Good morning, ladies and gentlemen, and welcome to the Q3 2020 Pacira BioSciences Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Susan Mesco, Head of Investor Relations.

Thank you, Debra, and good morning everyone. Welcome to today's conference call to discuss our third 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 concurrent 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 David Stack.

Thank you, Susan. Good morning, everyone and thank you for joining us to review our third quarter financial results and recent business highlights. The 2020 COVID-19 pandemic continues to escalate our nation's opioid crisis with the rising number of drug related fatalities, given the health, social and economic disruptions facing our nation. Never before has there been a more urgent need for opioid-sparing pain management. I'm incredibly proud of how Pacira -- the Pacira team has remained steadfast in advancing our mission to provide an opioid alternative to as many patients as possible. Our efforts to date position us to deliver a solid rebound from the unanticipated interruptions of patient care during this ongoing pandemic. We remained nimble and have adapted by deploying digital and educational tools in order to meet the needs of our customers, including the recent grand opening of our state of the art Pacira Innovation and Training facility or the PITT, which I will cover in greater detail shortly. As Charlie will discuss later in this call, we reported net revenue of $117.5 million for the third quarter, an increase of 12% over last year. The overwhelming needs of the marketplace and the transformation underway in the ambulatory surgery center model have allowed EXPAREL average daily sales to return to year-over-year growth in June and attractive trends continue with average daily sales in July at 109%; August, 111%; September, 110% and October through this morning, over 111% of 2019 levels on a date worked basis. Today, we also reported $34.2 million in adjusted EBITDA for the third quarter, as we continue to grow our topline, while our margin simultaneously improves. We are in a very strong position to deliver accelerating profitability since we are supporting this robust growth with appropriate investments and operating expenses. We are also in the strongest financial position in the history of our Company. With more than $575 million in cash and investments, our expectation of steadily increasing operating cash flow, we have a solid financial footing to invest both internally and externally. While we remain very bullish for the long-term, uncertainties around COVID-19 remain, which can impact our business in a variety of ways. To provide you with increased transparency and insight in the intra-quarter trends, we will continue to report preliminary monthly sales until we have the visibility necessary to reinstate revenue guidance. Turning now to a more detailed strategic review of the business. The third quarter was highlighted by strong financial execution across three global growth pillars. First, delivering robust top-line growth by expanding the use of EXPAREL and iovera for opioid-sparing pain management; second, pursuing innovative acquisition targets and strategic partnerships to improve the patient journey on the neuro pain pathway; and third, advancing a pipeline of customer focus non-opioid pain management and regenerative health solutions. I'll start with EXPAREL. With more than 7.5 million patients treated in the United States since launch, EXPAREL remains well positioned for long-term market leadership as the only long-acting local analgesic that is approved for infiltration field block and brachial plexus nerve block. We have seen key states show signs of recovery since hitting the bottom in April. But we have not seen a full return to normalization. Despite these headwinds, EXPAREL average daily sales achieved 10% growth in the third quarter compared to 2019. Importantly, when we compare EXPAREL weekly revenue growth to IQVIA procedural claims data since the pre-COVID with the pre-COVID baseline in February, EXPAREL growth rates have consistently and significantly exceeded those of the elective surgery market. The most recent weekly data for mid-October shows elective surgery procedures in the United States down by 26% and EXPAREL up by 13%. We believe this is a particularly strong indicator of the expanded role EXPAREL is playing in shifting a variety of complex surgical procedures to the 23-hour stay environment, as well as broadening utilization and non-elective procedures such as C-section, cardiothoracic and oncology surgeries. When the elective surgery market normalizes, this data implies that EXPAREL is very well positioned for further growth. With long-term shift of complex surgeries to the 23-hour setting, there is a significant demand in the market for new information, research and training in the use of regional anesthesia. Less than 20% of the current anesthesia procedures are using a regional approach. Through our expanding network of anesthesia group partnerships and robust educational and training initiatives, we are paving the way for long-term EXPAREL based blocks to revolutionize the practice of local anesthesia. A field block or nerve block provides the basis of migration from inpatient to 23-hour state facilities. Not only is this fundamental to our growth, it is directly correlated with patient outcomes and satisfaction rates. I'd like to highlight a few key markets where we are seeing accelerating demand. We would expect this growth to continue as awareness mounts around the opioid-sparing benefits of EXPAREL based regional approaches. EXPAREL administered as a brachial plexus nerve block continues to be a massive commercial opportunity. To remind you, an EXPAREL brachial plexus block provides coverage for the upper quadrant, not only rotator cuff and shoulder arthroplasty but also elbow risks and hand procedures. We see brachial plexus nerve block as an addressable market of more than three million procedures per year. Our customers are consistently reporting positive results. Surgeons are not only impressed with clinical outcomes, but they prefer administering a brachial plexus block preoperatively and avoiding the infiltration at the end of the case. Our anesthesiologist customers see the strong advantages of using blocks as a vehicle of shifting procedures to the ASC setting by replacing antiquated pumps and catheters, which often become dislodged and prevent a procedure from taking place in the 23-hour site of care. Additionally, the ASC environment is an area where EXPAREL reimbursement is consistently improving as payers and self-insured employers continue to drive the shift from inpatient to outpatient care. And this is especially important for elective surgeries in a COVID environment. After having success with brachial plexus block, anesthesiologists want to broaden their use of EXPAREL with additional field blocks. Transversus abdominis or TAP blocks are a significant market where EXPAREL is providing long-acting pain control in the abdominal region. An EXPAREL TAP block opens the door for more than six million abdominal and colorectal procedures per year and supports that migration of these procedures to the ASC space. With only high single-digit penetration, we expect expanding use to be a significant growth driver. Women's health is also an important growth driver. We are seeing anesthesia driven EXPAREL based TAP and pectoralis (Pecs) blocks take hold as institutional protocol for cesarean section, abdominoplasty, gynecologic oncology, mastectomy and breast reconstruction procedures. There is a significant and growing demand among women for managing pain with non-opioid options. Opioid addiction in women is growing at an alarming rate and studies have shown that women are 40% more likely to become newly persistent users of opioids following surgery. Cesarean sections are a great example of how EXPAREL will be a key component in transforming the standard of care for women. We are using the data from our two successful Phase 4 studies to educate stakeholders about the opioid-sparing benefits of EXPAREL based TAP blocks. This is especially relevant for moms who are navigating childbirth during the COVID pandemic. Most pregnant women prefer an opioid-free experience. So we are also using real world evidence from physicians and thought leaders to drive women and healthcare providers to act with EXPAREL. The women's health market is comprised of just under four million procedures per year in the United States. With only mid-single-digit penetration, we remain in the infancy of tapping this market and see this as an enormous opportunity for Pacira moving forward. Another key target is the cardiothoracic market, where we have a growing single digit penetration with 1.5 million procedures a year, we see the opportunity for major revenue producer, similar to C-section. The procedure accounts I just shared are based on IQVIA procedural claims data and EXPAREL utilization data, which we receive on a six-month lag. These and other procedural data are summarized in the investor deck on our website. To remind you, the key markets I just touched on are all on label. Beyond our on-label initiatives, we are working to further broaden the reach of the EXPAREL label. First, we are working with the FDA to advance their review of our supplemental new drug application seeking approval of EXPAREL in patients aged six and older. The PDUFA action date is set for March 22, 2021. Our submission is based on positive data from our study of EXPAREL in children undergoing cardiac and spine surgeries. Having pediatrics on the label is of critical importance, given the significant unmet need for non-opioid options for managing post-surgical pain in this vulnerable patient population. Further, with only opioids currently approved for post-surgical pain management in children, we believe it will be difficult to limit access to the only approved long-acting local analgesic, especially when parents are part of the decision process. With approximately one million pediatric procedures per year where catheters and pumps are the mainstay of post-surgical pain control, we see a significant unmet need and envision this to be a $100 million market opportunity. Beyond pediatrics, we are also working to expand the EXPAREL label to include lower extremity nerve blocks. Our Phase 3 STRIDE study is enrolling patients to evaluate EXPAREL versus bupivacaine as a nerve block in adult patients undergoing lower extremity procedures such as foot and ankle surgeries. We are currently planning for top line data around the end of the first quarter of 2021, and approval in early 2022. We believe the lower extremity market opportunity is at least as significant as the upper extremity market. We also continue to advance our regulatory strategy for EXPAREL outside the United States. In September, the European Regulatory agencies issued a positive opinion recommending approval for EXPAREL across a variety of surgical settings and administration techniques. We expect a final decision next month. We anticipate launching EXPAREL along with iovera in Europe around the middle of next year and we look forward to the opportunity to bring a safe and effective opioid alternative to surgical patients across Europe. We remain in labeling discussions with the Canadian health authorities and we are working with our partners in China to determine possible next steps in the regulatory process. Moving now to our collaboration with DePuy Synthes, we continue to work with our counterparts to support a smooth transition in this agreement as this agreement approaches its conclusion in January of 2021. We have been rolling out additional customer facing resources as the orthopedic market continues to move towards anesthesia driven regional pain management and the migration of complex procedures to the 23-hour sites of care. Key to this transition and a major growth driver for EXPAREL is education and training for our anesthesia partners. This is such an important element of our future growth that we are investing in this critical innovative step and we are thrilled to recently open the Pacira Innovation and Training Center in Tampa, or the PITT. The PITT is an adaptable facility equipped with state of the art technology and audiovisual capabilities to support a range of educational events from didactic presentations to hands-on workshops. It was designed with guidance and input from leading regional anesthesiologists who are in the forefront of this field. The PITT's live format for simultaneous peer to peer interface will allow world-leading physicians to collaborate, educate and share clinical experiences with each other in a virtual environment where anesthesiologists and surgeon leaders can continue to innovate with new EXPAREL based field and nerve blocks. This feature has become that much more important with the recent pandemic. The PITT will play a critical role in the creation of enduring educational materials and will support optimal opioid-sparing pain management techniques and protocols using EXPAREL based regional approaches. This facility also differentiates Pacira as a partner of choice for in-licensing assets. 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, our commercial and clinical initiatives have been significantly 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 horizon. Given the unforeseen impact due to COVID, we have adjusted our near-term commercial strategy to support orthopedic customers and their patients who have been impacted by delayed total knee arthroplasty surgery and osteoarthritis by positioning iovera as a proven tool for opioid-free pain management to bridge this unfortunate gap to surgery. On the iovera clinical front, PREPARE is enrolling patients to evaluate iovera and EXPAREL for opioid-sparing pain management for patients undergoing total knee arthroplasty. With iovera, patients can prepare for surgery with several months of non-opioid pain control. We also expect that EXPAREL plus iovera as a procedural solution for total knee arthroplasty post-surgical pain will provide a more rapid functional recovery. In parallel, we are launching an iovera registry to capture real world evidence for the use of TKA procedures with leading academic and orthopedic centers of excellence. Key opinion leaders and anesthesiologists continue to have great interest in using iovera across a wide range of treatment opportunities, such as low back pain, spine, spasticity and rib fracture, where these thought leaders have experienced in developing treatment guidelines. We will use investigator-initiated studies and grants to develop data across these areas. Turning now to our second pillar, pursuing innovative products or technologies that align with our mission and allow us to further leverage our established infrastructure and P&L. We are thoughtfully pursuing opportunities that are of interest to our surgical and anesthesia audiences. We believe that our leadership position in providing opioid-free pain control to patients, provides us with a significant opportunity to build a differentiated portfolio of non-opioid and regenerative health solutions to improve the patient journey along the neural pathway and we expect to have additional partnerships to discuss with you shortly. Finally, let's discuss our third pillar, advancing our 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. We are evaluating two programs for clinical development. Our lead program is an intrathecal or subarachnoid delivery of a DepoFoam-based local anesthetic for use in acute and chronic pain. We are conducting a Phase 1 pilot study with EXPAREL which will allow us to make a go/no-go decision on the next phase of development, which would involve Depo Libo bupivacaine. Next, we are advancing pre-clinical and clinical dose finding studies to determine next steps for a dexmedetomidine development. We look forward to keeping you appraised of our progress with these early stage pipeline. And with that, I'd like to turn the call over to Charlie, for a review of the financials.

Thank you, Dave, and good morning everyone. Before reviewing our third quarter results, 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, we remain very confident in the future of our business. The fundamentals are strong and we are on track for accelerating top and bottom line growth as states approach to normalize and growing levels of elective and emergent procedures in hospital inpatient, hospital outpatient and ASC sites of care. Furthermore, our organization is well positioned to capture the increasing number of procedures moving to the ASC setting and COVID-19 has only accelerated this shift. We ended September with more than $575 million of cash and investments. This strong foundation and the cash generating nature of our business leave us well equipped to both fund the repayment of the principal amount of the remaining April 2022 notes and continue to invest in internal and external growth opportunities that align with our mission. Third quarter total revenue of $117.5 million was approximately 112% of total revenues for the third quarter of 2019. Net product sales of EXPAREL were $113.7 million, which was approximately 112% of the third quarter of 2019 as well. For iovera, we reported net product sales of $2.7 million for the third quarter of 2020 as compared to $2.6 million for the third 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 the hospital outpatient setting were postponed due to COVID-19. However, our focused effort with iovera has allowed us to offer pain solutions to many of those patients still awaiting an opportunity to undergo surgery. Our non-GAAP gross margin for the third quarter of 2020 was 76%, versus 80% for the third quarter of 2019. The change in gross margin was primarily related to lower cost units sold in the third quarter of 2019 versus 2020, a period of scheduled downtime in San Diego during the third quarter of 2020 to support the development of a new 200-liter manufacturing suite at that facility and some unplanned downtime at our UK facility. Non-GAAP research and development expense was $13.3 million for the third quarter of 2020, versus $19 million in 2019. The decrease was primarily driven by the completion of our EXPAREL pediatric and cesarean section studies. These decreases were partially offset by the advancement of our iovera and EXPAREL trials. Our Phase 3 lower extremity nerve block study and our Phase 1 pharmacokinetic study of EXPAREL via intrathecal injection. In addition, third 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 the development phase to the registration phase. Non-GAAP SG&A expense was $44.6 million in the third quarter of 2020, versus $43.4 million in 2019. The increase is primarily attributable to the termination fee associated with the conclusion of our co-promotion partnership with the DePuy Synthes. This was partially offset by reductions in sales commissions, which are directly linked to EXPAREL growth, as well as the use of lower cost virtual tools and the cancellation of in-person meetings, medical conferences and non-essential travel due to the COVID-19 pandemic. To remind you, while we have not disclosed the specifics on the DePuy Commission, other than to say it is comprised of a small percentage for renewing the prior year's base business and a larger percent on year-on-year sales growth. Prior to COVID, this translated into a high-single digit percentage of net EXPAREL sales. Upon conclusion of the agreement in 2021, we would expect approximately 90% of that expense to positively impact our bottom line. All of this resulted in non-GAAP adjusted EBITDA of $34.2 million in the third quarter of 2020 versus $24.8 million in the third quarter of 2019. Our third quarter GAAP financial results included an income tax benefit of $124.6 million for the reversal of most of our deferred tax asset valuation allowance. As a result of our 2020 operating results, we have concluded that it is now likely that we will generate taxable income sufficient to realize these deferred tax assets, given our expectations for growing revenues, expanding margins and only modestly increasing operating expenses. We continue to anticipate that the utilization of our US deferred tax assets will offset the need to pay US federal cash taxes until the second half of 2022. As Dave mentioned earlier, we are not restating 2020 guidance today, given the continued uncertainties around COVID-19. We will continue to report preliminary monthly product sales to share the quarter trends with you. We will consider changing this practice that we have as we have more visibility around the impacts of COVID-19. Looking out over the long term, our five-year plan remains unchanged with an anticipated high-teen topline annual growth rate, steadily improving margins, appropriately managed operating expenses, all combining to make Pacira a very exciting EBITDA growth story. With that financial overview, let me turn the call back to Dave for his closing remarks.

Thank you for that review, Charlie. We have come through a difficult time and current market trends are indicating a positive rebound. We will continue to monitor COVID-19 and its impacts on the market, patient care and the safety of our employees will always remain our number one priority. As we look ahead over the coming months, we have several value creating milestones we expect to achieve. We look forward to securing regulatory approval for EXPAREL in Europe, expanding our US label to include pediatrics and reporting top line results from our lower extremity nerve block study and taking full ownership of the EXPAREL franchise as we wind down the partnership with DePuy Synthes. On the iovera front, we have the completion of the prepared trial next year and data from the iovera registry becoming available to our customers. Importantly, we have a financial foundation from which to achieve our goals and we are well equipped to quickly 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 percent and appropriately managed operating expenses. And with that, I will turn the call over to Deborah to begin our Q&A session. Deborah?

Thank you. [Operator Instructions] Your first question comes from Randall Stanicky with RBC Capital Markets.

Here you go. Okay.

Yes. Can you hear me?

We can, Randall. Thanks.

Great. So I'm not going to ask you for 2021 guidance, but if you look at consensus, it's still roughly at the same level as pre-COVID implying close to 30% growth built in for next year. I suspect, that's an assumption for either normalization and/or some volume catch up, so I don't want this to become an issue for the stock. So can you provide some context as to how you're thinking about the recovery path under various scenarios, including a vaccine in the market next year? I mean, I guess, do you see normalization and can you quantify for us how much pent-up demand that could be going into 2021? That's the first question. And I know it's a big one. And secondly for David, Charlie. I'm getting a lot of questions around whether Pacira would do or is looking at a large transaction. If you could provide context as to your current thinking on business development, that would be helpful. Thanks.

Thanks, Randall. The first question is the holy grail, I guess, in what we're thinking is that, we still believe that over 90% of the procedures that are being delayed will be done. So we are preparing for 2021 to be a substantial improvement over 2020. Whether that is 30% or not, it's going to depend a lot on how the situation develops. Operator: Ladies and gentlemen, please standby. Okay. Our leaders disconnected. You may begin. Thank you. Sorry, guys. We had a power failure in New Jersey. The power went out in this entire building. So, timing is everything, I guess. So Randall, the second part of your question is, as we follow this IQVIA data, there is between a 30% and a 40% delta of the performance of Pacira versus the performance of elective surgeries in the United States on a week-by-week basis. So from a manufacturing perspective and from a resource perspective, we're getting ready for, as you suggested, something like a 30% rebound. To answer your question more specifically and this is with some help from the folks that do this stuff for a living, we're expecting that the ambulatory surgery centers are going to remain the center of recovery here, especially for elective surgeries through Q1. What we're being told is that we can expect a more normalized opportunity as we get into the second quarter of next year and so it isn't a perfect answer to your question. But we see some sales from inpatient procedures like C-sections and things where the baby is just not going to wait. So we have to do those procedures. We see the elective surgeries being impacted by the spikes, not so much because of surgery, but because of the tracing in the fact that so many patients become unavailable to surgery as a result of the spike in the tracing. And so we are getting ready to have enough inventory to cover any expected issues as we come forward, especially as we prepare for the continued growth of C-section and launching pads at the end of the first quarter. So come back at me on that, Randall, if that's not -- if you have a specific question inside that context. On the BD front, we have a number of opportunities that we're addressing. I don't know how exactly we would define a large opportunity or a transformational opportunity. We have no financial or philosophical issue with a large opportunity if we find one that's appropriate for the business and would add real value to our shareholders. But as we sit here today, I can tell you that I don't have anything like that in hand or even in the pipeline that I'm aware of.

Great. Thanks, Dave.

Thanks, Randall. Deborah, are you there?

Yes. Your next question comes from David Amsellem with Piper Sandler.

Just a couple, first, Dave, you talked about at least qualitatively the cost structure, and I think the way you phrased it is appropriate management OpEx. So I wanted to dig a little deeper into that with the unwinding of the J&J partnership. Can you talk to what that means in 2021 and just generally for your sales and marketing spend? That's number one. And then unrelated to J&J, how should we think about the trajectory of R&D spend in the absence, of course, of any -- of any transactions? So that's number two. And then lastly, can you just give us a sense of as we move into 2021, what portion of EXPAREL usage you think is going to be coming in -- coming from the ASC setting? I think you had said in the past, maybe early this year was something around 60% of volumes are coming out of ASCs. Where do you think that's going to be trending over say the next six months or so? Thanks.

Yes. Thanks, David. So on the OpEx question. Well, let me separate J&J from OpEx for one second. So we really haven't had any real benefit of the J&J partnership as a result of COVID since mid-March. So -- and if there is any anticipation of what the world will look like for Pacira without Johnson & Johnson, I would suggest that we've already seen that for six months and so everything we reported today really benefited very modestly if at all from the Johnson & Johnson partnership. So as we look forward, our strategy and what you will see in 2021 is that something in the mid-single digits would be the increase in operating expense that would accompany a 20% plus increase in revenues and we also expect to benefit modestly in 2021 but very substantially over the five-year planning period and operating margin -- gross margins as a result of the 200-liter facilities coming online, both in Swindon and in San Diego later in the planning period. So appropriate OpEx and as we talked about during the call, we've added approximately 15 people in the customer facing organization. As we exit this year and get into next year, there is a plan for a handful more than that. But that's really all required. And again I'll remind everybody that as we move from a surgical audience to an anesthesia audience, the ROI, in our update where it transforms itself to be very much higher and so we are in a very good spot in terms of being able to cover the marketplace. We're having a fairly substantial disconnect between our revenue increase and the need to cover that with an operating expense increase. Second is the R&D spend. The first thing, David, is to just remind everybody that in our R&D spend, the -- we have both manufacturing and clinical in that spend. And so we're putting another 200-liter facility in San Diego. You will see a slight increase in the R&D spend for a manufacturing process as a result of that activity and we expect that the clinical R&D spend, well, my guess is, David, that it will increase modestly. And the reason I hesitate there is, there are some questions about what we would do, plus or minus, different aspects of the European label and what we would do, plus or minus certain aspects of the pediatric label. So for example, if we get the broad label for pediatric pain, then you have one scenario; if we only get scoliosis or spine surgery and cardiac surgery, then there is the need to do an additional trial. So, there are some brackets around the OpEx expense. But in any case, it is not a dramatic increase over what we reported in 2020. And then 2021 ASC, this is a tougher one because the data that we get actually is on a six-month delay. So we're working on March data as we have this call at the end of October. But what we see is, and let me restate where we exited last year, so when we left 2019, 60% of our cases where elective, 30% were urgent and 10% were other and those were primarily plastic surgery and oral and maxillofacial surgery. What we see is that we're growing the ASC marketplace by something like a point a month. So right now, think about something in the 63%, 64% range and that obviously has to come from the inpatient range. And if we spin that forward, we think in 2025 outpatient will be 70% plus; inpatient will be something in the very low 20s and other will be whatever is left, right, something in the mid-single digits. So I don't know if that's enough color, David, but by the way, just so everybody knows, if it's not broadcast quality, Charlie and I have talked in view on the same cell phone here, so we're passing thing around the room. So this is not optimal.

Yes. We hear you just fine. And that's very helpful color. Thanks.

Thanks, David.

Your next question comes from David Steinberg with Jefferies.

Thanks. And some of your new near term growth opportunities, specifically C-section, pediatrics, first for the cesarean piece. It's been on the market for a while, not too long. I was just curious if you could comment on the growth trajectory or perhaps even more granular what percent of the opportunity have you already captured. And then in terms of the slope of the trajectory, on the one hand some of the KOLs we've talked were very positive. They're seeing patients in non-opioid solution, patients getting out of the hospital more quickly and lower costs because of that. On the other hand, it's not an ASC targeted indication. So you're still facing some of the issues you had. Historically the hospitals where you have hospital pharmacies pushing back because of the differential in price versus generic bupivacaine. So, could you comment on the trajectory and then similarly with pediatrics. It's not yet approved in the market, the first part of that is, do you think some of the uses already off label? And also, could you comment on the potential trajectory once you get approval. Thanks.

Thanks, David. First on C-section, maybe I'll start with the end and say that our ability to address the opportunity is still very small, right, I mean more nascent as it relates to C-section now. We are also in a very good position. Remember, we have a relationship with MEDNAX where we train the maternal fetal MEDNAX group that represent maternal fetal services in over 500 hospitals in the United States. So we see C-section is growing quite rapidly. Although still a modest percentage of our $400 million plus in revenue. We expect that the slope will continue and your question is insightful, David. We've got a number -- we know of a number of places where private equity groups and OB/GYN groups are building birthing centers. To me it sounds like what we saw in the early days of the excimer laser where these centers are being built fairly quickly. We know a couple are going to actually open in November. We are based on the fact that mom can stay for one night or in some specific cases, no nights, replacing 3.3 days to 3.5 days, which is a standard of care when opioids are used for pain control, allows this procedure to move to an ambulatory environment and move away from the COVID exposure for mom and baby. There is a number of things that we've had to tackle as we've gone through that from an operational perspective. How do we get the pediatrician to discharge the baby even when the OB/GYN is available to discharge mom, et cetera. So there is a number of tactical things that we're working on. So I think as you see more non-hospital facilities open for birthing centers, you're going to see the velocity of change here, be quite appropriate and quite extreme relative to what we do today. So, and then on PEBs, there is always going to be some off-label, David, you know when you get into a 16-year-old or a football player who is 15 years old and they have a body weight that would suggest that their weight is or there doses in adult weight anyway. We have seen people adopt EXPAREL in the pediatric market, but it has been modest. And what we're seeing as a result of the pediatric ad boards and especially the anesthesia ad boards, is that they are significantly behind the way we do adult medicine for pain control and pumps and catheters are still the mainstay of the way they deliver post-surgical pain control. That is really low hanging fruit for us. And so we're working with a number of them on programs. Again, going back to regional approaches. How we're going to treat pediatric patients with an ESP block for example, for spine surgery and scoliosis patients and kids. And as we talked about a lot in the script, the PITT in Tampa and having the training facility where we can do cadaver labs and where we can have the world experts, all on either video or in person doing the work, is really important and improving the velocity of best practice care. So we expect the tease is going to take off but I should define that market for you a little bit. We will launch in approximately 40 major academic thought-leading centers and we'll do that with a team of nurses; important that everybody understands that PEBs are not little adults, the pediatric profile with their body weight, with their enzyme systems, et cetera is very different. So we need specific expertise to launch into that market. So we'll do that immediately after launch with the team of nurses with educational programs and then we'll broaden that out as we go through next year. So I hope that's enough, David. But if -- come right back to me if you have another question.

Hi, good morning and thanks for taking the question. Dave and Charlie, couple of questions from me. Firstly, your comment about the role of EXPAREL in non-elective procedures, could you expand further on this as to what percentage or what segment of procedures in cardiothoracic or oncology is non-elective and how could that be a growth driver? Secondly, as your transition to supporting ortho patients for iovera, again how should we factor this in terms of numbers and what does this shift in strategy imply? And maybe last one, can you speak a bit more about the focus on regenerative medicine, either in the context of sports medicine or beyond that and how do you envisage this business complementing the pain management component? Thank you.

Yes. Thank you. So for non-elective procedures, the obvious one is C-section, of course, but if you went to a place like MD Anderson, you would see that there is a pain protocol written for virtually every major procedure that they do, so lung resections, OB/GYN, cancer resections, et cetera. It's a bulking procedure and EXPAREL is a standard of care. So you would see the same at the Cleveland Clinic. You'd see the same at Mayo, especially in the Arizona facility. So there is a base of business that is growing on an annual basis that it will be unlikely that that would move to the ambulatory environment. Pretty much the same with some of the cardiovascular stuff that you referenced. You don't see a bypass machine being anything that's going to be used routinely in an ambulatory center. So there is a stable of procedures that we think will remain in the hospital environment as we go forward. And if that's 25% of a very rapidly growing revenue number, that's an important piece of our business and one we want to pay attention to and keep working with the customers on. When we -- your second question was around iovera and ortho, and -- so there are two things here really. One is what we basically purchased, and that was the use of iovera in a total knee arthroplasty to try to provide a prolonged pain control opportunity, so that patients could have a more appropriate physical therapy opportunity and that's why we've focused on functional recovery. And by the way as we talk to self-insured employers like the labor unions and a lot of the big companies, what they are interested in is, how do I get this patient back to work and have them be more functional than they were before they left and so that's a really important aspect of the reimbursement structure as well. So what we're doing is in PREPARE, we are looking at using iovera a month before your planned TKA surgery so that the patient can start going up and down stairs, can get out of a wheelchair, can start living -- start having some functional aspects to their lives, so that they become a better surgical patient. We use EXPAREL for the pain storm so that we can get them through the surgery without the need for opioids or any or pumps or anything that would keep them in the hospital. And then the plan always is to start them in physical therapy the day after their surgery. And so by moving quickly, we avoid a lot of the issues that were associated with femoral nerve blocks and patients just laying in the bed for two or three days following their surgery. And so we're looking at a very rapid transition back to the patient becoming a functional patient and being able to do things like drive their own car to their PT, go to church, go to the grocery store, all the things that you can do. So that's sort of one piece of it. The other piece of it is and this is what we've seen significantly as we've gone through the COVID crisis is, when a surgeon tells the patient that there is no room for them to have a TKA as planned and they're going to have to wait for two or three months, what do they do if they have debilitating knee pain. But we can offer that patients for several months of pain control by freezing that nerve. So think about iovera as a non-pharmacologic nerve block and we can do that nerve block that will last for several months until that patient has the opportunity to get into the OR and I'll extend that one more step to say a lot of what we're talking about with the marketplace is ortho again. Docs are incredibly interested in how you do this for shoulder, how you do this for hips, how you do it for spine. We're developing a new smart tip, hopefully we'll be able to perform a very specific procedure for low back pain. So ortho, peripheral orthopedic pain is really important to iovera as we go forward and the strategy is to provide a toolkit. So that we have data both for freezing the nerve with an iovera device and doing a nerve block with EXPAREL. With EXPAREL you're going to get a few days, with iovera you're going to get a few months. There's going to be a lot of scenarios where you're going to want to do both. And then lastly regenerative medicine, so our docs, the docs that we are working with, it's an interesting dynamic that takes really several years to really fully understand. So what happens in the market is we have big time orthopedic surgeon and that surgeon now can control the patient's pain. And when they control the patient's pain, then the demands of the patient, or the request of the patient change materially. So a patient that wasn't worried about playing golf because they couldn't get in and out of the car, once they don't have pain and they can get in and out of the car, now they start talking about, well, if you did a rotator cuff, I could play golf or if you could repair my ACL in a more appropriate way or you could do meniscal repair or cartilage repair and bone repair, all the different things that we have opportunities to do now that didn't exist 10 years ago. And so, it's the same customers. All of those procedures are being done in the ambulatory surgery department. So think about ACL repair, meniscal repair, cartilage repair, all of those opportunities are really an extension of pain control. And the way we're operating, it's the ASC, which we intend to own, and it's the customers that we're currently calling on today.

Thank you.

Thanks.

Your next question comes from Greg Fraser with Truist Securities.

Good morning, folks. Thanks for taking the questions.

Hey, Greg.

I'm curious if you're seeing more commercial payers, whether national or regional, implement policies like what United did last year or if you're aware of payers considering similar policies. And then on the European part...

I'm sorry, go ahead, Greg.

Yes. Second question is on the European markets that you plan to enter. If you could just speak to the dynamics in those markets and whether they are parallels with the US in terms of the shifting of procedures from hospitals to outpatient, that really drive the need for our product like EXPAREL.

Yes. Thank you. So on the first question, absolutely, is the answer. And we see, for example, Aetna is now paying for HOPD in several states. So in addition to following CMS we see 92% and 90% and paying for ambulatory surgery. They have now seen that they can actually move these patients to these less expensive environments and so many of the national payers are paying for EXPAREL in the hospital outpatient department as well as the ASC. We also see many of the self-insured employers and just as a frame of reference, 85% of all the companies in the United States who have more than 5,000 employees are self-insured. And we're working with those self-insured payers to demand that they have an opioid-sparing platform in their policies. And so we're working backwards essentially in saying, if you're a police union, if you have bus drivers, if you have people at the United Auto Workers, the last thing you want is folks in your facility who are on heavy doses of opioids and who are handling heavy machinery, et cetera. So we're working with those folks to demand that they have opioid or low or no opioid opportunities. So stay tuned, but we've got dedicated resources now Greg. They don't do anything but work with self-insured employers. Don't do anything but work with many of the concierge services that are popping up, that have got to find expertise, orthopedic surgeons generally by zip code, who are low opioid or no opioid users, who are treating their patients in the ambulatory surgery center. So many of these big self-insured employers are signing up with folks who have already defined where they're going to send their total joint patients and their spine patients in each zip code around the United States. That's all very, very recent, and accelerating quite rapidly. In Europe, we are going to have a well, at least the discussions to date, we expect to have a label for field blocks and nerve blocks. And so unlike the United States where we launched with infiltration and went through all the trials and tribulations of our surgery audience interactions and some of the negative papers that were written, we don't see the need to go through that in Europe. And so this will be largely an anesthesia driven launch in Europe. And just to remind everybody that ERAS protocols actually started in Europe. So having our interactions with the international ERAS society allows us to build protocols for the use of EXPAREL in these low or no opioid regional approaches. And so, yes, we expect that Europe will be a more defined opportunity, but will be a more rapid uptake with a much more appropriate audience using ultrasound guidance and being experts in the pain and the neural pathway. I would also say that there are markets in Europe that you just don't want to go to. So you can expect that we will launch into five or six major European countries. But this will not be a pan-European launch for many of the reasons that I'm sure you guys know.

Great, thanks for the color.

Thanks, Greg.

Your last question comes from the line of Gary Nachman with BMO.

Hi, guys.

Hey, Gary, can I interrupt for one second? Deborah, we don't want this to be the last question. Okay, so...

Okay, no problem. So just a few follow-ups. First on the ASC ramp, are you offering a discount on EXPAREL and is that helped increase usage in that setting. So how does net revenue per procedure in that setting differ from the inpatient setting? And then talk about the evolving dynamics. The efforts going after the anesthesiologist versus the orthopedics, how the sales force is changing there and how much more will the future growth be from the anesthesiologists? And then just one last one. Are you expecting that a generic will file at some point when the IP runs out next year or the barrier is still too high and are you planning to have any additional IP that could hit over the next couple of years? Thanks.

Yes, thanks Gary. So in the ASC, we do not offer any discounts or rebates of any kind. So I haven't actually thought about it this way, Gary. But I guess our ASP in that environment is actually modestly higher than it would be in an inpatient environment where you have big hospital chains, et cetera. And the basic difference there is that in a hospital, a pharmacist looks at us as a cost. In the ambulatory center, the folks who manage the ambulatory center look at EXPAREL as the reason that they were able to treat patients with low or no opioid treatment strategies. They can't use PCA pumps. They can't use thoracic epidurals, et cetera. So we are not the bad guy in the ASC. We are the person who actually made the ASC transition possible. So a much more appropriate environment for us and as we go forward, I don't see that changing any. The only difference in the ASC environment, and this probably would not be a surprise, is when you're using peripheral nerve blocks and this would be the case with lower or with brachial plexus nerve block, it's a 10-ml dose, right. So by definition, and the ASP per case is modestly lower. But the WAC price of EXPAREL on a vial basis is actually modestly higher. So then the second question was around anesthesia and surgery and the dynamics, I guess I'd start out Gary, by saying everybody is interested in pain control; everybody is interested in reducing the use of opioids. The surgeons would struggle in both the inpatient and the outpatient environment with adding a few minutes to the case by having to do an infiltration at the end of the case. And they are surgeons, right. They're not actually all that interested in extending the case and spending some time infiltrating. They're not experts in neuroanatomy as a general rule. So having an anesthesiologist who can do a nerve block in a couple of minutes that moves it to a block room where the patient visits before the case so they actually have their pain control on board before they ever go into the OR, it eliminates the need for the surgeon to have to add a few minutes to the end of the case that improves throughput. It provides us a higher quality quotient because it's done under ultrasound guidance, et cetera. And the anesthesiologist, actually they make their living doing this and so the anesthesiologist is the expert here. They do this. The surgeon is not in any great hurry to keep this doing infiltration at the end of the case. And so the vast majority of the growth that we're experiencing now is from anesthesia driven procedure, either a field block or a nerve block. And then your last question was around a generic. That's an easy one. We are filing some additional IP and we do have a couple of significant IP firms working on this with us in terms of putting up the picket fences, et cetera. I would bet you every penny I've ever made in my life that they will not be a generic EXPAREL. There is no way that anybody is going to be able to get that the release specifications and then guess at the assay that we used to release the drug on a batch by batch basis based on those release specifications. So the FDA has determined that they have to have an exact duplicate. There are hundreds of decisions that have to be made based on the specifications of the product as we go through the manufacturing cycle. Nobody has been -- we've never told anybody what those are and you would have to understand what our proprietary assay is and be able to deploy that against the release specifications. And I would tell you we have even further evidence of how hard this is to make. Our group in Europe that's been over there for five years, moving on EXPAREL and moving to the Swindon facility, has been struggling to make EXPAREL again in our own facility with our own people. So if anybody told me that there was an outside group that was going to figure this out, I'd say that's nonsense.

Okay, great. Thank you.

Thanks, Gary.

Your next question comes from Serge Belanger with Needham & Company.

Hi, good morning. Thanks for squeezing me in. First question is around recent monthly sales trends and seasonality. I think in the past or historically third quarter has seen softer external sales growth followed up by strong fourth quarters. Did you see any of that seasonality in the third quarter and should we expect, I guess, historical strong fourth quarters to continue in this environment?

That's the equivalent of Randall's question, I mean that's the question you do it, right. I mean so, in the third quarter, we were not disappointed with between 10% and 12% growth on 2019, given the pandemic and all the other issues that we have in the marketplace. Q4 is generally driven by elective procedures and the fact that patients have satisfied their deductible or it's really driven by insurance. Should there be a modest impact in the fourth quarter, is not as many patients have insurance, given the unemployment rate, probably, but we haven't gotten far enough into the quarter yet to fully understand that. But I would also say at the same time that the impact of COVID and the spikes of COVID, I think lay over any impact. We're going to see of patients not satisfying their deductibles in the year. I think having a patient, it's afraid to go out of their house or a patient who can contact trace, so that they're not available for surgery. Those are much bigger issues than patient insurance and having paid their co-pay so far. So, I think. And, but one thing we know for sure, the vast majority of all of these procedures are going to be done. Whether they're going to come back to the market in Q1 of '21 or Q2 of '21, it is very clear to us that all of this backlog of procedures is going to have to be satisfied. And so really all we can do is to continue to train on regional anesthesia, continue to work with the folks on reimbursement. So that we make it easier for people to move to the ASC environment and to have our reps have constant contact with these folks so we can understand the world they're living in and solve as many of their problems as we can. Other than that, it's just a matter of when, not if, from our perspective.

Okay. And second question was about EXPAREL use in hospitals and it was a big movement towards ASCs and HOPDs, but has there been any change with this movement for EXPAREL access or EXPAREL usage?

In the hospitals, no?

Yes.

No. The change actually is in the availability of the hospital beds for elective procedures. But what's happened in many states is the governors have sequestered the hospital beds for COVID-19 patients and so by virtue then of those beds, the pay at those beds have not been available for elective procedures. And so in the states where we have a vibrant ambulatory surgery environment, it's been relatively easy to move those procedures to the ambulatory center. And keep in mind, I mean, last year we grew by 23%. So when we say that ASCs are growing fast, the fastest of all, that does not mean in any way that hospitals are not also growing, but they're not growing by 23%.

Got it. Thank you.

Thanks.

Your next question comes from Ami Fadia with SVB Leerink.

Great, thank you for squeezing me in. Two questions, firstly, I want to continue on kind of the theme of how do we anticipate growth for 2021? How much of that is dependent on a vaccine being available such that institutions start to increase the surgical volumes? It seems that currently your growth is masked by kind of just the underlying year-over-year reduction in surgical volumes, but what needs to happen next year for that to change and do you think that we have enough visibility that the overall surgical volumes will actually flip to growth?

Well, in the elective environment -- in the elective surgery environment, it's growing now relative to last year. And it's hindered in the as you suggest, it's hindered in the inpatient environment by the COVID experience. And so I think on the positive side, Ami, I can tell you that we have a lot more capacity. We continue to add ambulatory surgery centers and we continue to move more high resource, more difficult surgeries to the ambulatory surgery environment. And for example, we saw a tremendous spike in total knee arthroplasty move into the ambulatory environment when CMS started paying for TKAs and the ASC. And the CMS is going to start paying for total hip arthroplasty on January 1, 2021. And we also see a major push from the payers to move their patients to the lower cost environment of an ASC versus an inpatient procedure. So the environment is heavily favoring, moving patients out of the hospital environment when possible. Do we have enough visibility on and how fast that's going to change? I'm sure we're using many of the same resources that you guys are. Do we need a vaccine? I think we need to have and this is what we're seeing, right. We have a greater understanding of how to do elective surgeries in a COVID environment, especially when patients don't appear to be seriously ill and don't require ICU stays to the same extent that they did before. So our expectation is that as we continue to stockpile these elective procedures that are not been done, many of those are going to need to be done more urgently because the pain profiles will continue to extend, right. And somebody who maybe wasn't ready for surgery or could delay surgery is going to move into the category of can longer delay that surgery and we're going to have to figure out how to do those. So I think you're going to see -- you're going to continue to see growth. You're going to continue to see modest growth against the 11% that -- we have over 11% that we just said, we're seeing in October so far. So something up into the mid-teens would not surprise us at all. To get to the 30% that Randall referenced in the beginning of this Q&A period, we clearly need to have either a treatment or a vaccine or something that makes the patients more comfortable. Because there's really two aspects here, right. One is the medical community figuring how to operate in a COVID environment and the other is, and as we evolve, actually more importantly, patients being willing to go out and get an elective surgery, even when it's available and even when they haven't been contact traced. So I think. And, but one thing we know for sure, the vast majority of all of these procedures are going to be done. Whether they're going to come back to the market in Q1 of '21 or Q2 of '21, it is very clear to us that all of this backlog of procedures is going to have to be satisfied. And so really all we can do is to continue to train on regional anesthesia, continue to work with the folks on reimbursement. So that we make it easier for people to move to the ASC environment and to have our reps have constant contact with these folks so we can understand the world they're living in and solve as many of their problems as we can. Other than that, it's just a matter of when, not if, from our perspective.

Thank you, that very helpful. My second question was just with regards to the up margin expansion that we should see with the J&J agreement going away. What's your commitment to maintaining that margin expansion as you think about R&D investments into the pipeline as well as business development.

So, well, two different questions there, right. One is what we have prepared in our five-year plan of the assets that we currently have. The margin expansion is extraordinary. And I think you're starting to see that and we expect that that would be further elucidated as we go through next year. It's clear that, and most of the BD opportunities we have, there will be some investment that's required in order to increase the value of those assets. But I would tell you, I mean anything that we have currently on the books, the investment is very modest, capital V very modest, relative to the margin expansion that we expect to see over the next three or four years.

At this time, I would like to turn the call back over to David Stack, Chairman and CEO for closing remarks.

Thank you, Deborah. 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 up for us is the Jefferies London Conference in November, followed by the Piper Conference in December. Thank you all, and stay well. Goodbye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.