Thank you for joining the Pacira Pharmaceuticals’ Second Quarter 2014 Financial Results Conference Call. At this time all participants are in a listen-only mode. Following the formal remarks Pacira management team will open all the lines for a question-and-answer period. Please be advised that this is being recorded at the company’s request and will be archived on the company’s website for two weeks from today’s date. At this time, I would like to introduce Jessica Cho of Pacira Pharmaceuticals. Ma’am you may begin.

Thank you and good morning everyone. Joining me on the call today from Pacira are Dave Stack, President, Chief Executive Officer and Chairman; Jim Scibetta, Senior Vice President and Chief Financial Officer; and Taunia Markvicka, Senior Vice President and Chief Commercial Officer. Before I turn the call over to the management team for their prepared remarks, I would like to remind you that certain remarks made by management during this call about the company’s future expectations, plans and prospects, including those regarding EXPAREL, Pacira’s plan to expand the indications of EXPAREL, including for nerve block and the related timing and success of an sNDA, as well as for chronic pain Pacira’s plans to evaluate, develop and pursue additional DepoFoam based product candidates, production in Suite A and Suite C, our manufacturing relationship with Patheon, anticipated fixed cost, gross margins, operating leverage and other statements containing the words believes, anticipates, plans, expects, and similar expressions constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are based on assumptions that the company believes are reasonable but are subject to a wide range of risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Many of these and other risks and uncertainties are described in the Risk Factors section of Pacira’s most recent Annual Reports on Form 10-K for the fiscal year ended December 31, 2013 and in other filings with the SEC, which are available through the investors and media section of the Pacira website at www.pacira.com or on the SEC website at www.sec.gov. During the course of this call we will also refer to certain non-GAAP financial measures, including non-GAAP net income or loss and non-GAAP EPS. Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to most directly comparable GAAP financial measures are included in the earnings release for the quarter. And with that, we’ll hear first from Dave.

Thanks, Jess. Good morning everyone and thank you for joining us today. The main focus of today’s call is EXPAREL, our primary product on the market now for nine full quarters. Let me begin with our latest commercial metrics for the quarter. We reported $44.9 million of EXPAREL sales in the second quarter up 31% from the previous quarter. For Q2, we saw the base of our business continue to grow with 363 new accounts, an average of 28 new customers per week. As of June 30, 2014 a total of 2,815 distinct customers have ordered EXPAREL since launch, with 469 ordering more than $100,000 worth of product, an increase of 139 customers or 42% from the previous quarter. Overall, we see continued growth in the base of new customers along with continued strong growth with hospital customers that have had access to EXPAREL for a longer time period, a testimony to the efficacy and safety of EXPAREL as well as the execution of our commercial and professional service teams in educating and training on the appropriate use of the product. While we are delayed with our second quarter performance, we would like to go with a various market dynamics in play starting with the seasonal influence on EXPAREL sales trajectory. Recall that in contrast to the 31% jump quarter-over-quarter in Q2. In Q1, we experienced a 13% increase from the previous quarter. This trend is in line with the expectations on seasonality that we provided to the street for the rest of the year. We expect market share gains in each quarter, but with the weaker first and third quarters driven by market share growth and the stronger second and fourth quarters driven by market share growth as well as high procedure volumes. As stated our largest customers tend…

Thanks Dave. And good morning everyone. We achieved several major financial milestones in Q2. A strong product update, the data outlined indicates that EXPAREL is becoming not just a major brand, but also possibly honest way to achieve in blockbuster status. For the first time, we achieved a measure of profitability by reporting positive non-GAAP earnings. We generated cash from operations for the first time and we exited the quarter with a balance sheet that prepares us to pursue a growth strategy after any foreseeable uncertainties about equity dilution. The most important, I think the impact of the Q2 results are most meaningful in the context of the company outlook is certainly we continue to execute effectively. For EXPAREL, we had an annual sales run rate of 180 million, and that’s where we stand with a market share of just over 1% driven only by the approved infiltration indication, a little over two years into the launch of an acute care product, where launches tend to be slower but product stickier and without the benefit of potential market, material market expansion opportunities including a nerve block indication which of course we expect to be a significant catalyst in 2015 and further down the road a chronic pain application possible a J code which could open up a significant ambulatory surgery market. Back to the year now, once again the Q2 EXPAREL sales estimates released by the third-party tracking services further support our recurrent cautionary note about relying on these numbers which have consistently shown the story of misleading trends. We’ve noted that the marketing numbers have been misleading for several quarters, and this quarter both services also missed over 5 million or 10% of our actual sales for the full quarter. We’ve guided that EXPAREL gross margins for product made…

Thanks Jim. So we’re ready for Q&A.

Thank you. [Operator Instructions]. And our first question comes from Liana Moussatos from Wedbush Securities. Your line is now open.

Congratulations on a great quarter. You mentioned a little bit about what to expect for seasonality quarter-over-quarter going forward for revenues. How about expenses what should we think about the second half over the first half? And also you mentioned potential new product maybe in the clinic in early 2015 will that be depot inside or another?

I’ll take number two and let – let Jim for number one. Liana good morning by the way. We’ve got a number of products potential DepoFoam based products that were doing primary market research on and working in the marketplace to make sure that we’ve got the right batting order if you will. So Depo NSAID is permitted on the list and we’re going to spend the next month making sure that we – we not only know that there is some market need, but that we can make it and that, we can make it cost effectively from a commercial perspective and we know how to study. And so Depo NSAID it’s clearly going to be there, we’ve got a number of things that we’re looking.

Yes. And thanks Liana, in terms of our cost structure I don’t think really there is anything seasonal about that. We’ve got a commercial tram that is growing modestly as Dave as talked about, and as I keep emphasizing the significant leverage in that, and saying with our manufacturing infrastructure sort of growing modestly to support what we’re doing. So you see modest expense growth, but nothing reflecting any seasonality in the business.

Will there be any kind of lumpiness like extra marketing work in Q3 or Q4?

Not material Liana.

Okay.

We’re ramping for the nerve block launch and you’ll see mostly publications and a lot of work on the education front through centers excellence and things like that, but it really is plugged into things that Taunia and her team we’re already doing.

Thank you very much.

Thank you.

Thank you. And our next question comes from Gary Nachman from Goldman Sachs. Your line is now open.

Hey guys, good morning, great quarter. So first the uptake with orthopedic surgeons as been very impressive, what other specialties you are seeing noticeable uptakes? And then on nerve block, how much off label you usually think, you’re seeing currently and just give us a little sense of how you see that market opportunity is shaking out, hopefully if you get the approval next year the PDUFA?

Thanks Gary. So I’m going to ask Taunia to comment on the physician specialties. Nerve block we think still, we have some there is a very modest amount of use in nerve block not material at all to the number that we just disclosed in our view. We do have some folks who are experimenting would use, indifferent nerve block applications and frankly some of that is – is to help us understand exactly the size of the opportunity which is the second of your question. Based on the add boards and the feedbacks that we’ve had from the KOLs and the anesthesia communities here and there is significant anticipation from this physician segment actually beyond anything that I would have understood a year ago. And so we’re spending a considerable amount of our time internally here getting ready for the nerve block launch and making sure that we can educate in an appropriate way and have the assistance of a number of the KOLs and the anesthesia community helping us with how the drug would be used in different treatment paradigm. So I don’t know if that’s a specific answer to your question, if not come back to me and then I’ll ask Taunia to comment on the customers and the people that are moving product along in addition to orthopedic.

Yes, I think a couple of the customer segment that we’re seeing really have some very strong interest in growth and you see that the orthopedic surgeons and the joint base have now really influenced a lot of the adoption in the spine space as well. So you see the spine segment neuro and ortho spine surgeons really starting to begin adopting EXPAREL into protocol then in proof care pathways. Because the early use of EXPAREL in the cosmetic segment also is really driving down further adoption in the reconstructive segment. So reconstructive plastic surgeons and surgical oncology are really starting to pick up and begin the same process of adopting EXPAREL in the hospital segment. And then the final segment that we’re seeing some real nice growth in the pediatric, so the work done in the general surgery and colorectal space is translating nicely over into the bariatric surgeons adoption of the product as well and we have a number of data presentations that will be coming at several meetings in those specialty segments over the next few quarters.

And in that Gary, I think what we see is that actually we’re growing everywhere, we just have some places where we’re growing faster and that’s let’s keep Taunia and her team on their toes.

Great and that’s great. And then lastly Dave just take a minute to just go through the chronic pain where you are, and where we’re going to have additional visibility on the path forward for that indication? Thanks.

Thanks Gary. What we’re doing really is – is trying to understand some of the physiology and the biology and talking to some folks who are experts in the chronic pain space. We really don’t anticipate having any kind of a formal program that would be material in terms of additional disclosures until actually we have nerve block indication and at the end of the first quarter Gary for, obviously reasons I mean all of these are nerve block indications. So we’re doing a lot of the background work around understanding exactly which procedures the guys do, how they quote for those procedures, where they think the use of a long-acting bupivacaine would be useful and where they don’t think it would be as useful and then doing some really initial work and with the KOLs again, I’m trying to look at how this product actually works in actual practice. But the, longer base programs where you start to do real clinical work wouldn’t take place until after we have the nerve block indication at the end of the first quarter.

Okay, thanks a lot.

Thank you.

Thank you. And our next question comes from Douglas Tsao from Barclays. Your line is now open.

Hi, good morning. So, obviously Dave you’ve spoken about your best accounts are typically the ones that have had access to the technology the longest. I was just curious if you have, over the course of the commercialization of product for two years has learned anything that can facilitate getting new accounts, because obviously that continues to remain very robust sort of up the curve a little bit more quickly, just sort of accelerate that that the growth within those account?

Yes, well I guess, I’ll answer the question two ways Doug and then I’m going to ask Taunia to provide comments, because she is in the – she is in this tranche every day. First it is interesting that and I’ll remind everybody on the call, we launched with the hemorrhoid data set in soft tissue. So it was not illogical than that people would restrict us in early days to those indications, right. And so as the product is continued to grow and the physician specialties in support of the brand have also continued to grow. What we see now is really not anything that we have strategically addressed. But we see the, when a new account puts the drug on formulary, because it’s not just the soft tissue guys it’s the anesthesia guys with [indiscernible] bariatric surgeons and the reconstructive guys and the orthopedic guys and the spine guys, because all of those different specialties are now interested in the use of EXPAREL. We don’t see the drug get restricted anywhere as near the frequency that we did in the early days of the launch. And because of that really not anything that we’ve done, from a strategic perspective, you see the adoption curve accelerated. And so, I don’t know Taunia if there is any that makes any – do you want to add to that.

Yes, two additional point, even as account release start to begin using the product they may start with one specialty and we’re seeing them move from a single specialty to multiple specialties much quicker. And it’s probably two-fold, because we see a lot of data generation coming out showing the clinical and safety and technique around various procedures that we’re sharing with though the accounts proactively. So we go in and educate across multiple specialties in order to show them the right technique to have success very quickly.

And lastly Doug I would just throw in that, we are now benefiting from a lot of the work that’s been done over the last couple of years. We’re – everybody should have a pretty clear in their mind that when we win a 20 chain hospital for example, we don’t actually have to go in and educate and train in all 20 of those hospitals, a lot of that work is done at the major centers. And then it’s the people who were trained in those centers that are going out and working a day or week or a couple of days a month in some of the more preferred hospitals. And so the cost of sales there is very low and so we not only see the growth in terms of the base of the business, but we don’t have to do the same amount of work in order to get those people up to speed that we would have had two years ago.

Okay. And then Dave, one follow-up question in response to Gary’s question, you said you’re under lot about the nerve block opportunity in the last year sort of sounds like you are incrementally or much more excited than you are? Just curious exactly what that was in terms of the opportunity that sort of is come to like you in the last 12 months? Thanks.

Thanks Doug. What we see is customers coming back to us, and saying we shouldn’t be using catheters. We shouldn’t be having to put out with the issues of catheter migration and all the other issues that they would have had to use in order to establish a nerve block over more than a single injection previous to EXPERAL. So it’s been gratifying and a little bit surprising to me, the way that that the anesthesiologist themselves have embraced the opportunity to replace a catheter, a drug reservoir and a pump with a single, single use of our single injection of EXPAREL. And so we’ve talked to these folks now about a broad range of specific nerve block procedures where they believe EXPAREL would be a value. And so when I talk about, the interactions with the marketplace it’s not just the business end of it, it’s really gratifying an interest and to talk to these people about how we can improve patient care and how we can continue to move patients who are currently treated in the hospital into a 23 hour stay environment by treating pain different. And so you roll out that all together and actually we’re quite excited about the potential for nerve block indication which of course then also opens up chronic pain, which a year ago we wouldn’t have even been talking about.

Okay, great, thank you.

Excellent.

Thank you. And our next question comes from David Amsellem from Piper Jaffray. Your line is now open.

Thanks just a couple, I joined late so maybe you addressed this, I had just a general question on pricing power, we’ve seen a lot of aggressive pricing action overall in the space and we saw a big price increase by Mallinckrodt on OFIRMEV. I guess my question to you is what are your thoughts on that kind of pricing action and also and your ability and willingness to take price aggressively on EXPAREL? Thanks.

So thank you, David. So I’ll be pretty unequivocal and tell you that we don’t have a 100% plus price increases even in our – that’s not anything that we’re even looking at. Our expectation is that, we have a significant amount of pricing flexibility in the marketplace. But, we continue to see significant growth opportunities for EXPAREL and at least this team believes that possible pricing is a much more appropriate strategic approach for this brand. A couple of things, we do feel like a non-narcotic opioid pain opportunity almost demands that we make this brand available to as many patients as possible. And that’s critical in our thinking and we will raise price as we think appropriate based on the cost of the business and our desire to return profits to our shareholders et cetera. But, we intend to do that in a thoughtful way and if I lay out the short-term opportunity and Jim talked about a couple of these things. If you are looking at the continued expansion of the base, and then you think about a nerve block indication, and then you think about a J code opportunity and then you think about a chronic pain opportunity; it just doesn’t seem to me like it makes a lot of sense to raise the price dramatically in all that comes with that in terms of the resources and all the rest of the stuff and I also tell you, I think we’re in the first row here of the bleachers, but I’m an interested observer to see how that price increase plays out and see whether that actually works out to their benefit or not, I’m highly skeptical.

And David, just to add a couple of comments on that. One is, I think that we very much view this as a partnership with our customers and Taunia and her team are always talking about the value of the product in the context of the price or relative to where it is today. And we know that some of the KOLs that support our business were also the people who supported the launch of OPHMED and the story is quite different now. And so, we’re – it’s a – for us we’re very mindful of the partnership, the relationship we have without customer base, it’s a critical value proposition frankly of the company overall. And then the other thing which is sort of unrelated to that is, we’ve emphasized that we don’t believe we have competition, we don’t have any generic insurance, we have a long runway with this franchise. So, I think we are in a – I don’t want to say unique, but certainly a different physician in terms of how we look at growing this business over five to ten plus year period.

And then another question if I may. This is more on the overall acute pain landscape. We may or may not see new alternatives to IV, PCA enter the market next year. And I guess the question that I have here is what kind of impact do you think if any it could have on EXPAREL or does it not have any impact at all, and or does it even synergize with the product like EXPAREL, how do you think about that?

In our forecast, David it has absolutely no impact at all. I mean, we don’t wish any or fortune on anybody. But, if you saw our forecast and you saw all of our footnotes, you wouldn’t see that even on the page.

Yes. I think there is also, we’ve always said that, that EXPAREL and multimodal regimen is going to be the right thing for patient care and based on EXPAREL being a foundation across the number of surgical procedures that additional multimodal approach is going to vary. So, we really believe there is a huge market opportunity for a lot of players out there. So, we don’t think that, that’s going to have either a major determent or benefit to us because there is a lot of options to add to EXPAREL.

We were all out again this week David and actually we all got back here late last night and I can tell you that in the thousands of discussions, we all with customers, I still have not had my first customer or people are you looking for different ways to use narcotics, they’re looking to get rid of them.

Okay. Thank you.

Thank you. And our next question comes from Oren Livnat from JMP Securities. Your line is now open.

Thanks for taking the question. You mentioned the J code earlier and Alan made some ignorance on what the implication really are for that. Could you help us better understand given your rapid trajectory of growth you already have now. What is that incrementally potentially due for you and may be an update on the potential timing and I have some follow-ups?

Yes. So, what the major growth opportunity for the J code is really in the ambulatory and the office setting where they are potential to use EXPAREL in surgical procedures. And so that really opens up that segment to us in a much broader way for not only Medicare paid patients but also commercial payers following the reimbursement pathway for the product in those setting. We’re not anticipating that to be a major part of our emphasis. In 2015, we believe that the real opportunity for J code is likely somewhere in the 2016 timeframe.

And yes, and I think the reason so, it just to recap on it, it opens up an opportunity largely with physician owned ambulatory centers where the cost of the drug would be embedded in the procedure and if we can get a J code, we would open up a separate opportunity to build for EXPAREL in addition to the procedure. So, that’s why it’s an extended opportunity. We also think that with the impending nerve block and all the things, we’ve already talked about associated with nerve block that we want to be thoughtful again about the J code and our ability to resource those – that additional customer base. So, the timing that Taunia just outlined is really pretty much appropriate for us.

All right, thanks for that. Also, on the seasonality, you’ve done a very good job for couple of years now. Warning us the potential seasonality and I guess do you outperformed actually I think in Q1 on that front. I’m just wondering do you know about summer seasonal procedure volume trend and your share gains you’re saying. Should we think that you could potentially see us take a sequential gain next quarter you saw on Q1 over Q4?

Something along those lines is what we would expect. We just don’t know is the answer. I mean if you remember in the – so we’ve been out two years now and in the first year, this first summer we were in the matter of a few months. So, effectively Oren, we have a one dot trend line so I made great risk when I started projecting off of a one dot trend line. I think the important thing that we’ve tried to convey to folks is we don’t see ourselves going backwards in any quarters, and some quarters are going to grow more than others based on the environment. And, I think we would expect that in July and August, procedures slow down, so, so do we. So, I think Q1 comp, who knows, I think it’s probably as good as any.

Just lastly if I may. Obviously, you’re only a couple of months into this taking on official relationship on these expanded capacity suites in the UK. But, can you just remind us, is this the first suite that you’re now talking specifically in the second half of 2016, that’s a duplicated suites here right. So, we should look at that as reasonably straight forward reasonably low risk when you’re giving us timelines and your confident level on that right, because you’re not trying to reinvent the way out, correct?

That’s correct in everything you said, our – we look at the demand curve and we’re basically replicating what we just did in Suite C and putting it in a different facility. So, it’s a lot of work internally but as you characterize that it’s a pretty low risk and very important obviously as demand continues to increase so we get that online as soon as we can.

And obviously you’re building excess inventory all the time, in the meantime you’ve been very clear that you gone around the clock. Can you just remind us the shelf life, is that potentially changing as you build more stability data, because they get longer. I’m just wondering how closer is to getting this cad and theory I mean you’re not giving us guidance but normally the straight is which is over 600 million in 2017, which is obviously above where you’re now. Do you feel like you have a large margin for error to build up inventory well ahead of time so that even if it was in early 2017 let’s say if you got approvals it just slipped a little bit that you’d be good to go?

Yes, I mean two facts that make us very comfortable with it. One is, two-year product data and then the second is that customers are using the product very quickly after they order it, right. So, if you put those two things together, there is no inventory in any channel other than at our third party with this provider wanting to finish the file, maybe they shift to customers and when they order it they typically use it. I don’t know within days, if not weeks or. So, because of that we’re very comfortable building inventory in 14 and 15, no one that some of that will be used in as we get into 16 and so forth.

Thank you so much.

Thank you.

Thank you. And our next question comes from Patti Banks from Discern Securities. Your line is now open.

Good morning. Just two quick questions. One, are there any major hospitals or hospital change that’s still on Board at this point. And just wondering if you could maybe quantify that? And then also Dave, you talked about having a number of potential new molecules that you’re working on depending to the clinic. Are they all potentially in the same kind of therapeutic area or would you possibly have to build infrastructure into maybe complimentary areas?

Thanks Patti. There are – there is certainly our medical centers that don’t have EXPAREL on formulary. Quantifying it, we don’t actually look at the world that way. I mean if you think that we’re available in two-thirds of all the hospitals in America and we need a market share of 8 in order to have a $1 billion product in the United States. We’re not chasing the final five percent and they’re clearly are people just don’t put any products on formulary, but especially anything that they believe has a high acquisition cost. And I guess if I was going to quantify that in any one way, I would say that where the product is not readily available is almost universally associated with the pharmacist who views the world through the acquisition cost of a product and doesn’t look at the totality of a patient care experience. So, if they don’t care about nursing resources and narcotic related adverse events and length of stay, and they tell you if this actually happens, that it doesn’t make any difference to them, because the only thing they’re responsible for is how much it cost from a pharmacy perspective. Then, I’m not sure that EXPAREL is the right product for that institution in any case. And we would be much more interested in deploying our resources to people who understand that they’re treating patients and getting patients out of the hospital sooner with fewer narcotic related adverse events is the right way to approach this and that’s what we do. So, we were not focused on that last x percent, whatever it is. And as it currently stands, Patti we, the products that are in development are would all use the same commercial infrastructure that we currently have. We might have to add a few people based on the size of the experiences, but they would all be tiny as commercial team plus a couple of folks in the same customer touching resources plus or minus a couple of folks. But, with that said, I would tell you that we continue, it’s a matter of fact timing and I were with the group on Monday that have a lot of ideas about where we should be expanding the product opportunity for EXPAREL and some of those are outside of our current spectrum of commercial resources, but that is not on the list of the first three or four things that we’re looking at.

And, did you say timeframe but when we might know no more on new molecules?

First quarter of 15 is what we’re hoping to be able to talk to you guys exhaustively about what we’ve got planned.

Okay, great. Thank you.

Okay. Thanks.

Thank you.

No, go ahead.

I’m showing no further questions. I’d like to now turn the call back over to Dave Stack for closing remarks.

Thanks Sobia. We’d like to note that coming up, we will be presenting at the Wedbush Life Sciences Conference in New York on August 12. We look forward to updating all of you on EXPAREL over the next several quarters. Thanks for joining us today. Thanks Sobia for all your help.

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a wonderful day.