Pacira BioSciences, Inc. Q3 FY2022 Earnings Call

Good morning everyone. Welcome to today's conference call to discuss our Third Quarter 2022 Financial Results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; Roy Winston, Chief Medical 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 our SEC filings 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 prepared remarks to highlight recent business developments before addressing your questions. We are pleased to share our third quarter results, which were strong across all measures, including revenue growth, increased adjusted EBITDA, and value creation. On the clinical and regulatory front, in addition to the recently announced positive results of our two Phase 3 lower extremity nerve block studies, we are ready to achieve several additional near-term milestones within our durable opioid-sparing portfolio. Third quarter EXPAREL sales reached $132.6 million, showing increased utilization across all target markets and care settings, with a year-over-year growth of 9% despite challenging macro conditions. The third quarter also saw the treatment of the 11 millionth patient with EXPAREL in the United States. Improvement in year-over-year growth trends for EXPAREL was observed starting in mid-August, culminating in September’s average daily sales exceeding figures from 2021 by 13%. Strong sales and effective operating discipline enabled us to achieve significant positive adjusted EBITDA of $55 million, marking our 22nd consecutive quarter of positive adjusted EBITDA. We are proud of this impressive record and our team's execution in a difficult operating environment. We can confidently state that despite unpredictable market conditions, Pacira has consistently performed well. Throughout the quarter, we continued to invest in key initiatives to enhance gross margins across our safe and unique opioid-sparing portfolio. For EXPAREL, we are now testing batches from our 200-liter manufacturing suite in San Diego and are on schedule for a supplemental new drug application submission in 2023, seeking approval for this new facility which will markedly improve EXPAREL gross margins. Our new ZILRETTA fill line is currently in the qualification phase, and we anticipate this line will enhance future quality and yield to support expected growth for ZILRETTA. Additionally, our new iovera° contract manufacturer is fully operational, providing lower unit costs that will benefit margins for future demand. Focusing on our EXPAREL franchise, Regional Analgesia remains our top growth driver and continues to bring about significant changes in patient care with long-acting EXPAREL-based nerve and field blocks, shorter recovery times, and enabling same-day surgeries. We expect further expansion in the regional analgesia market following recently announced positive trials for lower extremity nerve blocks. On the reimbursement side, we are backing legislation like the No Pain Act, which aims to provide Medicare reimbursement for non-opioid postsurgical pain treatments in outpatient settings. In September, advocates from 11 states met with policymakers in Washington D.C. to stress the significance of this bipartisan legislation. The passage of No Pain by Congress would lead to CMS reimbursement for 70% of our total addressable market for EXPAREL, with commercial and self-insured payers likely following suit. We are also championing initiatives to enhance access to non-opioids for our military and government employees and retirees, using similar language to No Pain that could provide coverage for roughly 10 million lives enrolled in TRICARE. While it's difficult to predict governmental actions with certainty, approval of any of these activities would significantly benefit the EXPAREL business. The strong interest in training programs at our Innovation and Training Center in Tampa highlights the market's enthusiasm for education surrounding EXPAREL-based regional approaches. So far this year, we have received 191 requests from institutions for training of their anesthesia and surgery teams in selected blocks, with erector spinae, transversus abdominis plane, and pectoralis workshops being the most requested. There is also growing interest in drug-free nerve blocks with iovera°. These educational programs for EXPAREL and iovera° will also enhance visibility, helping to broaden our ZILRETTA customer base for surgeons seeking non-opioid options for office-based osteoarthritis treatments. Our second innovation and training facility in Houston is expected to open in December, and we anticipate it will positively impact the expansion of EXPAREL and iovera° expertise among clinicians, particularly in Texas, which constitutes nearly 20% of our EXPAREL business. Importantly, we continue to advance our robust patent strategy for EXPAREL, fortifying our intellectual property with new patents and extending protection to January 22, 2041. We currently hold eight patents listed in the FDA Orange Book and have recently received a notice of allowance for a 9th patent, which we expect to be issued shortly. With no commercially viable alternative for long-lasting non-opioid postsurgical pain management, EXPAREL offers improved patient care and a sustainable revenue stream to support the continual expansion of our commercial products and promising pipeline. As a reminder, any generic filer must demonstrate that they do not infringe on every claim within these nine patents, as well as any future patents. From a customer acquisition standpoint, last quarter we discussed our agreement roll-out with one of the largest faith-based private healthcare systems in the United States, which operates in 19 states with over 140 hospitals and approximately 30 ambulatory surgery centers. I am happy to announce that EXPAREL is now on formulary at all hospitals in this system for use as a field or nerve block in both adult and pediatric patients. Since launching this partnership, EXPAREL has seen a notable rise in ordering accounts within the system, and we anticipate these favorable trends will persist. Regarding pricing, with increased manufacturing capacity and improved gross margins, we are now offering 340B pricing, which opens opportunities to 5,200 accounts that are currently not purchasing EXPAREL through the 340B program. This will provide a meaningful upside for the business and extend the reach of EXPAREL to uninsured or low-income patients, especially vulnerable populations where access to opioid-sparing regimens is crucial. Specific to key EXPAREL markets, orthopedic procedures are continuing to drive growth as more of these painful surgeries shift to outpatient settings using regional approaches. A prime example is the interscalene brachial plexus nerve block, where we are creating awareness around the superior clinical efficacy, cost efficiency, and safety of EXPAREL-based solutions for upper extremity surgeries, such as rotator cuff repair and total shoulder arthroplasty. We believe that an EXPAREL-based block will become a standard of care for the three million shoulder procedures conducted annually in the United States. In women's health, we are also observing greater market penetration. We are educating obstetric anesthesiologists by engaging with key leaders and organizations to discuss regional blocks, including tap blocks, and the value of EXPAREL, even when short-acting spinal anesthesia is utilized. Breast and plastic surgeons are looking to optimize their protocols and incorporate EXPAREL to manage pain while minimizing opioid use to facilitate outpatient procedures. We are witnessing growth and interest in erector spinae blocks for gynecologic oncology procedures to enhance pain management in this patient group, eliminating the use of opioids that may downregulate the immune system, particularly significant in oncology surgeries. Our initiatives for pediatric applications emphasize education programs showcasing the safety and efficacy of EXPAREL. These programs include the pediatric exchange, featuring renowned experts who share their insights through monthly interactive webinars. We are also seeing increased demand for EXPAREL from pediatric spine clinicians, which we believe results from several presentations on its use in scoliosis and spine deformity procedures, with three positive data presentations at the Scoliosis Research Society Annual Meeting in September. In the oral and maxillofacial market, we recently announced our initiative with Sevaredent to provide improved access to EXPAREL for patients undergoing various procedures, from third molar extractions to implants. This partnership will streamline access to long-acting pain control for over 1,800 dental practices within their network. We are pursuing similar partnerships across our portfolio and look forward to sharing updates soon. Internationally, we are making consistent progress. We recently appointed a new General Manager for these territories, and our team is focused on developing the business and securing approval for EXPAREL access from hospital pharmacy departments. We see a significant opportunity for EXPAREL in these markets to facilitate rapid recovery after surgery, positively impacting waiting lists for elective surgeries in the UK and Europe. We also secured marketing authorization from the European Medicines Agency for an expanded indication of EXPAREL to include use in children aged six and older. On the clinical side, we shared positive top-line data in September for our two Phase III registration studies of EXPAREL in lower extremity nerve block procedures. The first study involved a single-dose thermal nerve block in the adductor canal for total knee arthroplasty, while the second studied a single-dose sciatic nerve block in the popliteal fossa for bunionectomy. Both studies met their primary and secondary endpoints, demonstrating statistically significant reductions in postsurgical pain and opioid use for 96 hours. This data strongly supports the supplemental new drug application we plan to submit in the first quarter of 2023. Roy Winston, our Chief Medical Officer, will provide further insights on these studies shortly. We also have several upcoming value creation programs for iovera, including additional smart tips for spine and low back pain, as well as an exciting program targeting spasticity treatment and related pain management. For ZILRETTA, we will initiate clinical programs for treating diabetic patients suffering from knee pain due to osteoarthritis and a trial for shoulder arthroplasty as well. Roy will elaborate on these programs as well. We continue to advance our proprietary multivesicular liposome pipeline, expecting to complete our Phase 1 study of the EXPAREL program for intrathecal administration in the first quarter of 2023. We also anticipate launching trials for a multivesicular liposome formulation of dexamethasone targeted at low back pain in the second quarter of 2023, along with our 20-milligram multivesicular liposome bupivacaine formulation for longer-lasting pain and chronic pain management in the third quarter of 2023. As for our earlier-stage acquired assets, we have recently completed the analysis of data from our Phase 1 studies of PCRX-201 and PCRX-301, obtained through the Flexion transaction. PCRX-201 is an innovative intra-articular gene therapy product candidate delivering IL-1RA for osteoarthritis, while PCRX-301 is a locally administered Nav1.7 inhibitor formulated for extended release with a thermo-sensitive hydrogel. Due to insufficient clinical efficacy, formulation challenges, and commercial viability, we have decided strategically to discontinue the clinical development of PCRX-301. Based on promising initial Phase 1 efficacy and safety data for PCRX-201, we are coordinating with the investigators to schedule an FDA meeting to discuss the regulatory path forward for knee osteoarthritis, an important and exciting addition to our durable non-opioid pain management pipeline. Along with this thrilling progress in our early-stage pipeline, we have several important near-term, low-risk expansion opportunities within our commercial portfolio to enhance patient care for pain management and regenerative health. Now, I would like to hand the call over to Roy Winston, our Chief Medical Officer, to summarize some of these key value-creating milestones we anticipate delivering in the coming year.

Thanks, Dave. This is an exciting time not only for us at Pacira, but for the many patients, providers, and payers seeking safe and effective opioid-free options for pain management. I'll start with lower extremity nerve block as Dave mentioned. Our two registration studies were both successful. In our most recent reported study, sciatic nerve block in the popliteal fossa, patients who received a single-dose EXPAREL block experienced significantly lower pain scores and required significantly fewer opioids than patients who received a bupivacaine block for the 96 hours after surgery. These results were highly significant with p-values of less than 0.00001. EXPAREL has demonstrated statistical and clinically meaningful superiority in terms of opioid-free patients versus bupivacaine. In our study of a femoral nerve block in the adductor canal for patients undergoing total knee arthroplasty, the EXPAREL group also achieved significantly lower pain scores while requiring significantly fewer opioids compared to bupivacaine for the 96 hours after surgery. These data were also highly significant with a p-value of less than 0.01. As for next steps, we will be submitting a supplemental new drug application to the FDA for expansion of our label to include both sciatic and femoral nerve block in the adductor canal, with the submission date in the first quarter of next year and planning for approval in the fourth quarter of 2023. These studies clearly demonstrate four days of clinically meaningful reductions in both pain and opioids versus the active comparator bupivacaine. We believe adding these two additional nerve block indications to our label will significantly extend our reach into surgeries of the knee, medial lower leg and ankle, representing in excess of three million additional annual procedures. We are now working with key opinion leaders to publish these data to deliver strong evidence in the literature and implement them into practice guidelines for EXPAREL as a single-dose nerve block in lower extremity procedures. On the pediatric front, we now have alignment with the FDA and EMA regarding next tests for adding patients aged zero to six years to our US and EU labels. The study is expected to begin next year and will involve three age-based cohorts. We look forward to minimizing exposure to opioids for this vulnerable population. Turning to ZILRETTA, we are preparing to launch two label expansion studies next year. The first will be a study in diabetic patients with knee osteoarthritis and will compare ZILRETTA to immediate-release triamcinolone acetonide. After analyzing the data from our Flexion study previously completed, we believe there is tremendous opportunity in providing the diabetic and pre-diabetic community an intra-articular steroid that improves efficacy and is significantly safer with reduced glycemic spikes. We are also finalizing our protocol to study ZILRETTA in shoulder osteoarthritis, after receiving positive feedback from key opinion leaders. This study could make ZILRETTA the first and only approved steroid for use in shoulders. We expect to complete the diabetes trial in 2023 and the shoulder trial in the first half of 2024. These studies will establish ZILRETTA as the gold standard in patients with diabetes for both knee and shoulder by demonstrating superiority versus immediate release triamcinolone acetonide. Importantly, these two studies may also provide incremental opportunity for enhancing ZILRETTA commercial reimbursement. We also significantly advanced our regulatory registration activities for iovera° in spasticity. In September, we met with the FDA and now have clarity on study design and pathway to approve for iovera° as a treatment for spasticity. The study will evaluate iovera° versus sham in adult patients and is on track to launch in early 2023 with enrollment to conclude before the end of the year to support a 510(k) marketing approval. To remind you, pain associated with spasticity is already currently on label and we started educating physician specialists about the potential value of iovera° in this setting. We believe using iovera° to treat spasticity will completely disrupt the current treatment paradigm, bringing tremendous relief to patients and value creation for Pacira shareholders. Lastly for iovera°, we have recently completed enrollment in a study evaluating iovera° as a medial branch block to treat low back pain and expect to report data and launch the new smart tips in 2023.

Thank you, Roy, and good morning, everyone. I'll start with an update on sales and margin trends. Starting with EXPAREL, we had a solid quarter with a year-over-year increase in sales of 9% despite challenging market conditions. 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 role that EXPAREL plays in facilitating the market's ongoing shift to regional analgesia and outpatient sites of care. With more than 11 million patients treated in the US, a well-established safety and efficacy profile, and a significant exclusivity runway providing significant barriers to entry, we continue to have great confidence in the long-term market leadership for EXPAREL. ZILRETTA continues to be a meaningful addition to the Pacira portfolio with third quarter sales of $26.5 million. We continue to expect improving ZILRETTA sales trends as we broaden education and awareness around its value in treating patients with unique care needs such as diabetic patients. For iovera°, now that the rollout of the Gen 2 device is underway, we continue the transition of our customer base to this improved device, and we expect demand and sales growth to gain momentum going forward. We also remain optimistic about the iovera° opportunity, with new indications such as spasticity and medial branch blocks where we are making new clinical investments. Turning to gross margins, on a consolidated basis, our third quarter total non-GAAP gross margin percentage was 72%, comprised of non-GAAP gross margins of 74% for EXPAREL, 76% for ZILRETTA, and 35% for iovera°. For iovera°, gross margins include an estimate of the planned cost to replace current Generation 1 handheld devices with the new Gen 2 device. Third quarter ZILRETTA margins were impacted by the timing of one failed manufacturing line, which aligns with our full year expectations. Excluding this lot, third quarter ZILRETTA non-GAAP margins would have exceeded 90%. Lastly, in the third quarter, EXPAREL margins were impacted by supply chain quality issues with several lot failures caused by faulty components, as well as write-offs of certain backup parts previously purchased to mitigate potential COVID-related supply chain risk. These charges were specific to the third quarter, with no impact on the lots that were released. Looking ahead, we expect fourth quarter margins to rebound into the high 70s, resulting in full-year margins one to two points better than 2021, and then resume at a two to three point per year improvement until we reach full-year total gross margins in the mid-80% range. While we are currently not providing 2022 revenue or gross margin guidance, given continued market uncertainties, 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 visibility improves. Turning to expenses, third quarter non-GAAP R&D expense was $17.6 million reflecting ongoing investments in our clinical stage pipeline. Today, we are reiterating our full year non-GAAP R&D expense guidance of $75 million to $85 million. Our third quarter non-GAAP SG&A expense was $52 million. We currently expect full-year non-GAAP SG&A expense to come in at the low end of our guided range of $220 million to $230 million. Interest expense was $9.9 million for the third quarter of 2022. To remind you, most of the interest expense relates to our Term Loan B financing, which has a floating interest rate of SOFR plus 700 basis points. The remainder of the interest expense is primarily related to our convertible notes. For modeling purposes going forward, based on current interest rates, interest expense will be approximately $10 million per quarter. Other expense was $10.6 million for the quarter and includes a $10 million impairment charge for an equity investment. Turning to taxes, our GAAP P&L includes a third quarter tax expense of $2.8 million, which translates into a GAAP effective tax rate of 133%. This was driven by permanent differences related to expenses not allowed for tax purposes, namely the operating loss of our non-US business and the write-off of the equity investment. For non-GAAP purposes, our adjusted results reflect an effective tax rate of 29% for the third quarter and 27% year-to-date. We expect an effective tax rate for our full-year adjusted net income for 2022 of 26%. And lastly, despite challenging market conditions, we delivered another quarter of significantly positive adjusted EBITDA of $55 million. In summary, Pacira continues to operate from a position of financial strength. Despite ongoing headwinds, we continue to deliver impressive financial results and remain bullish on our 5-year plan for year-over-year top-line growth in the mid-teens in 2023 and beyond, gross margin improvement 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.

Thank you. We will now begin the question-and-answer session. Our first question comes from Gregory Renza of RBC Capital Markets. Gregory, your line is open.

Great, thanks. Good morning, Dave and team. Thanks for taking my question and congrats on all the progress. Dave, maybe more of a question for Charlie as well, I appreciate all the color about the business as you look to fourth quarter and of course 2023. And while understanding you'll maintain the status quo on the pre-reporting and appreciating the uncertainty with the larger dynamics, I'm just curious, how are you thinking about the process for getting comfortable with predictability and for forecasting in greater increments beyond monthly? What are those pushes and pulls? And how would that process be influenced with the evolving dynamics there? Thank you very much.

Thank you for your question, Greg. The market remains unpredictable. In recent months, we’ve experienced weeks of strong performance followed by unexpected downturns, then back to strong weeks. What we really need to enhance our outlook is some consistency in our weekly numbers, which would allow us to make more reliable short-term predictions. We appreciate providing monthly figures as they spark worthwhile discussions with analysts. Ideally, we would like to give annual revenue guidance, but currently, I would only feel comfortable doing so with very conservative estimates. For instance, over the past two weeks, we saw a 40% difference between two Mondays. The first couple of weeks in October were weak after a robust September, followed by a much better performance in the last two weeks. This inconsistency makes it challenging to confidently project future trends, even though the overall business is strong and growing. Predictability on a weekly basis remains elusive.

Yeah. That makes a great deal of sense. We appreciate that. And maybe if I could, Dave, just sneak one in on iovera°. And certainly nice to see some of the progress with Gen 2, of course, and you mentioned the spasticity and the expansion there. When we think about iovera° contribution longer term, and as you have laid out nicely the longer-term top line to 2030 across the various aspects of the business, how does iovera° factor into that? I do recall seeing the collective opportunity I think in your past presentations about in excess of $200 million. I'm just curious if you had any updated thoughts on those targets. Thanks.

Thank you, Greg. When we acquired the iovera° system from MyoScience, we initially discussed a potential market opportunity of $200 million. It's not surprising that we faced challenges during its launch, including two attempts hindered by COVID-19, which disrupted our plans. At present, we observe considerable interest in iovera° in the market, particularly from sources we didn't anticipate when we estimated the $200 million total value. The market has revealed a strong demand for blocking pain signals from surgical wounds to the brain, as well as from the brain to various body parts. Furthermore, the interest in treating spasticity has grown, and we have several indications for utilizing iovera° in pain management. We are currently investigating a medial branch block aimed at alleviating spine-related pain, which complements our initial application of the device that performed well in clinical tests but faced challenges in practical use. The new version of the device is more reliable and consistent for our customers. The marketplace is actively looking for guidance on how to manage spasticity-related pain, and our advisory boards have confirmed the need for on-label solutions that will enable us to train users while researching treatment options. We expect to conduct a modest trial against a placebo, which will allow us to obtain a 510(k) indication relatively quickly. While I can't disclose specific numbers or violate guidance, I can say that our expectations for iovera° exceed the initial $200 million projection related to total knee arthroplasty and peripheral knee pain. This may be a lengthy explanation for a straightforward question, but it reflects the significant developments surrounding iovera°. When Paul Winston speaks at events globally, we receive immediate responses from interested parties wanting to acquire units and learn how to utilize this device. Additionally, experts in stellate ganglion blockade are eager to understand how to manage aberrant pain signals from the brain to different body regions. Our ongoing studies will focus on cardiac dysrhythmias, and we anticipate that finding ways to interrupt brain signals could yield numerous positive outcomes in patient care moving forward.

Thank you. One moment while our next question is loaded. Our next question comes from Serge Belanger of Needham. Serge, your line is open.

Hi, good morning. I guess a question for Dave to start off. Just to drill down on your prior answer regarding the continuing volatility in the market, can you just give us a little color on what you think is driving that volatility? Is it still staffing shortages? And whether or not your ASCs and HOPDs are operating at capacity?

It's mainly staffing shortages, Serge. When we speak with CEOs and those managing hospitals and ambulatory surgery centers, the lack of staff, particularly registered nurses and anesthesiologists in certain regions, is limiting the number of procedures they can perform. We are observing some modest improvements in ASCs, such as opening on weekends and extending hours for procedures like spine and knee surgeries, which were previously restricted due to insufficient nursing coverage in the post-anesthesia care unit. However, we are not back to normal. We have access to the same data as others, as we receive the Kruger report every Friday afternoon. Additionally, after having dinner with two hospital CEOs recently and speaking with clinicians daily, I can tell you that no one in this market believes that elective surgeries have returned to pre-COVID levels.

Okay. You talked a little bit about targeting 340B hospitals. Maybe just tell us a little bit about what that represents in terms of the TAM for EXPAREL? And what's the process and potential timelines to capturing that opportunity?

We began rolling it out in mid-July, and the response has been quite impressive. Several dozen people have already placed orders. There are over 1,000 accounts that have purchased EXPAREL but haven’t bought it through the 340B program, and they are currently our customers. Additionally, there are around 5,000 potential customers who have not previously purchased. Our innovation team and deal desk are collaborating closely with the field force to manage inquiries as they arise, ensuring we gather all necessary information and secure contracts with these hospitals for the 340B program. Initially, we are focusing on those already using EXPAREL who will purchase it under this different program. We anticipate that over the next few months, more hospitals that do not currently buy EXPAREL will begin to participate. We believe this presents a significant opportunity. To provide some context regarding timing, our 200-liter facility in Swindon is operational, and we have another 200-liter facility in San Diego that will manufacture product throughout 2023. This gives us the capacity to implement these changes. Furthermore, we are already involved in the 340B program with ZILRETTA, so we are well-positioned to take advantage of the opportunity to add EXPAREL to our offerings.

Thank you.

Thanks, Serge.

One moment, while our next question is loaded. Our next question comes from Gary Nachman at BMO Capital Markets. Gary, your line is open.

Hey, guys. Good morning.

Hi, Gary.

Can you quantify a bit with EXPAREL, how much you've been penetrating in women's health and also with peds? Are you seeing good uptake there relative to your expectations? Are you seeing any challenges in those markets? Maybe just talk about that a little bit. And then how much would lower extremity nerve block help you in terms of the market opportunity relative to the upper extremity nerve block? Is it all the same anesthesiologists that would be doing those? And do you think it would be adopted relatively quickly if you get that indication?

Thank you, Gary. I'll address your questions separately. We received approval for pediatrics in April 2019, focusing on the 64 largest pediatric hospitals in the U.S., and we've made good progress there. Our efforts have primarily centered around specific situations, particularly scoliosis and spine surgery, as well as conditions like cleft palate and clubbed foot within the Shriners' system. Initially, the adoption was centered on cases where these children faced repeated exposure to opioids over the next few years due to the nature of the surgical procedures requiring multiple visits to the OR. We're now seeing expansion, with teams asking us to educate them about appendicitis and various chest surgeries. We've realized that a key driver is same-day surgery, especially with nurse practitioners, who are even more prevalent in pediatrics than in adults. There's a strong desire to treat these patients shortly after surgery, coupled with concerns from parents about managing pain without relying on opioids, especially during the first night post-surgery. Several centers are developing protocols and need to gain experience to ensure that the pain management techniques they're employing will effectively control pain during that critical time. In women's health, the situation is somewhat different, particularly in obstetrics, with leading institutions like MD Anderson, Mayo, and Cleveland in the forefront. When we train these professionals, especially around C-sections, we're motivated by the desire for shorter hospital stays, as neither mothers nor babies want to be in a COVID environment. While we don't have an outpatient system set up yet, we can at least reduce hospital stay duration, which is currently the best option and what healthcare providers are actively seeking. During our training, we observe a notable increase in the use of pec blocks for mastectomies and breast reconstruction surgeries, indicating our process is evolving and growing. We're satisfied with our progress, although it's part of a broader mix of market activities. Our hospital customers are facing financial challenges, and staffing remains a significant concern, among other issues. Given the circumstances in which we've launched, we're pleased with 9% growth this year, with pediatric and women's health being significant contributors. Regarding the lower extremity nerve block, the situation is clearer. In many cases, hospitals or young anesthesiologists seek FDA approval before using new products, which contrasts with the past when physicians relied on their experience with effective products. Our business in foot and ankle is still developing, but it offers an opportunity for 96 hours of pain control, which is a significant advance. A 10 cc dose in the adductor canal block aligns with current best practices, as those performing 15 to 18 procedures are typically using 10 mL adductor canal blocks along with an additional 10 mL for periarticular injections. Many are still using a total of 20 mL—10 cc for the adductor canal and 10 cc for the posterior capsule. The potential market size, as mentioned by Roy, is about three million procedures in the lower extremity, and EXPAREL is already utilized in approximately 300,000 of those cases. This leaves around 2.7 million new patients as potential opportunities, which should progress faster than pediatrics or lower extremity nerve blocks given that EXPAREL is already being administered as a 10 mL dose in the adductor canal. This will alleviate pharmacy concerns regarding product availability linked to lack of approval, allowing younger practitioners seeking FDA guidance to also adopt the product more swiftly. Overall, we expect this process to advance more rapidly than previous procedures we have discussed.

Okay. That's really helpful. And if I could just squeeze one more quick one on ZILRETTA. Just for current use, how much of it is already being used with diabetic patients? I know that's something that a previous company had talked about. Is there any awareness of the potential benefit there with diabetics? I'm just curious how important you think having that diabetic data will be to accelerate that product?

It's very surprising, Gary, how little understanding of the glycemic spikes that are being caused by IR triamcinolone acetonide. It's very well understood by the endocrinologists, and the folks who are helping us write these protocols are actually treating these diabetic patients when they end up in the ICU because of these glycemic spikes. Even our KOLs, even some of the folks that are most friendly to the company and help us with all of our protocols had no idea that this was a clinical issue in the marketplace. So we think it's quite important. When the docs have seen the data, they've said, well, hell, this is crazy. I'm going to start treating my diabetic patients, especially because we have a J-code, right? So they can treat in the office. They have a J-code. It's an easy way out for them relative to all the displacement in that marketplace because of the HA issues and some of the other things that are going on. So we think that this is going to be really important for patient care. And just to put a stamp on it here, about 30% of the patients who have adult OA knee pain, who are part of the medical system and being treated by physicians are diabetics. So it's a big number. It's millions.

Yes. Okay. Great. Thanks, Dave.

Okay.

Thank you for your questions. At this time, I would like to turn it back to David Stack, Chairman and CEO for closing remarks.

Thank you Amber, and thanks to all on the call today for your questions and your time. As you can see, we're making great progress on all fronts, and 2022 is setting the stage for an even more exciting 2023 and beyond. Moving forward, with EXPAREL continuing to drive significant and durable operating cash flows, we're well positioned for near and long-term value creation by growing our commercial portfolio through increased market penetration, new indications, and enhanced reimbursement, while simultaneously advancing new product development opportunities. The global acknowledgment of the need for non-opioid pain management is unequivocal, and our leadership position in this field offers us significant and growing opportunities for years to come. We look forward to keeping you updated on our progress. Next for us is the Jefferies Conference in London and the Piper Conference in New York. Thank you. Stay well. Bye for now.

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.