Thank you for joining the Pacira Pharmaceuticals Third 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. At this time, I would like to introduce Jessica Cho of Pacira Pharmaceuticals. Ma'am, you may begin.

Thank you and good morning, everyone. Joining me on the call today from Pacira are Dave Stack, Chief Executive Officer & Chairman; Jim Scibetta, President & Chief Financial Officer; and Kristen Williams, Chief Administrative Officer, General Counsel & Secretary. Before I turn the call over to the management team for their prepared remarks, I would like to remind you about certain remarks made by management during this call about the company's future expectations, plans, outlook, and prospects and statements containing the word 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 press release for the quarter. And with that, we'll hear first from Dave.

Thanks, Jess, and good morning, everyone. The focus of today's call is our flagship product EXPAREL, the only non-opioid, long acting, local analgesic formulation of bupivacaine approved to provide postsurgical pain control. Studies evaluating EXPAREL resulted in the reduced need for opioids earlier ambulation, with decreased task for resource consumption length of that stay and readmission correlating with increased patient satisfaction across the broad array of surgeries. As a reminder EXPAREL is safely and effectively improved the lives of over 1.5 million patients in the 3.5 years since launch. The third quarter of 2015 marked a period of continued growth for EXPAREL, indicative of both stabilizing sales against market headwinds within a quarter that is typically a low procedure volume quarter. Let me reiterate here that we fully expect EXPAREL sales to grow as we transition into Q4, historically, the strongest quarter of the year in terms of number of procedures. For this call, I will answer the question of how EXPAREL and Pacira will grow the brand in 2016 and beyond with four specific points. One, resolve the regulatory actions with the intention to reaffirm the broad indication and 72 hour efficacy of EXPAREL, which will allow us to switch the balance of influence in the hospital, back to surgeons, anesthesiologists and other care providers, who understand the value of that EXPAREL delivers to patients and to overall hospital economies. Two, build out the Pacira leadership team in anticipation of a protracted period of strong growth for EXPAREL, as well as DepoFoam based pipeline products. Three, understand the competitive environment and our belief that there is no commercially useful product and development to compete with EXPAREL. And four, invest in EXPAREL and DepoFoam to maximize shareholder value and to provide improved patient care options to our healthcare providers. I…

Thanks, Dave. To recap our legal action with the FDA, we and two doctors initiated a lawsuit on September 8 in the Southern District of New York seeking declaratory judgment from the threat of FDA enforcement action contained in the warning letter specifically, and also against threats implied elsewhere by the current regulatory framework. The next day, we filed a motion for preliminary injunction to protect our rights during the pendency of the litigation. Our lawsuit and the accompanying motion rely on judicial protection provided to all American citizens in the Administrative Procedures Act, the First Amendment and the Fifth Amendment to allow us to take certain actions without fear of retribution or prosecution that generally fall into five categories. One, affirm that the EXPAREL approval granted by the FDA in 2011 is for use in all adult surgical procedures where local administration is applicable. In other words, the intended uses as established by the FDA approval were for the broad range of surgical procedures and not limited to the two surgical models that were the basis of approval. This is what we refer to as the "broad indication." Two, affirm that the duration of efficacy established in our Phase 3 hemorrhoidectomy study was 72 hours. Three, affirm that we can use surgical technique videos and administration guides in our promotional efforts in support of the broad indication. Four, affirm that we can share with healthcare providers truthful and non-misleading information about EXPAREL such as data from clinical studies which are not contained in the label but are consistent with the approved broad indication. Importantly and in contrast to the Ameren lawsuit, our lawsuit does not seek to allow us to share truthful and non-misleading information related to any currently unapproved indication such as nerve block. And five, affirm that…

Thanks, Kristen. I'll discuss our financial results and outlook and then briefly touch on manufacturing and the organizational changes we've recently announced. As Dave noted, EXPAREL revenues grew in the third quarter, in spite of Q3 being seasonally low on procedure volume. Third quarter net EXPAREL sales of $59.7 million rose 19% over last year's Q3, and up 5% over the prior quarter. Based on current pricing going into the quarter, our unit volume growth in terms of boxes sold would have driven our Q3 revenue over $60 million. However, in the consequence of the commercial progress we've made with the U.S. Department of Defense, and that which we hope to make in the future with the Veteran Affairs department. We signed a Federal Supply Schedule or FSS in August of 2015. The FSS discount resulted in approximately $400,000 less revenue than would have occurred at the $315 per vial price we charge otherwise. The DoD is currently 2% to 3% of our business, whereas the VA business to-date is de minimis. The FSS price is applied directly to boxes sold into that channel, so while it impacts the average gross price per box sold, it does not impact our gross to net calculation. As of Q3, a total of 3,790 accounts have ordered EXPAREL since launch, a decent add-on of 127 new accounts this third quarter. There's some focus on sequential quarterly growth as an indicator of whether the product is growing overall, and that doesn't tell the whole story. In a given year, we could have moderate Q1 to Q3 sequential growth followed by a strong Q4, driven entirely by the growing seasonality dynamic that is pushing elective surgical procedures into Q4 and we still have considerable annual revenue growth. That is what we expect 2015 to look…

Thank you. Our first question comes from Douglas Tsao of Barclays. Your line is open.

Hi, Maybe Dave, I thought it was helpful your comments in terms of the understanding of the impact of volume of drug and the successive procedures and just in terms of the sort of adoption we've seen in orthopedics so far, how broadly understood is that fact right now and as you think about the go forward sort of growth opportunity, is that really a key point for surgeons to perhaps might not have understood that point and not necessarily received or seen the same benefits as others to sort of really start to appreciate the clinical benefit that the product provides.

Yeah, good morning, Doug, and thanks for the question. Yes, is the short answer. When you – there is a couple of things that have been common to the investigator sponsored trials that have been successful versus those that have been equivocal. And volume is the lead indicator because in order to follow the injection technique that's required, after the knee is removed but before the prostheses is inserted to inject the posterior capsule. And then while the adhesive is drying to inject the periosteum and begin the process of the periarticular injection, et cetera, requires a certain amount of volume. And we were routinely hearing that surgeons were running out of volume before they completed the technique. So, we moved to 100cc and then in the marketplace, the marketplace always being very efficient move to 120cc and we now have investigators, especially in the Midwest moving to 160cc. And the more volume doesn't have a downside and we continue to see improved reports of efficacy and especially early ambulation at the high volumes. And so, for TKAs and for large wounds specifically, Doug, but we're also implying some of that logic in smaller procedures as well.

But I guess what would be helpful to sort of understand the sort of timeline of that adoption, is that something that surgeons are sort of – it's just coming to appreciate, given sort of the evolution of the product and maybe some early adopters and it just wasn't fully elucidated in the community?

Yeah. We saw the first couple of datasets with 100 or more about a year ago, Doug. And so, it takes a while to push that out and to get the stuff into the press and into the public domain. But from most of the new data that we're seeing now too, it's pretty clear that if you're going to do one thing with EXPAREL – largely because when it's attached to a multivesicular liposome, it stays where you put it – 100cc or more and probably 120cc, as I said during the script, will be the best practice education training that we provide going forward.

Okay, great. And then just one follow-up. In terms of the randomized trial that you spoke about in knee arthroplasty, have you thought about what that would be a comparison to? Thank you very much.

Sure. I mean the plan is to have a bupivacaine comparator similar to the cocktails that many of the folks in the marketplace are using or trying to use, Doug. So, we'll mimic one of the best known cocktails and compare that to EXPAREL.

Okay, great. Thank you very much.

Thanks.

Thank you. Our next question comes from Gary Nachman of Goldman Sachs. Your line is open.

Hi, guys. Good morning.

Good morning, Gary.

Dave, I know you won't comment on the litigation specifically, but in the event of a good outcome with FDA, would you consider adding to your commercial resources behind EXPAREL to further accelerate it? And have you started to think about the commercial opportunity for oral surgery? I know it's out in 2017, but how you might approach that?

Yeah. It is a very similar question, Gary. We right now are in the process of examining the allocation and the alignment of our commercial-touching resources, not specifically tied to any legal action. It's a process that we go through every year at this time as we start to look for 2016 budgets. Part of that process is to look at not only dental or oral surgery but also all of the ambulatory surgery and non-hospital uses of the drug to make sure that we're anticipating our success and making sure that we put the right people in the right places. So, yeah, we are going through that process right now, Gary.

Okay. And then just a follow-up, in terms of business development opportunities, I don't think Scott's on the line, but how does the pipeline look and what types of deals are you guys considering that could make sense for the company and could add to the overall portfolio that would be synergistic? Thanks.

Thanks, Gary, the deals are coming to us in a number of different forums, largely driven by customers who have different techniques and different products that they use during their day-to-day activities. And so most of what we're looking at are driven by either surgeons or anesthesiologists recommending that our educational resources and our field force might be more appropriate for a product than the way it's currently being positioned to them and promoted to them. Scott and his team also have a number of strategic opportunities that we're looking at that would either be complementary to the activities of the current organization or strategically prepare us for a broader relationship with the anesthesiology community around nerve block, et cetera. So, strategic either from a customer's perspective or from the perspective that it would be – there would be zero cost of sales because our sales forces are already on those individuals and/or strategic and that we want to build relationships with customers of the future.

And just to add to that, I mean, I think it's important that we emphasize Scott's role is not only BD doing deals, Scott was a big proponent of this TKA study that we're going to do in infiltration and working with Dave and the team to think broadly about are there other studies we should be doing in support of the approved indication. And then I think you're also seeing additional commitment, sort of an internal discussion of we have two pipeline products with DepoFoam, why not more? And so Scott will be working with our R&D team to evaluate what commercial opportunities there are with DepoFoam to expand the pipeline. So, he's got those two plus looking at the BD opportunities as well.

Okay. Great. Thanks.

Thanks, Gary.

Thank you. Our next question comes from Corey Davis at Canaccord Genuity. Your line is open.

Great. Thanks very much. First question is, number one, how are you ever going to replace Jim as CFO? Number two, for Kristen, what does it mean to have the warning letter removed? Have we ever seen that before? And number three, I know you can't discuss what you're discussing with the FDA, but can you confirm that you are actually discussing with the FDA a potential settlement?

Corey, I'll turn it over to Kristen in one second. I can answer your – I guess, with your second question there is no replacing Scibetta. So, we are not even going to try. We're going to hire another CFO.

Corey to answer here legal questions. One, as I mentioned in terms of the warning letter coming down, as far as I can see that is unprecedented, but I truly don't have any further information on that at this point. So I don't know what it means or can't say anything further about that and what was your second legal question?

About whether you confirm that we are in discussion.

Oh, yeah. And, I mean you can see by following the docket, extension was filled for 21 days and now we just filed one for another 39 days, so the parties are in discussion at this point.

Okay. Just wanted to be clear on that. And then last one, probably for Dave, so can you help us understand hospital budgets that are getting finalized or developed in the middle of Q4 and is that determinant of how EXPAREL may or may not improve its position or is that always a fluid situation that could improve as we go into 2016?

It's both Corey, our national accounts folks and our strategic alliance folks are working with the IDNs and the GPOs and with our big customers to make sure that folks understand the flow of data and the interest of their surgical and anesthesiology groups to make sure that budgets are created. It also is driven in some cases by these ERAS and CQI programs, where everybody who comes into a surgical setting say for OB/GYN, oncology or for breast surgery or whatever, is getting EXPAREL. So in those scenarios it's simple math. We do expect that with resolution of the warning letter, we will be in a different position when it comes to enhancing the positioning of the product especially when customers have made decisions based on that information and so we do expect a physician to both be strategic as we put this, we work with them to put the budgets together in advance, but then also we expect the situation to improve as we go through 2016.

Great. Thanks very much guys.

Thanks Corey.

I was kidding about Jim by the way.

Yeah, before the next question, yeah I know you were kidding; you threw me off a little bit. But I do want to point out seriously that, I went out to California to oversee our science center activity in the summer of 2013, so we haven't had a full time CFO in this company since then, regardless of the person. So I do think that talking with Dave, I'm going to put my full energy into the operating role that I have – that I love doing and – but I think the company will seriously benefit from having a full-time CFO interacting with the investment community which, just hasn't been possible for the last couple of years.

Great. Thanks everyone.

Thanks Corey.

Thank you. Our next question comes from Liana Moussatos of Wedbush Securities. Your line is open.

Congratulations on a great quarter. Thanks for taking my question. Just, the R&D and COGS were low this quarter, I know you reiterated guidance for operating expenses, but could you talk about some of the dynamics going on – you kind of mentioned some things, but could you give us a little detail?

Yeah, two very separate issues. I mean R&D is the – it's the thing that's about to happen, that just didn't really kick-in yet, meaning that the oral surgery trials are getting going. There is a little bit of that in there, but the nerve block studies are about to crank-up and so if you do the math of guidance, we'll have significant more spend in R&D in Q4. If you subtract our guidance from what we spent through the first three quarters. And then I also obviously one is that, expectations that – we're going to be more of an R&D company with a great product, as you look into 2016 and we're very comfortable with that. We think it's the right thing to do. On the COGS front, it's a little bit of anomalistic math of Q3. Remember that, because we have some inventory, a lot of our reported cost of goods are related to what we manufactured in the previous quarter or the quarter before that and so there was a time when we were cranking out full capacity and that's where we got close to the 80% non-GAAP gross margins and just want to temper expectations as we move forward and we won't be manufacturing a full production.

Thank you very much.

Thank you. Our next question.

Thanks, Liana.

Our next question comes from Shibani Malhotra of Nomura. Your line is open.

Hi, thanks for taking the questions. So, I've got a couple. The first is, can you talk broadly about the implication of – implications of hospital groups acquiring ambulatory surgery centers like tenants do you see United Surgical Partners? And what that means in terms of the potential for increased usage of EXPAREL? And then separately, I think you'd mentioned in the past, the warning letter give hospitals formulary decision makers a reason to restrict EXPAREL. But if this is reversed, this warning letter is reversed and removed, have you thought about your strategy of explaining this to formularies and how do you think – how do you think formularies – or decision makers are going to react once this happens? Thank you.

Thanks, Shibani. I'll take them in order. First, your specific reference to a healthcare provider buying an ambulatory surgery group, we expect that we will continue to see more of that and we do believe that that's a positive for both Pacira and EXPAREL. We continue to have significant interests in identifying patient types, as well as surgical procedures where a 23-hour stay environment is appropriate. And we've got dedicated resources now working just on those kinds of initiatives with these customer groups. And so what we think you're seeing is, a strong understanding of the impact that the accountable care organizations are going to have as well as the CMS bundled payment programs and the for profit aggressive payers, healthcare providers and payers understanding that are looking at innovating with the use of EXPAREL to allow patients to be able to go home in a 23-hour stay environment without the need for a pump or a catheter or any of the other things that currently limit mobility limit the time to first ambulation and I'll remind everybody that it is absolutely in one case after another, it's the time to first ambulation that is the gate on the length of stay including the ability to treat in a 23-hour stay environment. So yeah, we see those things as very much connected and we see them as significant opportunities for EXPAREL over the immediate and short-term. As we talk about the warning letter, I'll revert back to some old verbiage, Shibani, one that you and I've talked about previously and that the folks who treat patients, the folks who actually have patient care responsibilities, very rarely have anything negative to say about EXPAREL. It is budget holders and gate keepers who are more prone to be limiting the access to…

Yes, it does. But can I actually push you on that because, when we were doing our research and I think many investors and they have spoken to some physicians who've used the product. The feedback isn't always consistently good, but what we found is that, the good feedback or the doctors who really like the products are the ones that have been trained very well and have experience. And is that something you've seen as well because sometimes, you do get in doctors who've used the product but maybe not correctly that actually think it doesn't work and we struggled with that ourselves.

Yes, we struggled with it every day is – and what we – I mean the biggest issue is bit of a strange issue from our perspective frankly is that, as part of this restricted access scenario, many healthcare providers and many institutions will not allow our folks in to train. And so, we can do it piecemeal through Cadaver Labs and we can have weekend meetings and we can train in national meetings et cetera. But that's very different than when we can train in the OR with the surgeon and their surgical team and then we can follow that to the PACU and then we can follow that to the Med Surg floor. So that all of the nurses understand that this patient has gotten a 72 hour non-opioid pain reliever and you need to think differently about whether you hook him up to a PCA machine at all or how you provide breakthrough therapy with an opioid, if required, et cetera. So, that will be another – that will be a secondary issue behind cleaning up some of these other things and picking off the low hanging fruit, Shibani, but the hope is, that once people start to realize that for all of the reasons that we've been talking about this morning, restricting access to EXPAREL is not in their best interest and if they are going to use EXPAREL, the only way to get the full benefit of the drug is to allow us to educate and train their surgeons and their anesthesiologists that we can get to that as well.

Great. Thank you.

Thank you as well.

Thank you. Our next question comes from David Amsellem of Piper Jaffray. Your line is open.

Thanks. Just a couple, so just Dave going back to your comments about this shifting of the balance of influence to back to the surgeon and physicians as opposed to people responsible for hospital budget, should I take that to mean that the restrictions that we have seen maybe have been more widespread than you originally let on or they are more widespread than you originally thought. Maybe help us understand that because I think in the past, you've said that the restrictive environment it is really limited to select few PNP committees, hospital, pharmacy, departments, et cetera, et cetera. So I'd like some more color there. And then secondly in terms of business development, just give us your latest thoughts on how you are thinking about using your cash, how you are thinking about the potential addition of other products? Is that something that you're looking at as a priority, or is it really more just R&D focus and trying to find other uses for the DepoFoam platform at this point? Thanks.

Thanks, David and fair question. And so, the progression here is if – so we got the warning letter in September of 2014 and all of the early narrative was around how is the field force doing, how are you maintaining in the marketplace relative to customer reaction to the warning letter, et cetera. And in the early days, the field – well, and even today, the field force has done extraordinarily well. What we've had to deal with as we've gone forward is inappropriate utilization of these folks who are dedicated to restricting access and trying to preserve budgets by inappropriately positioning the 72-hour efficacy claim that you would see in the Wei Declaration on our website, as well as the broad label which you would see on the Goldkind Declaration on our website. And so, that continues where we needed to push back. This is not a field force issue, this is more an issue of in the environment where budgets are constrained and where budgets are being capped, folks have used the warning letter inappropriately. And then as we did not get the nerve block claim, that was more obvious. And then with the DOJ subpoena, we have some customers that came back and cited that as yet another reason that they were concerned about the broad availability of EXPAREL. And so, it was – I don't believe we've ever misrepresented everything. The issue with the field force has been strong and the field force continues to perform at an admirable level, as Jim said, relative to everything that's happened to us in the last 12 months. A separate issue that certain customer groups in the marketplace have continued to use the warning letter completely inappropriately, which was one of the reasons that we took the legal action that we took. And so I – and I would, so just I'm going to turn it over to Jim in a second, David. So, I guess to specifically answer your question is has limited access continued to be a problem or be a growing problem as time went on, the answer is yeah. I mean that and the DOJ subpoena have together caused an environment where it's been difficult for our reps to push back against people who are dedicated to restricting access.

And then, David, to pick up on your other question about other products, I guess you in the investment community would hope that we calibrate strategy with circumstances and we're still looking at and we'll continue to look at additional products. We would love to have another product that – a marketed product, for example, that could be sold alongside our same sales force giving access, but we also are calibrating the appetite we have against, frankly, our stock price. And so I didn't want to suggest that we aren't continuing to look at things and Scott will continue to with the team here, but we're also realistic that with our market cap where it is, there is a size of opportunity that is only appropriate. Again also given the context we have, which is we believe we have a real growth engine in EXPAREL on its own, plus the pipeline. So we're always going to look at opportunities and how to finance them relative to the growth opportunity we have in our stock to just execute on our plan.

Thank you.

Thanks, David.

Thank you. Our next question comes from Jason Gerberry of Leerink Partners, your line is open.

Oh. Hi, good morning and thanks for taking my question. First question, just on the reported sales growth number for the quarter. Can you break out what was unit volume versus, I guess, net price or gross to net adjustments? Just trying to get a sense of the – given your comments about the reliability of some of the data that we have to track EXPAREL. If you can quantify the last two quarters of year-over-year volume growth for EXPAREL?

So, the unit volume compared to the previous quarter was pretty much in line with the revenue change as well. And I was just trying to point out that we did have a pricing change within the DOG this quarter that had a minor impact on this quarter but frankly, I just wanted to get it out there so that people are aware as we go forward that we have that component of our business. The volume – the unit volume relative to the previous year – we've got – we did have a price increase between then and now 5%. So, the 19% revenue increase is somewhat offset by the price increase in terms of unit volumes, but then that somewhat mitigated by this price change that we have with a small part of our business. So, there is not a big – there is not a big difference between them when you summarize that together, but we're just trying to help people find a narrative from one quarter to the next.

Okay. Yeah, because when I look at IMS, it's showing like unit volumes like I guess flat to slightly down year-over-year. So, if that data is unreliable effectively it's kind of a more of a mostly driven by volume with a little bit of price on a year-over-year basis. Is that the right way to think about? I'm ultimately trying to get a sense of how to think about trend going in the fourth quarter?

Yeah. We've got – again our volume is pretty much in-line with the revenue increases. So there is a significant increase in volume quarter-over-quarter from year-to-year, and I caution you to rely too heavily on the numbers that we said don't always reflects reality out there.

Okay. Fair enough. And then just lastly for me on the FDA case, as it relates to formulary access, you outlined a number of items you're negotiating with the FDA. Just kind of curious, it would seem to me the – the breadth of the label i.e. for all infiltration procedures seems to be the most critical, of those four items in terms of getting the broader formulary access, but just kind of curious if you would generally agree with that assessment or have a different view? Thanks.

We can't comment on that, it would – it's given the state of where everything is in terms of our working with the folks at the FDA, it just would be inappropriate for us to make any comments, Jason. So...

Okay.

I'd tell you if you have any thought in your mind, that EXPAREL sales year-on-year are flat. I would suggest that you might want to go back and look at the first three quarters of 2014 versus the first three quarters of 2015 and they are not anything close to flat, it's well over 20% growth.

Yup. Okay. Thanks.

Thank you. And I'm not showing any further questions in queue. I'd like to turn the call back over to Dave Stack for any closing remark.

Thank you, Ashley. Thanks for joining us today. We hope you join – we hope you enjoyed being part of our exciting journey. Coming up in November and early December we'll plan on attending the Brean Life Science Summit in New York City, the Jefferies Autumn Global Healthcare Conference in London and the Piper Jaffray Healthcare Conference in New York, we look forward to seeing some of you there. Thanks a lot for being on the call today. Thanks Ashley.

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