Pacira BioSciences, Inc. Q4 FY2021 Earnings Call

Good morning, and welcome to the Fourth Quarter 2021 Pacira BioSciences, Inc. Earnings Conference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Susan Mesco, Head of Investor Relations. And Susan, you may begin.

Thank you, Brandon, and good morning, everyone. Welcome to today's conference call to discuss our fourth quarter and full-year 2021 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; and Charlie Reinhart, Chief Financial Officer. Before we begin, let me remind you that today's call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today, and may involve risks and uncertainties. For information concerning risk factors that could affect the company, please refer to the company's filings with the SEC, which are available from the SEC or our website. One last piece of housekeeping; local internet went down this morning, so the Pacira team is participating via cellular device. We ask for your patience if sound quality is limited at any point. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone, and thank you for joining us. We'd like to focus most of the time today on your questions. I'll start today's discussion with some brief prepared remarks that highlight recent business developments. We take pride in our team for their ongoing performance and delivery for our patients and investors. The progress made in 2021 sets us up for even greater success in 2022. We have a number of value-driving milestones ahead and are excited about Pacira's future. We ended the year strongly, with a diversified portfolio of unique, safe, best-in-class products that enable healthcare providers to offer low or no-opioid therapies, enhancing patient experiences along the neural pain pathway. Our accomplishments in 2021, including increasing EXPAREL sales, acquiring Flexion, and a promising pipeline of innovations, have positioned Pacira at the forefront of opioid-sparing pain management. ZILRETTA adds a highly complementary commercial asset for treating osteoarthritis knee pain and increases our presence in chronic pain. With over $100 million in sales in 2021 and significant potential for future contributions, we are confident in ZILRETTA's long-term prospects as a durable product for Pacira. This acquisition diversifies our revenue and boosts our top line, providing meaningful synergies and expected substantial near- and long-term gains in cash flow and earnings. Now, regarding our progress with EXPAREL, I'm thrilled to share that over 10 million patients have been treated with EXPAREL since its launch in the U.S. last year. We achieved record EXPAREL sales of $507 million, with adjusted EBITDA margins at 37% in 2021, marking our eighth consecutive year of positive adjusted EBITDA. These are significant achievements. As we've emphasized, EXPAREL-based blocks are leading the regional anesthesia revolution, which is our primary growth driver. Regional anesthesiologists are innovating new blocks, refining existing ones, and using imaging to ensure positive patient outcomes. Our advanced PITT Training and Innovation Facility supports this market transition by transferring best practices in real time, aiding the shift to diverse patient care sites. Throughout 2021, we also strengthened our EXPAREL intellectual property with two new Orange Book composition patents now included in the FDA Orange Book. Recently, we received four new notices of allowance from the U.S. Patent and Trademark Office for additional composition patents, which will be submitted for Orange Book listing, bringing the total to six EXPAREL patents with expiration dates in January 2041. We were excited last year to launch EXPAREL in the pediatric market, where we're making a more significant impact than anticipated. Erector spinae or ESP blocks are becoming standard care, replacing costly pumps and catheters. Notably, the pediatric spine market is positively influencing adult procedures, allowing us to establish EXPAREL ESP regional blocks as best practices for improving recovery in both adult and pediatric spine surgeries. Moving to our international efforts, we are pleased to report that our targeted European launch for EXPAREL is underway. Importantly, EXPAREL has a broad label in Europe, covering both upper and lower extremity nerve blocks and field blocks like transverse abdominis plane (TAP) field blocks. This adaptability is crucial for gaining traction in this important market without the need to expand our outreach, simplifying market access. Our women's health franchise has seen a 30% increase in EXPAREL procedures over the past year, driven by TAP blocks for C-sections, given the excellent value proposition of faster recovery and opioid-sparing pain control for new mothers. With 1.3 million C-sections annually in the U.S. and rapidly expanding EXPAREL use, we have significant growth opportunities. Additionally, positive experiences from C-section procedures are increasing demand in gynecologic oncology and breast procedures. A positive birth experience with EXPAREL will influence mothers to consider opioid-sparing options for future procedures. The COVID-19 pandemic has heightened the need for breast, plastic, and oncology surgeons to expedite patient discharge. With EXPAREL, they can now meet the demand for an opioid-free experience and avoid overnight hospital stays, while enhancing care through better pain management using EXPAREL-based multimodal ERAS protocols. Alongside the successes of our EXPAREL and ZILRETTA franchises, our iovera franchise is also progressing well. Iovera is the only handheld cryotherapy option available, making it suitable for various institutional settings where prior console-based systems were impractical. In 2021, we teamed up with a partner in Canada to launch iovera, and also initiated efforts in the U.K. and EU. We took last year to design a more user-friendly next-generation device and develop additional SmartTips for new indications. A specific tip is ready for human pilot studies targeting medial branch blocks for chronic low-back pain, and we are preparing to assess iovera as a treatment for spasticity, a significant long-term opportunity. Looking ahead, we anticipate building on last year’s success, with 2022 being a standout year for Pacira, projecting record sales, considerable EBITDA growth, and numerous clinical and regulatory updates. Enrollment is advancing in our two Phase 3 lower extremity nerve block studies, known as the STRIDE studies. Delays caused by COVID in the last quarter of 2021 have shifted our sNDA submission timing to the fourth quarter of 2022. We believe that the lower extremity nerve block label is at least as important as the upper extremity market, representing around three million procedures annually and a market opportunity of roughly $100 million. For ZILRETTA, the first and only FDA-approved treatment for osteoarthritis knee pain, we are focusing on three areas of development in 2022, aiming to align with the FDA. The first is to expand the current label to include a safety superiority claim in diabetes, which we believe will position ZILRETTA as the top choice for corticosteroid treatment of osteoarthritis knee pain. Secondly, we plan to initiate a Phase 3 study for shoulder treatment by year-end. Lastly, we're working to broaden the current knee indication to allow for repeat dosing. We see ZILRETTA as an ideal addition to the Pacira family of products and envision our enhanced commercial and clinical capabilities expanding its use significantly in the long term. At the same time, we are addressing several issues with specialty distributors and pharmacies, including the previous stocking of short-dated materials. We are transferring these processes to our Pacira operations and expect many of these challenges to be resolved by the end of the second quarter. For iovera, the launch of our next-generation handheld device is underway, as we remain on track for an interim review of our PREPARE study evaluating the combined use of iovera and EXPAREL in TKA procedures, expected in the next few weeks. We are particularly enthusiastic about the potential in spasticity. At our analyst event last year, Dr. Paul Winston shared compelling proof-of-concept videos concerning spasticity patients. Importantly, pain related to spasticity is already on-label, and we aim to facilitate broader adoption given its efficacy, safety, and ease of use. We plan to collaborate with the FDA to define a regulatory pathway for adding spasticity treatment to our iovera label. Currently, patients face limited and often costly therapeutic options. For instance, Botox treatments come with dosage limits, requiring three to four treatments a year costing $1,800 to $2,400 each. Alternatively, phenol, a chemical neurolytic, is painful, necessitates anesthesia, and results in adjacent tissue scarring with unpredictable outcomes. In contrast, iovera shows promising potential in this area. With tips priced at $450 to $500, iovera could offer an excellent value proposition for spasticity treatment. In addition to EXPAREL, ZILRETTA, and iovera, our portfolio features promising early-stage opportunities. We plan to launch a Phase 2 study of our multivesicular liposome technology for subarachnoid analgesia in late 2022, alongside pilot studies for using EXPAREL and iovera for stellate ganglion blocks concerning cardiac dysrhythmia post-heart surgery. Furthermore, we're outlining next steps for our clinical programs involving our multivesicular liposome formulation of dexamethasone for inflammation and back pain, and high-dose bupivacaine for more extended pain management of five days or more. As we move forward, patient welfare remains at the forefront of our objectives. Pacira will continue to innovate across all areas of our business, including new indications, product line expansions, design enhancements, and more. We will utilize our state-of-the-art PITT innovation and training center in Tampa, as well as a second PITT facility being established in Houston, to deliver these innovations to our healthcare provider partners. I am proud of our achievements last year and even more excited about what lies ahead. With that, I'll hand the call over to Charlie for financial highlights.

Thank you, Dave, and good morning everyone. I'll start with a quick update on sales and margin trends. As previously reported, in the last week of December, we began to see a slowdown in elective procedures as regional surges in Omicron cases prompted governmental restrictions and escalated staffing challenges. These trends continued in the beginning of January until around the middle of the month when we began to see a notable improvement in EXPAREL sales with continued strong trends in February. On the competitive front, we've not seen any impact from new market entrants on our EXPAREL base business or our ability to generate new business. More than 10 years of physician experience, well-established efficacy, and a pristine safety profile continue to be key differentiators between EXPAREL and other extended-release bupivacaine formulations. For iovera, significant growth in 2021 was driven by a 72% increase in new customers with a growing representation from the physician office side of care. We believe the addition of ZILRETTA will accelerate this as it gives us another entrée into the physician office and allows us to extend our reach of physician office interactions. For ZILRETTA, as previously reported, sales were negatively impacted by rebate program modifications and several unanticipated manufacturing batch failures that led to short-dated ZILRETTA inventory resulting in smaller order sizes and higher product returns. As Dave mentioned, we are currently addressing these issues and expect to have them resolved by the end of the second quarter with 2022 sales trends improving throughout the year as we extend inventory dating, simplify the rebate program, and complete our transition of the product to the Pacira operating environment. Turning to gross margins, on a consolidated basis, our full-year total non-GAAP gross margin was 75% for 2021. This was comprised of full-year non-GAAP margin of 77% for EXPAREL, 33% for iovera as well as post-acquisition non-GAAP margins of 82% for ZILRETTA. In 2021, iovera margins were negatively impacted by overlapping expenses as we transitioned production to our San Diego facility and a new contract manufacturer along with our investments in our next-generation hand-held device. Looking ahead, we continue to expect to see improvements of roughly 3% for the year for EXPAREL gross margins in each of the next years until we reach gross margins in the mid-80% range. This improvement will be driven by a combination of steadily improving volumes and lower unit costs as our 200-liter suit contributes a greater percentage of EXPAREL units sold. For iovera and ZILRETTA as volumes continue to expand, we expect margins to increase and reach levels in the mid-80% in approximately the same timeframe as EXPAREL. For iovera, margins will also benefit as the cost to transition our manufacturing location to a contract manufacturer at a reduced unit cost as well as the rollout of our generation-2 device with reduced COGS by the end of the second quarter. For ZILRETTA, we are making investments in manufacturing facilities to improve quality metrics and efficiency as volumes grow. While we are currently not providing 2022 revenue or gross margin guidance given the continued uncertainty around COVID-19 and the pace of the recovery for the elective surgery market, we will continue our practice of transparency of reporting preliminary monthly product sales for EXPAREL and iovera to share intra-quarter trends with you. For ZILRETTA, we are currently not reporting preliminary monthly ZILRETTA net product sales as the required adjustments for certain product rebate programs are calculated after the end of the quarter. However, we will include a range for ZILRETTA sales in our quarterly preannouncements. We will consider adjusting this practice for all three products as the year and visibility progresses. Turning to our expense guidance for 2022, I'll start with our expectations for non-GAAP R&D of $75 million to $85 million. Key drivers over 2021 spend include approximately $40 million in incremental clinical and pharmaceutical product development costs associated with ZILRETTA and an early-stage program acquired from Flexion which is now known as PCRX201. Approximately $600 million in EXPAREL manufacturing capacity expansion cost for our 200-liter batch unit located in our San Diego facility. And the advancement of clinical development activities related to our STRIDE and PREPARE studies. For non-GAAP SG&A expense, today we are guiding to a range of $20 million to $30 million. Key drivers over 2021 spend include approximately $37 million of incremental SG&A spend for ZILRETTA. This includes doubling the size of our iovera and ZILRETTA field-based team, a ZILRETTA marketing campaign, and expanded market access function to include ZILRETTA, and G&A costs which include some transitional activities for certain shared support functions such as finance, legal, HR, and IT. Approximately $7 million in EU business costs which includes our commercial footprint and legal and regulatory support. Our forecast also includes expanded activities to accelerate growth within our spine, sports medicine, plastics, and OMFS businesses as well as increased medical innovation and education programs at the PITT. Finally, our 2022 stock-based compensation is expected to be in the range of $40 million to $45 million. So in summary, EXPAREL continues to be on a significant growth trajectory that is driving substantial operating leverage and cash flow. With ZILRETTA, we have added a significant and highly complementary revenue stream that makes our earnings outlook even more compelling. For iovera, we remain very excited about the near- and long-term outlook for growth. Continued growth in our iovera customer base and the new addition of ZILRETTA to our commercial offering leave us well-positioned to help physicians individualize osteoarthritis care with our unique pipeline of non-opioid options. On a longer-term horizon, we are investing in exciting new iovera opportunities that have the potential to be game-changers like spasticity and stellate ganglion blocks. The bottom line is that Pacira is financially stronger than we have ever been. And despite the turbulent macro environment, we continue to deliver impressive financial results and remain bullish in our long-term expectations for robust growth. We are confident that we are on track for year-over-year topline growth in at least the high teens, gross margin improvement to the mid-80% range, modest year-over-year growth in operating expenses, and adjusted EBITDA margins that exceed 50% by the end of 2024. That concludes our prepared remarks. I'd like to turn the call over to the operator to begin our Q&A session.

Thank you. We'll now begin the question-and-answer session. From Piper Sandler, we have David Amsellem. Please go ahead.

Hey, thanks. Just a few. So, on EXPAREL in the elective surgical environment, I may have missed this, so if you could clarify, in terms of the pace of volumes, where is it relative to pre-pandemic levels? Or to maybe put it differently, with the Omicron wave receding, are you getting back to pre-pandemic levels? When do you think you might be there? And just talk about in any way that's quantifiable surgical backlog, and how EXPAREL stands to benefit as that backlog is cleared. So, that's the first set of questions. And then secondly, on ZILRETTA, it sounds like there's, I guess, some speed bumps here. But I wanted to ask you about your commercial efforts, sale and marketing, and talk about what you are doing differently in terms of getting in front of physicians in terms of headcount, your physician targeting? I know you've alluded to this in the past, Dave, but maybe just provide some detail in terms of how you are approaching detailing differently than the predecessor company? Thanks.

Thanks, David. We receive the IQVIA report every Friday, which is available on our website. The report indicates that we've repeatedly reached the pre-COVID elective surgery levels, only to dip back down a few weeks later. The week after Christmas was particularly challenging, almost as bad as during COVID. We have yet to see this week's data, which is delayed by two weeks. Our performance tends to fluctuate around the pre-COVID elective surgery line in that report. Notably, EXPAREL consistently performs 20% to 40% better than that line, so we anticipate regaining all the market share we've gained from our various programs once we do recover. Based on our performance in February, we are likely very close to the pre-COVID elective line, though we have a two-week lag in our data. For context, the last week of the year was extremely poor, while the first two weeks of January showed some improvement, although not significant. However, the latter half of January brought us to a positive growth of four. We're seeing a continuation of that momentum into February, so we're moving back toward normalcy, though not fully there yet. Regarding ZILRETTA, we have a team actively engaging with iovera, and we've welcomed several individuals from the ZILRETTA sales force at Pacira. This has allowed us to enhance our team with new hires who are motivated to join us due to our successes. Interestingly, many of them were referred by their physicians to work for Pacira, which we view as very encouraging. The key difference for ZILRETTA customers is that we are actively reaching out to them, which has been well received. We're finding ZILRETTA particularly beneficial in office settings. As mentioned by Charlie in his remarks, many chronic pain medicine doctors are beginning to adopt iovera in their practices. Having both products is advantageous when engaging with chronic pain specialists, orthopedic surgeons, and spine specialists. Patient needs significantly drive treatment decisions, including the duration of pain control desired and the reimbursement landscape, which varies between hospital outpatient departments where reimbursement for iovera is strong, and offices where ZILRETTA is well reimbursed. We discuss various care settings and reimbursement options tailored to patient requirements. Additionally, we've connected with several physicians who are compiling datasets on ZILRETTA's use among Type 2 diabetic patients. These physicians are preparing this information for submission to the FDA to demonstrate how the product is being utilized for this specific patient demographic. Overall, it's still in the early stages. We just had our national meeting about three weeks ago, so the information I'm sharing is largely based on recent anecdotal observations. However, everything is progressing largely as we anticipated.

Okay, that's helpful. If I may revisit the question about EXPAREL and the surgical backlog, could you quantify that in any way? I believe you've provided this information in the past, so any additional insight would be appreciated.

Yes, the surgical backlog in orthopedics is actively being addressed, particularly in the ambulatory surgery setting. We understand that doctors are scheduling procedures two to three months out, but many of these urgent procedures are being directed to ambulatory surgical centers by CMS and commercial payers. Given the longstanding relationships between orthopedic patients and their physicians, the system is functioning well. Patients typically consult their doctor and then proceed to an ASC, which the doctor may have some stake in. However, predicting soft tissue procedures is much more challenging. Currently, over 75% of our business is orthopedic, as indicated by IQVIA. On the other hand, there is limited ASC capacity for soft tissue procedures. Some of this demand is being met in hospital outpatient departments, which tend to favor soft tissue cases slightly, with a 55% bias. As a result, many patients are being directed there. A major issue in today's market is that insurance companies are attempting to reduce costs by funneling patients to external settings, and hospitals often find it difficult to perform soft tissue procedures, such as hernias or hemorrhoidectomies, at the rates set by insurers. Soft tissue backlogs are impacted by ongoing COVID-19 disruptions, as primary care providers still need to see patients, even via telemedicine, and require lab work and EKGs before proceeding with soft tissue surgeries. This sector is less organized than orthopedics, which has led to delays. Additionally, the limited capacity in outpatient departments makes it hard to predict when the soft tissue segment will become more manageable. It is likely to take longer than a year to resolve these issues. Furthermore, some patients have been waiting up to a year and a half or two years, and their conditions may have worsened from ASA 2 to ASA 3, raising concerns about whether they can even undergo surgery. Therefore, the soft tissue landscape is significantly more complex compared to orthopedics. I apologize for the lengthy explanation to a straightforward question.

No, that's helpful. Thanks.

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

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

Thank you for the question. This has been an ongoing issue, as we've seen it persist since December and August. While Omicron was notable, the deeper challenge has really been labor shortages. The situation is improving, but particularly in ambulatory surgery centers, we're not fully back to where we need to be. It's still difficult to assemble a nursing team for long shifts on Saturdays. Doctors face challenges too when they have to work with unfamiliar staff in the operating room, which slows down the process. I wouldn’t say we’re fully prepared to manage the backlog that David mentioned. However, we’re currently at a point where operations are happening, and our data indicates that February should be strong, similar to October and November. The problem arises when demanding long shifts, especially for nurses with young families, who have difficulties managing schedules when kids are out of school. This week, for instance, kids in the Northeast are off all week, contributing to a slowdown in the ambulatory surgery centers.

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

I'm not sure I caught the first question. Is it around manufacturing of ZILRETTA?

Yes, just manufacturing and rebating.

Thanks for the question. The challenges related to manufacturing with proper dating are largely behind us. The current issue we face in the market is with short-dated materials that were shipped and can't be used within the label's timeframe by physicians. This situation often arises when inventory is held by specialty distributors or when doctors order in bulk to take advantage of rebates. We're working on resolving these issues. This is a common occurrence during an acquisition, so there's nothing particularly alarming; it's simply part of business operations. We believe ZILRETTA will perform better as we increase its visibility. Interestingly, during our sessions at PITT, we found that many doctors attending were unaware of what ZILRETTA is. By enhancing its exposure, we plan to introduce a discount program instead of a rebate program, which will be easier for doctors to understand and will encourage them to order as needed rather than in large quantities. Currently, things are looking stable for February, and as we tidy up these concerns and provide more exposure, we anticipate overcoming any hurdles. We're optimistic about growth opportunities this year across our product range. We're also in discussions with the FDA to enhance the label and will initiate a shoulder study. EXPAREL is already widely used in this area, and we are exploring iovera as well. We feel well-prepared to conduct a shoulder study for either iovera or ZILRETTA.

Great. Thank you very much.

Thank you.

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

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

David, you're absolutely right. I was a bit less detailed, and there's a reason for that—it depends more on volume. For iovera and ZILRETTA, we just received the product. In Q4, we achieved 82% margins for ZILRETTA, which exceeded my expectations. This was likely higher than usual due to late-Q4 manufacturing ramping up to compensate for the typical shutdown at the year's end. I believe ZILRETTA should average closer to 80% for the entire year and is on track to reach 85%. There's no set timeline other than we expect to gain five points over the next three years. The situation with iovera will change significantly. 2021 was an exception because we had overlapping operations in Northern California, Southern California, and Mexico, along with increased QA activities, which added expenses as we invested in the gen-2 device. With a revenue base of $16 million, even slight additional expenses can impact the margins. I expect noticeable margin improvements in 2022, putting iovera on course for growth over the next three years as well. This is the first time we've provided specifics beyond total gross margin, and I imagine you wanted to know about some other margins. A key takeaway is that EXPAREL is already in the high 70s and is on a solid trajectory to reach the mid-80s, which we've been communicating.

Okay, thanks, Charlie. And then Dave, a couple of questions for you. First, you mentioned in your prepared remarks that pediatrics were doing well, and actually better than you expect. I guess on that point, could you give us a little color around that? And then sort of some quantification, I think you'd said that pediatric peak sales for EXPAREL could be in the range of $100 million. And has your thinking changed based on that comment? And then finally, ZYNRELEF has been on the market for a couple quarters. Have you seen any losses at P&T committees and just any color on what you're seeing in the field from that product? Thanks.

For pediatrics, our forecast was largely based on the adult population. There are several areas in pediatric medicine where doctors are using EXPAREL almost exclusively, such as for clubfoot and scoliosis. It quickly became clear that our forecast was conservative, as many procedures were not included. A significant development is that we expected a percentage of pumps and catheters to be replaced, but we are actually seeing complete replacements due to the preference of many surgeons for patients to go home on the same day. I doubt anyone would have believed we could entirely replace pumps and catheters at major centers, but that's what's happening. Doctors often express their desire to avoid using these devices again. Therefore, I believe the market will exceed $100 million over time. While we haven't adjusted our long-term forecast for how and when we reach that figure, $100 million seems low given the current trajectory. Last week at Rady Children's Hospital, we saw numerous innovative uses of EXPAREL. The importance of allowing a pediatric patient to have surgery and return home with their parents cannot be overstated. The growth in pediatrics is remarkable; just this morning, there were several orders in larger quantities from pediatric hospitals compared to a year ago when we would have received barely any. It's performing very well.

The ability for a pediatric patient to have surgery and then go home from the hospital with their parents is incredibly significant in today's marketplace. The progress in pediatrics is remarkable; for instance, just this morning, we received several orders of 10 and 12 boxes from pediatric hospitals, whereas a year ago, we would have had maybe one box, if any at all. So, it's performing very well.

Oh, ZILRETTA, yes, that's a brief one. I have spoken to a few individuals who, for various reasons, have tried it. No one has decided to adopt it. All the issues we've discussed before are still present, like the smell, the stickiness, and the way it forms a shell over the sutures. A different suture technique is necessary. There have also been a few cases of infections, particularly in the lower extremities. Honestly, David, we've been engaging with the community a lot in recent weeks, and not a single customer has mentioned it to us.

Fair enough. Thank you.

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

Hi, good morning, and thank you for the opportunity to ask questions. I have a few questions for Dave and Charlie. First, I understand you are not currently providing revenue guidance, but I would appreciate any insights on other metrics. Looking at the current consensus, it's about $750 million, with EXPAREL expected at $575 million and ZILRETTA around $140 million. Could you share some insights or potential ranges regarding these numbers, particularly what could affect them on the upside or downside? Additionally, how do you see 2022 aligning with your long-term goals? Secondly, Dave, we talked about the distributor issues concerning ZILRETTA last month. Could you elaborate on that, particularly regarding the rebate, inventory, and manufacturing aspects? What actions are you currently taking, and how might this impact the revenue cadence for ZILRETTA this year? Thank you.

Sure. Regarding our revenue guidance, history gives us a good indication of our expectations. We have been quite clear about our anticipated product growth throughout the year. It's important to note that the lower extremity nerve block is projected to be a significant product moving forward. Additionally, we see growth in C-section, ortho, and peds markets, along with our launch in Europe. Therefore, you can expect similar performance on a percentage basis. We also need to consider the addition of STRIDE in 2023, as well as the stellate ganglion block around the same period. From our perspective, our long-term guidance remains unchanged. While there are fluctuations, ASCs are growing rapidly, whereas hospitals are experiencing low single-digit growth. As the focus shifts to HOPD and ASC, our forecast is being validated, slightly accelerated by COVID-19. However, we have also faced challenges due to staffing shortages that affect procedural capacity. Long-term, our outlook remains stable. For ZILRETTA, I believe $140 is too optimistic. Last year, it generated about $102 - 103 million, with $12 million to $13 million in the fourth quarter. These figures do not support projections of 40% to 50% growth this year. The manufacturing issues we faced regarding two-year product dating have been resolved. Our current rebate program complicates monthly reporting, as it only allows for accounting after the month ends, making it impossible for us to provide a monthly breakdown at this time. We hope to offer some ranges, as mentioned by Charlie, but we cannot guarantee specific figures. In the short term, we are addressing cleaning up issues related to dating and product handling in the marketplace, which will soon be resolved. If you generally consider our products growing by over 20% annually, thinking of ZILRETTA in the same context will lead you to a reasonable expectation.

And the second part of the question, Dave?

Yes, I touched on that earlier. What was happening was a straightforward rebate system where the discount increased with the number of boxes ordered. However, this approach led to several operational issues. Customers might wait until inventory is completely depleted to take advantage of the maximum discount at the end of the quarter. Given the high cost of the drug, which is over $500 per unit, it's unrealistic to expect our customers to place large orders all at once. We prefer a system where customers receive a consistent discount based on their volume of orders, allowing them to know what to expect for at least a year. The goal is for customers to order as needed and ensure they have enough inventory to last for the next week or so, without the risk of running out. This prevents situations where they over-order, leading to excess inventory that may go unused. Such circumstances are exacerbated by factors like COVID, when patient visits declined, resulting in short-dated inventory. We recognize our responsibility to assist our customers with returns, even if those products are nearing expiration.

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

Yes, I'll give you a little bit more than that. So, the low dose is really for a basically what it is, Balaji, is spinal. And so, it will be for a very simple way that we can produce pain control in patients where spinal analgesia is currently being used. So then the corollary to that then is can we produce a lipid particle that can take more bupivacaine than the current 13.3 milligrams in EXPAREL? And the answer to that is yes. And so, we've got a particle that has roughly 40% more bupivacaine on it. And then, the way these things are manufactured, we can change the triglyceride component of the product, so that these lipid particles that are more potent become available to the center nerves on a longer-term basis. And so, we think based on the early data that we're going to have at least five days, and it looks like it's going to be longer than that. And so, what we'll be addressing then is, you know, we hear from ankle surgeons and foot and ankle surgeons that three days just isn't enough when you operate on somebody's ankle. There are a number of patient indications, and oncology indications, where it's an open procedure, so you are doing a treatment, and the doc would just like to be able to provide a longer term of non-opioid pain control if there were some way for them to do that. So, if you thought about doing a lung resection, for example, you are in there, is there some place I can put this stuff so that the patient would get a week, instead of three days? That's the question we are trying to answer. We have the product; now we got to go on and do all the rest of the stuff.

Thank you.

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

Thank you for the questions. The first inquiry is about the leadership from HOPD, specifically regarding the two HOPD in the EOC setting. Can you provide insights on the trends you are observing in this channel, along with any notable impacts? Additionally, I'm looking to understand the procedure volumes for EXPAREL across these channels and their respective growth rates in the markets. For the second question, could you elaborate on the 2022 OpEx guidance related to the Flexion deal synergies? You mentioned a 3% target for those synergies in 2022; how do you evaluate your progress toward those initiative expectations? I'm trying to comprehend what has been factored into that guidance and the potential for further upside. Lastly, could you share more details about the OpEx cadence throughout the year?

Thank you, Christopher. I’ll address the first question and then hand it over to Charlie for the next part. I want to note that the IQVIA data by site of care and procedure is six months outdated, so what I’m sharing is from August 2021. August was not a good month, but I believe the information is still directionally accurate and provides clarity on your question. Overall, for all procedures, hospitals are evenly split between orthopedic and soft tissue surgeries, both growing at a mid-single-digit rate. In hospital outpatient departments (HOPDs), there’s a slight preference for soft tissue procedures at about 55% to 45%, and that segment is growing by 13%. In ambulatory surgery centers, the split is 75% orthopedic and 25% soft tissue, with an 18% growth rate. This data shows that insurance companies are moving their more profitable procedures. For example, the cost difference between a $1,500 hernia procedure and a $15,000 knee procedure is significant, and even more so for a $40,000 spine procedure. This shift is why softer tissue surgeries are leaning more towards HOPD and hospitals. If you have further questions, feel free to reach out. Now, I’ll pass it to Charlie to discuss OpEx.

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

And synergies.

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

I was just going to say I was just going to add, you know, you said 3%, 3% was really what we were talking about in terms of gross margin, and it has been on an annual basis. The way we think about OpEx is that, you know, net-net we're thinking something in the mid-single-digit range. So, the whole idea of the story here is gross margins heading towards 85%, revenue high-teens, OpEx a third of that, if you are thinking about it in the broadest terms, right. So, I don't want to think that 3% was not related to OpEx overall; it was related just with gross margin improvements.

Okay, great, that's super helpful.

Thank you for the questions.

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

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

Yes, thanks, Greg. So, in peds, I mean if you put additional resource out there, you are always going to get some additional revenue. The question is whether it's profitable revenue or whether you're just turning revenue. I mean I think we have to be careful here. And so, we launched with a team of nurses, all hospital, critical care nurses, pediatric ICU nurses et cetera, and we were very careful to let the leaders in pediatric pain control talk to their constituents, their fellows, and their residents, and talk about how they're going to use this, and how they are going to replace pumps and catheters and things like that. So, the sales force has been turned on, and I guess, since August now or early September, maybe, the bigger sales force has been working with the community hospitals and the smaller centers. But I think the number of educators that we got and the number of KOLs, Key Opinion Leaders that we have got in each of the specific disease categories suggests that the right way to do this is to take our time and to do it very well, so that we don't put any little guys in harm's way. So, I think we're happy with the case. I think as docs continue to use EXPAREL in different ways for different procedures and invent new blocks for how we can do things in kids that might be a little bit different than adults, I think if went any after, Greg, we would run the risk of cutting our legs off long-term; I think the best thing for us to do is keep doing what we are doing, and training people and making sure that our hospital is fully prepared to use EXPAREL and iovera products basically, but the question is largely around peds. And so, I don't know if you got anything to add to that. I'll let me come back when he answer the second part of the question. I can't remember. What was the second?

Spasticity regulatory?

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

Thank you for your question, Greg. To start with the regulatory pathway for spasticity, we are currently in discussions with the FDA to clarify the specifics. It's important to remember that iovera already has a very broad label, and we are looking at a minor addition since it involves treating similar nerves. Despite this, I believe we are poised to make significant advancements in spasticity treatment, and we have received considerable interest from the community since our Investor Day a few months back. It’s one of the most common inquiries we receive, and it’s notable how many individuals, whether they are friends or family members of stroke patients dealing with spasticity or families of children with cerebral palsy, are eager for a groundbreaking treatment option. We are actively working on it, and I anticipate having much more detailed information by the next earnings call.

Greg, I want to emphasize an important point that Roy brought up, which I believe everyone on the call should consider. We have experienced delays in several of our FDA meetings due to various issues, including staff shortages that we've mentioned previously. This makes it challenging to establish a timeline since it's hard to predict when we will be able to meet with the FDA. So, I just want you to keep that in mind as we move forward.

Got it. Thank you.

Thank you.

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

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

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