Good day and thank you for standing by. Welcome to the Quarter Four 2022 Pacira BioSciences, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Susan Mesco. Please go ahead.

Thank you, Chris, and good morning, everyone. Welcome to today's conference call to discuss our fourth quarter 2022 financial results. Joining me on the 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 are here 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 will start today's call with prepared remarks covering recent business highlights before turning to your questions. 2022 was another strong year for Pacira as we continue to outperform the elective surgery market, operating from a position of financial strength. We posted record revenues of $667 million in 2022, a 23% increase over 2021. Our growing top line, combined with ongoing operating discipline, drove significantly positive adjusted EBITDA of $213 million for the year and $59 million for the quarter, as well as adjusted diluted earnings per share of $2.59 for the year and $0.80 for the quarter. Our performance enables us to fund internal and external growth initiatives while optimizing our balance sheet with the planned prepayment of our term loan B. This marks our ninth consecutive year of positive adjusted earnings, a record we are proud of. Now looking at our EXPAREL franchise, I am pleased to report that we have treated more than 12 million patients in the United States. Regional analgesia techniques performed by surgeons and anesthesiologists continue to be a substantial growth driver. EXPAREL is facilitating a significant shift in patient care by enabling same-day surgeries and accelerating recovery times. Surgical procedures are progressively moving from inpatient to outpatient settings at increasing rates. Recent IQVIA procedural data shows that for hospital inpatient procedures, there was a year-over-year decline of 7%. While EXPAREL remained flat year-over-year, interest in women's health led to a 26% increase in the use of EXPAREL for C-sections in the inpatient setting. The outpatient procedure market saw a year-over-year increase of 5%. EXPAREL continues to significantly exceed market growth with a 13% year-over-year increase. Strong growth is noted in key outpatient procedures, including total joints with a 22% increase, spine with a 17% increase, and breast and gynecologic oncology with over 10% increases. For reference, these IQVIA data points are summarized in our investor deck available on our website. In 2023, we will continue supporting the market's shift through patient-centric initiatives. On the manufacturing front, we have optimized our capacity to supply over $1.4 billion worth of EXPAREL annually at the current price. Improving gross margins is a top organizational priority. We have addressed several supply chain and manufacturing issues that negatively impacted our margins in the last three quarters of 2022. We expect to see full-year margin improvements in 2023, aiming to reach the mid-80% range over time. Specific updates for EXPAREL include our expectation of securing FDA approval in the coming weeks for an improved product release assay that will enhance our batch failure rate, benefit margins, and support additional intellectual property protection. EXPAREL test batches from our 200-liter manufacturing facility in San Diego are underway, keeping us on track for a supplemental new drug application in 2023. Our new ZILRETTA fill line is in the qualification phase, expected to enhance future quality and yield to support anticipated CRE growth. For ioveraº, with our new contract manufacturer fully online, we are now seeing lower unit costs and volume expansion, which benefits margins. With increasing manufacturing capacity and improving margins, we are advancing new programs to drive EXPAREL volume growth and expand its use in outpatient settings. Starting with patient access, in October, we rolled out 340B pricing for EXPAREL. This initiative allows us to expand access for uninsured or low-income patients, populations particularly vulnerable to opioid addiction and those that can greatly benefit from EXPAREL-based, opioid-sparing regimens. We are seeing the results we anticipated after 17 weeks, with increases in both 340B and non-340B purchasers, amounting to a 5% discount to our overall net selling price. We believe this program will drive significant volume expansion within existing and new 340B business, representing nearly 10 million EXPAREL-relevant market procedures. We expect the 340B pricing program to be neutral to slightly accretive to net revenues by the end of 2023 as we access a significantly larger pool of patients and their surgeon providers in outpatient procedures. Importantly, 340B will enable us to leverage the new NOPAIN Act, which mandates CMS reimbursement for non-opioid postsurgical pain treatments in outpatient settings starting in 2025. Signed into law in December, NOPAIN provides a reimbursement pathway for nearly 20 million EXPAREL-relevant market procedures, with commercial and self-insured payers expected to follow CMS. We are actively working on implementation acceleration prior to 2025, possibly through a technical amendment or regulation. We believe that policymakers in Washington, D.C. understand the urgency of improving access to non-opioid options given the epidemic of drug overdoses, particularly involving opioids. NOPAIN and 340B are particularly vital for hospitals as they navigate lower-margin soft tissue procedures to enhance hospital outpatient sites. Both programs will support eligible health care systems in offering non-opioid pain control while advancing our mission of providing non-opioid pain management solutions for as many patients as possible. Our support for the critical need for opioid-sparing pain management is evident in our Pacira Innovation and Training Centers and through our in-field educational events. In 2022, our educational programs provided ultrasound-based training to over 6,000 physicians for specific regional blocks with erector spinae, transverse abdominis plane, and pectoralis being the most requested EXPAREL workshops. Our ioveraº workshops are also meeting the rising interest in long-acting drug-free nerve blocks. These educational initiatives for EXPAREL and ioveraº also raise awareness of ZILRETTA among our surgeon customer base who are seeking alternatives for non-opioid office-based osteoarthritis pain management solutions. With the recent opening of our second innovation and training center in Houston, we have doubled our capacity to host impactful education programs. This advanced facility includes a 125-seat adaptive lecture hall, broadcast studio, wet and dry lab space for cadaver labs and interactive workshops, and advanced ultrasound with artificial intelligence training software. Notably, it is the only facility in the United States offering simulation-based block training with computerized phantoms for user training and scoring. Our EXPAREL growth initiatives are backed by a strong and expanding patent estate. We currently hold eight Orange Book-listed patents, and any potential generic must successfully navigate every claim within each patent to establish bioequivalence at commercial scale. With no viable alternatives for long-acting non-opioid postsurgical pain management, we are very confident that EXPAREL will maintain its solid position as the branded market leader for many years to come. Internationally, we are making steady progress. We recently appointed a new international general manager, strengthening our efforts to develop the business, including securing EXPAREL access from hospital pharmacy departments. Long wait lists for elective surgeries are overwhelming health care systems in the United Kingdom and Europe, and we believe EXPAREL can contribute to enhancing this situation through more rapid recoveries. In Latin and South America, our partner EuroPharma has submitted for regulatory approval for EXPAREL in Brazil in December, and we are now focused on submitting for approval in additional countries. On the regulatory front, last month, we submitted our supplemental new drug application to the FDA, seeking to expand the EXPAREL label to include lower extremity block procedures. This timeline keeps us on track for approval in the fourth quarter of this year. Complementing EXPAREL, ZILRETTA and ioveraº are targeting attractive pre-surgical market segments. Last month, we held our annual national sales meeting, where we aligned and trained our full 240-person field force base team as a unified entity, with all account managers now responsible for selling all three products in our portfolio. This realignment results in smaller sales territories, significantly increasing our outreach and frequency, and we expect a threefold increase in ZILRETTA and ioveraº sales calls. We also have several value-creating milestones lined up for the next 12 to 24 months for ZILRETTA and ioveraº. For ZILRETTA, we are now promoting safety data that highlights its benefits for diabetic patients suffering from osteoarthritic knee pain. This data, which shows clinically meaningful reductions in glycemic spikes, will be presented at the Osteoarthritis Research Society World Congress in Denver next month. Roy will provide more details on this momentarily. For ioveraº, we are launching new commercial initiatives this quarter targeted at the cash pay market, inspired by platelet-rich plasma and stem cell injections. This presents a significant lifestyle market for drug-free nerve blocks that offer immediate pain relief lasting several months for patients seeking a better quality of life. We have sealed a multiyear agreement for ioveraº to be the official non-opioid pain management partner of the Ladies Professional Golf Association. Through direct-to-consumer strategies, we will raise awareness of ioveraº's benefits and how to access the product using commercial broadcast, digital advertising, and in-person presence at key tournaments nationwide. Our customers are also utilizing ioveraº for treating pain related to spasticity, which is an on-label application. We are on track to initiate the registration study for spasticity treatment around mid-year. In spasticity, ioveraº has the potential to transform treatment. Approximately 10.2 million patients in the United States are currently diagnosed with spasticity, of which 2.6 million have moderate to severe forms. Although 42% of these patients have received at least one treatment modality, only 150,000 currently receive treatment with toxin, highlighting a significant unmet need in the market. Beyond our advancements for our commercial portfolio, we have an exciting pipeline of early-stage product development opportunities, including PCRX 201, a novel intracellular gene therapy product candidate producing IL-1 RA for neo-osteoarthritis. Our preliminary Phase 1 safety and efficacy data are promising, showing the greatest efficacy at the lowest dose. These findings will be shared at orthopedic and gene therapy meetings in the upcoming months. We continue to make progress on our internal multi-visit liposome pipeline, with our Phase 1 study of EXPAREL for intrathecal administration on track for completion this quarter. We will also commence Phase 1 studies for our multivesicular liposome dexamethasone formulation for low back pain and the 20-milligram multivesicular liposome bupivacaine formulation as a nerve block or field block for chronic pain later this year. In addition to our internal efforts, we have a portfolio of externally sourced innovations that provide us opportunities to participate in the development of several promising product candidates targeting pain management along the neural pathway, aimed at serving our current customer base. These opportunities include strategic investments in Spine Biopharma, Genosense, GQ Biotherapeutics, and Cartronics. With that, I'd like to turn the call over to Roy Winston, our Chief Medical Officer, to summarize more details on some of the upcoming near-term value drivers from our clinical programs.

Thanks, Dave. This is an exciting time, not only for us at Pacira, but for patients, providers and payers seeking safe and effective opioid-free options for pain management. I'll start with our lower extremity nerve block. As Dave mentioned, our supplemental new drug application has been submitted to the FDA, and we are awaiting official acceptance, which is expected to come by a standard 74-day letter which will include our PDUFA date. To remind you, the basis of the submission are two Phase 3 studies. The first study was a single dose femoral nerve block in the adductor canal for total knee arthroplasty, and the second was a single dose sciatic nerve block in the popliteal fossa for bunionectomy. Both utilize the 10 ml dose, which is 133 milligrams. Both studies achieved the primary and key secondary endpoints of statistical significant reductions in postsurgical pain and opioid consumption from zero through 96 hours when compared to the active comparator, bupivacaine. These data provide strong evidence for label expansion to include these two new indications and should support a superiority claim for EXPAREL over bupivacaine in the new label. We believe adding these two additional nerve block indications will significantly extend our reach into surgeries of the knee, media lower leg, foot and ankle, representing more than 3 million annual procedures. Working with key opinion leaders, we've begun to publish these data to deliver strong evidence in the literature and incorporate them into society practice guidelines to use EXPAREL as a nerve block in lower extremity procedures. We were also on track to begin the pediatric study later this year that is designed to support the expansion of our U.S. and EU label to include patients from zero to six years of age. We look forward to minimizing exposure to opioids in this very vulnerable population. Turning to ZILRETTA. In March, investigators will present the results of a Phase 2 study of patients with knee OA and type 2 diabetes. Participants were randomized to receive ZILRETTA or immediate-release triamcinolone and compared glycemic spikes for the two groups. ZILRETTA was associated with a clinically meaningful reduction in hyperglycemia versus triamcinolone, suggesting that ZILRETTA treatment leads to fewer short-term hypoglycemic-related adverse events. In addition, the ZILRETTA group had significantly longer duration in the target glucose range, which helps improve glucose management, improve patients' well-being and reduce complications and health care utilization. Remember that approximately 50% of patients being treated for OA knee pain also have type 2 diabetes or are pre-diabetic, which is especially important for those needing repeat corticosteroid dosing or those that have bilateral knee disease. We also expect to initiate a new ZILRETTA label expansion study around the middle of this year. This includes a Phase 4 diabetes safety study in knee OA and Phase 3 Shoulder OA study. Our shoulder study would position ZILRETTA as the first and only approved corticosteroid for shoulder osteoarthritis. Both studies will evaluate ZILRETTA versus triamcinolone with the goal of adding a superiority claim to the ZILRETTA label, and equally as important to place ZILRETTA into orthopedic and pain management society guidelines as the new standard of care. Turning to ioveraº, we are excited about what we are seeing in using ioveraº for the treatment of spasticity itself. As Dave mentioned, treating the pain associated with spasticity is already on label, and we are now educating physician specialists around the value of ioveraº in this setting. In parallel, we are launching a registration study to evaluate ioveraº as a revolutionary new treatment for spasticity itself. This is based on strong data from the research of Dr. Paul Winston, President of the Canadian Association of Physical Medicine and Rehabilitation. Dr. Winston and his team recently presented data from his ongoing work in spasticity at the Annual Meeting of the Association of Academic Physiatrists, which was held in Anaheim last week. Presentations included data from 59 patients participating in an ongoing study evaluating cryoneurolysis as a treatment for upper extremity spasticity, demonstrating progressive functional improvement over a 180-day follow-up period. Data from three ongoing observational studies evaluating cryoneurolysis for managing upper and lower extremities spasticity were presented to characterize the safety profile of cryoneurolysis. Data from 113 patients demonstrated low and easily manageable side effect profile. A case study report of a 42-year old male with spastic hemiplegia following a medial cerebral artery stroke, the patient had a 10-year history of physical therapy and botulinum toxin injection therapy. After receiving ioveraº treatment one- and three-month follow-up showed a highly clinically significant improvement in shoulder movements, elbow and wrist extension, and ankle dose inflection. The patient also reported immediate pain relief. We have met with the FDA and expect to kick off our spasticity-label expansion study in the second quarter of this year of 2023. The study will evaluate ioveraº versus sham in adult patients, and enrollment is expected to conclude before the end of the year. Because ioveraº is a 510(k) device, we anticipate a review timeline of three to six months, which would place us on the market for the treatment of spasticity as early as the second or third quarter of 2024. We are also planning a second active comparator study in spasticity designed to demonstrate the superiority of ioveraº versus toxic. It is our belief that iovera can completely disrupt the current spasticity treatment paradigm, bringing tremendous relief to patients and value creation for Pacira shareholders. Lastly for ioveraº, we have completed the study evaluating ioveraº versus radiofrequency ablation as a medial branch block to treat low back pain. We expect to present these data at a scientific conference before the end of 2023. With that, I'll turn the call over to Charlie for his financial overview.

Thank you, Roy, and good morning, everyone. I'll start with some commentary on our 2022 results and then walk through our outlook for 2023. To remind you, I will be discussing non-GAAP financial measures this morning. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release we issued this morning. Let's begin with an update on sales and margin trends. Starting with EXPAREL, where we continue to outperform a flat surgical market, with net EXPAREL sales coming in at $536.9 million for the year and $138 million for the quarter. Fourth quarter average daily volume growth of 6% was partially offset by a lower net selling price due to our implementation of 340B drug pricing in October 2022. ZILRETTA continues to be a highly meaningful and accretive addition to the Pacira portfolio, adding $105.5 million post-acquisition sales to our top line in 2022. We saw improving sales trends for ZILRETTA as we exited the year, which we expect to accelerate as we broaden education and awareness around its value in treating patients, especially those with unique care needs such as diabetic patients. For ioveraº, full year sales of $15.3 million. We expect demand and sales growth to gain momentum in 2023 and beyond, with the launch of new commercial initiatives in the cash pay and spasticity pain market, as well as education and awareness collaborations with professional sports organizations like the NFL Alumni Association, the PGA Tour Champions and the LPGA. We also remain optimistic in ioveraº within new indications such as the treatment of spasticity and medial branch blocks where we are making new clinical investments. Turning to gross margins. On a consolidated basis, our total non-GAAP gross margin percent was 74% for the full year and 72% for the fourth quarter. Fourth quarter gross margins by product were 71% for EXPAREL, 82% for ZILRETTA, and 58% for ioveraº. EXPAREL gross margins in the fourth quarter were negatively impacted by new operational challenges including slightly higher-than-anticipated batch failures and the scarcity of one disposable part used in our manufacturing equipment. The supply of this part has now been replenished and we have not experienced elevated batch failures since early in the first quarter of 2023. Fourth quarter non-GAAP R&D expense was $15.7 million, reflecting ongoing investments in label expansion studies as well as our clinical stage pipeline. For the full year, non-GAAP R&D was $78.2 million and in line with our guided range of $75 million to $85 million. Our fourth quarter non-GAAP SG&A expense was $54.7 million. For the full year, non-GAAP SG&A expense was $219 million, slightly below our guided range of $220 million to $230 million. Interest expense was $11 million for the fourth quarter of 2022. To remind you, most of the interest expense relates to our term loan B finance, which has a floating interest rate of SOFR plus 700 basis points. The remainder of interest expense primarily related to our convertible notes. In December, we made a $50 million prepayment of outstanding principal under our term loan B, and we expect to use strong cash position to make another significant prepayment around the middle of 2023. We are also actively evaluating options to refinance the remainder of the Term Loan B by the end of the year. For modeling purposes, based on current interest rates and the current outstanding balance with only the required minimum payments of principal of $9 million per quarter, full year interest expense will be approximately $37 million. As discussed in today's press release, we are returning to our pre-pandemic standard practice of providing annual financial guidance, and we are discontinuing monthly sales updates. For sales, full year product guidance is as follows: for EXPAREL, we are currently guiding to 2023 global sales of $570 million to $580 million, which is in line with the year-over-year growth rate in 2022. Given ongoing macro uncertainties outside of our control, we believe this is very achievable given several growth initiatives that we expect to kick in as 2023 progresses such as volume expansion for existing for new 340B customers, as well as new initiatives with OMFS, plastics, outpatient, sports management, and pain management and rehabilitation health care providers, and our ongoing expansion in European markets. With respect to cadence, we anticipate 2023 EXPAREL sales to be more heavily weighted to the second half of the year with historical trends of roughly 20% in the first quarter, 25% for both the second and third quarters, and nearly 30% in the fourth quarter. Importantly, we remain very bullish on our long-term EXPAREL growth prospects and fully expect that once we are on the other side of the current macroeconomic challenges and elective procedure market normalizes, EXPAREL will return to steady double-digit year-over-year growth. For ZILRETTA, we are guiding to 2023 sales of $115 million to $125 million. And for ioveraº, we are guiding to full year sales of $17 million to $20 million. On the expense side, full year guidance for 2023 is as follows: non-GAAP gross margins of 76% to 78%. We expect margins to strengthen modestly during the year as sales volumes grow and acknowledge that first quarter margins may be slightly lower than our full year gross margin guidance range due to the late 2022 manufacturing challenges that spilled over into early first quarter operations. Non-GAAP R&D of $70 million to $80 million, which is consistent with 2022; non-GAAP SG&A expense of $220 million to $230 million, which is also consistent with 2022; finally, stock-based compensation, which is expected to be in the range of $51 million to $54 million. In summary, despite ongoing macro headwinds, Pacira delivered impressive financial results in 2022 with adjusted EBITDA of $212.7 million for the year and $58.8 million for the fourth quarter and adjusted diluted earnings per share of $2.59 for the year and $0.80 for the quarter. We remain bullish in our five-year plan with year-over-year top line growth turning to teens once elective surgery market normalizes. Gross margin is improving, modest year-over-year increases in operating expenses and adjusted EBITDA margins that exceed 50%. That concludes our prepared remarks. I'd like to turn the call over to the operator to begin our Q&A session.

Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from David Amsellem of Piper Sandler. Your line is open. You may go ahead with your question.

I have a few questions. First, regarding the guidance, could you elaborate on what it implies? I apologize if I missed this earlier, but could you discuss the implications for net pricing direction and the overall impact of the 340B pricing program and the discounts you are offering? Secondly, can you explain what the guidance suggests about new customer additions? You mentioned that you expect volume growth to drive top-line improvement in 2023 and beyond, so I'm trying to understand what you are factoring in regarding new customer additions. Lastly, could you share your perspective on the surgical environment, particularly concerning soft tissue? What is your view on when you expect that area to recover, considering the current trends? Do you anticipate any normalization in the soft tissue market in 2023, or do you view it as a longer-term process?

Thank you, David. Regarding our guidance, our current forecast indicates a 5% discount from gross to net. I believe you understand this well. As we attract new customers through the 340B program, we notice a blend of 340B and non-340B purchases. We're somewhat surprised that many hospitals are dividing their purchases between the 340B program and standard ASP plus sales. We feel we've already experienced the worst of this situation. Since 340B buyers began purchasing at the end of October, we are seeing more activity from hospitals that were previously non-340B buyers as well. Additionally, many of these transactions are not occurring at the 340B pricing levels. Everything is unfolding as we anticipated, although there is still work to be done in continuing this transition. We believe that 5% is likely the maximum discount we'll face if that's a fair characterization, and we expect it to improve as we expand our customer base. Furthermore, we view 340B as an opportunity to engage more hands-on customers, including their surgeons and anesthesiologists, which will ultimately streamline the access to EXPAREL during the formulary process once we introduce NOPAIN. I trust that answers your question. If it doesn't, please reach out again. The points I just covered relate to our new customer acquisitions. We have a group of customers who are nearly exclusively 340B, which aligns with our expectations. We're also welcoming new clients. Some hospitals that previously purchased EXPAREL are now less resistant due to our involvement with 340B and some have even started promoting EXPAREL as a more economically viable option in specific cases, especially as we prepare for NOPAIN, which will allow them to treat all CMS patients in outpatient settings and receive full reimbursement. Overall, things are progressing as we anticipated early on, which is promising for us in terms of opening new markets. With regards to soft tissue, it's intriguing; ASCs are primarily focused on high-margin procedures like joint and spine surgeries, which limits our reimbursement opportunities in that area. Insurance companies are saving significant amounts by transferring cases to ASCs, which reduces the incentive for them to reimburse $300 for EXPAREL in soft tissue procedures. Consistently, over 75% of EXPAREL usage in ASCs has been for orthopedic procedures, leaving soft tissue surgeries overlooked—these are lower margin and hospitals struggle to perform them due to inadequate reimbursement. Consequently, in outpatient settings, patients often receive bupivacaine and opioids as these are more affordable for them; bupivacaine is cheap and opioids are perceived as costless since they can be prescribed and filled in an outpatient environment. When discussing the potential for reimbursement, hospital representatives generally express a desire to use EXPAREL if it were financially feasible considering their operational costs associated with these procedures. A noteworthy observation is that when patients require soft tissue surgeries but don't get them within a reasonable timeframe—around six months to a year—they likely adapt to living with their pain. The data indicates that millions of patients still need soft tissue surgeries post-COVID, but we aren't seeing that reflected in market demand. The pent-up demand in orthopedics is tangible because patients need pain relief to maintain their daily activities and work, while for soft tissue, it seems many have accepted their pain levels, indicating a significant gap compared to the backlog of procedures that went unperformed over the last three years.

This question comes from Glen Santangelo of Jefferies. Your line is open.

Dave, I also want to follow up on some of the questions that David just asked with respect to EXPAREL and sort of your outlook. If I kind of go back to fourth quarter, you said in your prepared remarks, right, that you're continuing to outperform the elective surgery market. And then I think later in the remarks, you seem to suggest that volume grew 6% in the quarter in a flat surgical market. Did I hear that correctly with the offset in 4Q, maybe being some of the pricing differences on the 340B program, in particular, that you talked about? Is that a fair assessment of what happened in 4Q?

It is, Glen. Yes.

Okay, perfect. So then if we go to your guidance for 2023, you're forecasting 7% growth at the midpoint, which would that imply sort of low double-digit, sort of volume growth, with a similar type of pricing impact? And I'm not sure embedded within those assumptions, what you're expecting for the overall surgical market based on that assumption.

The difference in our guidance is due to the price increase. In early January, we raised the price of the 10 ml by 8% and the 20 ml by 3%. Your observation is absolutely correct. If we take into account a net benefit of about 3% from the price increase, that brings our guidance down to the 7% to 8% range, which aligns with what occurred in 2022. We aimed for conservative guidance based on that data, considering that the primary issue affecting the market is inflation. If the macro environment changes, then our guidance would indeed be conservative, which was our goal.

Perfect, okay. My final question relates to the competitive landscape. You mentioned bupivacaine and the availability of some opioids to surgery centers. Can you discuss the pricing difference between EXPAREL and how you think it impacts overall utilization? Do you believe this is more of a pricing issue or is it related to macroeconomic factors and the overall surgical volume?

Thank you, Glen. That's a three-credit course. In the hospital, we operate within the DRG environment, which is not changing. I raised that issue in our discussions in Washington D.C., and it's a sensitive topic for the Democrats regarding health care. They won’t even consider providing one-time reimbursements for surgical bundles related to inpatient care. For outpatient services, where we utilize ASCs, the advantage is significantly diminished because insurance carriers save 30% to 35% on procedure costs, leading them to fill most of ASC capacity with high-margin procedures like joints and spine surgeries. Soft tissue procedures, which are more challenging due to reimbursement rates in the inpatient market, are better suited for the outpatient market because of the improved cost structure in hospital outpatient departments. However, many hospitals across the United States, particularly in low-income and underserved areas, can't afford to use anything but the most basic options, and reimbursement is lacking. I have spoken to numerous individuals in these areas. The importance of 340B is crucial for giving these facilities a chance to purchase EXPAREL at a reduced price, helping us fulfill our mission to provide an alternative to opioids for as many patients as possible. There are still many areas, particularly in rural Florida, where even at the 340 price, EXPAREL remains unaffordable. This pricing situation is critical, which is why the NOPAIN Act is significant. The NOPAIN Act will compel CMS to reimburse for non-opioid pain medications for patients in rural areas, which we believe will lead to a significant increase in the use of EXPAREL. In that soft tissue market in rural locations, cost is indeed a barrier for surgeons when considering the product.

This question comes from Gregory Renza of RBC Capital Markets. Gregory, your line is open.

Congrats on the progress. Maybe just a few for me. Maybe building on the prior theme as well. Dave, I know you touched on this a little, but could you just comment about your approach to the organic price increases with respect to EXPAREL? How are you strategizing about that, especially with maybe more patients coming online? Do we kind of think about it as in line with historicals? Or are there other considerations that you and the team are considering?

Thank you, Greg. To respond to your question, I'll refer back to January. The effective dose for many of our historically treated procedures is 20 ml. In the trials Roy mentioned for lower extremity nerve block, we anticipate launching that later this year and early next year. Both the 96-hour pain reduction and opioid consumption in those trials were accomplished with a 10 ml dose. One of our rapidly growing sectors is oral maxillofacial surgery, typically using a 5 ml dose per tube, with many extractions also requiring a 10 ml dose. For various pediatric procedures, not related to large abdominal or orthopedic surgeries, we often see a 10 ml dosage as well. Hence, we have a range of surgical procedures where 10 ml serves as the procedural dose, providing several days of pain control and reducing opioid use. Our initial strategy aimed to minimize the difference between the 20 ml and 10 ml doses, as similar outcomes can be achieved with a lower dosage across different surgical procedures. Your question is particularly relevant as we move forward. Our expectation is that with the achievement of TRICARE and NOPAIN, around 75% of our total addressable market will be reimbursed by 2025. We have stated our intent to implement price increases aligned with CPI and do not plan a drastic 40% increase. We are aware of models in our field suggesting that such approaches may backfire. Therefore, we foresee CPI-related increases moving forward. Regarding ioveraº, it’s crucial for us to enhance gross margin, which gives us more strategic flexibility to assist more patients. Our goal is to reduce the cost of goods sold for ioveraº, especially as we venture into stellate ganglion blockade for spasticity. In contrast to competitive options priced in the thousands, we aim to keep ioveraº around $500 to support patients facing considerable challenges in pain management. I hope this clarifies your question. We do not plan to take undue advantage of reimbursement opportunities. Instead, we envision a strategy directed by CPI while ensuring fairness to our shareholders by balancing any increases with our annual merit raises for employees. Our focus will be on maximizing volume and lowering COGS to improve gross margins by selling all that we can produce when our two 200-liter facilities are operational. Looking ahead to 2024, we anticipate the capability to produce over $2 billion worth of EXPAREL. If we can achieve margins in the mid-80s, I would prefer to sell every vial instead of raising prices in a way that feels inappropriate given our mission.

Great. That's really helpful. Maybe just one last quick one and helpful to have you and lay out the lower extremity and sNDA. I'm just curious how you're thinking about prospects for an AdCom? Are you preparing for one? What is the likelihood there?

Yes. I'll comment on this and see if Roy has any different thoughts. The p-value here is quite positive, and the data is remarkably impressive, especially with a 10 ml dose compared to bupivacaine. We observed a p-value of 0.007 for both pain control and opioid use with the 10 ml dose for the adductor canal, and 0.001 for the foot and ankle in the bunionectomy trial, which involved a sciatic block in the popliteal area. This trial also used a 10 ml dose, resulting in a p-value of 0.00001 for both opioids and pain control. I'm not trying to get ahead of myself, but we filed this in January and are progressing in the regulatory process. We'll receive our 74-day letter soon. I don't see any reason for anyone to suggest that they need assistance from the medical community in determining whether this product is valuable in the market. Roy, do you have any different ideas?

I'll just add one thing to that, Gregory. The other studies we've submitted for NDA and sNDA with EXPAREL have always been compared to a placebo. This time, however, we compared it to bupivacaine, and we demonstrated superiority in two studies. We're actually requesting a superiority claim on the label. One of the criticisms we've faced is that the FDA initially asked us to compare to placebo, and some people question why we don't use an active comparator. But both of these studies were against an active comparator. As Dave mentioned, it was only a 10 ml dose instead of the 20, and it showed meaningful clinical reductions and statistical significance. We're always prepared for an AdCom, but I believe the chances of that happening are very low.

This question comes from Oren Livnat of H.C. Wainwright. Your line is open.

Really appreciate you returning to guidance. A couple for me. Firstly, on the EXPAREL guidance, I noticed you said global sales for that. And I'm wondering if you can help quantify sort of the significance of ex-U.S. sales in 2023. And then on 340B, I appreciate your commentary about the, I guess, neutral to slight revenue accretion by end 2023. And I just want to understand that, does that reflect sort of steady uptake already that's begun eventually sort of surpassing that effective price decrease by year-end? Or is there a lag that we're still seeing and as expected, between the initial price increase and even beginning to see uptake in new customers or uptake in existing customers such that maybe in 2024, do you expect acceleration on that front with 340B? Or do we have to wait for NOPAIN to kick in, in 2025 ostensibly to see that acceleration?

Yes. The sales of EXPAREL outside the U.S. are not substantial in 2023. While we are performing well and experiencing rapid percentage growth, it won't have a significant impact on the 2023 figures. This is crucial for our future, but for now, we are still aligning our strategies and navigating the formulary process while educating users on effective product utilization. There's considerable interest in ioveraº in Europe, and we are training many specialists in spasticity across the continent. Paul Winston is regularly traveling there to conduct these trainings. While Europe holds promise, it won't be material in 2023. We have identified potential customers for 340B pricing based on our current list of EXPAREL buyers, forecasting a 5% conversion to 340B prices. As new customers join, we anticipate increased total volume, which will enhance gross margin, especially as we onboard more locations. We're reaching out to 340B hospitals that have not previously purchased EXPAREL, and they are starting to come online significantly. We expect growth throughout 2023, with most of the progress in transitioning from 5% towards neutrality occurring in the second half of the year.

On gross margins. I guess some of these issues have persisted a little longer than at least I had modeled through year-end. And I guess you mentioned a little bit of spillover. Can you just characterize how conservative your 2023 gross margin guidance is on that front? Are you leaving a little room for continued batch failures that may be now that you've had to be a little more conservative? Or are you assuming totally smooth sailing in that guidance and it's entirely sort of sales and volume based?

Yes, we are not providing a forecast for total sales at this time. There are a few factors to consider. We talked about a new in vitro test that we expect to get approved. We encountered issues where the current test, which is soon to be replaced, incorrectly led us to reject good lots due to some variations in the testing method. Fortunately, despite challenges in accessing supply, we have what we need to produce EXPAREL. It’s important to remember that we operated in the late 70% range previously. In our opinion, aside from the unique challenges we faced primarily because of the pandemic and supply chain issues, we are looking to return to more normalized levels similar to those before the pandemic. We anticipate gradually moving towards that as the year progresses and hope to see increased volume as a result.

This question comes from Andreas Argyrides of Wedbush. Your line is open.

Congrats on the progress. I have a couple of questions regarding the NOPAIN Act. What are some ways that the implementation of the NOPAIN Act could move up to 2024 from 2025? I'm trying to gauge the likelihood of this happening. Additionally, how do you see EXPAREL being included in the act as a long-term measure for the next three years? I also have some follow-up questions.

Yes, the original bill that was being considered in Congress had a start date set for 2024. We are collaborating with patient advocacy groups that support non-opioid treatment therapies for individuals from low socioeconomic backgrounds. We are actively engaging with Congress on this matter. It's possible that the House might introduce a technical amendment that could advance the start date to 2024, or that CMS could move the approved items for 2025 up to 2024 during their normal rule-making process, and we are part of those discussions. We will also be in Washington next week. The starting point is the tragic statistic of 107,000 overdose deaths. There are various options we are discussing, such as considering approval for 2024 for individuals with existing C codes or J codes, while potentially extending the approval for new candidates to 2025. Those are the current topics we are addressing. I can't predict the exact outcome, but there's a reasonable chance for a positive result as we assess the situation in February. Regarding the extension, Chris Christie, who is on our Board, mentioned that the government typically does not retract successful initiatives. The bill originally proposed a five-year duration, which has been reduced to three years. However, I believe we can be confident in this timeframe because the anticipated impact on healthcare will make it difficult for the government to reverse course after three years. We have successfully maintained ASC reimbursement since 2018, so we understand how to effectively advocate for our interests in Washington.

Okay, great. And then just a follow-up on lower extremities. To what extent would the results from the STRIDE study be factored into the FDA here?

The data is included. The question is, yes, it's a compilation of both, Chris. The STRIDE study, while it missed its 24-hour endpoint, was the first indication that we had, that we had a p-value of 96 hours. So the difference here in demonstrating even a larger data set to the regulators is that if you take care of the front end, and you use the standard of care that addresses pain in the first 12 to 24 hours, that we can extend the duration here. And that's what the whole strategy was around the clinical program. So, we will include both of these data sets and the package that goes to the FDA.

The other thing too is in the STRIDE study that those patients all had a general anesthetic. So when they woke up and it actually takes a little longer to set up than the bupivacaine comparator they had. And we never positioned EXPAREL ever as something to help you during the surgery, right? It's really for postoperative pain management. So, that's why we evolved the next two studies to be patients having regional anesthesia for the surgery, which is really the standard of what's practice out there today. If you're having bunionectomy, ankle or a total knee, most of those patients are being done with regional anesthesia for the anesthetic, a little sedation along with it and not a general anesthetic. So, I think when you look at the STRIDE study days two, three, four, we demonstrated, again, not the primary endpoint, but we did demonstrate really meaningful pain reduction that was superior to the active comparative bupivacaine for 24 to 96 hours, if that makes sense.

Our final question today comes from Greg Fraser of Truist Securities. Your line is open. Please go ahead.

Can you provide more details about the design and size of the registration study on spasticity? Will that study include other elements, or will those be addressed in a later study? Additionally, regarding the gross margin, can you specify how much this year's guidance has been affected by the 340B pricing or discounting program? What level of volume growth do you anticipate needing to reach your mid-80s long-term target?

I'll start and let Roy address the spasticity issue. Regarding gross margin, we've provided a response in a different context. The 340B program does not affect gross margin; it impacts net margin. Over time, we anticipate increased volume from 340B and NOPAIN. The approval of the 200-liter facility in San Diego for commercial sale by the end of this year will give us the chance to operate two 200-liter facilities. The gross margins from these two facilities will be significantly better compared to the longer-term gross margin potential of the 45-liter facilities we currently use for production. While the situation in Swindon, UK, shows improvement in variable costs, the fixed cost environment in San Diego will offer even greater improvements. Both 200-liter facilities will enhance gross margins. This is crucial as it allows us to explore the 340B program effectively. Currently, around 20% of the 340B procedures have transitioned from existing customers. The additional customers gained through the 340B program will contribute to gross margin improvements, and once we produce $2 billion worth of EXPAREL, annual price increases will help offset the associated discounts. As we approach the end of next year, the new business from these 340B customers and the volume increase at the gross margin level will help us reach a neutral position by year-end. It’s a complex formula, but it’s vital to recognize the involvement of additional surgeons using EXPAREL and the engagement of previously uninformed EXPAREL accounts, which is a key component of our NOPAIN strategy. The successful implementation of 340B has given us confidence in our prospects for NOPAIN, representing a significant opportunity to boost margins by expanding capacity and increasing patient access to non-opioid treatment options.

Thank you. That concludes our Q&A segment. I'll now turn the call back over to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, Chris, and thanks to everyone on the call for your questions and time today. As you can see, we're making steady progress and expect to deliver on a variety of value-driving milestones over the next 12 to 24 months as we grow product revenue, advance our clinical pipeline to expand product offerings, improve gross margins, increase cash flow and strengthen our balance sheet. The need for non-opioid pain management remains a global imperative. And as Pacira further solidifies its leadership role in this important work, we expect to have significant market opportunities and growth in the years ahead. We look forward to keeping you updated on our progress. Next up for us is the Barclays Conference in Miami. Thanks all, and stay well. Goodbye.

And thank you for your participation in today's conference. This does conclude the program. You may now disconnect. The conference will begin shortly.