Good morning, ladies and gentlemen. And welcome to the Q3 2019 Pacira Biosciences Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Susan Mesco, Head of Investor Relations..

Thank you, Whitney, and good morning, everyone. Welcome to today’s conference call to discuss our third quarter 2019 financial results. Joining me on today’s call are Dave Stack, Chairman and Chief Executive Officer; Dr. Richard Scranton, Chief Medical Officer; and Charlie Reinhardt, Chief Financial Officer.

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

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

Thank you, Susan. Good morning, everyone, and thanks for joining. 2019 continues to be a terrific year led by significant growth in our core EXPAREL business along with an important asset acquisition in ioveraº. I will start by calling out a few key highlights.

Broad EXPAREL adoption is accelerating with five consecutive quarters of 20% plus year-over-year growth, validating our trajectory and placing us on a clear plan -- path to achieve average annual topline growth rates in the high-teens for at least the next five years.

Our significant partnership with Johnson & Johnson is solidifying the role of EXPAREL in painful orthopedic procedures and we expect this relationship to continue to deliver great value through the conclusion of the agreement in 2021.

We are in a terrific position with EXPAREL plus ioveraº to offer providers and patients a multimodal solution for opioid-sparing pain management before, during and after TKA surgery. Our Phase 3 label expansion studies are on track and decide to add pediatrics and lower extremity nerve block procedures to our already broad label.

Our Phase 4 opioid free C-section study which is known as CHOICE will read out topline results in January 2020. We are delighted to have Governor Chris Christie join our Board of Directors, his long-time unwavering commitment to the opioid crisis makes him a well-suited and valuable member of our Board.

All-in-all, this is a strong forward momentum leads us well-positioned to achieve long-term market leadership in non-opioid pain management and regenerative health solutions. To achieve this goal, we remain focused on three global growth pillars.

First, driving top line growth through the continued expansion of EXPAREL and key surgical settings and the rollout of ioveraº as a preferred procedural solution for opioid-free pain management throughout the osteoarthritis patient journey. Second, leveraging our deep -- our DepoFoam platform to rapidly advance new clinical candidates.

And third, building out our product pipeline through innovative partnerships and acquisitions that align directly with our mission, infrastructure and physician audiences. Let’s start with the topline, I will begin with EXPAREL. EXPAREL continues to deliver significant growth with increased year-over-year sales of 23% for the third quarter.

As a result of its established efficacy and excellent safety profile, we are seeing strong expansion across all procedures. I am pleased to report that EXPAREL has now been used in more than 6 million patients since its approval.

In-patient utilization continues to grow across important surgical segments such as orthopedics, abdominal, cardiothoracic and women’s health.

The momentum to support in direct surgery out of the in-patient setting to hospital out-patient departments or HOPDs and ambulatory surgery centers or ASCs present significant opportunity for CMS and commercial payers to realize cost savings.

CMS rule changes supporting surgery migration and new insurance policies and benefits that significantly incentivize and reward providers for delivering cost effective care in the ASC setting are growing.

For example, on November 1st, UnitedHealthcare implemented a site-of-service policy requiring prior authorization of medical necessity for 65 musculoskeletal procedures in the hospital outpatient setting and directing these cases to the ASC setting.

These procedures represent surgery types that commonly use EXPAREL and present a growth opportunity in the ASCs. As a result, we see continued robust uptick in our business from HOPD and ASC procedures driven by the ongoing migration of orthopedic and abdominal surgeries to the 23 hours stay environments.

In fact, roughly 55% of EXPAREL procedures are taking place outside of the hospital inpatient setting and we expect ongoing growth from this segment. On November 1st, the final ASC rules were published and include adding total knee arthroplasty to the approved list of procedures for Medicare.

Based on historical Medicare trends, there are more than 500,000 TKA procedures performed in Medicare patients in the hospital setting. The opportunity for savings to the Medicare program with just a 10% to 30% shift to the ASC setting is valued at $186 million to $558 million per year.

We continue to see strong and steady growth in the size of our active customer base with a 23% year-over-year increase in ordering accounts. We are averaging 95 new customers every month with over two thirds of these new customers coming primarily from ASCs.

As a result of these highly favorable market dynamics, we remain confident in our ability to deliver net EXPAREL sale within our guided range of $400 million to $410 million, which represents year-over-year growth of more than 20%. One of the key contributors to EXPAREL utilization is our significant orthopedic partnership with Johnson & Johnson.

This relationship continues to establish strong demand and multiple procedures including shoulder, hip fracture, joint reconstruction and spine surgeries.

As we have said before, advances in pain medicine such as EXPAREL-based regional approaches and opioid-sparing protocols are enabling the shift of painful orthopedic procedures to the ambulatory setting.

The key to achieving early recovery in ambulation is ensuring that post-surgical pain is well controlled through protocol-driven clinical experiences.

Together, our colleagues at Johnson & Johnson, we are -- with our colleagues at Johnson & Johnson, we are successfully and effectively adopting our marketing strategies and resource allocation to support key procedures moving to the ASC setting, driven by a significant reduction in the total cost of care, as well as enhance CMS and commercial reimbursement of EXPAREL.

We expect this alliance to remain an important strategic contributor through the remaining term of the agreement.

We will benefit from J&J’s world-class educational resources to meet the growing level of physician motivation around standardized proto -- multimodal protocols that enable more complex, painful and profitable procedures to be performed in the ASC setting.

This will support improved patient outcomes, patient satisfaction, financial performance and physician lifestyle.

We also value J&J’s significant commercial expertise in spine and sports medicine as we prepare for commercial expansion in the pediatric and lower extremity nerve block settings, and generate new Phase 4 data in important orthopedic procedures like spine and hip fracture.

For pediatrics, enrollment in our Phase 3 registration study has concluded and we are on track to report topline results before the end of this year. We will submit a supplementary new drug application soon thereafter.

Strategically, pediatrics will be a very important addition to the EXPAREL label as there is an urgent need for non-opioid options for managing moderate to severe post-surgical pain in this vulnerable population. If approved, EXPAREL will be the only local analgesic approved for use in children and thus will be an imperative formulary listing.

We are also working with FDA to define Phase 3 registration study of EXPAREL as a nerve block in the pediatric setting. In parallel, we are preparing to launch our STRIDE study. This is a Phase 3 registration trial evaluating EXPAREL versus bupivacaine as a nerve block in adult patients undergoing lower extremity surgeries.

We expect the market opportunity for lower extremity nerve blocks to be at least as meaningful as the brachial plexus block where there are more than 1 million shoulder procedures performed annually in the United States.

This indication continues to drive great interest among anesthesiologists who are implementing EXPAREL-based regional approaches to eliminate cumbersome pumps and catheters and improve pain control and patient satisfaction, while reducing opioid exposure with a single EXPAREL injection typically using ultrasound guidance.

Our clinical team is also advancing a number of Phase 4 studies and the ex-US regulatory activities to support our expansion of EXPAREL in key markets. Rich will walk through these details shortly.

Turning to iovera°, since the transaction in April, we are even more excited about the technology behind this innovative system and the significant patient care and commercial opportunity it represents. Consequently, we expect annual iovera° sales to approach $200 million within the next five years.

Last week CMS significantly improve the 2020 Medicare reimbursement for iovera° in HOPD setting. We believe this change will materially enhance the growth of iovera° with total Medicare reimbursement for hospital and physician increasing approximately $1,000 to nearly $1 900 for iovera° procedures targeting the genicular nerves around the knee.

As we outlined last quarter, we are increasing the base price per treatment to over $400 for our best customers with a list price of over $600 as we -- and we are making great progress on that front.

We have been encouraged by the sticky nature of this business and continue to build a robust pipeline of quality prospects for new business within large health systems.

Consistent with many other medical device companies, we are offering volume-based discounts to customers with a strategy to use ioveraº plus EXPAREL to maximize the ability to reduce or eliminate opioids for painful TKE procedures. As we discussed last quarter, our initial focus is on two broad patient categories.

The first is a combination of ioveraº plus EXPAREL as a multimodal procedure solution for total knee arthroplasty. In this setting, ioveraº would be administered before surgery for pre-rehabilitation and EXPAREL during surgery to provide patients with the opportunity for several months of opioid-free pain control.

At the recently concluded American Society of Anesthesia meeting in Orlando, we have live patient demonstrations on ioveraº cryoanalgesia and generated great interest from the anesthesia community. We have also begun training initiatives at three integrated delivery networks, all of which are seasoned EXPAREL users.

We are planning to use these networks to define standardized protocols and workflow. As we generate proof of principle data, we will replicate this training program nationally in early 2020.

Our team, led by President Max Reinhardt will be hosting a symposium later today at the American College of Hip and Knee Surgeons annual meeting in Dallas titled, Cryoanalgesia and Periarticular Infiltration, a multimodal solution to manage TKE pain.

The event will feature presentations on ioveraº and discussion of optimized multimodal pain management protocols and an overview of recent real world evidence and published clinical data.

Surgeon presentations will highlight their experience integrating these multimodal protocols that have helped them and pans out clinical outcomes, improve post-surgical recovery, and reduce costs. Our second target market is osteoarthritis patients.

Here we offer an ioveraº cryoanalgesia procedure to provide drug free, opioid free, surgery free pain management for several months. We are targeting those patients seeking an active lifestyle such as golf, tennis, hiking or simply walking with the grandchildren, as well as those choosing to delay surgery for family events like vacations or weddings.

On the manufacturing front, we have made considerable progress and expect to be able to supply over 100,000 ioveraº Smart Tips for sale in 2020.

In addition, we are developing clinical data to maximize this opportunity and position ioveraº and EXPAREL as the leading multimodal solution for opioid sparing pain management before, during and after surgery.

Our initial focus will be on TKA and ACL repair with ioveraº in combination with EXPAREL to highlight the complimentary effects of these two products. Turning now to our second pillar of growth, leveraging the proven safety flexibility and customize ability of our DepoFoam platform for acute, sub-acute and chronic pain applications.

As you know DepoFoam is a flexible delivery system that offers an immediate dose release followed by sustained delivery. So we see the potential for broad product development in this area. On our last call, we discussed two DepoFoam programs that we selected for clinical development.

The first, the DepoFoam-based local analgesic administered as a subarachnoid or spinal block. Anesthesiologists regularly use this technique for procedures below the umbilicus.

Our strategy here is to provide an alternative to the use of subarachnoid opioids, which are typically delivered via pumps or catheters, with a one-time injection of a long acting and non-opioid local analgesic. The program has been discussed with the FDA, and we are preparing to initiate a study in healthy volunteers.

To remind you, we have substantial experience in this space and we believe DepoFoam is the only delivery technology that can be safely in the subarachnoid space where we have specific experience with DepoDur as an epidural and DepoCyte as a -- in the subarachnoid setting where it was used safely and effectively for more than 15 years in the treatment of lymphomatous meningitis.

Next, we are currently optimizing formulations for dexmedetomidine and in parallel we will conduct a pilot study in healthy volunteers using a simulated release of dexmedetomidine that mimics a future DepoFoam based profile.

Finally, let me discuss the third growth pillar, pursuing innovative products or technologies that align with our strategy and are complementary to EXPAREL. Ioveraº is just one example of how we intend to build EXPAREL as a leading provider of non-opioid pain management and regenerative health solutions.

Looking ahead, additional tuck-in acquisitions or licensures that align with our mission to remain -- will remain a key component of our growth strategy.

We see a significant opportunity to build a differentiated non-opioid delivery portfolio focused on improving patient journeys along the neural pathway and have a number of robust opportunities to consider from our business development team. The last item I’d like to touch on before returning the call to Rich is the future competitive landscape.

Here, we are in an exceptionally strong position. EXPAREL has considerable first mover advantage over any other products that potentially enter the market. EXPAREL has been used in over six million of patients with an excellent safety profile and proven efficacy track record.

In addition, our strong network of strategic partnerships and academic collaboration and relationships have ensured that key players across the healthcare system have access to an experience with EXPAREL and its advantages including proven predictable opioid sparing approaches which are essential in a 23-hour stay setting.

In addition, the process for launching generating health outcome evidence and obtaining long-term reimbursement on new products is particularly long and arduous undertaking. So we feel very good about where we stand with regard to any new product entry.

We are very well-positioned in the long-term market leadership as the only non-opioid single dose long acting local analgesic that is currently FDA approved for infiltration, field block and brachial plexus nerve block. We expect to expand this label to include pediatrics, as well as lower extremity nerve block within the next two years.

Additionally, the ability to admix EXPAREL was sanely for larger procedures, as well as with bupivacaine for immediate pain relief provides clinicians with important flexibility so that pain management can be tailored to individual patient needs across a broad range of small and large procedures. With that, I’d like to turn the call over to Dr.

Rich Scranton to update you on our Phase 4 EXPAREL programs, as well as our ex-U.S. regulatory activities.

Rich?.

Thanks, Dave, and good morning to all joining today’s call. I will start with a quick update on our EXPAREL Phase 4 studies.

With the women’s health field, we are seeing significant and growing demand for anesthesia-driven regional field block approaches as these continue to take hold as institutional protocols or procedures such as C-section, mastectomy, breast reconstruction, abdominoplasty and gynecological oncology surgery.

Opioid addiction in women is growing at an alarming rate and studies have shown women are 40% more likely to become newly persistent users of opioids following surgery. As such, we expect this field to play an important role in our five-year growth trajectory.

Caesarian sections are one of our top growth drivers and we would expect demand to continue to accelerate as awareness mounts within the OB anesthesia community around the opioid sparing benefits of an EXPAREL TAP block.

We believe EXPAREL administered with the TAP block will be a key component in transforming the standard of care for mothers undergoing C-section. We continue to expect our CHOICE study to complete enrollment later this year, which places us on track to report topline results in January 2020.

This next-generation study is designed to be completely opioid free in the EXPAREL arm. We are awaiting publication of the results of our first C-section study. And to remind you, this study demonstrated the superiority of an EXPAREL TAP block to a bupivacaine TAP block in patients undergoing C-section.

EXPAREL achieved a 52% reduction in opioid use, while also reducing pain scores through 72 hours. Importantly, the study also demonstrated a statistically significant higher percentages of opioid spared patients in the EXPAREL group, meaning they took no more than one opioid tablet and experience no opioid-related side effects through 72 hours.

We are also investing in orthopedic space as this sector is a very important growth driver, given the migration of many painful procedures to the 23-hour stay environment.

Enrollment is now underway in our FUSION study, a multi-center active control, real world study comparing EXPAREL multimodal regimen with standard of care in patients undergoing spine surgery.

Looking up at U.S., in June our Marketing Authorization Application or MAA was validated by the European Medicines Agency, which means our application is complete and the review process is now underway. We expect an opinion sometime in the second half of 2020.

Our regulatory activities in Canada also remain on track with the next key milestone being the validation of our new drug submission by Health Canada.

Our EU and Canadians missions are robust, with data demonstrating the efficacy of EXPAREL in infiltration, field block and peripheral nerve blocks in both placebo-controlled and active comparative study. We will be seeking approval of EXPAREL for local and regional analgesia in adults.

As for China, we are initiating a pharmacokinetic study in Hong Kong with our partner Nuance Biotech. We will continue to keep you apprised of our progress in these expanding markets. With that overview, I will now turn the call over to Charlie for a review of the financials.

Charlie?.

Thank you, Rich, and good morning, everyone. Before I walk through the third quarter financial results, I’d like to remind you that we will be discussing non-GAAP financial measures.

The press release we issued this morning includes a description of these metrics and why we believe they provide additional insights into the financial aspects of our business. The press release also includes the reconciliation to GAAP for these measures.

We ended the third quarter in very strong financial position with approximately $336 million in cash and investments, and significantly growing cash flow from operations. On the P&L side, we have significant operating leverage with a rapidly growing topline that we are supporting with only modest increases in expenses.

This underscores the tremendous opportunity we have to capitalize on our business, while continuing to simultaneously ramp revenues and adjusted EBITDA. I will now turn to more specific financial highlights from the quarter. Total revenues increased by 25% to $104.7 million in the third quarter of 2019 versus $83.4 million in 2018.

This growth was predominantly driven by net product sales of EXPAREL, which increased by 23% to $101.5 million in the third quarter of 2019, as compared to $82.2 million in 2018. For ioveraº, we reported net product sales of $2.6 million in the third quarter. Our non-GAAP gross margin for the third quarter of 2019 improved to 80% versus 79% in 2018.

Non-GAAP research and development expenses were $19 million in the third quarter of 2019 versus $13.8 million in 2018. The increase in R&D was driven by the ongoing enrollment in our Phase 3 pediatric study or Phase 4 opioid-free C-section study, as well as the launch of our Phase 4 spine and hip fracture studies.

For the third quarter of 2019, roughly 60% of our non-GAAP R&D expense is attributable to clinical and regulatory activities, with the remaining 40% attributable to manufacturing and product development, including the scale up of our facilities in the UK.

For the third quarter of 2018, the split was roughly 60% attributable to manufacturing and product development, with the remaining 40% attributable to clinical and regulatory. Non-GAAP SG&A expenses were $43.4 million in the third quarter of 2019 versus $38.4 million in the third quarter of 2018.

This increase is attributable to increased sales and promotional activity for EXPAREL, including the establishment of a field-based team of account managers who are driving growth and access in the ambulatory setting, as well as the dental and plastic markets.

Another key driver of this increase is our co-promotion with J&J, which is directly linked to top line growth. All of these resulted in non-GAAP net income in the third quarter of 2019 of $20.2 million or $0.48 per diluted share versus $12.8 million or $0.31 per diluted share in 2018.

Looking ahead, given that EXPAREL is on a significant growth trajectory, delivering substantial operating leverage and cash flow, we have tremendous financial flexibility to capitalize on internal and external growth opportunities that align with our commitment to evolving Pacira into a global leader in non-opioid pain management and regenerative health.

Before turning to guidance, I’d like to quickly cover two non-cash items from our GAAP P&L. First, during the third quarter we recorded a $5.4 million impairment in our investment in TELA Bio. This adjustment was calculated based on the evaluation range contained in TELA’s recently filed IPO prospectus.

Second, as part of the purchase accounting related to our acquisition of MyoScience earlier this year, we recorded contingent consideration reflecting the forecasted value of a series of regulatory and commercial milestones.

We are required by GAAP to reassess the value of these milestones each quarter and adjust the value of contingent consideration accordingly.

During the third quarter of 2019, our re-evaluation concluded that the total value of contingent consideration increased by $7.3 million, resulting in an increase in our short-term and long-term contingent consideration liabilities and a charge to our P&L.

Turning now to guidance, as Dave discussed, we are very pleased with our financial outlook and feel very comfortable reiterating our 2019 sales guidance as follows.

EXPAREL net product sales guidance of $400 million to $410 million, which we expect to follow a similar cyclical pattern to last year with the fourth quarter historically being the largest quarter of the year. To remind you, EXPAREL growth is being driven by volume rather than price.

As for ioveraº, we remain optimistic about its long-term prospects and continue to expect to report $8 million to $10 million of net product sales in 2019. Given the strong commercial synergies, we remain confident that the MyoScience acquisition will become accretive beginning in the second half of 2020 and accelerating thereafter.

On the expense side of the P&L, we continue to be on track to achieve non-GAAP gross margins of 75% to 76%. To remind you, we expect margins to eventually improve to roughly 85% once our second dedicated suite in Swindon comes online and this location becomes primarily responsible for supplying EXPAREL.

Our non-GAAP R&D continues to track the higher end of our guided range of $60 million to $70 million. We now expect non-GAAP SG&A to be in the lower half of our guided range of $180 million to $190 million. Lastly, our guidance for stock-based compensation expense remains unchanged at $30 million to $35 million.

As Dave noted in his opening remarks, our growth trajectory now puts us on a path to achieve average annual revenue growth rates in the high-teens over the next five years. With that, I will now turn the call over to the operator to begin our Q&A session.

Operator?.

[Operator Instructions] Your first question is from Randall Stanicky..

Hi. Good morning. This is Ashley Ryu for Randall. Dave, can you talk a little bit more about your five-year targets for EXPAREL and ioveraº, the $1 billion and the $200 million targets, while I realize it’s not guidance.

Can you just talk about the moving pieces to kind of bridge you from today to those targets? For EXPAREL, how much of that is from geographic expansion versus kind of label expansions and for ioveraº, I know you have, of course, recently expanded manufacturing or adding more reps, better reimbursement, but can you just kind of talk about the growth target to get you there?.

Sure. That’s a lot, Ashley..

Sorry about that..

Let me start and come back and pick me up for pieces that I don’t get the first time here.

So, what we see is very strong support from anesthesia, especially regional anesthesia for EXPAREL and that is growing in not just in what we would call a classic nerve block, but in their use of the product in field blocks and we think we are very early in the adoption of these medical specialties using these regional approaches and getting rid of catheters and pumps, et cetera.

So that’s one piece. The other piece is that we go into a single shot where we get rid of epidurals and pain pumps and all of the things that are required when you try to treat pain in an inpatient environment.

The ability of an anesthesiologist to use EXPAREL as a single injection and achieve several days of pain control is a key element in moving those patients out of the hospital and into the ambulatory and HLPD setting, as we talked about during the script.

So if you look just at that, you can see that you get the kind of growth that we have been talking about as the base of the high-teens that we have talked about when we were working with you guys. Add to that then, pediatrics, which we think is a very viable procedure opportunity, we see more than 1 million patients there.

So, just to give you a home base, if you thought that we were going to get a 50% market share at $200, you are talking about $100 million over time. If you look at C-section, as Rich outlined, 1.2 million procedures, a market share 30, $300 is a $100 billion opportunity over time.

If you look a lower extremity nerve block, we think it’s bigger than upper extremity nerve block where we have 1 million procedures and again it’s predominantly a 20 ml dose.

So, you start to see that you have got multiple $100 million opportunities coming at us relatively over the next couple of years and if you add that to the growth that we expect to get from patients moving to the ambulatory environment and from the adoption of ambulatory care, you come to the kinds of numbers that we are talking about for EXPERAL.

With ioveraº, the -- when you are sitting around like at ASA when we were there in Orlando and we mentioned this in the script as well. We are develop -- we are doing formal clinical programs in an ACL repair where there’s a lot of interest actually, as well as TKA.

But what the docs want to talk about and where people are using EXPERAL is in a whole series of ways to use cryoanalgesia for peripheral nerve pain and so we have got folks that are looking at shoulders and hand and wrist, and fractured ribs and ribs and even intercostals for mastectomy projects, et cetera.

So you can really see how the use of iovera° is another non-opioid opportunity for folks to turn the pain signal off.

And the reason that we think it will grow fairly quickly is, these are customers that -- where we have an immediate intimacy and there is high interest in this and now with CMS nearly doubling the reimbursement for HOPD, you can see how you could use these two products in the HOPD or in the ASC very cost effectively and so you see this being an integral part of our overall offering.

So that’s the big piece of it for the two big products. That’s the vast majority of what we are talking about.

When you start talking about ROW, over the five-year plan actually, it becomes meaningful as a number, but it is still way less than 10% of the total global sales of EXPAREL, meaning that more than 90% of the global sales of EXPAREL are still in the United States at the end of our current five year plan.

We are putting more reps in the field, largely because of iovera°, because of peds, because of C-section, because of lower extremity nerve block. As an example C-section, OB anesthesia is really a distinct group of customers that work in a distinct area of the hospital.

So they wouldn’t be in our normal call pattern unless we have something to talk to them about relative to female cancers or something else that they might be involved in. So we need additional firepower in order to get to all those areas. That’s all I can remember of your question, Ashley. So if there was something….

I think that was everything. So -- no, I think, that was everything. Thank you so much..

All right. Thanks..

Your next question is from David Amsellem..

Thanks. So I just had a couple. First on the J&J partnership, can you just talk about where things stand, and I guess, more specifically, what your vision for that partnership is going forward and the how the role of J&J may or may not change? So that’s number one. Number two is on the gross margins.

You have seen some margin expansion, and that makes sense, I guess, the question is how sustainable is that and I know there’s some fairly sizable fixed cost component for EXPAREL. So I just want to get a better sense from you as to the directionality of those margins as EXPAREL expands and just help us understand the moving parts there? Thank you..

Thanks, David. Thanks for the questions. We are -- the J&J relationship is in full effect and we are benefiting from their professional services and all their professional education programs. For example, OCA starts today, and for recon and all of the other things that would be orthopedic oriented.

There is a huge presence for EXPAREL at OCAs at the American academy of hip and knee surgery, something way beyond anything that we could have done ourselves, David.

And they are very much committed to their training programs, and Rayham, as well as the peak programs as they call them, which are regional education programs that are meetings, et cetera.

So we think that as the world becomes more oriented around ambulatory care, the audiences that we call on in conjunction with Johnson & Johnson are going to be primary sponsors of that move and so we really see the benefit of having all of these resources in the field working with these customers.

If you add to that as we said during the script, we expect to get a peds indication and fundamental in that peds indication is the scoliosis trial.

So there are folks they have dedicated resources going to spine, as well as to sports medicine and to trauma and so we see them launching EXPAREL into all of those products during the term of this agreement. So we think it’s to our benefit to continue working with them aggressively until the end of this agreement in 2021.

At the end of 2021, David, there is no sunset, there is no residual and the agreement would end. And doubling back on Ashley’s question, we are adding some people to the field.

Ioveraº allows us to start to have relationships with the big orthopedic practices in this two-year interlude between now and then and so we are very comfortable that we can get the maximum value out of this strategic partnership over the next two years and then be prepared to do it on our own.

But I have no idea what’s going to happen two years from now, right? So, that’s just it is what it is. On the gross margin side, I will go quick Charlie and you can pick the answer. So any time we are producing at full scale David, we get better margins.

And so as the product continues to grow aggressively, you start to see that we are -- we have peak times of best gross margin opportunity.

I will remind everybody that there are times of the year when we close the facility for cleaning and maintenance and all of those things, and so 80% is not anything that we could promise to you on an ongoing basis.

To answer your question specifically, we will have sustained gross margins over 80% and approaching 85% once we have the 200 liter facility come on and start producing commercial material in Swindon and that’s scheduled for 2021. So, Charlie, if I -- if you saw some wrong there….

No. There’s nothing. Dave, the only thing I would add is, obviously manufacturing capacity is a fixed investment. And so, we have doubled capacity, and therefore, we start to reduce the utilization of the total combined, and as we ramp up demand, that we will start to see improvement in those as well. So that’s all I would add..

Yeah..

Hey, Dave.

Can I come back to your comments on J&J, are you discussing an extension of the relationship, I mean, from your comments and I was leaning that you don’t know where things will be after 2021, but is there a dialogue regarding life with J&J and the decencies beyond 2021?.

I wouldn’t expect that we would be having a discussion with them David two-plus before. I think we will -- we wouldn’t, I mean, that wouldn’t be a good use of our time in my experience from now.

The world is changing so fast that I think we want to use these next two years to get a view of the world of what 2022 looks like relative to AFCs and anesthesia and all the rest of the things that we are working on.

So, I would say, I mean, you can take that is that there’s no discussions ongoing, but I would expect that there would be any this far ahead of the timeline of the relationship..

Okay. Thanks..

Thank you, David..

Your next question is from David Steinberg..

Thanks and good morning. I have a couple of questions. The first revolves around business development. The company obviously has a lot going on. You are going to launch in Europe next year. You are ramping up with ioveraº. There are some new indications.

And so what sort of capacity you have for acquisitions? And if you do, how do we think about near-term versus long-term activity and what are the major buckets of potential acquisitions to in-licensing you are contemplating? And then, secondly, you have painted a pretty robust outlook for the next five years.

I am curious what you thought about consensus estimates. EXPAREL growth next year is projected to be I think about 12% followed by 6% the following year.

What do you think of those -- I know you haven’t given guidance, just some broad brush strokes into the future but what’s your view of that, those estimates and what do you -- if you think they are low, what do you see is the major disconnect? Thanks..

Yeah. Thank you, David. Let me start out with business development and capacity. Right now, we are growing into EXPAREL plus iovera° and I don’t think that would be anything that’s unexpected and the national meeting in early 2020 will be the kickoff of all of those things. So, I think, we are right-sized for those two opportunities today, David.

Most of what we are looking at are not things that we would have to worry about launching immediately. And then the rare occasion where we are looking at commercial assets, they have a sales organization that comes with them. So you wouldn’t see any kind of a broad displacement across our organization or the J&J relationship in any case.

What we are looking at really falls into a couple of buckets. One is, drugs, pharmaceutical -- typical pharmaceutical products. We mentioned a couple of DepoFoam products.

There are some other API assets where folks have not been able to use them because of toxicity or sight of delivery or the requirement for a pump or things like that where we think that marrying that -- their technology with DepoFoam technology could actually lead to a viable clinical candidate.

More likely, David, or from an M&A perspective, we are looking at things that block inflammation are somehow involved with non-opioid pain. It’s -- in many cases, it’s not acute pain as we are focused today.

We have got a number of discussions ongoing talking about peripheral pains, neuropathic pain, chronic pain, there’s a number of opportunities where we not only use the commercial organization that you guys are all familiar with. But we have got a very viable clinical team here and which understands pain implicitly.

So that is a very valuable asset to us. When people start to come to us and talk about how you develop a pain portfolio, it’s more than just the commercial assets and our relationship with KOL and with care of people.

So, on the drug side, you would think about more pain assets, anti-inflammatories that can block the inflammatory process, all of those kinds of things that an anesthesiologist and an orthopedic surgeon would be directly interested in.

On the regenerative medicine side, lots of things in the marketplace around MSL are about miniscule repair, ACL repair, growing cartilage, growing bone, a number of things that we are looking at.

Again, because of the relationship of the people that use those assets who are clinically interested in and the use of those assets as the patient journey along the OA life cycle goes.

We have what we think is a very robust opportunity, because we know those folks very, very well and in some cases, we are helping those folks in the early stages even before we get to have any kind of an interest in the product.

So you can see a lot of different opportunities that fall pretty much along those two guidelines driven primari6ly by the fact that the customers are the same for both buckets at the end of the day. Next, so I will go to your second part David if there’s no follow from you on that.

And so we said that we see a five-year trend of high-teens for our portfolio. We have run consistently in the low-20s for the last five quarters. How anybody would project that we would go from the low-20s to 12% from the fourth quarter of this year to the first quarter of next year? You would have to ask them. That makes absolutely no sense to me.

And if the worry in the field force or in the world in general is that there’s competitive pressures, there would be a good reason why there would be disconnect because there we are not worried about that at all..

Right. And just a couple of quick follow ups, speaking of the competition, Heron, says, they are going to run a head to head study of HTX-011 versus EXPAREL, any thoughts on that their protocols. And then, secondly, C-section, I think, there’s 1.2 million procedures a year.

How are you thinking about market share there?.

Yeah. We -- it would be higher than normal, David, largely because when we talk to these folks the interest in opioid free C-sections is way beyond anything that I would have anticipated. And the relationships we have with the anesthesia groups around the country confirms that this is really an area of intense interest to them.

So as I said in an earlier response of 1.2 million procedures, if you had a 30% market share at $300 a patient as the median average cost of EXPAREL, it would be $100 million opportunity with time obviously, it’s not going to be $100 million opportunity next year.

But over the five years of the plan, we don’t think that that’s an unreasonable expectation at all. Relative to Heron, they have had eight years to do a trial, head to head with EXPAREL trial, if they wanted to do it. If he was going to do it, why hasn’t he done it and I think we both know why, and I will just stop there..

Okay, our next question is from Tim Chiang..

Hi.

David, I want to get your thoughts on the brachial plexus nerve block indication, how is EXPAREL doing with that indication so far and how do you sort of see usage on the upper torso expanding heading into 2020?.

It’s, it is the entire corporation took off, Tim, when we got the, I mean, it was sort of a -- it was a perfect storm of J&J being fully trained and up to speed in the marketplace. The ASC code and CMS paying for EXPAREL and then the brachial plexus nerve block was sort of the catalyst that took all of that and had it expand.

It really is the reason that anesthesiologists have had an opportunity to use EXPAREL, the brachial plexus block was particularly interesting because as studied, it was a 10 ml dose with some free bupivacaine.

And so the anesthesia, regional anesthesiologists got to see the efficacy and the ability to control pain in a very painful procedure for the price of a half a dose of our 20 ml bottle or nearly every vial or nearly so and that really convinced them that this drug had some real efficacy and safety advantages over everything else that they were doing.

What we were surprised at in the early days is that that really led to anesthesia converting to 20 ml field blocks like PECS blocks and TAP blocks and fascia iliaca blocks, etcetera, way more quickly than we had any anticipation that it was going to do.

So that led to a number of hospitals putting EXPAREL on formulary, because the anesthesiologist was so interested.

It also led to a number of procedures like brachial plexus block being done with no opioids at all, which led to the physicians and the patients asking why they were in the hospital at all if they didn’t have any pain and they didn’t require any opioid. So it was really almost a front runner for moving these patients to an ambulatory environment.

So from a strategic -- from a revenue perspective, it’s been very important. From a strategic perspective, it’s been way more important even than the revenue, and it really has led the way to where we are going here. And so, I think, it’s hard for us to over -- to say more about that than is actual in the marketplace.

It’s been a fundamental change to our company. So nerve block we think is very important and that’s why we are so high on a lower extremity, which would give us the opportunity to do things like adductor canal blocks, et cetera..

And David, just one follow up, I mean, it looks like your iovera° peak sales potential basically doubled now with the CMS reimbursement rules.

And I am sort of wondering do you put more resources behind it heading into next year?.

No. We are still going to be bound, Tim, by our manufacturing capabilities. When we bought the asset, the company had never made more than 10,000 of these smart tips in a year. We have got to add up to 100,000 for next year. I don’t think we can do much better than that.

And when a hospital goes to ioveraº plus EXPAREL for things like TKA, we really have to be careful that we don’t run out of stock because that’s a fundamental change in the way they do business. And so we could never put ourselves in a position where they had to somehow go back to an old paradigm of care, an protocol of care.

So, I think, we are going to have to be very careful with how we approach this marketplace and make sure that we don’t run out of tips. But I don’t see that we need to put a lot more people out in the field.

I think what we would rather do is work with a relatively small number of high-end health care providers and really figure out how this product is going to be used in ACL repair and a number of these peripheral nerve opportunities like shoulder and spine, et cetera.

If we put more people out there, I’d just be afraid that we get too far afield and we would be doing our self any favor in the long-term..

Okay. Great. Thanks..

Thanks..

Your next question is from Serge Belanger..

Hi. Good morning. Just a couple of questions for me and I apologize if you covered this before. Can you just give us timelines on when we should see data from the pediatric trial, as well as I guess STRIDE 1, the lower extremity study and when they could generate a label expansion.

And then, second question is related to the CMS changes, I think, you discussed some of the recent changes that will impact ioveraº.

But do you foresee anything further impacting EXPAREL usage from recent CMS decisions?.

Yeah. Thanks, Serge. So we expect to have top line data on peds by the end of the year. We would expect that that would lead to a sNDA because peds -- well, let me make a distinction here, peds in lower extremity nerve block, we want to extend the label. That will require sNDAs in both cases.

Opioid-free C-section is a currently approved indication, so that we are just waiting on publications. So, I will go through the three. So, for peds, we will talk about top line data sometime in the next couple of months here.

And then filing sNDA and then you will see the papers and all the other things that come out over the course of the probably midyear next year. If we get -- so we would expect -- I won’t go into all the gory details of all the different aspects of this.

But I think what we are planning on is that we would expect to get an indication, a ped indication sometime before the end of next year. So with C-section, we expect that the first C-section trial, which has 0.001 p-values for a number of different primary and secondary endpoints will be published this month or early in December.

We expect that we will have the topline data for the opioid-free C-section study sometime early next year, likely in the JPMorgan time frame and that that would lead to a publication probably around the SOAP, the Society meeting, which is scheduled for May of next year.

And then, for lower extremity nerve block, we are doing a normal -- a healthy volunteer study. We expect that that will lead us to a formal trial in a lower extremity and lower extremity nerves. Assuming that that trial gets up and running early in late this year, early next year like we expect, we expect to finish sometime in the third quarter.

You would put together an SNDA and you would have a six-month review cycle. So the plan would be sometime around the 2021 national meeting. You would train on lower extremity nerve block and expect that sometime in the second quarter of next year --2021. I am sorry.

Yes?.

Yes. Thank you..

Okay. And let me talk about -- I will talk about CMS surge as well. So we will continue to work with FDA on a HOPD reimbursement for EXPAREL.

I think as EXPAREL continues to grow in that environment, I think our chances of actually getting reimbursement actually are not as good next year as they were this year, but that doesn’t mean we are not going to keep trying.

And in the ASC setting and in the office setting for ioveraº, we will have a very formal campaign that looks a lot like what we did with ASC and EXPAREL a couple of years ago.

So you can expect us to be very active in working with CMS on a -- especially in ambulatory care claim, but increasingly we are having more and more discussions in the marketplace with docs who don’t see any reason why they wouldn’t be able to use ioveraº in their office because if patient comes in pain, it acts immediately, there is no cutting, no opioids, no -- and there’s really -- it’s as safe as it could possibly be.

So there’s a lot of interest in the use of the product in the office setting but we have to work on CMS with that as well. And I would say, by the way that, with EXPAREL, CMS affirmed use in 2020 and also increase the payment from a $1.22 a milligram to a $1.25 a milligrams, so that’s good news as well..

Okay. Thank you..

Thanks..

Your next question is from Gary Nachman..

Hi. Good morning. It’s Rob Fay on for Gary. In the past, you have talked about ASCs comprising 10% of revenues.

Have that shift at all this year and where do you expect that to be over the next two years to three years? And regarding ioveraº, can you comment on how the product is differentiated from competing products like COOLIEF from Avanos and is there an international opportunity for ioveraº?.

Yes. Thank you, Rob Fay. I am sorry, [inaudible], what was the first one..

ASC..

ASC..

Okay. Yeah. So, yeah, ASC. So let me give a little bit of background information there. So if we use 2018 numbers, the population folks tell us that about 30% of American procedures were done in an ambulatory surgery setting. And if you extend out to 2025, the expectation is that that number will change to 70% to 755.

So, yes, this is a huge expectation that this will change quickly, not over the next three years, but probably for the next five years. What we see that’s just as interesting is that looking backwards, primary ASC procedures would have been relatively minor, relatively small, hernias and hysterectomies and things like that.

What’s happening and especially with CMS approving TKAs, total knee arthroplasty, into the outpatient space is that the ambulatory facilities are now gearing up to do very substantial surgeries like spine surgeries, discectomies, laminectomies, do knees, is quite a departure from doing a hernia.

So, we have not only moved a percentage of patients, but we moved patients who are -- have a much higher pain acuity to the ambulatory setting.

And the reason that we are so excited about ambulatory surgery centers is we believe that it’s EXPAREL that enables that move in the hospital you can’t use a thoracic epidural, you can’t use a pain, you can’t use a PCA pump, I am sorry, in the hospital you can use all of these different modalities, right epidurals, thoracic epidurals, where the patient is immobile for several days, pain balls, pain pumps, et cetera.

When you move that patient to an ambulatory environment, you don’t have access to a lot of other opportunities and you can’t use huge doses of opioids.

So, we see the move to the ambulatory care as being fundamentally important and then we believe our market share inside that move around procedures like TKA and spine favors EXPAREL in a fairly dramatic way. So we see it growing very rapidly. And in fact, this year, Rob Fay, it’s much higher than the 10% than it was last year.

And then, ioveraº versus COOLIEF, they are very different. ioveraº is a handheld device. So there is no piece of fixed capital equipment other than what looks like a Jetson family phone. And it goes into a little stand almost like a cell phone of the old days and it charges and the nitrous oxide cylinder and the tip screw on.

So it is 100% mobile device. It doesn’t require any fixed capital equipment or any space or anything like that. Fundamentally important is it doesn’t use heat. It uses cold which is a much more natural approach to the body. We don’t have any bystander effect because we use cold instead of heat, it is reversible.

So we use what’s called a wolevian [ph] effect, where once this nerve is frozen, it grows back at roughly an inch a month, we don’t kill the nerve, we stun the nerve so that it can’t conduct a pain signal and it grows back over time, so it can be used over and over again.

We believe that the tips that we are selling, these smart tips that we referenced to are significantly less expensive than the Cooley’s program.

So there are a number of advantages in the marketplace, especially as we start to talk about these patients and these procedures migrating to an ambulatory environment and potentially even to a physician’s office environment where we think the system that’s set up is at least as effective as Cooley’s and we like the way we are headed..

Thank you..

Thank you..

I am showing no further questions at this time. I would now like to turn the conference back to Dave Stack, Chairman and CEO for closing remarks..

Thank you, Whitney. Thanks for your questions and time this morning. We look forward to providing an additional updates in the future. Next up for us on the IR calendar is the Jefferies Conference in London, followed by the Piper Conference in New York. We look forward to seeing you also. Thanks..

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation and have a wonderful day. You may all disconnect..