Good day, and thank you for standing by. Welcome to the Q3 2021 Pacira BioSciences, Inc. Earnings Call. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, Amanda, and good morning, everyone. Welcome to today's conference call to discuss our third quarter progress. Joining me as speakers on today's call are Dave Stack, Chairman and Chief Executive Officer; and Charlie Reinhart, Chief Financial Officer. Additional members of the Pacira executive leadership team are also here for our question-and-answer session. Before we begin, let me remind you that today's call will include forward-looking statements based on current expectations, including those related to the potential transaction between Pacira and Flexion Therapeutics. Such statements represent our judgment as of today and may involve risks and uncertainties. For information concerning risk factors that could affect the company, please refer to our filings with the SEC, which are available for free on the SEC website or our website. In addition, we would like to remind you that the required tender offer documentation for both Pacira and Flexion has been filed with the SEC. Please also refer to the information in such documents which are available for free on the SEC 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. We will begin today’s discussion with a few prepared remarks to cover recent business highlights before turning to your questions, where we would like to devote most of our time today. Last month, we were thrilled to deliver a major milestone in our growth strategy with our proposed acquisition of Flexion Therapeutics. This transaction directly aligns with our goal of building out a robust offering of novel non-opioid treatments that will allow us to broaden our differentiated portfolio of end-to-end solutions across the neural pain pathway. With ZILRETTA we have a highly complementary commercial asset for the treatment of osteoarthritis knee pain, which will diversify our revenue stream, grow our top line and provide meaningful synergies that we expect to derive substantial near and long-term accretion to our cash flow and earnings. We are developing an integrated ZILRETTA operating plan for 2022. We expect significant operational synergies, accretion and growth potential for ZILRETTA, which will be fueled by our complementary call points and commercial activities. To put some quantitative context around this, the three complementary commercial assets are each on a strong growth trajectory with year-over-year to date net product sales growth of 27% for EXPAREL, 76% for iovera, and an estimated 25% for ZILRETTA as reported by Flexion Therapeutics last month. Based on our estimates, Pacira only needs to capture 30% of the operational synergies to make this deal accretive in 2022. Future growth opportunities for EXPAREL and iovera were highlighted at our Investor Day last month, which we hosted from the Pacira Innovation and Training Center in Tampa. We were joined by key opinion leaders who shared their experiences across multiple procedures. Dr. Jeff Gadsden, Head of Regional Anesthesia at Duke University, provided an excellent summary of the revolution taking place in the field of regional anesthesia where EXPAREL base blocks are transforming the standard of care by institutionalizing Enhanced Recovery After Surgery (ERAS) protocols that are yielding improved outcomes, faster recovery, better pain control and enabling the shifting of complex procedures to outpatient settings. Regional techniques are redefining the standard of care proposed surgical pain management, with field and nerve blocks expected to grow from 20% of anesthesia procedures in 2019 to 75% by 2025. EXPAREL is the only FDA approved product that allows field and nerve blocks for single dose long acting pain control. Dr. Sunny Tumber, a Pediatric Anesthesiologist from Shriners Children's Hospital, discussed how EXPAREL is changing the standard of care for his institution where they're using EXPAREL based regional techniques, such as erector spinae or ESP blocks to achieve excellent pain control using low or no opioid regimens in highly painful procedures, such as scoliosis, hip replacement and colorectal surgeries. EXPAREL is redefining pediatric post-surgical pain management by displacing opioids and cumbersome catheter systems which can have a 50% failure rate, especially important for this vulnerable patient population. With approximately 1 million pediatric procedures per year, we envision pediatrics to be at least a $100 million market opportunity by 2026. Dr. Maggie Holtz, a Regional Anesthesiologist and Medical Director at Wellstar Health Systems, performed live demonstrations of ultrasound guided EXPAREL based ESP and TAP blocks, showcasing the ease of administration and superiority to general anesthesia in terms of earlier recovery and fewer side effects. For example, as discussed by Dr. Tumber, EXPAREL based ESP blocks are becoming the marquee procedure for pediatric spine surgeries at influential children's hospitals across the country. Dr. Michael Wang, Chief of Neurosurgery at the University of Miami Hospital, highlighted how EXPAREL based ERAS protocols have paved the way for him to perform awake spinal fusion surgery and cited cost savings of more than $5,000 per case as well as a reduction in procedure time of more than two hours per case. Enabling the transition of spine procedures to outpatient settings is a game changer and represents at least a $100 million growth opportunity for EXPAREL. Dr. Paul Sethi, a leading research physician in sports medicine from Greenwich, Connecticut, has established new EXPAREL based clinical guidelines for shoulder surgery, where he has seen 30% of patients go opioid free after surgery in the ambulatory surgery setting. Shoulder surgery is the fastest growing orthopedic procedure for EXPAREL in the ambulatory surgery centers. Dr. Steve Garber, Obstetric Anesthesiologist at Saddleback Medical Center, in California, highlighted his success using EXPAREL TAP blocks to help new moms have an opioid free, pain free experience after C-section surgery. C-section is the cornerstone of the Women's Health market with EXPAREL, with sales also expected to exceed $100 billion by 2026. Dr. Josh Urban of OrthoNebraska, who has used iovera in more than 1,000 patients for treating pain associated with osteoarthritis or total knee arthroplasty, summarized the advantages of iovera cold therapy as a long acting, non-pharmacologic nerve block versus the safety risks associated with heat-based approaches. We are successfully positioning iovera as a total procedural solution for total knee arthroplasty and expanding to peripheral osteoarthritis as well. As we reported previously, orthopedic procedures make up slightly more than 50% of our EXPAREL procedures. All of these above are on-label applications and are driving real-time demand in the market. The event also highlighted several exciting future development opportunities, such as the treatment of pain from spasticity, presented by Dr. Paul Winston, who is the Medical Director of Rehabilitation and Transitions at the University of British Columbia, Victoria. And also the current President of the Canadian Association of Physical Medicine and Rehabilitation. Dr. Winston presented compelling data outcomes using iovera cold therapy as a novel approach for treating not only the pain of spasticity, but the spasticity itself. The unmet medical need is significant and the social impact and costs are extremely high. With an estimated 5 million patients, we believe iovera could make a meaningful impact for stroke, cerebral palsy, multiple sclerosis or spinal cord injury patients suffering from spasticity. Pilot studies are almost completed. Treating the pain of spasticity is currently on-label and we are defining the regulatory strategy to add spasticity itself to the indication. Spasticity has the potential to be a blockbuster market for iovera. From the beginning to the end, the event underscored the vast untapped market opportunity that lies ahead. With a total addressable market of 32 million procedures for EXPAREL and 31 million procedures for iovera, and current single-digit penetration, we feel great about the outlook for growth, with each 1% incremental market share adding another $100 million to the top line. A replay of our Investor Day can be found on the Investor Section of the Pacira website. Turning to Europe, the launch of EXPAREL and iovera are now underway in this important market. We are generating interest, taking orders and expect to be shipping products by mid-November. We are seeing a high level of interest as COVID has caused a tremendous backlog for orthopedic procedures in Europe, with waiting lists as high as two years. Importantly, the average length of stay in Europe is several days, which provides an optimal opportunity for both EXPAREL and iovera to improve pain management for patients waiting for surgery as well as recovery time, surgical efficiency and throughput for total hip and total knee procedures. On a clinical front, our team continues to make strong progress for EXPAREL two Phase III registration studies for EXPAREL and lower extremity nerve block are now underway. This timeline places us on track for regulatory submission in the third quarter of 2022. Activities to support label expansion to include a pediatric neural block program and an indication for patients under 6 years of age continue to progress as expected. A number of academic collaborations are also starting. These include an opioid-free C-section study at Henry Ford Hospital in Detroit and ESP blocks in pediatric spine surgeries at Shriners Hospitals and the Cleveland Clinic. Finally, we're defining regulatory strategies and new areas of interest such as Stellate Ganglion block for treatment of post-operative dysrhythmia from open heart surgery procedures. With iovera, we remain on track to report interim results from our PREPARE study, which is evaluating EXPAREL and iovera in total knee arthroplasty procedures. In addition, we are supporting a wide range of pilot initiatives and exciting markets such as Restless Legs Syndrome, Spasticity and Rib Fracture. As for the DepoFoam pipeline, we're moving to the next cohort in our subarachnoid program for spinal administration, a depodexamethasone asset for particular free inflammation therapy, and a high potency EXPAREL with an extended duration of action. In closing, we feel great about where we stand today and the market dynamics we are seeing for both products. We will continue to build on our momentum, and we remain highly confident in our growth outlook. Looking ahead, we intend to submit our leadership position by expanding the use of EXPAREL and iovera and look forward to adding ZILRETTA to our commercial offering to deliver patients end-to-end non-opioid solutions along the pain pathway. And with that, I'll now turn the call over to Charlie for a review of the financial outlook.

Thank you, Dave. Good morning, everyone. Turning to our financial outlook, we feel very confident in the financial strength of Pacira. We continue to see potential for significant revenues and cash flows to support debt reduction and continued investment in innovative, non-opioid additions to our pipeline. I'll start with a quick update on recent EXPAREL trends. As previously reported, the elective surgery market faced additional pandemic-related challenges in August and September due to regional surges in COVID-19 Delta variant cases, staffing shortages, and surgical fatigue and care teams addressing significant procedural backlogs. October EXPAREL revenues already indicated these challenges are beginning to moderate, supporting our optimistic outlook for a strong fourth quarter. On the competitive front, we have not seen any impact from the new market entrants on our base business or our ability to generate new business; a pristine safety profile continues to be a key differentiator between EXPAREL and other extended-release bupivacaine formulations. Regarding any potential generic EXPAREL, I'll quickly reiterate our confidence in our proprietary position and ability to protect a thriving EXPAREL franchise. To get to the finish line, a potential generic would have to successfully overcome every one of the rigorous hurdles that have been established for EXPAREL, including; first, our strong and growing EXPAREL patent estate. We currently have two orange book listed patents, and we recently received notices of allowance from the US Patent and Trademark Office for two additional patents, including a product composition patent that is eligible for Orange Book listing. Several additional orange book listable patents are forthcoming to further secure our exclusivity runway. Second, the high specific and rigorous regulatory criteria for approving bioequivalence established by the FDA. And third, the practical manufacturing challenges of the complexities of making a multivesicular liposome product using a validated, commercial scale, cold chain, sterile manufacturing process. Without any insight into the product composition specifications, batch release records that are proprietary to Pacira and have never been disclosed. In short, we have great confidence that there will never be a generic EXPAREL. Given the package inserts and safety profiles of potential competitors, we believe EXPAREL will remain the branded market leader for many years to come across a broad range of infiltration, field block, and nerve block procedures for adults and pediatrics. Now, let me turn to gross margins. We continue to project gross margin improvement of 1,000 basis points over the next few years, with EXPAREL gross margins reaching at least 85% by 2024, due to lower-cost manufacturing capacity and steadily improving volumes. During the third quarter, we began producing commercial product using our enhanced manufacturing process at our custom 200-liter suite in Swindon. We expect this facility to start benefiting gross margins in 2022 as we ramp up 200-liter manufacturing volumes and units sold. While we are currently not providing 2021 guidance, given the continued uncertainty around COVID-19 and the pace of recovery for the elective surgery market, we will continue to report preliminary monthly product sales to share intra-quarter trends with you. We will consider changing this practice as we have more visibility around pandemic-related disruptions. What I can tell you today is that we remain bullish in our long-term expectations for robust top and bottom line growth. We are confident in our 5-year plan, which is on track to deliver year-over-year revenue growth in at least the high teens, gross margin improvement of 1,000 basis points and operating margins that exceed 50% by the end of our planning period. With that, I will ask the operator to begin our Q&A session.

Our next question comes from the line of David Amsellem. Please go ahead.

Hey, thanks. Just a couple on Flexion and ZILRETTA to the extent if you can answer them. First, just broadly, Dave, can you talk to what you think you could do differently regarding the support, the commercial support of that product relative to Flexion? And just maybe talk about the extent to which you might have more reach into a wider audience of physicians with the transaction. So that's number one. And then number two, now that you're sort of pivoting into orthos more deeply and more deeply into chronic pain, how do you think about the extent to which you'd like to do additional acquisitions, leaning more into chronic pain? And what is your appetite for something significant in the near-term to intermediate term? Thanks.

Thanks, David. I'll grab the first piece, and I'll ask Ron to comment on where we're going with our additional BD activities. I think, David, really what we're talking about here is our deep relationships with the orthopedic community. We've had a number of discussions with folks who use ZILRETTA, and they've given us some feedback about things that they'd like to see to make it a little bit easier for them to be able to use the product and understand the reimbursement and some of the rebate programs, etc. So that'll be task one. We also know that there are a number of people that have been very close to Pacira that have not used ZILRETTA at all. And so we have an opportunity to use our network to go to a new group of folks that we think will benefit from, not only the corporate relationship, but it's pretty interesting actually when they were all here last week for the Analyst Day. The folks that were using ZILRETTA started selling it to the folks who weren't using it at the dinners that night. So I think just the scale of what we do here and the fact that we have multiple products going to the same customer audiences, including iovera by the way, is going to help us a lot. That's basically a partial answer to the same question, is that our reps now will be dedicated to this chronic pain marketplace, and we'll have iovera as well as ZILRETTA. So we'll have a couple of different ways that we can treat these patients. We believe that it'll be based on the physicians training, the reimbursement profile, where the site of care is, and very different aspects depending on whether you're doing it in the hospital outpatient department or in the physician's office. If the patient is a Type 2 diabetic, we will offer different solutions to those patient populations, etc. So we think there's a few considerations here that allow us to basically cast a wider net. And also from the perspective of the synergies that this allows, we can do it, we think very cost effectively and generate a lot of interest in ZILRETTA. For the second part of the question, David, I think you'll hear from Ron that chronic pain is really important, but also reimbursement. All the things that we're looking at are going to the same target audiences, which is really important when it gets back to the same answer to the same question. By dealing with the same physicians for all of these assets, we're able to get their ideas not only on the individual products, but on the pipeline as all this lays out in terms of how we have to develop these products one against the other as well as the total pipeline. So, Ron can give David a few ideas on what we're thinking about here.

Sure. And David, thank you. So in terms of ortho and chronic pain, iovera and ZILRETTA are both at the crossroads between chronic pain and musculoskeletal. We've made investments in gene coin, which would save in the similar vein as well as spine biopharma in that area as well. We focus on chronic pain, specifically, we get into neuropathic pain, and we've made investment there in CodaBio as well. In terms of anything more significant, I think we'll look towards the integration of Flexion and ZILRETTA before doing something more significant at a commercial scale. But that will primarily take place in the first half of next year and in the second half that may open up for other availability or opportunities.

And David, just to reiterate, what our folks are telling us is, they would like to have a long-term relationship with these patients, especially the ortho folks in the sports medicine and spine communities. Don’t lose sight of a depodexamethasone would be a particular free product. Think about being able to turn off the inflammation of a traumatic sports injury in a teenager, and then following those patients with the same customers through the advancement of these osteoarthritic scenarios, until they end up with a total joint arthroplasty or spine procedure. That’s really the focus is identifying where there are gaps and the ability to treat all of the different aspects of these patients who might start out in their 20s and still be a patient when they get into their 60s.

Thanks.

Our next question comes from the line of Gregory Renza with RBC Capital Markets. Your line is open. Please go ahead.

... for taking my questions. Just two for me, David. The first one is just around the commentary on certainly the elective procedure pressures and the surgical fatigue that you've commented on, but also the positive shift that you're seeing in October and exiting that month. I'm just curious if you could put a finer point on some of those potential drivers, whether there are regional considerations or other factors that we can look for as leading indicators. And then secondly, just on the longer term to build on the previous question of certainly, as you focus on your multi-year growth and revenue potential, just in addition to what ZILRETTA can offer. I'm curious if you can comment on Flexion's earlier pipeline with a 201 and 301, but maybe just a word on how you're thinking about the chronic pain and even the rheumatologic relief landscape across the variety of novel targets that exist in the early-stage space today? Thank you very much.

Yes, thanks, Greg. That’s a mouthful. But so the first one is pretty easy from what we've seen. I think Charlie talked about this a little bit. We’re not where we need to be and where we want to be yet. But you can see that week-by-week, the market is getting stronger. It’s stronger, both in new customers, total number of customers ordering and the size of the orders. We’re not back to June yet, but we're moving in that direction. You see improvement every week, including this week so far, by the way. Remember we get data every morning at 7 o'clock. So we've seen yesterday. I think COVID is largely behind us, and we don’t really see much impact from COVID. I think there are some short-term effects for really painful procedures. We see lower pain acuity procedures starting to come back to the marketplace. Yes, I can't tell you that we’ve actually got visibility on that, Greg, but I’m happy to hear that they think that’s happening because everything that’s come back, while 74% of the ambulatory surgery procedures that we went through the summer were actually ortho. This was very largely an ortho recovery. If the soft tissues are coming back now, that’s good. We still do see some shortcomings in the labor market regarding nursing teams that can work on weekends. There’s a whole bunch of things going there. They have to be able to do a certain number of procedures so they have to work 12 and 14 hour days to make it worthwhile to open the place and still have some reticence, and the mandates and other things are still confusing in the marketplace. I can’t tell you that to clear it up. But I think we're seeing modest progress on a week-on-week basis, and why we see these elective surgeries coming back. There are many things out there addressing a fairly dramatic need in the chronic pain area. Ron outlined several of the things we’re looking at specifically. We have to be careful on how we address our participation in the clinical development of these products, but things like gene therapy and some of the IL-1RAs and NAV 17s especially different preparations that may sidestep some of the adverse events that have been problematic in the past. I think that's of real value to us.

Greg, thank you. In terms of the patient journey, we shared a couple of slides during the Analyst Meeting of how we think about the knee osteoarthritis or joint osteoarthritis space as well as the chronic vertebrogenic back pain, and we are looking to add assets in that middle category. As Dave mentioned, depodexamethasone may be available for spines, ZILRETTA for knee, it’s starting patients off, and then EXPAREL at the end of that journey. In terms of the exact Flexion pipeline, we're looking forward to getting the data on both assets—both the Phase I data for 201 and 301 later this year or the beginning of next, and has some decisions on that. If you may recall, the 201 product was licensed from a company that we've invested in, GeneQuine. They share the same platform as well as the HDAC platform. So a lot of similarity there and overlapping interest in 301 as Dave mentioned, the sodium channel modulator may be interesting in terms of a reduction in motor weakness. We’re looking forward to seeing the data on both assets soon, yes.

Yes, I think that pretty much sums up where we are, Greg. You okay?

Thanks.

Our next question comes from the line of David Steinberg with Jefferies. Your line is now open.

The competitor to EXPAREL has been out in the market now for a little over a quarter. I know at your R&D meeting a couple weeks ago we heard from a bunch of the clinicians and their view. But just more broadly what are your sales people here hearing and seeing from the field now that it’s been out for a quarter? Have you lost out in any hospital formulary P&T discussions to them? Secondly, I know you've been talking about gross margin improvement. Charlie, just mentioned over the next couple of years. Just in your most recent quarter, it looked like it was the lowest gross margin over the last year and 100 basis points lower from last quarter. I know these things move around a lot. But I’m just curious why there were somewhat softer gross margins this quarter? Thanks.

Thanks, David. We haven't lost a single formulary to Heron that we know of, not only from the reps but from the physicians themselves. The coolest feedback comes from people who have actually tried to use it, and it's not usable from all the feedback that we've gotten. I’ll accept that that's probably a little biased, given who we are. But we haven't seen anything that concerns us on any level. So I think we're in very good shape and we view that as in the rearview mirror. Charlie, do you want to talk about gross margin improvement?

Sure, sure. So, David, I think the question is, we're investing in the 200-liter unit in the U.K., and that is transitioning up to speed. You also probably know that we've expanded the manufacturing capacity for iovera tips as well. There’s quite a lot of manufacturing transition going on at this point. Quite frankly, the third quarter was lighter from a volume perspective than we had anticipated due to the reasons that I mentioned in the script. So it’s a transitory issue and we’re going to be back at it, and fully expect to get to the mid-80s.

Yes, I think EXPAREL was where we thought it was going to be, David, iovera in building out some additional capacity for iovera had a greater impact based on lower revenues, as Charlie said, so the impact was really on both sides.

That makes sense. Just one quick follow-up. Just to clarify the backlog situation, I think most recently, you had indicated that the backlog was about 3 million procedures, and that you thought about a 1 million would be next year. But there's this ongoing more recent development of fatigue in ASCs and hospitals. Is that still the cadence you think 3 million backlog patients and a 1 million next year with 2 million to be done this year, or has that changed a bit? Thanks.

I think we've—well, your question leads me right to the answer, David, right, is that we do see it extended out and it becomes more of a 2022 event than we ever thought it was going to be. All the companies that work in this space are reporting similar kinds of activities. We think the 3 million number that you referenced starts to fall apart because these patients, some of them have spent a year and a half without surgery, and there is every reason to expect that ASA three patients would now be considered ASA four patients and are no longer appropriate for surgery. The procedures that have gone on for this extended period of time become much more difficult to do, and much less likely to be done in an ASC, which is where the insurance companies are trying to send all these patients. More patients will be directed by their insurance carrier to go get these procedures and an outpatient elective surgery center, but more of them are going to end up on opioids than would have been the case if we had done them in the timeline that was appropriate for the patient. As the disease progresses, those folks are less likely to be appropriate for the ASC, and we do see more patients struggling with their insurance company to marry where they want to pay for the procedure with somebody who's willing to do it, not only at a certain environment but at a certain price. If you've become a very complex chronic patient on opioids and you're being billed for a high percentage discount in a surgery center, that creates some tension in the marketplace. That's going to take time to work its way through.

Got it. Thank you, Dave.

Thanks, David.

The next question comes from Balaji Prasad from Barclays. Your line is now open.

Hi, good morning, and thanks for the question. Just two from me. Firstly, with the recent notices of allowance that you're saved, can you describe the IP for strengthening and the impact that it's going to have on file for challenges? And also when do you expect to see the OB listings? Secondly, in the longer-term dynamics that you highlighted, using a mid-teens CAGR, we look at a $900 million potential EXPAREL revenue by 2025. What part of this would be from the international market? And maybe can you provide some context around the relative size of these markets? Thank you.

I'm sorry, our connection isn't very good, Balaji. I may have to ask you for some clarity on exactly what your question was. I think the first one was IP exclusivity?

That is right, Dave. When do you expect to see the Orange Book listing and a bit more details about the patent claims or which strengthens your IP?

Yes, thank you. So, we expect that they will be listed by the end of this year, at least the ones that have currently been prosecuted. We expect to have more that will also be coming along. So what you're seeing now is just the tip of what we expect to have happen. We think there'll be a regular cadence here for another half dozen patents. Not all will be Orange Book listed, Balaji, but certainly some will. We would expect that we would have four to six Orange Book listed patents that would have to be navigated. I should also tell you that, Charlie referenced the press release of yesterday. We actually asked the PTO to look at the Paragraph 4 filing before they sent us the acceptance of those patents. And they did. The patent office has already looked at the P4 filing and still issued those patents to us, since the P4 was filed. Our belief and our position here is growing, so we feel pretty well. We feel increasingly positive about where we are in this whole thing. Can we get now with the second part of the question? It wasn’t much clear the last time.

Yes. The second question was on the longer-term dynamics. As you pointed out at least the mid-teens CAGR, which places EXPAREL at around $880 million to $900 million by 2025. What part of this would be from the international markets as you start to expand internationally? Can you provide some context around the relative sizes of some of these markets? Thank you.

Yes. So it's important, Balaji, especially given our mission to provide an opioid alternative to as many patients as possible. We expect to be profitable in the middle of '23. So there is a reason to operate here. Our 5-year plan does call out for our Board that 95% of our revenues are still going to be in the United States. Important good business, profitable business, but it’s not material to the long-term viability and the EBITDA numbers that we expect to attain as we go forward. In Europe, the biggest customer, as we see it, is going to be the U.K. They're way behind in terms of total joint arthroplasties and their length of stay is nearly four days, with the time lag being over two years. The NHS has been collaborating with several orthopedic groups on transitioning through ERAS protocols into something that looks like the U.S. marketplace without the ambulatory facilities where a patient can go. What we're working on with them is how do we use their current hospital facilities to perform something that looks very much like a same-day surgery without having a same-day surgery center to do it in, right? That's the kind of thing they fully understand. They need to catch up, and they can't catch up with a four-day length of stay, right? On iovera, we’re seeing great interest in using a non-opioid to control pain, especially in more serious patients while they're waiting for surgical procedures. So we have big hopes for both of them. It will be led by the U.K. We will focus on knees and shoulders out of the blocks. But we're already getting a lot of interest in spine and other procedures because they're hearing about it at the conferences. There will be some other opportunities here over the next couple of quarters. A lot of this is driven by our capacity to have close to $2 billion of product at an improving margin that Charlie pointed out for 2024. If you could make a couple billion dollars' worth of this stuff at 85%, we should be finding ways to sell $2 billion worth of it at 85%. We're not there yet, but for the first time, we have the capacity to make more than we can sell, and that puts us into a very different category when it comes to looking at the different world marketplaces.

Thank you, Dave. Very helpful.

Thanks, Balaji.

Our next question comes from Greg Fraser from Truist Securities. Your line is now open.

Can you speak to the Gen 2 iovera platform and the advantages that that version will bring over the current system? And then, quick one on EXPAREL. I know you're not providing specific guidance for sales, but you mentioned expecting robust growth in the fourth quarter. I was wondering if you could expand on what you think of as robust growth, double-digit teens, any additional color on that would be helpful. Thank you.

Yes, sure. The first one is a lot easier than the second one. So Gen 2—there are some ergonomic improvements. Some are modest, Greg, in terms of visuals, if you looked at it, it wouldn’t mean that much to you. For example, as we get into different marketplaces where the clinician wants to hold an ultrasound probe with one hand, with the Gen 1, they couldn’t hold an ultrasound probe and also reach all the buttons on the handheld to actually trigger a treatment. We’ve moved things around to accept the fact that somebody is going to want to hold this handheld with one hand. There are a number of modest things, but we will go from a tip that screws on to a tip that clips on. Our cartridges will be more robust, and we’ll be able to do more treatments per cartridge, and that continues down the line. We continue to refine this and look at ways we can shorten the cycle time for different procedures. Right now it’s sort of one size fits all. You push that button, you get a minute of a treatment. That might not necessarily be true as we get into some of these other facilities where the docs are trying to use iovera.

So as we get back to normal, we would expect that we would be into the teens. We were in the teens and obviously, we're over 25% through the third quarter. So the teens are not an unreasonable expectation. We're not there yet, just to be candid. But this week might be that week actually. We were pretty strong so far, Monday, Tuesday, Wednesday. I don't think that's an unreasonable expectation, Greg. But remember, we're coming off about not so great spot.

Thanks.

Our next question comes from Anita Dushyanth from Berenberg. Please go ahead. Your line is open.

Hi, Dave. Good morning. I have a few questions here. Just wanted to touch upon the resumption of elective procedures. I know you talked about it earlier. Considering the amount of backlog still building up and getting pushed out, are you likely to see the similar dynamics that you had seen pre-pandemic where Q4 was one of the stronger quarters? Is it likely to be the procedures being more spread out throughout the year?

No, well, I hope not. Anita, thank you for the question. The dynamics of Q4 really, there are two things that we see here that are very strong every year. One is the whole dynamic of insurance. Patients who have satisfied their deductible and their co-pays, etc. especially if they're in a place in their life where their employment situation is unsettled and they might not have insurance next year, we see a lot of elective procedures come in, especially for orthopedic procedures and Q4 driven by that dynamic. There are not as many people employed with insurance, and we can’t count on that as we would have earlier years. They still will be there, but we just don’t know whether it’ll be as strong as it was in other years. The other dynamic that you might smile at, but it’s true is that folks get cosmetic plastic surgery procedures as holiday gifts. They must know it's coming because they appear to go to the physician the next day after they get up. It sounds crazy, but it’s very strong in that week between Christmas and New Year’s every year. We think it’ll be stronger as people start to come out and return to an active lifestyle. To give you some context, Q4 would be roughly 30% of our business in a normal year. Given that the numbers are lighter than we expected due to the COVID dynamic, that is not an unreasonable expectation again. But it’s 30% of a smaller number, so it’s a little bit of game play, but you see where I’m going.

Yes, that was helpful. Thank you. And then with regard to the launch in the pediatric market, I just wanted to know if you're going to increase your presence there, or are you continuing to adopt a slow approach?

No, we did. In September, we trained the entire field organization on pediatrics. We continue to get approvals in major centers, which is exactly what we were hoping was going to happen, Anita. Our team is dedicated to Pediatrics has been very successful at major academic centers, and that’s really what we needed to accomplish. We need folks that look to those places for guidance to understand how they're using it, what their protocols are, and then get those protocols and send them out into the community. The whole sales force is trained. The folks that ran the ped launch are still running the ped launch. They’re actively involved and making sure the field force doesn’t just go to a bunch of hospitals, introduce the idea that you can replace pumps and catheters, but then not follow-up appropriately. We are being manic about making sure this is one hospital at a time.

Okay, great. Thank you. And then just one more related to the studies in the lower extremity nerve blocks. When are we likely to expect results from these?

So they started. We think that we can complete these trials using many of the same sites and most of the same surgeons. We think we'll have data sometime by the middle of Q2. That’s the current plan. There are two separate studies. What does an adductor canal block and the other is a bunion study. We hope to get both studies done in the first half of next year, so that we would submit an NDA early in Q3 for a 10-month approval that would give us a launch opportunity in the second quarter of next year. That’s the plan.

Great. Okay, that's helpful. Thank you.

Thanks.

Our next question comes from Christopher Neyor from JPMorgan. Your line is now open.

Two questions. The first one is on 2022 expense progression and gross margin improvement. As we look into next year, I was wondering if you could provide a bit more color on expectations for gross margin and expense progression through the year? You've outlined very helpful operating margin targets for both COGS improvement and expense leveraging, but I'm thinking about the pace at which some of these opportunities to be realized in the near-term. The second one, just a follow-up on business development. So post Flexion, how are you thinking about capital allocation priorities shifting? Are there any significant capacity constraints for pursuing additional deals, whether that be financial or operational integration? Thanks so much.

Thanks, Chris. On the first one, it’s a dynamic situation given Flexion and ZILRETTA. On the iovera, EXPAREL plan, you would expect OpEx increasing in mid-single digits. We expect to get something like, if you think that there are 1,000 basis points, we will get 300 of them as '22 rolls along, and we use more material that's produced in the Swindon facility, and revenues are expected to be several times that. So if revenues are growing in the 20s and expenses are growing in single digits while we’re getting gross margin improvement at the same time, it will improve with revenue improving, naturally. My working assumption, Chris, is that the synergies will be significant, and the margins will be better than significantly better than they would have been without these read up additions to the portfolio next year. I’m not giving you a perfect number based example. It would have been good with iovera and EXPAREL. It would be very good with iovera and EXPAREL. It can be very, very good with ZILRETTA. Everything is leading toward these margins improving dramatically as we go through the next couple of years.

On the BD question, don't see any significant shifts in strategy. We will continue to focus on three core franchises of two franchises, musculoskeletal pain, broken up across the osteoarthritis or tumorigenic back pain, and especially therapeutics within special therapeutics; in regards to capital allocation, we continue to look for promising external innovation opportunities.

I think it’s fair, Chris, to say — ask Ron to comment if I’m incorrect here. You’re not going to see us do another $600 million deal in the near-term. We have a lot of things where our ability to do clinical trials and our commercial understanding of the marketplace leads folks with earlier assets here. I think Spine Bioscience is a great example of a 7-amino acid peptide that they believe actually turns off the progression of this disease. That’s an investment that we made against a target profile. If that target profile is met, then we would take the asset on. That style of investing over the next—over the short-term while we digest the Flexion deal makes a lot more sense than looking at something that’s a significant opportunity.

That's helpful context.

Our next question comes from the line of Serge Belanger from Needham & Company. Your line is now open.

Just a couple of questions for me. First, I wanted to revisit one of the 2025 targets, more specifically related to iovera reaching $200 million in sales. I think that's only in TKA and OA knee pain. Just curious, do we get there with just more clinical data in those specific indications and building more awareness and maybe what needs to be done on the payer reimbursement fronts in order to get there?

First, it’s Gen 2 and having a more reliable system that the docs can count on. There have been some issues with the Gen 1 system that we bought, so that will help a lot in stabilizing the market. What we need, frankly, is access to the customers. I mean when people use iovera, if you use it once, you will use it many times. The opportunity for patient care improvement is dramatic. What we need, frankly, is we are increasing the size of this sales force to take ZILRETTA on as well. We need COVID to be behind us, frankly, so that reps have access to the docs. That’s the single biggest thing. A system we rely on and the third biggest thing, and this is in some instances is a data opportunity—reimbursement. The reimbursement in the HOPD is very good. We’ve got docs using the drug very successfully in Workmen’s Comp, for example, from a reimbursement perspective. We’re finding an increased acceptance of self-pay insurers and commercial insurers to pay for a nondrug therapy to provide pain control especially for pre-surgical patients. If we could turn off their pain, we could let them start going down the stairs, we could get them out of the wheelchair, even simple things like when we’re with docs, can you walk to the mailbox—for someone who has been in a wheelchair for 18 months, that’s a big deal. We’re trying to turn off the pain signal and get patients to be better patients for the surgery itself. That’s why we focus on functional outcomes. Does that make sense?

Sure. All right. And let me squeeze in one more. I think in your prepared comments, you talked about regional anesthesia approaches growing from 20% to 75% in 2025. Just curious what that means for the installation market. Will there be one in 2025 and going forward?

Yes, yes, there will be. There are some places where you just can't do a nerve block. In PEs, right now, the indication we have is for infiltration, not for a nerve block. While we are doing an adductor canal block, at the same time, most doctors would address the pain in the anterior knee by doing a periarticular infiltration where they inject the periosteum and might also put some drug in the posterior capsule, but they would do a direct injection into the periosteum or we have different injections being done in the case of ACL repair. I think you're going to see a combination here because we define this this way for the FDA and for you guys. In the marketplace, the docs think these discussions are nonsense. A nerve is a nerve and the way you define it because the FDA forces you to doesn’t make sense to the anesthesia community.

Okay, great. Thank you.

Thanks.

Our next question comes from Andreas Argyrides from Wedbush. Your line is now open.

Yes, just sticking on the topic of iovera PREPARE, the TKA PREPARE study results are expected, I guess, late this year, early next year. How are those results? I mean what can we—we can expect from those results? How are they going to, in essence, add to that profile for iovera? And then, secondly—I don't know if this was asked earlier, pardon if it was—just on the other partnerships that you have with the Spine Bio etc. Remedisc data, we have sometime in 2022. Is that still a timeline? When can we expect data from that study?

I’m going to take number one. Ron will comment on number two, Andreas. Thanks for the questions. The PREPARE study is mostly for reimbursement, looking at functional endpoints. When does the patient ambulate? When do they get into PT? How long are they in? How long does it take before they can drive? The big question is, I’m going to pay X amount of money to have this procedure. Do I get a patient back who’s actually in better shape? PREPARE will answer those big questions, it’ll also be useful for addressing the CMS and the commercial payers with a reimbursement outside the HOPD into the ASC.

Andreas, it’s Ron. Just on Remedisc, we expect the Phase III program to open in early 2022 and then for results in the first half of '23.

Fantastic. Thanks, guys. Very helpful color and congrats on the progress.

Great. Thanks, Andreas.

Thank you.

This concludes our Q&A session. At this time, I would like to turn the call back over to Dave Stack for closing remarks.

Thanks, Amanda. I would like to thank you all for participating and listening to today’s conference call. We look forward to keeping you updated on our progress. Next up for us is the Berenberg and the Jefferies Conferences later this month. Thank you all, and stay well.

This concludes today’s conference call. Thank you for participating. You may now disconnect.