Pacira BioSciences, Inc. Q4 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the Pacira BioSciences Fourth Quarter 2024 Conference Call. Operator provided instructions were given to participants. Please note that today's conference is being recorded. I would now like to turn the call over to Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to today's conference call to discuss our fourth quarter and full year 2024 financial results. Joining me are Frank Lee, Chief Executive Officer; and Shawn Cross, Chief Financial Officer. Kristen Williams, Chief Administrative Officer; Tony Molloy, Chief Legal Officer; Jonathan Slonin, Chief Medical Officer; and Brendan Teehan, Chief Commercial 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 subject to the safe harbor provisions of federal securities laws. Such statements represent our judgment as of today and may involve risks and uncertainties. This may cause our actual results, performance or achievements to differ materially. For information concerning risk factors that could affect the company, please refer to our filings with the SEC. These are available from the SEC or the Pacira website. Lastly, as a reminder, we will be discussing non-GAAP financial measures on today's call. A description of these metrics, along with our reconciliation to GAAP can be found in the news release issued earlier this afternoon. With that, I will now turn the call over to Frank Lee.

Thank you, Susan, and good afternoon, everyone. The considerable progress we made in 2024 leaves us well positioned for 2025 and beyond. Key highlights from last year include record revenues of $701 million, the high end of our guided range, separate CMS coverage and product-specific reimbursement codes for both EXPAREL and iovera. RMAT designation from the FDA for PCRX-201 and the readout of compelling 2-year data from our 72-patient Phase 1 study. And importantly, establishing a best-in-class commercial, market access and medical powerhouse to drive top line growth. Looking ahead, the year is off to a strong start. We're sharply focused on executing our 5/30 strategy and becoming an innovative biopharmaceutical organization. We believe executing on this strategy is the best way to achieve growth and value creation as a leader in musculoskeletal pain and adjacencies. The plan focuses on five key objectives that we intend to achieve by 2030. These objectives support two broad strategic imperatives: first, accelerating growth in our strong commercial-based business; and second, advancing an innovative pipeline and potentially transformative assets like PCRX-201. To summarize our 5/30 goals: patients — we expect our products to be benefiting more than 3 million patients annually by 2030. Products — we plan to grow product revenues by double-digit CAGR over the next 5 years. Profitability — we expect to achieve a 5-percentage point expansion in gross margin over 2024. Pipeline — we anticipate having five novel programs in our clinical development pipeline. In partnerships — we plan to establish at least five clinical or commercial partnerships. When we look at Pacira's commercial-based business, we have a solid foundation. Our three best-in-class products are generating significant cash flow. Each of these franchises has ample room for increased penetration and market expansion with multiple key growth drivers starting to kick in this year. For our flagship product, EXPAREL, the NOPAIN Act is now in effect. This means we have a reimbursement pathway for 18 million outpatient surgical procedures. Approximately 6 million of these procedures have CMS coverage and 12 million had commercial coverage. EXPAREL now has its own product-specific J code with the reimbursement rate of average selling price plus 6%. Securing this code was a particularly important milestone as it will expand patient access to best practice of opioid-sparing pain management. In addition, the J code will streamline the reimbursement and billing process. It is also more likely to be recognized and covered by commercial payers. While it's still early days, our field teams are seeing evidence of progress since the rollout of NOPAIN on January 1. This includes the recent formulary wins as well as a rising level of awareness around the J code. While we're pleased with the positive early indicators, it will take time for our customers to adopt this new reimbursement. In addition, our IQVIA claims data can take up to four months to process. We look forward to sharing future updates as more data become available. On the payer front, we continue to highlight the extra value proposition with real-world evidence. In addition to CMS, we now have commercial payers beginning to recognize the importance of reimbursing EXPAREL outside of the bundled payment. Recent progress includes several national payers adopting NOPAIN-like policies. This represents roughly 40 million covered lives and more than doubles our previous commercial coverage map. Our teams will continue to focus on expanding coverage, and we'll keep you apprised on future calls. Along with favorable patient outcomes, separate reimbursement helps our customers navigate financial challenges. At the same time, it gives them the opportunity to be at the forefront of opioid-sparing pain management. This is especially relevant for those accounts receiving discounted pricing through 340B or GPO networks and the benefit is mutual given the anticipated EXPAREL volume expansion. We launched two GPO partnerships last year, both are performing according to plan, with volumes up and only modest impact on net sales dollars. Our third and final GPO agreement is expected to go live in the first half of this year. And once completed, more than 80% of our current EXPAREL business will be under contract. Given our progress on the market access front, along with our learnings from market research, we believe it's the right time to invest in targeted direct-to-consumer marketing. We expect this DTC investment to expand utilization by driving patient demand for EXPAREL to be a part of their treatment plan for postsurgical pain. We will begin with targeted pilot programs in the first half of the year and adjust our investment accordingly based on the ROI data. These patient-focused programs augment the EXPAREL value proposition we are presenting to physicians and other key stakeholders. Turning to ZILRETTA, a best-in-class product that is promotionally sensitive. This year, we are focusing on generating additional share of voice, increasing our reach and driving awareness around its key advantages. It is the first and only long-acting single-shot corticosteroid injection for osteoarthritis knee pain. ZILRETTA has demonstrated high patient satisfaction, up to four months of reliable pain relief and fewer office visits. ZILRETTA also has a strong safety and pharmacokinetic profile as it remains localized in the knee. This allows for fewer systemic effects, including significantly lower blood glucose spikes and important benefit for diabetic patients. Forty percent of patients with osteoarthritis also have diabetes, so this represents a meaningful opportunity. In parallel with our commercial efforts, our Phase III registrational study is advancing in shoulder osteoarthritis and is on track for top line results next year. If approved, ZILRETTA would be the first and only long-acting steroid approved for use in shoulders. This is a sizable market with approximately 1 million intra-articular injections administered each year. Switching gears to iovera. We have a key growth driver kicking in this year with separate CMS reimbursement now in effect via the product-specific code, C-98-09. This is important as physicians are eligible to receive up to $256 for iovera using this new code. This payment is in addition to the procedural fees they are receiving. We're also launching a new iovera SmartTip. This innovative tip was approved late last year and is specifically designed for use as a medial branch block to relieve low back pain. Millions of Americans suffer from chronic low back pain; it often leads to poor quality of life, disability, lost wages and persistent prescription opioid use. Lastly, our registrational study of iovera for treatment of spasticity is advancing with top line results expected next year. There is a significant lack of innovation and patient satisfaction in this debilitating condition. We believe iovera represents a novel approach for patients with moderate to severe spasticity seeking better treatment options. Turning now to our second strategic imperative, advancing an innovative pipeline. Here, we're focused on becoming a therapeutic area leader in musculoskeletal pain and adjacencies. These are large markets, significantly lacking innovation. Nearly one in four Americans are living with chronic pain and seeking new interventions, addressing its underlying costs. As we look to new product development, we'll prioritize mid- to late-stage de-risked opportunities. More specifically, product candidates with validated mechanisms and established reimbursement pathways. We'll also look to leverage our long-standing market leadership in treating pain in a precise targeted manner. Our recently announced acquisition of the remaining ownership stake of GQ Bio is a perfect example. It directly aligns with our 5/30 strategy by adding an exciting first-of-its-kind high-capacity, local delivery platform for genetic medicines. This transaction also brings us a preclinical portfolio with disease-modifying potential in prevalent musculoskeletal diseases and research and development talent. Further, it eliminates future milestones and builds upon the process development activities we've been advancing with GQ Bio since 2023. In short, we know this technology very well. We believe there is great potential for this platform to position us as a leading developer of novel treatments for the underlying causes of chronic pain using a targeted molecular approach. We have a clear understanding of the safety and tolerability of the high-capacity adenovirus or HCAd viral vector, which is based on AD5. This is a well-understood serotype that is very common in community circulation. We also have strong data suggesting it is not susceptible to pre-existing neutralizing antibodies. This allows for the possibility of redosing. This platform solves many of the challenges that have made gene therapy inaccessible for common diseases. HCAd vector is much more efficient at delivering genes into cells compared to many other gene therapies that rely on adeno-associated virus (AAV) vectors. As a result, the desired effect can be achieved with much smaller doses. The vector used in the HCAd platform can carry up to 30,000 base pairs of DNA, which enables gene therapy with multiple or larger genes compared to AAV vectors. It is locally delivered and sustained. This differs from systemic approaches requiring much higher dosing to achieve the desired effect. Lower dose levels, coupled with efficient manufacturing, support a favorable and commercially viable cost of goods profile. Another key advantage of our HCAd gene therapies: PCRX-201 is a lead program from this platform, which we believe underscores its promise given its encouraging data in osteoarthritis. Last year, we reported compelling results from a robust Phase I study of PCRX-201 in 72 patients with moderate to severe osteoarthritis. A single intra-articular injection demonstrated unprecedented pain relief and durability across all levels of disease severity for at least two years. The greatest efficacy was observed in the steroid-pretreated group in all three doses: more than 70% of patients saw at least a 50% improvement in pain versus baseline at week 16 and 78% achieved significant benefit. PCRX-201 was also well tolerated with no serious treatment-emergent adverse events. We continue to follow these patients and look forward to reporting exciting 3-year follow-up data later this year. While there's typically a placebo phenomenon within osteoarthritis pain studies, we are encouraged by our data. The magnitude and durability of efficacy far exceeds the placebo effect reported in published randomized studies. Patient enrollment is now open for our Phase II double-blind two-part study of PCRX-201. The study will include an active steroid comparator. We will share additional details on the study design in the coming weeks with top line data from Part A expected late next year. Beyond PCRX-201, the GQ transaction brings us several exciting product candidates in preclinical development. We've also identified numerous well-validated cytokines for musculoskeletal pain and adjacencies that will be strong candidates for this platform. We're planning to share more details on the potential of this exciting platform through an educational webinar in the spring. For those areas outside of our strategic focus, we see great potential for partnering. This could extend the HCAd platform into other conditions of high unmet need, where localized treatment with a therapeutic protein is warranted. Fittingly, this brings us to the last component of the 5/30 plan, forming five clinical or commercial partnerships over the next five years. As you know, our products are currently only marketed in the U.S. We believe there is a meaningful opportunity in certain key markets outside of the U.S. where our products can be financially viable and deliver value to patients. We will be actively seeking commercial partners to realize that potential. In parallel, we will also look to identify ways we can partner on development programs to balance portfolio risk. Before I turn the call over to Shawn, I'd like to formally welcome two new additions to our executive team: Brendan Teehan, our newly appointed Chief Commercial Officer; and Krys Corbett, who joined as our Chief Business Officer. These two executives bring extensive experience to Pacira at an important stage in our evolution. The Board also recently appointed Laura Brege as Chair of the Board, while former Chair Paul Hastings and Andreas Wicki have both retired. As a reminder, our Board refreshment began 15 months ago with the appointment of five new directors. These changes also significantly reduced the average tenure of our Board to less than five years compared to nearly 12 years in 2023. We thank Paul and Andreas for the many contributions to the company. Moving forward, I am confident Laura, Brendan and Krys will be key contributors to our next phase of growth. With that, I'll turn the call over to Shawn for a review of the financials.

Thank you, Frank. I'll start with an update on sales and margin trends. Fourth quarter EXPAREL sales increased to $147.7 million versus $143.9 million in 2023. Volume growth and a 2024 price increase were partially offset by a shift in payer mix and discounting associated with GPO partnerships. Fourth quarter ZILRETTA sales increased to $33.1 million versus the $28.7 million reported in 2023. For iovera, sales were $6.5 million compared to $6.0 million in the fourth quarter of 2023. Turning to gross margins. On a consolidated basis, our fourth quarter non-GAAP gross margin was 79%. This was driven by improved margins for EXPAREL and ZILRETTA. For non-GAAP R&D expense, the fourth quarter increased to $22.0 million from $16.6 million reported last year. This increase relates to product development and clinical study costs. Non-GAAP SG&A expense came in at $78.6 million for the fourth quarter, which is up from $57.4 million last year. This increase is largely due to investments in our commercial, medical and market access organization as well as NOPAIN readiness. All of this resulted in another quarter of significant adjusted EBITDA of $62.5 million. As for the balance sheet, we exited the fourth quarter in a position of strength with $485 million of cash and investments. With the business producing significant operating cash flow, we believe we are well equipped to advance our 5/30 strategy and create shareholder value. We are taking a disciplined approach to capital allocation where we are focusing on four areas. First, accelerating growth in our best-in-class base business. Second, advancing an innovative pipeline to become the leader in musculoskeletal pain and adjacencies. Third, managing our balance sheet and planning for the repayment of debt. We have a convertible note due in 2025, a term loan due in 2028 and a second convertible note due in 2029. And fourth, returning capital to shareholders. We have $125 million remaining of our share buyback authorization, which we put in place last year and runs through the end of 2026. Going forward, we will continue to be highly strategic while balancing favorable operating margins and advancing our 5/30 strategy. This includes carefully investing in a best-practice commercial, medical and market access powerhouse and targeted direct-to-consumer marketing. In parallel, we will advance a pipeline of potentially transformative assets like PCRX-201 as we transition into an innovative biopharmaceutical organization. That brings us to our full year P&L guidance for 2025 as follows: total revenue of $725 million to $765 million. As Frank mentioned, we are pleased with the positive early signs and growing levels of awareness around NOPAIN. That said, it will take time for our customers to integrate this new reimbursement — we expect more meaningful uptick to begin in the second half of the year. Non-GAAP gross margins of 76% to 78%, non-GAAP R&D expense of $90 million to $105 million. At the midpoint, this represents an 11% increase over our fourth quarter 2024 annualized run rate. The key drivers are increased costs associated with clinical studies. These include the following: our Phase II study of PCRX-201, investments to support the PCRX-201 and HCAd commercial manufacturing process as well as other activities related to our acquisition of GQ Bio. The new pilot study of ZILRETTA and HIF-0A and ramping costs for the ZILRETTA and iovera registration studies, which we anticipate will read out in 2026. For non-GAAP SG&A expense, we are guiding to a range of $290 million to $320 million. At the midpoint, this represents an 8% increase over our fourth quarter 2024 annualized run rate. Key drivers of this increase are new marketing initiatives, including our DTC pilot programs that are beginning in the first half of the year. As Frank mentioned, we believe these DTC investments will drive increased patient demand for EXPAREL. And as always, we will be prudent and adjust spend accordingly based upon the data. Stock-based compensation of $56 million to $61 million. And lastly, for those modeling adjusted EBITDA, we expect our 2025 depreciation expense to be approximately $30 million. This increase over 2024 is largely driven by our 200-liter suite in San Diego, which began producing commercial supply in mid-2024 and a new ZILRETTA fill line. With that, I will turn the call back to Frank.

Thanks, Shawn. In closing, 2024 was a tremendous year of progress across the organization. All the work completed has allowed us to enter 2025 sharply focused on 5/30 and our transition into an innovative biopharmaceutical organization. We are confident the steps we are taking position us for sustainable growth and success as a leader in musculoskeletal pain and adjacencies. With that, operator, we're ready to open the call for questions.

Operator instructions were provided for the question-and-answer session. Our first question is coming from the line of Oren Livnat with H.C. Wainwright. Your line is now open.

Thanks. I got a couple of questions. Just big picture, can you talk more about the assumptions for NOPAIN, both implementation on the customer side and uptake? You're obviously not trying to get ahead of yourself by talking about a second half ramp. But I'm trying to understand what would be the impediments to sort of an aggressive rapid uptake on the customer side, given hospitals certainly would like to be making margins here? I'll wait for the follow-up.

Well, thanks for your question, Oren. We're excited about NOPAIN. And as we've said consistently, it will take time for our customers to really get traction around NOPAIN, and we think that's going to be starting in the second half. Some of the things that we've got to make sure we do with our customers are certainly raise awareness, get them comfortable with the J code and in many cases, our customers are trying out the code to make sure that they're getting reimbursed. So there's a learning period there. We have to go through that, and we have some encouraging signs that we're seeing in terms of the use of the J code, the awareness of NOPAIN and customers utilizing that code and starting to get reimbursed. The early signs are good, but it takes time for us to get traction on something like this.

All right. And I guess you sort of segued into my follow-up, which was about what experience people are already having. Are you seeing successful reimbursement such that any cautious approach to using it for fear of not getting paid is already starting to make some headway there? And have you had more access or penetration into accounts or geographies already that you hadn't at all before, where obviously there are many accounts that don't use EXPAREL at all for financial reasons, but I'm wondering if you've broken new ground with NOPAIN already with a broader set of customers?

Yes. These are all really good questions. As we get more and more data, we'll be able to answer them more factually. As we mentioned, the IQVIA claims data takes some time to true up over time. Oftentimes, these revenue cycles take a little while — it could take a couple of weeks to six, seven or eight weeks to see the revenue cycle be completed. So it's still very early days. Anecdotally, we're seeing good traction. As we mentioned, we have commercial payer wins out of the gate. It's not only the accounts but also the payers that are very important. CMS is important certainly for the outpatient setting, but of course, accounts have a mix of CMS and commercial payers. We find it encouraging that we've got some commercial payer wins early on.

All right. And if I could just — I don't know if you want to comment at all on litigation going forward. But just big picture, you've been very confident in your optimism for a long EXPAREL runway especially after your new IP issued late last year. I'm trying to reconcile your approach to capital allocation given your confidence there, especially with the market having only barely backed off its most dire concerns from earlier last year and bounced back a little bit, but there's a huge disconnect in my view between even the current business and what it's worth, let alone major growth potential from NOPAIN and upside optionality from a pipeline. Why wouldn't you be much more aggressive with potential buyback at these levels?

Let me start by saying, as always, we value certainty as much or more than any other investor. That is an important part. We also value making sure that we have long-term value for our shareholders. That's our guiding principle. We've been active in making sure that we continue to innovate and drive forward with new patents and new work — and I would expect that going forward. From a capital allocation standpoint, we're going through a very disciplined approach, as Shawn mentioned, to make sure that we're funding our current operations. We also have quite a few catalysts here as we just talked about. We also have important pipeline additions with the great news around GQ Bio. We can talk about that a little bit. And of course, managing the balance sheet, and we do have $125 million left on our buyback program. So we'll be managing all of those in a very disciplined and balanced way. We think that's going to get us to where we need to be over the next five years.

All right. Appreciate it. I'll hop back in the queue.

Our next question is coming from the line of Gregory Renza with RBC Capital Markets. Your line is now open.

Great. Frank and team, thanks. Frank, maybe a question for Shawn. As you lay out the ranges and the guidance for 2025, can you talk a bit about the relative contributions of the product portfolio for '25? How are you thinking about that across EXPAREL, ZILRETTA, and iovera? Also, is there anything sequentially over the year we should be thinking about above and beyond what you've described when it comes to NOPAIN?

Yes, sure. I'll let Shawn speak to that in a second. Obviously, EXPAREL is our flagship product, and we have a good catalyst here with the J code as well as NOPAIN — but certainly, we plan on putting a shoulder behind ZILRETTA and iovera as well. Shawn, you can speak a little bit to how we're thinking about that.

Yes. I think the relative mix, as Frank mentioned, EXPAREL is still of course the flagship product. We fully expect the commercial investments we've made in 2024 to bear fruit and enable the top line to achieve double-digit CAGR as we exit the year and beyond in line with our 5/30 goals. As mentioned, we are pleased by the positive early signs of NOPAIN, but it will take time for customers to integrate the new reimbursement and stay tuned for what we expect to be a more meaningful uptake beginning in the second half of the year.

Great. That's really helpful. Maybe as a follow-up: you mentioned the double-digit CAGR on product revenue with 5/30. Help us understand what some of the implications are and some of the competitive landscape you were thinking about when you set those numbers through to 2030. Does it imply competitive entry with EXPAREL on some degree of timeline and competitive dynamics there?

That's a great question. We're very thoughtful as we put the 5/30 path to growth together and specifically around compounded annual growth rates in the double digits. We do not believe there will be a generic launch this year or in the foreseeable future. On top of that, we continue to build on our IP estate — we continue to innovate — and that gave us confidence to put forth the 5/30 strategy. As Shawn mentioned, we expect to pick up that growth rate as we exit the year with all the different catalysts that we have behind us.

Our next question is coming from the line of Gary Nachman with Raymond James. Your line is now open.

Hi, guys. Good afternoon. Back to the revenue guidance range: what are you assuming in terms of volume growth versus how much offsetting pressure you'll have on gross-to-net from the GPO contracts, just when we think about the NOPAIN dynamic? And then for DTC, the pilot effort — how much could EXPAREL utilization be consumer-driven versus targeting physicians and hospitals like you have done traditionally? I have a follow-up after that.

Sure. Let me address the targeted DTC question first, and then I'll hand it over to Shawn to talk a little bit more about the numbers. Typically, what we see in the industry is once you educate health care providers — and when you lower the access barriers, that is reimbursement, coding, etc. — then it's the right time to consider a very targeted approach to activating the patient. I want to underscore targeted because the level of education, access and billing savvy varies by customer across geographies. So, we're going to be very targeted, and we're going to be ROI-driven. These days, you can be very targeted with these approaches. As Shawn mentioned, we'll pilot some of those approaches in the first half of the year, and depending on what we see, we'll adjust our investment accordingly. The great news is we have a long history of educating health care providers about EXPAREL. With the J code now and NOPAIN, that gives us the opportunity to lower access barriers. Now is the right time to start to pilot and understand how best we can activate patients in certain settings and geographies. I'll hand it over to Shawn to talk about the numbers.

Yes. Just to keep this simple with regard to forward guidance on the revenue side, think about it as effectively all volume growth. That's the way to consider it.

Okay. Great. But in terms of magnitude of gross-to-net, you're going to have a little bit of pressure this year when you have the additional contracts that would obviously be offset. Is that a bit of a headwind, Shawn?

Yes. That's correct. We took a price increase and have a little bit of headwind from increased contractual discounts, and they'll offset each other. So just think about it as volume growth being the main driver.

Okay. And then, Frank, you mentioned the notable step-up in R&D spend this year. How comfortable are you with what you have in-house? Maybe comment quickly on GQ Bio and the types of preclinical programs. Do you think you need to still go outside the company to expand the pipeline further, or do you have enough internally to generate the kind of innovation you're looking for?

That's a good question. We're in the process of transitioning from specialty pharma to innovative pharma. I don't think that transition is complete; we will be taking steps in that direction. As a result, we'll start to invest more in R&D consistent with that profile. What's great is we've got not only life cycle programs for our existing products but now we're adding truly innovative programs like PCRX-201, which we're very excited about. We're starting the Phase II study — the study is open now for enrollment. That will read out Part A late next year. We're carefully evaluating the preclinical pipeline from GQ Bio; there are interesting programs there that support our 5/30 goal of five novel development programs by 2030. The HCAd platform comes with GQ Bio and could enable additional programs. The acquisition also brings talent and capabilities historically we haven't had in-house, and from a financial standpoint we believe it's a compelling transaction that eliminates future milestone payments. We're excited about the acquisition and look forward to working with the GQ Bio team.

Our next question is coming from the line of Serge Belanger with Needham & Company. Your line is now open.

This is John on for Serge today. Thanks for taking my questions. First, on iovera: with the implementation of NOPAIN, do you see it taking on a similar trajectory adjacent to EXPAREL regarding any potential increased uptake throughout 2025? Second, on the generic front, although it looks unlikely we'll see a generic launch in the near term, I wanted to gauge your appetite for a potential settlement agreement at this time.

Let me speak to the generic first, then iovera. From a generic standpoint, we value certainty as much or more than any other investor. In terms of settlement, we really can't comment on those kinds of discussions. Whatever we do will be in the long-term best interest of our shareholders and patients. I want to reiterate that we feel very good about our IP estate and we continue to innovate; you should expect more patents later this year. Regarding iovera, we're very excited about the additional reimbursement. We didn't know we would get it, so this was a bit of a positive surprise. We're excited about iovera being included as part of the products with new reimbursement. Brendan, you can speak to the additional reimbursement and the situation for iovera.

Sure. Thanks for the question. We do see this as a key growth driver kicking in this year with separate CMS reimbursement for iovera via the product-specific C code, C-98-09. That's important as physicians are eligible to receive up to $256 for iovera when it's administered in the ambulatory surgical center or an HOPD setting via the new code. The payment is importantly in addition to the procedural fees they would currently receive. So we see this as an untapped opportunity. We're looking at selectively investing in iovera for accelerated growth. It's at a different stage of its life cycle than EXPAREL, and we'll try to capitalize on the improved reimbursement landscape. Finally, we have the new SmartTip launching later this year for low back pain, and we'll continue our Phase III registration study in spasticity.

Our next question is coming from the line of Leszek Sulewski with Truist Securities. Your line is now open.

This is Gavin on for Les. Thank you for taking my questions. Quick one: with ZILRETTA's Phase III data for shoulder OA expected in 2026, how do you view its potential contribution to revenue growth? Are there plans to accelerate development timelines or expand indications?

Thanks for the question. I'm excited about ZILRETTA. It may be the product of the three that hasn't gotten the attention it deserves. It's a fantastic product for patients with pain. We're excited about the opportunity in shoulder. We expect top line data mid- to late next year. This would be the first long-acting corticosteroid for shoulder, and the opportunity is meaningful — roughly about 1 million intra-articular injections a year. We're optimistic, but obviously we have to conduct the studies and have good data. Those studies are now enrolling, and we feel good about delivering that data mid- to late next year.

Our next question is coming from the line of Hardik Parikh with JPMorgan. Your line is now open.

Frank and team, a few questions. First, a follow-up on the R&D and OpEx increase that was asked earlier. This is definitely higher than we expected. Do you see this level of year-over-year increase being more the standard, or is this mostly one-time because of the PCRX-201 enrollment and the DTC? That's the first question, and I'll follow up.

It's a good question, Hardik. I don't want to guide too many years out; I'll speak about this year. We have important catalysts this year and believe these investments will deliver a good return on investment. On the commercial, medical and market access side and on development programs, it's an exciting time around these programs. In terms of the pace of shifting toward more innovative activity, we'll be opportunistic. The key thing to take away is focus on this year: we believe, given the catalysts and investment opportunities, this will return the ROI we expect.

Okay. Great. You mentioned some commercial payers adopted NOPAIN-like reimbursement models. Can you give more insight into which payers made that switch and how close their models are to the NOPAIN model?

It's a tricky thing to mention specific payers because sometimes you need permission. What I can tell you is we have at least one national payer and a couple of other important payers. We're probably sitting at about double where we were before in terms of commercial covered lives — we've gone from about 20 million to about 40 million covered lives. This is early out of the gate, which is a good sign. In some cases, the coverage is outside of the bundle and at least matches CMS reimbursement. I should also note we got TRICARE as well, which services the military and their families. So we're encouraged, but it's still early days; commercial payers typically lag, but these early wins are encouraging.

We have a follow-up question from Oren Livnat with H.C. Wainwright. Your line is now open.

Just want to think about how conservative or not this guidance is. I noticed on the gross margin guidance it's flat to down from where we were in the second half of last year. I would think with growth, even conservative assumptions above your fixed cost structure and the 200-liter skid in San Diego now online, gross margin would be higher in 2025. Can you talk about gross margin trends, cadence through the year, or anything new factoring into that guidance?

Gross margins can be a little lumpy as they were last year, but Shawn can speak to that. Overall, we expect margins to improve over time because of volume. As we start to see volume pick up more going into the second half and particularly quarter four, and the 200-liter suite becomes more of our mix, these things will give us a tailwind, but it will take time to realize.

Thanks for the question. I completely agree that over time we'll improve margins by driving volume growth. We were pleased to see strong fourth quarter margins that exceeded our guided range of 74% to 76%. There can be quarter-over-quarter variability in our gross margins, and full year margins are a better frame of reference. That informed our guided range for 2025 of 76% to 78%.

Yes. As we start to see volume pick up more going into the second half and quarter four, and as the 200-liter suite becomes more and more part of our mix, margins will improve materially over time. It will just take a little time to get there.

Thank you. I will now turn the call back over to Susan Mesco for closing remarks.

Thank you, Operator, 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 remainder of the year, we will continue to ensure we are well positioned for long-term success by executing our 5/30 plan to advance our mission. Thank you, and be well.

This concludes the conference call. Thank you all for participating, and you may now disconnect.