Good day, and thank you for standing by. Welcome to the Q4 2023 Pacira BioSciences Earnings Conference Call. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to today's conference call to discuss our fourth quarter and full year 2023 financial results. Joining me are Frank Lee, Chief Executive Officer; Tony Malloy, Chief Legal Counsel; and Charlie Reinhart, Chief Financial Officer; Jonathan Slonin, Chief Medical Officer, is 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 our filings with the SEC, which are available from the SEC or the Pacira website. Before turning the call over to Frank, I'd like to mention that going forward in 2024, we will be shifting the timing of our quarterly calls to post market, with an expected start time of 4:30 p.m. Eastern Time. With that, it is my pleasure to welcome Frank Lee.

Well, thank you, Susan, and good morning, everyone. I'm excited to speak to you today as the new CEO of Pacira BioSciences. I was drawn to this organization because Pacira is the leader in non-opioid pain management. Pacira has market-leading products, a clear sense of purpose, a talented team, and an unwavering commitment to transforming the lives of patients by expanding access to opioid-sparing pain management. I was especially inspired by the team's steadfast commitment to working with leading medical societies and patient organizations to get NOPAIN over the finish line. And this legislation is a real testament to Pacira's leadership. It's been a busy and productive time since I joined the company last month. I've met with colleagues here in New Jersey and at our Science Center Campus in San Diego. I've also received valuable feedback on our culture and met with key stakeholders. Now that I've spent several weeks listening and learning, there's no doubt. This team is highly committed to our corporate mission and the impact that our three trusted products are making in patients' lives. Consequently, I'm even more enthusiastic for Pacira and the patients we serve. This is a special company that I'm both humbled and honored to lead to this next phase of growth. While much has been accomplished, it's still early days in my tenure here at Pacira. I'm excited to continue to work with the team and our stakeholders to define a thoughtful path for long-term growth. And I look forward to sharing more details as the year progresses. That said, we're taking several steps to ensure we are fit for growth going forward and best positioned for sustainable success. We've initiated an organizational restructuring that includes the following key changes: Reshaping our executive team and launching searches for a new position, Chief Commercial Officer and Chief Business Officer; reallocating our efforts and resources from ex U.S. markets and certain early-stage development programs to the U.S. market; reprioritizing investments to focus on NOPAIN readiness; and enhancing key commercial capabilities such as strategic and national accounts, marketing, market access, and reimbursement; and finally, doing a thorough strategic review of our pipeline and therapeutic area strategy. Going forward, we'll foster a culture we call One Pacira, grounded on key values and behaviors that enable the whole organization to work as a united team. For the remainder of today's call, I'd like to focus on EXPAREL, the product that will drive substantial growth in 2025 and beyond. EXPAREL recently passed the 14 million patient mark, and we're confident in its potential to grow to blockbuster status. This year, we're advancing three key drivers: first, launching EXPAREL in two new lower extremity nerve block indications; second, preparing for the launch of NOPAIN in 2025; and third, expanding access to 340B pricing and new GPO partnerships. I'll start with lower extremity nerve blocks. Our sales force is ready, and the launch is officially underway. Importantly, we're going to market with an overwhelmingly positive body of data. From two head-to-head Phase III studies demonstrating 4 days of superiority over bupivacaine. The first study evaluated EXPAREL as a sciatic nerve block in the popliteal posterior for bunionectomy. EXPAREL achieved a 44% reduction in pain scores while reducing opioid consumption by 61% versus bupivacaine. In addition, patients who received EXPAREL were 5 times more likely to be opioid-free. The second study evaluated EXPAREL as an adductor canal block for total knee arthroplasty. In this study, EXPAREL achieved statistically significant reductions in pain scores and a 23% reduction in opioid consumption versus bupivacaine. These results are highly significant with p-values of less than 0.01. With respect to safety, EXPAREL was well tolerated, with the safety profile consistent with bupivacaine. These positive outcomes were achieved with a 10 ml dose, making a single-dose EXPAREL nerve block a very attractive value proposition to the anesthesia and surgical community for knee and foot and ankle surgeries across all sites of care. The sciatic nerve block study in the popliteal posterior was recently published online in the Journal of Clinical Anesthesia, and we're working to secure publication of the TKA study. We believe this is going to be a $100 million opportunity over time. We have a strong presence in where anesthesiologists are already doing adductor canal blocks with bupivacaine. So we expect faster uptake in this segment, which is over one million procedures. Conversely, we have a very limited presence in other lower extremity procedures like ACL repair or foot and ankle procedures. So we expect uptake in these segments to be slower. Switching gears to NOPAIN, we believe this will be an important event for both patients and Pacira. As you know, products used to manage postsurgical pain are largely reimbursed as part of the bundled procedure payment. Bundled reimbursement incentivizes the use of cheaper generic approaches to managing postsurgical pain that often incorporate opioids. Financial pressures facing healthcare systems further incentivize cost-driven approaches. NOPAIN mandates separate CMS reimbursement of non-opioid therapies for postsurgical pain relief across all outpatient settings. It will eliminate the cost period by fully reimbursing at average selling price, or ASP, plus 6% beginning January 2025. There are roughly 6 million annual CMS procedures in the outpatient settings, with a split of roughly 3.5 million procedures in the hospital outpatient settings and 2.5 million procedures performed at ambulatory surgical centers. As a first step, we'll be allocating resources to drive education and to help healthcare systems implement EXPAREL as the best practice standard of care for CMS patients. The value proposition is clear as a recent review of 5-year real-world Medicare claims data for hospital outpatient procedures demonstrated a significant correlation between EXPAREL utilization and improved patient outcomes, including reduced opioid prescription pills, emergency room visits, and hospital admissions. These data were published in the Journal of Medical Economics. Over time, as we underscore the value of EXPAREL is providing to CMS patients, we're hopeful that commercial payers will be compelled to follow suit and provide separate coverage for another 12 million outpatient procedures. We've been paving the way for NOPAIN through our investments in 340B pricing and new GPO partnerships, such as our recently announced deal with Premier, whose significant network of hospitals and healthcare systems covers nearly 20% of EXPAREL relevant market procedures. These programs assist healthcare systems in affording the opportunity to improve patient care through best-practice pain management. Our customers will have a favorable acquisition cost, and once NOPAIN takes effect next year, they'll be reimbursed at ASP plus 6%. In 2024, we're preparing for NOPAIN as we would a new product launch because it's that important. To ensure readiness, we'll be enhancing our commercial organization with new talent and expertise to ensure operational excellence within critical functions such as marketing, strategic accounts, market access, and reimbursement. We'll also be investing in programs to drive awareness and education and action across key decision-makers and sites. We'll track and update you on our progress during the course of the year. We believe NOPAIN will result in accelerated and sustainable growth beginning in 2025 that will drive EXPAREL to blockbuster status. As we do this, we'll hold the bar high with respect to resource allocation and strong execution. Before turning the call over to Tony, I'd like to highlight the FDA's recent approval of our sNDA for our 200-liter manufacturing suite in San Diego. This enhanced 200-liter manufacturing process is just another example of how the Pacira team continues to innovate and augment our broad IP estate with new EXPAREL patents. Our strong and growing patent estate leaves us confident that our EXPAREL franchise is well protected and positioned to drive significant and durable long-term sales growth, as a potential generic would have to successfully litigate and overcome all of our EXPAREL patents. With that, I'll turn the call over to Tony Malloy, our Chief Legal Counsel, for his review of our recent Paragraph IV litigation and next steps.

Thanks, Frank, and good morning to all on the call. I'd like to take a few minutes to update you on the status of our patent infringement lawsuit against eVenus. As background, Pacira initiated this litigation in the U.S. District Court of New Jersey, after receiving notice from eVenus that they submitted an abbreviated new drug application, or ANDA, to the FDA with a Paragraph IV certification seeking authorization for a generic version of EXPAREL. This first lawsuit alleges patent infringement of EXPAREL U.S. patent number 11033495 or the 495 patent. The 495 patent claims a composition of EXPAREL made using an enhanced manufacturing process which was a result of several years of innovation by the Pacira scientific team, with an investment exceeding $100 million. The 5-day bench trial concluded on February 14, and we are currently engaged in post-trial briefings, with closing arguments set for May 2. We expect the judge to rule on the 495 case before the expiration of the 30-month stay on July 1. We are confident in our position regarding our 495 patent and the related 2041 expiry, and we stand ready to engage the court with it in the event of any decision. A second patent infringement suit is also underway in the U.S. District Court of New Jersey, alleging infringement of U.S. patent number 11426348, or the 348 patent, which claims the composition of matter for EXPAREL. The trial date has not been set for the 348 patent litigation. The 495 and 348 patents are just two deliverables from our comprehensive and growing patent portfolio. Our efforts continue to bear fruit by listing additional patents in the FDA Orange Book. We also have additional notices of allowance from the U.S. Patent and Trademark Office, and further applications are being prosecuted. These include chemical composition, product by process, method of use, and process patents. Many of these patents will qualify for listing in the FDA Orange Book. It is important to note that the FDA has established extremely rigorous hurdles for proving bioequivalence to a multivesicular liposomal bupivacaine, and this would have to be accomplished without infringing on the broad Pacira patent estate. We know consistently manufacturing EXPAREL would be extremely challenging for a potential generic, since Pacira is the only company to manufacture multivesicular liposomal products at commercial scale, with more than 20 years of expertise in doing so. For eVenus to be successful in the 495 case, the 348 case, as well as any future patent litigation, they will have to overcome every one of our patents. This is in addition to establishing bioequivalence and securing approval from the FDA, which they haven't done yet. Bottom line, we firmly believe we have built an extensive portfolio of intellectual property around our EXPAREL franchise, and it is well protected from multiple directions. Generic attempts are contemplated for successful products like EXPAREL. We continue to have a thriving EXPAREL franchise that is supported by a strong and growing patent estate that we will continue to vigorously defend. With that, I will turn the call over to Charlie for his financial report.

Thank you, Tony, 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. Fourth quarter EXPAREL sales of $143.9 million were 4% higher than 2022. Fourth quarter ZILRETTA sales increased to $28.7 million versus $28 million for 2022. And iovera sales improved to $6 million compared to $4.6 million reported in 2022. Turning to gross margins. On a consolidated basis, our fourth quarter non-GAAP gross margin percentage was 74%. Fourth quarter EXPAREL margins were in the high 70% range as expected, but were partially offset by lower margins for ZILRETTA and iovera. For non-GAAP R&D expense, the fourth quarter increased to $16.6 million, from the $15.7 million reported in 2022. This year-over-year increase primarily relates to start-up activities for the ZILRETTA Phase III study in shoulder OA. Non-GAAP SG&A expense came in at $57.4 million for the fourth quarter, which is up from $54.7 million in 2022. This increase is largely due to legal fees associated with the Paragraph IV and other litigation. Fourth quarter interest expense improved to $3.4 million versus $11 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. And lastly, we delivered another quarter of significantly positive adjusted EBITDA of $65.4 million. Turning to our outlook for 2024. Today, we are guiding to full year total revenues of $680 million to $705 million. This range assumes mid-single-digit volume growth for EXPAREL and ZILRETTA, and a low-teens growth rate for iovera. To remind you, EXPAREL volume growth will be largely offset by a lower net selling price due to our investment in expanding market access through our new GPO partnerships, which are expected to have a mid-single-digit impact on our selling price while growing volumes over time. As Frank mentioned, we believe these GPO partnerships are a core investment to ensure NOPAIN readiness in January 2025. For expenses, 2024 guidance is as follows: non-GAAP consolidated gross margins of 74% to 76%; non-GAAP research and development expense of $70 million to $80 million; non-GAAP SG&A expense of $245 million to $265 million; and finally, noncash compensation expense of $50 million to $55 million. As Frank highlighted, underpinning our sharp focus on growth will be a commitment to solid execution and delivering on the expectations that we set by providing guidance we can confidently stand behind. With respect to our capital allocation strategy for 2024, in the near term, we are investing to ensure commercial readiness for the rollout of NOPAIN pain in 2025 and to support long-term growth. We are also planning for the retirement of debt, including the face value of our convertible notes in August 2025 and the subsequent repayment of our Term Loan A. We will continue to regularly assess our capital allocation strategy. As detailed plans for NOPAIN are implemented this year, we look forward to sharing more specifics. With that, I'll turn the call back over to Frank.

Thank you, Charlie. As you may have seen today, we reported that Charlie will be stepping down as our Chief Financial Officer at the end of the year. I'd like to personally recognize him for his 8 years of financial leadership at Pacira. We're on solid financial and operational footing, and we wish Charlie all the best as he prepares for his well-deserved next chapter. In closing, let me summarize. We are sharply focused on driving long-term growth. We have three great products, and there's no question about that. We currently have the lower extremity launch, which will be a solid tailwind for EXPAREL. We have a significant catalyst ahead in NOPAIN, and in 2024, will be a key setup year to ensure we are fit for driving growth in 2025 and beyond. To that end, we're reshaping our executive team, reallocating ex U.S. and early-stage development resources to the U.S. market, and reprioritizing investments to focus on NOPAIN readiness and enhancing key commercial capabilities. Lastly, we're confident in our strong and growing intellectual property estate, and we'll continue to vigorously defend our EXPAREL franchise. As we progress through the course of this year, I look forward to sharing updates on the lower extremity nerve block launch, NOPAIN readiness, our progress in reshaping our culture and capabilities, and crystallizing our long-term vision and growth strategies. I want to take a moment to applaud the dedicated and talented Pacira team, who have built a successful and sustainable business that we're now scaling to drive EXPAREL to blockbuster status. I also want to thank you, our shareholders and partners in this journey, for the warm welcome and encouragement I received since taking the helm at Pacira. Together, we're changing the course of pain management and hopefully saving patients from the deadly effects of opioid addiction. With that, operator, we're ready to open the call for questions.

Our first question comes from David Amsellem from Piper Sandler.

I have a few questions. Frank, there are many areas that are still in progress. Can you discuss your general strategy for the cost structure, especially the R&D infrastructure, and how you envision margin expansion over time? I'm interested not only in how EXPAREL will benefit from NOPAIN but also in the overall cost structure and the potential operating leverage from the official launch. Secondly, regarding NOPAIN, what are your thoughts, and although it's early, how do you anticipate the volume trajectory for next year? Additionally, could you clarify your views on the influence of sales and volumes? I'll leave it at that.

David, Frank Lee here. Thanks for the question. You were kind of breaking up a little bit on me there, but I think what I heard you ask about is cost going forward, particularly in R&D and also maybe providing a little bit more color on NOPAIN in '25 and beyond. So as it relates to cost in R&D, I may have mentioned in my script that we've taken a look at some early development programs. And based on our efforts now to reallocate our resources towards driving growth of EXPAREL, we've stopped certain programs that are in early development and reallocated those expenses towards those things that will drive EXPAREL growth, for example, like our efforts towards NOPAIN. I can tell you we've reallocated substantial resources towards NOPAIN going forward. With regard to the opportunity on NOPAIN, Charlie, maybe you can speak a little bit towards the volumes and the procedures that are impacted by NOPAIN.

So, David, you're likely aware that NOPAIN is specifically targeting the outpatient setting from the Hospital Outpatient Department. CMS handles around 6 million procedures across both the HOPD and Ambulatory Surgical Center settings, with approximately 3.5 million in HOPD and 2.5 million in ASC. Clearly, NOPAIN is relevant to CMS. Additionally, there are around 12 million patients within our total addressable market, comprising both HOPD and ASC, who are covered by commercial payers. NOPAIN will initially concentrate on CMS, and then it will be Pacira's priority to engage commercial payers as well. We are really excited about this initiative. While I don't expect everything to be completed by 2025, the initial steps of this process will definitely begin by then.

And let me just add that as we grow, margin will improve accordingly. In addition, as we consider the customers affected by NOPAIN, which include these large strategic customers, we are making investments to better serve them going forward.

Maybe just a quick follow-up. Are you going to devote significant resources to ZILRETTA and iovera going forward?

So let me just start by saying we've got three great products. And I like all of them a lot. That said, we are hyper-focused on driving EXPAREL growth. So we'll focus on that first. And then, of course, as needed, we'll pay some attention to ZILRETTA and iovera, to make sure those businesses go forward. But if you think about where we're reallocating our resources and where we expect to drive growth, it's EXPAREL.

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

Frank, as we look ahead to 2024, Charlie provided some useful insight into the revenue guidance. I’m interested in hearing more about the factors that will influence this, particularly how they affect the overall outlook for 2024. Any additional details you could share regarding these factors and their impact on the year's trajectory would be appreciated. Additionally, Frank, as you express continued confidence in EXPAREL and the advantages with NOPAIN, I’d like your thoughts on the long-term potential for EXPAREL, specifically regarding its ability to achieve over $1 billion in sales. I’m curious about your perspective on its ultimate potential in the coming years.

Yes. Thanks for the questions, Greg. First, with regard to revenue for 2024, maybe some initial comments here, and then I'll turn it over to Charlie. What we're trying to do this year is to be conservative in terms of the way we provide guidance, and to provide you guidance that we can stand behind. So as the year goes forward, we expect to tighten the guidance as we have additional information, but that's what we expect, number one. And it's a setup year for 2025. And Charlie, maybe you can provide a little bit more color to your comments on 2024.

We have indicated that we anticipate mid-single-digit volume growth for both EXPAREL and ZILRETTA. While ZILRETTA's gross to net remains stable, the implementation of the GPO contracts may offset the volume growth for EXPAREL. Consequently, the primary revenue increase for 2024 is likely to come from NOPAIN. Overall, looking at our profit and loss for 2024, we expect modestly higher revenues and improved gross margins. Our R&D budget will remain the same as last year, and we are increasing our SG&A investment to support NOPAIN's growth next year, leading to a bottom line similar to this year’s results. We view 2024 as a bridge to 2025, making important investments to leverage NOPAIN in 2025. Overall, we expect the year to be better than 2023, which we consider a favorable situation.

Thanks, Charlie. Just about the long term. First, let me just say that it's still early days in my tenure. That said, just some color about the long term. In particular, I think you had mentioned NOPAIN. About 75% of EXPAREL-relevant procedures are in the outpatient setting. As you know, NOPAIN is really impacting outpatient reimbursement, specifically for CMS patients. That's important to note. Secondly, commercial payers will be important in terms of a lever to accelerate that growth. So we're taking steps now to make sure that we're serving the commercial payer customers in the way they need to be served. And third, as I've mentioned earlier, we're enhancing and bolstering our commercial capabilities. We have great products, and we need to get them to more patients and serve our customers at a higher level. We'll do that. Those factors will be important as we think about driving growth with EXPAREL in the midterm. Over the long term, what we're doing now is we're taking a very thoughtful look at our pipeline, and we're taking a very thoughtful look at our strategic outlook as it relates to our therapeutic area strategy. As the year goes on, we'll be able to communicate that more clearly to you, and so that will help drive some of our future growth over the long term as well.

Our next question comes from the line of Gary Nachman from Raymond James.

Welcome, Frank. Could you elaborate on the additional GPO contracting for EXPAREL that you're planning for this year? How many more of these contracts might you pursue? Charlie mentioned that this should affect the net price in the mid-single digits. How much clarity do you have on that? Are you confident that this will be the only effect in terms of net price? Also, how much are you anticipating the lower extremity nerve block will contribute this year, and what measures are you taking to support its launch? You previously mentioned reallocating resources and increasing SG&A spending. Are there other areas or indications for EXPAREL that you'll be investing in more this year after reviewing the overall market?

Thanks for the questions, Gary. Let me hit the GPO one and then turn it over to Charlie for additional detail. With respect to GPO contracting, just at a high level, our product, EXPAREL, is utilized in both the hospital and HOPD setting, of course, in the broadly outpatient ASC as well. And so in these kinds of settings, it's very commonplace for products to participate in GPOs. That's number one. What that does is it makes spending at the hospital, at the institution, be compliant spend versus noncompliant spend. What that means is it's not a flag, so there's not yet another hurdle for physicians to utilize EXPAREL in these settings. We're participating in the Premier GPO contract as we mentioned previously. We expect to sign a couple more in the coming months ahead. What that does not only enhances access but also allows us to tap into the services that GPOs provide in helping to educate their membership. In our case, this is going to be very helpful as we think about NOPAIN education and what that means in terms of making that take hold in the institutions and all the steps it takes. So Charlie, maybe over to you.

Certainly. Gary, Frank mentioned that we are currently in discussions with a few other GPO organizations and anticipate signing agreements with them this year. The organizations we're considering are the most significant, particularly concerning our total addressable market. Collectively, these three organizations represent about two-thirds of our total addressable market from a procedural standpoint. As for our confidence regarding their impact, we feel quite assured. We understand the terms of the contracts and what percentage of our existing business will likely be influenced. If I have underestimated the costs, that would actually be a positive outcome, as it would indicate an increase in volume and revenue, which is precisely what we aim for. Ultimately, in 2024, the growth in volume from our main business of EXPAREL will match the costs associated with the GPOs. We expect them to assist us in preparing for NOPAIN, which is akin to a product launch for us, and we want to ensure we have the widest access possible when NOPAIN is introduced. We see this as a crucial approach to achieving that goal.

Thanks, Charlie. The question about lower extremity, Gary. I'm really happy to say that we're just coming off of our national sales meeting. That was at the end of January, and our sales reps are very excited to take this new data. This is the first controlled data versus an active control, and it's very positive, as I mentioned earlier in my talk. So they're very excited to be in front of their customers. Early feedback has been very positive. That said, it's early days. They've only been out there for about a week or so. So we'll have more news for you as the year goes on. As we've talked about before, some use is already taking place in that setting. However, we think there's incremental sales there as well. So as the year goes on, we'll provide you further updates.

Are there any other areas or markets you believe have potential for growth, such as obstetrics or pediatrics, if you were to direct more efforts towards them?

Yes. Thanks, Gary. I mean, certainly, there are some other areas that we've talked about. One of the things that we're doing now is we're taking a very thoughtful review of our entire pipeline as well as programs that we have ongoing. As we move forward, we'll be able to communicate more about that with you. I do see quite a bit of potential for EXPAREL. I also want to make sure that we're doing the kinds of studies that are required to get the right kind of reimbursement and the right kind of differentiation in the marketplace.

This now concludes our question-and-answer session. I would like to turn it back to Susan Mesco, Head of Investor Relations, for closing remarks. The floor is yours.

Thank you, Gerald, and thanks to all on the call for your questions and time today. We are excited about the opportunities that lie ahead for us. Throughout the balance of the year, we will continue to ensure we are well positioned for long-term success. The opioid epidemic continues to be a national crisis, underscoring the vital importance of our mission. Thank you, and stay well.

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