Thank you for joining the Pacira Pharmaceuticals Third Quarter 2016 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.

Good morning, everyone. The format of this call will be as follows: Dave Stack, Chief Executive Officer and Chairman, will discuss the key programs currently underway driving the company strategy; Jim Scibetta, President, will provide a commercial and manufacturing overview; and finally, Charlie Reinhart, Chief Financial Officer, will provide a recap of Q3 2016 financial results and any related updates before we open up the lines for questions. Before I turn the call over to the management team, 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 the company's most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2015 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. The overriding mission driving Pacira is to be the catalyst for opioid minimization and eventually opioid pre-surgery in America and beyond. In my remarks today, we discuss that we are making tremendous strides towards this mission. However, let me start the call by acknowledging that in spite of continued growth, EXPAREL sales have not accelerated as fast as we had expected following the FDA resolution in December 2015. It is taking us longer to reverse the fallout from the warning letter, but changing the way medicine is practiced takes time, even with the tailwind of the opioid epidemic. We have a three-part strategy to accelerate sales by making EXPAREL available to as many patients as possible: one, to work with patients in addition to hospital systems and physician groups to standardize and broaden the reach of opioid-sparing protocols with EXPAREL through our public relations efforts, enhanced recovery protocols and education and training programs; second, is to build out robust clinical data to support marketplace use of EXPAREL for current and expanded use; and three, is to capitalize in commercial partnerships for EXPAREL opportunities both in and outside the United States. Starting with the first leg of the strategy, we continue to work with patient advocates and healthcare providers to provide opioid minimization treatment options. Through our public relations program, Choices Matter, we are educating patients on alternatives to opioid-based pain control; and through the PlanAgainstPain website, patients are provided educational materials on their available non-opioid options and how to proactively discuss a little or no opioid plan with their healthcare provider. These programs have been successfully launched with over 476 million media impressions, driving 27,000 unique visitors to the website in just two months, following the August launch of the campaign. We will continue to build on these…

Thanks, Dave, and good morning, everyone. For EXPAREL, in Q3 we experienced year-over-year revenue growth of 9% and box-per-day growth of 10%. A quarter of $64.9 million in absolute terms represents a solid foundation on which to build our future growth from the three pillars Dave just discussed. We continue to successfully open up new accounts and achieve a significant number of new formulary wins at the hospital and service-line level, which will contribute to growth in future quarters. Just like last quarter, we continue to see strong growth in soft tissue procedures especially where anesthesiologists are employing TAP procedures. And within ortho, we're also seeing solid expansion in the spine and shoulder procedures. We continue to experience headwinds in our hip and knee business from two sources. One, perceived cost savings from utilizing drug cocktail that consists of a combination of unapproved drugs, oftentimes opioids, and a short-acting local anesthetic; and two, a lack of Level 1 data that hospital gatekeepers can use to limit access. We're addressing both sources aggressively with three synergistic initiatives. Number one, we're pursuing a comprehensive cocktail defense strategy highlighting the benefits of EXPAREL, as evidenced by existing clinical data when the product is properly used employing three critical factors, appropriate administration technique, appropriate volume expansion, and add mixing with free bupivacaine to achieve a denser field block. When all of these three critical factors are employed, EXPAREL can lead to a reduction in opioids in shorten length of stay relative to cocktails. And it's important to juxtapose that data with equivocal or negative results that are generated when and because any of the three critical factors are not understood or followed. Number two, we'll soon have the Level 1 data from the TKA randomized control trial that Dave discussed. We believe the information…

Thank you, Jim, and good morning, everyone. Today, we reported third quarter 2016 financial results. For the quarter ended September 30, 2016, we reported total revenues of $68.4 million, a 10% increase over the $62.2 million reported for the third quarter of 2015. During the third quarter of 2016, EXPAREL net product sales were $64.9 million, a 9% increase over the $59.7 million reported for the same period last year. For the third quarter of 2016, total GAAP operating expenses were $89.2 million, comprised of $43.2 million in cost of goods sold, $9.8 million in R&D expense, and $36.3 million in SG&A expense. Adjusted for items identified in the GAAP to non-GAAP reconciliation tables included in the earnings press release issued this morning, total non-GAAP operating expenses were $60 million, including $19.6 million in cost of goods sold, $9.1 million in R&D costs, and $31.4 million in SG&A costs. As Jim mentioned earlier, our routine stability testing recently identified that a single stability batch of EXPAREL manufactured in early 2016 fell out of specification for one of approximately 20 acceptance criteria measured during the testing. An internal investigation has tied this unexpected result to modification to the manufacturing process that existed when this product was made and was corrected in June 2016. During the third quarter, we recorded a $21.9 million charge to cost of goods sold to fully reserve for the value of EXPAREL product manufactured during 2016 prior to the process correction. Including this $21.9 million charge, GAAP cost of goods sold for the third quarter of 2016 totaled $43.2 million, and our gross margin percentage was 36%. Excluding the impact of this reserve and stock-based compensation expense of $1.6 million, non-GAAP cost of goods sold for the quarter was $19.6 million, yielding Q3 2016 non-GAAP gross margin…

Thank you. Our first question comes from David Amsellem of Piper Jaffray.

Thanks. Just a couple. So, this is sort of a high level question regarding pricing. Can you talk about in some detail how you're thinking about discounting and providing more financial incentives to your customers to buy more EXPAREL bearing in mind that the cost pressures in the hospital environment as you've cited kind of had been particularly intense? So, what are you planning to do there differently, if anything? And then, secondly, on the launch of the 10 mL, can you talk about the potential for it to take away from 20 mL business or conversely, do you think it will be additive to the business because it gives surgeons the flexibility of using a smaller vial in smaller wound spaces? So, maybe help us think about the dynamics of 10 mL. Thanks.

Sure. Thanks, David. So, the first question regarding pricing pressures – insightful because it's very clear that there has been a significant impact of patients coming with Affordable Care Act insurance, for example, that is making life difficult for our customers. And I'll give as much detail as I can, David, and please come right back at me. So, we don't anticipate that we will have a broad price reduction of any sort. What we do talk about with folks as a way to form the partnerships that I talked about earlier is that when we institute a program or, say, a health system of several – well, 100 hospitals, say, just to make it easy, is going to use EXPAREL across a broad platform that we would stand behind the product first and make sure that we met all of the metrics that were guaranteed as part of the discussions with them regarding length of stay in opioids and the savings that they would recognize. But then, we also have a price accommodation that makes it useful and easier for them inside current budgets to be able to use EXPAREL in a more broad platform. So, I wouldn't be looking for any kind of a price discount. I mean that is not a strategy that we have any intention of employing. But where folks are using EXPAREL appropriately and across a broad platform of procedures, we do realize that they are under pricing pressures. And even though we continue to believe that the institution will save money as a result of the use of EXPAREL, we want to work with them especially in situations, David, where they are bidding in self-insurance models or they're addressing large patient populations at the state level relative to the opioid epidemic, et cetera.…

No, that makes sense. And if I may follow up just on pricing. I guess, the follow-up here is – okay, so you're not planning to do any big discounting. So, your belief is that this is still a data-driven customer base? In other words, as you grow the body of data, and grow the availability of (38:36) data, you will be able to get more buy-in even without providing deeper financial incentives?

I would say, David, that in the deepest of the discussions that are ongoing, and you've probably got from my script that there are several, this is the obvious optic that you would think would be important in those discussions, but frankly, it's not. What our customers are looking for is a greater service platform. They're looking for that training. They would like to see us contribute to a local – so let's just say you're a hospital CEO, David, and we could cut the price by some number or we could provide some services to you relative to communicating the fact that you're an opioid-free center. We could work with your clinicians to highlight their practice in local newspapers and on radio spots. There's a number of services that these folks are interested in relative to training and clinical research and doing more trials of specific interest to them that are a lot more appealing to them than the price of the drug when they understand the economics of reduced length of stay, et cetera. And so, I'm always prepared for that discussion and I'm generally surprised that it doesn't come up as the number one thing that somebody wants to talk about. What they do want to talk about, David, is if I move somebody and they want – and I don't – I'm not – this isn't just me, there's a bunch of people here that can do that. But what they are worried about, frankly, is that they did with an enhanced recovery protocol with EXPAREL, and that we raised the price by 20% the day after they do that, right. So, what they're interested in is what's the total cost of care for these procedures. Can we put an enhanced recovery protocol in place that squeezes the air bars around these trials, so that they become much more predictable. And in that context, can they bid a large teachers union or state employee association, et cetera. And so – that what they ask me for is, frankly, if the drug is used inappropriately, will we share that cost with them, and will we guarantee that for the life of this deal that they're about to sign, we won't raise the price. Those are the kinds of things they're looking for, not any kind of a material price decrease from us.

And David just to add one – this is Jim – just to add one thing to that. You go into some of these IDNs or large systems where they say upfront that cost is the issue. But as Dave alluded to, often it is going back to what we were talking about in the script, is the product being administered properly and therefore delivering the value of opioid reduction, length of stay and once you get people focused on that, then we're kind of in a partnership with our customer, and they're actually, as Dave said, not really focused on price per se, but on the product delivering its value.

Hello?

Nova?

Thank you. Our next question comes from the line of Doug Tsao of Barclays. Your line is open, Doug.

Why don't we go to Don Ellis?

Yeah.

Thank you. Our next question comes from Donald Ellis of JMP Securities.

Good morning, everyone. Thanks for taking the questions. The first question is regarding the DoD opportunity. Can you help us quantify, I understand a lot of new recruits have their third molars removed when they join the military, and this might be a patient population at higher risk of opioid abuse. Can you kind of quantify what numbers we're looking at, and what are the biggest advantages to the DoD?

Well, we've got a really robust clinical program with the DoD, Don. We're doing – right now, we're doing – they've only, to my – this is my understanding, they've only done one registry in their history, and we are now doing a registry with EXPAREL. It spans a number of different situations. You are correct that there is a special need to avoid opioids in the military, but it starts – most of what we saw in the early days, frankly, was hernia. And folks that were in basic training that were doing things that a typical person wouldn't do, but as time has gone on, they've seen it by avoiding opioids, you can avoid these addictive problems specifically to them, and this comes from a camp commander that I was with, out in California that basically said, when somebody's addicted to these opioid medications, I can't give him a gun, I can't let him drive a truck, I can't do much of anything with him. And in many cases, we end up discharging these folks at great cost after they have gone through basic, et cetera. So, it's been a real focus of the DoD. In addition to the registry now, though, DoD is way more than what you would think about if you were just not dealing with what we're dealing with every day, they have a lot of patient lives, I mean they're doing a very large trial in C-sections, and they're interested in colorectal surgery, and they're interested in a whole lot of these different procedures. And, in fact, the registry covers a number of procedures looking at plastic surgery applications and OB/GYN applications and colorectal applications, as well as TKA, et cetera. We've done a couple of things, Don, specifically for them. So, you'll…

And to you point, Don, I can't quantify it, but it is an interesting phenomenon that kids 18 years to 22 years go into the military, they go into intensive training, and they have their kind of a third molar extraction mil that exists, so that is an opportunity that we definitely want to pursue.

That's great. At what point does this kind of transition from a clinical trial registry to a customer and product sales? When – is it a 2017 event or 2018, or when can we expect that?

No, they are a very significant customer now, Don. We have signed, what's called an FSS or Federal Supply Schedule agreement, and they do have a statutorily mandated discount on the price. So, they are not paying $300 a vial, but they are a very significant customer of ours today in terms of sales.

Okay, terrific. And then any additional – last question, any additional details on kind of the timing change for the nerve block trial?

No. Only that what we're trying to do is – we have a six-month PDUFA. And so, what we're trying to do is line ourselves up for a 2018 first-quarter launch. And so, we're working with some different sites in Europe, and there were a couple of issues related to the timing of the time that those patients – or the clinical practice and the time those patients had to spend in the hospital via the protocol, five days just turned out to be a real challenge. And that was the way the initial protocols were written. And so, the trial got off to a bit of a slow start, but I think we're where we want to be now going forward.

Okay. Great. I actually do have one additional question. We've talked to some oral surgeons that are to lower the cost to the patient even more from the 10 mL that are diluting with normal saline and getting maybe two-patient treatments out of one 10 mL vial. Are you seeing that frequently?

In oral surgery, Don, it's something – the treatment paradigm goes something like 2.5 mils a tooth. So, you'd have to know whether they were doing all four or whether they're just doing two. But I think again, people in the marketplace are going to experiment. Some of the folks that are the high-end users that have a lot of experience with EXPAREL, think that they're – I'll go back to my comment to David Amsellem, you may have enough particles there in order to get 36 hours of pain control and if a surgeon determines that that's what they're looking for, what's in free bupivacaine they probably could get away with that. Honestly, we haven't seen a lot of that yet, but the guys that are doing it are the guys that have had the most experience. And so, I think it's probably not unreasonable and it's one of the reasons we put a 10 mL vial out there. The marketplace is so big, I think we would lean towards more patients rather than trying to maximize the number of mils that are used in each patient as long as the patients understand that when you cut the dose in half, you're not going to get 72 hours of pain control.

Understood. Thank you very much for taking the questions.

Thank you.

Our next question comes from the line of Doug Tsao of Barclays.

Hi. Good morning. Thanks for taking the questions. Can you hear me now?

Yeah. We can hear you, Doug.

Great. So, just maybe, Dave, I think you acknowledged and apologies if I missed this in the opening remarks, a lot of calls this morning. But sort of the benefit of the FDA settlement sort of playing out a little bit more slowly, maybe can you talk a little bit about sort of your break of accounts that are sort of growing very nicely versus some others that you still might be seeing some pressure in terms of the warning letter restrictions or sort of pushback on the product?

Most of the – and I tried to address this specifically, Doug, but I appreciate the question. So, when we got the warning letter, not allowed to go into the OR because a gatekeeper who wanted for any reason, generally it was budgetarily driven, to limit access to EXPAREL. And so, because our – in the context of the warning letter, it was positioned that EXPAREL was only had an indication for bunions and hemorrhoids, there was no context there where we could go into an OR and work with an orthopedic surgeon and teach him how to do a knee or a hip. And so, a number of folks in the marketplace, many, by the way, ironically trying to produce positive datasets in support of EXPAREL did not have the technique that's required for best practice in terms of volume free bupivacaine use, dosing the posterior caps or dosing the periosteum, exactly what the timing is of all of those different injections. And so, there were datasets that were developed that were equivocal or negative, and it took some time for those to come out, Doug, it didn't happen as a immediate result. And actually, we started see those for the first time in (52:19) November of 2014. And so, as we've reversed the warning letter, we still have folks out there that think that based on local market data that EXPAREL is no different than bupivacaine. And so, there's a couple of things that are going on then to reverse that. One is that we're working on enhanced recovery protocol where you can show people very specifically how to use the drug and how to lower your cost in joints and working with systems, who will mandate from the C-suite down that we're going to address the use…

Okay. Great. That's really helpful. And maybe just a couple of quick follow-ups on that. One, when we get the knee data, what are the things that you think based on the feedback you've been getting from accounts should we be more focused on? You sort of focused on reduced opioid usage, but should we be looking at pain scores, or length of stay or sort of what do you think is the most important sort of data points that we should be looking for? And then as a follow-up, just maybe levels that everybody in terms of realistic expectations in terms of how long it might take for that data set to sort of start to meaningfully or detectably, perhaps is a better way to put it, start to affect numbers?

So, I'll take number two, and then I'm going to introduce – this is really Scott's. Scott's the brainchild behind this trial. So I'm going to turn it over to him for the primary endpoints. But we will talk about it at AOS assuming that everything goes as planned. And I think one thing that you see about the orthopedic community is they respond quickly both positively and negatively but quickly. And so, our expectation is that the places that have invested themselves in saying that EXPAREL doesn't work effectively based on their data will obviously take some time. But I think the vast majority of the orthopedic community, especially with the pending bundle programs on April 1 will very much be looking forward to a dataset and a protocol that drive them to shorten length of stay and all of the other aspects of improved and earlier mobilization. But I think you will see an impact of this in the second quarter modest. But in the fourth quarter of next year which is the big elective quarter for orthopedics, I would expect that you would see a significant difference from this year. And with that, I'll turn it over to Scott in terms of the way the trial is designed in terms of the importance of the endpoints.

Thanks, Dave. Doug, thanks for the question. When Jim Jones and I sat down with multiple investigators and the knee community, there were one or two things they absolutely wanted to see in this trial. They wanted to see a reduction in pain, they wanted to see a meaningful reduction in opioids. When we reviewed the literature and the TKA studies in the public domain, you would see a great variation in opioid requirements post-op, typically the numbers were between 50 to 100 morphine equivalent units. That was a critical piece of the equation of what we were looking for, and I've told others that when you look at that literature, we were expecting our placebo group to fall somewhere in the 50 to 60 morphine equivalent units range, and for us to have a significant reduction to those numbers. I think it's really important, and we talk about it internally all the time, when you see negative studies or mixed studies with EXPAREL, one of the first things we always look at is that morphine equivalent unit number. And so, if there are studies out there, which there are some morphine equivalent units in an EXPAREL arm and a control arm or close to 100, I would argue, that's not someone you want when you had your knee surgery. And I think our goal in this study is to show a clear benefit in morphine equivalent unit. That's a number that we're going to focus on, we're going to focus on it relative to what's out there in the marketplace. That's critical. From the secondary endpoint, you should focus on a lot of outcomes, which we think are critically important. Discharge readiness is being one of the most important. Remember in this study, Doug, we're keeping patients in the…

And, Doug, I would only add that what these visual reality tools that have been developed are an absolute mimic of the 331 protocol. So, we are confident enough in this trial that we want to be able to, in a virtual way, teach doctors how to achieve the same results that we'll report from this trial so.

Okay. Great. Thank you very much.

Thanks.

Thank you. Ladies and gentlemen, we unfortunately are out of time. And this concludes our Q&A session. I will now turn the call back to Dave Stack. Sir?

Thank you, Nova. Thank you for joining our call today. We appreciate your support as we continue this important work. Up next, we'll be at the Global Mizuho Investor Conference on November 16 in New York, and the Jefferies 2016 London Healthcare Conference taking place that same week. We look forward to seeing some of you there. Thanks a lot.

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