Pacira BioSciences, Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Pacira BioSciences Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, Demetrius, and good morning, everyone. Welcome to today's conference call to discuss our second quarter 2020 financial results. Joining me on today's call are David 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 website. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone, and thank you for joining us to review our second quarter financial results and recent business highlights. The 2020 COVID-19 pandemic has exacerbated our nation's opioid crisis, with a significant increase in overdoses versus last year due to delayed elective procedures, social isolation, and economic uncertainties. Never before has there been a more urgent need for opioid-sparing pain management. We moved quickly to ensure the safety of our team while maintaining highly productive interactions with our customers. We adapted and will continue to adapt field-based face-to-face physician interactions to any and all challenges resulting from the pandemic to maintain continuity of care for patients. I could not be more proud of our nimble team and their ability to provide industry-leading customer, product, and reimbursement support by applying digital tools for virtual training and key opinion leader preceptorships. As Charlie will discuss later in the call, we reported net revenue of $75.5 million for the second quarter of 2020. While second quarter product sales were impacted by COVID-19-related delays in elective surgical procedures, we began to see these restrictions lift on a state-by-state basis in April. We remain very encouraged by recent market and revenue trends, recognizing that patients need to attend to their medical needs, coupled with a stronger grasp on the COVID pandemic. All 50 states have stopped softening restrictions, and we have seen a significant rebound in elective procedures since mid-April. Average daily sales of EXPAREL are now delivering attractive growth over the prior year, with average daily sales in June at 107% and July at 109% of 2019 levels, respectively. Today, we are pleased to report that steps have been taken to curtail select operating expenditures, including strategic shifts in spending, resulting in positive adjusted EBITDA of $8.5 million for the second quarter. We believe this will continue to ramp as the year progresses as operational spend adjustments we have made continue to drive our ability to grow and deliver attractive results. We also remain on solid financial footing to continue to invest internally and externally. We ended the second quarter with more than $335 million in cash and investments. Our recent refinancing of our convertible notes, along with the cash-generating nature of our business, further strengthens our financial foundation and brings our pro forma cash balance to more than $500 million, further supporting our mission to expand our footprint as a leader in non-opioid pain management and regenerative health solutions. We remain highly confident in our long-term outlook. Given that COVID-19-related uncertainties remain, we will not be reinstating financial guidance on today's call. However, to provide you with greater transparency and the ability to track our intra-quarter progress, we are reporting preliminary monthly sales. For July 2020, we achieved net product sales of $38.1 million for EXPAREL and $800,000 for iovera. We intend to provide you with updates on monthly net product sales around the middle of each month. We will eliminate or make adjustments to this practice as we gain more visibility about the impact, if any, of COVID in the fall. To remind you, government intervention in the elective procedure marketplace could have a profound impact in one direction or another. Turning now to review our second quarter performance, during which we continued to execute on the three global growth pillars: First, delivering robust revenue growth by expanding the use of EXPAREL and iovera for opioid-sparing pain management; second, pursuing innovative acquisition targets to improve the patient journey on the neural pain pathway; and third, advancing a pipeline of customer-focused non-opioid pain management and regenerative health solutions. Let's begin with EXPAREL. With more than seven million patients treated since launch, EXPAREL remains well positioned for long-term market leadership as the only long-acting local analgesic approved for infiltration, field block, and brachial plexus nerve block. Our expectation to return to pre-COVID year-over-year growth rates of 20-plus percent in the second half of the year is largely due to elective surgeries returning to key states and ambulatory surgery centers quickly returning to the operating room to accommodate patients who were required to wait for important surgical interventions due to COVID-19-related shutdowns. This underscores our investment in working closely with our ambulatory surgery center and our anesthesia partners to broaden the use of long-acting EXPAREL regional approaches as a cornerstone for multimodal opioid-sparing strategies that enable the shift from inpatient procedures to the 23-hour stay environment. The COVID-19 pandemic has created a critical need for expedited recovery, making EXPAREL-based enhanced recovery protocols more relevant than ever for patients, health care providers, and payers across all sites of care. Patients prefer opioid minimization strategies, reduced length of stay, and outpatient care in a facility not burdened by the COVID pandemic. Providers are seeking to increase patient throughput, especially for painful surgery, such as total joint arthroplasty and abdominal and colorectal procedures, while minimizing the risk for patients presenting to the emergency room. And payers recognize the significant economic savings from reduced length of stay with procedural migration to the 23-hour site of care. Women's health also continues to be one of our top growth drivers, and we are seeing anesthesia-driven opioid-sparing regional approaches using EXPAREL-based field blocks take hold in institutional protocols for cesarean section, mastectomy, breast reconstruction, abdominoplasty, and gynecologic oncology procedures. Here, we believe EXPAREL will be a key component in transitioning the standard of care for women, especially relevant for moms who are navigating childbirth during the COVID pandemic. Most pregnant women prefer an opioid-free opportunity, so we are using real-world experience from physician thought leaders as well as data from our two successful Phase IV studies in C-section to educate stakeholders virtually about the opioid-sparing benefits of an EXPAREL TAP block. Our first Phase IV study has recently published in Anesthesia and Analgesia, comparing an EXPAREL TAP block to a bupivacaine TAP block in 13 centers in the United States. In addition, the results from our Phase IV next-generation CHOICE study have been accepted for oral presentation at this year's meeting of the American Society of Anesthesia, or ASA, and we are preparing a manuscript for submission to a peer-reviewed journal later this year. The CHOICE study successfully demonstrated that EXPAREL TAP block was superior for pain control to morphine-based spinal anesthesia while reducing opioids and controlling pain for 72 hours. In addition to our Phase IV and education initiatives, I would like to highlight two key regulatory programs designed to further broaden the reach of the EXPAREL label. First, the FDA recently accepted our supplemental New Drug Application seeking approval of EXPAREL in patients aged six years and older. The PDUFA action date has been set for March 22, 2021. Our sNDA filing is based on the positive data from our PLAY study of EXPAREL in children undergoing cardiac and spine surgeries. Data from the PLAY study will also be presented as a podium presentation at this year's American Society of Anesthesia Meeting. Having pediatrics on the label is of critical importance given the significant unmet need for non-opioid options for managing postsurgical pain in this vulnerable patient population. Further, with the only currently approved label for postsurgical pain management, we believe it will be difficult to limit access to the only long-acting local analgesic approved for use in children under 12 years of age, especially when mom and dad are part of the decision process. Beyond pediatrics, we are also working to expand the EXPAREL label to include lower extremity nerve blocks. Our Phase III STRIDE study is evaluating EXPAREL versus bupivacaine as a lower-extremity nerve block in adult patients undergoing lower-extremity procedures, such as foot and ankle surgeries. We are in the process of incorporating feedback from the FDA into our STRIDE protocol, and we are currently planning for top line data around the end of the first quarter in 2021. To remind you, we believe that the lower extremity opportunity is at least as significant as the upper extremity market, where there are more than one million procedures each year. We also continue to advance our strategy to secure approvals for EXPAREL outside the United States. Our regulatory activities with European and Canadian health authorities have progressed virtually and remain on track, with anticipated regulatory decisions around the end of the year. We have completed a pharmacoeconomic study requested by the China regulators, and we are working with our partners in China to determine next steps in the regulatory process. Moving now to our collaboration with DePuy Synthes. Last month, we announced the decision to terminate our agreement to jointly market and promote the use of EXPAREL for orthopedic procedures in the United States. Since 2017, this collaboration has allowed us to significantly expand the use of EXPAREL, solidifying its role in opioid-sparing protocols across a range of orthopedic procedures. We have established a firm commercial foundation in orthopedics, and we now have the in-house expertise to take over and expand upon these relationships. As we have stated repeatedly, orthopedic practice is evolving from an inpatient hospital experience to the ambulatory setting, with anesthesia-driven regional approaches playing an increasingly essential role. This growing market is already largely served by our sales force, so we are well-trained and proficient in the 23-hour stay environment. In addition to evolving site of care call point for EXPAREL, the iovera platform further extends our commercial focus into the orthopedic, spine, and sports medicine markets. We believe it is in the best interest of our stakeholders to take ownership of this franchise beginning in 2021. Our implemented strategic planning modifications, combined with improvements in our EXPAREL-related contribution margins due to the conclusion of the partnership, made this an obvious decision for Pacira. Also, we are nearing completion of the build-out of a 20,000 square foot innovation and training center in Tampa, which will allow for interactive hands-on customer training related to both infiltration technique and best practice nerve block and field block regional approaches to improve patient care with both EXPAREL and iovera. Switching gears to iovera. As you know, we kicked off the relaunch of iovera after our national meeting in February. Given the impact of COVID-19, this launch is now delayed. We remain highly confident in the technology behind this innovative system and the significant commercial opportunity it represents, with sales potential approaching the $200 million mark within our five-year planning period. Due to COVID, we have adjusted our near-term strategy to support our orthopedic customers and patients who have been impacted by the delayed TKA surgery and osteoarthritis. To remind you, these patients are in significant chronic pain. We have positioned iovera as a proven tool for opioid-free pain management while bridging the gap to surgery. Two key iovera manuscripts are currently under review with two prestigious orthopedic journals. The first study was a single-center randomized controlled trial by Dr. William Mihalko at the Campbell Clinic in Tennessee. Data from this study demonstrated that cryoneurolysis with iovera can be an important component of a multimodal postsurgical pain management strategy to help reduce long-term postsurgical opioid use. Patients who received iovera plus the standard of care showed a 62% decrease in opioid consumption six weeks after TKA and 29% fewer after 12 weeks. Patients also showed improved function at two-week, six-week, and twelve-week follow-up. No patients experienced a serious or device cryoneurolysis-related adverse event. The second study led by Dr. Joshua Urban at OrthoNebraska analyzed data from 221 patients undergoing TKA who received a traditional multimodal pain management versus a multimodal regimen that included iovera and EXPAREL. The treatment group's multimodal pain management regimen included preoperative iovera and intraoperative EXPAREL. During the hospital stay, the iovera and EXPAREL group required 32% fewer opioids while reducing pain by 22% versus the control group. The iovera and EXPAREL groups also required significantly fewer opioids for two and six weeks after discharge, including discharge opioid prescriptions, as well as significantly shortening length of stay and achieving a greater range of motion at the time of discharge. These data will support the commercial rollout of iovera as we focus on two broad patient categories: First, the combination of iovera plus EXPAREL as a multimodal procedural solution for TKA procedures, and second, osteoarthritis patients seeking drug-free, opioid-free, surgery-free pain management that lasts several months. On the clinical front, we remain on track to begin enrollment this summer of our PREPARE study. PREPARE will evaluate iovera and EXPAREL for opioid-sparing pain management for patients undergoing total knee arthroplasty. iovera will be administered before surgery, and EXPAREL will be administered during surgery. With iovera, patients can prepare for surgery with several months of non-opioid pain control. We also expect that EXPAREL plus iovera for postsurgical pain control will support a more rapid functional recovery. There are 14 million individuals in the United States who have symptomatic knee osteoarthritis. And when we look at the market potential, we believe that this is a $1 billion opportunity, where iovera can capture a meaningful share. As we continue to work with these key opinion leader surgeons and anesthesiologists, we have identified additional cryoanalgesia treatments for development, such as low back pain, spine, spasticity, and face pain, where there are thought leaders who have experience in developing treatments and a great interest in the opportunity to utilize iovera. Turning now to our second growth pillar, pursuing innovative products or technologies. Strategic partnerships and acquisitions that align with our mission, such as iovera, remain a key component of our strategy as we leverage our established infrastructure and P&L. We are thoughtfully pursuing opportunities complementary to our existing offerings that are also of interest to the surgical and anesthesia audiences we are calling on today. We see a significant opportunity to build a differentiated non-opioid portfolio focused on the patient journey along the neural pathway and have several robust opportunities to consider from a business development perspective. Sports medicine remains a key area of strategic focus. Here, ASCs are the typical site of care, so this is a well-defined physician specialist group that we are already engaged with day-to-day. The rapidly growing market is driven by a continuous influx of new products and increasing incidence of sports injuries and significant advances in the field of gene therapy and regenerative medicine. Sports medicine also offers a prospect of engaging younger patients earlier in their journey with pain and degenerative conditions, which is especially important with our projected launch of the EXPAREL label for patients aged six and up next year. Finally, let's discuss our third growth pillar, advancing a pipeline of non-opioid opportunities for acute and chronic pain. Our in-house team is focused on leveraging the proven safety, flexibility, and customizability of our DepoFoam platform. Last year, we announced two new DepoFoam programs. First, the intrathecal or subarachnoid delivery of DepoFoam-based local anesthetic for acute and chronic pain. Earlier this year, we met with the FDA to discuss this program, and a Phase I clinical study is now underway. Next, we are currently optimizing formulations for depodexmedetomidine, and we will begin a pilot study later this year in healthy volunteers using a simulated release. We look forward to keeping you apprised of our progress on both of these important programs. With that, I'd like to turn the call over to Charlie to review the financials.

Thank you, Dave, and good morning, everyone. I'll start by summarizing our second quarter 2020 financial results. Before proceeding, I'd like to remind you that 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 press release we issued this morning. I'll begin by briefly echoing Dave in saying that the fundamentals of our business are very strong and the sales trends we are seeing are highly encouraging. We are well equipped to successfully navigate these challenging times and overcome any temporary disruption to top line sales. We delivered year-over-year revenue growth of 25% in 2019, and these robust growth trends continued through mid-March. We are now seeing a consistent uptake in EXPAREL sales and ordering accounts on a weekly basis since the peak of the COVID-19 pandemic impact in April, with both June and July returning to year-over-year growth. We remain very bullish about the future of our business, which is on track for accelerating profitability now that many states are back to regularly performing elective and emerging procedures in hospital inpatient, hospital outpatient, and ASC sites of care. Furthermore, our organization has been preparing for a long time to capture the increasing number of procedures moving to the ASC setting, and COVID-19 has only accelerated this shift. We ended June in a very strong financial position with $335 million of cash and investments. In July, we completed a very successful offering of convertible senior notes due August 2025 that brings our pro forma cash balance to more than $500 million. Second quarter total revenue of $75.5 million was approximately 74% of total revenues for the second quarter of 2019. This decline was, of course, due to the negative impact of COVID-19 and public health guidelines and government directives that postponed elective surgical procedures. Net product sales of EXPAREL were $73 million, which was approximately 74% of the second quarter of 2019. For iovera, we reported net product sales of $1.4 million for the second quarter of 2020 as compared to $2 million for the second quarter of 2019. We kicked off the relaunch of iovera at our national meeting in February. However, the launch was interrupted in mid-March when TKAs in HOPD setting were postponed due to COVID-19. During the second quarter, we shifted our focus to iovera utilization in physician offices to help our orthopedic customers offer non-opioid pain management to patients who have delayed TKA procedures due to COVID-19. Our non-GAAP gross margin for the second quarter of 2020 was 72% versus 77% for the second quarter of 2019. Gross margin was negatively impacted by inventory write-offs as well as unanticipated downtime at our manufacturing site in Swindon. Non-GAAP research and development expense was $12.3 million in the second quarter of 2020 versus $16.6 million in 2019. The decrease was primarily driven by the completion of our EXPAREL clinical studies in pediatrics and cesarean section as well as COVID-related study delays. These decreases were partially offset by the advancement of our Phase III lower extremity nerve block study and our Phase I pharmacokinetic study of EXPAREL via intrathecal injection. In addition, second quarter R&D spend benefited from reduced costs related to manufacturing capacity expansion, with the transition of our 200-liter suite at our Swindon facility from development phase to the registration phase. Non-GAAP SG&A expenses were $36.8 million in the second quarter of 2020 versus $43.8 million in 2019. This decrease is primarily attributable to reductions in J&J commission, which are directly linked to EXPAREL growth. In addition, the use of lower-cost virtual tools and the cancellation of in-person meetings, medical conferences, and nonessential travel all triggered meaningful savings on the SG&A line. All of this resulted in non-GAAP net income of $5 million in the second quarter of 2020 or $0.12 per diluted share versus $17.5 million or $0.41 per diluted share in 2019. Looking ahead, we will continue to seek ways to reduce costs while remaining fully committed to providing the necessary investment for the growth of our products, future indications, and pipeline. Operating expenses are being managed very closely with potential significant full-year reductions in SG&A expenses given the social distancing implemented by state and local governments. We remain committed to profitability and expect to be adjusted EBITDA-positive for the full year. Looking out over the long term, our 5-year plan remains unchanged with anticipated high-teen top line annual growth rate, steadily improving margins, appropriately managed operating expenses, and significant adjusted EBITDA. As Dave mentioned earlier, we are not reinstating 2020 financial guidance today given the continued uncertainties around COVID-19. But in order to provide greater transparency, we are reporting monthly revenue to share intra-quarter trends. We will consider changing this practice as we learn more about the impacts from COVID-19 as the year progresses. To remind you, state and local mandates on elective procedures can have a meaningful impact, and seasonal factors are also difficult to predict with a high degree of accuracy. We are very confident in the continued growth of our business given the market's desire for opioid-sparing postsurgical pain management. With that financial review, let me turn the call back to Dave for his closing remarks.

Thank you, Charlie, for that review. We have come through a difficult time, and the current market trends are indicating a positive turnaround. We will continue to monitor how COVID-19 unfolds and the impacts to the market. We are ready and prepared to respond accordingly, noting that patient care and the safety of our employees will remain our number one priority. As we move into the back half of 2020, we have several value-creating milestones we expect to achieve. We look forward to securing regulatory approval of EXPAREL in both Europe and Canada, expanding our U.S. label to include pediatrics, reporting top line results from our lower extremity nerve block study, and taking full ownership of the EXPAREL franchise as we wind down our partnership with DePuy Synthes. Importantly, we have the financial foundation from which to achieve our goals, and we are moving quickly with strong top line and bottom line growth. As we look ahead beyond COVID-19 procedure disruptions, we are extremely optimistic about our growth prospects in the long term. As you'll recall, EXPAREL grew by more than 23% in 2019, and that demand continued unabated in January and February 2020. Given this momentum, along with new C-section data publications, pediatric and lower extremity nerve block label expansions, and the rest of world launches, each of which represents an additional addressable market opportunity of $100 million per year, we are highly confident in our five-year planning growth projections. We are well equipped to transition into a powerful earnings story with top line year-over-year growth in the high teens, steadily improving margins from the mid-70s to the mid-80s, and appropriately managed operating expenses. Before closing, let me take this opportunity to thank our shareholders, along with our dedicated employees, for their continued support and encouragement as we build Pacira into the world's leading provider of non-opioid pain management and regenerative health solutions. With that, I'll turn the call over to the operator to begin the Q&A sessions.

Thank you. [Operator Instructions] And our first question comes from David Amsellem with Piper Sandler. You may proceed.

This is Zach on for David. So just starting off with COVID. I guess given the case burden that is obviously growing across the country right now, I was just wondering if you could provide a little bit more color on what you're expecting now in terms of pace of recovery for EXPAREL in the latter half of this year and 2021 and what that might mean for further catalyzing migration in the ASC setting going forward.

Sure. Thank you for the question. What we see here over the last several weeks is we are highly sensitive to the increase in COVID-19 cases in the primary ambulatory surgery states like Florida, Texas, and California. And so we've seen those states stabilize basically on a week-to-week basis. At the same time, we've seen the states that were less reliant on ASCs or who were slow to recover come online, so we've continued to see a weekly increase in sales. I think what we're seeing is that the ASC is becoming the primary route of recovery. As all 50 states participate at a higher level and when we see these leading states, like Texas, California, and Florida, and we see these spikes abate, we expect that we're in a very good position to continue to come out of this in a strong way. The nature of your question is how does the ASC lead us through the rest of the year? Other than governmental control of elective procedures, if we don't have any unforeseen spikes that lead state governments to shut down elective procedures again, I think we're in very good shape to meet the number we've been talking about for many months now—that we would see roughly 80% to 85% of the procedures come back and be performed and that the majority of those would be recovered in the ambulatory—specifically in the 23-hour stay market.

Okay, great. Thank you.

And our next question comes from Randall Stanicky with RBC Capital Markets. You may proceed.

Two questions. Number one, can you help us understand how sticky the business is on the ortho side as we think about J&J stepping away as your partner in 2021? Specifically, how much new spend that you're going to need to support that business? This has been a recurring investor question. And then secondly, I just wanted to ask you about July. How normal was that month? Because if you annualize the $38 million in EXPAREL sales, you get close to where your initial guidance was for the year. So I'm just trying to understand how much more opportunity is there. Was there any kind of catch-up in that number? Just how to think about that month from a sales perspective.

Thanks, Randall, and both are very relevant questions. So when you look at the projected savings from the termination of the DePuy Synthes relationship and we look at the additional cost that will be borne by taking over those services, it's roughly 10% of what will be saved. To be complete, we've been adding folks for iovera. We've got a field force alignment and allocation model that has already anticipated that we were going to be replacing DePuy Synthes at the end of 2021. We’ve moved that forward modestly, and along with the build-out of our training center in Tampa, which will allow us to do many things virtually in this post-COVID world we are addressing, we think that the investment will be modest relative to the savings. As for July, that's an interesting month, and I appreciate the question because we think about it the same way you are. What we saw was the market is stable to growing modestly, and I'm sure that's the nature of your question. We think that's very encouraging given that we didn't see the same kind of progression of growth in the big states that brought us out of this recovery. Specifically, Florida was significantly ahead of pre-COVID going into July and has come back to basically flat on pre-COVID now. As we get over these spikes in these big states for ASCs where there's a lot of business, we think we're in a great position to benefit both from the growth in the states that were delayed or don't have the same reliance on ASCs, who are finding different ways to treat patients in the 23-hour stay environment, like hospital outpatient, for example. So as the big states come back online, we believe we're very well positioned to continue to grow through the back half of 2019, always stating the obvious that the unknown additional COVID spikes, especially in these heavy ASC states, or any government mandates could significantly impact that. But ex those kinds of intrusions into the marketplace, we think we're in a really good position here.

Great, thanks, guys.

And our next question comes from Greg Fraser with Truist Securities. You may proceed.

Good morning, guys. Thanks for taking the questions.

Good morning, Greg.

I was wondering if you could discuss your strategy to build patent protection around EXPAREL. Specifically, maybe you can comment on the types of patents that you're pursuing and when you think patents could issue.

That's a long – that's a three-credit course, Greg. I'll go quickly. First of all, as we've said several times, points to consider that were developed by the generic division of the FDA, help us a lot. Due to their demand, you would need an exact duplicate of EXPAREL; someone would need the specifications for release that we use to release a batch from a manufacturing facility, and then they would have to validate that by being able to have an assay that measures all of those specifications. The fact that we've never disclosed those specifications into the marketplace is a significant hurdle. The assay that measures those release specifications was developed by Pacira, is proprietary to Pacira, and we've never told anybody what that assay is—this is the second significant hurdle, in addition to sterile manufacturing and all the rest. We have a series of patents that were filed with the PTO many years ago on spray technology. We have not disclosed in a general sense which of these technologies are being used by our manufacturing facilities and when. While we built out our 200-liter facilities, we've come up with many nonobvious, unanticipated observations that have been patented. The PTO could come back with the patents on the new manufacturing process; they've been filed for many years, so that could be in the relative short term. The new patents based on observations in building out the 200-liter would take several years to come through the PTO. In the interim, we don't believe anyone has any type of commercial manufacturing capability that would allow them to make a multivesicular liposome of any kind, specifically EXPAREL. It’s not a perfect answer to your question, but we filed several patents and continue to do so, not only around these observations, but also on different IVRA, the assay that allows you to release these batches. We think we're in a strong position relative to anyone being able to make a generic EXPAREL in a nontraditional way. But we don't see a generic patent coming in the foreseeable future, if at all.

Great, thanks for all the color.

And our question comes from Ami Fadia with SVB Leerink. You may proceed.

Thanks for the questions. So on the pace of recovery across the states—different states, could you give us some idea about the variation from state-to-state? What are the best and worst states currently doing in terms of surgery volume and EXPAREL use? Is the 109% year-over-year growth in July you've seen driven by a few large states, or is it robust recovery across the board? You mentioned that some large states are heavy with ASCs like Florida, Texas, and California. But these states have also seen a great spike in COVID cases these days. Have you seen these states taking any measures of rolling back their elective surgery? For example, you mentioned Texas, which I thought put a pause on elective surgery a few weeks ago. Any color on those measures will be appreciated. Thanks.

Sure. Thanks for the question. Let me go in reverse. There have been no rollbacks of elective surgeries in ambulatory surgery centers and hospital outpatient departments. You are correct. There were situations where hospitals were saved for the potential COVID spikes, so elective surgeries were not allowed in hospitals, but they have never been diminished or eliminated from ASCs and HOPD use. This is an important aspect of answering your question. What we saw in July was a still growth in Texas, in California specifically, over 2019. Florida moderated back to where it was basically pre-COVID. Making up the difference from the previous months were smaller states that are not as dependent on HOPD. We saw New York state, for example, come back strong in July. In states like Ohio, North Carolina, Georgia, those states are also participating more meaningfully than earlier in the COVID recovery. To be very specific, Texas, California, and Florida largely led us out of this mid-April period. With the increase in COVID-positive cases in those states in July, the governors did not close the opportunity for surgery. However, the number of patients who were infected and their extended families dampened the number of appropriate patients for elective surgery. We think that was the reason for some moderation in the growth in those states. We were able to maintain our growth, especially since July 2019, with participation from a larger number of states. That’s what gives us the confidence that when we return to normal in the big ASC states like Texas, California, and Florida, along with participation from all of the other states, we believe that we're going to be in a position to get back to our pre-COVID growth rate that we talked about during the script.

Thanks, that’s helpful.

And our next question comes from Serge Belanger with Needham & Company. You may proceed.

Hi, good morning. A couple of questions for me. First, Dave, on the marketing footprint of the company, can you tell us what that looks like once the DPS collaboration is over? Should we expect any additions to that footprint with a label expansion to pediatrics and lower extremities?

Yes, thanks for the question, Serge. We have separate customer-facing organizations. We started earlier this year expanding the regular sales force, our normal-sized sales force, that is driven by surgery and surgical procedure opportunity on a geographic basis. There are approximately 140 folks in that organization, and we've started adding folks and training so that we would have been at full allocation at the end of 2020. Now given COVID and some of the new ways that physicians want to deal with us on a virtual basis, or the inability to make time to train and see our representatives, we've got a dozen or so territories open that we are not going to fill until the end of this year when we have a better grasp on our interactions with customers and how we’re going to train those folks. At the same time, we've got roughly 50 that only do training. There’s an innovation team and a clinical education team; these folks train all our anesthesiologists and surgical customers. We've increased the size of that sales force to anticipate that we would be doing more virtual sessions and training not live but in a more virtual, online way. A few more places will be added based on the iovera rollout, but generally speaking, that is rightsized as we move away from DePuy Synthes. We've hired a team of specialty nurses who will work in pediatric hospitals. There are only roughly 60 of those in the United States of significant strategic interest, so we don’t believe we need to increase the size of the sales force at the current time to address the pediatric opportunity. Right now, we're looking at having data from the STRIDE study on lower extremity nerve block at the end of Q1 in 2021. With a normal 10-month review process, we expect early 2022 approval for the lower extremity nerve block. There are no plans to address that opportunity today. That will be something we do mid-2021, so those people are trained and available for a national meeting early in 2022 as we launch the lower extremity nerve block. We're watching the marketplace and building out the training center in Tampa, where we think we can train 100 physicians at a time. We also have strategic relationships with MEDNAX, Envision, and several anesthesia groups. We're training more on regional anesthesia with our clinical education team and innovation team. We think we're in a good spot, and the additional resources required to service our customers once we no longer have a partnership with DePuy Synthes will be relatively modest compared to what we have today.

Okay. My second question is regarding the reimbursement environment for EXPAREL. As usage increases outside the hospital and especially in ASCs, are there any expected changes to CMS policies or payment levels that we should look for in this fall?

No. As a matter of fact, two days ago now, CMS came out with their 2021 OPPS guidelines, and they made specific mention that the only ASC product that is unbundled from the surgical bundle is EXPAREL. We also have seen CMS pay for total hip arthroplasty as we move into 2021. So CMS puts us in a very good position. We continue to work with commercial payers; Aetna, for example, is paying for hospital outpatient use of EXPAREL in Florida, which we see as a good pilot for us as we improve reimbursement with commercial payers. A number of concierge-type services are entering the market now, working directly with self-insured providers and payers, and we have very significant relationships with these folks as well. I should also mention that CMS has increased the payment for EXPAREL to $1.29 a milligram now, so there is no reason to expect anything negative with EXPAREL reimbursement. We increasingly see insurers more interested in moving patients out of the hospital, and the way to do that is with EXPAREL. If an insurer is thinking they're going to save several thousand dollars on a major spine or knee procedure, it's not an issue to spend $300 to make that happen by using EXPAREL.

Thank you.

And our next question comes from Gary Nachman with BMO Capital Markets. You may proceed.

It's Rafay on for Gary. Could you comment on your current appetite for business development? Are you looking at opportunities more aggressively following your recent debt refinancing that strengthened your cash position?

Not more aggressively, Rafay. We never really stopped looking at opportunities that we're interested in. We continue to work with several different opportunities. A couple of them are very exciting for us that we continue to pursue, and we expect to tell the world about a couple of these things before the end of this year. We've been very active, and there are many things of great interest to us. The additional cash always helps, of course, but I wouldn't say we’re any more aggressive now than before.

Thanks. And then for the pediatric indication, how quickly do you expect EXPAREL use could ramp in that patient population? Are you still targeting a nerve block indication for pediatrics?

So two different things, right? The pediatric community is relatively small, so we will have to train, which is one of the reasons for the Tampa training facility. We expect that with a modest requirement for rep-to-customer training, we'll be able to train this community very quickly, and this will ramp much more quickly than any other indications we've ever had the opportunity to put in the marketplace. We see great interest. When we're talking to these folks about EXPAREL and iovera, there's a lot of interest in the pediatric marketplace and some anger, actually, in some cases, when the anesthesiologists and pain management folks find out that no local anesthetic is currently approved for pain management in pediatric patients. Most were not even aware of that. So there is positive energy in that marketplace. The first indication, as you point out, is for infiltration. We're working with the FDA on a nerve block indication. It is not easy to find a nerve block indication that would pick up on adult use of the product. Where you find yourself leads to things like open fractures, and we've learned that emergency situations require mom and dad to sign a patient into a clinical trial, which are very difficult. The FDA knows that. We're working with them on finding an appropriate procedure where we can do a study that would add the EXPAREL label for nerve block in kids.

Thank you.

And our next question comes from Dana Flanders with Guggenheim. You may proceed.

Thank you. So from the questions, Dave, I know you just mentioned you have a study reading out in lower nerve blocks in Q1. Can you just remind us how you are viewing that opportunity and the importance of that indication for future EXPAREL growth? I know pain studies are tough, especially it's an active comparator. What have you learned or incorporated from prior nerve block studies to position this one for success?

A lot. Well, thanks for the question, Dana. Obviously, we are not going to teach potential competitors how to do clinical trials in pain. There are several not obvious things we’re able to do in these clinical trials that allow us to have the clinical success we’ve had. I don't think there is any reason to believe that lower extremity nerve block will be any different. The first obvious thing to us is that you can't use competitive agents in any appropriate way in a nerve block indication largely because they're neurotoxic for one reason or another, but secondly, they have limitations on how those products can be used. When we're doing a nerve block or a field block, EXPAREL allows us to put the drug in direct contact with the sensory nerves and set itself up so that these multivesicular liposomes release small quantities over the next three to four days in such close proximity to the sensory nerves that we achieve this long-term application and extended pain control. As far as we know, the only delivery technology that allows you to do that is DepoFoam. In some respects, it’s easier for us to do, but we also know that there are several problems when you're working in an area where you cannot let patients have pain. You have to provide a rescue. It's not whether you rescue or not; it's more about the statistical analysis you apply against that and how you analyze the impact of rescue medications, the rescue medications you allow, and how to set up your protocol to capture that in a meaningful way. It’s all about how you set up the statistical protocol and your relationship with clinicians so that they're able to follow a complex protocol. 50% of pain trials fail for many reasons that we've identified in developing EXPAREL. Not in a position to give specifics, but we think we're in a good spot to achieve a nerve block claim. The FDA is very interested. We've been working with them regularly on the STRIDE study. We’ve moved this back a couple of months because we've been working with them on a couple of modifications that they suggested could make this a much easier trial to evaluate after patient enrollment is complete.

And just can you remind us how you're viewing the market opportunity?

The fastest-growing use of nerve blocks and field blocks is in foot and ankle. We think that this specific number positions us quite hopeful about the future of nerve block in this indication. We also know there’s significant use of EXPAREL in adductor canal blocks in the knee. We believe we would have a much higher market share if we had a nerve block indication for the lower extremity. The brachial plexus nerve block launched in April 2018 accelerated the company again when we got into the low teens of EXPAREL growth on a quarter-by-quarter basis. We believe the same kind of opportunity and magnitude is available for the lower extremity. We also like this because many of these surgeries are already done in ambulatory surgical centers. Being able to replace pumps and catheters and a lot of techniques currently used to achieve several days of pain control can be improved with a single dose of EXPAREL providing several days of pain management. We think this is another rapid, customer-demanded opportunity moving a patient to an ambulatory surgery center while providing pain control simultaneously.

Great, thanks for all the color, Dave.

Thank you, Dana.

Ladies and gentlemen, this concludes our Q&A portion of today's conference call. I would now like to turn the call back to Mr. Dave Stack, Chairman and CEO, for any closing remarks.

Thank you, Demetrius. I'd 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 for us is the Wedbush Conference in August, followed by the H.C. Wainwright in September. Thank you, and stay well.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a wonderful day.