Pacira BioSciences, Inc. Q2 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the Q2, 2023 Pacira BioSciences Inc. Earnings Conference Call. At this time, all participants are in 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 your speaker today, Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, Gerald. And good morning, everyone. Welcome to today's conference call to discuss our second quarter 2023 financial results. Joining me on today's call are David Stack, Chairman and Chief Executive Officer, and Charlie Reinhart, Chief Financial Officer; Ron Ellis, Chief Strategy Officer, and Roy Winston, Chief Medical Officer are also 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 are entering the second half of the year with positive momentum after seeing a meaningful uptick in year-over-year EXPAREL growth in June and July. In addition, recent data indicate an improving elective surgery market that we believe will continue through the remainder of the year. As the economy moderates and soft tissue elective surgeries come back, we are well positioned to get back to more robust top-line growth rates. While we are encouraged by improving trends, today, we are adjusting the full year sales and gross margin guidance to reflect an updated view of market conditions and procedural cadence for the year. Charlie will discuss guidance in greater detail later in the call. In the second half of the year, we will continue to focus on three priorities: growing revenue, improving gross margins, and expanding market access. Second quarter revenues of $169 million include EXPAREL sales of $135 million, driven by solid volume growth in a slowly recovering market. In addition, we continue to build awareness around ZILRETTA and iovera, with our field-based team now promoting all three of our products. Second quarter ZILRETTA sales exceeded $29 million, and iovera sales grew to more than $4 million. Our significant top line combined with ongoing operating discipline is driving strong and durable cash flows that allow us to further solidify our financial condition by recently prepaying $25 million of outstanding principal under our term loan facility. The second quarter also marks our 25th consecutive quarter of significantly positive adjusted EBITDA of $54 million. We continue to focus on improving gross margins, and we are moving in the right direction with second quarter margins improving to 73%. Our San Diego facility is now outperforming volume targets and achieved second quarter margins of 76% for EXPAREL. We have also made significant improvements in the quality of the 200-litre process in Swindon that we expect will positively impact EXPAREL margins later this year. Bottom line, we believe that the foundation is set for gross margins to return to the high-70% range as we exit 2023. On the regulatory front, 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. In addition, the FDA recently completed its review of our application for an improved product release assay for EXPAREL and has requested additional information to support an approval. We will submit a meeting request to define the most efficient path forward with the agency. Importantly, this shift in timing does not impact our ability to improve gross margins this year. Turning now to more specifics on the commercial portfolio starting with our EXPAREL franchise. We are pleased to report that we continue to outperform the broader elective surgery market with second quarter EXPAREL sales of $135 million, which was essentially flat versus the prior year as volume growth of 4% was offset by 340B pricing and other discounting. Our investment in these programs has continued to provide meaningful access to EXPAREL for a larger and growing procedure base, setting the stage for meaningful inflection in the implementation of the NOPAIN Act in 2025. As a reminder, our performance last year was particularly strong, with EXPAREL sales at near record levels with the second quarter of 2022 being the third highest quarter ever for EXPAREL. Importantly, year-over-year growth rate improved as the second quarter progressed and into July, leaving us optimistic for a higher second half of the year as the market continues to normalize. We also expect that growth initiatives that we have put in place, such as continued volume expansion from 340B and TRICARE reimbursement, as well as initiatives in oral maxillofacial plastics and outpatient surgeries and sports medicine, will contribute to revenue growth in the second half of this year. Turning to market access, we continue to expand our EXPAREL user base, adding more than 350 first-time purchasing accounts so far this year. We are seeing a growing level of EXPAREL interest among Oral and Maxillofacial Surgeons fueled by last year's rollout of the partnership with Sevaredent. We expect to launch a similar partnership in the coming months with another large dental support organization with more than 1,000 offices across 46 states. Together we will support training and education around best practices for optimizing patient recovery after oral surgery using an EXPAREL-based opioid-sparing approach. As expected, our 340B pricing program is contributing to volume growth in both existing and new business as it helps alleviate cost challenges by offering a reduced price to eligible entities where opioids are often most problematic. For the first half of the year, EXPAREL 340B volumes were roughly 25%, with recent weekly 340B volumes at roughly 20%. Gross to net remains at a highly favorable level for our industry at roughly 86%. We also expect the 340B discount to improve from roughly 28% to 25% in the second half of the year, with the 2023 price increase taking effect for government orders, which pricing runs into with a two-quarter lag. All in all, the 340B program is doing what it was designed to do. Expanding the EXPAREL user base and growing volumes within existing and new businesses. This investment advances our mission to provide an opioid alternative to as many patients as possible, regardless of income level or insurance status. Furthermore, 340B is paving the way for us to leverage NOPAIN since we are accessing a significantly larger pool of patients and their surgeon providers who want to perform more outpatient procedures. CMS recently issued their proposed Outpatient Prospective Payment System rule for 2024, with EXPAREL continuing to qualify for separate reimbursement in the ambulatory surgery center under Reimbursement Code C9290. Their preliminary rule also notes that the agency will implement the NOPAIN Act, which mandates CMS to begin reimbursing separately for non-opioid products for post-surgical pain in all outpatient settings on January 1, 2025. NOPAIN will provide a reimbursement pathway for nearly 20 million EXPAREL-relevant market procedures. We expect commercial and self-insured payers to follow the lead of CMS. Reimbursement in the hospital outpatient setting as well as 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-opioid pain management for government employees, our military, and their families through efforts like NOPAIN. In October of this year, TRICARE will adopt the CMS Medicare Reimbursement methodology for ambulatory surgery centers and begin providing separate reimbursement for EXPAREL in this setting. We expect TRICARE to also mirror CMS policy in the hospital outpatient setting, with the implementation of NOPAIN. 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 the hospital outpatient settings. These programs will assist eligible health care systems in affording the opportunity to offer non-opioid pain control for these populations. Our state-of-the-art training and innovation centers continue to support the market's demand for best practice knowledge transfer to accelerate surgical migration to outpatient sites of care. In the first half of the year, our educational programs provided training and conducted more than 140 on-site and in-field events to more than 4,200 healthcare providers who want to be at the forefront of opioid-sparing pain management. In pediatrics, interest continues to grow as new data are generated. Our commercial organization is focusing on top pediatric institutions, and EXPAREL use continues to significantly expand in influential hospitals such as the Shriner's system and Wisconsin Children's. We also have secured several recent wins in spine programs and other centers of excellence including Cincinnati Children's Hospital, Chop in Philadelphia, Children's Hospital of Colorado, Mercy Children's in Kansas City, and Seattle Children's. We look forward to building on our success and initiating a registration study later this year to support the expansion of the EXPAREL label to include patients aged zero to six years. On the regulatory front, we are advancing the FDA review process for our supplemental new drug application to expand the EXPAREL label with a PDUFA action date of November 13. To remind you this application seeks 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 flush, and ankle representing more than 3 million annual procedures. Finally, our Phase 1 study and EXPAREL for intrathecal administration continues and is on track for completion around the end of this year. Switching gears to ZILRETTA and iovera, while our full 200-person field-based team is broadening education and awareness around these complementary and standalone non-opioid solutions for managing osteoarthritis pain. So far this year, the team added more than 270 new first-time purchasing ZILRETTA customers and over 100 new iovera customers. Several 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. These include a shoulder osteoarthritis study and a diabetes safety study in knee osteoarthritis. Importantly, if our shoulder study is successful, ZILRETTA should become the first and only approved corticosteroid specifically for shoulder OA. Both studies will evaluate ZILRETTA versus triamcinolone with the goal of adding a superiority claim to the ZILRETTA label. For iovera, we recently announced our newest partnership with renowned professional golfer Lexi Thompson, who will be advocating and educating athletes, their families, and fans about non-opioid solutions like iovera. We also have a new broadcast TV commercial that started running last month on the Golf Channel and other select networks to drive viewers to learn more at iovera.com. On the clinical front, we continue to be excited about the prospects for iovera as a potential game changer in spasticity. Last month, Dr. Gerald Francisco from the University of Texas Health Sciences Center highlighted iovera and cryoneurolysis as promising technologies in his keynote address titled 'Looking Ahead: Exciting Prospects in Spasticity Management' at the 2023 International Society of Physical and Rehabilitation Medicine Conference. A registration study of iovera for the treatment of spasticity remains on track to launch later this year. As you know, this is a highly dissatisfied market with inadequate treatment options currently limited to phenol and toxins. Our iovera expansion activities also include a new iovera smart tip for medial branch blocks for low back pain, which we 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 1 RA for osteoarthritis. As you may recall, data from our first Phase 1 study were very encouraging, with the greatest level of efficacy observed at the lowest dose studied. Based on this positive data, we are planning to launch a second Phase 1 study for PCRX-201 in osteoarthritis of the knee. We are currently finalizing our protocol after receiving input from the FDA. We also continue to advance Phase 1 readiness activities for our internal multivesicular liposomes pipeline, which includes a multivesicular liposome dexamethasone formulation for low back pain and a multivesicular liposome bupivacaine formulation as a nerve block or field block for longer-lasting chronic pain where patients are most at risk of becoming addicted to their pain medications. And with that, I'd like to turn the call over to Charlie for his financial review.

Thank you, Dave. 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 second quarter with net EXPAREL sales coming in at $135.1 million. Second quarter average daily volume growth of 4% was offset by the impacts of our investment in the 340B program and other contracting activities. As Dave mentioned, we were encouraged to see improved year-over-year growth in June and July. These data leave us optimistic that the second half of the year will be stronger than the first half. For ZILRETTA, second quarter sales were $29.3 million, with our 200-person field force now promoting education and awareness; we continue to see encouraging uptick in the first time customers and expect ZILRETTA growth will accelerate over time as the team continues to grow our user base. For iovera, their second quarter sales came in at $4.4 million. Here too, we are seeing strong growth in our customer base and expect demand and sales to gain momentum, with the full field-based team generating awareness around the advantages of a drug-free nerve block with iovera. We also expect our sports initiatives with NFL Alumni, the PGA, and the LPGA to drive awareness around iovera as an innovative opioid-free option for managing pain. Turning to gross margins. On a consolidated basis, our second quarter non-GAAP gross margin percent was 73%. This is comprised of non-GAAP gross margins of 72% for EXPAREL, 82% for ZILRETTA, and 78% for iovera. As Dave mentioned, our San Diego facility is performing in line with expectations and achieved EXPAREL margins of 76% for the second quarter. For Swindon, while we've made significant improvements in the 200-litre process at this facility, these changes did not take hold quickly enough to drive a more favorable impact to the overall mix of EXPAREL units sold in the second quarter, with units produced at the higher cost San Diego 45-litre facility representing a significantly greater proportion of total units sold versus units from the lower-cost Swindon facility. The good news is that the Swindon production is now on track, and we expect to exit the year with margins in the high 70% range, as we shift to a more favorable mix of commercial products sold. Turning to expenses. Non-GAAP R&D expense for the second quarter was $17.1 million, down from $24.8 million last year. The year-over-year decline primarily relates to the completion of our two lower extremity nerve block studies, which was partially offset by production development and capacity expansion costs for the 200-litre facility in San Diego. We expect to see an increase in R&D expense in the back half of the year with the launch of new clinical programs. Non-GAAP SG&A expense came in at $57.1 million, which is in line with the $56.5 million reported last year. We expect to see a decline in SG&A expense in the back half of the year. Second quarter interest expense improved significantly to $3.9 million, versus the $8.8 million reported last year. This was driven by the interest expense savings associated with the retirement of our term loan B on March 31, using a new term loan A and cash on hand. As you know, Pacira's leadership team is constantly assessing the best use of capital and ways to optimize our balance sheet. To that end, last week, we made a $25 million principal prepayment on the term loan A, and we continue to fully expect our significant cash flow outlook will enable early retirement of the remaining term loan A balance of approximately $122 million. For modeling purposes, that $25 million prepayment will result in interest expense savings of roughly $1 million in the second half of the year. And lastly, despite some challenges, we delivered another quarter of significantly positive adjusted EBITDA of $54.3 million. As for guidance, as noted in today's release, we are updating our full year guidance for the following P&L line items to reflect our current views of market conditions and actual results for the first half of the year. EXPAREL net sales of $550 million to $560 million versus previous guidance of $570 million to $580 million. With respect to cadence, the first quarter of 2023 appears to have shifted away from typical seasonal trends and will represent a slightly higher percentage of the full year than it has historically, similar to 2022 when we had one quarter outlier with the second quarter at near record levels. We now believe the first three quarters of the year will be more evenly balanced in terms of percentage contribution to full year EXPAREL sales. With the market showing signs of normalization and 340B hitting its one-year anniversary in October, we continue to believe that the fourth quarter will be the strongest performer and the largest contributor to full year EXPAREL sales. ZILRETTA net sales of $110 million to $150 million versus previous guidance of $115 million to $125 million, non-GAAP gross margins of 73% to 74% versus previous guidance of 76% to 78% and stock-based compensation of $46 million to $49 million versus previous guidance of $51 million to $54 million. Today, we are also reiterating our full year 2023 guidance for the following: Iovera net sales of $17 million to $20 million, non-GAAP R&D expense of $70 million to $80 million, non-GAAP SG&A expense of $220 million to $230 million. In summary, we remain bullish in our five-year plan with year-over-year top-line growth returning to more robust rates as economic conditions improve, and the elective surgery market normalizes. Gross margin 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. We will now conduct a question-and-answer session. Our first question comes from the line of David Amsellem from Piper Sandler. Line is now yours.

Hey, thanks. So just had a few questions. I know you talked about underlying electrosurgical dynamics. But with improvement, I guess I would have thought we would see more robust volume growth for EXPAREL, and it doesn't seem to be there. So I'm just wondering out loud, is there something else that we're missing on the volume side? Is there something regarding underlying commercial execution that we're missing and just help enlighten us as to what is happening here and why EXPAREL seems to be lagging in the overall recovery of the electrosurgical space. So that's number one. Number two, you talked about margin expansion and operating leverage for a number of years. Here you are guiding down for gross margins. I get your remarks on Swindon. But at what point can you take more aggressive measures to deliver on the operating leverage that you've talked about again for a number of years? And is there a sense of accountability that the margin expansion and operating leverage that you've cited in the past just hasn't come to pass yet? So I'm wondering if you can give us some thoughts on that. Thank you.

Good morning, David, and thanks. First, on the first question, as we came into and out of Q2 of this year, April was very soft, actually, one of the worst months that we've seen since the pandemic. We saw that increase as the market conditions improved, or at least related to EXPAREL as we got into June and July. So as we look at commercial execution, I don't believe that there are any issues in the marketplace related to how we're being viewed. I think the marketplace continues to be financially strained, especially in the hospital marketplace. We regularly talk to folks about the hospital outpatient marketplace and these low-margin soft tissue procedures that are difficult for the providers to do because of their low-margin aspects and the trying to move these procedures from the hospital inpatient to the hospital outpatient environment, which is helpful but still doesn't provide the kind of return that would give comfort to people who are using 30 minutes of their OR time for a very low return on investment. What I'm trying to point out here is that people are struggling to provide their patients with a low opioid alternative, and we cure that with the institution of the NOPAIN Act. So I don't believe that this is a commercial execution story as much as it is a macro story with customers and patients who are being squeezed and the cost of a non-opioid treatment therapy is quite a bit different than the ability to use EXPAREL and opioids. Many of our patients are being treated with bupivacaine and opioids purely because the system or the patient cannot afford the more costly non-opioid therapies. Hopefully, that provides some color to Q1. On Q2, all fair comments on your part, David. And we've struggled. If you go back to the first quarter of 2022, our gross margin was in the 79% range. We ran into a series of issues that have been well described. We thought we were coming out of those issues and that we would have more significant recovery in 2022. We had yet another acute issue in Swindon that caused us to improve but not at the level that we were expecting with the guidance Charlie just gave. The lowered guidance is really a conservative measure to make sure that we meet these new milestones. The cadence is that we have to fix Swindon. Science Center is the most reliable material that we produce but it’s also the most expensive. We need to fix Swindon because it’s the least costly material that we can make. That's high on the list, and we think that we've achieved that for the most part. We're still — it's not perfect yet, but we've made great progress over the last two months. We will also open the 200-liter facility in San Diego, which will provide us with significant capacity and again lower the cost. Slightly underappreciated is the fact that when those two facilities are running efficiently and dependably, we will close at least one of the 45-liter facilities in San Diego and the savings associated with that will be material. That's the plan, and it should all happen here as we get into the first part of '24. We should start to see material produced in these lower-cost facilities, and that will enable us to get into this 80% range that we've talked about for quite a while. It is also a revenue story. We obviously need more revenue to make more material to have a lower gross margin, but that's the cadence of what we're doing here.

Okay, thanks. If I might just sneak in a follow-up, why are you continuing to invest significantly further in iovera?

That's an easy one for me, David. Iovera remains an opportunity to change patients' lives. When we see what we're doing on the market and how the product is being used, it truly is a game changer. We've got to conduct the studies and provide the data that allows us to have a label that can turn the sales force on to these things. We are seeing real growth in cash market opportunities. We're seeing physicians opening iovera-only cash pay facilities in both the U.S. and Europe. We now have spasticity hospitals using iovera—many of these programs are quite nascent but real. As we do the spasticity trials, we think that trial can be completed reasonably quickly. Because it's a device, it can be approved reasonably quickly under the 510(k). This product in spasticity will be an important asset for EXPAREL and our share for iovera for the company and our shareholders. We are at a tipping point where iovera will start to really change lives and add significant value to Pacira as a company.

Our next question comes from the line of Gregory Renza of RBC Capital Markets. Please proceed.

Great. Good morning, Dave and team, I appreciate all the color. Thanks for taking my question. Dave, just maybe for you and Charlie, just on the revised guidance. I'm just curious, as you set the full year earlier in the year and leading to where we are now? I know you've acknowledged potentially this tale of two halves for the year. But are you entirely applying a more cautious methodology? Are there newer inputs that I think are informing the potential predictability? Just walk us through just that process and how you've really incorporated some of the new data points and how it sort of changed maybe your degree of confidence? And then just, Dave, maybe broadly for you as you're commenting on now that degree of optimism for the second half of the year. Just curious if you could just build on that a little bit? Maybe just put another way, what is your level of concern that the disconnect that was — that you've covered earlier between EXPAREL and the broader market can persist or maybe more relevantly, that the gap can close and EXPAREL can certainly outsized growth here? Thanks so much for your questions.

No, thank you, Greg. When we set out the annual goal, we were looking at the expectation that procedures would experience 6% to 8% growth for the year. We saw 6% in the first quarter and 4% in the second quarter. The second quarter is where we started to take a look again, and it was largely an analysis around soft tissue procedures. We've got a lot of data now on the issues relating to patients getting these elective surgeries, especially soft tissue elective surgeries. The impact of inflation is real, labor is real, and the mortality relating to the patients who expired as a result of the COVID pandemic is another factor. As we're looking forward here, we've taken that 6 to 8 number down to 4% for the third quarter. Then we expect to make it up in the fourth quarter with something that approaches the high end of what we originally thought at 8% or in the range of 8% plus. As we move into the back half of the year, we have several things that will help us close this gap. First is TRICARE. We have a significant base of patients, and we are increasingly integrating within military installations. We expect to see VA business pick up, and the military year closes at the end of September. For SSS and DoD, we should have a strong influence in the third quarter from military accounts. We also expect TRICARE to make an impact in early December, primarily benefiting EXPAREL. In the West, we anticipate a positive overall impact from TRICARE across our entire portfolio. There is also a new OMFS partnership that we cited in the script, which is a major opportunity. When we compare that to the Sevaredent experience, we saw that dental service organizations can quickly adapt and educate their members about a new non-opioid strategy, benefitting from 340B pricing that provides a tailwind for the year. When we combine those elements, we feel confident we can meet the opportunity that allows us to reach the $550 million range that Charlie talked about.

No, that's very helpful, David. Appreciate the additional color.

Thank you. Our next question comes from the line of Glen Santangelo from Jefferies. Please proceed.

Good morning. Thanks for taking my question. Dave, not to beat this EXPAREL horse to death here, but when I look at the full six months coming into this year, we thought we entered the year with you seemingly giving somewhat conservative guidance and now you're taking the guidance down midyear. I appreciate the last couple of months seemingly looks better. But when you look at the first half of the year, what played out differently relative to what you would have thought? Is it just that the pricing dynamic of EXPAREL versus bupivacaine and the opioids is just creating a much larger headwind than you thought? Is that the primary issue here? Because it sounds like 340B, the volumes there are playing out as expected, and the pricing related to that is kind of as expected. So I'm just trying to really figure out what's gone different relative to what you thought at the beginning of the year?

It's really two things, Glen, and you're accurate in your assessment. 340B has been slightly heavier than we anticipated in the first six months of the year, although the net impact on the bottom line is modest. The primary challenge has been discussions with customers, particularly regarding TRICARE and NOPAIN, where the pharmacy is being pressured—'squeezed' may not be the right term, but it's the term that comes to mind. There are demands for cost savings across hospitals and treatment centers. What we hear is that CFOs and CEOs are not fully aware of the issues surrounding opioids and falsely view opioids as free because prescriptions are filled outside of the hospital under Part D. It essentially costs them nothing to use opioids. Consequently, our clinicians are using the lowest cost alternative available. We've seen that in the past but believe the pressure on pharmacies and hospital systems has intensified recently. This is another reason we hope to see improvements once NOPAIN is approved, alongside TRICARE and the 340B program. We're not drastically behind where we expected to be, but we've adjusted our guidance to be conservative while we assess future opportunities related to TRICARE and lower extremity nerve blocks.

I appreciate those comments. And so now, looking forward, it's hard to think that anything changes in the next 18 months. Isn't this all kind of window dressing ahead of NOPAIN coming in 2025? Have you started to think about how much impact NOPAIN can have in 2025? And my follow-up is with NOPAIN less than 18 months away; does that change your view of capital allocation priorities—perhaps shifting away from business development to repurchasing some of your stock here in the low to mid-30s, given the significant opportunity just 17 months away?

Sure. We do have a significant product launch related to a PDUFA date for lower extremity nerve block set for November 13. This will bring another 3 million patients under the protection of our labeling. It’s surprising that many discussions we've had about the issues stem from the lack of a direct package insert that provides our physician customers an appropriate reference point to present to pharmacists or CFOs. This will be addressed with the approval of the lower extremity nerve block, and we have confidence this will occur in November. This will be an important launch for us and into next year. We also see early signs of recovery in some areas that had previously posed challenges, including inflation, labor, and perhaps even patient restocking. The patients that we would have seen have surgeries over the years were lost to the pandemic. Now, as indications improve, we believe those patients will return and will start to have more of these soft tissue procedures, which will improve the situation as we progress through this year and into 2024. Therefore, we're eager for the opportunities presented with lower extremity nerve block and TRICARE. It's a great time to prepare for NOPAIN, as we will be actively discussing its importance with our customers. For instance, we will demonstrate to hospitals that 60% to 70% of their business is outside the hospital setting and will be fully reimbursed. This comparative analysis shows that EXPAREL is priced competitively against other alternatives, making it attractive. Furthermore, under NOPAIN, EXPAREL will be the only treatment option without inherent costs. Our capital allocation strategy will focus on retiring our existing term loan A using cash and addressing the convertible note due in August 2025. We'll evaluate options based on our share price, considering stock opportunities if necessary. However, our priorities are to achieve deleveraging as we move forward.

Thanks for the comments, Dave.

Our next call comes from an undisclosed line from Truist Securities. Please proceed.

Good morning. Thank you for taking my questions. Just to go back to EXPAREL on the 4% volume growth—can you just give us a little bit of a dynamic to what portion of that was on 340B, and how did existing channels perform? And also on trends from 20ml to the 10ml lower dosage—any impact on the margin side there? And then perhaps give us the latest on the Paragraph IV filer—and then I have a follow-up on ZILRETTA. Thank you.

For 340B, we were running at approximately 25%. Over the last month and a half, we've seen that drop to around 20%. I believe that certain external activities and our internal initiatives regarding the appropriateness of 340B pricing are impacting the marketplace. I don't foresee it going much higher than we’ve seen in the past. We have seen new 340B hospitals entering the market for EXPAREL, which adds a material volume attributable to non-340B pricing. As for margins on 10ml versus 20ml, they are similar. We have implemented price increases on the 10ml to align with value associated with four days of pain control. The revenue for the 10ml is lower than the 20ml, but its margin is slightly better than the 20ml variant. This isn't a perfect half relationship, but the margin works favorably for the smaller formulation despite a material revenue discrepancy. Lastly, regarding the Paragraph IV update, there's not much new from what we've reported since the Waxman hearings. Progress has been slow for the 340B filer requirements, and timelines continue to slip.

Got it. Very helpful. Thank you. On the ZILRETTA front, what is the latest progress on moving into specialty pharmacies? And what have been some of the adoption trends from naïve patients versus those on repeat dosing? I'll stop there. Thank you.

We are advancing into specialty pharmacies for several reasons. The HA market has been unsettled, especially with significant price reductions in June that some popular HAs experienced. This has made the market cautious about maintaining inventory due to fluctuating prices quarterly. Physicians inform us that many resources are tied up in prior authorizations, and liquidity in inventory is important. Transitioning to specialty pharmacies should help alleviate these issues. We anticipated advancing in this direction, and we expect to fully optimize our strategy later this quarter.

Thank you. Our next question comes from the line of Balaji Prasad from Barclays. Please proceed.

Hi, good morning. This is on behalf of Balaji. Thank you for taking our question. During our recent conversation in June, you mentioned a positive structural change in the demand for volumes. How can we align that with the low volume for EXPAREL? Thank you.

What we saw is strength in the back half of June, which is accurate. Unfortunately, April was very soft. As we got into May, we observed some normalization back to what we thought would be the case for the quarter. Only in the back half of June did we see strengthening. When you blend those things together, we reported a 4% procedure increase. Both statements hold true: we enjoyed strengthening in the second half of June, and we reported 4% year-over-year volume growth, which was a recovery from a tough April leading into May and ultimately stabilizing as June progressed.

Got it. Very helpful. Thank you.

Thanks.

Thank you. Our next question comes from the line of Rohit Bhasin from Needham & Co. Please proceed.

Hi, this is Rohit on for Serge. Thanks for taking our questions. Why do you think we haven't seen EXPAREL benefit from the improved procedure volumes that we've seen with medtech companies and hospital companies reporting in the first half of '23? Also, can you provide an update on the European launch of EXPAREL and how that's going?

The answer is quite simple. The growth we see, such as in hips and knees, aligns with the numbers reported by the medtech companies. However, various other orthopedic procedures—rotator cuff and foot & ankle, for example—remain soft. Overall, orthopedic volumes are down year-on-year using IQVIA data, which shows a larger decline in soft tissue. We are participating in knees and hips, where we have seen growth; these two are the only surgery types growing currently. Also, we have observed a decline in soft tissue procedures accounting for more than 45% of our business. The second part of your question about Europe: it has been slower than we anticipated, given the war and its negative impact on approving new products in hospital formularies. However, we have made significant progress lately. We witnessed several major medical institutions approve EXPAREL and iovera recently. Specifically, several spasticity centers have adopted iovera for use in Europe, and in the last few days, we secured a 52-hospital chain alongside various orthopedic hospitals in Europe. So while Europe was slow, we expect to catch up and do well throughout the remainder of this year and into 2024.

Thank you.

Thank you.

Thank you. Our last question comes from the line of Boris Peaker from TD Cowen. Please proceed.

Great. Thanks for taking my question. First, I just want to know cadence has been on the FDA drug shortage list, I think, for a while now. Curious what you're seeing in terms of bupivacaine availability and how that may be impacting EXPAREL? And my second question in terms of the lower extremity nerve block, have you discussed with the FDA if you should be expecting an advisory panel on this or not? Thank you.

Our experience with bupivacaine suggests that the shortage has affected our pumps more than EXPAREL. The bupivacaine shortage revolves around certain packaging sizes, strengths, and dosages. In hospitals, protocols dictate providers to have specific dosage availability. If they need a certain strength that isn’t available, it creates concern about improper administration. The net result is that while there isn't a material benefit to EXPAREL because of the shortage, the protocol mechanisms are impacted. Regarding the lower extremity nerve block, we've had extensive discussions with the FDA, and we do not expect an advisory panel on this.

Great. Thanks for taking my question.

Thanks, Boris.

Thank you. At this time, I'm showing no further questions, and I would like to turn the conference back to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, Gerald, and thanks to all on the call today for your questions and time. We are starting the second half of the year with positive momentum, and we are excited about the opportunities that are ahead of us. Throughout the balance of the year, we will continue to work to transform the lives of patients who need non-opioid pain management, which is an ongoing pain point throughout this country and around the world. Next up for us is the Wedbush Conference in New York. Thank you all, and stay well. Goodbye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.