their babies. The study is in the final stages of enrollment with a follow-on study on track to launch later this year.

The second study will utilize patient reported outcomes to measure the benefits of reducing or eliminating the need for opioids administered via an epidural. Linking opioid reduction to patient benefit will help define clinical meaningfulness in support of an opioid-sparing claim.

Site selection is underway for our Phase 4 spine study with enrolment on track to begin later this year. This observational study will collect patient reported outcomes for today's opioid-based standard of care versus an EXPAREL-based multimodal regimen.

We're also finalizing our protocol for our Phase 4 hip fracture study that will evaluate EXPAREL as a fascia iliaca compartment block. Turning to Europe, we met with the regulators and are preparing to file a Marketing Authorization Application seeking approval of EXPAREL for local and regional analgesia in the acute pain setting for adults.

We have also prepared a Pediatric Investigation Program (sic) [Plan] or PIP for Europe that will include studies in peripheral nerve block. In China, the teams have kicked off the partnership and we are in the process of defining our clinical development strategy.

Our intention is to meet with the regulators in China later this year to discuss the clinical trial requirements. Finally, as far as additional products, we have conducted additional animal studies with our DepoMeloxicam candidate to assess the effect using different administration sites.

We are assessing next steps and we'll make a go, no-go decision in the upcoming months. We also have several DepoFoam-based products in preclinical development and in tandem continue to evaluate in-licensing opportunities. Our focus is on commercial and clinical stage assets that are complementary to our EXPAREL commercial focus and customer base.

With that, I'll turn the call over to Charlie to walk through our financial results.

Charlie?.

non-GAAP R&D expense of $50 million to $60 million; non-GAAP SG&A expense of $150 million to $160 million, with expectations that we will be at the higher end of this range; and stock-based compensation expense of $30 million to $35 million. With that, I will now turn the call back over to Dave..

Thanks, Charlie. In closing, we are extremely pleased with our strong performance during the first half of this year, and are delighted to be increasing our revenue guidance for 2018.

We expect to build upon the strong foundation established year-to-date, as we drive to expand the use of EXPAREL across multiple procedures to reduce the role of the operating room as a gateway to opioid use and abuse. Pacira is in a stronger position than ever.

We are the only opioid-free, long-acting local and regional analgesic approved for infiltration, field blocks and brachial plexus nerve blocks, and a significant first-to-market advantage, which will be difficult to challenge.

We have strong partnerships, particularly the JNJ partnership and collaborations that are solidifying the role of EXPAREL in multiple surgical verticals, and we have a growing level of favorable reimbursement to drive more widespread adoption. And with that, I'd like to turn the call over to the operator.

Halley?.

Thank you. Our first question comes from Randall Stanicky of RBC Capital Markets. Your line is now open..

Hi, good morning. This is Ashley Ryu on for Randall. Dave, can you provide a little bit more granularity around the CMS proposed unbundling for ASCs. I know JNJ have said in the past that more ortho procedures are moving towards ambulatory surgery centers. And I think you had mentioned previously that it's only about 10% of your customer base now.

But how do you see the segment kind of growing over the next few years. Clearly, this is an important tailwind for growing the segment. So if you can just provide a little bit more color around the potential quantification of the impact of the CMS proposal? Thanks..

Yeah. Thank you for the question. We are not going to provide guidance on what we think the future value of the CMS proposed unbundling is other than to say that it is very material to our business. We've been actively engaged in developing this outpatient market, especially through partners like Aetna and Cigna and SCA.

And we've recently put a sales force out there to specifically address oral/maxillofacial surgeons, plastic surgeons and to focus on the ambulatory community. So I can tell you that we've fully got our hands around exactly what the value of the CMS program is. We are in the middle of a 60-day comment period in any case.

And so it will certainly be part of our 2019 guidance. You are very correct that we see, especially hip and now with the new CMS proposal, knees, moving for Medicare patients even to the outpatient environment. I can tell you that Aetna has been very interested in moving their knee patients to the outpatient environment.

We mentioned on the call that there are surgeons who are very important key spine surgeons, KOLs, who are moving their practices to the outpatient environment. So we see this as the future and really important to us. But I can't tell you today that I'm in a position where I can quantify it with numbers..

Great. Yeah, that makes sense. Thank you.

As a quick follow-up, Charlie, could you provide a little bit more granularity around the nerve block contributions to the updated guidance?.

Well, obviously, nerve block has been impacting the significant growth we've been seeing in the 10 mL vial. It is difficult, however, to say exactly what the nerve block is and at this point, we're not going to provide any detail comments on what 10 mL sales are versus 20 mL. Both products are important to us, both are growing very nicely.

Obviously, the growth rate of the 10 mL is significantly higher simply because it had a smaller base..

Maybe if I can take a shot at that, I think the way we're thinking about it, is we're only seeing the very front-edge of what nerve block is going to bring to us.

I'll give you some color – again, it's not numerical, but I think it's important – if we were going to look just at the anesthesiologist, this 10 mL vial and the efficacy of EXPAREL in a shoulder or a rotator cuff has eliminated any of the commentary in any medical community about the efficacy and safety of EXPAREL.

And what we see is, once the anesthesiologist uses the product in a rotator cuff, then they have a lot more confidence in expanding that use to regional field blocks like PEC blocks and TAPs and fascia iliaca, which Rich mentioned a couple of times. So we see it being very important in that realm.

We also think that this is really important to our Johnson & Johnson partnership. We've been responsible frankly for the last several years to educating the anesthesiology community on EXPAREL, on multivesicular liposomes.

They are a fairly demanding medical customer from a safety perspective, and so we've had a lot of time to be able to educate them in advance of this launch, and their knowledge of how to provide – and I'll just highlight the shoulder study.

I mean, patients who are getting over four days of pain control, 78% reduction in opioids, 13% opioid-free with a $170 WAC price. I mean, that makes us competitive even with many of the oral products that are on the market.

And so the partnership with Johnson & Johnson, then where they are talking to people both in and out about the extremity orthopedic indications, we're talking to folks about hysterectomy and hernias and things like that, and the anesthesiologists are moving to these regional programs, you start to understand strategically how important EXPAREL is – or the nerve block indication is.

But I would also say that, in places – one of the things that's a little bit surprising to us is that we've got 200 new users of EXPAREL in a very short period of time. The places where our folks had to go back for a formulary approval either through a safety committee or through an access P&T committee, we haven't even seen that yet.

So, I think this is a very big deal for us..

Got it. Thank you so much for your color..

Thanks..

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

Hi, good morning. Thanks for taking the question. Dave, just you've spoken about some of the progress you've made with commercial payers. Just curious, maybe – and you sort of highlighted that you think that the unbundling will accelerate that. Maybe if you could just sort of walk through some of the mechanics and how you see that playing out.

And relative to the Medicare opportunity, do you see the commercial side of this being potentially as big or potentially bigger? And then just in terms of your comment that you're seeing people start to use EXPAREL for a nerve block and then sort of progressing to using it for other regional blocks, is that really common and is that sort of seen primarily in past and how much of an accelerant for the rest of the business do you think that potentially could be over time?.

Yeah. Thanks, Doug. It is a bit of a head-scratcher in terms of where we'll go here in terms of the J-code. So I'll answer your question in as much detail as I can, but feel free to come back at me if it doesn't make any sense here. So the commercial payers are paying for EXPAREL.

And because there is no J-code, it has not been obvious to the commercial folks exactly how to get reimbursed for the use of EXPAREL even though the payers believe that they have a plan that covers EXPAREL. So, I'll give you an example. We have one payer that uses the old J-code or the old C-code of C9290 and pays $1.19 a milligram.

We have another payer that uses C9290, but is paying $1.80 a mill, and we have another payer who is negotiating ERAS protocols separately and then paying for the bundle without a specific payment for EXPAREL inside that bundle.

And so you can imagine when we go into an ambulatory center, the first question we get is, isn't there some simpler way that we could do this? And the CMS opportunity to have a J-code actually solves that problem for us because we believe that all of the payers will gravitate to the J-code like they always do with everything else.

And so, that's sort of part one of your question. Part two is, the Medicare patient population is not a perfect match for ambulatory settings because of comorbidities and age, et cetera. So, in our view, the commercial segment of the ambulatory market has the potential at least to be much bigger than the Medicare market.

And so, the CMS J-code opportunity here is really important to us on many fronts. As you know well, we're going from OPP to ambulatory centers for knees next year. I'm sure you guys have all read the CMS guidance in opening the ambulatory environment to more and more procedures.

We think that will continue to grow, and so, really important to us on multiple fronts. And then your last question, Doug, was about the field blocks. It's highly variable, Doug. So, I want to be careful that I don't overstate the case here.

Where a hospital has a regional anesthesia program and specifically where they have a block room, this is a fundamental change in the way pain control is administered, but it's not everywhere.

And so you see this regional anesthesia movement growing fairly rapidly where instead of trying to address a very specific body part or a very specific nerve they're doing a regional program where they can do almost any surgery for that part of the body, but it's not everywhere.

And so again, we see that as a – it's taken off over the last three months since we got the nerve block indication. But we think again, we're just on the tip of the spear because that movement in itself is growing rapidly. I don't know if that satisfies the question, Doug..

No. That's very helpful. Thank you so much, Dave..

Thanks, Doug..

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

Thanks. So, just a couple.

So, in terms of the unbundling, I know you're not providing specifics, but I did want to get a sense from you as to what portion of the mix right now comes from these ambulatory surgical centers, number one? And then, number two, is it safe to say that given the unbundling in the ambulatory surgical centers that that's going to have a favorable effect on brachial plexus blocks? In other words, are these primarily done in ambulatory centers outside of the hospital, and is that where you're going to see the largest benefit? Thanks..

Thanks, David. If I can go in reverse order, what we see generally in the ambulatory care settings are peripheral surgeries, rotator cuff repair, shoulder surgery, hand surgery, carpal tunnel, et cetera, those kinds of things, as well as abdominal surgeries, hysterectomies.

We have a number of ambulatory care centers that have strategic programs in hysterectomies. And in procedures like hernia, David, almost all of them now are being done in an ambulatory environment. So, in many ways, again, it will be the way the art is being practiced in a locale.

So where you have a regional anesthesia program, absolutely, especially for the upper extremity a procedure like a brachial plexus block will be given before the patient actually enters the operating room, and so we will be turning off the pain signal before the patient ever has any type of a surgical insult. There will be no wound.

There will be no acute pain that has to be unwound or any of those things. So it is actually a very much improved way of providing patient care.

There will be scenarios where there is ambulatory care settings and there is no regional anesthesia program available where they've been using EXPAREL and either not being paid for it, or they've been using bupivacaine because they can't get paid for EXPAREL that we think people will practice the arc.

But in a scenario where the only hindrance to using EXPAREL was the cost, we think that those folks will fairly rapidly convert to EXPAREL given the new reimbursement opportunity.

Does that answer the question, David?.

Yeah. That's helpful. And if I may just sneak in a follow-up, I think in terms of the mix right now in terms of....

Oh, yeah, I'm sorry..

...hospital versus ambulatory surgery, I don't know if you're willing to disclose that, but can you talk to the...?.

Randall asked the question on the last call, and I think that I'll reiterate what we said then. The data is far from perfect. So understand that we're cobbling together a couple of different data sources here to come to what we think is a conclusion.

But it was before – I mean, as the business exists now and highly influenced by the data before we had a brachial plexus block. So those are two fairly significant asterisks that I'm putting behind this. Our business that was pure ambulatory was roughly 10%.

And so the way we look at this is, if 10% of our business was – it was either driven by some of the newer programs with the payers, specifically Aetna, or it was people who're willing to pay out of pocket for EXPAREL.

In either of those cases, we think that a reimbursement code that allows for payment either commercial or government is a huge advance in stepping in front of the opioid epidemic and allowing these patients to get prolonged pain relief without the use of opioids.

And so, I think that would give you the idea why we're so bullish on the long tour opportunity here, both for nerve blocks and for ambulatory..

Thank you..

Thanks, David..

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

Thanks very much. A couple of questions.

First, can you give an update on the spray technology and when you think it will become part of your operations, and can you confirm that when that happens that – I know in the past you've said you can get to gross margins in the mid-80s [Technical Difficulty] (39:47) ramp-up your focus on plastics and oral surgeons, how is that going? And if you've mentioned it before, I apologize [Technical Difficulty] (39:59).

Now that you're [Technical Difficulty] (40:04) any additional comments on acquisitions, more in-licensing and that sort of thing going forwards?.

I got some of that, David. So if I don't answer your questions, come back, you're really fading in and out badly. I think the first question is gross margins, in the mid-80s from spray.

Our focus right now, David, especially given China and the CMS ruling and the rapid growth of the product is getting the 200-liter [Technical Difficulty] (40:38) understand. So, we've got a facility in Swindon that is about to come online in the UK, that is about to come online that will equal the capacity of our San Diego operation.

And so we could make – I'll just use round numbers, if you thought we could make $450 million in San Diego in the next few months, we expect it will have Swindon online, and that will give us the opportunity to make $900 million worth of EXPAREL. Right behind that is a facility that is four times as large as each of those 45-liter skids.

And so that facility on its own will make another $900 million worth of EXPAREL. So if we left San Diego running at full scale, we would have the opportunity to make $1.8 billion worth of EXPAREL.

And you saw the margin improvement this quarter over last quarter, when we get to the 200 liter, we won't get to 85%, but we will have significantly improved margins. Behind that is spray.

As we look at our opportunity to improved margins with the 200-liter facilities, especially with the way it's working out and with our partner Patheon in Europe and the 21% opportunity for a tax rate in the United States, the opportunity to improved gross margins with spray actually is narrowing.

And so we're looking at what the next facility should be, should it be another 200-liter facility in the United States. And then we would use the European facility for China and the EU and we would use the U.S. facility for the Americas, if you will.

And if it turns out, David, that it's 100 basis points for moving to a new technology, I'm not sure we'd be willing to accept the risk. And so spray is clearly on the books for our pipeline.

I'm not sure that the risk associated with putting this product into a new manufacturing technique as we go forward actually is worth the risk, if that makes sense to you. So the second one I think, David, you asked about plastics and oral and maxillofacial surgeons and whether we've seen anything from the sales force that is out there.

I'll be very specific on this point, David. They graduated from training last Friday. So I'm happy to report that as far as I know, they're all still working every day, but that's about all I know. So nothing bad has happened. How's that? So....

So no great sales on Monday or Tuesday then?.

Not that I know of. I'm hoping that I'm wrong, but I don't know that yet. And then on the M&A front, we've got a lot of opportunities. So we're looking at a number of things, obviously. We're focused on what our customers are telling us where their medical needs are.

The Johnson & Johnson relationship allows us to have a very specific focus on soft tissue, and you know we've invested in TELA, and we look forward to moving forward with that collaboration. We're looking at a number of different products not only for established products.

OA is something that's important to us, could be important to us given our current audiences, et cetera. The ambulatory setting is very important to us, and so we're looking at ways that we can improve medical care both for surgeons and for anesthesiologists, especially in the ambulatory setting.

And we also have the benefit of the Johnson & Johnson partnership where we get to see the kinds of tools that they're developing for the orthopedic surgeons. And then we can have a view of the world around the complementary nature of what those folks would need if they move to those new technologies.

And so, Ron Ellis and his team have done a fabulous job of not only bringing in China and all the other things that they've done, but we've got a number of very significant opportunities I hope that we'll be able to talk about those in the next call, David..

Okay. Very helpful. Thanks..

Okay. Thanks, David..

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

Thanks very much. Dave, I want to go back to your comments about how important it is to get a J-code to make it more clear for commercial payers how to get reimbursed in the ambulatory care setting.

So what's the mechanism by which you have to reapply again to get that J-code, and how does the CMS decision assuming that it sticks kind of help you in that process?.

Yeah. It is the process, David so – David – Corey. So we never actually had a J-code, we had a C-code which is – it's an ambulatory procedure code or an APC code that's typically called a C-code in the marketplace. It was C9290 and it paid $1.19 a milligram for EXPAREL.

We expect, as we go through the comment process and then as we go up to January 1, that we will receive a J-code from CMS that will have the complementary code and then a payment for the use of that code.

What would traditionally happen in the marketplace then is all payers will gravitate to that code using that reimbursement mechanism to be paid for the use of EXPAREL. So basically, the commercial payers will adopt the CMS nomenclature and payment unless there is some separate negotiated rate.

As I said earlier, we do have people that are negotiating with their ASCs around bundles and then paying for bundles. We'll have to have a separate discussion with them because my guess is that they will want to then bill separately for EXPAREL and pull EXPAREL out of those bundles from a reimbursement perspective as well.

But again, in the week since we've had this news, we haven't had a chance to have any of those discussions yet, Corey..

Okay. Thanks. And then two more quick ones. What do you think was the rationale behind CMS' decision to unbundle it in ambulatory care centers, but not in hospital outpatient centers.

And then, secondarily, the decision CMS made last year to take knee surgeries off the inpatient-only list I think was a good first step, but didn't they choose also not to reimburse it for a procedure done in – that wasn't inpatient even though they took it off the list?.

No, I'll take the first one first. So it is a bit of a different animal.

So the OPPs that are part of a hospital system, it's not the simple calculation to be able to define the environment of use in those environments, whether that person was actually in an environment where it was a hospital OR, or whether it was via some type of a walkway where the patient was in an outpatient treatment center, but was still in the same hospital generally being treated by the same docs and almost always being provided drug from the same pharmacy.

And so, their analysis was that it didn't appear to them that not having a code in that environment had actually harmed the use of EXPAREL. The problem with that, of course, is that the data is awful. And we don't know whether a good decision was made or a bad decision was made, because the data that support either is just not available.

So our expectation, Corey, is that we'll continue to have discussions with the folks down at CMS and HHS, by the way, where we do see hospitals sending patients to the OPP and using EXPAREL because of the ability to improve patient satisfaction, actually provider satisfaction, as you've heard in the script several times, and reduce costs.

And so where we've got to work with CMS and HHS now is demonstrating that we still are not having the effect that is possible on the opioid epidemic by providing a drug in that OPP setting, as well as the ambulatory setting. And if nothing else, I certainly know a lot of people in Washington now.

So I think the discussions are very collaborative, and I'm looking forward to continuing the discussions on how we can actually do more. The last piece, Corey, I think I'm right here, but I wouldn't stake my life on it. So, they unbundled the – or they would pay for knee in an OPP, but not in an ambulatory setting. I believe that it is still accurate.

Come January 1st of 2019, they are going to start to pay for knees in the ambulatory setting as well..

Okay. All right. Thanks. I might have been mistaken on that, but....

Yeah. I think what they did is, they went to OPP and they wanted to get some visibility on how that was going, and then extend it to knees, at least that was the preliminary announcements..

Okay. Great. Thanks, Dave..

Thanks, Corey..

Thank you. Our next question comes from Chris Schott of JPMorgan. Your line is open..

Hi, thank you. This is actually Catarina (50:14) on for Chris. Can you update us on what's happening on the ex-U.S. front with EXPAREL? Which international markets do you think are most attractive and what's your strategy there? And then I do have a quick follow-up..

I'm sorry, I'm going to have to be honest here, I was totally distracted for a couple of minutes.

Can you repeat the question?.

Sure. Can you update us on what's happening on the ex-U.S.

front with EXPAREL? Which international markets do you think are most attractive and what's your strategy there?.

Oh, sure. Thank you. And Rich covered this in some detail. So, we've got a partner in China called Nuance. We are in the middle – there have been some significant changes in China relative to how a product is approved.

So we're trying to find our way through exactly what the right path is going to be and our partners and our regulatory folks here have had a lot of discussions together on exactly how to make that happen. The China marketplace is just enormous. And Rich referenced that there is 100,000 C-Sections done in the United States every month or 1.2 million.

I mean, just to give you a sense, there is 6 million C-Sections done in China every year. So it's hard to get too far beyond China in terms of the value of any ex-U.S. marketplace. Early in 2019, we will file a MAA application for the European Union, and so we will then look for a partner to cover Europe. Those are the two big opportunities.

Behind them, we have significant discussions on Latin America, some for the entire geography, some for specific geographies. Canada is under discussion. Japan is under discussion. MENA, the Middle East and North Africa marketplaces are under discussion.

So we've got a lot of opportunities, but we wanted to make sure that we got China and the European Union upfront so that the resources that we have are applied against the biggest opportunities, and then we'll take the rest of these on as we have resources to do them frankly..

Great. Thank you. And then just a quick follow-up.

How important are partnerships to the Pacira story specifically when you're looking at it from a perspective of a potential new entrant who wouldn't have those in place, what kind of advantage do you see them giving you?.

Oh, God, just enormous. Well, first of all, I guess the – if I started out in the treetops, the opioid epidemic is such a massive problem. There is just not anyway that a company like Pacira can solve that problem by itself. And so if I tick the boxes, we have dozens of partnerships now.

If you think about patient education and patient advocacy, Shatterproof, Partner (sic) [Partnership] for a Drug-Free America, Breastcancer.org, BoneSmart, I mean, they're just – there's just dozens of them, people who are helping us educate their patients about non-opioid alternatives and making sure that patients know how to speak with their physicians about demanding a non-opioid alternative.

If you think about payers, the relationship with Aetna and them putting on their DocFind a little icon, and when you click on that icon, you go to the EXPAREL website to learn about opioid-free alternatives. I mean, that is just a massive opportunity for a company like Pacira, and we have several of those ongoing with other folks.

And then, Johnson & Johnson, not only the reps, but their know-how, their surgical training programs, their presence at major orthopedic meetings, I mean, this is without the kind of assistance that we've had and it's not just with customers. It's not just what I'm talking about.

I mean, Johnson & Johnson, Shatterproof, the people who went and presented at the AdCom that led to the approval for nerve block, ERAS programs with major academic centers, Cleveland Clinic, Duke, UT Knoxville, MD Anderson, Mayo Clinic, I mean, all of those folks have embedded the use of EXPAREL into their protocols, and their protocols are now part of their EMR.

So, without the partnerships, frankly, if we had 170 or 180 people in the field, given the scope of the need, we would be nowhere. So the partnerships are – there's no way for – I can't even imagine what the company would be like if we didn't have all these partnerships..

Great, thank you..

Thank you..

Thank you. Our next question comes from Serge Belanger from Needham & Company. Your line is open..

Hi. Good morning. Just a couple questions for me. Dave, early in your prepared comments you mentioned that you had seen growth continue to accelerate through the end of July.

Was that growth on par with the numbers you reported in terms of growth for May and June?.

At least..

Okay. And then just an overview of your current sales efforts, I guess to start off with JNJ. Where they've been the most impactful and has their focus changed since the approval of the label expansion? On your own sales force, I think last year they kind of refocused towards soft tissue in anesthesiologists.

Is that still their focus now? And then, you mentioned a new sales force addressing the ASC opportunity.

Can you just give us kind of the numbers around that effort and whether you think it will extend if the CMS proposals are enacted?.

Yeah. I'll take a shot. So, the JNJ partnership – we have four verticals with the DePuy Synthes sales forces.

So recon was obvious, right? With the PILLAR data, we had had some issues in the orthopedic world and so Johnson & Johnson through their recon sales force was able to actually stop the bleeding, if you will, and give us a neutral scenario in that marketplace.

Marry that with the spine surgery where Johnson & Johnson had a great impact in a marketplace where we had no presence at all. And so as we've talked about on these calls many times, you could follow spine surgeons who would come to the Johnson & Johnson programs and then we saw use in those hospitals where previously we had no presence.

So I would say that was the big win with our partnership pre the nerve block. Since nerve block, things like rotator cuff and shoulder arthroplasty and upper quadrant nerve blocks, the sports medicine groups and the trauma groups have really taken off.

And so I would say that everything – and because they're separate, it's not like we're stealing from one to resource the other.

So the first two organizations continue on, and I would say that nerve block gave us an opportunity to be much more active in the sports medicine and trauma fields where you can imagine in a trauma scenario being able to give a single shot nerve block that would last four days is a great advancement in care.

And that sort of leads us to fascia iliaca and hip fracture and things like that. I mean, that's all made possible by the relationships that have come to us through the JNJ partnership. For us, we are working with anesthesia. We are also still in-charge of getting the drug on formulary where it is new to the institution, et cetera.

But we are focused on soft tissue. We are focused on TAPs and the fascia iliaca block for hip fracture, for PEC 1/2s, for breast recon. Those are the kinds of things where the anesthesiologist and the soft tissue come together very nicely.

And we still work with all of the other folks that are doing infiltration and field blocks for hernias and hemorrhoidectomies and all the other things that are available to us in the soft tissue field. The ASC opportunity, if mapped out to cover about 65% of the U.S.

opportunity for oral surgeons, plastic surgeons and ambulatory care at a number in the low-30s. We've put roughly a third of that group out into the marketplace as of last week.

And the intention here is to work with them for a couple of months now that we've got the CMS, hopefully the improved reimbursement through CMS, and I think this was probably your point, it's fair enough that we're going to have to reconsider that, right? And so, we'll see how effective we are.

We know that there is a business that we haven't addressed aggressively enough in oral, maxillofacial surgery and plastics. And so this group will take on all of those opportunities. And I don't know how big it will be given like I said a couple times we've only had a week since the ruling from CMS.

But we think we're going to learn a lot from the first dozen folks that we've put out there. And then, we'll react from there as to how big it should be..

Okay. Thank you..

Okay. Thank you..

Thank you. Our next question comes from Ami Fadia with Leerink Partners. Your line is open..

Hi. Good morning. Thanks for taking the call. I apologize if this question has been asked in a different form before because I joined late.

The question is, with the CMS approval or a potential approval of unbundling in the ambulatory setting and not in the hospital outpatient setting can you help me understand how a decision gets made with respect to whether a surgery has to be done in a hospital outpatient versus an ambulatory setting? And is that potentially going to change or influence some sort of a trend with respect to where surgeries get done?.

Yeah. There is no simple answer to that question. Increasingly, what we see is that patients and physicians would greatly prefer to be treated in the ambulatory setting if that is a possibility. I mean, that is not universal, but it's very close.

So there are things that would keep you for going to the ambulatory setting, a patient with multiple comorbidities or advanced age or some need to be around acute care resuscitation, et cetera. But I think on average the vast majority of procedures, not only patients, but physicians would greatly appreciate being in an ambulatory setting.

How that decision is actually made, we think, increasingly will be driven by cost. So the most expensive environment is the hospital environment.

Hospitals have started to move patients to the outpatient environment, in their own environment, for example, many times because the patient doesn't require all the expensive services of the OR, but also because the hospital can lose less. It might not be obvious to you, but there are a number of procedures where the hospital loses money.

And it doesn't sound like much of a business strategy, I'll agree, but there are scenarios where a hospital administrator will move a patient from a formal hospital OR to an outpatient environment so that they can lose less.

And then we think that if you were talking to the primary payers, the rule of thumb that's being used in the marketplace is that if you move a patient from a hospital inpatient environment to an ambulatory environment, you save 40% of the total cost of care.

So the payers have accepted this and are pushing hard on moving their patients to an outpatient environment whenever they can, and especially to an ambulatory environment where they have a relationship with that environment.

So, we've got relationships now – I'm not going to disclose any confidences, but I would tell you that we have scenarios where physicians are being incented monetarily to treat patients in an ambulatory care environment, because of the total cost savings to the payer. So the physician actually does better doing their surgery in an ambulatory setting.

So it's evolving very quickly. It is irregularly administered across the United States, because there are pockets of very aggressive ambulatory care and there's pockets where there basically isn't much of any.

And so it's a very dynamic environment and we think almost – well, the one thing that is for sure is that when you lose – when you use a low or no opioid pain strategy, you make an ambulatory opportunity available to these patients that wasn't available when we had to treat them with large doses of opioids..

Yeah.

And why do you think sort of CMS may have thought that it was not necessary to unbundle EXPAREL in the inpatient setting, because at the end of the day, if you're trying to avoid opioids, it would mean the same thing in both cases, of course?.

Yeah..

I understand that inpatient means that the patient is getting some other....

It's a fair question..

...pain treatments by IV?.

Yeah. And you guys know, look, I've spent, man, months down there over the last nine months, 10 months. It is a highly charged political scenario. It is very hard to get bipartisan support. But especially on anything that looks like it might be an affront to the Affordable Care Act. So I wouldn't say, going forward, that it's impossible.

I'm hoping and the opioid epidemic and all of the work that was done by the Opioid Commission supports this, that this is the first step and that we will continue to see improvements in the opportunity to use non-opioid alternatives going forward. We're hoping that this is a first step.

But I would tell you that anything that requires bipartisan support in Washington D.C. now, especially when it looks like you're undoing something that was done by a previous administration, is – it's not impossible, maybe I should just say I haven't figured it out yet..

Okay. Maybe just two more questions.

Firstly, what is the mix of surgeries that are currently done where EXPAREL is used which are actually in the ambulatory setting versus maybe the hospital inpatient and the hospital outpatient setting, if you have that type of data? And then, also, can you give me a little bit more color on how have you seen the utilization in nerve block evolve in the last couple of months? Thank you so much..

The ambulatory setting is – and remember, the reimbursement and it's been quite a significant hurdle to people moving more ambulatory procedures to the outpatient environment. So that's why we think that this is so important. But it would be the extremities, the things that you can easily get at.

So it's – if you're going to have ankle surgery, if you're going to have hand surgery, shoulder surgery, knees, those are the obvious places – and that's why the brachial plexus block for nerve block has been so important in that environment.

The others are the surgeries that would be considered to be less acute from a physician and from a risk perspective. So you're thinking about things like hysterectomies and hernias and things like that where previously they didn't want to use the OR time because they didn't think that the patient needed that very highly-acute environment.

So that's the way the history has driven these procedures. I think now you are going to see the surgeons move towards more aggressive procedures, and we see that in the spades in spine where it has become almost commonplace to see spine procedures moving from inpatient to outpatient.

Five years ago, you would have thought you were lucky if you said you're going to do an outpatient spine, now it's done everywhere. So I think you're in a very dynamic scenario where ASCs have grown rapidly. And I think you're going to see us – you doing more outpatient surgery and more painful procedures because we can treat the pain.

I mean, remember when you don't have any overnight stay, it was impossible to do a spine not because the technical competence of the surgeon wasn't there, it was when you use very large doses of opioids in order to control the pain of that procedure, you could not discharge them in 23 hours, right? So, once you solve that problem, then you make a whole another opportunity for patients available to these patients.

And it's very clear from all of the work that the patient – if the patient doesn't have to go to the hospital, that's cool with them.

Okay? With that – so, Halley, I think we're done?.

So, thank you for your questions and time this morning. We look forward to providing an additional updates in the future. Next up for us is the Wedbush Conference in New York the week after next. We look forward to seeing you all soon. Thank you very much..

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