Pacira BioSciences, Inc. Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Q1 2023 Pacira BioSciences Inc Earnings Conference Call. All participants are in a listen-only mode. After the speaker's 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 your speaker today, Susan Mesco, Head of Investor Relations. Susan, please go ahead.

Thank you, Grace, and good morning, everyone. Welcome to today's conference call to discuss our first quarter 2023 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; Ron Ellis, Chief Strategy Officer; and Charlie Reinhart, Chief Financial Officer. Roy Winston, Chief Medical Officer, is also here and will be joining us 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. The year is off to a positive start as EXPAREL continues to outpace the elective surgery market recovery as we expand utilization across key target markets and sites of care. We are focusing on three major objectives for 2023: growing revenues in a slowly recovering surgical procedure market, further advancing gross margins to the mid-to-high 70% range, and improving reimbursement across our portfolio with a specific focus on the NOPAIN Act and TRICARE. First quarter revenues of $160 million include EXPAREL sales of $130 million, and ZILRETTA also was a key contributor for the quarter with sales exceeding $24 million. These results are highlighted by solid growth in EXPAREL volumes as the rollout of our 340B program continues to expand volumes within both existing and new businesses. I'd also note that the first quarter of 2022 was unseasonably stronger than Q1 historical trends. Our significant top line is driving strong and durable cash flows that allow us to self-fund growth opportunities and significantly improve our debt leverage ratio by recently retiring our Term Loan B using cash on hand and a new term loan A facility. This new highly flexible debt carries a significantly lower interest rate projected to reduce interest expense by at least $15 million in 2023. We are also pleased to report our 24th consecutive quarter of significantly positive adjusted EBITDA of $42 million. As we have said, improving gross margins is a top organizational priority. We have addressed different supply chain and manufacturing issues that negatively impacted margins for the last four quarters. As a testament to our commitment to excellence in manufacturing, we recently welcomed Chris Young as our new Chief Manufacturing Officer. Chris brings more than 25 years of experience to Pacira and is responsible for overseeing all manufacturing activities and locations across our product portfolio. Additional progress on the manufacturing front includes our enhanced product release assay for EXPAREL. The FDA is reviewing our application for this new test, which we expect will benefit gross margins and support additional intellectual property protection. In parallel, we remain on track to submit a supplemental new drug application for our 200-liter facility in San Diego later this year. This will be another critical milestone towards improving EXPAREL gross margins. Turning now to more specifics on our EXPAREL franchise. We're pleased with our performance relative to the broader elective surgery market with EXPAREL volumes increasing by 6% year-over-year. To further illustrate this, let me highlight some key data points from our most recent site of care and procedural IQVIA data from October of 2022. These data show year-over-year growth for knee and hip procedures, while other orthopedic and soft tissue procedures decreased, with inflationary pressures causing patients to delay healthcare due to costs. In outpatient settings, the procedure market was up 1.2% year-over-year while EXPAREL showed 13% growth with EXPAREL joint procedures up 20%, breast procedures and gynecologic procedures up 16%, general surgery up 11%, and shoulder procedures up 9%. The hospital inpatient market was down 6% versus EXPAREL, which was up 1%, with continued year-over-year growth in key markets such as spine with a 49% increase, shoulder with a 20% increase, and C-section with a 16% increase. For your reference, these data points are summarized in our investor deck, which is available on our website. Turning to market access. We continue to expand our EXPAREL user base and added 180 first-time purchasing accounts during the first quarter. In addition, the rollout of our 340B pricing program for outpatient procedures increased both 340B and non-340B volumes in these accounts. We believe this program will drive significant volume expansion, with both existing and new 340B accounts representing nearly 10 million EXPAREL relevant market procedures. As expected, we are seeing growth in existing 340B accounts take place at a greater pace than new 340B business. This is resulting in a slightly lower gross to net, which remains at a highly favorable level for our industry at more than 86%. Importantly, 340B will pave the way for us to leverage the NOPAIN Act. This legislation currently mandates CMS reimbursement for non-opioid postsurgical pain treatments in outpatient settings beginning in 2025. We are actively monitoring efforts to accelerate implementation to 2024 and should know more about this when the preliminary CMS rules issue this summer. We believe policymakers in Washington appreciate the urgency for improving access to non-opioid options. NOPAIN will provide a reimbursement pathway for nearly 20 million EXPAREL-relevant market procedures, with commercial and self-funded payers expected to follow the lead of CMS. Reimbursement in the hospital outpatient as well as the ambulatory surgery centers will cover more than 70% of the current total addressable market for EXPAREL. In parallel, we are seeing expanding access to non-opioids for government employees and our military and their families through efforts similar to NOPAIN. In October of this year, TRICARE will adopt CMS reimbursement methodology for ambulatory surgery and begin providing separate reimbursement for EXPAREL in this setting. We would expect TRICARE to also mirror CMS in the hospital outpatient setting with the implementation of the NOPAIN Act. There are roughly 10 million members enrolled in TRICARE for primary or secondary coverage. Importantly, NOPAIN, TRICARE, and 340B are especially meaningful to the migration of lower-margin soft tissue procedures to hospital outpatient settings. These programs will assist in eligible healthcare systems affording the opportunity to offer non-opioid pain control for these procedures and advance our mission to provide a non-opioid pain management solution to as many patients as possible. Earlier this year, we opened our second innovation and training center in Houston, which more than doubles our previous capacity to host meaningful educational programming. Our training centers are core to developing both physician champions and community-based clinicians, who want to stay at the forefront of opioid-sparing pain management, especially for nerve blocks and field block procedures. In the first quarter alone, our educational programs provided training to more than 1,700 healthcare providers at 63 on-site and in-field events. We believe this immense need for training around opioid-sparing pain management bodes well for our future growth as more physicians become familiar with best practices on how to incorporate our portfolio of safe and unique commercial products into their practice. Outside the United States, we continue to make steady progress. Our team has secured approval for EXPAREL access in key centers across the European Union and the United Kingdom. We are focusing our attention on regional analgesia for EXPAREL, and we form partnerships with thought leaders who are now advocating for EXPAREL and iovera°. We will also have a presence at several key scientific meetings and society meetings. In Latin and South America, our partner, EuroPharma, is advancing the regulatory approval process for EXPAREL in Brazil, and we are on track for submissions in other South American countries in the coming months. On the regulatory front, we're making important progress. The FDA review of our supplemental new drug application for EXPAREL is now underway, with a PDUFA action date of November 13, 2023. To remind you, this application is seeking expansion of the EXPAREL label to include two key lower extremity nerve block indications that we expect will significantly extend our reach into surgeries of the knee, medial lower leg, foot and ankle, representing more than 3 million annual procedures. In pediatrics, interest continues to grow as new data are generated. We look forward to building on this and initiating our regulatory study later this year to support the expansion of the EXPAREL label to include patients from birth to 6 years. Finally, our Phase I study of EXPAREL for intrathecal administration continues and is on track for completion later this year. Switching gears to ZILRETTA and iovera°, where our full 240-person field-based team is broadening education and awareness around these complementary and stand-alone non-opioid solutions for monitoring and managing osteoarthritis pain. In the first quarter, the team added 122 new ZILRETTA first-time purchasing customers and 55 new iovera° customers. Several value-creating milestones are on track for the next year and current and new indications for both products. For ZILRETTA, we expect to initiate two new label expansion studies. This includes a Phase IV diabetes safety study in knee osteoarthritis and a Phase III shoulder osteoarthritis study. Importantly, if our shoulder study is successful, ZILRETTA could become the first and only approved corticosteroid specifically for shoulder osteoarthritis. Both studies will evaluate ZILRETTA versus triamcinolone with the goal of adding a superiority claim to the ZILRETTA label. For iovera°, we recently launched a cash pay program and are seeing expanded utilization in knee applications. Clinicians are using iovera° as an additional offering to patients for pain management. In addition to orthopedic practices, we are seeing success in regenerative medicine specialists, who are historically early adopters of new technology. Our clinical education team is working closely with KOLs on iovera° treatment for the pain of spasticity to provide a new treatment option for pain control in this patient population. We recently announced a year-long partnership with the PGA Tour Champions, naming iovera° as the official non-opioid pain management option of multiple 2023 tournaments. This partnership will raise awareness around drug-free pain control with iovera° as the product that will have a presence at several PGA Tour champion tournaments, with the first appearance recently taking place at the invited celebrity Classic. We also recently hosted various educational and awareness initiatives in the LPGA fitness trailer during the Chevron Championship, which is the tour's first major of the season. On the clinical front, we are preparing to launch a registration study for the treatment of spasticity later this year. In spasticity, iovera° has the potential to be a game changer. There are approximately 10.2 million patients in the United States currently diagnosed with spasticity. 2.6 million of those patients have moderate-to-severe spasticity and 42% of them have received at least one treatment modality, but only 150,000 are currently receiving a treatment with toxin. This underscores a highly dissatisfied market with inadequate treatment options like toxins and phenol. We have an iovera° smart tip for a medial branch block for low back pain, which we also expect to have on the market in 2024. Beyond our commercial portfolio, we have an exciting earlier-stage portfolio of new product development opportunities that include PCRX-201, a novel intra-articular gene therapy product candidate that produces IL-1Ra for osteoarthritis. Our preliminary Phase I safety and efficacy findings were recently presented at the Osteoarthritis Research Society International World Congress in Denver. PCRX-201 was well tolerated with improvements in knee pain observed across all dose groups. Importantly, the greatest level of efficacy was observed at the lowest dose. Based on these encouraging data, we are planning to launch a second Phase I study of PCRX-201 in osteoarthritis of the knee. Ron Ellis will share some more details around the PCRX-201 development program shortly. We also anticipate advancing Phase I readiness activities around our internal multivesicular liposome pipeline, which includes a multivesicular liposome dexamethasone formulation for low back pain and a multivesicular liposome bupivacaine formulation as a nerve block or a field block for longer-lasting chronic pain where patients are most at risk of becoming addicted to their pain medications. With that, I'd like to turn the call over to Ron to provide some more details on our investments in GQ Bio and PCRX-201. Ron?

Thanks, Dave. And good morning to all joining us today. I'm excited to share some highlights on the progress we have made for PCRX-201, which we believe has the potential to be an important disease-modifying gene therapy for osteoarthritis. The product candidate was discovered by GQ Bio, a privately held biopharmaceutical company headquartered in Hamburg, Germany. GQ Bio's product candidates are next-generation gene transfer vehicles. These gene therapy vectors are highly efficient in entering joint cells to confer multiyear clinical benefit. In PCRX-201, these high-capacity adenoviral gene therapy vectors express IL-1Ra when in the presence of inflammation. IL-1 is a cytokine inhibitor that plays a central role in inflammation in catabolic processes, many of which are associated with disease progression in osteoarthritis. Interrupting this cycle is likely essential to slowing disease progression. After intra-articular injection, the Vector enters joint cells and turns them into factories to produce sustained therapeutic levels of IL-1Ra to manage pain and mitigate osteoarthritis-related joint damage while remaining localized to the joint space. Our Phase I single ascending dose trial enrolled 72 patients in two cohorts: a co-administered steroid cohort and a cohort that did not receive a steroid. As Dave mentioned, PCRX-201 was well tolerated with efficacy observed at all doses. But what was particularly compelling was the level of efficacy achieved by the co-administered steroid group, which showed a significantly greater percentage of patients with the decline of WOMAC pain scores that exceeded 50%. The level of efficacy and duration of response will be an unexpected finding from steroids alone. The outcomes were so unique that we filed for patent protection around it and currently have a patent pending. Based on these data, we are initiating a second Phase I study that will help us to find the best administration regimen to take into the next stage of development. In parallel to the Phase I study, we will begin advancing our process development activity. To that end, we're expanding our relationship with GQ Bio to include process optimization and forming a new collaboration with Exothera, a Belgium-based clinical development and manufacturing organization with a proven track record in customized process development and GMP manufacturing services for viral vector technology. These activities will ensure that we move forward with a commercially amenable process with a competitive cost of goods. Lastly, in April, we made an additional investment of EUR 2.5 million in GQ Bio in the form of a convertible note. We will make an additional investment of up to EUR 2.5 million upon the achievement of certain pre-specified development and scale-based milestones. We look forward to providing you with additional updates on PCRX-201 on future calls.

Thank you, Ron, and good morning, everyone. 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. I'll start with an update on sales and margin trends. Starting with EXPAREL. We had a solid quarter with net EXPAREL sales coming in at $130.4 million for the first quarter. First quarter average daily volume growth of 6% yielded average daily revenue growth of 1%, primarily due to contracting activities. With the first quarter historically representing 22% to 23% of full-year sales, we believe we're off to a positive start to 2023, especially given several growth initiatives that we expect to kick in as the year progresses. These include ongoing growth in volume from both existing and new 340B customers, and new initiatives with OMFS, plastics, outpatient, sports management, and pain management and rehabilitation healthcare providers, and our ongoing expansion into European markets. For ZILRETTA, first quarter sales were $24.3 million. With our 240-person field force now promoting education and awareness, we expect ZILRETTA growth will accelerate as the year progresses and the team gains traction. As Dave mentioned, we are already seeing an encouraging uptick in new first-time ZILRETTA customers. For iovera°, first quarter sales came in at $4 million. Here, too, we are seeing strong growth in our customer base and expect demand and sales will gain momentum with a full field-based team generating awareness around the advantages of a drug-free nerve block with iovera°. We also expect to benefit from new commercial initiatives. Our sports initiatives with NFL Alumni, the PGA, and the LPGA were off to a strong start, and the cash pay market is gaining real traction with orthopedic healthcare providers. Turning to gross margins. On a consolidated basis, our first quarter total non-GAAP gross margin percentage was 72%. This is comprised of non-GAAP gross margins of 71% for EXPAREL, 83% for ZILRETTA, and 58% for iovera°. As discussed on our fourth quarter call in February, the tail end of the manufacturing challenges experienced in late 2022 were seen in our first quarter 2023 operations. Based upon action that Chris and the team are taking, we expect to report sequential improvements in quarterly margins for the remainder of the year and believe we are on the path to achieving sustaining margins in the mid-80% range over time. Turning to expenses. Non-GAAP R&D expense was $15.3 million, reflecting ongoing investments in our clinical programs. We expect R&D expenditures to be more heavily weighted to the second half of the year as several new clinical studies get underway. Non-GAAP SG&A expense came in at $62.5 million. We expect that SG&A expenses will be more heavily weighted to the first half of the year with the launch of new commercial initiatives. First quarter interest expense was $9.6 million. Importantly, the remainder of the year will benefit from $15 million or more of interest expense savings with the retirement of our Term Loan B on March 31, 2023 using a new term loan A and cash on hand. The new term loan A carries an interest rate that is 400 basis points lower than the previous term loan B debt and has enhanced flexibility that meets our operational needs. And lastly, despite several challenges, we delivered another quarter of significantly positive adjusted EBITDA of $41.9 million. As for guidance, today, we are reiterating our 2023 full-year guidance as follows: EXPAREL net sales of $570 million to $580 million. ZILRETTA net sales of $115 million to $125 million, iovera° net sales of $17 million to $20 million; non-GAAP gross margins of 76% to 78%, non-GAAP R&D expenses of $70 million to $80 million, non-GAAP SG&A expense of $220 million to $230 million; and stock-based compensation of $51 million to $54 million. In summary, we remain bullish on our 5-year plan for year-over-year top line growth returning to the teens once inflation eases and the elective surgery market normalizes. Gross margins improving, modest year-over-year increases in operating expenses, and adjusted EBITDA margins that exceed 50%. That concludes our prepared remarks. I'd now like to turn the call over to the operator to begin our Q&A session.

Our first question comes from David Amsellem of Piper Sandler. David, you’re live.

Just had some questions on margins and spend. Can you provide more color on the gross margin headwinds? I think you talked about pricing, but just wanted to drill down on the extent to which just manufacturing has been problematic in terms of getting the EXPAREL margins up? I know you had some issues periodically last year. So can you talk about that? And how to think about the cadence of gross margins as the year progresses? And then secondly, when do you think you'll get to the ADVs? You said over time, but what's your thinking on timing there longer term? And then lastly, on R&D spend, how should we think about that generally? I mean I know there's a number of things you listed in the slides. Should we think about that as kind of growing over time, flat, getting some leverage in the model? Just help us understand that.

On margins, gross margin for manufacturing. We've talked about this over the last four quarters. We've had quality issues with some of our APIs, and we believe that that's now behind us. We've also had some issues with some sterile filters that we think we've got our hands around, but that is not totally behind us. And so we think that we've got the folks in place that can handle these things, and we're working in a very aggressive manner with our suppliers to make sure that we can solve those problems. I remind everybody that we've had a gross margin of 79% before. So we're not trying to break into new territory here. We're just trying to fix some of these issues that appear mostly to be COVID-related in one way or another so that we can get back to those kinds of numbers. And you just heard Charlie reaffirm 76% to 78% for this year. I think we're well on our way to get there. There are a couple of inflection points right in front of us. We will submit the sNDA for the 200-liter facility in San Diego as we get into the third quarter. We expect that facility will be making commercial material in the beginning of 2024. In the relative short term, we're building out another fill line for ZILRETTA at our contract manufacturer. That's important because the yield needs to be improved from the yield of the fill line and the product that we bought from Flexion last year. We've moved the production of the smart tips for iovera° to a contract manufacturer with a much better margin profile as we go forward. We need to get back to that 79%, 80% plus. We think we'll do that with the 200-liter facility. Just as important, that opportunity will allow us to decommission at least one of the 45-liter skids, save the other for Europe and for some of the smaller countries in Latin and South America. We should get back into the 80s here over the next 2 or 3 years. That's the plan. On the R&D spend, we're nearly done with EXPAREL. I mean, there really isn't much more to do. We've got infiltration for all uses in all indications in adults. We have peds, 6 to 17, now for infiltration again. We have agreement with the FDA on what the clinical trial looks like to go from neonates to 6s. So with the approval of the lower extremity nerve block, there's really nothing else to study for EXPAREL unless there's some specific indication that comes to light that we haven't really anticipated yet. You'll see the move go over to the pipeline products. There's a lot to be done with ZILRETTA as it relates to safety and use in the diabetic population, which we've highlighted a couple of times. That trial will start this year. We have a protocol for a shoulder study. We have our eye on a superiority claim versus triamcinolone acetonide, which I think will be a real marketing advantage. There is some discussion, especially in the PM and our doctor world, that we should develop ZILRETTA ZILRETTA for hips—not much for revenue but more for proof of principle and showing that we can actually have a long-term impact on this procedure group. So there's a lot of things we can do with ZILRETTA as we go forward from here. And then iovera°, we're currently working on the pain of spasticity as well as the broad label that we have for peripheral pain. I would say that this is not a direct answer to your R&D question, but we now have folks in the marketplace asking us if they can use the iovera° trade name for cash pay clinics in local markets. Several of them around the country, especially for sports. So you see a lot of traction there and iovera° for spasticity is probably as big an opportunity from a patient care perspective as well as from a revenue perspective, as I've had in my career. The results are dramatic. We've met with the FDA. We think we have a line of sight on a clinical trial that we'll do later this year. We're training up many of the KOLs in spasticity by using the pain of spasticity, where those are both apparent in certain patient populations. And then spasticity really has the potential to be a game changer for the spasticity population as well as for Pacira. You just heard Ron talk about 201. I think we need to get another look at not only the Phase I study but what the protocols look like from our discussions with the FDA going forward. These trials have, in the past, had a propensity to be pretty expensive. So we have to decide whether we want to do this by ourselves or whether we want to take on a partner. Then we've got the portfolio of dexamethasone and a higher potency bupivacaine product that will mimic EXPAREL but will last for a longer period of time. So when you look at all of those things together, I mean, our plan is that R&D expense should be relatively consistent over time, with EXPAREL moderating backwards and the other two commercial products being front and center for the next couple of years while we work through the Phase I studies with the intrathecal EXPAREL with 201 with dexamethasone and bupivacaine. So there's a lot to be done here, David. I don't think you're going to see any spikes. I think we're in a position where we can take the most important things from a revenue and patient care perspective and move them forward while tuning some of the other things we have in the multivesicular liposome pipeline. So that's the plan.

Our next question comes from Glen Santangelo of Jefferies. Glen, you’re live.

Dave, I wanted to talk to you about the revenues a little bit because I think last quarter, you said you expected EXPAREL sales in Q1 to be roughly 20% of the full year, and you clearly did better than expected there. But conversely, if you look at ZILRETTA, it seems like you're happy with the new accounts that you signed up, but revenue sort of declined almost mid-teens on a sequential quarter basis. So what's interesting is you did better at EXPAREL, maybe a little bit worse relative to what we were thinking in ZILRETTA, yet you maintained the guidance for both of them. Intuitively, you would think you might want to raise one and lower the other. I'm wondering if you could just reconcile what happened in Q1 relative to your expectations.

A couple of things. I'll start with EXPAREL. We did slightly better than the historical trends would suggest. We also have the outlier of 2022 when the first quarter was one of the strongest quarters. I think it's entirely prudent for us to wait for another couple of quarters of data before we start increasing from what would have been the smallest number in the quarterly progression of the year. So we're happy to have a little bit of cushion there. I don't think it's time yet to raise the revenue until we start to see the procedures start to come back in the fold. We think that that's going to happen over the next couple of quarters and a couple of years, but let's let that happen before we raise guidance from where we are. On the ZILRETTA front, there's a couple of things. First, the field force only started promoting ZILRETTA to the wider base on the reach-and-frequency strategy in the back half of January. You're talking about a very small sampling here in terms of letting that opportunity mature. Also, we had a couple of significant users of ZILRETTA that came over from Flexion. The issue we were facing was that they were giving what we thought were inappropriately high discounts. It took a while to straighten all that out until in the middle of February, when we were able to come to an agreement with those large purchasers, and they are now buying ZILRETTA. When you add that to the safety story we've got in the marketplace, again, it didn't start until the back half of January relative to keeping the patients in range and eliminating these glycemic spikes. I think that ZILRETTA is a little light on an annual basis, but with a number of levers that we believe will get us back to the number that Charlie just reiterated. So I don't think we're uncomfortable with either one. I think it would be a little early to lower or raise either one of them.

Could you provide some clarification on the gross margin? I understand you aim to reach the 80s in the next couple of years, but given the Q1 result of 71.8%, which is close to your low point from last year, I was hoping to hit the midpoint of your guidance. It appears you would need to achieve between 78% and 80% in the next three quarters, which seems like quite a substantial increase. Could you address that? Additionally, concerning SG&A, it looks like you're exceeding your full-year guidance based on Q1. You mentioned that spending was more concentrated in the first half, but I'm unclear on the reasons for that. I’ll leave it at that.

Sure. So as it relates to the gross margin, we noted on the Q4 call that there was some overlap from Q4 into Q1 that was going to depress the Q1 margins. Some of that was related to EXPAREL, and some of that was related to ZILRETTA. We believe that we've cured both of those. I'll remind you, again, Glen, that we were running at 79% in the first quarter of last year. We've made some structural changes from a personnel perspective. Right now, Science Center is running as planned. We're not uncomfortable with reiterating the guidance of 76% to 78%, noting that what we've got is $130 million of the $570 million to $580 million guide. So the majority of the business for the year is in front of us at the higher margin. So the math doesn't exactly work that it's a quarter of the year that's gone. As a matter of fact, it doesn't work at all. We're not uncomfortable with where we are with the manufacturing goal, especially with some of the personnel changes that have been made and some of the ways that we're now working with the 200-liter in both places. On the SG&A, we reconfigured the sales force at the national meeting this year. We put folks out there with the idea that we were going to have three times the frequency and the reach for both iovera° and ZILRETTA. We think that's working in terms of new users. It's not a direct comparison from Q1 when someone is just getting started using these compounds to the way their product will grow as they get used to using the product and expand their utilization. SG&A is according to plan but is a little higher than in previous years for the same quarter because we've added some folks. We've got a three-product portfolio now that these folks are working with in the marketplace. We've added PM&R guys to the call pattern, and we have a separate sales force out there that is small but still an added expense focused just on OMFS and peds. There are some structural changes that we made that support SG&A. We watch that carefully, of course. Every quarter, we look at all those territories to determine where the growth is and where the growth is at. But right now, same comment for the year; I think we've got the right folks in the right place.

Our next question comes from Gregory Renza of RBC Capital Markets. Gregory, you’re live.

And Dave, maybe just on the 340B pricing program. I just wanted to ask you to perhaps expand a little bit on your commentary. Maybe just give us a state of where you are now, certainly, with respect to the mix of the existing and naive businesses that you've represented or that you've discussed and how that has fared with your expectations thus far, and really where you see that going?

Yes. No, thanks, Greg. It's doing what it was supposed to do. Just to reiterate, we wanted to open up those additional procedures where EXPAREL wasn't being used, understanding that there were going to be some purchases from current users that would modify the benefit of that. I think generally, Greg, we're exactly where we thought we were going to be. The numbers we see are basically flat week-to-week, a little bit higher than what we projected when we talked about this in the Q4 call. But understand that the price increase of 2023, this year's price increase, we've not seen any of that yet for the 340B customers, and that will take effect in July. So, there's a six-month lag in any pricing action that will fall over to the 340B customers. We expect that the majority of that 3.5% will come and have an impact on 340B that will take it right back to where we thought we were going to be and what we guided to as we came out of the year. So we're not disappointed. It's running, I would say, Greg, probably a point higher than we thought we were going to be. So it's slightly higher than we thought it might be. But we also see that the new users are increasing their use, and we continue to have 7 to 10, 12 new users every week, which are all positives. If you look at this in the short term and you want to train the healthcare providers and you want to offer the opportunity for non-opioid pain control for the patients, I think we're doing exactly the right thing while we work on TRICARE and NOPAIN, which will provide us yet another alternative way to provide these patients and maybe not have to discount the product according to the 340B calculations we just talked about, if that makes sense.

And maybe just a question on the pipeline, perhaps more broadly. It's nice to see you talk about 201 and others in the hopper. I think you alluded to certainly the investment and maybe the differentiation of capabilities when it comes to taking a gene therapy or some of the novel approaches forward. Could you just touch a little bit upon where you see those decisions coming to bear, at what stage of development certainly as you're proceeding in early stage with the Phase I? Just curious how you're thinking about really changing the complexion of your capabilities and R&D approach should you want to move forward with this approach?

The approach is definitely different. The first thing Ron mentioned is the process. As you all know, the product is the process as we move ahead. Right now, Greg, we're looking at some additional Phase I work. It's really about the timing and the type of steroid, whether it will be oral or injectable, and how to best prepare for a protocol. As we get closer to finalizing the process for the pivotal trials, we have received some interest in 201 from potential partners. I don’t anticipate any major changes to our R&D organization. We have successfully integrated the team working on 201 at Flexion into Pacira, so now we have a group of gene therapy experts in our organization who have significantly aided our discussions with the FDA on this matter. The direction we take will really depend on the agreed protocol, and I believe we are close to that. We will see how this unfolds with the trials over the next 1.5 years.

Yes, Greg, thank you for the question. Just to add what Dave said, we're a couple of years away from having a defined dose and process, and that really opens up the next milestone where we can take a look at opportunities to partner.

Our next question comes from Greg Fraser of Truist Securities. Greg, you’re live.

Can you comment on the export net in the quarter? Is gross net stable now? Or would you anticipate some additional pressure in the coming quarters as volume to the 340B hospitals grows? It sounds like you have some offset from the price increase in the second half. And then I had a question on pediatrics. How much demand do you think is being driven by pediatric use? And what inning do you think you're in with respect to the pediatric opportunity?

It is stable at the current percentage use. As you said, we do expect to benefit by several points as we enjoy the price action of the beginning of the year against the 340B account. Our thought process is that we are probably at or very near the low point, and without any price increase, we will get back to where we thought we were going to be initially with the price increase. It is stable and it doesn't move much at all from week to week now. Also, Greg, there's a bit of a shadow here as there's significant activity in the whole 340B arena. I think folks are taking the idea that they have to use 340B purchases for 340B customers very seriously. So I don't think there's any risk of additional use out in an inappropriate 340B program going forward. So we feel pretty good about that. Pediatrics is still in the early innings. I mean if I said it was—the lady hasn't sung yet for sure. It's probably the third. It is a slower group to adopt in terms of just making a significant move in a short period of time. It’s good to see, though, that with the people who have adopted EXPAREL in peds, their growth is quite explosive and they get to be significant purchasers of the drug in a very short period of time. Roy is with us, and this is Roy's baby. So I'll ask Roy to see if there's anything additional he would say to that for pediatrics.

Yes. And I think it's a very good question. The thing about pediatrics, it always lags behind what you see in the adults. It's probably five years on the curve still to go with peds to get it to get to where EXPAREL is today. With that, we have a lot of data that's about to come out pretty much from collaboratives and from some investigator-initiated. For instance, as an example, scoliosis, which is one of the really big, painful procedures you see in pediatrics. We now have two large centers—one is the Shriner’s system, and one is Cleveland Clinic—doing studies in scoliosis with EXPAREL, and we should have that data, I would hope, within the next six months. Once that's out there and really objective from two big places like that, I think it will be something that people can latch on to. We have calls every day dealing with pediatric centers looking to get started. But again, the process is longer because they want very strict protocols and details. And just like you do with kids, the threshold is always higher to adoption. So I don't know. Hopefully, that helps.

Our next question comes from Makela Francheskina of Barclays. You’re live.

This is Makela on for Balaji Prasad. Just following up on the 340B. Could you just provide a bit more detail on its impact on gross margins and operating margins this quarter? Or really just any further color you can provide on volumes instead?

When we started down the road of 340B, it was really mediated by the fact that we had to either get in or get out because we purchased ZILRETTA, which was a 340B participant. Our hand was forced to some level. But at the same time, we saw 340B and the expected decrease in the gross to net as a way to get additional clinicians using the product outside the hospital, especially as we anticipated the NOPAIN Act coming. There was a clear understanding that roughly 20% of the business that we currently enjoy—this is October of '22—that 20% of that business would likely move to 340B and that, that would cause roughly a 5%, 5.5% reduction in the gross to net. That was without the benefit of the price increase, right? Interestingly, it's because we—the greatest benefit so far has actually been more purchases of 340B active accounts. The fastest-growing section of our business actually is the 340B participating accounts, both non- and 340B. It has worked to some level. Our anticipated growth into non-340B accounts, who would not—would order both 340B and non-340B, has been slightly slower than we thought. That brings us back to this 25.5%, 26%. The focus then is on the six-month delay in the 340B pricing reflecting the price increase of January 1. When you lay that on top for the rest of our business, the net-net of that was about 3.5%. The government has all of the CPI calculations, and we go through all of that with this too. So we're not calculating that we would enjoy the full 3.5%, but that there will be a 2%, 2.5% improvement in the gross to net on July 1 as we start to enjoy the benefit of the price increase. That brings us right back to the 24%—that 23%, 24% that we thought we were going to get in the first place. It's pretty much where we thought it was going to be. I think we did the right thing, especially given the progress on NOPAIN and some of the other things that are coming down the pike that will open up the opportunity to have reimbursement in these same outpatient populations.

I would now like to turn it back to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, and thanks to all on the call for questions and the time today. 2023 is off to a positive start, and we're energized about the opportunities that lie ahead of us. Throughout the balance of the year, we continue to work to transform the lives of patients in need of non-opioid pain management, which is an ongoing play throughout the country and around the world. Next up for us are the RBC and Jefferies conferences in New York. Thanks. Stay well. We'll see you all soon. Bye-bye.

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