Good morning, ladies and gentlemen. And welcome to the Q1 2020 Pacira BioSciences, Inc. Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to hand the conference over to your host, Ms. Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, Anita. And good morning, everyone. Welcome to today's conference call to discuss our first quarter 2020 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer, and Charlie Reinhart, Chief Financial Officer. Before we begin, let me remind you that today's 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 our website. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone. And thanks for joining us. Particularly during these challenging and unprecedented times, I hope this finds all of you and your families well and safe. We'll be taking a different approach to our call this morning, focusing mostly on a review of the first quarter, but also what we're seeing in the field today and other data points that are relevant in the current COVID-19 environment. We will also briefly touch on our strategies for EXPAREL, our iovera° program and our business development efforts before turning to your questions. Our highest priority at Pacira has been providing an opioid-free pain alternative to patients while keeping those patients, our employees and the community safe in order to aid in the global containment of the COVID-19 virus. Toward that end, most of our office and lab-based colleagues have been primarily working from home. Since mid-March, our sales and clinical education teams have remained highly productive, providing customer, product and reimbursement support using digital tools, which focus on virtual training programs and key opinion leader preceptorships. These teams recently began taking limited calls to hospital and ambulatory surgery centers, or ASCs, where elective surgery bans have been eased or lifted. During this work-from-home period, we had the pleasure of welcoming a new Chief Medical Officer, Don Manning. Don brings extensive experience and shares our commitment to bringing opioid-sparing pain management to patients. We are thrilled to have him join our executive leadership team and we're looking forward to his contributions. Many of you have asked how this pandemic is affecting our business in both the short and long term. The simple answer is that we do not fully know what the impact will be until we have more data points from the field. We do believe that…

Thank you, Dave. And good morning, everyone. I'll start by summarizing our first quarter 2020 financial results and then we'll review our outlook for 2020, including the effects of the global COVID-19 pandemic. To remind you, I will be discussing non-GAAP financial measures this morning, which we believe more accurately reflect our business results. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release we issued this morning. Let me start by reiterating Dave's points. The fundamentals of our business are very strong, and Pacira is well equipped to successfully navigate these challenging times and withstand any temporary disruption to our business. We delivered top line revenue growth of 25% in 2019 and strong year-over-year growth trends continued through mid-March. We remain very optimistic about the future of our business, which is on track for accelerating profitability once hospitals and ASCs are back to regularly performing elective and emergent procedures. We ended the first quarter in very strong financial position, with approximately $354 million of cash and investments. Total revenues increased by 16% in the first quarter of 2020. This was primarily driven by net product sales of EXPAREL, which increased by 12% to $101.3 million in the first quarter of 2020 as compared to $90.6 million for the same period last year. For iovera°, we reported net product sales of $2.3 million in the first quarter of 2020. Our non-GAAP gross margin for the first quarter of 2020 improved to 73% versus 71% in 2019. Non-GAAP research and development expenses were $14.6 million in the first quarter of 2020 versus $13.2 million in 2019. The increase was primarily driven by increased regulatory activities to support the label and geographic expansion of EXPAREL as well as costs related to our Phase III…

Thank you, Charlie. Before opening the call to your questions, I want to underscore one important point. This pause in our 2020 guidance in no way undermines our confidence in the long-term outlook for our business. While we are experiencing a short-term revenue deferral, we believe our opioid-sparing innovative products, combined with a great market need for a non-opioid pain management, provides a compelling long-term investment opportunity. We remain steadfast in our long-term strategy to position Pacira as the leading provider of non-opioid pain management and regenerative health solutions. We believe the fundamentals of our business will continue to fuel our long-term expansion. We are committed to advancing these goals, and we believe they will create increasing shareholder value. Anita, that concludes our prepared remarks. I'd like now to turn the call over to you to begin our Q&A session.

[Operator Instructions]. Line of Randall Stanicky with RBC Capital.

Great, thanks. Hey, Dave. Survey feedback that we received both from anesthesiologists as well as orthos was that roughly a third of volumes could be moved to ASCs to help manage volumes. It sounds like you're seeing some similar trend. So, what have you seen here? And more importantly, can you help us understand what percent of your volumes were ASC before the pandemic? And what do you think that will look like as we come out of this in 2021? And then, I have one quick follow-up after that.

A couple of things, Randall. First, just to make sure we're all talking about the same thing. When we say 23-hour stay environment, we're talking about ambulatory care as well as hospital outpatients, right? So, those are two marketplaces that both foster this movement to a less expensive, less intense environment. The reason I mentioned that is that there are several states that are ASC very heavy, and we have several states where there are virtually no ASCs at all. And so, in the nature of your question, you almost have to look at it state-by-state to understand how this thing is unwinding and you have to be able to tease out hospital outpatient from pure ASCs. We don't have a really good data source and we have virtually no data sources other than yesterday's sales and the day before sales to be able to answer your question in a very appropriate kind of way, Randall. I think it's safe to say that what we are seeing is a significant bounce back in both of these not inpatient environments. And we also see a fair amount of business that's being driven by the reopening of plastic surgery and oral maxillofacial practices, et cetera. So, I think that a third is probably the right number from your surveys. I think it would be highly dependent on which states those folks actually worked in. If anything, it would be conservative in many states. It would be very conservative, Randall. So, we think that, for sure, more than half of the business that we've generated over the last three weeks is coming from a non-inpatient environment, if you'll allow me to change your question slightly.

No, it's helpful. The other question I have is more specific. How receptive do you think hospitals or P&T clinics are going to be to look at potential newer competitive product, given just the logistics and focus here around the pandemic, assuming that we do see an approval over the next month or so?

Let me tell you what we're doing, and then I'll translate that into a specific answer. What we hear from docs, especially in the 24/7 scenarios, and more places are going to open up and guys are going to have surgical suites for 12-hour blocks of time, is that they are going to be totally committed to just taking care of their surgical patients and really aren't going to have much time for anything else. That comes from our discussions with them about how can we support a 24/7 operation with virtual opportunities, with key opinion leaders, docs in different surgical procedures who might be able to come on online or in a split screen scenario and help docs through a surgical case where they might not be as familiar with EXPAREL as somebody who uses it all the time. So, if I translate that into your question, I think it's going to be very difficult for anybody to get through a safety committee and then a P&T committee. Those committees don't meet during the summer as a general rule anyway. And I think you can extend that. I think it's going to be very difficult to get an anesthesiologist who, generally, would be the person who would run a P&T committee for a pain product to come out of a 12-hour stint in an OR or on a 24-hour stay environment or a 6-day work week and go to a meeting, especially if the surgery center that they're working in is not in the hospital where the meeting is going to be. So, I think that's about as specific as I can get, Randall.

That's helpful. Thanks, Dave.

Your next question comes from the line of David Amsellem with Piper Sandler.

Thanks. So, just wanted to ask a sort of general question. With COVID-19 and with the public health and institutional reverberations, do you see a faster migration to the ambulatory setting? In other words, hospitals needed to free up capacity, but do you think that a faster migration to ASCs happens and that endures given the shock to the system in terms of capacity, so to speak? And with that in mind, what does that mean for your commercial messaging and how you calibrate your messaging to your customers in the field?

Thanks, David. I'll take it slightly in reverse. We think that it's really field blocks and nerve blocks largely being done by anesthesiologists under ultrasound guidance that give us the confidence that we can provide several days of pain control. And it's really having that now that confidence that we can provide several days of pain control with a high-quality procedure that allows us to move these patients from an inpatient procedure to an outpatient procedure, thinking specifically about things like total knee arthroplasty and spine surgeries and things like that. So, specifically, to answer your question, we thought that, by the time we got to 2025, 70% of the surgeries in America would be done in ambulatory care centers anyway. That was the normal progression that we were seeing, David, that about 2 million patients in our TAM on an annual basis were actually moving from inpatient to the different outpatient opportunities that I just outlined with Randall. So, given all of that, we absolutely think that this is going to accelerate the move to ambulatory care. In fact, when we talk to patients and when we do patient surveys, one of the things that I think is going to be an interesting byproduct observational opportunity here is to see whether patients actually want to go to a hospital for anything, but especially for a surgery. And so, we think we have an opportunity to move these patients to an ambulatory facility. Remember that CMS approved total knee arthroplasty as an ambulatory care procedure in 2020. And they put hospital outpatient in place for hip surgery and for many spine surgeries. So, you can already see that the government is leaning towards moving patients out of the hospital. We know, for example, that United put out a list of 65 musculoskeletal procedures on the November 1 that they would no longer pay for without prior authorization in the hospital outpatient department. They would pay only in the ambulatory department. So, I think you've got the perfect storm here of where patients don't want to go to the hospital, surgeons generally would prefer to work in an ambulatory environment, and the payers, in many cases, are insisting on the patients going to an ambulatory environment. So, the answer to your question is a pretty-strong absolutely.

Okay. And then, if I may just – sorry, go ahead, Dave.

No, I was going to say I didn't answer your question about how do we direct our people then. We've been doing this for the last year-and-a-half, David. And that's why we highlighted in the script that there are a couple of unusual circumstances that are driven by COVID-19. But we've been working with ERAS protocols and highly protocol driven care for a couple of reasons. One is throughput in an ambulatory environment is critically important. And because you're operating in a lower cost environment, an ERAS protocol gives management of these ASCs an opportunity to understand the air bars around what the cost of the procedures might be when they're bidding on these different procedures. So, we've been working on ERAS protocols for ambulatory care environments now for a couple of years. And the opportunity here is driven – as you suggested, that there'll be surgeons who have not been allowed access to EXPAREL, who would be using it for the first time in these ambulatory environments and we've been training to that, as well as surgeons who have been operating in the hospital, but now in an ambulatory environment might actually have a different view on how to use the product in terms of cost and throughput, et cetera. So, we've got virtual programs that are on our website that we're sending to docs that are product-specific, that are ERAS specific. And our field force and our education teams and especially our innovation team are all training against those things, so that we can be part of the solution to how do we move these patients into these lower cost environments without sacrificing patient care. David, you had another question?

And your next question comes from the line of Greg Fraser with SunTrust.

Good morning, guys. Thanks for taking the questions. Can you expand on the assumptions underlying your estimate that 80% of deferred procedures will be rescheduled, with the majority made up this year? Sort of what does that assume in terms of the timing for ASCs and hospitals getting that to a new normal? And can you also comment on the discounts that you're offering?

Sure. So, the numbers come from what we've seen in the marketplace and from all the surveys that we've shared from you guys, Greg, for one, but from all of the big banks that have talked about how this is going to roll out. We also have the opportunity to talk with a number of the insurance carriers in terms of how this is going to happen. We think that the ambulatory care centers are going to lead the way, and we think that's what we're seeing right now. We also see states where there was not a heavy burden placed by COVID-19 patients, and those folks are coming back online. So, we do start to see some hospitals starting to participate. The reason that you come up with the 80% number that we outlined is that it's pretty clear that there are some patients, either mortality or patient's clinical situation has deteriorated, and they're no longer surgical appropriate. And then, there is a small number in there for patients who we think will not have healthcare. In some cases, that's a current issue that will translate back to normal over time. And so, about half of those 20% that are not in the 80% for this year move into Q1 of next year. And then, there's 4%, 5% of those that we think are lost and then there's 4%, 5% in there, frankly, that's just a fudge factor that – the unknowns are so wide and varied that we just can't get to – we're not saying we know where 100% or going to be, but we can be pretty clever or pretty certain that as you roll out the capacity of the ASCs, you can do most of these procedures, but you can't do all without the hospitals…

Great, thank you.

Thanks, Greg.

Your next question comes from the line of Tim Chiang with Northland Securities.

Hi, thanks. Dave, you talked a little bit about just some of the rebound numbers recently. Could you talk a little bit about just geographies in the US? Where do you see elective surgeries coming back first? Obviously, we're looking for a stabilization and then a recovery. Can you talk a little bit about how much of the pent-up demand you'll see come back in the fourth quarter and even maybe in the third quarter?

And it is very much state-specific today, Tim. Thanks for the question, by the way. We get daily sales. So, it's really a great tool to be able to get sales for last night this morning. And the states that are heavy ASC are the states that we tried to outline in the script – Florida, Texas, Georgia, California are states that have a lot of ASCs. And when you look at the daily sales, you would see that the sales numbers that I called out in the script are heavily reliant on those markets. You would also see, Tim, and this is probably the nature of your question, that there are also other heavy ASC states like New Jersey. And there's several others, actually, but New Jersey is the one that does a lot of ASC business where we have virtually – we're still in lockdown. We have virtually no business in those places. And so, I think that what we've seen so far is a very rapid recovery in about a third of the market. And if those numbers prove to be true, it would suggest that we're going to do very well as the rest of the country opens up. The Carolinas, for example; New Jersey, as I stated; Pennsylvania. There are a number of other states where we would have a lot of ASC business in the normal course of business, and right now we have virtually none. I should answer your question. No, I was going to say, Tim, I should go to the back half of the year. Yeah, that's all going to be – as I mentioned in my answer to David, we can't get to doing 80% to 85% of all of the procedures we would have seen in 2020 unless we…

Okay, great. Thanks for the very helpful…

And, Tim, it's soft, as you know. I'm extrapolating the numbers that you saw from last night, right? You'd see big numbers in California, big numbers in Texas, big numbers in Florida. And then, you'd see states where normally they would be huge supporters of EXPAREL and we had one order from some states last night, just to give you a sense.

And your next question comes from the line of David Steinberg with Jefferies.

Thanks and good morning. I have three questions. The first one is, I was just trying to get a sense of what percent of EXPAREL uses for medically necessary procedures, like C-sections, are oncology related. I think, Dave, you'd said that, in late March, sales had plummeted 70%. So, is the implication that about 30% of your business is medically necessary? And then the second question is, as I understand that J&J is going to introduce either this year or next year a new system. I think it's called Simplicity. It's a suite of products, including robotics, and will include EXPAREL – feature EXPAREL. And I was wondering when that happens if that would help accelerate your business and also perhaps create more of a moat around your business when other competitors come out of the market? And then, the third question revolves around pricing. I know you said you've offered a modest discount in iovera°. Did you also say there would be some discounting or will be some discounting in EXPAREL? Thanks.

Thanks, David. And thanks for the questions. So, as we come out of April with that 30% number, David, I think that's as good as any. It might be a little bit low. And the reason I say that is you have to remember, we had bureaucrats determining what was elective and what was emergent. And there were great debates around the country around things and the people on the bureaucrat side had very little medical understanding of what the heck they were talking about. So, it's very difficult to determine with the specificity that we would like around what we would consider to be an emergent procedure. But if you think about 60% of our patients that we said we had in Q4 being done in an ambulatory environment, if you marry that with 30% and you add 10% for plastic surgeons and oral maxillofacial surgeons and all of the rest of the things that are going on out there, that feels about right. So, I don't have any – I think that's as good a number as I can give you, frankly. For J&J, we work with them closely. Certainly, if there was a new line that allowed us to be part of the outcome projection, then that would be an interesting opportunity for us to build a moat around, as you suggest. I think most of these procedures are looking towards what would have been considered 10 years ago to be non-traditional environments of care. And frankly, I don't see our competitors offering any resistance there under any cases. So, it can certainly help. We're happy to have any help, of course. But I think you're seeing that many of the people who are selling metal into the ambulatory care environments and many of the service providers…

Okay, thanks.

Thanks, David.

And your next question comes from the line of Liana Moussatos with Wedbush Securities.

Thank you for taking my questions. Congratulations on a strong quarter. Just for Charlie, how should we think about operating expenses in Q2 versus Q1 and then for the rest of the year?

So, Liana, thanks for the question. At this point, what we said is we got rid of our guidance of positive this year for the exact same reason as you were asking, and that is, it's not 100% clear what's going to happen to OpEx. As I noted in the prepared remarks, the clinical activity is on hold at this point. We're hoping optimistically that we get that back on track when some of the surgical restrictions stop, but that remains to be seen exactly how that happens. And from an SG&A perspective, frankly, I'm very confident we're not going to get anywhere near what our original guidance was from that perspective. There's just so much activity that we can't do, and frankly, nobody else can. So, at this point, all I can tell you is that we paused the guidance because we believe the numbers are likely to be below those guidance ranges, for obvious reasons. I don't know that – from an R&D perspective, the question really is when can we start dosing patients again. And, hopefully, that's in the second half of the year. And hopefully, we can make it up. And if that's true, maybe we get back in the range, but we won't know that for a while. SG&A, I think, is going to be light. And I don't know that it will be exactly what it was in the first quarter. I'm struggling with how to give you some good guidance because, frankly, I'm not really sure, Liana.

Let me just see if I can add a couple of bullet points here, Liana. And thanks for the question. In our own numbers, we've included doing all of these clinical trials. So, they might be phased a couple of months later, but they would still be done in this year. So, I think the R&D number is probably close to what you'll see. I think, as Charlie suggests, the SG&A number is going to be significantly, materially reduced. We're not filling open positions. As I answered part of the questions earlier, we don't think that we're going to have the same access to physicians and to their staffs, et cetera, because folks are going to be in the OR all day, most every day. And so, we're looking at virtual training, we're looking at weekend training programs and things like that. And actually, where we have open territories, we're re-cutting those territories to pick up the big accounts, but not to do it with any new resource. So, there are some places where you're going to have obvious savings. And then, our relationship with Johnson & Johnson is such that – and we've disclosed this publicly many times, that they get a small royalty on replacing last year's dollars. The major impact of COVID-19 will be that the delta over last year's dollars in 2020 will be modest relative to the original expectations. And so, most of what Johnson & Johnson would get as our partner this year will be the small end of the royalties, and they will not have the benefit of the much larger royalty on new dollars. And so, I think R&D will be pretty much the same. I think SG&A will be quite different.

Very helpful, thank you.

Thanks, Liana. Thanks for the question.

And your next question comes from the line of Serge Belanger with Needham & Company.

Hi, good morning. A couple of questions for me. First, Dave, you mentioned there was a 70% drop in EXPAREL demand in April. Does that reflect the overall decrease in volume of elective surgeries during that time? And what would you estimate the drop in non-elective surgeries was also in April? And then, my second question is, you mentioned some facilities would be running at six, seven days a week, maybe even 24/7 to make up for the backlog. How much capacity in the system is there to run at those levels and make up the backlog from the decrease in volume and procedures?

So, our data sources are three to six months behind. And so, I don't have any real-time procedure data that I could share with you. What we tried to follow, and the only data we had, for example, is places like MD Anderson maintained a steady flow of orders. So, you can see that they were using the drug for oncology-based urgent scenarios. Most of the big medical centers continue to order, but a place that would have ordered 10 or 15 boxes a week was ordering 1 or 2 boxes a week. The only assumption we can draw from that is it was for the more urgent procedures, which were generally oncology-based. We have a lot of case studies where, because of pain, patients were threatening suicide and the hospitals were letting those folks operate on an urgent basis. We had some places where a hernia became a protruding hernia. So, you went from an elective to clearly an urgent scenario, and those folks were allowed to operate. But, honestly, I don't have a really good data-driven answer to your question, other than it appears that roughly 30% of the procedures were considered, by the local authorities, to be urgent. I would say in that regard that not many of those were C-sections. We have centers that have studied EXPAREL TAP in C-sections who are big users of the product. But as a general rule, C-section is still in its infancy in terms of rolling it out nationally, and we hope to get on that pretty quickly. Your next question actually gets back to my comment earlier that we have to have participation. If you think about from mid-March to the end of April, you would figure out that something close to 20% of the surgical procedures in the…

Yeah. Thank you.

Thanks.

And your next question comes from the line of Ami Fadia with SVB Leerink.

Hi. This is Sheldon on for Ami. Thanks for taking our question. We have a couple. First, in the states that are already reopened, do you have any color about how much capacity they have already reached? How long do you think it would take for them to ramp to that plus 30% capacity? And our second question is about, for the longer term, as you commented, the COVID-19 pandemic may actually help accelerate shift to ASC setting. What type of procedures do you see as the next to shift to the ASC setting? Thanks.

Thank you. So, the first of capacity question, it takes a little while to get these things up and running. In many cases – and this is something we were involved with, frankly, before we started to see the ramp-up – we were working with ASC chains, for example, on credentialing surgeons who previously didn't come to the ASC, who were anxious to get to the ASC for all the reasons that we've talked about on this call. We also, as we said, have training programs for docs that have not had access to EXPAREL previously and for docs who had access to EXPAREL, but were going to be doing different surgical procedures when they were in the ASC. So, all of those things have been ongoing. I can only guess at how much of the ASC capacity today is taken. I would say, it's probably approaching 60%, but it would be somewhere in that range if I had to take a guess. But again, I have absolutely no data sources at all other than to tell you that we talk to docs every day, all day. And they would tell you – I've talked to orthopedic surgeons in the last week that are doing – normally would have done six cases a day on a big day, are doing 8 or 10 cases. So, in some cases, the individual docs are fully allocated, but I think that the ASC has now become an environment of care for docs and some specialties who would not have gone to the ASC previously. And that leads me right into your second question. And I'll just give you just two seconds of history here. If we go on back four or five years, we would have seen that ASCs were really doing small…

And your final question comes from the line of Gary Nachman with BMO Capital Markets.

Hi. Good morning. It's Rob Fay [ph] on for Gary. Just a couple of questions. Assuming EXPAREL is approved in Europe in the second half of the year, what are your current launch plans there? Are there certain markets that are less impacted by the pandemic that you might initially target? And then, secondly, could you comment on the status of the lower extremity nerve block trial and how quickly that could resume? To what extent do you expect that indication could also help accelerate the move of certain procedures from the inpatient setting to outpatient and ASCs? Thank you.

Thank you. So, we expect to get approval from the European authorities sometime late this year. Based on COVID and a number of other things that are moving around in terms of the expense line that was discussed earlier, we expect to launch that in the latter part of the first half of next year in Europe. You are absolutely correct that we will launch into specific markets, five or six markets, five or six countries in Europe. Frankly, it won't have much to do with COVID or, at least if it does, we don't fully understand that or appreciate that yet. Our plan was never to launch in more than five or six countries in Europe just because there is a vast difference in the way medicine is practiced, the impact of technology in some of the different markets, and also the receptivity of new technologies into some of the different markets. So, our plan is to launch into five or six countries and do it in the back half of next year – I'm sorry, late in the first half of next year. Lower extremity nerve block, it's called the STRIDE study. It really is another major opportunity for us. The protocol and the site selections and all of that are done. We're just waiting to get comfortable now that it won't have any negative consequences from COVID. In terms of where the centers that are going to execute the study are, I would anticipate that, in the next month, we'll start that study. It clearly will be done this year. We put together a clinical study report, file an sNDA sometime in the first quarter, back half probably of the first quarter of next year, and expect that we would have approval by the end of 2021. So, to give you a frame of reference of the way we think about it, right, C-section was the focus of the national meeting this year. Peds would be the focus of the national meeting next year. Lower extremity nerve block would be the focus of the national meeting in January, February of 2022. So, there's a cadence to the way these things are developed. And then there's a whole series of things with iovera° that would ride in alongside of those opportunities.

Thank you. There are no further questions at this time. I would now like to hand the conference over to Mr. David Stack, Chairman and CEO. The floor is yours.

Thanks, Anita. Thank you for your questions and the time this morning. Next up will be the RBC conference later this month, followed by the BMO conference in June. We look forward to providing additional updates in the future. Thanks again, everybody. Take care.

And this does conclude today's conference call. Thank you for your participation. You may now disconnect.