Good day, and thank you for standing by. Welcome to the Q1 2023 Pacira BioSciences Inc Earnings Conference Call. All participants are in a listen-only mode. After the speakers presentation there will be question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Mesco, Head of Investor Relations. Susan, please go ahead.

Thank you, Grace, and good morning, everyone. Welcome to today's conference call to discuss our first quarter 2023 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; Ron Ellis, Chief Strategy Officer; and Charlie Reinhart, Chief Financial Officer. Roy Winston, Chief Medical Officer, is also here and will be joining us for today's question-and-answer session. . Before we begin, let me remind you that this call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. For information concerning risk factors that could affect the company, please refer to the company's filings with the SEC, which are available from the SEC or our website. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone, and thank you for joining us. The year is off to a positive start as EXPAREL continues to outpace the elective surgery market recovery as we expand utilization across key target markets and sites of care. We are focusing on three major objectives for 2023, growing revenues in a slowly recovering surgical procedure market, further advancing gross margins to the mid-to high 70% range and improving reimbursement across our portfolio with a specific focus on the NOPAIN Act and TRICARE. . First quarter revenues of $160 million include EXPAREL sales of $130 million, ZILRETTA also was a key contributor for the quarter with sales exceeding $24 million. These results are highlighted by solid growth in EXPAREL volumes as the rollout of our 340B program continues to expand volumes within both existing and naive businesses. I'd also note that the first quarter of 2022 was unseasonably stronger than Q1 historical trends. Our significant top line is driving strong and durable cash flows that allow us to self-fund growth opportunities and significantly improve our debt leverage ratio by recently retiring our Term Loan B using cash on hand and a new term loan A facility. This new highly flexible debt carries a significantly lower interest rate projected to reduce interest expense by at least $15 million in 2023. We are also pleased to report our 24th consecutive quarter of significantly positive adjusted EBITDA of $42 million. As we have said, improving gross margins is a top organizational priority. We have addressed different supply chain and manufacturing issues that negatively impacted margins for the last four quarters. As a testament to our commitment to excellence in manufacturing, we recently -- we are excited to welcome Chris Young as our new Chief Manufacturing Officer. Chris brings more than…

Thanks, Dave. And good morning to all joining us today. I'm excited to share some highlights on the progress we have made for PCRX-201, which we believe has the potential to be an important disease-modifying gene therapy for osteoarthritis. The product candidate was discovered by GQ Bio, a privately held biopharmaceutical company headquartered in Hamburg, Germany. GQ Bio's product candidates are next-generation gene transfer vehicles. These gene therapy vectors are highly efficient in entering joint cells to confer multiyear clinical benefit. In PCRX-201, these high capacities adenoviral gene therapy vectors express IL-1Ra when in the presence of inflammation. IL-1 is a cytokine inhibitor that plays a central role in inflammation in catabolic processes, many of which are associated with disease progression in osteoarthritis. Interrupting this cycle is likely essential to slowing disease progression. After intra-articular injection, the Vector enters join cells and turns them into factories to produce sustained therapeutic levels of IL-1Ra to manage pain and mitigate OA-related joint damage while remaining localized to the joint space. Our Phase I single ascending dose trial enrolled 72 patients in two cohorts, a co-administered steroid cohort and a cohort that did not receive a steroid. As Dave mentioned, 201 was well tolerated with efficacy observed at all doses. But what was particularly compelling was the level of efficacy achieved by the co-administered steroid group, which showed a significantly greater percentage of patients with the decline of WOMAC pain scores that exceeded 50%. The level of efficacy and duration of response will be an unexpected finding from steroids alone. The outcomes were so unique. We filed for patent protection around it and currently have a patent pending. Based on these data, we are initiating a second Phase I study that will help us to find the best administration regimen to take into the next stage of development. We expect to launch this study later this year. In parallel to the Phase I study, we will begin advancing our process development activity. To that end, we're expanding our relationship with GQ Bio to include process optimization and forming a new collaboration with Exothera, a Belgium-based clinical development, manufacturing organization, with a proven track record in customized process development and GMP manufacturing services for viral vector technology. These activities will ensure that we move forward with a commercially amenable process with a competitive cost of goods. Lastly, in April, we made an additional investment of EUR 2.5 million in GQ Bio in the form of a convertible note. We will make an additional investment of up to EUR 2.5 million upon the achievement of certain prespecified development and scale-based milestones. We look forward to providing you with additional updates on PCRX-201 on future calls. With that, I'll turn the call to Charlie for his financial review. Charlie?

Thank you, Ron, and good morning, everyone. To remind you, I will be discussing non-GAAP financial measures this morning. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release we issued this morning. I'll start with an update on sales and margin trends. Starting with EXPAREL. We had a solid quarter with net EXPAREL sales coming in at $130.4 million for the first quarter. First quarter average daily volume growth of 6% yielded average daily revenue growth of 1%, primarily due contracting activities. With the first quarter historically representing 22% to 23% full year sales, we believe we're off to a positive start to 2023, especially given several growth initiatives that we expect to kick in as the year progresses. These include ongoing growth in volume from both existing and new 340B customers, new initiatives with OMFS, plastics, outpatient, sports management and pain management and rehabilitation health care providers and our ongoing expansion in European markets. For ZILRETTA, first quarter sales were $24.3 million. With our 240-person field force now promoting education and awareness, we expect ZILRETTA growth will accelerate as the year progresses, and the team gains traction. As Dave mentioned, we are already seeing an encouraging uptick in new first-time ZILRETTA customers. For iovera°, first quarter sales came in at $4 million. Here, too, we are seeing strong growth in our customer base and expect demand and sales will gain momentum with a full field-based team generating awareness around the advantages of a drug-free nerve block with iovera°. We also expect to benefit from new commercial initiatives. Our sports initiatives with NFL Alumni, the PGA and the LPGA were off to a strong start and cash pay market is gaining real traction with orthopedic health care providers. Turning to gross…

[Operator Instructions] Our first question comes from the line of David Amsellem of Piper Sandler. David, you’re live.

Just had some questions on margins and spend. Can you provide more color on the gross margin headwinds, I think you talked about pricing, but just wanted to drill down on the extent to which just manufacturing has been problematic in terms of getting the EXPAREL margins up? I know you had some issues periodically last year. So can you talk about that. And how to think about cadence of gross margins as the year progresses? And then secondly, when do you think you'll get to the AVs? You said over time, but what's your thinking on timing there longer term? And then lastly, on R&D spend, how should we think about that generally? I mean I know there's a number of things you listed in the slides. Should we think about that as kind of growing over time, flat, getting some leverage in the model. Just help us understand that.

On margins, gross margin for manufacturing and we've talked about this, I mean, over the last four quarters, we've had quality issues with some of our APIs, and we believe that, that's now behind us. And we've had some issues with some sterile filters that we think we've got our hands around but is not totally behind us. And so we think that we've got the folks in place that can handle these things, and we're working in a very aggressive manner with our suppliers to make sure that we can solve those problems. I remind everybody that we've been -- we've had a gross margin of 79% before. So we're not trying to break into new territory here. We're just trying to fix some of these issues that appear mostly to be COVID related in one way or another so that we can get back to those kinds of numbers. And you just heard Charlie reaffirm 76% to 78% for this year. So I think we're well on our way to get there. I mean there are a couple of inflection points right in front of us here. We will submit the sNDA for the 200-liter facility in San Diego as we get into the third quarter. We expect that, that facility will be making commercial material in the beginning of 2024. So on the relative short term, we're building out a another fill line for ZILRETTA at our contract manufacturer. And that's important because the yield needs to be improved from the yield of the fill line and the product that we bought from Flexion last year. So -- and we've moved the production of the smart tips for iovera° to a contract manufacturer with a much better margin profile as we go forward. So really, we need…

[Operator Instructions] Our next question comes from Glen Santangelo of Jefferies. Glen, you’re live.

Dave, I wanted to talk to you about the revenues a little bit because I think last quarter, you said you expected EXPAREL sales in 1Q to be roughly 20% in the full year, and you clearly did better than expected there. But conversely, if you look at ZILRETTA, it seems like you're happy with the new accounts that you signed up, but revenue sort of declined almost mid-teens on a sequential quarter basis. So what's interesting is you did better at EXPAREL, maybe a little bit worse relative to what we were thinking in ZILRETTA, but yet you maintained the guidance for both of them. And intuitively, you would think you might have raised one and lower the other. And so I'm wondering if you could just sort of reconcile what happened in 1Q relative to your expectations.

A couple of things. I'll start with EXPAREL. I mean we did slightly better than the historical trends would suggest. We also have the outlier of 2022 when the first quarter was one of the strongest quarters. And so I think it's entirely prudent for us to wait for another couple of quarters of data before we start increasing off of what would have been the smallest number in the quarterly progression of the year. So we're happy to have a little bit of cushion there. I don't think it's time yet to raise the revenue until we start to see the procedures start to come back in the fold. And we think that, that's going to happen over the next couple of quarters and couple of years, but let's let that happen before we raise guidance from where we are. On the ZILRETTA front, there's a couple of things. First, the field force only started promoting ZILRETTA to the wider base on the reach and frequency strategy in the back half of January. So you're talking about a very small sampling here in terms of letting that opportunity mature. There's also the issue, Glen, that we had a couple of significant users of ZILRETTA that were -- that came over from Flexion. The issue that we were facing was that they were giving what we thought were inappropriately high discounts. And it took a while to straighten all that out until in the middle of February, we were able to come to agreement with those large purchasers and they are now buying ZILRETTA. So when you add that to the safety story that we've got in the marketplace, again, didn't start until the back half of January relative to keeping the patients in range and eliminating these glycemic spikes. I think that ZILRETTA is a little light on an annual basis, but with a number of levers that we think will get us back to the number that Charlie just reiterated. So I don't think we're uncomfortable with either one. I think it would be a little early to lower or raise either one of them.

Maybe if I could just ask one quick follow-up on the margin side. With respect to gross margin, I heard your comments that you hope to get to the 80s over the next kind of couple of years. But if you look at the result in 1Q with the 71.8% gross margin, I want to almost match your low watermark last year. And I wanted to get to the midpoint of the guidance it almost needs -- it seems like you need 78% to 80% for the next three quarters, and it seems like a pretty sizable ramp. And so I was wondering if you could comment on that. And then lastly, with respect to SG&A, it certainly seems like you're running hot relative to your full year guidance in 1Q. And you seem to suggest it was more heavily weighted in the first half. I just wasn't clear why. And I'll stop there.

Sure. So as it relates to the gross margin, we noted on the Q4 call that there was some overlap from Q4 into Q1 that was going to depress the Q1 margins. Some of that was related to EXPAREL and some of that was related to ZILRETTA. We believe that we've cured both of those, and I'll remind you, again, Glen, that we were running at 79% in the first quarter of last year. So we've made some structural changes from a personnel perspective. . And right now, Science Center is running as planned. So we're not uncomfortable with reassuring the guidance of 76% to 78%, noting that what we've got is $130 million of the $570 million to $580 million guide. So the majority of the business for the year is in front of us at the higher margin. So the math doesn't exactly work that it's a quarter of the year that's gone. As a matter of fact, it doesn't work at all. So we're not uncomfortable with where we are with the manufacturing goal, especially with some of the personnel changes that have been made and some of the ways that we're now working with the 200-liter in both places. On the SG&A, we reconfigured the sales force at the national meeting this year. And we put folks out there with the idea that we were going to have 3 times the frequency and the reach for both iovera° and ZILRETTA. We think that, that's working in terms of new users. And it's not a direct comparison from Q1 when somebody has -- is getting started using these compounds to the way their product will grow as they get used to using the product and they expand their utilization. So SG&A is according to plan, but it's a little higher than in previous years for the same quarter because we've added some folks. And we've got a 3-product portfolio now that these folks are working in the marketplace with. We've also added PM&R guys to the call pattern, and we've got a separate sales force out there that is small but still an added expense. It's focused just on OMFS and peds. So there's some structural changes that we made that support the SG&A. We watch that carefully, of course. And every quarter, we look at all of those territories to determine where the growth is and where the growth is in. But right now, same comment for the year, I think we've got the right folks in the right place.

[Operator Instructions] Our next question comes from Gregory Renza of RBC Capital Markets. Gregory, you’re live.

And Dave, maybe just on the 340B pricing program. I just wanted to ask you to perhaps expand a little bit on your commentary. Maybe just give us maybe a state of where you are now, certainly, with respect to the mix of the existing and naive businesses that you've represented or that you've discussed and how that has fared with your expectations thus far and really where you see that going?

Yes. No, thanks, Greg. It's doing what it was supposed to do. Just to reiterate, we wanted to open up those additional procedures where EXPAREL wasn't being used, understanding that there was going to be some purchases from current users that was going to modify the benefit of that. I think generally, Greg, we're exactly where we thought we were going to be. The numbers that we see are basically flat week-to-week, a little bit higher than what we projected when we talked about this in the Q4 call, but understand that the price increase of 2023, this year's price increase, we've not seen any of that yet in for the 340B customers, and that will take effect in in July. So there's a 6-month lag in any pricing action that will fall over to the 340B customers. So we expect that the majority of that 3.5% will come and have an impact on 340B that will take it right back to where we thought we were going to be and what we guided to as we came out of the year. So we're not disappointed. It's running, I would say, Greg, we're probably a point higher than we thought we were going to be. So it's slightly higher than we thought it might be. But we also see that the new users are increasing their use, and we continue to have 7 to 10, 12 new users every week, which are all positives. And so if you look at this in the short term and you want to train the health care providers and you want to offer the opportunity for non-opioid pain control for the patients, I think we're doing exactly the right thing while we work on TRICARE and NOPAIN, which will give us yet another alternative way to provide these patients and maybe not have to discount the product according to the 340B calculations that we were just talking about if that makes sense.

And maybe just a question on the pipeline, perhaps more broadly. It's nice to see you talk about 201 and others in the hopper. I think you alluded to just certainly the investment and maybe the differentiation of capabilities when it comes to taking a gene therapy or some of the novel approaches forward. Could you just touch a little bit upon where you see those decisions coming to bear, at what stage of development certainly as you're proceeding in early stage with the Phase I. Just curious how you're thinking about really changing the complexion of your capabilities and R&D approach should you want to move forward with this approach?

The approach is different for sure. I mean I think the first thing that Ron just talked about, right, is the process, and as you guys know well, the product is -- the process is the product as we go forward here. So right now, Greg, where we are is, we're going to look at some additional Phase I work. It's really around the timing and what type of steroid, whether it's oral or injectable, the timing of that steroid and how to best prepare ourselves for a protocol. We will have a -- as we get closer to when we have the process determined for doing the actual pivotal trials, we've had some interest. We've had some inbound interest in 201 already from potential partners. And I don't think you'll see us make any radical changes to our R&D organization. We've been fortunate enough to bring the people that we're working on 201 at Flexion, have joined Pacira. So we have a cadre of gene therapy experts in our organization now and that have helped us a lot with the discussions with the FDA on that topic. It will really be driven by the the protocol that's agreed to, and I think we're there. And we'll see how this eventuates with trials over the next 1.5 years. And then the cost that's projected versus the commercial costs in addition to the clinical costs. So I think we'll -- our desire would be to keep as much of this asset as we can at least early on as we create value. And then if it turns out that there's a partner that can add more value and can share the expense with us, we've got a lot of interest in being able to do that, and that would be an approach we would probably take. We're not looking to double the size of our R&D organization to be a gene therapy company for sure if that's the nature of your question. Ron, I don't know -- Ron is here with us, Greg, we should ask him. He works on this every day.

Yes, Greg, thank you for the question. Just to add what Dave said, we're a couple of years away from having a defined dose and process, and that really opens up the next milestone where we can take a look at opportunities to partnership.

[Operator Instructions] Our next question comes from Greg Fraser of Truist Securities. Greg, you’re live.

Can you comment on the export net in the quarter is gross net stable now? Or would you anticipate some additional pressure in the coming quarters as volume to the 340B hospitals grows? It sounds like you have some offset from the price increase in the second half. . And then I had a question on pediatrics. How much demand do you think is being driven by pediatric use? And what inning do you think you're in with respect to the pediatric opportunity?

It is stable at the current percentage use. And as you said, we do expect to benefit by several points as we enjoy the price action of the beginning of the year against the 340B account. So I think our thought process is that we are probably at or very near the low point and without any price increase, and we will get back to where we thought we were going to be initially with the price increase. And so I think it is stable and it doesn't move much at all from week to week now. And so I think we're in a stable position and can improve from here with more purchasing from the non-stored 340B accounts outside of 340B. I think also, Greg, there's also a bit of a shadow here as more -- there's activity, significant activity in the whole 340B arena. And I think folks are taking the idea that they have to use 340B purchases, for 340B customers very seriously. So I don't think that there's any risk of any additional use out in a 340B -- in an inappropriate 340B program going forward. So we feel pretty good about that. Peds is still in the early innings. I mean if I said it was -- the lady hasn't sung yet for sure. It's probably the third, it is a slower group to adopt in terms of just making a significant move in a short period of time. I would tell you, it's good to see, though, that with the people have adopted EXPAREL impedes that their growth is quite explosive and they get to be significant purchasers of the drug in a very short period of time. I mean Roy is with us, and this is Roy's baby. So I'll ask Roy to see if there's anything additional he would say to that for pediatrics.

Yes. And I think it's a very good question. The thing about pediatrics, it always lags behind what you see in the adults. So it's probably 5 years on the curve still to go with peds to get it to get to where EXPAREL is today. And with that, we have a lot of data that's about to come out pretty much from from collaboratives and from some investigator initiated. So for instance, as an example, scoliosis, which is one of the really big, painful procedures you see in pediatrics. We now have two large centers. One is the Shriner’s system and one is Cleveland Clinic doing studies in scoliosis with EXPAREL, and we should have that data, I would hope, within the next 6 months. And once that's out there and really objective from two big places like that, I think it will be something that people can latch on to. We have calls every day dealing with pediatric centers looking to get started. But again, the process is longer because they want very strict protocols. They want all the details. And just like you do any time with kids, the threshold is always higher to adoption. So I don't -- hopefully, that helps.

[Operator Instructions] Our next question comes from [Makela Francheskina] of Barclays. You’re live.

This is [Makela] on for Balaji Prasad. Just following up on the 340B. Could you just provide a bit more detail on this impact on gross margins and operating margins this quarter? Or really just any further color you can provide on volumes index?

When we started down the road of 340B, it was really mediated by the fact that we had to either get in or get out because we purchased ZILRETTA that was a 340B participant. And so our hand was forced to some level. But at the same time, we saw 340B and the expected decrease in the gross to net as a way to get additional clinicians using the product outside the hospital, especially as we anticipated the NOPAIN Act coming. So there was a clear understanding that roughly 20% of the business that we currently enjoy. This is October of '22 now that 20% of that business would likely move to 340B and that, that would cause roughly a 5%, 5.5% reduction in the gross to net. Now that was without the benefit of the price increase, right? And so we are just very modestly ahead of that. Interestingly, it's because we -- the greatest benefit so far has actually been more purchases of 340B active accounts. And so the fastest-growing section of our business actually is the 340B participating accounts, both non- and 340B. So it has worked to some level. Our anticipated growth into non-340B accounts who would not -- who would order both 340B and non-340B has been slightly slower than we thought. And so that's what brings us back to this 25.5%, 26%. And then the focus then is on the 6-month delay in the 340B pricing reflecting the price increase of January 1. So when you lay that on top for the rest of our business, the net-net of that was about 3.5%. The government has all of the CPI calculations, and we go through all of that with this too. So we're not calculating that we would enjoy the full 3.5%, but that there will be a 2%, 2.5% improvement in the gross to net on July 1 as we start to enjoy the benefit of the price increase. So that brings us right back to the 24% -- that 23%, 24% that we thought we were going to get in the first place. So it's pretty much where we thought it was going to be. And I think we did the right thing, especially given the progress on NOPAIN and some of the other things that are coming down the pike that will open up the opportunity to have reimbursement in these same outpatient populations.

[Operator Instructions] Our next question comes from Rohit Bhasin from Needham & Co. Rohit, you’re live.

This is Rohit on for Serge. Can you talk about your expectations for the remainder of 2023 for surgery trends? And then secondly, how do you think having the lower extremity nerve block indication label for EXPAREL changes [indiscernible] opportunity.

Yes. Thank you, Rohit. Let me start in reverse. So when we look at lower extremity nerve block and just to remind everybody, this data will be specifically for knee and foot and ankle. Those two procedures encompass about 3 million additional procedures. I always caution everyone that we are already being used in about 300,000 of the knee procedures. It's not necessarily for an adductor canal block but in the same procedure. So the delta is about 2.7 million procedures, clearly meaningful. We think that we'll get some of those knees relatively quickly because it is just a matter of not being in the package insert, especially with a number of the younger anesthesiologists. Foot and ankle will be a more linear approach. I think there's interest in many of the foot and ankle surgeons, but they don't have a lot of experience with EXPAREL yet, and so that will be a bit of a longer-term opportunity. But clearly, one that should take -- we should take advantage of pretty quickly. Just to be clear, Rohit, we will more than likely -- unless there's some type of an early approval, which we do not expect we will start doing some immediate targeting on approval, but the big launch for this would be at a national meeting in January of 2024. For the rest of this year, there's a whole bunch of stuff going on. And so that's a very complex question, but I'll give you what we think. So first, the -- well, we thought that the big issue in 2022 was labor until we saw that the peak of the 2022 procedure volume was in the second week in April. So if that was true, then it couldn't have been labor because we had enough labor to meet…

I would now like to turn it back to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, and thanks to all on the call for questions and time today. 2023 is off to a positive start, and we're energized about the opportunities that lie ahead of us. Throughout the balance of the year, we continue to work to transform the lives of patients in need of non-opioid pain management, which is an ongoing play throughout the country and around the world. Next up for us is the RBC and Jefferies conferences in New York. Thanks. Stay well. We'll see you all soon. Bye-bye.

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