Thank you for joining the Pacira Pharmaceuticals Fourth Quarter and Full Year 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 and Chairman; Jim Scibetta, President and Chief Financial Officer; and Scott Braunstein, Senior Vice President of Strategy and Corporate Development. 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 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 company's most recent Annual Report on Form 10-K 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 full year. And with that, we'll hear first from Dave.

Thanks, Jess, and good morning, everyone. 2015 was an important period for Pacira. We finished the year with another solid quarter of growth, in line with seasonal expectations and we achieved an amicable resolution with the FDA, reaffirming the clarity of the broad label – the broad scope of the indication approved for EXPAREL in 2011. But more importantly, we spent 2015 building up the infrastructure that we believe will enable us to leverage the multiple opportunities for EXPAREL, our DepoFoam pipeline and our commercial organization to advance the Pacira brand in both the near-term and the intermediate term. Let's start with our flagship product, EXPAREL, the only non-opioid, long-acting analgesic formulation of bupivacaine currently approved to provide postsurgical pain control. Our key strategy remains making EXPAREL accessible to as many patients and healthcare providers as possible, developing clinical datasets and enhanced recovery protocols, and providing package configurations at a price which demonstrates the significant value of EXPAREL. Given the dramatic societal need for reduced opioid strategies in the very large patient audiences, our strategy will provide customer access points across a wide range of procedures and treatment settings, driving real growth for our business for the long-term. The market response to the resolution of the FDA warning letter has been very positive. The affirmation of the broad label has provided the basis of healthcare providers to challenge decisions which limited access to EXPAREL based on inaccurate information provided in the warning letter. In addition, we have a number of programs involving infiltration into the transversus abdominis plane or TAP blocks that have been initiated to provide pain control, reduced opioids in important procedures such as C-sections. Of special interest to many surgeons is the opportunity to mix bupivacaine and EXPAREL in the same syringe, providing for ease-of-use and another…

All right. Thank you, Dave. In my comments, I'll review our 2015 financial results and provide an update on operations in the context of our outlook for 2016. To recap, in early January, we preannounced EXPAREL sales of $67.2 million for Q4 and $239.9 million for 2015. Our total sales were $69.3 million for Q4 and $249 million for full-year 2015. In retrospect, we're quite pleased with year-over-year growth in excess of 25% in a year that was burdened by then now resolved FDA warning letter. As of Q4, a total of almost 4,000 accounts, 3,917 to be specific, have ordered EXPAREL since launch, an add-on of 127 new accounts this quarter, a modest but growing number, which continue to be ambulatory surgery center customers, substantiating the nascent move of procedures from the inpatient-outpatient settings. We achieved a non-GAAP gross margin of 74% in Q4 and 73% for the full year. And this was achieved while operating our plan below full potential capacity, further validating the gross margin opportunity for the product. Non-GAAP R&D spend was $11.2 million in Q4. And this included expenses associated with preparatory work for our two Phase III nerve block studies and the randomized control trial in knee that Dave outlined earlier. Total 2015 non-GAAP R&D expense was $23.5 million, in line with our prior non-GAAP R&D guidance. Q4 non-GAAP SG&A was $31.5 million, with legal expenses related to the FDA resolution driving most of the fourth quarter spend uptick. We finished with 2015 non-GAAP SG&A expense totaling $116.8 million, on the lower end of our previous annual guidance. Non-GAAP net income was $8.3 million or $0.20 per diluted share in the fourth quarter and was $39.4 million or $0.95 per diluted share for all of 2015, marking another period of non-GAAP profitability for Pacira.…

Thank you. Our first question comes from the line of Douglas Tsao with Barclays. Your line is open. Please go ahead.

Hi. Good morning. Thanks for taking the questions. Just, Jim and Dave, maybe to start off with, you could clarify a little bit about the protocol violations that were seen in the oral surgery data? And then just confirm that, in terms of the ITT, does that include the patients from that site or were those also excluded from the ITT?

No. Hi, Doug, this is Dave. Thanks for the question. I outlined – so the data is very fresh, Doug. We've only gotten this recently and still working, frankly, on some of the more elaborate data tables. But the specific answer to your question is the ITT does not include that site. The major problem, Doug, was that there were data points that in the protocol that just weren't collected. So, there really is no way to build that analysis unless you just have an extensive revision of the data sets on a per-protocol basis – I'm sorry, on an ITT basis. And so, we've elected, given the nature of what we're doing here and the importance of this to the launch, to collect the data the way we did, just eliminate that site and to move forward, working with the steering committee, et cetera.

Okay. And then, in terms of your sort of the development plans on a go forward basis, I mean, how are you thinking about pursuing this opportunity or do you think that just – what you have in terms of being on label obviously, do you think commercial uptake will be driven more by users' experience in this case, similar to what we saw in orthopedics where it was really just sort of by word of mouth in terms of surgeons who sort of drove the penetration into that market?

Yeah. A couple of things, Doug. As I referenced in the remarks, we are doing some additional Phase IV work with particular oral maxillofacial procedures of interest and so we expect to be generating that data between now and when we launch. Also, we were on the phone with the steering committees last night and there is real interest there in developing manuscripts and abstracts from the data on a per-protocol basis with them having a pretty significant understanding of where we are with the data. And there are folks in the marketplace that have got a very positive experience with EXPAREL and we will use them as you suggest. So, we don't see this as having a negative impact on the launch, Doug. It's – from us, frankly, it's another learning, that there is a technique and that needs to be followed in order to generate the data and provide a best patient experience here. And so, we use this as another opportunity to learn and make sure that as we roll this out and as we work with the KOLs in this oral maxillofacial community that we're very specific about how this drug needs to be used in order to achieve best practice.

And not to belabor the point, but was there evidence in some of the sites that were off protocol that they were not using EXPAREL or they were not using – they weren't following proper technique in sort of treatment of patients or was it exclusively a question of data collection?

No, it's a site, Doug, and it was -

A site, yeah.

And it is more than data collection. There were some very significant PK differences, which led us to believe that there was a technique variation, and discussions with the site have verified the fact that the product wasn't used according to the protocol. As the trial went on, Doug, we had some – another aspect of this is that these trials enrolled very quickly. And so, in the early days, in the startup phase, the data looked quite good actually and the PK curves were fine. Unfortunately, as the trial rolled on, it appears that the standard was not quite as lofty, and we didn't get the same PK results near the end of the trial from a single site.

Okay.

But again remember, the two sites that remain in the study, a significant P value on a per-protocol basis and then on an intent-to-treat basis, trending towards a P value that would be significant, if it didn't result in being under power because of the dynamic of the site that had to be eliminated.

Okay. And then, in terms of spray, this is the first we've sort of had an opportunity to sort of revisit that subject. Obviously, you spoke about the timelines when you'd revisioned (35:28). What clinical work – I know you reached agreement with the FDA, what progress, if any, has been made in terms of transitioning to that process?

Sure. So, you're referring to the interaction we had with the FDA last year regarding the development pathway for the spray manufacturing process where they confirmed that provided that we conducted a bioequivalent study only that that would be the basis of us being able to transition from the batch process to the spray process down the road. That's actually going to happen closer to the 2019 approval timeframe than today. Right now, we're designing the commercial system and we'll do – like we've done with the first Patheon skid that we moved over there, we'll design it and send it overseas and install and so forth. And then, once it's installed and ready to be used in that site, then we'll do the bioequivalent study that is the basis of moving forward to approval in 2019 is our target.

Okay, great. Thank you very much.

Thanks, Doug.

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 of questions. So, on the anecdotal evidence that you cited regarding surgeon receptivity and the wider promotional paradigm, is that – to be clear, is that already translating into greater volume growth? And if so, why would you be sticking with the idea that the benefits of wider promotion will be loaded into the back half of the year? So, that's the first question. And then secondly, on the R&D spend that you're guiding to in 2016, can you go through the big sources of the spend beyond the nerve block study? I guess, I'm just struggling with the magnitude of the growth and spend, maybe help me understand what the big drivers are here. Thank you.

Thanks, David. So, let me take number one. So, the institutional environment, which is the vast majority of our current business, is a highly structured environment. And so, we now – our reps and our medical folks and our customers are in a position where we have a very different data set and a very different way of thinking about EXPAREL in terms of access, but that doesn't happen overnight. And so where access was denied, our clinicians are going back and meeting with the C-suite and with the P&T committee if that was how the restriction was organized. And there is a time lag for how those changes are reversed. And so, the tenor of our customer relations in the marketplace is very different than it was pre the resolution of the warning letter and it is entirely positive. But with that said, as Jim outlined, it takes time to get through the different committees and the different structures of the hospital environment. And then, at the same time, David, where we have new customers as a result of the resolution of the warning letter, we want to make sure that they're appropriately trained and that we can ensure that the patients are going to get a best practice experience. And so, when you marry those two things together, we expect, as Jim said, to see the expected growth in the back half of the year. All things are positive, but there is a time lag to making the kinds of changes that have to be made. This is very different than just going to a physician and have him write a prescription based on a drug sample. That isn't the way the hospital environment works unfortunately in this case. Jim, you want to talk about part two?

Sure. So, the big dollars associated with the R&D spend, we're running two pivotal nerve block studies and then a TKA RCT that obviously is on label, but we're going to do a robust study. And each of those you can think of as $10 million to $15 million. So, a big chunk of the spend is those pivotal studies. In addition, we're going to be in the clinic, as I mentioned, with DepoTranexamic Acid and DepoMeloxicam. So, we've got additional clinical work there. So, the clinical program itself basically dwarfs what we spent last year in total. And then, in addition, we're also excited about the fact that a couple of years back, we said make EXPAREL, sell EXPAREL, now we're doing that, but we're also investing very much in the pipeline. And so, our R&D team in San Diego is in – we leased a new facility right next to our commercial manufacturing facility. We're sizing – we're adding people into that group so that we can put additional products into the clinic and fully take advantage of the DepoFoam-based technology we have. And then finally, there's a little bit of an anomaly that's not immaterial and that some of the manufacturing investments we're making over in Patheon, before they become commercial, they hit the R&D line. So, that's all of it.

Yeah. If I may sneak in a follow-up, just going back to my first question, so you mentioned your relatively favorable interactions with the surgeons. Maybe some commentary, some anecdotal commentary, if you will, on your interactions with hospital pharmacies, with P&T committees, now that the shackles have been removed, so to speak.

Very different from the pre-warning letter era, David. And so the P&Ts now are dealing with a different information deck than they were when the perception was that the drug was only approved – that EXPAREL was only approved for bunions and hemorrhoids. And so, very favorable folks, obviously, as I've stated earlier, wanting to make sure that their sites were appropriately trained and that we do enhance that, and the enhanced recovery protocols come in very handy here, on what this technique is and who the patients are, who are going to benefit most from EXPAREL therapy, et cetera, so we're going through all of those things. I would say, with pharmacy, the scenario is more driven by the environmental pressures than it is, frankly, by a difference in frank attitude of a pharmacy. Things like bundles where the ability of academic centers who have participated in the bundled program since the beginning of 2013 and have shown that if you use large doses of opioids or if you use femoral nerve blocks that these patients cannot be ambulated or mobilized in an appropriate time to allow them to be discharged to home. Those total cost analyses are forcing pharmacy to think differently about how the pharmacy budget impacts on the total cost of care. And so, as the CMS and as the payers put pressure on the healthcare system, the folks with line item budget responsibility are being forced to think differently about the cost of a product in the overall cost of the 90-day spectrum of care. And so, that is very helpful to us. And so, we are increasingly communicative and positive with pharmacy, but it's generally based on outside pressures, which are forcing them to analyze the cost of care in a very different way than they did two years ago, for example.

Yeah. Thank you.

Thanks, David.

Thank you. And our next question comes from the line of Shibani Malhotra with Nomura Securities. Your line is open. Please go ahead

Hi. This is Austin Nelson on for Shibani. We had a couple. I guess, the first one was just moving from the lessons of protocol violation that you saw with the dental study. The prep work you were doing in 4Q 2015 for nerve block and with those expected to initiate this year, have you considered after this issue adding sites to the nerve block trials to ensure they're properly powered? And are there any other lessons from this you'd take to try to avoid this issue and make sure that this data is positive and can be filed in 2017?

No. Thank you for the question. And the answer is, obviously, we're always learning and we're always looking at different ways to ensure that we have successful trials, but I would point out that the issues here are very different. We had an oral surgeon who was not experienced in the use of EXPAREL, who was doing these infiltration procedures in a clinic setting. That is very different than anesthesiologists who are using ultrasound guidance in order to administer EXPAREL in a nerve block procedure in an institution setting. And many of the anesthesiologists that are in the nerve block trials are the same folks who were participants in the previous nerve block trial, where we had a P-value of 0.0001 for pain and a P-value of 0.0016 for opioid reduction. So that trial is being redone not because it was a failed trial from a efficacy perspective, but because there were some PK issues around the Cmax and the Tmax that required us to enhance the safety profile to make sure that we had a full understanding of the PK/PD of EXPAREL before we launch into the nerve block space. So I would never be presumptuous enough to tell you that we're done learning, and we're always looking at the P-values and we're always trying to figure out if there's any way to improve the likelihood of the outcome. But these are appropriately powered for what we believe is going to happen. And these people are very experienced in the use of EXPAREL and the use of ultrasound guided administration. So we feel as good as we could feel about the nerve block trials. It's still clinical research, of course, but a very different scenario than we faced with the oral surgery trial.

And we didn't do it because of this, obviously, but just the fact that there's 15 to 20 sites in each of the nerve block studies. So, we won't have that diversification challenge that we faced here or lack of.

Okay. Thank you. That's helpful. And then just to follow up on the oral surgery launch in 3Q 2016. I know the data is fresh, but when – are you still expecting to get this data published ahead of the AAOMS meeting, and do you think this issue might impact the ability to get it published ahead of that meeting in order to have the launch you were originally planning for?

No. As I said in response to the first question, we were on the phone with the steering committee last night, and they're excited about the opportunity to get abstracts in for this AAOS meeting – I'm sorry AAOMS meeting, sorry about that. And no, we do expect to get the data published. I mean, remember, this is pain and failure in pain is not – I'm not trying to make an excuse, but it is not unknown and the (47:37) have trials that are difficult. And no, our steering committee is quite excited actually about having the opportunity to publish the per-protocol analysis and further, by the way, accentuate the fact that technique is important. And so, the things that we're thinking about is, how can we make some videos and how do we marry those videos with PK curves, for example, to make sure that best practice is transferred to folks who are interested in using an EXPAREL-based regimen around the launch. And those are the kinds of activities we'll take. But no, our anticipated course of action is to have abstracts and publications in advance of the launch.

Yeah. I think, our – this is a little bit of an atypical situation where we're talking about an approved indication – a launch in an approved indication where some people are using the drug and getting great results with it and the steering committee is a big believer in it. And so from their perspective, this is data that we didn't have a couple days ago on a per-protocol basis that they can use to talk to their peers and get people excited about the use of the drug, which they know and we know works when it's used properly.

Okay. Thank you.

Thanks.

Thank you. And our next question comes from the line of David Steinberg with Jefferies. Your line is open. Please go ahead.

Yeah. Thanks and good morning. I just wanted to touch on your comment about pricing. If I heard you right, you said you're not going to take a price increase this year. And in the world of hefty price increases, particularly in pain, you've always been pretty restrained. So just curious the thoughts behind why no price increase. I know you've always said that later on when you have heavy volume, that would be the time to take it, but you have taken some modest price increases recently. And so just curious on your thoughts about this year.

Sure. And we think about this all the time, David. And just for the matter of the record, we've had two roughly 5% price increases since April of 2012 when we launched the drug. And just as a strategy first, we believe that with the opportunity to address chronic pain (49:45) and nerve block, and all of the other opportunities that we have in front of us, as well as the success of the product so far in infiltration, that we have over 100 million patients on the relative short-term that would benefit from a long-acting non-opioid pain reliever. So the strategy is to price so that we can drive access to as many of those patients as possible. So that's sort of the big strategy, if you will. If you get down to the specifics of 2016, when we're talking to folks in the marketplace about bundles and the CMS instituting bundles for [MS-DRGs] 469 and 470 for hips to knees, and people are trying to figure out how they're going to survive in that bundle, we're having very strategic discussions with them about how EXPAREL fits in there, how one of the major components of surviving in the bundle is pain. And so we thought that the best way for us to proceed, frankly, is to partner with those people so that they can flip over to EXPAREL, if they don't have it, and they can expand the use of EXPAREL, if they are currently using it, without having to worry about us having some exorbitant price increase that would make it more difficult for them to survive inside the bundle. So we think we're sitting in front of a growth profile that allows us to actually take this action, David. Remember, we're going to launch a 4-ml – a 4-pack and a 10-ml vial this year as well. So there's a lot going on in the marketplace. And we thought that as a gesture of good faith, given the growth profile we see and the discussions we're having with CEOs and with ambulatory care centers, et cetera, that a price increase for part of 2016 wasn't necessary in order to get us where we need to be.

Okay. And then just a little more color perhaps on your promotional strategy for oral surgery. Have you defined all the target territories, regions, deciles, et cetera? And then, I think you said you're adding 20 reps. I thought before you'd indicated you're going to keep the reps at the same level and they're going to promote both oral surgery and in the hospitals and the AM. Are these new reps targeting both sets of customers or are they just for oral surgery? And then also, any thoughts about possibly co-promotion.

No. Thanks, David. So, we will – our strategy, again, is that all of our reps will be trained on all of the EXPAREL opportunities, and that when we increase the size of the sales force, there will be only a modest increase in the size of the footprint. Primarily, what we're trying to do is to size the territories appropriately so that they can accommodate new uses of the product. And when hospitals get very big in terms of being customers of EXPAREL, the rep can handle fewer of those big accounts. And so, we will always – at least as currently constituted, we will always have all of our reps trained on all of the opportunities. And these 20 reps will go into territories that we'll take two territories and make it into three territories, for example, because the reps just can't keep up with the volume of business. Now, oral surgery does have something to do with that, of course. And we do have the deciling of the oral maxillofacial surgeons and the reps will be provided the list of these high-volume customers. And as you state, the thought process is that the – at least one way for a rep to spend their day would be to be in the hospital from early morning and do a number of surgical procedures with their customers in the hospital, and then in the afternoon be in the retail environment where they may talk to plastic surgeons as well as talking the oral maxillofacial surgeons and fill out their day that way. And if the territories become smaller as a result of these additions, we also facilitate the opportunity for these reps to make more of those kinds of calls because they're spending significantly less windshield time, right? So, this all works as you go forward. Makes sense?

Yes. Thanks, Dave.

Okay. Thanks.

Thank you. And our next question comes from the line of Tazeen Ahmad with Bank of America Merrill Lynch. Your line is open. Please go ahead.

Tazeen, I think that was you.

Sorry, guys. I was on mute. Sorry about that.

Okay. Okay. I thought you didn't recognize your name because I had a look up as well. So...

Yeah. Thanks. So, for oral surgery, if might, I know you've touched upon this topic before, but now as you edge closer to becoming commercial on it, do you have any sense of what kind of coverage dental providers would give for EXPAREL and what your sense is of what out-of-pocket expenses might be?

It's all over the place, Tazeen. The one thing I can tell you, that the research continues to confirm, is that the vast majority of these surgical practices do not accept insurance. And so, these are scenarios where the patients pay cash and then the office practice bills, the insurance company on behalf of the insurance – I'm sorry, on behalf of the patient. And so then the insurance payment would go to the patient back to the provider. And to be quite honest, and if I use our own dental insurance as a proxy here, it isn't great, but it is something and it is the way the artisan practiced forever as far as we can tell. So I don't know if that spurs a follow-up question, Shibani, but that's sort of where we are today – I'm sorry, Tazeen, that's where we are today.

Yeah. So, I guess based on that knowledge, how do you think the initial ramp would be for oral surgery? Are you expecting it to see something that develops over time or do you think there would be sharp uptake right away?

I think in some procedures in the oral maxillofacial world, I think the uptake will be consistent, but it'll be linear. I don't think everybody is going to start using it overnight. I think also just as a frame of reference, remember, at least as the protocol that we just finished with third molar extraction, it's a 10-ml dose, so the pricing is considerably different than if it was a 20-ml dose. And the primary research picks out very specific areas where folks don't want their late teen, early 20s sons and daughters exposed to opioids as an opioid naïve patient. And then, there will be situations where, especially as the opioid epidemic becomes more well-known and people start to work with their surgeon on not wanting opioids, we think for the price here that there will be a market. And at the end of the day, honestly, Tazeen, if there's 35 million patients of interest, and that's the number we're using from the market research, then even if we were talking about a couple of hundred bucks a patient here net-net, the revenue opportunity here is quite significant, even without a market share that has to be enormous as a percentage of the total market. So, I think you're going to see very much what we've seen in other places. I think the KOLs that have had significant use of the product and who have moved away from using opioids, even writing prescriptions for opioids, will be quite vocal here in their success and folks will dabble in the beginning and they'll use it in certain patient populations. And as they gain comfort that the drug actually does what it's supposed to do and understand the technique associated with it, we'll see a ramp in a linear kind of way.

And remember, we're talking about the oral surgery focus here of roughly 7,000 oral surgeons, so not just the general dental community. So, these are trained surgeons, they manage the pain of their patients. So, there is – it's not too daunting of a community to access from the rep perspective.

Okay, great. And then just going back to the trials for a second, you guys already have oral surgery on your label and FDA have basically told you, you didn't have to run these trials – this trial. But in terms of what impact, if at all, just missing (58:19) on ITT will have? Was the purpose really of running these trials to be able to have publication?

Well, remember, Tazeen, we started these trials before the resolution of the warning letter. So when we started these trials, if we knew that we were going to get the resolution of the warning letter, we probably would have just done Phase IV trials and we would have taken a different approach in terms of the procedures that we addressed. We didn't. And so we were doing a trial that, if required, would have gone to the FDA and would have gotten oral surgery put on the label as a specific procedure in an environment where we were still under pressure relative to bunions and hemorrhoids. So, that's behind us now. And so to answer your question specifically, no, I don't think that this community, really, when they hear for KOLs that they use the drug in this procedure, in this technique and the drug works well and the patients have a low or no opioid opportunity, I don't actually think that practicing clinicians in the oral maxillofacial community really care much about intent-to-treat or per-protocol.

Okay. And then I guess quickly, lastly. In the past, you have provided revenue guidance and this year, for various reasons, you're not, at least not now. But once you get a better sense of how the year is progressing in terms of trends, do you think it's still a possibility that you could provide guidance for 2016 on revenue?

Yes, Tazeen. We have said the last couple of quarters, I guess, really since the resolution, that we'd like to have a couple of quarters under our belt to get to the point where that we want to have confidence in our ability to provide the guidance in specific numbers. And obviously, we're providing, over the last couple of quarters and now, some more soft guidance. But, yeah, I think without making a promise, I think it's sort of the middle of the year that we'll take a look at where we are and evaluate that.

Okay. Perfect. Thanks very much.

Okay. Michele, we all set?

This does – we are out of time for Q&A today. So, I'd like to turn the conference back over to Mr. Stack for any closing remarks.

Great. Thanks, Michele. Thanks for joining us today. Coming up in March, we plan on attending the Barclays Global Healthcare Conference in Miami. We look forward to seeing you there. Thanks much for all your time and consideration today.

Well, ladies and gentlemen, thank you for participating in today conference. This does conclude the program and you may all disconnect. Everyone, have a great day.