Thank you for joining the Pacira Pharmaceuticals First Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, the Pacira management team will open the lines for a question-and-answer period. Please be advised that this call is being recorded at the company's request and will be archived on the company's website for two weeks from today's date. I'd now like to introduce your host for today’s conference, Jessica Cho of Investor Relations. Ma’am, please go ahead.

Thank you and good morning, everyone. Joining me on the call today from Pacira are Dave Stack, President, Chief Executive Officer and Chairman; and Jim Scibetta, Senior Vice President and Chief Financial Officer and Head of Technical Operations. 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, outlook, and prospects and 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 and that 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 Report on Form 10-K for the fiscal year ended December 31, 2014 and in other filings with the SEC, which are available through the Investors & 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. Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the earnings release for the quarter. And with that, we will hear first from Dave.

Thanks, Jess and good morning, everyone. It has certainly been an eventful few months at Pacira since we had our last call, including clinical and commercial progress, a disappointing regulatory development and additional uncertainty related to a government investigation. To summarize, in February, following constructive discussions, we reached a resolution with the FDA’s Office of Prescription Drug Promotion or OPDP, we agreed to take corrective actions on certain promotional aspects of EXPAREL marketing and response to a warning letter we received from OPDP in late September. Last month, we received a complete response letter from the FDA on our supplemental NDA, seeking approval of EXPAREL use in nerve block to produce postsurgical analgesia. We are working through the regulatory process and look forward to providing an update when we have greater clarity on the path forward for the nerve block indication. And most recently, the company received a subpoena from the U.S. Department of Justice, U.S. Attorney’s Office for the District of New Jersey, requiring the production of a broad range of documents pertaining to marketing and promotional practices related to EXPAREL. We take this matter very seriously and intend to cooperate with the Government investigation. Candidly, we expect these events to impact our rate of progress in the coming periods, which is why we’re suspending annual guidance for EXPAREL revenue and non-GAAP product gross margins until we have a better level of visibility. Jim will elaborate further on this decision and update guidance for certain non-GAAP operating expenses in 2015. However, our aspirations for the product in the Company remain undaunted. As we work together with the appropriate government entities on these regulatory matters, we plan to execute on a multiple fronts in 2015. Following an end of review meeting with the FDA, we remain fully committed to obtaining…

Thanks Dave. Let my start by summarizing the overall results in the first quarter. We announced total revenues of $58.3 million, up 59% from last year's first quarter. Total sales were primarily driven by $56 million of EXPAREL revenues compared to $34.4 million in Q1 of last year. We noted on our year-end fourth quarter call in February that for hospital based products, Q1 is not comparable to Q4 because of the seasonality of Q1's lower hospital procedure activity compared to the previous quarter. We also noted the time of the impact of severe weather patterns on scheduled surgical procedures. Surgical procedure volume in Q1 was further impacted by the growing number of high deductible insurance plans with surgeries, especially elective surgeries after later in the year. This latter dynamic has a meaningful impact on us, given that over 50% of our business is in orthopedic procedures, which have a significant collective component. One consequence of the complete response to the nerve block sNDA in March was that, in the absence of a new customer launch, we went ahead and implemented our second price increase for EXPAREL on April 1, in line with our annual expectations for nominal price increases going forward. We estimate there was a modest buying impact in Q1 sales of about $2 million, resulting from the price increase which is roughly the amount of volume discount related buying activity we experienced at the end of Q4. Since launched in Q1, a total of 3,498 accounts have ordered EXPAREL, which increased 43% from the same period last year; 835 of these customers have ordered $100,000 worth of products, 162 have ordered $0.5 million worth and 36 have ordered $1 million worth of products since launch. Comparable commercial metrics available to us, customers ordering a $100,000 worth of…

[Operator Instructions] Our first question comes from the line of Doug Tsao with Barclays. Your line is open. Please go ahead.

Hi, good morning. Thanks for the questions. I guess, Jim and Dave, what I think a lot of, as we are trying to sort of understand right now is when we should separate out factors like the DOJ subpoena and the investigation versus factors like pressure on hospitals, sort of how those all contributed to the decision withdraw guidance and if there's one that was ultimately more important than others. And then, I guess, Dave, when you think about the end opportunity for EXPAREL, has that changed at all?

Good morning, Doug. Thanks for the question. No, and I think what Jim was conveying in his prepared remarks really were that what we are seeing is the combined impact of all of these different issues that we've had to face here over the last several months. And really the decision to suspend was around the critical mass of all of that. And our discomfort with providing any specific guidance that we could standby behind with any comfort and that's really where the decision came from, Doug. There really is no one of those things that is any more important or any more instrumental in our decision than any other. I would tell you that, over time, we do not -- we think we have to clean all these things up and we have to be very careful that we do all the right things in order to achieve the future indications going forward, but now my confidence in the long term benefit of EXPAREL to patient care, if anything continues to grow as we work with various academic, especially major academic institutions on CQI and ERAS programs and we see the benefit of those programs. And if I look out over the next several years, Doug, I think while some of the issues that Jim raised are short-term issues for us to address in our business, over time as you see the opioid epidemic being addressed in a more specific way by policy and hospital administration. And as you see the move from inpatient to outpatient procedures as a consequence of the ACOs and ACA initiatives, I think our business model gains traction. It's actually increasingly important to the practice of medicine going forward, but acknowledging that the next few quarters is going to be difficult for us to be able to forecast.

And then I guess sort of not asking for specific numbers, but it's your expectation that EXPAREL volumes should continue to grow as we move through the year?

Doug, I mean, we suspended guidance, I don't think it would be appropriate for me to make any other comments other than that. I mean I think that's what we are trying to be for today at least, to be true to ourselves more than anything else.

Okay, I will hop back into the queue for now.

Thank you. Our next question comes from the line of Gary Nachman with Goldman Sachs. Your line is open. Please go ahead.

Hi, guys. Just a follow-up on that last question. Could you at least comment what demand has looked like so far in April? Are you seeing at least an improvement relative to the seasonal weakness in 1Q and any change as to how the physicians have been using EXPAREL since you changed your promotional practices after the OPDP warning letter?

So, I will let Dave answer the second question. I will just say that we are obviously only reporting on Q1 and then, as we look forward making the statements that we just -- our standard for guidance is the high level of visibility that we don't have right now. The DOJ activity just happened a couple of weeks ago, so what our customers do and how that shows up in sales, we don't have a relevant timeframe since that activity regardless. So I don't really want to characterize Q2 sales until we report on Q2 sales other than that.

First of all, thanks for the question, Gary. What we see in the marketplace is interestingly that most of the ERAS and CQI programs, other than the specifics with that program, that was part of our prepared remarks are in soft tissue indications, largely in different breast cancer and OB/GYN oncology reconstruction, et cetera indications and so it is interesting to us that we attribute that by the way to the fact that folks started using the drug in soft tissue procedures several months, several quarters actually before they did an orthopaedics, so they’ve had more time to actually understand the benefits of reduced opioids in an EXPAREL treatment strategy. So, I think that we’re encouraged on all fronts, we don’t see the physicians in anyway having any lack of desire to use EXPAREL. The pressures that Jim talked about really are based in purchasers and customers who are in difficult financial straits who are trying to make very short-term financial decisions as it relates to their business, very rare that we have any negative comments from clinicians about the use of EXPAREL and the benefits of their patients.

Okay. And then on nerve block, it sounds like you had the meeting with FDA already, just maybe if you could give us a timeline when we should hear about the next steps and it sounds like you’re confident, it’s a question of when not if, so I just want you to confirm that and it sounds like you’re comfortable enough with the green light to move forward with oral surgery based on what came out of the meeting, I just want to make sure I heard that correctly?

So we are in discussions with the FDA, we did have the meeting as you ascertained Gary and as we get minutes and we’re certain that we’ve got specific agreements with the FDA. We certainly will look forward to sharing all that with you as quickly as we can and your intuition is right that we are going to pursue oral surgery not necessarily as a result of the meeting that we had with the FDA on the nerve block indication, but just as an affirmation that that is an activity that is taking place as well.

Okay. Thank you.

Thank you. Our next question comes from the line of Jonathan Aschoff from Brean Capital. Your line is open. Please go ahead.

Thank you. I was wondering if the monthly trends, the $17 million, $18 million, $24 million for Jan, Feb, and March, if that was true to how it was spilled over the quarter or was that another quarter where IMS has gotten it wrong?

Yeah, Jonathan. I mean, we – the IMS will just generally are getting a little bit better. This was the first call that I didn’t, I have been a broken record of saying, formidably you should always ignore them, but you will see that the two of them actually had numbers that weren’t very close to each other in this quarter as well. So, and other than that, we don’t really talk about monthly trends within the quarter. So I think I’ll just leave it at that.

Okay. And just based on the last questions, you have had your FDA meeting already, regarding the CRL?

That’s correct.

And so you will await the minutes and then let us know what you will do?

That’s correct.

And that’s going to be in June, maybe?

You will know as soon as we know, Jonathan.

You will recall, Jonathan, what we said, complete response, early March and we said, we created the expectation of roughly a 90-day timeframe for us to request the meeting, have the meeting, get the minutes and be in a position to come back and have a decision ourselves or an understanding of where we are and then communicate that to you folks and then we’ve also said and we’re just saying the same thing now that as soon as we know, we obviously want to get that information up to the marketplace.

Okay. And I do actually appreciate you’re ripping off the band aid with the suspension and kinds of things, that’s a good idea. Thanks.

Thanks, Jonathan.

And our next question comes from the line of Corey Davis with Canaccord Genuity. Your line is open. Please go ahead.

Thanks. Dave, can you be more specific with how your marketing practices have changed both before the warning letter, after the warning letter and now after the Department of Justice subpoena?

Yes, and I hope, Corey that I am really consistent here with what we have talked about previously. So we have the broad -- and we believe that we have broad indication and just for the sake of everybody on this call, let me read exactly what the indication is from the package insert and it says, indication for EXPAREL. EXPAREL is a liposomal injection of bupivacaine, an amide type local anesthetic indicated for administration into the surgical site to produce post-surgical analgesia. EXPAREL has not been studied for use in patients younger than 18 years of age. The agreement with OPDP is that our sales force should only be providing procedure-specific information to customers on the two studies indications and that is bunions or hemorrhoids, and as a result of the warning letter corrective action and the agreement with the OPDP that is what we are doing. So when a customer – when a physician asks for specific information on dosing and administration outside of those two procedures, that information is provided either through a medical information letter or through a visit from a medical affairs representative, typically a nurse or a physician who will answer those questions and help ensure that the physician has all of the available and appropriate information to make sure that we provide best practice for patient care. We only received the DoJ letter two weeks ago, and so since this is a information subpoena, there really has been no change in that since what the FDA has asked for – I am sorry, what the DoJ has asked for is information on marketing and promotion practices, so we are operating as we have under the agreement that we came to with OPDP.

Okay. And Jim, I don’t want to put words in your mouth, but were you saying that the folks that are actually buying EXPAREL, not the docs who are using it, but the people who are making the buying decisions are becoming more hesitant to buy it because they are becoming more cost conscious and making short-term cost like decisions?

I think, Corey, I was really just trying to create the context for the recent events, right and I think you know this, but just for anybody listening, we were just -- I was just trying to remind of the context that our customer base faces financial pressures and that’s part of the buy decision that affects our growth trajectory and so forth. And then with these events, it just makes it a little more difficult to sort of look at paths and say that’s prolong, and that’s really all I was saying, Corey.

Okay. And then Dave on the dental study, you convinced that you only need to do one pivotal study in order to get approval in that indication, the FDA clearly agreed to one pivotal study there?

Yeah, we have got some things that we will discuss with them on this topic as well Corey, but remember this is an infiltration and so it’s an sNDA, so what we are accomplishing by doing the Phase III program is putting the information in the package insert, so the sales force can talk about, right. So given our agreement with OPDP now, we have a change in the strategy that we need these procedure-specific information in the package insert in order for the field force to be able to talk about it and we believe one study is appropriate for that, but we will have some discussions to make sure that that’s the case.

Okay. And last question. I think you’re also planning a study in facet’s disease, is that still in the works?

Yeah, it still is certainly on the scorecard Corey. The issue is that will be informed by the nerve block discussions that are ongoing with the FDA, and so once we have affirmation of the nerve block program, then the facet joint program and chronic will be informed by that.

Okay. I got it. Thanks, that’s all I had.

Thank you. And our next question comes from the line of David Amsellem with Piper Jaffray. Your line is open, please go ahead.

Thanks. Just a couple. So on nerve block, can you talk about the extent to which the personnel changes in the pain division, may or may not have had a role in the CRL and maybe give us some qualitative context on your relationship with the division, how it’s changed in the wake of dealing with new personnel, so that's number one. And then two number is, you talked about this cost constrained environment and you’re signing that now is one of the factors in the suspension of the guidance, but I guess the question that comes to my mind is what exactly has changed in the sense that in the fourth quarter, certainly last year that was not something that you had cited, now it's something that you're seeing. So I guess the question is, can you point to us -- point us in the direction that tells us, okay what actually has changed amongst your customers? Thanks.

Thanks for the question David. First of all, let me take the first question regarding the relationship with the FDA. Honestly David, really the change in personnel really doesn't have anything to do with Pacira, I mean, we can only work with the people who are currently at the FDA and we believe that we have a good working relationship with those folks and we expect that we're all trying to address the opportunity to provide options to opioids for the postsurgical care environment, and we're working with them effectively we hope and we'll report on that as soon as we have some solid agreements that we can report to you. On the issue of cost constrain, I think, the issue of direct comparisons to Q4 David are not what Jim was trying to relate, I think what we were trying to relate was that, there are issues that our customers face every day, we previously talked about the difference in how physicians view EXPAREL versus line item budgets and the impact of some of the purchasers and how those objectives might not be perfectly aligned in the hospital environment. And I think what Jim was pointing out was that the warning letter and then the CRL and the anticipation that we were going to have a nerve block indication which then led to the disappointment that we didn't get a nerve block indication and now the DOJ has had an impact on how people view EXPAREL from the purchasing perspective and its really nothing more that. So it wasn't a direct comparison of Q4 to Q1. But you would also understand that in a low procedure volume order that the optics of that are really different then when the ORs are full and you've got high volume, high revenue procedures.

Let me just make a broad comment about our view of disclosure too though, I mean we tend to I think that we have a track record of being very quick at disclosing events if we think they’re material whether they're good or bad, and being very cautious at making forward looking statements whether they're good or bad if we don't feel comfortable with what they are. So we didn’t provide guidance [indiscernible] launch, we did provide guidance obviously in February and then we had these recent events, most recently the DOJ investigation which, let's be honest, I mean that creates uncertainty amongst employees and some uncertainty in the marketplace. And so, what we're saying is, we don't have visibility, we can't unlike in the past, recent past look at trend of the recent activity and then sort of have some deepened foundation for what it's going to look like going forward. So we just don't have that comfort to provide that now, that's really our view of why we're suspending.

Okay, if I may sink in a follow up, given the events recently, the suspension of guidance but also given that you are profitable, you have cash, does this -- do these events potentially drive you to get maybe aggressive in looking at other assets to acquire or more aggressively use your cash?

We've been looking at things for the last several quarters David, and this doesn't really change anything there, we continue to look at additional assets, especially if we think that they are useful to the target audiences where EXPAREL is specifically where we don't have really any cost of sales because we are already going through that surgical audiences.

Thank you.

Thanks.

Thank you. Our next question comes from the line of Liana Moussatos with Wedbush Securities. Your line of open. Please go ahead.

Thank you for taking my question. Could you give us an update on the two new product candidates that you mentioned at the Analyst Day in January?

Yes. So we continue to, I mean still preclinical, so that everybody gets exactly the right frame of reference, but we continue to move forward towards IND stage with those products, Liana, and I don't know if you are looking for a clinical development update, I assume. They are both still preclinical. We're making progress towards manufacturing of clinical batches and look forward to having the appropriate tasks et cetera that we will file INDs as rapidly as we can.

Will they be in the clinic next year?

We haven't provided that information, Liana. We sort of put the broad view of that if we -- these are 505(b)(2)s and they actually have a little bit of a different clinical pathway and the only disclosure we provide around that is that we expect them to be in late-stage Phase 3 studies by the second half of 2017 and we are still on track with that.

Yeah, I would remind you, Liana, that this -- and Jim is right on point, I mean because of the 505(b)(2) pathway and because of the FDA guidance that 50% of our Phase 3 patients need to be treated with product that was produced at the commercial scale, we actually can do clinical developments faster than we can do manufacturing development. And so the program will be somewhat guided by how fast we can provide Phase 3 material.

Got it. Thank you.

Thanks for the question, Liana.

Thank you. Our next question comes from the line of Steve Byrne with Bank of America. Your line is open. Please go ahead.

Hi, guys, this is Tazeen in for Steve this morning .Thanks for taking the question. Just on oral surgeries, can you let us know how much of the oral surgeries that you mentioned are done in a hospital setting? I know there is certain categories like cosmetics where people are willing to pay out of pocket, but if it's not something where patients need to stay in the hospital afterward, do you see this as being more of an out-of-pocket pay segment?

Yes, for sure. I mean to answer your first question, Tazeen, the number of patients who are treated in a hospital is modest. Generally guided by patients who have some associated comorbidity that requires that you have nursing care immediately on close by, not that they are doing in a treatment center, but a different level of care immediately available. One of things that's actually attractive about this marketplace is that generally these are cash pay environments and the clinician will bill the insurance company on behalf of the patient. And so the physician makes the treatment decision. We think it's different, but it is somewhat analogous to the plastic surgery marketplace in that regard.

Okay. And I guess tied to that, how would your current hospital based sales force be able to promote such an indication if it got approved? Do you anticipate needing to increase your commercial infrastructure to get penetration into that market?

Not, very modestly. We haven't actually done all of that work and so I can't tell you with any specificity, but I would tell you that when we built the sales organization, it was done around hospital-based procedures that we thought were appropriate for long-acting non-opioid pain reliever. And remember that we also built that around the docile 7, 8, 9, 10 plastic surgeons. So to the extent that the plastic surgery opportunity and the dental surgery opportunity are analogous, the reps are already constructed around a territory alignment that would pick those up. I think a specific answer to your question is, what you expect is that the reps would do their hospital work and I’m sure you guys know, I know you know, Tazeen, that this typically would start 5:30, 6 o'clock in the morning. You’d be in the OR for a few cases. And then we look at dental surgery where the surgical account specialist could go in the afternoon or to go in off hours when they are not required to be in the hospital for any reason. So I would expect that there would be some modest increase in the sales organization but nothing that you would need to be worried about or recruiting four years in advance or anything like that.

Okay, thanks for color on that. And then, just going back to a comment that was made a few minutes ago in response to how you’ve adjusted your marketing practices with regards to FDA’s [indiscernible], did you say that sales reps are currently only actively talking about bunions and hemorrhoids for using EXPAREL?

So, our understanding of our OPDP requirement is that the reps can -- the issue of bunions and hemorrhoids is around specific guidance to clinicians on dosing an administration. So, exactly what’s the dose, exactly what’s the -- what’s the technique, et cetera, and that’s what the hospital account specialists can provide around bunions and hemorrhoids. When a clinician asks about a laparoscopic procedure, for example, or an orthopedic procedure, because that information is not specifically outlined in the package insert, we provide that information either through a medical information letter or if the clinician would rather see one of our medical accounts -- I’m sorry, medical affairs folks who are almost entirely physicians and nurses and pharmacists, then, they would have a visit from somebody other than a rep to provide that guidance.

Can you just let us know what portion of the orthopedics market have you penetrated so far?

It’s in our -- we gave guidance that it was over 50% of our business, but it’s tiny as a result of the overall orthopedic business. I don’t have that number at the top of my head, Tazeen, but we can get back to you.

Okay. Just want to get a sense of if you’re now no longer talking about anything outside of bunions and hemorrhoids and let’s say an orthopedic surgeon may not be fully familiar with EXPAREL, I guess, how do you expect to increase that rate of penetration and so, what is obviously been a successful market for you but to be able to continue that trend?

So, the broad desire of the clinical community is to provide reduced opioid treatment strategies and so, if you focus specifically on orthopedics as your question implies, then, this started with knees, many of the ERAS and CQI protocols that are driven independent of Pacira have included EXPAREL in their treatment guidelines. And so, you expect that that would continue to happen as the medical community understands that the use of opioids, while fine [ph] pain relievers have all of the consequences of nausea, vomiting, urinary retention, et cetera, the primary growth of the product frankly in many of these environments is the success of the product and the physician lounge, where clinicians relate other clinicians that they’ve had experience and that they’ve been able to reduce opioids and improve patient care whether that’s length of stay or patient satisfaction scores or whatever it is. And so, our organization has been focused around making sure that we can provide adequate information so that we assist the physicians in their use of the product, but I wouldn’t look at the way EXPAREL has been expanded from physician to physician as in the traditional retail environment where it’s one doc at a time. I mean, in the hospital, we have a more closed environment where success leads to success and docs who are looking for opioid -- reduced opioid treatment strategies will seek out folks that are having success in similar procedures. So, the sales force is talking to other physicians, Tazeen. The issue that was agreed with OPDP is that we will provide specific information on dosing an administration outside of bunions and hemorrhoids, which are specifically listed in the package insert.

Okay, thanks, Dave.

Okay, thanks.

Thank you, and we do have a follow-up question from the line of Doug Tsao with Barclays. Your line is open sir, please go ahead.

My part was asked and answered, thank you.

Thanks, Doug.

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

Thanks, Valerie. Thank you, everyone for joining us today. Coming up, we’d like to note that we will be presenting at the Bank of America Merrill Lynch 2015 Healthcare Conference next month in Las Vegas. Thanks a lot and we really appreciate your continued support. Thanks everybody.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a good day.