Good morning, and welcome to the Fourth Quarter 2021 Pacira BioSciences, Inc. Earnings Conference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session [Operator Instructions].

I will now turn the call over to Susan Mesco, Head of Investor Relations. And Susan, you may begin..

Thank you, Brandon, and good morning, everyone. Welcome to today's conference call to discuss our fourth quarter and full-year 2021 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; and Charlie Reinhart, Chief Financial Officer.

Before we begin, 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.

For information concerning risk factors that could affect the company, please refer to the company's filings with the SEC, which are available from the SEC or our Web site. One last piece of housekeeping; local internet went down this morning, so the Pacira team is participating via cellular device.

We ask for your patience if sound quality is limited at any point. With that, I will now turn the call over to Dave Stack..

Thank you, Susan. Good morning, everyone, and thank you for joining us. We'd like to devote most of the time today to your questions. So, I'll begin today's discussion with the brief prepared remarks that cover recent business highlights. We remain proud of our team as they continue to perform and deliver, both for our patients and our investors.

The progress we made throughout 2021 positions us for even greater success in 2022. We have a series of value-driving milestones in the year ahead, and we couldn't be more excited for the future of Pacira.

We ended the year in a strong position with a diversified portfolio of unique, safe, best-in-class products that support healthcare providers' ability to provide low or no-opioid therapies to improve patient experiences along the neural pain pathway.

Our achievements in 2021, highlighted by growing EXPAREL sales, the acquisition of Flexion, and an exciting pipeline of innovation that have placed Pacira in the forefront of opioid-sparing pain management.

ZILRETTA provides us with a highly complimentary commercial asset for the treatment of osteoarthritis knee pain, while also increasing our presence in chronic pain.

With more than $100 million in sales in 2021, and a significant potential for an even greater contribution moving forward, ZILRETTA gives us great confidence in its long-term prospects as a high-potential, durable product for Pacira. Importantly, this acquisition diversifies our revenue stream, enhances our top line.

And we believe it will provide meaningful synergies as we expect to drive substantial near and long-term accretion to our cash flows and earnings. Turning now to progress we made with EXPAREL. I'll start with the recent achievement of a very exciting milestone.

Over 10 million patients have been treated with EXPAREL, since launch, in the United States alone. Our team achieved record EXPAREL sales of $507 million, with adjusted EBITDA margins up 37% in 2021, marking our eighth consecutive year of positive adjusted EBITDA. These are important accomplishments.

As we have been reiterating, EXPAREL-based blocks are enabling the regional anesthesia revolution, which is our number one growth driver. Regional anesthesiologists are developing new blocks, perfecting old blocks, and using imaging to ensure successful patient outcomes.

Our state-of-the-art [PITT] [Ph] Training and Innovation Facility is supporting this market transition with real-time best-practice knowledge transfer, and is helping accelerate the surgical migration to all patient sites of care.

In addition, throughout 2021, we significantly fortified our EXPAREL IP estate with two new Orange Book composition patents that are now listed in the FDA Orange Book. Recently, we received four new notices of allowance from the U.S. Patent Trademark Office.

These are all composition patents that we will submit for Orange Book listing, after which there will be a total of six EXPAREL patents listed in the Orange Book with expiration dates of January 22, 2041. Last year, we were excited to launch EXPAREL in the pediatrics market, where we are making an even bigger impact than anticipated.

We are seeing erector spinae or ESP blocks becoming the standard of care, and displacing costly and cumbersome pumps and catheters. Interestingly, pediatric spine is triggering a halo effect in adult procedures.

Spine surgeons are a tight-knit group of likeminded surgeons, and the technique for an erector spinae block is the same for children and adults. This provides us with an opportunity to establish EXPAREL ESP regional blocks as the cornerstone of best practice, enhance recovery pathways for both adult and pediatric spine surgeries.

Looking to our international expansion for EXPAREL, we are delighted to report that our targeted European launch is now underway. Importantly, as you may recall, EXPAREL enjoys a broad label in Europe, which includes both upper and lower extremity nerve blocks as well as field blocks, such as transverse abdominis plane field blocks, or TAP.

This is key and will factor into our ability to gain traction in this important market without having to expand our call points, and should help simplify market access. Our women's health franchise has seen 30% improvement in EXPAREL procedures over the prior year.

EXPAREL TAP blocks for C-section are driving this success, which is not surprising given the incredible value proposition, the faster recovery and opioid-sparing pain control means to new mothers. With 1.3 million C-sections per year in the U.S. and rapidly expanding EXPAREL penetration, we see significant opportunity for continued growth.

Further, positive experience in outcomes in C-section procedures are driving demand in gynecologic oncology and breast procedures. As we all know, mothers are the CEOs of the household, and a positive birth experience with EXPAREL will drive a lifetime of opioid-sparing decision-making for other procedures.

This past year, COVID has escalated the need for many breast, plastic, and oncology surgeons to expedite discharge for their patients.

With EXPAREL, they are now able to meet the needs of women who demand an opioid-free experience and don't want to stay overnight in the hospital, while simultaneously optimizing their care experience through better pain management using EXPAREL-based multimodal ERAS protocols.

In addition to the success of our growing EXPAREL and ZILRETTA franchises, we are also making great strides with our iovera franchise; iovera is the only cryotherapy option available in a handheld design allowing it to be used in a variety of institutional settings and environments where you could not use the previously available console-based cryoanalgesia systems.

In 2021, we launched iovera with a partner in Canada, and with Pacira resources in the U.K. and EU. We also used last year as an opportunity to design a more user-friendly, next-generation device, and develop additional SmartTips for new indications.

We now have a specific tip ready for human pilot studies medial branch block as a treatment for chronic low-back pain. We are also preparing to evaluate iovera as a treatment for spasticity, which represents a very significant long-term opportunity.

Looking ahead, we expect to build on last year's success, and believe 2022 will be a banner year for Pacira as we expect to deliver another year of record sales, significant EBITDA growth, and multiple clinical and regulatory updates. Enrollment is progressing in our two Phase 3 lower extremity nerve block studies EXPAREL or the STRIDE studies.

COVID-related delays in the fourth quarter of last year have shifted the expected timing of our sNDA submission to the fourth quarter of 2022. We believe the lower extremity nerve block label is at least as significant as the upper extremity market, with around here million procedures a year, and an addressable market of approximately $100 million.

For ZILRETTA, the first and only FDA-approved treatment for osteoarthritis knee pain, we are focusing on three areas of development in 2022, and will be meeting with the FDA to obtain alignment.

The first is to expand the current label to include a safety superiority claim in diabetes, which we expect will establish ZILRETTA as first-choice corticosteroid for osteoarthritis pain of the knee. Second, we are preparing to launch a Phase 3 shoulder study, which we plan to begin in year-end.

And lastly, we are working to expand the current knee indication to include repeat dosing. In short, we believe ZILRETTA is a perfect fit for the Pacira family of unique products. And we envision longer-term our commercial and clinical capabilities will significantly expand its use.

At the same time, we are addressing several issues with specialty distributors and pharmacies, as well as previously stocking of short data materials. We are moving these systems and processes to our Pacira operations, and expect to have many of these issues behind us by the end of the second quarter.

For iovera, the launch of our next-generation handheld device is now underway, and we remain on track for an interim review of our PREPARE study, which is evaluating the combination of iovera and EXPAREL as a procedural solution in TKA procedures in the next few weeks.

As I mentioned earlier, we are particularly excited for the opportunity in spasticity. You may recall that at our analyst event last year, Dr. Paul Winston shared some compelling proof-of-concept videos in spasticity patients. Importantly, pain associated with spasticity is already on-label.

And we are working to facilitate greater adoption given the efficacy, safety, and ease of use. We plan to work with the FDA to define a regulatory pathway for adding treatment of spasticity to our iovera label. Patients currently have limited and often costly therapeutic options. For example, patients are receiving Botox which has dose limitation.

Here patients received three-four treatments a year for $1800 to $2400 per treatment. Another example is the use of phenol, a chemical neurolytic. Phenol is painful, requires anesthesia, and has adjacent tissue scarring with outcomes that are highly variable. And contrast, iovera has shown great promise in this indication.

With tips costing $450 to $500, iovera could represent a tremendous value proposition in spasticity. In addition to EXPAREL, ZILRETTA, and iovera, our portfolio includes promising early stage opportunities. We expect to initiate a Phase 2 study of our multivesicular liposome technology for subarachnoid analgesia in late 2022.

We are planning pilot studies to evaluate EXPAREL and iovera spasticity separately -- I am sorry as stellate ganglion blocks for use in cardiac dysrhythmia following heart surgery.

In addition, we are defining next steps for clinical programs in our multi-modal -- our multivesicular liposome formulation of dexamethasone for inflammation and low back pain and high dose bupivacaine for longer acting pain management of five days or more.

Moving ahead with patients always at the forefront of endeavors, Pacira will continue to innovate in all areas of our business including new indications, line expansion, design improvements and more.

We will leverage our state-of-the-art PITT innovation and training center in Tampa as well as a second PITT facility that we are building out in Houston to bring these innovations into the hands of our healthcare provider partners. I am proud of all we accomplished last year and even more excited for what's to come.

With that, I'll turn the call over to Charlie for some financial highlights.

Charlie?.

Thank you, Dave, and good morning everyone. I'll start with a quick update on sales and margin trends. As previously reported, in the last week of December, we began to see a slowdown in elective procedures as regional surges in Omicron cases prompted governmental restrictions and escalated staffing challenges.

These trends continued in the beginning of January until around the middle of the month when we began to see a notable improvement in EXPAREL sales with continued strong trends in February. On the competitive front, we've not seen any impact from new market entrants on our EXPAREL base business or our ability to generate new business.

More than 10 years of physician experience, well established efficacy, and a pristine safety profile continue to be key differentiators between EXPAREL and other extended release bupivacaine formulations.

For iovera, significant growth in 2021 was driven by a 72% increase in new customers with a growing representation from the physician office side of care. We believe the addition of ZILRETTA will accelerate this as it gives us another entrée into the physician office and allows us to extend our reach of physician office interactions.

For ZILRETTA, as previously reported sales were negatively impacted by rebate program modifications and several unanticipated manufacturing batch failures that led to short dated ZILRETTA inventory resulting in smaller order sizes and higher product returns.

As Dave mentioned, we are currently addressing these issues and expect to have them resolved by the end of the second quarter with 2022 sales trends improving throughout the year as we extend inventory dating, simplify the rebate program, and complete our transition of the product to the Pacira operating environment.

Turning to gross margins, on a consolidated basis our full-year total nonGAAP gross margin was 75% for 2021. This was comprised of full-year nonGAAP margin of 77% for EXPAREL, 33% for iovera as well as post acquisition nonGAAP margins of 82% for ZILRETTA.

In 2021, iovera margins were negatively impacted by overlapping expenses as we transitioned production to our San Diego facility and a new contract manufacturer along with our investments in our next generation hand held device.

Looking ahead, we continue to expect to see improvements of roughly 3% for year for EXPAREL gross margins in each of the next years until we reach gross margins in the mid 80% range.

This improvement will be driven by a combination of steadily improving volumes and lower unit cost as our 200-liter suit contribute a greater percentage of EXPAREL unit sold. For iovera and ZILRETTA as volumes continue to expand, we expect margins to increase and reach levels in the mid 80% in approximately the same timeframe as EXPAREL.

For iovera, margins will also benefit as the cost to transition our manufacturing location to a contract manufacturer at a reduced unit cost as well as the rollout of our generation-2 device with a reduced COGS by the end of the second quarter.

For ZILRETTA, we are making investments in manufacturing facilities to improve quality metrics and efficiency as volumes grow.

While we are currently not providing 2022 revenue or gross margin guidance given the continued uncertainty around COVID-19 and the pace of the recovery for the elective surgery market, we will continue our practice of transparency of reporting preliminary monthly product sales for EXPAREL and iovera to share intra-quarter trends with you.

For ZILRETTA, we are currently not reporting preliminary monthly ZILRETTA net product sales as the required adjustments for certain product rebate programs are calculated after the end of the quarter. However, we will include a range for ZILRETTA sales in our quarterly preannouncements.

We will consider adjusting this practice for all three products as the year and visibility progresses. Turning to our expense guidance for 2022, I'll start with our expectations for non-GAAP R&D of $75 million to $85 million.

Key drivers over 2021 spend include approximately $40 million in incremental clinical and pharmaceutical product development cost associated with ZILRETTA and an early stage program acquired from Flexion which is now known as PCRX201.

Approximately, $600 million in EXPAREL manufacturing capacity expansion cost for our 200-liter batch unit located in our San Diego facility. And, the advancement of clinical development activities related to our STRIDE and PREPARE studies. For non-GAAP SG&A expense, today we are guiding to a range of $2020 million and $2030 million.

Key drivers over 2021 spend include approximately $37 million of incremental SG&A spend for ZILRETTA.

This includes doubling the size of our iovera and ZILRETTA field based team, a ZILRETTA marketing campaign, and expanded market access function to include ZILRETTA, and G&A cost which include some transitional activities for certain shared support functions such finance, legal, HR, and IT.

Approximately, $7 million in EU business cost which includes our commercial footprint as well legal and regulatory support. Our forecast also includes expanded activities to accelerate growth within our spine, sports medicine, plastics, and OMFS businesses as well as increased medical innovation and education programs at the PITT.

Finally, our 2022 stock-based compensation is expected to be in the range of $40 million to $45 million. So in summary, EXPAREL continues to be on a significant growth trajectory that is driving substantial operating leverage and cash flow.

With ZILRETTA, we have added a significant and highly complementary revenue stream that makes our earnings outlook even more compelling. For iovera, we remain very excited about the near- and long-term outlook for growth.

Continued growth in our iovera customer base and new addition of ZILRETTA to our commercial offering leave us well-positioned to help physicians individualize osteoarthritis care with our unique pipeline of non-opioid options.

On a longer-term horizon, we are investing in exciting new iovera opportunities that have the potential to be game changers like spasticity and stellate ganglion blocks. The bottomline is that Pacira is financially stronger than we have ever been.

And despite turbulent macro environment, we continue to deliver impressive financial results and remain bullish in our long-term expectations for robust growth.

We are confident that we are ontrack for year-over-year topline in at least the high teens, gross margin improvement to the mid 80% range, modest year-over-year growth in operating expenses, and adjusted EBITDA margins that exceed 50% by the end of 2024. That concludes our prepared remarks.

I'd like to turn the call over to the operator to begin our Q&A session.

Operator?.

Thank you, sir. We'll now begin the question-and-answer session. [Operator Instructions] And from Piper Sandler we have David Amsellem. Please go ahead..

Hey, thanks. Just a few.

So, on EXPAREL in the elective surgical environment, I may have missed this, so if you could clarify, in terms of the pace of volumes, where is it relative to pre-pandemic levels? Or to maybe put it differently, with the Omicron wave receding, are you getting back to pre-pandemic levels? When do you think you might be there? And just talk about in any way that's quantifiable surgical backlog, and how EXPAREL stands to benefit as that backlog is cleared.

So, that's the first set of questions. And then secondly, on ZILRETTA, it sounds like there's, I guess, some speed bumps here.

But I wanted to ask you about your commercial efforts, sale and marketing, and talk about what you are doing differently in terms of getting in front of physicians in terms of headcount, your physician targeting? I know you've alluded to this in the past, Dave, but maybe just provide some detail in terms of how you are approaching detailing differently than the predecessor company? Thanks..

Thanks, David. First, the pace of volumes, I mean we get the IQVIA report every Friday. And it is up on our Web site. And what you would see is that we've come up on to the pre-COVID elective surgery line several times, only to retreat and several weeks afterwards. And then the week after Christmas was really bad, almost as bad as COVID inputs.

And so we were, I think -- well, we haven't seen this week yet, of course. It lags by two weeks; I should've said that, David. And so, we bounce back and forth off of the pre-COVID elective surgery line in that report. I think the interesting thing is that EXPAREL is routinely between 20% and 40% higher than the line -- that the return.

So, we expect that when we do return, we're going to enjoy all of the shares that we've taken with all of the programs that we've talked about. So, I would say, based on the performance in February, David, that we're probably very near the elective pre-COVID line again, but again, we're two weeks in a rear.

So, I mean, just to give you some context, the last week of the year was horrible, almost unbelievably so. The first two weeks in January were a little better, but not great -- I'm sorry, the first two weeks in January were a little better, but not great. The second-half of January got us to plus-four, in January.

And we continue to see that kind of momentum into February. So, think teens again. Not 100% back, but we're getting there. On the ZILRETTA, so, we've got a team that's been out there with iovera. And we were fortunate enough to have a number of people come over to Pacira from the ZILRETTA sales force.

So, we have been able to supplement them with some new hires, again, people that are willing -- looking to come here based on all the success in some of the things that are exciting around our program.

Actually, interestingly, David, many of them have been referenced by their physicians to come and work for Pacira, which we think is a very, very positive sign.

And so, without being trite, I would tell you the first difference in terms of ZILRETTA customers is that we're actually calling on them, and we hear that often, that our folks are working with -- I don't even know how to make that any more clear.

And we're working our way through ZILRETTA being useful in the -- or I'm sorry, ZILRETTA being useful in the office primarily. As Charlie said in his script, we see a lot of chronic pain medicine docs adopting iovera in their offices.

So, we see the benefit of having two products when we go talk to the chronic pain docs and to the orthopedic surgeons and the spine folks.

It is clearly driven by the patient status, the duration of pain control that they're looking for, major driving by reimbursement, so that does subset-select patients that you'd want to treat in a hospital outpatient department, where the reimbursement is very good for iovera, versus the office, where the reimbursement is quite good for ZILRETTA.

So, we can talk about these folks in different sites of care, different reimbursement options they have based on the patient needs. And we're working, again, on -- we've found a number of physicians in the marketplace who have come to us with datasets on the use of ZILRETTA and Type 2 diabetic patients.

And so, we've got a number of these folks writing those datasets up for us with the intention of bringing them to the FDA to show them how the product is actually being used in the marketplace in this patient category that obviously has some specific needs that are all their own. So, all in all, I think it's very early days.

Remember, we only had our national meeting about three weeks ago. So, what I'm telling you is a couple of weeks' worth of largely anecdotal data, David. But so far it's -- everything is going the way we expect it to, more or less..

Okay, that's helpful. And if I just may go back to the question -- the EXPAREL question, just on the surgical backlog.

Can you just quantify that in any way? I think you've done in the past, but if you could provide a little color there that would be helpful?.

Yes, the surgical backlog is orthopedics is -- it has been actively worked upon, largely in the ambulatory surgery marketplace. And so, we know that the docs are out two, three months, but I think most of these very painful procedures are being driven to the ASC by CMS and by commercial payers.

And given the long-term relationship of orthopedic patients with their physician, you see a system that's actually working, right. They go through the doc, and they go to an ASC that the doc might or might not have interest in. And the soft tissue is much more difficult predict.

It's -- if you look at ASCs now, David, and you look at EXPAREL, over 75% of our business, as reported by IQVIA is ortho. And so, the other side of that, of course, is there isn't a lot of ASC capacity for soft tissue.

We see some of that being taken up in HOPD, and the HOPD actually has -- in the hospital outpatient, there is a slight bias, like 55% to soft tissue. So, you can see that many of these patients are finding their way there.

The issue that we see in the marketplace today is that the insurance companies are trying to save costs by moving these patients through these outside environments.

And, largely, what's happening is the hospitals really struggle to be able to do a soft tissue procedure, like a hernia or a hemorrhoidectomy for what the insurance companies want to pay for a soft tissue procedure, because they're basing that off of what they can get it done in the outpatient treatment.

So, the backlog in soft tissue is suffering from two things. One is these continued intrusions by COVID. The fact that the primary care guys want to meet with the patient, even if it's telemedicine, and they need to have lab work done, and EKGs done and stuff before they go for these soft tissue procedures.

That marketplace is not as structured as the orthopedic marketplace, so it's lagging.

And when you put on top of that the fact that there isn't a lot of capacity in the outpatient departments for these patients to go get their procedures, it's hard to predict that this soft tissue marketplace is going to be satisfied in the next year or so, I think it's going to take longer than that.

And then you get into the issue of some of these patients have been waiting a year-and-a-half or two years, and their ASA 2 patients have become ASA 3 patients, and then do you operate on them at all. So, it's -- soft tissue is a lot more complicated, David, than ortho. Long answer to a simple question, sorry..

No, that's helpful. Thanks..

From RBC Capital Markets, we have Gregory Renza. Please go ahead..

Good morning. This is Nina Wang for Greg. Thank you for taking our questions.

Maybe first one just follow-up on what you're seeing around recovery on procedures, I was wondering, could you provide more color on what you're seeing in terms of nursing staffing shortage now, and when do you think we'll see the labor force return to pre-pandemic levels, and how that will impact the recovery on procedures in the clinical environment and EXPAREL? Thank you..

Yes, thanks. Yes, thank you for the question. It clearly is the issue. And frankly, in December, it was the issue as well. And in August it was the issue as well, right. So, I mean, you think Omicron was easy to identify, but I think underlying that, the real issue, frankly, was labor shortages. It's better.

I can tell you that the ambulatory surgery centers in particular are not all the way back, right. And so, it still is difficult to get a nursing team together to work a 12 or a 14-hour shift on a Saturday.

And the docs struggle when you get a number of [PRNs] [Ph], and bring them in, and you have five people in the OR on a Saturday morning, but they've never worked together before, and they don't know each other, and the anesthesiologist is introducing themselves to the nursing team, et cetera; it just slows everything down.

And so, I wouldn't say that we're back to where we have to be in order to take care of the backlog that David was just referring to. But I think right now, we're at a place where folks are working, the centers are open, and our numbers would suggest that February is going to be a very good month.

Looks a lot like what October did, and November did actually, and we'll see.

But when you run into trouble is when you start talking about a 12 or a 14-hour shift, on Saturday, and nurses, especially nurses that have got young families really struggle with how they do that when the kids are out of school and -- this week, for example, is a little bit tough, right. Up in the Northeast, all the kids are off for the whole week.

So, you can see right away that the ASCs are slowed down..

Great, thank you. And then just a second question, if I may, on ZILRETTA. Maybe could you talk a little bit more about your plans to address some of the other headwinds ZILRETTA face on manufacturing, rebating, and maybe just pandemic vulnerabilities? And when should we expect to see meaningful growth in revenue in the near-term? Thank you..

I'm not sure I caught the first question.

Is it around manufacturing of ZILRETTA?.

Yes, just manufacturing, rebating, and -- yes --.

Yes, okay, thanks. Yes, that's pretty much over, frankly. I mean it's -- the issue of making manufacturing with appropriate dating is behind us. The issue in the marketplace is short-dated material that was shipped in beyond the capacity of a physician to use it in the time that the label enabled.

And so, especially in some places where inventory was placed with a specialty distributor or in a scenario where a doc bought a lot to maximize rebates, et cetera, cleaning some of that up is what's happening.

And so, it's -- there's some -- this is always going to happen in an acquisition, so there's nothing here that's alarming or troublesome, it's just running a business, it's just stuff. And I think that you're going to see ZILRETTA do better largely just because of the exposure that we're giving it, right.

I mean the docs that come to the PITT to learn about iovera and to learn about EXPAREL, it's a little bit surprising to us, that I would say just a general number, at least half; maybe more than half of these guys don't even know what ZILRETTA is.

So, I think giving it more exposure, we will come back with a -- it won't be a rebate program, it will be a discount program, which is much easier for the docs to understand, and won't incent them to bring in large quantities. And we want them to order it when they need it, and not order a bunch of it in some type of a rebate program.

I think we're doing fine right now. February, it looks okay. And as we clean the rest of these things up and we give these guys more exposure, then we'll clear any of these hurdles that are in the way. And we think that this will be a good growth opportunity this year. And we're looking at all of these products to grow substantially in this year.

And then, as we talk to the FDA about improving the label, and we start the shoulder study, and there's a number of things that we think we can do to improve this. And remember, we're -- EXPAREL is already used extensively in the shoulder. We're also looking at iovera in the shoulder.

So, we've got a lot of context doing clinical research in this part of the body. So, we think we're equipped pretty well to handle doing an iovera or a ZILRETTA shoulder study..

Great. Thank you very much..

Thank you..

From Jefferies, we have David Steinberg. Please go ahead..

Thanks, good morning. I have a question for Charlie. You gave you us a pretty clear pathway, both sequencing and sort of peak margins for EXPAREL. But with regard to ZILRETTA and iovera, I think you mentioned about three years to expect mid-80s gross margin. It was a little unclear in the sequencing in phasing, and how you get there.

Could you give us a sense of sort of annual increments in improvement in gross margin for those two products to get to that peak number?.

Well, David, you're on the top of your game, because that's exactly right. I was a little less specific, and there is a reason for that. And that is it's a little more volume-dependent. And for iovera and for ZILRETTA, we literally just got the product.

So, you notice that, in Q4, we had 82% margins in ZILRETTA, which was actually better than I had anticipated. I think that was a little higher than normal because late-Q4 manufacturing is coming along to make up for the normal shutdown at the end of the year. So, I think ZILRETTA should have been closer to 80% for the full-year, and it'll get to 85%.

I don't know that there's any prescribed notion, other than in the next three years we'll pick up five points. I don't think that's -- anything more specific. iovera will change drastically.

This year -- '21 was an outlier because we doubled up -- as we basically were running the relay race, we had an overlapping section of operations in Northern California, operations in Southern California, operations in Mexico, more QA activity at all three locations; there was just some additional expenses in addition to investing in the gen-2 device, so.

And when you're talking about a $16 million revenue base, it doesn't take much of additional expense to change that margin. That margin will go up very noticeably in '22, and will be -- at that point, will be on track, I think, over the next three years, for iovera to make it too.

So, I think this is the first time we've given detail other than total gross margin. And so, I suspect you were interested to see what some of the other margins were. I think maybe the more important lesson is that EXPAREL is already in the high 70s, and is on a nice path to get to the mid 80s, as we've been trying to communicate..

Okay, thanks, Charlie. And then Dave, a couple questions for you. First, you mentioned in your prepared remarks that pediatrics were doing well, and actually better than you expect.

I guess on that point, could you give us a little color around that? And then sort of some quantification, I think you'd said that pediatric peak sales for EXPAREL could be in the range of $100 million. And has your thinking changed based on that comment? And then finally, ZYNRELEF has been on the market for a couple quarters.

Have you seen any losses at P&T committees and just any color of what you're seeing the field from that product? Thanks..

Yes. No, thanks, David. For pediatrics, what we forecasted was largely off of the adult population. And so, there is a number of places in pediatric medicine where physicians are using EXPAREL almost exclusively, clubfoot, scoliosis, and things like that.

So, immediately it was obvious that our forecast was conservative because there were a number of procedures that weren't included in it at all, to be honest with you. The big enhancement though is we projected that we would have a percentage of the replacement of pumps and catheters.

And, in fact, what we're seeing is that based on the desire of many of these surgeons to have these patients go home on the same day, they're replacing pumps and catheters totally. And so, I don't think anybody would have believed us if we told us that we were going to replace pumps and catheters totally at a number of big major centers.

But in fact, that's what's happening. And we hear docs tell us all the time, I hope I never put another one of things in my life. So, it's going to be than $100 million, David, I think over time. Frankly, we haven't changed the long term forecast to make to improve that in terms of how it gets there and when it gets there.

But it's $100 million given the pace of what we see is clearly on the low side. We were all at Rady Children's Hospital again last week, and the drug just step on all kinds of different ways to use EXPAREL. Again, may be a bit of a conservative judgment on our part.

But the ability to have a patient have a surgery -- a pediatric patient to have a surgery and to go home from the hospital with mom and dad can't be overestimated in terms of what we are seeing in the marketplace.

And so, the pace of what's going on in pediatrics is extraordinary in -- I mean even this morning there were several 10 box and 12 box orders from pediatric hospitals where a year ago, we would have had maybe a box, but likely none. And so, it's doing really well..

[Technical difficulty]….

Oh, ZILRETTA, yes, that's a short one. I haven't -- I have talked to a couple of people that for one reason or another tried it. Nobody has decided that they are going to use it. All the issues that we raised before, it smells, it's sticky, it's -- it forms a shell over the sutures. You got to use a different suture technique.

There have been a couple of issues with infections especially in the lower extremities. Honestly, David, we have been out in the community a lot in the last couple of weeks. I haven't -- not one single customer has brought it up to us..

Fair enough. Thank you..

Thanks..

From Barclays we have Balaji Prasad. Please go ahead..

Hi, good morning, and thanks for taking questions. Couple of questions from me Dave and Charlie, firstly as I -- I understand that you are still not providing revenue guidance. But, appreciate the color on some of the other metrics.

But if I look at where consensus is right now approximately $750 million with EXPAREL at $575 and ZILRETTA at around $140 million, would you be able to provide some color around these, or throw some ranges around what would move both on the upside and downside? And, how do you think 2022 will be with regard to your long term goal? That is one.

Secondly, Dave, we discussed the distributor issues around ZILRETTA last month. Could you just drill down on that a bit more, especially around the rebate, inventory, and manufacturing issues? And what you are doing currently? And, what would that mean for the cadence of ZILRETTA revenue for the year? Thanks..

Sure. On the first part on the revenue guidance, I think if we look at history, you see you have a pretty good idea. And, we have been quite honest about -- candid I guess is probably a better word about how much we expect the product to grow over year. And that is where we are.

I think we have to keep in mind the fact that we do have lower extremity nerve block. And we expect that to be a very big product going forward. But as we said in our prepared remarks, Balaji, that C-section is growing, ortho is growing, peds is growing. We are launching in Europe.

So, I think that you can expect the same kind of performance on a percentage basis. And then, you have to think about adding for STRIDE in 2023. And then stellate ganglion block probably in that same kind of timeframe, 2023. So, from our perspective, our longer term guidance is intact. I don't see it changing. There is some puts and takes.

ASCs are growing very rapidly. Hospitals are not growing at all -- low single digits. So, as the world goes to HOPD and ASC, I think basically what we built the forecast off of is happening. It's slightly accelerated because of COVID. But then, COVID gives us a little bit by moving to the ACS.

And then it takes it back too by not having staff and not being able to do all the procedures that a facility might be able to handle. So, I think long term it is intact. For ZILRETTA, I think $140 is too high just to put it out there, right? They did a $102 - 103 million last year with $12 million to $13 million of that in the fourth quarter.

So, those two numbers -- nothing about those two numbers would suggest that you are going to grow by 40% or 50% this year. And so, as I have tried to say already, the manufacturing issues in terms of manufacturing product with two years of dating is behind us. We have that.

What we have to clean up and why it will be hard to give monthly numbers, well, first of all the way the current rebate program that we are honoring by the way while we replace it with our own program, that program doesn't allow you to actually have accounting of the numbers until the month is over. So, yes -- and the quarter is over.

Yes, so there would be no way for us to give you a monthly accounting there. We will hopefully be able to provide some ranges as Charlie said in the context. But, there is no way for us to have a firm handle on exactly that.

So, in the very short term there are some things in the marketplace that we just are cleaning up relative to dating and some of the way the product was being handled in the marketplace. But, that will all be behind us shortly.

So, if you would just thinking general terms and you were thinking about our products growing by 20+ percent on an annual basis, I think thinking about ZILRETTA that same way would put you into the right place..

And the second part of the question, Dave?.

Yes, the second part around while I sort of answered part of that as well, right? What was being done was a pure rebate. You ordered so many boxes and the rebate grew as the number of units grew.

There is a bunch of problems with that from an operating system perspective, right? You let inventory run out zero until you can get the big discount or the big rebate at the end of the quarter. This is a fairly expensive drug at $500 plus a unit.

So, expecting that our customers especially in their office based practices are going to order anything close to a 100 boxes all-in-one order is just not practical. We would rather put you in a system where you a get discount based on volume. And you know what that discount is because it's going to be for at least a year.

And so, the hope is then, Balaji, that you would order when you need it. And as we said before, we have people [indiscernible] three times a week. You would want your customer to order enough inventory so that they are going to get through the next 10 days or so.

And know that they can order it any time they need it at the same price rather than running the risk of running out and then having a ton of product. And then running the risk you are going to run out again. And that's what leads to the center ordering inventory that they are borderline whether they going to use or not.

And that's where the dating comes in. You order a lot of it to get the total rebate -- the biggest rebate you can. But then you don't use it all because of COVID and that the fact that the patients didn't come into to your office. And you end up having inventory that's short dated, that's out of date.

And obviously, we have an obligation then to work with our customers to take that back even if we are not going to [indiscernible] and that's where we are, if that helps you..

Yes, that was very helpful.

You I could just add one final follow-up on EXPAREL? Could you discuss the opportunity around high dose bupivacaine and where all do you see the applications for this?.

Yes, I'll give you a little bit more than that. So, the low dose is really for a basically what it is, Balaji, is spinal. And so, it will be for a very simple way that we can produce pain control in patients where a spinal analgesia is currently being used.

So then the corollary to that then is can we produce a lipid particle that can take more bupivacaine than the current 13.3 milligrams in EXPAREL? And the answer to that is yes. And so, we've got a particle that has roughly 40% more bupivacaine on it.

And then, the way these things are manufactured, we can change the triglyceride component of the product, so that these lipid particles that are more potent become available to the center nerves on a longer term basis.

And so, we think based on the early data that we're going to have at least five days, and it looks like it's going to be longer than that. And so, what we'll be addressing then is, you know, we hear from ankle surgeons, and foot and ankle surgeons that three days just isn't enough when you operate on somebody's ankle.

There is a number of patient indications, and oncology indications, where it's an open procedure, so you are doing an treatment, and the doc would just like to be able to provide a longer term of non-opioid pain control if there were some way for them to do that.

So, if you thought about doing a lung resection, for example, you are in there, is there some place I can put this stuff so that the patient would get a week, instead of three days. That's the question we are trying to answer. We have the product, now we got to go on a do all the rest of the stuff..

Thank you..

Thanks, Balaji..

From J.P. Morgan, we have Christopher Neyor. Please go ahead..

Great, thanks for the questions. So, first one is on the leadership from HOPD, there are two HOPD in the EOC setting.

And so, what's the trend that you're seeing in this channel, and maybe specific impact that you would note? Also, just trying to get a better picture around EXPAREL procedure volumes across each of those channels and what their growth rates are in those respective markets? And maybe for the second question, could you maybe give a bit more color on the 2022 OpEx guidance in the Flexion deal synergies? You talked about the 3% target for deal synergies, and achieving that in 2022, what do you stand versus those initiative expectations what the 2022 guidance -- Just trying to get a sense of what's baked in there, and to what extent, could there be further upside? And then, on the OpEx side, any more color you can provide on the cadence of OpEx through the year?.

Thanks, Christopher. I'll take a short at the first one, and hand the stuff on to Charlie here with this very sophisticated system we got. So, real specific data and I'll remind everybody that the IQVIA data by sight of care and by procedure is six months late. So, what I'm sharing with you now is August of 2021 data.

But if we remember, August was a horrible month. I still think it's directionally correct and clearly allows me to answer your question, with a lot more color, which I think is helpful for everybody. So, if we look at -- let me see, I'm just going to get myself a second piece of data here, so I don't confuse, I got everybody here.

So, let me tell you, overall, if you look at all procedures, hospitals are about 50:50, both orthopedic, what we call, bone surgeries and soft tissue surgeries, and are growing at a mid single-digit.

If you look at HOPDs, they're a slight bias towards soft tissue, which is what we would expect, given the answer, you know, what we tried to talk about on the call, it's about 55:45. And it's growing by 13%. And in the ambulatory surgery center, it's 75 ortho, 25 soft tissue, and it's growing by 18%.

So, you can see a clear bias, and what you see inside those numbers, Christopher, is that the insurance companies are respectively moving their large painful profitable procedures, right? So, you can say 35% on the cost of care, there is a huge difference between doing a $1,500 hernia and doing a $15,000 knee.

And if you can do a $40,000 spine, now you're really talking, right? And so, that's what's going on in the marketplace, and that's why you see these soft tissues gravitating more towards HOPD and into the hospital. So, if you have any follow-up questions, please come back. I'm going to hand the phone to Charlie to answer question on OpEx..

Great, thank you, that's super helpful..

So, I think one of the questions you had on OpEx was overall timing, is that what you were looking for?.

And synergies..

Oh, on synergies..

Timings for the year….

Okay. So, from a timing perspective, I don't have my quarterly progression in front of me with this phone hiccup this morning. We are all resting in our conference room. I can get back to you. I don't think there is anything unusual. I would just look at past trends, and expect them to follow probably a similar path.

And if that's not right, I can get back to you. [Multiple Speakers].

I was just going to say….

Oh, go ahead..

I was just going to add, you know, you said 3%, 3% was really what we were talking about in terms of gross margin, and it has been on an annual basis. The way we think about OpEx is that, you know, net-net we're thinking something in the mid single-digit range.

So, the whole idea of the story here is gross margins heading towards 85, revenue high-teens, OpEx a third of that, if you are thinking about it in the broadest terms, right. So, I don't want to think that 3% was not related to OpEx overall, it was related just with gross margin improvements..

Okay, great.

And on the OpEx run, how much of the deal synergies are really taking upfront? Is there any additional synergies we would be expecting further or later date than 2022?.

So, I have to say I'm really pleased with organization and our equipments, which we implemented changes and started to bring things in. So, the 2022 guidance includes significant synergies.

There might be $2 million, $3 million, $4 million better that we do next year, as I mentioned in my script, there are some transitional activities on the G&A side, mostly that you know, we have overlapping things for the next six months or so, as we fully transition. But after that, I have to tell you, I think we've done a great job with synergies.

If you go back, and you know, I tried to layout in my script a path for you guys to follow from a top line, margin, and synergies perspective.

And what we said when we acquired the company was that we expected it to be highly accretive and that really needed to capture 30% of our target to breakeven on this, and we have well exceeded that at this point. So, I don't think it's going to be significantly differently going forward, and I'm pleased with where we are..

That's great context. Maybe last one from me, maybe more on the M&A and the business development side, so I realize that you guys have just completed the Flexion deal, but I think you guys popped up staying active, and we are seeing a pretty meaningful pullback in valuations for both early stage and commercial stage companies.

Maybe any opportunity we're seeing for acquisitions either on chronic or acute pain space, maybe what's the profiled asset, the type of asset you guys will be looking to acquire?.

Yes. Thanks, Christopher. So, that really falls into two buckets. There are things like spine biopharma, where they're looking into the genetic disease, with a 7-amino acid peptide, you know, we think and the turn off the genetic process. You know, those kinds of assets are meaningful.

We made an investment in that company, and there is a type of profile, and hopefully on attainment of that type of profile there would be further activity, the nature of which we are talking about, right, there is a number of places where we're working with folks on different products for neuropathic pains, for post-surgical pain.

We have a whole bunch of different teamed opportunities. Some are very broad like diabetic neuropathy or peripheral neuropathy, and some of them are highly specific like specific spine types of pain, and -- So, Rod and his team are active across a broad spectrum of opportunity.

I would agree with your comment on pricing as it relates to commercial resources or commercial assets, I haven't seen anybody in the private side. So, their asset isn't going to change the way we would practice medicine in the world, and they're worth a lot more than anybody that's been around the block for 10 minutes.

So, the private market in my view needs a lot of thoughtful reflections on what their assets are actually worth in this economy. Most of the stuff that we're working at is in that environment, and folks are still very proud of their assets.

And so, we will have to see where that goes, but the majority of deals that we don't do are because of just the crazy valuation and people that are pre-man comparing themselves to a product that's on the market. In terms of the market cap of the company, I mean it's just crazy stuff, Christopher; it's unworldly in some in some cases..

Great, that's super helpful context. I appreciate you guys for taking the questions..

Thank you for the questions..

And from Truist Securities, we have Greg Fraser. Please go ahead..

Good morning, folks, and thanks for taking the questions.

On the pediatric market, if we are doing more in terms of sales cost or marketing spend to try to use that, would you say that pediatric effort is pretty well resourced for now? And then, iovera, would you expect to have visibility on the regulatory pathway, or is that just the indication? Thanks..

Yes, thanks, Greg. So, in peds, I mean if you put additional resource out there, you are always going to get some additional revenue. The question is whether it's profitable revenue or whether you're just turning revenue. I mean I think we have to be careful here.

And so, we launched with a team of nurses, all hospital, critical care nurses, pediatric ICU nurses et cetera, and we were very careful to let the leaders in pediatric pain control talk to their constituents, their fellows, and their residents, and talk about how they're going to use this, and how they are going to replace pumps and catheters and things like that.

So, the sales force has been turned on, and I guess, since August now or early September, maybe, the bigger sales force has been working with the community hospitals and the smaller centers.

But I think the number of educators that we got and the number of KOLs, Key Opinion Leaders that we have got in each of the specific disease categories suggest that the right way to do this is to take our time and to do it very well, so that we don't put any little guys in harm's way. So, I think we're happy with the case.

I think as docs continue to use EXPAREL in different ways for different procedures and invent new blocks for how we can do things in kids that might be a little bit different than adults, I think if went any after, Greg, we would run the risk of cutting our legs off long-term, I think the best thing for us to do is keep doing what we are doing, and training people and making sure that our hospital is fully prepared to use EXPAREL and iovera products basically, but the question is largely around peds.

And so, I don't know if you got anything to add to that. I'll let me come back when he answer the second part of the question. I can't remember.

What was the second?.

Spasticity regulatory?.

Oh yes, regulatory. Well, you know what; I'm going to give the phone to Roy Winston, who is our Chief Medical Officer, who is here with us, and he can answer both those questions..

Hey, Greg, and thanks for the question. So, I think starting with the regulatory pathway for spasticity, we are in the middle of discussions with the FDA right now on exactly what that is.

Keep in mind, iovera has a very, very broad label at this point, and it's really only a small addition, because it's the same process of treating -- could be treating the same nerves, even [technical difficulty] timeline, but I do think you are going to see a lot of very fast progress in spasticity, and we have a lot of interest already in the community since the Investor Day a several months ago.

We find it to be one of the most frequently asked questions we have, and it's surprising to see how many people, whether it's friends and relatives with strokes that have spasticity as a byproduct of that, or families with kids with cerebral palsy, who now are going to have a treatment modality that is really groundbreaking.

So, we are on it, and we are engaged, and I would expect by the next earnings call to have a lot of very specific, and we are already on that..

[Technical difficulty]….

Yes. So, peds continues to grow at a rapid rate. We have several collaborative studies now, starting one with Cleveland Clinic, looking at major spine surgeries for kids with scoliosis, as you know, they're one of the leaders in doing that.

And another one, with Shriners Children Hospital, which -- throughout all their campuses, and then, we have a meeting, which was postponed by the FDA, because I guess they're overwhelmed with everything going on, but we have a meeting towards the end of March to define the regulatory pathway for the expansion of the pediatric label down to, you know, we hope somewhere around six-months-old, and to include nerve block in all those kids.

I think in pediatrics, the combination of low-extremity nerve blocks and the rest of these tissue plain blocks like CAP and particularly tectospinal really are the pathways that people are using now, and you look at the literature, there is -- almost a week doesn't go by with someone doesn't publish a case report about using EXPAREL for some new indication in pediatrics, which is very exciting to us, and the major pediatric centers, Texas Children, the largest children's hospital in the world, has now come online as a user in multiple treatment modalities.

And I think we are going to see it, because where the leaders in the community go, everybody follows..

And Greg, I would just close that, Roy raised an important topic for I think everybody on the call to at least have a frame of reference on. We've had several of our FDA meetings delayed for all the different things that they're going through, and the same kind of staff shortages that we referenced in other places.

So, it's very difficult to figure out what a timeline is when it's very difficult to know exactly when you are going to be able to meet with the FDA. So, just something else to keep in the back of your mind as we go forward, so --.

Got it. Thank you..

Thanks, Greg..

Thank you. And we will now turn it back to Dave Stack, Chairman and CEO for closing comments..

Thank you, Brandon. I would like to thank you all for participating and listening to today's conference call. We look forward to keeping you updated on our progress. Next up for us is the Barclays Conference next month. Thank you all, and stay well. Goodbye..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect..