Good morning, ladies and gentlemen. And welcome to the Q1 2020 Pacira BioSciences, Inc. Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to hand the conference over to your host, Ms. Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, Anita. And good morning, everyone. Welcome to today's conference call to discuss our first quarter 2020 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 our filings with the SEC, which are available from the SEC or our website. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone. And thanks for joining us. Particularly during these challenging and unprecedented times, I hope this finds all of you and your families well and safe. We'll be taking a different approach to our call this morning, focusing mostly on a review of the first quarter, but also what we're seeing in the field today and other data points that are relevant in the current COVID-19 environment. We will also briefly touch on our strategies for EXPAREL, our iovera° program and our business development efforts before turning to your questions. Our highest priority at Pacira has been providing an opioid-free pain alternative to patients while keeping those patients, our employees and the community safe in order to aid in the global containment of the COVID-19 virus. Toward that end, most of our office and lab-based colleagues have been primarily working from home. Since mid-March, our sales and clinical education teams have remained highly productive, providing customer, product and reimbursement support using digital tools, which focus on virtual training programs and key opinion leader preceptorships. These teams recently began taking limited calls to hospital and ambulatory surgery centers, or ASCs, where elective surgery bans have been eased or lifted. During this work-from-home period, we had the pleasure of welcoming a new Chief Medical Officer, Don Manning. Don brings extensive experience and shares our commitment to bringing opioid-sparing pain management to patients. We are thrilled to have him join our executive leadership team and we're looking forward to his contributions. Many of you have asked how this pandemic is affecting our business in both the short and long term. The simple answer is that we do not fully know what the impact will be until we have more data points from the field. We do believe that we are now starting to see the other side of the elective surgery restrictions, with several states coming online with EXPAREL and data for the last two weeks showing week-over-week growth, which is very encouraging. I'll touch more on this point shortly. We do know that patients will continue to require emergent and elective surgeries and that all deserve an opioid-free alternative for their pain control. We also believe that disruption on these surgeries as a result of COVID-19 will be temporary. While we cannot speculate on the duration of COVID-19 impact, a number of seasonal factors may also change in terms of when patients schedule elective procedures. For example, we may not have the usual seasonal dips in surgeries in late August. Ambulatory surgery centers also offer an outpatient solution for patients in the healthcare system by providing capacity for COVID-19 patients in the hospital, while allowing for staging and isolation of surgical patients in the ASC environment, away from the more crowded hospitals. Importantly, the long-term trends, along with the expanding use of EXPAREL and an increasing number of procedures, highlights the market's desire for opioid-sparing post-surgical pain management. This is supported by the growing demand for EXPAREL, which continued unabated for the first 11 weeks of the year, with sales tracking ahead of plan and year-over-year growth rates of 21% for January and 22% for February. We saw demand continue to expand within the anesthesia community with EXPAREL-based nerve blocks and field blocks taking hold as institutional protocol for a variety of surgical procedures. We had a very strong first quarter with total revenues of $105.7 million, while even in these challenging times, this 16% year-over-year growth is in line with our long-term guidance for top line growth in the high teens. Today, we are pausing our annual guidance. We will look to provide greater granularity on our 2020 projections once we have more data and real-world insight into this unprecedented situation, specifically, when hospitals will be in a position to resume elective surgeries and how quickly the surgical backlog can be relieved. Even with a significant short-term disruption in revenues, we believe the natural curtailing of operating expenditures, resulting from COVID-19 restrictions, will still allow us to be adjusted EBITDA positive for the full year, and we are very well positioned to quickly ramp up as the world reopens for business. Importantly, we are on solid financial footing with $354 million in cash and investments. I'd like also to touch on our manufacturing as we've gotten some questions on this in recent weeks. The manufacturing of EXPAREL and iovera° are fully operational as they are deemed essential in the states in which we operate. We have not had any disruption in API sourcing or any aspects of our manufacturing supply needed to ensure necessary inventory for patients. iovera° production is back up and running after a temporary halt in Fremont, California, triggered by a three-week shelter in place order, so that the team could implement proper social distancing and other safety protocols. We do not have any exposure in China or Italy and have not learned of any supply interruptions or late deliveries from any of our suppliers. We are monitoring our supply chain closely. And as of today, we have no issues. With manufacturing operations ongoing, we have sufficient inventory to supply our original 2020 revenue expectations and satisfy any surge in demand. Let's turn now to a more detailed discussion of EXPAREL, where during the first quarter of 2020, we posted a nearly 12% year-over-year growth in product sales despite the fact that economic and personal activity essentially came to a halt in mid-March. We saw a precipitous drop begin in the second half of March and continue through the end of April with a decline in year-over-year EXPAREL sales of approximately 70% during this period. However, with states now lifting surgical restrictions, we have seen positive signs of a rebound over the past three weeks. To make these numbers as real-time as possible, we are comparing Friday to Thursday two weeks ago and one week ago to this week ending this morning. Comparing last week to two weeks ago, we saw a 39% increase in ordering customers and a 32% increase in EXPAREL sales. And comparing this week to last week, we see an additional 47% increase in ordering customers and a 51% increase in EXPAREL sales. Again, this is real-time as of this morning. While these recent sales data are very encouraging, we do not know how long some states will mandate stay-at-home orders or how quickly the surgical community, and especially hospital inpatient surgery, will return to business as usual. During the time when elective surgery is limited, our teams are focused on education, planning and targeting in anticipation of increased surgical volumes to address the demand that is building. An example of the education we are currently providing is how EXPAREL is an enabler of reduced length of stay through regional analgesia. This is not only important today as healthcare providers work to get patients out of the hospital to reduce the risk of infection and release hospital beds, but it is also a key trend in healthcare with many large painful procedures, such as spine surgery and total knee arthroplasty, shifting to the 23-hour environment where EXPAREL is the perfect solution. In fact, we believe that the COVID-19 situation may actually accelerate the migration from inpatient settings to ASCs that was already taking place before this pandemic. Patients are more motivated than ever to avoid hospital stays, and hospital resources continue to be deployed to the sickest patients. Additionally, we see this transition for those surgeries where ICU recovery is not necessitated and for which a 23-hour stay is preferable as we aim to reduce exposure to the virus in the surgical setting. As you can see from the rapid increase in customer ordering of EXPAREL, a growing number of states are now relaxing mandates and allowing elective surgeries, including in ASCs and hospital outpatient facilities. We are working closely with the surgical and anesthesia communities in key states, such as Texas, California, Florida, New York, Ohio and Georgia, as well as an additional 11 states currently allowing elective procedures to begin treating the backlog of surgical patients. As we expect ASCs to come back online earlier than hospitals, which will need time to recover from the COVID-19 burden, when they start to admit more surgical patients, we are ready to ramp up in lockstep with them. As a reminder, 60% of EXPAREL-relevant procedures were already being performed outside of the hospital inpatient setting in Q4 of 2019. Our ASC customers are eager to get back up to speed as quickly as possible to benefit their patients who have been deprived of important surgical interventions. These facilities are planning to operate six or seven days a week and, in many cases, 24/7. To facilitate this activity, we have rolled out a program available through June, which offers ambulatory surgical centers, plastic surgery offices and oral maxillofacial practices to order EXPAREL at a discount and with extended payment terms. Our expectations are that more than 80% of the delayed procedures will be rescheduled, with the lion's share made up in 2020. We have also been working closely with our partners at DePuy Synthes and with key opinion leaders in the area of joint reconstruction, spine and sports medicine at a time when orthopedic surgeons have experienced a dramatic reduction in scheduled surgeries. Here, we have focused on creating new marketing materials to provide virtual education around EXPAREL-based regional approaches as an important enabler of reduced length of stay to shift major orthopedic procedures, like TKA and spine, to the 23-hour side of care. This is especially important when surgeons have not had access to EXPAREL in their hospital and for surgeons new to operating in the ASC setting. While it is likely to be some time before we fully return to normal terms of EXPAREL use, we expect elective procedures to be largely open to all patients in the second half of the year and we believe that significant opportunity is ahead of us to support the market in addressing surgical backlog through EXPAREL-based lower or no opioid strategies. That said, we also have a base of business that is being driven by the use of EXPAREL and non-elective emergent procedures such as C-section and trauma surgery, as well as gynecologic oncology, breast cancer, cardiovascular and spine cases, even in markets with restricted access to elective surgery. Increasing EXPAREL use in C-section continues to be one of our top growth drivers, and we expect demand to continue to increase given the current marketplace dynamics. While scheduled C-sections continue to occur, many hospitals are limiting and restricting the presence of birth partners and women are very hesitant about being admitted to the hospital. Most pregnant women already want an opioid-free experience. So, this is accelerating our anesthesia training programs to the opioid-sparing benefits of an EXPAREL TAP block. We only launched the broad marketing and awareness program for C-section in early 2020. So, we're in the infancy of tapping this market segment and we see this as a terrific near-term opportunity to improve patient care and hospital economics. We recently hosted a webinar highlighting the benefits of EXPAREL-based TAP block from our opioid-free CHOICE study. More than 150 providers, payers and policy decision-makers participated, which underscores the growing demand for limiting the time new mothers spend in the hospital for a C-section. As you know, we have a robust clinical program intended to drive EXPAREL growth. These include our Phase III STRIDE study of EXPAREL as a lower extremity nerve block, our Phase IV FUSION study in spine procedures and our Phase IV PREPARE study of iovera° and EXPAREL in total knee arthroplasty as a procedural solution. These studies are on pause for now, but we look forward to completing each in a timely manner. The team is also working toward securing EXPAREL approvals in Europe and Canada by the end of 2020. To date, interactions with regulatory agencies in Canada and the EU have progressed using virtual communications. From a strategic perspective, having pediatrics on our label is of critical importance to all key stakeholders – parents, children, doctors and payers. There is an urgent need for non-opioid options to manage post-surgical pain in this vulnerable population. Here, we remain on track to submit our sNDA to pediatrics in the next few weeks. Building on our 23% EXPAREL growth in 2019 as well as multiple new data sets, package insert expansions and international launches, we remain confident that once the other side of procedural disruptions due to COVID-19, we will be in a position to deliver rapidly growing top line, steadily improving margins and appropriately managed operating expenses. The takeaway here is that we have a tremendous opportunity to invest in our business while simultaneously ramping the top and bottom lines. Now turning to iovera°. We continue to be highly confident that the technology behind this innovative system and the significant commercial opportunity it represents. We kicked off a relaunch of iovera° at our national meeting in February. The launch is now delayed given the impact of COVID-19. And as a result, we are temporarily suspending iovera° sales guidance. We recently introduced an iovera° initiative, offering a kit containing all components of cryoanalgesia treatment at a reduced price. This will help our orthopedic customers offer pain management to patients who have delayed TKA procedures due to COVID-19. This will, of course, help patients while concurrently generating incremental cash flow for provider practices during this difficult time. Over the last six weeks, we've held a series of webinars with our customer-facing organization as well as orthopedic surgeons to discuss how iovera° provides several months of pain control across a range of patient needs, patients preparing for TKA surgery, patients whose surgery has been delayed as well as patients who are hoping to delay surgery but have osteoarthritic pain impacting their daily life. We are also continuing with our development programs for iovera°. In addition to launching a study of iovera° plus EXPAREL and TKA, the PREPARE study, we are developing clinical data in a wide range of treatment opportunities for spasticity, low back pain, foot and ankle pain, fractured ribs, spine and shoulder as examples. Before turning the call over to Charlie, I'd like to briefly comment on the business development. We continue to thoughtfully and opportunistically pursue assets complementary to our existing offerings that are also of interest to the surgical and anesthesia audiences we call on today. That said, we are laser-focused on supporting our partners, surgeons and anesthesiologists, and will avoid any heavy upfront cash requirements in the near-term. Let me remind you of the unique opportunity we find ourselves in today. Our portfolio of innovative non-opioid products allows us to address two national public health crises – the delay in surgery and the demand of backlog driven by the COVID-19 pandemic, as well as the ongoing opioid crisis that has been further exacerbated with the patients requiring opioids for pain control while awaiting surgery. And with that, I'd like to turn the call over to Charlie for a review of the financials. Charlie?

Thank you, Dave. And good morning, everyone. I'll start by summarizing our first quarter 2020 financial results and then we'll review our outlook for 2020, including the effects of the global COVID-19 pandemic. To remind you, I will be discussing non-GAAP financial measures this morning, which we believe more accurately reflect our business results. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release we issued this morning. Let me start by reiterating Dave's points. The fundamentals of our business are very strong, and Pacira is well equipped to successfully navigate these challenging times and withstand any temporary disruption to our business. We delivered top line revenue growth of 25% in 2019, and strong year-over-year growth trends continued through mid-March. We remain very optimistic about the future of our business, which is on track for accelerating profitability once hospitals and ASCs are back to regularly performing elective and emergent procedures. We ended the first quarter in a very strong financial position, with approximately $354 million of cash and investments. Total revenues increased by 16% in the first quarter of 2020. This was primarily driven by net product sales of EXPAREL, which increased by 12% to $101.3 million in the first quarter of 2020 as compared to $90.6 million for the same period last year. For iovera°, we reported net product sales of $2.3 million in the first quarter of 2020. Our non-GAAP gross margin for the first quarter of 2020 improved to 73% versus 71% in 2019. Non-GAAP research and development expenses were $14.6 million in the first quarter of 2020 versus $13.2 million in 2019. The increase was primarily driven by increased regulatory activities to support the label and geographic expansion of EXPAREL as well as costs related to our Phase III and Phase IV studies of EXPAREL. Non-GAAP SG&A expenses were $38.3 million in the first quarter of 2020 versus $42.2 million in 2019. This decrease is primarily attributable to reductions in J&J commissions, partially offset by additional spending and promotional activities in support of EXPAREL growth, including the expansion of our field force. J&J commissions are directly linked to EXPAREL growth, which was impacted by the mandated delay in elective surgical procedures. All of this resulted in non-GAAP net income of $22.8 million in the first quarter of 2020 or $0.53 per diluted share versus $9.3 million or $0.22 per diluted share in 2019. Turning now to our outlook for the remainder of 2020. We are especially happy to report that we are weathering COVID-related disruptions without making any reductions in force. We greatly value our talented staff and sales team who are subject matter experts and are glad to be able to support them through these unprecedented times. As Dave noted, we are confident that we will make up any disruption to our upcoming quarterly sales with a building backlog of elective surgeries and increasing utilization of hospitals to execute a greater volume of emergent surgeries as capacity frees up. As mentioned by Dave and in today's release, we are extremely optimistic about our long-term outlook. However, we are temporarily pausing our 2020 financial guidance, given the uncertainties around COVID-19 and the timing of hospitals and ASCs returning to new normal. Like most companies, we continuously seek to reduce costs, while fully being committed to providing the necessary investment for the growth of our products, future indications, and pipeline. In many ways, reductions are occurring naturally in the current environment. Major meetings have been canceled. We have virtually no T&E expenses. Most clinical activity has been suspended. Hiring is on hold. Training programs are taking place virtually. We expect that some of these changes, like virtual training, will continue for ongoing savings moving forward. This is a fluid situation, and operating spending is being managed very closely with potential significant full-year reductions in R&D and SG&A expenses, given the social distancing and stay-at-home regulations implemented by state and local governments. We remain committed to profitability and believe, for the full year, we are well positioned to still deliver positive EBITDA. Our long-term growth projections remain unchanged, and we expect a high-teen top line annual growth rate over our five-year planning horizon. With that financial overview, let me turn the call back to Dave for his closing remarks.

Thank you, Charlie. Before opening the call to your questions, I want to underscore one important point. This pause in our 2020 guidance in no way undermines our confidence in the long-term outlook for our business. While we are experiencing a short-term revenue deferral, we believe our opioid-sparing innovative products, combined with a great market need for a non-opioid pain management, provides a compelling long-term investment opportunity. We remain steadfast in our long-term strategy to position Pacira as the leading provider of non-opioid pain management and regenerative health solutions. We believe the fundamentals of our business will continue to fuel our long-term expansion. We are committed to advancing these goals, and we believe they will create increasing shareholder value. Anita, that concludes our prepared remarks. I'd like now to turn the call over to you to begin our Q&A session.

[Operator Instructions]. Line of Randall Stanicky with RBC Capital.

Great, thanks. Hey, Dave. Survey feedback that we received both from anesthesiologists as well as orthos was that roughly a third of volumes could be moved to ASCs to help manage volumes. It sounds like you're seeing some similar trends. So, what have you seen here? And more importantly, can you help us understand what percent of your volumes were ASC before the pandemic? And what do you think that will look like as we come out of this in 2021? And then, I have one quick follow-up after that.

A couple of things, Randall. First, just to make sure we're all talking about the same thing. When we say 23-hour stay environment, we're talking about ambulatory care as well as hospital outpatients, right? So, those are two marketplaces that both foster this movement to a less expensive, less intense environment. The reason I mentioned that is that there are several states that are ASC very heavy, and we have several states where there are virtually no ASCs at all. And so, in the nature of your question, you almost have to look at it state-by-state to understand how this thing is unwinding and you have to be able to tease out hospital outpatient from pure ASCs. We don't have a really good data source and we have virtually no data sources other than yesterday's sales and the day before sales to be able to answer your question in a very appropriate kind of way, Randall. I think it's safe to say that what we are seeing is a significant bounce back in both of these not inpatient environments. And we also see a fair amount of business that's being driven by the reopening of plastic surgery and oral maxillofacial practices, et cetera. So, I think that a third is probably the right number from your surveys. I think it would be highly dependent on which states those folks actually worked in. If anything, it would be conservative in many states. It would be very conservative, Randall. So, we think that, for sure, more than half of the business that we've generated over the last three weeks is coming from a non-inpatient environment, if you'll allow me to change your question slightly.

No, it's helpful. The other question I have is more specific. How receptive do you think hospitals or P&T clinics are going to be to look at potential newer competitive products, given just the logistics and focus here around the pandemic, assuming that we do see an approval over the next month or so?

Let me tell you what we're doing, and then I'll translate that into a specific answer. What we hear from docs, especially in the 24/7 scenarios, and more places are going to open up and guys are going to have surgical suites for 12-hour blocks of time, is that they are going to be totally committed to just taking care of their surgical patients and really aren't going to have much time for anything else. That comes from our discussions with them about how can we support a 24/7 operation with virtual opportunities, with key opinion leaders, docs in different surgical procedures who might be able to come on online or in a split screen scenario and help docs through a surgical case where they might not be as familiar with EXPAREL as somebody who uses it all the time. So, if I translate that into your question, I think it's going to be very difficult for anybody to get through a safety committee and then a P&T committee. Those committees don't meet during the summer as a general rule anyway. And I think you can extend that. I think it's going to be very difficult to get an anesthesiologist who, generally, would be the person who would run a P&T committee for a pain product to come out of a 12-hour stint in an OR or on a 24-hour stay environment or a 6-day work week and go to a meeting, especially if the surgery center that they're working in is not in the hospital where the meeting is going to be. So, I think that's about as specific as I can get, Randall.

That's helpful. Thanks, Dave.

Your next question comes from the line of David Amsellem with Piper Sandler.

Thanks. So, just wanted to ask a sort of general question. With COVID-19 and with the public health and institutional reverberations, do you see a faster migration to the ambulatory setting? In other words, hospitals needed to free up capacity, but do you think that a faster migration to ASCs happens and that endures given the shock to the system in terms of capacity, so to speak? And with that in mind, what does that mean for your commercial messaging and how you calibrate your messaging to your customers in the field?

Thanks, David. I'll take it slightly in reverse. We think that it's really field blocks and nerve blocks largely being done by anesthesiologists under ultrasound guidance that gives us the confidence that we can provide several days of pain control. And it's really having that now that confidence that we can provide several days of pain control with a high-quality procedure that allows us to move these patients from an inpatient procedure to an outpatient procedure, thinking specifically about things like total knee arthroplasty and spine surgeries and things like that. So, specifically, to answer your question, we thought that, by the time we got to 2025, 70% of the surgeries in America would be done in ambulatory care centers anyway. That was the normal progression that we were seeing, David, that about 2 million patients in our TAM on an annual basis were actually moving from inpatient to the different outpatient opportunities that I just outlined with Randall. So, given all of that, we absolutely think that this is going to accelerate the move to ambulatory care. In fact, when we talk to patients and when we do patient surveys, one of the things that I think is going to be an interesting byproduct observational opportunity here is to see whether patients actually want to go to a hospital for anything, but especially for a surgery. And so, we think we have an opportunity to move these patients to an ambulatory facility. Remember that CMS approved total knee arthroplasty as an ambulatory care procedure in 2020. And they put hospital outpatient in place for hip surgery and for many spine surgeries. So, you can already see that the government is leaning towards moving patients out of the hospital. We know, for example, that United put out a list of 65 musculoskeletal procedures on November 1 that they would no longer pay for without prior authorization in the hospital outpatient department. They would pay only in the ambulatory department. So, I think you've got the perfect storm here of where patients don't want to go to the hospital, surgeons generally would prefer to work in an ambulatory environment, and the payers, in many cases, are insisting on the patients going to an ambulatory environment. So, the answer to your question is a pretty strong absolute.

Okay. And then, if I may just – sorry, go ahead, Dave.

No, I was going to say I didn't answer your question about how do we direct our people then. We've been doing this for the last year-and-a-half, David. And that's why we highlighted in the script that there are a couple of unusual circumstances that are driven by COVID-19. But we've been working with ERAS protocols and highly protocol driven care for a couple of reasons. One is throughput in an ambulatory environment is critically important. And because you're operating in a lower cost environment, an ERAS protocol gives management of these ASCs an opportunity to understand the air bars around what the cost of the procedures might be when they're bidding on these different procedures. So, we've been working on ERAS protocols for ambulatory care environments now for a couple of years. And the opportunity here is driven – as you suggested, that there'll be surgeons who have not been allowed access to EXPAREL, who would be using it for the first time in these ambulatory environments and we've been training to that, as well as surgeons who have been operating in the hospital, but now in an ambulatory environment might actually have a different view on how to use the product in terms of cost and throughput, et cetera. So, we've got virtual programs that are on our website that we're sending to docs that are product-specific, that are ERAS specific. And our field force and our education teams and especially our innovation team are all training against those things, so that we can be part of the solution to how do we move these patients into these lower-cost environments without sacrificing patient care. David, you had another question?

And your next question comes from the line of Greg Fraser with SunTrust.

Good morning, guys. Thanks for taking the questions. Can you expand on the assumptions underlying your estimate that 80% of deferred procedures will be rescheduled, with the majority made up this year? Sort of what does that assume in terms of the timing for ASCs and hospitals getting that to a new normal? And can you also comment on the discounts that you're offering?

Sure. So, the numbers come from what we've seen in the marketplace and from all the surveys that we've shared from you guys, Greg, for one, but from all of the big banks that have talked about how this is going to roll out. We also have the opportunity to talk with a number of the insurance carriers in terms of how this is going to happen. We think that the ambulatory care centers are going to lead the way, and we think that's what we're seeing right now. We also see states where there was not a heavy burden placed by COVID-19 patients, and those folks are coming back online. So, we do start to see some hospitals starting to participate. The reason that you come up with the 80% number that we outlined is that it's pretty clear that there are some patients, either mortality or patient's clinical situation has deteriorated, and they're no longer surgical appropriate. And then, there is a small number in there for patients who we think will not have healthcare. In some cases, that's a current issue that will translate back to normal over time. And so, about half of those 20% that are not in the 80% for this year move into Q1 of next year. And then, there's 4%, 5% of those that we think are lost and then there's 4%, 5% in there, frankly, that's just a fudge factor that – the unknowns are so wide and varied that we just can't get to – we're not saying we know where 100% will be, but we can be pretty clever or pretty certain that as you roll out the capacity of the ASCs, you can do most of these procedures, but you can't do all without the hospitals coming back on board to get us to that 80-ish, mid-80s number that. If that answers your question. For iovera°, what we put together was a packet that was a no capital cost of the handhelds and a discount below the base that we've told you guys before. So, we previously announced that the lowest price we had was $450. We went below that price to make sure that even folks that were in CMS states where the reimbursement wasn't very good would be able to generate a small profit. And so, the kit went out to these guys, 20 tips, two handhelds and the cartridges, the NO2 cartridges that were required. And it was at a modest discount. I guess, if I figured out the numbers, it was something like 20-plus percent to what the full WAC would have been. But I think the big thing is that we've built the handhelds into the cost of the tips. And so, there is no capital requirement. So, guys didn't have to come up with a lot of money to get started. That was the whole intention to be able to defray the cost while allowing patients to have a way to have pain control while their surgery was deferred. On the EXPAREL side, the discount is modest. It depends on how many boxes you order, but it's in the 5% to 7% range for the majority of these orders. And the dating is even more important to the docs. Many of these orders are taken on a physician's credit card or an ASC credit card. So, having a period of time to pay for that bill actually turns out to be quite important to them. We know from history, Greg, that from when we do the programs, say, during the Christmas season for plastic surgeons and during the school vacation seasons for oral maxillofacial surgeons, for example, that there is a very considerable shelf pressure. And docs want to use it on an immediate – when they have a patient, they need to have it local and handy. And so, we're trying to make it really easy for the docs to have EXPAREL on the shelf. And this has also turned out to be a great way for our field organization to get into all of these different places, offer this, but then have a discussion about appropriate reimbursement, do they need any help with all of the training modules and all the reimbursement, do they need to talk to about KOL, et cetera. So, it really is a number of purposes.

Great, thank you.

Thanks, Greg.

Your next question comes from the line of Tim Chiang with Northland Securities.

Hi, thanks. Dave, you talked a little bit about just some of the rebound numbers recently. Could you talk a little bit about just geographies in the US? Where do you see elective surgeries coming back first? Obviously, we're looking for a stabilization and then a recovery. Can you talk a little bit about how much of the pent-up demand you'll see come back in the fourth quarter and even maybe in the third quarter?

And it is very much state-specific today, Tim. Thanks for the question, by the way. We get daily sales. So, it's really a great tool to be able to get sales for last night this morning. And the states that are heavy ASC are the states that we tried to outline in the script – Florida, Texas, Georgia, California are states that have a lot of ASCs. And when you look at the daily sales, you would see that the sales numbers that I called out in the script are heavily reliant on those markets. You would also see, Tim, and this is probably the nature of your question, that there are also other heavy ASC states like New Jersey. And there's several others, actually, but New Jersey is the one that does a lot of ASC business where we have virtually – we're still in lockdown. We have virtually no business in those places. And so, I think that what we've seen so far is a very rapid recovery in about a third of the market. And if those numbers prove to be true, it would suggest that we're going to do very well as the rest of the country opens up. The Carolinas, for example; New Jersey, as I stated; Pennsylvania. There are a number of other states where we would have a lot of ASC business in the normal course of business, and right now we have virtually none. I should answer your question. No, I was going to say, Tim, I should go to the back half of the year. Yeah, that's all going to be – as I mentioned in my answer to David, we can't get to doing 80% to 85% of all of the procedures we would have seen in 2020 unless we have participation from hospitals. So, what we're seeing is the ambulatory centers and then some of the ancillary offices, as I said, plastic surgery and oral MFS are opening up where elective surgeries are allowed. What we'll need is for the hospitals to get back online. We think that's going to happen sometime early in the third quarter, at least that's our hope. But as you look out in time, that's what we're talking to surgeons about. Even in the states where we don't have current participation, we have guys who are telling us that they're scheduling cases – that we're scheduling our educator teams to be in these different facilities for the first few cases, et cetera. So, we think that, as you go through the next couple of months, virtually all of the ASCs will be up in line in one form or another. And then, we're just going to have to see how fast the hospitals can recover from COVID. We think in places like New York, it's going to take a long time. In other places, where we didn't have that same depth of an issue, we think they'll come online faster. But when you roll all that together, that's when you get to that 80% to 85%. We're allowing for that 15% to 20% that just can't be done this year, and most of those roll into 2021.

Okay, great. Thanks for the very helpful...

And, Tim, it's soft, as you know. I'm extrapolating the numbers that you saw from last night, right? You'd see big numbers in California, big numbers in Texas, big numbers in Florida. And then, you'd see states where normally they would be huge supporters of EXPAREL and we had one order from some states last night, just to give you a sense.

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

Thanks and good morning. I have three questions. The first one is, I was just trying to get a sense of what percent of EXPAREL uses for medically necessary procedures, like C-sections, are oncology related. I think, Dave, you'd said that, in late March, sales had plummeted 70%. So, is the implication that about 30% of your business is medically necessary? And then the second question is, as I understand that J&J is going to introduce either this year or next year a new system. I think it's called Simplicity. It's a suite of products, including robotics, and will include EXPAREL – feature EXPAREL. And I was wondering when that happens if that would help accelerate your business and also perhaps create more of a moat around your business when other competitors come out of the market? And then, the third question revolves around pricing. I know you said you've offered a modest discount in iovera°. Did you also say there would be some discounting or will be some discounting in EXPAREL? Thanks.

Thanks, David. And thanks for the questions. So, as we come out of April with that 30% number, David, I think that's as good as any. It might be a little bit low. And the reason I say that is you have to remember, we had bureaucrats determining what was elective and what was emergent. And there were great debates around the country around things and the people on the bureaucrat side had very little medical understanding of what the heck they were talking about. So, it's very difficult to determine with the specificity that we would like around what we would consider to be an emergent procedure. But if you think about 60% of our patients that we said we had in Q4 being done in an ambulatory environment, if you marry that with 30% and you add 10% for plastic surgeons and oral maxillofacial surgeons and all of the rest of the things that are going on out there, that feels about right. So, I don't have any – I think that's as good a number as I can give you, frankly. For J&J, we work with them closely. Certainly, if there was a new line that allowed us to be part of the outcome projection, then that would be an interesting opportunity for us to build a moat around, as you suggest. I think most of these procedures are looking towards what would have been considered 10 years ago to be non-traditional environments of care. And frankly, I don't see our competitors offering any resistance there under any cases. So, it can certainly help. We're happy to have any help, of course. But I think you're seeing that many of the people who are selling metal into the ambulatory care environments and many of the service providers to the ambulatory center community are understanding that the key to success is pain control without opioids. And it's hard to imagine, again, going back to Randall's question, that in this environment, anybody is going to take their nursing team and try to teach them how to use anything, but what they're already doing. It just doesn't make any sense to me. But the answer to your question is, yeah, we'll take the help if we can get it. And then with pricing, what we've offered with EXPAREL, and it's only for ambulatory care centers, for plastic surgery offices and with oral maxillofacial surgery offices. So, it's not for the bulk of our – or for the hospital marketplace at all. And what we're offering is a small discount in dating. And as I said, I think Tim asked the same question is, what the docs are really interested in is the dating. In many cases, we're selling these in a relatively non-traditional way, and the docs are using their credit cards and to make these purchases. So, being able to have some time to be able to pay for it and to buy it at a slightly reduced cost, I think, is both a gesture of goodwill to get them back up and running. And as I just said, it also creates an opportunity for our field force to have a positive interaction with these folks and have a discussion about anything else they might need as they get up and running. And we'll trade a little bit of a discount for an NPV where we get these sales earlier, and there clearly will be some opportunity to be able to move more EXPAREL through these environments as we go forward. So, we thought it was a good trade.

Okay, thanks.

Thanks, David.

And your next question comes from the line of Liana Moussatos with Wedbush Securities.

Thank you for taking my questions. Congratulations on a strong quarter. Just for Charlie, how should we think about operating expenses in Q2 versus Q1 and then for the rest of the year?

So, Liana, thanks for the question. At this point, what we said is we got rid of our guidance of positive this year for the exact same reason as you were asking, and that is, it's not 100% clear what's going to happen to OpEx. As I noted in the prepared remarks, the clinical activity is on hold at this point. We're hoping optimistically that we get that back on track when some of the surgical restrictions stop, but that remains to be seen exactly how that happens. And from an SG&A perspective, frankly, I'm very confident we're not going to get anywhere near what our original guidance was from that perspective. There's just so much activity that we can't do, and frankly, nobody else can. So, at this point, all I can tell you is that we paused the guidance because we believe the numbers are likely to be below those guidance ranges, for obvious reasons. I don't know that – from an R&D perspective, the question really is when can we start dosing patients again. And hopefully, that's in the second half of the year. And hopefully, we can make it up. And if that's true, maybe we get back in the range, but we won't know that for a while. SG&A, I think, is going to be light. And I don't know that it will be exactly what it was in the first quarter. I'm struggling with how to give you some good guidance because, frankly, I'm not really sure, Liana.

Let me just see if I can add a couple of bullet points here, Liana. And thanks for the question. In our own numbers, we've included doing all of these clinical trials. So, they might be phased a couple of months later, but they would still be done in this year. So, I think the R&D number is probably close to what you'll see. I think, as Charlie suggests, the SG&A number is going to be significantly, materially reduced. We're not filling open positions. As I answered part of the questions earlier, we don't think that we're going to have the same access to physicians and to their staffs, et cetera, because folks are going to be in the OR all day, most every day. And so, we're looking at virtual training, we're looking at weekend training programs and things like that. And actually, where we have open territories, we're re-cutting those territories to pick up the big accounts, but not to do it with any new resources. So, there are some places where you're going to have obvious savings. And then, our relationship with Johnson & Johnson is such that – and we've disclosed this publicly many times, that they get a small royalty on replacing last year's dollars. The major impact of COVID-19 will be that the delta over last year's dollars in 2020 will be modest relative to the original expectations. And so, most of what Johnson & Johnson would get as our partner this year will be the small end of the royalties, and they will not have the benefit of the much larger royalty on new dollars. And so, I think R&D will be pretty much the same. I think SG&A will be quite different.

Very helpful, thank you.

Thanks, Liana. Thanks for the question.

And your next question comes from the line of Serge Belanger with Needham & Company.

Hi, good morning. A couple of questions for me. First, Dave, you mentioned there was a 70% drop in EXPAREL demand in April. Does that reflect the overall decrease in volume of elective surgeries during that time? And what would you estimate the drop in non-elective surgeries was also in April? And then, my second question is, you mentioned some facilities would be running at six, seven days a week, maybe even 24/7 to make up for the backlog. How much capacity in the system is there to run at those levels and make up the backlog from the decrease in volume and procedures?

So, our data sources are three to six months behind. And so, I don't have any real-time procedure data that I could share with you. What we tried to follow, and the only data we had, for example, is places like MD Anderson maintained a steady flow of orders. So, you can see that they were using the drug for oncology-based urgent scenarios. Most of the big medical centers continue to order, but a place that would have ordered 10 or 15 boxes a week was ordering 1 or 2 boxes a week. The only assumption we can draw from that is it was for the more urgent procedures, which were generally oncology-based. We have a lot of case studies where, because of pain, patients were threatening suicide and the hospitals were letting those folks operate on an urgent basis. We had some places where a hernia became a protruding hernia. So, you went from an elective to clearly an urgent scenario, and those folks were allowed to operate. But, honestly, I don't have a really good data-driven answer to your question, other than it appears that roughly 30% of the procedures were considered, by the local authorities, to be urgent. I would say in that regard that not many of those were C-sections. We have centers that have studied EXPAREL TAP in C-sections who are big users of the product. But as a general rule, C-section is still in its infancy in terms of rolling it out nationally, and we hope to get on that pretty quickly. Your next question actually gets back to my comment earlier that we have to have participation. If you think about from mid-March to the end of April, you would figure out that something close to 20% of the surgical procedures in the United States have been deferred. That's not a big number. That's not our TAM. That would be the total number. And so, you then walk the balance of how many procedures are we doing now on a daily basis and when do we get to that scenario where in and out are the same and all we've got to do is take care of the backlog and we don't think we're here yet. So, that's where the 80% number comes from. And we think that we're doing a fair amount of business. The numbers that we suggested would suggest that it's growing quickly. And this is not my number. This is a number that the banks have put out and the folks that have got a lot more resource to do this stuff than I do. But their general conclusion is that the hospitals can have the ability once they come back online to increase their capacity by 30% over pre-COVID. Now, that's an interesting number because that would tell you that we have to do surgeries in the ASC because by the time the hospitals come back online, they won't have the time or they won't have the capacity to be able to take up all of the backlog. So, everything we're looking at says ambulatory care centers, six, seven days a week, 24/7, that was the reference was to ambulatory care. And then hospitals will come back up slowly. And that's the great unknown to us, frankly, given you guys and given the world in general, guidance is we just don't know how fast the hospitals are going to be able to help us take care of this backlog, if that makes sense.

Yeah. Thank you.

And your next question comes from the line of Ami Fadia with SVB Leerink.

Hi. This is Sheldon on for Ami. Thanks for taking our question. We have a couple. First, in the states that are already reopened, do you have any color about how much capacity they have already reached? How long do you think it would take for them to ramp to that plus 30% capacity? And our second question is about, for the longer term, as you commented, the COVID-19 pandemic may actually help accelerate the shift to ASC setting. What type of procedures do you see as the next to shift to the ASC setting? Thanks.

Thank you. So, the first of the capacity question, it takes a little while to get these things up and running. In many cases – and this is something we were involved with, frankly, before we started to see the ramp-up – we were working with ASC chains, for example, on credentialing surgeons who previously didn't come to the ASC, who were anxious to get to the ASC for all the reasons that we've talked about on this call. We also, as we said, have training programs for docs that have not had access to EXPAREL previously and for docs who had access to EXPAREL, but were going to be doing different surgical procedures when they were in the ASC. So, all of those things have been ongoing. I can only guess at how much of the ASC capacity today is taken. I would say, it's probably approaching 60%, but it would be somewhere in that range if I had to take a guess. But again, I have absolutely no data sources at all other than to tell you that we talk to docs every day, all day. And they would tell you – I've talked to orthopedic surgeons in the last week that are doing – normally would have done six cases a day on a big day, are doing 8 or 10 cases. So, in some cases, the individual docs are fully allocated, but I think that the ASC has now become an environment of care for docs and some specialties who would not have gone to the ASC previously. And that leads me right into your second question. And I'll just give you just two seconds of history here. If we go on back four or five years, we would have seen that ASCs were really doing small procedures, things like hernias and hemorrhoids and those kinds of things. And they are low profit margin procedures. And so, the ASCs were working really hard to generate a modest return. What's happened over the last couple of years is that, led by CMS, the insurance carriers have understood that they can have at least the same quality of care for the same surgical procedure done in the ambulatory environment than in the hospital environment. And CMS reimbursement, for things like total knee, have dropped fairly materially as you go from inpatient to hospital outpatient to ambulatory. So, the big change in the ambulatory environment is that we can now treat large, painful, profitable procedures for the ASC in that environment. So, specific answer to your question, knees – I had my knee replaced six weeks ago. I got to the ASC at 06:30 in the morning. They started operating on me at 07:00. My wife and I were home before 11:00 that morning. We increasingly talk to docs about spine surgeries being done in the ASC. We're doing awake surgeries with spine patients now. And so, the ambulatory environment is a perfect application of where you would do that kind of a surgical technique. So, we're starting to see large abdominal wounds change and move to the ASC environment, where we're replacing thoracic epidurals with an EXPAREL TAP. So, it's really the expertise of the regional anesthesiologist who can provide predictable pain control that's allowing the insurance carriers to mandate the environment of care and move that to the less expensive ambulatory environment, which is an easy move because it's where the docs and the patients want to be anyway.

And your final question comes from the line of Gary Nachman with BMO Capital Markets.

Hi, good morning. It's Rob Fay on for Gary. Just a couple of questions. Assuming EXPAREL is approved in Europe in the second half of the year, what are your current launch plans there? Are there certain markets that are less impacted by the pandemic that you might initially target? And then, secondly, could you comment on the status of the lower extremity nerve block trial and how quickly that could resume? To what extent do you expect that indication could also help accelerate the move of certain procedures from the inpatient setting to outpatient and ASCs? Thank you.

Thank you. So, we expect to get approval from the European authorities sometime late this year. Based on COVID and a number of other things that are moving around in terms of the expense line that was discussed earlier, we expect to launch that in the latter part of the first half of next year in Europe. You are absolutely correct that we will launch into specific markets, five or six markets, five or six countries in Europe. Frankly, it won't have much to do with COVID or, at least if it does, we don't fully understand that or appreciate that yet. Our plan was never to launch in more than five or six countries in Europe just because there is a vast difference in the way medicine is practiced, the impact of technology in some of the different markets, and also the receptivity of new technologies into some of the different markets. So, our plan is to launch into five or six countries and do it in the back half of next year – I'm sorry, late in the first half of next year. Lower extremity nerve block, it's called the STRIDE study. It really is another major opportunity for us. The protocol and the site selections and all of that are done. We're just waiting to get comfortable now that it won't have any negative consequences from COVID. In terms of where the centers that are going to execute the study are, I would anticipate that, in the next month, we'll start that study. It clearly will be done this year. We put together a clinical study report, file an sNDA sometime in the first quarter, back half probably of the first quarter of next year, and expect that we would have approval by the end of 2021. So, to give you a frame of reference of the way we think about it, right, C-section was the focus of the national meeting this year. Peds would be the focus of the national meeting next year. Lower extremity nerve block would be the focus of the national meeting in January, February of 2022. So, there's a cadence to the way these things are developed. And then there's a whole series of things with iovera° that would ride in alongside of those opportunities.

Thank you. There are no further questions at this time. I would now like to hand the conference over to Mr. David Stack, Chairman and CEO. The floor is yours.

Thanks, Anita. Thank you for your questions and the time this morning. Next up will be the RBC conference later this month, followed by the BMO conference in June. We look forward to providing additional updates in the future. Thanks again, everybody. Take care.

And this does conclude today's conference call. Thank you for your participation. You may now disconnect.