Pacira BioSciences, Inc. Q2 FY2022 Earnings Call

Thank you for being here, and welcome to the Pacira BioScience's Second Quarter 2022 Earnings Call. I would now like to hand the call over to Susan Mesco, Head of Investor Relations. Please proceed.

Thank you, Paula, and good morning, everyone. Welcome to today's conference call to discuss our second quarter 2022 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; and Charlie Reinhart, Chief Financial Officer. Additional members of our executive team will join for today's question-and-answer session. Before we begin, let me remind you that this call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. For information concerning risk factors that could affect the company, please refer to the company's filings with the SEC, which are available from the SEC or our website. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone, and thank you for joining us. We'll start today's discussion with a brief overview of recent business highlights before moving to your questions. I am proud of our team and its performance. We reported record revenue for the second quarter and continued to innovate in non-opioid pain management, achieving significant progress across our portfolio in the first half of the year. Second quarter sales for EXPAREL reached $137 million, making it the second highest quarter for the product. ZILRETTA also contributed significantly this quarter, with sales exceeding $27 million, highlighting the rationale behind our Flexion acquisition last year and the success of our integration. Despite ongoing challenges like labor shortages, COVID disruptions, reduced hospital services, decreased hours at ambulatory surgery centers, and inflation's impact on certain elective procedures, EXPAREL continues to outshine the elective surgery market recovery with increased use in all target markets and care settings. I encourage you to check our latest IQVIA data in the Investor Relations section of our website. Strong sales paired with operational efficiency enabled us to achieve positive adjusted EBITDA of $44.9 million, marking our 21st consecutive quarter of positive adjusted EBITDA. We take pride in this achievement and our capability to navigate through unpredictable market conditions. I can confidently assert that Pacira has consistently delivered. Along with our ongoing revenue growth, we are making investments in key initiatives to enhance our gross margins, which includes the installation of our 200-liter EXPAREL suite in San Diego, now fully operational. We are in the process of commissioning the equipment and anticipate submitting our application for FDA approval of this facility in 2023. This expansion will provide significant scale, supporting EXPAREL's revenue growth and margin improvement. Our new ZILRETTA production line aims to enhance quality and yield, and we successfully transitioned our iovera° operations from Fremont to our San Diego facility and a contract manufacturer. Now, regarding our EXPAREL franchise, regional analgesia is still our top priority. Long-acting EXPAREL-based nerve and field blocks are facilitating faster recovery times and same-day surgeries, reshaping patient care. Anesthesia and surgeon customers recognize the advantages of EXPAREL-based blocks as they replace outdated pumps and catheters. Increased patient satisfaction and improved cost-effectiveness in the outpatient environment enable us to enhance EXPAREL reimbursement. Recently, CMS proposed an outpatient prospective payment system rule for 2023, ensuring that EXPAREL will qualify for separate reimbursement in ambulatory surgery centers under code C9290. The agency is also soliciting comments and data on possibly extending the current ASC policy to hospital outpatient settings. Alongside our CMS efforts, we are monitoring legislative actions like the NOPAIN Act to guarantee equal access to all non-opioid options for Medicare beneficiaries in outpatient settings. Our state-of-the-art PITT training and innovation center in Tampa is actively promoting best practices and accelerating the shift of surgeries to outpatient locations. In 2022, we received 142 requests from institutions for training their anesthesia and surgery teams on various blocks, with the Erector spinae and transverse abdominis plane blocks being particularly sought after. Our training programs at PITT, along with in-person medical society meetings, are fostering strong engagement with clinicians eager for education in regional pain management approaches for EXPAREL. There is also growing interest in drug-free nerve blocks with iovera°. These educational initiatives for EXPAREL and iovera° are helping to expand our ZILRETTA customer base. We are making significant strides in establishing our second innovation and training facility in Houston, which will open later this year. We expect this facility to further boost EXPAREL and iovera° expertise among clinicians, particularly for field blocks and nerve block procedures. Importantly, we continue to advance our patent strategy for EXPAREL to strengthen our intellectual property, with new patents extending protection to January 22, 2021. We now have six patents listed in the FDA Orange Book and have recently received notice of allowance for a seventh patent, expected to be issued shortly. We have finalized a new agreement with one of the largest faith-based private healthcare systems in the U.S., which operates in 19 states with over 140 hospitals and around 30 ambulatory surgery centers. We will collaborate to implement EXPAREL-based opioid-sparing protocols across their service lines through extensive training provided by our clinical education teams. This agreement also opens opportunities for expanding iovera° use within their system. Additionally, we are forming a new partnership with a large group purchasing organization in the dental sector, allowing access to EXPAREL at one of the nation’s largest dental support organizations serving over 600 dentists across 400 practices in 42 states. Together, we will promote best practices for optimizing recovery after oral maxillofacial surgery with an EXPAREL-based opioid-sparing approach. This partnership will also involve working with the group purchasing organization to introduce EXPAREL to their network of more than 1,100 dental accounts, focusing on key EXPAREL markets. Orthopedic procedures remain a crucial growth driver, with the latest annualized IQVIA data showing a 24% year-over-year utilization increase. EXPAREL-based regional protocols are supporting a transition to orthopedic procedures, where EXPAREL utilization rose 34% over the past year in 23-hour care settings. In pediatrics, our initiatives are progressing well. Safety is our critical focus, and awareness of efficacy is rising thanks to new data. Research from the Scottish Rite for Children Hospital in Dallas demonstrated that children undergoing posterior spinal fusion surgery with EXPAREL infiltration consumed significantly less opioid and ambulated sooner compared to those receiving a continuous epidural infusion. This study was published in the May issue of the Journal of Pediatric Orthopedic Society and will be featured at the annual Scoliosis Research Meeting in St. Louis in September. This advancement is essential for treating children who often undergo multiple surgeries with opioid exposures. Our medical education platform continues to drive awareness through our monthly series, the Pediatric Exchange, featuring experts from top pediatric centers. In women’s health, we are experiencing considerable growth from C-section success, which is translating into increased uses in breast augmentation and gynecologic oncology procedures, especially in 23-hour care settings. Regarding our European launch, we are seeing slow yet steady progress in several key countries. In the U.K., several national health service trust hospitals have adopted EXPAREL, with its value evident in addressing surgical backlogs through reduced lengths of stay and enhanced surgical throughput. Customer feedback is encouraging, with strong retention and repeat orders from influential hospitals. We believe Europe holds significant future opportunities for EXPAREL and Pacira. Moving to the EXPAREL pipeline, both Phase III studies evaluating lower extremity nerve blocks are now fully enrolled. We expect to report top-line results from the first study in early September, followed by data from the second study approximately six weeks later. If successful, these studies will support a supplemental NDA filing early next year, and we see the lower extremity nerve block label opportunity as significant, with around three million procedures annually and an addressable market potential of roughly $100 million. We are also planning a multicenter registration study of EXPAREL as a stellate ganglion block for treating refractory cardiac dysrhythmias and for preventing postoperative atrial fibrillation after open-heart surgery, collaborating with Dr. Shivkumar, a leading expert in this area. A panel of key opinion leaders in regional anesthesia and stellate ganglion blocks will convene this fall to help finalize the study design. After a meeting with the FDA to align our regulatory strategy for expanding the EXPAREL label, we will initiate the registration trial. A stellate ganglion block using EXPAREL, lasting several days, could meet a pressing need for patients experiencing ventricular and atrial dysrhythmias. In addition to our success with EXPAREL, our second quarter sales benefited from ZILRETTA's strong performance, highlighting the effective integration and rationale for the acquisition. ZILRETTA is in the early stages of its growth trajectory, and we are confident it will become a vital revenue and earnings contributor as the only FDA-approved extended-release corticosteroid for knee osteoarthritis pain. We are currently finalizing designs for label expansion studies in shoulder osteoarthritis and type 2 diabetes. Our analysis of the Flexion diabetes data indicates a significant opportunity in providing a safer intra-articular steroid that improves efficacy for the diabetic and prediabetic population. We are preparing to study ZILRETTA in diabetes with osteoarthritis, comparing it to immediate-release triamcinolone acetonide, as well as in shoulder osteoarthritis, potentially positioning ZILRETTA as the first and only approved steroid for shoulder applications. These studies will also provide opportunities to enhance reimbursement as we demonstrate superiority over media release triamcinolone acetonide for diabetic patients and those undergoing shoulder surgery. Moving to iovera°, our handheld cryotherapy device, we are rolling out the Generation 2 device to our customer base, receiving positive feedback on its user-friendly design and increased efficiency. We have partnered with the PGA Senior Tour, having a presence at two major tournaments in Q2, with plans for the Charles Schwab Cup Championship in November where we will feature iovera° branding and facilitate local provider appointments for treatments. Our sports initiatives also include collaborating with the NFL Alumni Association to promote non-opioid pain management options, educating retired players and staff about these safer alternatives. Regarding the iovera° pipeline, Dr. Paul Winston has been conducting promising observational studies on iovera° in spasticity. We are collaborating on publication strategies for these preliminary findings and have submitted a design for a registration study to the FDA for evaluating iovera° in treating spasticity in post-stroke patients. We have scheduled a meeting with the FDA and will proceed with this registration trial. Additionally, alongside the EXPAREL stellate ganglion block study, Dr. Shivkumar is initiating a study on iovera° cryo technology for addressing various cardiac dysrhythmias. We believe both EXPAREL and iovera° hold the potential for treating both acute and chronic cardiac conditions in various patient groups. Moving on to earlier-stage pipeline opportunities, we expect to initiate the second half of our Phase I study of our multi-vesicular liposome bupivacaine for subarachnoid analgesia later this year, progressing to Phase II next year. We are also defining clinical programs for proprietary liposome formulations of dexamethasone aimed at inflammation and lower back pain, along with high-dose bupivacaine for longer-lasting pain management exceeding seven days. In conclusion, the progress we have made thus far and our ambitious future plans are converging to enhance our confidence in achieving our corporate goals of strong revenue and earnings growth. Given the significant patient need for opioid-sparing options and limited competition, we are more confident than ever in our ability to establish our leadership position in delivering innovative non-opioid solutions along the neuro pain pathway while generating substantial shareholder value. Now, I'll turn the call over to Charlie for his financial highlights.

Thank you, Dave, and good morning, everyone. I'll start with a quick update on sales and margin trends. Starting with EXPAREL, we remain very pleased with the ongoing success of EXPAREL as the clear market leader in non-opioid postsurgical pain management. We saw a year-over-year increase of 5% for the second quarter and posted our second highest quarterly ever EXPAREL despite persisting regional labor shortages, other pandemic-related disruptions, and impacts of worsening economic and inflationary trends. To date, we have not seen any impact from new market entrants on our EXPAREL base business or our ability to generate new business, which is not surprising given the ability of EXPAREL to help facilitate the market's ongoing shift to regional analgesia and outpatient sites of care. Having treated more than 10 million patients in the U.S., we are also confident that our well-established efficacy, pristine safety profile, and more than a decade of physician experience will continue to be key advantages for EXPAREL over other extended-release bupivacaine formulations. For ZILRETTA, we have completed the rollout of our new discounting program to normalize customer purchasing patterns, and the product is performing according to plan. We continue to expect improving ZILRETTA sales trends through the year as we broaden education and awareness through our commercial expertise and established relationships. For iovera°, now that the rollout of Gen 2 device is underway, as Dave mentioned earlier, we expect the product to return to more robust year-over-year growth as the year progresses. We remain very optimistic in the iovera° opportunity within its current as well as new indications such as spasticity and stellate ganglion block, where we are making new clinical investments. Turning to gross margins. On a consolidated basis, our second quarter non-GAAP gross margin percentage was 72%. This is comprised of non-GAAP gross margins of 73% for EXPAREL, 82% for ZILRETTA, and negative 28% for iovera°. EXPAREL and iovera° gross margins were negatively impacted by certain operational challenges specific to the second quarter that are now behind us, including for EXPAREL, based on supply chain disruption in the second quarter, we made the decision to manufacture using older on-hand raw materials to ensure that we could meet market demands. The majority of these batches were successful, but with a higher-than-normal batch failure rate, causing our second quarter margins to be lower than expected. This challenge is now behind us, and we believe we have a stable source of raw materials going forward to meet increased demand. EXPAREL manufacturing efficiencies are now operating in line with expectations, and we expect gross margins to improve in the second half of this year and continue to improve by 2 to 3 percentage points per year, ultimately reaching the mid-80% range. For iovera°, second quarter margins were impacted by activities to support the shift to our Generation 2 device, which included downtime for training at our contract manufacturer. We also incurred overlapping expenses from the transition of activities from Fremont to our San Diego facility for the handpieces and to a new contract manufacturer for the Smart Tips. Importantly, these activities are now complete. The Fremont office is closed. The Gen 2 rollout is underway, and iovera° margins are now beginning to benefit from the reduced unit costs at the contract manufacturer. These investments are important to the short- and long-term opportunities for iovera° as a drug-free nerve block as well as additional opportunities in spasticity and stellate ganglion block. Looking ahead, we continue to expect to see gross margins improve for all 3 products and to reach the mid-80% range. While we are currently not providing 2022 revenue or gross margin guidance, given the continued uncertainty around labor shortages, other COVID-related disruptions, impacts from the recent worsening economic and inflationary trends, and the pace of recovery for the elective surgery market, we remain committed to the transparency of reporting preliminary monthly product sales to share inter-quarter trends with you. We will consider adjusting this practice for all three products as the year and visibility progresses. Turning to expenses. Second quarter non-GAAP R&D expense was $24.8 million, reflecting additional investments in our 2 lower extremity nerve block studies and ongoing investments in our proprietary multi-vesicular lipid pipeline. We continue to expect R&D expense to tail off in the second half of the year, with enrollment now complete in our lower extremity nerve flex studies. And today, we are reiterating our full year non-GAAP R&D expense guidance of $75 million to $85 million. Our second quarter non-GAAP SG&A expense was $56.5 million and tracking in line with our full year guided range of $220 million to $230 million, which we are reiterating today. As discussed in today's release, today, we are revising our guidance for stock-based compensation expense to the range of $47 million to $50 million to more accurately reflect this year's equity grants including our annual midyear equity grant. Interest expense was $8.8 million for the second quarter. Most of this interest expense relates to our Term Loan B financing for $375 million with a floating interest rate of SOFR plus 700 basis points. The remainder of this interest expense relates to our convertible notes. For modeling purposes going forward, based on current interest rates, interest expense will be approximately $10 million per quarter. As a reminder, the Term Loan B is a partially amortizing loan with principal repayments due quarterly beginning at the annual rate of 10% of the original principal balance and increasing to 15% in the later stages of the loan. Our first quarterly principal repayment of $9.4 million was made at the end of Q2. In addition to the scheduled quarterly principal repayments, the Term Loan B also provides further reduction of principal with set percentages of annual excess free cash flow with no prepayment penalties and the ability for us to expand upon these repayments further at very modest prepayment penalties that are eliminated altogether after year 3. Our original forecast indicated that the Term Loan B would be completely repaid during year 4 of this 5-year loan. Based on today's interest rate environment, however, we are exploring ways to reduce the total interest cost of this loan more quickly. Our GAAP P&L reflects a second quarter effective tax rate of 10%, which benefited from the impact of a discrete tax deduction related to equity compensation transactions, often referred to as an equity windfall deduction, and acquisition-related benefits. For non-GAAP purposes, our adjusted results reflected an effective tax rate of 26% for the second quarter and 25% year-to-date, which we continue to believe is an appropriate effective tax rate for our full year adjusted net income for 2022. And lastly, despite challenging market conditions, we delivered another quarter of significantly positive adjusted EBITDA of $44.9 million. In summary, Pacira continues to operate from a position of financial strength. Despite ongoing headwinds, including labor shortages, continued COVID intrusions, reduced hospital services, decreased hours at ambulatory centers, and the impact of inflation on certain elective procedures, we continue to deliver impressive financial results and remain bullish in our 5-year plan for year-over-year top line growth in the mid- to high teens in 2023 and beyond. Gross margin improvements to the mid-80% range, modest year-over-year increases in operating expenses, and adjusted EBITDA margins that exceed 50%. That concludes our prepared remarks. I'd like to now turn the call over to the operator to begin our Q&A session.

Your first question comes from David Amsellem.

So I just have a couple. So first, can you just walk me through your thought process on when market dynamics you think might improve vis-a-vis things like staffing shortages? So that's number one. Number two, as you look at the third quarter, one thing that sort of struck me about 2Q is that the comps were difficult year-over-year in 2Q. So can you talk to year-over-year comps in 3Q and how that would speak to the growth trajectory of EXPAREL irrespective of the headwinds that you've been talking about?

Yes. Thank you, David. And really, in our minds, the comments, your questions are interrelated actually. For number one, we do see things resolving modestly, slowly, I guess, is the better way to put it. Ironically, to some extent, inflation appears to be driving the labor market in a more positive direction than we had seen. And very simply put, when it costs $140 to fill your gas tank up, you realize that your cash balance doesn't last as long as you were hoping it might. And so we do see that the labor market is easing, although slowly; it at least is positive for the first time in a few quarters. And so not a bad thing for sure. You are exactly correct relative to the comps in Q2. As a matter of fact, today, after 3 days, 3 selling days of August, you would see the impact of a better comp for us on a year-on-year basis. And so we do expect to have the optics of our business changed quite significantly based on the third quarter of last year versus the third quarter of this year. And so far, we're seeing that in the first few days of August, David. So positive. We're making progress every day. Some of these big relationships that we announced today are adding real benefits, and we can see it in real-time as we look at the numbers. And so we're excited about going forward with all the clinical programs we're doing as well. So thanks for the question.

Your next question comes from the line of Chris Neyor.

Great. The first question is about expectations for the elective procedure market. You've mentioned a gradual recovery in the procedure market during the first half of 2022. Can you discuss the impact of labor shortages on volumes and provide a timeline for when we might see greater normalization? Additionally, you've mentioned a backlog of deferred procedures in the past, but it seems less likely that we will see that reflected in volumes. Any insights or perspectives you have on this would be appreciated.

Yes, thank you, Chris. The labor shortage is affecting the marketplace in several ways. One major issue is that Mondays remain the lowest revenue day of the week for EXPAREL, primarily because ambulatory surgery centers typically do not operate on weekends. The difficulty in securing a nursing team to work long hours on Saturdays has restricted these centers from opening and generating the revenue needed to cover costs. This presents a significant opportunity for us as Saturday operations in these centers could help alleviate backlogs. Moreover, the labor shortage impacts hospitals and ASCs' ability to staff PACUs as they once did before COVID. For example, PACUs used to remain open until 10:00 PM or even midnight, allowing surgeries to continue into the evening and enabling same-day patient discharges. However, reduced PACU hours, sometimes ending at 6:00 PM, have limited spine surgeons to fewer surgeries per week, causing them to adjust their schedules from two surgeries three days a week to sometimes only one surgery four days a week. This change has a significant effect on our business. We have noticed that some PACU hours are starting to return, and certain facilities are beginning to accommodate additional surgeries for complex cases on an outpatient basis. Regarding the backlog, our initial expectations from the early days of COVID have shifted, and the market has become harder to predict. We observe that high acuity pain procedures, particularly in orthopedics like total joints, shoulders, and spine surgeries, continue to be performed, especially in ambulatory surgery centers where surgeons have a stake. These procedures are being conducted regularly, while soft tissue procedures like hernias and colorectal surgeries face more challenges. Hospitals are finding it hard to complete these procedures due to the reimbursement rates provided by payers, making it unfeasible to perform them at either inpatient or outpatient settings. Consequently, the majority of ASC operations are dominated by orthopedic procedures, while the reimbursement for soft tissue surgeries does not incentivize many centers to offer them. The market appears to be navigating these challenges, with ongoing discussions between payers and facilities to streamline these outpatient surgeries, and we expect this to progress throughout the year. We anticipate that the third quarter will gradually transition toward a pre-COVID normalized environment as we approach the fourth quarter.

Could you discuss your capital allocation priorities, specifically the balance between business development and the potential for further debt paydown? Additionally, what is your perspective on the business development market? Have you noticed a pullback in valuations for commercial stage companies, and has this impacted earlier stage companies? What types of assets are you currently considering, and what would constitute an ideal fit for Pacira's portfolio at this time?

Yes, we'd love to find another Flexion, Chris, if we found one. We don't have anything on the immediate term for a commercial asset that would be fit for purpose, the way ZILRETTA was. You are correct that there's a lot more interest in private companies as well as some of the smaller public companies; the inability to raise financing is leading to some more aggressive activity on that front relative to the opportunity for M&A or licensing or even partnerships in some cases. So we've got a lot of things that we're looking at. Our focus has been on the knee and the patient journey to a total knee arthroplasty. And so we're looking at a number of pain opportunities in the gene therapy and cell therapy space. A number of compounds that are available for us to take through clinical development, but most of these are earlier, Chris, and we don't have a lot of stuff that's commercially viable in the next 2 or 3 years. The second place that we're aggressively looking is in the vertebral space. We have a number of opportunities for products that would be in the degenerative disc disease space and low back pain, big opportunities in places where we're already working with folks on degenerative disc disease for pain management that regenerative medicine, things like spine biopharma with a 7 amino acid peptide for that would be used in conjunction with a pain injection for low back pain. So we're actively looking at these things where we would love to do a commercial transaction if we can find an appropriate asset. We're wide open to larger agreements, and some of those are starting to percolate to the top, but nothing that really would be of interest in the next couple of years. And so most of the stuff we're working on takes advantage of our commercial and clinical expertise to develop earlier assets for organizations that are either struggling financially or just plain don't want to be a commercial company.

Your next question comes from the line of Balaji Prasad.

Question. Dave, could you provide some incremental clarity around the recent CMS reimbursement and what was incremental to EXPAREL? Also, the time lines and impact around the expansion to the hospital outpatient setting and what it means to? Secondly, you commented on called out a couple of new agreements, including with the NHS, if I got it right. So I want to understand the impact of this, what were 140 hospitals and 30 ASCs partnering with Pacira mean in the longer run? And when could we start seeing the impact of this in the P&L?

Thanks, Balaji. First, I'd like to clarify the importance of CMS reimbursement for us, particularly maintaining C9290 for ASCs as a baseline. We have been actively engaging with CMS about the availability of non-opioid options for economically challenged areas in the U.S., especially in regions without ASCs where access to care mainly occurs in HOPDs. Although we haven't achieved a specific win, CMS is seeking feedback on data and discussions related to HOPD and the necessity for reimbursement there. This ties into Chris's earlier question regarding the significance of non-opioid alternatives in HOPD for lower socioeconomic populations, who often lack access to any opioid-free options. Interestingly, after CMS approved C9290 for EXPAREL in the ASC, several counties removed EXPAREL from their HOPD formulary, encouraging patients to use ASCs instead. This led to a situation where patients in counties without ASCs lost access to low or no opioid surgical options. Therefore, it's crucial for us to stay engaged on this issue. We are working closely with CMS regarding the HOPD opportunity, and we anticipate this will evolve as we progress through the comment period that extends to September. The expansion of HOPD involves two main factors: the hospital's need to perform surgeries and the search for economically viable ways to do so. Many ASCs have begun to handle higher-volume, higher-profit margin procedures, resulting in lower acuity, lower-margin procedures reverting to traditional hospital care. This has led to the construction of several orthopedic and spine hospitals nationwide to meet the capacity issues faced by ASCs regarding spine and joint procedures. Consequently, hospitals are exploring outpatient procedures to reduce costs, given the revenue significance of surgeries for medical centers. They are actively working on shifting inpatient treatments to outpatient settings and collaborating with payers to ensure patients can access soft tissue procedures locally rather than having to travel. This complex issue requires time and is gradually improving in various markets. The new agreements we've formed are vital to this process. We are making strides with stakeholders who recognize the importance of opioid-sparing techniques, especially for patients like expectant mothers. We discuss these partnerships not only as revenue opportunities but as a means to inform patients in their operational states about available opioid-free options, recognizing that 20 million Americans are in recovery. We receive daily inquiries from patients seeking opioid-free surgical options. This strategic partnership enables us to highlight these alternatives and reassure patients that they won’t leave the operating room with excessive opioid prescriptions. Dental procedures are equally significant; for many teens, their first encounter with opioids occurs during third molar extractions. We have been collaborating with organizations to establish protocols, provide education, and supply EXPAREL for initial cases, allowing them to gain hands-on experience with opioid-free third molar extractions. This effort is crucial for our revenue and for showcasing the possibility of opioid-free surgeries, as well as taking advantage of that potential.

Your next question comes from the line of Gregory Renza.

Congrats on the progress. Dave, I just wanted to revisit some of those macro themes that you commented on earlier, just more specifically, I think there's just an emerging increase investor interest in understanding potential impacts from a recession and even job losses that perhaps relate to coverage loss in live. I'm just curious if you had any thoughts on how that potentially could impact surgical volumes your mix and what you're seeing with EXPAREL in the marketplace. And of course, I know the data aren't even it is speculative, but just your high-level thoughts on recession impacts to EXPAREL performance would be very helpful.

Thank you, Greg. That's a really interesting question, and we've dedicated considerable time to analyze the various factors at play here. We have our own consumer surveys as well as historical data from both inflationary and recessionary markets. It's clear that patients' ability to pay co-pays and afford insurance for soft tissue and lower acuity surgical procedures is affected. Balancing that against the current situation, we think it will have a modest dampening effect on the recovery of procedures. However, we also recognize that the backlog of procedures and the ongoing issues faced by patients who have delayed surgeries over the last 24 to 30 months serve as a strong motivator for action. We're monitoring this closely, as neither high inflation nor a recession will be advantageous for the procedure rebound. Nevertheless, there remains significant motivation for high acuity procedures, which continue with little change, along with increased opportunities for soft tissue procedures that are financially viable for hospitals. We believe that CMS and the support for Medicare beneficiaries may help mitigate the impacts of recession and high inflation. Beyond this, it becomes a balancing act regarding the pace at which these elements recover, and we’ll just have to see how it unfolds. I can’t provide very specific data; our internal consumer insights indicated a more dramatic negative impact from inflation 60 days ago compared to now. However, I can’t quantify that with a specific percentage. It does seem that people are less sensitive to inflation today than they were two months ago.

And just one last one, if I may. I believe at the top of the call, in your remarks, you just mentioned that perhaps competition drivers were at a minimum. I'm just curious, is that something that we could see as more of a base case going forward that is a driver to EXPAREL pressure, less so being thrown off from competitive options and the landscape?

Yes, for sure, Greg. I think the ability to do nerve blocks and field blocks with an FDA-approved product is really an advantage to us. And I don't see that changing over the immediate planning period of a couple of years. The reason that we're building the second innovation and training center in Tampa is to handle all of these requests we're getting for training around regional approaches and being able to move different patient populations to the less costly outpatient environment. And so I don't see that that's going to change over the next years.

Your next question comes from the line of Greg Fraser.

I'm not sure if I missed this, but did you comment on EXPAREL growth in July? And you mentioned inflation impacting certain elective procedures, or what types of procedures are you seeing an impact? And then just on a question on iovera°, you introduced the Gen 2 devices. You've seen a positive reception. You talked about the various initiatives to drive awareness. When do you think that product might start gaining more traction and seeing more use for the current indications?

Thank you, Greg. In July, we experienced a growth rate of between 5% and 6%. While we continue to see modest improvements, it is against a challenging comparison for us. This is simply a fact, not an excuse. Our product is still growing. When considering the impact of inflation, we find it affects patients significantly. For instance, when patients are unable to get out and complete essential tasks like going to church or grocery shopping, it greatly affects their mobility. People tend to prioritize getting necessary procedures done, and insurance providers are encouraging patients to return to outpatient care, driven by both cost considerations and patient satisfaction. Patients are managing less urgent conditions differently, delaying procedures like hernia repairs because they can cope with the pain better than they would for something critical like a knee or shoulder issue, which affects their ability to work or move about. The beginning of the year brings challenges as patients often haven't settled their co-pays and other costs related to their insurance plans. As the year progresses, there’s a hope for better insurance coverage in the upcoming year, influencing how patients respond to their healthcare needs. We acknowledge that our rollout of the Gen 2 device did not go as planned. The device we acquired was not perfect, and we faced some setbacks with the software, which was more complex than necessary, leading to delays in transitioning from the Gen 1 to the Gen 2 device. This gap meant we avoided starting new patients on Gen 1 since it would be replaced with Gen 2 soon, which would not be sensible given the situation. However, we're starting to see renewed interest in a non-drug nerve block approach. Some practitioners have been hesitant to use our product due to earlier challenges, but we now have a functional device. We believe this will attract new users, especially as certain prominent practitioners begin to publicly discuss their success with drug-free nerve blocks. The PGA tournaments we participate in serve as a unique opportunity to engage with potential patients who are looking for ways to manage pain while playing golf. We’re collaborating with local orthopedic and physical medicine and rehabilitation doctors to provide appointments for iovera° treatments straight from the tournament venue, which should help increase local interest over time. Similar outreach efforts are also in place with the NFL, where advocacy for opioid-free pain management is growing. Overall, we see significant potential in the cash market, particularly with services similar to PRP treatments, where patients are often willing to pay out of pocket without extensive data backing the treatments. We are organizing what we're calling iovera° days, akin to PRP days, to increase local user engagement. It's essential for us to connect with more users in various markets, and I'm committed to fostering conversations around drug-free nerve blocks. Additionally, we are preparing for larger opportunities, especially in addressing spasticity, where we could greatly enhance care standards for patients with post-stroke spasticity and other related conditions. There is a lot at stake, and we are determined to put in the effort.

Your next question comes from the line of Serge Belanger.

Just a couple of questions. A couple of questions for me. First, on the NOPAIN Act. It’s been a little more in the news lately. It seems to be gaining momentum. I don’t know if you want to comment on whether it gets to the finish line or not, but – maybe if you can talk about what impact it could have on the coverage of EXPAREL? And then secondly, I wanted to go back to the not so EXPAREL-friendly editorial that was published in the ASA journal last year. I assume it’s been widely disseminated now. So what impact, if it has had any, either practice guidelines or have hospitals curtailed the access of EXPAREL because of this editorial?

Good. So first, we now have over 100 members of the house supporting NOPAIN, and we are approaching half of the Senate. We only need a few more members to reach that milestone. Additionally, we have over 50 affiliated organizations, including those from the insurance industry, the AMA, and orthopedic societies. Overall, we are in a strong position. We anticipated some movement during the summer, but that shifted due to other legislative priorities, particularly regarding gun control and mental health, which didn't align with our goals for coverage of all non-opioid therapies. We are still engaged with decision-makers in Washington and are looking for opportunities in upcoming reconciliation bills later this year. This is the best position we have ever been in to get the NOPAIN Act approved. To clarify, the NOPAIN Act would mandate that CMS cover products indicated for postsurgical pain for five years, specifically all non-opioid products. This would enable us to cover over 70% of the procedure marketplace for EXPAREL, presenting a significant opportunity for reimbursement that would alleviate budget concerns for institutions providing non-opioid alternatives compared to generics, which we believe would be a substantial advancement. Regarding the ASA, we have articulated our view that their recent article was fundamentally flawed. The declarations on our website highlight the erroneous calculations in their meta-analysis and the inappropriate procedures included in that report. Notably, the leading procedure referenced was a penile transplant, which we have not presented. This fundamentally misrepresents how a meta-analysis should be conducted. Has this impacted us? Yes, it has somewhat affected the marketplace. However, practitioners who utilize EXPAREL and recognize its benefits find it perplexing that their society would restrict a product that is uniquely capable of enhancing regional anesthesia, improving patient care, and facilitating outpatient procedures. We continue to engage with the ASA to advance our discussions, but this has not significantly hindered our work with the anesthesiologists who regularly use EXPAREL for regional pain management. I would also like to point out a recent article in the ASA Journal regarding shoulder procedures. They reported a negative trial for EXPAREL but made a confusing statistical error. They claimed no significant difference with a p-value of 0.098, while the actual p-value for EXPAREL was 0.02. This illustrates the misdirection in the current discourse, possibly stemming from reasons we do not fully grasp. Nevertheless, EXPAREL continues to see steady growth, and we anticipate that the approval of STRIDE for lower extremity nerve block will help clarify the beneficial facts about EXPAREL for patients compared to opioids and ketamine, which seem to be the alternatives being proposed in this context.

This concludes the question-and-answer session of today's call. I will now turn the floor back over to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, Paula. I'd like to thank you all for participating and listening to today's conference call. We look forward to keeping you updated on our progress. Next up for us is the Wedbush Conference later this month and Citi in September. Thank you all. Stay well.

Thank you. This does conclude today's call. Thank you for your participation in today's event. You may now disconnect.